Introduction

The following discussion and analysis presents management's view of our business, financial condition and overall performance and should be read in conjunction with our consolidated financial statements and the accompanying notes in Item 8, "Financial Statements and Supplementary Data." This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future. Our discussion and analysis include the following subjects:

• Overview of Business

• Overview of 2008 Events

• Liquidity and Capital Resources

• Contractual Obligations

• Results of Operations

• Off-Balance Sheet Arrangements

• Inflation and Changing Prices

• Summary of Critical Accounting Policies and Estimates

• Recently Issued Accounting Standards Not Yet Adopted

Overview of Business

We operate three segments: LNG receiving terminal business, natural gas pipeline business, and LNG and natural gas marketing business. To a limited extent, we continue to be engaged in oil and natural gas exploration, development and exploitation activities in the Gulf of Mexico.

LNG Receiving Terminal Business

We have focused our LNG receiving terminal development efforts on the following three projects: the Sabine Pass LNG receiving terminal in western Cameron Parish, Louisiana on the Sabine Pass Channel; the

Corpus Christi LNG receiving terminal near Corpus Christi, Texas; and the Creole Trail LNG receiving terminal at the mouth of the Calcasieu Channel in central Cameron Parish, Louisiana. In addition, we own a 30% interest in Freeport LNG Development, L.P. ("Freeport LNG") which has constructed an LNG receiving terminal located on Quintana Island near Freeport, Texas.

Our ownership interest in the Sabine Pass LNG receiving terminal is held through Cheniere Energy Partners, L.P. ("Cheniere Partners"), a Delaware limited partnership, in which we hold an approximate 90.6% interest as a result of the completion of a public offering of common units in Cheniere Partners. Cheniere Partners owns a 100% interest in Sabine Pass LNG, L.P. ("Sabine Pass LNG"), which is constructing the Sabine Pass LNG receiving terminal. We currently own 100% interests in the proposed Corpus Christi and Creole Trail LNG receiving terminals. The three LNG receiving terminals under development by us have an aggregate designed regasification capacity of approximately 10.1 Bcf/d, subject to expansion.

Construction of the Sabine Pass LNG receiving terminal commenced in March 2005, and we achieved commercial operability in September 2008 with initial sendout capacity of approximately 2.6 Bcf/d and storage capacity of approximately 10.1 Bcf. We anticipate achieving full operability of the Sabine Pass LNG receiving terminal with a total sendout capacity of approximately 4.0 Bcf/d and total storage capacity of approximately 16.8 Bcf during the third quarter of 2009. Sabine Pass LNG has entered into long-term terminal use agreements ("TUAs") with Total LNG USA, Inc. ("Total"), Chevron U.S.A., Inc. ("Chevron") and Cheniere Marketing, LLC ("Cheniere Marketing"), our wholly-owned subsidiary formerly known as Cheniere Marketing, Inc., for the entire 4.0 Bcf/d of regasification capacity that will be available at the Sabine Pass LNG receiving terminal upon completion of construction.

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

Natural Gas Pipeline Business

We are developing natural gas pipelines to provide access to North American natural gas markets from our LNG receiving terminals, and to serve growing natural gas markets with diverse new sources of natural gas supplies. We have focused our natural gas pipeline development efforts on the following three projects: the Creole Trail Pipeline originating at the Sabine Pass LNG receiving terminal to points of interconnection with multiple interstate and intrastate natural gas pipelines throughout southern Louisiana; the Corpus Christi Pipeline originating at the Corpus Christi LNG receiving terminal to points of interconnection with interstate and intrastate natural gas pipelines in South Texas; and the Cheniere Southern Trail Pipeline originating in southern Louisiana to a point of interconnection with the Florida Gas Transmission Pipeline in western Florida. We have also purchased 100% interest in the Frontera Pipeline project, a combined transportation and storage project designed to serve industrial and power generation customers in northeastern Mexico (the "Burgos Hub Project").

