================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-9092
CHENIERE ENERGY, INC.
(Exact name as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-4352386
(I. R. S. Identification No.)
333 Clay Street, Suite 3400 Houston, Texas
(Address of principal place of business)
77002-4102
(Zip Code)
(713) 659-1361
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] NO [_].
As of May 15, 2002, there were 13,297,393 shares of Cheniere Energy, Inc. Common
Stock, $.003 par value, issued and outstanding.
================================================================================
CHENIERE ENERGY, INC.
INDEX TO FORM 10-Q
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet ................................................. 3
Consolidated Statement of Operations ....................................... 4
Consolidated Statement of Stockholders' Equity ............................. 5
Consolidated Statement of Cash Flows ....................................... 6
Notes to Consolidated Financial Statements ................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................. 14
Part II. Other Information
Item 1. Legal Proceedings .......................................................... 14
Item 5. Other Information .......................................................... 15
Item 6. Exhibits and Reports on Form 8-K ........................................... 16
Signatures .................................................................................. 16
2
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, December 31,
ASSETS 2002 2001
------ ----------- -------------
(Unaudited)
CURRENT ASSETS
Cash $ 25,593 $ 610,718
Accounts Receivable 836,095 636,527
Prepaid Expenses 185,268 96,914
------------ ------------
Total Current Assets 1,046,956 1,344,159
OIL AND GAS PROPERTIES, full cost method
Proved Properties, net 1,874,512 1,929,124
Unproved Properties, not subject to amortization 17,694,511 16,236,962
------------ ------------
Total Oil and Gas Properties 19,569,023 18,166,086
LNG SITE COSTS 1,475,000 1,350,000
FIXED ASSETS, net 340,747 416,232
INVESTMENT IN UNCONSOLIDATED AFFILIATE 970,938 3,747,199
------------ ------------
Total Assets $ 23,402,664 $ 25,023,676
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts Payable $ 1,323,516 $ 1,494,812
Accrued Liabilities 926,872 379,589
Note Payable, net of unamortized debt discount 370,923 --
------------ ------------
Total Current Liabilities 2,621,311 1,874,401
STOCKHOLDERS' EQUITY
Preferred Stock, $.0001 par value
Authorized: 5,000,000 shares
Issued and Outstanding: none -- --
Common Stock, $.003 par value
Authorized: 40,000,000 shares
Issued and Outstanding: 13,297,393 shares 39,892 39,892
Additional Paid-in-Capital 41,296,913 41,133,868
Accumulated Deficit (20,555,452) (18,024,485)
------------ ------------
Total Stockholders' Equity 20,781,353 23,149,275
------------ ------------
Total Liabilities and Stockholders' Equity $ 23,402,664 $ 25,023,676
============ ============
The accompanying notes are an integral part of these financial statements.
3
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
2002 2001
------------ ------------
Revenues
Oil and Gas Sales $ 161,604 $ 971,656
------------ ------------
Total Revenues 161,604 971,656
------------ ------------
Operating Costs and Expenses
Production Costs 65,336 120,510
Depreciation, Depletion and Amortization 114,691 327,898
General and Administrative Expenses
LNG Terminal Development 727,407 314,038
Other 572,671 711,584
------------ ------------
Total General and Administrative Expenses 1,300,078 1,025,622
------------ ------------
Total Operating Costs and Expenses 1,480,105 1,474,030
------------ ------------
Loss from Operations Before Interest,
Equity in Net Loss of Unconsolidated Affiliate and Income Taxes (1,318,501) (502,374)
Equity in Net Loss of Unconsolidated Affiliate (1,213,909) (418,541)
Interest Income 1,443 10,064
------------ ------------
Loss Before Income Taxes (2,530,967) (910,851)
Provision for Income Taxes -- --
------------ ------------
Net Loss $ (2,530,967) $ (910,851)
============ ============
Net Loss Per Share - Basic and Diluted $ (0.19) $ (0.07)
============ ============
Weighted Average Number of Shares Outstanding - Basic and Diluted 13,297,393 12,645,393
============ ============
The accompanying notes are an integral part of these financial statements.
