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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
COMMISSION FILE NO. 0-9092
CHENIERE ENERGY, INC.
(Exact name as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
95-4352386
(I. R. S. Identification No.)
333 CLAY STREET, SUITE 3400
HOUSTON, TEXAS
(Address or principal place of business)
77002-4102
(Zip Code)
(713) 659-1361
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] NO [_].
As of August 14, 2001, there were 13,297,393 shares of Cheniere Energy, Inc.
Common Stock, $.003 par value, issued and outstanding.
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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.......................................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk..... 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURES.................................................................. 16
2
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, December 31,
ASSETS 2001 2000
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash $ 1,763 $ 1,888,562
Accounts Receivable 882,199 851,706
Prepaid Expenses 783,213 98,532
------------ -----------
Total Current Assets 1,667,175 2,838,800
OIL AND GAS PROPERTIES, full cost method
Proved Properties, net 5,261,459 6,727,613
Unproved Properties, not subject to amortization 18,810,374 18,253,731
------------ -----------
Total Oil and Gas Properties 24,071,833 24,981,344
LNG SITE COSTS, net 720,896 -
FIXED ASSETS, net 460,919 206,204
INVESTMENT IN UNCONSOLIDATED AFFILIATE 5,631,839 6,639,270
------------ -----------
Total Assets $ 32,552,662 $34,665,618
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 1,995,337 $ 1,472,293
Accrued Liabilities 456,264 132,117
------------ -----------
Total Current Liabilities 2,451,601 1,604,410
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 at June 30, 2001
and 120,000,000 shares at December 31, 2000
Issued and Outstanding: 13,297,393 shares at
June 30, 2001 and 12,547,393 shares at
December 31, 2000 39,892 37,642
Additional Paid-in-Capital 41,116,868 39,382,789
Accumulated Deficit (11,055,699) (6,359,223
------------ -----------
Total Stockholders' Equity 30,101,061 33,061,208
------------ -----------
Total Liabilities and Stockholders' Equity $ 32,552,662 $34,665,618
============ ===========
The accompanying notes are an integral part of these financial statements.
3
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
Oil and Gas Sales $ 774,832 $ 1,731,078 $ 1,746,488 $ 2,904,683
----------- ----------- ----------- -----------
Total Revenues 774,832 1,731,078 1,746,488 2,904,683
----------- ----------- ----------- -----------
Operating Costs and Expenses
Production Costs 86,553 114,008 207,063 195,733
Depreciation, Depletion and Amortization 432,734 1,070,390 760,632 1,996,347
Ceiling Test Write-down 2,159,645 - 2,159,645 -
General and Administrative Expenses 1,296,536 192,755 2,322,158 669,764
----------- ----------- ----------- -----------
Total Operating Costs and Expenses 3,975,468 1,377,153 5,449,498 2,861,844
----------- ----------- ----------- -----------
Income/(Loss) from Operations Before Interest and
Income Taxes and Equity in Net Loss of
Unconsolidated Affiliate (3,200,636) 353,925 (3,703,010) 42,839
Interest Income 3,900 4,210 13,964 12,919
Provision for Income Taxes - - - -
Equity in Net Loss of Unconsolidated Affiliate (588,889) - (1,007,430) -
----------- ----------- ----------- -----------
Net Income/(Loss) $(3,785,625) $ 358,135 $(4,696,476) $ 55,758
=========== =========== =========== ===========
Net Income/(Loss) Per Share - Basic $(0.29) $0.03 $(0.37) $0.01
=========== =========== =========== ===========
Net Income/(Loss) Per Share - Diluted $(0.29) $0.03 $(0.37) $0.00
=========== =========== =========== ===========
Weighted Average Number of Shares Outstanding - Basic 12,890,800 10,734,613 12,768,774 10,476,016
=========== =========== =========== ===========
Weighted Average Number of Shares Outstanding - Diluted 12,890,800 13,556,949 12,768,774 13,183,977
=========== =========== =========== ===========
