LNG

Business Context and Reporting Period

This Form 10-K covers Cheniere Energy, Inc. for the fiscal year ended December 31, 2009. Cheniere is a Houston-based energy company primarily engaged in LNG-related businesses. Key assets include the Sabine Pass LNG receiving terminal in Louisiana (operated through a 90.6% owned partnership, Cheniere Energy Partners, L.P.) and the Creole Trail Pipeline. The company also holds a 30% interest in Freeport LNG and is developing additional terminals in Corpus Christi and Creole Trail. In 2009, the company achieved full operability of the Sabine Pass terminal (4.0 Bcf/d capacity) and began commercial LNG marketing activities.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased significantly from $7.1 million in 2008 to $181.1 million in 2009. This was driven by the commencement of commercial operations at the Sabine Pass LNG terminal, generating $170.1 million in terminal revenue from capacity reservation fees paid by Total, Chevron, and Cheniere Marketing.
• Reduced Net Loss: The net loss improved by approximately $211.5 million year-over-year. This improvement was primarily due to increased terminal revenues, a $45.4 million gain on the early extinguishment of debt, and reduced restructuring charges (from $78.7 million in 2008 to $0.02 million in 2009).
• Increased Expenses: Operating expenses rose due to the full operation of the Sabine Pass terminal, resulting in higher depreciation, depletion, and amortization (DD&A) of $54.2 million (up from $24.3 million) and increased operating expenses of $36.9 million (up from $14.5 million).
• Debt Reduction: The company reduced its Convertible Senior Unsecured Notes principal by $120.4 million through an exchange of cash and common stock, recognizing a gain on extinguishment.

Guidance, Outlook, Risks, and Contingencies

• Liquidity and Debt Maturity: Management states it has sufficient cash and working capital to fund operations until August 2011, the earliest date principal payments may be required on existing indebtedness (specifically the 2008 Convertible Loans). The company anticipates needing to restructure finances, refinance debt, or issue equity prior to this date.
• Marketing Strategy: The company is actively monetizing 2.0 Bcf/d of reserved capacity at Sabine Pass through its subsidiary, Cheniere Marketing. In 2009, it successfully purchased, transported, and sold commercial LNG cargoes, utilizing hedging strategies to manage price risk.
• Key Risks:
  • Financial Risk: High leverage ($3.1 billion debt) and negative operating cash flow create liquidity risks. Failure to refinance or restructure debt by 2011 could lead to reorganization.
  • Customer Concentration: Future results depend heavily on the performance of two third-party TUA customers (Total and Chevron) and the ability of Cheniere Marketing to commercially exploit its reserved capacity.
  • Market Risk: The business is sensitive to the price differential between North American natural gas and international LNG prices. Low domestic gas prices could reduce the competitiveness of imported LNG.
  • Regulatory Risk: Operations are subject to extensive FERC, EPA, and state regulations regarding safety, environment, and greenhouse gas emissions.
• Contingencies: The company has no material pending legal proceedings as of December 31, 2009. However, it faces potential capital calls from its 30% investment in Freeport LNG, though none are anticipated in the foreseeable future.

Important Facts for Investor Verification

• Debt Refinancing Timeline: Verify the company's progress in refinancing or restructuring its debt obligations maturing or callable in August 2011.
• Cheniere Marketing Performance: Monitor the ability of Cheniere Marketing to secure long-term LNG supply contracts and sell regasified gas at a profit to cover its $250 million annual TUA obligation.
• Customer Creditworthiness: Assess the financial stability of Total and Chevron, whose TUA payments are critical to the company's cash flow.
• Regulatory Compliance: Track any new environmental regulations (specifically regarding greenhouse gases) that could increase compliance costs or restrict operations.
• Stock Price Volatility: Given the convertible debt features and the company's deficit equity position, monitor stock price movements which could impact debt conversion terms or equity raising capabilities.