Cheniere Energy, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone Q4 filing; unaudited fourth-quarter results are summarized below. Financial amounts are in U.S. dollars.
Business context and reporting period
Cheniere is an LNG infrastructure and marketing company. It owns and operates the Sabine Pass terminal through Cheniere Partners and wholly owns the Corpus Christi project. At year-end, Sabine Pass Trains 1–4 were operational, Train 5 was commissioning, and Train 6 was being commercialized. Corpus Christi Trains 1 and 2 were commissioning and Train 3 was under construction. Cheniere consolidated Cheniere Partners despite owning 48.6% of its limited partner interests.
The business relies substantially on long-term LNG sale and purchase agreements (SPAs) with fixed-fee components, generally payable even when customers suspend or cancel cargo deliveries. Cheniere reported one operating and reportable segment.
Financial results and key metrics
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Revenue | $7.987 billion | $5.601 billion | Up 42.6%, primarily from increased LNG volumes as additional Sabine Pass trains operated |
| Income from operations | $2.024 billion | $1.388 billion | Operating margin approximately 25.3%, versus 24.8% |
| Net income (loss) | $1.200 billion | $563 million | Consolidated, before allocation to non-controlling interests |
| Net income (loss) attributable to common stockholders | $471 million | $(393) million | EPS: $1.92 basic and $1.90 diluted, versus loss per share of $1.68 |
| Interest expense, net of capitalized interest | $875 million | $747 million | Higher debt and less interest eligible for capitalization |
| Operating cash flow | $1.990 billion | $1.231 billion | Up $759 million, mainly from increased LNG cargo receipts |
| Investing cash flow | $(3.654) billion | $(3.381) billion | Primarily construction spending |
| Cash capital spending on property, plant and equipment | $3.643 billion | $3.357 billion | Operating cash flow less this spending was approximately $(1.653) billion |
| Cash and cash equivalents at year-end | $981 million | $722 million | In addition, $2.175 billion of current restricted cash |
| Total debt, net on balance sheet | $28.418 billion | $25.336 billion | Includes $239 million current debt; gross debt before unamortized items was approximately $29.2 billion |
| Total assets / total equity | $31.987 billion / $1.929 billion | $27.906 billion / $1.240 billion | Year-end 2018 stockholders’ deficit was $526 million, offset by non-controlling interest |
At December 31, 2018, current assets were $4.234 billion and current liabilities were $1.742 billion. Available commitments under listed credit facilities totaled approximately $3.838 billion, though these commitments belong to separate subsidiaries and are subject to facility terms. The company also reported $741 million of letters of credit. Its $55.835 billion of disclosed contractual obligations included debt, interest, construction, purchase, lease and other commitments.
LNG revenue was $7.572 billion, including $4.677 billion from Sabine Pass third-party long-term SPAs, $1.987 billion from Cheniere’s integrated marketing function and $745 million from LNG procured from third parties. Total LNG volumes recognized as revenue were 1,057 TBtu. Four customers each represented more than 10% of external revenue, with individual shares of 18%, 19%, 14% and 13%.
Unaudited Q4 2018: Revenue was $2.383 billion, income from operations $516 million, net income $223 million and net income attributable to common stockholders $67 million (diluted EPS $0.26). Q4 2017 revenue was $1.746 billion, operating income $441 million, net income $280 million and common-stockholder net income $127 million (diluted EPS $0.54).
Material changes versus prior year
- Revenue increased by $2.386 billion as more Sabine Pass trains operated for more of the year; LNG volumes recognized as revenue rose from 758 TBtu to 1,057 TBtu.
- Operating expenses rose from $4.213 billion to $5.963 billion, mainly reflecting higher feed-gas, operating, maintenance and depreciation costs from additional operating trains.
- Common-stockholder results shifted from a $393 million loss to $471 million of income. The 2017 comparison included approximately $748 million of non-cash beneficial-conversion-feature amortization allocated to non-controlling interests; this did not recur in 2018.
