Cheniere Energy, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2016; filed August 8, 2016. Cheniere develops and operates LNG infrastructure and markets LNG and natural gas. Sabine Pass Train 1 achieved substantial completion and began operating activities in May, moving the company into commercial LNG production. Corpus Christi and additional Sabine Pass trains remained under construction.
Financial performance and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $176.8 | $68.0 | $245.9 | $136.4 |
| Operating loss | $(76.5) | $(95.9) | $(167.0) | $(156.1) |
| Net loss attributable to common stockholders | $(298.4) | $(118.5) | $(619.3) | $(386.2) |
| Basic and diluted loss per share | $(1.31) | $(0.52) | $(2.71) | $(1.71) |
| Net interest expense | $106.0 | $85.5 | $182.3 | $145.1 |
| Derivative loss (gain), net | $90.6 | $(46.0) | $271.6 | $80.6 |
For the six months, operating cash outflow was $144.0 million, compared with $295.0 million in 2015. Cash and cash equivalents were $1.049 billion at June 30; restricted cash totaled $756.2 million, much of it designated for projects, debt service or other specified uses. Six-month cash spending for property and equipment was approximately $2.28 billion, primarily for Sabine Pass and Corpus Christi construction.
Total debt, net, was $19.47 billion at June 30, up from $16.59 billion at year-end 2015. Current debt was $1.68 billion and long-term debt was $17.79 billion. Total assets were $21.44 billion; total equity was $864.2 million, including a $1.49 billion stockholders’ deficit and $2.36 billion non-controlling interest.
Material changes versus prior periods
- Q2 revenue rose by $108.8 million, largely as LNG sales began to be recognized after Train 1 reached substantial completion. Revenue included $110.7 million of LNG revenue, versus a small loss in Q2 2015.
- Operating costs increased by $89.4 million in Q2 and $120.4 million in the first half, mainly with Train 1 operations; depreciation also rose as Train 1 assets entered service. Lower development and general and administrative expenses partly offset increases.
- Common-stockholder losses widened by $179.9 million in Q2 and $233.1 million in the first half. Management attributed the increases primarily to higher derivative losses and operating costs, with higher interest expense also contributing in the first half.
- Interest expense and debt increased as the company funded construction. New 2024 CCH notes ($1.25 billion principal) and 2026 Sabine Pass notes ($1.5 billion principal) were used mainly to prepay borrowings under existing credit facilities; related refinancing generated debt-extinguishment charges.
Outlook, commentary, risks and unusual items
- Management stated that it expected each major capital structure’s cash needs for at least the next 12 months to be met through a mix of operating cash flow, available cash, project financing, debt or equity funding and distributions, as applicable. It said available resources were adequate to complete Sabine Pass Trains 1–5 and meet anticipated requirements.
- Sabine Pass Train 2 produced first LNG in late July 2016; management expected substantial completion in late September 2016. Trains 3 and 4 were expected to reach substantial completion in 2017 and Train 5 in 2019. Corpus Christi Stage 1 was 36.6% complete, with Trains 1 and 2 then expected to complete in 2019.
- Estimated capital costs were $12.5–$13.5 billion before financing costs for Sabine Pass Trains 1–5, and $9–$10 billion before financing costs for Corpus Christi Stage 1. Further construction phases require acceptable commercial arrangements and financing; no final investment decision had been made for Sabine Pass Train 6 or Corpus Christi Stage 2.
- Derivative fair-value changes were a major earnings driver. Interest-rate swaps and commodity contracts expose the company to market and counterparty risks; certain physical supply derivative valuations use significant unobservable inputs.
- Revenue concentration was significant: one SPA customer provided 74% of net LNG revenues in Q2 and 72% in the first half. Restricted cash, debt covenants and separate subsidiary capital structures may limit the availability of cash for other uses.
- Parallax litigation includes the company’s claim to recover amounts due on an approximately $46 million secured note and Parallax’s claim seeking $400 million in alleged damages and rescission of the note. Motions remained pending; management did not expect a material adverse financial impact. The filing reported no material changes to previously disclosed risk factors.
- Comparability is affected by new operating and revenue line-item classifications following the start of liquefaction operations; prior-period figures were reclassified. Q2 also included employee-separation share-based compensation, and refinancing-related debt-cost write-offs contributed to losses.
Important facts for investors to verify
- Train 1’s commercial operating performance, cargo volumes, unit costs and cash generation as operations ramp.
- Actual completion timing and final costs for Sabine Pass and Corpus Christi, including financing costs and any change orders.
- Funding availability, refinancing of the 2016 SPLNG notes, debt maturities, covenant compliance and limits on subsidiary distributions.
- Customer concentration and the status and credit quality of counterparties under LNG sale and purchase agreements.
- The magnitude and earnings effects of derivative fair-value changes, including assumptions used for Level 3 valuations.
- Developments in the Parallax and referenced LDEQ matters; the filing text here does not provide a detailed update on the LDEQ matter.