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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
Commission File No. 0-9092
CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4352386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Smith Street, Suite 1740 77002-4312
Houston, Texas (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 659-1361
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ 0.003 PAR VALUE
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant was approximately $36,290,457 as of March 24, 2000
(based upon the March 24, 2000 closing market price of such common stock as
reported by the Nasdaq SmallCap Market). 42,381,973 shares of the registrant's
Common Stock were outstanding as of March 24, 2000.
Documents incorporated by reference: Proxy Statement for the registrant's
Annual Meeting of Stockholders (to be filed within 120 days of the close of the
registrant's fiscal year) is incorporated by reference into Part III.
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CHENIERE ENERGY, INC.
Index to Form 10-K
PART I
Items 1 and 2. Business and Properties.................................................................... 3
Item 3. Legal Proceedings................................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............................................... 17
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters... 18
Item 6. Selected Financial Data........................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....................................... 23
Item 8. Financial Statements and Supplementary Data....................................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 45
PART III
Items 10-13. (Incorporated by reference to Proxy Statement)............................................... 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 46
SIGNATURES................................................................................................ 49
2
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
Cheniere Energy, Inc. is a Delaware corporation engaged in exploration for
oil and gas reserves. The terms "Cheniere" and "Company" refer to Cheniere
Energy, Inc. and its subsidiaries. The Company principally operates through its
wholly-owned subsidiary, Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). Cheniere is a Houston-based company formed for the purpose of oil
and gas exploration, development and exploitation. The Company is currently
evaluating and generating drilling prospects using a regional and integrated
approach with a large 3-D seismic database as a platform.
Cheniere was formed in 1996 to fund the acquisition of a proprietary 3-D
seismic database along the transition zone in Cameron Parish, Louisiana. The
228-square-mile survey was acquired and processed during 1997. Interpretation
of the data yielded drilling prospects located onshore and in the state and
federal waters of offshore Louisiana. Leasing activity occurred over identified
prospects throughout these three jurisdictions during 1998 and 1999 and
continues.
During 1999 the Company drilled exploration wells on six prospects: two were
discoveries and four were dry holes. Both discoveries are located on West
Cameron Block 49 in Louisiana state waters in approximately 25 feet of water.
Production of natural gas commenced from a common platform in September 1999.
Further drilling in the Cameron project area is scheduled for 2000 on leased
prospects, and multiple leads are under development for possible leasing in the
future.
To ensure continued access to high quality drilling prospects, the Company
expanded beyond the Cameron area and into the shallow waters of the Gulf of
Mexico. Cheniere hired additional management and technical expertise and
licensed 8,700 square miles of 3-D seismic data, which is currently being
evaluated. The Company also made the commitment to reprocess the entire 8,700
square-mile seismic database. The resulting new data set is being delivered
over a period of approximately two years beginning in September 1999 and
provides the Company with a higher resolution image of the subsurface than has
previously been available.
Cheniere's existing data set and the reprocessed data set, as it is
delivered, provide the Company the framework with which to "capture" drilling
prospects through leasing at the area-wide federal and state lease sales,
through farm-ins, and through participation in industry prospects.
Cheniere has been publicly traded since July 3, 1996 under the name Cheniere
Energy, Inc. The Company's principal executive offices are located at 1200
Smith Street, Suite 1740, Houston, Texas 77002, and its telephone number is
(713) 659-1361. Cheniere's internet website is located at www.cheniere.com.
On April 7, 1998, the Company's Board of Directors approved a change in
fiscal year-end. The change in year-end resulted in a transition period from
September 1, 1997 to December 31, 1997.
Prior to the commencement of its revenues in September 1999, Cheniere was a
development stage company.
BUSINESS STRATEGY
The Company's objective is to expand the net value of its assets by building
an oil and gas reserve base in a cost-efficient manner. Cheniere's exploration
program combines the use of regional 3-D seismic data in shallow water areas of
the Gulf of Mexico, advanced analytical technologies, a methodology that
integrates geoscience and engineering disciplines, and a core of experienced
staff.
Seismic Data
Cheniere has acquired two significant seismic database assets: 1) a 228
square-mile proprietary 3-D seismic program in the transition zone of Cameron
Parish, Louisiana, and 2) an 8,700 square-mile 3-D seismic database offshore
Louisiana, licensed from Fairfield Industries. The licensed database has been
available previously to the industry and was processed using a technique called
dip move out ("DMO"). Cheniere has acquired the DMO data and is underwriting the
reprocessing of the data utilizing a more rigorous technology known as prestack
time migration ("PSTM"). The regional PSTM data is the "technology tool" which
management believes gives Cheniere a competitive advantage and is being
processed at the rate of approximately 300 square-miles (40 blocks) per month.
3
Analysis
Cheniere has built a prospect generation infrastructure capable of detailed
analyses of large volumes of seismic, geological, and engineering data. At the
center of the analytical capabilities is a UNIX workstation network, which
allows large databases to be shared by the technical staff. Geological and
geophysical interpretation, modeling, and mapping software packages are
available on the network for use by each of the geoscientists to generate and
refine drilling opportunities. A thorough analysis of the various technical
factors, utilizing some of these advanced evaluation capabilities, is essential
to accurately quantify reserve potential and risks.
Methodology
Cheniere employs a rigorous methodology which includes: 1) the detailed
analyses of existing fields to identify geological and geophysical attributes
for use as analogs, 2) regional trend mapping to extend prolific plays into
under-explored areas, 3) the use of workstation interpretation techniques to
rapidly identify prospects with attributes similar to those identified in the
analog fields, 4) the integration of seismic interpretation, well control,
structure, stratigraphy, timing, sourcing factors, and production data to
quantify prospect potential, and 5) the integration of the above sciences with
experience and conservative economic evaluation to focus the exploration program
on highly commercial projects. By conducting a thorough analysis of the data
(in particular the use of seismic attributes and field analogs) and strict
adherence to the methodology, Cheniere can reduce the risk of dry holes and
achieve significant growth, while maintaining a competitive cost of finding and
development. The typical prospect generation flow in a focus area is as
follows:
1. Review existing discoveries to identify main producing trends and
attributes associated with production;
2. Map regional producing trends;
3. Create regional attribute maps;
4. Combine 1, 2, and 3 to develop leads;
5. Determine if lead meets basic economic hurdles;
6. Determine acreage availability;
7. Evaluate remaining leads in detail to develop prospects;
8. Compare prospects directly to analogs;
9. Fully evaluate reserves and risks for prospects;
10. Run economics and determine commercial attractiveness;
11. Acquire and drill prospects.
Experience
Cheniere has built a technical and management team that is very experienced
in the Gulf of Mexico and in various technical specialties required for its
exploration program. In general, this experience allows the Company to be very
productive in the generation, capture, and drilling of exploratory wells. In
specific, the experience has produced a number of leads and prospects in areas
where staff members had previously worked but lacked either data or capital to
exploit their ideas.
PROPRIETARY 3-D SEISMIC EXPLORATION PROGRAM IN CAMERON PARISH, LOUISIANA
TRANSITION ZONE
The Proprietary 3-D Seismic Exploration Program is located within an area
referred to as the transition zone of Louisiana, which defines an area extending
roughly three to five miles on either side of the coastline and includes the
westernmost 28 miles of Louisiana coastline. Substantial infrastructure along
the Gulf Coast and in the shallow Gulf of Mexico should permit Cheniere to lower
its development costs compared to those in other geographic regions and
facilitate timely development of oil and gas discoveries. The Company's
officers and technical staff have extensive experience both onshore and offshore
in the Gulf Coast and believe the Proprietary 3-D Seismic Exploration Program is
well-positioned to evaluate, explore and develop properties in the area.
Exploration Agreement
Under the terms of the exploration agreement covering the Proprietary 3-D
Seismic Exploration Program, Cheniere paid for certain seismic costs and owns a
50% working interest participation in the leasing and drilling of all prospects
generated from the survey.
4
Cheniere has elected to generate its own prospects, which it has offered to
the other party to the exploration agreement. Neither party to the Proprietary
3-D Seismic Exploration Program is permitted to sell or license the data without
the other party's approval.
Schedule for the Proprietary 3-D Seismic Exploration Program
Drilling activities, which are described above, commenced in 1999.
Reprocessing and interpretation of the survey data is continuing. Cheniere and
the other party to the exploration agreement have designated the entire survey
(onshore and offshore) as an area of mutual interest for five years ending May
15, 2001, during which period the two companies may continue to participate in
drilling, testing, and developing prospects.
West Cameron Block 49
Two natural gas discoveries located in West Cameron Block 49 in Louisiana
state waters were tied into a common platform and began production during
September 1999. Both the Redfish well and the Stingray well are located in
shallow waters of approximately 25 feet and were drilled into the Lower Miocene
formation from 9,000 to 11,000 feet. Cheniere owns a 35% working interest in
Redfish and a 45% working interest in Stingray, both of which are operated by IP
Petroleum Company. Subsequent to the commencement of production on September 9,
1999, the two wells produced approximately 651 million cubic feet equivalent of
natural gas net to Cheniere's interest, or an average of 5.3 million cubic feet
per day.
In February 2000, the Stingray well was successfully recompleted. Subsequent
to the recompletions, the production rates at West Cameron Block 49 have
increased compared to fourth quarter 1999 production rates. Cheniere plans to
drill an additional prospect at West Cameron Block 49 during 2000 and is also
considering multiple leads for possible additional leasing in the area.
3-D SEISMIC DATABASE LICENSED FROM FAIRFIELD
In June 1999, Cheniere acquired 8,700 square miles of 3-D seismic data from
Fairfield Industries, covering over 1,100 outer continental shelf blocks in the
shallow waters of the Gulf of Mexico. The delivery and reprocessing of the data
is described above and will continue through 2001.
In March 2000, Cheniere entered into an exploration agreement with Samson
Offshore Company, a private Oklahoma company, for Samson to participate as a 50%
working interest owner in any drilling prospect generated or taken by Cheniere
in the Gulf of Mexico. Samson will pay a disproportionate share of the cost of
leasing and drilling of the initial test well on each prospect. Cheniere will
be the operator.
Also in March 2000, Cheniere and Samson jointly were the high bidder on five
federal offshore lease blocks. The blocks are offshore Louisiana in water
depths of less than 100 feet and initial drilling is expected to commence in May
2000.
5
PRODUCTION AND SALES
The following table presents certain information with respect to natural gas
production attributable to the Company, average sales prices received and
average production costs during 1999. The Company had no production prior to
1999.
Year Ended
December 31,
1999
-------------
Production:
Oil (bbls) 2,975
Gas (mmcf) 633,432
Gas equivalents (mmcfe) 651,282
Average sales prices:
Oil (per barrel) $ 23.18
Gas (per mcf) 2.59
Selected data per mcfe:
Average sales price $ 2.48
Production costs 0.20
Oil and gas depreciation, depletion and amortization 1.84
ACREAGE AND WELLS
The following table sets forth certain information with respect to the
Company's developed and undeveloped leased acreage as of December 31, 1999.
Developed Acres Undeveloped Acres (1)
--------------- ---------------------
Gross Net Gross Net
-------- ------ ----------- ---------
Louisiana 1,366 547 7,583 4,725
Texas - - 2,300 1,840
----- --- ----- -----
Total 1,366 547 9,883 6,565
===== === ===== =====
- ------------
(1) Approximately 23% of net undeveloped acres are covered by leases that
expire during 2000.
As of December 31, 1999, the Company had working interests in 2 gross (0.8
net) producing gas wells.
6
DRILLING ACTIVITIES
All of Cheniere's drilling activities are conducted through arrangements
with independent contractors. Cheniere owns no drilling equipment. Certain
information with regard to the Company's drilling activities, during the year
ended December 31, 1999, is set forth below:
Year Ended
December 31,
1999
------------------
Net
Working
Gross Interest
------- ----------
Development wells: - -
Exploratory wells:
Oil - -
Gas 2 0.8
Nonproductive 4 2.5
-- ---
Total 6 3.3
-- ---
Total wells 6 3.3
== ===
Cheniere drilled no wells prior to 1999. All of the Company's wells are in
the United States. At December 31, 1999, the Company was not participating in
the drilling of any wells.
OIL AND GAS RESERVES
All information herein regarding estimates of the Company's proved
reserves, related future net revenues and PV-10 is taken from reports generated
by Ryder Scott Company Petroleum Engineers in accordance with the rules and
regulations of the SEC. The independent engineers' estimates were based upon a
review of production histories and other geologic, economic, ownership and
engineering data provided by the Company. The PV-10 amount (present value of
estimated future net revenues discounted at 10%) is calculated using year-end
prices of $25.47 per barrel of oil and $2.34 per mcf of
gas.
December 31, 1999
----------------------------------------------
Proved Reserves
----------------------------------------------
Oil Gas
(Bbls) (Mcf) Mmcfe PV-10
------- ---------- ---------- ------------
West Cameron Block 49 27,816 5,796,000 5,962,896 $7,570,129
------ --------- --------- ----------
Total Proved Reserves 27,816 5,796,000 5,962,896 $7,570,129
====== ========= ========= ==========
Total Proved Developed Reserves 27,816 5,796,000 5,962,896 $7,570,129
====== ========= ========= ==========
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and future amounts
and timing of development expenditures, including many factors beyond the
control of the Company. Reserve engineering is a subjective process of
estimating underground accumulations of crude oil and natural gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Estimates of proved undeveloped reserves are
inherently less certain than estimates of proved developed reserves. The
quantities of oil and gas that are ultimately recovered, production and
operating costs, the amount and timing of future development expenditures,
geologic success and future oil and gas sales prices may all differ from those
assumed in these estimates. In addition, the Company's reserves may be subject
to downward or upward revision based upon production history, purchases or sales
of properties, results of future development, prevailing oil and gas prices and
other factors. Therefore, the present value shown above should not be construed
as the current market value of the estimated oil and gas reserves attributable
to the Company's properties.
7
In accordance with SEC guidelines, the Independent Engineers' estimates of
future net revenues from the Company's proved reserves and the present value
thereof are made using oil and gas sales prices in effect as of the dates of
such estimates and are held constant throughout the life of the properties
except where such guidelines permit alternate treatment, including, in the case
of gas contracts, the use of fixed and determinable contractual price
escalations. See "Supplemental Information to Consolidated Financial
Statements" in the Notes to the Consolidated Financial Statements of the
Company. Estimates of the Company's proved oil and gas reserves were not filed
with or included in reports to any other federal authority or agency other than
the SEC during the fiscal year ended December 31, 1999.
COMPETITION AND MARKETS
Competition in the industry is intense, particularly with respect to the
acquisition of producing properties and proved undeveloped acreage. The Company
competes with the major oil companies and other independent producers of varying
sizes, all of which are engaged in the exploration, development and acquisition
of producing and non-producing properties. Many of the Company's competitors
have financial resources and exploration and development budgets that are
substantially greater than those of the Company, which may adversely affect the
Company's ability to compete.
The Company anticipates selling a portion of its interest in certain prospects
as a means of funding its participation in the development of these properties.
Cheniere is also investigating with certain oil and gas service companies the
possibility of obtaining vendor financing for a portion of its drilling
activities. The Company anticipates that competition will arise from other
companies also seeking drilling funds from vendors and potential working
interest partners. There can be no assurance that the Company will be
successful in securing funds in this manner.
The availability of a ready market for and the price of any hydrocarbons
produced by the Company will depend on many factors beyond the control of the
Company, including the extent of domestic production and imports of foreign oil,
the marketing of competitive fuels, the proximity and capacity of natural gas
pipelines, the availability of transportation and other market facilities, the
demand for hydrocarbons, the political conditions in international oil-producing
regions, the effect of federal and state regulation of allowable rates of
production, taxation, the conduct of drilling operations, and federal regulation
of natural gas. In the past, as a result of excess deliverability of natural
gas, many pipeline companies have curtailed the amount of natural gas taken from
producing wells, shut in some producing wells, significantly reduced gas taken
under existing contracts, refused to make payments under applicable "take-or-
pay" provisions, and have not contracted for gas available from some newly
completed wells. The Company can give no assurance that such conditions will
not arise again.
