Business context and reporting period
Cheniere Energy, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company develops and operates U.S. LNG export and related infrastructure. At quarter-end, Sabine Pass Trains 1–4 were operational, Train 5 was commissioning, and Corpus Christi Stages 1 and 2 were under construction; Corpus Christi Train 1 had begun commissioning. The Corpus Christi Pipeline was completed during the quarter.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $1.543 billion | $1.241 billion | $3.785 billion | $2.452 billion |
| Operating income | $336 million | $274 million | $1.083 billion | $650 million |
| Operating margin | 21.8% | 22.1% | 28.6% | 26.5% |
| Net income (loss) attributable to common stockholders | $(18) million | $(285) million | $339 million | $(231) million |
| Basic earnings (loss) per share | $(0.07) | $(1.23) | $1.42 | $(0.99) |
- Revenue and operations: LNG revenue was $1.442 billion in Q2 and $3.608 billion for the first half. Recognized LNG sales volumes were 240 TBtu in Q2 and 524 TBtu for the six months.
- Cash flow: First-half operating cash flow was $982 million, versus $536 million a year earlier. Investing cash outflow was $1.492 billion, primarily for construction, versus $2.357 billion. Financing cash inflow was $1.168 billion. Cash, cash equivalents and restricted cash totaled $3.271 billion at June 30.
- Debt and liquidity: Total debt, net, was $26.919 billion, including $137 million current debt, compared with $25.336 billion at year-end 2017. Cash and cash equivalents were $874 million; restricted cash was $2.397 billion and is subject to use restrictions. Available commitments included $750 million under Cheniere’s revolving facility, $2.247 billion under the CCH Credit Facility, and $881 million under the CCH Working Capital Facility. Issuers were in compliance with debt covenants.
- Balance sheet: Total assets were $30.327 billion; total equity was $1.734 billion. Property, plant and equipment, net, was $25.760 billion.
Material changes versus prior comparable periods
- Q2 revenue increased 24% and first-half revenue increased 54%, primarily because more Sabine Pass trains were operating. First-half operating income rose to $1.083 billion from $650 million.
- First-half common-stockholder results turned to $339 million of income from a $231 million loss. Q2 remained loss-making for common stockholders, although the loss narrowed to $18 million from $285 million. The 2017 comparison included substantial non-cash amortization of the beneficial conversion feature on Cheniere Partners’ Class B units; increased non-controlling-interest attribution also affects the difference between consolidated net income and common-stockholder income.
- Operating costs rose with additional operating trains. First-half interest expense, net of capitalized interest, increased to $432 million from $353 million, while derivative results and debt-modification losses were more favorable than in 2017.
- Debt increased, mainly reflecting borrowings under the expanded CCH Credit Facility. In May, its commitments were increased to $6.1 billion; the CCH Working Capital Facility was increased to $1.2 billion in June.
Outlook, management commentary, risks and unusual items
- Management expects LNG revenues to rise as Sabine Pass Train 5 and Corpus Christi Trains 1–3 enter service, and expects operating expenses to increase with additional trains, though some costs may benefit from efficiencies. The filing provides project milestones and cost estimates, but no specific consolidated earnings or cash-flow guidance.
- Train 5 was 95.1% complete at June 30, with expected substantial completion in the first half of 2019. Corpus Christi Stage 1 was 89.9% complete, with Train 1 expected in the first half of 2019 and Train 2 in the second half of 2019; Stage 2 was 28.7% complete, with Train 3 expected in the second half of 2021. These are forward-looking estimates.
- The board made a positive final investment decision for Corpus Christi Stage 2 in May and issued Bechtel a full notice to proceed. Cheniere also filed a FERC application for a proposed Corpus Christi Stage 3 expansion of seven midscale trains, approximately 9.5 mtpa; development remains subject to regulatory, commercial and financing conditions.
- Cheniere agreed to acquire the publicly held shares of Cheniere Holdings in a stock-for-stock merger, expected to close by the end of Q3 2018, subject to conditions. The filing identifies the possibility of delay or failure to complete and potential adverse market and financial effects.
- Two Sabine Pass LNG storage tanks were taken out of service following reported minor leaks/releases. A PHMSA consent order superseded the corrective action order; management did not expect a material adverse effect from the order and remediation.
- The Parallax litigation includes claims seeking $400 million in alleged damages, along with Cheniere’s counterclaims. Discovery was ongoing; the court granted a continuance and had not set a new trial date. Management did not expect a material adverse financial impact.
- Derivative valuations are exposed to commodity, interest-rate and foreign-exchange movements. Certain physical gas-supply derivative valuations use significant unobservable inputs and could be materially affected by changes in gas basis spreads.
- The company expects the new lease accounting standard, effective January 1, 2019, to have a material balance-sheet impact; the impact on results and cash flows had not yet been determined. The 2018 adoption of ASC 606 did not change previously reported periods or retained earnings.
Important facts for investors to verify
- Progress, cost, financing and commissioning schedules for Sabine Pass Train 5 and Corpus Christi Trains 1–3, including whether stated completion estimates remain achievable.
- How much reported cash is restricted, the availability and conditions of project credit facilities, and the effect of rising debt and interest costs on liquidity.
- The sources and sustainability of LNG revenue and margins as operating capacity expands, including exposure to feedstock costs, shipping, derivative marks and customer concentration.
- Completion conditions and timing for the Cheniere Holdings merger, and the expected effect on share count and non-controlling interests.
- Tank remediation and regulatory developments at Sabine Pass, the Parallax litigation outcome, and the final balance-sheet effect of lease-standard adoption.