Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-9092
CHENIERE ENERGY, INC.
(Exact name as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-4352386
(I. R. S. Identification No.)
333 Clay Street, Suite 3400
Houston, Texas
(Address or principal place of business)
77002-4102
(Zip Code)
(713) 659-1361
(Registrant's telephone number, including area code)
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 [ ].
As of August 14, 2002, there were 13,297,393 shares of Cheniere Energy, Inc.
Common Stock, $.003 par value, issued and outstanding.
================================================================================
CHENIERE ENERGY, INC.
INDEX TO FORM 10-Q
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, December 31,
ASSETS 2002 2001
------
--------------- --------------
(Unaudited)
CURRENT ASSETS
Cash $ 1,165,259 $ 610,718
Accounts Receivable 34,479 636,527
Prepaid Expenses 164,460 96,914
------------ -----------
Total Current Assets 1,364,198 1,344,159
OIL AND GAS PROPERTIES, full cost method
Proved Properties, net 1,073,682 1,929,124
Unproved Properties, not subject to amortization 16,905,484 16,236,962
------------ -----------
Total Oil and Gas Properties 17,979,166 18,166,086
LNG SITE COSTS 1,600,000 1,350,000
FIXED ASSETS, net 293,764 416,232
INVESTMENT IN UNCONSOLIDATED AFFILIATE - 3,747,199
------------ -----------
Total Assets $ 21,237,128 $25,023,676
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable 735,067 1,464,812
Accrued Liabilities 1,289,988 409,589
Note Payable 750,000 -
------------ -----------
Total Current Liabilities 2,775,055 1,874,401
STOCKHOLDERS' EQUITY
Preferred Stock, $.0001 par value
Authorized: 5,000,000 shares
Issued and Outstanding: none - -
Common Stock, $.003 par value
Authorized: 40,000,000 shares
Issued and Outstanding: 13,297,393 shares 39,892 39,892
Additional Paid-in-Capital 41,343,662 41,133,868
Accumulated Deficit (22,921,481) (18,024,485)
------------ -----------
Total Stockholders' Equity 18,462,073 23,149,275
------------ ------------
Total Liabilities and Stockholders' Equity $ 21,237,128 $ 25,023,676
============ ============
The accompanying notes are an integral part of these financial statements.
3
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------- ---------- ---------- ------------
Revenues
Oil and Gas Sales $ 37,955 $ 774,832 $ 199,559 $ 1,746,488
----------- ---------- ---------- ------------
Total Revenues 37,955 774,832 199,559 1,746,488
----------- ---------- ---------- ------------
Operating Costs and Expenses
Production Costs 24,702 86,553 90,038 207,063
Depreciation, Depletion and Amortization 65,781 432,734 180,472 760,632
Ceiling Test Write-down - 2,159,645 - 2,159,645
General and Administrative Expenses
LNG Terminal Development 1,002,479 575,801 1,729,886 889,839
Other 581,661 720,735 1,154,332 1,432,319
----------- ---------- ---------- ------------
General and Administrative Expenses 1,584,140 1,296,536 2,884,218 2,322,158
----------- ---------- ---------- ------------
Total Operating Costs and Expenses 1,674,623 3,975,468 3,154,728 5,449,498
----------- ---------- ---------- ------------
Gain on Sale of Proved Oil and Gas Properties 340,257 - 340,257 -
----------- ---------- ---------- ------------
Loss from Operations (1,296,411) (3,200,636) (2,614,912) (3,703,010)
Equity in Net Loss of Unconsolidated Affiliate (970,938) (588,889) (2,184,847) (1,007,430)
Loss on Early Extinguishment of Debt (100,544) - (100,544) -
Interest Income 1,864 3,900 3,307 13,964
----------- ---------- ---------- ------------
Loss Before Income Taxes (2,366,029) (3,785,625) (4,896,996) (4,696,476)
Provision for Income Taxes - - - -
----------- ---------- ---------- ------------
Net Loss $(2,366,029) $(3,785,625) $(4,896,996) $(4,696,476)
=========== =========== =========== ===========
Net Loss Per Share - Basic and Diluted $ (0.18) $ (0.29) $ (0.37) $ (0.37)
=========== =========== =========== ===========
Weighted Average Number of Shares Outstanding -
Basic and Diluted 13,297,393 12,890,800 13,297,393 12,768,774
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Total
------------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
----------- ----------- ------------ ------------- --------------
Balance - December 31, 2000 12,547,393 $37,642 $39,382,789 $ (6,359,223) $33,061,208
Issuances of Stock 750,000 2,250 1,647,750 - 1,650,000
Issuances of Warrants - - 93,000 - 93,000
Expenses Related to Offerings - - (6,671) - (6,671)
Net Loss - - - (4,696,476) (4,696,476)
----------- ------- ----------- ------------ -----------
Balance - June 30, 2001 13,297,393 $39,892 $41,116,868 $(11,055,699) $30,101,061
=========== ======= =========== ============ ===========
Balance - December 31, 2001 13,297,393 $39,892 $41,133,868 $(18,024,485) $23,149,275
Issuances of Warrants - - - 209,794 209,794
Net Loss - - - (4,896,996) (4,896,996)
----------- ------- ----------- ------------ -----------
Balance - June 30, 2002 13,297,393 $39,892 $41,343,662 $(22,921,481) $18,462,073
=========== ======= =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
5
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------------
2002 2001
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(4,896,996) $(4,696,476)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation, Depletion and Amortization 180,472 760,632
Ceiling Test Write-down - 2,159,645
Non-Cash Expense 56,648 183,000
Gain on Sale of Proved Oil and Gas Properties (340,257) -
Loss on Early Extinguishment of Debt 100,544 -
Equity in Net Loss of Unconsolidated Affiliate 2,184,847 1,007,430
----------- -----------
(2,714,742) (585,769)
Changes in Operating Assets and Liabilities
Accounts Receivable 225,555 (30,493)
