form_10-q.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission File No. 001-16383
CORPORATE LOGO
CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
   
Delaware
95-4352386
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
700 Milam Street, Suite 800
 
Houston, Texas
77002
(Address of principal executive offices)
(Zip code)
 
(713) 375-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  S    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
   
Large accelerated filer  ¨
Accelerated filer                    S
Non-accelerated filer    ¨
Smaller reporting company   ¨
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  S
 
As of   November 1, 2010, there were 57,643,732 shares of Cheniere Energy, Inc. Common Stock, $0.003 par value, issued and outstanding.

 
 

 

CHENIERE ENERGY, INC.
 
INDEX TO FORM 10-Q

 
     
 
 
 
 
 
     
     
     
     
 
     
     


 
i

 

PART I. FINANCIAL INFORMATION

Item 1.                      Consolidated Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 
   
September 30,
2010
   
December 31,
2009
 
ASSETS
 
(unaudited)
       
CURRENT ASSETS
           
Cash and cash equivalents
 
$
81,515
   
$
88,372
 
Restricted cash and cash equivalents
   
116,231
     
138,309
 
LNG inventory
   
901
     
32,602
 
Accounts and interest receivable
   
3,259
     
9,899
 
Prepaid expenses and other
   
15,367
     
17,093
 
TOTAL CURRENT ASSETS
   
217,273
     
286,275
 
                 
NON-CURRENT RESTRICTED CASH AND CASH EQUIVALENTS
   
82,892
     
82,892
 
PROPERTY, PLANT AND EQUIPMENT, NET
   
2,170,820
     
2,216,855
 
DEBT ISSUANCE COSTS, NET
   
39,375
     
47,043
 
GOODWILL
   
76,819
     
76,819
 
INTANGIBLE LNG ASSETS
   
6,067
     
6,088
 
OTHER
   
23,232
     
16,650
 
TOTAL ASSETS
 
$
2,616,478
   
$
2,732,622
 
                 
LIABILITIES AND DEFICIT
               
CURRENT LIABILITIES
               
Accounts payable
 
$
1,393
   
$
426
 
Current debt—related parties
   
242,598
     
 
Current debt
   
12,499
     
 
Accrued liabilities
   
71,492
     
38,425
 
Deferred revenue
   
26,340
     
26,456
 
Other
   
85
     
905
 
TOTAL CURRENT LIABILITIES
   
354,407
     
66,212
 
                 
LONG-TERM DEBT, NET OF DISCOUNT
   
2,585,408
     
2,692,740
 
LONG-TERM DEBT—RELATED PARTIES, NET OF DISCOUNT
   
74,629
     
349,135
 
DEFERRED REVENUE
   
30,734
     
33,500
 
OTHER NON-CURRENT LIABILITIES
   
2,312
     
23,162
 
COMMITMENTS AND CONTINGENCIES
   
     
 
                 
DEFICIT
               
Stockholders’ deficit
               
Preferred stock, $.0001 par value, 5.0 million shares authorized, none issued
   
     
 
Common stock, $.003 par value
Authorized: 240.0 million shares at September 30, 2010 and December 31, 2009
Issued and outstanding: 57.6 million and  56.7 million shares at September 30, 2010 and December 31, 2009, respectively;
   
173
     
170
 
Treasury stock: 1.0 million and 0.7 million shares at September 30, 2010 and December 31, 2009, respectively, at cost
   
(2,175
)
   
(1,494
)
Additional paid-in-capital
   
350,388
     
336,971
 
Accumulated deficit
   
(975,316
)
   
(985,246
)
Accumulated other comprehensive loss
   
(185
)
   
(133
)
TOTAL STOCKHOLDERS’ DEFICIT
   
(627,115
)
   
(649,732
)
Non-controlling interest
   
196,103
     
217,605
 
TOTAL DEFICIT
   
(431,012
)
   
(432,127
)
TOTAL LIABILITIES AND DEFICIT
 
$
2,616,478
   
$
2,732,622
 
                 
 
The accompanying notes are an integral part of these financial statements.

 
1

 

CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
REVENUES
                       
LNG receiving terminal revenues
 
$
65,945
   
$
65,119
   
$
199,109
   
$
103,320
 
Oil and gas sales
   
749
     
797
     
2,170
     
2,370
 
Marketing and trading
   
1,533
     
(9,609
)
   
14,703
     
(10,265
)
Other
   
21
     
25
     
58
     
100
 
TOTAL REVENUES
   
68,248
     
56,332
     
216,040
     
95,525
 
                                 
OPERATING COSTS AND EXPENSES
                               
LNG receiving terminal and pipeline development expense
   
4,885
     
122
     
6,746
     
122
 
LNG receiving terminal and pipeline operating expense
   
9,053
     
8,004
     
31,673
     
26,033
 
Oil and gas production and exploration costs
   
133
     
126
     
343
     
290
 
Depreciation, depletion and amortization
   
16,649
     
14,269
     
47,885
     
39,126
 
General and administrative expense
   
15,145
     
15,557
     
51,273
     
48,776
 
TOTAL OPERATING COSTS AND EXPENSES
   
45,865
     
38,078
     
137,920
     
114,347
 
                                 
INCOME (LOSS) FROM OPERATIONS
   
22,383
     
18,254
     
78,120
     
(18,822
)
                                 
OTHER INCOME (EXPENSE)
                               
Gain on sale of equity method investment
   
     
     
128,330
     
 
Derivative gain, net
   
     
1,158
     
461
     
4,482
 
Gain (loss) on early extinguishment of debt
   
     
     
(1,011
)
   
45,363
 
Interest expense, net
   
(63,899
)
   
(61,557
)
   
(198,044
)
   
(176,766
)
Interest income
   
169
     
114
     
408
     
1,313
 
Other income (loss)
   
46
     
124
     
(42
)
   
107
 
TOTAL OTHER EXPENSE
   
(63,684
)
   
(60,161
)
   
(69,898
)
   
(125,501
)
INCOME (LOSS) BEFORE INCOME TAXES
   
(41,301
)
   
(41,907
)
   
8,222
     
(144,323
)
INCOME TAX PROVISION
   
     
     
     
 
NET INCOME (LOSS)
   
(41,301
)
   
(41,907
)
   
8,222
     
(144,323
)
NET (INCOME) LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST
   
721
     
(590
)
   
1,708
     
6,034
 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
 
$
(40,580
)
 
$
(42,497
)
 
$
9,930
   
$
(138,289
)
                                 
Net income (loss) per share attributable to common stockholders—basic
 
$
(0.73
)
 
$
(0.80
)
 
$
0.18
   
$
(2.71
)
Net income (loss) per share attributable to common stockholders—diluted
 
$
(0.73
)
 
$
(0.80
)
 
$
0.16
   
$
(2.71
)
Weighted average number of common shares outstanding—basic
   
55,609
     
52,945
     
55,316
     
51,073
 
Weighted average number of common shares outstanding—diluted
   
55,609
     
52,945
     
61,314
     
51,073
 

 
The accompanying notes are an integral part of these financial statements.

 
2

 

CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)
(in thousands)
(unaudited)
 
                                   
Accumulated
             
                         
Additional
         
Other
   
Non-
   
Total
 
   
Common Stock
 
Treasury Stock
   
Paid-in
   
Accumulated
   
Comprehensive
   
controlling
   
Equity
 
   
Shares
   
Amount
 
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
   
Interest
   
(Deficit)
 
Balance—December 31, 2009
 
56,651
 
$
170
 
697
 
$
(1,494
)
$
336,971
 
$
(985,246
)
$
(133
)
$
217,605
 
$
(432,127
)
Issuances of restricted stock
 
1,248
   
3
 
   
   
(4
)
 
   
   
   
(1
)
Forfeitures of restricted stock
 
(51
)
 
 
51
   
   
   
   
   
   
 
Stock-based compensation
 
   
 
   
   
13,419
   
   
   
   
13,419
 
Treasury stock acquired
 
(204
)
 
 
204
   
(681
)
 
2
   
   
   
   
(679
)
Comprehensive income:  Foreign currency translation
 
   
 
   
   
   
   
(52
)
 
   
(52
)
Loss attributable to non-controlling interest
 
   
 
   
   
   
   
   
(1,708
)
 
(1,708
)
Distribution to non-controlling interest
 
   
 
   
   
   
   
   
(19,794
)
 
(19,794
)
Net income attributable to common stockholders
 
   
 
   
   
   
9,930
   
   
   
9,930
 
Balance— September 30, 2010
 
57,644
 
$
173
 
952
 
$
(2,175
)
$
350,388
 
$
(975,316
)
$
(185
)
$
196,103
 
$
(431,012
)

 
The accompanying notes are an integral part of these financial statements.

 
3

 

CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss) attributable to common stockholders
 
$
9,930
   
$
(138,289
)
Adjustments to reconcile net income (loss) attributable to common stockholders to net cash used in operating activities:
               
Gain on sale of limited partnership investment
   
(128,330
)
   
 
(Gain) loss on early extinguishment of debt
   
1,011
     
(45,362
)
Depreciation, depletion and amortization
   
47,885
     
39,126
 
Amortization of debt issuance and debt discount
   
20,397
     
21,179
 
Non-cash compensation
   
13,380
     
13,416
 
Restricted interest income on restricted cash and cash equivalents
   
     
(2,794
)
Use of restricted cash and cash equivalents
   
(4,337
)
   
(22,237
)
Non-cash derivative (gain) loss
   
(820
)
   
587
 
Non-cash inventory write-downs
   
     
17,065
 
Non-controlling interest
   
(1,708
)
   
(6,034
Non-cash interest expense
   
24,963
     
23,866
 
Use of cash for accrued interest
   
(60,899
)
   
 
Other
   
(5,872
)
   
(19
)
Changes in operating assets and liabilities:
               
Accounts payable and accrued liabilities
   
40,019
     
30,364
 
LNG inventory
   
31,702
     
(34,335
Accounts and interest receivable
   
2,246
     
(433
)
Deferred revenue
   
(3,116
)
   
20,696
 
Prepaid expenses and other
   
1,918
     
(11,022
)
NET CASH USED IN OPERATING ACTIVITIES
   
(11,631
)
   
(94,226
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale of limited partnership investment
   
104,330
     
 
Use of restricted cash and cash equivalents
   
3,939
     
96,464
 
LNG receiving terminal and pipeline construction-in-process, net
   
(2,805
)
   
(97,991
)
Distributions from limited partnership investment
   
3,900
     
9,000
 
Purchases of intangibles and fixed assets, net of sales
   
291
     
(293
)
Other
   
(91
)
   
(533
)
NET CASH PROVIDED BY INVESTING ACTIVITIES
   
109,564
     
6,647
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Use of restricted cash and cash equivalents
   
22,475
     
123,263
 
Distributions to non-controlling interest
   
(19,794
)
   
(19,794
)
Repurchases and prepayments of debt
   
(104,681
)
   
(30,030
)
Debt issuance costs
   
(9
)
   
(121
)
Purchase of treasury shares
   
(681
)
   
(80
Other
   
(2,100
)
   
(497
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
   
(104,790
)
   
72,741
 
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
   
(6,857
)
   
(14,838
)
CASH AND CASH EQUIVALENTS—beginning of period
   
88,372
     
102,192
 
CASH AND CASH EQUIVALENTS—end of period
 
$
81,515
   
$
87,354
 

The accompanying notes are an integral part of these financial statements.

 
4

 

CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 
NOTE 1—Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Cheniere Energy, Inc. have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included. As used in these Notes to Consolidated Financial Statement, the terms “Cheniere,” “the Company,” “we,” “our” and “us” refer to Cheniere Energy, Inc. and its wholly-owned or controlled subsidiaries, unless otherwise stated or indicated by context.

Results of operations for the three- and nine-month periods ended September 30, 2010 are not necessarily indicative of the results of operations that will be realized for the year ended December 31, 2010.

