Cheniere Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statements are unaudited. Cheniere operates the Sabine Pass LNG terminal through an 88.8% interest in Cheniere Partners, owns the Creole Trail Pipeline, and conducts LNG and natural-gas marketing. It is also developing liquefaction and other LNG projects.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $65.8 million | $68.2 million | $217.9 million | $216.0 million |
| Operating income | $10.4 million | $22.4 million | $50.4 million | $78.1 million |
| Net income (loss) | $(53.9) million | $(40.6) million | $(140.9) million | $9.9 million |
| Basic EPS | $(0.67) | $(0.73) | $(1.94) | $0.18 |
| Net interest expense | $65.1 million | $63.9 million | $193.9 million | $198.0 million |
| Cash used in operating activities | Not separately presented | Not separately presented | $39.9 million | $11.6 million |
Derived operating margin was approximately 15.7% in Q3 2011 versus 32.8% in Q3 2010, and 23.1% for the first nine months of 2011 versus 36.2% in the comparable 2010 period. The filing does not present gross margin as a single measure.
- At September 30, 2011, total assets were $2.65 billion and stockholders’ deficit was $664.7 million; total deficit including non-controlling interest was $446.9 million.
- Cash and cash equivalents available to Cheniere were $131.3 million. Consolidated restricted cash was $235.4 million and was designated for debt service, subsidiary working capital, and other restricted uses. The company emphasizes that Cheniere, Cheniere Partners, and Sabine Pass LNG have independent capital structures.
- Current assets were $312.3 million against current liabilities of $595.0 million. Current debt, net of discount, was $488.7 million. Total debt, net of discounts, was approximately $2.96 billion, including subsidiary debt.
- Cash increased by $57.2 million during the first nine months, principally supported by $123.1 million of Cheniere common-stock proceeds and $52.6 million from Cheniere Partners’ unit issuance. Cash used in investing activities was $20.0 million; financing activities provided $117.0 million.
Material changes versus the prior comparable period
- Q3 revenue declined 3.6%, while operating income fell by $12.0 million. The quarter’s marketing and trading result shifted to a $3.0 million loss from $1.5 million of revenue, primarily due to a $4.9 million LNG inventory lower-of-cost-or-market adjustment.
- For the first nine months, revenue was broadly flat, but operating income declined by $27.7 million and results shifted from $9.9 million of net income to a $140.9 million net loss. The main comparison item was the $128.3 million gain on the 2010 sale of the Freeport LNG investment. Higher development and general and administrative expenses and lower marketing and trading revenue also weighed on 2011 results.
- LNG terminal and pipeline development expense rose to $32.9 million for nine months from $6.7 million, largely reflecting Sabine Pass liquefaction development. General and administrative expense increased to $57.1 million from $51.3 million. Net interest expense decreased by $4.2 million.
- Cheniere issued 12.7 million common shares in June for $123.1 million net proceeds. Common shares issued and outstanding rose to 82.8 million from 67.8 million at year-end 2010.
- In September, Cheniere Partners issued units and received approximately $60 million net proceeds, including the company’s purchase of 1.1 million units for $17.8 million.
Outlook, risks, contingencies, and unusual items
- Debt and liquidity: The $298.0 million 2007 Term Loan matures in May 2012; $204.6 million principal of convertible notes matures in August 2012. Management said it expects adequate resources to fund operations and meet obligations, but stated that the 2012 principal payments require extending or retiring debt through refinancing, securities issuance, asset sales, or a combination. Success depends partly on natural-gas and capital-market conditions.
- Liquefaction project: The company estimated construction costs of approximately $4.5–$5.0 billion, before financing costs, for the first two Sabine Pass trains; the estimate remained subject to further engineering and potential cost changes. Construction and a final investment decision depend on regulatory approval, acceptable commercial arrangements, and financing. The company anticipated exports could begin as early as 2015.
- Commercial and regulatory developments: In October 2011, Sabine Liquefaction signed a conditional 20-year LNG sale agreement with BG for approximately 3.5 million tonnes per year. The agreement includes a fixed sales charge of $2.25/MMBtu, approximately $410 million annually at the full contract quantity, plus a commodity-linked price. Conditions include regulatory approvals, financing, and a final investment decision. DOE export authorizations had been received; the FERC application for construction and operation remained part of the approval process.
- Business model and earnings variability: Marketing results can be volatile because LNG inventory is measured at cost subject to lower-of-cost-or-market adjustments, while derivatives are marked to market through earnings. These accounting effects may not offset in the same period.
- Other risks: The filing identifies project construction, financing, permitting, commodity-price, counterparty, impairment, and pipeline regulatory risks. Approximately $855 million of tax net operating loss carryforwards became subject to annual utilization limits following a 2010 ownership change. Management reported no known pending or threatened legal matters expected to have a material adverse effect.
- Management controls: Management concluded disclosure controls and procedures were effective at quarter-end and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress on refinancing or otherwise meeting the May and August 2012 debt maturities, and the amount of cash genuinely available to the parent versus restricted or held in subsidiaries.
- Status of FERC approvals, project financing, final investment decision, and fulfillment of conditions in the BG agreement; update the cost estimate and schedule for the first two trains.
- Whether additional long-term customer contracts are secured and on what pricing, volume, and credit terms.
- Drivers of marketing and trading results, including inventory valuation adjustments, derivative positions, and the expiration or continuation of the LNGCo arrangements.
- Potential dilution and financing needs, including share issuance, the at-the-market stock program, and the exchange feature on a portion of the 2008 Loans.