In addition, the restructuring of the natural gas pipeline industry has
eliminated the gas purchasing activity of traditional interstate gas
transmission pipeline buyers. Producers of natural gas, therefore, have been
required to develop new markets among gas marketing companies, end-users of
natural gas, and local distribution companies. All of these factors, together
with economic factors in the marketing area, generally may affect the supply
and/or demand for oil and gas and thus the prices available for sales of oil and
gas.
GOVERNMENT REGULATION
The Company's oil and gas exploration, production, and related operations
are subject to federal and state statutes and extensive rules and regulations
promulgated by federal and state agencies. Failure to comply with such laws can
result in substantial penalties. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and affects its
profitability. Because such laws are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with them.
Production
In most, if not all, areas in which the Company conducts activities,
statutes concerning the production of oil and natural gas authorize
administrative agencies to adopt rules which, among others matters, (i) regulate
the operation of, and production from, both oil and gas wells, (ii) determine
the reasonable market demand for oil and gas, and (iii) establish allowable
rates of production. Such regulation may restrict the rate at which the
Company's wells may produce oil or gas, with the result that the amount or
timing of the Company's revenues could be adversely affected.
8
MMS Regulation
The Company may conduct certain activities on federal oil and gas leases
which the Minerals Management Service ("MMS") administers. The MMS grants
leases through competitive bidding. These leases contain relatively
standardized terms and require compliance with detailed MMS regulations and
orders pursuant to The Outer Continental Shelf Lands Act ("OCSLA") (which
regulations and orders are subject to change by the MMS). For offshore
operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits which may be required from other agencies (such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS prior to the commencement of
drilling. The MMS has adopted regulations requiring offshore production
facilities located on the Outer Continental Shelf ("OCS") to meet stringent
engineering and construction specifications. The MMS also has regulations
restricting the flaring or venting of natural gas, and has amended such
regulations to prohibit the flaring of liquid hydrocarbons and oil without prior
authorization except under certain limited circumstances. Also, the MMS has
promulgated other regulations governing the plugging and abandonment of wells
located offshore and the removal of all production facilities. To cover the
various obligations of lessees on the OCS, the MMS generally requires that
lessees post substantial bonds or other acceptable assurances that such
obligations will be met. The cost of such bonds or other surety can be
substantial and there is no assurance that the Company will be able to obtain
such bonds or other surety in all cases.
In March 2000, the MMS amended its regulations governing the calculation of
royalties and the valuation of crude oil produced from federal leases. This
rule modifies the valuation procedures for both arm's length and non-arm's
length crude oil transactions to decrease reliance on oil posted prices and
assign a value to crude oil that better reflects its market value. The Company
cannot predict how it will be affected by this regulation.
In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments and requested comment on
two alternative options for natural gas valuation. The changes as originally
proposed would have established an alternative market-based method to calculate
royalties on certain natural gas sold to affiliates or pursuant to non-arm's
length sales contracts. Informal discussions among the MMS and industry
officials are continuing, although it is uncertain whether, and what, changes
may be proposed regarding gas royalty valuation.
Bonding and Financial Responsibility Requirements
The Company is required to obtain bonding, or otherwise demonstrate
financial responsibility, at varying levels by governmental agencies in
connection with obtaining state or federal leases or acting as an owner or
operator on such leases or of exploration and production related facilities.
These bonds may cover such obligations as plugging and abandonment of
unproductive wells, removal and closure of related exploration, production
facilities, and pollution liabilities. The costs of such bonding and financial
responsibility requirements can be substantial, and there can be no assurance
that the Company will be able to obtain such bonds and/or otherwise demonstrate
financial responsibility in all cases.
Natural Gas Marketing and Transportation
The Federal Energy Regulatory Commission ("FERC") regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act
of 1978 (the "NGPA"). In the past, the federal government has regulated the
prices at which natural gas could be sold. Deregulation of wellhead sales of
natural gas began with the enactment of the NGPA in 1978. In 1989, Congress
enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act") which
removed all NGA and NGPA price and nonprice controls affecting wellhead sales of
natural gas effective January 1, 1993. While sales by producers of natural gas
can currently be made at uncontrolled market prices, Congress could reenact
price controls in the future.
Commencing in April 1992, the FERC issued its Order No. 636 and related
clarifying orders ("Order No. 636"), which, among other things, restructured the
interstate natural gas industry and required interstate pipelines to provide
transportation services separate, or "unbundled," from the pipelines' sales of
natural gas. Order No. 636 and certain related proceedings have been the
subject of a number of judicial appeals and orders on remand by the FERC. Order
No. 636 has largely been upheld on appeal. The Company cannot predict when
these remaining appeals will be completed or their impact on the Company. FERC
continues to address Order 636-related issues (including capacity brokering,
alternative and negotiated ratemaking and transportation policy matters) in a
number of pending proceedings. It is unclear what impact, if any, increased
competition within the natural gas industry under Order Nos. 636, et al. will
have on the Company's activities. Although Order No. 636 could provide the
Company with additional market access and more fairly applied transportation
service rates, Order No. 636 could
9
also subject the Company to more restrictive pipeline imbalance tolerances and
greater penalties for violations of these tolerances.
FERC has announced its intention to re-examine certain of its
transportation-related policies, including the appropriate manner in which
interstate pipelines release transportation capacity under Order No. 636, and
the use of market-based rates for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, FERC's current
rules and policy statements may have the effect of enhancing competition in
natural gas markets by, among other things, encouraging non-producer natural gas
marketers to engage in certain purchase and sale transactions. The Company
cannot predict what action FERC will take on these matters, nor can it
accurately predict whether FERC's actions will achieve the goal of increasing
competition in markets in which the Company's natural gas is sold. However, the
Company does not believe that it will be treated materially differently than
other natural gas producers and marketers with which it competes.
OCSLA requires that all pipelines operating on or across the OCS provide
open-access, non-discriminatory service. Although FERC has opted not to impose
the regulations of Order No. 509, in which FERC implemented OCSLA, on gatherers
and other non-jurisdictional entities, FERC has retained the authority to
exercise jurisdiction over those entities if necessary to permit non-
discriminatory access to service on OCS. In this regard, FERC issued a
Statement of Policy ("Policy Statement") regarding the application of its
jurisdiction under the NGA and OCSLA over natural gas facilities and service on
OCS. In the Policy Statement, FERC concluded that facilities located in water
depths of 200 meters or more shall be presumed to have a primary purpose of
gathering up to the point of interconnection with the interstate pipeline grid.
FERC has determined that gathering facilities are outside of its jurisdiction,
and thus, it will no longer regulate the rates and services of such OCS
facilities under the NGA. While it is not possible to determine what the actual
impact of this new policy will be, it is possible that the Company could
experience an increase in transportation costs associated with its OCS natural
gas production and, possibly, reduced access to OCS transmission capacity.
The FERC has also issued numerous orders approving the sale and abandonment
of natural gas gathering facilities previously owned by interstate pipelines and
has acknowledged that if the FERC does not have jurisdiction over services
provided thereon, then such facilities and services may be subject to regulation
by state authorities in accordance with state law. A number of states have
either enacted new laws or are considering the inadequacy of existing laws
affecting gathering rates and/or services. In addition, FERC's approval of
transfers of previously regulated gathering systems to independent or pipeline-
affiliated gathering companies that are not subject to FERC regulation may
affect both the costs and the nature of gathering services that will be
available to interested producers or shippers in the future. The effects, if
any, of state and federal gathering policies on the Company's operations are
uncertain.
Oil Sales and Transportation Rates
Sales of crude oil, condensate, and gas liquids by the Company are not
currently regulated under federal or state law and are made at market prices.
FERC regulates the transportation of oil in interstate commerce pursuant to the
Interstate Commerce Act. However, the price a company receives from the sale of
these products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, FERC implemented regulations establishing an
indexing system for transportation rates for oil pipelines, which would
generally index such rates to inflation, subject to certain conditions and
limitations. Over time, these regulations could increase the cost of
transporting crude oil, liquids, and condensate by pipeline. The Company is not
able to predict with certainty what effect, if any, these regulations will have
on it; but other factors being equal, these regulations may tend to increase
transportation costs or reduce wellhead prices for such commodities.
Operating Hazards and Environmental Matters
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
natural gas leaks, ruptures and discharge of toxic gases, the occurrence of any
of which could result in substantial losses to the Company due to injury or loss
of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. Such
hazards may hinder or delay drilling, development and on-line production
operations.
Extensive federal, state and local laws and regulations applicable to oil
and gas operations regulate the discharge of substances into the environment or
otherwise relate to the protection of the environment. These laws and
regulations may require the acquisition of a permit before drilling commences,
restrict or prohibit the types, quantities and concentration of substances that
can be released into the environment or wastes that can be disposed of in
connection with drilling and production activities, prohibit drilling activities
on certain lands lying within
10
wetlands or other protected areas and impose substantial liabilities for
pollution or releases of hazardous substances resulting from drilling and
production operations. Failure to comply with these laws and regulations may
also result in civil and criminal fines and penalties. Moreover, state and
federal environmental laws and regulations may become more stringent.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the original conduct, on certain classes of persons who are
considered to be responsible for the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the disposal site
or sites where the release occurred and companies that disposed or arranged for
the disposal of the hazardous substances. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources and for the costs of certain health studies, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release of hazardous
substances.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from the operations
of the Company. The EPA and states have been developing regulations to
implement these requirements. The Company may be required to incur certain
capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining permits and approvals
addressing other air emission-related issues. The Company does not believe,
however, that its operations will be materially adversely affected by any such
requirements.
In addition, the U.S. Oil Pollution Act ("OPA") requires owners and
operators of facilities that could be the source of an oil spill into "waters of
the United States" (a term defined to include rivers, creeks, wetlands, and
coastal waters) to adopt and implement plans and procedures to prevent any spill
of oil into any waters of the United States. OPA also requires affected
facility owners and operators to demonstrate that they have at least $35 million
in financial resources to pay for the costs of cleaning up an oil spill and
compensating any parties damaged by an oil spill. Such financial assurances may
be increased to as much as $150 million if a formal assessment indicates such an
increase is warranted.
Operations of the Company are also subject to the federal Clean Water Act
("CWA") and analogous state laws. In accordance with the CWA, the state of
Louisiana has issued regulations prohibiting discharges of produced water in
state coastal waters effective July 1, 1997. Producers may be required to incur
certain capital expenditures in the next several years in order to comply with
the prohibition against the discharge of produced waters into Louisiana coastal
waters or increase operating expenses in connection with offshore operations in
Louisiana coastal waters. Pursuant to other requirements of the CWA, the EPA
has adopted regulations concerning discharges of storm water runoff. This
program requires covered facilities to obtain individual permits, participate in
a group permit or seek coverage under an EPA general permit. The Company
believes that it will be able to obtain, or be included under, such storm water
discharge permits, where necessary.
In addition, the disposal of wastes containing naturally occurring
radioactive material, which are commonly generated during oil and gas
production, is regulated under state law. Typically, wastes containing
naturally occurring radioactive material can be managed on-site or disposed of
at facilities licensed to receive such waste at costs that are not expected to
be material.
OPERATIONAL RISKS AND INSURANCE
The Company anticipates that any wells established by it will be
drilled by proven industry contractors. Based on financial considerations, the
Company may choose to utilize turnkey contracts that limit its financial and
legal exposure. However, circumstances may arise where the Company is unable to
secure a turnkey contract on satisfactory terms. In this case, the Company may
decide to drill, or cause to be drilled, the applicable test well(s) on either a
footage or day-rate basis, and the drilling thereof will be subject to the usual
drilling hazards such as cratering, explosions, uncontrollable flows of oil, gas
or well fluids, fires, pollution, and other environmental risks. The Company's
activities are also subject to perils specific to marine operations, such as
capsizing, collision, and damage or loss from severe weather. These hazards can
cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage, and suspension of
operations. In accordance with customary industry practices, the Company
intends to maintain insurance against some, but not all, of such risks, and
some, but not all, of such losses. The occurrence of a significant event not
fully insured or indemnified against could materially and adversely affect the
Company's financial condition and operations.
11
Moreover, no assurance can be given that the Company will be able to maintain
adequate insurance in the future at rates considered reasonable by the Company.
EMPLOYEES
The Company had 18 full-time employees as of March 24, 2000.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This annual report contains certain statements that may be deemed "forward-
looking statements" within the meaning of Section 27A of the Securities Act, and
Section 21E of the United Stated Securities Exchange Act of 1934, as amended.
Readers of this annual report are cautioned that such forward-looking statements
are not guarantees of future performance and that actual results, developments
and business decisions may differ from those envisaged by such forward-looking
statements.
All statements, other than statements of historical facts so included in
this annual report that address activities, events or developments that the
Company intends, expects, projects, believes, or anticipates will or may occur
in the future, including, without limitation: statements regarding the Company's
business strategy, plans and objectives; statements expressing beliefs and
expectations regarding the ability of the Company to successfully raise the
additional capital necessary to meet its obligations, the ability of the Company
to secure the leases necessary to facilitate anticipated drilling activities and
the ability of the Company to attract additional working interest owners to
participate in the exploration and development of oil and gas reserves, and
statements about non-historical Year 2000 information, are forward-looking
statements within the meaning of the Act. These forward-looking statements are,
and will be, based on management's then-current views and assumptions regarding
future events.
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 important factors are not exclusive.
THE COMPANY HAS A LIMITED OPERATING HISTORY DURING WHICH IT HAS INCURRED LOSSES,
AND IT MAY CONTINUE TO INCUR LOSSES.
The Company has a limited operating history with respect to its oil and gas
exploration activities, which were commenced in April 1996. From the Company's
inception it has incurred losses and may continue to incur losses, depending on
whether it generates sufficient revenue from producing reserves acquired either
through acquisitions or drilling activities.
THE COMPANY HAS LIMITED CURRENT OIL AND GAS PRODUCTION AND LIMITED PROVED
RESERVES, WHICH MEANS THAT ITS SUCCESS IS HIGHLY DEPENDENT ON THE SUCCESS OF ITS
EXPLORATION PROGRAM.
Cheniere established its initial oil and gas production in September 1999.
Through its drilling in 1999, the Company established "proved reserves," which
means that it has identified oil and gas reserves that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. The focus of Cheniere's business is exploratory drilling. Because
almost all of the Company's assets are represented by investments to date in its
exploration program, and the Company anticipates investing additional amounts in
the program, the Company is highly dependent on the success of its exploration
program.
THE COMPANY MAY NEED ADDITIONAL FINANCING AND MAY NOT BE ABLE TO OBTAIN IT ON
TERMS THAT ARE ACCEPTABLE TO THE COMPANY, WHICH COULD HARM ITS ABILITY TO
CONDUCT BUSINESS.
Cheniere presently has limited operating revenues, all of which are
currently dedicated to making payments on the Company's indebtedness. As of
December 31, 1999, Cheniere had only $3,445,292 of current assets and a working
capital deficit of $3,290,245. Because of its low level of current assets, the
Company may need additional capital for a number of purposes, and if the Company
were unable to obtain additional financing it could significantly harm
Cheniere's ability to conduct its business, including its ability to take
advantage of opportunities that come from its exploration program. Cheniere's
need for additional financing include the following:
. Additional capital will be required to pay for Cheniere's share of costs
relating to the drilling of prospects and development of those that are
successful, to exercise lease options, and to acquire additional oil and
gas leases. The total amount of the Company's capital needs will be
12
determined in part by the number of prospects generated within its
exploration program and by the working interest that the Company retains
in those prospects.
