LNG

Cheniere Energy, Inc. 2008 10-K Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2008. Cheniere Energy, Inc. is a Houston-based energy company primarily engaged in developing, constructing, and operating LNG receiving terminals and natural gas pipelines. The company operates through three segments: LNG receiving terminals, natural gas pipelines, and LNG/natural gas marketing. A key milestone in 2008 was achieving commercial operability of the initial phase of the Sabine Pass LNG receiving terminal in September 2008, with a capacity of 2.6 Bcf/d.

Key Financial Metrics

Material Changes vs. Prior Period

• Increased Net Loss: The net loss more than doubled from 2007 to 2008. This was driven by $78.7 million in restructuring charges (downsizing marketing activities and cancelling LNG vessel charters), a $10.7 million loss on early extinguishment of debt, increased interest expense, and higher depreciation as assets came online.
• Revenue Growth: Revenues increased to $7.1 million from $0.6 million, primarily due to the commencement of operations at the Sabine Pass terminal and the Creole Trail Pipeline, though these were offset by marketing losses.
• Debt Structure: Total indebtedness increased to approximately $3.2 billion. In August 2008, the company secured $250 million in convertible term loans to repay a bridge loan and fund a reserve for Terminal Use Agreement (TUA) payments. In September 2008, an additional $183.5 million of Senior Notes was issued.
• Construction Progress: Approximately 88% of the remaining construction for the Sabine Pass expansion was complete as of year-end. The Creole Trail Pipeline Phase 1 was placed in service in mid-2008.

Guidance, Outlook, and Risks

• Liquidity Concerns: Management stated that current cash inflows are not sufficient to fund 2009 expenditures. The company is dependent on existing cash resources and the timely receipt of TUA payments from third-party customers (Total and Chevron) and its own subsidiary (Cheniere Marketing).
• Future Revenue: The company expects to begin receiving significant capacity reservation fees from Total and Chevron in 2009 (commencing April and July, respectively), totaling approximately $250 million annually from these two customers alone. Cheniere Marketing is also obligated to pay approximately $250 million annually for its reserved capacity.
• Key Risks:
  • Refinancing Risk: The company has substantial indebtedness that must be refinanced. Tight lending conditions could prevent refinancing on reasonable terms.
  • Customer Performance: Future liquidity is heavily dependent on Total and Chevron performing their TUA obligations. Failure by these customers to pay would materially adversely affect the company.
  • Construction Completion: Risks regarding cost overruns and delays in completing the Sabine Pass expansion (targeted for Q3 2009) remain.
  • Marketing Viability: The company's ability to commercially exploit the 2.0 Bcf/d capacity reserved by Cheniere Marketing is uncertain and subject to market conditions.

Investor Verification Checklist

• TUA Payment Status: Verify that Total and Chevron have commenced their capacity reservation fee payments as scheduled in 2009.
• Construction Budget: Monitor the remaining construction costs for the Sabine Pass expansion against the estimated $143 million remaining budget (total budget ~$1.56 billion).
• Debt Covenants: Review compliance with debt covenants, specifically the fixed charge coverage ratio required by the Sabine Pass Indenture, which restricts distributions.
• Marketing Strategy: Assess the progress of Cheniere Marketing in securing LNG cargoes and off-take agreements to utilize its reserved capacity.
• Refinancing Progress: Track the company's ability to secure additional financing or refinance existing debt given the high leverage and negative operating cash flow.