4
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Total
------------------------------ Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------ ------------ ------------ ------------ ------------
Balance - December 31, 2000 12,547,393 $ 37,642 $ 39,382,789 $ (6,359,223) $ 33,061,208
Issuance of Stock 250,000 750 499,250 -- 500,000
Expenses Related to Offerings -- -- (6,671) -- (6,671)
Net Loss -- -- -- (910,851) (910,851)
------------ ------------ ------------ ------------ ------------
Balance - March 31, 2001 12,797,393 $ 38,392 $ 39,875,368 $ (7,270,074) $ 32,643,686
============ ============ ============ ============ ============
Balance - December 31, 2001 13,297,393 $ 39,892 $ 41,133,868 $(18,024,485) $ 23,149,275
Issuance of Warrants -- -- 163,045 -- 163,045
Net Loss -- -- -- (2,530,967) (2,530,967)
------------ ------------ ------------ ------------ ------------
Balance - March 31, 2002 13,297,393 $ 39,892 $ 41,296,913 $(20,555,452) $ 20,781,353
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,530,967) $ (910,851)
Adjustments to Reconcile Net Loss to
Net Cash (Used in) Provided by Operating Activities:
Depreciation, Depletion and Amortization 114,691 327,898
Non-Cash Expense 90,000 --
Equity in Net Loss of Unconsolidated Affiliate 1,213,909 418,541
----------- -----------
(1,112,367) (164,412)
Changes in Operating Assets and Liabilities
Accounts Receivable 20,738 157,512
Prepaid Expenses (66,754) (328,069)
Accounts Payable and Accrued Liabilities 565,681 1,803,509
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (592,702) 1,468,540
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (1,847) (336,919)
Oil and Gas Property Additions (365,576) (2,860,996)
LNG Site Costs (125,000) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (492,423) (3,197,915)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Note Payable and Attached Warrants 500,000 --
Sale of Common Stock -- 500,000
Offering Costs -- (6,671)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 500,000 493,329
----------- -----------
NET DECREASE IN CASH (585,125) (1,236,046)
CASH - BEGINNING OF PERIOD 610,718 1,888,562
----------- -----------
CASH - END OF PERIOD $ 25,593 $ 652,516
=========== ===========
The accompanying notes are an integral part of these financial statements.
6
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The unaudited consolidated financial statements of Cheniere Energy, Inc.
("Cheniere" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation, have been included.
For further information, refer to the financial statements and footnotes
included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 2001. Interim results are not necessarily indicative of results to
be expected for the full fiscal year ended December 31, 2002.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (ARO), which requires that an asset retirement cost be capitalized
as part of the cost of the related long-lived asset and allocated to expense by
using a systematic and rational method. Under this Statement, an entity is not
required to re-measure an ARO liability at fair value each period but is
required to recognize changes in an ARO liability resulting from the passage of
time and revisions in cash flow estimates. This Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company expects to adopt SFAS 143 on January 1, 2003. The Company has not yet
determined the impact that the adoption of SFAS 143 will have on its earnings or
statement of financial position.
In May 2001, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. This
Statement, among other matters, rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This Statement, as it
relates to the rescission of Statement 4, shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in Opinion 30 for classification as an extraordinary item
shall be reclassified. The Company does not believe the adoption of this
Statement will have a material effect on its financial position, results of
operations or cash flows.
7
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 -Note Payable
In March 2002, the Company entered into a short-term bridge financing
arrangement with an unrelated third party lender. The amount of the borrowing
was $500,000. The term was 120 days. Interest was payable monthly at 10% per
annum. Warrants were issued to the lender for the purchase of 150,000 shares of
Cheniere common stock, exercisable at a price of $2.50 per share on or before
March 7, 2012. Additionally, Cheniere extended the term to March 7, 2012 on
existing warrants for the purchase of 255,417 shares held by parties affiliated
with the lender. The Black-Scholes valuation of warrants issued (150,000 shares)
and of the extension of existing warrants (255,417 shares) in connection with
this financing arrangement totals $241,939. Debt discount of $163,045 was
recorded based on the relative fair values of the note payable and the warrants.