. The Company may need funds for the repayment of its $3,100,000 short
term note payable which matures on June 30, 2000. If the Company is
unable to obtain sufficient new financings to repay the note or to
extend its maturity, then it may be in default with respect to the note
and the holder of the note will have the right to seek immediate
repayment of the entire indebtedness due thereunder and enforce all
other rights at law or in equity. Such a default may also cause defaults
under other material contracts to which the Company is a party. Any of
the foregoing actions would have a material adverse effect on the
Company.
. The Company will need funds for the payment of approximately $200,000
per month related to future deliveries of reprocessed 3-D seismic data
through December 2001.
. Should the Company choose to make an acquisition of producing oil and
gas properties, it is likely that such an acquisition would require that
some portion of the purchase price be paid in cash, and thus would
create the need for additional capital.
Additional capital could be obtained from a combination of funding sources.
These potential funding sources include:
. borrowings from financial institutions,
. debt offerings, which would increase the Company's leverage and add to
its need for cash to service such debt,
. additional offerings of the Company's equity securities, which could
cause substantial dilution of its common stock,
. the sale of a portion or all of the producing properties it owns at West
Cameron Block 49, or
. sales of portions of its working interest in the prospects within its
exploration program, which would reduce future revenues from its
exploration program.
Cheniere's ability to raise additional capital will depend on the results
of its operations and the status of various capital and industry markets at the
time such additional capital is sought. Accordingly, there can be no assurances
that capital will be available to the Company from any source or that, if
available, it will be on terms acceptable to the Company.
BECAUSE OF THE COMPANY'S LACK OF DIVERSIFICATION, FACTORS HARMING THE OIL AND
GAS INDUSTRY IN GENERAL, INCLUDING DOWNTURNS IN PRICES FOR OIL AND GAS, WOULD BE
ESPECIALLY HARMFUL TO IT.
As an independent energy company, Cheniere's revenues and profits will be
substantially dependent on the oil and gas industry in general and the
prevailing prices for oil and gas in particular. Circumstances that harm the
oil and gas industry in general will have an especially harmful effect on
Cheniere. Oil and gas prices have been and are likely to continue to be
volatile and subject to wide fluctuations in response to any of the following
factors:
. relatively minor changes in the supply of and demand for oil and gas;
. political conditions in international oil producing regions;
. the extent of domestic production and importation of oil in relevant
markets;
. the level of consumer demand;
. weather conditions;
. the competitive position of oil or gas as a source of energy as compared
with other energy sources;
. the refining capacity of oil purchasers; and
. the effect of federal and state regulation on the production,
transportation and sale of oil and gas.
It is likely that adverse changes in the oil market or the regulatory
environment would have an adverse effect on the Company's ability to obtain
capital from lending institutions, industry participants, private or public
investors or other sources.
13
THE COMPANY EXPERIENCES INTENSE COMPETITION IN THE OIL AND GAS INDUSTRY, WHICH
MAY MAKE IT DIFFICULT FOR THE COMPANY TO SUCCEED.
The oil and gas industry is highly competitive. If Cheniere is unable to
compete effectively, it will not succeed. A number of factors may give the
Company's competitors advantages over Cheniere. For example, most of the
Company's current and potential competitors have significantly greater financial
resources and a significantly greater number of experienced and trained
managerial and technical personnel than the Company does. There can be no
assurance that Cheniere will be able to compete effectively with such companies.
Moreover, the oil and gas industry competes with other industries in supplying
the energy and fuel needs of industrial, commercial and other consumers.
Increased competition causing over supply and depressed prices could greatly
affect Cheniere's operating revenues.
THE COMPANY IS SUBJECT TO SIGNIFICANT OPERATING HAZARDS AND UNINSURED RISKS, ONE
OR MORE OF WHICH MAY CREATE SIGNIFICANT LIABILITIES FOR IT.
The Company's oil and gas operations are subject to all of the risks and
hazards typically associated with the exploration for, and the development and
production of, oil and gas. In accordance with customary industry practices,
the Company intends to maintain insurance against some, but not all, of these
risks and losses. The occurrence of a significant event not fully insured or
indemnified against could seriously harm the Company. Moreover, no assurance
can be given that the Company will be able to maintain adequate insurance in the
future at rates it considers reasonable. Risks in drilling operations include
cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires,
pollution and other environmental risks. The Company's activities are also
subject to perils specific to marine operations, such as capsizing, collision
and damage or loss from severe weather. These hazards can cause personal injury
and loss of life, severe damage to and destruction of property and equipment,
pollution or environmental damage and suspension of operations.
THE COMPANY IS SUBJECT TO SIGNIFICANT EXPLORATION RISKS, INCLUDING THE RISK THAT
IT MAY NOT BE ABLE TO FIND OR PRODUCE ENOUGH OIL AND GAS TO GENERATE ANY
PROFITS.
The Company's exploration activities involve significant risks, including
the risk that it may not be able to find or produce enough oil and gas to
generate any profits. There can be no assurance that the use of technical
expertise as applied to geophysical or geological data will ensure that any well
the Company drills will discover oil or gas. Further, there is no way to know
in advance of drilling and testing whether any prospect will yield oil or gas in
sufficient quantities to make money for the Company. In addition, the Company
is highly dependent on seismic activity and the related application of new
technology as a primary exploration methodology. This methodology, however,
requires greater pre-drilling expenditures than traditional drilling strategies.
Even when fully used and properly interpreted, 3-D seismic data can only assist
the Company in identifying subsurface structures and hydrocarbon indicators, and
will not allow the Company to determine conclusively if hydrocarbons will in
fact be present and recoverable in such structures. There can be no assurance
that the Company's exploration efforts will be successful.
THE COMPANY MAY NOT BE ABLE TO ACQUIRE THE OIL AND GAS LEASES IT NEEDS TO
SUSTAIN PROFITABLE OPERATIONS.
There can be no assurance that Cheniere will be successful in acquiring
farmouts, seismic permits, lease options, leases or other rights to explore for
or recover oil and gas. Consequently, the area covered by Cheniere's 3-D
seismic data that could be explored through drilling could be reduced if these
leases, permits, options and the like are not acquired. Both the United States
Department of the Interior and the State of Louisiana award oil and gas leases
on a competitive bidding basis. Further, non-governmental owners of the onshore
mineral interests within the area covered by the Company's exploration program
are not obligated to lease their mineral rights to the Company except where the
Company has already obtained lease options. Other major and independent oil and
gas companies with financial resources significantly greater than Cheniere's may
bid against Cheniere for the purchase of oil and gas leases.
IF THE COMPANY IS UNABLE TO OBTAIN SATISFACTORY TURNKEY CONTRACTS, IT MAY HAVE
TO ASSUME ADDITIONAL RISKS AND EXPENSES WHEN DRILLING WELLS.
Cheniere anticipates that any wells drilled in which it has an interest
will be drilled by established industry contractors under turnkey contracts that
limit its financial and legal exposure. Circumstances may arise, however, where
a turnkey contract is not economically beneficial to the Company or is otherwise
unobtainable from proven industry contractors. In such instances, the Company
may decide to drill wells on a day-rate basis, subjecting it to the usual
drilling hazards such as cratering, explosions, uncontrollable flows of oil, gas
or well fluids, fires, pollution
14
and other environmental risks. The Company would also be liable for any cost
overruns attributable to drilling problems that otherwise would have been
covered by a turnkey contract.
Under a turnkey drilling contract, a negotiated price is agreed upon and
the money is placed in escrow. The contractor then assumes all of the risk and
expense, including any cost overruns, of drilling a well to contract depth and
completing any agreed upon evaluation of the wellbore. Upon performance of all
these items, the escrowed money is released to the contractor. On a non-turnkey
basis, all risk and expense, including cost overruns, of drilling a well to
total depths lies with the operator.
EXISTING AND FUTURE UNITED STATES GOVERNMENTAL REGULATION, TAXATION AND PRICE
CONTROLS COULD SERIOUSLY HARM THE COMPANY.
Oil and gas production and exploration are subject to comprehensive
federal, state and local laws and regulations controlling the exploration for
and production and sale of oil and gas and the possible effects of such
activities on the environment. Failure to comply with such rules and
regulations can result in substantial penalties and may harm the Company.
Present as well as future legislation and regulations could cause additional
expenditures, restrictions and delays in the Company's business, the extent of
which cannot be predicted and which may require the Company to limit
substantially, delay or cease operations in some circumstances. In most areas
where the Company plans to conduct activities, there are statutory provisions
regulating the production of oil and natural gas which may restrict the rate of
production and adversely affect revenues. The Company plans to acquire oil and
gas leases in the Gulf of Mexico, which will be granted by the federal
government and administered by the U.S. Department of Interior Minerals
Management Service. The Department strictly regulates the exploration,
development and production of oil and gas reserves in the Gulf of Mexico. Such
regulations could seriously harm the Company's operations in the Gulf of Mexico.
The federal government regulates the interstate transportation of oil and
natural gas, through the Federal Energy and Regulatory Commission ("FERC"). The
FERC has in the past regulated the prices at which oil and gas could be sold.
Federal reenactment of price controls or increased regulation of the transport
of oil and natural gas could seriously harm the Company. In addition, the
Company's operations are subject to numerous laws and regulations governing the
discharge of oil and hazardous materials into the environment or otherwise
relating to environmental protection, including the Oil Pollution Act of 1990.
These laws and regulations have continually imposed increasingly strict
requirements for water and air pollution control, solid waste management, and
strict financial responsibility and remedial response obligations relating to
oil spill protection. The cost of complying with such environmental legislation
could have a general harmful effect on the Company's operations.
THE COMPANY MAY EXPERIENCE YEAR 2000 PROBLEMS, WHICH COULD CAUSE DISRUPTIONS OF
ITS OPERATIONS.
The Year 2000 presents significant issues for many computer systems. Much
of the software in use today may not be able to accurately process data beyond
the year 1999. The vast majority of computer systems process transactions using
two digits for the year of the transaction, rather than the full four digits,
making such systems unable to distinguish January 1, 2000 from January 1, 1900.
Such systems may encounter significant processing inaccuracies or become
inoperable when Year 2000 transactions are processed. Such matters could impact
not only the Company in its day-to-day operations but also its financial
institutions, customers and vendors as well as state, provincial and federal
governments with jurisdictions where the Company maintains operations.
The Company has addressed Year 2000 issues, and to date, the Company has
not experienced any problems or any significant expenses related to Year 2000
issues. It has been the Company's strategy to use, wherever possible, industry
prevalent products and processes with minimal customization. As a result, the
Company did not have any extensive in-house hardware, software or process
conversions in an effort to be Year 2000 compliant nor did the Company have Year
2000 compliance related costs that were material to its operations.
While it is the Company's goal to be Year 2000 compliant, there can be no
assurance that there will not be a material adverse effect on Cheniere as a
result of a Year 2000 related issue. The Company's business partners may
present the area of greatest risk to the Company, in part because of the
Company's limited ability to influence actions of third parties, and in part
because of the Company's inability to estimate the level and impact of
noncompliance of third parties. Additionally, there are many variables and
uncertainties associated with judgments regarding any contingency plans
developed by the Company.
THERE IS ONLY LIMITED TRADING IN THE COMPANY'S COMMON STOCK, WHICH MAKES ITS
STOCK MORE DIFFICULT TO SELL THAN THE STOCK OF COMPANIES WITH MORE ACTIVE
MARKETS.
Historically, there has been only limited trading in Cheniere's common
stock, which makes its stock more difficult to sell than the stock of companies
with more active markets. During 1999, the average trading volume of Cheniere's
common stock on The Nasdaq SmallCap Market was approximately 78,000 shares per
day. During the
15
period from January 1, 2000 through March 24, 2000, the average trading volume
of Cheniere's common stock has been approximately 674,000 shares per day.
THE COMPANY HAS NOT PAID DIVIDENDS AND DOES NOT EXPECT TO IN THE FORESEEABLE
FUTURE, SO ITS STOCKHOLDERS WILL NOT BE ABLE TO RECEIVE A RETURN ON THEIR
INVESTMENT WITHOUT SELLING THEIR SHARES.
The Company has not paid dividends since its inception and does not expect
to in the foreseeable future, so Cheniere's stockholders will not be able to
receive a return on their investments without selling their shares. The Company
presently anticipates that all earnings, if any, will be retained for
development of its business. Any future dividends will be subject to the
discretion of the Company's board of directors and will depend on, among other
things, future earnings, the Company's operating and financial condition, its
capital requirements and general business conditions.
THE COMPANY'S STOCKHOLDERS COULD EXPERIENCE DILUTION IN THE VALUE OF THEIR
SHARES BECAUSE OF ADDITIONAL ISSUANCES OF SHARES.
Any issuance of common stock by the Company may result in a reduction in
the book value per share or market price per share of its outstanding shares of
common stock and will reduce the proportionate ownership and voting power of
such shares. The Company has 65,000,000 authorized shares of stock, consisting
of 60,000,000 shares of the common stock, and 5,000,000 shares of preferred
stock. As of December 31, 1999, approximately 33% of the shares of the common
stock remained unissued. The board of directors has the power to issue any and
all of such shares without shareholder approval. It is likely that the Company
will issue shares of the common stock to raise capital to sustain operations, to
exchange for or to repay its $3,100,000 in short-term notes payable and/or to
finance future oil and gas exploration projects. In addition, the Company has
reserved 8,467,803 shares of the common stock for issuance upon the exercise of
outstanding warrants and 2,550,000 shares of the common stock for issuance upon
the exercise of stock options. As of December 31, 1999, there are 2,161,195
issued and outstanding options to purchase common stock. To the extent that
outstanding warrants and options are exercised, the percentage ownership of
common stock of the Company's stockholders will be diluted. Moreover, the terms
upon which the Company will be able to obtain additional equity capital may be
adversely affected because the holders of outstanding warrants and options can
be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable than
the exercise terms provided by such outstanding securities. In the event of the
exercise of a substantial number of warrants and options, within a reasonably
short period of time after the right to exercise commences, the resulting
increase in the amount of the common stock in the trading market could
substantially adversely affect the market price of the common stock or the
Company's ability to raise money through the sale of equity securities.
THE COMPANY DEPENDS ON KEY PERSONNEL AND COULD BE SERIOUSLY HARMED IF IT LOST
THEIR SERVICES.
Cheniere depends on its executive officers for various activities. The
Company does not maintain "key person" life insurance policies on any of its
personnel nor does it have employment agreements with any of its personnel. The
loss of the services of any of these individuals could seriously harm the
Company. In addition, the Company's future success will depend in part on its
ability to attract and retain additional qualified personnel. Cheniere
currently has 18 full-time employees.
THE COMPANY DEPENDS ON INDUSTRY PARTNERS AND COULD BE SERIOUSLY HARMED IF THEY
DO NOT PERFORM SATISFACTORILY, WHICH IS USUALLY NOT WITHIN THE COMPANY'S
CONTROL.
Because the Company has limited financial resources, it will be largely
dependent on industry partners for the success of its oil and gas exploration
projects for the foreseeable future. Cheniere could be seriously harmed if its
industry partners do not perform satisfactorily on projects that affect it. The
Company often has no control over factors that influence the performance of its
partners.
THE COMPANY IS CONTROLLED BY A SMALL NUMBER OF PRINCIPAL STOCKHOLDERS WHO MAY
EXERCISE A PROPORTIONATELY LARGER INFLUENCE ON CHENIERE THAN ITS STOCKHOLDERS
WITH SMALLER HOLDINGS.