As of December 31, 2008, Phase 1 of the Creole Trail Pipeline, consisting of 94 miles of natural gas pipeline, had been constructed and placed into commercial operation. In conjunction with Phase 1 of the Creole Trail Pipeline, six delivery meter stations were commissioned providing access to eight major interstate and intrastate natural gas pipeline systems.

If we decide to complete construction of the Corpus Christi LNG receiving terminal, we intend to develop the Corpus Christi Pipeline when, among other things, we have entered into acceptable commercial and acceptable financing arrangements.

The Cheniere Southern Trail Pipeline project would interconnect with multiple takeaway pipelines from LNG receiving terminals in southwestern Louisiana and a LNG receiving terminal being developed in Mississippi. The Cheniere Southern Trail Pipeline may also interconnect with multiple onshore pipelines serving conventional basins in the Gulf of Mexico and with new developments transporting natural gas from the

unconventional shale plays in Texas and Arkansas. The Cheniere Southern Trail Pipeline could supply Florida with natural gas needed to supply the growth we anticipate in natural gas-fired generation capacity in the state over the next ten to fifteen years. This pipeline would provide LNG suppliers with access to new natural gas markets, while providing alternative access to conventional gas supplies, to improve gas supply security for Florida and the remainder of the Southeastern U.S. The Cheniere Southern Trail Pipeline will be developed once we have entered into acceptable commercial and acceptable financing arrangements.

The Burgos Hub Project involves the construction of an integrated pipeline project that would traverse the United States and Mexico border and includes a related subterranean storage facility in Mexico. We will contemplate making a final investment decision in the Burgos Hub Project upon, among other things, receiving all required authorizations to construct and operate the pipeline and storage facility, and entering into acceptable commercial and acceptable financing arrangements.

LNG and Natural Gas Marketing Business

Our LNG and natural gas marketing business segment is focused on producing long-term, recurring cash flow utilizing its reserved 2.0 Bcf/d of regasification capacity at the Sabine Pass LNG receiving terminal. Our strategy is to remain engaged in the LNG spot market as opportunities arise, and to maintain relationships with key suppliers and market participants that we believe are candidates for entering into long-term LNG cargo sales and/or the purchase of TUA capacity currently reserved by Cheniere Marketing.

To help achieve these goals, we have entered into domestic marketing agreements with various counterparties for the sale of LNG. These agreements provide a framework under which Cheniere Marketing may offer to sell to a counterparty all or a portion of the LNG from each LNG cargo it acquires on delivery to the Sabine Pass LNG receiving terminal, and under which the counterparty will utilize a portion of Cheniere Marketing's TUA capacity for storage and regasification services related to the portion of the LNG cargo that the counterparty purchases.

Oil and Natural Gas Exploration, Development and Exploitation Activities

Although our focus is primarily on the development of LNG-related businesses, we continue to be involved to a limited extent in oil and gas exploration, development and exploitation 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.

Overview of 2008 Events

Our significant accomplishments during 2008, some of which may also impact future years, include the following:

• in February 2008, we announced that we were exploring strategic options for Cheniere to enhance stockholder value, including options to optimize the value of the Sabine Pass LNG receiving terminal and the regasification capacity at the terminal held by Cheniere Marketing under a long-term TUA;

• in April 2008, we commenced a cost savings program in connection with the downsizing of our natural gas marketing business activities, the nearing completion 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 interests in two LNG vessels. The cost savings program involved reducing our personnel company-wide by approximately 43%. We recognized losses of $78.7 million from this cost savings program, including the impact of cancelling our LNG vessel charter agreements, with substantially all of these losses having no material effect on our working capital in 2008. As of December 31, 2008, we estimate that we will recognize an additional $0.9 million of such losses in the future;

• in May 2008, we entered into a $95.0 million, 18-month bridge loan (the "Bridge Loan") 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 the Bridge Loan was to provide incremental funding and liquidity until we entered into a strategic transaction, obtained sufficient revenues from a significant number of imported LNG cargos or consummated an alternative financing transaction;

