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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
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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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.
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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.
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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
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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.
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
-------------
<S> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
Developed Acres Undeveloped Acres (1)
--------------- ---------------------
Gross Net Gross Net
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Louisiana 1,366 547 7,583 4,725
Texas - - 2,300 1,840
----- --- ----- -----
Total 1,366 547 9,883 6,565
===== === ===== =====
</TABLE>
- ------------
(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
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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.
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------
Proved Reserves
----------------------------------------------
Oil Gas
(Bbls) (Mcf) Mmcfe PV-10
------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
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
====== ========= ========= ==========
</TABLE>
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.
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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.
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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)
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
<S> <C>
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
</TABLE>
24
<PAGE>
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
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
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
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Four Months Ended
December 31, December 31, Year Ended
-------------------------- -------------------------- August 31,
1999 1998 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
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
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional Total
--------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
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
========== ========= ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
CHENIERE ENERGY, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Four Months Ended
December 31, December 31, Year Ended
--------------------------- -------------------------- August 31,
1999 1998 1997 1996 1997
------------ ----------- ------------ ---------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
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
============ =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3-FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
---------- --------
<S> <C> <C>
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
========== ========
</TABLE>
NOTE 4-OIL AND GAS PROPERTIES
Investments in oil and gas properties were as follows at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
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
=========== ============
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
--------------------------
Deferred Tax Assets 1999 1998
- ------------------- ----------- -----------
<S> <C> <C>
NOL Carryforwards $ 4,400,000 $ 1,554,000
Less: Valuation Allowance (4,400,000) (1,554,000)
----------- -----------
Net Deferred Tax Assets $ - $ -
=========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
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
</TABLE>
37
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended
December 31, Four Months Ended Year Ended
--------------------------- December 31, August 31,
1999 1998 1997 1997
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
=========== ========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
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
===========
</TABLE>
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
<PAGE>
CHENIERE ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
(unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter Year
---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
- ----------
(1) Revenues less operating expenses other than general and administrative.
44
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Exhibit 10.26
CHENIERE ENERGY, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
Optionee: Ron A. Kreszke
I. GRANT OF STOCK OPTION. As of the GRANT DATE (identified below), Cheniere
Energy, Inc., a Delaware corporation (the "COMPANY"), hereby grants a
Nonqualified Stock Option (the "OPTION") to the OPTIONEE (identified below) to
purchase the number of shares of the Company's common stock, $.003 par value per
share, identified below (the "SHARES"), subject to the terms and conditions of
this agreement (the "AGREEMENT"). The Shares, when issued to Optionee upon the
exercise of the Option, shall be fully paid and nonassessable. The Option is
not an "incentive stock option" as defined in Section 422 of the Internal
Revenue Code.
II. DEFINITIONS. All capitalized terms used herein shall have the meanings set
forth in the Plan unless otherwise provided herein. Section 15 below sets forth
meanings for various capitalized terms used in this Agreement.
III. OPTION TERM. The Option shall commence on the Grant Date (identified
below) and terminate on the date prior to the fifth (5th) anniversary of the
Grant Date. This period during which the Option is in effect and may be
exercised is referred to herein as the "OPTION PERIOD".
IV. OPTION PRICE. The Option Price per Share is identified below.
V. VESTING. The total number of Shares subject to this Option shall vest in
accordance with the VESTING SCHEDULE (identified below). The Shares may be
purchased at any time after they become vested, in whole or in part, during the
Option Period. The right of exercise provided herein shall be cumulative so
that if the Option is not exercised to the maximum extent permissible after
vesting, it shall be exercisable, in whole or in part, at any time during the
Option Period.
VI. METHOD OF EXERCISE. The vested portion of the Option may be exercised, in
whole or in part, at any time, with respect to whole Shares only, within the
period permitted for the exercise thereof, and shall be exercised by written
notice of intent to exercise the Option with respect to a specified number of
Shares delivered to the Company at its principal office, and payment in full to
the Company at said office of the amount of the Option Price for the number of
Shares with respect to which the Option is then being exercised. Payment of the
Option Price shall be made (i) in cash or by cash equivalent, (ii) at the
discretion of the Committee, in Common Stock (not subject to limitations on
transfer) valued at the Fair Market Value of such Shares on the trading date
immediately preceding the date of exercise, or (iii) at the discretion of the
Committee, by a combination of such cash and such Common Stock. In addition to
and at the time of payment of the Option Price, the Optionee shall pay to the
Company in cash or, at the discretion of the Committee, in Common Stock, the
full amount of all federal and state withholding and other employment taxes
applicable to the taxable income of such Optionee resulting from such exercise.
1
<PAGE>
VII. TERMINATION OF EMPLOYMENT. Voluntary or involuntary termination of
employment and death or disability of Optionee shall affect Optionee's rights
under the Option as follows:
A. Termination for Cause. The Option shall terminate immediately and
shall not be further exercisable to any extent if Optionee's employment with the
Company (or any of its Subsidiaries) is terminated for cause.
B. Other Involuntary Termination or Voluntary Termination. If Optionee's
employment with the Company (or any of its Subsidiaries) is terminated for any
reason other than for cause, death or disability, then (i) the Option will
immediately terminate to the extent it is unvested and (ii) the vested portion
of the Option will terminate to the extent not exercised within 180 calendar
days after the date of such termination. In no event may the Option be
exercised by anyone after the earlier of (i) the expiration of the Option Period
or (ii) 180 calendar days after termination of employment.
C. Death or Disability. If Optionee's employment is terminated by death
or disability, then (i) the Option will immediately terminate to the extent it
is unvested and (ii) the vested portion of the Option will terminate 365
calendar days after the date of such termination to the extent not exercised by
Optionee or, in the case of death, by the person or persons to whom Optionee's
rights under the Option have passed by will or by the laws of descent and
distribution or, in the case of disability, by Optionee's legal representative.
In no event may any Option be exercised by anyone after the earlier of (i) the
expiration of the Option Period or (ii) 365 days after Optionee's death or
termination of employment due to disability.
VII. REORGANIZATION OF COMPANY. The existence of the Option shall not affect
in any way the right or power of Company or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in Company's capital structure or its business, or any merger or
consolidation of Company, or any issue of bonds, debentures, preferred or prior
preference stock ahead of or affecting the Shares or the rights thereof, or the
dissolution or liquidation of Company, or any sale or transfer of all or any
part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
In the event of a change in control of the Company, vesting of the Option
may be accelerated.
VIII. ADJUSTMENT OF SHARES. In the event of stock dividends, spin-offs of
assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers, consolidations, reorganizations, liquidations,
issuances of rights or warrants and similar transactions or events involving
Company, appropriate adjustments shall be made to the terms and provisions of
this Option.
IX. NO RIGHTS IN SHARES. Optionee shall have no rights as a stockholder in
respect of the Shares until the Optionee becomes the record holder of such
Shares.
X. INVESTMENT REPRESENTATION. Optionee will enter into such written
representations, warranties and agreements as Company may reasonably request in
order to comply with any federal or state securities law. Moreover, any stock
certificate for any Shares issued to Optionee
2
<PAGE>
hereunder may contain a legend restricting their transferability as determined
by the Company in its discretion. Optionee agrees that Company shall not be
obligated to take any affirmative action in order to cause the issuance or
transfer of Shares hereunder to comply with any law, rule or regulation that
applies to the Shares subject to the Option.
XI. NO GUARANTEE OF EMPLOYMENT OR SERVICE CONTRACT. The Option shall not
confer upon Optionee any right to employment or other service with Company, nor
shall it interfere with any right the Company would otherwise have to terminate
such Optionee's employment or other service at any time, with or without cause.
XII. WITHHOLDING OF TAXES. Company shall have the right to (i) make deductions
from the number of Shares otherwise deliverable upon exercise of the Option in
an amount sufficient to satisfy withholding of any federal, state or local taxes
required by law, or (ii) take such other action as may be necessary or
appropriate to satisfy any such tax withholding obligations.
XIII. GENERAL.
A. Notices. All notices under this Agreement shall be mailed or delivered
by hand to the parties at their respective addresses set forth beneath their
signatures below or at such other address as may be designated in writing by
either of the parties to one another. Notices shall be effective upon receipt.
B. Shares Reserved. Company shall at all times during the Option Period
reserve and keep available such number of Shares as will be sufficient to
satisfy the requirements of this Option.
C. Nontransferability of Option. The Option granted pursuant to this
Agreement is not transferable other than by will, the laws of descent and
distribution or by a qualified domestic relations order (as defined in Section
414(p) of the Internal Revenue Code). The Option will be exercisable during
Optionee's lifetime only by Optionee or by Optionee's legal representative in
the event of Optionee's disability. No right or benefit hereunder shall in any
manner be liable for or subject to any debts, contracts, liabilities, or torts
of Optionee.
D. Amendment and Termination. No amendment or termination of the Option
shall be made at any time without the written consent of Optionee. No amendment
or termination of the Plan will adversely affect the rights and privileges of
Optionee under the Option without the written consent of Optionee.
E. No Guarantee of Tax Consequences. Neither Company, Board or Committee
makes any commitment or guarantee that any federal or state tax treatment will
apply or be available to any person eligible for benefits under the Option. The
Optionee has been advised and been provided the opportunity to obtain
independent legal and tax advice regarding the grant and exercise of this Option
and the disposition of any Shares acquired thereby.
F. Severability. In the event that any provision of this Agreement shall
be held illegal, invalid, or unenforceable for any reason, such provision shall
be fully severable, but shall not affect the remaining provisions of the
Agreement, and the Agreement shall be construed and enforced as if the illegal,
invalid, or unenforceable provision had not been included herein.
3
<PAGE>
G. Governing Law. The Option shall be construed in accordance with the
laws of the State of Texas without regard to its conflict of law provisions, to
the extent federal law does not supersede and preempt Texas law.
XIV. DEFINITIONS AND OTHER TERMS. The following capitalized terms shall have
those meanings set forth opposite them:
A. Optionee: Ron A. Krenzke.
B. Grant Date: July 1, 1999.
C. Shares: Six Hundred Thousand (600,000) Shares of the Company's Common
Stock.
D. Option Price: One Dollar and Fifty Cents ($1.50) per Share.
E. Option Period: July 1, 1999 through June 30, 2004 (until 12:00 p.m.
central).
F. Vesting Schedule: Options for 300,000 Shares shall vest on the Grant
Date, Options for 75,000 Shares shall vest on the first anniversary of
the Grant Date, and Options for 75,000 Shares shall vest on each
subsequent anniversary of the Grant Date until fully vested as follows:
Date Options Vesting
---- ---------------
July 1, 1999 300,000
July 1, 2000 75,000
July 1, 2001 75,000
July 1, 2002 75,000
July 1, 2003 75,000
-------
Total 600,000
=======
IN WITNESS WHEREOF, this Stock Option Agreement is executed this ______ day of
_____________, 19_____.,
"COMPANY"
CHENIERE ENERGY, INC.
By:
------------------------------
Name: Michael L. Harvey
4
<PAGE>
Title: President and CEO
1200 Smith Street, Suite 1740
Houston, Texas 77002-4312
Accepted and agreed this ____ day of ____________, 19_____.
"OPTIONEE"
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Address:
------------------------
------------------------
------------------------
5
<PAGE>
Exhibit 10.27
CHENIERE ENERGY, INC. 1997 STOCK OPTION PLAN
AMENDMENT NO. 1
INCREASING NUMBER OF SHARES SUBJECT TO PLAN
The Company's Board of Directors and stockholders have approved and
declared the advisability of amending the Company's 1997 Stock Option Plan to
increase the total number of shares subject to the Plan from 950,000 to
1,950,000.
This Amendment No. 1 hereby changes the first sentence of Article V Section
5.1 to read:
"Subject to adjustment pursuant to the provisions of Section 5.2
hereof, the maximum number of shares of Common Stock which may be
issued and sold hereunder shall be 1,950,000."
1
<PAGE>
Exhibit 10.28
[*] 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.
2000 PROGRAM AGREEMENT
----------------------
This Program Agreement (this "Agreement" or the "Program") is dated as of
the 1st day of March, 2000, by and between CHENIERE ENERGY, INCORPORATED, a
Delaware corporation (hereinafter referred to as "Cheniere") and SAMSON OFFSHORE
COMPANY, an Oklahoma corporation (hereinafter referred to as "Samson"). Cheniere
and Samson may also be referred to individually herein as "Party" and
collectively as the "Parties".
ARTICLE I
Section 1.1 Intention of Parties:
The Parties desire to participate in the cost of the evaluation and the
interpretation of the 3-D seismic data (the "Fairfield Data") licensed to
Cheniere pursuant to that certain Master License Agreement dated June 9, 1999 as
supplemented by Supplement Agreement No. 1 dated June 9, 1999, (the "Master
Service Agreement") between Fairfield Industries Incorporated and Cheniere for
the mutual benefit of the Parties on the terms set forth herein. The purpose of
such evaluation and interpretation of the Fairfield Data is to generate
Prospects, as defined in Section 4.1, and to permit the negotiation of the
acquisition of oil and gas leases covering offshore blocks or portions thereof
(hereinafter referred to as "Target Blocks", whether one or more) that the
Parties agree are (i) potentially productive of oil and gas, or (ii) producing
oil and gas. No wells shall be drilled under the terms of this Agreement but
rather, all drilling and all other operations on the Subject Properties, as
defined in Section 4.2, shall be conducted under the Joint Operating Agreement,
as provided for in Section 4.5.
Section 1.2 Area of Operations:
The Program shall restrict its evaluation, interpretation, and acquisition
of Target Blocks to the area covered by the Fairfield Data, which area is
outlined on Exhibit A attached hereto. Such area shall hereinafter be referred
to as "Area of Operations".
1
<PAGE>
Section 1.3 Cheniere's Use of Data:
Cheniere shall, pursuant to the terms of this Program Agreement, evaluate
the Fairfield Data for the purpose of the generation and screening of Prospects,
as defined in Section 4.1 within the Area of Operations.
ARTICLE II
Section 2.1 Definitions:
Whenever used in this Agreement, the following terms shall have the
meanings assigned them in this Section 2.1:
"Agenda" shall have the meaning ascribed to it in Section 3.4.
"Area of Mutual Interest" ("AMI") shall have the meaning ascribed to it in
Section 7.4 and, when applicable, 4.4.
"Area of Operations" shall have the meaning ascribed to it in Section 1.2.
"Discovery Bonus" shall have the meaning ascribed to it in Section 4.6.
"Excluded Target Blocks" shall have the meaning ascribed to it in Section 4.4.
"Extended Term" shall have the meaning ascribed to it in Section 7.5.
"Fairfield Data" shall have the meaning ascribed to it in Section 1.1.
"Initial Well" shall have the meaning ascribed to it in Section 4.6.
"Participant" shall mean Samson.
"Presentation Block" shall have the meaning ascribed to it in Section 3.4.
"Program Interest" shall have the meaning ascribed to it in Section 4.6
"Program Management Fee" shall have the meaning ascribed to it in Section 5.3.
"Program Manager" shall have the meaning ascribed to it in Section 3.1.
"Prospect" shall have the meaning ascribed to it in Section 4.1.
"Related Entity" shall have the meaning ascribed to it in Section 4.4.
"Subject Property" shall have the meaning ascribed to it in Section 4.2.
"Target Blocks" shall have the meaning ascribed to it in Section 1.1.
"Target Blocks Identification Notice" shall have the meaning ascribed to it in
Section 4.1.
"Term" shall have the meaning ascribed to it in Section 6.1.
Exhibits:
A. Plat of Area of Operations, Section 1.2
B. Joint Operating Agreement, Section 4.5
C. Staffing Levels, Section 3.3
D. Blocks excluded from the AMI, Section 7.4
E. Provisions of Area of Mutual Interest, Section 4.4
2
<PAGE>
ARTICLE III
Section 3.1 Program Manager:
Cheniere shall act as Program Manager and in such capacity shall,
subject to the terms hereof, (i) manage the evaluation and interpretation of the
Fairfield Data, and (ii) negotiate for the acquisition of Target Blocks. As the
Program Manager, Cheniere shall exercise ordinary business judgment in managing
the affairs of the Program. In the absence of fraud, intentional wrong doing or
gross negligence, Cheniere shall not be liable to the Participant for any
mistake of fact or judgment made by Cheniere in managing the Program. Cheniere
is engaged in oil and gas exploration, development and production operations,
and pipeline operations outside of the Area of Operations, and Participant
acknowledges Cheniere shall have no obligation or accountability to Participant
for any such activities that are conducted outside the Area of Operations. The
business of the Program shall be conducted under the name of Cheniere or, where
appropriate, under the names of Cheniere and Samson.
Section 3.2 Authority of Program Manager:
Subject to Section 3.3 below, the Program Manager shall have the power
and authority to take such action from time to time as it may deem to be
necessary, appropriate, or convenient in connection with the management and
conduct of the business and affairs of the Program, including without limitation
the power (i) to acquire or lease equipment required to evaluate and interpret
the Fairfield Data, (ii) to employ, retain or otherwise secure personnel or
third party consultants to evaluate and interpret said Fairfield Data, (iii) to
incur such other expenses associated with evaluating and interpreting said
Fairfield Data as may, in its judgment, be necessary, (iv) to incur expenses
associated in the negotiation for and acquisition of Target Blocks, and (v) to
negotiate for the acquisition of Target Blocks by farm-ins or otherwise.
Section 3.3 Requirements of Program Manager:
The Program Manager shall devote such time, attention, and business
capacity to the affairs of the Program as may be necessary as more fully set
forth herein. The Program Manager shall furnish office space, clerical and
administrative assistance, and such other support staff as needed. The Program
Manager shall provide geologists and geophysicists and the equipment required to
interpret the Fairfield Data and shall make available its drilling and reservoir
engineering staff and its land staff to the Program at the staffing levels set
forth on Exhibit C hereto. All costs associated with the matters set forth in
Section 3.2 and Section 3.3 (except as set forth below) shall be covered by the
Program Management Fee provided for in Section 5.2, and Program Manager will not
be entitled to any reimbursement for the costs incurred by it in providing any
of the matters set forth in this Section. [*]
3
<PAGE>
Section 3.4 Reports:
During the Term of the Program, and at least five (5) days prior to
such meeting provided for in Section 4.3. Program Manager shall provide
Participant with a written report containing an "Agenda" setting forth a listing
of all blocks to be reviewed at the meeting (the "Presentation Blocks") and
summarizing the Program's activities, evaluations, drilling operations and
related matters, together with such information (including copies of technical
data) regarding the Program and its activities and interests as is available to
Program Manager to the extent not prohibited by license agreements and as
reasonably requested by Participant. During ordinary business hours,
Participant or its authorized representatives shall have access, in Program
Manager's offices, to all of the Program's books, records and materials, and
geophysical surveys (including the Fairfield Data subject to the limitations in
the Master Services Agreement). In the event the Agenda is not an accurate
representation of the blocks actually reviewed at the meeting, the Parties shall
execute a mutually agreeable amendment of the Agenda reflecting all Presentation
Blocks actually reviewed at the meeting.
ARTICLE IV
Section 4.1 Identification of Target Blocks:
When during the Term hereof the Program Manager identifies offshore
blocks that Program Manager believes contain economically viable Prospects (as
defined below), the Program Manager shall provide written notice to Participant,
(the "Target Blocks Identification Notice") which shall (i) identify the owner
and the location of the offshore blocks necessary to control the Prospect, as
defined below, not to exceed in size four (4) offshore blocks, (the "Target
Blocks") and (ii) designate the date and time Program Manager will meet jointly
with Participant at the offices of Program Manager to discuss the specific
details relating to such Target Blocks. Said notice shall be given not less
than five (5) working days prior to the proposed meeting.
