LNG

Cheniere Energy, Inc. - Form 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2010. Cheniere Energy, Inc. operates the Sabine Pass LNG receiving terminal in Louisiana (via Cheniere Energy Partners, L.P.), the Creole Trail natural gas pipeline, and an LNG and natural gas marketing business. The company is also developing additional LNG terminals and a liquefaction project at Sabine Pass to enable LNG exports.

Key Financial Metrics

Note: Debt figures include $255.1 million reclassified to current liabilities due to potential prepayment requirements.

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a net loss of $40.6 million for the quarter, an improvement of $1.9 million compared to the $42.5 million loss in the same period of 2009. For the nine-month period, the company achieved a net income of $9.9 million, a significant improvement of $148.2 million from the $138.3 million loss in the prior year.
• Revenue Growth: Total revenues increased to $216.0 million for the nine months ended September 30, 2010, compared to $95.5 million in the prior year. This was driven by a $95.8 million increase in LNG receiving terminal revenues and a $25.0 million swing in marketing revenues from a loss to a gain.
• Asset Sale: A major driver of the nine-month income was a $128.3 million gain on the sale of the company's 30% interest in Freeport LNG Development, L.P. in May 2010.
• Debt Restructuring: The company prepaid $102.0 million of its 2007 Term Loan using proceeds from the Freeport LNG sale. Additionally, $63.6 million from a reserve account was used to prepay accrued interest and principal on 2008 Convertible Loans.
• Expense Increases: Operating expenses and depreciation increased due to the full operability of the Sabine Pass LNG terminal and development costs for the new liquefaction project.

Guidance, Outlook, and Risks

• Liquidity and Debt Maturity: The company reclassified $255.1 million of 2008 Convertible Loans as current liabilities because lenders can require prepayment between May 18, 2011, and June 16, 2011. Management believes it has sufficient unrestricted cash and access to capital markets to satisfy this obligation. The next principal payment maturity is May 2012.
• Strategic Shifts: In June 2010, the company assigned its Terminal Use Agreement (TUA) to a subsidiary of Cheniere Partners, eliminating the need to fund TUA payments from corporate cash. This improved annual cash flow by an estimated $5 million to $16 million.
• Liquefaction Project: The company received U.S. Department of Energy approval in September 2010 to export up to 16.0 million tonnes per annum of LNG starting no later than September 2020. A second application to expand export rights to all WTO member countries is under public comment.
• Risks: Key risks include the ability to refinance or repay the 2008 Convertible Loans if demanded, the success of monetizing capacity at Sabine Pass, and the impact of natural gas price volatility on marketing revenues.

Investor Verification Checklist

• Debt Prepayment Risk: Verify the company's ability to refinance or repay the $255.1 million in 2008 Convertible Loans if lenders demand prepayment in mid-2011.
• Non-GAAP Measures: Review the reconciliation of GAAP marketing revenue ($14.7 million) to the Adjusted Non-GAAP measure ($3.5 million) to understand the true performance of the trading business.
• Liquefaction Timeline: Monitor progress on the Sabine Pass liquefaction project, specifically the Final Investment Decision (FID) and regulatory approvals for the expanded export license.
• Cash Flow Sustainability: Assess whether operating cash flows and distributions from Cheniere Partners are sufficient to cover interest expenses and future capital expenditures without further asset sales.
• Inventory Valuation: Review the lower-of-cost-or-market (LCM) adjustments on LNG inventory, as these can significantly impact reported earnings in volatile markets.