Cheniere Energy, Inc. quarterly report, Q3 FY2017

Business context and reporting period

Cheniere Energy, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company develops and operates LNG export and related infrastructure. Sabine Pass Trains 1–3 were operational at quarter-end; Train 4 reached substantial completion in October 2017, Train 5 was under construction, and Corpus Christi Stage 1 was under construction.

Financial highlights

Operating margin was approximately 21% in Q3 2017 versus 3% in Q3 2016, and approximately 25% for the first nine months of 2017 versus a negative operating margin in the prior-year period. LNG revenue growth reflected more operational trains and higher revenue per MMBtu. The common-stockholder loss, despite consolidated net income, reflected income allocated to non-controlling interests, including a substantial non-cash allocation from amortization of Cheniere Partners’ Class B unit beneficial conversion feature.

At September 30, 2017, cash and cash equivalents were $919 million; restricted cash was $1.656 billion, for total cash, cash equivalents and restricted cash of $2.575 billion. Total debt, net, was $24.964 billion, compared with $21.935 billion at December 31, 2016. Current debt was $41 million and long-term debt, net, was $24.923 billion. Total assets were $27.134 billion and total equity was $1.083 billion. Restricted cash and subsidiary financing availability are subject to use restrictions and are not equivalent to unrestricted parent-company liquidity.

Material changes versus the prior comparable period

• Q3 revenue increased $938 million year over year; nine-month revenue increased $3.144 billion. Operational LNG volumes recognized as revenue were 196 TBtu in Q3 and 515 TBtu year to date, versus 64 TBtu and 87 TBtu, respectively, in 2016.
• Operating costs rose as additional trains entered operation. Nine-month cost of sales increased to $2.140 billion from $353 million, while depreciation and amortization increased to $252 million from $106 million.
• Nine-month operating cash flow improved by approximately $1.2 billion, primarily due to increased cash receipts from LNG cargo sales. Investing cash outflow was $2.926 billion, mainly for construction; financing cash inflow was $2.779 billion.
• Net interest expense increased to $539 million for nine months from $330 million, reflecting higher debt and less interest eligible for capitalization as trains completed construction. Debt issuance and refinancing included new notes at SPL, CCH and Cheniere Partners.
• Cheniere Partners’ Class B units mandatorily converted on August 2, 2017. The conversion ended related beneficial-conversion-feature amortization but increased non-controlling ownership of Cheniere Partners.

Outlook, commentary, risks and unusual items

• Management stated it expects to fund anticipated needs for at least the next 12 months through a mix of project financing, operating cash flows, borrowings, available commitments and, for certain subsidiaries, equity contributions. It believed resources were adequate to complete Sabine Pass Trains 1–5 and meet currently anticipated requirements. No specific earnings or cash-flow guidance was provided.
• Management expects revenue to rise as additional trains become operational, while operating costs will also generally increase. Sabine Pass Train 5 was expected to reach substantial completion in the second half of 2019; Corpus Christi Trains 1 and 2 were expected in the first and second halves of 2019, respectively.
• Corpus Christi Stage 1 was 72.4% complete at quarter-end. The company was revising the proposed Corpus Christi expansion design to up to seven midscale trains, with approximately 9.5 mtpa nominal capacity, from two trains with approximately 9.0 mtpa. Further investment decisions depend on acceptable commercial arrangements and financing.
• Debt refinancing generated $100 million of nine-month losses on early extinguishment, largely write-offs of financing costs. Derivative loss was $37 million for nine months, compared with $242 million in 2016; quarterly derivative results were affected by movements in the forward LIBOR curve.
• Hurricane Harvey temporarily suspended construction and LNG loading; the company reported no significant terminal damage and no material financial-statement impact. In Parallax litigation, claims included alleged damages of $400 million; Cheniere said it did not expect resolution to materially adversely affect results. A preliminary-injunction hearing was scheduled for November 17, 2017.
• Key risks include project construction and financing, regulatory approvals, LNG and natural-gas markets, counterparties, leverage and covenants, and derivative valuation. Much of the physical supply derivative fair value relies on unobservable Level 3 inputs. The company reported no material changes to its previously disclosed risk factors.

Important facts for investors to verify

• Progress, timing, total costs and funding plans for Sabine Pass Train 5 and Corpus Christi Stage 1, including any changes to expected completion dates or project budgets.
• How much reported cash is restricted, where it is held, and which subsidiaries can access available credit commitments.
• Debt maturities, interest costs, refinancing needs, covenant and debt-service coverage requirements, and the extent to which subsidiary debt is non-recourse or secured.
• The sustainability and cash conversion of LNG revenue growth, including cargo volumes, customer payment obligations, marketing activity and exposure to commodity prices.
• Developments in the Parallax litigation and other regulatory matters, including export authorizations and the Corpus Christi expansion applications.