Business context and reporting period
Cheniere Energy, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company operates the Sabine Pass LNG import terminal through its 90.3% interest in Cheniere Partners, operates the Creole Trail Pipeline, and conducts LNG and natural-gas marketing. It is also developing liquefaction and export facilities at Sabine Pass.
Financial performance and position
Amounts below are in millions of dollars except per-share data.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $72.8 | $68.3 | $152.0 | $147.8 |
| Operating income | $16.5 | $24.7 | $40.0 | $55.7 |
| Net income (loss) attributable to common stockholders | $(47.2) | $85.7 | $(87.0) | $50.5 |
| Basic EPS | $(0.67) | $1.55 | $(1.26) | $0.92 |
| Cash used in operating activities | Not stated separately | Not stated separately | $(29.5) | $(20.6) |
- Revenue increased 6.6% in Q2 and 2.9% for the first half. Operating income fell in both periods; reported operating margins were approximately 22.6% for Q2 and 26.3% for the first half.
- The Q2 2010 and first-half 2010 comparisons included a $128.3 million gain on the sale of the company’s 30% Freeport LNG interest. This gain was absent in 2011.
- At June 30, cash and cash equivalents were $162.6 million, unrestricted and available to Cheniere. Consolidated restricted cash was $155.4 million, including funds for debt service and working capital at subsidiaries; subsidiary cash is not freely available to the parent. Current assets were $261.0 million and current liabilities were $364.2 million.
- Debt included $298.0 million of current 2007 Term Loan debt and $2,655.1 million of long-term debt, net of discounts (including related-party debt). The term loan bears 9.75% interest and matures May 31, 2012. Senior Notes at Sabine Pass LNG have $2,215.5 million principal outstanding; the parent’s 2008 Loans bear 12% interest.
- Cash rose by $88.4 million in the first half to $162.6 million, principally supported by $123.3 million net proceeds from a common-stock offering. Cash used in operations was $29.5 million; investing activities used $0.9 million and financing activities provided $118.8 million.
Material changes versus the prior comparable period
- Development expense rose to $13.4 million in Q2 and $21.8 million in the first half, from $1.1 million and $1.9 million, respectively, as work advanced on the Sabine Pass liquefaction project.
- Marketing and trading revenue increased to $4.6 million in Q2 from $1.0 million, largely reflecting LNGCo-related and other trading revenue and smaller derivative losses. First-half marketing and trading revenue was approximately unchanged at $13.1 million.
- LNG terminal and pipeline operating expense declined to $7.9 million in Q2 and $18.0 million for the first half, primarily due to lower fuel costs and inventory-management efficiencies. Net interest expense also declined, to $64.6 million in Q2 and $128.7 million for the first half.
- The company issued 12.7 million common shares in June at $10.35 per share, raising $123.3 million net. Shares issued and outstanding increased to 82.7 million at June 30 from 67.8 million at year-end 2010.
Outlook, risks and unusual items
- No specific earnings guidance is provided. Management said the company expects sufficient unrestricted cash, operating cash generation and capital-market access to fund operations and meet obligations, but it must extend or retire the $298.0 million term loan due in May 2012. Potential means include refinancing, securities issuance, asset sales or a combination; availability depends partly on natural-gas and capital-market conditions.
- DOE authorized Sabine Pass liquefaction to export domestically produced LNG to countries with which trade is permissible, up to approximately 16 million tonnes per year, subject to satisfactory FERC review and other conditions. FERC authorization to construct and operate remained pending.
- The project was contemplated in phases, with exports potentially beginning as early as 2015. Management estimated construction costs at approximately $400 per metric ton before financing, but said project-specific estimates were not complete. A final investment decision depends on acceptable commercial contracts, regulatory approvals and adequate financing; the company intended to contract at least 3.5 million tonnes per year per train.
- Other risks include high leverage and interest costs, refinancing and project-funding needs, construction cost and schedule uncertainty, commodity-price and derivative volatility, and possible impairment of long-lived assets or goodwill. LNG inventory accounting and mark-to-market derivative accounting can cause timing differences in reported results.
- Cheniere Marketing’s maximum exposure to loss relating to LNGCo was $2.5 million. Management reported no known pending or threatened legal matter expected to materially adversely affect the company; a lawsuit filed against Centerbridge was dismissed without prejudice in June.
- Management concluded disclosure controls and procedures were effective as of quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Cheniere can refinance, extend or otherwise repay the $298.0 million term loan by its May 2012 maturity, and what the resulting cost and terms would be.
- How much parent-available liquidity remains after distinguishing it from restricted cash and cash held within subsidiaries with independent capital structures.
- Progress on FERC approval, binding liquefaction contracts, financing and project-specific construction costs before any final investment decision.
- Underlying operating performance excluding the prior-year $128.3 million Freeport LNG sale gain, alongside rising development and corporate costs.
- The effects of the equity offering and other potential conversions or share awards on dilution, and the company’s ability to fund operations without further equity issuance.