Certain reclassifications have been made to prior period information to conform to the current presentation.  The reclassifications had no effect on our overall consolidated financial position, results of operations or cash flows.

For further information, refer to the consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2009.
 
NOTE 2—Liquidity
 
As of September 30, 2010, we had unrestricted cash and cash equivalents, accounts receivable and other working capital from LNG and natural gas marketing activities of $89.3 million that will be available to Cheniere, which excludes cash and cash equivalents available to Cheniere Energy Partners, L.P. (“Cheniere Partners”), a publicly traded partnership in which we own a 90.6% interest, and Sabine Pass LNG, L.P. (“Sabine Pass LNG”), a wholly-owned subsidiary of Cheniere Partners. In addition, we had restricted cash and cash equivalents of approximately $199.1 million which was designated for the following purposes: approximately $5.2 million for Sabine Pass LNG’s working capital; approximately $51.9 million for Cheniere Partners’ working capital; approximately $137.3 million for interest payments related to the Senior Notes described below; and approximately $4.7 million for other restricted purposes.  Although consolidated for financial reporting, Cheniere, Sabine Pass LNG and Cheniere Partners operate with independent capital structures.

As of September 30, 2010, we reclassified $255.1 million of debt from long-term liability to current liability because the lenders of our 2008 Convertible Loans can require prepayment of the loans within 12 months of September 30, 2010. If the lenders of the 2008 Convertible Loans require a prepayment, they must provide 90 days notice between May 18, 2011 and June 16, 2011.  If the lenders of the 2008 Convertible Loans require prepayment, we believe we will have sufficient unrestricted cash, liquid assets, cash generated from our operations and access to capital markets to satisfy the obligation and fund our operations until our next maturity in May 2012.  In order to satisfy our first required principal payment in May 2012, we will need to continue improving our capital structure, which may be accomplished by entering into commercial agreements, refinancing our existing indebtedness, issuing equity or other securities, selling assets or through a combination of the foregoing, which will be dependent on factors such as worldwide natural gas and capital market conditions (see “Risk Factors” in our current report on Form 8-K dated as of August 6, 2010).

We have made progress in reducing our debt obligations. During the second quarter of 2009, we prepaid $120.4 million aggregate principal amount of our Convertible Senior Unsecured Notes using a combination of $30.0 million cash and cash equivalents and 4.0 million shares of our common stock. In May 2010, we prepaid $102 million of the 2007 Term Loan using the proceeds from the sale of our 30% interest in Freeport LNG Development, L.P. (“Freeport LNG”). In June 2010, we prepaid $60.9 million in accrued interest and $2.7 million of principal on the 2008 Convertible Loans using funds held in a Terminal Use Agreement (“TUA”) reserve account that were released as they were no longer needed to make quarterly TUA payments.

 
5

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)


NOTE 3—Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents consist of cash and cash equivalents that are contractually restricted as to usage or withdrawal, as follows:
 
Senior Notes Debt Service Reserve
 
Sabine Pass LNG consummated private offerings of an aggregate principal amount of $2,215.5 million of Senior Notes (See Note 10—“Debt and Debt—Related Parties”). Under the indenture governing the Senior Notes (the “Sabine Pass Indenture”), except for permitted tax distributions, Sabine Pass LNG may not make distributions until certain conditions are satisfied: there must be on deposit in an interest payment account an amount equal to one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment, and there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment of $82.4 million. Distributions are permitted only after satisfying the foregoing funding requirements, a fixed charge coverage ratio test of 2:1 and other conditions specified in the Sabine Pass Indenture. As of September 30, 2010 and December 31, 2009, we classified the permanent debt service reserve fund of $82.4 million as non-current restricted cash and cash equivalents. As of September 30, 2010 and December 31, 2009, we classified $54.9 million and $13.7 million, respectively, as current restricted cash and cash equivalents for the payment of interest due within twelve months. These cash accounts are controlled by a collateral trustee, and, therefore, are shown as restricted cash and cash equivalents on our Consolidated Balance Sheets.

TUA Reserve
 
Under the original terms and conditions of the 2008 Convertible Loans, we were required to fund a reserve account (“TUA Reserve Account”) with $135.0 million to pay obligations of Cheniere Marketing, LLC (“Cheniere Marketing”), a wholly-owned subsidiary of Cheniere, under its TUA with Sabine Pass LNG and as additional collateral for the 2008 Convertible Loans. The cash account is controlled by a collateral trustee, and therefore, is shown as restricted cash and cash equivalents on our Consolidated Balance Sheet as of December 31, 2009.

In June 2010, we amended the 2008 Convertible Loans to permit all funds on deposit in the TUA Reserve Account to be applied to the prepayment of the accrued interest on the loans outstanding under the 2008 Convertible Loans, with any remainder to be applied to the prepayment of the principal balance of such 2008 Convertible Loans.  As a result, $63.6 million from the TUA Reserve Account was applied to such prepayment, leaving the balance of the TUA reserve account at zero at September 30, 2010. The balance of the TUA reserve account was zero at December 31, 2009.

Other Restricted Cash and Cash Equivalents
 
As of September 30, 2010 and December 31, 2009, $57.0 million and $117.5 million, respectively, of cash and cash equivalents was primarily related to cash and cash equivalents held by Sabine Pass LNG and Cheniere Partners that is considered restricted to Cheniere.  As of September 30, 2010 and December 31, 2009, due to various other contractual restrictions, $4.3 million and $7.1 million had been classified as current restricted cash and cash equivalents, respectively, and $0.5 million had been classified as non-current restricted cash and cash equivalents on our Consolidated Balance Sheets.

NOTE 4—LNG Inventory

LNG inventory is recorded at cost and is subject to the lower of cost or market (“LCM”) adjustments at the end of each period.  Inventory cost is determined using the average cost method. Recoveries of losses resulting from interim period LCM adjustments are recorded when market price recoveries occur on the same inventory in the same fiscal year.  These recoveries are recognized as gains in later interim periods with such gains not exceeding previously recognized losses.  As of September 30, 2010 and December 31, 2009, we had 250,000 million British thermal units (“MMBtu”) of LNG inventory recorded at $0.9 million and 7,778,000 MMBtu of LNG inventory recorded at $32.6 million, respectively, on our Consolidated Balance Sheets.

NOTE 5—Variable Interest Entity

In March 2010, Cheniere Marketing entered into various agreements (“LNGCo Agreements”) with JPMorgan LNG Co. (“LNGCo”), an indirect subsidiary of JPMorgan Chase & Co., effective April 1, 2010, providing Cheniere Marketing with financial support to source more cargos of LNG than it could source on a stand-alone basis.  Under the LNGCo Agreements, Cheniere Marketing has agreed to develop and maintain commercial and trading opportunities in the LNG industry and present any such

 
6

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)


opportunities exclusively to LNGCo. In addition, Cheniere Marketing is responsible for providing operational and administrative services to LNGCo in exchange for a portion of the risk and return of certain assets and operating results of LNGCo. In return for the services to be provided by Cheniere Marketing, LNGCo pays a fixed fee to Cheniere Marketing, and may pay additional fees dependent upon the gross margins of each transaction, and the aggregate revenue earned during the term of the various agreements. In the event LNGCo incurs operating losses on its LNG cargo activities, Cheniere Marketing would be responsible for funding a portion of these operating losses. Cheniere Marketing holds no ownership interest in LNGCo and does not have the authority to contractually bind LNGCo under the LNGCo Agreements. LNGCo has various operational responsibilities and unilateral participating rights to direct the activities of LNGCo that most significantly impact LNGCo’s economic performance. The term of the LNGCo Agreements is two years; however, either party may terminate without penalty at the end of one year. We have determined that LNGCo is a variable interest entity (“VIE”) for which Cheniere Marketing is not the primary beneficiary because Cheniere Marketing has a portion of the risk and return of certain assets and operating results of LNGCo, but Cheniere Marketing holds no equity in LNGCo and does not have substantive decision making ability. As a result, we have not consolidated LNGCo into Cheniere’s financial statements.

In April 2010, Cheniere Marketing sold its remaining LNG inventory of 2.4 million MMBtu to LNGCo.

During the three- and nine-month periods ended September 30, 2010, we recognized $2.3 million and $5.4 million, respectively, of marketing and trading revenues from LNGCo. As of September 30, 2010, Cheniere Marketing’s maximum exposure to loss relating to LNGCo was $3.7 million related to margin deposits that have been paid to LNGCo and fixed fee and gross margin revenue receivables earned as of September 30, 2010.  A portion of this $3.7 million represents our fixed fee receivable and is reported as accounts and interest receivable, and the remaining portion is reported as other non-current assets and is to be paid to Cheniere Marketing upon the completion or termination of the LNGCo Agreements.

NOTE 6— Property, Plant and Equipment

Property, plant and equipment consist of LNG receiving terminal costs, natural gas pipeline costs, oil and gas properties costs, and fixed assets costs, as follows (in thousands):

   
September 30,
   
December 31,
 
   
2010
   
2009
 
LNG RECEIVING TERMINAL COSTS
           
LNG receiving terminal
  $ 1,637,960     $ 1,637,542  
LNG receiving terminal construction-in-process
    38,783       37,120  
LNG site and related costs, net
    2,990       2,994  
Accumulated depreciation
    (71,648 )     (40,200 )
Total LNG receiving terminal costs, net
    1,608,085       1,637,456  
                 
NATURAL GAS PIPELINE COSTS
               
Natural gas pipeline
    563,698       564,213  
Natural gas pipeline construction-in-process
    2,422       1,995  
Pipeline right-of-ways
    18,455       18,455  
Accumulated depreciation
    (34,195 )     (23,004 )
Total natural gas pipeline costs, net
    550,380       561,659  
                 
OIL AND GAS PROPERTIES, successful efforts method
               
Proved
    3,857       3,565  
Accumulated depreciation, depletion and amortization
    (2,485 )     (1,787 )
Total oil and gas properties, net
    1,372       1,778  
                 
FIXED ASSETS
               
Computers and office equipment
    5,478       5,799  
Furniture and fixtures
    4,509       5,291  
Computer software
    12,356       12,284  
Leasehold improvements
    7,282       9,258  
Other
    1,465       1,488  
Accumulated depreciation
    (20,107 )     (18,158 )
Total fixed assets, net
    10,983       15,962  
                 
PROPERTY, PLANT AND EQUIPMENT, NET
  $ 2,170,820     $ 2,216,855  
 

 
7

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)


LNG Receiving Terminal Costs
 
Depreciation expense related to the Sabine Pass LNG receiving terminal totaled $10.4 million and $8.8 million for the three-month periods ended September 30, 2010 and 2009, respectively, and totaled $31.4 million and $22.4 million for the nine-month periods ended September 30, 2010 and 2009, respectively.

Natural Gas Pipeline Costs
 
Depreciation expense related to our Creole Trail pipeline totaled $3.7 million for each of the three-month periods ended September 30, 2010 and 2009, and totaled $11.2 million and $11.1 million for the nine-month periods ended September 30, 2010 and 2009, respectively.
 
Fixed Assets
 
Our fixed assets are recorded at cost and are depreciated on a straight-line method based on estimated lives of the individual assets or groups of assets. Depreciation expense related to our fixed assets totaled $0.9 million and $1.6 million for the three-month periods ended September 30, 2010 and 2009, respectively; and totaled $3.4 million and $4.9 million for the nine-month periods ended September 30, 2010 and 2009, respectively.

NOTE 7— Non-controlling Interest

We have consolidated our interest in Cheniere Partners because we have a controlling interest in the partnership. Therefore, Cheniere Partners’ financial statements are consolidated in our consolidated financial statements and its other equity is recorded as a non-controlling interest. The following table sets forth the components of our non-controlling interest balance attributable to third-party investors’ interest (in thousands):
 
Net proceeds from Cheniere Partners’ issuance of common units (1)
  $ 98,442  
Net proceeds from Holdings’ sale of Cheniere Partners common units (2)
    203,946  
Distributions to Cheniere Partners’ non-controlling interest
    (86,209 )
Non-controlling interest share of loss of Cheniere Partners
    (20,076 )
Non-controlling interest as of September 30, 2010
  $ 196,103  

(1)
In March and April 2007, we and Cheniere Partners completed a public offering of 15,525,000 Cheniere Partners common units (“Cheniere Partners Offering”). Through the Cheniere Partners Offering, Cheniere Partners received $98.4 million in net proceeds from the issuance of its common units to the public.
 