At such meeting, the Program Manager shall discuss with Participant
the specific details of the Prospect (as defined herein below) located on the
Target Blocks and shall allow Participant to examine all relevant geological and
geophysical data, interpretations, and other information in the possession of
Program Manager that pertains to such Prospects subject to the limitations on
the use of the Fairfield Data set forth in the Master Service Agreement.
"Prospect" as used herein shall consist of the entire geologic confines of the
potential development area, located on the Target Blocks, as defined by the
structure and/or stratigraphy,
4
<PAGE>
without limitation in depth. The Program Manager shall also provide to
Participant the following information:
(i) geological and geophysical information including the Program's
most recent reports, interpretations and maps;
(ii) a land summary and plats and any agreements associated therewith;
(iii) an itemized list of the estimated acquisition costs and the
geological and geophysical cost allocable to such Target Blocks.
(iv) the preliminary estimate of the cost of any Exploratory Well for
such Prospect;
(v) a preliminary estimate of the costs to be incurred in connection
with platforms, facilities and development well(s) for such Prospect;
(vi) The Program Manager's reserve estimate and economic analysis,
which shall be provided for informational purposes only and without liability to
Program Manager and with the understanding that Participant will prepare its own
reserve estimate and economic analysis and satisfy itself as to the economics of
the Prospect.
(vii) The terms on which the Program Manager estimates the leases,
farm-outs or other drilling rights can or may be acquired, including the amount
of bonus (if any), well obligation, net revenue interest and working interest,
both before and after payout.
Section 4.2 Participant's Election to Participate in Target Blocks:
Participant shall have fifteen (15) working days after the meeting
held pursuant to Section 4.1 above in which to review in the Program Manager's
office the data referred to in Section 4.1. Failure of Participant to timely
review such data shall be deemed an election by such Participant to exclude from
the Program the Target Blocks identified in the Program Manager's notice;
provided, however, that Participant may waive its right to review the data and
may elect to include such Target Blocks in the Program by giving written notice
to Cheniere to such effect within said fifteen (15)-day period. Within twenty-
five (25) working days after the meeting referred to in the first sentence of
this Section, Participant shall indicate to Program Manager its election to
either include or exclude such Target Blocks in the Program. All such elections
shall be as to all depths. Such election shall be in writing. If Participant
fails to timely elect to include such Target Blocks in the Program, such failure
shall be deemed an election to exclude such Target Blocks from the Program.
If Participant elects to include such Target Blocks in the Program, the Program
Manager shall proceed with its efforts to negotiate for the acquisition of
leases, farm-out agreements or other drilling rights covering such Target Blocks
and if successful, such leases, farm-out agreements or drilling rights
(hereinafter referred to as "Subject Property") shall be acquired by the Parties
for the consideration and in the proportions set forth in Section 4.6, subject
in all cases to the provisions of Section 4.7.
Section 4.3 Meetings
During the Term of the Program, the Parties shall hold a meeting the
first Friday of each calendar month to review the status of all Program
business.
5
<PAGE>
Section 4.4 Effect of Participant's Election:
The Participant's election or failure to timely elect with respect to
Target Blocks has the following consequences:
(i) If Participant elects or is deemed to have elected to exclude Target
Blocks from the Program (taking into account the additional election provided
for in Section 4.7) (the "Excluded Target Blocks"), Participant and its
officers, employees, directors and any Related Entity shall thereafter have no
right, for a period of eighteen (18) months following such election or deemed
election, to acquire an interest in such Excluded Target Blocks, directly or
indirectly. If Participant does acquire an interest in such Excluded Target
Blocks it shall so notify Cheniere and shall offer 100% of such interest to
Cheniere, and Cheniere may acquire such interest by reimbursing Participant its
purchase price. Cheniere may, individually or in concert with others, acquire
an interest in said Excluded Target Blocks, and in such case have no obligation
to Participant other than under Section 4.7 hereof. The term "Related Entity,"
as used herein, shall mean any corporation, partnership, trust or other entity
which, on the date of the election provided for in Section 4.2, Participant
controls, or which, as of the date of said election, is owned at least 50%,
directly or indirectly, by Participant.
(ii) If Participant timely elects under Section 4.2 to include Target
Blocks in the Program, the Area of Mutual Interest provisions set forth on
Exhibit E hereto shall be applicable to the Target Blocks effective as of the
date of such election. If the Target Blocks or a portion of them are acquired,
said Area of Mutual Interest shall remain in force and effect as to such Target
Blocks for as long as both Parties own an interest within said Area of Mutual
Interest. If the Target Blocks is not acquired said Area of Mutual Interest
shall terminate at the later of (i) eighteen (18) months from the date of such
election by Participant or (ii) the termination of the Area of Mutual Interest
provided for in Section 7.4.
Section 4.5 Title; Joint Operating Agreement; Area of Mutual Interest:
If title to a Subject Property is acquired in the name of the Program
Manager or of any other Party, the Non Acquiring Party shall be assigned upon
its request its respective share of the acquired Subject Property subject to
payment by such Non Acquiring Party of its stipulated share of the acquisition
costs of such Subject Property as set forth in Section 4.6 as applicable. Each
Subject Property shall be subject to a Joint Operating Agreement in the form
attached hereto as Exhibit "B" which names Cheniere Energy, Inc. as Operator,
unless such is acquired subject to an existing Joint Operating Agreement naming
a third party as Operator. A separate Joint Operating Agreement shall be
executed for each Subject Property and shall be deemed to be effective the day
the Subject Property is acquired. Each Party shall have the right to participate
or not participate in the exploration and/or development of a Subject Property
in accordance with
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the terms of the Joint Operating Agreement. In the event Cheniere elects to
dispose of more than 50% of its initial interest in a Subject Property, or, in
the event it elects to resign as Operator under the Joint Operating Agreement,
Cheniere shall notify Participant of its intent and, if requested, will vote for
or support Participant as Operator.
If the farmout agreement or other agreement pursuant to which the
Program acquires drilling rights provides that a Joint Operating Agreement other
than that provided for herein shall govern operations on a Subject Property, the
Parties agree the Area of Mutual Interest provided for in Section 4.4 applicable
to such Subject Property shall nonetheless remain in effect in accordance with
its terms.
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Section 4.6 Program Interests; Acquisition Costs; Burdens
A. All rights in and to the Target Blocks and all Subject Property
acquired pursuant to this Agreement, not including the Excluded Target Blocks,
shall be owned 50% by Samson and 50% by Cheniere.
B. All costs, as set forth below, of Target Blocks shall be borne [*]
by Samson and [*] by Cheniere.
(i) Lease bonuses, rentals, and option payments (the acquisition
costs)
(ii) The costs of drilling the Initial Well, as defined below, to
casing point, limited to the original AFE containing a 15% contingency. "Initial
Well" is defined as the first well, and any substitutes therefore, drilled on
each Subject Property.
C. Samson shall bear fifty percent (50%) of the following overriding
royalties on all Presentation Blocks:
(i) A 2% of 8/8th overriding royalty payable to the Cheniere staff,
which override is reduced in proportion to the Program Interest, as defined
below;
(ii) A [*] overriding royalty due under [*].
D. Samson shall also pay to Cheniere a discovery bonus (the
"Discovery Bonus") in the amount of $100,000 for a discovery of 30 BCFE or
greater, but less than 40 BCFE (computed at one barrel of oil equals 6 MCF of
natural gas) attributable to the interest of the Program, as defined below, or
$150,000 for a discovery of 40 BCFE or greater (computed at one barrel of oil
equals 6 MCF of natural gas), attributable to the interest of the Program,
defined below, based on proved reserves reflected on the reserve report of Ryder
Scott prepared as of one year after commencement of production and payable
within 90 days after receipt of such reserve report. The interest of the Program
(sometimes referred to as the Program Interest) shall consist of the initial
working interests of Cheniere and Samson, less any back-in due a farming-out
party.
Section 4.7 Change of Election by Participant
If the Program Manager is able to acquire the leases, farm-out agreements or
drilling rights as described in the Target Blocks Identification Notice but the
terms of such acquisition are materially different than estimated in the Target
Blocks Identification Notice, the Program Manager shall so notify Participant,
specifying the differences and advising Participant it has ten (10) days to
change its election with respect to such Target Blocks. A difference of more
than 10% in any one of the following factors shall be deemed to be material for
the purposes of this
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paragraph: lease acquisition cost and rentals, net revenue interest, working
interest, or the AFE for the Initial Well dry hole cost.
Section 4.8. Change of Election by Program Manager
Program Manager may elect, for any reason, to not acquire an interest in a
Presentation Block, in which case, if Participant elects to proceed with the
acquisition of the same, [*].
ARTICLE V
Section 5.1 Liabilities
The obligation and liability of the Parties, with respect to any and all
liabilities in connection with the business of the Program, exclusive of the
costs related to services performed pursuant to Sections 3.2 and 3.3, but
specifically inclusive of the costs incurred pursuant to the last sentence of
Section 3.3, shall be as follows:
Samson 50%
Cheniere 50%
---
100%
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Section 5.2 Program Management Fee:
Participant shall pay the Program Manager a Program Management Fee for
managing the Program and providing the services set forth in Section 3.2 and
Section 3.3 above (exclusive of the last sentence of Section 3.3). The amount
of the Program Management Fee shall be $4,140,000 payable in 18 monthly
installments of $230,000 each, the first installment being due five days after
execution of this Agreement and thereafter payable on the first day of each
month, with the final installment being due August 1, 2001.
Section 5.3 Failure to Pay, Failure to Perform:
In the event Participant fails to timely pay the Program Manager Fee pursuant
to Section 5.2, Program Manager shall give such Party written notice of such
failure and, unless, the fees are paid within fifteen (15) days following
receipt of such notice, such Party shall be deemed to be in default (the
"Default") of its obligations hereunder. In addition to all other remedies
available at law or in equity, the defaulting Party shall forfeit all of its
rights in and to the Program and any Prospects, potential Prospects and Target
Blocks, but shall not forfeit its interest in any Subject Properties.
In the event the Program Manager fails to perform its Program obligations
set forth herein, the Participant shall give the Program Manager written notice
of such failure and, unless the Program Manager cures such failure within
fifteen (15) days following receipt of such notice, the Program Manager shall be
deemed to be in default of its obligations hereunder. Upon such default, the
Participant shall no longer be subject to its obligations, duties and
liabilities assumed hereunder and shall further retain all other remedies
available at law or in equity.
Section 5.4 Books and Records:
The Program Manager shall keep or cause to be kept adequate books and records
reflecting all financial activities of the Program in accordance with generally
accepted accounting procedures. Such books and records shall be available for
inspection and audit by Participant or their duly authorized representatives (at
the expense of Participant) during business hours at the office of the Program
Manager; provided, however, the Program Manager shall not be required to
maintain any such books or records for a period in excess of six (6) years from
the date of preparation or receipt thereof. Prior to disposing of any books or
records, the Program Manager shall give notice of its intent to dispose or
destroy the same to Participant who may within fifteen (15) days of such notice
elect to take possession of said books and records. Said records shall be
immediately delivered by the Program Manager to said Participant at
Participant's cost and expense. The Program Manager shall not, without the
prior written consent of Participants, make, execute or deliver an assignment
for the benefit of creditors or
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contract to sell, mortgage or otherwise dispose or encumber any Subject Property
or assets which were acquired whole or in part with funds provided by
Participant.
ARTICLE VI
Section 6.1 Term of Program:
The term of this Agreement (the "Term") shall be for a period of eighteen (18)
months commencing effective as of March 1, 2000 and terminating on August 31,
2001.
ARTICLE VII
Section 7.1 Samson's Representations:
Samson hereby represents, warrants and agrees that it has the right, power and
authority to enter into this Agreement, to become a Party and to perform its
obligations hereunder, and that this Agreement is a legal, valid and binding
obligation of Samson. Samson warrants with respect to its execution of this
Agreement and its acquisition of any interest in the Subject Property as
follows:
(i) Samson is able to bear the economic risk of its investment in the
Program. Samson has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of this
investment. Samson recognizes that investment in the Program involves a high
degree of risk.
(ii) Samson has had an opportunity to ask questions of and to receive
answers from the Program Manager, or a person or persons on its behalf,
concerning the terms and conditions of this investment, and all documents,
records, books and other information pertaining to the investment in the Program
and/or Subject Properties.
(iii) The Interest will not be sold or transferred by Samson in
violation of the Securities Act of 1993 (the "Act"), and the financial condition
of Samson is such that it is able to hold the Interest for an indefinite period
of time. Samson is aware that the offering and sale of the Interest has not been
registered under the Act, that the Interest must be held indefinitely unless it
is subsequently registered or an exemption from such registration is available
and that neither the Program Manager nor the Program is under any obligation to
register the Interest nor does it have any present intention to do so;
(iv) Samson is an "accredited investor" as such term is defined in Rule
501 of Regulation D promulgated by Securities and Exchange Commission under the
Act.
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(v) Samson is qualified with the Minerals Management Service to hold
title to federal offshore leases in the Gulf of Mexico.
(vi) Samson is fully aware of the terms of the Master License Agreement
(exclusive of Supplement Agreement No. 1 dated June 9, 1999) to be utilized in
the granting of all Licenses covering the Fairfield Data under the terms of the
agreements relating to the same specified in Section 1.1 hereof. In compliance
with the provisions of the Master License Agreement, Cheniere and Samson have
executed contemporaneously herewith an acknowledgment to Fairfield Industries
Incorporated that Cheniere has fully advised Samson of the restrictions on the
use of the Fairfield Data.
Section 7.2 Cheniere's Representations:
Cheniere hereby represents, warrants and agrees that it has the right, power
and authority to enter into this Agreement, to become a Party and to perform its
obligations hereunder, and that this Agreement is a legal, valid and binding
obligation of Cheniere. Cheniere also warrants with respect to its execution of
this Agreement and its acquisition of any interest in the Subject Property as
follows:
(i) Cheniere is able to bear the economic risk of its investment in the
Program. Cheniere has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of this
investment. Cheniere recognizes that investment in the Program involves a high
degree of risk.
(ii) The Interest will not be sold or transferred by Cheniere in
violation of the Securities Act of 1993 (the "Act"), and the financial condition
of Cheniere is such that it is able to hold the Interest for an indefinite
period of time. Cheniere is aware that the offering and sale of the Interest has
not been registered under the Act, that the Interest must be held indefinitely
unless it is subsequently registered or an exemption from such registration is
available and that neither the Program Manager nor the Program is under any
obligation to register the Interest nor does it have any present intention to do
so;
(iii) Cheniere is an "accredited investor" as such term is defined in
Rule 501 of Regulation D promulgated by Securities and Exchange Commission under
the Act.
(iv) Cheniere is qualified with the Minerals Management Service to hold
title to federal offshore leases in the Gulf of Mexico.
(v) The Master Service Agreement is in full force and effect and neither
Fairfield nor the Program Manager is in breach of same. The Supplement Agreement
No. 1 dated June 9, 1999 contains no provisions, other than those taken into
account herein, that have or could have an adverse economic consequence to the
Program.
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(vi) Cheniere has fully advised Samson of the restrictions on the use of
the Fairfield Data.
Section 7.3 Confidentiality
Neither the financial terms of this Agreement nor any geophysical, geological,
engineering, technical, production, test or other data resulting from the
conduct of the business of the Program shall be given to or made available to
any person or entity which is not a Party or a director, officer or employee of
a Party, unless otherwise agreed to by the Parties, except that this prohibition
shall not apply to disclosure to the parent or any affiliated corporation of any
Party and shall not apply to a disclosure of information, including press
releases and public notices, which is (i) required by any stock exchange on
which the shares of Party and/or its parent company are listed, (ii) required
for the purpose of review by private engineering firm(s) for purposes of
preparing reservoir and other similar evaluations or for purposes of obtaining
financing from a reputable financial institution, (iii) required by a private
geological or geophysical consultant for purposes of preparing a technical
evaluation of a Prospect, (iv) required by a pipeline in connection with
negotiations for a gas purchase contract, (v) required in order to comply with
the provisions of this Agreement, (vi) made to a third party to whom any Party
desires to sell all or a portion of its interest in a Subject Property, provided
that in all cases above the recipient of any such information shall have first
agreed in writing to keep such information confidential. Notwithstanding
anything to the contrary expressed or implied herein, the Program Manager is
authorized and directed to furnish or to make disclosure of any information as
may be necessary to comply with the rules and regulations of governmental
authorities having jurisdiction in the Subject Properties.
Section 7.4 Area of Mutual Interest; Non-Competition Obligation:
A. Effective as of the date of this Agreement, the Parties establish an Area
of Mutual Interest ("AMI") consisting of the entirety of the Area of Operation
less and except the excluded blocks specified on Exhibit D attached hereto.
Said AMI shall terminate six (6) months after the expiration of the Term or, as
to lease sale blocks only, after the final award of leases that have been bid on
by either of the Parties at the first Federal Offshore Louisiana Lease Sale
after the expiration of the Term but, in any event, twelve (12) months after the
expiration of the Term. During the term of the AMI, if either Party (the
"Acquiring Party") acquires a lease, farm-out, or drilling right in the AMI, it
shall immediately notify the other Party, (the "Non-Acquiring Party"), which
notice shall specify the interest acquired and the terms of the acquisition,
including the cost of acquisition. The notice shall contain an offer to present
the technical data relating to the acquisition at a specified time not less than
five (5) business days or more than ten (10) business days after the date of the
notice. The Non-Acquiring Party shall have ten (10) business days after the
date for the presentation of the technical data to make the election provided in
this section. If Samson is the Non-Acquiring Party it shall have the election
to acquire 50% of said interest on the terms set forth in Section 4.6. If
Cheniere is the Non-
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Acquiring Party it shall have the election to acquire 50% of said interest by
paying [*] of the acquisition costs as set forth in Section 4.6 and the Initial
Well shall be drilled pursuant to Section 4.6.
B. Notwithstanding Section 7.4 A, if either Party acquires a producing
field (as defined below) in the Area of Mutual Interest, the following shall
apply to interests acquired within the Area of Mutual Interest:
The Acquiring Party shall offer the other Party (the Non Acquiring
Party) 50% of the interest acquired in exchange for payment by the Non-Acquiring
Party of 50% of the fairly allocated cost of acquisition and the Initial Well
thereon shall be drilled on a non-promoted, heads-up basis. Additionally, the
Non-Acquiring Party shall reimburse the Acquiring Party for 50% of its direct
third party out-of-pocket costs incurred in connection with such acquisition.
Notwithstanding Section 4.5, the Acquiring Party shall have the right to be
Operator.
For the purposes of this Section 7.4.B, an interest shall be deemed to
be a producing field if it has not been previously designated as a Target Block
and if:
(a) one or more of the blocks comprising the field has existing
producing wells, wells capable of production or proved oil and/or gas
reserves; and
(b) the fairly allocated valuation of the field, after deducting any
contingent liabilities for well plugging, platform and pipeline removal and
ocean bottom clean-up, is more than $2,000,000.
If the parties cannot agree on (a) or (b) above, the Non-Acquiring
Party may challenge, in which case the determination of (a) and (b) shall
be made by Ryder Scott at the cost of the Non-Acquiring Party. Such
determination by Ryder Scott shall not determine the purchase price to be
paid by the Non-Acquiring Party, which shall be based on the Acquiring
Party's fairly allocated valuation.
The Ryder Scott evaluation shall utilize the average of the ensuing
twelve months closing NYMEX future prices in existence on the effective
date of the acquisition, appropropriate costs and a 10% discounted present
value.