Prepaid Expenses (54,346) (273,941)
Accounts Payable and Accrued Liabilities 845,499 757,191
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,698,034) (133,012)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (2,266) (350,113)
Oil and Gas Property Additions (755,524) (2,750,200)
Net Proceeds from Sale of Proved Oil and Gas Properties 2,235,365 -
Sale of Interest in Oil and Gas Prospects 150,000 -
Sale of Oil and Gas Seismic Data - 853,197
LNG Site Costs (125,000) -
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,502,575 (2,247,116)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuances of Notes Payable 1,250,000 -
Repayment of Note Payable (500,000) -
Sale of Common Stock - 500,000
Offering Costs - (6,671)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 750,000 493,329
----------- -----------
NET INCREASE/(DECREASE) IN CASH 554,541 (1,886,799)
CASH - BEGINNING OF PERIOD 610,718 1,888,562
----------- -----------
CASH - END OF PERIOD $ 1,165,259 $ 1,763
=========== ===========
The accompanying notes are an integral part of these financial
statements.
6
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The unaudited consolidated financial statements of Cheniere Energy,
Inc. ("Cheniere" or the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation, have been included.
For further information, refer to the consolidated financial statements
and footnotes included in the Company's Annual Report on Form 10-K/A for the
year ended December 31, 2001. Interim results are not necessarily indicative of
results to be expected for the full fiscal year ended December 31, 2002. Certain
reclassifications have been made to conform prior period amounts to the current
period presentation. These reclassifications have no effect on net income/(loss)
or stockholders' equity.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 143, Accounting for Asset
Retirement Obligations (ARO), which requires that an asset retirement obligation
be capitalized as part of the cost of the related long-lived asset and allocated
to expense by using a systematic and rational method. Under this Statement,
the ARO liability is recorded at its present value, and an entity is required to
recognize changes in the ARO liability resulting from the passage of time and
revisions in cash flow estimates. FAS 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company expects to
adopt FAS 143 on January 1, 2003. The Company has not yet determined the impact
that the adoption of FAS 143 will have on its earnings or statement of financial
position.
In May 2002, the FASB issued FAS 145, Rescission of FAS Nos. 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections as of April 2002. This Statement,
among other matters, rescinds FAS 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FAS 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. FAS 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. FAS 145, as it relates to the rescission of FAS 4, shall be applied
in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods and which
does not meet the extraordinary item criteria in Opinion 30 shall be
reclassified. The Company early adopted FAS 145 in the second quarter of 2002
and reflected its loss on early extinguishment of debt as an ordinary loss in
the statement of operations.
Note 2 - Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and
gas properties. Under this method, all productive and nonproductive exploration
and development costs incurred
7
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
for the purpose of finding oil and gas reserves are capitalized. In April 2002,
Cheniere sold substantially all of its proved oil and gas reserves for
$2,235,365 and recognized a gain on the sale of $340,257. In the first six
months of 2002, the Company's exploration program has made discoveries of proved
oil and gas reserves which have replaced approximately one half of the reserves
it sold. The Company's ownership in these properties takes the form of an
overriding royalty interest (ranging from 0.7% to 2.0%), convertible into a
working interest (ranging from 0.6% to 8.4%) after payout. Accordingly, the
Company will have no capital commitment related to these wells until after
payout of the wells, which payouts are expected to begin occurring in the fourth
quarter of 2003.
Note 3 - Note Payable
In March 2002, the Company entered into a short-term bridge financing
arrangement with an unrelated third party lender. The amount of the borrowing
was $500,000. The term was 120 days. Interest was payable monthly at 10% per
annum. Warrants were issued to the lender for the purchase of 150,000 shares of
Cheniere common stock, exercisable at a price of $2.50 per share on or before
March 7, 2012. Additionally, Cheniere extended the term to March 7, 2012 on
existing warrants for the purchase of 255,417 shares held by parties affiliated
with the lender. Based on the Black-Scholes model, the warrants issued (150,000
shares) and the extension of existing warrants (255,417 shares) in connection
with this financing arrangement have an aggregate value of $241,939. Debt
discount of $163,045 was recorded based on the relative fair values of the note
payable and the warrants. An additional 50,000 warrants were required to be
issued to the lender for each month or partial month for which the principal
remained unpaid after April 7, 2002. The Company repaid the loan on April 22,
2002, resulting in a loss on early extinguishment of debt in the amount of
$100,544, which is classified as an ordinary loss in the Company's statement of
operations. Cheniere also issued an additional 50,000 warrants to the lender,
valued at $24,054 based on the Black-Scholes model.
