LNG

Cheniere Energy, Inc. 2006 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2006. Cheniere Energy, Inc. is a Houston-based company primarily engaged in developing, constructing, and operating a network of onshore LNG receiving terminals and related natural gas pipelines along the U.S. Gulf Coast. The company operates four segments: LNG receiving terminals, natural gas pipelines, LNG and natural gas marketing, and oil and gas exploration and development. As of the reporting date, the company was in a heavy development phase, with the Sabine Pass LNG terminal under construction and two other terminals (Corpus Christi and Creole Trail) in the planning/pre-construction stages.

Key Financial Metrics

Note: The company reported negligible operating revenues in 2006, derived almost entirely from its limited oil and gas exploration activities. The LNG and pipeline segments generated no revenue as they were not yet operational.

Material Changes vs. Prior Period

• Net Loss Expansion: The net loss increased significantly from $29.5 million in 2005 to $145.9 million in 2006. This was driven by a $43.2 million loss on early extinguishment of debt and a $20.1 million derivative loss resulting from the termination of interest rate swaps in November 2006. Excluding these one-time charges, the adjusted net loss would have been $82.7 million.
• Debt Restructuring: In November 2006, the company issued $2.032 billion in Senior Secured Notes (Sabine Pass LNG Notes) to refinance existing credit facilities and fund construction. This increased total long-term debt from $0.92 billion to $2.36 billion.
• Capital Expenditures: Investing cash outflows surged to $1.54 billion in 2006 compared to $405.6 million in 2005, primarily due to funding restricted cash accounts for the new notes and increased construction-in-progress for the Sabine Pass terminal.
• Accounting Changes: The company adopted SFAS No. 123R (Share-Based Payment) effective January 1, 2006, resulting in $17.3 million of additional non-cash compensation expense. It also changed its accounting method for oil and gas properties from full cost to successful efforts.

Guidance, Outlook, and Risks

• Project Timeline: Construction of the Sabine Pass LNG terminal (Phase 1) is expected to be completed in the second quarter of 2008, with commercial operations commencing shortly thereafter. Phase 2 expansion is targeted for completion in late 2009.
• Liquidity: Management believes it has adequate financial resources to complete currently approved projects (Sabine Pass Phase 1 & 2-Stage 1 and Sabine Pass Pipeline) through the first half of 2009. However, additional financing will be required for the Corpus Christi and Creole Trail terminals and pipelines.
• Revenue Outlook: The company does not expect its LNG-related businesses to generate significant cash flows before 2008. It anticipates continuing to incur operating losses and negative operating cash flow through 2008.
• Key Risks:
  • Construction Delays/Cost Overruns: Risks include contractor performance, material shortages, and weather events (e.g., hurricanes). Change orders for the Sabine Pass Phase 1 EPC contract had already increased the price by over $121 million as of February 2007.
  • Financing: The ability to complete the business plan is contingent on obtaining additional funding for projects not yet fully financed.
  • Regulatory: Operations are subject to extensive FERC, EPA, and state regulations. Failure to obtain or maintain permits could impede completion.
  • Market Conditions: The business depends on the ability of customers to import LNG and the competitiveness of LNG prices versus domestic natural gas.
• Legal Proceedings: The company is subject to a nonpublic, informal SEC inquiry regarding its agreements with Chevron and its December 2004 public offering. The company has cooperated fully and has not received communication from the SEC since September 2005.

Investor Verification Checklist

• Construction Progress: Verify the status of the Sabine Pass LNG terminal construction against the Q2 2008 completion target and monitor for further change orders with Bechtel Corporation.
• Financing Status: Confirm the availability of funding for the Corpus Christi and Creole Trail projects, which are not yet fully financed.
• Customer Commitments: Review the status of Terminal Use Agreements (TUAs) for the non-operational terminals (Corpus Christi and Creole Trail), as the company currently lacks third-party TUAs for these facilities.
• SEC Investigation: Monitor for any updates regarding the SEC inquiry into the company's 2004 offering and Chevron negotiations.
• Debt Covenants: Assess compliance with the restrictive covenants in the new $2.0 billion Senior Secured Notes indenture, particularly regarding distributions and additional indebtedness.