Cheniere Energy, Inc. quarterly report, Q3 FY2015

Cheniere Energy, Inc. — Form 10-Q summary

Reporting period: Quarter and nine months ended September 30, 2015. The filing is unaudited and consolidates Cheniere Energy and its subsidiaries, including publicly traded Cheniere Partners and Cheniere Holdings.

Business context and reporting period

Cheniere was developing and constructing LNG export facilities at Sabine Pass, Louisiana, and Corpus Christi, Texas, while operating Sabine Pass regasification facilities and conducting LNG and natural-gas marketing. The company’s results remained dominated by construction activity, financing costs, and the fair-value effects of derivatives; export liquefaction operations had not yet begun.

Financial performance and liquidity

Metric	Q3 2015	Q3 2014	Nine months 2015	Nine months 2014
Total revenue	$66.1 million	$66.8 million	$202.5 million	$202.0 million
Operating loss	$52.1 million	$61.2 million	$208.2 million	$171.2 million
Net loss attributable to common stockholders	$297.8 million	$89.6 million	$684.0 million	$389.3 million
Loss per common share, basic and diluted	$1.31	$0.40	$3.02	$1.74

• Q3 operating-loss margin, calculated as operating loss divided by revenue, was approximately 78.8%, compared with 91.6% in Q3 2014. For the nine-month periods, it was approximately 102.8% versus 84.7%. No gross margin is reported in the filing.
• Q3 2015 operating loss included a $32.2 million fair-value gain on natural-gas purchase agreements following pipeline modifications. Excluding that gain, operating and maintenance expense was comparable to the prior-year quarter.
• Q3 net loss included a $161.5 million net derivative loss and $93.6 million net interest expense. For the nine months, net derivative loss was $242.1 million, net interest expense was $238.7 million, and a $96.3 million debt-extinguishment loss was recorded.
• Total interest cost was $707.8 million for the first nine months; $469.2 million was capitalized or deferred, principally for construction. The remainder contributed to reported interest expense.
• Operating cash outflow was $274.6 million for the first nine months, versus $41.1 million in 2014. Investing cash outflow was $528.6 million and financing cash inflow was $395.8 million. Cash and cash equivalents declined to $1.340 billion from $1.748 billion at year-end 2014.
• At September 30, cash and cash equivalents were $1.340 billion and restricted cash was $771.1 million. Restricted funds were designated for project costs, debt service, and other contractual purposes and should not be treated as freely available liquidity.
• Long-term debt was $16.321 billion gross and $15.836 billion net of discounts and premiums, up from $9.990 billion gross and $9.806 billion net at December 31, 2014. Total equity was $1.865 billion, including a $639.9 million stockholders’ deficit and $2.505 billion of non-controlling interest.

Material changes versus the prior comparable period

• Revenue was nearly unchanged, while the nine-month operating loss widened by $37.0 million and the common-stockholder net loss increased by $294.7 million.
• The larger losses reflected higher derivative losses, interest expense, and general and administrative expense. The derivative results included losses related to interest-rate swaps and the 2015 CCH financing; derivative changes are recorded in earnings rather than designated as cash-flow hedges.
• Debt increased substantially as Cheniere financed construction. New or expanded 2015 funding included $2.0 billion of Sabine Pass senior notes, a $2.4 billion draw on the Corpus Christi credit facility, a $250 million draw on the Sabine Pass credit facilities, and $1.0 billion of CCH HoldCo II notes. Cheniere also issued $625 million principal amount of 2045 convertible notes at a 20% original issue discount.
• Property, plant and equipment rose to $15.225 billion from $9.247 billion, primarily reflecting LNG project construction. Nine-month cash spending on property, plant and equipment was $5.748 billion.

Outlook, management commentary, and risks

• Management expected Sabine Pass Train 1 to produce LNG as early as late 2015, with Trains 2 through 5 expected to begin operations on a staggered basis. Sabine Pass Trains 1 and 2 were 95.2% complete and Trains 3 and 4 were 73.6% complete at September 30, 2015; Train 5 construction had commenced.
• Management projected Sabine Pass project cash flow beginning in early 2016 and stated that available project financing, undrawn commitments, and expected operating cash flows should provide adequate resources to complete Trains 1 through 5 and meet currently anticipated needs. This is management’s expectation, not a guarantee.
• Corpus Christi Stage 1 was 22.8% complete overall at quarter-end; engineering was 82.0% complete, procurement 32.0%, and construction less than 1%. Stage 1 received a positive final investment decision in May 2015. Management had not committed to a final investment decision for Stage 2 or Sabine Pass Train 6, which depended on commercial arrangements, financing, and other conditions.
• Estimated Sabine Pass capital costs for Trains 1–5 were $12.5–$13.5 billion before financing costs and $17.0–$18.0 billion including financing costs, owners’ costs, and contingencies. Corpus Christi Stage 1 estimates were $9.0–$10.0 billion before financing costs and $11.0–$12.0 billion including financing costs, owners’ costs, and contingencies.
• Project execution and funding remain significant risks, alongside potential cost changes, future financing availability and terms, variable-rate debt exposure, and LNG market and regulatory conditions. A Sierra Club request for rehearing of certain non-FTA export authorizations remained pending before the Department of Energy. The filing reported no material change to the risk factors in the 2014 Form 10-K.
• Liquefaction supply derivatives included Level 3 valuations based on significant unobservable inputs. Interest-rate derivative liabilities were $158.8 million at quarter-end, including $143.1 million for Corpus Christi; changes in derivative values contributed materially to earnings volatility.
• The company reported that disclosure controls and procedures were effective and that there had been no material change in internal control over financial reporting during the quarter. The shareholder litigation concerning approval of an incentive-plan amendment was settled and approved in March 2015.

Important facts for investors to verify

• Whether Sabine Pass Train 1 achieved first LNG production on the expected timetable, and subsequent commissioning and commercial-operation dates for the remaining trains.
• Actual project spending, change orders, contingency use, and remaining funding needs compared with the disclosed capital-cost ranges.
• Availability and conditions on undrawn project credit commitments, restricted-cash access, and the separate liquidity of Cheniere’s subsidiaries.
• Debt service, refinancing needs, and the effects of variable interest rates and derivative fair-value movements on cash flows and reported earnings.
• Progress on Corpus Christi construction, future investment decisions, customer contract conditions, and outstanding regulatory approvals or rehearing requests.