C. Notwithstanding the provisions of Section 7.4 A. above, if
Participant acquires an interest in an industry generated prospect on a promoted
basis without having solicitated such interest, Participant shall offer Program
Manager a 50% interest in such interest in exchange for payment by Program
Manager of 50% of the fairly allocated cost of acquisition and the Initial Well
thereon shall be drilled on a non-promoted, heads-up basis. The foregoing
sentence shall apply to only the first six (6) such prospects acquired by the
Participant. For each such prospect after the first six (6) such prospects
acquired by the Participant, the Program Manager shall be offered a 50% interest
in such prospect in exchange for payment by the Program Manager of 50% of the
fairly allocated cost of acquisition and the Initial Well thereon shall be
drilled pursuant to Section 4.6.
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D. Nothing herein contained shall prohibit or restrict either Party from
conducting oil and gas exploration, development or production operations,
pipeline operations or any other business for its own account that:
(i) is located outside the Area of Operations, or is excluded therefrom
by Exhibit D, or
(ii) relates to properties that were excluded from the Program by the
other Party as a result of its actions or inaction hereunder, and in any such
event, such Party shall have no obligation or accountability to the other Party
for any such activities.
E. In the event of conflict between the provisions of Section 7.4 and
Sections 4.4, the provisions of Section 4.4 shall control.
Section 7.5 Winding Up:
For a period of six (6) months beginning September 1, 2001, and
terminating February 28, 2002 (the "Extended Term"), the Program Manager, when
it identifies offshore blocks that it believes contain economically viable
Prospects, shall give Participant a Target Blocks Identification Notice pursuant
to Section 4.1. The first such Target Blocks Identification Notice shall be
delivered to Participant within ten (10) working days after the end of the Term.
The following terms shall govern the respective rights and obligations of the
Parties during such Extended Term with respect to such Target Blocks:
(i) All of the provisions of Article IV hereof shall be applicable
during such Extended Term to such Target Blocks except as set forth in this
Section 7.5.
(ii) No Program Management fee shall be payable during the Extended
Term. Instead, Participant shall pay a $25,000 prospect fee at the time it
elects to participate in a Target Blocks and an additional $75,000 fee at the
time the drill site on the Target Blocks becomes a Subject Property. The $75,000
fee shall be proportionately reduced in the event less than a full 100% working
interest is acquired by the Program in the Target Blocks.
(iii) The Extended Term shall, as to lease sale blocks only, continue
until after the final award of leases that have been bid on by either Party at
the next Federal Offshore Louisiana Lease Sale after the expiration of the Term,
or six (6) months after the Term, whichever is later, but in no event longer
than twelve (12) months from the expiration of the Term.
Section 7.6 Assignment by the Parties:
Neither Party may sell, assign, convey or otherwise transfer its
interest in the Program to any party other than a Related Party without the
written consent of the other Party. Each Party
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may sell its interest in the Subject Properties, however, such sale shall not
relieve the selling party of its obligations under this Agreement, the Joint
Operating Agreement, or any other agreements, contracts and obligations
applicable to the Subject Properties at the time the same are conveyed, and
provided further that if the interest of a Party in the Subject Properties
becomes owned by five (5) or more Parties, the owners of said interests agree,
upon request by Program Manager, to appoint a single nominee or representative
for all such owners.
Section 7.7 Successors and Assigns:
Subject to the provisions of Section 7.6, the terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of the heirs,
successors, personal and legal representatives, and assigns of the Parties.
ARTICLE VIII
Section 8.1 Notices
All notices or other communications required or permitted to be given pursuant
to this Agreement shall be in writing and shall be considered as received when
deposited in the U.S. Mail, postage prepaid, and transmitted by facsimile
transmission. All notices shall be addressed to the Parties at their respective
addresses and facsimile numbers set forth below or at such other addresses and
facsimile numbers as may have been theretofore specified by written notice
delivered in accordance herewith.
If to Cheniere:
Cheniere Energy, Inc.
1200 Smith Street
Suite 1740
Houston, TX 77002
Attention: Don A. Turkleson
Fax (713) 659-5459
If to Samson:
Samson Offshore Company
910 Travis Street
Suite 2170
Houston, TX 77002
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Attn: Jeff Carpenter
Fax (713) 751-8864
Section 8.2 Individual Obligations:
The obligations, duties, and liabilities of the Parties shall be several and
not joint or collective; and nothing contained herein is intended to create, nor
shall ever be construed as creating, a partnership of any kind, joint venture,
association, or other character of business entity recognizable in law for any
purpose.
Section 8.3 Waiver
Neither failure nor any delay on the part of any Party in exercising any
right, power or remedy hereunder shall operate as a waiver thereof, or of any
other right, power or remedy; nor shall any single or partial exercise of any
right, power or remedy preclude any further or other exercise thereof, or the
exercise of any other right, power or remedy. No waiver of any of the
provisions of this Agreement shall be valid unless it is in writing and signed
by the party against whom it is sought to be enforced, nor shall any such waiver
constitute a continuing waiver unless otherwise expressly provided.
Notwithstanding the foregoing, acceptance by Program Manager of a late payment
shall constitute a waiver of the default created by a Participant's failure to
make timely payment.
Section 8.4 Law Governing:
This Agreement shall be governed by and construed in accordance with the laws
of The State of Texas.
Section 8.5 Controlling Documents:
In the event of a conflict between the terms of this Agreement and the terms
of any of the Exhibits attached hereto, the terms of this Agreement shall
control.
Section 8.6 Press Releases
No public announcement or statement regarding the matters contained in this
Agreement
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or any of the wells drilled hereunder shall be made or released without the
approval of the Parties hereto or those Parties participating in the operation
which is the subject of such public announcement or statement. No public
announcement or statements about a specific well shall be made until all testing
in a well is completed. Any proposed public announcement or statement regarding
a specific well shall contain at a minimum the following information:
a. Name of well
b. OCS block
c. Location of well
c. Tested interval(s)
d. Test results
e. Development/confirmation plans, if appropriate
f. Participants and percentages
g. Acreage controlled, if appropriate
Either Party may elect to exclude its name from a proposed public
announcement or statement and thus remove itself from the approval process.
Program Manager will coordinate the approvals of any proposed public
announcement or statement, unless Program Manager has elected to be excluded
from any such proposed public announcement or statement, in which case the
Party proposing such public announcement or statement shall coordinate such
approval process. Notwithstanding anything herein to the contrary, Program
Manager may make such public announcements as it deems appropriate in the event
of an emergency or imminent harm to people, property or environment without
prior consultation with Participant. In addition, any Party may make such
public announcements as required by the SEC or other governmental agency,
without consultation with the other Party, but shall furnish a copy of such
release to the other Party at the time such release is made.
Section 8.7 Severability:
In the event any one or more of the provisions contained in this Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
provision of this Agreement, which other provisions shall remain in full force
and effect.
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Section 8.8 Entire Agreement:
This Agreement constitutes the entire agreement between the parties hereto
with respect to the transactions described herein, superseding all prior
negotiations, discussions, agreements and understandings, whether oral or
written, relating to such subject matter. This Agreement may not be amended and
no rights hereunder may be waived except by a written document signed by the
duly authorized representative of the party to be charged with such amendment or
waiver. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver unless otherwise
expressly provided. Each party acknowledges that it has read and understands
the terms of this Agreement and has had the opportunity to consult with legal
counsel of its choice concerning the meaning and effect thereof. Neither party
has relied upon the other party or its counsel or advisers with respect to the
meaning or effect of such an agreement or provision.
Section 8.9 Surviving Obligations:
In addition to the specified terms of the Areas of Mutual Interest and Non-
Competition Agreement provided for in Sections 4.4 and 7.4, the provisions of
Sections 5.4, 7.1, 7.2, 7.3, 7.5 and 8.6 shall survive the expiration of the
Extended Term and remain binding obligations of the parties.
Section 8.10 Counterparts:
This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original for all purposes.
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In witness whereof, this Agreement is executed the 10th day of March, 2000,
effective as of the date first hereinabove set forth.
WITNESSES: CHENIERE ENERGY INCORPORATED
_________________________ _______________________________
BY: MICHAEL L. HARVEY
TITLE: President, Chief Executive Officer
SAMSON OFFSHORE COMPANY
_________________________ _______________________________
BY: ROBERT C. BILGER
TITLE: Attorney-in-Fact
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Exhibit 10.29
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (herein called this "Amendment")
is made as of the 31st day of December, 1999 by and between Cheniere Energy,
Inc. ("Borrower") and EnCap Energy Capital Fund III, L.P. ("Lender").
W I T N E S S E T H:
WHEREAS, Borrower and Lender have entered into that certain Credit
Agreement dated as of September 1, 1999 (as amended, supplemented, or restated
to the date hereof, the "Original Agreement"), for the purposes and
consideration therein expressed, pursuant to which Lender made a loan to
Borrower as therein provided; and
WHEREAS, Borrower and Lender desire to amend the Original Agreement for the
purposes described herein; and
WHEREAS, Borrower and Lender hope to enter into a Three Party Agreement
with Schlumberger Technology Corporation;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and in the Original Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
Definitions and References
(S) 1.1. Terms Defined in the Original Agreement. Unless the context
otherwise requires or unless otherwise expressly defined herein, the terms
defined in the Original Agreement shall have the same meanings whenever used in
this Amendment.
(S) 1.2. Other Defined Terms. Unless the context otherwise requires, the
following terms when used in this Amendment shall have the meanings assigned to
them in this (S) 1.2.
"Amendment" means this First Amendment to Credit Agreement.
"Amendment Documents" means this Amendment and, if executed and
delivered, the Three Party Agreement.
"Credit Agreement" means the Original Agreement as amended hereby.
"IP" means IP Petroleum Company, Inc.
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"Net Profits Interest" means the net profits overriding royalty
interest, and all appurtenant rights, titles and interests, conveyed by
Borrower to Lender under the Net Profits Interest Conveyance.
"Net Profits Interest Conveyance" means that certain Conveyance of Net
Profits Overriding Royalty Interest dated as of September 1, 1999, and
recorded in Cameron Parish Louisiana on September 3, 1999 under Entry No.
261732 in Conveyance Book 900.
"Schlumberger" means Schlumberger Technology Corporation, a Texas
corporation.
"Specified Payables" means the accounts payable owed by Borrower that
are listed on Schedule 1 hereto, in the amounts listed on such Schedule.
"Stingray Well" means the State Lease 16017 Well #1 located on the
Stingray Prospect.
"Three Party Agreement" means a Three Party Agreement to be entered
into by and among Borrower, Lender, and Schlumberger in a form acceptable
to Lender and Borrower.
ARTICLE II.
Amendments to Original Agreement; Waivers of Events of Default
(S) 2.1. Defined Terms.
(a) Effective as of September 2, 1999, the definition of "Base Rate"
in Section 1.1 of the Original Agreement is hereby amended in its entirety
to read as follows:
" "Base Rate" means the rate of ten percent (10.00%) per annum.
The Base Rate shall in no event, however, exceed the Highest Lawful
Rate."
(b) The definition of "Maturity Date" in Section 1.1 of the Original
Agreement is hereby amended in its entirety to read as follows:
" "Maturity Date" means June 30, 2000, or, if earlier, the day on
which the Note first becomes due and payable in full."
(c) The following definitions are hereby added to Section 1.1 of the
Original Agreement:
"Schlumberger Note" means a promissory note in the principal
amount of $1,118,424.00 to be made by Borrower to the order of
Schlumberger Technology Corporation in a form acceptable to Lender and
Borrower to evidence Liabilities
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<PAGE>
incurred by Borrower in connection with the provision of materials and
services by Schlumberger Technology Corporation.
"Three Party Agreement" means a Three Party Agreement to be
entered into by and among Borrower, Lender, and Schlumberger in a form
acceptable to Lender and Borrower.
(S) 2.2. Monthly Payments. Section 2.5 of the Original Agreement is
hereby amended in its entirety to read as follows:
"Section 2.5. Monthly Payments. Borrower will arrange for all
payments of the proceeds of Collateral to be paid directly to Lender.
Whenever Lender is obligated to forward a portion of such proceeds to
Schlumberger Technology Corporation under Section 3 of the Three Party
Agreement, Lender will apply all such proceeds as agreed to in Section
3 of the Three Party Agreement. Whenever such Section 3 ceases to be
applicable, Lender will apply all such payments of Collateral proceeds
that Lender receives (other than payments under the NPI Conveyance,
which are Lender's own property) first to interest on the Note and
other non-principal Obligations as determined by Lender and then to
principal owing under the Note."
(S) 2.3. Deletion of Section 2.6. Section 2.6 of the Original Agreement
and hereby deleted in their entirety and Section 2.6 of the Original Agreement
is hereby amended in its entirety to read as follows:
"Section 2.6. - [Reserved]"
(S) 2.4. Deletion of Article III. Sections 3.1, 3.2, 3.3, and 3.4 of the
Original Agreement and hereby deleted in their entirety and Article III of the
Original Agreement is hereby amended in its entirety to read as follows:
"ARTICLE III - [Reserved]"
(S) 2.5. Indebtedness. The following Subsection (h) is hereby added to
Section 7.1(h) of the Original Agreement:
"(h) Liabilities arising under the Schlumberger Note and other
items of Indebtedness (excluding Indebtedness for borrowed money) not
exceeding $500,000 in aggregate principal amount at any time
outstanding."
(S) 2.6. Limitation on Liens. The following Subsection (d) is hereby
added to Section 7.2 of the Original Agreement:
"(d) Liens encumbering the Redfish Prospect and the Stingray Prospect
securing the payment of Liabilities under the Schlumberger Note."
(S) 2.7. Waivers of Events of Default. Borrower has failed to complete
the September 1999 Issuance when required under the Original Agreement, and
Borrower has failed to pay the
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Subordinated Debt when required under the Original Agreement. Each of these
failures constitutes an Event of Default under the Original Agreement. Certain
Specified Payables have been outstanding for more than 90 days past the original
invoice or billing date therefor, and Lender contends that Borrower failed to
disclose to Lender the incurring of additional Indebtedness through the aging of
accounts payable beyond ninety (90) days subsequent to the closing of the
Original Agreement. Lender contends that each of these failures constitutes an
Event of Default under the Original Agreement. Borrower anticipates that
additional Specified Payables will hereafter remain outstanding for more than 90
days past the original invoice or billing date therefor, and Borrower's failure
to pay the same may constitute additional Events of Default under the Credit
Agreement. The foregoing Events of Default and alleged Events of Default are
herein called the "Designated Defaults". Lender hereby waives, effective upon
the effectiveness of this Amendment, the Designated Defaults and Lender's right
to seek any remedy against Borrower on account of the Designated Defaults,
including but not limited to, on account of Designated Defaults continuing after
the date hereof.
(S) 2.8. Bridge Note Defaults. Borrower has requested, but as of the date
hereof not received, the consent of certain of its creditors with respect to the
execution and delivery by Borrower of a mortgage in favor of Schlumberger. The
failure by Borrower to obtain such consents from such creditors will result in
Events of Default under Section 8.1(f) of the Original Agreement (such Events of
Default are herein referred to as the "Bridge Note Defaults"). Lender agrees
not to seek any remedy against Borrower on account of the Bridge Note Defaults
so long as no such creditor of Borrower seeks any remedy against Borrower on
account of the Bridge Note Defaults.
(S) 2.9. Certificates and Opinion to be Delivered. Concurrently with the
execution and delivery of the Three Party Agreement (or upon any earlier request
by Lender), Borrower will deliver to Lender all of the following documents, each
document (unless otherwise indicated) being dated the date of receipt thereof by
Lender, duly authorized, executed and delivered, and in form and substance
satisfactory to Lender:
(a) Opinion of Counsel for Borrower. A written opinion of Mayor, Day,
Caldwell, and Keeton, L.L.P., addressed to Lender, to the effect that the
Amendment Documents have been duly authorized, executed and delivered by
Borrower and that each of the Credit Agreement and the Amendment Documents
constitute the legal, valid and binding obligation of Borrower, enforceable
in accordance with its terms.
(b) Officer's Certificate. A certificate of a duly authorized officer
of Borrower to the effect that all of the representations and warranties
set forth in (S) 4.1 hereof are true and correct at and as of the time of
such effectiveness.
(c) Supporting Documents. (i) A certificate of the Secretary of
Borrower dated the date of this Amendment certifying that attached thereto
is a true and complete copy of resolutions adopted by the Board of
Directors of Borrower authorizing the execution, delivery and performance
of the Amendment Documents and (ii) such supporting documents as Lender may
reasonably request.
(d) Other Documents. Any instruments, agreements, documents, or
writings of any kind and character requested by Lender under (S) 4.6 of
this Amendment.
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ARTICLE III.
Conditions of Effectiveness
(S) 3.1. Effective Date. This Amendment shall become effective as of the
date first above written (except as provided in (S)2.1(a)) when and only when
(i) Lender shall have received, at Lender's office, a counterpart of this
Amendment executed and delivered by Borrower, and (ii) Borrower shall have paid
all interest on the Note due from September 2, 1999 through and including
December 31, 1999, and (iii) Borrower shall have paid all amounts due and owing
as of December 31, 1999 under the NPI Conveyance.
ARTICLE IV.
Representations and Warranties; Agreements; Waivers; Releases
(S) 4.1. Representations and Warranties of Borrower. In order to induce
Lender to enter into this Amendment, Borrower represents and warrants to Lender
that:
(a) Subject to the matters described in Schedule 4.1 attached hereto,
the representations and warranties contained in Article V of the Credit
Agreement are true and correct at and as of the time of the effectiveness
hereof. Borrower has paid all Specified Payables (other than the listed
payables owing to Marine Drilling and Schlumberger Technology Corporation).
(b) Borrower is duly authorized to execute and deliver the Amendment
Documents and the other Loan Documents and is and will continue to be duly
authorized to borrow and to perform its obligations under the Credit
Agreement. Borrower has duly taken all corporate action necessary to
authorize the execution and delivery of the Amendment Documents and the
other Loan Documents and to authorize the performance of the obligations of
Borrower thereunder.
(c) The execution and delivery by Borrower of the Amendment Documents
and the other Loan Documents, the performance by Borrower of its
obligations thereunder and the consummation of the transactions
contemplated thereby do not and will not conflict with any provision of
law, statute, rule or regulation or of the certificate of incorporation and
bylaws of Borrower, or (upon receipt of the consents contemplated in part
(c) of Schedule 4.1 attached hereto) of any material agreement, judgment,
license, order or permit applicable to or binding upon Borrower, or result
in the creation of any Lien, charge or encumbrance upon any assets or
properties of Borrower. Except for those which have been duly obtained or
as set forth in part (c) of Schedule 4.1 attached hereto, no consent,
approval, authorization or order of any court or governmental authority or
third party is required in connection with the execution and delivery by
Borrower of the Amendment Documents or the other Loan Documents or to
consummate the transactions contemplated thereby.
(d) When duly executed and delivered, each Amendment Document will be
a legal and binding instrument and agreement of Borrower, enforceable in
accordance with
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its terms. Each other Loan Document is and shall continue to be the legal,
valid and binding obligation of Borrower, enforceable against Borrower in
accordance with their respective terms.
(e) The unaudited quarterly Consolidated financial statements of
Borrower dated as of September 30, 1999 fairly present the Consolidated
financial position at such date and the Consolidated statement of
operations and the changes in Consolidated financial position for the
periods ending on such date for Borrower. Copies of such financial
statements have heretofore been delivered to Lender. Since September 30,
1999, no Material Adverse Change has occurred in the Consolidated financial
condition or businesses of Borrower.
