LNG

Cheniere Energy, Inc. 2005 Form 10-K Summary

Business Context and Reporting Period

Company: Cheniere Energy, Inc.
Reporting Period: Fiscal year ended December 31, 2005
Business Overview: Cheniere is a Houston-based energy company primarily focused on developing, constructing, and operating a network of three onshore LNG receiving terminals (Sabine Pass, Corpus Christi, and Creole Trail) along the U.S. Gulf Coast, along with related natural gas pipelines. The company also maintains a limited oil and gas exploration and development business in the Gulf of Mexico and holds a 30% limited partner interest in Freeport LNG Development, L.P.

Key Financial Metrics

Note: Revenues are derived solely from the oil and gas exploration segment. The LNG terminal development segment generated no revenue as facilities are under construction.

Material Changes vs. Prior Period

• Debt Financing: The company significantly increased leverage to fund capital projects. In 2005, Cheniere issued $325 million in Convertible Senior Unsecured Notes and secured a $600 million Term Loan. Long-term debt increased from $0 in 2004 to $917.5 million in 2005.
• Cash Position: Cash and cash equivalents more than doubled to $692.6 million, driven by proceeds from the debt offerings and a public equity offering in late 2004. However, $160.9 million of this cash is restricted for debt service and project funding.
• Operating Expenses: General and administrative expenses surged 134% to $29.1 million due to business expansion and increased staffing. LNG terminal development expenses rose 28% to $22.0 million.
• One-Time Gain: The 2005 net loss was significantly mitigated by a $20.2 million gain from the sale of the company's investment in Gryphon Exploration Company. Without this gain, the net loss would have been approximately $50.0 million.
• Construction Progress: Construction on Phase 1 of the Sabine Pass LNG terminal commenced in March 2005. The company capitalized $229.7 million in construction-in-progress during the year.

Guidance, Outlook, and Risks

Outlook and Strategy: Cheniere anticipates commencing operations at the Sabine Pass terminal in 2008, Corpus Christi in 2010, and Creole Trail in 2011. The company expects to incur operating losses and negative operating cash flow for at least the next two years as it completes construction. The strategy relies on securing long-term Terminal Use Agreements (TUAs) with anchor tenants (Total and Chevron USA have signed for Sabine Pass) to secure financing and future cash flows.

Key Risks and Contingencies:

• Construction Delays and Costs: Hurricanes Katrina and Rita in 2005 caused temporary suspensions and labor shortages, leading to potential schedule delays and cost overruns. The company is negotiating change orders with its EPC contractor, Bechtel, which could increase the Sabine Pass Phase 1 contract price by up to $50 million.
• Financing Dependence: Completion of the three terminals (estimated at $3.0 billion) and pipelines ($800 million - $1 billion) is contingent on obtaining additional debt and equity financing. Failure to secure funding could halt the business plan.
• Regulatory Approval: While FERC has authorized construction for Sabine Pass and Corpus Christi, the Creole Trail project is still awaiting final authorization. Delays in permitting could materially impact the timeline.
• SEC Investigation: The company disclosed a formal, nonpublic factual investigation by the SEC regarding agreements with Chevron USA, the December 2004 public offering, and trading in its securities. The company is cooperating fully.
• Market Risk: The business model depends on natural gas prices remaining high enough to make imported LNG competitive with domestic supply. A sustained decline in gas prices could harm the ability to develop terminals and market gas.

Investor Verification Checklist

• Construction Schedule: Verify the current status of the Sabine Pass Phase 1 construction and the impact of hurricane-related labor shortages on the 2008 target completion date.
• Cost Estimates: Confirm the final approved contract price with Bechtel for Sabine Pass Phase 1, including any change orders related to the hurricanes.
• Financing Status: Review the status of funding for Phase 2 of Sabine Pass and the Corpus Christi and Creole Trail terminals, as the company has not yet secured all necessary capital.
• SEC Investigation: Monitor for any updates or resolutions regarding the SEC's investigation into the Chevron negotiations and 2004 stock offering.
• Terminal Use Agreements: Track the progress of securing additional TUAs for the Corpus Christi and Creole Trail terminals, which are currently uncommitted.
• Freeport LNG Interest: Assess the financial health and construction progress of Freeport LNG, in which Cheniere holds a 30% interest, as it is a significant asset on the balance sheet.