Cheniere Energy, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 7, 2019. Cheniere develops and operates U.S. LNG export facilities at Sabine Pass and Corpus Christi. Sabine Pass Trains 1–5 were operational, with Train 6 under construction; Corpus Christi Train 1 was operational, Train 2 was commissioning, and Train 3 was under construction.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $2.292 billion | $1.543 billion | $4.553 billion | $3.785 billion |
| Operating income | $432 million | $336 million | $1.038 billion | $1.083 billion |
| Net income | $2 million | $150 million | $339 million | $750 million |
| Net income (loss) attributable to common stockholders | $(114) million | $(18) million | $27 million | $339 million |
| Basic and diluted EPS attributable to common stockholders | $(0.44) | $(0.07) | $0.11 | $1.42 basic; $1.40 diluted |
| Operating margin, calculated as operating income/revenue | 18.8% | 21.8% | 22.8% | 28.6% |
Q2 LNG revenue was $2.173 billion, compared with $1.442 billion a year earlier. First-half LNG revenue was $4.316 billion versus $3.608 billion. Higher volumes from newly operational trains lifted revenue, while lower LNG pricing weighed on revenue per unit and margins. Derivative gains and losses also affected reported LNG revenue and earnings.
Net interest expense rose to $372 million in Q2 from $216 million, and to $619 million for the first half from $432 million. Net derivative loss was $74 million in Q2 versus a $32 million gain a year earlier, and $109 million for the first half versus a $109 million gain. Operating and maintenance expense and depreciation also increased as additional facilities entered service.
Cash flow, six months: Operating cash flow was $760 million, down from $982 million. Investing outflow was $1.542 billion, primarily for liquefaction project construction; financing inflow was $1.066 billion. Cash, cash equivalents and restricted cash increased by $284 million to $3.440 billion, including $2.279 billion of cash and cash equivalents and $1.161 billion of restricted cash.
Debt and liquidity, June 30, 2019: Long-term debt, net, was $29.944 billion; total debt, net, was also $29.944 billion, with no current debt reported. Total assets were $34.572 billion and total equity was $2.023 billion, including a $454 million stockholders’ deficit. Available commitments included $1.250 billion under Cheniere’s revolving facility, $851 million under the 2019 CQP facilities, $862 million under the CCH working capital facility, and $785 million under the SPL working capital facility. Availability is held within separate subsidiary capital structures and is subject to facility terms.
Changes and significant developments
- Revenue increased year over year, reflecting additional operating capacity, but operating income declined for the first half and common-stockholder earnings fell substantially.
- Operating cash flow decreased by $222 million year over year, which management attributed primarily to higher operating costs, partly offset by increased LNG cargo receipts.
- Gross debt before unamortized discounts, premiums and issuance costs increased; management cited higher CCH Credit Facility borrowings and lower capitalization of interest as projects entered service.
- Cheniere Partners replaced its prior credit facilities with $1.5 billion of 2019 facilities, including a $750 million term loan and $750 million revolving facility. $649 million was outstanding at quarter-end; proceeds are intended principally for Train 6 development and construction.
- The board authorized a three-year, $1.0 billion share repurchase program in June. The company repurchased 44,600 shares for $3 million during Q2; $997 million remained authorized at quarter-end.
- Train 6 at Sabine Pass reached 32.4% overall completion, with substantial completion expected in the first half of 2023. Corpus Christi Stage 1 was 99.5% complete, with Train 2 expected to reach substantial completion in Q3 2019; Stage 2 was 62.4% complete, with Train 3 expected in the second half of 2021.
Outlook, risks and unusual items
- Management expects LNG revenue to increase as Sabine Pass Train 6 and Corpus Christi Trains 2 and 3 become operational. It also expects operating costs to generally rise as new trains enter service, while noting that some costs may not increase proportionally.
- Management said available project financing, commitments and operating cash flows are expected to meet anticipated needs for at least the next 12 months across the company’s separate capital structures. This depends on project execution, financing access, operating results and compliance with debt conditions.
- Corpus Christi Stage 3 is proposed as seven midscale trains with approximately 9.5 mtpa capacity. Cheniere anticipated the remaining necessary regulatory approvals by the end of 2019; development remains subject to approvals and acceptable commercial and financing arrangements.
- Derivative fair-value movements can add earnings volatility. At June 30, the reported net fair value included a $95 million liability for interest rate derivatives, a $137 million asset for commodity derivatives, and a $10 million net FX derivative asset. Management’s 10% commodity-price sensitivity indicated a $127 million fair-value change for liquefaction supply derivatives and $39 million for LNG trading derivatives.
- ASC 842 adoption in January 2019 recognized approximately $550 million of operating lease assets and liabilities at adoption, with no material effect on reported operations or cash flows. Quarter-end lease liabilities were $553 million. Separately, $1.6 billion of legally binding vessel-charter payments executed by quarter-end were excluded from recognized operating lease liabilities because the charters were expected to commence primarily in 2020–2021.
- The company maintains a valuation allowance against federal and state deferred tax assets. Management said sufficient positive evidence might become available within approximately 6–18 months to release a significant portion, but timing and amount depend on profitability and remain uncertain.
- Two Sabine Pass LNG tanks remained out of service following 2018 leaks. A July 2019 joint PHMSA/FERC letter set conditions for return to service; the company said it did not expect the matter and remediation to materially affect financial results or operations.
- Parallax-related litigation, including claims involving former chairman and CEO Charif Souki, was consolidated in Texas state court; trial was set for February 2020 and discovery was ongoing. Cheniere said it did not expect the litigation to materially adversely affect financial results.
- Four customers each accounted for at least 10% of Q2 external revenue, indicating customer concentration. The filing reported no material changes in risk factors from the 2018 Form 10-K, no material off-balance-sheet arrangements, and compliance with debt covenants at quarter-end.
Important facts for investors to verify
- Whether new trains meet commissioning, completion, regulatory and ramp-up milestones, and whether capital costs remain within disclosed estimates.
- How LNG prices, marketing margins, feedstock costs and derivative marks affect earnings and cash flow as volumes grow.
- Debt service capacity, refinancing needs, interest-rate exposure, restricted cash availability and covenant or distribution limitations across the separate subsidiaries.
- Whether operating cash flow can support ongoing construction, debt service and the announced share repurchase program.
- Resolution and operational implications of the Sabine Pass tank repairs, and the status and potential exposure of the Parallax litigation.