(f) No Default or Event of Default has occurred or is continuing
(other than the Designated Defaults).
(g) Borrower has no defense, counterclaim or setoff with respect to
the Obligations or the Loan Documents (any such setoffs, defenses or
counterclaims being hereby waived and released by Borrower).
(S) 4.2. Waivers. Borrower hereby waives and affirmatively agrees not to
allege or otherwise pursue any or all defenses, affirmative defenses,
counterclaims, claims, causes of action, setoffs or other rights that it may
have to contest (a) the enforceability of any of the Obligations; (b) any
provision of the Loan Documents; (c) any Lien or security interest of Lender in
any Collateral or other property, whether movable or immovable, real or
personal, or tangible or intangible, or any right or other interest, now or
hereafter arising in connection with the Collateral; (d) the actions and
inactions of Lender prior to the date hereof in administering the Loan
Documents, or any other matter prior to the date hereof relating to the
financing arrangements between Borrower and Lender; or (e) the rights of Lender
to the Net Profits Interest.
(S) 4.3. Mutual Release. Each of Borrower and Lender HEREBY RELEASES,
REMISES, ACQUITS AND FOREVER DISCHARGES the other and the other's partners,
participants, predecessors, successors and assigns, subsidiary entities, parent
entities, and other affiliates, as well as all employees, agents,
representatives, consultants, attorneys, fiduciaries, partners, officers and
directors of any of the foregoing (all of the foregoing beneficiaries of such
release being hereinafter called the "Released Persons") from any and all
actions and causes of action, judgments, executions, suits, debts, claims,
demands, liabilities, obligations, damages and expenses of any and every
character, known or unknown, direct or indirect, at law or in equity, sounding
in contract or in tort, of whatsoever kind or nature, for or because of any
matter or things done, omitted or suffered to be done by any of the Released
Persons prior to the date of execution hereof and in any way directly or
indirectly arising out of or in any way connected to the Credit Agreement or any
attempt by Borrower to raise funds through the sale of equity or debt
securities, INCLUDING WITHOUT LIMITATION ANY CLAIM OR LIABILITY RELATED TO
FRAUD, INADEQUATE DISCLOSURE, NEGLIGENCE, USURY (INCLUDING WITHOUT LIMITATION
ANY DEFENSE BASED ON USURY), OR WRONGFUL INTERFERENCE WITH CONTRACTS, BUSINESS
OPPORTUNITIES OR RELATIONSHIPS (all of the foregoing hereinafter called the
"Released Matters"); PROVIDED THAT THE RELEASED MATTERS DO NOT INCLUDE OR APPLY
TO, AND THAT NO RELEASE IS GIVEN
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HEREBY WITH RESPECT TO, ANY PRINCIPAL, INTEREST, OTHER INDEBTEDNESS, INDEMNITY,
COVENANT, OR OTHER RIGHTS, OBLIGATIONS OR DUTIES OF BORROWER OR LENDER UNDER
THIS AMENDMENT, THE CREDIT AGREEMENT, THE NOTE OR ANY OTHER LOAN DOCUMENT. Each
of Borrower and Lender acknowledges and agrees that the provisions of this
Amendment constitute full and adequate consideration for the foregoing releases.
For the purposes of the foregoing release by Borrower, the affiliates of
Borrower shall be deemed to include, without limitation, EnCap Energy Advisors,
Inc., RP&C International, Inc., and EnCap Investments L.C.
(S) 4.4. Acknowledgments and Admissions. Borrower hereby represents,
warrants, acknowledges and admits that (a) it has made an independent decision
to enter into the Amendment Documents and the other Loan Documents without
reliance on any representation, warranty, covenant or undertaking by Lender,
whether written, oral or implicit, other than as expressly set out in the
Amendment Documents or in the other Loan Documents, (b) there are no
representations, warranties, covenants, undertakings or agreements by Lender as
to the Loan Documents except as expressly set out in the Amendment Documents or
in another Loan Document, (c) Lender has no fiduciary obligation toward
Borrower with respect to any Loan Document or the transactions contemplated
thereby, (d) the relationship pursuant to the Loan Documents between the
Restricted Persons, on one hand, and Lender, on the other hand, is and shall be
solely that of debtor and creditor, respectively, (e) no partnership or joint
venture exists with respect to the Amendment Documents, the Loan Documents, or
the Collateral between Borrower and Lender, (f) should a breach or other default
occur or exist under the Amendment Documents, any Loan Document, or any document
or instrument at any time delivered in connection therewith, Lender will
determine in its sole discretion and for its own reasons what remedies and
actions it will or will not exercise or take at that time, (g) without limiting
any of the foregoing, Borrower is not relying upon any representation or
covenant by Lender, or any representative of Lender, and no such representation
or covenant has been made, that Lender will, at the time of any such breach or
default, or at any other time, waive, negotiate, discuss, or take or refrain
from taking any action permitted under the Loan Documents with respect thereto,
and (h) Lender has relied upon the truthfulness of the acknowledgments in this
section in deciding to execute and deliver the Amendment Documents.
(S) 4.5. Recompletion of Stingray Well. Borrower anticipates that IP
shall propose the recompletion of the Stingray Well (such proposal is herein
called the "Recompletion Proposal") in the near future. Each of Borrower and
Lender hereby agrees that it will consider whether the Recompletion Proposal is
a prudent economic decision based solely upon the risks and rewards of the
Recompletion Proposal and not upon other factors. If the Three Party Agreement
has been entered into by all parties thereto, and if each of Borrower and Lender
determines that the Recompletion Proposal is a prudent economic decision, Lender
agrees to loan to Borrower an amount not to exceed $650,000 for the express
purpose of the payment by Borrower of Borrower's share of the costs of the
Recompletion Proposal and for no other purpose, such loan to be made pursuant to
an amendment to the Credit Agreement which shall be acceptable to Lender in
Lender's sole and absolute discretion.
(S) 4.6. Letter in Lieu. Borrower has previously executed and delivered
to Lender a letter in lieu of transfer order in the form attached hereto as
Exhibit A (the "Letter in Lieu"). Such Letter in Lieu has been delivered to IP
and IP has informed Borrower and Lender that IP shall begin making payments to
Lender as directed in such Letter in Lieu. Borrower hereby agrees to execute
and deliver to IP or Lender such instruments, agreements, documents, and
writings of
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any kind and character as may be from time to time requested by IP or Lender
(including without limitation duplicate originals of the Letter in Lieu) in
order to assist Lender in obtaining direct payment of any proceeds from the sale
of Collateral. Lender agrees to authorize IP to withhold from the proceeds from
the sale of production Borrower's share of lease operating expenses owed to IP,
as operator of the Stingray Prospect and the Redfish Prospect.
ARTICLE V.
Miscellaneous
(S) 5.1. Ratification of Agreements. The Original Agreement as hereby
amended is hereby ratified and confirmed in all respects. Any reference to the
Credit Agreement in any Loan Document shall be deemed to refer to this Amendment
also. The execution, delivery and effectiveness of the Amendment Documents
shall not, except as expressly provided therein, operate as a waiver of any
right, power or remedy of Lender under the Credit Agreement or any other Loan
Document nor constitute a waiver of any provision of the Credit Agreement or any
other Loan Document.
(S) 5.2. Survival of Agreements. All representations, warranties,
covenants and agreements of Borrower herein shall survive the execution and
delivery of this Amendment and the performance hereof, including without
limitation the making or granting of the Loan, and shall further survive until
all of the Obligations are paid in full. All statements and agreements
contained in any certificate or instrument delivered by any Restricted Person
hereunder or under the Credit Agreement to Lender shall be deemed to constitute
representations and warranties by, or agreements and covenants of, Borrower
under this Amendment and under the Credit Agreement.
(S) 5.3. Loan Documents. Each Amendment Document is a Loan Document, and
all provisions in the Credit Agreement pertaining to Loan Documents apply
thereto.
(S) 5.4. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and any applicable
laws of the United States of America in all respects, including construction,
validity and performance.
(S) 5.5. Counterparts. This Amendment may be separately executed in
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed shall be deemed to constitute one and the same
Amendment.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
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IN WITNESS WHEREOF, this Amendment is executed as of the date first above
written.
ENCAP ENERGY CAPITAL FUND III, L.P.
By: ENCAP INVESTMENTS, L.C., general partner
By:
---------------------------------
D. Martin Phillips
Managing Director
CHENIERE ENERGY, INC.
By:
-----------------------------------------
Walter L. Williams
Vice Chairman of the Board of Directors
CONSENT AND AGREEMENT
The undersigned hereby consents to the provisions of this Amendment and the
transactions contemplated herein, and hereby ratifies and confirms the Guaranty
dated as of September 1, 1999 made by it for the benefit of Lender, and agrees
that its obligations and covenants thereunder are unimpaired hereby and shall
remain in full force and effect.
CHENIERE ENERGY OPERATING CO., INC.
By:
Walter L. Williams
President
Exhibit A -- Letter in Lieu
Schedule 1 -- Specified Payables
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Exhibit 10.30
THREE PARTY AGREEMENT
This Three Party Agreement (this "Agreement") is made as of the 4th day of
January, 2000, by Cheniere Energy, Inc. ("Cheniere"), Schlumberger Technology
Corporation ("Schlumberger"), and EnCap Energy Capital Fund III, L.P. ("EnCap
Fund III").
RECITALS:
1. EnCap Fund III and Cheniere have entered into that certain Credit
Agreement dated as of September 1, 1999 (the "EnCap Credit Agreement"), pursuant
to which EnCap Fund III made loans to Cheniere and Cheniere mortgaged to EnCap
Fund III Cheniere's interests in Louisiana State Leases Nos. 16185, 16017, and
16186 in Cameron Parish, Louisiana (as more fully described on Schedule 1
hereto, the "Stingray Prospect") and Louisiana State Leases Nos. 16016, 16018,
16020 and 16022 in Cameron Parish, Louisiana (as more fully described on
Schedule 1 hereto, the "Redfish Prospect"), pursuant to that certain Mortgage,
Assignment, Security Agreement, Fixture Filing and Financing Statement recorded
in Cameron Parish, Louisiana on September 3, 1999 in Mortgage Book 245, File No.
261733, as amended by that certain First Amendment to Mortgage, Assignment,
Security Agreement, Fixture Filing and Financing Statement recorded in Cameron
Parish, Louisiana on September 9, 1999 in Mortgage Book 245, File No. 2618017 as
amended by that certain Second Supplement and Amendment to Mortgage, Assignment,
Security Agreement, Fixture Filing and Financing Statement recorded in Cameron
Parish, Louisiana on October 26, 1999 in Mortgage Book 246, File No. 262290.
Prior to giving such mortgage, Cheniere executed and delivered to EnCap Fund III
a Conveyance of Net Profits Overriding Royalty Interest dated as of September 1,
1999 (the "NPI Conveyance") which has been filed for record in Cameron Parish,
Louisiana on September 3, 1999 in Conveyance Book 900, File No. 261733.
2. Schlumberger has provided materials and services to Cheniere in
connection with the Stingray Prospect and has mechanic's and materialman's liens
on the Stingray Prospect (the "M&M Liens") that are superior to the liens under
EnCap Fund III's mortgage to secure unpaid bills owing by Cheniere to
Schlumberger. Prior to the execution hereof, Schlumberger does not have any
liens, security interests or privileges of any kind on the Redfish Prospect.
3. EnCap Fund III, Cheniere and Schlumberger desire to enter into this
Agreement to provide a procedure under which payments will be made to both EnCap
Fund III and Schlumberger.
In consideration of the mutual covenants herein, including, without
limitation Schlumberger's agreement with respect to foreclosure, as provided
below, and EnCap Fund III's agreement to allow certain proceeds from the Redfish
Prospect to be used to pay Schlumberger, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
EnCap Fund III, Cheniere and Schlumberger hereby agree as follows:
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AGREEMENTS:
Section 1. Payments; Collections.
(a) Cheniere has paid to Schlumberger the amount of $360,000 in immediately
available funds.
(b) Cheniere has arranged, and, until all amounts owed EnCap Fund III under
the EnCap Credit Agreement or other Loan Documents (as such term is defined in
the EnCap Credit Agreement) entered into pursuant thereto have been paid in
full, will continue to arrange, for all payments owing to Cheniere by the
purchasers of Cheniere's production from the Stingray Prospect and the Redfish
Prospect to be paid directly to EnCap Fund III. IP Petroleum Company, Inc.
("IP"), who is the operator of both prospects, presently distributes revenue
attributable to the sale of such production and may possibly from time to time
net out of such payments certain amounts owing to IP, as operator, by Cheniere,
as non-operator. As used herein, "Net Payments" refers to the net amounts
actually received by EnCap Fund III from IP or any other purchasers of
Cheniere's production from the Stingray Prospect and the Redfish Prospect, less
any billings from the operators of the Redfish Prospect or Stingray Prospect
that have not already been netted out (it being agreed that EnCap Fund III will
authorize IP to withhold, from the proceeds of the sale of such production,
Cheniere's share of lease operating expenses owed to IP as operator of the
Stingray Prospect and the Redfish Prospect.
Section 2. Reduced Schlumberger Claim; Promissory Note; Mortgage;
Subordination.
(a) Schlumberger claims and believes that the amount of indebtedness owing
to it by Cheniere for services and materials provided in connection with the
Stingray Prospect (the "Original Schlumberger Claim") is in excess of
$1,117,569.84, as determined after application of the $360,000 referred to in
Section 1(a) above. Schlumberger hereby reduces the Original Schlumberger Claim
(together with any other amounts owing by Cheniere to Schlumberger that are
possibly secured by any lien, security interest, or privilege of any kind
burdening either the Stingray Prospect or the Redfish Prospect) to $1,117,569.84
(which includes its legal fees and expenses to date), and Schlumberger hereby
waives any rights Schlumberger may have on the date hereof to receive more than
such reduced claim from Cheniere (except to the limited extent provided in (i)
the Debt Restructure Agreement by and between Cheniere and Schlumberger, (ii)
the Mortgage, Assignment, Security Agreement, Fixture Filing and Financing
Statement dated January 4, 2000 executed by Cheniere in favor of Schlumberger
(the "Schlumberger Mortgage"), and (iii) the Promissory Note dated January 4,
2000 executed by Cheniere in favor of Schlumberger. Schlumberger's reduced
claim in the amount of $1,117,569.84 plus (i) future legal fees and expenses
and (ii) Cheniere's obligation under the Debt Restructure Agreement, the
Schlumberger Note, and the Schlumberger Mortgage is herein collectively referred
to as the "Reduced Schlumberger Claim".
(b) Cheniere has executed and delivered to Schlumberger on the date hereof
the Debt Restructure Agreement ("Debt Restructure Agreement").
(c) In order to evidence the Reduced Schlumberger Claim, Cheniere executed
and delivered to Schlumberger on the date hereof a promissory note in the form
required by the Debt Restructure Agreement (the "Schlumberger Note").
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(d) In order to secure the payment and performance of the Schlumberger
Note, Cheniere executed and delivered to Schlumberger the Schlumberger Mortgage.
(e) EnCap Fund III hereby promises simultaneously with execution hereof to
execute and deliver to Schlumberger on the date hereof the Lien Subordination
Agreement attached hereto as Exhibit A.
Section 3. Application of Net Payments. Until the Schlumberger Note is
paid in full, either pursuant to this Agreement or otherwise, EnCap Fund III
will apply all Net Payments it receives during January 2000 and each calendar
month thereafter as follows:
(a) Within two business days after receipt of Net Payments, EnCap
Fund III will first apply such Net Payments to any payments (i) which are
then due under the Schlumberger Note, or (ii) shall become due on the first
business day of the following month (e.g., for January 2000, to any
payments due under the Schlumberger Note on or before February 1, 2000) by
paying over the same to Schlumberger;
(b) EnCap Fund III will thereafter apply the entirety of any
remaining Net Payments:
(i) with respect to the Net Proceeds received from production that
occurred in November 1999, December 1999, and January 2000, (A)
first to the amount of outstanding legal fees and costs owed by
Cheniere and (B) next to the unpaid principal balance under the
EnCap Credit Agreement or the promissory note issued in
connection therewith;
(ii) with respect to any other Net Proceeds (A) first to all amounts
then due and payable under the NPI Conveyance, (B) next to all
interest then due and payable under the EnCap Credit Agreement
and the related promissory note, and (C) next to the unpaid
principal balance under the EnCap Credit Agreement or the
promissory note issued in connection therewith.
Pending payment to Schlumberger under subsection (a) above, EnCap Fund III will
hold in trust for Schlumberger any Net Payments to be paid to Schlumberger.
EnCap Fund III will promptly send a written report to Cheniere and to
Schlumberger of the amounts paid and applied under subsections (a) and (b)
above, and within two business days after receipt of such report Cheniere will
(1) make additional payments to Schlumberger as required under the Schlumberger
Note if the amount applied by EnCap Fund III under subsection (a) above is less
than the amount then due and payable under the Schlumberger Note, and (2) prior
to EnCap Fund III's receipt of Net Proceeds from production that occurred in
January 2000, make additional payments to EnCap Fund III of all interest then
due and payable under the EnCap Credit Agreement and the related promissory note
and of all amounts then due and payable under the NPI Conveyance. If Net
Payments are not timely received from IP and, as a result, Cheniere directly
pays to Schlumberger amounts due under the Schlumberger Note, then when such Net
Payments are received from IP, EnCap Fund III shall (upon authorization by
Schlumberger, which Schlumberger hereby agrees to give promptly after receipt of
such payment by Cheniere)
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disburse to Cheniere from such Net Payments the amount of the direct payments
made by Cheniere to Schlumberger.
Section 4. Limitations on Foreclosure by Schlumberger; Option to Purchase
Schlumberger Note and Schlumberger Mortgage by EnCap Fund III.
(a) Schlumberger hereby agrees to give written notice to EnCap Fund III and
Cheniere of the occurrence of any Schlumberger Note Default. (As used herein,
"Schlumberger Note Default" means the occurrence of any event defined as a
"default" or "event of default" in the Schlumberger Note, the Debt Restructure
Agreement, or the Schlumberger Mortgage which default or event of default is not
remedied within any applicable period of grace provided therefor therein.).
Each of Schlumberger and Cheniere promises to copy EnCap Fund III on any other
written notice or communication that it sends pursuant to the Debt Restructure
Agreement.
(b) Schlumberger will not take any action to enforce the Schlumberger
Mortgage or any other liens, security interests, privileges, or similar rights
that it may have with respect to any properties, assets, revenues, or proceeds
of Cheniere until the end of the fifteenth (15th) day following the delivery by
Schlumberger of written notice to EnCap Fund III and Cheniere of the occurrence
of a Schlumberger Note Default. (The period from the date hereof to the end of
such fifteenth day is herein referred to as the "Standstill Period".)
(c) Schlumberger hereby grants to EnCap the option to purchase the
Schlumberger Note (together with the Schlumberger Mortgage and any other related
agreements or documents) at any time during the Standstill Period, for a
purchase price equal to the amounts then owing and unpaid to Schlumberger
thereunder (including legal fees and expenses incurred by Schlumberger). This
option terminates upon expiration of the Standstill Period.
Section 5. No Enforcement Against Co-Owners. Schlumberger hereby
releases, and agrees not to perfect or enforce, any liens, security interests,
privileges, or similar rights that it may have with respect to the interests of
any person or entity other than Cheniere in the Stingray Prospect or the Redfish
Prospect, including without limitation the interests of EnCap Fund III under the
NPI Conveyance and the interests of Cheniere's joint interest owners in the
Stingray Prospect. Schlumberger expressly reserves any liens, security
interests, privileges, or similar rights that it has with respect to the
interests of Cheniere, subject to the terms hereof.