Unamortized debt discount at March 31, 2002 was $129,077, resulting in a note
payable balance of $370,923, net of the discount. An additional 50,000 warrants
were required to be issued to the lender for each month or partial month for
which the principal remained unpaid after April 7, 2002. The Company repaid the
loan on April 22, 2002 and issued an additional 50,000 warrants, valued at
$24,054.
Note 3 - Investment in Unconsolidated Affiliate
Cheniere accounts for its investment in Gryphon using the equity method of
accounting. Although Cheniere's participation on the Gryphon board of directors
provides significant influence over the operating and financial policies of
Gryphon, Cheniere does not participate in the day-to-day management of Gryphon,
does not exercise control over Gryphon and cannot effect a change in the
management of Gryphon. Cheniere's equity share of Gryphon's losses for the three
months ended March 31, 2002 was $1,213,909, calculated by applying Cheniere's
100% common stock ownership interest to Gryphon's net loss of $49,032 and
reducing such result for Gryphon's preferred dividend arrearages of $1,164,877.
For the three months ended March 31, 2001, Cheniere's equity share of Gryphon's
losses was $418,541, calculated by applying Cheniere's 100% common stock
ownership interest to Gryphon's net income of $90,250 and reducing such result
for Gryphon's preferred dividend arrearages of $508,791 for the period. At such
time as Warburg converts its preferred shares to common shares, Cheniere's
equity share of Gryphon's earnings (losses) will be calculated using the
effective ownership interest at the time of such conversion, and will no longer
be reduced by preferred dividends. Gryphon's preferred stock is convertible at
the option of the holder at a rate of $100 per share of common stock at any time
after the holders of a majority of the preferred stock execute a written consent
permitting a conversion of the preferred stock or, if earlier, at any time after
August 31, 2010. In the event the holders of a majority of the preferred stock
vote to convert all of their shares of preferred stock into common stock, all
shares of preferred stock shall automatically be converted, without further
action by Gryphon or its shareholders. In addition, Gryphon has the right, at
its option, to convert shares of preferred stock into common stock upon
Gryphon's closing of a firm commitment qualified public offering. The financial
position of Gryphon at March 31, 2002 and December 31, 2001 and the results of
Gryphon's operations for the three months ended March 31, 2002 and 2001 are
summarized as follows:
8
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, December 31,
2002 2001
----------- --------------
Current assets $14,705,953 $14,865,290
Oil and gas properties, full cost method
Proved properties, net 24,465,257 25,484,504
Unproved properties 32,063,682 28,066,833
----------- -----------
56,528,939 53,551,337
Fixed assets, net 678,184 615,654
----------- -----------
Total assets $71,913,076 $69,032,281
=========== ===========
Current liabilities $ 3,881,353 $ 5,001,131
Long-term liabilities 1,612,352 --
Deferred tax liabilities 1,182,284 1,182,284
Stockholders' equity 65,237,087 62,848,866
----------- -----------
Total liabilities and stockholders' equity $71,913,076 $69,032,281
=========== ===========
Three Months Ended March 31,
--------------------------------------
2002 2001
----------- -------------
Revenues $ 1,864,699 $ 211,389
Loss from continuing operations (81,676) (41,430)
Net income (loss) (49,032) 90,250
Cheniere's equity in losses from unconsolidated affiliate (1,213,909) (418,541)
In March 2002, Cheniere sold 51,400 shares of its Gryphon common stock to
Gryphon, subject to an option to repurchase the shares, thereby reducing its
interest in Gryphon from 20.2% to 13.7% on an as-converted basis. Such sale was
made in connection with settlement of a lawsuit filed by Fairfield Industries
Incorporated against Cheniere and Gryphon. In connection with its sale of
Gryphon common stock to Gryphon, Cheniere has a one-year option to repurchase
all or a portion of the 51,400 shares at a price of $50 per share if exercised
within 120 days of the sale or at prices increasing ratably thereafter to
approximately $68 per share one year after the sale. As consideration for the
shares, Gryphon has agreed to make payments in full satisfaction of certain
existing and contingent obligations of Cheniere totaling $3,561,692. Cheniere,
Gryphon and Fairfield Industries, Inc. reached a settlement agreement whereby a
lawsuit and related claims asserted by Fairfield against Cheniere and Gryphon
have been dismissed. (See additional discussion of the claims and settlement
thereof under "Legal Proceedings" on page 14 of this Quarterly Report.)
