Why did Cheniere report a net loss in 2003 despite a $4.76 million gain on sale?

The gain was more than offset by $6.70 million of LNG terminal development expenses, a $4.47 million non-cash equity loss from the Freeport LNG partnership, and $2.54 million of other G&A. A $3.02 million minority interest credit reduced the net loss to $5.29 million, since the Corpus Christi partner funded that project's losses.

Is Cheniere's near-term liquidity sufficient to fund its LNG development?

Year-end 2003 liquidity was weak, with working capital of only $155,526. Subsequent events improved the position: $13.9 million net from the January 2004 private placement, $2.5 million from Freeport LNG, and $1.3 million from warrant and option exercises. Management says these and other sources cover the next twelve months, but the company will need substantial additional capital, possibly through debt, equity, or sales of terminal capacity, to build the terminals.

When could Cheniere's LNG terminals start generating revenue?

The company does not expect LNG receiving operations to generate revenue before the second half of 2007. Freeport LNG construction is scheduled to start in the second half of 2004, with commercial start-up expected in the second half of 2007. Timing for Sabine Pass and Corpus Christi depends on FERC approval and financing, which are not yet secured.

What are the main risks to the LNG strategy?

Key risks include failure to obtain FERC and other permits, LNG failing to become a competitive supply source if U.S. domestic gas prices remain low, difficulty attracting customers, construction cost overruns and delays, and dependence on the commercial success of partners such as ConocoPhillips and Dow. Management's stated premise is that U.S. natural gas prices stay at or above $3.00 per Mcf, and a sustained decline below that level could significantly hurt the terminal business.

LNG 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 25, 2004. Cited figures are marked; the original filing is the authoritative source.

Cheniere Energy's 2003 10-K shows a company in transition from a small Gulf of Mexico oil and gas explorer to a developer of LNG receiving terminals.

In 2003 it reported a net loss of $5.29 million^a ($0.36 per share) on revenue of just $657,467, almost all from non-cost-bearing overriding royalty interests. The loss was driven by $6.7 million of LNG terminal development expense and a $4.47 million non-cash equity loss from its 30% stake in Freeport LNG. These were partly offset by a $4.76 million gain on the sale of a 60% Freeport interest and a $423,454 gain on a 10% interest sale, plus a $3.0 million minority interest absorbing losses at the Corpus Christi partnership.

The balance sheet at December 31, 2003 was thin: total assets of $24.6 million^b, working capital of only $155,526, and cash of $1.26 million. Operating cash burn was $7.6 million. Subsequent events materially improved liquidity: a January 2004 private placement raised $13.9 million net at $13.50 per share, the $2.5 million Freeport payment was received, and a $10 million ConocoPhillips capacity reservation fee was paid to Freeport LNG.

Pro forma working capital would have been about $17.8 million^c. Management states that LNG terminal revenues are not expected before the second half of 2007, so the company has no operating revenue stream for several years. For investors, the filing is essentially a bet on U.S. LNG import economics and on permitting progress.

Its key dependencies are FERC approval for Freeport, Corpus Christi and Sabine Pass, financing for terminals costing roughly $450 million to $600 million^d each, and sustained U.S. natural gas prices above $3.00 per Mcf. The company's own oil and gas exploration is a minor, speculative contributor, and the company faces significant going-concern-type funding needs despite the recent capital raise.

02—Key points

Key Highlights

2003 net loss of $5.29 million ($0.36 per share) versus $5.63 million ($0.42 per share) in 2002; revenue was only $657,467, all from overriding royalty interests.
LNG terminal development expense rose to $6.70 million in 2003, up from $1.56 million net in 2002, as the company accelerated work on Sabine Pass and Corpus Christi and phased out direct involvement at Freeport.
Freeport LNG transaction: the company sold a 60% interest in the Freeport site for a $4.76 million gain, retained a 30% limited partner stake, and recorded a $4.47 million equity loss that reduced that investment to zero.
Liquidity was tight at year-end 2003 (working capital $155,526; cash $1.26 million), but a January 2004 private placement raised $13.9 million net at $13.50 per share, and pro forma working capital was about $17.8 million.
Freeport LNG signed a 20-year terminal use agreement with Dow for 250 Mmcf/d, with an option on another 250 Mmcf/d, and ConocoPhillips agreed to reserve 1 Bcf/d and pay a $10 million capacity reservation fee; both are subject to closing conditions.
Pipeline and terminal projects: Sabine Pass and Corpus Christi terminals each have 2.6 Bcf/d regas capacity with estimated construction costs of roughly $450 million to $600 million; FERC permit applications were filed in December 2003, and Bechtel was selected as EPC contractor.
Management does not expect LNG operating revenues before the second half of 2007, and the company's oil and gas segment is small, with 2003 proved reserves of 943,517 Mcfe and a PV-10 of $4.28 million.

03—Questions

Frequently Asked Questions

Why did Cheniere report a net loss in 2003 despite a $4.76 million gain on sale?
The gain was more than offset by $6.70 million of LNG terminal development expenses, a $4.47 million non-cash equity loss from the Freeport LNG partnership, and $2.54 million of other G&A. A $3.02 million minority interest credit reduced the net loss to $5.29 million, since the Corpus Christi partner funded that project's losses.
Is Cheniere's near-term liquidity sufficient to fund its LNG development?
Year-end 2003 liquidity was weak, with working capital of only $155,526. Subsequent events improved the position: $13.9 million net from the January 2004 private placement, $2.5 million from Freeport LNG, and $1.3 million from warrant and option exercises. Management says these and other sources cover the next twelve months, but the company will need substantial additional capital, possibly through debt, equity, or sales of terminal capacity, to build the terminals.
When could Cheniere's LNG terminals start generating revenue?
The company does not expect LNG receiving operations to generate revenue before the second half of 2007. Freeport LNG construction is scheduled to start in the second half of 2004, with commercial start-up expected in the second half of 2007. Timing for Sabine Pass and Corpus Christi depends on FERC approval and financing, which are not yet secured.
What are the main risks to the LNG strategy?
Key risks include failure to obtain FERC and other permits, LNG failing to become a competitive supply source if U.S. domestic gas prices remain low, difficulty attracting customers, construction cost overruns and delays, and dependence on the commercial success of partners such as ConocoPhillips and Dow. Management's stated premise is that U.S. natural gas prices stay at or above $3.00 per Mcf, and a sustained decline below that level could significantly hurt the terminal business.

04—Continue

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