CHENIERE ENERGY INC (Form: 10-Q, Received: 08/11/2008 14:48:43)

Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

¨	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

CHENIERE ENERGY, INC.

(Exact name as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

95-4352386

(I.R.S. Employer Identification No.)

700 Milam Street, Suite 800

Houston, Texas

(Address of principal executive offices)

77002

(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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller company filer. 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 x
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 x

As of July 31, 2008, there were 50,692,153 shares of Cheniere Energy, Inc. Common Stock, $0.003 par value, issued and outstanding.

Index to Financial Statements

CHENIERE ENERGY, INC.

INDEX TO FORM 10-Q


PART I. FINANCIAL INFORMATION		1

Item 1.	Consolidated Financial Statements	1
Consolidated Balance Sheets		1
Consolidated Statements of Operations		2
Consolidated Statement of Stockholders’ Deficit		3
Consolidated Statements of Cash Flows		4
Notes to Consolidated Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4.	Disclosure Controls and Procedures	39

PART II. OTHER INFORMATION		40

Item 1.	Legal Proceedings	40

Item 4.	Submission of Matters to a Vote of Security Holders	40

Item 6.	Exhibits	41

Index to Financial Statements

PART I. FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30, 2008			December 31, 2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	162,615		$	296,530
Restricted cash and cash equivalents		192,302			228,085
Accounts and interest receivable		33,126			48,786
Prepaid expenses and other		41,628			27,211

Total current assets		429,671			600,612
NON-CURRENT RESTRICTED CASH AND CASH EQUIVALENTS		61,716			478,225
NON-CURRENT RESTRICTED U.S. TREASURY SECURITIES		42,206			63,923
PROPERTY, PLANT AND EQUIPMENT, NET		2,074,380			1,645,112
DEBT ISSUANCE COSTS, NET		51,496			44,005
GOODWILL		76,844			76,844
INTANGIBLE LNG ASSETS		6,182			20,402
LNG HELD FOR COMMISSIONING		65,416			—
ADVANCES UNDER LONG-TERM CONTRACTS		10,378			28,497
OTHER		14,052			4,679

Total assets	$	2,832,341		$	2,962,299

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	5,610		$	6,620
Accrued liabilities		123,000			164,917
Derivative liabilities		7,760			1,564

Total current liabilities		136,370			173,101
LONG-TERM DEBT		2,852,000			2,757,000
MINORITY INTEREST		268,809			285,675
DEFERRED REVENUE		40,000			40,000
OTHER NON-CURRENT LIABILITIES		6,015			8,637
COMMITMENTS AND CONTINGENCIES		—			—

STOCKHOLDERS’ DEFICIT
Preferred stock, $.0001 par value, 5,000,000 shares authorized, none issued		—			—
Common stock, $.003 par value
Authorized: 120,000,000 shares at both June 30, 2008 and December 31, 2007
Issued and outstanding: 50,630,482 and 47,730,869 shares at June 30, 2008 and December 31, 2007, respectively		152			143
Treasury stock: 9,452,110 and 9,192,529 shares at June 30, 2008 and December 31, 2007, respectively, at cost		(329,445	)		(325,039	)
Additional paid-in-capital		469,670			451,705
Accumulated deficit		(611,162	)		(428,918	)
Accumulated other comprehensive loss		(68	)		(5	)

Total stockholders’ deficit		(470,853	)		(302,114	)

Total liabilities and stockholders’ deficit	$	2,832,341		$	2,962,299

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

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenues
Oil and gas sales	$	1,207		$	2,719		$	2,293		$	3,551
Marketing and trading gain (loss)		(293	)		(1,847	)		98			(3,936	)

Total revenues		914			872			2,391			(385	)
Operating costs and expenses
LNG receiving terminal and pipeline development expense		2,566			10,532			9,282			16,286
LNG receiving terminal and pipeline operating expense		416			—			416			—
Exploration costs		24			14			93			372
Oil and gas production costs		114			101			207			168
Depreciation, depletion and amortization		3,333			1,513			5,617			2,589
General and administrative expenses		19,364			28,936			50,043			50,197
Restructuring charges		78,564			—			78,564			—

Total operating costs and expenses		104,381			41,096			144,222			69,612
Loss from operations		(103,467	)		(40,224	)		(141,831	)		(69,997	)
Loss from equity method investments		(3,000	)		—			(4,800	)		—
Derivative loss		(11,536	)		—			(12,366	)		—
Interest expense, net		(21,402	)		(25,930	)		(41,251	)		(52,356	)
Interest income		4,801			24,120			14,405			45,703
Other expense		(34	)		(184	)		(71	)		(183	)

Loss before income taxes and minority interest		(134,638	)		(42,218	)		(185,914	)		(76,833	)
Income tax provision		—			—			—			—

Loss before minority interest		(134,638	)		(42,218	)		(185,914	)		(76,833	)
Minority interest		2,305			1,099			3,670			1,158

Net loss	$	(132,333	)	$	(41,119	)	$	(182,244	)	$	(75,675	)

Net loss per common share—basic and diluted	$	(2.81	)	$	(0.76	)	$	(3.87	)	$	(1.38	)

Weighted average number of common shares outstanding—basic and diluted		47,129			54,391			47,053			54,640

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

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(in thousands)

(unaudited)


	Common Stock				Treasury Stock at Cost			Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Deficit
	Shares		Amount		Treasury Stock at Cost			Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Deficit
Balance—December 31, 2007	47,731		$	143	$	(325,039	)	$	451,705		$	(428,918	)	$	(5	)	$	(302,114	)
Issuances of stock	45			—		—			241			—			—			241
Issuances of restricted stock	3,113			9		—			(9	)		—			—			—
Forfeitures of restricted stock	(104	)		—		—			—			—			—			—
Stock-based compensation	—			—		—			17,733			—			—			17,733
Treasury stock acquired	(155	)		—		(4,406	)		—			—			—			(4,406	)
Comprehensive loss:
Foreign currency translation	—			—		—			—			—			(63	)		(63	)
Net loss	—			—		—			—			(182,244	)		—			(182,244	)

Balance—June 30, 2008	50,630		$	152	$	(329,445	)	$	469,670		$	(611,162	)	$	(68	)	$	(470,853	)

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

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(182,244	)	$	(75,675	)
Adjustments to reconcile net loss to net cash used in operating activities:
Use of restricted cash and cash equivalents		54,926			56,610
Non-cash compensation		15,905			19,321
Non-cash restructuring charges		17,144			—
Depreciation, depletion and amortization		5,617			2,571
Amortization of debt issuance costs		5,012			2,722
Restricted interest income on restricted cash and cash equivalents		(13,105	)		(29,719	)
Minority interest		(3,670	)		(1,158	)
Non-cash derivative loss		6,196			—
Other		(155	)		204
Changes in operating assets and liabilities:
Accounts and interest receivable		16,716			(12,776	)
Prepaid expenses		(15,473	)		(6,700	)
Accounts payable and accrued liabilities		(14,031	)		16,308
Other		—			4,448

NET CASH USED IN OPERATING ACTIVITIES		(107,162	)		(23,844	)

CASH FLOWS FROM INVESTING ACTIVITIES:
LNG terminal and pipeline construction-in-progress		(440,782	)		(360,400	)
Use of restricted cash and cash equivalents		410,457			300,314
Use of (investment in) restricted treasury securities		21,717			(98,442	)
Purchases of LNG for commissioning, net of amounts transferred to LNG terminal construction-in-process		(65,416	)		—
Purchases of fixed assets		(3,542	)		(15,926	)
Advances under long-term contracts, net of amounts transferred to LNG terminal construction-in-process		(5,118	)		(11,816	)
Investment in unconsolidated affiliate		—			(25,025	)
Other		(9,218	)		101

NET CASH USED IN INVESTING ACTIVITIES		(91,902	)		(211,194	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Bridge Loan		95,000			—
Proceeds from sale of common units in partnership		—			203,946
Proceeds from issuance of common units to minority owners in partnership		—			98,442
Proceeds from 2007 Term Loan		—			400,000
Distributions to minority interest		(13,196	)		(435	)
Debt issuance costs		(12,503	)		(8,883	)
Sale of common stock		241			1,748
Purchase of treasury shares		(4,406	)		(212,582	)
Use of restricted cash and cash equivalents		13			641

NET CASH PROVIDED BY FINANCING ACTIVITIES		65,149			482,877

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(133,915	)		247,839
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD		296,530			462,963

CASH AND CASH EQUIVALENTS—END OF PERIOD	$	162,615		$	710,802

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

Index to Financial Statements

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 with the instructions to Form 10-Q 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 herein, 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.

For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2007.

NOTE 2—Recent Business Developments

In February 2008, we announced that we were exploring strategic options for the Company. Further to this strategic option review process, in April we announced our decision to take steps aimed at reducing costs and capital requirements and increasing our available cash and cash equivalents. Since that time those actions have included:

•

In May 2008, we entered into an 18-month credit facility with Credit Suisse and received approximately $82.3 million of net proceeds (see Note 12—“Long-Term Debt and Credit Facility”). The purpose of this facility is to provide incremental funding and liquidity until we enter into a strategic transaction, obtain sufficient revenues from a significant number of imported LNG cargos or consummate an alternative financing transaction.

•

As a result of the downsizing of our natural gas marketing business activities and the wrapping up of significant construction activities for both the Sabine Pass LNG receiving terminal and Creole Trail Pipeline, we have reduced our personnel Company-wide by approximately 41% (see Note 3—“Restructuring Charges”).

•

We terminated one of the two LNG vessel time charter interests during the second quarter of 2008, and have subsequently terminated the second time charter interest in July 2008. In consideration for the termination of both time charters, we have forfeited cash collateral that had been classified as non-current restricted cash and cash equivalents on our Consolidated Balance Sheet (see Note 3—“Restructuring Charges”).

•

In June 2008, we announced that we had entered into a domestic marketing agreement for the sale of LNG with J.P. Morgan Ventures Energy Corporation, a wholly owned subsidiary of J.P. Morgan Chase & Co. (“JPMorgan”). The agreement provides a framework under which Cheniere Marketing may offer to sell to JPMorgan all or a portion of the LNG from each cargo it acquires on delivery to the Sabine Pass LNG receiving terminal, and under which JPMorgan will utilize a portion of Cheniere Marketing’s terminal use agreement (“TUA”) capacity for storage and regasification services related to the portion of the LNG cargo that JPMorgan purchases. In addition, JPMorgan has agreed to purchase any LNG that is delivered to Cheniere Marketing under its Transatlantic Option Agreement with Gaz de France during 2008. JPMorgan has also acquired a “first look” right through March 31, 2009 under which JPMorgan will have the preemptive right to acquire LNG on the same pricing terms that Cheniere Marketing offers to its other customers. JPMorgan will guarantee all of J.P. Morgan Ventures Energy Corporation’s obligations under this agreement, including any LNG purchases executed under this agreement.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

•

On August 6, 2008, we accepted a commitment for $250.0 million of convertible security financing to replace the Credit Suisse 18-month credit facility and provide additional funds. The commitment is subject to certain conditions, including regulatory approvals, completion of definitive documentation and the absence of any change, development or event that would be expected to have a material adverse effect on us or our industry, business, financial condition or prospects. We expect to complete the new $250.0 million financing in August 2008.

Upon closing of the new $250.0 million financing we believe we will have sufficient short-term liquidity to conduct our business even assuming we are wholly unsuccessful in our efforts to exploit our reserved capacity at the Sabine Pass LNG receiving terminal and our other business initiatives (see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations).

We have recognized losses from our cost savings program, which are described in greater detail in Note 3—“Restructing Charges.”

If we are not successful in closing this $250.0 million convertible security financing, entering into another strategic transaction, or obtaining a sufficient number of LNG cargos, we will need to obtain an alternative source of funding during the first quarter of 2009.

NOTE 3—Restructuring Charges

In the second quarter of 2008, we announced a cost saving program in connection with the downsizing of our natural gas marketing business activities, the wrapping up of significant construction activities for both the Sabine Pass LNG receiving terminal and Creole Trail Pipeline and the seeking of alternative arrangements for our time charter interest in two LNG vessels (see Note 2—“Recent Business Developments”). In connection with this program, we recognized $78.6 million in restructuring charges in the second quarter of 2008 in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and have presented the financial impact as Restructuring Charges on the Consolidated Statement of Operations.

Below is a reconciliation of the total restructuring charges expected to be recognized and charged to expense over the restructuring period to the amount of expected restructuring charges at June 30, 2008 (in thousands):


	Severance Costs			Facility Costs			Marketing Costs			Total
Estimated restructuring charges (at inception of plan)	$	12,400		$	—		$	69,400		$	81,800
Adjustment to estimated restructuring charges as of June 30, 2008		(5,431	)		2,549			1,235			(1,647	)

Total estimated restructuring charges at June 30, 2008		6,969			2,549			70,635			80,153
Restructuring charges recognized in second quarter 2008		(5,380	)		(2,549	)		(70,635	)		(78,564	)

Estimated restructuring charges to be recognized in the future	$	1,589		$	—		$	—		$	1,589

NOTE 4—LNG Held for Commissioning

In connection with the construction of the Sabine Pass LNG receiving terminal, we require LNG to perform certain commissioning activities, as follows:

•

Cool down—A minimum amount of LNG will be used to cool down the LNG receiving terminal. Cool down represents the amount of LNG required to cool the LNG receiving terminal to its normal operating temperature.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

•

LNG heel—A certain amount of LNG will be used to establish a level of LNG inventory in each LNG storage tank and in the LNG receiving terminal piping in order for the LNG receiving terminal to function properly.

•

Equipment commissioning—The remaining amount of the LNG will be used to commission the equipment in the LNG receiving terminal to ensure that it performs at designed specifications. Equipment commissioning will result in natural gas being sold.