In June 2002, Cheniere received $750,000 as a refundable payment for the
sale of two options to purchase an aggregate of up to a 20% interest in its
Freeport LNG receiving terminal project. In the event the first option is
exercised, the payment is applied to the purchase price. In the event the option
is not exercised, the payment is refundable, and repayment is secured by a note
payable executed by Cheniere. The note is payable in full on July 15, 2003. It
will bear interest at 8%, payable at maturity and accruing from the earlier of
the time the option expires or the date the holder elects not to exercise. As of
June 30, 2002, the note has not yet begun to bear interest. The note is secured
by Cheniere's revenues, accounts receivable and other assets.
Note 4 - Investment in Unconsolidated Affiliate
Cheniere accounts for its investment in Gryphon using the equity method
of accounting because its participation on the Gryphon board of directors
provides significant influence over the operating and financial policies of
Gryphon. Cheniere's equity share of Gryphon's losses for the three months ended
June 30, 2002 was $970,938, calculated by applying Cheniere's 100% common stock
ownership interest to Gryphon's net loss of $2,080,000, reducing such result for
Gryphon's preferred dividend arrearages of $1,327,091 and limiting the amount of
loss recognized to the balance of Cheniere's investment in Gryphon as of March
31, 2002. In the second quarter of 2002, Cheniere limited the amount of loss
recognized such that the basis of its investment in Gryphon was reduced to zero,
but not below zero, because Cheniere does not guarantee any obligations of
Gryphon and is not committed to provide additional financial support to Gryphon.
The amount of
8
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Gryphon's net loss that has not yet been recorded by Cheniere was $2,437,124 at
June 30, 2002. For the three months ended June 30, 2001, Cheniere's equity share
of Gryphon's losses was $588,889, calculated by applying Cheniere's 100% common
stock ownership interest to Gryphon's net income of $33,269 and reducing such
result for Gryphon's preferred dividend arrearages of $622,158. At such time as
Warburg converts its preferred shares to common shares, Cheniere's equity share
of Gryphon's earnings (losses) will be calculated using the effective ownership
interest at the time of such conversion, and will no longer be reduced by
preferred dividends.
Gryphon's preferred stock is convertible at the option of the holder at a rate
of $100 per share of common stock at any time after the holders of a majority of
the preferred stock execute a written consent permitting a conversion of the
preferred stock or, if earlier, at any time after August 31, 2010. In the event
the holders of a majority of the preferred stock vote to convert all of their
shares of preferred stock into common stock, all shares of preferred stock shall
automatically be converted, without further action by Gryphon or its
shareholders. In addition, Gryphon has the right, at its option, to convert
shares of preferred stock into common stock upon Gryphon's closing of a firm
commitment qualified public offering.
The financial position of Gryphon at June 30, 2002 and December 31, 2001 and the
results of Gryphon's operations for the three and six months ended June 30, 2002
and 2001 are summarized as follows (in thousands):
June 30, December 31,
2002 2001
------------- -------------
(Unaudited)
Current assets $30,164 $14,864
Oil and gas properties, full cost method
Proved properties, net 30,476 25,484
Unproved properties 31,411 28,067
--------- --------
61,887 53,551
Fixed assets, net 579 616
--------- ---------
Total assets $92,630 $69,031
========= =========
Current liabilities $17,730 $ 5,001
Long-term liabilities 562 -
Deferred tax liabilities 1,182 1,182
Stockholders' equity 73,156 62,848
--------- ---------
Total liabilities and stockholders' equity $92,630 $69,031
========= =========
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
2002 2001 2002 2001
---------- --------- ---------- ---------
(Unaudited) (Unaudited)
Revenues $ 2,039 $183 $ 3,904 $ 394
Loss from continuing operations (2,121) (47) (2,203) (88)
Net income (loss) (2,080) 34 (2,130) 124
Cheniere's equity in losses from
unconsolidated affiliate (971) (589) (2,185) (1,007)
In March 2002, Cheniere sold 51,400 shares of its Gryphon common stock to
Gryphon,
9
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
subject to an option to repurchase the shares, thereby reducing its
interest in Gryphon from 20.2% to 13.7% on an as-converted basis. Such sale was
made in connection with the settlement of a lawsuit filed by Fairfield
Industries Incorporated against Cheniere and Gryphon. In connection with its
sale of Gryphon common stock to Gryphon, Cheniere has a one-year option to
repurchase all or a portion of the 51,400 shares at a price of $50 per share if
exercised within 120 days of the sale or at prices increasingly ratably
thereafter to approximately $68 per share one year after the sale (approximately
$57 per share as of August 14, 2002). As consideration for the shares, Gryphon
agreed to make payments in full satisfaction of certain existing and contingent
obligations of Cheniere totaling $3,561,692. Cheniere, Gryphon, and Fairfield
Industries, Inc. reached a settlement agreement whereby a lawsuit and related
claims asserted by Fairfield against Cheniere and Gryphon were dismissed. (See
additional discussion of the claims and settlement thereof under "Legal
Proceedings" on page 16 of this Quarterly Report.)