Cheniere is controlled by a small number of principal stockholders who may
do things that are not in the interests of the Company's stockholders with
smaller holdings. Together, William D. Forster, a director, and BSR
Investments, Ltd. own approximately 17% of the outstanding common stock. BSR
Investments, Ltd. is controlled by the mother of Charif Souki, chairman of
Cheniere's board of directors. Accordingly, it is likely that Mr. Forster and
BSR Investments, Ltd. will have significant influence on the election of
Cheniere's directors and on its management, operations and affairs, including
the ability to prevent or cause a change in control of the Company.
16
ANTI-TAKEOVER PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW COULD ADVERSELY IMPACT A POTENTIAL ACQUISITION BY THIRD PARTIES
THAT MAY ULTIMATELY BE IN THE FINANCIAL INTERESTS OF THE COMPANY'S SHAREHOLDERS.
Cheniere's certificate of incorporation, bylaws and the Delaware General
Corporation Law contain provisions that may discourage unsolicited takeover
proposals. These provisions could have the effect of inhibiting fluctuations in
the market price of the Company's shares that could result from actual or
rumored takeover attempts, preventing changes in its management or limiting the
price that investors may be willing to pay for shares of common stock. These
provisions, among other things, authorize the board of directors to designate
the terms of and to issue new series of preferred stock, to limit the personal
liability of directors, to require the Company to indemnify directors and
officers to the fullest extent permitted by applicable law and to impose
restrictions on business combinations with some interested parties.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings currently pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The common stock of the Company has traded on The Nasdaq SmallCap Market under
the symbol "CHEX" since April 11, 1997. From the time the Company first traded
publicly until April 11, 1997, the Company traded on the OTC Bulletin Board.
The table below presents the high and low daily closing sales prices of the
common stock, as reported by the Nasdaq, for each quarter during 1998 and 1999,
and for a portion of the Company's current quarter.
High Low
----- ----
Three Months Ended
March 31, 1998 $3.06 $2.00
June 30, 1998 $3.63 $1.75
September 30, 1998 $2.93 $0.81
December 31, 1998 $1.44 $0.44
Three Months Ended
March 31, 1999 $2.00 $0.88
June 30, 1999 $1.75 $0.88
September 30, 1999 $2.13 $1.19
December 31, 1999 $1.41 $0.41
Three Months Ended
March 31, 2000
(through March 24, 2000) $1.75 $0.19
As of March 24, 2000, there were 42,381,973 shares of the Company's common
stock outstanding held by 809 stockholders of record.
The Company has never paid a cash dividend on its common stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying any cash dividends on the common
stock in the foreseeable future. Any future change in the Company's dividend
policy will be made at the discretion of the Company's Board of Directors in
light of the financial condition, capital requirements, earnings and prospects
of the Company, and any restrictions under any credit agreements, as well as
other factors the Board of Directors deems relevant.
With respect to equity securities sold by the Company during the fourth
quarter of 1999 that were not registered under the Securities Act of 1933, as
amended ("Securities Act"), see "Liquidity and Capital Resources - Private
Placements of Equity" under Item 6 of this report.
18
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data set forth below are derived from the Consolidated
Financial Statements of the Company for the periods indicated. The financial
data should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report.
For the Year Ended For the Four Months Ended For the Period Ended
December 31, December 31, August 31,
--------------------------- ---------------------------- ------------------------------
1999 1998 1997 1996 1997 1996
----------- ----------- ------------ ----------- ----------- -----------
(Unaudited)
Revenues $ 1,614,055 $ - $ - $ - $ - $ -
Production costs 128,859 - - - - -
Depreciation, depletion and
amortization 1,361,644 39,171 2,936 2,695 8,268 3,603
General and administrative
expenses 1,908,805 1,619,307 444,087 189,635 1,705,193 100,211
Loss from operations (1,785,253) (1,658,478) (447,023) (192,330) (1,713,461) (103,814)
Interest income (expense) 31,530 20,634 58,662 (1,223) 36,993 (18,033)
Net loss (1,753,723) (1,637,844) (388,361) (193,553) (1,676,468) (121,847)
Net loss per share (basic
and diluted) (0.07) (0.10) (0.03) (0.02) (0.14) (0.01)
Cash dividends per share $ - $ - $ - $ - $ - $ -
Weighted average shares
outstanding 25,796,414 16,015,499 14,348,128 10,601,368 12,143,919 8,610,941
December 31 August 31,
------------------------------------------------------------ ------------------------------
1999 1998 1997 1996 1997 1996
----------- ----------- ------------ ----------- ------------ -----------
(Unaudited)
Cash $ 1,175,950 $ 143,868 $ 787,523 $ 2,419,264 $ 234,764 $1,093,180
Oil and gas properties,
proved, net 9,459,041 - - - - -
Oil and gas properties,
unproved 20,648,923 20,000,425 16,534,054 6,000,000 13,500,000 4,000,000
Total assets 34,481,275 20,840,474 17,705,627 8,476,710 13,841,712 5,145,310
Long-term notes payable - 2,025,020 2,025,020 - - -
Total liabilities 6,735,537 4,523,144 4,285,599 262,798 888,291 718,855
Total stockholders' equity 27,745,738 16,317,330 13,420,028 8,213,912 12,953,421 4,426,455
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cheniere Operating was incorporated in Delaware in February 1996 for the
purpose of engaging in the oil and gas exploration business, initially on the
Louisiana Gulf Coast. On July 3, 1996, Cheniere Operating underwent a
reorganization whereby Bexy Communications, Inc., a publicly held Delaware
corporation ("Bexy"), received 100% of the outstanding shares of Cheniere
Operating, and the former stockholders of Cheniere Operating received
approximately 93% of the issued and outstanding Bexy shares. As a result of the
share exchange, a change in the control of the Company occurred. The
transaction was accounted for as a recapitalization of Cheniere Operating. Bexy
spun off its existing assets and liabilities to its original stockholders and
changed its name to Cheniere Energy, Inc.
On April 7, 1998, the Company's Board of Directors approved a change in fiscal
year-end. The change in year-end resulted in a transition period from September
1, 1997 to December 31, 1997.
Prior to the commencement of its revenues in September 1999, Cheniere was a
development stage company.
19
PRODUCTION AND PRODUCT PRICES
Information concerning the Company's production and average prices received
for the year ended December 31, 1999 is presented in the following table.
Cheniere commenced its production of oil and gas on September 9, 1999.
Year Ended
December 31,
1999
------------
Production:
Oil (Bbls) 2,975
Gas (Mcf) 633,432
Gas equivalents (Mcfe) 651,282
Average sales prices:
Oil (per Bbl) $ 23.18
Gas (per Mcf) $ 2.59
RESULTS OF OPERATIONS - COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 1999
AND 1998
The Company's financial results for the year ended December 31, 1999, reflect
a loss of $1,753,723 or $0.07 per share (both basic and diluted), as compared to
a loss of $1,637,844, or $0.10 per share (both basic and diluted), for the
fiscal year ended December 31, 1998. The Company began its initial production
of oil and gas in September 1999. Oil and gas revenues totaled $1,614,055 for
1999, and related production costs were $128,859. Depreciation, depletion and
amortization ("DD&A") increased to $1,361,644 in 1999 from $39,171 in 1998
principally due to the inclusion in 1999 of $1,200,186 related to proved oil and
gas properties.
General and administrative ("G&A") expenses increased to $1,908,805 in 1999
compared to $1,619,307 in 1998. During 1999, Cheniere licensed 8,700 additional
square miles of 3-D seismic data and doubled the number of its employees, adding
management and exploration professionals to exploit its expanded 3-D database.
As a result, salaries, benefits and consulting expenses increased to $1,674,200
for 1999 compared with $773,485 in 1998. Additionally, the related expansion of
office facilities increased office rent and occupancy expenses to $264,971 in
1999 from $52,558 in 1998. Legal and professional fees decreased to $286,716 in
1999 from $938,766 in 1998, largely due to the inclusion in 1998 of $817,870 of
nonrecurring expenses related to arbitration proceedings. Investor relations
and travel expenses increased to $293,623 in 1999 from $49,691 in 1998 as
Cheniere engaged outside consultants to assist in broadening investor interest
in the Company; approximately $100,000 of the 1999 expenses relate to the non-
cash issuance of warrants to the Company's outside consultants. Cheniere
capitalizes as oil and gas property costs that portion of G&A related to its
exploration and development activities. Cheniere capitalized $960,000 of such
G&A expenses in 1999 and $444,000 in 1998.
At December 31, 1999, the cost of Cheniere's oil and gas properties
exceeded its ceiling test limitation by $1,888,912. Increases in the prices of
oil and gas subsequent to year-end were significant enough to fully eliminate
the need for a write-down of the Company's oil and gas properties. For further
discussion, see Note 2 - Summary of Significant Accounting Policies.
RESULTS OF OPERATIONS - COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 1998
AND AUGUST 31, 1997
The Company's financial results for the year ended December 31, 1998, reflect
a loss of $1,637,844 or $0.10 per share (both basic and diluted), as compared to
a loss of $1,676,468, or $0.14 per share (both basic and diluted), for the
fiscal year ended August 31, 1997. The Company did not generate revenues from
operations in either of the periods. The 2% decrease in net loss in 1998 as
compared to that in fiscal 1997 is primarily due to a 3% decrease in general and
administrative ("G&A") expenses to $1,658,478 in 1998 compared to $1,713,461 in
the 1997 fiscal year. Both periods included significant non-recurring expenses.
In 1998, the Company incurred $817,870 in expenses related to arbitration
proceedings. In the fiscal year ended August 31, 1997, the Company incurred a
non-cash charge of $624,400 related to financial advisory services, and it
incurred $164,812 in professional fees related to an acquisition that was not
consummated.
Salaries and benefits increased to $698,973 for 1998 compared with $270,209 in
fiscal year 1997 as a result of the Company's hiring of additional technical
employees early in 1998 to assist in the interpretation of seismic data and the
generation of prospects. Beginning in the fourth quarter of calendar 1997,
Cheniere began capitalizing as oil
20
and gas property costs that portion of G&A related to its exploration and
development activities. Cheniere capitalized $444,000 of G&A expenses in 1998
but it did not capitalize any such costs in the fiscal year ended August 31,
1997. The remaining variance in G&A expenses is the net effect of several
offsetting factors but is principally the result of a decrease in routine legal
fees to $79,647 in 1998 from $144,538 in fiscal 1997, which is largely accounted
for by the Company's change in 1997 from a New York based law firm to a Houston
based law firm.
Other factors affecting the Company's net loss for the year ended December 31,
1998 were lower interest income (down by $35,527) related principally to lower
average balances in its short-term investment funds and the absence of net
interest expense in 1998 compared with expense of $19,168 in fiscal 1997.
Beginning in the fourth quarter of calendar 1997, Cheniere began capitalizing
interest expense related to its 3-D exploration and development project.
RESULTS OF OPERATIONS - COMPARISON OF THE FOUR-MONTH PERIODS ENDED DECEMBER 31,
1997 AND 1996
The Company's operating results for the four months ended December 31, 1997,
reflect a loss of $388,361 or $0.03 per share (both basic and diluted), as
compared to a loss of $193,553, or $0.02 per share (both basic and diluted) for
the four months ended December 31, 1996. The Company did not generate revenues
from operations in either of the periods. The increased loss in the more recent
four-month period is primarily due to higher G&A expenses of $447,023, as
compared to $192,330 a year earlier. G&A expenses are higher in the more recent
period as the result of: (a) increased professional fees related to financing
activities and to the Company's initial annual stockholders' meeting in November
1997, (b) fees related to recruiting technical professionals who were hired
January 1, 1998, and (c) insurance expenses for coverages not carried in the
earlier period. Interest income of $58,662 in the four months ended December
31, 1997 includes $49,000 related to an agreement that interest earned from
inception to date on funds advanced by Cheniere into its 3-D exploration program
accrues to the benefit of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that future liquidity requirements will be met by cash
balances, the sale of equity, further borrowings, vendor financing arrangements
and/or the sale of portions of its interest in the prospects it has in inventory
or generates in the future. At this time, no assurance can be given that such
sales of equity, future borrowings, future vendor agreements or sales of
portions of its interest in properties will be accomplished on terms acceptable
to the Company.
Private Placements of Equity
Since its inception, Cheniere's primary source of financing for operating
expenses and investments in its exploration program has been the sale of its
equity securities. Through December 31, 1999, the Company has issued 40,212,473
shares of its common stock, generating net proceeds of $33,323,981. Additional
funding has come through the private placement of short-term notes, of which
$4,963,213 were outstanding at December 31, 1999. Through December 31, 1999
Cheniere had invested approximately $31,308,150 in its 3-D exploration program.
21
During the year ended August 31, 1997, the Company raised $9.4 million, net
of offering costs, from the sale of common stock to accredited investors
pursuant to Regulation D and to offshore investors pursuant to Regulation S.
From the $9.4 million in net proceeds and from other available funds, $9.5
million was invested in the Company's 3-D exploration program.
During the four months ended December 31, 1997, the Company raised $0.5
million, net of offering costs, from the sale of common stock to accredited
investors pursuant to Regulation D and to offshore investors pursuant to
Regulation S. The proceeds, together with cash balances and proceeds from a
$4.0 million December 1997 bridge financing, were used to fund a $2.9 million
payment to the 3-D exploration program.
In 1998, the Company raised approximately $4.2 million, net of offering
costs, from the sale of common stock to accredited investors pursuant to
Regulation D. Proceeds of the offerings were used for the acquisition of leases
and other exploration costs, as well as for general corporate purposes.
In 1999, the Company raised approximately $12.9 million, net of offering
costs, from the sale of common stock to accredited investors pursuant to
Regulation D. Proceeds of the offerings were used for the acquisition of leases
and other exploration costs, as well as for general corporate purposes.
Issuances of securities during the fourth quarter of 1999 consisted of: (a)
250,000 units (each unit representing one share of common stock and one half
warrant to purchase one share of common stock) sold at a price of $1.10 per unit
for net proceeds of $247,500 after payment of $27,500 in selling commissions;
(b) 10,483,031 shares of common stock sold at a price of $0.33 1/3 per share for
net proceeds of $3,179,372 after payment of $314,972 in selling commissions; (c)
150,000 shares of common stock issued to an employee as compensation at a price
of $0.25 per share; and (d) the issuance of 81,750 shares of common stock at a
price of $1.00 and 49,341 shares of common stock at a price of $0.33 1/3 in
connection with the extension of certain short-term notes payable. All of the
purchasers were accredited investors, and the sales were made pursuant to Rule
506 of Regulation D without the participation of any underwriters.
Short-Term Promissory Notes
In December 1997, Cheniere completed the private placement of a $4,000,000
bridge financing (the "December 1997 Bridge Financing"). The notes payable
issued by Cheniere had an initial maturity date of March 15, 1998, which was
extended to September 15, 1998 and further extended to January 15, 1999. In
December 1998, Cheniere received commitments from certain noteholders to
exchange notes payable for an aggregate of 2,812,528 shares of Cheniere common
stock at a price of $0.72 per share. Accordingly, the $2,025,020 face amount of
the exchanged notes is classified as a long-term obligation as of December 31,
1998. For those notes not exchanged for common stock, the maturity date was
extended to March 15, 1999. The notes bear interest at a rate of LIBOR plus 4%
(ranging from 9.5% to 9.9% through December 31, 1998). The securities purchase
agreements which govern such bridge financing specify that, during the term of
the notes, capital raised by the Company in excess of $16,000,000 must be
directed to repayment of the notes.
In connection with the December 1997 Bridge Financing, Cheniere issued
100,000 shares of common stock and four-year warrants to purchase 1,333,334
shares of common stock at $2-3/8 per share. Additional warrants to purchase
1,600,000 shares of Cheniere common stock were issued on September 15, 1998 in
consideration for the extension to that date. In connection with the extension
to January 15, 1999, the Company offered two alternatives of consideration.