LNG purchased for commissioning activities is recorded at cost and classified as a non-current asset on our consolidated balance sheet as LNG held for commissioning. As the LNG held for commissioning is used to cool down the LNG receiving terminal and establish LNG heel in the LNG receiving terminal, we capitalize the portion used. The LNG used in the commissioning process is capitalized net of amounts received from the sale of natural gas.

As of June 30, 2008, we had acquired a total of three LNG commissioning cargoes for the Sabine Pass LNG receiving terminal and have successfully unloaded the LNG into the Sabine Pass LNG receiving terminal.

NOTE 5—Minority Interest

We have consolidated certain joint ventures and partnerships because we have a controlling interest in these ventures. Therefore, the entities’ financial statements are consolidated in our consolidated financial statements and the ownership interests of others in these entities equity is recorded as minority interest. The following table sets forth the components of our minority 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 sale of Cheniere Partners common units (2)		203,946
Distributions to Cheniere Partners’ minority interest		(26,827	)
Minority interest share of loss of Cheniere Partners		(7,095	)
Minority interest in Frontera (3)		343

Minority interest at June 30, 2008	$	268,809

(1)

Through the public offering of Cheniere Energy Partners, L.P. (“Cheniere Partners”), Cheniere Partners received $98.4 million in net proceeds from the issuance of its common units to the public in March 2007 (“Cheniere Partners Offering”). Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 51, Accounting for Sales of Stock by a Subsidiary , provides guidance on accounting by the parent for issuances of a subsidiary’s common equity to unaffiliated parties. Under SAB No. 51, a company may elect an accounting policy of recording a gain or loss on the sale of common equity of a subsidiary equal to the amount of proceeds received in excess of the carrying value of the parent’s investment. Upon the conversion of all of our subordinated units in Cheniere Partners to common units, we will evaluate whether to recognize a gain through earnings at that time.

(2)

In conjunction with the Cheniere Partners Offering, we sold a portion of our Cheniere Partners common units to the public, realizing net proceeds of $203.9 million. Due to the subordinated distribution rights on our subordinated units, we have recorded those proceeds as a minority interest. Upon the conversion of all of our subordinated units in Cheniere Partners to common units, we will evaluate whether to recognize a gain through earnings at that time.

(3)

In September 2007, we acquired an 80% interest in Frontera Pipeline LLC (“Frontera”) from Tidelands Oil and Gas Corporation (“Tidelands”) for $1.0 million, providing us with an 80% ownership stake in the Burgos Hub Project. This project involves the development and construction of an integrated pipeline

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

project traversing the United States and Mexico border and the construction of a related subterranean storage facility in Mexico. As of June 30, 2008, Tidelands’ proportionate interest in the net assets of Frontera was $0.3 million.

NOTE 6—Restricted Cash, Cash Equivalents and U.S. Treasury Securities

Restricted cash and cash equivalents and U.S. treasury securities are composed of cash that has been contractually restricted as to usage or withdrawal, as follows:

Sabine Pass LNG Receiving Terminal Construction Reserve

In November 2006, Sabine Pass LNG, L.P., our majority-owned subsidiary (“Sabine Pass LNG”), consummated a private offering of an aggregate principal amount of $2,032.0 million of Senior Secured Notes consisting of $550.0 million of 7 ¹ / 4 % Senior Secured Notes due 2013 (the “2013 Notes”) and $1,482.0 million of 7 ¹ / 2 % Senior Secured Notes due 2016 (the “2016 Notes” and collectively with the 2013 Notes, the “Senior Notes”) (see Note 12—“Long-Term Debt and Credit Facility”). Under the terms and conditions of the Senior Notes, we were required to fund a cash reserve account with approximately $887 million to pay the costs to construct the Sabine Pass LNG receiving terminal. The cash accounts are controlled by a collateral trustee, and therefore, are shown as restricted cash and cash equivalents on our Consolidated Balance Sheets. As of June 30, 2008 and December 31, 2007, $42.6 million and $40.2 million related to accrued construction costs were classified as part of current restricted cash and cash equivalents, and $26.8 million and $380.2 million related to remaining construction costs were classified as a non-current asset on our Consolidated Balance Sheets, respectively.

Senior Notes Debt Service Reserve

As described above, Sabine Pass LNG consummated a private offering of an aggregate principal amount of $2,032.0 million of Senior Notes (see Note 12—“Long-Term Debt and Credit Facility”). Under the terms and conditions of the Senior Notes, we were required to fund a cash reserve account of $335.0 million related to future interest payments on the Senior Notes through May 2009. The cash accounts are controlled by a collateral trustee, and therefore, are shown as restricted cash and cash equivalents on our Consolidated Balance Sheets. As of June 30, 2008 and December 31, 2007, $141.3 million and $151.0 million related to the payment of interest due within twelve months had been classified as part of current restricted cash, and zero and $61.8 million related to the remaining payments of interest through May 2009 had been classified as non-current restricted cash, respectively.

Cheniere Partners Distribution Reserve

At the closing of the Cheniere Partners Offering, Cheniere Partners funded a distribution reserve of $98.4 million, which was invested in U.S. treasury securities. The distribution reserve, including interest earned thereon, will be used to pay quarterly distributions of $0.425 per common unit for all common units, as well as related distributions to Cheniere Partners’ general partner, through the distribution made in respect of the quarter ending June 30, 2009. The U.S. treasury securities were acquired at a discount from their maturity values equal to an average of approximately 4.87% per year. As of June 30, 2008, and December 31, 2007, we classified the $42.2 million and $63.9 million balance of U.S. treasury securities as Non-Current Restricted U.S. Treasury Securities on our Consolidated Balance Sheet, respectively, as these securities had original maturities greater than three months. In addition, we classified $11.9 million of the distribution reserve as non-current restricted cash as of June 30, 2008.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Other Restricted Cash and Cash Equivalents

As of June 30, 2008 and December 31, 2007, $8.4 million and $36.9 million had been classified as part of current restricted cash and cash equivalents, and $23.0 million and $36.2 million had been classified as a non-current asset on our Consolidated Balance Sheets, respectively, related to various other contractual restrictions.

NOTE 7—Property, Plant and Equipment

Property, plant and equipment consists of LNG terminal construction-in-process expenditures, LNG site and related costs, investments in oil and gas properties, and fixed assets, as follows (in thousands):


	June 30, 2008			December 31, 2007
LNG TERMINAL COSTS
LNG terminal construction-in-process	$	1,462,514		$	1,169,695
LNG site and related costs, net		2,031			1,991

Total LNG terminal costs	$	1,464,545		$	1,171,686

NATURAL GAS PIPELINE COSTS
Pipeline	$	537,640		$	—
Natural gas pipeline construction-in-process		28,376			425,038
Pipeline rights-of-way		17,136			15,751
Accumulated depreciation		(1,042	)		—

Total natural gas pipeline costs	$	582,110		$	440,789

OIL AND GAS PROPERTIES, successful efforts method
Proved	$	2,526		$	2,526
Accumulated depreciation, depletion and amortization		(860	)		(653	)

Total oil and gas properties, net	$	1,666		$	1,873

FIXED ASSETS
Computers and office equipment	$	6,729		$	8,195
Furniture and fixtures		5,123			5,008
Computer software		12,650			12,268
Leasehold improvements		10,456			11,247
Projects-in-process		1,104			2,147
Other		1,197			1,072
Accumulated depreciation		(11,200	)		(9,173	)

Total fixed assets, net	$	26,059		$	30,764

PROPERTY, PLANT AND EQUIPMENT, net	$	2,074,380		$	1,645,112

LNG Terminal Costs

Once an LNG receiving terminal is constructed, the related LNG terminal construction-in-process costs will be depreciated using the straight-line depreciation method. The identifiable components of the Sabine Pass LNG receiving terminal with similar estimated useful lives have a depreciable range between 10 and 50 years. Depreciation will begin once construction is complete.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Costs associated with the construction of the Sabine Pass LNG receiving terminal have been capitalized as construction-in-process since the date the project satisfied our criteria for capitalization. For the six months ended June 30, 2008 and 2007, we capitalized $47.6 million and $27.9 million of interest expense related to the construction of the Sabine Pass LNG receiving terminal, respectively. In March 2006, our Corpus Christi LNG receiving terminal satisfied the criteria for capitalization. Accordingly, costs associated with the initial site work for the Corpus Christi LNG receiving terminal have been capitalized as construction-in-process since that time. For the six months ended June 30, 2008 and 2007, we capitalized $0.6 million and $1.0 million, respectively, of interest expense related to this construction project.

Natural Gas Pipeline Costs

Our natural gas pipeline business is subject to the jurisdiction of the Federal Energy Regulatory Commission (“FERC”) in accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978, and we have determined that our pipelines that may be constructed have met the criteria set forth in SFAS No. 71. Accordingly, we began applying the provisions of SFAS No. 71 to the affected pipeline subsidiaries in the third quarter of 2006. Natural gas pipeline costs also include amounts capitalized as Allowance for Funds Used During Construction (“AFUDC”). The rates used in the calculation of AFUDC are determined in accordance with guidelines established by the FERC. AFUDC represents the cost of debt and equity funds used to finance our natural gas pipeline additions during construction. AFUDC is capitalized as a part of the cost of our natural gas pipelines. Under regulatory rate practices, we generally are permitted to recover AFUDC, and a fair return thereon, through our rate base after our natural gas pipelines are placed in service. For the six months ended June 30, 2008 and 2007, we capitalized $17.0 million and $4.0 million, respectively, of AFUDC to our natural gas pipeline projects.

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 property, plant and equipment totaled $5.6 million and $2.4 million for the six months ended June 30, 2008 and 2007, respectively.

Asset Retirement Costs

Our asset retirement obligations relate primarily to the retirement of certain LNG receiving terminal, natural gas pipeline assets and obligations related to right-of-way agreements. In accordance with SFAS No. 143, Accounting for Asset Retirement Obligations , we determined that due to an indeterminate life of such assets, the fair value of the retirement obligation is not reasonably estimable. A liability for such asset retirement obligation will be recorded when a fair value is determinable.

NOTE 8—Advances Under Long-Term Contracts

We have entered into certain engineering, procurement and construction (“EPC”) contracts and purchase agreements related to the construction of the Sabine Pass LNG receiving terminal that require us to make payments to fund costs that will be incurred or equipment that will be received in the future. Advances made under long-term contracts on purchase commitments are carried at face value and transferred to property, plant and equipment as the costs are incurred or equipment is received. As of June 30, 2008 and December 31, 2007, our Advances Under Long-term Contracts were $10.4 million and $28.5 million, respectively.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

NOTE 9—Intangible Assets

The fair values, net book values and estimated useful lives of our intangible assets as of June 30, 2008 and December 31, 2007 are presented in the following tables.


			As of June 30, 2008
	Fair Value		Amortization Period	Accumulated Amortization		Net book value
Intangible assets not subject to amortization	$	6,182	—	$	—	$	6,182


			As of December 31, 2007
	Fair Value		Amortization Period	Accumulated Amortization		Net book value
Amortizable intangible assets	$	14,228	5 years	$	—	$	14,228
Intangible assets not subject to amortization		6,174	—		—		6,174

	$	20,402		$	—	$	20,402

Amortizable Intangible Assets

At December 31, 2007, we assigned $14.2 million to intangible assets acquired either individually or with a group of assets that are subject to amortization as of December 31, 2007. The weighted average amortization period for these assets is 5 years. For the year ended December 31, 2007, we had not recognized amortization expense.

In the second quarter of 2008, we impaired these amortizable intangible assets in connection with the downsizing of our natural gas marketing business. This impairment was recorded in Restructuring Charges on the Consolidated Statement of Operations for the three months ended June 30, 2008 (see Note 3—“Restructuring Charges”).

Intangible Assets Not Subject to Amortization

We assigned $6.2 million to intangible assets acquired either individually or with a group of assets that are not subject to amortization as of both June 30, 2008 and December 31, 2007.

NOTE 10—Investment in Limited Partnership

We account for our 30% limited partnership investment in Freeport LNG Development, L.P. (“Freeport LNG”) using the equity method of accounting. As of June 30, 2008 and December 31, 2007, we had unrecorded cumulative suspended losses of $25.1 million and $19.8 million, respectively, related to our investment in Freeport LNG as the basis in this investment had been reduced to zero.

In March 2008 and May 2008, we received cash call notices from Freeport LNG requesting that we provide further financial support due to higher than expected commissioning and performance testing costs. During the six months ended June 30, 2008, we funded the cash calls and recorded $4.8 million of additional losses in Freeport LNG. We have not recorded the unrecorded cumulative suspended losses referred to above as we have not guaranteed any obligations and are not committed to provide any further financial support.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The financial position of Freeport LNG at June 30, 2008 and December 31, 2007 and the results of Freeport LNG’s operations for the three and six months ended June 30, 2008 and 2007 are summarized as follows (in thousands):


	June 30, 2008			December 31, 2007
Current assets	$	81,311		$	120,580
Property, plant and equipment, net		908,764			1,590
Construction-in-process		51,072			863,977
Other assets		50,072			46,316

Total assets	$	1,091,219		$	1,032,463

Current liabilities		28,192			34,477
Notes payable		1,143,944			1,063,984
Deferred revenue and other deferred credits		8,243			5,478
Partners’ capital		(89,160	)		(71,476	)

Total liabilities and partners’ capital	$	1,091,219		$	1,032,463


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Loss from continuing operations	$	(27,180	)	$	(5,540	)	$	(33,157	)	$	(11,201	)
Net loss		(27,459	)		(5,540	)		(33,684	)		(11,201	)
Cheniere’s 30% equity in net loss from limited partnership (1)		(8,238	)		(1,662	)		(10,105	)		(3,360	)

(1)

During the three months ended June 30, 2008 and 2007, we did not record $8.2 million and $1.7 million of the net losses for such periods, respectively, and during the six months ended June 30, 2008 and 2007, we did not record $10.1 million and $3.4 million of the net losses for such periods, respectively, as the basis in this investment had been reduced to zero and because we have not guaranteed any obligations and have not been committed to provide any further financial support since December 2005.

