LNG

Cheniere Energy, Inc. - 10-Q Summary (Period Ended September 30, 2009)

Business Context and Reporting Period

This Form 10-Q covers the quarterly and nine-month periods ended September 30, 2009. Cheniere Energy, Inc. is primarily engaged in developing, constructing, and operating LNG receiving terminals and related natural gas pipelines. The reporting period marks a significant milestone with the substantial completion and full operability of the Sabine Pass LNG receiving terminal (4.0 Bcf/d sendout capacity). The company operates through three segments: LNG receiving terminal, natural gas pipeline, and LNG/natural gas marketing.

Key Financial Metrics

Note: Financial data is presented in thousands. Prior year figures are adjusted for accounting changes.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues for the nine months ended September 30, 2009, increased to $95.5 million from $6.5 million in the prior year period. This surge is driven by the commencement of Terminal Use Agreement (TUA) payments from Total Gas & Power North America (April 2009) and Chevron U.S.A. (July 2009).
• Reduced Net Loss: The consolidated net loss decreased by 47% to $138.3 million for the nine-month period compared to $261.9 million in 2008. Improvements were driven by increased terminal revenues, a $45.4 million gain on the early extinguishment of debt, and the absence of $78.9 million in restructuring charges recorded in 2008.
• Debt Reduction: In Q2 2009, the company exchanged $120.4 million of Convertible Senior Unsecured Notes for cash and common stock, reducing the principal amount due in 2012 to $204.6 million.
• Marketing Losses: Marketing and trading revenues turned negative ($10.3 million loss for the nine months) due to a $17.0 million lower-of-cost-or-market (LCM) inventory write-down, partially offset by derivative gains.
• Capital Expenditures: Cash used for LNG terminal and pipeline construction decreased significantly to $98.0 million (nine months 2009) from $521.7 million (nine months 2008) as the Sabine Pass terminal neared completion.

Guidance, Outlook, and Risks

• Liquidity: Management believes it has sufficient unrestricted cash ($87.4 million) and working capital to fund operations until at least August 2011, the earliest date principal payments may be required on existing indebtedness.
• Outlook: Strategies to enhance liquidity include exploiting reserved TUA capacity at Sabine Pass, entering into long-term TUAs or LNG purchase agreements to refinance debt, issuing equity, or selling assets.
• Future Projects: Final investment decisions for the Corpus Christi and Creole Trail LNG terminals are contingent upon securing acceptable commercial and financing arrangements. No significant spending is expected until these are secured.
• Risks: Key risks include the ability to meet fixed charge coverage ratios to permit distributions from Sabine Pass LNG, commodity price volatility affecting marketing margins, and regulatory changes impacting natural gas pipeline cost recovery.
• Accounting Changes: The company adopted new accounting standards effective January 1, 2009, regarding convertible debt (separating liability and equity components) and non-controlling interest presentation, resulting in retrospective adjustments to prior periods.

Key Facts for Investor Verification

• Debt Maturities: Verify the company's ability to refinance or repay debt maturing in August 2011 (2008 Convertible Loans) and May 2012 (2007 Term Loan and Convertible Senior Unsecured Notes).
• TUA Performance: Confirm that Total and Chevron continue to meet their capacity reservation fee obligations under their 20-year TUAs, which are critical for cash flow.
• Marketing Inventory: Monitor the valuation of LNG inventory and the effectiveness of derivative hedges, as LCM write-downs significantly impacted recent earnings.
• Construction Completion: Verify the final capital cost of the Sabine Pass terminal against the budgeted $1.559 billion and the timeline for full commercial utilization.
• Non-Controlling Interest: Review the distribution requirements and coverage ratios for Cheniere Partners, as distributions to the parent company depend on Sabine Pass LNG meeting specific financial covenants.