Holders of $3,000,000 of the notes elected to reduce the exercise price of their
warrants to $1.50 per share. The holder of $1,000,000 of the notes elected to
reduce the exercise price of its warrants to $2.00 per share, to extend the term
of such warrants to five years from the latter of September 15, 1998 or the date
of issue, to receive additional warrants to purchase 387,500 shares of common
stock and to receive 50,000 shares of common stock. In January 1999, the
maturity date was extended to March 15, 1999. In March 1999, the maturity date
was extended to April 15, 1999. As consideration for the extension to April 15,
1999, the Company reduced the exercise price by $0.25 per share for all warrants
issued in connection with the issuance or extensions of the notes. In April
1999, the maturity date was extended to July 15, 1999, at which time $987,490
(50% of the then-outstanding balance) was repaid, the maturity date for the
remainder was extended to October 15, 1999 and the interest rate was increased
to LIBOR plus 6%. In September 1999, certain noteholders exchanged notes
payable and accrued interest totaling $158,548 for units of common stock and
warrants to purchase common stock at a price of $1.10 per unit. In October
1999, the maturity date of the remaining notes was extended to December 15,
1999. In consideration of the extension of the maturity date, the Company
issued 81,750 shares of common stock to the noteholders at a price of $1.00 per
share. In December 1999, the maturity date of the notes was extended to March
15, 2000. In consideration of this extension, the Company issued 49,341 shares
of common stock at a price of $0.33 1/3 per share and warrants to purchase
382,401 shares of common stock at a price to be determined in the future,
between $0.75 and $1.00 per share, on or before December 16, 2004. Also in
December 1999, a noteholder exchanged a $75,000 note payable for units of common
stock and warrants to purchase common stock at a price of $0.33 1/3 per unit.
Proceeds from the December 1997 Bridge Financing were used to fund the Company's
activities related to its 3-D exploration program and for general corporate
purposes. On March 15, 2000, the Company repaid the remaining balance of
$755,000 on the notes outstanding under the December 1997 Bridge Financing.
On September 1, 1999, Cheniere established a $3,100,000 platform financing
facility to fund a production platform and other exploration and development
costs in the West Cameron Block 49 area. Borrowings under the facility are to
be repaid from Cheniere's share of net cash flow from production through the
West Cameron Block 49 platform. The note is secured by Cheniere's oil and gas
properties and has a maturity date of June 30, 2000. Financing costs include
interest at 10% per annum and a 5% net profit interest in the initial two wells
producing through the platform. At December 31, 1999 the outstanding balance
under the facility was $3,090,643.
22
In December 1999, Cheniere entered into a financing agreement with a
supplier of well services to consolidate and convert trade accounts payable
balances into a short-term secured note payable. Interest is payable at 10% per
annum. The note is secured by Cheniere's oil and gas properties and matures on
July 5, 2000. At December 31, 1999 the outstanding balance was $1,117,570.
In December 1999 and February 2000, the Company entered into amendments
with respect to the platform financing facility in part to amend certain
financial covenants with respect to which it was in breach as disclosed in the
Company's quarterly report for the three months ended September 30, 1999. In
connection with these amendments, the Company also formalized the well services
financing, provided for certain priorities in repayments between lenders to come
from oil and gas production revenues and borrowed an additional $605,000 in
February 2000.
Management believes that the Company is in compliance with all financial
covenants relating to its debt agreements as of December 31, 1999.
Management's Plans and Continued Capital Raising Activities
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Cheniere is a
company in the early stages of its operations, with initial production and
revenues commencing in September 1999.
The recoverability of the Company's unevaluated oil and gas properties is
dependent on future events, including obtaining adequate financing for its
exploration and development program, the successful completion of its planned
drilling program, and the achievement of a level of operating revenues that is
sufficient to support the Company's cost structure. At various times during the
life of the Company to date, it has been necessary for the Company to raise
additional capital through private placements of debt or equity financing. When
such a need has arisen, the Company has met it successfully. It is management's
belief that it will continue to be able to meet its needs for additional capital
as such needs arise in the future.
At December 31, 1999, the Company had outstanding $4,963,213 in notes
payable, which is the major component of the Company's working capital deficit
of $3,290,245, and it borrowed an additional $605,000 on February 29, 2000. On
March 15, 2000, Cheniere repaid the full balance outstanding of $755,000 related
to its December 1997 bridge financing. In addition, it has made the required
payments under its other notes payable, totaling $803,160 for principal,
interest and net profit interest payments through February 29, 2000. Cheniere
has raised $1,762,500 through the sale of equity securities subsequent to
December 31, 1999. The Company has also entered into an exploration agreement
whereby it has agreed to sell a partial interest in certain existing prospects
and in prospects yet to be generated. (See Note 12-Subsequent Events.)
In the event that the Company is not successful in future efforts to raise
capital for its operations, management believes that trades or sales of partial
interests to industry partners would be utilized to explore and develop the
Company's oil and gas properties; however, the ownership interest which would be
retained by the Company would be reduced accordingly.
New Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 for certain companies
(January 1, 2001 for the Company). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income (only certain types of hedge transactions are
reported as a component of other comprehensive income). Additionally, for all
hedge transactions the nature and type of hedge should be disclosed. The
Company does not expect the adoption of SFAS 133 to have a material impact on
its financial statements.
ITEM 7A. 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.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
CHENIERE ENERGY, INC. AND SUBSIDIARIES
Report of Independent Accountants................ 25
Consolidated Balance Sheet....................... 26
Consolidated Statement of Operations............. 27
Consolidated Statement of Stockholders' Equity... 28
Consolidated Statement of Cash Flows............. 29
Notes to Consolidated Financial Statements....... 30
Supplemental Information to Consolidated Financial
Statements...................................... 41
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Cheniere Energy, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 46 present fairly, in all material
respects, the financial position of Cheniere Energy, Inc. and its subsidiaries
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for the years ended December 31, 1999 and 1998, the four-month period
ended December 31, 1997, and the year ended August 31, 1997 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has, since its inception in February 1996,
been dependent on capital contributions to finance its oil and gas exploration
activities. The recoverability of the Company's unevaluated oil and gas
properties is dependent on future events, including obtaining adequate financing
for its exploration and development program, the successful completion of its
planned drilling program, and the achievement of a level of operating revenues
that is sufficient to support the Company's cost structure. In addition, at
December 31, 1999, the Company has $4,963,213 of notes payable which are due on
or before July 5, 2000. Management's plans in regard to these matters are also
described in Note 13. The uncertainties associated with these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 15, 2000
25
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
Cash $ 1,175,950 $ 143,868
Accounts Receivable 906,569 97,837
Subscriptions Receivable - 500,000
Debt Issuance Costs, net 138,909 -
Prepaid Expenses and Other Current Assets 1,223,864 8,833
------------ -----------
Total current assets 3,445,292 750,538
OIL AND GAS PROPERTIES, full cost method
Proved Properties, net 9,459,041 -
Unproved Properties, not subject to amortization 20,648,923 20,000,425
------------ -----------
30,107,964 20,000,425
FIXED ASSETS, net 928,019 89,511
------------ -----------
Total Assets $ 34,481,275 $20,840,474
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 1,772,324 $ 523,144
Notes Payable 4,963,213 1,974,980
------------ -----------
Total current liabilities 6,735,537 2,498,124
------------ -----------
LONG-TERM NOTES PAYABLE
Related Party - 2,000,000
Other - 25,020
------------ -----------
Total long-term liabilities - 2,025,020
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Common Stock, $.003 par value
Authorized: 60,000,000 and 40,000,000 shares, respectively
Issued and Outstanding: 40,212,473 shares at December 31, 1999;
18,973,749 at December 31, 1998 120,637 56,922
Preferred Stock, $.0001 par value
Authorized: 5,000,000 shares; Issued and Outstanding: none - -
Additional Paid-in-Capital 33,203,344 20,084,928
Accumulated Deficit (5,578,243) (3,824,520)
------------ -----------
Total Stockholders' Equity 27,745,738 16,317,330
------------ -----------
Total Liabilities and Stockholders' Equity $ 34,481,275 $20,840,474
============ ===========
The accompanying notes are an integral part of the financial statements.
26
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended Four Months Ended
December 31, December 31, Year Ended
-------------------------- -------------------------- August 31,
1999 1998 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(Unaudited)
Oil and Gas Revenues $ 1,614,055 $ - $ - $ - $ -
----------- ----------- ----------- ----------- -----------
Production Costs 128,859 - - - -
Depreciation, Depletion and Amortization 1,361,644 39,171 2,936 2,695 8,268
General and Administrative Expenses 1,908,805 1,619,307 444,087 189,635 1,705,193
----------- ----------- ----------- ----------- -----------
Total Operating Costs and Expenses 3,399,308 1,658,478 447,023 192,330 1,713,461
----------- ----------- ----------- ----------- -----------
Loss from Operations Before Interest
and Income Taxes (1,785,253) (1,658,478) (447,023) (192,330) (1,713,461)
Interest Income 31,530 20,634 58,662 7,329 56,161
Interest Expense - - - (8,552) (19,168)
----------- ----------- ----------- ----------- -----------
Loss From Operations Before Income Taxes (1,753,723) (1,637,844) (388,361) (193,553) (1,676,468)
Provision for Income Taxes - - - - -
----------- ----------- ----------- ----------- -----------
Net Loss $(1,753,723) $(1,637,844) $ (388,361) $ (193,553) $(1,676,468)
=========== =========== =========== =========== ===========
Net Loss Per Share (basic and diluted) $ (0.07) $ (0.10) $ (0.03) $ (0.02) $ (0.14)
=========== =========== =========== =========== ===========
Weighted Average Number of Shares
Outstanding 25,796,414 16,015,455 14,348,128 10,601,368 12,143,919
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
27
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional Total
--------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- --------- ------------- ------------ -------------
Balance - August 31, 1996 9,931,767 $29,795 $ 4,518,507 $ (121,847) $ 4,426,455
Issuances of Stock 4,124,099 12,373 11,128,052 - 11,140,425
Conversion of Notes Payable 105,000 315 209,685 - 210,000
Issuance of Warrants - - 6,450 - 6,450
Expenses Related to Offerings - - (1,153,441) - (1,153,441)
Net Loss - - - (1,676,468) (1,676,468)
---------- --------- ------------- ------------ -----------
Balance - August 31, 1997 14,160,866 42,483 14,709,253 (1,798,315) 12,953,421
Issuances of Stock 297,000 891 827,609 - 828,500
Issuance of Warrants - - 101,000 - 101,000
Expenses Related to Offerings - - (74,532) - (74,532)
Net Loss - - - (388,361) (388,361)
---------- --------- ------------- ------------ -----------
Balance - December 31, 1997 14,457,866 43,374 15,563,330 (2,186,676) 13,420,028
Issuances of Stock 4,515,883 13,548 4,370,104 - 4,383,652
Issuance of Warrants - - 319,494 - 319,494
Expenses Related to Offerings - - (168,000) - (168,000)
Net Loss - - - (1,637,844) (1,637,844)
---------- --------- ------------- ------------ -----------
Balance - December 31, 1998 18,973,749 56,922 20,084,928 (3,824,520) 16,317,330
Issuances of Stock 17,483,887 52,451 10,962,229 - 11,014,680
Conversion of Notes Payable and Interest 3,170,362 9,511 2,236,626 - 2,246,137
Issuance of Warrants - - 200,000 - 200,000
Repricing of Warrants - - 35,702 - 35,702
Conversion of Production Payment 584,475 1,753 398,247 - 400,000
Expenses Related to Offerings - - (714,388) - (714,388)
Net Loss - - - (1,753,723) (1,753,723)
---------- --------- ------------- ------------ -----------
Balance - December 31, 1999 40,212,473 $ 120,637 $ 33,203,344 $ (5,578,243) $27,745,738
========== ========= ============= ============ ===========
The accompanying notes are an integral part of the financial statements.
28
CHENIERE ENERGY, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended Four Months Ended
December 31, December 31, Year Ended
--------------------------- -------------------------- August 31,
1999 1998 1997 1996 1997
------------ ----------- ------------ ---------- ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,753,723) $(1,637,844) $ (388,361) $ (193,553) $ (1,676,468)
Adjustments to Reconcile Net Loss to
Net Cash Provided by (Used in) Operating
Activities:
Depreciation, Depletion and Amortization 1,361,644 39,171 2,936 2,695 8,268
Compensation Paid in Common Stock 37,500 - - - 624,400
Non-Cash Expense (Issuance of Warrants) 100,000 - - - 6,450
------------ ----------- ------------ ---------- ------------
(254,579) (1,598,673) (385,425) (190,858) (1,037,350)
Changes in Operating Assets and Liabilities
Accounts Receivable (808,732) 4,493 (102,330) - -
Subscriptions Receivable 500,000 (500,000) - - -
Debt Issuance Costs (138,909) - - - -
Prepaid Expenses and Other Current Assets (82,734) 1,710 46,598 (1,832) (52,341)
Accounts Payable and Accrued Liabilities 1,249,178 251,378 (18,525) (31,056) 95,397
Advances from Officers - - - - (961)
------------ ----------- ------------ ---------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 464,224 (1,841,092) (459,682) (223,746) (995,255)
------------ ----------- ------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (999,965) (81,810) - (6,180) (10,745)
Proceeds from Sales of Oil and Gas Seismic
Data 275,000 - 46,000 - -
Oil and Gas Property Additions (8,534,225) (2,804,905) (3,050,027) (2,000,000) (9,500,000)
------------ ----------- ------------ ---------- ------------
NET CASH USED IN INVESTING ACTIVITIES (9,259,190) (2,886,715) (3,004,027) (2,006,180) (9,510,745)
------------ ----------- ------------ ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Notes with
Detachable Warrants - 180,000 4,000,000 - -
Proceeds from Issuance of Notes Payable or
Advances 3,100,000 697,000 - - 500,000
Repayment of Notes Payable or Advances (996,846) (877,000) (500,000) (215,000) (215,000)
Sale of Common Stock 8,438,282 4,252,152 591,000 4,460,375 10,516,025
Offering Costs (714,388) (168,000) (74,532) (689,365) (1,153,441)
------------ ----------- ------------ ---------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,827,048 4,084,152 4,016,468 3,556,010 9,647,584
------------ ----------- ------------ ---------- ------------
NET INCREASE (DECREASE) IN CASH 1,032,082 (643,655) 552,759 1,326,084 (858,416)
CASH - BEGINNING OF PERIOD 143,868 787,523 234,764 1,093,180 1,093,180
------------ ----------- ------------ ---------- ------------
CASH - END OF PERIOD $ 1,175,950 $ 143,868 $ 787,523 $ 2,419,264 $ 234,764
============ =========== ============ =========== ============
The accompanying notes are an integral part of the financial statements.
29
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND NATURE OF OPERATIONS
Cheniere Energy, Inc., a Delaware corporation, is engaged in exploration for
oil and gas reserves. The terms "Cheniere" and "Company" refer to Cheniere
Energy, Inc. and its subsidiaries. The Company operates principally through its
wholly-owned subsidiary, Cheniere Energy Operating Co., Inc. ("Cheniere
Operating"). Cheniere Operating is a Houston-based company formed for the
purpose of oil and gas exploration, development and exploitation. The Company
is currently engaged in the exploration for oil and natural gas along the Gulf
Coast of Louisiana, onshore and in the shallow waters of the Gulf of Mexico.
The Company began its oil and gas activities in April 1996 and commenced oil and
gas production in September 1999. Prior to the commencement of its revenues in
September 1999, Cheniere was a development stage company under the provisions of
Statement of Financial Accounting Standards No. 7 - "Development Stage
Enterprises."