NOTE 11—Accrued Liabilities

As of June 30, 2008 and December 31, 2007, accrued liabilities consisted of the following (in thousands):


	June 30, 2008		December 31, 2007
LNG terminal construction costs	$	37,822	$	39,574
Restructuring costs		23,088		—
Accrued interest expense and related fees		18,591		16,159
Pipeline construction costs		21,714		47,266
Domestic natural gas marketing purchases		9,499		40,607
Payroll		6,666		16,143
Other accrued liabilities		5,620		5,168

Accrued liabilities	$	123,000	$	164,917

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

NOTE 12—Long-Term Debt and Credit Facility

As of June 30, 2008 and December 31, 2007, our long-term debt consisted of the following (in thousands):


	June 30, 2008		December 31, 2007
Senior Notes	$	2,032,000	$	2,032,000
Convertible Senior Unsecured Notes		325,000		325,000
2007 Term Loan		400,000		400,000
Bridge Loan		95,000		—

Total Long-Term Debt	$	2,852,000	$	2,757,000

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 the 2013 Notes and $1,482.0 million of the 2016 Notes. 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 indenture governing the Senior Notes, except for permitted tax distributions, Sabine Pass LNG may not make distributions until certain conditions are satisfied. The indenture requires that Sabine Pass LNG apply its net operating cash flow (i) first, to fund with monthly deposits its next semiannual payment of approximately $75.5 million of interest on the Senior Notes, and (ii) second, to fund a one-time, permanent debt service reserve fund equal to one semiannual interest payment of approximately $75.5 million on the Senior Notes. Distributions from Sabine Pass LNG will be permitted only after phase 1 target completion, as defined in the indenture governing the Senior Notes, or such earlier date as project revenues are received, upon satisfaction of the foregoing funding requirements, after satisfying a fixed charge coverage ratio test of 2:1 and after satisfying other conditions specified in the indenture.

Convertible Senior Unsecured Notes

In July 2005, we consummated a private offering of $325.0 million aggregate principal amount of Convertible Senior Unsecured Notes due 2012 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (“Securities Act”). The notes bear interest at a rate of 2.25% per year. 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 June 30, 2008, 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 a 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 rate plus 50 basis points. The indenture governing the notes contains customary reporting requirements.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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 9.75% 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 net proceeds of $391.7 million from the 2007 Term Loan are being used for general corporate purposes, including our repurchase, completed during the year ended December 31, 2007, of approximately 9.2 million shares of our outstanding common stock pursuant to the exercise of the call options acquired in the issuer call spread purchased by us in connection with the issuance of the Convertible Senior Unsecured Notes. The 2007 Term Loan is secured by a pledge of our 135,383,831 subordinated units in Cheniere Partners and our equity interests in the entities that own our 30% interest in Freeport LNG.

Marketing Credit Facility

In June 2008, we terminated a credit facility that Cheniere Marketing had and cash collateralized letters of credit that had been issued under the facility but had not yet been returned to us. As of June 30, 2008, we had $3.3 million of cash collateralized letters of credit outstanding that had been issued under the facility. Except for the cash that collateralizes outstanding letters of credit, all of the working capital of Cheniere Marketing has become unrestricted funds available to the Company.

Bridge Loan

In May 2008, Cheniere Common Units Holding, LLC (“Cheniere Common Units Holding”), a newly formed wholly-owned subsidiary of Cheniere, entered into a Credit Agreement (the “Bridge Loan”) among Cheniere Common Units Holding, Credit Suisse, Cayman Islands Branch, as administrative agent, collateral agent and as a lender, and the several lenders from time to time party thereto, pursuant to which the lenders agreed to make a term loan of $95.0 million to Cheniere Common Units Holding. Borrowings under the Bridge Loan generally bear interest at a fixed rate of 16.458% per annum. Interest is calculated on the unpaid principal amount of the Bridge Loan and is payable quarterly in arrears on the earlier of the 46 ^th day following the end of each calendar quarter, or the maturity date. The Bridge Loan will mature on November 5, 2009. The net proceeds from the Bridge Loan were $82.3 million and are being used for general corporate purposes and pipeline capital expenditures. The Bridge Loan is secured by a pledge of our 10,891,357 common units in Cheniere Partners and our equity interests in the entities that own our Creole Trail Pipeline.

NOTE 13—Financial Instruments

We entered into financial derivatives to hedge the exposure to variability in expected future cash flows attributable to the future sale of natural gas from our LNG commissioning cargoes (“LNG commissioning cargo derivatives”). The net cost (LNG commissioning cargo purchase price less natural gas sales proceeds) of our LNG commissioning cargoes is capitalized on our Consolidated Balance Sheets as it is directly related to the LNG receiving terminal construction and is incurred to place the LNG receiving terminal in usable condition. However, changes in the fair value of our LNG commissioning cargo derivatives are reported in earnings because they are not able to be designated in a qualifying hedging relationship in accordance with FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities .

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements , and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 . As a result of the adoption, we elected not to measure any additional financial assets or liabilities at fair value, other than those which were recorded at fair value prior to adoption.

The estimated fair value of financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The financial assets and liabilities at June 30, 2008, measured at fair value on a recurring basis, are summarized below (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 at June 30, 2008
Trading derivative payables	$	—	$	20	$	—	$	20
Other derivatives payables		7,704		36		—		7,740

Total liabilities at fair value	$	7,704	$	56	$	—	$	7,760

Trading derivatives reflect positions held by Cheniere Marketing and include exchange-traded derivative contracts and over-the-counter derivative contracts. Other derivatives reflect positions held by Sabine Pass LNG related to natural gas swaps entered into to hedge the cash flows from the sale of excess LNG purchased for commissioning.

SFAS No. 107, Disclosures about Fair Value of Financial Instruments , requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the SFAS No. 159 fair value option was not elected. The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, restricted cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The carrying amounts of the fair values of financial instruments for which SFAS No. 159 was not elected are as follows:

Financial Instruments (in thousands):


	June 30, 2008				December 31, 2007
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
2013 Notes (1)	$	550,000	$	497,750	$	550,000	$	525,250
2016 Notes (1)		1,482,000		1,326,390		1,482,000		1,404,195
2.25% Convertible Senior Unsecured Notes (2)		325,000		157,424		325,000		338,611
2007 Term Loan (3)		400,000		400,000		400,000		400,000
Bridge Loan (4)		95,000		95,000		—		—
Restricted U.S. treasury securities (5)		42,206		45,272		63,923		66,984

(1)	The fair value of the Senior Notes is based on quotations obtained from broker-dealers who made markets in these and similar instruments as of June 30, 2008 and December 31, 2007, as applicable.

(2)	The fair value of our Convertible Senior Unsecured Notes is based on the closing trading prices on June 30, 2008 and December 31, 2007, as applicable.

(3)

The 2007 Term Loan bears interest at a fixed rate; therefore, the estimated fair value is expected to vary with changes in market interest rates. At June 30, 2008 and December 31, 2007, the fair value of the debt instrument was stated at its carrying amount due to it being a non-trading instrument with no liquid market.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(4)	The Bridge Loan bears interest at a fixed rate; therefore, the estimated fair value is expected to vary with changes in market interest rates. At June 30, 2008, the fair value of the debt instrument was stated at its carrying amount due to it being a non-trading instrument with no liquid market.

(5)	The fair value of our Restricted U.S. Treasury Securities is based on quotations obtained from broker-dealers who made markets in these and similar instruments as of June 30, 2008 and December 31, 2007, as applicable.

NOTE 14—Income Taxes

From our inception, we have reported a net operating loss (“NOL”) for both financial reporting purposes and for international, federal and state income tax reporting purposes. Accordingly, 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 months ended June 30, 2008 and 2007 included no income tax benefits.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 . FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition rules.

We adopted the provisions of FIN No. 48 on January 1, 2007. We have determined that all of the material tax positions taken in our income tax returns and the positions we expect to take in our future income tax filings meet the more likely-than-not recognition threshold prescribed by FIN No. 48. We have approximately $19.3 million of deferred tax benefits for tax positions related to the accelerated recovery of certain capital costs for which the ultimate deductibility is highly certain, but for which there is some uncertainty corresponding to the timing of the related prior, current and future year tax deductions. Under SFAS No. 109, the disallowance of an accelerated recovery period would not affect our annual reported effective income tax rate in any of the prior, current or future financial reporting periods, but could result in the acceleration of cash payments in prior reporting periods. Adjustments that would increase our federal taxable income in our prior periods would largely be offset by our available NOL carryovers, and therefore, the potential underpayment interest and penalties have not been accrued with respect to this liability.

The amount of our unrecognized tax benefits associated with uncertain tax positions decreased significantly in the first quarter of 2008 based on discussions with the relevant taxing authorities on the timing of the deductions related to a significant portion of our capital costs. The remaining $19.3 million of unrecognized tax benefits pertain to tax positions taken in prior years for which there is still some uncertainty as to the timing of the corresponding tax deductions. To date, the adoption of FIN No. 48 has had no impact on our financial position, results of operations or cash flows. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


Balance at January 1, 2008	$	70,530
Additions based on tax positions related to current year		—
Additions for tax positions of prior years		3,400
Reductions for tax positions of prior years		(54,591	)
Settlements		—

Balance at June 30, 2008	$	19,339

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

SFAS No. 109, Accounting for Income Taxes , establishes specific procedures to (a) measure deferred tax liabilities and assets using a specified tax rate convention, and (b) assess whether a valuation allowance should be established for an enterprise’s deferred tax assets. As provided for in SFAS No. 109, we have established a tax valuation allowance for the tax benefits related to all of our international, federal and state NOL carryovers and all of our other deferred tax assets due to the uncertainty of our ability to realize the related future tax benefits. Once a valuation allowance has been established, SFAS No. 109 requires that all available evidence, both positive and negative, must be considered to determine when, based on the weight of that evidence, it is appropriate to release all or any portion of the valuation allowance. Judgment must be used in considering the relative impact of both positive and negative evidence; the weight given to such evidence must be commensurate with the extent to which such evidence can be objectively verified. Based on the criteria provided in SFAS No. 109, we have determined that all of our deferred tax assets should have a full valuation allowance for financial reporting purposes as of June 30, 2008.

Our federal consolidated income tax returns have not been audited by the Internal Revenue Service; we have not been notified of any pending federal, state or international income tax audits; and we are not aware of any additional income tax controversies that are likely to occur with any taxing authority. We have not entered into any agreements with any taxing authorities to extend the period of time in which they may assert or assess additional income tax, penalties or interest. However, since we are presently in an NOL carryover position and have been since our inception, under the applicable Internal Revenue Service guidelines, in the event of an audit, our available federal NOL carryover amount is subject to adjustment until the normal three year federal statute of limitations closes for the year in which the NOL is fully utilized. In 2007, the Texas Comptroller’s office completed an audit of Cheniere’s Texas franchise tax returns for the three year period ended December 31, 2004; the Louisiana Department of Revenue completed an income and franchise audit of Cheniere and one of our wholly-owned affiliates for the two year period ended December 31, 2003. We expect that all of our significant operating affiliates will be audited by the States of Texas and Louisiana for annual tax reporting periods ended on and after December 31, 2004. To date, all of the state-level income tax audits that have been settled favorably and without changes. None of our foreign affiliates have been audited by any foreign taxing authorities and none have been notified of any pending income tax audits.

As discussed above, we have not previously recorded a liability for international, federal or state income taxes and therefore we have not been subject to any penalties or interest expense related to any income tax liabilities. In future reporting periods, if any interest or penalties are imposed in connection with an income tax liability, we expect to include both of these items in the our income tax provision.

NOTE 15—Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. The computation of diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock that are dilutive to net income were exercised or converted into common stock or resulted in the issuance of common stock that would then share in our earnings.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The following table reconciles basic and diluted weighted average common shares outstanding for the three and six months ended June 30, 2008 and 2007 (in thousands except for loss per share):


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Weighted average common shares outstanding:
Basic		47,129			54,391			47,053			54,640
Dilutive common stock options		—			—			—			—
Dilutive Convertible Senior Unsecured Notes		—			—			—			—

Diluted		47,129			54,391			47,053			54,640

Basic loss per share	$	(2.81	)	$	(0.76	)	$	(3.87	)	$	(1.38	)
Diluted loss per share	$	(2.81	)	$	(0.76	)	$	(3.87	)	$	(1.38	)

NOTE 16—Comprehensive Loss

The following table is a reconciliation of our net loss to our comprehensive loss for the three and six months ended June 30, 2008 and 2007 (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net loss	$	(132,333	)	$	(41,119	)	$	(182,244	)	$	(75,675	)
Other comprehensive loss items:
Foreign currency translation		(53	)		(28	)		(63	)		(33	)

Comprehensive loss	$	(132,386	)	$	(41,147	)	$	(182,307	)	$	(75,708	)

NOTE 17—Supplemental Cash Flow Information and Disclosures of Non-Cash Transactions

The following table provides supplemental disclosure of cash flow information for the six months ended June 30, 2008 and 2007 (in thousands):


	Six Months Ended June 30,
	2008		2007
Cash paid for:
Interest, net of amounts capitalized	$	36,968	$	55,110
Construction-in-process and debt issuance additions funded with accrued liabilities	$	103,135	$	54,787

NOTE 18—Business Segment Information

We have four business segments: LNG receiving terminal business, natural gas pipeline business, LNG and natural gas marketing business and oil and gas exploration and development business. These 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.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Our LNG receiving terminal business segment is in various stages of developing up to three LNG receiving terminal projects along the U.S. Gulf Coast at the following locations: Sabine Pass LNG, approximately 90.6% owned, in western Cameron Parish, Louisiana on the Sabine Pass Channel; 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. In addition, we own a 30% limited partner interest in a fourth project, Freeport LNG, located on Quintana Island near Freeport, Texas.