• in June 2008, Freeport LNG achieved commercial operability, and it began receiving TUA payments from its customers in the second half of 2008;

• in August 2008, Cheniere Common Units Holding, LLC, our wholly-owned subsidiary, closed a $250.0 million senior secured convertible term loan agreement ("2008 Convertible Loans"). Proceeds were used to: repay the Bridge Loan obtained in May 2008; fund a reserve account for payments under Cheniere Marketing's TUA with Sabine Pass LNG; pay expenses incurred in connection with the 2008 Convertible Loans and the consideration of other potential strategic alternatives; and fund working capital and general corporate needs of Cheniere and its subsidiaries;

• in September 2008, Sabine Pass LNG received $145.0 million, net of discount, from the issuance of an additional $183.5 million of Sabine Pass LNG's 7 1/2% Senior Secured Notes due 2016 ("2016 Notes") pursuant to the existing indenture, dated as of November 9, 2006 (the "Sabine Pass Indenture"), under which Sabine Pass LNG had previously issued $1,482.0 million in aggregate principal amount of 2016 Senior Notes and $550.0 million in aggregate principal amount of 7 1/4% Senior Secured Notes due 2013 ("2013 Notes" and collectively with the 2016 Notes, the "Senior Notes");

• in September 2008, Cheniere Marketing began making its TUA payments to Sabine Pass LNG; and

• in September 2008, the initial 2.6 Bcf/d of sendout capacity and 10.1 Bcf of storage capacity at the Sabine Pass LNG receiving terminal was completed and achieved commercial operability.

We believe that these 2008 activities will provide us with sufficient liquidity to operate our business and pursue our business strategies over the next several years.

Liquidity and Capital Resources

Overview



                                                                                  Other           Consolidated
                                        Sabine           Cheniere Energy         Cheniere           Cheniere
(in thousands)                      Pass LNG, L.P.       Partners, L.P.        Energy, Inc.       Energy, Inc.
------------------------------     ----------------     -----------------     --------------     --------------
Cash and cash equivalents          $             -      $              -      $      102,192     $      102,192
Restricted cash and cash
equivalents                                 362,041                11,928             66,064            440,033
U.S. Treasury securities                         -                 20,829                 -              20,829
                                   -- -------------     --- -------------     -- -----------     -- -----------
Total                              $        362,041     $          32,757     $      168,256     $      563,054
                                   -- -------------     --- -------------     -- -----------     -- -----------

As of December 31, 2008, we had unrestricted cash and cash equivalents of $102.2 million. In addition, we had restricted cash and cash equivalents of $440.0 million and U.S. Treasury securities of $20.8 million, which were designated for the following purposes: $71.1 million for construction costs of the Sabine Pass LNG receiving terminal; $194.8 million for Sabine Pass LNG's working capital; $96.1 million for interest payments related to the Senior Notes described below; $62.8 million for Cheniere Marketing TUA payments; $32.8 million for cash distributions by Cheniere Partners; and $3.3 million in other restricted cash and cash equivalents.

As described below in further detail by business segment and corporate and other activities, we believe that we have sufficient cash and cash equivalents to operate our business and pursue our business strategies over the next several years.

LNG Receiving Terminal Business

Cheniere Partners

Our ownership interest in the Sabine Pass LNG receiving terminal is held through Cheniere Partners. In 2007, Cheniere Partners completed a public offering of 15,525,000 Cheniere Partners common units. As a result of this public offering, our combined general partner and limited partner ownership interests in Cheniere Partners was reduced to approximately 90.6%. Cheniere Partners owns a 100% interest in Sabine Pass LNG, which is constructing and operating the Sabine Pass LNG receiving terminal.

For each calendar year, Cheniere Partners is expected to make distributions of $1.70 per unit on all outstanding common units, subordinated units and related distributions to its general partner. We anticipate receiving $18.5 million per year out of the total $44.9 million of annual common unit distributions. We anticipate receiving $235.8 million per year from distributions to the subordinated unitholders and general partner, of which we own 100%.