(2)
In conjunction with the Cheniere Partners Offering, Cheniere LNG Holdings, LLC (“Holdings”) sold a portion of the Cheniere Partners common units held by it to the public, realizing proceeds net of offering costs of $203.9 million, which included $39.4 million of net proceeds realized once the underwriters exercised their option to purchase an additional 2,025,000 Cheniere Partners common units from Holdings. Due to the subordinated distribution rights on our subordinated units, we have recorded those proceeds as a non-controlling interest.

NOTE 8—Investment in Limited Partnership

In May 2010, we sold our 30% interest in Freeport LNG to institutional investors for net proceeds of $104.3 million.  We accounted for our investment in Freeport LNG using the equity method of accounting.  Upon the closing of the sale, we had unrecorded cumulative suspended losses related to our investment in Freeport LNG, as the basis in our investment had been reduced to zero.  During our investment, we received $24.0 million in distributions in excess of our share of income (losses); therefore, we presented the distributions as a long-term liability representing a negative equity investment on our Consolidated Balance Sheets.  As a result of the sale, we recognized a net gain of $128.3 million.  The gain was comprised of net proceeds of $104.3 million and $24.0 million in distributions in excess of income.

 
8

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)


NOTE 9—Accrued Liabilities

As of September 30, 2010 and December 31, 2009, accrued liabilities consisted of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
Accrued interest expense and related debt fees
  $ 55,698     $ 16,179  
Payroll
    7,409       11,118  
LNG receiving terminal construction and operating costs
    2,035       10,335  
Other accrued liabilities
    6,350       793  
Total accrued liabilities
  $ 71,492     $ 38,425  
 
NOTE 10—Debt and Debt—Related Parties

As of September 30, 2010 and December 31, 2009, our debt consisted of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
Current debt (including related parties):
           
2008 Convertible Loans (including related parties)
  $ 255,097     $  
                 
Long-term debt (including related parties):
               
Senior Notes (including related parties)
  $ 2,215,500     $ 2,215,500  
2007 Term Loan
    298,000       400,000  
2008 Convertible Loans (including related parties)
          293,714  
Convertible Senior Unsecured Notes
    204,630       204,630  
Total long-term debt
    2,718,130       3,113,844  
Long-term debt discount:
               
Senior Notes (including related parties)
    (28,950 )     (32,471
Convertible Senior Unsecured Notes
    (29,143 )     (39,498
Total debt discount
    (58,093 )     (71,969
Long-term debt (including related parties), net of discount
  $ 2,660,037     $ 3,041,875  
 
Sabine Pass LNG Senior Notes
 
In November 2006, Sabine Pass LNG issued an aggregate principal amount of $2,032.0 million of Senior Notes, consisting of $550.0 million of 7¼% Senior Secured Notes due 2013 (the “2013 Notes”) and $1,482.0 million of 7½% Senior Secured Notes due 2016 (the “2016 Notes” and collectively with the 2013 Notes, the “Senior Notes”). In September 2008, Sabine Pass LNG issued an additional $183.5 million, before discount, of 2016 Notes whose terms were identical to the previously outstanding 2016 Notes. The net proceeds received from the additional issuance of 2016 Notes were $145.0 million.  The additional issuance and the previously outstanding 2016 Notes are treated as a single series of notes under the Sabine Pass Indenture.

Interest on the Senior Notes is payable semi-annually in arrears on May 30 and November 30 of each year. The Senior Notes are secured on a first-priority basis by a security interest in all of Sabine Pass LNG’s equity interests and substantially all of its operating assets. Under the Sabine Pass Indenture, except for permitted tax distributions, Sabine Pass LNG may not make distributions until certain conditions are satisfied: there must be on deposit in an interest payment account an amount equal to one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment, and  there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment of $82.4 million. Distributions are permitted only after satisfying the foregoing funding requirements, a fixed charge coverage ratio test of 2:1 and other conditions specified in the Sabine Pass Indenture. During the three- and nine-month periods ended September 30, 2010, Sabine Pass LNG made distributions of $86.8 million and $298.6 million, respectively, to Cheniere Partners after satisfying all of the applicable conditions in the Sabine Pass Indenture. During the three- and nine-month periods ended September 30, 2009, Sabine Pass LNG made distributions of $73.2 million and $222.5 million, respectively, to Cheniere Partners after satisfying all of the applicable conditions in the Sabine Pass Indenture.

 
9

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)



As of September 30, 2010 and December 31, 2009, we classified $74.6 million and $72.9 million, respectively, as part of long-term debt—related parties on our Consolidated Balance Sheets because related parties held these portions of the Senior Notes.
 
Convertible Senior Unsecured Notes
 
In July 2005, we consummated a private offering of $325.0 million aggregate principal amount of Convertible Senior Unsecured Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.  The notes bear interest at a rate of 2¼% per year and mature in August 2012. The notes are convertible at any time into our common stock under certain circumstances at an initial conversion rate of 28.2326 shares per $1,000 principal amount of the notes, which is equal to a conversion price of approximately $35.42 per share. As of September 30, 2010, no holders had elected to convert their notes at the conversion rate.
 
We may redeem some or all of the notes on or before August 1, 2012, for cash equal to 100% of the principal plus any accrued and unpaid interest if in the previous 10 trading days the volume-weighted average price of our common stock exceeds $53.13, subject to adjustment, for at least five consecutive trading days. In the event of such redemption, we will make an additional payment equal to the present value of all remaining scheduled interest payments through August 1, 2012, discounted at the U.S. Treasury securities rate plus 50 basis points. The indenture governing the notes contains customary reporting requirements.
 
On January 1, 2009, we adopted an accounting standard that requires issuers of certain convertible debt instruments to separately account for the liability component and the equity component represented by the embedded conversion option in a manner that will reflect that entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  The following table summarizes the liability component of the Convertible Senior Unsecured Notes (in thousands):

   
September 30,
2010
   
December 31,
2009
 
Principal amount
 
$
204,630
   
$
204,630
 
Unamortized discount
   
(29,143
)
   
(39,498
)
Net carrying amount
 
$
175,487
   
$
165,132
 
 
The unamortized discount is being amortized through the August 2012 maturity of the Convertible Senior Unsecured Notes.  Interest expense for the Convertible Senior Unsecured Notes, including the debt discount amortization, for the nine-month periods ended September 30, 2010 and 2009 was $10.4 million and $16.8 million, respectively.  The effective interest rate for the Convertible Senior Unsecured Notes as of September 30, 2010 was 10.9%.
 
2007 Term Loan
 
In May 2007, Cheniere Subsidiary Holdings, LLC (“Cheniere Subsidiary”), a wholly-owned subsidiary of Cheniere, entered into a $400.0 million credit agreement (“2007 Term Loan”).  Borrowings under the 2007 Term Loan generally bear interest at a fixed rate of 9¾% per annum. Interest is calculated on the unpaid principal amount of the 2007 Term Loan outstanding and is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The 2007 Term Loan will mature on May 31, 2012. The 2007 Term Loan is secured by a pledge of our 135,383,831 subordinated units in Cheniere Partners.

In May 2010, we sold our 30% interest in Freeport LNG, which was pledged as security of the 2007 Term Loan, to institutional investors for net proceeds of $104.3 million.  The net proceeds from the sale were used to prepay $102.0 million of the 2007 Term Loan in May 2010 (see Note 8—“Investment in Limited Partnership” for additional information). As of September 30, 2010 and December 31, 2009, $298.0 million and $400.0 million, respectively, were outstanding under the 2007 Term Loan and were included in long-term debt on our Consolidated Balance Sheets.
 
2008 Convertible Loans
 
In August 2008, we entered into a credit agreement pursuant to which we obtained $250.0 million in convertible term loans (“2008 Convertible Loans”).  The 2008 Convertible Loans will mature in 2018, but the lenders can require prepayment of the loan for 30 days following August 15, 2011, 2013 and 2015, and upon a change of control. The 2008 Convertible Loans bear interest at a fixed rate of 12% per annum, except during the occurrence of an event of default during which time the rate of interest will be 14% per annum. Interest is due semi-annually on the last business day of January and July. At our option, until August 15, 2011, accrued interest may be added to the principal on each semi-annual interest date. The aggregate amount of all accrued interest to August 15,

 
10

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)



2011 will be payable upon the maturity date. The 2008 Convertible Loans are secured by Cheniere’s rights and fees payable under management services agreements with Sabine Pass LNG and Cheniere Partners, by Cheniere’s 10.9 million common units in Cheniere Partners, by the equity and non-real property assets of Cheniere’s pipeline entities, by the equity of various other subsidiaries and certain other assets and subsidiary guarantees. The outstanding principal amount may be exchanged for newly-created Series B Convertible Preferred Stock, par value $0.0001 per share (“Series B Preferred Stock”), with voting rights limited to the equivalent of 10,125,000 shares of Cheniere common stock. The exchange ratio is one share of Series B Preferred Stock for each $5,000 of outstanding borrowings, subject to adjustment. The aggregate preferred stock is exchangeable into shares of Cheniere common stock at a price of $5.00 per share pursuant to a broadly syndicated offering. No portion of any accrued interest is eligible for conversion into Series B Preferred Stock.
 
As long as the 2008 Convertible Loans are exchangeable for shares of Series B Preferred Stock or shares of Series B Preferred Stock remain outstanding, the holders of a majority of the 2008 Convertible Loans and Series B Preferred Stock, acting together, have the right to nominate two individuals to the Company’s Board of Directors, and together with the Board of Directors, a third nominee, who would be an independent director.  In addition, one of the lenders is Scorpion Capital Partners LP, an affiliate of one of the Company’s directors.  

In June 2010, the 2008 Convertible Loans were amended to permit all funds on deposit in the TUA Reserve Account to be applied to the prepayment of the accrued interest on the loans outstanding under the 2008 Convertible Loans, with any remainder to be applied to the prepayment of the principal balance of such 2008 Convertible Loans.  As a result, $63.6 million from the TUA Reserve Account was used to prepay $60.9 million of accrued interest and $2.7 million of principal.

As of September 30, 2010, we reclassified $255.1 million of debt from long-term liability to current liability because the lenders of our 2008 Convertible Loans can require prepayment of the loans within 12 months of September 30, 2010. If the lenders of the 2008 Convertible Loans require a prepayment, they must provide 90 days notice no later than June 16, 2011 (see Note 2—“Liquidity”).  As of September 30, 2010 and December 31, 2009, $255.1 million and $293.7 million were outstanding under the 2008 Convertible Loans and are presented as on our Consolidated Balance Sheets as follows (in thousands):

   
September 30,
   
December 31,
 
   
2010
   
2009
 
Current debt:
           
Current debt—related parties
  $ 242,598     $  
Current debt
    12,499        
Total Current debt
    255,097        
                 
Long-term debt:
               
Long-term debt—related parties
          280,423  
Long-term debt
          13,291  
Long-term 2008 Convertible Loans
          293,714  
Total 2008 Convertible Loans
  $ 255,097     $ 293,714  

NOTE 11—Financial Instruments

We entered into financial derivatives to hedge the exposure to variability in expected future cash flows and currency fluctuations attributable to the future sale of LNG inventory. Changes in the fair value of our derivatives are reported in earnings because they do not meet the criteria to be designated as a hedging instrument that is required to qualify for cash flow hedge accounting. In addition, we entered into financial derivatives in order to take market positions associated with LNG and natural gas.

