LNG

Business Context and Reporting Period

Company: Cheniere Energy, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: April 7, 2005
Purpose: Update of business description and risk factors reflecting recent developments in the company's liquefied natural gas (LNG) receiving terminal projects.

Cheniere is a development-stage company focused on constructing LNG receiving terminals on the U.S. Gulf Coast to import natural gas. The company is not yet profitable and anticipates negative operating cash flow until at least 2008, when the first terminals are expected to commence operations.

Key Financial Metrics and Project Status

Revenue and Profitability: The filing does not provide specific revenue or profit figures for the current period. The company explicitly states it has incurred losses since inception and expects to continue incurring operating losses and negative operating cash flow for several years.

Capital Expenditures and Financing:

• Total Estimated Cost: Completion of four LNG projects is estimated to exceed $3 billion (before financing costs).
• Sabine Pass LNG: Estimated construction cost of $750 million to $850 million. An $822 million credit facility was secured on February 25, 2005. Equity contribution of $216 million is required before initial borrowing.
• Freeport LNG: Estimated construction cost of approximately $750 million. Cheniere holds a 30% limited partner interest. ConocoPhillips provides the majority of debt financing.
• Corpus Christi LNG: Estimated construction cost of $650 million to $750 million. Cheniere acquired 100% ownership in February 2005.
• Creole Trail LNG: Estimated construction cost of $850 million to $950 million.

Terminal Use Agreements (TUAs) and Cash Flow:

• Freeport LNG: TUAs signed with Dow Chemical (500 MMcf/d) and ConocoPhillips (1.0 Bcf/d). Cheniere estimates pre-tax cash distributions of $10 million to $20 million per year from this interest.
• Sabine Pass LNG: TUAs signed with Total (1.0 Bcf/d) and Chevron USA (700 MMcf/d). Total and Chevron have paid advance capacity reservation fees totaling $20 million and $20 million respectively (with additional payments due).
• Corpus Christi & Creole Trail: No TUAs signed as of the filing date.

Material Changes and Developments

• Freeport LNG Construction: FERC authorized construction in January 2005. Construction commenced in Q1 2005. Operations expected in 2008.
• Sabine Pass LNG Construction: FERC authorized construction in March 2005. Preliminary construction began in March 2005. A lump-sum turnkey EPC agreement with Bechtel was finalized in December 2004 (contract price ~$648.4 million). Notice to Proceed (NTP) issued in April 2005.
• Corpus Christi LNG Ownership: In February 2005, Cheniere acquired the 33.3% interest held by BPU LNG, Inc., becoming the sole owner of the project.
• Financing Milestones: Sabine Pass LNG secured an $822 million credit facility. Freeport LNG partners are calling for additional capital contributions (Cheniere's share approx. $2.5 million for Dec 2004–June 2005).
• Regulatory Progress: FERC issued a Final Environmental Impact Statement (FEIS) for Corpus Christi in March 2005. Construction authorization is anticipated in Q2 2005.

Outlook, Risks, and Contingencies

Management Outlook: Cheniere expects to commence terminal operations in 2008 for Freeport, Sabine Pass, and Corpus Christi, and in 2009 for Creole Trail. The company relies on securing long-term TUAs with "anchor tenants" to secure project financing. It plans to fund remaining projects through project financing, debt, or equity offerings.

Key Risks and Contingencies:

• Financing Risk: The ability to complete projects is contingent on obtaining debt and equity financing. Failure to secure funding could halt the business plan.
• Regulatory Risk: Construction requires FERC authorization and other permits. Delays or denials could materially adversely affect the company. Corpus Christi and Creole Trail have not yet received final construction orders.
• Customer Commitment Risk: TUAs contain termination rights. For example, Total and Chevron USA may terminate agreements if specific conditions (e.g., NTP acceptance, financing closure) are not met by June 30, 2005.
• Construction Risk: Costs are subject to overruns, change orders, and commodity price fluctuations (specifically steel). The company has no prior experience constructing LNG terminals.
• SEC Inquiry: The company is cooperating with a nonpublic, informal SEC inquiry regarding trading in its securities and press releases from late 2004.

Investor Verification Checklist

• Verify the status of FERC construction orders for the Corpus Christi and Creole Trail projects, which were pending as of April 2005.
• Confirm that Total and Chevron USA have satisfied the conditions to prevent termination of their TUAs by the June 30, 2005 deadline.
• Monitor the company's ability to raise the required $216 million equity contribution for the Sabine Pass project to access the $822 million credit facility.
• Track the progress of the SEC informal inquiry regarding the company's November and December 2004 disclosures.
• Assess the impact of potential steel price increases on the $3 billion+ total project cost estimates.