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Cheniere
Energy, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
On April 7, 1998, the Company's Board of Directors approved a change in
fiscal year-end. The change in year-end resulted in a transition period from
September 1, 1997 to December 31, 1997.
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 for the purpose of finding oil and gas reserves are
capitalized. Such capitalized costs include lease acquisition, geological and
geophysical work, delay rentals, drilling, completing and equipping oil and gas
wells, together with internal costs directly attributable to property
acquisition, exploration and development activities. Interest is capitalized on
oil and gas properties not subject to amortization and in the process of
development. The Company capitalized interest in the amount of $415,262 for the
year ended December 31, 1999, $1,058,595 for the year ended December 31, 1998
and $49,616 during the four-month period ended December 31, 1997. No interest
was capitalized prior to the four-month period ended December 31, 1997.
The costs of the Company's oil and gas properties, including the estimated
future costs to develop proved reserves, are depreciated using a composite
units-of-production rate based on estimates of proved reserves. Investments in
unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined or until
impairment occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized costs to
be amortized. Net capitalized costs are limited to a capitalization ceiling,
calculated on a quarterly basis as the aggregate of the present value,
discounted at 10%, of estimated future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties, less related income tax effects.
Subsequent to December 31, 1999, prices for oil and gas have increased to levels
at which the Company's capitalized costs do not exceed its capitalization
ceiling. If the capitalization ceiling were limited to a value calculated using
prices in effect at December 31, 1999, the Company's capitalized costs would
have exceeded its capitalization ceiling by $1,888,912. Product prices continue
to be volatile subsequent to December 31, 1999. In the future, should prices
decline further, and depending upon drilling results, the Company could be
required to record a valuation adjustment to its oil and gas property balances,
resulting in a future noncash charge against earnings.
The Company's allocation of 3-D seismic exploration costs to proved
properties involves an estimate of the total reserves to be discovered in the
project. It is reasonably possible, based on the results obtained from future
drilling, that revisions to this estimate could occur within the next twelve
months, which could affect the Company's capitalization ceiling.
30
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenues from the sale of oil and gas produced are recognized upon the
passage of title, net of royalties and net profits royalty interests.
Revenues from natural gas production are recorded using the sales method, net
of royalties and net profits royalty interests. When sales volumes exceed the
Company's entitled share, an overproduced imbalance occurs. To the extent the
overproduced imbalance exceeds the Company's share of the remaining estimated
proved natural gas reserves for a given property, the Company records a
liability. At December 31, 1999 and 1998, the Company had no overproduced
imbalances.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved oil
and gas reserves.
Debt Issuance Costs
Costs incurred in connection with the issuance of debt are capitalized and
amortized into interest expense (which is then capitalized as a cost of oil and
gas properties) over the term of the related debt. Accumulated amortization was
$24,382 as of December 31, 1999.
Fixed Assets
Fixed assets are recorded at cost. Repairs and maintenance costs are charged
to operations as incurred. Depreciation is computed using the straight-line
method calculated to amortize the cost of assets over their estimated useful
lives which range from three to seven years. Upon retirement or other
disposition of property and equipment, the cost and related depreciation is
removed from the accounts and the resulting gains or losses are recorded.
Offering Costs
Offering costs consist primarily of placement fees, professional fees and
printing costs. These costs are charged against the related proceeds from the
sale of common stock in the periods in which they occur.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the amount of
taxable income and pretax financial income and between the tax bases of assets
and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed in Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the current period's
provision for income taxes.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. The Company grants options at or above the market
price of its common stock at the date of each grant.
Earnings (Loss) Per Share
Earnings (loss) per share ("EPS") is computed in accordance with the
requirements of SFAS No. 128, "Earnings Per Share." Basic EPS excludes dilution
and is computed by dividing net income (loss) by the weighted average number of
shares outstanding during the period. Diluted EPS reflects potential dilution
and is computed by
31
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dividing net income (loss) by the weighted average number of common shares
outstanding during the period increased by the number of additional common
shares that would have been outstanding if the potential common shares had been
issued. Basic and diluted EPS for all periods presented are the same since the
effect of the Company's options and warrants is antidilutive to its net loss per
share under SFAS No. 128.
Cash Equivalents
The Company classifies all investments with original maturities of three
months or less as cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short maturity of those
instruments. The carrying value of the Company's notes payable is considered to
approximate the fair value of those instruments due to the short-term nature of
the instruments.
Commodity Price 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 hedging transactions. The Company's market
risk with respect to its fixed-rate, short-term notes payable is considered to
be immaterial due to the short-term nature of these instruments.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires that the Company make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Management believes its estimates are reasonable.
New Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 for certain companies
(January 1, 2001 for the Company). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income (only certain types of hedge transactions are
reported as a component of other comprehensive income). Additionally, for all
hedge transactions the nature and type of hedge should be disclosed. The
Company does not expect the adoption of SFAS 133 to have a material impact on
its financial statements.
32
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3-FIXED ASSETS
Fixed assets consist of the following:
December 31,
-------------------------
1999 1998
---------- --------
Furniture and Fixtures $ 133,588 $ 37,442
Computers and Office Equipment 544,925 84,904
Other 464,939 21,143
---------- --------
1,143,452 143,489
Less Accumulated Depreciation (215,433) (53,978)
---------- --------
Fixed Assets, Net $ 928,019 $ 89,511
========== ========
NOTE 4-OIL AND GAS PROPERTIES
Investments in oil and gas properties were as follows at December 31, 1999
and 1998:
1999 1998
----------- ------------
Oil and gas properties:
Proved $10,659,227 $
Unproved 20,648,923 20,000,425
----------- ------------
31,308,150 20,000,425
Less accumulated depreciation,
depletion and amortization (1,200,186) $
----------- ------------
$30,107,964 $20,000,425
=========== ============
Depreciation, depletion and amortization of oil and gas property costs
commenced in 1999 and totaled $1,200,186 for the year ended December 31, 1999.
Depreciation, depletion and amortization per equivalent Mcf (using an Mcf-to-
barrel conversion factor of 6 to 1) was $1.84 for the year ended December 31,
1999. All of Cheniere's oil and gas properties are located within the United
States or its territorial waters.
The Company has made a substantial investment in acquiring, processing and
reprocessing its 3-D seismic database covering a 9,000-square-mile project area
in the Gulf of Mexico. The costs of this project become subject to amortization
on a ratable basis as the oil and gas reserves expected to be recovered from the
project are discovered. As of December 31, 1999, Cheniere had received
reprocessed seismic data over approximately 900 square miles. Interpretation of
this data is ongoing.
NOTE 5-NOTES PAYABLE
At December 31, 1999, Cheniere had outstanding short-term notes payable of
$4,963,213. Three financing facilities comprised the balance: platform
financing of $3,090,643, well services financing of $1,117,570 and December 1997
bridge financing notes of $755,000. The terms of each of these facilities and
of others that were utilized within the three years ended December 31, 1999 are
described in the following paragraphs.
September 1999 - $3,100,000 Platform Financing
On September 1, 1999, Cheniere established a $3,100,000 financing facility to
fund a production platform and other exploration and development costs in the
West Cameron Block 49 area. Borrowings under the facility are to be repaid from
Cheniere's share of net cash flow from production through the West Cameron Block
49 platform. The note is secured by Cheniere's oil and gas properties and has a
maturity date of June 30, 2000. Financing costs
33
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
include interest at 10% per annum and a 5% net profit interest in the initial
two wells producing through the platform. At December 31, 1999, the outstanding
balance under the facility was $3,090,643. Subsequent to December 31, 1999, the
Company borrowed an additional $605,000 under the same facility. (See Note 12-
Subsequent Events.)
December 1999 - $1,117,570 Well Services Financing
In December 1999, Cheniere entered into a financing agreement with a supplier
of well services to consolidate and convert trade accounts payable balances into
a short-term secured note payable. Interest is payable at 10% per annum. The
note is secured by Cheniere's oil and gas properties and matures on July 5,
2000. At December 31, 1999 the outstanding balance was $1,117,570.
December 1997 - $4,000,000 Bridge Financing
In December 1997, Cheniere completed the private placement of a $4,000,000
bridge financing (the "December 1997 Bridge Financing"). The notes payable
issued by Cheniere had an initial maturity date of March 15, 1998, which was
extended to September 15, 1998 and further extended to January 15, 1999. In
December 1998, Cheniere received commitments from certain noteholders to
exchange notes payable for an aggregate of 2,812,528 shares of Cheniere common
stock at a price of $0.72 per share. Accordingly, the $2,025,020 face amount of
the exchanged notes was classified as a long-term obligation as of December 31,
1998. For those notes not exchanged for common stock, the maturity date was
extended to March 15, 1999. The notes originally bore interest at a rate of
LIBOR plus 4%. The securities purchase agreements which govern such bridge
financing specify that, during the term of the notes, capital raised by the
Company in excess of $16,000,000 must be directed to repayment of the notes.
In connection with the December 1997 Bridge Financing, Cheniere issued
100,000 shares of common stock and four-year warrants to purchase 1,333,334
shares of common stock at $2-3/8 per share. Additional warrants to purchase
1,600,000 shares of Cheniere common stock were issued on September 15, 1998 in
consideration for the extension to that date. In connection with the extension
to January 15, 1999, the Company offered two alternatives of consideration.
Holders of $3,000,000 of the notes elected to reduce the exercise price of their
warrants to $1.50 per share. The holder of $1,000,000 of the notes elected to
reduce the exercise price of its warrants to $2.00 per share, to extend the term
of such warrants to five years from the latter of September 15, 1998 or the date
of issue, to receive additional warrants to purchase 387,500 shares of common
stock and to receive 50,000 shares of common stock. In January 1999, the
maturity date was extended to March 15, 1999. In March 1999, the maturity date
was extended to April 15, 1999. As consideration for the extension to April 15,
1999, the Company reduced the exercise price by $0.25 per share for all warrants
issued in connection with the issuance or extensions of the notes. In April
1999, the maturity date was extended to July 15, 1999, at which time $987,490
(50% of the then-outstanding balance) was repaid, the maturity date for the
remainder was extended to October 15, 1999, and the interest rate was increased
to LIBOR plus 6% (approximately 12.14% at December 31, 1999). In September
1999, certain noteholders exchanged notes payable and accrued interest totaling
$158,608 for units of common stock and warrants to purchase common stock at a
price of $1.10 per unit. In October 1999, the maturity date of the remaining
notes was extended to December 15, 1999. In consideration of the extension of
the maturity date, the Company issued 81,750 shares of common stock to the
noteholders at a price of $1.00 per share. In December 1999, the maturity date
of the notes was extended to March 15, 2000. In consideration of this
extension, the Company issued 49,341 shares of common stock at a price of
$0.33 1/3 per share and warrants to purchase 382,401 shares of common stock at a
price to be determined in the future, between $0.75 and $1.00 per share, on or
before December 16, 2004. Also in December 1999, a noteholder exchanged a
$75,000 note payable for units of common stock and warrants to purchase common
stock at a price of $0.33 1/3 per unit. On March 15, 2000, the Company repaid
the $755,000 remaining balance of the notes. (See Note 12 - Subsequent Events.)
NOTE 6-INCOME TAXES
From its inception the Company has recorded losses for both financial
reporting purposes and for federal income tax reporting purposes. Accordingly,
the Company is not presently a taxpayer and has not recorded a provision for
income taxes in any of the periods presented in the accompanying financial
statements.
34
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, the Company had net operating loss ("NOL")
carryforwards for tax reporting purposes of approximately $12,940,000. In
accordance with SFAS No. 109, a valuation allowance equal to the tax benefit for
deferred taxes has been established due to the uncertainty of realizing the
benefit of such NOL carryforwards.
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities at December 31,
1999 and 1998 are as follows:
December 31,
--------------------------
Deferred Tax Assets 1999 1998
- ------------------- ----------- -----------
NOL Carryforwards $ 4,400,000 $ 1,554,000
Less: Valuation Allowance (4,400,000) (1,554,000)
----------- -----------
Net Deferred Tax Assets $ - $ -
=========== ===========
Net operating loss carryforwards expire starting in 2006 extending through
2014. Per year availability of losses incurred prior to July 3, 1996 of
approximately $747,000 is subject to change of ownership limitations under
Internal Revenue Code Section 382.
The gross change in the valuation allowance for deferred tax assets
increased $2,846,000 and $557,000 during the years ended December 31, 1999 and
1998, respectively.
NOTE 7-WARRANTS
As of December 31, 1999 the Company has issued and outstanding 8,467,803
warrants. The Company has reserved an equal number of shares of common stock
for issuance upon the exercise of its outstanding warrants. Warrants issued by
the Company do not confer upon the holders thereof any voting or other rights of
a stockholder of the Company. In instances where warrants were granted in
connection with financings, the valuation of such warrants was calculated in
accordance with the provisions of APB Opinion No. 14, incorporating the
estimated fair market interest rate at the time. The issuances and terms of the
warrants are described below.
December 1997 Bridge Financing Warrants
In connection with Cheniere's $4,000,000 December 1997 Bridge Financing
(Note 5), the Company issued warrants to purchase 1,333,334 shares of common
stock at $2 3/8 per share. Additional warrants to purchase 1,600,000 shares of
Cheniere common stock were issued on September 15, 1998 in consideration for the
extension to that date. In connection with the extension to January 15, 1999,
the Company offered two alternatives of consideration. Holders of warrants to
purchase 2,200,000 shares of common stock elected to reduce the exercise price
of their warrants to $1.50. The holder of warrants to purchase 733,334 shares
of common stock elected to reduce the exercise price of its warrants to $2.00
per share, to extend the term of such warrants to five years from the latter of
September 15, 1998 or the date of issue, to receive additional warrants to
purchase 387,500 shares of common stock and to receive 50,000 shares of common
stock. In January 1999, the maturity date was extended to March 15, 1999. In
March 1999, the maturity date was extended to April 15, 1999. As consideration
for the extension to April 15, 1999, the Company reduced the exercise price by
$0.25 per share for all warrants issued in connection with the issuance or
extensions of the notes. In connection with extensions of the maturity dates
from October 1999 to December 1999 and then to March 2000, the Company issued
131,091 shares of common stock and warrants to purchase 382,401 shares of common
stock at a price to be determined in the future, between $0.75 and $1.00 per
share, and extended the term of all warrants related to then outstanding notes
payable to December 16, 2004.
35
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unit Warrants
In August, September, November, and December 1998, the Company sold
1,950,000 units, each such unit consisting of one share of common stock and one-
half warrant to purchase one share of common stock, totaling 1,950,000 shares of
common stock and warrants to purchase 975,000 shares of common stock. Each such
warrant is exercisable within two years from the date of issue at an exercise
price of $2.00 per share.
In April 1999, Cheniere sold 300,000 units to two investors at a price of
$1.00 per share. Each unit was comprised of one share of common stock and one
warrant to purchase one share of common stock, totaling 300,000 shares of common
stock and warrants to purchase 300,000 shares of common stock. Warrants issued
in connection with these sales of the units are exercisable on or before the
second anniversary date of the date the units were sold at an exercise price of
$1.00 per share. In July 1999, the Company issued 150,000 warrants exercisable
at $1.00 per share on or before July 5, 2004 in connection with a pricing
adjustment to the number of units sold in April 1999.
In September and October 1999, Cheniere sold 1,074,134 units at a price of
$1.10 per unit. Each unit was comprised of one share of common stock and one
half warrant to purchase one share of common stock, totaling 1,074,134 shares of
common stock and warrants to purchase 537,067 shares of common stock. Warrants
issued in connection with these sales of units are exercisable at an exercise
price of $1.50 per share on or before the third anniversary date of the date the
units were sold.