Our natural gas pipeline business segment is in various stages of developing natural gas pipelines to provide access to North American natural gas markets.

Our LNG and natural gas marketing business segment is developing a portfolio of long-term, short-term, and spot LNG purchase agreements, and will focus on entering into business relationships such as the one entered into with JPMorgan for the domestic marketing of natural gas that is imported by Cheniere Marketing as LNG to the Sabine Pass LNG receiving terminal.

Our oil and gas exploration and development business segment conducts and participates in exploration, development and production activities in the shallow waters of the Gulf of Mexico.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The following table summarizes revenues, net income (loss) from operations and total assets for each of our operating segments (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenues:
LNG receiving terminal	$	—		$	—		$	—		$	—
Natural gas pipeline		352			—			352			—
LNG and natural gas marketing		(607	)		(1,847	)		(226	)		(3,936	)
Oil and gas exploration and development		1,207			2,719			2,293			3,551

Total		952			872			2,419			(385	)
Corporate and other (1)		(38	)		—			(28	)		—

Total consolidated	$	914		$	872		$	2,391		$	(385	)

Restructuring charges:
LNG receiving terminal	$	1,451		$	—		$	1,451		$	—
Natural gas pipeline		130			—			130			—
LNG and natural gas marketing		70,563			—			70,563			—
Oil and gas exploration and development		—			—			—			—

Total		72,144			—			72,144			—
Corporate and other (1)		6,420			—			6,420			—

Total consolidated	$	78,564		$	—		$	78,564		$	—

Net income (loss):
LNG receiving terminal	$	(26,585	)	$	(13,340	)	$	(40,167	)	$	(28,406	)
Natural gas pipeline		(3,694	)		(1,147	)		(4,063	)		(1,886	)
LNG and natural gas marketing		(58,003	)		(6,490	)		(68,165	)		(11,950	)
Oil and gas exploration and development		898			2,507			1,743			2,843

Total		(87,384	)		(18,470	)		(110,652	)		(39,399	)
Corporate and other (1)		(44,949	)		(22,649	)		(71,592	)		(36,276	)

Total consolidated	$	(132,333	)	$	(41,119	)	$	(182,244	)	$	(75,675	)


	June 30, 2008		December 31, 2007
Total assets:
LNG receiving terminal	$	2,006,046	$	2,041,894
Natural gas pipeline		592,322		443,421
LNG and natural gas marketing		198,242		157,601
Oil and gas exploration and development		2,681		2,403

Total		2,799,291		2,645,319
Corporate and other (1)		33,050		316,980

Total consolidated	$	2,832,341	$	2,962,299

(1)	Includes corporate activities and certain intercompany eliminations.

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

NOTE 19—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 (“2003 Plan”). Effective January 1, 2006, we adopted SFAS No. 123R (revised 2004), Share-Based Payment , which revised SFAS No. 123 and superseded Accounting Principles Bulletins (“APB”) No. 25. No adjustments to prior periods were made as a result of adopting SFAS No. 123R. SFAS No. 123R requires that all share-based payments to employees be recognized in the 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 under SFAS No. 123R. We consider many factors when estimating expected forfeitures, including types of awards, employee class and historical experience.

For the three and six months ended June 30, 2008, the total share-based compensation expense (net of amount capitalized) recognized in our net loss was $3.1 million and $15.9 million, respectively. For the three and six months ended June 30, 2007, the total share-based compensation expense (net of amounts capitalized) recognized in our net loss was $12.7 million and $19.3 million, respectively. As required by SFAS No. 123R, the effect of a change in estimated forfeitures is recognized through a cumulative adjustment included in share-based compensation cost in the period of change in estimate. We consider many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. Given the staff reduction plan implemented during second quarter 2008, a cumulative adjustment of $8.3 million was recognized as a decrease in our compensation expense during the six months ended June 30, 2008. For the three and six months ended June 30, 2008, the total share-based compensation cost capitalized as part of the cost of capital assets was $0.3 million and $0.8 million, respectively. For the three and six months ended June 30, 2007, the total share-based compensation expense (net of amounts capitalized) recognized in our net loss was $0.3 million and $0.7 million, respectively.

The total unrecognized compensation cost at June 30, 2008 relating to non-vested share-based compensation arrangements granted under the 1997 Plan and 2003 Plan, before any capitalization, was $62.1 million. That cost is expected to be recognized over 4 years, with a weighted average period of 1.15 years.

We received total proceeds from the exercise of stock options of $0.2 million and $1.7 million in the six months ended June 30, 2008 and 2007, respectively.

Phantom Stock

In May 2007, the Company established the 2007 Incentive Compensation Plan (“2007 Plan”) and the 2008-2010 Incentive Compensation Plan (“2008-2010 Plan”) covering executive officers and other key employees for the performance periods of 2007, 2008, 2009 and 2010. During 2007, a total of 537,000 and 1,647,000 shares of phantom stock were granted under the 2007 Plan and 2008-2010 Plans, respectively, which will be payable in shares of our common stock if stock price hurdles established by the plans are achieved. At its sole discretion, the Compensation Committee of our Board of Directors may elect to settle all or part of the phantom stock in cash. Using a Monte Carlo simulation, fair values (net of forfeitures) of $13.7 million, $11.1 million and $8.3 million were calculated for the performance periods 2008, 2009 and 2010, respectively. A projected earnings date was also forecasted on which the stock price hurdle will be achieved for the award related to each performance period. The fair value of the award for each performance period will be amortized as compensation expense ratably from the date of plan approval to the date it is expected to be earned. In January 2008, 537,000 shares of our common stock were issued as the stock price hurdle for the 2007 Plan was achieved. In addition, during the

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

six months ended June 30, 2008, additional grants of 147,000 shares of phantom stock were made under the 2008-2010 Plan. Using the Monte Carlo simulation, fair values (net of forfeitures) of $0.5 million, $0.3 million, and $0.2 million were calculated for the additional shares for the performance periods 2008, 2009 and 2010, respectively. For the six months ended June 30, 2008, a total of $6.2 million was recognized as compensation expense relating to all phantom stock awards.

Stock Options

We estimate the fair value of stock options under SFAS No. 123R at the date of grant using a Black-Scholes valuation model, which is consistent with the valuation technique we previously utilized to value stock options for the footnote disclosures required under SFAS No. 123. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term (estimated period of time outstanding) of stock options granted is based on the “simplified” method of estimating the expected term for “plain vanilla” stock options allowed by SAB No. 107, Valuation of Share-based Payment Agreements for Public Companies , and varies based on the vesting period and contractual term of the stock option. Expected volatility for stock options granted is based on an equally weighted average of the implied volatility of exchange traded stock options on our common stock expiring more than one year from the measurement date, and historical volatility of our common stock for a period equal to the stock option’s expected life. We have not declared dividends on our common stock. We did not issue any options to purchase shares of our common stock during the six months ended June 30, 2008.

The table below provides a summary of option activity under the combined plans as of June 30, 2008, and changes during the six months then ended:


	Option		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(in thousands)						(in thousands)
Outstanding at January 1, 2008	4,442		$	38.84
Granted	—			—
Exercised	(55	)		7.88
Forfeited or Expired	(765	)		32.11

Outstanding at June 30, 2008	3,622			40.72		5.7		206

Exercisable at June 30, 2008	1,179		$	23.61	$	3.2	$	206

Stock and Non-Vested Stock

We have granted stock and non-vested (restricted) stock to employees, executive officers, outside directors and consultants under the 2003 Plan. Under SFAS No. 123R, grants of non-vested stock are accounted for on an intrinsic value basis. No recognition of deferred compensation is made in stockholders’ equity. Instead, the amortization of the calculated value of non-vested stock grants is accounted for as a charge to compensation and an increase in additional paid-in-capital over the requisite service period.

In January 2008, 479,802 shares having three-year graded vesting were issued to our employees in the form of non-vested stock awards and 537,000 were issued to our executive officers in the form of vested stock awards related to our performance in 2007. In May 2008, 202,788 shares having a one-year graded vesting were issued

Index to Financial Statements

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

to our directors. In May 2008 and June 2008, as a part of the short-term and long-term retention plans approved by the Compensation Committee, 373,656 shares vesting on December 1, 2008 and 1,525,038 shares having a three-year graded vesting beginning December 31, 2008 were issued to our employees and a consultant in the form of non-vested stock awards. In the six months ended June 30, 2008, an additional 21,293 shares of non-vested stock having three- or four-year graded vestings were issued to employees.

The table below provides a summary of the status of our non-vested shares under the 2003 Plan as of June 30, 2008, and changes during the six months then ended (in thousands except for per share information):


	Non-Vested Shares		Weighted Average Grant Date Fair Value Per Share
Non-vested at January 1, 2008	1,355		$	32.74
Granted	3,140			12.85
Vested	(870	)		11.67
Forfeited	(107	)		25.74

Non-vested at June 30, 2008	3,518		$	8.42

Share-based Plan Descriptions and Information

Our 1997 Plan provided for the issuance of stock options to purchase up to 5.0 million shares of our common stock, all of which have been granted. Non-qualified stock options were granted to employees, contract service providers and outside directors. Option terms for the remaining unexercised options are five years with vesting that generally occurs on a graded basis over three years.

Awards providing for the issuance of up to an aggregate of 11.0 million shares of our common stock may be made under our 2003 Plan. These awards may be in the form of non-qualified stock options, incentive stock options, purchased stock, restricted (non-vested) stock, bonus (unrestricted) stock, stock appreciation rights, phantom stock and other share-based performance awards deemed by the Compensation Committee to be consistent with the purposes of the 2003 Plan. To date, the only awards made by the Compensation Committee have been in the form of non-qualified stock options, restricted stock, bonus stock and phantom shares. Beginning in 2005, stock options granted to employees as hiring incentives have been granted at the money with 10-year terms and graded vesting over four years. Prior to that time, stock options granted as hiring incentives were granted at the money with five-year terms and graded vesting over three years. Retention grants made to employees provide for exercise prices at or in excess of the stock price on the grant date, 10-year terms and graded vesting over three years, which commence on the fourth anniversary of the grant date. Restricted stock that has been granted as a hiring incentive vests over three or four years on a graded basis, while restricted stock granted from a bonus pool vests over three years. Shares issued under the 2003 Plan are generally newly issued shares.

Index to Financial Statements

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 and operation of each of our proposed liquefied natural gas (“LNG”) receiving terminals or our proposed pipelines, 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; 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 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 strategies, any business plans or any other plans, forecasts, projections or objectives, including potential revenues, capital expenditures, cost savings and strategic options, 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 and phrases such as “achieve,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “plan,” “potential,” “project,” “propose,” “strategy” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do 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.

Index to Financial Statements

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 annual report on Form 10-K for the year ended December 31, 2007, as supplemented herein. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. These forward-looking statements are made as of the date of this quarterly report.

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.

OVERVIEW

We are engaged primarily in the business of developing and constructing, and then owning and operating, a network of up to three onshore LNG receiving terminals and related natural gas pipelines. In addition, we are engaged to a limited extent in LNG and natural gas marketing activities, and in oil and natural gas exploration and development activities in the Gulf of Mexico.

In February 2008, we announced that we were exploring strategic options for the Company to enhance stockholder value, including options to optimize the value of the Sabine Pass LNG receiving terminal and the regasification capacity at the facility held under a long-term terminal use agreement by our wholly-owned subsidiary, Cheniere Marketing, Inc. (“Cheniere Marketing”).

In April 2008, we commenced a cost savings program in connection with the downsizing of our natural gas marketing business activities as well as nearing completion of significant construction activities for both the Sabine Pass LNG receiving terminal and Creole Trail Pipeline. The cost savings program involves reducing our personnel Company-wide by approximately 41%. We anticipate recognizing losses from this cost savings program, including the impact of cancelling our LNG vessel charter agreements, of approximately $80.2 million, with substantially all of these losses being non-working capital impacts. As of June 30, 2008, we had recognized approximately $78.6 million of such losses.

In May 2008, we entered into an 18-month credit facility with Credit Suisse and received approximately $82.3 million of net proceeds to be held as unrestricted cash and cash equivalents and to be used for general corporate purposes and pipeline capital expenditures. The purpose of this facility is to provide incremental funding and liquidity until we enter into a strategic transaction, obtain sufficient revenues from a significant number of imported LNG cargos or consummate an alternative financing transaction.

As of June 30, 2008, we had unrestricted cash and cash equivalents of $162.6 million. In addition, we had restricted cash and cash equivalents and U.S. treasury securities of $296.2 million, which were designated for the following purposes: $69.4 million for construction costs of the Sabine Pass LNG receiving terminal; $141.3 million for interest payments through May 2009 related to the Senior Notes described below; $54.1 million for cash distributions by Cheniere Energy Partners, L.P. (“Cheniere Partners”) through the distribution made in respect of the quarter ending June 2009; $3.3 million held as cash collateral for guarantee arrangements; and $28.1 million in other restricted cash and cash equivalents.

On August 6, 2008, we accepted a commitment for $250 million of convertible security financing to replace the Credit Suisse 18–month credit facility and provide additional funds. The commitment is subject to certain conditions, including regulatory approvals, completion of definitive documentation and the absence of any change, development or event that would be expected to have a material adverse effect on us or our industry, business, financial condition or prospects. We expect to complete the new $250 million financing in August 2008.