Cheniere Partners relies on the receipt of operating revenues from Sabine Pass LNG's TUAs to fund quarterly cash distributions to us and other unitholders. Sabine Pass LNG is not permitted under the Sabine Pass 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 Sabine Pass Indenture. If the coverage test is not met, we may not receive distributions. As of December 31, 2008, the fixed charge coverage ratio was met and the first distribution was made from Sabine Pass LNG to Cheniere Partners; Cheniere Partners utilized the cash received from Sabine Pass LNG to pay expenses and make distributions to us and its other unitholders.

A distribution reserve account was established from proceeds of Cheniere Partners' initial public offering to pay distributions to the common unitholders and general partner until Cheniere Partners is able to sustain distributions from unrestricted cash, at which time the funds remaining in the account are expected to be returned to us. As of February 15, 2009, there was $32.8 million in the distribution reserve account, which is adequate to fund distributions to the common unitholders and general partner made with respect to each calendar quarter through September 30, 2009. Sabine Pass LNG began making distributions from unrestricted cash in February 2009 and expects to continue making its distributions from its cash balances. We expect that approximately $35 million will be remaining in the distribution reserve account after accounting for interest earned in the account after February 15, 2009, and that approximately $35 million of remaining funds will be distributed to us in August 2009 pursuant to the terms of Cheniere Partners' partnership agreement.

We also expect to receive approximately $19 million of annual management and service fees from Sabine Pass LNG and Cheniere Partners pursuant to existing agreements.

Sabine Pass LNG Receiving Terminal

Our estimated aggregate construction, commissioning and operating cost budget through the achievement of full operability of the Sabine Pass LNG receiving terminal (with approximately 4.0 Bcf/d of total sendout capacity and five LNG storage tanks with approximately 16.8 Bcf of aggregate storage capacity) is approximately $1,559 million, excluding financing costs. Of this amount, approximately $1,416 million of construction and commissioning costs had been incurred as of December 31, 2008. Our remaining construction, commissioning and operating costs are anticipated to be funded from working capital and the $71.1 million of restricted cash and cash equivalents designated for construction. In September 2008, Hurricane Ike and related storm activity, such as windstorms, storm surges and floods, struck the Texas and Louisiana coasts. We experienced minor damage at the Sabine Pass LNG receiving terminal with most of the damage impacting equipment and facilities associated with the 1.4 Bcf/d of sendout capacity and 6.7 Bcf of storage capacity still under construction. Impact to operations and the equipment and facilities associated with the initial 2.6 Bcf/d of sendout capacity and 10.1 Bcf of storage capacity was minimal. We continue to expect to complete construction of the remaining 1.4 Bcf/d of sendout capacity and 6.7 Bcf of storage capacity in the third quarter of 2009.

Estimated costs to repair damage caused by Hurricane Ike are approximately $32 million, of which we believe approximately $22 million will be recoverable from insurance proceeds and other sources. The estimated costs to repair this damage have been factored into the budget estimate above.

The entire 4.0 Bcf/d of regasification capacity that will be available at the Sabine Pass LNG receiving terminal upon completion of construction has been fully reserved under three long-term TUAs, under which Sabine Pass LNG's customers are required to pay fixed monthly fees, whether or not they use the terminal. Because we achieved commercial operability of the Sabine Pass LNG receiving terminal in September 2008, capacity reservation fee TUA payments will begin to be made by our third-party customers as follows:

• Total has reserved approximately 1.0 Bcf/d of regasification capacity and has agreed to make monthly capacity payments to Sabine Pass LNG aggregating approximately $125 million per year for 20 years 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 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. In September 2008, Cheniere Marketing made a capacity reservation fee payment of $15.0 million for October, November and December 2008. In December 2008, Cheniere Marketing made a capacity reservation fee payment of $62.7 million for the first three months of 2009. Cheniere Marketing is required to make monthly capacity payments aggregating approximately $250 million per year for the period from January 1, 2009, through at least the third quarter of 2028. Cheniere has guaranteed Cheniere Marketing's obligations under its TUA.