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, 1999 10,053,118 $30,159 $33,293,822 $ (5,578,243) $ 27,745,738
Equity Issuances 694,275 2,083 2,104,417 - 2,106,500
Expenses Related to Offerings - - (169,545) - (169,545)
Net Income - - - 55,758 55,758
---------- ------- ----------- ------------ ------------
Balance - June 30, 2000 10,747,393 $32,242 $35,228,694 $ (5,522,485) $ 29,738,451
========== ======= =========== ============ ============
Balance - December 31, 2000 12,547,393 $37,642 $39,382,789 $ (6,359,223) $ 33,061,208
Equity Issuances 750,000 2,250 1,647,750 - 1,650,000
Issuance of Warrants to
Purchase Common Stock - - 93,000 - 93,000
Expenses Related to Offerings - - (6,671) - (6,671)
Net Loss - - - (4,696,476) (4,696,476)
---------- ------- ----------- ------------ ------------
Balance - June 30, 2001 13,297,393 $39,892 $41,116,868 $(11,055,699) $ 30,101,061
========== ======= =========== ============ ============
The accompanying notes are an integral part of these financial statements.
5
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
------------------------------------
2001 2000
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) $(4,696,476) $ 55,758
Adjustments to Reconcile Net Income/(Loss) to
Net Cash Provided by (Used in) Operating Activities:
Depreciation, Depletion and Amortization 760,632 1,996,347
Ceiling Test Write-down 2,159,645 -
Non-Cash Expense (Issuance of Warrants) 93,000 100,000
Equity in Net Loss of Unconsolidated Affiliate 1,007,430 -
----------- -----------
(675,769) 2,152,105
Changes in Operating Assets and Liabilities
Accounts Receivable (30,493) (361,143)
Prepaid Expenses (273,941) (60,061)
Accounts Payable and Accrued Liabilities 847,191 729,103
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (133,012) 2,460,004
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets (350,113) (150,161)
Oil and Gas Property Additions (2,750,200) (3,340,221)
Sale of Oil and Gas Seismic Data 853,197 -
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,247,116) (3,490,382)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Notes Payable or Advances - 1,705,000
Repayment of Notes Payable or Advances - (3,028,698)
Sale of Common Stock 500,000 2,056,500
Offering Costs (6,671) (169,545)
Debt Issuance Costs - 68,223
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 493,329 631,480
----------- -----------
NET DECREASE IN CASH (1,886,799) (398,898)
CASH - BEGINNING OF PERIOD 1,888,562 1,175,950
----------- -----------
CASH - END OF PERIOD $ 1,763 $ 777,052
=========== ===========
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 for the year ended December
31, 2000. Interim results are not necessarily indicative of results to be
expected for the full fiscal year ended December 31, 2001. Certain
reclassifications have been made to conform prior period amounts to the current
period presentation. These reclassifications have no effect on net income/(loss)
or stockholders' equity.
In early July, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." The
standards revise accounting for business combinations by:
. prohibiting the "pooling of interest" method of accounting and requiring
the purchase method of accounting to be used on all business combinations
initiated after June 30, 2001;
. requiring that separately identifiable intangible assets, other than
goodwill, be recorded as assets. These intangible assets must either be
amortized over their useful lives or, if they have indefinite useful lives,
not be amortized and periodically tested for impairment; and
. ceasing all amortization of goodwill, instead requiring it be tested at
least annually for impairment. In addition, existing goodwill on business
combinations completed before July 1, 2001 will no longer be amortized
after December 31, 2001 and should be tested for impairment by January 1,
2002.
Cheniere will account for all future business combinations under SFAS No.
141. Effective January 1, 2002, Cheniere will adopt SFAS No. 142 as required.
The impact of these standards will be evaluated in future periods, but it is
not expected to be material.
