had converted its investmentIn December 2004, Sabine Pass LNG entered into a lump-sum turnkey EPC contract with Bechtel Corporation (“Bechtel”). Under the EPC contract, we were required to common stockmake a 5% advance payment to Bechtel upon issuance of the final Notice to Proceed (“NTP”) related to the construction of the Sabine Pass LNG facility. A payment of $32,347,000 was made to Bechtel on March 28, 2005 when the NTP was issued and is classified on our consolidated balance sheet as a current asset. This amount will be reclassified to construction-in-progress over the next twelve months in accordance with the payment schedule included in the EPC contract.

NOTE 5—Property, Plant and Equipment

Property, plant and equipment is comprised of such date, our ownership interest would have been 9.3%.  This effective percent ownership remains unchanged as of September 30, 2004.investments in oil and gas properties, LNG terminal construction-in-progress expenditures, LNG site and related costs, and fixed assets (in thousands):

NOTE 6 —Debt Issuance Costs

As of DecemberMarch 31, 2002,2005, we had incurred $17,939,000 of costs directly associated with arranging debt financing, net of accumulated amortization. Of this amount, $17,059,000 was incurred for the Sabine Pass Credit Facility, which closed February 25, 2005. In March 2005, we began amortizing the costs associated with the Sabine Pass Credit Facility over the ten-year term of the facility. The amortized cost is being capitalized as construction-in-progress during the construction period for the Sabine Pass LNG receiving terminal and will be expensed as interest expense when the terminal is in service. For the three months ended March 31, 2005, the amount amortized and capitalized was $141,000.

In addition, as of March 31, 2005, we had incurred $970,000 of costs directly related to our planned offering of senior notes in a result of Gryphon’s cumulative losses and preferred dividend arrearages, our investment in Gryphon was reduced to zero, but not below zero, because we have not guaranteed any obligations of Gryphon, and weprivate debt placement. In the event it is determined that the senior notes are not committed to provide additional financial supportbe issued, we will charge this amount to Gryphon.expense.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Note 4 – NOTE 7—Investment in Limited Partnership

In August 2002, we entered into an agreement with entities controlled by Michael S. Smith (the “Smith Entities”) to sell a 60% interest in the Freeport LNG receiving terminal site and project.  On February 27, 2003, we sold our interest in the site and project to Freeport LNG Development, L.P.  (“Freeport LNG”), in which we held a 40% limited partner interest.  One of the Smith Entities holds a 60% limited partner interest in Freeport LNG.  We recovered $1,740,426 in costs that we had incurred on the project and received an additional $5,000,000 ($2,500,000 during 2003 and $2,500,000 in January 2004) from Freeport LNG.  For the funding of Freeport LNG project development costs, the Smith Entities also committed to contribute up to $9,000,000 and to allocate available proceeds from any sales of options or capacity reservations and/or proceeds from loans related to capacity reservations to these costs.  In connection with the closing, we issued warrants to one of the Smith Entities to purchase 700,000 shares of Cheniere common stock at a price of $2.50 per share, exercisable for a period of 10 years.

Effective March 1, 2003, we sold a 10% limited partner interest in Freeport LNG to an affiliate of Contango Oil & Gas Company (“Contango”) for $2,333,333 payable over time, including the cancellation of our $750,000 short-term note payable.  We also issued warrants to Contango to purchase 300,000 shares of Cheniere common stock at a price of $2.50 per share, exercisable for a period of 10 years.  As a result of the sale, we now hold a 30% limited partner interest in Freeport LNG.

We accounted for the transfer of the site and planned LNG receiving terminal to Freeport LNG in accordance with Emerging Issues Task Force Issue No. 01-2, Interpretations of APB Opinion No. 29.  Accordingly, in February 2003, we recorded a $4,760,000 gain on the sale of LNG assets to the extent of the 60% interest not retained.

We account for our 30% limited partnership investment in Freeport LNG Development, L.P. (“Freeport LNG”) using the equity method of accounting. During 2003, we received installment payments totaling $2,500,000 from Freeport LNG, which amounts were recorded as a reduction toFor the basis ofthree months ended March 31, 2004, our investment in the partnership.  In addition, we recorded $4,471,529 related to our 30% equity share of net income in the 2003 net losslimited partnership was $2,155,000. This amount includes a reduction of Freeport LNG.  This non-cash loss reduced the basis of our investment in Freeport LNG$278,000 related to zero, and as a result, we did not record $278,071 of our equity share of the net loss of the partnership as ofnot recorded in 2003 because our investment in the limited partnership at December 31, 2003.2003 had been reduced to zero, and we had no obligation or commitment to fund this unrecorded loss. For the three months ended March 31, 2005, our equity share of the net loss of the limited partnership was $844,000.