Under each of these TUAs, Sabine Pass LNG is also entitled to retain 2% of the LNG delivered for the customer's account, which Sabine Pass LNG will use primarily as fuel for revaporation and self-generated power at the Sabine Pass LNG receiving terminal.

Each of Total and Chevron has paid us $20.0 million in nonrefundable advance capacity reservation fees, which will be amortized over a 10-year period as a reduction of each customer's regasification capacity fees payable under its TUA.

Other LNG Receiving Terminals

We have a 30% limited partner interest in Freeport LNG. 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 2008, we funded the cash calls and have recorded $4.8 million of additional losses in Freeport LNG. In October 2008, Freeport LNG made its first distribution of $4.8 million to us. We expect to continue to receive distributions from Freeport LNG as they are approved by Freeport LNG's board of directors.

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. We do not expect to spend significant funds on these projects until we have entered into acceptable commercial arrangements and acceptable financing arrangements.

Natural Gas Pipeline Business

As of December 31, 2008, Phase 1 of the Creole Trail Pipeline, consisting of 94 miles of natural gas pipeline, had been constructed and placed into commercial operations. Expenditures incurred for the construction of the Creole Trail Pipeline through December 31, 2008 were approximately $553 million, including accrued liabilities. We believe we have sufficient cash and cash equivalents to operate our Creole Trail Pipeline for the next several years.

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 and acceptable financing arrangements for the applicable project.

LNG and Natural Gas Marketing Business

In April 2008, we commenced a cost savings program in connection with the downsizing of our natural gas marketing business activities, the nearing completion 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 interests in two LNG vessels. 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 deposited $135.0 million in a TUA reserve account utilizing a portion of the 2008 Convertible Loans that were closed in August 2008. Pursuant to the 2008 Convertible Loans, all funds in the TUA reserve account in excess of three months of Cheniere Marketing's TUA payments can be released to us as unrestricted cash and cash equivalents after we have received three consecutive monthly payments from both Total and Chevron under their respective TUAs, which we believe will occur in August 2009. We believe that we will obtain approximately $66 million from the TUA reserve account as unrestricted cash and cash equivalents in August 2009.

Cheniere Marketing will utilize funds in the TUA reserve account, distributions from Cheniere Partners and operating cash flows to pay its TUA obligation.

Corporate and Other Activities

We are required to maintain a certain level of corporate general and administrative functions to serve our business activities described above. We believe that we have sufficient cash and cash equivalents to fund these business activities over the next several years.

Although our focus is primarily on the development of LNG-related businesses, we continue to be involved to a limited extent in oil and gas exploration, development and exploitation activities in the shallow waters of the Gulf of Mexico. We do not anticipate significant cash expenditures related to this activity and expect cash inflows from oil and natural gas production to gradually decrease as our reserves are produced.

Sources and Uses of Cash

The following table summarizes (in thousands) the sources and uses of our cash and cash equivalents for 2008, 2007 and 2006. The table presents capital expenditures on a cash basis; therefore, these amounts differ from the amounts of capital expenditures, including accruals that are referred to elsewhere in this report. Additional discussion of these items follows the table.

                                                   2008               2007               2006
                                               ------------       ------------       ------------
Sources of cash and cash equivalents
Use of restricted cash and cash
equivalents                                    $    465,323       $    527,043       $         -
Proceeds from debt issuance                         239,965            400,000          2,415,400
Proceeds from debt issuance-related
parties                                             250,000                 -                  -
Use of restricted U.S. Treasury securities           16,702                 -                  -
Sale of common stock                                    472              3,158              1,953
Proceeds from sale of common units in
partnership                                              -             203,946                 -
. . .