LNG

Cheniere Energy, Inc. - 10-Q Summary (Period Ended June 30, 2008)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2008, for Cheniere Energy, Inc., a Delaware corporation engaged in developing LNG receiving terminals, natural gas pipelines, and limited oil and gas exploration. The company is currently in a strategic transition phase, having announced in April 2008 a cost-saving program to downsize its natural gas marketing business and reduce personnel by approximately 41% as construction on the Sabine Pass LNG terminal nears completion.

Key Financial Metrics

Material Changes vs. Prior Period

• Restructuring Charges: The company recognized $78.6 million in restructuring charges in the second quarter of 2008, compared to none in the prior year. This was driven by the downsizing of the marketing business, termination of LNG vessel charters, and facility closures.
• Derivative Losses: A derivative loss of $12.4 million was recorded for the six months ended June 30, 2008, primarily due to natural gas swaps hedging commissioning cargoes. No such loss was recorded in the comparable 2007 period.
• Interest Income Decline: Interest income dropped significantly to $14.4 million (six months 2008) from $45.7 million (six months 2007) due to lower average invested cash balances as funds were deployed for construction and lower market interest rates.
• Debt Structure: Long-term debt increased by $95 million due to the May 2008 Bridge Loan. The company also terminated its Marketing Credit Facility, releasing $39.7 million in cash collateral.

Guidance, Outlook, and Risks

• Liquidity Strategy: In May 2008, the company secured an 18-month Bridge Loan of $95 million ($82.3 million net proceeds) to provide liquidity until a strategic transaction is consummated or LNG revenues commence. On August 6, 2008, the company accepted a commitment for $250 million in convertible security financing to replace the Bridge Loan.
• Project Status: The Sabine Pass LNG terminal is operational for commissioning, with three cargoes unloaded. Full commercial operations are expected in late 2008. The Creole Trail Pipeline Phase 1 is in commercial operation.
• Strategic Options: Management is exploring strategic options to enhance shareholder value, including optimizing the Sabine Pass terminal and the regasification capacity held by Cheniere Marketing. A domestic marketing agreement with J.P. Morgan Ventures Energy Corporation was announced in June 2008.
• Risks: If the $250 million financing is not closed, or if sufficient LNG cargos are not obtained, the company will need alternative funding in the first quarter of 2009. The company also faces risks related to the completion of construction and the ability to secure long-term commercial arrangements for its terminals.

Investor Verification Checklist

• Financing Closure: Verify the closing status of the $250 million convertible security financing committed in August 2008.
• Restructuring Execution: Confirm the completion of the 41% workforce reduction and the final costs associated with the $78.6 million restructuring charge.
• Sabine Pass Commissioning: Monitor the timeline for the completion of the commissioning process and the start of commercial LNG cargoes to generate revenue.
• Debt Covenants: Review the fixed charge coverage ratio requirements for the Sabine Pass Senior Notes, which must be met to allow distributions to Cheniere Partners.
• Freeport LNG Cash Calls: Assess any potential future cash calls from the 30% equity investment in Freeport LNG, which recently required $4.8 million in additional funding.