On March 11, 2002, the board of directors of Gryphon approved a cash call
in the amount of $5,000,000. Cheniere's share of the cash call was $1,009,500
and was payable approximately 30 days from the receipt of the cash call.
Cheniere elected not to participate in the March 11 cash call. Warburg funded
Cheniere's portion of the cash call, further reducing Cheniere's ownership in
Gryphon to 12.7% on an as-converted basis. If Cheniere were to exercise its
option to acquire 51,400 shares of Gryphon common stock for $2,570,000, its
as-converted ownership in Gryphon would increase to 18.8%.
9
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Subsequent Events
On April 22, 2002, the Company closed the sale of its proved oil and gas
properties to the operator of the properties. The purchase price, effective
January 1, 2002, was $2,350,000. Net proceeds to Cheniere, after payment of a
commission, were $2,327,000.
On May 7, 2002, the board of directors of Gryphon approved a cash call in
the amount of $10,000,000. Cheniere's share of the cash call was $1,274,913 and
was payable approximately 30 days from the receipt of the cash call. Cheniere
elected not to participate in the May 7 cash call. If Warburg funds Cheniere's
portion of the cash call, Cheniere's ownership in Gryphon will be reduced to
11.1% on an as-converted basis, which ownership may be increased to 16.6% if
Cheniere were to exercise its option to acquire an additional 51,400 shares of
Gryphon common stock for $2,570,000.
10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company's unaudited consolidated financial statements and notes thereto
relate to the three-month periods ended March 31, 2002 and 2001. These
statements, the notes thereto and the consolidated financial statements included
in the Company's Annual Report on Form 10-K/A for the year ended December 31,
2001 contain detailed information that should be referred to in conjunction with
the following discussion.
Production and Product Prices
Information concerning the Company's production and average prices received
for the three-month periods ended March 31, 2002 and 2001 is presented in the
following table.
Three Months Ended
March 31,
-------------------
2002 2001
------- --------
Production
Oil (Bbls) 472 601
Gas (Mcf) 68,090 133,968
Gas equivalents (Mcfe) 70,922 137,575
Average sales prices
Oil (per Bbl) $ 19.84 $ 33.07
Gas (per Mcf) $ 2.33 $ 7.49
Results of Operations
Comparison of Three-Month Periods Ended March 31, 2002 and 2001 - The
Company's operating results for the three months ended March 31, 2002 reflect a
loss of $2,530,967, or $0.19 per share, compared to a loss of $910,851, or $0.07
per share a year earlier. The majority of the increase in Cheniere's loss
results from: (a) an increase of $656,086 in the non-cash preferred dividend
accrual within Cheniere's equity pick-up of Gryphon's results due to additional
Gryphon preferred stock being outstanding in 2002; (b) a decline of $532,186 in
the operating results from the Company's producing oil and gas wells; and (c) an
additional $413,369 spent on LNG project expenses in the quarter ended March 31,
2002, compared to a year earlier, due to the increased level of activity on the
project.
In the first quarter of 2002, Cheniere recorded oil and gas revenues of
$161,604 compared to $971,656 a year earlier. The $810,052 decrease in revenues
results from a decline in the production rates due to depletion of the currently
producing zones and due to mechanical problems on one of the Company's two
wells, which caused it to be off production for the month of March 2002.
Additionally, the decline in product prices between periods created a negative
price variance of approximately $360,000. The Company sold its producing oil and
gas properties on April 22, 2002.