 
11

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)



The estimated fair value of financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The fair value of our commodity futures contracts are based on inputs that are quoted prices in active markets for identical assets or liabilities, resulting in Level 1 categorization of such measurements. The following table sets forth, by level within the fair value hierarchy, the fair value of our financial assets and liabilities at September 30, 2010 (in thousands):
 
   
Quoted Prices in
Active Markets for
Identical Instruments
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable Inputs
(Level 3)
   
Total  Carrying
Value
 
Derivatives liability—natural gas swaps
 
$
37
   
$
   
$
   
$
37
 
Derivatives liability—foreign exchange contracts
   
48
     
     
     
48
 
 
Derivatives liability—natural gas swaps reflects the fair value of natural gas swaps associated with the marketing of LNG and natural gas.

Derivatives liability—foreign exchange contracts reflects the fair value of forward foreign exchange contracts entered into to hedge the exposure to fluctuations in currency values.
 
The estimated fair value of financial instruments, including those financial instruments for which the fair value option was not elected are set forth in the table below. The carrying amounts reported on our Consolidated Balance Sheets for cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, interest receivable, and accounts payable approximate fair value due to their short-term nature.
 
Financial Instruments (in thousands):
   
September 30,
2010
   
December 31,
2009
 
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
2013 Notes (1)
 
$
550,000
   
$
530,750
   
$
550,000
   
$
503,250
 
2016 Notes, net of discount (1)
   
1,636,550
     
1,493,352
     
1,633,029
     
1,371,744
 
Convertible Senior Unsecured Notes, net of discount (2)
   
175,487
     
73,705
     
165,132
     
95,777
 
2007 Term Loan (3)
   
298,000
     
292,677
     
400,000
     
384,640
 
2008 Convertible Loans (3)
 
$
255,097
   
$
268,124
   
$
293,714
   
$
299,001
 

 
(1)
The fair value of the Senior Notes, net of discount, was based on quotations obtained from broker-dealers who made markets in these and similar instruments as of September 30, 2010 and December 31, 2009, as applicable.
 
 
(2)
The fair value of our Convertible Senior Unsecured Notes was based on the closing trading prices on September 30, 2010 and December 31, 2009, as applicable.
 
 
(3)
The 2007 Term Loan and 2008 Convertible Loans are closely held by few holders and purchases and sales are infrequent and are conducted on a bilateral basis without price discovery by us.  These loans are not rated and have unique covenants and collateral packages such that comparisons to other instruments would be imprecise. Moreover, the 2008 Convertible Loans are convertible into shares of Cheniere common stock. Nonetheless, we have provided an estimate of the fair value of these loans as of September 30, 2010 and December 31, 2009 based on an index of the yield to maturity of CCC rated debt of other companies in the energy sector.

NOTE 12—Income Taxes

We are not presently a taxpayer and have not recorded a net liability for international, federal or state income taxes in any of the periods included in the accompanying financial statements.  Our Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2010 and 2009 include no income tax benefits.





 
12

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)



Changes in the balance of unrecognized tax benefits excluding tax interest and penalties are as follows (in thousands): 

Balance at December 31, 2009
  $ 21,877  
Additions based on tax position related to current year
     
Additions for tax positions of prior years
     
Reductions of tax positions of prior years
    (21,877 )
Settlements
     
Balance at September 30, 2010
   $  

At December 31, 2009, we had $21.9 million of unrecognized federal income tax benefits that pertain to tax positions taken in the prior years for which there is uncertainty as to the timing of the corresponding tax deductions, but which the ultimate deductibility is highly certain.  Pursuant to Internal Revenue Code Section 172(b)(1)(H) and Revenue Procedure 2009-52, we have elected to apply and utilize an expanded three year net operating loss (“NOL”) carryback on our 2009 United States corporate consolidated tax return.  The expanded three year NOL carryback election eliminates the federal tax consequences related to the uncertainty as to the timing of the unrecognized federal income tax benefits provided above.

During the fourth quarter of 2008, largely due to the increased level of trading activity in our shares, we believed we had experienced an ownership change within the provisions of Internal Revenue Code Section 382 (“Section 382”) that would have subjected approximately $600 million of our existing NOL carryforwards to the annual NOL utilization limitations.  The applicable Section 382 limitation may have affected our ability to fully utilize our existing tax NOL carryforwards.  Our ability to fully utilize our existing tax NOL carryforwards was dependent on increasing the recognition of built-in gains in the five-year period following the above-referenced ownership change.

During the third quarter of 2010, additional information was obtained regarding the trading activity in our shares during 2008.  The additional information accelerated the ownership change date within the provisions of Section 382 from the fourth quarter of 2008 to the first quarter of 2008.  A first quarter 2008 ownership change will not affect our ability to fully utilize our existing tax NOL carryforwards.  We will continue to monitor trading activity in our shares which may cause an additional ownership change which may ultimately affect our ability to fully utilize our existing tax NOL carryforwards.
 
NOTE 13—Net Income (Loss) Per Share Attributable to Common Stockholders

Basic net income (loss) per share attributable to common stockholders (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the potential common shares had been issued.
 
The following table reconciles basic and diluted weighted average common shares outstanding for the three- and nine-month periods ended September 30, 2010 and 2009 (in thousands except for loss per share):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Weighted average common shares outstanding:
                       
Basic
   
55,609
     
52,945
     
55,316
     
51,073
 
Dilutive common stock options (1)
   
     
     
5,998
     
 
Dilutive Convertible Senior Unsecured Notes (2)
   
     
     
     
 
Dilutive 2008 Convertible Loans (3)
   
     
     
     
 
Diluted
   
55,609
     
52,945
     
61,314
     
51,073
 
                                 
Basic income (loss) per share attributable to common stockholders
 
$
(0.73
)
 
$
(0.80
)
 
$
0.18
   
$
(2.71
)
Diluted income (loss) per share attributable to common stockholders
 
$
(0.73
)
 
$
(0.80
)
 
$
0.16
   
$
(2.71
)

 
 
13

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
 
 
 
 (1)
Stock options, phantom stock and unvested stock of 6.2 million shares representing securities that could potentially dilute basic EPS in the future, were not included in the diluted net loss per share computation for the three-month period ended September 30, 2010, because they would have been anti-dilutive. Stock options, phantom stock and unvested stock of 10.7 million shares representing securities that could potentially dilute basic EPS in the future, were not included in the diluted net loss per share computations for the three- and nine-month periods ended September 30, 2009, because they would have been anti-dilutive.
 
 
(2)
Common shares of 5.8 million issuable upon conversion of the Convertible Senior Unsecured Notes for the three- and nine-month periods ended September 30, 2010 and 2009 were not included in the diluted computation because the computations of diluted net loss per share attributable to common stockholders utilizing the “if-converted” method would be anti-dilutive.
 
 
 (3)
Common shares of 49.5 million issuable upon conversion of the 2008 Convertible Loans were not included in the computations of diluted net loss per share for the three- and nine-month periods ended September 30, 2010 because the computations of diluted net loss per share attributable to common stockholders utilizing the “if-converted” method would be anti-dilutive. Common shares of 50.0 million issuable upon conversion of the 2008 Convertible Loans were not included in the computations of diluted net loss per share for the three- and nine-month periods ended September 30, 2009 because the computations of diluted net loss per share attributable to common stockholders utilizing the “if-converted” method would be anti-dilutive.

NOTE 14—Comprehensive Loss

The following table is a reconciliation of our net income (loss) attributable to common stockholders to our comprehensive income (loss) for the three- and nine-month periods ended September 30, 2010 and 2009 (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income (loss) attributable to common stockholders
  $ (40,580 )   $ (42,497 )   $ 9,930     $ (138,289 )
Other comprehensive income (loss) items:
                               
Foreign currency translation
    18       71       (52 )     113  
Comprehensive income (loss) attributable to common stockholders
  $ (40,562 )   $ (42,426 )   $ 9,878     $ (138,176 )

NOTE 15—Supplemental Cash Flow Information and Disclosures of Non-Cash Transactions

The following table provides supplemental disclosure of cash flow information (in thousands):

   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
Cash paid for interest, net of amounts capitalized
 
$
156,874
   
$
91,204
 
Construction-in-process and debt issuance additions funded with accrued liabilities
   
     
5,592
 


 
14

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)


NOTE 16—Business Segment Information

We have three operating business segments: LNG receiving terminal business, natural gas pipeline business and LNG and natural gas marketing business. These operating segments reflect lines of business for which separate financial information is produced internally and are subject to evaluation by our chief operating decision makers in deciding how to allocate resources.
 
Our LNG receiving terminal business segment consists of the operational Sabine Pass LNG receiving terminal, approximately 90.6% owned (at September 30, 2010), in western Cameron Parish, Louisiana on the Sabine Pass Channel and two other LNG receiving terminals that are in various stages of development at the following locations: Corpus Christi LNG, 100% owned, near Corpus Christi, Texas; and Creole Trail LNG, 100% owned, at the mouth of the Calcasieu Channel in central Cameron Parish, Louisiana.
 
Our natural gas pipeline business segment consists of the Creole Trail Pipeline, consisting of 94 miles of natural gas pipeline connecting the Sabine Pass LNG receiving terminal to numerous interconnection points with existing interstate natural gas pipelines in southwest Louisiana, and other natural gas pipelines in various stages of development to provide access to North American natural gas markets.
 
Our LNG and natural gas marketing business segment is seeking to develop a portfolio of long-term, short-term, and spot LNG purchase agreements and focuses on entering into business relationships for the domestic marketing of natural gas that is imported by Cheniere Marketing as LNG to the Sabine Pass LNG receiving terminal.
 
The following table summarizes revenues, net income (loss) from operations and total assets for each of our operating segments (in thousands):

   
Segments
 
   
LNG Receiving Terminal
   
Natural
Gas Pipeline
   
LNG & Natural Gas Marketing
   
Corporate and Other (1)
   
Total
Consolidation
 
As of or for the Nine Months Ended September 30, 2010
                             
Revenues
  $ 199,109     $ 58     $ 14,703     $ 2,170     $ 216,040  
Intersegment revenues (losses) (2) (3) (4) (5)
    128,382       255       (127,012 )     (1,625 )      
Depreciation, depletion and amortization
    32,008       11,296       832       2,730       46,866  
Non-cash compensation
    1,241       375       4,517       7,300       13,433  
Income (loss) from operations
    235,440       (16,407 )     (129,255 )     (11,658 )     78,120  
Interest expense, net
    (140,323 )     (33,795 )           (23,926 )     (198,044 )
Interest income
    272             88       48       408  
Goodwill
    76,819                         76,819  
Total assets
    1,948,286       557,948       93,494       16,750       2,616,478  
Expenditures for additions to long-lived assets
    2,279       (326 )     (349 )     (1,371 )     233  
                                         
As of or for the Nine Months Ended September 30, 2009
                                       
Revenues
  $ 103,320     $ 100     $ (10,265 )   $ 2,370     $ 95,525  
Intersegment revenues (losses) (2) (3) (4) (5)
    188,105       699       (182,110 )     (6,694 )      
Depreciation, depletion and amortization
    23,041       11,054       1,180       3,851       39,126  
Non-cash compensation
    1,150       412       3,838       8,005       13,405  
Income (loss) from operations
    228,511       (16,096 )     (209,865 )     (21,371 )     (18,821 )
Interest expense, net
    (111,556 )     (33,519 )           (31,691 )     (176,766 )
Interest income
    1,008             195       110       1,313  
Goodwill
    76,819                         76,819  
Total assets
    2,073,045       575,185       128,637       12,178       2,789,045  
Expenditures for additions to long-lived assets
    110,598       (4,111 )     1,084       (1,222 )     106,349  

 
 
15

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)



   
Segments
 
   
LNG Receiving Terminal
   
Natural
Gas Pipeline
   
LNG & Natural Gas Marketing
   
Corporate and Other (1)
   
Total
Consolidation
 
For the Three Months Ended September 30, 2010
                             
Revenues
  $ 65,945     $ 21     $ 1,533     $ 749     $ 68,248  
Intersegment revenues (losses) (2) (3) (4) (5)
    672             (276 )     (396 )      
Depreciation, depletion and amortization
    10,645       3,800       260       925       15,630  
Non-cash compensation
    397       121       916       2,014       3,448  
Income (loss) from operations
    34,907       (5,559 )     (3,976 )     (2,989 )     22,383  
Interest expense, net
    (47,963 )     (11,401 )           (4,535 )     (63,899 )
Interest income
    110             44       15       169  
Expenditures for additions to long-lived assets
    342       (221 )           (1,295 )     (1,174 )
                                         
For the Three Months Ended September 30, 2009
                                       
Revenues
  $ 65,119     $ 25     $ (9,609 )   $ 797     $ 56,332  
Intersegment revenues (losses) (2) (3) (4) (5)
    61,491       268       (60,427 )     (1,332 )      
Depreciation, depletion and amortization
    9,024       3,618       449       1,178       14,269  
Non-cash compensation
    383       166       1,371       2,852       4,772  
Income (loss) from operations
    105,433       (5,210 )     (78,319 )     (3,649 )     18,255  
Interest expense, net
    (40,610 )     (11,232 )           (9,715 )     (61,557 )
Interest income
    71             14       29       114  
Expenditures for additions to long-lived assets
    21,015       (5,021 )     1,015       (1,463 )     15,546  

(1)
Includes corporate activities, oil and gas exploration, development and exploitation activities and certain intercompany eliminations. Our oil and gas exploration, development and exploitation operating activities have been included in the corporate and other column due to the lack of a material impact that these activities have on our consolidated financial statements.
 