The board of directors of Gryphon approved cash calls of $10,000,000 in
May 2002 and $5,000,000 in July 2002. Cheniere elected not to participate in
either of the cash calls. Warburg funded Cheniere's portion of the May 2002 cash
call, reducing Cheniere's interest in Gryphon on an as-converted basis to 11.1%.
Although Cheniere's as-converted ownership in Gryphon will be reduced to 10.4%
if Warburg funds Cheniere's portion of the July cash call, Cheniere continues to
exercise significant influence over the operating and financial policies of
Gryphon through its participation on Gryphon's board of directors. As a result
of continued dilution of Cheniere's ownership interest in Gryphon, Cheniere is
no longer entitled to representation on Gryphon's board, however, the other
directors on Gryphon's board have elected for Cheniere's board representation to
continue. Cheniere holds an option to acquire 51,400 shares of Gryphon common
stock for an amount, which increases ratably from $2,570,000 in July 2002 to
approximately $3,474,000 in March 2003. If Cheniere were to exercise the option
to purchase Gryphon shares, its as-converted ownership in Gryphon would increase
to 15.6%.
Note 5 - Sale of Option for Interest in LNG Terminal Project
In June 2002, the Company sold options to purchase up to a 20% interest
in its planned LNG receiving terminal in Freeport, Texas. The exercise price for
an initial 10% interest in the project is $1,500,000, consisting of a $750,000
payment made at signing and the balance payable upon exercise of the option. If
the holder elects not to exercise the initial 10% option, Cheniere will repay
the $750,000 on or prior to July 15, 2003 under the terms of its note payable
(Note 3). In the event the initial 10% option is exercised, the holder will have
the right to acquire an additional 10% interest in the project upon payment of
an additional $1,500,000. The options will expire on December 15, 2002 or
earlier upon the occurrence of certain events. The purchaser would also be
responsible for its share of all project costs, subsequent to January 1, 2002.
Note 6 - Related Party Transactions
In April 2002, Cheniere's president advanced amounts totaling $30,000
to the Company. Subsequent to its sale of producing oil and gas properties,
Cheniere repaid the advances on April 25, 2002, with accrued interest at 10% per
annum totaling $122.
Note 7 - Non-Cash Transactions
In March 2002, the Company sold 51,400 shares of Gryphon common stock
back to Gryphon in connection with the settlement of a lawsuit filed by
Fairfield Industries Incorporated against Cheniere and Gryphon. The shares were
valued at $1,562,352. The Company recorded $1,062,352 to oil and gas
properties and $500,000 to accounts payable in connection with the transaction.
10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company's unaudited consolidated financial statements and notes thereto
relate to the three-month and six-month periods ended June 30, 2002 and 2001.
These statements, the notes thereto and the consolidated financial statements
included in the Company's Annual Report on Form 10?K/A for the year ended
December 31, 2001 contain detailed information that should be referred to in
conjunction with the following discussion.
Production and Product Prices
Information concerning the Company's production and average prices received
for the three-month and six-month periods ended June 30, 2002 and 2001 is
presented in the following table:
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- ---------------------
2002 2001 2002 2001
----------- --------- -------- ---------
Production
Oil (Bbls) 18 924 490 1,525
Gas (Mcf) 12,342 173,975 80,432 307,943
Gas equivalents (Mcfe) 12,450 179,519 83,372 317,093
Average sales prices
Oil (per Bbl) $ 24.00 $ 27.28 $ 20.00 $ 29.56
Gas (per Mcf) $ 3.04 $ 4.58 $ 2.44 $ 5.85
Gas equivalents (per Mcfe) $ 3.05 $ 4.58 $ 2.47 $ 5.82
Results of Operations
Comparison of Three-Month Periods Ended June 30, 2002 and 2001 - The
Company's operating results for the three months ended June 30, 2002 reflect a
loss of $2,366,029, or $0.18 per share, compared to a loss of $3,785,625, or
$0.29 per share a year earlier. The principal factors contributing to the
$1,419,596 decrease in Cheniere's loss for the quarter were: (1) oil and gas
activities, including the effects of a $2,159,645 ceiling test write-down in the
2001 period combined with a $340,257 gain on the sale of properties in 2002,
offset by a decline in oil and gas operating results of $318,789 due to
Cheniere's April 2002 sale of properties; (2) LNG related expenses, which
increased $426,678 due to the commencement of engineering work related to the
Company's plan to file for a permit in 2002; and (3) Cheniere's equity in net
loss of unconsolidated affiliate, which increased $382,049.
In the second quarter of 2002, Cheniere recorded oil and gas revenues of
$37,955 compared to $774,832 a year earlier. Depreciation, depletion and
amortization ("DD&A") of oil and gas property costs also decreased significantly
to $9,979 for the 2002 quarter compared to $366,216 for the 2001 quarter.