The FASB also recently authorized for issuance SFAS No. 143, "Accounting
for Asset Retirement Obligations." This statement significantly changes the
method of accruing for costs associated with the retirement of fixed assets
(e.g. oil and gas production facilities) for which an entity is legally
obligated to incur. We will be further evaluating the impact and timing of
implementation of SFAS No. 143. Implementation of this standard is required no
later than January 1, 2003, with earlier adoption encouraged.
NOTE 2 - OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for its oil and gas
properties. Under this method, all productive and nonproductive exploration and
development costs incurred
7
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
for the purpose of finding oil and gas reserves are capitalized.
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. The
Company's allocation of 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 events, that
revisions of this estimate could occur which would affect the Company's
capitalization ceiling. At June 30, 2001, the Company's capitalized costs
exceeded its capitalization ceiling by $2,159,645, resulting in a ceiling test
write-down.
NOTE 3 - COMMON STOCK AND WARRANTS
In February 2001, the Company issued to one investor 250,000 units at a
price of $2.00 per unit, each unit representing one share of common stock and
one-sixth warrant to purchase a share of common stock. Warrants issued in
connection with this sale of units are exercisable at a price of $3.00 per share
on or before December 31, 2003. This issuance was made in reliance on the
exemption from registration provided by Section 506 of Regulation D. Net
proceeds were $493,329.
In May 2001, the Company granted to a consultant warrants to purchase
50,000 shares of Cheniere common stock at a strike price of $3.00 per share,
exercisable on or before April 30, 2005. The non-cash issuance of warrants was
valued at $93,000 using the Black-Scholes method.
On June 14, 2001, the Company issued 500,000 shares of common stock to
acquire a lease option on a potential site for a liquefied natural gas ("LNG")
receiving terminal in Freeport, Texas. In connection with the transaction,
Cheniere is obligated to issue an additional 750,000 shares of common stock when
it completes the permitting process and an LNG site is ready for construction to
commence. The 500,000 shares issued in June were valued at $1,150,000, or $2.30
per share, the closing market price on the date of the transaction. LNG site
costs totaling $410,740 were classified as short-term and were included in
prepaid expenses.
NOTE 4 - INVESTMENT IN UNCONSOLIDATED AFFILIATE
Cheniere accounts for its investment in Gryphon Exploration Company
("Gryphon") using the equity method of accounting. 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
presently owns 100% of the outstanding common stock of Gryphon. At such time as
Gryphon's preferred shares are converted to common shares, Cheniere's equity
share of Gryphon's earnings (losses) will be calculated using its percentage
ownership of common shares on a converted basis, which percentage is 23.6% as of
August 14, 2001. Gryphon was formed on October 11, 2000. Results of Gryphon's
operations for the three months and six months ended June 30, 2001 are
summarized as follows:
8
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Period Ended June 30, 2001
----------------------------------
Three Months Six Months
----------------- ---------------
Net sales $ 183,019 $ 394,408
Gross profit 138,552 334,398
Income from continuing operations 33,269 123,519
Net income 33,269 123,519
Accrued preferred dividends (622,158) (1,130,949)
Cheniere's equity in net loss of
unconsolidated affiliate (588,889) (1,007,430)
During the first six months of 2001, Gryphon made cash calls totaling
$20,000,000 against its capital commitment of $75,000,000. Cheniere declined to
participate in such cash calls, and accordingly, its ownership interest in
Gryphon, after the effect of converting preferred stock into common stock, was
reduced from 36.8% at December 31, 2000 to 24.4% as of July 23, 2001.
Cheniere's ownership interest was diluted further, to 23.6%, on July 27, 2001,
when it transferred 6,740 shares of Gryphon common stock to Gryphon in
connection with the sale of licenses to certain seismic data.
NOTE 5 - RELATED PARTY TRANSACTIONS
In April 2001, the Company sold an interest in a prospect to Gryphon.
Gryphon paid Cheniere $225,563 for a 50% interest in the related leases and will
pay a disproportionate share of the drilling costs on terms representative of
what a third party would pay for participation in the prospect generated by
Cheniere.