(2)
Intersegment revenues related to our LNG receiving terminal segment are primarily from TUA capacity reservation fee revenues of $125.5 million and $187.6 million and tug revenues that were received from our LNG and natural gas marketing segment for the nine months ended September 30, 2010 and 2009, respectively. Intersegment revenues related to our LNG receiving terminal segment are primarily from TUA capacity reservation fee revenues of zero and $62.5 million and tug revenues that were received from our LNG and natural gas marketing segment for the three-month periods ended September 30, 2010 and 2009, respectively. These LNG receiving terminal segment intersegment revenues are eliminated with intersegment expenses in our Consolidated Statement of Operations.
 
(3)
Intersegment revenues related to our natural gas pipeline segment are primarily from transportation fees charged by our natural gas pipeline segment to our LNG receiving terminal and LNG and natural gas marketing segments to transport natural gas that was regasified at the Sabine Pass LNG receiving terminal.  These natural gas pipeline segment intersegment revenues are eliminated with intersegment expenses in our Consolidated Statement of Operations.
 
(4)
Intersegment losses related to our LNG and natural gas marketing segment are primarily from TUA capacity reservation fee expenses of $125.5 million and $187.6 million and tug costs that were incurred from our LNG receiving terminal segment for the nine-month periods ended September 30, 2010 and 2009, respectively. Intersegment losses related to our LNG and natural gas marketing segment are primarily from TUA capacity reservation fee expenses of zero and $62.5 million and tug costs that were incurred from our LNG receiving terminal segment for the three-month periods ended September 30, 2010 and 2009, respectively. The costs of the LNG and natural gas marketing segment TUA capacity reservation fee expenses are classified as marketing trading gains (losses) as they are considered capacity contracts related to our energy trading and risk management activities. These LNG and natural gas marketing segment intersegment revenues are eliminated with intersegment expenses in our Consolidated Statement of Operations.
 
 (5)
Intersegment losses related to corporate and other are from various transactions between our LNG receiving terminal, natural gas pipeline and LNG and natural gas marketing segments in which revenue recorded by one operating segment is eliminated with a non-revenue line item (i.e., operating expense or is capitalized) by the other operating segment.


 
16

 
CHENIERE ENERGY, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)


NOTE 17—Share-Based Compensation

We have granted options to purchase common stock to employees, consultants and outside directors under the Cheniere Energy, Inc. Amended and Restated 1997 Stock Option Plan (“1997 Plan”) and the Cheniere Energy, Inc. Amended and Restated 2003 Stock Incentive Plan, as amended (“2003 Plan”). We recognize our share-based payments to employees in the consolidated financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization) over the requisite service period, net of estimated forfeitures, using the straight-line method.
 
For the three- and nine-month periods ended September 30, 2010, the total share-based compensation expense recognized in our net income attributable to common stockholders, net of capitalization, was $3.5 million and $13.4 million, respectively.  For the three- and nine-month periods ended September 30, 2009, the total share-based compensation expense recognized in our net loss attributable to common stockholders, net of capitalization, was $4.8 million and $13.4 million, respectively.
 
The total unrecognized compensation cost at September 30, 2010 relating to non-vested share-based compensation arrangements granted under the 1997 Plan and 2003 Plan, before any capitalization, was $12.6 million. The total unrecognized compensation cost at September 30, 2010 is expected to be recognized over 3.0 years, with a weighted average period of 0.7 years.

We received no proceeds from the exercise of stock options in the three- and nine-month periods ended September 30, 2010 and 2009.
 
 
17

 

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
 
This quarterly report contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included herein or incorporated herein by reference are “forward-looking statements.” Included among “forward-looking statements” are, among other things:
 
·  
statements relating to the construction or operation of each of our proposed liquefied natural gas (“LNG”) receiving terminals or our proposed pipelines or liquefaction facilities, or expansions or extensions thereof, including statements concerning the completion or expansion thereof by certain dates or at all, the costs related thereto and certain characteristics, including amounts of regasification and storage capacity, the number of storage tanks and docks, pipeline deliverability and the number of pipeline interconnections, if any;
 
·  
statements regarding future levels of domestic natural gas production, supply or consumption; future levels of LNG imports into North America; sales of natural gas in North America; exports of natural gas from North America; and the transportation, other infrastructure or prices related to natural gas, LNG or other energy sources or hydrocarbon products;
 
·  
statements regarding any financing transactions or arrangements, or ability to enter into such transactions or arrangements, whether on the part of Cheniere or at the project level;
 
·  
statements regarding any terminal use agreement (“TUA”) or other commercial arrangements presently contracted, optioned or marketed, or potential arrangements, to be performed substantially in the future, including any cash distributions and revenues anticipated to be received and the anticipated timing thereof, and statements regarding the amounts of total LNG regasification, liquefaction or storage capacity that are, or may become, subject to TUAs or other contracts;
 
·  
statements regarding counterparties to our TUAs, construction contracts and other contracts;
 
·  
statements regarding any business strategy, any business plans or any other plans, forecasts, projections or objectives, including potential revenues and capital expenditures, any or all of which are subject to change;
 
·  
statements regarding legislative, governmental, regulatory, administrative or other public body actions, requirements, permits, investigations, proceedings or decisions;
 
·  
statements regarding our anticipated LNG and natural gas marketing activities; and
 
·  
any other statements that relate to non-historical or future information.
 
These forward-looking statements are often identified by the use of terms such as “achieve,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “potential,” “project,” “propose,” “strategy” and similar terms. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report.
 
As used herein, the terms “Cheniere,” “the Company,” “we,” “our” and “us” refer to Cheniere Energy, Inc. and its wholly-owned or controlled subsidiaries.
 
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed under “Risk Factors” in our current report on Form 8-K dated as of August 6, 2010. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. Other than as required under the securities laws, we assume no obligation to update or revise these forward-looking statements or provide reasons why actual results may differ.

 
18

 

Introduction
 
The following discussion and analysis presents management’s view of our business, financial condition and overall performance and should be read in conjunction with our consolidated financial statements and the accompanying notes in Item 1. “Consolidated Financial Statements.” This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future.

Our discussion and analysis includes the following subjects:

·  
Overview of Business
·  
Overview of Significant 2010 Events
·  
Liquidity and Capital Resources
·  
Results of Operations
·  
Off-Balance Sheet Arrangements
·  
Summary of Critical Accounting Policies and Estimates
·  
Recent Accounting Standards
 
Overview of Business

We own and operate the Sabine Pass LNG receiving terminal in Louisiana through our 90.6% ownership interest in and management agreements with Cheniere Energy Partners, L.P. (“Cheniere Partners”), which is a publicly traded partnership we created in 2007.  We also own and operate the Creole Trail Pipeline, which interconnects the Sabine Pass LNG receiving terminal with downstream markets.  One of our subsidiaries, Cheniere Marketing, LLC (“Cheniere Marketing”), is marketing liquefied natural gas (“LNG”) and natural gas and is developing a portfolio of contracts to monetize capacity at the Sabine Pass LNG receiving terminal and the Creole Trail Pipeline.  We are also in various stages of developing other LNG receiving terminal and pipeline related projects, which, among other things, will require commercial justification before we make a final investment decision.  In addition, we are engaged to a limited extent in oil and natural gas exploration and development activities in the Gulf of Mexico.

In June 2010, Cheniere Marketing assigned its TUA with Sabine Pass LNG, L.P. (“Sabine Pass”) to Cheniere Energy Investments, LLC (“Investments”), a wholly-owned subsidiary of Cheniere Partners, and concurrently Cheniere Marketing entered into a Variable Capacity Rights Agreement (“VCRA”) with Investments that allows Cheniere Marketing to continue to monetize the capacity at the Sabine Pass LNG receiving terminal on Investments’ behalf.  The impact of this TUA assignment and VCRA on us is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations.  The following diagram depicts our abridged organizational structure after the TUA assignment:

OWNERSHIP STRUCTURE
 
 
19

 
 
 
Overview of Significant 2010 Events

In the first nine months of 2010, and through the date of this Form 10-Q, we continue to execute our strategy to operate and to monetize our capacity at the Sabine Pass LNG receiving terminal and the Creole Trail pipeline, as well as restructure our financial obligations, including the following:

·  
In March 2010, Cheniere Marketing entered into various agreements (“LNGCo Agreements”) with JPMorgan LNG Co. (“LNGCo”), an indirect subsidiary of JPMorgan Chase & Co., providing Cheniere Marketing with financial support to source more cargoes of LNG than it could source on a stand-alone basis;

·  
In June 2010, we used $102.0 million of cash received from the sale of our 30% limited partner interest in Freeport LNG Development, L.P. (“Freeport LNG”) to prepay a portion of the 2007 Term Loan described below;

·  
In June 2010, we used $63.6 million of cash and cash equivalents held in a TUA reserve account established in connection with the 2008 Convertible Loans described below to prepay $60.9 million of accrued interest on, and $2.7 million of principal of, the 2008 Convertible Loans as a result of the assignment of the Cheniere Marketing TUA;

·  
In June 2010, Cheniere Partners initiated a project to add liquefaction services at the Sabine Pass LNG receiving terminal that would transform the terminal into a bi-directional facility capable of liquefying natural gas and exporting LNG in addition to importing and regasifying foreign-sourced LNG; and

·  
In September 2010, Sabine Pass Liquefaction, LLC, a subsidiary of Cheniere Partners, received approval from the U.S. Department of Energy to export 16.0 million tonnes per annum ("mtpa") of LNG, equivalent to approximately 2 billion cubic feet per day (“Bcf/d”), produced from domestic natural gas over a thirty year period starting not later than September 2020. This license authorizes Sabine Pass Liquefaction, LLC to export LNG to purchasers in countries which have a free trade agreement with the United States. A second application to expand the authorization granted in the first license to all World Trade Organization member countries, and to any other country with which the U.S. may conduct trade, has been filed and is in a 60-day public comment period which ends on December 13, 2010.

Liquidity and Capital Resources
 
Although consolidated for financial reporting, Cheniere, Sabine Pass LNG and Cheniere Partners operate with independent capital structures.   With respect to Sabine Pass LNG and Cheniere Partners, the cash needs of each entity have been met since inception with a combination of borrowings, issuance of units and operating cash flows.  We expect the cash needs for Sabine Pass LNG and Cheniere Partners over the next 12 months will be met through operating cash flows and existing unrestricted cash.  With respect to Cheniere, we have historically satisfied cash needs by utilizing existing unrestricted cash, management fees from Sabine Pass LNG and Cheniere Partners, distributions from our investment in Cheniere Partners, distributions from the 30% limited partner interest in Freeport LNG and operating cash flows from our pipeline and LNG and natural gas marketing businesses.