Production costs declined to $24,702 from $86,553 in 2001. The decreases in
all areas of oil and gas operations are the result of lower production due to
the Company's sale of its West Cameron Block 49 properties on April 22, 2002.
The Company reported a $340,257 gain related to the sale.
General and administrative ("G&A") expenses, net of amounts capitalized,
were
11
$1,584,140 and $1,296,536 in the second quarters of 2002 and 2001, respectively.
Total G&A expenses increased by $283,604 to $1,794,140 in the second quarter of
2002 from the total of $1,510,536 of a year earlier. Consulting fees increased
by $478,719, principally related to permitting, environmental and regulatory
work related to the LNG receiving terminal project. Legal fees decreased by
$157,671, principally related to the decreased level of legal involvement in the
LNG project in 2002 as compared to 2001. Offsetting total G&A expenses were
amounts capitalized to the Company's oil and gas properties. Cheniere
capitalizes as oil and gas property costs that portion of G&A expenses directly
related to its exploration and development activities. Cheniere capitalized
$210,000 in the second quarter of 2002 compared to $214,000 a year earlier.
Cheniere accounts for its investment in Gryphon using the equity method
of accounting because Cheniere's participation on the Gryphon board of directors
provides significant influence over the operating and financial policies of
Gryphon. Cheniere's equity share of Gryphon's losses for the three months ended
June 30, 2002 was $970,938, calculated by applying Cheniere's 100% common stock
ownership interest to Gryphon's net loss of $2,080,000, reducing such result for
Gryphon's preferred dividend arrearages of $1,327,091 and limiting the amount of
loss recognized to the balance of Cheniere's investment in Gryphon as of March
31, 2002. In the second quarter of 2002, Cheniere limited the amount of loss
recognized such that the basis of its investment in Gryphon was reduced to zero,
but not below zero, because Cheniere does not guarantee any obligations of
Gryphon and is not committed to provide additional financial support to Gryphon.
The amount of Gryphon's net loss that has not yet been recorded by Cheniere was
$2,437,124 at June 30, 2002. For the three months ended June 30, 2001,
Cheniere's equity share of Gryphon's losses was $588,889, calculated by applying
Cheniere's 100% common stock ownership interest to Gryphon's net income of
$33,269 and reducing such result for Gryphon's preferred dividend arrearages of
$622,158. At such time as Warburg converts its preferred shares to common
shares, Cheniere's equity share of Gryphon's earnings will be calculated at
11.1%, based on the number of Gryphon shares outstanding at June 30, 2002.
Comparison of Six-Month Periods Ended June 30, 2002 and 2001 - The
Company's operating results for the six months ended June 30, 2002 reflect a
loss of $4,896,996, or $0.37 per share, compared to a loss of $4,696,476, or
$0.37 per share a year earlier. The principal factors contributing to the
$200,520 increase in Cheniere's loss for the quarter were: (1) oil and gas
activities, including the effects of a $2,159,645 ceiling test write-down in the
2001 period combined with a $340,257 gain on the sale of properties in 2002,
offset by a decline in oil and gas operating results of $850,975 for 2002
principally due to Cheniere's April 2002 sale of properties; (2) LNG related
expenses, which increased $840,047 due to the commencement of engineering work
related to the Company's plan to file for a permit in 2002; and (3) Cheniere's
equity in net loss of unconsolidated affiliate, which increased $1,177,417.
In the first half of 2002, Cheniere recorded oil and gas revenues of
$199,559 compared to $1,746,488 a year earlier. The $1,546,929 decrease in
revenues results from: (1) the Company's sale of its West Cameron Block 49
producing oil and gas properties on April 22, 2002; (2) a decline in production
rates due to depletion of currently producing zones and due to mechanical
problems on one of the Company's active two wells in 2002, which caused it to be
off production for the two months prior to their sale; and (3) the decline in
product prices between periods which created a negative price variance of
approximately $280,000.
Depreciation, depletion and amortization ("DD&A") of oil and gas
property costs decreased to $67,940 from $646,869 and production costs decreased
to $90,038 from $207,063 for the 2002 period as compared to 2001 because of the
production decline described above in the discussion of Cheniere's revenues.
G&A expenses, net of amounts capitalized, were $2,884,218 and
$2,322,158 in the first six months of 2002 and 2001, respectively. Total G&A
expenses increased by $549,060 to $3,292,218 in the first half of 2002 from the
total of $2,743,158 of a year earlier. Consulting fees increased by $835,072,
principally
12
related to permitting, environmental and regulatory work related to the LNG
receiving terminals project. Legal fees decreased by $293,951, principally
related to the decreased level of legal involvement in the LNG project in 2002
as compared to 2001. Offsetting total G&A expenses were amounts capitalized to
the Company's oil and gas properties. Cheniere capitalizes as oil and gas
property costs that portion of G&A expenses directly related to its exploration
and development activities. Cheniere capitalized $408,000 in the first half of
2002 compared to $421,000 a year earlier.