In June 2001, Cheniere sold to Gryphon for $3,500,000 one of its two
licenses to certain 3D seismic data covering 3,800 square miles. Gryphon paid
$853,197 in cash to Cheniere and assumed $2,646,803 of Cheniere's obligations
related to the reprocessing of the data. Cheniere is responsible for the cost
of reprocessing the remainder of the data ($1,061,692), which is expected to be
completed in the fourth quarter of 2001. Cheniere retains one license to the
seismic data.
In July 2001, Cheniere sold to Gryphon for $3,500,000 one of its two
licenses to certain 3D seismic data covering an additional 3,000 square miles.
Gryphon assumed Cheniere's entire obligation ($4,174,021) related to the
reprocessing of the data. In connection with the transaction, Cheniere
transferred to Gryphon 6,740 shares of Gryphon common stock, valued at $674,021,
or $100 per share, based on the estimated fair market value of the Gryphon
common stock. Cheniere retains one license to the seismic data.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company's unaudited consolidated financial statements and notes thereto
relate to the three-month and six-month periods ended June 30, 2001 and 2000.
These statements, the notes thereto and the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001 contain detailed information that should be referred to in conjunction
with the following discussion.
PRODUCTION AND PRODUCT PRICES
Information concerning the Company's production and average prices received
for the three-month and six-month periods ended June 30, 2001 and 2000 is
presented in the following table:
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------ -------------------------------
2001 2000 2001 2000
----------- --------- ----------- ---------
Production
Oil (Bbls) 924 1,667 1,525 3,360
Gas (Mcf) 173,975 510,942 307,943 947,175
Gas equivalents (Mcfe) 179,519 520,944 317,093 967,335
Average sales prices
Oil (per Bbl) $ 27.28 $ 29.22 $ 29.56 $ 28.93
Gas (per Mcf) $ 4.58 $ 3.49 $ 5.85 $ 3.14
Gas equivalents (per Mcfe) $ 4.58 $ 3.52 $ 5.82 $ 3.18
RESULTS OF OPERATIONS
COMPARISON OF THREE-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 - The
Company's operating results for the three months ended June 30, 2001 reflect a
loss of $3,785,625, or $0.29 per share (basic and fully diluted), compared to
net income of $358,135, or $0.03 per share (basic) a year earlier. The most
significant factor in Cheniere's loss for the current quarter is a ceiling test
write-down of $2,159,645.
In the three months ended June 30, 2001, Cheniere recorded oil and gas
revenues of $774,832 compared to $1,731,078 a year earlier. The decrease in
revenues results principally from a decline in the production rates ($1,201,816
negative variance) offset partially by an increase in product prices ($190,884
positive variance). The decrease in production reflects depletion of the zones
currently producing in the Company's two wells. Production costs totaled $86,533
for the 2001 quarter and $114,008 for the 2000 quarter, with the decrease
relating primarily to the effect of lower production rates on severance taxes.
Depreciation, depletion and amortization decreased to $432,734 for the 2001
quarter compared to $1,070,390 for the 2000 quarter. Depreciation, depletion
and amortization of oil and gas property costs decreased to $366,216 for the
2001 quarter compared to $958,541 for the 2000 quarter, principally due to lower
levels of production in 2001. Depreciation of fixed assets decreased to $48,154
in the 2001 quarter, compared to $111,849 a year earlier, as a result of
Cheniere's transfer of assets to Gryphon in October 2000. Additionally, the
2001 quarter includes
10
$18,364 in amortization of costs related to a site for an LNG facility for which
a three-year lease option was acquired in June 2001.
At June 30, 2001, the Company's capitalized costs exceeded its
capitalization ceiling by $2,159,645, resulting in a ceiling test write-down.
The write-down was a result of a decline in oil and gas prices to $28.00 per
barrel and $3.68 per mcf as of June 30, 2001 (compared to $29.72 per barrel and
$10.71 per mcf as of December 31, 2000).
