LNG

Cheniere Energy, Inc. - Q1 2011 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2011. Cheniere Energy, Inc. operates the Sabine Pass LNG terminal (via Cheniere Energy Partners, L.P.), the Creole Trail natural gas pipeline, and an LNG and natural gas marketing business. The company is actively developing a liquefaction project at Sabine Pass to enable LNG exports and is pursuing regulatory approvals for additional terminal projects in Corpus Christi and Creole Trail.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss Increase: Net loss increased by $4.6 million compared to Q1 2010. This was primarily driven by a $7.7 million increase in LNG terminal and pipeline development expenses (related to the liquefaction project) and a $3.7 million decrease in marketing and trading revenues.
• Marketing Revenue Decline: Marketing and trading revenues dropped from $12.1 million to $8.4 million. The decrease was largely due to a significant derivative gain in Q1 2010 that did not recur in 2011, partially offset by new revenue from LNGCo agreements.
• Operating Cash Flow Deterioration: Operating cash flow swung from a $3.9 million source in Q1 2010 to a $49.2 million use in Q1 2011. This was primarily caused by cash outflows for purchasing LNG inventory in February 2011, with proceeds from sales not received until April 2011.
• Interest Expense Reduction: Net interest expense decreased by $3.0 million to $64.2 million, reflecting debt reductions made in the second quarter of 2010.

Outlook, Risks, and Management Commentary

• Liquidity Position: Management states that Cheniere (excluding subsidiaries) has sufficient unrestricted cash and working capital to fund operations until at least May 2012, the maturity date of the 2007 Term Loan. The company plans to restructure finances via refinancing, equity issuance, or asset sales before this date.
• Liquefaction Project: In January 2011, the company submitted an application to the FERC to construct liquefaction and export facilities at Sabine Pass. The project aims for potential export commencement as early as 2015. The company has signed non-binding MOUs for up to 9.8 mtpa of capacity.
• Regulatory Risks: The company faces risks related to obtaining FERC and DOE approvals for export facilities and the ability to secure long-term commercial agreements to justify capital investment.
• Legal Proceedings: On March 7, 2011, Sabine Pass LNG and Cheniere filed a lawsuit against Centerbridge Partners for defamation and tortious interference. No material adverse impact is currently expected, but the case is pending.
• Debt Covenants: Distributions from Sabine Pass LNG are restricted until specific conditions are met, including maintaining a debt service reserve fund of approximately $82.4 million and satisfying a 2:1 fixed charge coverage ratio.

Investor Verification Checklist

• Debt Maturity Wall: Verify the company's progress in refinancing the $298 million 2007 Term Loan maturing in May 2012.
• Liquidity Constraints: Confirm the availability of unrestricted cash ($24.5 million) versus the significant portion of cash restricted for debt service ($137.3 million) and working capital.
• Marketing Cash Flow Timing: Monitor the timing of cash receipts from LNG inventory sales to ensure they align with operating cash outflows, as seen in the Q1 2011 lag.
• Regulatory Approvals: Track the status of the FERC application for the Sabine Pass liquefaction project and the DOE export order expansion.
• Derivative Exposure: Review the fair value of derivative positions and their impact on marketing revenues, given the volatility observed between 2010 and 2011.