Index to Financial Statements

Upon closing of the new $250 million financing we are confident that we will be able to conduct our business for a minimum of three years even assuming we are wholly unsuccessful in our efforts to exploit our reserved capacity at the Sabine Pass terminal and our other business initiatives.

If we are not successful in closing this $250 million financing, entering into another strategic transaction, or obtaining a sufficient number of LNG cargos, we will need to obtain an alternative source of funding during the first quarter of 2009

LIQUIDITY, CAPITAL RESOURCES AND OPERATIONS

LNG Receiving Terminal Business

Sabine Pass LNG

Subject to the completion of routine punch list items, as of June 30, 2008, we had completed construction of the initial 2.6 Bcf/d of send out capacity and 10.1 Bcf of storage capacity at the Sabine Pass LNG receiving terminal. The terminal is operating and able to accept commercial cargoes. The commissioning process was initiated in April 2008 and is estimated to be completed in the third or fourth quarter of 2008. To date, three LNG cargoes have been obtained for the commissioning process and we expect to obtain one more cargo to complete the process. Construction for the remaining 1.4 Bcf/d was approximately 79% complete as of the end of the second quarter.

Our estimated aggregate cost to construct the Sabine Pass LNG receiving terminal is approximately $1,462 million, before operating expenses during construction, future commissioning costs, and financing costs, an increase of approximately $36 million from our estimate as of March 31, 2008 due to commissioning costs not previously budgeted. Our estimated total construction, commissioning and operating cost budget through the achievement of full operability is approximately $1,559 million. As of June 30, 2008, we incurred approximately $1,437 million of our total budget. Our remaining construction, commissioning and operating costs are anticipated to be funded from restricted cash and cash equivalents designated for construction, working capital or additional financing.

Beginning in 2009, each of the 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. Provided the Sabine Pass LNG receiving terminal has achieved commercial operations, capacity reservation fee TUA payments will be made by the following Sabine Pass LNG customers:

•

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, L.P. (“Sabine Pass LNG”) aggregating approximately $125 million per year for 20 years commencing 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 commencing not later than July 1, 2009. Chevron Corporation has guaranteed Chevron’s obligations under its TUA up to 80% of the fees payable by Chevron.

In addition, Cheniere Marketing has reserved the remaining 2.0 Bcf/d of regasification capacity, and is entitled to use any capacity not utilized by Total and Chevron. Cheniere Marketing has agreed to make monthly capacity payments to Sabine Pass LNG aggregating approximately $250 million per year for at least 19 years commencing January 1, 2009, plus capacity payments of $5 million per month during 2008 after the Sabine Pass LNG receiving terminal commences commercial operations. Cheniere has guaranteed Cheniere Marketing’s obligations under its TUA.

Index to Financial Statements

Other LNG Receiving Terminals

We have a 30% limited partner interest in Freeport LNG Development, L.P. (“Freeport LNG”). Under the limited partnership agreement of Freeport LNG, development expenses of the Freeport LNG receiving terminal project and other Freeport LNG cash needs generally are to be funded out of Freeport LNG’s own cash flows, borrowings or other sources, and with capital contributions by the limited partners. In March 2008 and May 2008, we received cash call notices from Freeport LNG requesting that we provide further financial support due to higher than expected commissioning and performance testing costs. As of June 30, 2008, we had funded the cash calls and have recorded $4.8 million of additional losses in Freeport LNG. We do not anticipate any additional cash calls in the foreseeable future.

We will contemplate making final investment decisions to complete construction of our Corpus Christi LNG receiving terminal project and to commence construction of our Creole Trail LNG receiving terminal project upon, among other things, entering into acceptable commercial arrangements and entering into acceptable financing arrangements for the applicable project.

Natural Gas Pipeline Business

As of June 30, 2008, Phase 1 of the Creole Trail Pipeline, consisting of 94 miles of pipeline, had been placed into commercial operations. Creole Trail Pipeline expenditures incurred through June 30, 2008 were $547.7 million, including accrued liabilities. On a cash basis, we had incurred $522.9 million through June 30, 2008 and expect to spend an additional $33.1 million of cash from July 1, 2008 until completion of Phase 1 of the pipeline. Total costs, excluding financing costs, are expected to be approximately $556 million to construct the Creole Trail Pipeline.

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 arrangements, including acceptable financing arrangements for the applicable project.

LNG and Natural Gas Marketing Business

We have unwound, terminated or assigned our commitments under our domestic natural gas agreements on terms we believe to be acceptable and have cancelled both of our LNG vessel charters.

We have cancelled our Marketing Credit Facility and, as a result of the release of cash collateral for that facility, have increased our unrestricted cash balance by $39.7 million as of June 30, 2008.

Oil and Gas Exploration and Development Business

Although our focus is primarily on the development of LNG-related businesses, we have continued to be involved to a limited extent in oil and gas exploration, development and production activities in the shallow waters of the Gulf of Mexico. This business has historically required, and will continue to require, an insignificant amount of cash to fund its operations.

Index to Financial Statements

Cheniere Partners

For each calendar quarter through June 30, 2009, Cheniere Partners is expected to make quarterly cash distributions of $0.425 per unit on all outstanding common units, as well as related distributions to its general partner, from restricted cash and cash equivalents. We anticipate receiving $4.8 million per quarter out of the total $11.4 million of quarterly common unit distributions. After the distribution in respect of the quarter ending June 30, 2009, a distribution reserve established in connection with Cheniere Partners’ initial public offering is expected to have been depleted, and Cheniere Partners will rely on the receipt of operating revenues from Sabine Pass LNG’s TUAs to fund future quarterly cash distributions to us and other unitholders. Sabine Pass LNG is not permitted under the Senior Notes indenture to make cash distributions to Cheniere Partners if it does not satisfy a fixed charge coverage ratio test of 2:1, calculated as required in the indenture. When Cheniere Marketing makes its capacity reservation fee payments under its TUA of approximately $250 million per year in addition to the TUA payments of approximately $250 million aggregate payments by Total and Chevron under their TUAs, we anticipate that the fixed charge coverage ratio test will be met and we expect to receive, subject to declaration by Cheniere Partners’ board of directors, approximately $254 million per year from Cheniere Partners in distributions on our common, subordinated and general partner units, as well as an additional approximately $18 million of management and service fees. Until such time, we may not receive distributions equal to the amount of our TUA payment.

Sources and Uses of Cash

The following table summarizes the sources and uses of our cash and cash equivalents for the six months ended June 30, 2008 and 2007. 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 document. Additional discussion of these items follows the table (in thousands).


	Six Months Ended June 30,
	2008			2007
Sources of cash and cash equivalents:
Use of restricted cash and cash equivalents	$	410,470		$	300,955
Use of restricted treasury securities		21,717			—
Proceeds from debt		95,000			400,000
Proceeds from sale of common units in partnership		—			203,946
Proceeds from issuance of common units in partnership		—			98,442
Other		241			1,748

Total sources of cash and cash equivalents		527,428			1,005,091
Uses of cash and cash equivalents:
LNG terminal and pipeline construction-in-process		(440,782	)		(360,400	)
Operating cash flow		(107,162	)		(23,844	)
Purchases of LNG for commissioning, net of amounts transferred to LNG terminal construction-in- process		(65,416	)		—
Distributions to minority interest		(13,196	)		(435	)
Debt issuance costs		(12,503	)		(8,883	)
Advances under long-term contracts, net of transfers to construction-in-process		(5,118	)		(11,816	)
Purchase of treasury shares		(4,406	)		(212,582	)
Purchase of investment in unconsolidated affiliate		—			(25,025	)
Investment in U.S. treasury securities		—			(98,442	)
Purchases of intangible and fixed assets, net of sales		(3,542	)		(15,926	)
Other		(9,218	)		101

Total uses of cash and cash equivalents		(661,343	)		(757,252	)

Net increase (decrease) in cash and cash equivalents	$	(133,915	)	$	247,839

Cash and cash equivalents at end of period	$	162,615		$	710,802

Index to Financial Statements

Use of restricted cash and cash equivalents

Under the indenture governing the Senior Notes, a portion of the proceeds from the Senior Notes is 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 indenture, the proceeds are not presented as cash and cash equivalents, and therefore, when proceeds from the Senior Notes are used they are presented as a source of cash and cash equivalents. For the six months ended June 30, 2008 and 2007, the $410.5 million and $301.0 million, respectively, of restricted cash and cash equivalents were used primarily to pay for construction activities at the Sabine Pass LNG receiving terminal.

Use of treasury securities

At the closing of the Cheniere Partners offering, we funded a distribution reserve, which was invested in U.S. treasury securities. The distribution reserve, including interest earned thereon, will be used to pay quarterly distributions of $0.425 per common unit for all common units, as well as related distributions to Cheniere Partners’ general partner, through the distribution made in respect of the quarter ended June 30, 2009.

Proceeds from debt

Our proceeds from debt were $95.0 million and $400.0 million for the six months ended June 30, 2008 and 2007, respectively. During the six months ended 2008, we received $95.0 million under the Bridge Loan described below used primarily for general corporate purposes. During the six months ended June 30, 2007, we received $400.0 million from borrowings under the 2007 Term Loan described below used primarily to repurchase shares of our common stock under the call option acquired in the issuer call spread purchased by us in connection with the issuance of the Convertible Senior Unsecured Notes described below.

Proceeds from sale of common units in partnership

In conjunction with the Cheniere Partners offering in the first quarter of 2007, we sold to the public a portion of the Cheniere Partners common units held by us, realizing net proceeds of $164.5 million. These net proceeds are being used for corporate and general purposes.

Proceeds from issuance of common units in partnership

Through the Cheniere Partners offering in the first quarter of 2007, Cheniere Partners received $98.4 million in net proceeds for the issuance of common units to the public. Cheniere Partners used all of the net proceeds to purchase U.S. treasury securities to fund a distribution reserve for payment of initial quarterly distributions through the quarter ending June 30, 2009.

LNG terminal and pipeline construction-in-process

Capital expenditures for our LNG receiving terminals and pipeline projects were $440.8 million and $360.4 million in the six months ended June 30, 2008 and 2007, respectively. The 22.3% increase in the six months ended June 30, 2008 resulted primarily from our continued construction expenditures on the Sabine Pass LNG receiving terminal, which commenced construction in the first quarter of 2005, and the Creole Trail Pipeline, which commenced initial construction in the second quarter of 2007.

Operating cash flow

Net cash used in operations was $107.2 million and $23.8 million in the six months ended June 30, 2008 and 2007, respectively. The $83.4 million increase in the net cash used in operations in the six months ended June 30, 2008 resulted primarily from restructuring charges recognized in the second quarter of 2008 and an increase in interest expense.

Index to Financial Statements

Purchases of LNG for commissioning

Distributions to minority interest

During the six months ended June 30, 2008 and 2007, we distributed $13.2 million and $0.4 million to non-affiliated common unitholders of Cheniere Partners, respectively.

Debt issuance costs

Our debt issuance costs were $12.5 million and $8.9 million in the six months ended June 30, 2008 and 2007, respectively. The debt issuance costs in 2008 primarily related to the Bridge Loan. Debt issuance costs in 2007 related primarily to the 2007 Term Loan.

Advances under long-term contracts, net of transfer to construction-in-process

We have entered into certain contracts and purchase agreements related to the construction of the Sabine Pass LNG receiving terminal that require us to make payments to fund costs that will be incurred or equipment that will be received in the future. Advances made under long-term contracts on purchase commitments are carried at face value and transferred to property, plant and equipment as the costs are incurred or equipment is received.

Purchase of treasury securities

In the six months ended June 30, 2008 and 2007, we purchased treasury shares valued at $4.4 million and $212.6 million, respectively. In 2007, we purchased approximately 6.0 million shares under the call option acquired in the issuer call spread purchased by us in connection with the issuance of the Convertible Senior Unsecured Notes.

Purchase of investment in unconsolidated affiliate

In the six-month period ended June 30, 2007, we increased our ownership interest in J & S Cheniere, S.A. (“J & S Cheniere”) to 49% and loaned J & S Cheniere $25.0 million for the purpose of collateralizing certain obligations of J & S Cheniere relating to two LNG tanker time charters. We subsequently acquired the remaining 51% interest in J & S Cheniere and cancelled the time charters.

Investment in U.S. treasuries

Debt Agreements

Convertible Senior Unsecured Notes

Index to Financial Statements

of the notes, which is equal to a conversion price of approximately $35.42 per share. As of June 30, 2008, 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 rate plus 50 basis points. The indenture governing the notes contains customary reporting requirements.

Sabine Pass LNG Senior Secured 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 7 ¹ / 4 % Senior Secured Notes due 2013 and $1,482.0 million of 7 ¹ / 2 % 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 indenture governing the Senior Notes, except for permitted tax distributions, Sabine Pass LNG may not make distributions until certain conditions are satisfied. The indenture requires that Sabine Pass LNG apply its net operating cash flow (i) first, to fund with monthly deposits its next semiannual payment of approximately $75.5 million of interest on the Senior Notes, and (ii) second, to fund a one-time, permanent debt service reserve fund equal to one semiannual interest payment of approximately $75.5 million on the Senior Notes. Distributions will be permitted only after phase 1 target completion of the Sabine Pass LNG receiving terminal, as defined in the indenture governing the Senior Notes, or such earlier date as project revenues are received, upon satisfaction of the foregoing funding requirements, after satisfying a fixed charge coverage ratio test of 2:1 and after satisfying other conditions specified in the indenture.