In January 2004, we received the finala $2,500,000 payment from Freeport LNG. AsBecause our investment basis in Freeport LNG had been reduced to zero as of December 31, 2003, the payment was recorded as a reimbursement from limited partnership investment in our consolidated statement of operations foroperations.

In December 2004 and February 2005, we received capital call notices totaling $2,491,000 from Freeport LNG related to the nine months ended September 30, 2004.  Forfunding of our 30% share of forecasted partnership expenditures from December 2004 through June 2005. During December 2004 and the threefirst quarter of 2005, we funded $275,000 and nine months ended September 30,$1,134,000, respectively, of such capital calls.

As of March 31, 2005 and December 31, 2004, our 30% equity shareinvestment balances in Freeport LNG were zero, and we had accrued losses on investment in limited partnership of net income (loss) from$780,000 and $1,071,000, respectively. We accrued this liability because we presently intend to provide additional financial support through the Freeport partnership was $(582,798) and $84,473 (after deducting the $278,071 loss that was not recordedcapital calls as of December 31, 2003 discussed above), respectively.described above.

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OurFor the three months ended March 31, 2005 and 2004, the consolidated financial statements includestatement of operations includes $97,000 and $1,482,000, respectively, related to the accountsminority interest of Corpus Christi LNG. Substantially all Corpus Christi LNG expenditures incurred through March 31, 2004 were the obligation of the minority owner, as the minority owner was required to fund 100% of the first $4,500,000 of partnership expenditures. As partnership expenditures had reached $4,500,000 as of March 31, 2004, the minority interest owner began sharing all subsequent expenditures based on its 33.3% limited partner interest.

Note 7 – Accrued Liabilities

Accrued liabilities consistOn February 8, 2005, we acquired the minority interest of Corpus Christi LNG through the acquisition of BPU. As a result of this transaction, we now own 100% of the following:

limited partner interests of Corpus Christi LNG.

Note 8—Deferred RevenueNOTE 13— Sabine Pass Credit Facility and Notes Payable

Sabine Pass Credit Facility

On December 23, 2003, CheniereFebruary 25, 2005, Sabine Pass LNG Services, Inc. (“Cheniere LNG Services”), a wholly-owned subsidiary of Cheniere, entered into a shareholders agreement whereby it became a minority owner of J&S Cheniere S.A., a Switzerland joint-stock company (“J&S Cheniere”).  We account for this investment using the cost method of accounting.  At September 30, 2004, our investment basis was $15,910.

Also on December 23, 2003, Cheniere LNG, Inc. (“Cheniere LNG”), a wholly-owned subsidiary of Cheniere, and J&S Cheniere entered into an option agreement providing J&S Cheniere an option to purchase liquefied natural gas (“LNG”) storage tank capacity and regas capacity of up to 200 million cubic feet per day (“Mmcf/d”) in each of Cheniere LNG’s$822,000,000 Sabine Pass Credit Facility with an initial syndicate of 47 financial institutions. Société Générale serves as the administrative agent and Corpus LNG facilities. Following executionHSBC serves as collateral agent. The Sabine Pass Credit Facility will be used to fund a substantial majority of the option agreement, $1,000,000 was paid by J&S Cheniere to Chenierecosts of constructing and placing into operation the Sabine Pass LNG in January 2004.  The option agreement may be terminated by J&S Cheniere and the option fee refunded in the event that Cheniere LNG does not receive approval from the Federal Energy Regulatory Commission (“FERC”) for at least one of the facilities or if Chenierereceiving terminal. Unless Sabine Pass LNG decides not to proceed withterminate availability earlier, the development of at least one of the facilities, in either case before December 15, 2005.  J&S Cheniere may exercise the option as to each facility by entering into a terminal use agreementSabine Pass Credit Facility will be available until no later than 60 daysApril 1, 2009, after receiptwhich time any unutilized portion of written notification by Chenierethe Sabine Pass Credit Facility will be permanently canceled. Before Sabine Pass LNG may make an initial borrowing under the Sabine Pass Credit Facility, it will be required to provide evidence that such facilityit has been approved by FERC and all other approvals and permits have been received which are necessaryequity contributions in amounts sufficient to begin constructionfund $216 million of the project costs. As of March 31, 2005, there were no borrowings outstanding under the Sabine Pass Credit Facility.