Cheniere accounts for its investment in Gryphon using the equity method of
accounting because Cheniere's participation on the Gryphon board of directors
provides significant influence over the operating and financial policies of
Gryphon. Cheniere's equity share of Gryphon's losses for the six months ended
June 30, 2002 was $2,184,847, calculated by applying Cheniere's 100% common
stock ownership interest to Gryphon's net loss of $2,130,000, reducing such
result for Gryphon's preferred dividend arrearages of $2,491,968 and limiting
the cumulative amount of net loss recognized to the balance of Cheniere's
investment in Gryphon. In the second quarter of 2002, Cheniere limited the
amount of loss recognized such that the basis of its investment in Gryphon was
reduced to zero, but not below zero, because Cheniere does not guarantee any
obligations of Gryphon and is not committed to provide additional financial
support to Gryphon. The amount of Gryphon's net loss that has not yet been
recorded by Cheniere was $2,437,124 at June 30, 2002. For the six months ended
June 30, 2001, Cheniere's equity share of Gryphon's losses was $1,007,430,
calculated by applying Cheniere's 100% common stock ownership interest to
Gryphon's net income of $123,519 and reducing such result for Gryphon's
preferred dividend arrearages of $1,130,949. At such time as Warburg converts
its preferred shares to common shares, Cheniere's equity share of Gryphon's
earnings will be calculated at 11.1%, based on the number of Gryphon shares
outstanding at June 30, 2002.
Liquidity and Capital Resources
Cash balances and cash flows from current operations will not be adequate
to meet the future liquidity requirements of the Company. In addition to its
operating expenses, the Company will need to finance approximately $8,000,000 of
costs and expenses in connection with the permitting, environmental and
regulatory work planned for 2002 and 2003, related to the development of
Cheniere's initial LNG receiving terminal. As a result, there is uncertainty
about the Company's ability to continue as a going concern. The Company expects
that future liquidity requirements will be met by one or more of the following:
sale of all or a portion of the Company's interest in oil and gas properties,
sales of portions of its working interest in the prospects within its
exploration program, sale to an industry partner of a participation in the
Company's exploration program, sale of Cameron Project 3D seismic data licenses,
sale of all or a portion of its investment in Gryphon, sale of a participation
interest in the Company's LNG project, sale of options on throughput capacity
for the Company's planned LNG terminals and/or additional offerings of the
Company's equity securities. Management expects to meet all of its liquidity
requirements through December 31, 2002 through such sources. In the event that
the Company is unable to obtain additional capital from one or more of these
sources, its financial position and operations could be adversely affected.
Cash Flow from Operating Activities
On April 22, 2002, Cheniere sold its producing oil and gas properties for
$2,235,365, with an effective date of January 1, 2002. The Company continues to
own an overriding royalty interest (less than 1%) in a well which began
production in February 2002. During 2002, Cheniere's partners have drilled an
additional four discoveries on prospects sold by Cheniere, and the Company
expects that additional wells will be drilled on prospects it has sold to
industry partners. Cheniere retains an overriding royalty interest and/or a
working interest in these wells. The Company expects oil and gas revenues will
not be significant until late 2003 when the wells are projected to reach payout,
at which time Cheniere will be able to convert its overriding royalty interests
into larger working interest positions in these wells.
Note Payable
In March 2002, the Company entered into a short-term bridge financing
arrangement with an unrelated third party lender. The amount of the borrowing
was $500,000. The term was 120
13
days. Interest was payable monthly at 10% per annum. Warrants were issued to the
lender for the purchase of 150,000 shares of Cheniere common stock, exercisable
at a price of $2.50 per share on or before March 7, 2012. Additionally, Cheniere
extended the term to March 7, 2012 on existing warrants for the purchase of
255,417 shares held by parties affiliated with the lender. Based on the
Black-Scholes model, the warrants issued (150,000 shares) and the extension of
existing warrants (255,417 shares) in connection with this financing arrangement
have an aggregate value of $241,939. Debt discount of $163,045 was recorded
based on the relative fair values of the note payable and the warrants. An
additional 50,000 warrants were required to be issued to the lender for each
month or partial month for which the principal remained unpaid after April 7,
2002. The Company repaid the loan on April 22, 2002, resulting in a loss on
early extinguishment of debt in the amount of $100,544, which is classified as
an ordinary loss in the Company's statement of operations. Cheniere also issued
an additional 50,000 warrants to the lender, valued at $24,054 based on the
Black-Scholes model.
In June 2002, Cheniere received $750,000 as a refundable payment for the
sale of two options to purchase an aggregate of up to a 20% interest in its
Freeport LNG receiving terminal project. In the event the first option is
exercised, the payment is applied to the purchase price. In the event the option
is not exercised, the payment is refundable, and repayment is secured by a note
payable executed by Cheniere. The note is payable in full on July 15, 2003. It
will bear interest at 8%, payable at maturity and accruing from the earlier of
the time the option expires or the date the holder elects not to exercise. As of
June 30, 2002, the note has not yet begun to bear interest. The note is secured
by Cheniere's revenues, accounts receivable and other assets.
