Cheniere Energy, Inc
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CHENIERE ENERGY, INC. 2006 ANNUAL REPORT 2006 HIGHLIGHTS In 2006, construction continued on the Sabine Pass Liquefied Natural Gas (LNG) regasification terminal and Cheniere received authorization from the Federal Energy Regulatory Commission for the second phase of the project. This authorization enables the terminal to be expanded to approximately 4.0 billion cubic feet per day (Bcf/d) of send-out capacity. As the project progressed, so did reconstruction of the community surrounding the terminal site. The unyielding spirit of the people affected by Hurricane Rita in September 2005 has been an inspiration. In 2006, Cheniere continued to offer support to its neighbors while sharing in the area’s unique renewal. Community Involvement • Entered into agreements with local Cameron Parish tax authorities to accelerate tax payments to fund continued parish reconstruction, which is subject to the confirmation from appropriate authorities of our entitlement to receive a credit for our accelerated payments • Funded the rental of a new campus of temporary buildings for Johnson Bayou High School including handicap access ramps and walkways to temporary classroom buildings needed to replace structures damaged by the hurricane. In addition, Cheniere replaced the Hackberry and Johnson Bayou gym floors and bleachers • Launched the development of a Cameron Parish rural health clinic, scheduled for a Fall 2007 opening • Sponsored the Cameron Parish Marshland Festival, a community event created to raise funds for area youth education organizations • Sponsored cycling teams raising funds for local communities including Cheniere’s “Making Cancer History” team, benefiting cancer research and treatment at M. D. Anderson Cancer Center in Houston, Texas; and the Corpus Christi Conquer the Coast bike ride, benefiting the Corpus Christi Chamber of Commerce and the Tarpon Foundation Scholarship Program Terminal Development • Sabine Pass Phase 1 was 68% complete as of December 2006; the terminal remains on target for a second quarter 2008 start-up • All of the operations and maintenance supervisory staff for the Sabine Pass facility were hired by December 2006 and other pre-operations activities were substantially advanced • Corpus Christi terminal commenced site preparation in June 2006 • Creole Trail terminal received Federal Energy Regulatory Commission permitting in June 2006 Human Resources • Cheniere’s employee group more than doubled to 241 industry experts and staff Cheniere Marketing • Entered into a 10-year Natural Gas Purchase and Sale Agreement with PPM Energy, Inc., a U.S. subsidiary of Scottish Power plc, in April 2006 • Entered into a 10-year agreement with Washington 10 Storage Corporation in November 2006 for up to 3.0 Bcf of interstate natural gas storage located in Michigan • Commenced U.S. domestic natural gas trading and marketing in the fourth quarter of 2006 • Reserved 2.0 Bcf/d of regasification capacity in the Sabine Pass terminal and 1.0 Bcf/d of regasification capacity in the Corpus Christi terminal Corporate Financing • Year-end working capital was $767 million • Completed a bond offering of approximately $2 billion in senior secured notes at a blended rate of 7.43% at Sabine Pass LNG, L.P. • Announced the formation of Cheniere Energy Partners, L.P. through an underwritten initial public offering. This publicly traded partnership (AMEX: CQP) will own and operate Sabine Pass LNG. North America’s LNG GatewayTM Cheniere Energy, Inc. is developing a network of three LNG receiving terminals and related natural gas pipelines along the U.S. Gulf Coast. The three terminals, when completed, will have an aggregate send-out capacity of approximately 9.9 Bcf/d to serve as the platform from which Cheniere pursues related LNG business opportunities, both upstream and downstream of the terminals, and develops a business to market LNG and natural gas. Cheniere is also the founder of and holds a 30% limited partner interest in a fourth LNG receiving terminal and holds a minority interest in an LNG shipping company. LETTER TO SHAREHOLDERS April 4, 2007 Dear Shareholders: Sometimes, when everything seems perfect, life will remind have joined. A year and a half after the event, we are just you of its inherent fragility and will help put the proper starting to see normalcy return. perspective on events and accomplishments. In the meantime, our Sabine Pass terminal continues to In late 2005, Hurricanes Rita and Katrina devastated progress and you can feel the excitement as we are getting Louisiana. While our terminal at Sabine Pass did not close to first operations. The facility is expected to receive experience any significant adverse effects, our neighbors its first cool-down cargo in the first quarter of next year. in Cameron Parish suffered greatly and will take a long time to recover. Twelve miles from our facility, the town of It was a tumultuous year