LNG

Cheniere Energy, Inc. - 10-Q Summary (Period Ended Sept 30, 2007)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2007. Cheniere Energy, Inc. is primarily engaged in developing, constructing, and operating LNG receiving terminals and natural gas pipelines along the U.S. Gulf Coast. The company operates four segments: LNG receiving terminals, natural gas pipelines, LNG and natural gas marketing, and oil and gas exploration and development. As of the reporting date, the company is in the construction phase for its major projects, with commercial operations for the Sabine Pass LNG terminal anticipated in the second quarter of 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss Increase: Net loss for the nine months ended Sept 30, 2007, increased to $129.1 million from $52.5 million in the same period in 2006. This was driven by higher General and Administrative (G&A) expenses ($85.1M vs $37.7M), increased interest expense ($80.4M vs $33.1M), and higher development costs for LNG terminals and pipelines ($26.4M vs $6.7M).
• Revenue Decline: Total revenues dropped to $0.01 million for the nine months of 2007 compared to $1.6 million in 2006, primarily due to a $4.4 million marketing and trading loss in 2007 versus no such loss in 2006.
• Debt Expansion: Long-term debt increased by $400 million to $2.76 billion, reflecting the new 2007 Term Loan entered into in May 2007.
• Stock Repurchase: The company repurchased approximately 9.2 million shares of common stock for $325.0 million during the quarter, utilizing proceeds from the 2007 Term Loan and call options associated with convertible notes.
• Cheniere Partners Offering: In March 2007, the company completed an IPO of Cheniere Energy Partners, L.P., raising net proceeds of $98.4 million for the partnership and $203.9 million for the parent company (Holdings), resulting in a minority interest balance of $293.5 million.

Guidance, Outlook, and Risks

• Project Timeline: Commercial operation of the Sabine Pass LNG receiving terminal is expected in the second quarter of 2008. The Creole Trail Pipeline is expected to be partially operational in Q4 2007, with full operations in Q2 2008.
• Liquidity: Management states it has adequate financial resources to complete approved projects, citing $446.6 million in unrestricted cash and $930.5 million in restricted cash/securities. Significant cash flows from operations are not expected until Q2 2008.
• Capital Expenditures: Estimated costs to complete the Sabine Pass LNG terminal are $1.4–$1.5 billion, and the Creole Trail Pipeline is estimated at $500–$550 million.
• Risks: Key risks include construction delays, cost overruns, regulatory approvals (FERC), and the ability to secure financing for future projects (Corpus Christi and Creole Trail LNG terminals). The company also faces commodity price risk in its marketing segment, though Value at Risk (VaR) was low ($0.1 million) as of Sept 30, 2007.
• Tax Status: The company has reported net operating losses (NOLs) since inception and has not recorded a current income tax liability. A deferred tax provision was recorded in 2006 but not in 2007.

Investor Verification Checklist

• Construction Progress: Verify the status of the Sabine Pass LNG terminal and Creole Trail Pipeline against the Q2 2008 and Q4 2007 operational targets.
• Capital Burn Rate: Monitor the rate of cash consumption against the $930.5 million in restricted funds to ensure sufficiency for project completion without additional financing.
• Debt Covenants: Review the terms of the Sabine Pass LNG notes and the 2007 Term Loan, specifically regarding distribution restrictions and interest coverage ratios.
• Marketing Segment Performance: Assess the volatility and profitability of the LNG and natural gas marketing segment, which contributed a $4.4 million loss in the first nine months of 2007.
• Share Count: Confirm the impact of the 9.2 million share repurchase on future earnings per share once operations commence.