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 9.75% 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 net proceeds from the 2007 Term Loan were $391.7 million and are being used for general corporate purposes, including the repurchase, completed in July 2007, of approximately 9.2 million shares of our outstanding common stock pursuant to the exercise of the call options acquired in the issuer call spread purchased by us in connection with the issuance of the Convertible Senior Unsecured Notes. The 2007 Term Loan is secured by a pledge of our 135,383,831 subordinated units in Cheniere Partners and our equity interests in the entities that own our 30% interest in Freeport LNG.

Marketing Credit Facility

In June 2008, we terminated a credit facility that Cheniere Marketing had and cash collaterialized letters of credit that had been issued under the facility but had not yet been returned to us. As of June 30, 2008, we had $3.3 million of cash collateralized letters of credit outstanding that had been issued under the facility. Except for the cash that collateralizes outstanding letters of credit, all of the working capital of Cheniere Marketing has become unrestricted funds available to the Company.

Bridge Loan

Index to Financial Statements

agent and as a lender, and the several lenders from time to time party thereto, pursuant to which the lenders agreed to make a term loan of $95.0 million to Cheniere Common Units Holding. Borrowings under the Bridge Loan generally bear interest at a fixed rate of 16.458% per annum. Interest is calculated on the unpaid principal amount of the Bridge Loan and is payable quarterly in arrears on the earlier of the 46 ^th day following the end of each calendar quarter, or the maturity date. The Bridge Loan will mature on November 5, 2009. The net proceeds from the Bridge Loan were $82.3 million and are being used for general corporate purposes and pipeline capital expenditures. The Bridge Loan is secured by a pledge of our 10,891,357 common units in Cheniere Partners and our equity interests in the entities that own our Creole Trail Pipeline.

Issuances of Common Stock

During the first six months of 2008, a total of 45,403 shares of our common stock were issued pursuant to the exercise of stock options, resulting in net cash proceeds of $0.2 million. In addition, in January 2008, 479,802 shares of our common stock were issued to our employees in the form of non-vested restricted stock awards, and 537,000 shares of vested common stock were issued to our executive officers related to our performance in 2007. In May 2008, 202,788 shares having a one-year graded vesting were issued to our directors. In May 2008 and June 2008, as a part of the short-term and long-term retention plans approved by the Compensation Committee, 373,656 shares vesting on December 1, 2008 and 1,525,038 shares having a three-year graded vesting beginning December 31, 2008 were issued to our employees and a consultant in the form of non-vested stock awards. In the six months ended June 30, 2008, an additional 21,293 shares of non-vested stock having three- or four-year graded vestings were issued to employees.

During the first six months of 2007, a total of 208,728 shares of our common stock were issued pursuant to the exercise of stock options, resulting in net cash proceeds of $1.7 million. In addition, 206,359 shares of common stock were issued in satisfaction of cashless exercises of options to purchase 225,330 shares of common stock.

In January 2007, 628,396 shares of our common stock were issued to our employees and executive officers in the form of non-vested (restricted) stock awards related to our performance in 2006. During the first six months of 2007, we issued an additional 179,741 shares of non-vested restricted stock to new and existing employees.

In May 2007, 30,574 shares of our common stock were issued to our outside directors in the form of non-vested restricted stock awards.

As of July 26, 2007, we had purchased approximately 9.2 million shares of our common stock for a cash price of $35.42 per share under the call options acquired by us concurrently with the issuance of the Convertible Senior Unsecured Notes.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2008 vs. Three Months Ended June 30, 2007

Overall Operations

Our consolidated net loss for the second quarter of 2008 reflected a net loss of $132.3 million, or $2.81 per share (basic and diluted), compared to a net loss of $41.1 million, or $0.76 per share (basic and diluted), for the second quarter of 2007. The increase in consolidated net loss was primarily due to restructuring charges, losses on derivatives, a loss from equity method investments and decreased interest income, which was partially offset by decreased general and administrative expenses, decreased LNG receiving terminal and pipeline development expense and decreased interest expense. Not including the impact of the restructuring charges in the second quarter of 2008, our net loss would have been $53.7 million, or $1.14 per common share—basic and diluted.

Index to Financial Statements

Restructuring Charges

During the three months ended June 30, 2008, we recognized $78.6 million of restructuring charges resulting from our cost savings program in connection with the downsizing of our natural gas marketing business activities, wrapping up of significant construction activities for both the Sabine Pass LNG receiving terminal and Creole Trail Pipeline and seeking alternative arrangements for our time charter interests in two LNG vessels (see Note 3— “Restructuring Charges” of our Notes to Consolidated Financial Statements).

Derivative Loss

During the three months ended June 30, 2008, we recognized $11.5 millions derivative losses as a result of entering into several natural gas swaps to hedge the exposure to variability in expected future cash flows related to the commissioning and cool down cargos purchased.

Loss from Equity Method Investments

During the three months ended June 30, 2008, we recognized $3.0 million of suspended losses from our equity method investment in Freeport LNG. In the second quarter of 2008, we received and paid a $3.0 million cash call notice from Freeport LNG requesting that we provide further financial support due to higher than expected commissioning and performance testing costs.

Interest Income

Interest income decreased $19.3 million in the second quarter of 2008 compared to the second quarter of 2007 because of the lower average invested cash balances resulting from the use of cash to pay construction costs and interest payments and lower interest rates.

General and Administrative Expenses

General and administrative (“G&A”) expenses decreased $9.6 million in the second quarter of 2008 compared to the second quarter of 2007. The decrease in G&A primarily resulted from a decrease of non-cash compensation of $8.6 million. The decrease in non-cash compensation was a result of our cost savings program in connection with the downsizing of our natural gas marketing business activities and wrapping up of significant construction activities for both the Sabine Pass LNG receiving terminal and Creole Trail Pipeline.

LNG Receiving Terminal and Pipeline Development Expenses

Our LNG receiving terminal and pipeline development expenses include primarily professional costs associated with front-end engineering and design work, obtaining orders from the FERC authorizing construction of our facilities and other required permitting for our LNG receiving terminals and natural gas pipelines.

LNG receiving terminal and pipeline development expenses decreased $8.0 million in the second quarter of 2008 compared to the second quarter of 2007. The primary cause of the decrease was a $2.9 million decrease in salaries, $0.9 million decrease in non-cash compensation and a $4.2 million decrease in travel and other business development expenditures that were not incurred in the second quarter of 2008 compared to the second quarter of 2007.

Interest Expense, net

Interest expense, net of amounts capitalized, decreased $4.5 million in the second quarter of 2008 compared to the second quarter of 2007. The decrease was caused primarily by the increase in capitalized interest as a result of an increase in advances under long-term contracts and property, plant and equipment.

Index to Financial Statements

Six Months Ended June 30, 2008 vs. Six Months Ended June 30, 2007

Overall Operations

Our consolidated net loss for the first six months of 2008 reflected a net loss of $182.2 million, or $3.87 per share (basic and diluted), compared to a net loss of $75.7 million, or $1.38 per share (basic and diluted), for the first six months of 2007. The increase in the loss was primarily due to restructuring charges, losses on derivatives, a loss from equity method investments and decreased interest income, which was partially offset by decreased LNG receiving terminal and pipeline development expenses and decreased interest expense. In addition, a significant portion of our loss was attributable to the recognition of non-cash, share-based payments accounted for under SFAS No. 123R, Share-Based Payments , which requires all non-cash, share-based compensation be recognized in the financial statements based on fair value at the date of grant. As a result of our issuance of non-cash, share-based payments to employees, we recorded $15.9 million of non-cash compensation expense in the first six months ended June 30, 2008 compared to $19.3 million of non-cash compensation expense in the first six months ended June 30, 2007. Not including the impact of the restructuring charges and this non-cash expense in the six months ended June 30, 2008, our net loss would have been $87.7 million, or $1.86 net loss per common share—basic and diluted.

Restructuring Charges

During the six months ended June 30, 2008, we incurred $78.6 million of restructuring charges resulting from our cost savings program in connection with the downsizing of our natural gas marketing business activities, wrapping up of significant construction activities for both the Sabine Pass LNG receiving terminal and Creole Trail Pipeline and seeking alternative arrangements for our time charter interests in two LNG vessels (see Note 3— “Restructuring Charges” of our Notes to Consolidated Financial Statements).

Derivative Loss

During the six months ended June 30, 2008, we recognized $12.4 million of derivative losses primarily as a result of entering into several natural gas swaps to hedge the exposure to variability in expected future cash flows related to the commissioning and cool down cargos purchased.

Loss from Equity Method Investments

During the first six months ended June 30, 2008, we recognized $4.8 million of suspended losses from our equity method investment in Freeport LNG. In the first six months of 2008, we received and paid cash call notices of $4.8 million from Freeport LNG requesting that we provide further financial support due to higher than expected commissioning and performance testing costs.

Interest Income

Interest income decreased $31.3 million in the six months ended June 30, 2008 compared to the six months ended June 30, 2007, because of the lower average invested cash balances resulting from the use of cash to pay construction costs and interest payments and lower interest rates.

LNG Receiving Terminal and Pipeline Development Expenses

LNG receiving terminal and pipeline development expenses decreased $7.0 million in the first six months of 2008 compared to the first six months of 2007. The primary cause of the decrease was a $2.4 million decrease in salaries and a $4.6 million decrease in travel and other business development expenditures that were not incurred in the six months ended June 30, 2008 compared to the six months ended June 30, 2007.

Index to Financial Statements

Interest Expense, net

Interest expense, net of amounts capitalized, decreased $11.1 million in the fist six months of 2008 compared to the first six months of 2007. The decrease was caused primarily by the increase in capitalized interest as a result of an increase in advances under long-term contracts and property, plant and equipment.

Off-Balance Sheet Arrangements

As of June 30, 2008, we had no off-balance sheet debt or other such unrecorded obligations, and we have not guaranteed the debt of any other party.

OTHER MATTERS

Critical Accounting Estimates and Policies

The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have developed. Accounting rules generally do not involve a selection among alternatives but involve an implementation and interpretation of existing rules, and the use of judgment, to the specific set of circumstances existing in our business. We make every effort to comply properly with all applicable rules on or before their adoption, and we believe that the proper implementation and consistent application of the accounting rules are critical. However, not all situations are specifically addressed in the accounting literature. In these cases, we must use our best judgment to adopt a policy for accounting for these situations. We accomplish this by analogizing to similar situations and the accounting guidance governing them.

Accounting for LNG Activitie s

Generally, we begin capitalizing the costs of our LNG receiving terminals and related pipelines once the individual project meets the following criteria: (i) regulatory approval has been received, (ii) financing for the project is available and (iii) management has committed to commence construction. Prior to meeting these criteria, most of the costs associated with a project are expensed as incurred. These costs primarily include professional fees associated with front-end engineering and design work, costs of securing necessary regulatory approvals, and other preliminary investigation and development activities related to our LNG receiving terminals and related pipelines.

Generally, costs that are capitalized prior to a project meeting the criteria otherwise necessary for capitalization include: land costs, costs of lease options and the costs of certain permits, which are capitalized as intangible LNG assets. The costs of lease options are amortized over the life of the lease once it is obtained. If no lease is obtained, the costs are expensed. Site rental costs and related amortization of capitalized options have been capitalized during the construction period through the end of 2005. Beginning in 2006, such costs have been expensed as required by the FASB Staff Position No. 13-1.

During the construction periods of our LNG receiving terminals, we capitalize interest and other related debt costs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 34, Capitalization of Interest Cost , as amended by SFAS No. 58, Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method (an Amendment of FASB Statement No. 34) . Upon commencement of operations, capitalized interest, as a component of the total cost, will be amortized over the estimated useful life of the asset.

In connection with the construction of the Sabine Pass LNG receiving terminal, we require LNG to perform certain commissioning activities, as follows:

•

Index to Financial Statements

•

LNG heel—A certain amount of LNG will be used to establish a level of LNG inventory in each LNG storage tank and in the LNG receiving terminals piping in order for the LNG receiving terminal to function properly.

•

LNG purchased for commissioning activities is recorded at cost and classified as a non-current asset on our Consolidated Balance Sheets as LNG held for commissioning. As the LNG held for commissioning is used to cool down the LNG receiving terminal and establish LNG heel in the LNG receiving terminal, we capitalize the portion used. The LNG used in the commissioning process is capitalized net of amounts received from the sale of natural gas.

Regulated Operations

Our natural gas pipeline business is subject to the jurisdiction of the FERC in accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978, and we have determined that certain of our pipeline systems to be constructed have met the criteria set forth in SFAS No. 71. Accordingly, we have applied the provisions of SFAS No. 71 to the affected pipeline subsidiaries beginning in the second quarter of 2006.

Our application of SFAS No. 71 is based on the current regulatory environment, our current projected tariff rates, and our ability to collect those rates. Future regulatory developments and rate cases could impact this accounting. Although discounting of our maximum tariff rates may occur, we believe that the standards required by SFAS No. 71 for its application are met and the use of regulatory accounting under SFAS No. 71 best reflects the results of future operations in the economic environment in which we will operate. Regulatory accounting requires us to record assets and liabilities that result from the rate-making process that would not be recorded under GAAP for non-regulated entities. We will continue to evaluate the application of regulatory accounting principles based on on-going changes in the regulatory and economic environment. Items that may influence our assessment are:

•

inability to recover cost increases due to rate caps and rate case moratoriums;

•

inability to recover capitalized costs, including an adequate return on those costs through the rate-making process and the FERC proceedings;

•

excess capacity;

•

increased competition and discounting in the markets we serve; and

•

impacts of ongoing regulatory initiatives in the natural gas industry.

