LNG

Business Context and Reporting Period

Company: Cheniere Energy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: Cheniere is primarily engaged in developing and constructing a network of three onshore LNG receiving terminals (Sabine Pass, Corpus Christi, and Creole Trail) and related natural gas pipelines along the U.S. Gulf Coast. The company also maintains a developing LNG and natural gas marketing business and limited oil and gas exploration activities in the Gulf of Mexico. As of the reporting date, the company is in a pre-revenue construction phase for its major infrastructure projects, with commercial operations anticipated in 2008.

Key Financial Metrics

Note: Total revenues for Q1 2007 were negative due to a $2.1 million marketing and trading loss exceeding $0.8 million in oil and gas sales.

Material Changes vs. Prior Period

• Net Loss Expansion: Net loss increased by $18.8 million (119%) compared to Q1 2006. This was driven by higher interest expense ($26.4 million vs. $11.1 million) and increased general and administrative expenses ($21.3 million vs. $13.2 million), partially offset by higher interest income ($21.6 million vs. $9.5 million).
• Financing Activity: Net cash provided by financing activities surged to $263.0 million, primarily due to the Initial Public Offering (IPO) of Cheniere Energy Partners, L.P. on March 26, 2007. The company received $164.5 million from the sale of common units by its subsidiary and $98.4 million from the issuance of units to minority owners.
• Investing Activity: Cash used in investing activities nearly doubled to $113.9 million, reflecting accelerated construction spending of $160.7 million on LNG terminals and pipelines, and $98.4 million invested in restricted treasury securities to fund future distributions.
• Segment Performance: The LNG and Natural Gas Marketing segment reported a net loss of $5.5 million (vs. $1.2 million loss in 2006) due to the commencement of trading activities and increased staffing. Conversely, the Oil and Gas Exploration segment turned profitable with $0.3 million net income.

Outlook, Risks, and Management Commentary

• Project Timeline: Construction of the Sabine Pass LNG terminal is ongoing, with commercial operations anticipated in the second quarter of 2008. The Sabine Pass Pipeline is expected to commence operations in Q4 2007. Final investment decisions for Corpus Christi and Creole Trail terminals are pending commercial arrangements and financing.
• Liquidity Position: Management states it has adequate financial resources to implement approved projects. Unrestricted cash stands at $583.6 million, supplemented by $1.2 billion in restricted cash and securities earmarked for construction costs, interest payments, and partner distributions through 2009.
• Debt Structure: The company carries $2.032 billion in Sabine Pass LNG Senior Secured Notes (due 2013 and 2016) and $325 million in Convertible Senior Unsecured Notes (due 2012). Distributions from the Sabine Pass project are restricted until specific construction milestones and debt service reserve requirements are met.
• Risks and Contingencies:
  • SEC Investigation: The company is cooperating with a nonpublic factual investigation by the SEC regarding actions and communications related to agreements with Chevron and the December 2004 public offering. No material adverse impact is currently anticipated.
  • Construction Risks: Projects are subject to cost overruns, delays, and regulatory approvals. Cost estimates for Sabine Pass Phase 1 and Phase 2-Stage 1 range from $1.4 billion to $1.5 billion.
  • Market Risk: The marketing segment faces commodity price volatility. The one-day Value at Risk (VaR) for marketing positions was $0.3 million as of March 31, 2007.

Investor Verification Checklist

• Construction Progress: Verify the status of Sabine Pass LNG terminal construction against the Q2 2008 commercial operation target and monitor for cost overruns relative to the $1.4B-$1.5B estimate.
• Debt Covenants: Review the specific conditions required to release restricted cash for distributions, particularly the fixed charge coverage ratio and debt service reserve fund requirements.
• Marketing Segment Viability: Assess the sustainability of the marketing and trading losses as the company scales its trading operations and hires additional staff.
• Regulatory Status: Monitor the outcome of the ongoing SEC investigation and the status of FERC approvals for the Creole Trail and Sabine Pass pipelines.
• Capital Calls: Evaluate potential future capital calls for the 30% interest in Freeport LNG, though none are currently anticipated.