Cheniere Energy, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statements are unaudited and consolidated. Cheniere develops and operates LNG export and related infrastructure, including Sabine Pass and Corpus Christi.
Business context and operating progress
- At Sabine Pass, Trains 1–4 were operational; Train 5 was commissioning and 98.5% complete, with substantial completion expected in Q1 2019. Train 6 was being commercialized, but no final investment decision had been made.
- At Corpus Christi, Stage 1 was 93.9% complete and Stage 2 was 36.3% complete. Train 1 had begun commissioning; substantial completion was expected in Q1 2019 for Train 1, 2H 2019 for Train 2, and 2H 2021 for Train 3. The Corpus Christi Pipeline was completed in Q2.
- In May, Cheniere made a positive final investment decision for Corpus Christi Stage 2. In June, it applied to FERC for Corpus Christi Stage 3: seven midscale trains with approximately 9.5 mtpa of expected nominal capacity.
- Cheniere completed its merger with Cheniere Holdings in September; former public holders received Cheniere common shares. Cheniere also signed LNG sale agreements with Vitol, CPC Corporation Taiwan, PetroChina, and Trafigura.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $1.819 billion | $1.403 billion | $5.604 billion | $3.855 billion |
| Income from operations | $425 million | $297 million | $1.508 billion | $947 million |
| Operating margin | 23.4% | 21.2% | 26.9% | 24.6% |
| Net income attributable to common stockholders | $65 million | ($289 million) | $404 million | ($520 million) |
| Basic EPS | $0.26 | ($1.24) | $1.67 | ($2.24) |
| Net cash from operating activities | Not presented by quarter in the supplied filing text | $1.504 billion | $895 million |
- Revenue growth primarily reflected higher LNG volumes as additional Sabine Pass trains entered service. Nine-month LNG revenue rose $1.681 billion; operational LNG volumes recognized increased to 731 TBtu from 451 TBtu in the comparable period.
- Operating costs increased with the additional trains. Nine-month cost of sales was $3.078 billion, up $938 million; operating and maintenance expense was $457 million, up $148 million. Depreciation and amortization rose to $333 million from $252 million.
- Net interest expense increased to $653 million for nine months from $539 million. Total interest cost was $1.242 billion, of which $589 million was capitalized. Derivative results improved to a $132 million gain for nine months from a $37 million loss.
- Operating cash flow increased by $609 million year over year, mainly from LNG sales receipts. Investing cash outflow was $2.722 billion, principally reflecting $2.712 billion of property, plant and equipment expenditures. Operating cash flow less property, plant and equipment expenditures was approximately negative $1.208 billion.
- Cash and cash equivalents were $989 million at September 30, versus $722 million at year-end 2017; restricted cash was $1.943 billion, versus $1.880 billion. Much of the restricted balance is subject to project, trustee, or credit-agreement limits. Total cash, cash equivalents, and restricted cash were $2.932 billion.
- Total debt, net, was $27.504 billion, including $66 million of current debt, compared with $25.336 billion at year-end 2017. Long-term debt, net, was $27.438 billion. Total equity was $1.831 billion; Cheniere stockholders’ deficit was $609 million, alongside $2.440 billion of non-controlling interest.
Material changes and financing
- Cheniere Partners issued $1.1 billion of 5.625% notes due 2026 and used the proceeds to repay outstanding CQP Credit Facilities term debt; only an undrawn $115 million revolver remained. The transaction resulted in $12 million of debt modification and extinguishment costs.
- CCH amended its project credit facility, raising commitments to $6.1 billion; borrowings outstanding rose to $4.492 billion from $2.485 billion at year-end. Its working-capital facility commitments increased to $1.2 billion. Available commitments at September 30 included $1.646 billion under the CCH credit facility, $884 million under its working-capital facility, and $750 million under Cheniere’s revolver.
- Nine-month financing cash flow was $1.537 billion, including debt issuance and borrowings, partly offset by repayments, financing costs, and $435 million of distributions and dividends to non-controlling interests. The merger and related adjustments increased common shares; 257.1 million shares were outstanding at quarter-end.
- Common-stockholder results improved substantially versus 2017, partly because the prior-year periods included non-cash amortization of the beneficial conversion feature on Cheniere Partners’ Class B units. The improvement also reflected higher operating income and better derivative results, partly offset by higher interest expense and the allocation of earnings to non-controlling interests.
Outlook, risks, and unusual items
- No specific consolidated earnings or revenue guidance was provided. Management expected LNG revenue to rise as Train 5 and Corpus Christi Trains 1–3 enter service, and operating costs to generally increase with new trains. Management stated it believed available resources were adequate to complete Sabine Pass Train 5 and meet anticipated requirements; Corpus Christi construction was expected to be financed through project financing, operating cash flows, and equity contributions.
- Execution, schedule, cost, commercial arrangements, financing, regulatory approvals, and LNG market conditions remain important uncertainties for projects under construction or development. Corpus Christi Stage 3 and Sabine Pass Train 6 were not yet operating projects; further investment depends on approvals, commercial arrangements, and financing.
- Debt is substantial and includes variable-rate facilities; interest-rate, commodity-price, foreign-exchange, and counterparty risks are managed in part through derivatives. Some physical gas supply derivative valuations use significant unobservable inputs. Restricted cash and debt covenants can limit funds available for general corporate use or distributions. The company reported compliance with debt covenants at quarter-end.
- Parallax-related litigation remained ongoing, with trial set for June 2019; Cheniere said it did not expect resolution to materially adversely affect financial results. The filing reported no material changes to previously disclosed risk factors.
- Cheniere expected adoption of lease accounting standard Topic 842 on January 1, 2019 to have a preliminary material effect on the balance sheet; the effect on earnings and cash flows had not been determined. Adoption of the revenue standard had no impact on previously reported periods or retained earnings.
Most important facts for investors to verify
- Subsequent construction and commissioning progress against the stated completion targets for Sabine Pass Train 5 and Corpus Christi Trains 1–3, including cost and schedule changes.
- How much reported cash is unrestricted and available at each subsidiary, and whether project funding and facility availability remain sufficient as construction spending continues.
- Debt balances, interest costs, refinancing needs, covenant compliance, and the consequences of additional borrowing or rising rates.
- Whether higher LNG volumes translate into durable cash generation after feed-gas, operating, shipping, and financing costs, and how derivative marks affect reported results.
- Regulatory and commercial milestones for Corpus Christi Stage 3, Sabine Pass Train 6, and other development projects, plus developments in the Parallax litigation.