Natural gas pipeline costs include amounts capitalized as an Allowance for Funds Used During Construction (“AFUDC”). The rates used in the calculation of AFUDC are determined in accordance with guidelines established by the FERC. AFUDC represents the cost of debt and equity funds used to finance our natural gas pipeline additions during construction. AFUDC is capitalized as a part of the cost of our natural gas pipelines. Under regulatory rate practices, we generally are permitted to recover AFUDC, and a fair return thereon, through our rate base after our natural gas pipelines are placed in service.

Revenue Recognition

LNG receiving terminal capacity reservation fees are recognized as revenue over the term of the respective TUAs. Advance capacity reservation fees are deferred initially.

Index to Financial Statements

Cash Flow Hedges

As defined in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , cash flow hedge transactions hedge the exposure to variability in expected future cash flows (i.e., in our case, the variability of floating interest rate exposure). In the case of cash flow hedges, the hedged item (the underlying risk) is generally unrecognized (i.e., not recorded on the balance sheet prior to settlement), and any changes in the fair value, therefore, will not be recorded within earnings. Conceptually, if a cash flow hedge is effective, this means that a variable, such as a movement in interest rates, has been effectively fixed so that any fluctuations will have no net result on either cash flows or earnings. Therefore, if the changes in fair value of the hedged item are not recorded in earnings, then the changes in fair value of the hedging instrument (the derivative) must also be excluded from the income statement or else a one-sided net impact on earnings will be reported, despite the fact that the establishment of the effective hedge results in no net economic impact. To prevent such a scenario from occurring, SFAS No. 133 requires that the fair value of a derivative instrument designated as a cash flow hedge be recorded as an asset or liability on the balance sheet, but with the offset reported as part of other comprehensive income, to the extent that the hedge is effective. We assess, both at the inception of each hedge and on an on-going basis, whether derivatives that are used in our hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. On an on-going basis, we monitor the actual dollar offset of the hedges’ market values compared to hypothetical cash flow hedges. Any ineffective portion will be reflected in earnings. Ineffectiveness is the amount of gains or losses from derivative instruments that are not offset by corresponding and opposite gains or losses on the expected future transaction.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets are accounted for in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. We perform an annual impairment review in the fourth quarter of each year, although we may perform an impairment review more frequently whenever events or circumstances indicate that the carrying value may not be recoverable.

Share-Based Compensation Expense

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective transition method. Under this method, we recognize compensation expense for all share-based payments granted after January 1, 2006 and prior to, but not yet vested as of, January 1, 2006, in accordance with SFAS No. 123R using the Black-Scholes option valuation model. Under the fair value recognition provisions of SFAS No. 123R, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. We believe that implied volatility, calculated based on traded options of our common stock, combined with historical volatility is an appropriate indicator of expected volatility and future stock price trends. Therefore, expected volatility for the quarter ended June 30, 2008 was based on a combination of implied and historical volatilities. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Note 19—”Share-Based Compensation” of our Notes to Consolidated Financial Statements for a further discussion on share-based compensation.

Index to Financial Statements

New Accounting Pronouncements

On January 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option) with changes in fair value reported in earnings. Cheniere already records derivative contracts at fair value in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). The adoption of SFAS No. 159 had no impact on our Consolidated Financial Statements as management did not elect the fair value option for any financial instruments or other assets and liabilities.

On January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”) as it relates to financial assets and financial liabilities. In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 , which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. The adoption of SFAS No. 157 did not have a material impact on our Consolidated Financial Statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This standard becomes effective for us on January 1, 2009. Earlier adoption of SFAS No. 161 and, separately, comparative disclosures for earlier periods at initial adoption are encouraged. As SFAS No. 161 only requires enhanced disclosures, this standard will have no impact on our Consolidated Financial Statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R, and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We are currently evaluating the impact of SFAS FSP 142-3 but do not expect the adoption of this pronouncement will have a material impact on our Consolidated Financial Statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We are currently evaluating the impact of SFAS No. 162 but do not expect the adoption of this pronouncement will have a material impact on our Consolidated Financial Statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Commodity Prices

We produce and sell natural gas, crude oil and condensate. As a result, our financial results can be affected as these commodity prices fluctuate widely in response to changing market forces. We have not entered into any derivative transactions related to our oil and gas producing activities.

Index to Financial Statements

Cash Investments

We have cash investments that we manage based on internal investment guidelines that emphasize liquidity and preservation of capital. Such cash investments are stated at historical cost, which approximates fair market value on our Consolidated Balance Sheets.

Cheniere Marketing and Sabine Pass LNG Derivative Commodity Price Risk

Our derivative positions as of June 30, 2008 primarily consist of NYMEX natural gas swaps entered into to hedge the exposure to variability in expected future cash flows related to commissioning and cool down cargoes purchased in the second quarter of 2008 that are being sold as part of the testing phase of the commissioning process. We entered into a total of 4,495,000 MMBtu of August 2008 NYMEX natural gas swaps with counterparties for which they will receive fixed prices of $11.87 to $13.41 per MMBtu. At June 30, 2008, the value of the derivatives was a liability of $7.8 million.

Item 4.

Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective.

During the most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Index to Financial Statements

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

We may in the future be involved as a party to various legal proceedings which are incidental to the ordinary course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. In the opinion of management and legal counsel, as of June 30, 2008, there were no known threatened or pending legal matters that could reasonably be expected to have a material adverse impact on our consolidated results of operations, financial position or cash flows.

Item 4.

Submission of Matters to a Vote of Security Holders

We held an annual meeting of our stockholders on June 13, 2008. The following individuals were elected to the Board of Directors: Charif Souki, Walter L. Williams and Keith F. Carney. In addition to the election of directors, the following matters were submitted to a vote and approved by stockholders: the ratification of the appointment of Ernst & Young LLP as independent accountants for the fiscal year ending December 31, 2008, and an amendment to our 2003 Stock Incentive Plan to provide as follows:

•

no one participant shall be granted awards under the 2003 Stock Incentive Plan during any calendar year covering or relating to more than 1,000,000 shares of common stock;

•

the maximum amount of cash that may be paid under an award to any one participant during a calendar year cannot exceed $10,000,000 in the aggregate;

•

expands the list of permissible business criteria pursuant to which Performance Awards may be granted under the 2003 Plan to include the following: earnings before taxes and depreciation; stock price measures (including growth measures and total stockholder return); and price per share of common stock; and

•

certain other technical amendments to the provisions of, and definitions used in, the 2003 Stock Incentive Plan.

There were 48,544,882 shares of common stock outstanding and eligible to vote as of the record date of April 14, 2008. The following table summarizes the results of the voting:

ITEM 1:

ELECTION OF DIRECTORS


Director	Number of Votes For	Number of Votes Withheld
Charif Souki	31,715,493	990,274
Walter L. Williams	31,744,418	961,349
Keith F. Carney	31,136,594	1,569,173

ITEM 2:

APPROVAL OF AMENDMENT NO. 3 TO THE CHENIERE ENERGY, INC. AMENDED AND RESTATED 2003 STOCK INCENTIVE PLAN

Number of

Votes For

Percent of
Votes

Number of
Votes
Against

Percent of
Votes

Number of
Votes
Abstained

Percent of
Votes

Non-Votes

21,211,115

94.22

1,243,995

5.53

56,588

0.25

10,194,029

Index to Financial Statements

ITEM 3:

RATIFICATION OF THE AUDIT COMMITTEE’S APPOINTMENT OF ERNST & YOUNG LLP

Number of

Votes For

Percent of
Votes

Number of
Votes
Against

Percent of
Votes

Number of
Votes
Abstained

Percent of
Votes

32,430,259

99.16

171,519

0.52

103,989

0.32

Item 6.

Exhibits

(a)

Each of the following exhibits is filed herewith:


10.1		Change Orders 35, 36, 37, 38 and 39 to Construction Agreement, dated January 10, 2007, between Cheniere Creole Trail Pipeline, L.P. and Sheehan Pipe Line Construction Company.

10.2		Change Orders 13, 14, 15 and 16 to Construction Agreement, dated January 5, 2007, between Cheniere Creole Trail Pipeline, L.P. and Sunland Construction, Inc.

10.3		Change Orders 9, 10, 11, and 12 to Construction Agreement, dated March 12, 2007, between Cheniere Creole Trail Pipeline, L.P. and Sunland Construction, Inc.

10.4		Change Order 17 to Construction Agreement, dated February 1, 2006, between Cheniere Sabine Pass Pipeline Company and Willbros Engineers, Inc.

10.5		Change Orders 8 through 55 to Construction Agreement, dated August 24, 2007, between Cheniere Sabine Pass Pipeline, L.P. and Willbros RPI, Inc.

10.6		Change Orders 57 and 58 to Lump Sum Turnkey Engineering, Procurement and Construction Agreement, dated December 18, 2004, between Sabine Pass LNG, L.P. and Bechtel Corporation.

10.7		LNG Lease Agreement, dated June 24, 2008, between Cheniere Marketing, Inc. and Sabine Pass LNG, L.P.

31.1		Certification by Chief Executive Officer required by Rule 13a-14(a) and 15d-14(a) under the Exchange Act

31.2		Certification by Chief Financial Officer required by Rule 13a-14(a) and 15d-14(a) under the Exchange Act

32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Index to Financial Statements

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CHENIERE ENERGY, INC.

/s/ J ERRY D. S MITH

Vice President and Chief Accounting Officer

(on behalf of the registrant and

as principal accounting officer)

Date: August 11, 2008

EXHIBIT 10.1

SCHEDULE D-1

CHANGE ORDER FORM

(for use when the Parties mutually agree upon and execute the Change Order pursuant to Section 6.1B or 6.2C)


PROJECT NAME: Alternate Route 42” Single Line Option Creole Trail Pipeline - Segment 3A Project		CHANGE ORDER NUMBER: CCT 3A-035
		DATE OF CHANGE ORDER: 04-23-08
OWNER: Cheniere Creole Trail Pipeline, L.P.

CONTRACTOR: Sheehan Pipe Line Construction
Company (SPLCC)

DATE OF AGREEMENT: January 10, 2007

SUBJECT: Various Miscellaneous Additional Items

Please reference attachment #1 for miscellaneous additional items used.


Adjustment to Estimated Contract Price
The original Estimated Contract Price was	$	65,605,739.22
Net change by previously authorized Change Orders	$	17,233,602.21
The Estimated Contract Price prior to this Change Order was	$	82,839,341.43
The Estimated Contract Price will be increased by this Change Order in the amount of	$	178,263.00
The new Estimated Contract Price including this Change Order will be	$	83,017,604.43

Adjustment to dates in Project Schedule

The following dates are modified (list all dates modified; insert N/A if no dates modified) : N/A

The Guaranteed Mechanical Completion Date will be unchanged.

The Guaranteed Mechanical Completion Date as of the date of this Change Order therefore is January 31 , 2008 .

The Guaranteed Substantial Completion Date will be unchanged.

The Guaranteed Substantial Completion Date as of the date of this Change Order therefore is February 29 , 2008 .

The Guaranteed Final Completion Date will be unchanged.

The Guaranteed Final Completion Date as of the date of this Change Order therefore is March 31 , 2008 .

Adjustment to other Changed Criteria: N/A

Upon execution of this Change Order by Owner and Contractor, the above-referenced change shall become a valid and binding part of the original Agreement without exception or qualification, unless noted in this Change Order. Except as modified by this and any previously issued Change Orders, all other terms and conditions of the Agreement shall remain in full force and effect. This Change Order is executed by each of the Parties’ duly authorized representatives.


Cheniere Creole Trail Pipeline, L.P.		Sheehan Pipe Line Construction Company
Owner		Contractor
/s/ T. R. Hutton	R. Keith Teague	/s/ Robert A. Riess, Sr.
Signature		Signature
T. R. Hutton	R. Keith Teague	Robert A. Riess, Sr.
Name		Name
Director	President	President & COO
Title		Title
4/28/08	4/28/08	April 30, 2008
Date of Signing		Date of Signing

D-2

SCHEDULE D-1

CHANGE ORDER FORM

(for use when the Parties mutually agree upon and execute the Change Order pursuant to Section 6.1B or 6.2C)


PROJECT NAME: Alternate Route 42” Single Line Option Creole Trail Pipeline - Segment 3A Project		CHANGE ORDER NUMBER: CCT 3A-036
		DATE OF CHANGE ORDER: 05-22-2008
OWNER: Cheniere Creole Trail Pipeline, L.P.

CONTRACTOR: Sheehan Pipe Line Construction
Company (SPLCC)

DATE OF AGREEMENT: January 10, 2007

SUBJECT: Final Settlement of All Outstanding Issues

This Change Order represents a full settlement of all claims, damages, losses, costs and expenses, except those items specifically excluded below, that Contractor has, may have, or may have in the future against Owner for any event, circumstance or any other act or omission occurring at any time up through the date of this Change Order, including but not limited to all claims, damages, losses, costs and expenses arising from or related to Contractor’s claims (including, without limitation, requested change orders) referred to, raised or which could have been raised in any of the following letter and attachments, copies of which are attached:

(i)

Letter from Mr. Tarry Hutton of Cheniere to Mr. Rob Riess of Sheehan, dated May 16, 2008

(ii)

Sheehan extra work requests nos. 1467-F-EW-19 through 1467-F-EW-44

(Collectively the above letter together with all extra work requests, the “Letter and Attachments”).

Further, this Change Order represents a full settlement of all claims, damages, losses, costs and expenses that Contractor has, may have, or may have in the future against Owner related to the brine line crossings (1467-F-EW-24) and item C9 of the Pricing Schedule in Attachment J of the Construction Agreement. It is also a full settlement of all work necessary to facilitate the crossing of Creek E46 and foreign pipelines just upstream of MLV 1-5 at approximately MP 11.7

However, this Change Order does not represent a settlement of items B12.1 through B12.7, C1 through C8, & C10 through C16, and M. These unit prices are fixed by the Pricing Schedule in Attachment J of the Construction Agreement. These items are billed in direct relation to the quantity installed in the field.