The following table presents (in thousands) Cheniere's restricted and unrestricted cash and cash equivalents for each portion of our capital structure as of September 30, 2010, with all restricted and unrestricted cash and cash equivalents held by Cheniere Partners and Sabine Pass LNG being deemed restricted by Cheniere as to usage or withdrawal:  
   
 
Sabine
Pass LNG, L.P.
   
 
Cheniere Energy
Partners, L.P.
   
Other Cheniere Energy, Inc.
   
Consolidated Cheniere Energy,
Inc.
 
Cash and cash equivalents
  $     $     $ 81,515     $ 81,515  
Restricted cash and cash equivalents
    142,501       51,850       4,772       199,123  
Total
  $ 142,501     $ 51,850     $ 86,287     $ 280,638  
 
As of September 30, 2010, we had unrestricted cash and cash, accounts receivable and other working capital from LNG and natural gas marketing activities of $89.5 million that will be available to Cheniere, which excludes cash and cash equivalents available to Cheniere Partners, a publicly traded partnership in which we own a 90.6% interest, and Sabine Pass LNG, a wholly-owned subsidiary of Cheniere Partners. In addition, we had restricted cash and cash equivalents of $199.1 million, which were designated for the following purposes: $5.2 million for Sabine Pass LNG’s working capital; $51.9 million for Cheniere Partners’ working capital; $137.3 million for interest payments related to the Senior Notes described below; and $4.8 million for other restricted purposes.

 
20

 

    As of September 30, 2010, we reclassified $255.1 million of debt from long-term liability to current liability because the lenders of our 2008 Convertible Loans can require prepayment of the loans within 12 months of September 30, 2010 (see Note 10—“Debt and Debt—Related Parties” of our Notes to Consolidated Financial Statements for additional information). If the lenders of the 2008 Convertible Loans require a prepayment, they must provide 90 days notice between May 18, 2011 and June 16, 2011.  If the lenders of the 2008 Convertible Loans require prepayment, we believe we will have sufficient unrestricted cash, liquid assets, cash generated from our operations and access to capital markets to satisfy the obligation and fund our operations until our next maturity in May, 2012.  In order to satisfy our first required principal payment in May 2012, we will need to continue improving our capital structure, which may be accomplished by entering into commercial agreements, refinancing our existing indebtedness, issuing equity or other securities, selling assets or through a combination of the foregoing, which will be dependent on factors such as worldwide natural gas and capital market conditions (see “Risk Factors” in our current report on Form 8-K dated as of August 6, 2010).

In the first nine months of 2010, we have accomplished the following items that we believe improve our liquidity and strengthen our capital structure:

·  
In March 2010, our liquidity position was improved by entering into the LNGCo Agreements, which monetized our then-existing LNG inventory of 2,415,000 MMBtu, may reduce our working capital requirements to operate our marketing business by allowing us to source more cargos of LNG than we could source on a stand-alone basis, and may provide additional financial support to commercialize our capacity at the Sabine Pass LNG receiving terminal and Creole Trail Pipeline;

·  
In May 2010, our capital structure was improved by the pre-payment of $102.0 million of principal of the 2007 Term Loan as a result of the sale of our 30% interest in Freeport LNG.  The principal pre-payment also  reduced the amount of annual interest payable under the 2007 Term Loan by $10.1 million, offsetting or potentially exceeding any distributions we may have received from our 30% interest in Freeport LNG as a source of liquidity; and

·  
In June 2010, our liquidity and capital structure were improved by assigning Cheniere Marketing’s TUA to a subsidiary of Cheniere Partners and entering into related transactions. We used the restricted cash that was previously reserved to fund Cheniere Marketing’s TUA payment obligation to prepay $60.9 million in accrued interest and $2.7 million of principal on the 2008 Convertible Loans.  As a result of the TUA assignment and related transactions, we improved our annual cash flow by $5 million to $16 million on a net basis:

o  
the assignment of the TUA eliminated the need for us to use distributions we receive from Cheniere Partners to fund Cheniere Marketing’s TUA payment obligation, and therefore distributions we receive will be available to us as unrestricted cash;

o  
the elimination of Cheniere Marketing’s TUA payments reduces the cash available to Cheniere Partners to make distributions on the subordinated units that we own; and

o  
we amended our management services agreement with Cheniere Partners to change our fixed management fee to a variable fee dependent on cash available to Cheniere Partners after distributions to its common unitholders and general partner, and therefore the cash we receive for managing Cheniere Partners may be less than it was prior to the amendment.

LNG Receiving Terminal Business
 
Cheniere Partners
 
Our ownership interest in the Sabine Pass LNG receiving terminal is held through Cheniere Partners. We own approximately 90.6% of Cheniere Partners in the form of 10,891,357 common units, 135,383,831 subordinated units, and a 2% general partner interest, equivalent to 3,302,045 units. Cheniere Partners owns a 100% interest in Sabine Pass LNG, which is operating the Sabine Pass LNG receiving terminal.
 

 
21

 

We receive quarterly distributions from Cheniere Partners for our ownership interests and we receive management fees for managing Sabine Pass LNG and Cheniere Partners.  For the nine-month period ended September 30, 2010 we received $13.9 million in distributions from our common units, $115.1 million from our subordinated units and $3.0 million from our general partnership interest.  We also received $5.4 million under our management agreements with Cheniere Partners and $5.9 million under our management agreements with Sabine Pass LNG during the nine-month period ended September 30, 2010.

In June 2010, we and Cheniere Partners amended, effective as of July 1, 2010, the fee structure for the various general and administrative services provided by us for Cheniere Partners’ benefit and changed it from a fixed fee to a variable fee. The amended and restated services agreement provides that fees will be paid quarterly from Cheniere Partners’ unrestricted cash and cash equivalents remaining after making distributions to the common unitholders and the general partner in respect of each quarter and retaining certain reserves. Our ability to receive management fees from Cheniere Partners is dependent on our ability to, among other things, manage Cheniere Partners’ and Sabine Pass LNG’s operating and administrative expenses, monetize the 2.0 Bcf/d regasification capacity held by Investments (as discussed below) and develop new projects through either internal development or acquisition to increase cash flow.  The fixed management fees payable by Sabine Pass LNG remain unchanged.

Pursuant to the assignment of Cheniere Marketing’s TUA to Investments, Cheniere Marketing will  no longer make the approximately $250 million per year of payments to Sabine Pass LNG, and Cheniere Partners will not make distributions on our subordinated units unless it generates additional cash flow for Sabine Pass LNG’s excess capacity or its new business. Therefore, distributions to us on our subordinated units and conversion of the subordinated units into common units will depend upon future business development.

Concurrent with the TUA assignment, Investments entered into the VCRA with Cheniere Marketing.  Under the terms of the VCRA, Cheniere Marketing will continue to be responsible for monetizing the capacity at the Sabine Pass LNG receiving terminal and is obligated to pay Investments 80% of the expected gross margin of each cargo of LNG it arranges for delivery to the Sabine Pass LNG receiving terminal. To the extent payments from Cheniere Marketing to Investments under the VCRA or new Cheniere Partners business development increase Cheniere Partners’ available cash in excess of the common unit and general partner distributions and certain reserves, the cash would be distributed to us in the form of distributions on our subordinated units. During the term of the VCRA, Cheniere Marketing is responsible for the payment of taxes and new regulatory costs under the TUA.  We have guaranteed all of Cheniere Marketing’s payment obligations under the VCRA.

Sabine Pass LNG Receiving Terminal
 
The entire approximately 4.0 Bcf/d of regasification capacity at the Sabine Pass LNG receiving terminal has been fully reserved under three 20-year, firm commitment TUAs.  2.0 Bcf/d is contracted with unaffiliated third parties and 2.0 Bcf/d is contracted with Investments.  Each of the three customers at the Sabine Pass LNG receiving terminal must make the full contracted amount of capacity reservation fee payments under its TUA whether or not it uses any of its reserved capacity. Capacity reservation fee TUA payments are made by Sabine Pass LNG’s third-party customers as follows:

·  
Total Gas and Power North America, Inc. (formerly known as Total LNG USA, Inc.) (“Total”) has reserved approximately 1.0 Bcf/d of regasification capacity and has agreed to make monthly capacity payments to Sabine Pass LNG aggregating approximately $125 million per year for 20 years that commenced on April 1, 2009. Total, S.A. has guaranteed Total’s obligations under its TUA up to $2.5 billion, subject to certain exceptions; and

·  
Chevron U.S.A., Inc. (“Chevron”) has reserved approximately 1.0 Bcf/d of regasification capacity and has agreed to make monthly capacity payments to Sabine Pass LNG aggregating approximately $125 million per year for 20 years that commenced on July 1, 2009. Chevron Corporation has guaranteed Chevron’s obligations under its TUA up to 80% of the fees payable by Chevron.

    In June 2010, Sabine Pass LNG entered into amendments of the TUAs with Total and Chevron for the purpose of clarifying various operational rights and obligations of the parties.  In connection with these amendments, Total and Chevron have agreed to minimum pro rata inventory obligations as necessary to ensure cryogenic readiness of the Sabine Pass LNG receiving terminal and to mitigate the effects of inventory weathering.  In addition, Total and Chevron have each agreed to daily boil-off gas re-delivery obligations, service fees related to the compression services associated with minimization of their respective daily boil-off gas re-delivery obligations and pro-rata obligations for the incremental fuel associated with these compression services.  Additional items clarified in these amendments include the recognition of inventory transfers between parties and procedural obligations related to daily and monthly informational postings, gas re-delivery and vessel nominations and delivery point flexibility.

Each of Total and Chevron previously paid Sabine Pass LNG $20.0 million in nonrefundable advance capacity reservation fees, which are being amortized over a 10-year period as a reduction of each customer’s regasification capacity reservation fees payable under its respective TUA.

 
22

 

In November 2006, Cheniere Marketing reserved approximately 2.0 Bcf/d of regasification capacity under a TUA and was required to make capacity payments aggregating approximately $250 million per year for the period from January 1, 2009, through at least September 30, 2028.  In June 2010, Cheniere Marketing assigned its TUA with Sabine Pass LNG to Investments, including all of its rights, titles, interests, obligations and liabilities in and under the TUA and will therefore no longer be obligated to make the approximately $250 million per year of payments to Sabine Pass LNG.  In connection with the assignment, Cheniere’s guarantee of Cheniere Marketing’s obligations under the TUA was terminated and Cheniere Partners provided a guarantee of Investments’ obligations under the TUA.  Investments is required to make capacity payments aggregating approximately $250 million per year through at least September 30, 2028; however, the revenue earned by Sabine Pass LNG and the capacity payments under the TUA will be eliminated upon consolidation of our financial statements.

Under each of these TUAs, Sabine Pass LNG is entitled to retain 2% of the LNG delivered for the customer’s account, which Sabine Pass LNG will use primarily as fuel for revaporization and self-generated power at the Sabine Pass LNG receiving terminal.
 
Other LNG Receiving Terminals
 
As discussed above, in May 2010, we sold our 30% limited partnership interest in Freeport LNG.  However, prior to the sale, Freeport LNG made aggregate distributions to us of $24.0 million since inception.

We will contemplate making final investment decisions to construct our Corpus Christi and Creole Trail LNG receiving terminal projects upon, among other things, entering into acceptable commercial and financing arrangements for the applicable project. We do not expect to spend significant funds on these projects in the near-term.