Exploration Funding
On October 11, 2000, Cheniere completed a transaction with Warburg to fund
its exploration program on approximately 8,800 square miles of seismic data in
the Gulf of Mexico through a newly formed affiliated company, Gryphon. Cheniere
contributed selected assets and liabilities in exchange for 100% of the common
stock of Gryphon (36.8% effective interest after conversion of preferred stock)
and $2,000,000 in cash. Such assets included: Cheniere's seismic data license
covering 8,800 square miles offshore Louisiana, certain offshore leases, a
prospect then being drilled, its exploration agreement with an industry partner
and certain other assets and liabilities. Warburg contributed $25,000,000 and
received preferred stock, with an 8% cumulative dividend, convertible into 63.2%
of Gryphon's common stock. Cheniere and Warburg also had options, under certain
circumstances, to contribute an additional $75,000,000 to Gryphon, proportionate
to their respective ownership interests. As of June 30, 2002, Warburg has funded
an additional $45,000,000, making its total cash contributions to Gryphon
$70,000,000. The effect of Cheniere's decision not to fund these subsequent cash
calls to date, and the effect of sales of Gryphon common stock held by Cheniere
back to Gryphon, have reduced Cheniere's effective ownership in Gryphon to 11.1%
as of August 14, 2002. On July 25, 2002, the Company received a cash call from
Gryphon for $5,000,000, ($556,855 net to Cheniere) payable by September 3, 2002.
The Company has elected not to participate in this cash call. If Warburg funds
Cheniere's portion, as they are entitled to do, and as they have done since the
formation of Gryphon, the Company's ownership interest in Gryphon on an
as-converted basis will be further reduced to 10.4%.
In connection with the seismic license contributed to Gryphon upon its
formation, Cheniere entered into an agreement with the third party issuer of the
license. The agreement provided that Cheniere would pay a transfer fee to the
third party in an aggregate amount of up to $2,500,000. Such transfer fee was
contingent upon Gryphon's completion of up to ten successful wells during the
license period and within the license area.
14
Cheniere's existing and contingent obligations under this agreement were fully
discharged in March 2002 in connection with its sale of Gryphon common stock to
Gryphon and the related assumption by Gryphon of these obligations.
Seismic Reprocessing
Between June 2000 and October 2000, Cheniere acquired licenses to
approximately 6,800 square miles of seismic data primarily in the shallow waters
offshore Texas and also in the West Cameron area in the Gulf of Mexico (the
"Offshore Texas Project Area") in separate transactions with Seitel Data Ltd., a
division of Seitel Inc., and JEBCO Seismic, L.P. Cheniere committed to reprocess
all of the data from the Offshore Texas Project Area at a cost of approximately
$8,500,000, payable in installments beginning in October 2000 and continuing
through the final delivery of reprocessed data, which was expected to occur in
2002. Deliveries of reprocessed data began in May 2001. After the assumption of
liabilities by Gryphon related to its purchase in 2001 of one license to the
data and related to the March 2002 sale of 51,400 shares of its Gryphon common
stock back to Gryphon (Note 4), Cheniere has no existing or contingent liability
related to seismic reprocessing as of June 30, 2002.
Recently Issued Statements of Financial Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 143, Accounting for Asset
Retirement Obligations (ARO), which requires that an asset retirement obligation
be capitalized as part of the cost of the related long-lived asset and allocated
to expense by using a systematic and rational method. Under this Statement, the
ARO liability is recorded at its present value, and an entity is required to
recognize changes in the ARO liability resulting from the passage of time and
revisions in cash flow estimates. This Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
expects to adopt FAS 143 on January 1, 2003. The Company has not yet determined
the impact that the adoption of FAS 143 will have on its earnings or statement
of financial position.
In May 2002, the FASB issued FAS 145, Rescission of FAS Nos. 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections as of April 2002. This Statement,
among other matters, rescinds FAS 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FAS 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. FAS 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. FAS 145, as it relates to the rescission of FAS 4, shall be applied
in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods and which
does not meet the extraordinary item criteria in Opinion 30 shall be
reclassified. The Company early adopted FAS 145 in the second quarter of 2002
and reflected its loss on early extinguishment of debt as an ordinary loss in
the statement of operations.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in this report and
other filings with the Securities and Exchange Commission and in reports to its
stockholders.
15
All statements, other than statements of historical facts so included in
this report that address activities, events or developments that the Company
intends, expects, projects, believes, or anticipates will or may occur in the
future are forward-looking statements within the meaning of the Act, including,
without limitation; (i) statements regarding the Company's business strategy,
plans and objectives and (ii) statements expressing beliefs and expectations
regarding the ability of the Company to secure the leases necessary to
facilitate anticipated drilling activities, the ability of the Company to
attract additional working interest owners to participate in its exploration and
development activities and the ability of the Company to fund the development
phase of its LNG project, and to obtain the appropriate permits and
environmental approvals necessary to begin construction of an LNG terminal.
These forward-looking statements are, and will be, based on management's then
current views and assumptions regarding future events.