Section 6. Cheniere to Remain Liable. Notwithstanding anything to the
contrary contained herein, Cheniere shall remain liable to EnCap Fund III under
the EnCap Credit Agreement and the Loan Documents (as such term is defined in
the EnCap Credit Agreement) and shall remain liable to Schlumberger on the
Reduced Schlumberger Claim and under the Schlumberger Note.
Section 7. Notices. All notices, requests, demands and other
communications required or permitted under this Three Party Agreement or by law
shall be in writing and shall be deemed to have been duly given, made and
received only when sent by facsimile transmission (receipt confirmed) or
reputable overnight delivery service (receipt confirmed), when delivered against
receipt, or when deposited in the United States mails, certified mail, return
receipt requested, postage prepaid, addressed as set forth below, and actually
presented at the address of the noticed party:
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(a) if to Schlumberger:
Schlumberger Technology Corporation
1325 South Dairy Ashford, Suite 300
Houston, Texas 77077
Attention: Pre Moss
Fax: (281) 749-8381
(b) if to EnCap Fund III:
EnCap Energy Capital Fund III, L.P.
1100 Louisiana
Houston, Texas 77002
Attention: John Howie
Fax: (713) 659 6130
(c) if to Cheniere:
Cheniere Energy, Inc.
Two Allen Center, Suite 1740
1200 Smith Street
Houston, Texas 77002
Attention: Charif Souki
Fax: (713) 659-6130
Any addressee may alter the address to which communications are to be
sent by giving notice of such change of address in conformity with the
provisions of this section for the giving of notice.
5
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed and delivered by EnCap Fund
III, Cheniere and Schlumberger as of date first written above.
WITNESSES CHENIERE ENERGY, INC.
By:
----------------------------------
Name: Walter L. Williams, Vice Chairman
of the Board of Directors
Name:
Notary Public
ENCAP ENERGY CAPITAL FUND III, L.P.
By: EnCap Investments L.C., General Partner
Name:
By:
---------------------------------------
D. Martin Phillips, Managing Director
Name:
Notary Public
SCHLUMBERGER TECHNOLOGY CORPORATION
Name: By:
---------------------------------
Name:
Title:
Name:
Notary Public
6
<PAGE>
ACKNOWLEDGMENT
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
On this date before me, the undersigned authority, personally came and
appeared Walter L. Williams, to me personally known and known by me to be the
person whose genuine signature is affixed to the foregoing document as the Vice
Chairman of the Board of Directors of Cheniere Energy, Inc., a Delaware
corporation, who signed said document before me in the presence of the two
witnesses, whose names are thereto subscribed as such, being competent
witnesses, and who acknowledged, in my presence and in the presence of said
witnesses, that he signed the above and foregoing document as his own free act
and deed on behalf of such corporation by authority of its board of directors
and as the free act and deed of such corporation and for the uses and purposes
therein set forth and apparent.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal in the
City of Houston, Harris County, Texas, on the day and year first above written.
______________________________________
NOTARY PUBLIC, State of Texas
______________________________________
(printed name)
My commission expires:
[SEAL]
7
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
On this date before me, the undersigned authority, personally came and
appeared D. Martin Phillips, to me personally known and known by me to be the
person whose genuine signature is affixed to the foregoing document as the
Managing Director of EnCap Investments L.C., General Partner of EnCap Energy
Capital Fund III, L.P., a Texas limited partnership, who signed said document
before me in the presence of the two witnesses, whose names are thereto
subscribed as such, being competent witnesses, and who acknowledged, in my
presence and in the presence of said witnesses, that he signed the above and
foregoing document as his own free act and deed on behalf of such general
partner acting on behalf of said limited partnership by proper authority and as
the free act and deed of such general partner acting of behalf of said limited
partnership and for the uses and purposes therein set forth and apparent.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal in the
City of Houston, Harris County, Texas, on the day and year first above written.
______________________________________
NOTARY PUBLIC, State of Texas
______________________________________
(printed name)
My commission expires:
[SEAL]
8
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
On this date before me, the undersigned authority, personally came and
appeared ____________, to me personally known and known by me to be the person
whose genuine signature is affixed to the foregoing document as the
________________________of Schlumberger Technology Corporation, a Texas
corporation, who signed said document before me in the presence of the two
witnesses, whose names are thereto subscribed as such, being competent
witnesses, and who acknowledged, in my presence and in the presence of said
witnesses, that he signed the above and foregoing document as his own free act
and deed on behalf of such corporation by authority of its board of directors
and as the free act and deed of such corporation and for the uses and purposes
therein set forth and apparent.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal in the
City of Houston, Harris County, Texas, on the day and year first above written.
______________________________________
NOTARY PUBLIC, State of Texas
______________________________________
(printed name)
My commission expires:
[SEAL]
9
<PAGE>
SCHEDULE 1
*[Property Descriptions from EnCap Mortgage to be attached]
Redfish Prospect
Stingray Prospect
Exhibit A
Lien Subordination Agreement
10
<PAGE>
Exhibit 10.31
LIEN SUBORDINATION AGREEMENT
THIS LIEN SUBORDINATION AGREEMENT is entered into this 4th day of January,
2000, by and among EnCap Energy Capital Fund III, L.P. ("Subordinated
Creditor"), Schlumberger Technology Corporation ("Senior Creditor"), and
Cheniere Energy, Inc. ("Debtor").
WHEREAS, each of Senior Creditor and Subordinated Creditor has heretofore
extended credit to Debtor; and
WHEREAS, in order to secure the payment and performance of its obligations
to Senior Creditor under that certain promissory note made by Debtor in the
principal amount of $1,117,569.84 to the order to Senior Creditor of even date
herewith (the "Senior Note"), Debtor has granted liens and security interests
encumbering certain of its real and personal property (the "Collateral") to
Senior Creditor pursuant to that certain (i) Mortgage, Assignment, Security
Agreement, Fixture Filing and Financing Statement ("Mortgage") by Debtor of even
date herewith in favor of Senior Creditor (the liens and security interests
created by such Mortgage are herein referred to as the "Senior Liens"), and (ii)
Debt Restructure Agreement between Senior Creditor and Debtor of even date
herewith; and
WHEREAS, in order to secure the payment and performance of its obligations
to Subordinated Creditor, Debtor has granted liens and security interests
encumbering the Collateral to Subordinated Creditor pursuant to that certain
Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement
recorded in Cameron Parish, Louisiana on September 3, 1999 in Mortgage Book 245,
File No. 261733, as amended by that certain First Amendment to Mortgage,
Assignment, Security Agreement, Fixture Filing and Financing Statement recorded
in Cameron Parish, Louisiana on September 9, 1999 in Mortgage Book 245, File No.
2618017, and as amended by that certain Second Supplement and Amendment to
Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement
recorded in Cameron Parish, Louisiana on October 26, 1999 in Mortgage Book 246,
File No. 262290 (such Mortgage, Assignment, Security Agreement, Fixture Filing
and Financing Statement, as from time to time amended, is herein referred to as
the "Subordinated Mortgage" and the liens and security interests created by
Subordinated Mortgage are herein referred to as the "Subordinated Liens"); and
WHEREAS, Senior Creditor has asked Subordinated Creditor to, and
Subordinated Creditor has agreed to, subordinate the Subordinated Liens to the
Senior Liens;
NOW THEREFORE, Senior Creditor, Subordinated Creditor, and Debtor hereby
agree as follows:
1
<PAGE>
1. Subordinated Creditor hereby subordinates the Subordinated Liens to the
Senior Liens to the same extent as if the Senior Liens had been properly
recorded, filed, and otherwise perfected prior to the Subordinated Liens
regardless of the relative priority of the Subordinated Liens without
regard to this Lien Subordination Agreement.
2. Each party hereto agrees that the subordination contained herein shall
become null and void upon the date on which all obligations owing by Debtor
to Senior Creditor under the Senior Note have been satisfied in full.
3. Upon any sale, transfer or other disposition of any Collateral by either
Senior Creditor or Subordinated Creditor in exercise of their respective
rights as a lienholder, secured party or mortgagee, Subordinated Creditor
shall have no right to any proceeds of such sale, transfer or other
disposition until all obligations owing by Debtor to Senior Creditor under
the Senior Note have been satisfied in full.
4. If Subordinated Creditor receives any payment or distribution of any kind
(whether in cash, securities or other property) in contravention of either
(i) this Lien Subordination Agreement, or (ii) the Three Party Agreement by
and between Debtor, Senior Creditor and Subordinated Creditor of even date
herewith, it shall hold such payment or distribution in trust for Senior
Creditor, shall segregate the same from other cash or assets it holds and
shall immediately deliver the same to Senior Creditor in the form received
by Subordinated Creditor (together with any necessary endorsement).
5. If any term or provision of this Lien Subordination Agreement shall be
determined to be illegal or unenforceable all other terms and provisions
shall nevertheless remain effective and shall be enforced to the fullest
extent permitted by applicable law.
6. This Lien Subordination Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Louisiana. This Lien
Subordination Agreement may be separately executed in counterparts, each of
which shall be deemed to constitute one and the same agreement. Facsimiles
of executed documents shall be deemed original documents.
7. Debtor hereby consents to the terms of this Lien Subordination Agreement.
2
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed and delivered by the parties
hereto as of date first written above.
WITNESSES CHENIERE ENERGY, INC.
By:
---------------------------------
Name: Walter L. Williams, Vice Chairman
of the Board of Directors
Name:
Notary Public
ENCAP ENERGY CAPITAL FUND III, L.P.
By: EnCap Investments L.C., General Partner
Name:
By:
--------------------------------------
D. Martin Phillips, Managing Director
Name:
Notary Public
SCHLUMBERGER TECHNOLOGY CORPORATION
Name: By:
------------------------------
Name:
Title:
Name:
Notary Public
3
<PAGE>
ACKNOWLEDGMENT
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
On this date before me, the undersigned authority, personally came and
appeared Walter L. Williams, to me personally known and known by me to be the
person whose genuine signature is affixed to the foregoing document as the Vice
Chairman of the Board of Directors of Cheniere Energy, Inc., a Delaware
corporation, who signed said document before me in the presence of the two
witnesses, whose names are thereto subscribed as such, being competent
witnesses, and who acknowledged, in my presence and in the presence of said
witnesses, that he signed the above and foregoing document as his own free act
and deed on behalf of such corporation by authority of its board of directors
and as the free act and deed of such corporation and for the uses and purposes
therein set forth and apparent.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal in the
City of Houston, Harris County, Texas, on the day and year first above written.
______________________________________
NOTARY PUBLIC, State of Texas
______________________________________
(printed name)
My commission expires:
[SEAL]
4
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
On this date before me, the undersigned authority, personally came and
appeared D. Martin Phillips, to me personally known and known by me to be the
person whose genuine signature is affixed to the foregoing document as the
Managing Director of EnCap Investments L.C., General Partner of EnCap Energy
Capital Fund III, L.P., a Texas limited partnership, who signed said document
before me in the presence of the two witnesses, whose names are thereto
subscribed as such, being competent witnesses, and who acknowledged, in my
presence and in the presence of said witnesses, that he signed the above and
foregoing document as his own free act and deed on behalf of such general
partner acting on behalf of said limited partnership by proper authority and as
the free act and deed of such general partner acting of behalf of said limited
partnership and for the uses and purposes therein set forth and apparent.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal in the
City of Houston, Harris County, Texas, on the day and year first above written.
______________________________________
NOTARY PUBLIC, State of Texas
______________________________________
(printed name)
My commission expires:
[SEAL]
5
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
On this date before me, the undersigned authority, personally came and
appeared ___________________________________________, to me personally known and
known by me to be the person whose genuine signature is affixed to the foregoing
document as the __________________________________________of Schlumberger
Technology Corporation, a Texas corporation, who signed said document before me
in the presence of the two witnesses, whose names are thereto subscribed as
such, being competent witnesses, and who acknowledged, in my presence and in the
presence of said witnesses, that he signed the above and foregoing document as
his own free act and deed on behalf of such corporation by authority of its
board of directors and as the free act and deed of such corporation and for the
uses and purposes therein set forth and apparent.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal in the
City of Houston, Harris County, Texas, on the day and year first above written.
______________________________________
NOTARY PUBLIC, State of Texas
______________________________________
(printed name)
My commission expires:
[SEAL]
6
<PAGE>
Exhibit 10.32
DEBT RESTRUCTURE AGREEMENT
The parties to this Debt Restructure Agreement are Cheniere Energy, Inc.
("Cheniere") and Anadrill, Schlumberger Well Services and Dowell, divisions of
Schlumberger Technology Corporation (collectively hereinafter referred to as
"Schlumberger").
R E C I T A L S
WHEREAS, Cheniere entered into the Subject Contracts (defined below) with
Schlumberger pursuant to which Schlumberger provided certain services, materials
and equipment in connection with operations performed on State Lease #16017 in
Cameron Parish, Louisiana;
WHEREAS, Schlumberger has previously issued to Cheniere the Subject
Invoices (defined below);
WHEREAS, Cheniere has not been able to pay the Subject Invoices in
accordance with their terms and the terms of the Subject Contracts;
WHEREAS, Schlumberger has filed the Subject M&M Liens (defined below) to
secure payment of the Subject Invoices;
WHEREAS, certain of the Subject Contracts provide for a discount on the
dollar amount charged for the services, materials and equipment provided by
Schlumberger which is only earned if the applicable Subject Invoices are timely
paid;
WHEREAS, Cheniere has not earned the price discounts that were conditioned
on timely payment;
WHEREAS, the Subject Invoices include price discounts which Cheniere is not
entitled to pursuant to the terms of the Subject Contracts;
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements contained in this Agreement, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Cheniere and Schlumberger agree as follows:
1
<PAGE>
ARTICLE I
DEFINITIONS
The following terms, as used in this Agreement, shall have the meanings
indicated below, unless the context otherwise requires:
1.01 "AGREEMENT" means this Debt Restructure Agreement.
1.02 "CHENIERE" means Cheniere Energy, Inc.
1.03 "CLOSING" shall mean the occurrence of all of the actions described
in Article IV.
1.04 "DECEMBER PAYMENT" means a payment by Cheniere to Schlumberger in the
amount of Three Hundred Sixty Thousand Dollars ($360,000) to be made on or
before December 30, 1999 and to be applied in the manner specified in Article
III.
1.05 "ENCAP" means Encap Energy Capital Fund III, L.P.
1.06 "EVENT OF DEFAULT" shall mean the occurrence of any of the events set
forth in Section 10.01.
1.07 "MORTGAGE" means the Mortgage, Assignment, Security Agreement, Fixture
Filing and Financing Statement substantially in the form attached hereto as
Exhibit A.
1.08 "NOTE" means a Promissory Note in the original principal amount of One
Million One Hundred Seventeen Thousand Five Hundred Sixty-Nine and 84/100
Dollars ($1,117,569.84), dated January 4, 2000, executed by Cheniere in favor of
Schlumberger substantially in the form attached hereto as Exhibit B.
1.09 "SCHLUMBERGER" means Schlumberger Technology Corporation, including
its Dowell, Schlumberger Well Services and Anadrill divisions.
1.10 "SCHLUMBERGER ORIGINAL CLAIM" means the indebtedness of Cheniere under
the Subject Contracts after charging back any price discounts which were
initially issued by Schlumberger but Cheniere failed to earn due to failure to
timely pay the Subject Invoices, plus interest and legal fees.
1.11 "SUBJECT CONTRACTS" means the Service Order Receipts and Contracts
entered into by Schlumberger and Cheniere in connection with the provision of
services, equipment and materials for operations on the State Lease #16017.
1.12 "SUBJECT INVOICES" means the invoices identified in Exhibit C.
1.13 "SUBJECT M&M LIENS" means the following mechanic's and materialman's
liens which were filed in Cameron Parish as to the State Lease #16017:
Filing
Claimant Amount Date of Filing Information
-------- ------ -------------- ------------
Dowell $751,585.09 12/20/99 File #262981
Schlumberger Well Services $537,380.59 12/20/99 File #262982
Anadrill $172,459.12 12/20/99 File #262980
2
<PAGE>
1.14 "SUBORDINATION AGREEMENT" means an agreement between Cheniere,
Schlumberger and Encap substantially in the form of Exhibit D.
1.15 "THREE PARTY AGREEMENT" means an agreement between Cheniere,
Schlumberger and Encap substantially in the form of Exhibit E.
ARTICLE II
ACKNOWLEDGMENTS
2.01 DEBT. Prior to crediting the December Payment, and after allowance
for all claims and offsets, Cheniere was indebted to Schlumberger for services,
materials and equipment furnished pursuant to the Subject Contracts in the
amount of One Million Four Hundred Sixty Thousand Five Hundred Sixty-Nine and
84/100 Dollars ($1,460,569.84), plus (i) the unearned discounts, (ii) interest,
and (iii) legal fees and expenses.
2.02 SCHLUMBERGER'S PERFORMANCE. Schlumberger fully satisfied all of its
obligations under the Subject Contracts, including, but not limited to, all
representations and warranties whether express or otherwise.
2.03 SUBJECT M&M LIENS. The Subject M&M Liens are valid, properly
perfected and encumber Cheniere's interest in the property described therein.
ARTICLE III
DECEMBER PAYMENT
The sum of Three Hundred Sixty Thousand Dollars ($360,000) has been paid by
Cheniere to Schlumberger on or before December 30, 1999. The December Payment
shall be applied first against all legal fees and expenses incurred by
Schlumberger as a result of Cheniere's breach of the Subject Contracts,
including those incurred in connection with (i) the preparation of the Subject
M&M Liens, and (ii) negotiation and drafting of this Agreement and the various
documents provided for herein.
ARTICLE IV
CLOSING
4.01 CLOSING. The Closing shall be held on or before January 4, 2000,
provided that all conditions to Closing have been satisfied or waived. The
Closing shall be held at the offices of Ware, Snow, Fogel, Jackson & Greene,
L.L.P., whose address is 1111 Bagby, 49th Floor, Houston, Texas 77002.
3
<PAGE>
4.02 DELIVERY BY CHENIERE TO SCHLUMBERGER AT CLOSING. Cheniere shall
deliver or cause to be delivered to Schlumberger duly executed originals of the
following:
a. the Note;
b. the Mortgage;
c. financing statements;
d. the Three Party Agreement; and
e. the Subordination Agreement.
4.03 DELIVERY BY ENCAP AT CLOSING. Encap shall deliver or cause to be
delivered to Schlumberger and Cheniere duly executed originals of the following:
a. the Three Party Agreement; and
b. the Subordination Agreement.
4.04 DELIVERY BY SCHLUMBERGER AT CLOSING. Schlumberger shall deliver or
cause to be delivered to Encap and Cheniere duly executed originals of the
following:
a. the Three Party Agreement; and
b. the Subordination Agreement.
ARTICLE V
CONDITIONS
5.01 CONDITIONS TO OBLIGATIONS OF CHENIERE. The obligations of Cheniere
hereunder are subject to the satisfaction, unless waived in writing by Cheniere,
at its option and in its sole discretion, on or before the Closing of the
conditions set forth below:
a. Performance of Covenants and Agreements. Schlumberger shall have
performed and complied with all covenants, agreements and obligations
contained in this Agreement required to be performed or complied with by it
prior to or at the Closing.
b. Delivery by Encap. Encap shall have delivered to Schlumberger and
Cheniere duly executed originals of the Three Party Agreement and the
Subordination Agreement.