Depreciation, depletion and amortization ("DD&A") of oil and gas property
costs decreased to $57,961 for the 2002 quarter compared to $280,653 for the
2001 quarter, due to the 48% decline in production as well as a decrease in the
DD&A rate per mcfe to $0.85 in 2002 from $2.04 a year earlier. The DD&A rate
decreased significantly as a result of the Company's non-cash ceiling test
write-downs in June 2001 and September 2001. Depreciation of fixed assets
increased slightly to $56,730 in the 2002 quarter, compared to $47,245 a year
earlier due to the
11
inclusion in 2002 of LNG site cost amortization.
General and administrative ("G&A") expenses, net of amounts capitalized,
were $1,300,078 and $1,025,622 in the first quarters of 2002 and 2001,
respectively. Total G&A expenses increased by $265,456 to $1,498,078 in the
first quarter of 2002 from the total of $1,232,622 of a year earlier. Legal and
professional fees decreased by $116,467 principally related to business
development projects being explored by the Company in 2001. Consulting fees
increased by $356,353, principally related to regulatory and permitting work to
advance the LNG receiving terminals project. Offsetting total G&A expenses were
amounts capitalized to the Company's oil and gas properties. Cheniere
capitalizes as oil and gas property costs that portion of G&A expenses directly
related to its exploration and development activities. Cheniere capitalized
$198,000 in the first quarter of 2002 compared to $207,000 a year earlier.
Cheniere accounts for its investment in Gryphon using the equity method of
accounting. Although Cheniere's participation on the Gryphon board of directors
provides significant influence over the operating and financial policies of
Gryphon, Cheniere does not participate in the day-to-day management of Gryphon,
does not exercise control over Gryphon and cannot effect a change in the
management of Gryphon. Cheniere's equity share of Gryphon's losses for the three
months ended March 31, 2002 was $1,213,909, calculated by applying Cheniere's
100% common stock ownership interest to Gryphon's net loss of $49,032 and
reducing such result for Gryphon's preferred dividends earned but undeclared for
the quarter ($1,164,877). For the three months ended March 31, 2001, Cheniere's
equity share of Gryphon's losses was $418,541, calculated by applying Cheniere's
100% common stock ownership interest to Gryphon's net income of $90,250 and
reducing such result for Gryphon's preferred dividends earned by undeclared for
the quarter ($508,791). At such time as Warburg converts its preferred shares to
common shares, Cheniere's equity share of Gryphon's earnings will be calculated
at 12.7%. Gryphon commenced operations on October 11, 2000.
Liquidity and Capital Resources
Cash balances and cash flows from current operations will not be adequate
to meet the future liquidity requirements of the Company. In addition to its
operating expenses, the Company will need to finance approximately $8,000,000 of
costs and expenses in connection with the permitting, environmental and
regulatory work planned for 2002 and 2003, related to the development of
Cheniere's initial LNG receiving terminal. As a result of this, there is some
uncertainty about the Company's ability to continue as a going concern. The
Company expects that future liquidity requirements will be met by one or more of
the following: the divestiture of producing oil and gas properties (which closed
in April 2002), sales of portions of its working interest in the prospects
within its exploration program, sale to an industry partner of a participation
in the Company's exploration program, sale of Cameron Project 3D seismic data
licenses, sale of a participation interest in the Company's LNG project, sale of
options on throughput capacity for the Company's planned LNG terminals and/or
additional offerings of the Company's equity securities. Management expects to
meet all of its liquidity requirements through December 31, 2002 through such
sources. In the event that the Company is unable to obtain additional capital
from one or more of these sources, its operations could be adversely affected.
Cash Flow from Operating Activities
On April 22, 2002, Cheniere sold its producing oil and gas properties for
$2,350,000, with an effective date of January 1, 2002. The Company continues to
own an overriding royalty interest (less than 1%) in a well which began
production in February 2002. The Company presently has no other
revenue-producing assets. It expects that additional wells will be drilled in
2002 on
12
prospects it sold to industry partners in 2001 and it retains an overriding
royalty interest and/or a working interest in these wells.