Factors That May Impact Forward-Looking Statements or Financial Performance
The following are some of the important factors that could affect the
Company's financial performance or could cause actual results to differ
materially from estimates contained in the Company's forward-looking statements:
-- The Company's ability to generate sufficient cash flows to support
capital expansion plans, obligations to repay debt and general
operating activities.
-- The Company's ability to obtain additional financing from lenders,
through debt or equity offerings, or through sales of a portion of its
interest in prospects.
-- The Company's ability to encounter hydrocarbons in sufficient
quantities to be economically viable, and its ability to overcome the
operating hazards which are inherent in the oil and gas industry and
which are intensified by the Company's concentration of its producing
oil and gas assets in few properties.
-- Changes in laws and regulations, including changes in accounting
standards, taxation requirements (including tax rate changes, new tax
laws and revised tax law interpretations) and environmental laws in
domestic or foreign jurisdictions.
-- The uncertainties of litigation as well as other risks and
uncertainties detailed from time to time in the Company's Securities
and Exchange Commission filings.
The foregoing list of important factors is not exclusive.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company produces and sells natural gas, crude oil and condensate.
As a result, the Company's financial results can be significantly affected as
these commodity prices fluctuate widely in response to changing market forces.
The Company has not entered into any derivative transactions as of June 30,
2002.
PART II. Other Information
Item 1. Legal Proceedings
The Company has been and may in the future be involved as a party to
various legal proceedings, which are incidental to the ordinary course of
business. Management regularly analyzes current information and as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. In the opinion of management and legal counsel, as of
16
June 30, 2002, there were no threatened or pending legal matters that would have
a material impact on the Company's consolidated results of operations, financial
position or cash flows.
In February 2002, the Company received a copy of a lawsuit styled Fairfield
Industries Incorporated (Fairfield) vs. Cheniere Energy, Inc. and Gryphon
Exploration Company, which was filed in district court in Harris County, Texas.
The lawsuit related to a seismic license agreement between Fairfield and
Cheniere, which was later assigned to Gryphon. In the lawsuit, Fairfield alleged
that Cheniere and Gryphon conspired to defraud the plaintiff of certain transfer
payments, which may be owed by Cheniere in connection with the transfer to
Gryphon of the initial seismic contributed at the time of its formation. In
March 2002, Fairfield, Gryphon, and the Company settled this lawsuit. Existing
and contingent obligations to Fairfield by Cheniere totaling $2,500,000 have
been fully discharged through agreement by Gryphon to make current and
contingent payments as part of the consideration for the transfer of 51,400
Gryphon common shares from Cheniere to Gryphon.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held an annual meeting of its stockholders on May 23, 2002. The
following individuals were elected to the Board of Directors: Nuno Brandolini,
Keith F. Carney, Paul J. Hoenmans, John K. Howie, Charles M. Reimer, Charif
Souki and Walter L. Williams. In addition to the election of Directors, the
following matters were submitted to a vote and approved by stockholders: the
amendment of the Company's 1997 Stock Option Plan to increase the number of
shares subject to the plan from 1,500,000 to 2,000,000; and the ratification and
approval of the appointment of PricewaterhouseCoopers LLP as independent
accountants for the year ended December 31, 2002. There were 13,297,393 shares
of common stock outstanding and eligible to vote as of the record date of April
1, 2002. The results of voting on these matters is summarized in the following
table:
Votes Abstentions or
Description Votes For Against Broker Non-Votes
- ----------- --------- ------- ----------------
Nuno Brandolini 7,505,848 - 0 - 44,425
Keith F. Carney 7,505,848 - 0 - 44,425
Paul J. Hoenmans 7,505,848 - 0 - 44,425
John K. Howie 7,505,848 - 0 - 44,425
Charles M. Reimer 7,505,848 - 0 - 44,425
Charif Souki 7,505,848 - 0 - 44,425
Walter L. Williams 7,505,848 - 0 - 44,425
Amend Stock Option Plan 7,320,644 227,227 2,402
Independent Accountants 7,545,827 1,097 3,349
Item 5. Other Information
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, each of the Chief Executive Officer and the
Chief Financial Officer of the Company has certified that the Quarterly Report
of the Company on Form 10-Q for the period ended June 30, 2002 (the "Report")
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
17
Item 6. Exhibits and Reports on Form 8-K
(a) Each of the following exhibits is incorporated by reference or filed
herewith:
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the three months
ended June 30, 1999 (File No. 0-09092))
3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Cheniere Energy, Inc. (incorporated by
reference to Exhibit 3.2 of the Company's Quarterly Report on
Form 10-Q for the three months ended June 30, 1999 (File No.
0-09092))
3.3 By-laws of Cheniere as amended through April 7, 1997
(incorporated by reference to Exhibit 3.1 of the Company's Annual
Report on Form 10-K filed on March 29, 1999 (File No. 0-9092))
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Current Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHENIERE ENERGY, INC.
/s/ Don A. Turkleson
--------------------------------------
Don A. Turkleson
Chief Financial Officer (on behalf of
the registrant and as principal
accounting officer)
Date: August 14, 2002
18