 Liquefaction Project

As mentioned above, in June 2010, Cheniere Partners initiated a project to add liquefaction services at the Sabine Pass LNG receiving terminal that would transform the terminal into a bi-directional facility capable of liquefying natural gas and exporting LNG in addition to importing and regasifying foreign-sourced LNG. As currently contemplated, the liquefaction project would be designed and permitted for up to four modular LNG trains, each with a peak processing capacity of up to approximately 0.7 Bcf/d of natural gas and an average liquefaction capacity of approximately 3.5 mtpa.  The initial project phase is anticipated to include two modular trains and the capacity to process on average approximately 1.2 Bcf/d of pipeline quality natural gas. We intend to enter into contracts for at least 0.5 Bcf/d of natural gas liquefaction capacity per train in support of reaching final investment decision regarding the development of the project. Cheniere Partners believes that the time and cost required to develop its proposed liquefaction project would be materially lessened by Sabine Pass LNG’s existing large acreage and infrastructure (docks, LNG storage tanks, power generation assets and pipeline connections).  Development costs incurred during the assessment of this project will be funded by Cheniere Partners using its existing funds.  Cheniere Partners will contemplate making a final investment decision to commence construction of the liquefaction facilities upon, among other things, achieving regulatory approval and entering into acceptable commercial and financing arrangements.  We anticipate LNG export could commence as early as 2015.

Natural Gas Pipeline Business
 
Phase 1 of the Creole Trail Pipeline, consisting of 94 miles of natural gas pipeline, had been constructed and is currently in-service and operating.
 
We will contemplate making a final investment decision to construct Phase 2 of the Creole Trail Pipeline, the Corpus Christi Pipeline, the Cheniere Southern Trail Pipeline and the Burgos Hub Project upon, among other things, receiving all required authorizations to construct and operate the applicable pipeline (and storage facility in the case of Burgos Hub), to the extent not already obtained, and entering into acceptable commercial and financing arrangements for the applicable project. We do not expect to spend significant funds on these projects in the near-term.

As discussed above, we believe that we have sufficient cash, other working capital and cash generated from our operations to operate Phase 1 of our Creole Trail Pipeline until the earliest date when principal payments on our outstanding indebtedness may be required.  The lenders of the 2008 Convertible Loans can require prepayment of the loans between August 16, 2011 and September 14, 2011.  If the lenders of the 2008 Convertible Loans do not require the principal payment in 2011, the earliest date that principal payments will be required is May 31, 2012, which is the maturity date of the 2007 Term Loan.

 LNG and Natural Gas Marketing Business
 
The accounting treatment for LNG inventory differs from the treatment for derivative positions such that the economics of Cheniere Marketing’s activities are not transparent in the consolidated financial statements until all LNG inventory is sold and all

 
23

 

derivative positions are settled.  Our LNG inventory is recorded as an asset at cost and is subject to lower of cost or market (“LCM”) adjustments at the end of each reporting period.  The LCM adjustment market price is based on period-end natural gas spot prices, and any gain or loss from a LCM adjustment is recorded in our earnings at the end of each period. Revenue and cost of goods sold are not recognized in our earnings until the regasified LNG is sold.  Our unrealized derivatives positions at the end of each period extend into the future to hedge the cash flow from future sales of our LNG inventory or to take market positions and hedge exposure associated with LNG and natural gas.  These positions are measured at fair value, and we record the gains and losses from the change in their fair value currently in earnings.  Thus, earnings from changes in the fair value of our derivatives may not be offset by losses from LCM adjustments to our LNG inventory because the LCM adjustments that may be made to LNG inventory are based on period-end spot prices that are different from the time periods of the prices used to fair value our derivatives.  Any losses from changes in the fair value of our derivatives will not be offset by gains until the regasified LNG is actually sold.

Management evaluates the performance of its LNG and natural gas marketing business activities differently than the measure calculated and presented in accordance with GAAP in our Consolidated Statements of Operations.  Management calculates an Adjusted LNG and natural gas revenue non-GAAP measure to assess the performance of the LNG and natural gas marketing business activities during each period.  As our LNG and natural gas marketing business has entered into natural gas swaps that hedge the cash flows from the future sale of LNG inventory and to take market positions and hedge exposure associated with LNG and natural gas, management believes that the presentation of the Adjusted LNG and natural gas revenue non-GAAP measure provides a meaningful indicator of the performance of our LNG and natural gas marketing business activities during the stated period.

The table below shows the differences between the components of both the LNG and natural gas marketing revenue GAAP measure (presented in our Consolidated Statements of Operations) and the Adjusted LNG and natural gas revenue non-GAAP measure (in thousands):
 
 
For the Nine Months Ended September 30, 2010
 
 
LNG and natural gas marketing revenue
(GAAP measure)
 
Adjusted LNG and natural gas marketing revenue
(Non-GAAP measure)
 
Difference
 
Physical natural gas sales
$
36,485
 
$
36,485
 
$
 
Cost of LNG
 
(29,761
)
 
(41,261
)
 
11,500
(a)
Realized natural gas derivative gain
 
2,838
   
2,838
   
 
Unrealized natural gas derivative gain
 
743
   
743
   
 
Other energy trading activities and adjustments
 
4,398
   
4,686
   
(288
)
LNG and natural gas revenue
$
14,703
 
$
3,491
 
$
11,212
 

(a)  
The Cost of LNG GAAP measure takes into consideration only the cost of LNG that was regasified and sold during the nine-month period ended September 30, 2010, using the weighted average cost method for LNG inventory.  The Cost of LNG non-GAAP measure represents the marketing revenue, net of historical cost of LNG, expected from future LNG inventory sales based on published forward natural gas price curve prices corresponding to the future months when the regasified LNG is planned to be sold.

Under GAAP measurement, our LNG and natural gas marketing revenue was $14.7 million for the nine-month period ended September 30, 2010, but only $3.5 million was generated by marketing activities during the period. We believe that the Adjusted LNG and natural gas marketing revenue non-GAAP measure is a meaningful indicator of performance of our LNG and natural gas marketing business activities during a stated period.

LNGCo Agreements

In March 2010, Cheniere Marketing entered into the LNGCo Agreements with LNGCo under which Cheniere Marketing has agreed to develop and maintain commercial and trading opportunities in the LNG industry and present any such opportunities exclusively to LNGCo.  Cheniere Marketing also agreed to provide, or arrange for the provision of, all of the operations and administrative services required by LNGCo in connection with any LNG cargoes purchased by LNGCo, including negotiating agreements and transporting, receiving, storing, hedging and regasifying LNG cargoes.  Cheniere Marketing does not have the authority to contractually bind LNGCo under the LNGCo Agreements.  In the event LNGCo declines to purchase an LNG cargo presented to it by Cheniere Marketing under the LNGCo Agreements, Cheniere Marketing may pursue the opportunity on its own behalf or present it to third parties.  The term of the LNGCo Agreements is two years; however, either party may terminate without penalty at the end of one year.  In return for the services to be provided by Cheniere Marketing, LNGCo will pay a fixed fee to Cheniere Marketing and may pay additional fees dependent upon the gross margins of each transaction and the aggregate revenue earned during the term of the LNGCo Agreements.

 
24

 
 
During the three- and nine-month periods ended September 30, 2010, we recognized $2.3 million and $5.4 million, respectively, of marketing and trading revenues from LNGCo. As of September 30, 2010, Cheniere Marketing’s maximum exposure to loss relating to LNGCo was $3.7 million related to margin deposits that have been paid to LNGCo and fixed fee and gross margin revenue receivables earned as of September 30, 2010.  A portion of this $3.7 million represents our fixed fee receivable and is reported as accounts and interest receivable, and the remaining portion is reported as other non-current assets and is to be paid to Cheniere Marketing upon the completion or termination of the LNGCo Agreements.

As discussed above, we believe that we have sufficient cash, other working capital and cash generated from our operations to fund our LNG and natural gas marketing business until the earliest date when principal payments on our outstanding indebtedness may be required.  The lenders of the 2008 Convertible Loans can require prepayment of the loans between August 16, 2011 and September 14, 2011.  If the lenders of the 2008 Convertible Loans do not require the principal payment in 2011, the earliest date that principal payments will be required is May 31, 2012, which is the maturity date of the 2007 Term Loan.

Corporate and Other Activities
 
We are required to maintain corporate general and administrative functions to serve our business activities described above. As discussed above, we believe that we have sufficient cash, other working capital and cash generated from our operations to fund our operating expenses and other cash requirements until the earliest date when principal payments on our outstanding indebtedness may be required.  The lenders of the 2008 Convertible Loans can require prepayment of the loans between August 16, 2011 and September 14, 2011.  If the lenders of the 2008 Convertible Loans do not require the principal payment in 2011, the earliest date that principal payments will be required is May 31, 2012, which is the maturity date of the 2007 Term Loan.
 
Although our focus is primarily on the development of LNG-related businesses, we continue to be involved to a limited extent in oil and gas exploration, development and exploration activities in the shallow waters of the Gulf of Mexico. We do not anticipate significant cash expenditures related to these activities and expect our cash inflows from oil and natural gas production to decrease as reserves are produced.
 
Sources and Uses of Cash
 
The following table summarizes the sources and uses of our cash and cash equivalents for the nine-month periods ended September 30, 2010 and 2009 (in thousands). The table presents capital expenditures on a cash basis; therefore, these amounts differ from the amounts of capital expenditures, including accruals, that are referred to elsewhere in this report. Additional discussion of these items follows the table.
 
   
Nine Months Ended September 30,
 
   
     2010
   
     2009
 
Sources of cash and cash equivalents
           
Proceeds from sale of limited partnership investment
  $ 104,330     $  
Use of restricted cash and cash equivalents
    26,414       219,727  
Distribution from limited partnership investment in Freeport LNG
    3,900       9,000  
Other
    291        
Total sources of cash and cash equivalents
    134,935       228,727  
                 
Uses of cash and cash equivalents
               
Debt repurchases
    (104,681 )     (30,030 )
Operating cash flow
    (11,631 )     (94,226 )
Distributions to non-controlling interest
    (19,794 )     (19,794 )
LNG receiving terminal and pipeline construction-in-process, net
    (2,805 )     (97,991 )
Other
    (2,881 )     (1,524 )
Total uses of cash and cash equivalents
    (141,792 )     (243,565 )
                 
Net increase (decrease) in cash and cash equivalents
    (6,857 )     (14,838 )
Cash and cash equivalents—beginning of period
    88,372       102,192  
Cash and cash equivalents—end of period
  $ 81,515     $ 87,354  

 Proceeds from sale of limited partnership investment
 
In May 2010, we sold our 30% interest in Freeport LNG to institutional investors for net proceeds of $104.3 million.

 
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Use of restricted cash and cash equivalents
 
During the nine-month period ended September 30, 2010, the $26.4 million of restricted cash and cash equivalents were used primarily to make distributions of $19.8 million to non-controlling interests, repurchase debt of $2.7 million, pay for construction activities at the Sabine Pass LNG receiving terminal of $3.6 million and other items of $0.3 million.

During the nine-month period ended September 30, 2009, $219.7 million of restricted cash and cash equivalents was used to pay for scheduled interest payments and construction activities at the Sabine Pass LNG receiving terminal.  Under the Sabine Pass Indenture, a portion of the proceeds from the Senior Notes was initially required to be used for scheduled interest payments through May 2009 and to fund the cost to complete construction of the Sabine Pass LNG receiving terminal.  Due to these restrictions imposed by the Sabine Pass Indenture, the proceeds from the Senior Notes are not presented as cash and cash equivalents.  When proceeds from the Senior Notes that have been designated as restricted cash and cash equivalents are used, they are presented as a source of cash and cash equivalents.  The decreased use of restricted cash and cash equivalents during the nine-month period ended September 30, 2010, primarily resulted from substantially completing construction of the Sabine Pass LNG receiving terminal during the third quarter of 2009.

Distribution from limited partnership investment in Freeport LNG 

In the nine-month periods ended September 30, 2010 and 2009, we received $3.9 million and $9.0 million of distributions from Freeport LNG.  In June 2010, we sold our investment in Freeport LNG and therefore will not receive distributions in the future.