in the natural gas business, Johnson Bayou was severely affected, lost many houses, marked by pronounced weather events and unexpected had to close its schools and had to adapt to survive. Farther political turns. We have seen conflicting signals in the down the road, the town of Holly Beach was destroyed. Not global natural gas market. Natural gas prices at the United a single structure remained standing. Various towns such as Kingdom’s National Balancing Point were as high as $17 Hackberry and Cameron were also seriously impacted. per MMBtu in January, and yet by October briefly turned negative as a new pipeline from Norway was commissioned. The people of Cameron Parish are our friends and Asian customers paid as much as $22 in the spring and yet neighbors. Many of them will work with us for many years. by September, 15 vessels were filled with LNG and had no Cheniere has worked with them to bring some normalcy place to unload their cargoes. Instead, they were used as back as quickly as possible. We will continue to do our best floating storage, a new concept in LNG trading. to restore medical facilities, schools and public services. This underscores the uncertainty and volatility in our When we located in the parish, we received a tax abatement industry. As liquefaction continues to grow at a very for 10 years. In spite of this, we have decided to accelerate fast rate, around 12 percent per year, and new markets some of the taxes due to various tax authorities to allow begin receiving LNG, it becomes more difficult to plan them to use the funds to help in the reconstruction of logistics, shipping, receiving facilities and spare capacity. the parish. The program is subject only to confirmation International utilities are no longer the dominant from appropriate authorities of our entitlement to receive purchasers of LNG, as a number of aggregators have a credit for our accelerated payments. This is the most entered the market and producers are increasingly important thing we have done in 2006. marketing the product directly. Together, these changes have created more flexibility of destination but they have I am proud of our employees and the efforts they have also created more uncertainty around the infrastructure deployed to bring some relief to the community that we requirements. Weather and seasonality compound this 2 Boys and Girls Basketball Team at Johnson Bayou High School Gym problem. In this environment, the industry strives to find new business models to respond to new realities. The two terminals we conceived in the early part of the decade, Sabine Pass LNG and Freeport LNG, will finally be ready to operate in 2008. They will become vital components in the world LNG infrastructure, opening up access to the U.S. Gulf Coast natural gas market, one of the largest single integrated markets in the world, and beyond to North American markets at large through an extensive pipeline infrastructure. These terminals will also be a critical component of the North American natural gas supply. By the end of the decade our nation is projected to rely on LNG for approximately 20% of our natural gas needs. Reflecting on our progress, it almost strains belief that a small microcap company and one individual entrepreneur, Michael Smith, who became our partner at Freeport LNG in 2003, were able to accomplish so much. It is a testimony to our employees and partners that these facilities will be the first two new onshore receiving facilities to operate in the U.S. in almost thirty years. I am proud to be associated with them. Sincerely, Charif Souki Chairman and CEO 3 TOTAL STOCKHOLDER RETURN (Includes Reinvestment of Dividends) The following graph compares the cumulative total stockholder return on Cheniere Energy Inc.’s common stock (AMEX:LNG) against the S&P Oil and Gas Exploration and Production Index, and the Russell 2000 Index for five years ending at fiscal year-end December 31, 2006. The graph was constructed on the assumption that $100 were invested in the Company’s common stock, the S&P Oil and Gas Exploration and Production Index and the Russell 2000 Index on December 31, 2001. COMPANY / INDEX 2001 2002 2003 2004 2005 2006 CHENIERE ENERGY, INC. $ 100 $128 $1,170 $ 6,370 $ 7,444 $5,774 RUSSELL 2000 INDEX $ 100 $ 80 $ 117 $ 139 $ 145 $ 171 S&P OIL & GAS EXPLORATION & PRODUCTION INDEX $ 100 $ 99 $ 122 $ 164 $ 273 $ 286 COMPARISON OFCO CUMULATIVEMPARISON OF C FIVE–YEARUMULATIVE TOTALFIVE YE ARETURNR TOTAL RETURN $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 0 2001 2002 2003 2004 2005 2006 Cheniere Energy, Inc. Russell 2000 Index S&P Oil & Gas Exploration & Production Index 4 North America’s LNG GatewayTM APRIL 2008 Construction Photo of Sabine Pass LNG with view to Gulf of Mexico 5 “Cheniere strives to be a good neighbor and a strong corporate citizen.” CHENIERE’S INDUSTRY The emergence of North America as a major LNG importer in the next few years will trigger fundamental changes in the LNG business.