Cheniere Energy Builds LNG Terminal -- No One's Coming

• The Company: Cheniere Energy, a Houston-based liquefied natural gas (LNG) project developer
• The Filing: Form 10-Q filed with the SEC on August 11, 2008
• The Finding: After approximately three years of construction -- and subject to the completion of routine punch list items -- Cheniere Energy completed construction of an initial 2.6 billion cubic feet per day (Bcf/d) of send-out capacity of LNG and 10.1 Bcf/d of storage capacity at its Sabine Pass receiving terminal in Cameron Parish, Louisiana. The development approach Cheniere adopted for the terminal -- direct operational control -- almost bankrupted the company, due in large part to significant cost overruns.

Although the U.S. has limited LNG infrastructure, Cheniere still bet all of its chips on rising domestic demand for LNG. No hedging here -- the company opted to shoulder the entire financial risk, looking to capture extra profit as sole operator/owner.

Domestic storage capacity has neither stimulated local demand or diverted supply. This paradigm shift, where LNG becomes an attractive alternative to crude or natural gas, has yet to happen, for abundant supplies of locally sourced, low-cost, piped natural gas has effectively restricted LNG shipment flows to traditional trade routes -- European and Asian markets.

An additional 1.4 Bcf/d of send-out capacity is expected to be complete by the fall of 2008, and as operations are ramped up, the Sabine Pass LNG terminal could handle up to 240 cargoes per year come 2009, according to management. The Company is also sinking millions more in developing two other onshore LNG receiving terminals and related natural gas pipelines along the U.S. Gulf Coast.

As of the six months ended June 30, Cheniere has accumulated a deficit and long-term debt of $611.2 million and $2.82 billion, respectively. Nonetheless, Chairman and CEO Charif Souki remains confident in the strategy: "build it, and they will come." To date, however, only three commercial cargoes had been confirmed and unloaded.

On August 11, Souki told analysts that the company accepted a commitment for $250 million of convertible security financing, which should provide liquidity sufficient for three years of operations -- assuming even limited use of its Sabine Pass terminal.

The Question: Although the financing is good news, if sellers can contract higher LNG prices in Europe and Asia, where will the company find suppliers willing to ship LNG to its U.S. terminals?