General and administrative ("G&A") expenses, net of recoveries and amounts
capitalized, were $1,296,536 and $192,755 in the second quarters of 2001 and
2000, respectively. Total G&A expenses increased by $507,448 to $1,510,536 in
the second quarter of 2001 from the total of $1,003,088 a year earlier. Legal
and professional fees increased by $316,084 to $409,600 principally related to
the Company's project to develop an LNG receiving terminal business and the
acquisition of sites for such terminals in 2001. Consulting expenses increased
by $276,336 to $346,736, also related to the LNG project. Salaries and benefits
decreased by $204,206 to $373,804 in 2001 because Cheniere has fewer employees
as a result of the formation of, and transfer of certain employees to, Gryphon
in October 2000. Also included in the 2001 quarter were $93,000 in non-cash
expenses related to the issuance of warrants to a consultant who assisted in
listing Cheniere's stock on The American Stock Exchange. Cheniere capitalized
$214,000 of G&A expenses to oil and gas property costs in the second quarter of
2001 compared to $437,000 a year earlier, the change being a direct result of
the reduced number of Cheniere's exploration staff following the formation of
Gryphon in October 2000.
Cheniere accounts for its investment in Gryphon using the equity method of
accounting. 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 operating
results for the three months ended June 30, 2001 was a loss of $588,889,
calculated by applying Cheniere's 100% common stock ownership interest to
Gryphon's net income of $33,269 and reducing such result for Gryphon's preferred
dividends earned but undeclared for the quarter of $622,158. At such time as
Gryphon's preferred shares are converted to common shares, Cheniere's equity
share of Gryphon's earnings (losses) will be calculated using its percentage
ownership of common shares on an as-converted basis, which percentage is 23.6%
as of August 14, 2001. Gryphon commenced operations on October 11, 2000.
COMPARISON OF SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 - The
Company's operating results for the six months ended June 30, 2001 reflect a net
loss of $4,696,476, or $0.37 per share (basic and fully diluted) compared to net
income of $55,758, or $0.01 per share (basic), a year earlier. The most
significant factor in Cheniere's loss for the current period is a ceiling test
write-down of $2,159,645.
In the first six months of 2001, Cheniere recorded revenues of $1,746,488
compared to $2,904,683 in the comparable period of 2000. The decrease in
revenues results principally from a decline in the production rates ($2,067,770
negative variance) offset partially by an increase in product prices ($838,302
positive variance). The decrease in production reflects depletion of the zones
currently producing in the Company's two wells.
Depreciation, depletion and amortization decreased to $760,632 for the
first six months of 2001 compared to $1,996,347 in the first six months of 2000.
Depreciation, depletion and amortization of oil and gas property costs decreased
to $646,869 for the 2001 period compared to $1,778,074 for the 2000 period,
principally due to lower levels of production in 2001. Depreciation of fixed
assets decreased to $95,399 in the 2001 quarter, compared to $218,273 a year
earlier, as a result of Cheniere's transfer of assets to Gryphon in October
2000. Additionally, the 2001 period includes $18,364 in amortization of costs
related to a site for an LNG facility for which a three-year lease option was
acquired in June 2001.
At June 30, 2001, the Company's capitalized costs exceeded its
capitalization ceiling by $2,159,645, resulting in a ceiling test write-down as
of June 30, 2001. The write-down was a result of a decline in oil and gas prices
to $28.00 per barrel and $3.68 per mcf as of June 30, 2001 (compared to $29.72
per barrel and $10.71 per mcf as of December 31, 2000.)