Seismic Transaction Warrants
In June 1999, the Company issued 1,000,000 warrants to its president and
chief executive officer and 200,000 warrants to another member of its board of
directors, both of whom were instrumental in negotiating the Company's license
of 8,700 square miles of 3-D seismic data in the Gulf of Mexico. Warrants
issued in connection with this transaction are exercisable on or before the
fifth anniversary of the date the transaction closed at an exercise price of
$1.50 per share.
Adviser Warrants
In consideration of certain investment advisory and other services to the
Company, and pursuant to warrant agreements, each dated as of August 21, 1996,
the Company issued warrants to purchase 13,600 and 54,400 shares of common
stock. The warrants are exercisable at any time on or before May 15, 2000, at
an exercise price of $3.00 per share. The exercise price represents the
approximate market price of the underlying common stock at the time of the
transaction.
In conjunction with a private placement of common stock in March 1997 the
Company issued 50,000 warrants to a financial advisor. The warrants were issued
in March 1998 at an exercise price of $3.125 per share and are exercisable on or
before March 31, 2000.
Effective in July 1999, Cheniere issued 50,000 warrants exercisable at
$1.50 per share on or before June 30, 2004 as consideration for assistance in
the private placement of securities.
In September 1999, the Company issued to a consultant warrants to purchase
200,000 shares of common stock on or before September 26, 2004 at exercise
prices per share of $1.375 for 50,000 shares, $1.875 for 50,000 shares, $2.375
for 50,000 shares and $2.875 for 50,000 shares. The warrants were valued at
$1.00 per warrant using a Black-Scholes methodology at the date of the issuance,
which is being amortized over the term of the consulting agreement.
In November and December 1999, as consideration for assistance in the
private placement of securities, the Company issued 945,000 warrants exercisable
at $1.00 per share on or before the third anniversary of the issuances.
June 1998 Bridge Financing Warrants
In conjunction with the issuance of $180,000 senior term notes payable in
June 1998, the Company issued warrants to purchase 83,334 shares of common stock
at an exercise price of $2.00 per share. Such warrants are exercisable on or
before June 4, 2002 at an exercise price of $2.00 per share and are subject to
customary anti-dilution adjustments.
36
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 1996 Warrants
In conjunction with the issuance of the $425,000 in notes payable, the
Company issued and continues to have outstanding 141,667 warrants (collectively,
the "June 1996 Warrants"), each of which entitles the registered holder thereof
to purchase one share of common stock. The June 1996 Warrants are exercisable
at any time on or before June 14, 2000, at an exercise price of $3.00 per
share. The exercise price was determined at a 100% premium to the sales price
of Cheniere stock by private placement during May 1996. The June Warrants were
originally issued by Cheniere and were converted to warrants of Cheniere
following the Reorganization. The June 1996 Warrants were issued to a group of
eleven investors in connection with a private placement of unsecured promissory
notes.
Effective September 14, 1996, the Company had not paid all amounts due and
payable under the notes by the Maturity Date. Certain of the noteholders
converted their notes into 105,000 shares of common stock. One of the
noteholders purchased the promissory notes of the remaining noteholders. As per
the terms of the notes, the holder was entitled to receive up to an aggregate of
21,500 additional warrants for each month, or partial month, any amounts
remained due and payable after September 14, 1996, up to a maximum aggregate
number of 86,000 such additional warrants. These notes were repaid on December
14, 1996, and upon repayment the Company issued 64,500 warrants in accordance
with the loan agreement. The terms of the warrants are similar to the June 1996
Warrants.
NOTE 8-STOCK OPTIONS
In 1997 the Company established the Cheniere Energy, Inc. 1997 Stock Option
Plan (the "Option Plan"). The Option Plan allows for the issuance of options to
purchase up to 1,950,000 shares of Cheniere common stock. In addition to grants
made under the Option Plan, the Company granted options to purchase 600,000
shares at $1.50 per share during 1999. The Company has reserved 2,550,000
shares of common stock for issuance upon the exercise of options which have been
granted or which may be granted. The term of options granted under the Option
Plan is generally five years. The vesting schedule varies, but vesting
generally occurs over four years, 25% on each anniversary of the grant date.
Grants made by the Company are summarized in the following table:
December 31,
-----------------------------------------------------
1999 1998 1997
----------- ---------- ---------
Outstanding at beginning of period 686,445 539,445 319,445
Options granted at an exercise price
of $3.00 per share 35,000 135,000 220,000
Options granted at an exercise price of
$1.50 per share 1,473,500 12,000 -
Options canceled (33,750) - -
---------- -------- --------
Outstanding at end of period 2,161,195 686,445 539,445
========== ======== ========
Exercisable at end of period 761,195 320,695 131,945
========== ======== ========
Weighted average exercise price of
options outstanding $ 1.58 $ 1.68 $2.96
========== ======== ========
Weighted average exercise price of
options exercisable $ 1.64 $ 1.67 $2.82
========== ======== ========
Weighted average fair value of options granted
during the period $ 0.85 $ 0.79 n/a
========== ======== ========
Weighted average remaining contractual life of
options outstanding 4.7 years 3.4 years 4.0 years
37
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about fixed options outstanding at
December 31, 1999.
Weighted Average
Exercise Number Remaining
Prices Outstanding Contractual Life
-------- ----------- ----------------
$1.50 2,026,750 4.8
$1.80 19,445 3.9
$3.00 115,000 4.4
The fair value of options is calculated using the Black-Scholes option
pricing model. Assumptions used for the years ended December 31, 1999 and 1998,
respectively, were: no dividend yield, weighted average volatility of 124% and
88%, risk-free interest rates of 6.3% and 4.6% and expected lives of the options
of 3.0 years and 2.5 years. The pro forma effect on the Company's net losses had
it adopted the optional recognition provisions of SFAS No. 123 for 1999 and
1998, respectively, would be to increase the reported net losses by $1,431,000
and $155,000 or $0.06 and $0.01 per share (both basic and diluted). The
disclosure-only provisions of SFAS No. 123 for periods earlier than 1998 do not
have a material effect on the Company's financial statements.
On December 11, 1998, the Company adjusted the exercise price from $3.00 to
$1.50 per share for the 575,000 options then issued and outstanding to
management and employees. On September 30, 1999, all options then outstanding
to management and employees were extended to September 30, 2004.
In June 1999, the Company issued 1,000,000 warrants to its president and
chief executive officer and 200,000 warrants to another member of its board of
directors, both of whom were instrumental in negotiating the Company's license
of 8,700 square miles of 3-D seismic data in the Gulf of Mexico. Warrants
issued in connection with this transaction are exercisable on or before the
fifth anniversary of the date the transaction closed at an exercise price of
$1.50 per share. The fair value of these warrants is included in the pro forma
net loss calculation under SFAS No. 123.
NOTE 9-SUBSCRIPTIONS RECEIVABLE
At December 31, 1998, the Company had received and accepted a subscription
for the purchase of 666,667 shares of common stock at a price of $0.75 per
share. Funding of the stock sale took place on January 6, 1999.
NOTE 10-RELATED PARTY TRANSACTIONS
BSR Investments, Ltd., a major stockholder of the Company controlled by the
mother of Charif Souki, Chairman of Cheniere, purchased $2,000,000 of the notes
issued in the Company's $4,000,000 December 1997 Bridge Financing and pledged a
portion of its investment in Cheniere common stock to fund its participation.
In conjunction with the financing, BSR received warrants to purchase 166,667
shares of the Company's common stock. On September 15, 1998, BSR received
warrants to purchase an additional 400,000 shares of common stock as
consideration for extending the maturity of the notes to that date. Also in
September 1998, the exercise price of the warrants held by BSR was reduced from
$2.375 to $1.50 per share as consideration to extend the maturity date of the
notes to January 15, 1999. In March 1999, BSR exchanged notes payable of
$2,000,000 for 2,777,778 shares of Cheniere common stock ($0.72 per share).
In May 1999, BSR purchased from another noteholder $240,000 in short-term
notes payable by Cheniere. In July 1999, the Company repaid $120,000 to BSR at
the time it repaid 50% of the outstanding balances on all of the notes issued in
the December 1997 Bridge Financing. On September 30, 1999, BSR exchanged its
remaining $120,000 note payable and $1,000 in accrued interest for 110,000 units
($1.10 per unit), each unit representing one share of common stock and one half
warrant to purchase a share of common stock at an exercise price of $1.50 per
share on or before September 30, 2002.
In conjunction with certain of the Company's private placements of equity,
placement fees have been paid
38
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to Investors Administration Services, Limited ("IAS"), a company in which the
brother of Charif Souki, Cheniere's Chairman, is a principal. Placement fees
paid to IAS totaled $562,372 for 1999, $138,000 for 1998 and $255,000 for the
year ended August 31, 1997. Such payments were recorded as offering costs and
reflected as a reduction of additional paid-in capital. In addition, in
connection with the sale of 10,483,031 units (of common stock and warrants),
Cheniere granted to IAS, or its assigns, warrants to purchase 645,000 shares of
common stock at an exercise price of $1.00 per share on or before
December 30, 2002.
During June 1998, the Company received and repaid short-term advances from
then Co-Chairman of the Board, William D. Forster, and members of his family or
entities under their control, totaling $592,000. Interest was paid at LIBOR
plus 4% and totaled $1,622. In addition, non-interest bearing, short-term
advances totaling $105,000 were made to the Company by Co-Chairman Forster
($75,000) and BSR ($30,000) in October and November 1998. Such advances were
repaid by the Company in October and November 1998.
NOTE 11-COMMITMENTS AND CONTINGENCIES
The Company has entered into an operating lease agreement with a
noncancelable term in excess of one year for office space. Future minimum lease
payments are $236,259, $236,259, $236,259, $59,065 and nil for the years ended
December 31, 2000, 2001, 2002, 2003, and 2004, respectively. Total rental
expense for office space for the years ended December 31, 1999 and 1998, the
four-month period ended December 31, 1997, and the year ended August 31, 1997
was $229,381, $42,741, $4,716 and $14,148, respectively.
On June 9, 1999 Cheniere entered into a master license agreement covering
the license of approximately 8,700 square miles of 3-D seismic data in the Gulf
of Mexico. In connection with the license agreement, the Company has made a
commitment to reprocess certain of the seismic data and to pay a fee for such
reprocessing as the reprocessed data are delivered. If reprocessed seismic data
are delivered to Cheniere on the schedule specified in the agreement, Cheniere
will be obligated to make processing payments of approximately $200,000 per
month from December 1999 through December 2001.
NOTE 12-SUBSEQUENT EVENTS
On February 29, 2000, Cheniere amended its $3,100,000 loan agreement and
borrowed an additional $605,000 under the facility (as described further in Note
5 - Notes Payable). The funds were used in connection with the recompletion of
a producing well.
On March 10, 2000, the Company entered into an exploration agreement.
Under the terms of the agreement, Cheniere's exploration partner acquired an
option to participate at a 50% working interest level in any drilling prospects
generated by Cheniere in the Gulf of Mexico over the next eighteen months for
$4,140,000 payable in equal monthly installments over the term of the agreement.
In addition, the partner will pay a disproportionate share of the cost of
leasing and of the initial test well on each prospect. Cheniere will be the
operator of the drilling program.
In February and March 2000, the Company raised $924,000 through the sale of
units (common stock and warrants) at a price of $0.75 per unit. During March
2000, the Company issued 937,500 shares pursuant to the exercise of warrants at
an exercise price of $1.00 per share. Combined net proceeds from these
issuances of equity securities totaled $1,762,500, which funds were used for
general corporate purposes and for the repayment of $755,000 in short-term notes
payable.
On March 15, 2000, Cheniere repaid the remaining balance of $755,000
related to its short-term notes payable which were issued as a part of the
December 1997 Bridge Financing.
39
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13-MANAGEMENT'S PLANS AND CONTINUED CAPITAL RAISING ACTIVITIES
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Cheniere is a
company in the early stages of its operations, with initial production and
revenues commencing in September 1999.
The recoverability of the Company's unevaluated oil and gas properties is
dependent on future events, including obtaining adequate financing for its
exploration and development program, the successful completion of its planned
drilling program, and the achievement of a level of operating revenues that is
sufficient to support the Company's cost structure. At various times during the
life of the Company to date, it has been necessary for the Company to raise
additional capital through private placements of debt or equity financing. When
such a need has arisen, the Company has met it successfully. It is management's
belief that it will continue to be able to meet its needs for additional capital
as such needs arise in the future.
At December 31, 1999, the Company had outstanding $4,963,213 in notes
payable and it borrowed an additional $605,000 on February 29, 2000. On March
15, 2000, Cheniere repaid the full balance outstanding of $755,000 related to
its December 1997 bridge financing. In addition, it has made the required
payments under its other notes payable, totaling $803,160 for principal,
interest and net profit interest payments through February 29, 2000. Cheniere
has raised $1,762,500 through the sale of equity securities subsequent to
December 31, 1999. The Company has also entered into an exploration agreement
whereby it has agreed to sell a partial interest in certain existing prospects
and in prospects yet to be generated. (See Note 12-Subsequent Events.)
In the event that the Company is not successful in future efforts to raise
capital for its operations, management believes that trades or sales of partial
interests in its oil and gas properties to industry partners would be utilized
to explore and develop the Company's oil and gas properties; however, the
ownership interest which would be retained by the Company would be reduced
accordingly.
NOTE 14-SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
In conjunction with its December 1997 Bridge Financing, the Company issued at
closing 100,000 shares of common stock (valued at $237,500) and upon extension
of the maturity date 50,000 shares of common stock (valued at $33,500), which
were recorded as debt issuance costs. In the same financing, the Company issued
warrants to purchase 1,333,334 shares of its common stock (valued at $101,000)
and warrants to purchase 1,987,500 shares of its common stock (valued at
$315,833) related to extensions of the maturity dates. In conjunction with a
short-term bridge financing in June 1998, the Company issued warrants to
purchase 83,334 shares of common stock (valued at $3,661). The amortization of
such warrant costs was included in interest expense, which was capitalized as a
cost of oil and gas properties.
In 1998, the Company issued 70,000 shares of common stock (valued at $98,000)
in settlement of invoices for previously rendered legal services.
In 1999, the Company issued 2,812,528 shares of common stock in exchange for
$2,025,020 in notes payable and 225,000 shares of common stock in exchange for
$75,000 in notes payable. The Company also issued 144,189 units (each unit
representing one share of common stock and one half of a warrant to purchase one
share of common stock) in exchange for notes payable and accrued interest
totaling $158,608. In March 1999, the Company adjusted the exercise price for
certain warrants (valued at $35,702) in connection with the extension of the
maturity dates of notes payable. In the fourth quarter of 1999, the Company
issued 131,091 shares of common stock and warrants to purchase 382,401 shares of
common stock (collectively valued at $98,197) in connection with the extension
of maturity dates of notes payable. The Company issued 2,057,465 shares of
common stock to purchase oil and gas services and seismic data valued at
$2,828,210. The Company issued warrants to purchase 200,000 shares of common
stock (valued at $200,000) in payment for investor relations consulting
services. The Company issued 150,000 shares (valued at $37,500) in connection
with the employment of one of its executives. The Company issued a short-term
note payable for oil and gas services valued at $1,117,570.
40
CHENIERE ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
(unaudited)
Costs Incurred in Oil and Gas Producing Activities
Presented below are costs incurred in oil and gas property acquisition,
exploration and development activities:
Year Ended
December 31, Four Months Ended Year Ended
--------------------------- December 31, August 31,
1999 1998 1997 1997
------------ ---------- ---------- ----------
Acquisition of properties:
Proved properties $ 1,364,809 $ - $ - $ -
Unproved properties 648,498 3,466,371 3,034,054 9,500,000
Exploration costs 7,675,809 - - -
Development costs 1,618,609 - - -
----------- ---------- ---------- ----------
Total $11,307,725 $3,466,371 $3,034,054 $9,500,000
=========== ========== ========== ==========
Included in the above amounts for the years ended December 31, 1999 and 1998 and
the four months ended December 31, 1997 were $1,375,262, $1,502,595 and $75,616,
respectively, of capitalized general and administrative expenses and capitalized
interest expense directly related to property acquisition, exploration and
development.