Note Payable
In March 2002, the Company entered into a short-term bridge financing
arrangement with an unrelated third party lender. The amount of the borrowing
was $500,000. The term was 120 days. Interest was payable monthly at 10% per
annum. Warrants were issued to the lender for the purchase of 150,000 shares of
Cheniere common stock, exercisable at a price of $2.50 per share on or before
March 7, 2012. Additionally, Cheniere extended the term to March 7, 2012 on
existing warrants for the purchase of 255,417 shares held by parties affiliated
with the lender. An additional 50,000 warrants were required to be issued to the
lender for each month or partial month for which the principal remained unpaid
after April 7, 2002. The Company repaid the loan on April 22, 2002 and issued an
additional 50,000 warrants, valued at $24,054.
Exploration Funding
On October 11, 2000, Cheniere completed a transaction with Warburg to fund
its exploration program on approximately 8,800 square miles of seismic data in
the Gulf of Mexico through a newly formed affiliated company, Gryphon. Cheniere
contributed selected assets and liabilities in exchange for 100% of the common
stock of Gryphon (36.8% effective interest after conversion of preferred stock)
and $2,000,000 in cash. Such assets included: Cheniere's seismic data license
covering 8,800 square miles offshore Louisiana, certain offshore leases, a
prospect then being drilled, its exploration agreement with an industry partner
and certain other assets and liabilities. Warburg contributed $25,000,000 and
received preferred stock, with an 8% cumulative dividend, convertible into 63.2%
of Gryphon's common stock. Cheniere and Warburg also had options, under certain
circumstances, to contribute an additional $75,000,000 to Gryphon, proportionate
to their respective ownership interests. As of March 31, 2002, Warburg has
funded an additional $35,000,000, making its total cash contributions to Gryphon
$60,000,000. The effect of Cheniere's decision not to fund these subsequent cash
calls to date, and the effect of sales of Gryphon common stock held by Cheniere
back to Gryphon, have reduced Cheniere's effective ownership in Gryphon to 12.7%
as of March 31, 2002.
In connection with the seismic license contributed to Gryphon upon its
formation, Cheniere entered into an agreement with the third party issuer of the
license. The agreement provided that Cheniere would pay a transfer fee to the
third party in an aggregate amount of up to $2,500,000. Such transfer fee was
contingent upon Gryphon's completion of up to ten successful wells during the
license period and within the license area. Upon Gryphon's completion of such a
well, an amount of $250,000 was payable by Cheniere one month after production
commences. If such amount were not paid at the end of the one-month period, it
would bear interest of 18% per annum from such date until paid. Any transfer
fees payable would be recorded as additions to Cheniere's investment in Gryphon.
Cheniere's existing and contingent obligations under this agreement were fully
discharged in March 2002 in connection with its sale of Gryphon common stock to
Gryphon and the related assumption by Gryphon of these obligations.
Seismic Reprocessing
Between June 2000 and October 2000, Cheniere acquired licenses to
approximately 6,800 square miles of seismic data primarily in the shallow waters
offshore Texas and also in the West Cameron area in the Gulf of Mexico (the
"Offshore Texas Project Area") in separate transactions with Seitel Data Ltd., a
division of Seitel Inc., and JEBCO Seismic, L.P. Cheniere committed to reprocess
all of the data from the Offshore Texas Project Area at a cost of approximately
$8,500,000, payable in installments beginning in October 2000 and continuing
through the final delivery of reprocessed data, which is expected to occur in
2002. Deliveries of reprocessed data began in May 2001. After the assumption of
liabilities by Gryphon related to its purchase in 2001 of one license to the
13
data and related to the March 2002 sale of Gryphon common stock, Cheniere has no
existing or contingent liability related to seismic reprocessing as of March 31,
2002.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (ARO), which requires that an asset retirement cost be capitalized
as part of the cost of the related long-lived asset and allocated to expense by
using a systematic and rational method. Under this Statement, an entity is not
required to re-measure an ARO liability at fair value each period but is
required to recognize changes in an ARO liability resulting from the passage of
time and revisions in cash flow estimates. This Statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company expects to adopt SFAS 143 on January 1, 2003. The Company has not yet
determined the impact that the adoption of SFAS 143 will have on its earnings or
statement of financial position.