5.02 CONDITIONS TO OBLIGATIONS OF SCHLUMBERGER. The obligations of
Schlumberger hereunder are subject to the satisfaction, unless waived in writing
by Schlumberger, at its option and in its sole discretion, on or before the
Closing of the conditions set forth below:
4
<PAGE>
a. Representations and Warranties of Cheniere to be True and Correct.
The representations and warranties of Cheniere contained in this Agreement
shall be true and correct in all material respects on and as of the
Closing, with the same effect as though such representations and warranties
had been made on and as of each such date.
b. Performance of Covenants and Agreements. Cheniere shall have
performed and complied with all covenants, agreements and obligations
contained in this Agreement required to be performed or complied with by it
prior to or at the Closing.
c. Consents and Litigation. Cheniere shall have obtained all
required third party consents to the transactions contemplated by this
Agreement and all statutory requirements for valid consummation of the
transactions contemplated by this Agreement shall have been fulfilled and
all necessary governmental consents, approvals or authorizations shall have
been obtained. There shall not then exist any filed or threatened suit,
action or other proceeding (including any investigation of any governmental
agency) to restrain or invalidate the transactions contemplated by this
Agreement and no order, writ, injunction, or decree shall have been entered
or be in effect that restrains, enjoins or limits the transactions
contemplated by this Agreement.
d. Delivery by Encap. Encap shall have delivered to Schlumberger and
Cheniere duly executed originals of the Three Party Agreement and the
Subordination Agreement.
e. Supporting Documents. Schlumberger and its counsel shall have
received prior to or at the Closing reasonably satisfactory evidence that
Cheniere has full power and authority, and has taken all corporate actions
necessary to execute and deliver this Agreement and consummate the
transactions contemplated hereby and perform all of its obligations
hereunder.
ARTICLE VI
RELEASES
6.01 RELEASE BY CHENIERE. Cheniere acknowledges, confesses and agrees
that, to the extent that any facts, events or conditions which, either now or
with the passage of time or the giving of notice, or both, constitute or will
constitute a basis for any claims, actions, demands, or causes of action of
whatever kind or character, whether joint or several, whether known or unknown,
which may have arisen or accrued prior to the date of execution of this
Agreement, including, but not limited to, any claim, demand, cause of action or
liability for any and all injuries, harm, damages, penalties, costs, losses,
expenses, attorneys' fees, and/or liabilities whatsoever (including any defense,
counterclaim or right of setoff to the payment or performance of any obligations
or indebtedness of Cheniere), whenever incurred or suffered by it, including,
without limitation, any claim, demand, action, damage, liability, loss, cost,
expense, and/or detriment, of any kind or character, growing out of or in any
way connected with or in any way resulting from any breach of any duty of fair
dealing, care, or any other duty, undue influence, duress, economic coercion,
negligence, willful misconduct, bad faith, intentional or negligent infliction
of distress or harm, tortious interference with contractual relations, tortious
interference with corporate governance or prospective business advantage, breach
of contract,
5
<PAGE>
failure to perform any obligation under any of the Subject Contracts, deceptive
trade practices, libel, slander, conspiracy, interference with business, usury,
strict liability, lender liability, breach of warranty or representation, fraud,
or any other claim or cause of action (herein being collectively referred to as
"Claims"), it hereby, for itself, its subsidiaries, its representatives, agents,
officers, directors, employees, shareholders, successors, heirs and assigns
(collectively called the "Releasing Parties"), knowingly and willfully, fully,
finally and completely release, discharge, waive and acquit Schlumberger and its
respective representatives, agents, officers, directors, employees,
shareholders, and successors and assigns (collectively called the "Released
Parties") from the Claims. The Releasing Parties further covenant and agree
that, to the extent they, jointly and severally, are aware of any specific or
general claim, cause of action or liability, facts, events, or conditions which,
either now or with the passage of time or the giving of notice, or both,
constitute or will constitute a basis for any claim, action, demand, or cause of
action of whatever kind or character, that they possess, jointly or severally,
against any or all of the Released Parties, such specific or general claim,
cause of action or liability, fact, event, or condition is or are specifically
delineated above, constitutes a claim or claims as defined in this paragraph,
and are fully subject to and included within the release contained herein. It is
the intent of all parties hereto that upon Closing all Claims shall be released
and extinguished. IT IS EXPRESSLY AGREED THAT THE CLAIMS RELEASED HEREBY INCLUDE
THOSE ARISING FROM OR IN ANY MANNER ATTRIBUTABLE TO THE NEGLIGENCE (SOLE,
CONCURRENT, ORDINARY OR OTHERWISE), WILLFUL MISCONDUCT, OR OTHER CONDUCT OF ANY
OF THE RELEASED PARTIES. Notwithstanding any provision of this Agreement this
section shall remain in full force and effect and shall survive the delivery and
payment of the Note, and the making, extension, renewal, modification, amendment
or restatement of any thereof.
6.02 RELEASE BY SCHLUMBERGER. Effective as of the Closing, Schlumberger
agrees to waive and release its right to charge back the unearned price
discounts which were included within the Schlumberger Original Claim. This
release does not in any way impair or affect any other claim or right of
Schlumberger.
ARTICLE VII
REPRESENTATIONS OF CHENIERE
Cheniere agrees and represents and warrants to Schlumberger as follows:
7.01 ORGANIZATION. Cheniere is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
7.02 AUTHORITY AND CONFLICTS. Cheniere has full corporate power and
authority to carry on its business as presently conducted, to enter into this
Agreement and to perform its obligations under this Agreement. The execution and
delivery of this Agreement by Cheniere does not, and the consummation of the
transactions contemplated by this Agreement shall not, (i) violate or be in
conflict with, or require the consent of any person or entity under, any
provisions of Cheniere's Articles of Incorporation or other governing documents,
(ii) except as set forth on Schedule 7.02, conflict with, result in a breach of,
constitute a default (or an event that with the lapse of time or notice, or
both, would constitute a default) under, or require any consent, authorization
or approval under any agreement or instrument to which Cheniere is a party or is
bound, or (iii) violate any provision of or require any consent, authorization
or approval under
6
<PAGE>
any judgment, decree, judicial or administrative order, award, writ, injunction,
statute, rule or regulation applicable to Cheniere.
7.03 AUTHORIZATION. The execution and delivery of this Agreement have been
and the performance of this Agreement and the transactions contemplated hereby
shall be at the time required to be performed hereunder, duly and validly
authorized by all requisite corporate action on the part of Cheniere.
7.04 ENFORCEABILITY. This Agreement has been duly executed and delivered on
behalf of Cheniere, and constitutes a legal, valid and binding obligation of
Cheniere enforceable in accordance with its terms, subject to applicable
bankruptcy laws, insolvency, moratorium and reorganization laws generally
affecting the enforcement of creditors' rights.
ARTICLE VIII
REPRESENTATIONS OF SCHLUMBERGER
Schlumberger agrees and represents and warrants to Cheniere as follows:
8.01 AUTHORIZATION. The execution and delivery of this Agreement have been
and the performance of this Agreement and the transactions contemplated hereby
shall be at the time required to be performed hereunder, duly and validly
authorized by all requisite corporate action on the part of Schlumberger.
8.02 ENFORCEABILITY. This Agreement has been duly executed and delivered
on behalf of Schlumberger, and constitutes a legal, valid and binding obligation
of Schlumberger enforceable in accordance with its terms, subject to applicable
bankruptcy laws, insolvency, moratorium and reorganization laws generally
affecting the enforcement of creditors' rights.
ARTICLE IX
MORATORIUM
Prior to the occurrence of an Event of Default, Schlumberger shall not (i)
take any action to foreclose the Subject M&M Liens, (ii) amend the Subject M&M
Liens to name working interest owners in addition to Cheniere, or (iii) file any
suit or action against Cheniere to collect the indebtedness.
ARTICLE X
DEFAULT
10.01 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an Event of Default by Cheniere hereunder:
(a) Any payment provided for under the Note is not paid when due,
whether by lapse of time or acceleration or otherwise unless the default is
fully cured within five (5) calendar days after Schlumberger has given
Cheniere written notice thereof, provided
7
<PAGE>
that Schlumberger shall not be required to provide such notice more than
once during the term of the Note.
(b) Cheniere fails to perform, observe or comply with--or defaults
under--any of the terms, covenants, conditions or provisions contained in
the Note, the Mortgage, the Debt Restructure Agreement or the Three Party
Agreement (other than any such failure or default described in one of the
other subparagraphs of this paragraph) unless the failure or default is
fully cured within the lesser of (i) thirty (30) calendar days after
Schlumberger has given Cheniere written notice thereof, and (ii) the cure
period specified in the applicable agreement;
(c) Cheniere defaults under any of the terms, covenants, conditions or
provisions contained in any agreement with Encap including any note,
mortgage or credit agreement, unless the failure or default is fully cured
within the period permitted in the applicable agreement;
(d) Encap terminates or defaults on any term or condition of the Three
Party Agreement or the Subordination Agreement;
(e) Cheniere (i) voluntarily suspends transactions of business; (ii)
becomes insolvent or unable to pay its debts as they mature; (iii)
commences a voluntary case in bankruptcy or a voluntary petition seeking
reorganization or to effect a plan or other arrangement with creditors;
makes an assignment for the benefit of creditors; (v) applies for or
consents to the appointment of any receiver or trustee for any such part or
for any substantial portion of its property, or (vi) makes an assignment to
an agent authorized to liquidate any substantial part of its assets;
(f) In respect of Cheniere (i) an involuntary case shall be commenced
with any court or other authority seeking liquidation, reorganization or a
creditor's arrangement of any such party, (ii) an order of any court or
other authority shall be entered appointing any receiver or trustee for
Cheniere or for any substantial portion of its property, or (iii) a writ or
warrant of attachment or any similar process shall be issued by any court
or other authority against any material portion of the property of Cheniere
and such petition seeking liquidation, reorganization or a creditors'
arrangement or such order appointing a receiver or trustee is not vacated
or stayed, or such writ, warrant of attachment or similar process is not
vacated, released or bonded off within ninety (90) days after its entry or
levy;
(g) the dissolution, liquidation or termination of Cheniere;
(h) Cheniere shall have concealed, removed, or permitted to be
concealed or removed, any part of its property, with intent to hinder,
delay or defraud any of its creditors, or make or suffered a transfer of
any of its property which may be fraudulent under any bankruptcy,
fraudulent conveyance or similar law, or shall have made any transfer of
its property to or for the benefit of a creditor at a time when other
creditors similarly situated have not been paid, or, while insolvent, shall
have suffered or permitted any creditor to obtain a lien upon any of its
property through legal proceedings or distraint which is not vacated within
sixty (60) days from its date; or
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(i) Any representation or warranty by Cheniere contained (i) in this
Agreement, (ii) the Mortgage, (iii) the Three Party Agreement, (iv) the
Subordination Agreement, or (v) the Note shall prove to have been false or
incorrect in any material respect on any date on or as of which made.
10.02 REMEDIES. If any Event of Default shall occur, Schlumberger may
protect and enforce its rights under the Note, Mortgage, Three Party Agreement
and Subordination Agreement by any appropriate proceedings, including
proceedings for specific performance of any covenant or agreement, and
Schlumberger may enforce payment of any obligations due it or enforce any other
legal or equitable right. All rights, remedies and powers conferred upon
Schlumberger under this Agreement, the Note, Mortgage, Three Party Agreement and
Subordination Agreement shall be deemed cumulative and not exclusive of any
other rights or remedies.
ARTICLE XI
MISCELLANEOUS
11.01 GOVERNING LAW. This Agreement and all instruments executed in
accordance with it shall be governed by and interpreted in accordance with the
laws of the State of Texas, without regard to conflict-of-law rules that would
direct application of the laws of another jurisdiction, except to the extent
that it is mandatory that the law of some other jurisdiction, wherein the assets
are located, shall apply.
11.02 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including all exhibits
attached hereto and made a part hereof constitute the entire agreement between
the parties with respect to the transactions contemplated hereby and supersede
all prior agreements, understandings, negotiations and discussions, whether oral
or written, of the parties with respect to such transactions. No amendment of
this Agreement shall be binding unless executed in writing by all parties.
11.03 WAIVER. No waiver by a party of any of the provisions of this
Agreement (a) shall be binding unless executed in writing by such party, (b)
shall be deemed or shall constitute a waiver by such party of any other
provision hereof (whether or not similar), and (c) shall not constitute a
continuing waiver by such party.
11.04 TRANSFERS. Except as expressly provided herein to the contrary,
neither party hereto shall transfer this Agreement or any of its rights or
obligations hereunder without the prior written consent of the other party, and
any such transfer made without such consent shall be void. Except as otherwise
provided herein, this Agreement shall be binding upon and inure to the benefit
of the parties and their respective successors and permitted transferees.
11.05 NOTICES. Any notice, request, consent, approval, waiver or other
communication provided or permitted to be given under this Agreement shall be in
writing and shall be delivered in person or sent by U.S. mail, overnight courier
or fax to the appropriate addresses set forth below. Any such communication
shall be effective upon actual receipt; provided, however, that in the case of
delivery by fax after the normal business hours of the recipient, such
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communication shall be effective on the next Business Day following the
transmission of such fax. For purposes of notice, the addresses of the parties
shall be as follows:
If to Cheniere:
Cheniere Energy, Inc.
Two Allen Center, Suite 1740
1200 Smith Street
Houston, TX 77002
If to Schlumberger:
Pre D. Moss, Jr.
Schlumberger Technology Corporation
1325 South Dairy Ashford, Suite 300
Houston, TX 77077
With a copy to:
Phil F. Snow
Ware, Snow, Fogel, Jackson & Greene, L.L.P.
1111 Bagby, 49th Floor
Houston, TX 77002
Each party shall have the right, upon giving ten (10) days' prior notice to the
other party in the manner provided in this section, to change its address for
purposes of notice.
11.06 EXPENSES. Cheniere shall be solely responsible for all costs and
expenses incurred by it and Schlumberger in connection with the transactions
contemplated hereby.
11.07 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any adverse manner with
respect to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties shall negotiate
in good faith to modify this Agreement so as to effect the original intent of
the parties as closely as possible. The obligations of the parties hereunder are
severable and not joint.
11.08 COUNTERPARTS. This Agreement may be executed in counterparts
(including faxed counterparts). Each such counterpart shall be deemed an
original, but all such counterparts together shall constitute one and the same
instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the 4th day
of January, 2000.
CHENIERE ENERGY, INC.
BY:
--------------------------------------
Walter Williams, Vice Chairman of the
Board
SCHLUMBERGER TECHNOLOGY CORPORATION
By:
----------------------------------
PRE D. MOSS, JR., CREDIT MANAGER
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Exhibit 10.33
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (herein called this "Amendment")
is made as of the 29th day of February, 2000, by and between Cheniere Energy,
Inc. ("Borrower") and EnCap Energy Capital Fund III, L.P. ("Lender").
W I T N E S S E T H:
WHEREAS, Borrower and Lender have entered into a secured term loan facility
pursuant to that certain Credit Agreement dated as of September 1, 1999 (as
amended, supplemented, or restated to the date hereof, the "Original Agreement")
and that certain Mortgage, Assignment, Security Agreement, Fixture Filing and
Financing Statement dated September 1, 1999 by Borrower in favor of Lender (as
amended, supplemented, or restated to the date hereof, the "Original Mortgage");
and
WHEREAS, Section 2.1(j) of the Original Mortgage provides that Borrower
will not, without the prior written consent of Lender, elect not to participate
in a proposed operation on the Mortgaged Properties (as such term is defined in
the Original Mortgage) where the effect of such election would be the forfeiture
either temporarily or permanently of any interest in the Mortgaged Properties;
and
WHEREAS, Section 2.3 of the Original Mortgage provides that if Borrower
fails to take any action required under the Original Mortgage (including but
limited to actions required under Section 2.1(j) of the Original Mortgage),
Lender may take such action, provided that any costs or expenses incurred by
Lender in connection therewith shall be a demand obligation owing by Borrower to
Lender at the rate of fifteen percent per annum; and
WHEREAS, Borrower has been requested by IP Petroleum Company, Inc. to pay
$605,000 for the costs of recompleting the State Lease 16017 Well No. 1, which
is part of
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Lender's Collateral, and if Borrower fails to do so Borrower will be in default
of Section 2.1(j) of the Original Mortgage; and
WHEREAS, Borrower is not able to pay such amount and has requested that
Lender exercise its rights under Section 2.3 of the Original Mortgage and
advance $605,000 directly to IP Petroleum Company, Inc., but that Lender agree
to let such advance be subject to the terms of the Promissory Note attached
hereto as Exhibit A rather than bear interest at the rate of fifteen percent per
annum and be payable on demand; and
WHEREAS, Lender has agreed to make such advance on such terms in
consideration of this Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and in the Original Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
DEFINITIONS AND REFERENCES
(S) 1.1 Terms Defined in the Original Agreement. Unless the context
otherwise requires or unless otherwise expressly defined herein, the terms
defined in the Original Agreement shall have the same meanings whenever used in
this Amendment.
(S) 1.2. Other Defined Terms. Unless the context otherwise requires, the
following terms when used in this Amendment shall have the meanings assigned to
them in this (S) 1.2.
"Amendment" means this Second Amendment to Credit Agreement.
"Amendment Documents" means this Amendment, the Renewal Note, and the
Security Document Amendments.
"Credit Agreement" means the Original Agreement as amended hereby.
"Original Note" means the "Note" referred to and defined as such in
the Original Agreement.
"Renewal Note" means the renewal promissory note of Borrower attached
hereto as Exhibit A, expressly renewing and increasing the Original Note.
"Security Document Amendments" means, collectively, (a) the Third
Supplement and Amendment to Mortgage, Assignment, Security Agreement,
Fixture Filing and Financing Statement by Borrower and Lender of even date
herewith, (b) the First Amendment to Guaranty by Cheniere Operating of even
date herewith, and (c) the First Amendment to Stock Pledge Agreement by
Borrower of even date herewith.
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ARTICLE II.
AMENDMENTS TO ORIGINAL AGREEMENT
(S) 2.1. Defined Terms. The following defined term is hereby added to
Section 1.1 of the Original Agreement:
"IP" means IP Petroleum Company, Inc.
(S) 2.2. Loan. Section 2.1 of the Original Agreement is hereby amended in
its entirety to read as follows:
"Section 2.1 Loan. Subject to the terms and conditions hereof,
Lender agrees to make (a) an advance to Borrower on September 1, 1999 in
the amount of $3,100,000 (herein called the "First Loan") and (b) a payment
to IP on behalf of Borrower on February 29, 2000 in the amount of $605,000
(herein called the "Second Loan"; the First Loan and the Second Loan are
herein collectively referred to as the "Loan"). The obligation of Borrower
to repay to Lender the Loan, together with interest accruing in connection
therewith, shall be evidenced by a single promissory note (herein called
the "Note") made by Borrower payable to the order of Lender in the form of
Exhibit A with appropriate insertions. The amount of principal owing on
the Note at any given time shall be the aggregate amount of the Loan minus
all payments of principal theretofore received by Lender on the Note.
Interest on the Note shall accrue and be due and payable as provided herein
and therein. The Note shall be due and payable as provided herein and
therein, and shall be due and payable in full on the Maturity Date. The
proceeds of the Second Loan shall be forwarded directly by Lender to IP
with instructions to apply the same to the payment of costs incurred by
Borrower in connection with the recompletion of the State Lease 16017 Well
No.1."
