LNG

Cheniere Energy, Inc. - 10-Q Summary (Period Ended June 30, 2006)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006. Cheniere Energy, Inc. is primarily engaged in developing, constructing, and operating a network of LNG receiving terminals and related natural gas pipelines along the U.S. Gulf Coast. The company operates four segments: LNG receiving terminal, natural gas pipeline, LNG and natural gas marketing, and oil and gas exploration and development. As of July 31, 2006, there were approximately 54.98 million shares of common stock outstanding.

Key Financial Metrics

Note: Revenue is derived almost exclusively from the oil and gas exploration and development segment. The LNG and pipeline segments are in the development phase and generated no revenue.

Material Changes vs. Prior Period

• Net Loss Improvement (Q2): Net loss decreased to $3.6 million in Q2 2006 from $9.7 million in Q2 2005. This improvement was driven by a $12.3 million credit to expenses due to the capitalization of pipeline development costs as a regulatory asset under SFAS No. 71, and a $5.6 million income tax benefit.
• Accounting Changes:
  • Share-Based Compensation: Adoption of SFAS No. 123R on Jan 1, 2006, resulted in the recognition of $10.9 million in stock-based compensation expense for the six months ended June 30, 2006 (compared to $1.7 million in 2005).
  • Oil & Gas Accounting: Changed from the full cost method to the successful efforts method effective Jan 1, 2006, requiring retrospective adjustments to prior periods.
• Debt and Liquidity: Long-term debt increased to $1.06 billion from $917.5 million at year-end 2005, primarily due to $149 million drawn under the Sabine Pass Credit Facility. Cash balances decreased slightly to $657.6 million from $692.6 million.
• Segment Performance: The Natural Gas Pipeline segment reported a net income of $10.5 million in Q2 2006 (vs. a loss of $3.7 million in Q2 2005) largely due to the regulatory asset capitalization. The LNG Receiving Terminal segment loss widened to $15.2 million due to increased development costs.

Guidance, Outlook, and Risks

• Project Status:
  • Sabine Pass LNG: Phase 1 construction commenced in 2005; operations anticipated in 2008. Phase 2 expansion authorized in July 2006.
  • Corpus Christi LNG: Preliminary work commenced Q2 2006; operations anticipated in 2010.
  • Creole Trail LNG: FERC authorization granted June 2006; construction anticipated to commence in 2007 with operations in 2011.
• Capital Requirements: The company estimates total costs of approximately $3 billion for the three LNG terminals and $800 million to $1 billion for related pipelines. Funding is expected via cash on hand, project-level debt, and equity issuances.
• Recent Financing: In July 2006 (subsequent to period end), the Sabine Pass Credit Facility was amended and restated to increase capacity to $1.5 billion.
• Risks:
  • SEC Investigation: The company is cooperating with a formal, nonpublic SEC investigation regarding agreements with Chevron USA, the December 2004 public offering, and trading in securities.
  • Regulatory: Future operations depend on FERC approvals and the ability to recover costs through regulated rates (SFAS No. 71 application).
  • Commodity Prices: Business viability is premised on sustained U.S. natural gas prices of $3.00 per Mcf or more.

Investor Verification Checklist

• Regulatory Asset Validity: Verify the sustainability of the $12.3 million regulatory asset capitalization under SFAS No. 71 and the likelihood of cost recovery through future FERC rate-making.
• Capital Sufficiency: Assess the adequacy of current cash ($657.6M) and credit facilities ($1.5B amended) against the estimated $4+ billion total capital requirement for terminal and pipeline completion.
• SEC Investigation Status: Monitor developments regarding the SEC's formal investigation into the company's past transactions and disclosures.
• Share-Based Compensation Impact: Review the ongoing impact of SFAS No. 123R on future earnings, noting $73 million in unrecognized compensation cost remaining at period end.
• Construction Progress: Track the timeline for Phase 1 completion at Sabine Pass (target 2008) and the commencement of Phase 2 and other terminal projects.