Cheniere Energy, Inc. quarterly report, Q2 FY2012

Cheniere Energy, Inc. — Q2 2012 Form 10-Q

Reporting period: Three and six months ended June 30, 2012. Unaudited consolidated results; comparisons are with the corresponding 2011 periods. Cheniere operates the Sabine Pass LNG terminal and Creole Trail Pipeline and is developing LNG export facilities.

Financial performance and position

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total revenue	$62.3 million	$72.8 million	$132.8 million	$152.0 million
Operating income (loss)	$(6.1) million	$16.5 million	$(5.4) million	$40.0 million
Net loss	$(73.0) million	$(47.2) million	$(129.5) million	$(87.0) million
Net loss per share	$(0.43)	$(0.67)	$(0.86)	$(1.26)
Operating cash flow	Not separately provided	Not separately provided	$(94.9) million	$(29.5) million

Revenue declined about 14% in both the quarter and first half. LNG terminal revenue was relatively steady, while marketing and trading moved to a loss: $(4.0) million in Q2 and $(1.3) million for six months, versus revenue of $4.6 million and $13.1 million, respectively, in 2011.
Operating performance deteriorated: Q2 operating margin was approximately negative 9.8%, compared with positive 22.6% a year earlier; the six-month margin was approximately negative 4.1%, versus positive 26.3%. The filing does not present EBITDA.
Interest expense, net, decreased to $55.9 million in Q2 and $114.2 million for six months, from $64.6 million and $128.7 million. Debt extinguishment charges were $14.6 million in Q2 and $15.1 million for six months.
At June 30, cash and cash equivalents were $137.9 million; restricted cash was $574.2 million and was not generally available to Cheniere for unrestricted use. Current debt, net of discount, was $203.2 million and long-term debt, net of discount, was $2.195 billion, primarily Sabine Pass Senior Notes.
Total assets were $3.028 billion and total equity was $508.9 million, compared with a $173.0 million total equity deficit at December 31, 2011. The improvement primarily reflects substantial equity issuance. Shares issued and outstanding rose from 129.5 million to 186.4 million during the period.
Cash decreased $321.3 million to $137.9 million during the first half. Financing activities used $222.9 million net; cash sources included $819.7 million of common-stock proceeds, while uses included $571.9 million of debt repayments/prepayments and $170.3 million invested in Cheniere Partners.

Material changes and significant events

Marketing and trading results were pressured by less LNG export activity and a $4.85 million provision for loss on an LNG inventory purchase commitment. Accounting differences between LNG inventory and derivatives can cause reported results to be volatile and not reflect the economics of positions until inventory is sold and derivatives settle.
LNG terminal and pipeline development expense increased to $21.1 million in Q2 and $42.9 million for six months, mainly due to Sabine Pass liquefaction development. Terminal and pipeline operating expense also increased, partly due to dredging.
Cheniere repaid its $298.0 million 2007 Term Loan in January and its 2008 Loans in June. The latter repayment generated the reported early-extinguishment loss. The remaining $204.6 million principal balance of convertible notes was repaid on August 1, 2012, after the quarter.
In March and May, Cheniere issued shares for net proceeds of approximately $351.9 million and $468.1 million, respectively. In July, it issued 28.0 million additional shares for $380.3 million net proceeds. As of July 23, 2012, 214.4 million common shares were issued and outstanding.

Outlook, risks and unusual items

In July, Cheniere Partners’ board made a positive final investment decision for the first two Sabine Pass liquefaction trains, subject to specified equity-funding conditions; the project-level subsidiary also closed a $3.6 billion, seven-year credit facility. Facility pricing is LIBOR plus 350 basis points during construction and 375 basis points during operations. Cheniere reported that it would hedge at least 75% of this financing’s interest-rate exposure.
The first two trains were estimated to cost approximately $4–5 billion before financing costs. Management expected first-train operations in late 2015, with the second train following approximately six to nine months later. Costs and timing remain subject to change, including construction delays, change orders, and material and labor escalation.
Four third-party sales agreements cover approximately 16 million tonnes per annum; customers were expected to pay approximately $2.3 billion annually plus a natural-gas price-linked component. Export execution depends on construction, financing, permits, and commercial arrangements. FERC authorization for up to four trains was pending rehearing consideration.
Management stated it expected sufficient cash, operating cash flows, financing commitments, and capital-market access to meet obligations and planned expenditures. However, cash within Cheniere, Cheniere Partners, and Sabine Pass LNG is subject to separate capital structures and contractual restrictions.
Other items to monitor include the $27.5 million Crest Royalty acquisition amid ongoing litigation over the royalty’s calculation and scope; termination of Cheniere Marketing’s LNGCo agreements in June; and the anticipated employee bonus pool associated with the first two trains, estimated at approximately $60 million in cash awards and 10 million restricted shares, subject to vesting conditions.
The filing identifies risks from project construction and financing, regulatory approvals, future LNG and natural-gas markets, commercial counterparties, and capital-market access. Management reported no pending legal matter expected to have a material adverse effect as of June 30 and no material off-balance-sheet arrangements.

Key facts for investors to verify

Whether the $3.6 billion project financing and required equity contributions are sufficient to complete the first two trains within the stated cost and timing estimates.
Current project construction progress, final project costs, and status of regulatory approvals and rehearing matters.
Cash availability by legal entity: the distinction between Cheniere’s $137.9 million unrestricted cash and consolidated restricted cash of $574.2 million.
Post-quarter repayment of the convertible notes, July share issuance and resulting dilution, and the terms and funding requirements of Cheniere Partners’ equity commitments.
Performance and accounting impacts of LNG marketing, inventory commitments, and derivatives, including whether the unusual $4.85 million inventory provision recurs.