(S) 2.3. Payment of Trade Liabilities, Taxes, etc. Section 6.7(c) of the
Original Agreement is hereby amended in to read in its entirety as follows:
"(c) within ninety (90) days after the same becomes due pay all
Liabilities owed by it on ordinary trade terms to vendors, suppliers, and
other Persons providing goods and services used by it in the ordinary
course of its business (except to the extent that such Liabilities
constitute Indebtedness permitted under Section 7.1(h));"
(S) 2.4. Exhibit A. Exhibit A to the Original Agreement is hereby deleted
in its entirety and replaced with Exhibit A attached to this Amendment.
(S) 2.5. Second Loan. The proceeds of the Second Loan referenced in
Section 2.1 of the Credit Agreement shall be wired to:
Southwest Bank of Texas for the account of IP Petroleum Company, Inc.
ABA No. 11301258
Account No. 0157546
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ARTICLE III.
CONDITIONS OF EFFECTIVENESS
(S) 3.1. Effective Date. This Amendment shall become effective as of the
date first above written when and only when:
(a) Lender shall have received, at Lender's office (i) a counterpart
of this Amendment and each other Amendment Document executed and delivered
by each Restricted Person that is a party thereto in form and substance
acceptable to Lender in Lender's sole and absolute discretion, (ii) a
written opinion of Mayor, Day, Caldwell, and Keeton, L.L.P., addressed to
Lender, to the effect that (A) the Amendment Documents have been duly
authorized, executed and delivered by each Restricted Person that is a
party thereto, and (B) each Amendment Document and each Loan Document
amended thereby (other than the Original Mortgage as so amended, as to
which no opinion shall be required) constitutes the legal, valid and
binding obligation of each Restricted Person that is a party thereto,
enforceable in accordance with its terms, (iii) a certificate of a duly
authorized officer of Borrower to the effect that all of the
representations and warranties set forth in (S) 4.1 hereof are true and
correct at and as of the time of such effectiveness, (iv) a certificate of
the Secretary of Borrower dated the date of this Amendment certifying that
attached thereto is a true and complete copy of resolutions adopted by the
Board of Directors of Borrower authorizing the execution, delivery and
performance of the Amendment Documents, and (v) such supporting documents
as Lender may reasonably request, and
(b) Borrower shall have paid in immediately available funds (i) an
amendment fee to Lender in the amount of $12,100 and (ii) all legal fees
and expenses owing to Thompson & Knight L.L.P., legal counsel to Lender,
relating to the preparation, negotiation, execution, and recordation of the
Amendment Documents, which Lender estimates will not exceed $7,500 in fees,
plus recording costs and other expenses.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES; WAIVERS; MUTUAL RELEASE
(S) 4.1. Representations and Warranties of Borrower. In order to induce
Lender to enter into this Amendment, Borrower represents and warrants to Lender
that:
(a) Except as set forth in Schedule 4.1(a) attached hereto, the
representations and warranties contained in Article V of the Credit
Agreement are true and correct at and as of the time of the effectiveness
hereof. The balance of the Renewal Note is $3,621,904.62, which is the
sum of $605,000 plus the unpaid principal balance of the Original Note as
of the close of business on February 28, 2000.
(b) Each Restricted Person is duly authorized to execute and deliver
the Amendment Documents and the other Loan Documents to which it is a party
and is and will continue to be duly authorized to borrow and to perform its
obligations under the Credit Agreement. Each Restricted Person has duly
taken all corporate action necessary
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to authorize the execution and delivery of the Amendment Documents and the
other Loan Documents to which it is a party and to authorize the
performance of the obligations of such Restricted Person thereunder.
(c) The execution and delivery by each Restricted Person of the
Amendment Documents and the other Loan Documents to which it is a party,
the performance by each Restricted Person of its obligations thereunder and
the consummation of the transactions contemplated thereby do not and will
not conflict with any provision of law, statute, rule or regulation or of
the certificate of incorporation and bylaws of any Restricted Person, or of
any material agreement, judgment, license, order or permit applicable to or
binding upon any Restricted Person, or result in the creation of any Lien,
charge or encumbrance upon any assets or properties of any Restricted
Person. No consent, approval, authorization or order of any court or
governmental authority or third party is required in connection with the
execution and delivery by any Restricted Person of the Amendment Documents
or the other Loan Documents to which it is a party or to consummate the
transactions contemplated thereby.
(d) When duly executed and delivered, each Amendment Document will be
a legal and binding instrument and agreement of each Restricted Person that
is a party thereto, enforceable in accordance with its terms. Each other
Loan Document is and shall continue to be the legal, valid and binding
obligation of each Restricted Person that is a party thereto, enforceable
against such Restricted Person in accordance with their respective terms.
(e) The unaudited quarterly Consolidated financial statements of
Borrower dated as of September 30, 1999 fairly present the Consolidated
financial position at such date and the Consolidated statement of
operations and the changes in Consolidated financial position for the
periods ending on such date for Borrower. Copies of such financial
statements have heretofore been delivered to Lender. Since September 30,
1999, no Material Adverse Change has occurred in the Consolidated financial
condition or businesses of Borrower.
(f) No Default or Event of Default has occurred or is continuing
(other than the Defaults or Events of Default waived in writing by Lender
or disclosed in Schedule in 4.1(a) attached hereto).
(g) Borrower has no defense, counterclaim or setoff with respect to
the Obligations or the Loan Documents (any such setoffs, defenses or
counterclaims being hereby waived and released by Borrower).
(S) 4.2. Waivers. Borrower hereby waives and affirmatively agrees not to
allege or otherwise pursue any or all defenses, affirmative defenses,
counterclaims, claims, causes of action, setoffs or other rights that it may
have to contest (a) the enforceability of any of the Obligations; (b) any
provision of the Loan Documents; (c) any Lien or security interest of Lender in
any Collateral or other property, whether movable or immovable, real or
personal, or tangible or intangible, or any right or other interest, now or
hereafter arising in connection with the Collateral; (d) the actions and
inactions of Lender prior to the date hereof in administering the Loan
Documents, or any other matter prior to the date hereof relating to the
financing
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arrangements between Borrower and Lender; or (e) the rights of Lender to the Net
Profits Interest.
(S) 4.3. Mutual Release. Each of Borrower and Lender HEREBY RELEASES,
REMISES, ACQUITS AND FOREVER DISCHARGES the other and the other's partners,
participants, predecessors, successors and assigns, subsidiary entities, parent
entities, and other affiliates, as well as all employees, agents,
representatives, consultants, attorneys, fiduciaries, partners, officers and
directors of any of the foregoing (all of the foregoing beneficiaries of such
release being hereinafter called the "Released Persons") from any and all
actions and causes of action, judgments, executions, suits, debts, claims,
demands, liabilities, obligations, damages and expenses of any and every
character, known or unknown, direct or indirect, at law or in equity, sounding
in contract or in tort, of whatsoever kind or nature, for or because of any
matter or things done, omitted or suffered to be done by any of the Released
Persons prior to the date of execution hereof and in any way directly or
indirectly arising out of or in any way connected to the Credit Agreement or any
attempt by Borrower to raise funds through the sale of equity or debt
securities, INCLUDING WITHOUT LIMITATION ANY CLAIM OR LIABILITY RELATED TO
FRAUD, INADEQUATE DISCLOSURE, NEGLIGENCE, USURY (INCLUDING WITHOUT LIMITATION
ANY DEFENSE BASED ON USURY), OR WRONGFUL INTERFERENCE WITH CONTRACTS, BUSINESS
OPPORTUNITIES OR RELATIONSHIPS (all of the foregoing hereinafter called the
"Released Matters"); PROVIDED THAT THE RELEASED MATTERS DO NOT INCLUDE OR APPLY
TO, AND THAT NO RELEASE IS GIVEN HEREBY WITH RESPECT TO, ANY PRINCIPAL,
INTEREST, OTHER INDEBTEDNESS, INDEMNITY, COVENANT, OR OTHER RIGHTS, OBLIGATIONS
OR DUTIES OF BORROWER OR LENDER UNDER THIS AMENDMENT, THE CREDIT AGREEMENT, THE
NOTE OR ANY OTHER LOAN DOCUMENT. Each of Borrower and Lender acknowledges and
agrees that the provisions of this Amendment constitute full and adequate
consideration for the foregoing releases. For the purposes of the foregoing
release by Borrower, the affiliates of Borrower shall be deemed to include,
without limitation, EnCap Energy Advisors, Inc., RP&C International, Inc., and
EnCap Investments L.C.
(S) 4.4. Acknowledgments and Admissions. Borrower hereby represents,
warrants, acknowledges and admits that (a) it has made an independent decision
to enter into the Amendment Documents and the other Loan Documents without
reliance on any representation, warranty, covenant or undertaking by Lender,
whether written, oral or implicit, other than as expressly set out in the
Amendment Documents or in the other Loan Documents, (b) there are no
representations, warranties, covenants, undertakings or agreements by Lender as
to the Loan Documents except as expressly set out in the Amendment Documents or
in another Loan Document, (c) Lender has no fiduciary obligation toward
Borrower with respect to any Loan Document or the transactions contemplated
thereby, (d) the relationship pursuant to the Loan Documents between the
Restricted Persons, on one hand, and Lender, on the other hand, is and shall be
solely that of debtor and creditor, respectively, (e) no partnership or joint
venture exists with respect to the Amendment Documents, the Loan Documents, or
the Collateral between Borrower and Lender, (f) should a breach or other default
occur or exist under the Amendment Documents, any Loan Document, or any document
or instrument at any time delivered in connection therewith, Lender will
determine in its sole discretion and for its own reasons what remedies and
actions it will or will not exercise or take at that time, (g) without limiting
any of the foregoing, Borrower is not relying upon any representation or
covenant by Lender, or any representative of Lender, and no such representation
or covenant has been made, that Lender will, at the time of any such breach or
default, or at any other time, waive, negotiate, discuss, or take or refrain
from taking any action permitted under the Loan Documents with respect thereto,
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and (h) Lender has relied upon the truthfulness of the acknowledgments in this
section in deciding to execute and deliver the Amendment Documents.
ARTICLE V.
MISCELLANEOUS
(S) 5.1. Ratification of Agreements. The Loan Documents as amended by the
Amendment Documents are hereby ratified and confirmed in all respects. Any
reference to the Credit Agreement in any Loan Document shall be deemed to refer
to this Amendment also. Any reference to the Note in any other Loan Document
shall be deemed to be a reference to the Renewal Note issued and delivered
pursuant to this Amendment. The execution, delivery and effectiveness of this
Amendment and the other Amendment Documents shall not, except as expressly
provided herein or therein, operate as a waiver of any right, power or remedy of
Lenders under the Credit Agreement, the Note, or any other Loan Document nor
constitute a waiver of any provision of the Credit Agreement, the Note or any
other Loan Document.
(S) 5.2. Survival of Agreements. All representations, warranties,
covenants and agreements of Borrower herein shall survive the execution and
delivery of this Amendment and the performance hereof, including without
limitation the making or granting of the Loan, and shall further survive until
all of the Obligations are paid in full. All statements and agreements
contained in any certificate or instrument delivered by any Restricted Person
hereunder or under the Credit Agreement to Lender shall be deemed to constitute
representations and warranties by, or agreements and covenants of, Borrower
under this Amendment and under the Credit Agreement.
(S) 5.3. Loan Documents. Each Amendment Document is a Loan Document, and
all provisions in the Credit Agreement pertaining to Loan Documents apply
thereto.
(S) 5.4. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and any applicable
laws of the United States of America in all respects, including construction,
validity and performance.
(S) 5.5. Counterparts. This Amendment may be separately executed in
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed shall be deemed to constitute one and the same
Amendment.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
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IN WITNESS WHEREOF, this Amendment is executed as of the date first above
written.
ENCAP ENERGY CAPITAL FUND III, L.P.
By: ENCAP INVESTMENTS, L.C., general partner
By:_________________________________________
Robert L. Zorich
Managing Director
CHENIERE ENERGY, INC.
By:____________________________________
Charif Souki
Chairman of the Board of Directors
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CONSENT AND AGREEMENT
The undersigned hereby consents to the provisions of this Amendment and the
transactions contemplated herein, and hereby ratifies and confirms the Guaranty
dated as of September 1, 1999 made by it for the benefit of Lender, and agrees
that its obligations and covenants thereunder are unimpaired hereby and shall
remain in full force and effect.
CHENIERE ENERGY OPERATING CO., INC.
By:
Walter L. Williams
President
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EXHIBIT A
PROMISSORY NOTE
$3,621,904.62 Houston, Texas February 29, 2000
FOR VALUE RECEIVED, the undersigned, Cheniere Energy, Inc., a Delaware
corporation (herein called "Borrower"), hereby promises to pay to the order of
EnCap Energy Capital Fund III, L.P. (herein called "Lender"), the principal sum
of Three Million Six Hundred Twenty One Thousand Nine Hundred Four and 62/100
Dollars ($3,621,904.62), together with interest on the unpaid principal balance
thereof as hereinafter set forth, both principal and interest payable as herein
provided in lawful money of the United States of America at the offices of the
Lender under the Credit Agreement, 1100 Louisiana, Suite 3150, Houston, Texas
77002, or at such other place within Harris County, Texas, as from time to time
may be designated by the holder of this Note.
This Note (a) is issued and delivered under that certain Credit Agreement
dated as of September 1, 1999 among Borrower and Lender (herein, as from time to
time supplemented, amended or restated, called the "Credit Agreement"), and is
the "Note" as defined therein, and (b) is subject to the terms and provisions of
the Credit Agreement, which contains provisions for payments and prepayments
hereunder and acceleration of the maturity hereof upon the happening of certain
stated events. Payments on this Note shall be made and applied as provided
herein and in the Credit Agreement. Reference is hereby made to the Credit
Agreement for a description of certain rights, limitations of rights,
obligations and duties of the parties hereto and for the meanings assigned to
terms used and not defined herein.
The principal amount of this Note, together with all interest accrued
hereon, shall be due and payable in full on the Maturity Date. Additional
payments of principal are due as required under the Credit Agreement. Interest
payments on this Note are due on each Monthly Payment Date, beginning on the
date hereof.
The principal amount of this Note (exclusive of any past due principal or
interest) from time to time outstanding shall bear interest on each day
outstanding at the Base Rate in effect on such day; provided that if an Event of
Default has occurred and is continuing, the principal amount of this Note
(exclusive of any past due principal or interest) from time to time outstanding
shall bear interest on each day outstanding at the Default Rate in effect on
such day. All past due principal and interest on the Loan shall bear interest
on each day outstanding at the Default Rate in effect on such day, and such
interest shall be due and payable daily as it accrues. Notwithstanding the
foregoing provisions of this paragraph: (a) this Note shall never bear interest
in excess of the Highest Lawful Rate, and (b) if at any time the rate at which
interest is payable on this Note is limited by the Highest Lawful Rate (by the
foregoing clause (a) or by reference to the Highest Lawful Rate in the
definitions of Base Rate and Default Rate), this Note shall, to the extent
permitted by applicable law, bear interest at the Highest Lawful Rate and shall
continue to bear interest at the Highest Lawful Rate until such time as the
total amount of interest accrued hereon equals (but does not exceed) the total
amount of interest which would have accrued hereon had there been no Highest
Lawful Rate applicable hereto.
Notwithstanding the foregoing paragraph and all other provisions of this
Note or any other Loan Document, in no event shall the interest payable hereon,
together with any other
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amounts constituting interest on the Obligations, whether before or after
maturity, exceed the maximum amount of interest which, under applicable law, may
be charged on this Note and such other Obligations, and this Note is expressly
made subject to the provisions of the Credit Agreement which more fully set out
the limitations on how interest accrues hereon. In the event applicable law
provides for an interest ceiling under Chapter 303 of the Texas Finance Code
(the "Texas Finance Code") as amended, for any day, the ceiling for such day
shall be the "weekly ceiling" as defined in the Texas Finance Code and such
ceiling shall be used in this Note for calculating the Highest Lawful Rate and
for all other purposes, provided that if any applicable law permits greater
interest, the applicable law permitting the greatest interest shall apply. The
term "applicable law" as used in this Note shall mean the Laws of the State of
Texas including the Laws of the United States, as such laws now exist or may be
changed or amended or come into effect in the future.
If this Note is placed in the hands of an attorney for collection after
default, or if all or any part of the indebtedness represented hereby is proved,
established or collected in any court or in any bankruptcy, receivership, debtor
relief, probate or other court proceedings, Borrower and all endorsers, sureties
and guarantors of this Note jointly and severally agree to pay reasonable
attorneys' fees and collection costs to the holder hereof in addition to the
principal and interest payable hereunder.
Borrower and all endorsers, sureties and guarantors of this Note hereby
severally waive demand, presentment, notice of demand and of dishonor and
nonpayment of this Note, protest, notice of protest, notice of intention to
accelerate the maturity of this Note, declaration or notice of acceleration of
the maturity of this Note, diligence in collecting, the bringing of any suit
against any party and any notice of or defense on account of any extensions,
renewals, partial payments or changes in any manner of or in this Note or in any
of its terms, provisions and covenants, or any releases or substitutions of any
security, or any delay, indulgence or other act of any trustee or any holder
hereof, whether before or after maturity.
This Note is given in renewal and increase, but not in extinguishment or
novation, of that certain promissory note by Borrower to the order of Lender in
the original principal amount of $3,100,000 dated September 1, 1999.
THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HERETO SHALL BE GOVERNED
BY THE LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW), EXCEPT TO THE EXTENT THE SAME ARE GOVERNED BY APPLICABLE FEDERAL LAW.
CHENIERE ENERGY, INC.
By:
------------------------- Charif Souki
Chairman of the Board of Directors
11
<PAGE>
SCHEDULE 4.1 (a)
The representations and warranties contained in Article V of the Original
Agreement are true and correct, subject to the matters below:
Section 5.1 -- Defaults
Subject to the agreements, understandings, and waivers set forth in the
Amendment Documents and the other documents contemplated therein, no Restricted
Person is in default in the performance of any of the covenants and agreements
contained in any Loan Document and no event has occurred and is continuing which
constitutes a Default except as follows:
Sections 6.7, 6.11, 8.1(f), 8.1(g) Borrower has failed to timely pay
obligations under contracts to which it is a party, including Borrower s
obligations under the Fairfield Agreement and disputed amounts under its
agreement with RP&C International, Inc.
Section 7.3 By December 31, 1999, Borrower has not entered into
Hedging Contracts as contemplated in Section 7.3.
Section 5.12 Title to Properties
The Stingray Prospect and the Redfish Prospect are encumbered by mechanics
and materialmens liens in favor of Schlumberger Technology Corporation, as
contemplated in the First Amendment to Credit Agreement, dated as of
December 31, 1999, between Borrower and Lender, and the Amendment
Documents, as such term is defined therein.
12
<PAGE>
Exhibit 10.34
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(713) 659-1361
FAX: (713) 659-5459
April 30, 1999
Lender
Form of Sixth Amendment to Securities Purchase Agreement ("Sixth
Amendment")
Dear Lender:
Reference is made to the Securities Purchase Agreement dated as of December
15, 1997 as amended by the Third Amendment dated on or about September 13, 1998,
by the Fourth Amendment dated January 12, 1999 and by the Fifth Amendment dated
March 15, 1999 (as amended, the "Agreement"), between Cheniere Energy, Inc., a
Delaware corporation ("Borrower"), and Lender. Unless otherwise indicated, all
capitalized terms herein are used as defined in the Agreement.