In May 2001, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. This
Statement, among other matters, rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This Statement, as it
relates to the rescission of Statement 4, shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in Opinion 30 for classification as an extraordinary item
shall be reclassified. The Company does not believe the adoption of this
Statement will have a material effect on its financial position, results of
operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company produces and sells natural gas, crude oil and condensate. As a
result, the Company's financial results can be significantly affected as these
commodity prices fluctuate widely in response to changing market forces. The
Company has not entered into any derivative transactions.
PART II. Other Information
Item 1. Legal Proceedings
The Company has been and may in the future be involved as a party to
various legal proceedings, which are incidental to the ordinary course of
business. Management regularly analyzes current information and as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. In the opinion of management and legal counsel, as of March 31, 2002,
there were no threatened or pending legal matters that would have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
In February 2002, the Company received a copy of a lawsuit styled Fairfield
Industries Incorporated (Fairfield) vs. Cheniere Energy, Inc. and Gryphon
Exploration Company, which was filed in district court in Harris County, Texas.
The lawsuit related to a seismic license agreement between Fairfield and
Cheniere, which was later assigned to Gryphon. In the lawsuit, Fairfield alleged
that Cheniere and Gryphon conspired to defraud the plaintiff of certain transfer
payments, which may be owed by Cheniere in connection with the transfer to
Gryphon of the initial seismic
14
contributed at the time of its formation. In March 2002, Fairfield, Gryphon, and
the Company settled this lawsuit. Existing and contingent obligations to
Fairfield by Cheniere totaling $2,500,000 have been fully discharged through
agreement by Gryphon to make current and contingent payments as part of the
consideration for the transfer of 51,400 Gryphon common shares from Cheniere to
Gryphon.
Item 5. Other Information
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in this report and
other filings with the Securities and Exchange Commission and in reports to its
stockholders.
All statements, other than statements of historical facts so included in
this report that address activities, events or developments that the Company
intends, expects, projects, believes, or anticipates will or may occur in the
future are forward-looking statements within the meaning of the Act, including,
without limitation: 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 the obligations under its 3D seismic master license agreement, 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 its exploration and development activities. These
forward-looking statements are, and will be, based on management's then current
views and assumptions regarding future events.
Factors That May Impact Forward-Looking Statements or Financial Performance
The following are some of the important factors that could affect the
Company's financial performance or could cause actual results to differ
materially from estimates contained in the Company's forward-looking statements.
-- The Company's ability to generate sufficient cash flows to
support capital expansion plans, obligations to repay debt and
general operating activities.
-- The Company's ability to obtain additional financing from
lenders, through debt or equity offerings, or through sales of
a portion of its interest in prospects.
-- The Company's ability to encounter hydrocarbons in sufficient
quantities to be economically viable, and its ability to
overcome the operating hazards which are inherent in the oil
and gas industry and which are intensified by the Company's
concentration of its producing oil and gas assets in few
properties.
-- Changes in laws and regulations, including changes in
accounting standards, taxation requirements (including tax
rate changes, new tax laws and revised tax law
interpretations) and environmental laws in domestic or foreign
jurisdictions.
-- The uncertainties of litigation as well as other risks and
uncertainties detailed from time to time in the Company's
Securities and Exchange Commission filings.
The foregoing list of important factors is not exclusive.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Each of the following exhibits is incorporated by reference or filed
herewith:
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. ("Cheniere") (incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 1999)
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Cheniere Energy, Inc.
(incorporated by reference to Exhibit 3.2 of the Company's
Quarterly Report on Form 10-Q for the three months ended
June 30, 1999)
3.3 By-laws of Cheniere as amended through April 7, 1997
Incorporated by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K filed on March 29, 1999
(File No. 0-9092))
(b) Cheniere made no filings on Form 8-K during the three months ended
March 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHENIERE ENERGY, INC.
/s/ Don A. Turkleson
----------------------------------------
Don A. Turkleson
Chief Financial Officer (on behalf of the
registrant and as principal accounting
officer)
Date: May 15, 2002
16