Borrowings under the Sabine Pass Credit Facility bear interest at a variable rate equal to LIBOR plus the applicable margin. The applicable margin varies from 1.25% to 1.625% during the term of the Sabine Pass Credit Facility. The Sabine Pass Credit Facility provides for a commitment fee of 0.50% per annum on the daily committed, undrawn portion of the facility. CheniereAdministrative fees must also be paid annually to the administrative agent and the collateral agent. Principal and interest payments are to be made in semi-annual installments commencing six months after the latter of (i) the date that substantial completion of the project occurs under the EPC contract and (ii) the commercial start date under the Total TUA. Sabine Pass LNG may specify an earlier date to commence repayment upon satisfaction of certain conditions. In any event, payments under the Sabine Pass Credit Facility must commence no later than October 1, 2009, and all obligations under the Sabine Pass Credit Facility mature and must be fully repaid by February 25, 2015.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The Sabine Pass Credit Facility contains customary conditions precedent to the initial borrowing and any subsequent borrowings as well as customary affirmative and negative covenants. Sabine Pass LNG has recordedobtained and may in the option fee as deferred revenue,future seek consents, waivers and it is anticipated thatamendments to the option fee will be recognized as revenue overSabine Pass Credit Facility documents. The obligations of Sabine Pass LNG under the initial five-year periodSabine Pass Credit Facility are secured by all of Sabine Pass LNG’s personal property, including the terminal use agreement contemplated byTotal and Chevron USA TUAs, and the option agreement.partnership interests in Sabine Pass LNG.

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Note 9 – Note PayablePayble

On June 23,In January 2004, we terminated ourrepaid the $1,000,000 outstanding balance under a line of credit with a commercial bank. This facility was originally established on July 25, 2003 as a $5,000,000The line of credit with a borrowing base of $2,000,000.  During 2003, we borrowed $1,000,000 under the facility to acquire oil and gas leases.  The balance was repaidterminated in JanuaryJune 2004.

Note 10 – Non-Cash Transactions

On February 2, 2004, under the Cheniere Energy, Inc. 2003 Stock Incentive Plan (the “2003 Stock Incentive Plan”), 383,000 shares of common stock were issued to employees and outside directors in the form of bonus and restricted stock awards.  We recorded $1,915,000 of non-cash compensation in February 2004 related to the issuance of 127,667 shares (bonus stock awards) valued at $15.00 per share, which shares were fully vested on the date of grant.  In addition, we recorded $3,830,000 of deferred compensation as a reduction to stockholders’ equity related to the issuance of 255,333 shares (restricted stock awards) valued at $15.00 per share on the grant date that vests on each of the first and second anniversaries of the grant date.  As of September 30, 2004, $1,276,667 of deferred compensation had been amortized.

In August 2003, we issued 378,308 shares of common stock in exchange for the surrender of warrants to purchase 700,000 shares in a cashless transaction.

In April 2003, pursuant to a contingent contractual obligation related to our 2001 acquisition of an option to lease the Freeport LNG terminal site, we issued 750,000 shares of Cheniere common stock, valued at $1,312,500 on the date of issuance, to satisfy a closing requirement related to our February 2003 sale of a 60% interest in our Freeport LNG project.

In February 2003, in connection with the sale of a 60% interest in our Freeport LNG project, we issued warrants valued at $540,015 to purchase 700,000 shares of Cheniere common stock to one of the Smith Entities.  In connection with the closing of the Freeport transaction, we also issued additional warrants valued at $173,576 to purchase 225,000 shares of Cheniere common stock to LNG consultants for services previously performed for us.  In March 2003, in connection with the sale of a 10% interest in the limited partnership, we issued warrants valued at $241,893 to purchase 300,000 shares of Cheniere common stock to Contango, and Contango canceled the $750,000 note previously payable by Cheniere to Contango.

During the nine months ended September 30, 2004, 162,700 and 56,461 shares of Cheniere common stock were issued in satisfaction of cashless exercises of stock options and warrants to purchase 195,062 and 62,500 shares, respectively.

Note 11 – NOTE 14—Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. The computation of diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock that are dilutive to net income were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Company.Cheniere.

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