The purpose of this amendment to the Agreement is to extend the maturity
date from April 30, 1999 to July 15, 1999 as described below.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Borrower and Lender agree as follows:
1. Amendment of Maturity Date. The definition of Maturity Date in
Section 12 shall be hereby amended by replacing the paragraph captioned
MATURITY DATE in its entirety with the following paragraph:
"MATURITY DATE means the earlier of (a) July 15, 1999 and (b) the
date that the Senior Notes are declared immediately due and payable
pursuant to SECTION 11 in the event of a Default; provided that
Lender's rights continue until the Obligation has been paid and
performed in full."
2. Representations and Warranties. Borrower represents and warrants that
it possesses all requisite power and authority to execute, deliver and
comply with the terms of this instrument, which has been duly authorized
and approved by all necessary corporate action and for which no consent
of any person is required.
<PAGE>
3. Fees and Expenses. Borrower agrees to pay the reasonable fees and
expenses of counsel to Lender for services rendered in connection with
the negotiation and execution of this instrument.
4. Loan Paper; Effect. This instrument is a Loan Paper and, therefore, is
subject to the applicable provisions of Section 13 of the Agreement, all
of which are incorporated herein by reference the same as if set forth
herein verbatim. In the event of any inconsistency between the terms of
the Agreement as hereby modified (the "Amended Agreement") and any other
Loan Papers, the terms of the Amended Agreement shall control and such
other document shall be deemed to be amended hereby to conform to the
terms of the Amended Agreement.
5. No Waiver of Defaults. This instrument does not constitute a waiver of,
or a consent to any present or future violation of or default under, any
provision of the Loan Papers, or a waiver of Lender's right to insist
upon future compliance with each term, covenant, condition and provision
of the Loan Papers, and the Loan Papers shall continue to be binding
upon, and inure to the benefit of, Borrower, Lender and their respective
successors and assigns.
6. Final Agreement. THE LOAN PAPERS, AS AMENDED HEREBY, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
If the foregoing terms and conditions are acceptable to Lender, Lender
should indicate its acceptance by signing in the space provided below and
returning an executed copy hereof to Borrower, whereupon this letter shall
become an agreement binding upon and inuring to the benefit of Borrower and
Lender and their respective successors and assigns.
Sincerely,
CHENIERE ENERGY, INC.
By:
-------------------------------
Don A. Turkleson
Chief Financial Officer
Accepted and agreed to as of the day
and year first set forth in this Sixth
Amendment.
- -------------------------------
Lender
2
<PAGE>
Exhibit 10.35
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(713) 659-1361
FAX: (713) 659-5459
May 19, 1999
Lender
Form of Seventh Amendment to Securities Purchase Agreement ("Seventh
Amendment")
Dear Lender:
Reference is made to the Securities Purchase Agreement dated as of
December 15, 1997 as amended by the Third Amendment dated on or about
September 13, 1998, by the Fourth Amendment dated January 12, 1999, by the Fifth
Amendment dated March 15, 1999 and by the Sixth Amendment dated April 14, 1999
(as amended, the "Agreement"), between Cheniere Energy, Inc., a Delaware
corporation ("Borrower"), and Lender. Unless otherwise indicated, all
capitalized terms herein are used as defined in the Agreement.
The purpose for this amendment of the Agreement is to increase from $5,000,000
to $10,000,000 the amount of net funds which Borrower may raise through private
placement of its equity securities or from the sale of seismic data and retain
for use in its business before being required to direct the proceeds from such
sources to prepayment of the Term Loan.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Borrower and Lender agree as follows:
1. Amendment of Terms of Payment. Section 2 of the Agreement is hereby
amended by replacing paragraph (c) of such Section in its entirety with
the following paragraph:
(c) In addition to prepayments under clause (b) above, Borrower shall
make prepayments of principal of the Term Loan equal to the net cash
proceeds received by Borrower from any private placement of Borrower's
equity securities or from any sale by Borrower of seismic data, less up
to $10,000,000 which may be retained by Borrower.
2. Representations and Warranties. Borrower represents and warrants that
it possesses all requisite power and authority to execute, deliver and
comply with the terms of this instrument, which has been duly authorized
and approved by all necessary corporate action and for which no consent
of any person is required.
<PAGE>
3. Fees and Expenses. Borrower agrees to pay the reasonable fees and
expenses of counsel to Lender for services rendered in connection with
the negotiation and execution of this instrument.
4. Loan Paper; Effect. This instrument is a Loan Paper and, therefore, is
subject to the applicable provisions of Section 13 of the Agreement, all
of which are incorporated herein by reference the same as if set forth
herein verbatim. In the event of any inconsistency between the terms of
the Agreement as hereby modified (the "Amended Agreement") and any other
Loan Papers, the terms of the Amended Agreement shall control and such
other document shall be deemed to be amended hereby to conform to the
terms of the Amended Agreement.
5. No Waiver of Defaults. This instrument does not constitute a waiver of,
or a consent to any present or future violation of or default under, any
provision of the Loan Papers, or a waiver of Lender's right to insist
upon future compliance with each term, covenant, condition and provision
of the Loan Papers, and the Loan Papers shall continue to be binding
upon, and inure to the benefit of, Borrower, Lender and their respective
successors and assigns.
7. Final Agreement. THE LOAN PAPERS, AS AMENDED HEREBY, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
If the foregoing terms and conditions are acceptable to Lender, Lender
should indicate its acceptance by signing in the space provided below and
returning an executed copy hereof to Borrower, whereupon this letter shall
become an agreement binding upon and inuring to the benefit of Borrower and
Lender and their respective successors and assigns.
Sincerely,
CHENIERE ENERGY, INC.
By:
-------------------------------
Don A. Turkleson
Chief Financial Officer
Accepted and agreed to as of the day
and year first set forth in this Seventh
Amendment.
- ---------------------------------------
Lender
2
<PAGE>
Exhibit 10.36
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(713) 659-1361
FAX: (713) 659-5459
July 13, 1999
Lender
Form of Eighth Amendment to Securities Purchase Agreement ("Eighth
Amendment")
Dear Lender:
Reference is made to the Securities Purchase Agreement dated as of
December 15, 1997 as amended by the Third Amendment dated on or about
September 13, 1998, by the Fourth Amendment dated January 12, 1999, by the Fifth
Amendment dated March 15, 1999, by the Sixth Amendment dated April 14, 1999 and
by the Seventh Amendment dated May 19, 1999 (as amended, the "Agreement"),
between Cheniere Energy, Inc., a Delaware corporation ("Borrower"), and Lender.
Unless otherwise indicated, all capitalized terms herein are used as defined in
the Agreement.
The purpose of this amendment to the Agreement is to provide notice of the
repayment of 50% of the outstanding principal balance on July 15, 1999, to
extend the maturity date for the remaining principal balance from July 15, 1999
to October 15, 1999, to increase the interest rate effective July 16, 1999 from
LIBOR plus 4% to LIBOR plus 6% and to increase from $10,000,000 to $12,000,000
the amount of net funds which Borrower may raise through private placement of
its equity securities or from the sale of seismic data and retain for use in its
business before being required to direct the proceeds from such sources to
prepayment of the Term Loan.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Borrower and Lender agree as follows:
1. Amendment of Maturity Date. The definition of Maturity Date in Section
12 shall be hereby amended by replacing the paragraph captioned MATURITY
DATE in its entirety with the following paragraph:
"MATURITY DATE means the earlier of (a) October 15, 1999 and (b)
the date that the Senior Notes are declared immediately due and
payable pursuant to SECTION 11 in the event of a Default; provided
that Lender's rights continue until the Obligation has been paid and
performed in full."
<PAGE>
2. Amendment of Contract Rate. The definition of CONTRACT RATE in the
Senior Term Note shall be hereby amended by replacing the fourth
paragraph of the Senior Term Note in its entirety with the following
paragraph:
"The principal from day to day unpaid shall, except as stated
below, bear interest at a rate per annum which shall from day to day
be equal to the lesser of (a) the Maximum Rate (hereinafter defined)
and (b) the sum of 6% plus LIBOR. At the option of the holder of this
note and to the extent permitted by applicable law, all past-due
principal of this note and accrued and past-due interest on this note
shall bear interest from the date due and payable (stated or by
acceleration) until paid at a rate per annum which shall from day to
day be equal to the lesser of (a) the Maximum Rate and (b) the sum of
6% plus LIBOR, regardless of whether such payment is made before or
after entry of a judgement. Each change in the Maximum Rate will
become effective, without notice to Maker or any other person or
entity, upon the effective date of such change."
3. Amendment of Terms of Payment. Section 2 of the Agreement is hereby
amended by replacing paragraph (c) of such Section in its entirety with
the following paragraph:
"In addition to prepayments under clause (b) above, Borrower
shall make prepayments of principal of the Term Loan equal to the net
cash proceeds received by Borrower from any private placement of
Borrower's equity securities or from any sale by Borrower of seismic
data, less up to $12,000,000 which may be retained by Borrower."
4. Representations and Warranties. Borrower represents and warrants that it
possesses all requisite power and authority to execute, deliver and
comply with the terms of this instrument, which has been duly authorized
and approved by all necessary corporate action and for which no consent
of any person is required.
5. Fees and Expenses. Borrower agrees to pay the reasonable fees and
expenses of counsel to Lender for services rendered in connection with
the negotiation and execution of this instrument.
6. Loan Paper; Effect. This instrument is a Loan Paper and, therefore, is
subject to the applicable provisions of Section 13 of the Agreement, all
of which are incorporated herein by reference the same as if set forth
herein verbatim. In the event of any inconsistency between the terms of
the Agreement as hereby modified (the "Amended Agreement") and any other
Loan Papers, the terms of the Amended Agreement shall control and such
other document shall be deemed to be amended hereby to conform to the
terms of the Amended Agreement.
7. No Waiver of Defaults. This instrument does not constitute a waiver of,
or a consent to any present or future violation of or default under, any
provision of the Loan Papers, or a waiver of Lender's right to insist
upon future compliance with each term, covenant, condition and provision
of the Loan Papers, and the Loan Papers shall continue to be binding
upon, and inure to the benefit of, Borrower, Lender and their respective
successors and assigns.
2
<PAGE>
8. Final Agreement. THE LOAN PAPERS, AS AMENDED HEREBY, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
If the foregoing terms and conditions are acceptable to Lender, Lender
should indicate its acceptance by signing in the space provided below and
returning an executed copy hereof to Borrower, whereupon this letter shall
become an agreement binding upon and inuring to the benefit of Borrower and
Lender and their respective successors and assigns.
Sincerely,
CHENIERE ENERGY, INC.
By:
------------------------------
Don A. Turkleson
Chief Financial Officer
Accepted and agreed to as of the day
and year first set forth in this Eighth
Amendment.
- ---------------------------------
Lender
3
<PAGE>
Exhibit 10.37
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(713) 659-1361
FAX: (713) 659-5459
October 13, 1999
Lender
Form of Ninth Amendment to Securities Purchase Agreement ("Ninth
Amendment")
Dear Lender:
Reference is made to the Securities Purchase Agreement dated as of
December 15, 1997 as amended by the Third Amendment dated on or about
September 13, 1998, by the Fourth Amendment dated January 12, 1999 and by the
Fifth Amendment dated March 15, 1999, by the Sixth Amendment dated April 14,
1999, by the Seventh Amendment dated May 19, 1999 and by the Eighth Amendment
dated July 13, 1999 (as amended, the "Agreement"), between Cheniere Energy,
Inc., a Delaware corporation ("Borrower"), and Lender. Unless otherwise
indicated, all capitalized terms herein are used as defined in the Agreement.
Cheniere is presently undertaking to raise $12,000,000 through a private
placement of convertible preferred stock in which San Jacinto Securities is
acting as the financial advisor. It is expected that this preferred stock
offering will close by the end of October. In addition, we have engaged RP&C
International to assist in a European private placement of $20,000,000 in
convertible notes payable, which private placement will be initiated later this
month and is expected to close in November. Repayment of the amounts due to
Lender will be made from the proceeds of these offerings, and will be occur as
soon as practicable after the closing of the first offering.
The purpose of this amendment to the Agreement is to extend the maturity
date from October 15, 1999 to December 15, 1999 as described below.
For good and valuable consideration, consisting of 10 percent of the
outstanding balance of your note, payable in Cheniere common stock valued at
$1.20 per share, the receipt and adequacy of which are hereby acknowledged,
Borrower and Lender agree as follows:
1. Amendment of Maturity Date. The definition of Maturity Date in Section
12 shall be hereby amended by replacing the paragraph captioned MATURITY
DATE in its entirety with the following paragraph:
<PAGE>
"MATURITY DATE means the earlier of (a) December 15, 1999 and (b)
the date that the Senior Notes are declared immediately due and
payable pursuant to SECTION 11 in the event of a Default; provided
that Lender's rights continue until the Obligation has been paid and
performed in full."
2. Representations and Warranties. Borrower represents and warrants that
it possesses all requisite power and authority to execute, deliver and
comply with the terms of this instrument, which has been duly authorized
and approved by all necessary corporate action and for which no consent
of any person is required.
3. Fees and Expenses. Borrower agrees to pay the reasonable fees and
expenses of counsel to Lender for services rendered in connection with
the negotiation and execution of this instrument.
4. Loan Paper; Effect. This instrument is a Loan Paper and, therefore, is
subject to the applicable provisions of Section 13 of the Agreement, all
of which are incorporated herein by reference the same as if set forth
herein verbatim. In the event of any inconsistency between the terms of
the Agreement as hereby modified (the "Amended Agreement") and any other
Loan Papers, the terms of the Amended Agreement shall control and such
other document shall be deemed to be amended hereby to conform to the
terms of the Amended Agreement.
5. No Waiver of Defaults. This instrument does not constitute a waiver of,
or a consent to any present or future violation of or default under, any
provision of the Loan Papers, or a waiver of Lender's right to insist
upon future compliance with each term, covenant, condition and provision
of the Loan Papers, and the Loan Papers shall continue to be binding
upon, and inure to the benefit of, Borrower, Lender and their respective
successors and assigns.
8. Final Agreement. THE LOAN PAPERS, AS AMENDED HEREBY, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
If the foregoing terms and conditions are acceptable to Lender, Lender
should indicate its acceptance by signing in the space provided below and
returning an executed copy hereof to Borrower, whereupon this letter shall
become an agreement binding upon and inuring to the benefit of Borrower and
Lender and their respective successors and assigns.
Sincerely,
CHENIERE ENERGY, INC.
By:
-------------------------------
Don A. Turkleson
Chief Financial Officer
Accepted and agreed to as of the day
and year first set forth in this Ninth
Amendment.
- ------------------------------
Lender
2
<PAGE>
Exhibit 10.38
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(713) 659-1361
FAX: (713) 659-5459
December 13, 1999
Lender
Form of Tenth Amendment to Securities Purchase Agreement ("Ninth
Amendment")
Dear Lender:
Reference is made to the Securities Purchase Agreement dated as of
December 15, 1997 as amended by the Third Amendment dated on or about
September 13, 1998, by the Fourth Amendment dated January 12, 1999 and by the
Fifth Amendment dated March 15, 1999, by the Sixth Amendment dated April 14,
1999, by the Seventh Amendment dated May 19, 1999, by the Eighth Amendment dated
July 13, 1999, by letter agreement dated August 25, 1999 and by the Ninth
Amendment dated October 13, 1999 (as amended, the "Agreement"), between Cheniere
Energy, Inc., a Delaware corporation ("Borrower"), and Lender. Unless otherwise
indicated, all capitalized terms herein are used as defined in the Agreement.
The purposes of this amendment to the Agreement are to extend the maturity
date from December 15, 1999 to March 15, 2000 and to increase from $12,000,000
to $16,000,000 the amount of net funds which Borrower may raise through private
placement of its equity securities or from the sale of seismic data and retain
for use in its business before being required to direct the proceeds from such
sources to prepayment of the Term Loan.
For good and valuable consideration, which includes the issuance of 12,971
shares of Cheniere Energy, Inc. common stock, the issuance of three-year
warrants to purchase 89,227 shares of Cheniere common stock and the adjustment
of the exercise price to a dollar amount yet to be determined, but which will
fall within the range of $0.75 to $1.00 per share, for all outstanding warrants
issued pursuant to the Agreement, the receipt and adequacy of which are hereby
acknowledged, Borrower and Lender agree as follows:
2. Amendment of Terms of Payment. Section 2 of the Agreement is hereby
amended by replacing paragraph (c) of such Section in its entirety with
the following paragraph:
(c) "In addition to prepayments under clause (b) above, Borrower
shall make prepayments of principal of the Term Loan equal to the net
cash proceeds received by Borrower from any private placement of
Borrower's equity securities or from any sale by Borrower of seismic
data, less up to $16,000,000 which may be retained by Borrower."
<PAGE>
2. Amendment of Maturity Date. The definition of Maturity Date in Section
12 shall be hereby amended by replacing the paragraph captioned MATURITY
DATE in its entirety with the following paragraph:
"MATURITY DATE means the earlier of (a) March 15, 2000 and (b)
the date that the Senior Notes are declared immediately due and
payable pursuant to SECTION 11 in the event of a Default; provided
that Lender's rights continue until the Obligation has been paid and
performed in full."
3. Representations and Warranties. Borrower represents and warrants that
it possesses all requisite power and authority to execute, deliver and
comply with the terms of this instrument, which has been duly authorized
and approved by all necessary corporate action and for which no consent
of any person is required.
4. Fees and Expenses. Borrower agrees to pay the reasonable fees and
expenses of counsel to Lender for services rendered in connection with
the negotiation and execution of this instrument.
5. Loan Paper; Effect. This instrument is a Loan Paper and, therefore, is
subject to the applicable provisions of Section 13 of the Agreement, all
of which are incorporated herein by reference the same as if set forth
herein verbatim. In the event of any inconsistency between the terms of
the Agreement as hereby modified (the "Amended Agreement") and any other
Loan Papers, the terms of the Amended Agreement shall control and such
other document shall be deemed to be amended hereby to conform to the
terms of the Amended Agreement.
6. No Waiver of Defaults. This instrument does not constitute a waiver of,
or a consent to any present or future violation of or default under, any
provision of the Loan Papers, or a waiver of Lender's right to insist
upon future compliance with each term, covenant, condition and provision
of the Loan Papers, and the Loan Papers shall continue to be binding
upon, and inure to the benefit of, Borrower, Lender and their respective
successors and assigns.
7. Final Agreement. THE LOAN PAPERS, AS AMENDED HEREBY, REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
If the foregoing terms and conditions are acceptable to Lender, Lender
should indicate its acceptance by signing in the space provided below and
returning an executed copy hereof to Borrower, whereupon this letter shall
become an agreement binding upon and inuring to the benefit of Borrower and
Lender and their respective successors and assigns.
Sincerely,
CHENIERE ENERGY, INC.
By:
------------------------------
Don A. Turkleson
Chief Financial Officer
Accepted and agreed to as of the day
and year first set forth in this Tenth
Amendment.
- --------------------------------
Lender
2
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-57533, 333-49847, 333-70195 and 333-83949) and
on form S-8 (No. 333-52479) of Cheniere Energy, Inc. of our report dated
March 15, 2000 appearing on page 25 of Cheniere Energy, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,175,950
<SECURITIES> 0
<RECEIVABLES> 906,569
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,445,292
<PP&E> 30,107,964
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,481,275
<CURRENT-LIABILITIES> 6,735,537
<BONDS> 0
0
0
<COMMON> 120,637
<OTHER-SE> 27,625,102
<TOTAL-LIABILITY-AND-EQUITY> 34,481,275
<SALES> 0
<TOTAL-REVENUES> 1,614,055
<CGS> 128,859
<TOTAL-COSTS> 1,490,503
<OTHER-EXPENSES> 1,908,805
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,753,723)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,753,723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,753,723)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