The settlement amount was reached through verbal negotiations which took place May 14, 2008.


Adjustment to Estimated Contract Price
The original Estimated Contract Price was	$	65,605,739.22
Net change by previously authorized Change Orders	$	17,411,865.21
The Estimated Contract Price prior to this Change Order was	$	83,017,604.43
The Estimated Contract Price will be increased by this Change Order in the amount of	$	5,000,000.00
The new Estimated Contract Price including this Change Order will be	$	88,017,604.43

Adjustment to dates in Project Schedule

The following dates are modified (list all dates modified; insert N/A if no dates modified) :

The Guaranteed Mechanical Completion Date will be increased by 110 days.

The Guaranteed Mechanical Completion Date as of the date of this Change Order therefore is May 20 , 2008 .

The Guaranteed Substantial Completion Date will be increased by 110 days.

The Guaranteed Substantial Completion Date as of the date of this Change Order therefore is June 18 , 2008 .

The Guaranteed Final Completion Date will be increased by 110 days.

The Guaranteed Final Completion Date as of the date of this Change Order therefore is July 19 , 2008 .

Page 1 of 2

Other impacts to liability or obligation of Sheehan or Cheniere under the Agreement:

In consideration of the execution of this Change Order, Cheniere Creole Trail Pipeline Company agrees to waive any claims related to Guarantee of Timely Completion under Article 13.1 of the Agreement.

Sheehan hereby waives and releases Cheniere, as Owner, from and against any and all claims, damages, losses, costs and expenses that Contractor has, may have, or may have in the future against Owner for any event, circumstance or any other act or omission occurring at any time up through the date of this Change Order, including but not limited to all claims, damages, losses, costs and expenses related to Contractor’s change order requests referred to, raised, or which could have been raised in any of the above Letter and Attachments, except for claims related to those items specifically excluded above.


Cheniere Creole Trail Pipeline, L.P.				Sheehan Pipe Line Construction Company
Owner				Contractor
/s/ R. Keith Teague				/s/ Kent F. Schobe
Signature				Signature
R. Keith Teague				Kent F. Schobe
Name				Name
President				Vice President of Engineering
Title				Title
6/13/08				June 11, 2008
Date of Signing				Date of Signing

Page 2 of 2

SCHEDULE D-1

CHANGE ORDER FORM

(for use when the Parties mutually agree upon and execute the Change Order pursuant to Section 6.1B or 6.2C)


PROJECT NAME: Alternate Route 42” Single Line Option Creole Trail Pipeline - Segment 3A Project		CHANGE ORDER NUMBER: CCT 3A-037
		DATE OF CHANGE ORDER: 06-05-2008
OWNER: Cheniere Creole Trail Pipeline, L.P.

CONTRACTOR: Sheehan Pipe Line Construction
Company (SPLCC)

DATE OF AGREEMENT: January 10, 2007

SUBJECT: Additional Horizontal Directional Drill Footage

Through mutual agreement between Cheniere and Sheehan, additional HDD footage was necessary to complete various crossings.

Please reference attachment #1 for previous estimate and actual footages.


Adjustment to Estimated Contract Price
The original Estimated Contract Price was	$	65,605,739.22
Net change by previously authorized Change Orders	$	22,411,865.21
The Estimated Contract Price prior to this Change Order was	$	88,017,604.43
The Estimated Contract Price will be increased by this Change Order in the amount of	$	44,587.50
The new Estimated Contract Price including this Change Order will be	$	88,062,191.93

Adjustment to dates in Project Schedule

The following dates are modified (list all dates modified; insert N/A if no dates modified) : N/A

The Guaranteed Mechanical Completion Date will be unchanged.

The Guaranteed Mechanical Completion Date as of the date of this Change Order therefore is May 20 , 2008 .

The Guaranteed Substantial Completion Date will be unchanged.

The Guaranteed Substantial Completion Date as of the date of this Change Order therefore is June 18 , 2008 .

The Guaranteed Final Completion Date will be unchanged.

The Guaranteed Final Completion Date as of the date of this Change Order therefore is July 19 , 2008 .


Cheniere Creole Trail Pipeline, L.P.				Sheehan Pipe Line Construction Company
Owner				Contractor
/s/ R. Keith Teague				/s/ Robert A. Riess, Sr.
Signature				Signature
R. Keith Teague				Robert A. Riess, Sr.
Name				Name
President				President & COO
Title				Title
6/11/08				June 13, 2008
Date of Signing				Date of Signing

D-2

SCHEDULE D-1

CHANGE ORDER FORM

(for use when the Parties mutually agree upon and execute the Change Order pursuant to Section 6.1B or 6.2C)


PROJECT NAME: Alternate Route 42” Single Line Option Creole Trail Pipeline - Segment 3A Project		CHANGE ORDER NUMBER: CCT 3A-038
		DATE OF CHANGE ORDER: 06-07-2008
OWNER: Cheniere Creole Trail Pipeline, L.P.

CONTRACTOR: Sheehan Pipe Line Construction
Company (SPLCC)

DATE OF AGREEMENT: January 10, 2007

SUBJECT: Additional Miscellaneous Items

Please reference attachment #1 for miscellaneous additional items quantity and amounts.


Adjustment to Estimated Contract Price
The original Estimated Contract Price was	$	65,605,739.22
Net change by previously authorized Change Orders	$	22,456,452.71
The Estimated Contract Price prior to this Change Order was	$	88,062,191.93
The Estimated Contract Price will be increased by this Change Order in the amount of	$	87,967.00
The new Estimated Contract Price including this Change Order will be	$	88,150,158.93

Adjustment to dates in Project Schedule

The following dates are modified (list all dates modified; insert N/A if no dates modified) : N/A

The Guaranteed Mechanical Completion Date will be unchanged.

The Guaranteed Mechanical Completion Date as of the date of this Change Order therefore is May 20 , 2008 .

The Guaranteed Substantial Completion Date will be unchanged.

The Guaranteed Substantial Completion Date as of the date of this Change Order therefore is June 18 , 2008 .

The Guaranteed Final Completion Date will be unchanged.

The Guaranteed Final Completion Date as of the date of this Change Order therefore is July 19 , 2008 .


Cheniere Creole Trail Pipeline, L.P.				Sheehan Pipe Line Construction Company
Owner				Contractor
/s/ R. Keith Teague				/s/ Robert A. Riess, Sr.
Signature				Signature
R. Keith Teague				Robert A. Riess, Sr.
Name				Name
President				President & COO
Title				Title
6/11/08				June 13, 2008
Date of Signing				Date of Signing

D-2

SCHEDULE D-1

CHANGE ORDER FORM

(for use when the Parties mutually agree upon and execute the Change Order pursuant to Section 6.1B or 6.2C)


PROJECT NAME: Alternate Route 42” Single Line Option Creole Trail Pipeline - Segment 3A Project		CHANGE ORDER NUMBER: CCT 3A-039
		DATE OF CHANGE ORDER: 07-25-2008
OWNER: Cheniere Creole Trail Pipeline, L.P.

CONTRACTOR: Sheehan Pipe Line Construction
Company (SPLCC)

DATE OF AGREEMENT: January 10, 2007

SUBJECT: Final Change Order

The Agreement between the Parties listed above is changed as follows: Per the terms and conditions outlined under Article 6.1-B of the Construction Agreement for Segment 3A project between Cheniere Creole Trail Pipeline, L.P. and Sheehan Pipe Line Construction Company dated January 10, 2007; Cheniere will reduce the contract price according to the final billing of $85,266,117.17. This Change Order represents a final settlement of items B12.1 through B12.7, C1 through C8, & C10 through C16, and all other outstanding issues. These unit prices were fixed by the Pricing Schedule in Attachment J of the Construction Agreement. These items were billed in direct relation to the quantity installed in the field.

This Change Order represents a full settlement of all claims, damages, losses, costs and expenses that Contractor has, may have, or may have in the future against the Owner.


Adjustment to Estimated Contract Price
The original Estimated Contract Price was	$	65,605,739.22
Net change by previously authorized Change Orders	$	22,544,419.71
The Estimated Contract Price prior to this Change Order was	$	88,150,158.93
The Estimated Contract Price will be increased by this Change Order in the amount of	$	-2,884,041.76
The new Estimated Contract Price including this Change Order will be	$	85,266,117.17

Adjustment to dates in Project Schedule

The following dates are modified (list all dates modified; insert N/A if no dates modified) : N/A

The Guaranteed Mechanical Completion Date will be unchanged.

The Guaranteed Mechanical Completion Date as of the date of this Change Order therefore is May 20 , 2008 .

The Guaranteed Substantial Completion Date will be unchanged.

The Guaranteed Substantial Completion Date as of the date of this Change Order therefore is June 18 , 2008 .

The Guaranteed Final Completion Date will be unchanged.

The Guaranteed Final Completion Date as of the date of this Change Order therefore is July 19 , 2008 .


Cheniere Creole Trail Pipeline, L.P.				Sheehan Pipe Line Construction Company
Owner				Contractor
/s/ R. Keith Teague				/s/ Robert A. Riess, Sr.
Signature				Signature
R. Keith Teague				Robert A. Riess, Sr.
Name				Name
President				President & COO
Title				Title
7/30/08				August 1, 2008
Date of Signing				Date of Signing

D-2

EXHIBIT 10.2

Schedule D-1

CHANGE ORDER FORM

(for use when the parties mutually agree upon and execute the Change Order Pursuant to Section 6.1B or 6.2C)


PROJECT NAME: Creole Trail Pipeline – Segment 2		CHANGE ORDER NUMBER: CO 2-013
Project, Alternate Route Single Line Option

OWNER: Cheniere Creole Trail Pipeline, L.P.		DATE OF CHANGE ORDER: 5/07/08

CONTRACTOR: Sunland Construction, Inc.

DATE OF AGREEMENT: January 5, 2007

The Agreement between the Parties listed above is changed as follows: (attach additional documentation if necessary)

Additional cost for providing equipment, material, and labor for site work at the MLV 2-1 site in the north marsh including rocking and fencing around the valve station site per the attached estimate of May 6, 2008.

Adjustment to Estimated Contract Price


The original Estimated Contract Price was	$	70,078,195.00

Net change by previously authorized Change Order (# CO 2-001, 002, 003, 004, 005, 006, 007, 008, 009, 010, 011, and 012 )	$	6,981,487.72

The Estimated Contract Price prior to this Change Order was	$	77,059,682.72

The Estimated Contract Price will be increased by this Change Order in the amount of	$	35,662.50

The new Estimated Contract Price including this Change Order will be	$	77,095,345.22

Adjustment to dates in Project Schedule

The following dates are modified ( list all dates modified; insert N/A if no dates modified):

The Required Mechanical Completion Date will be unchanged by ( ) Days

The Required Mechanical Completion Date as of the date of this Change Order therefore is March 15 , 20 08

(attach additional documentation if necessary) No Attachment

The Required Substantial Completion Date will be unchanged by ( ) Days

The Required Substantial Completion Date as of the date of this Change Order therefore is

(attach additional documentation if necessary) No Attachment

The Required Final Completion Date will be unchanged by ( ) Days

The Required Final Completion Date as of the date of this Change Order therefore is

(attach additional documentation if necessary) No Attachment

Adjustment to other Changed Criteria (insert N/A if no changes or impact; attach additional documentation if necessary) N/A

Upon execution of this Change Order by Owner and Contractor, the above-referenced change shall become a valid and binding part of the original Agreement without exception or qualification, unless noted in this Change Order. Except as modified by this and any previous issued Change Orders, all other terms and conditions of the Agreement shall remain in full force and effect. This Change Order is executed by each of the Parties’ duly authorized representatives.


Cheniere Creole Trail Pipeline, L.P.		Sunland Construction, Inc.
Owner		Contractor

/s/ R. Keith Teague		/s/ Randy Maturin
Name		Name

President		Project Manager
Title		Title

5-29-2008		5-27-08
Date of Signing		Date of Signing

Schedule D-1

CHANGE ORDER FORM

(for use when the parties mutually agree upon and execute the Change Order Pursuant to Section 6.1B or 6.2C)


PROJECT NAME: Creole Trail Pipeline – Segment 2		CHANGE ORDER NUMBER: CO 2-014
Project, Alternate Route Single Line Option

OWNER: Cheniere Creole Trail Pipeline, L.P.		DATE OF CHANGE ORDER: 5/19/08

CONTRACTOR: Sunland Construction, Inc.

DATE OF AGREEMENT: January 5, 2007

The Agreement between the Parties listed above is changed as follows: (attach additional documentation if necessary)

For the negotiated global settlement agreed to on 5/15/08 and outlined in items 1 through 7 of the 5/15/08 spreadsheet attached. The items include:

ITEMS 1 THROUGH 7


Delayed Start – dredging	$	188,000.00
Delayed Start – Pipeline Machinery	$	8,995.83
Delayed Start – Add’l Equipment	$	214,053.33
South Lake Screw Anchors	$	128,698.00
Targa Screw Anchors	$	143,353.74
Add’l Submar Mats	$	21,378.00
Chemical Injection in Calc. R. HDD	$	35,000.00

	$	739,478.90

Adjustment to Estimated Contract Price


The original Estimated Contract Price was	$	70,078,195.00

Net change by previously authorized Change Order (# CO 2-001, 002, 003, 004, 005, 006, 007, 008, 009, 010, 011, 012, and 013 )	$	7,017,150.22

The Estimated Contract Price prior to this Change Order was	$	77,095,345.22

The Estimated Contract Price will be increased by this Change Order in the amount of	$	739,478.90

The new Estimated Contract Price including this Change Order will be	$	77,834,824.12