- Operating cash flow improved by $759 million, while cash investing outflows increased to $3.654 billion as construction continued.
- Debt increased, principally from Corpus Christi project borrowings. Cheniere Partners issued $1.1 billion of 5.625% notes due 2026 and used proceeds to repay its remaining term-loan borrowings.
- Cheniere amended and expanded its revolving credit facility to $1.25 billion, and Corpus Christi amended its project and working-capital facilities. The merger of Cheniere Holdings into Cheniere was completed, with former public shareholders receiving Cheniere shares.
Outlook, risks, contingencies and unusual items
- Projects and outlook: Management expected LNG revenue to increase as Sabine Pass Train 5 and Corpus Christi Trains 1–3 entered service. Train 5 was expected to reach substantial completion in Q1 2019; Corpus Christi Train 1 in Q1 2019, Train 2 in the second half of 2019 and Train 3 in the second half of 2021. These are stated expectations, not guarantees.
- Train 6 and Corpus Christi Stage 3: Train 6 had an EPC contract and limited early-work notices, but full notice to proceed and FID depended on acceptable commercial arrangements and adequate financing. Corpus Christi Stage 3 was proposed as seven midscale trains with approximately 9.5 mtpa capacity; regulatory and export authorizations remained subject to approvals and changes.
- Funding and liquidity: Cheniere warned that significant debt and construction spending make it dependent on project financing and capital-market access. Subsidiary debt covenants, reserve requirements and distribution restrictions can limit cash transfers to the parent. Restricted cash should not be treated as freely available corporate liquidity.
- Execution and market risks: Construction delays, cost changes, contractor performance, feed-gas or pipeline availability, LNG shipping capacity, severe weather, operational incidents, customer credit or contract termination, commodity prices and competition could affect results. The company also cited extensive permitting, environmental, pipeline-safety, derivatives-regulation and cybersecurity risks.
- Legal and safety matters: Two Sabine Pass LNG tanks were removed from operational service following minor leaks/releases and were subject to PHMSA-directed analysis and remediation; management did not expect a material financial or operational impact. PHMSA withdrew a proposed $0.2 million pipeline-welding penalty and closed that matter. The Parallax litigation includes a claim seeking $400 million; trial was set for June 2019, and Cheniere stated it did not expect the litigation to materially affect financial results. A Louisiana permit-compliance matter was also being resolved, with no material impact expected.
- Accounting and other items: Adoption of ASC 606 using the full retrospective method did not change previously reported statements or retained earnings. The company recorded $27 million of debt modification/extinguishment losses and a net derivative gain of $57 million. It maintained a valuation allowance on federal and state deferred tax assets and said a significant release might become possible within 12–24 months, depending on sustained profitability.
- Governance and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective internal control. Cheniere had never paid a common-stock cash dividend and said it expected to communicate capital-allocation policy decisions during 2019.
Important facts for investors to verify
- Confirm actual commercial-operation and ramp-up dates, output and reliability for Sabine Pass Train 5 and Corpus Christi Trains 1–3 against the stated schedule.
- Track Train 6’s FID, binding sales commitments and financing; separately monitor Corpus Christi Stage 3 permits, export approvals, contracting and funding.
- Assess parent-level liquidity separately from restricted cash, subsidiary cash and undrawn commitments; review covenant tests, debt maturities, interest exposure and the ability to upstream cash.
- Review construction cost-to-complete estimates, change orders, remaining commitments and any schedule or contractor developments.
- Monitor SPA customer concentration and credit quality, customer performance, uncontracted LNG marketing exposure, and changes in gas, LNG and shipping economics.
- Follow the Sabine Pass tank remediation and the Parallax litigation, including potential outcomes and any changes to management’s stated materiality assessment.
- Evaluate the extent to which reported earnings depend on non-controlling interests, derivative fair-value movements and any future deferred-tax valuation-allowance release.