NextDecade Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. NextDecade is a pre-revenue LNG development company focused on the Rio Grande LNG terminal in southern Texas and also holds a lease for a potential Galveston Bay terminal.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $7.2 million | $12.5 million |
| Operating loss | $7.2 million | $12.5 million |
| Net income (loss), before preferred dividends | $0.9 million | Loss of $12.0 million |
| Net loss attributable to common stockholders | $2.6 million; $0.02 per share | $17.6 million; $0.16 per share |
| Net cash used in operations | $14.2 million | $8.0 million |
| Cash and cash equivalents | $58.3 million | $15.7 million at December 31, 2019 |
| Total assets | $218.8 million | $221.2 million at December 31, 2019 |
| Total liabilities | $31.9 million | $33.6 million at December 31, 2019 |
| Property, plant and equipment, net | $146.0 million | $134.6 million at December 31, 2019 |
Operating margin is not meaningful because the company had no revenue. The reported Q1 net income primarily reflects an $8.3 million noncash gain from remeasurement of common stock warrant liabilities; it does not represent operating profitability. The company reported no material borrowings in the provided balance sheet. Its Series A and Series B convertible preferred stock totaled $101.4 million and carries cumulative dividends at 12% annually; Q1 preferred dividends of $3.4 million were paid in kind. The filing reports $3.7 million of warrant liabilities and $15.0 million of other non-current liabilities, the latter associated with the Rio Bravo sale proceeds.
Cash flow, liquidity, and spending
- Cash increased $42.5 million during the quarter. Investing activities provided $41.9 million, mainly from $62.0 million of investment-security sales, partly offset by $19.9 million of terminal development spending. Financing activities provided $14.9 million, principally the $15.0 million Rio Bravo sale payment.
- Operating cash outflow rose year over year by $6.2 million, which management attributed primarily to additional employees and higher professional fees.
- Management expected $72 million of pre-FID development spending in 2020 and said approximately $46 million had been incurred in Q1. It expected spending to average just over $2 million per month from Q2 onward and stated that cost measures were intended to sustain pre-FID development through year-end 2021.
- Terminal and pipeline project assets not yet placed in service were $145.4 million at quarter-end. These development assets are not producing operating revenue.
Material changes and developments
- General and administrative expense decreased $5.2 million year over year, primarily because share-based compensation expense declined by $7.2 million, including the effect of restricted-stock forfeitures. Higher personnel, professional, travel, marketing, and sponsorship costs partly offset the reduction.
- The company redeemed its remaining JPMorgan Managed Income Fund investment securities in March, recognizing a $0.4 million loss; the balance was zero at quarter-end, versus $62.2 million at December 31, 2019.
- On March 2, NextDecade sold Rio Bravo Pipeline Company to an Enbridge subsidiary. It received $15.0 million at closing; the remaining purchase price, subject to a $25 million cap, is contingent on Rio Grande reaching FID and receiving initial project financing. Because of repurchase/resale rights if a required notice to proceed is not issued by December 31, 2023, the company recorded the proceeds as a liability and did not derecognize Rio Bravo’s assets.
- The Shell 20-year LNG sale and purchase agreement became effective in Q1 after its conditions precedent were satisfied or waived. It covers approximately 2 million tonnes per annum, subject to the first train becoming commercially operable.
- FERC authorized the terminal and pipeline in November 2019; FERC denied rehearing and stay requests in January 2020. Appeals challenging the FERC order and other permits remained pending.
Outlook, risks, and contingencies
- The company had not made a final investment decision. It expects the terminal to require substantial additional capital, primarily project financing and future debt and equity offerings; management cautioned that financing may not be available or may be costly or dilutive. The terminal would not generate significant cash flow until several years after completion.
- To conserve liquidity, NextDecade reported an 18% reduction in full-time headcount since year-end 2019, a further furlough of 14% of full-time staff in May, 10% voluntary base-salary reductions for the CEO and certain executives for the rest of 2020, a limited scope of ongoing Bechtel work, and plans to reduce leased office space and defer certain IT spending.
- COVID-19, the energy-market downturn, reduced LNG demand, and volatility in commodity prices could delay FID, disrupt project development, and constrain access to capital. The company modified work practices, temporarily closed its offices, and reopened them on May 18. It relied on SEC COVID-19 filing relief to delay this 10-Q.
- Subsequent to quarter-end, Bechtel contract-price validity was extended to July 31, 2020. The Rio Grande site lease effective date was extended to May 6, 2021, with a company option to extend to May 6, 2022; NextDecade committed to pay approximately $1.5 million per quarter until the earlier of lease commencement or the effective date.
- A lawsuit filed by the City of Port Isabel and other parties seeks to enjoin LNG terminal development on land owned by the Brownsville Navigation District. Management said it was not aware of legal claims likely to have a material adverse effect, but could not assure that such an effect would not occur.
- The filing states there were no material changes in contractual obligations from the 2019 Form 10-K and no off-balance-sheet arrangements as of March 31, 2020. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether and when NextDecade can secure financing and reach FID, and how the LNG market and COVID-19 affect those milestones.
- The status and outcomes of pending permit appeals and the Port Isabel-related litigation.
- The contingent remaining Rio Bravo sale consideration, the related liability and repurchase rights, and the pipeline agreements’ conditions and take-or-pay terms.
- Cash runway versus development spending, including the assumptions behind management’s estimate that liquidity measures support activities through year-end 2021.
- The cumulative 12% preferred-stock dividends, potential dilution from preferred shares and warrants, and the effect of warrant remeasurement on reported earnings.