11
G&A expenses, net of recoveries and amounts capitalized, were $2,322,158
and $669,764 in the first six months of 2001 and 2000, respectively. Total G&A
expenses increased by $667,062 to $2,743,158 in the 2001 period from the total
of $2,076,096 a year earlier. Legal and professional fees increased by $593,736
to $772,175 principally related to the Company's project to develop an LNG
receiving terminal business and the acquisition of sites for such terminals in
2001. Consulting expenses increased by $418,082 to $557,820, also related to
the LNG project. Salaries and benefits decreased by $337,127 to $749,116 in
2001 because Cheniere has fewer employees as a result of the formation of, and
transfer of certain employees to, Gryphon in October 2000. Also included in the
2001 period were $93,000 in non-cash expenses related to the issuance of
warrants to a consultant who assisted in listing Cheniere's stock on The
American Stock Exchange. Cheniere capitalized $421,000 of G&A expenses to oil
and gas property costs in the first half of 2001 compared to $803,000 a year
earlier, the change being a direct result of the reduced number of Cheniere's
exploration staff following the formation of Gryphon in October 2000.
Cheniere accounts for its investment in Gryphon using the equity method of
accounting. 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 operating
results for the six-months ended June 30, 2001 was $1,007,430, calculated by
applying Cheniere's 100% common stock ownership interest to Gryphon's net income
of $123,519 and reducing such result for Gryphon's preferred dividends earned
but undeclared for the period of $1,130,949. At such time as Gryphon's
preferred shares are converted to common shares, Cheniere's equity share of
Gryphon's earnings (losses) will be calculated using its percentage ownership of
common shares on an as-converted basis, which percentage is 23.6% as of
August 14, 2001. 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. 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, 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 proprietary 3D seismic data or licenses thereto, sale of a participation
interest in the Company's LNG project, and/or additional offerings of the
Company's equity securities. Management expects to meet all of its liquidity
requirements through December 31, 2001 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.
Subsequent to June 30, 2001, the Company has received offers for the sale
of its producing oil and gas properties, for the sale of an interest in certain
prospects, for the sale of a portion of its 3D seismic data, and for the sale of
a participation interest in its LNG project. The Company is in the process of
evaluating these offers.
Cash Flow from Operating Activities
Due to declines in the production rates of its two wells and expenses
related to the development of an LNG receiving terminal business, the Company
reported a $675,769 net use of cash in its operations (before changes in
operating assets and liabilities) for the six months ended June 30, 2001. It is
anticipated that the Company will sell its producing oil and gas properties in
the third quarter of 2001. These properties, however, presently represent the
Company's sole source of operating cash flow. At June 30, 2001, the Company had
a working capital deficit of $784,426.
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Private Placements of Equity
In February 2001, the Company issued to one investor 250,000 units at a
price of $2.00 per unit, each unit representing one share of common stock and
one-sixth warrant to purchase a share of common stock. Warrants issued in
connection with this sale of units are exercisable at a price of $3.00 per share
on or before December 31, 2003. These issuances were made in reliance on the
exemption from registration provided by Section 506 of Regulation D. Net
proceeds were $493,329.
Exploration Funding
On October 11, 2000, Cheniere completed a transaction with Warburg, Pincus
Equity Partners L.P. ("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.
Warburg contributed $25,000,000 and received preferred stock, with an 8%
cumulative preferred dividend, convertible into 63.2% of Gryphon's common stock.
Cheniere and Warburg also agreed, under certain circumstances, to contribute an
additional $75,000,000 to Gryphon, proportionate to their respective ownership
interests.
During the first six months of 2001, Gryphon made cash calls totaling
$20,000,000. Cheniere declined to participate in such cash calls, and
accordingly, its ownership interest in Gryphon, after the effect of converting
preferred stock into common stock, was reduced from 36.8% at December 31, 2000
to 24.4% as of July 23, 2001. Cheniere's ownership interest was diluted
further, to 23.6%, on July 27, 2001, when it transferred 6,740 shares of Gryphon
common stock back to Gryphon in connection with the sale of licenses to certain
seismic data.
