LNG

Business Context and Reporting Period

Company: Cheniere Energy, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2011
Business Overview: Cheniere is a Houston-based energy company primarily engaged in LNG-related businesses. Its core asset is the Sabine Pass LNG terminal in Louisiana, operated through an 88.8% ownership interest in Cheniere Energy Partners, L.P. The company also operates the Creole Trail Pipeline and engages in LNG and natural gas marketing. A major strategic focus in 2011 was the development of liquefaction capabilities at the Sabine Pass terminal to enable LNG exports.

Key Financial Metrics

Note: The company reported a net loss for the third consecutive year. Operating cash flow remains negative, primarily due to development costs and overhead.

Material Changes vs. Prior Period

• Net Loss Increase: The net loss widened significantly from $76.2 million in 2010 to $198.8 million in 2011. This increase was primarily driven by the absence of a one-time $128.3 million gain in 2011 from the sale of the company's interest in Freeport LNG (which occurred in 2010).
• Development Expenses: LNG terminal and pipeline development expenses surged to $40.8 million in 2011 from $12.0 million in 2010, reflecting increased activity related to the proposed liquefaction project at Sabine Pass.
• Marketing Revenues: LNG and natural gas marketing revenues decreased to $13.6 million in 2011 from $19.0 million in 2010, largely due to lower-of-cost-or-market adjustments on LNG inventory.
• Liquidity Position: Unrestricted cash and cash equivalents increased substantially to $459.2 million in 2011 from $74.2 million in 2010, bolstered by equity offerings totaling approximately $468.6 million in net proceeds during the year.

Guidance, Outlook, and Risks

Outlook and Strategy

Management anticipates that market factors will have little impact on the commercial success of the liquefaction project due to long-term take-or-pay contracts. The company expects to commence construction of the first two LNG trains in the first half of 2012, with operations beginning in late 2015. Total estimated construction costs for the four-train project are projected between $9.0 billion and $10.0 billion.

Key Risks and Contingencies

• Liquidity and Debt: The company has significant debt ($3.0 billion) and negative operating cash flow. It relies on access to capital markets to refinance indebtedness and fund construction. A $298 million term loan was reclassified as current in 2011 (repaid in January 2012) and Convertible Senior Unsecured Notes due in August 2012 require refinancing or repayment.
• Construction and Financing: Failure to secure financing or regulatory approvals by specific deadlines (e.g., December 31, 2012) could allow customers to terminate Sale and Purchase Agreements (SPAs) or contractors to demand change orders, increasing costs.
• Customer Concentration: Future results depend heavily on the performance of key customers (Total, Chevron, BG, Gas Natural Fenosa, GAIL, KOGAS) under long-term contracts.
• Regulatory: Operations are subject to extensive regulation by the FERC, DOE, and EPA. Delays in permits or changes in environmental laws could materially impact the business.

Investor Verification Checklist

• Debt Refinancing: Verify the status of refinancing for the Convertible Senior Unsecured Notes due August 2012 and the ability to access capital markets for the $9-10 billion liquefaction project.
• Construction Timeline: Monitor the commencement of construction for LNG trains 1 and 2, targeted for the first half of 2012, and the receipt of necessary FERC approvals.
• Customer Contracts: Confirm that conditions precedent for the SPAs with BG, Gas Natural Fenosa, GAIL, and KOGAS are being met to avoid contract termination rights.
• Operating Cash Flow: Assess the trajectory of operating cash flow, which remains negative, and the company's ability to cover interest expenses and development costs without further dilution.
• Regulatory Approvals: Track the status of the FERC application for the liquefaction facilities and DOE export authorizations.