LNG

Business Context and Reporting Period

Company: Cheniere Energy, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Cheniere is a Houston-based energy company primarily engaged in LNG-related businesses. Its core assets include the Sabine Pass LNG terminal in Louisiana (operated through a 90.6% interest in Cheniere Energy Partners, L.P.) and the Creole Trail Pipeline. The company operates three segments: LNG Terminal, Natural Gas Pipeline, and LNG/Natural Gas Marketing. In 2010, the company initiated a project to add liquefaction services at Sabine Pass to enable bi-directional import/export capabilities.

Key Financial Metrics

Note: The company reported a net loss for the period. Margins are not explicitly stated as a percentage in the filing text, but operating income was $104.6 million in 2010 compared to $23.5 million in 2009.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $110.4 million (61%) from 2009 to 2010. This was driven primarily by a $99.4 million increase in LNG terminal revenues, resulting from full-year capacity reservation fee payments from third-party customers (Total and Chevron) and increased retainage fees.
• Net Loss Reduction: The net loss improved significantly from $161.5 million in 2009 to $76.2 million in 2010. This improvement was largely due to a one-time gain of $128.3 million from the sale of the company's 30% interest in Freeport LNG Development, L.P.
• Debt Restructuring: In December 2010, the company amended its 2008 Loans to eliminate lenders' put rights and allow for early prepayment. As part of this amendment, 96.6% of lenders terminated conversion rights into Series B Preferred Stock in exchange for 10.1 million shares of Cheniere common stock, resulting in a $50.3 million loss on early extinguishment of debt.
• Capital Structure: The company reduced its 2007 Term Loan by $102.0 million using proceeds from the Freeport LNG sale. Additionally, $63.6 million from a TUA reserve account was used to prepay accrued interest and principal on the 2008 Loans.

Guidance, Outlook, and Risks

Outlook and Strategy:

• Liquefaction Project: Cheniere Partners initiated a project in June 2010 to add liquefaction services at Sabine Pass, aiming to transform the terminal into a bi-directional facility. The company anticipates LNG export could commence as early as 2015. As of February 2011, non-binding MOUs were signed for up to 9.8 mtpa of capacity.
• Monetization: The company is focused on monetizing the 2.0 Bcf/d of regasification capacity reserved by its subsidiary, Cheniere Investments, through the Variable Capacity Rights Agreement (VCRA) with Cheniere Marketing.
• Liquidity: Management believes it has sufficient cash and working capital to fund operations until at least May 2012, the maturity date of the 2007 Term Loan. Future liquidity will depend on refinancing, equity issuances, or asset sales.

Key Risks and Contingencies:

• Debt Maturity: Approximately $298 million of debt matures in May 2012. The company explicitly states it does not currently have financial resources to repay this debt and may need to reorganize or refinance.
• Customer Concentration: Future results are substantially dependent on performance by two third-party customers (Total and Chevron) who pay approximately $125 million annually each. Failure of either to perform would materially adversely affect the company.
• Regulatory Approval: The liquefaction project requires FERC authorization and DOE export permits. While DOE approval for FTA countries was granted in September 2010, expansion to non-FTA countries is pending.
• Market Conditions: The company faces risks related to the competitiveness of imported LNG in North America due to abundant domestic natural gas supplies and lower domestic prices.

Investor Verification Checklist

• Debt Refinancing Status: Verify the company's progress in refinancing the $298 million 2007 Term Loan maturing in May 2012, as the filing indicates a potential inability to repay without external resources.
• Liquefaction Project Financing: Confirm the status of commercial agreements and financing arrangements required to reach a final investment decision for the Sabine Pass liquefaction expansion.
• Customer Performance: Monitor the financial health and performance of Total and Chevron under their Terminal Use Agreements (TUAs), as they represent the primary source of fixed revenue.
• Marketing Monetization: Assess the success of Cheniere Marketing in monetizing the 2.0 Bcf/d of capacity reserved by Cheniere Investments, which is critical for generating cash flow beyond third-party TUA payments.
• Regulatory Milestones: Track the FERC application status for the liquefaction project and the DOE application for non-FTA export rights.