Seismic Reprocessing
Between June 2000 and October 2000, Cheniere acquired licenses to
approximately 6,800 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 has 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 the fourth quarter of 2001. Deliveries of reprocessed data began in
May 2001. After the assumption of liabilities by Gryphon related to its
purchase of one license to the data (see discussion below), Cheniere's remaining
liability for reprocessing is $1,061,692.
Sale of Licenses to Seismic Data
In June and July 2001, Cheniere sold licenses to 6,800 square miles of
seismic data to Gryphon for $7,000,000. Cash proceeds to Cheniere were
$853,197. Gryphon also assumed $6,820,824 of Cheniere's obligation to fund the
reprocessing of the seismic data. In connection with the transaction, Cheniere
also transferred 6,740 shares of Gryphon common stock to Gryphon. Cheniere
retains one license to all of the data in the Offshore Texas Project Area.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In early July, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." The
standards revise accounting for business combinations by:
. prohibiting the "pooling of interest" method of accounting and requiring
the purchase method of accounting to be used on all business combinations
initiated after June 30, 2001;
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. requiring that separately identifiable intangible assets, other than
goodwill, be recorded as assets. These intangible assets must either be
amortized over their useful lives or, if they have indefinite useful lives,
not be amortized and periodically tested for impairment; and
. ceasing all amortization of goodwill, instead requiring it be tested at
least annually for impairment. In addition, existing goodwill on business
combinations completed before July 1, 2001 will no longer be amortized
after December 31, 2001 and should be tested for impairment by January 1,
2002.
Cheniere will account for all future business combinations under SFAS No.
141. Effective January 1, 2002, Cheniere will adopt SFAS No. 142 as required.
The impact of these standards will be evaluated in future periods, but it is not
expected to be material.
The FASB also recently authorized for issuance SFAS No. 143, "Accounting
for Asset Retirement Obligations." This statement significantly changes the
method of accruing for costs associated with the retirement of fixed assets
(e.g. oil and gas production facilities) for which an entity is legally
obligated to incur. We will be further evaluating the impact and timing of
implementation of SFAS No. 143. Implementation of this standard is required no
later than January 1, 2003, with earlier adoption encouraged.
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; (i) statements regarding the Company's business strategy,
plans and objectives and (ii) statements expressing beliefs and expectations
regarding the ability of the Company to successfully raise the additional
capital necessary to meet the obligations under its 3-D 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.
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FACTORS THAT MAY IMPACT FORWARD-LOOKING STATEMENTS OR FINANCIAL PERFORMANCE
The following are some of the important factors that could affect the
Company's financial performance or could cause actual results to differ
materially from estimates contained in the Company's forward-looking statements:
-- The Company's ability to generate sufficient cash flows to support
capital expansion plans, obligations to repay debt and general
operating activities.
-- The Company's ability to obtain additional financing from lenders,
through debt or equity offerings, or through sales of a portion of its
interest in prospects.
-- The Company's ability to encounter hydrocarbons in sufficient
quantities to be economically viable, and its ability to overcome the
operating hazards which are inherent in the oil and gas industry and
which are intensified by the Company's concentration of its producing
oil and gas assets in few properties.
-- Changes in laws and regulations, including changes in accounting
standards, taxation requirements (including tax rate changes, new tax
laws and revised tax law interpretations) and environmental laws in
domestic or foreign jurisdictions.
-- The uncertainties of litigation as well as other risks and
uncertainties detailed from time to time in the Company's Securities
and Exchange Commission filings.
The foregoing list of important factors is not exclusive.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information contained in Notes 3 and 5 to the Consolidated Financial
Statements is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Each of the following exhibits is incorporated by reference or filed
herewith:
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Cheniere
Energy, Inc. (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the three months
ended June 30, 1999)
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) Current Reports on Form 8-K: None.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHENIERE ENERGY, INC.
/s/ Don A. Turkleson
-------------------------------------------
Don A. Turkleson
Chief Financial Officer (on behalf of the
registrant and as principal accounting
officer)
Date: August 14, 2001
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