Capitalized Costs Related to Oil and Gas Producing Activities
The following table presents total capitalized costs of proved and unproved
properties and accumulated depreciation, depletion and amortization related to
oil and gas producing operations:
December 31,
---------------------------
1999 1998
----------- -----------
Proved properties $10,659,227 $ -
Unproved properties 20,648,923 20,000,425
----------- -----------
31,308,150 20,000,425
Accumulated depreciation, depletion and amortization (1,200,186) $ -
----------- -----------
$30,107,964 $20,000,425
=========== ===========
Of the unproved properties capitalized cost at December 31, 1999, approximately
$2,013,307 and $3,466,371 was incurred in 1999 and 1998, respectively. The
Company anticipates evaluating these properties during subsequent years.
41
CHENIERE ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
(unaudited)
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The results of operations from oil and gas producing activities are as
follows:
Year ended
December 31,
1999
-----------
Revenues $ 1,614,055
Production costs (128,859)
Depreciation, depletion and amortization (1,200,816)
Income tax benefit (expense) -
-----------
Results of operations from oil and
gas producing activities
(excluding corporate overhead and
interest costs) $ 284,380
===========
RESERVE QUANTITIES
Estimates of proved reserves of the Company and the related standardized
measure of discounted future net cash flow information are based on the reports
generated by Ryder Scott Company Petroleum Engineers in accordance with the
rules and regulations of the SEC. The independent engineers' estimates were
based upon a review of production histories and other geologic, economic,
ownership and engineering data provided by the Company. These estimates
represent the Company's interest in the reserves associated with its properties.
The Company's estimates of its proved reserves and proved developed reserves
of oil and gas as of December 31, 1999 and 1998 and the changes in its proved
reserves are as follows:
1999
-------------------
Oil Gas
(Bbls) (Mcf)
------ ---------
Proved reserves:
Beginning of year - -
Production (2,975) (633,432)
Extensions and discoveries 30,791 6,429,432
------ ---------
End of year 27,816 5,796,000
====== =========
Proved developed reserves:
Beginning of year - -
End of year 27,816 5,796,000
====== =========
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and future amounts
and timing of development expenditures, including many factors beyond the
control of the Company. Reserve engineering is a subjective process of
estimating underground accumulations of crude oil and natural gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Estimates of proved undeveloped reserves are
inherently less certain than estimates of proved developed reserves. The
quantities of oil and gas that are ultimately recovered, production and
operating costs, the amount and timing of future development expenditures,
geologic success and future oil and gas sales prices may all differ from those
assumed in these estimates. In addition, the Company's reserves may be subject
to downward or upward revision based upon production history, purchases or sales
of properties, results of future development, prevailing oil
42
CHENIERE ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
(unaudited)
and gas prices and other factors. Therefore, the present value shown above
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The standardized measure of discounted future net cash flows was calculated
by applying year-end prices to estimated future production, less future
expenditures (based on year-end costs) to be incurred in developing and
producing such proved reserves and the estimated effect of future income taxes
based on the current tax law. The resulting future net cash flows were
discounted using a rate of 10% per annum.
The standardized measure of discounted future net cash flow amounts contained
in the following tabulation does not purport to represent the fair market value
of oil and gas properties. No value has been given to unproved properties.
There are significant uncertainties inherent in estimating quantities of proved
reserves and in projecting rates of production and the timing and amount of
future costs. Future realization of oil and gas prices over the remaining
reserve lives may vary significantly from current prices. In addition, the
method of valuation utilized, based on year-end prices and costs and the use of
a 10% discount rate, is not necessarily appropriate for determining fair value.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows:
December 31,
1999
------------
Future gross revenues $13,651,636
Less - future costs:
Production (2,050,892)
Development and dismantlement (1,516,500)
-----------
Future net cash flows before income taxes 10,084,244
Less - 10% annual discount for estimated timing of cash flows (2,514,115)
-----------
Present value of future net cash flows before income taxes 7,570,129
Less - present value of future income taxes -
-----------
Standardized measure of discounted future net cash flows $ 7,570,129
===========
The following table summarizes the principal sources of change in the
standardized measure of discounted future net cash flows:
Year Ended
December 31,
1999
-----------
Standardized measure - beginning of period $ -
Sales of oil and gas produced, net of production costs (1,485,196)
Extensions and discoveries 9,055,325
-----------
Standardized measure - end of period $ 7,570,129
===========
The standardized measure amounts are based on year-end prices of $25.47 per
barrel of oil and $2.34 per mcf of gas.
43
CHENIERE ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
(unaudited)
First Second Third Fourth
quarter quarter quarter quarter Year
---------- ---------- --------- ----------- -----------
Year ended December 31, 1999:
Revenues $ - $ - $ 421,268 $1,192,787 $ 1,614,055
Gross profit (1) (10,344) (10,982) 134,147 10,731 123,552
Loss from operations (334,043) (360,139) (347,522) (743,549) (1,785,253)
Net loss (329,105) (354,885) (333,999) (735,735) (1,753,723)
Net loss per share - basic and diluted $ (0.02) $ (0.02) $ (0.01) $ (0.02) $ (0.07)
Year ended December 31, 1998:
Revenues $ - $ - $ - $ - $ -
Gross profit (1) (7,772) (10,453) (13,451) (7,495) (39,171)
Loss from operations (195,394) (436,435) (532,270) (494,379) (1,658,478)
Net loss (189,500) (429,816) (528,113) (490,415) (1,637,844)
Net loss per share - basic and diluted $ (0.01) $ (0.03) $ (0.03) $ (0.03) $ (0.10)
- ----------
(1) Revenues less operating expenses other than general and administrative.
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
In accordance with paragraph (3) of General Instruction G to form 10-K, Part
III of this Report is omitted because the Company will file with the Securities
and Exchange Commission not later than 120 days after the end of the fiscal year
ended December 31, 1999 a definitive proxy statement pursuant to Regulation 14A
involving the election of directors, which proxy statement is incorporated
herein by reference (with the exception of certain portions noted therein that
are not so incorporated by reference).
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
(1) Financial Statements
Report of Independent Accounts................... 25
Consolidated Balance Sheet....................... 26
Consolidated Statement of Operations............. 27
Consolidated Statement of Stockholders' Equity... 28
Consolidated Statement of Cash Flows............. 29
Notes to Consolidated Financial Statements....... 30
Supplemental Information to the Consolidated
Financial Statements............................. 41
(2) Financial Statement Schedule
All consolidated financial statement schedules have been omitted because
they are not required, are not applicable, or the information has been included
elsewhere within this Form 10-K.
(3) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. ("Cheniere") (Incorporated by reference to Exhibit
3.1 of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 0-9092))
3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Cheniere (Incorporated by reference to Exhibit
3.2 of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 0-9092))
3.3 By-laws of Cheniere as amended through April 7, 1997 (Incorporated
by reference to Exhibit 3.2 of the Company's Annual Report on Form
10-K for the year ended December 31, 1998 (File No. 0-9092))
4.1 Specimen Common Stock Certificate of Cheniere (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.1 Exploration Agreement between FX Energy, Inc. (now known as
Cheniere Energy Operating Co., Inc. ("Cheniere Operating")) and
Zydeco Exploration, Inc. ("Zydeco") (Incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement under the
Securities Act of 1933 on Form S-1 filed on August 27, 1996 (File
No. 333-10905))
10.2 First Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated by
reference to Exhibit 10.2 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.3 Second Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated by
reference to Exhibit 10.3 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.4 Third Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated by
reference to Exhibit 10.4 of the Annual Report on Form 10-K for
the year ended August 31, 1996 (File No. 2-63115))
10.5 Form of Warrant Agreement between Cheniere and each of C.M. Blair,
W.M. Foster & Co., Inc. and Redliw Corp. (Incorporated by
reference to Exhibit 10.8 of the Company's Registration Statement
on Form S-1 filed on August 27, 1996 (File No. 333-10905))
10.6 Fourth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated by
reference to Exhibit 10.12 of the Company's Registration Statement
on Form S-1 filed on March 17, 1997 (File No. 333-23421))
46
10.7 Fifth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated by
reference to Exhibit 10.18 of the Annual Report on Form 10-K for
the year ended August 31, 1997 (File No. 0-9092))
10.8 Sixth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated by
reference to Exhibit 10.19 of the Annual Report on Form 10-K for
the year ended August 31, 1997 (File No. 0-9092))
10.9 Seventh Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated by
reference to Exhibit 10.23 of the Annual Report on Form 10-K for
the year ended August 31, 1997 (File No. 0-9092))
10.10 Cheniere Energy, Inc. 1997 Stock Option Plan (Incorporated by
reference to Exhibit 10.25 of the Quarterly on Form 10-Q for the
quarter ended November 31, 1997 (File No. 0-9092))*
10.11 Eighth Amendment to the Exploration Agreement between FX Energy,
Inc. (now known as Cheniere Operating) and Zydeco (Incorporated by
reference to Exhibit 10.26 of the Transition Report on Form 10-K
for the period from September 1, 1997 to December 31, 1997 (File
No. 0-9092))
10.12 Form of Securities Purchase Agreement dated December 15, 1997
(Incorporated by reference to Exhibit 10.27 of the Transition
Report on Form 10-K for the period from September 1, 1997 to
December 31, 1997 (File No. 0-9092))
10.13 Form of First Amendment to Securities Purchase Agreement dated
December 15, 1997 (Incorporated by reference to Exhibit 10.28 of
the Transition Report on Form 10-K for the period from
September 1, 1997 to December 31, 1997 (File No. 0-9092))
10.14 Securities Purchase Agreement among Cheniere, Arabella S.A., Alba
Limited and Scorpion Energy Partners dated December 15, 1997
(Incorporated by reference to Exhibit 10.29 of the Transition
Report on Form 10-K for the period from September 1, 1997 to
December 31, 1997 (File No. 0-9092))
10.15 Letter Agreement between Cheniere and Zydeco dated December 31,
1997 (Incorporated by reference to Exhibit 10.30 of the Transition
Report on Form 10-K for the period from September 1, 1997 to
December 31, 1997 (File No. 0-9092))
10.16 Services Agreement dated October 1, 1998 between Cheniere and
Charif Souki (Incorporated by reference to Exhibit 10.22 of the
Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 0-9092))*
10.17 Form of Second Amendment to Securities Purchase Agreement dated
December 15, 1997 (Incorporated by reference to Exhibit 10.23 of
the Annual Report on Form 10-K for the year ended December 31,
1998 (File No. 0-9092))
10.18 Form of Third Amendment to Securities Purchase Agreement dated
December 15, 1997 (Incorporated by reference to Exhibit 10.24 of
the Annual Report on Form 10-K for the year ended December 31,
1998 (File No. 0-9092))
10.19 Form of Fourth Amendment to Securities Purchase Agreement dated
December 15, 1997 (Incorporated by reference to Exhibit 10.25 of
the Annual Report on Form 10-K for the year ended December 31,
1998 (File No. 0-9092))
10.20 Form of Fifth Amendment to Securities Purchase Agreement dated
December 15, 1997 (Incorporated by reference to Exhibit 10.26 of
the Annual Report on Form 10-K for the year ended December 31,
1998 (File No. 0-9092))
10.21 Exchange Agreement between Cheniere and BSR Investments, Ltd.
(Incorporated by reference to Exhibit 10.27 of the Annual Report
on Form 10-K for the year ended December 31, 1998
(File No. 0-9092))
10.22 Master License Agreement dated June 9, 1999 between Fairfield
Industries Incorporated and Cheniere. Certain information in this
exhibit has been omitted and filed separately with the Commission.
Confidential treatment has been requested with respect to the
omitted portions. (Incorporated by reference to Exhibit 10.28 of
the Quarterly Report on Form 10-Q for the quarter ended June 30,
1999 (File No. 0-9092))
10.23 Supplement Agreement No. 1 to Master License Agreement dated June
9, 1999 between Fairfield Industries Incorporated and Cheniere.
Certain information in this exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions. (Incorporated by
reference to Exhibit 10.29 of the Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 (File No. 0-9092))
47
10.24 Credit Agreement between Cheniere as Borrower and EnCap Energy
Capital Fund III, L.P. as Lender for $3,100,000 dated as of
September 1, 1999 (Incorporated by reference to Exhibit 10.30 of
the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (File No. 0-9092))
10.25 Conveyance of Net Profits Overriding Royalty Interest from and by
Cheniere Energy, Inc. to and in favor of EnCap Energy Capital Fund
III, L.P. dated as of September 1, 1999 (Incorporated by reference
to Exhibit 10.31 of the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 (File No. 0-9092))
10.26 Stock Option Agreement with Ron A. Krenzke dated July 1, 1999*
10.27 First Amendment to Cheniere Energy, Inc. 1997 Stock Option Plan*
10.28 Exploration Agreement dated as of March 31, 2000 between Cheniere
and Samson Offshore Company. Certain information in this exhibit
has been omitted and filed separately with the Commission.
Confidential treatment has been requested with respect to the
omitted portions.
10.29 First Amendment to Credit Agreement between Cheniere and EnCap
Energy Capital Fund III, L.P. dated December 31, 1999
10.30 Three Party Agreement, dated January 4, 2000, between Cheniere,
EnCap Energy Capital Fund III, L.P., and Schlumberger Technology
Corporation.
10.31 Subordination Agreement, dated January 4, 2000, between Cheniere,
EnCap Energy Capital Fund III, L.P., and Schlumberger Technology
Corporation
10.32 Debt Restructure Agreement, dated January 4, 2000, between
Cheniere and Schlumberger Technology Corporation
10.33 Second Amendment to Credit Agreement between Cheniere and EnCap
Energy Capital Fund III, L.P. dated February 29, 2000
10.34 Form of Sixth Amendment to Securities Purchase Agreement dated
December 15, 1997
10.35 Form of Seventh Amendment to Securities Purchase Agreement dated
December 15, 1997
10.36 Form of Eighth Amendment to Securities Purchase Agreement dated
December 15, 1997
10.37 Form of Ninth Amendment to Securities Purchase Agreement dated
December 15, 1997
10.38 Form of Tenth Amendment to Securities Purchase Agreement dated
December 15, 1997
21.1 Subsidiaries of Cheniere Energy, Inc. (Incorporated by reference
to Exhibit 21.1 of the Annual Report on Form 10-K filed on
October 14, 1997 (File No. 0-9092))
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
- -------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit
(b) Reports On Form 8-K
None filed during the fourth quarter of 1999.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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.
By: /s/ MICHAEL L. HARVEY
----------------------
Michael L. Harvey
President and Chief Executive Officer
Date: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ------ ----
/s/ CHARIF SOUKI Chairman of the Board March 27, 2000
- ----------------------
Charif Souki
/s/ MICHAEL L. HARVEY President and Chief Executive March 27, 2000
- ---------------------- Officer Director (Principal
Michael L. Harvey Executive Officer)
/s/ WALTER L. WILLIAMS Vice Chairman March 27, 2000
- ---------------------- Director
Walter L. Williams
/s/ DON A. TURKLESON Chief Financial Officer, Secretary March 27, 2000
- -------------------- and Treaurer (Principal Financial
Don A. Turkleson and Accounting Officer)
/s/ WILLIAM D. FORSTER Director March 27, 2000
- ----------------------
William D. Forster
/s/ KENNETH R. PEAK Director March 27, 2000
- -------------------
Kenneth R. Peak
/s/ CHARLES M. REIMER Director March 27, 2000
- ---------------------
Charles M. Reimer
49