LNG

Cheniere Energy, Inc. - Q1 2009 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Cheniere Energy, Inc. is primarily engaged in developing, constructing, and operating LNG receiving terminals and related natural gas pipelines. The company's primary asset is the Sabine Pass LNG receiving terminal in Louisiana, which achieved commercial operability in September 2008. The company also holds a 30% interest in Freeport LNG and operates a natural gas pipeline business (Creole Trail Pipeline).

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss Increase: Net loss increased 66% to $82.7 million from $49.9 million. This was driven by a $33.4 million increase in net interest expense, a $9.8 million increase in depreciation, depletion, and amortization (DD&A), and an $8.7 million increase in operating expenses as assets came online.
• Revenue Decline: Total revenues decreased 16% to $1.2 million. This reflects the transition from development to operations and lower oil and gas sales.
• Capital Expenditures: Cash used for LNG terminal and pipeline construction dropped 87% to $27.2 million from $211.1 million, as the initial phase of the Sabine Pass terminal and Creole Trail Pipeline neared completion.
• Interest Expense: Net interest expense rose significantly due to reduced capitalization of interest (as assets were placed in service) and additional debt issuances in late 2008.
• Derivative Gains: The company recorded a net derivative gain of $2.6 million in Q1 2009, compared to a loss of $0.8 million in Q1 2008, related to natural gas swaps hedging commissioning cargoes.

Outlook, Management Commentary, and Risks

• Sabine Pass Operations: The Sabine Pass terminal is fully reserved under long-term Terminal Use Agreements (TUAs) with Total, Chevron, and Cheniere Marketing. Capacity reservation fees are expected to begin generating steady revenue starting April 2009 (Total) and July 2009 (Chevron).
• Liquidity: Management states it has sufficient cash and restricted cash ($409 million) to fund operations and construction completion. A distribution reserve of $32.8 million is maintained to fund Cheniere Partners distributions through Q3 2009.
• Subsequent Event (Debt Reduction): In April 2009, the company exchanged $77.2 million of Convertible Senior Unsecured Notes for $13.5 million in cash and 4.0 million common shares. This transaction is expected to generate a $46.3 million gain on early extinguishment of debt in Q2 2009.
• Risks: Key risks include the ability to meet fixed charge coverage ratios to make distributions, regulatory approvals for future projects (Corpus Christi, Creole Trail), and commodity price volatility. The company has significant debt obligations, including Senior Notes due 2013 and 2016, and Convertible Loans due 2018.

Investor Verification Checklist

• Debt Covenants: Verify the company's ability to maintain the 2:1 fixed charge coverage ratio required by the Sabine Pass Indenture to ensure continued distributions to Cheniere Partners.
• Construction Completion: Confirm the timeline and cost to complete the Sabine Pass terminal to full operability (estimated remaining costs funded by available cash).
• Revenue Recognition: Monitor the commencement of capacity reservation fee payments from Total and Chevron as per the TUA schedules (April and July 2009).
• Convertible Debt: Review the terms of the 2008 Convertible Loans (12% interest, exchangeable for Series B Preferred Stock) and the impact of the April 2009 debt exchange on future interest obligations.
• Freeport LNG Investment: Assess the status of the 30% investment in Freeport LNG, noting that cumulative suspended losses exist and the basis is reduced to zero.