Debt Repurchases
 
In the nine-month periods ended September 30, 2010 and 2009, we used $104.7 million and $30.0 million, respectively, of cash and cash equivalents to repurchase a portion of our long-term debt.

In the second quarter of 2010, we used $102.0 million of the net proceeds from the sale of our limited partner interest in Freeport LNG to partially prepay the 2007 Term Loan. In addition, as a result of the assignment of the Cheniere Marketing TUA in the second quarter of 2010, we used $2.7 million to partially prepay the 2008 Convertible Loans.
  
In the second quarter of 2009, we used a combination of $30.0 million cash and cash equivalents and 4.0 million common shares to prepay $120.4 million aggregate principal amount of our Convertible Senior Unsecured Notes.

Operating cash flow
 
In the nine-month periods ended September 30, 2010 and 2009, we used $11.6 million and $94.2 million, respectively, of cash and cash equivalents for operating activities.   Net cash used in operations related primarily to the general administrative overhead costs, pipeline operations costs, LNG and natural gas marketing overhead; offset by earnings from our LNG and natural gas marketing business.
  
Distributions to non-controlling interest
 
In the nine-month periods ended September 30, 2010 and 2009, Cheniere Partners distributed $19.8 million to its non-affiliated common unitholders.

LNG receiving terminal and pipeline construction-in-process, net
 
In the nine-month periods ended September 30, 2010 and 2009, capital expenditures for our LNG receiving terminals and pipeline projects were $2.8 million and $98.0 million, respectively.  Our capital expenditures decreased in the nine-month period ended September 30, 2010 as a result of the achievement of full operability of the Sabine Pass LNG receiving terminal during the third quarter of 2009.

 
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Debt Agreements

The following table (in thousands) and the explanatory paragraphs following the table summarize our debt agreements as of September 30, 2010.
 
   
Sabine
Pass LNG, L.P.
 
Cheniere Energy
Partners, L.P.
 
Other Cheniere Energy, Inc.
 
Consolidated Cheniere Energy,
Inc.
 
Current debt (including related parties):
                 
2008 Convertible Loans
 
$
 
$
 
$
255,097
 
$
255,097
 
                           
Long-term debt (including related parties)
                         
Senior Notes
 
$
2,215,500
 
$
 
$
 
$
2,215,500
 
2007 Term Loan
   
   
   
298,000
   
298,000
 
2008 Convertible Loans
   
   
   
   
 
Convertible Senior Unsecured Notes
   
   
   
204,630
   
204,630
 
Total long-term debt
   
2,215,500
   
   
502,630
   
2,718,130
 
Debt discount (including related parties)
                         
Senior Notes (1)
   
(28,950
)
 
   
   
(28,950
)
Convertible Senior Unsecured Notes (2)
   
   
   
(29,143
)
 
(29,143
)
Total debt discount
   
(28,950
)
 
   
(29,143
)
 
(58,093
)
Long-term debt (including related parties), net of discount
 
$
2,186,550
 
$
 
$
473,487
 
$
2,660,037
 

 
 (1)  
In September 2008, Sabine Pass LNG issued an additional $183.5 million, par value, of 2016 Notes.  The net proceeds from the additional issuance of the 2016 Notes were $145.0 million.  The difference between the par value and the net proceeds is the debt discount, which will be amortized through the maturity of the 2016 Notes.
 
 
(2)  
Effective as of January 1, 2009, we are required to record a debt discount on our Convertible Senior Unsecured Notes.  The unamortized discount will be amortized through the maturity of the Convertible Senior Unsecured Notes.
 
Convertible Senior Unsecured Notes
 
In July 2005, we consummated a private offering of $325.0 million aggregate principal amount of Convertible Senior Unsecured Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The notes bear interest at a rate of 2¼% per year. Interest on the notes is payable semi-annually in arrears on February 1 and August 1 of each year. The notes are convertible at any time into our common stock under certain circumstances at an initial conversion rate of 28.2326 per $1,000 principal amount of the notes, which is equal to a conversion price of approximately $35.42 per share. As of September 30, 2010, no holders had elected to convert their notes. We may redeem some or all of the notes on or before August 1, 2012, for cash equal to 100% of the principal plus any accrued and unpaid interest if in the previous 10 trading days the volume-weighted average price of our common stock exceeds $53.13, subject to adjustment, for at least five consecutive trading days. In the event of such redemption, we will make an additional payment equal to the present value of all remaining scheduled interest payments through August 1, 2012, discounted at the U.S. Treasury securities rate plus 50 basis points. The indenture governing the notes contains customary reporting requirements.

As discussed in Note 10—“Debt and Debt—Related Parties” of our Notes to Consolidated Financial Statements, we adopted on January 1, 2009 an accounting standard that requires issuers of certain convertible debt instruments to separately account for the liability component and the equity component represented by the embedded conversion option in a manner that will reflect that entity’s nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods.  The fair value of the embedded conversion option at the date of issuance of the Convertible Senior Unsecured Notes was determined to be $134.0 million and has been recorded as a debt discount to the Convertible Senior Unsecured Notes, with a corresponding adjustment to additional paid-in capital.  At September 30, 2010, the unamortized debt discount to the Convertible Senior Unsecured Notes was $29.1 million.

 
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Sabine Pass LNG Senior Notes
 
Sabine Pass LNG has issued an aggregate principal amount of $2,215.5 million of Senior Notes consisting of $550.0 million of 7¼% Senior Secured Notes due 2013 and $1,665.5 million of 7½% Senior Secured Notes due 2016. Interest on the Senior Notes is payable semi-annually in arrears on May 30 and November 30 of each year. The Senior Notes are secured on a first-priority basis by a security interest in all of Sabine Pass LNG’s equity interests and substantially all of its operating assets. Under the Sabine Pass Indenture governing the Senior Notes, except for permitted tax distributions, Sabine Pass LNG may not make distributions until certain conditions are satisfied: there must be on deposit in an interest payment account an amount equal to one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment, and there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment of $82.4 million. Distributions are permitted only after satisfying the foregoing funding requirements, a fixed charge coverage ratio test of 2:1 and other conditions specified in the Sabine Pass Indenture.

As of September 30, 2010 and December 31, 2009, we classified $74.6 million and $72.9 million, respectively, as part of long-term debt—related parties on our Consolidated Balance Sheets because related parties held these portions of the Senior Notes.
 
2007 Term Loan
 
In May 2007, Cheniere Subsidiary Holdings, LLC, a wholly-owned subsidiary of Cheniere, entered into a $400.0 million credit agreement (“2007 Term Loan”). Borrowings under the 2007 Term Loan generally bear interest at a fixed rate of 9¾% per annum. Interest is calculated on the unpaid principal amount of the 2007 Term Loan outstanding and is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The 2007 Term Loan will mature on May 31, 2012. The 2007 Term Loan is secured by a pledge of our 135,383,831 subordinated units in Cheniere Partners.

In May 2010, we sold our 30% interest in Freeport LNG to institutional investors for net proceeds of $104.3 million.  The net proceeds from the sale were used to prepay $102.0 million of the 2007 Term Loan in May 2010 (See Note 8—“Investment in Limited Partnership” of our Notes to Consolidated Financial Statements for additional information). As of September 30, 2010 and December 31, 2009, $298.0 million and $400.0 million, respectively, were outstanding under the 2007 Term Loan and were included in long-term debt on our Consolidated Balance Sheets.

2008 Convertible Loans
 
In August 2008, we entered into a credit agreement pursuant to which we obtained $250.0 million in convertible term loans (“2008 Convertible Loans”). The 2008 Convertible Loans will mature in 2018, but the lenders can require prepayment of the loans for 30 days following August 15, 2011, 2013 and 2015, and upon a change of control. The 2008 Convertible Loans bear interest at a fixed rate of 12% per annum, except during the occurrence of an event of default during which time the rate of interest will be 14% per annum. Interest is due semi-annually on the last business day of January and July. At our option, until August 15, 2011, accrued interest may be added to the principal on each semi-annual interest date. The aggregate amount of all accrued interest to August 15, 2011 will be payable on the maturity date. The 2008 Convertible Loans are secured by Cheniere’s rights and fees payable under management services agreements with Sabine Pass LNG and Cheniere Partners, by Cheniere’s 10.9 million common units in Cheniere Partners, by the equity and non-real property assets of Cheniere’s pipeline entities, by the equity of various other subsidiaries and certain other assets and subsidiary guarantees. The outstanding principal amount may be exchanged for newly-created Series B Convertible Preferred Stock, par value $0.0001 per share (“Series B Preferred Stock”), with voting rights limited to the equivalent of 10,125,000 shares of common stock. The exchange ratio is one share of Series B Preferred Stock for each $5,000 of outstanding borrowings, subject to adjustment. The exchange ratio will be adjusted in the event we make certain distributions of cash, shares or property on our shares of Cheniere common stock. The aggregate Series B Preferred Stock is exchangeable into shares of Cheniere common stock at a price of $5.00 per share pursuant to a broadly syndicated offering. We are required to file a registration statement to register the Series B Preferred Stock upon demand by the majority of the holders of the Series B Preferred Stock. Such holders also have the right to demand registration of the shares of common stock into which the Series B Preferred Stock is convertible. No portion of any accrued interest is eligible for conversion into Series B Preferred Stock.
 
As long as the 2008 Convertible Loans are exchangeable for shares of Series B Preferred Stock or shares of Series B Preferred Stock remain outstanding, the holders of a majority of the 2008 Convertible Loans and Series B Preferred Stock, acting together, have the right to nominate two individuals to the Company’s Board of Directors, and together with the Board of Directors, a third nominee, who would be an independent director.  In addition, one of the lenders is Scorpion Capital Partners LP (“Scorpion”), an affiliate of one of the Company’s directors.  
 
 
In June 2010, we amended the 2008 Convertible Loans to permit all funds on deposit in a TUA reserve account to be applied to the prepayment of the accrued interest outstanding under the 2008 Convertible Loans, with any remainder to be applied to the

 
28

 

prepayment of the principal balance of the 2008 Convertible Loans.  As a result, $63.6 million from the TUA Reserve Account was used to prepay $60.9 million of accrued interest and $2.7 million of principal.

As of September 30, 2010, we reclassified $255.1 million of debt from long-term liability to current liability because the lenders of our 2008 Convertible Loans can require prepayment of the loans within 12 months of September 30, 2010. If the lenders of the 2008 Convertible Loans require a prepayment, they must provide 90 days notice no later than June 16, 2011 (See Note 2—“Liquidity” of our Notes to Consolidated Financial Statements for additional information). As of September 30, 2010, $242.6 million was outstanding under the 2008 Convertible Loans and was included in current debt-related parties on our Consolidated Balance Sheet.  As of December 31, 2009, $280.4 million was outstanding under the 2008 Convertible Loans and was included in long-term debt—related parties on our Consolidated Balance Sheets.
 
Issuances of Common Stock
 
In the nine-month periods ended September 30, 2010 and 2009, no shares of our common stock were issued pursuant to the exercise of stock options.  In the nine-month periods ended September 30, 2010 and 2009, we issued 420,000 shares and 326,000 shares, respectively, of non-vested restricted stock to new and existing employees.  In the nine-month period ended September 30, 2009, we issued 4.0 million shares of our common stock as part of the consideration used to repurchase a portion of the Convertible Senior Unsecured Notes.

Results of Operations

Three-Month Period Ended September 30, 2010 vs. Three-Month Period Ended September 30, 2009
 
   Overall Operations
 
Our consolidated net loss attributable to common stockholders decreased $1.9 million, from a net loss of $42.5 million, or $0.80 per share (basic and diluted), in the three-month period ended September 30, 2009 to a net loss of $40.6 million, or $0.73 per share basic and diluted, in the three-month period ended September 30, 2010. This decrease in net loss was primarily a result of increased marketing revenue that was partially offset by increased development expense related to Cheniere Partners’ proposed liquefaction project, increased interest expense, increased operations and maintenance expense, and increased depreciation.