Cheniere Energy, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; summarized Q4 results are also disclosed. Amounts below are U.S. dollars unless noted.
Business context and reporting period
Cheniere develops, owns and operates U.S. LNG infrastructure. Sabine Pass Trains 1–4 were operating by year-end, Train 5 was under construction, and Train 6 was being commercialized. Corpus Christi Stage 1 and its pipeline were under construction; Train 3 was being commercialized. The company reported one consolidated operating segment following organizational changes.
Financial and operating highlights
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $5.601 billion | $1.283 billion |
| Operating income (loss) | $1.388 billion | $(30) million |
| Operating margin | Approximately 24.8% | Not meaningful due to operating loss |
| Net income (loss) | $563 million | $(665) million |
| Net loss attributable to common stockholders | $(393) million; $(1.68) per share | $(610) million; $(2.67) per share |
| Operating cash flow | $1.231 billion | $(404) million |
| Investing cash flow | $(3.381) billion | $(4.413) billion |
| Cash, cash equivalents and restricted cash | $2.613 billion | $1.827 billion |
| Cash and cash equivalents | $722 million | $876 million |
| Consolidated debt outstanding, before discounts and issuance costs | $26.1 billion | $22.7 billion |
Net debt on the balance sheet was $25.336 billion. Current restricted cash was $1.880 billion and non-current restricted cash was $11 million; these amounts are contractually restricted and should not be treated as freely available liquidity. The filing reports no standalone gross-margin figure.
FY 2017 LNG revenue was $5.317 billion, including sales under third-party long-term SPAs, the integrated marketing function and LNG procured from third parties. LNG volumes recognized as revenue totaled 758 TBtu, versus 158 TBtu in 2016. Four customers individually contributed more than 10% of external revenue; the largest represented 24%.
Q4 2017: Revenue was $1.746 billion, operating income $441 million, net income $280 million, and net income attributable to common stockholders $127 million, or $0.54 per share. In Q4 2016, these were $572 million, $122 million, $150 million, and $110 million, or $0.48 per share, respectively.
Material changes versus prior periods
- Revenue rose $4.318 billion year over year, principally as more Sabine Pass trains entered operation and LNG sales increased.
- Operating income improved to $1.388 billion from an operating loss of $30 million. Operating costs also rose substantially as additional trains operated.
- Operating cash flow improved by approximately $1.6 billion, from an outflow of $404 million to an inflow of $1.231 billion, largely due to increased LNG receipts.
- Interest expense, net of capitalized interest, increased to $747 million from $488 million as debt rose and more completed trains meant less interest could be capitalized.
- Common-stockholder results remained a net loss despite consolidated net income. Non-controlling interest included a significant non-cash allocation associated with amortization of Cheniere Partners’ Class B unit beneficial conversion feature; the Class B units converted into common units in August 2017.
- Investing outflows remained high at $3.381 billion, primarily for construction. Financing activities provided $2.936 billion, including proceeds from new senior notes and credit borrowings.
Outlook, commentary, risks and unusual items
- Management expected to fund near-term needs across its separate capital structures through project debt, available commitments, operating cash flow and, where needed, equity contributions or capital-market access. It considered resources adequate to complete Sabine Pass Train 5 and meet anticipated requirements; additional financing and acceptable commercial arrangements were prerequisites for final investment decisions on Train 6 and Corpus Christi Stage 2/Train 3.
- At year-end, Sabine Pass Train 5 was 83.1% complete, with substantial completion expected in the first half of 2019. Corpus Christi Stage 1 was 81.8% complete; Train 1 was expected in the first half of 2019 and Train 2 in the second half of 2019. These are forward-looking estimates, not guarantees.
- Contracted fixed fees underpin much of the planned cash flow: Sabine Pass third-party SPA fixed fees were expected to reach approximately $2.9 billion annually upon Train 5 commercial delivery; Corpus Christi Stage 1 fees were expected to reach approximately $1.4 billion annually upon Train 2 delivery. Customer performance, construction timing and contract termination rights remain important risks.
- Total expected capital costs for Sabine Pass Trains 1–5 were estimated at $12.5–$13.5 billion before financing costs and $17.5–$18.5 billion after financing costs. Corpus Christi Stage 1 and its pipeline were estimated at $9.0–$10.0 billion before financing costs and $11.0–$12.0 billion after financing costs. Change orders, delays and financing availability could affect final costs.
- Contractual obligations totaled $47.160 billion, including $26.546 billion of scheduled debt payments and $10.191 billion of interest payments. The company disclosed $914 million of letters of credit and approximately $3.4 billion of restricted net assets at consolidated subsidiaries. Debt agreements restrict distributions and other actions; issuers reported covenant compliance at year-end.
- The Tax Cuts and Jobs Act reduced the corporate tax rate and led to a $404 million reduction in U.S. net deferred tax assets, offset by a valuation-allowance change; the filing says there was no current-period income-tax expense impact from that remeasurement. Federal and state deferred tax assets remained fully valuation-allowanced.
- Hurricane Harvey temporarily suspended construction and LNG loading in 2017; management reported no material financial-statement impact. In February 2018, after year-end, PHMSA ordered two Sabine Pass tanks taken out of service following minor releases pending analysis, repair and remediation; management did not expect a material impact.
- Other disclosed matters include ongoing discussions with Louisiana regulators over self-reported permit deviations, a proposed $0.2 million PHMSA penalty concerning Corpus Christi Pipeline welding, and Parallax litigation involving a claimed $400 million in damages. Management did not expect these matters to materially affect financial results.
- Key risks include high leverage and refinancing needs, construction cost or schedule overruns, customer concentration and credit risk, LNG market and price competition, pipeline/feed-gas availability, regulatory and environmental requirements, severe weather, and potential dilution from convertible notes or future equity financing. The company reported historical common-stockholder losses and does not anticipate paying common dividends in the foreseeable future.
Important facts for investors to verify
- Whether unrestricted cash, restricted project cash and undrawn credit commitments are available to the specific subsidiaries that need funding.
- Actual construction progress, remaining cost and commercial-start timing for Sabine Pass Train 5 and Corpus Christi Trains 1–2, including subsequent updates to estimates and change orders.
- Debt maturities, interest costs, covenant and distribution restrictions, and the financing conditions for Train 6 and Corpus Christi Stage 2.
- Customer concentration, guarantees and payment performance, along with the timing and enforceability of fixed-fee SPA obligations and any termination rights.
- The operational and regulatory consequences of the PHMSA tank order and the status and resolution of the disclosed environmental, pipeline and litigation matters.
- How the Class B unit conversion, non-controlling interests, convertible securities and any future financing affect common-stockholder earnings, ownership and dilution.