Cheniere Energy, Inc. quarterly report, Q1 FY2019

Cheniere Energy, Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019. Unless stated otherwise, amounts are in U.S. dollars; financial figures are in millions. Cheniere is an LNG-focused energy company, with operating liquefaction facilities at Sabine Pass and Corpus Christi and additional trains under construction or development.

Financial performance and position

Metric	Q1 2019	Q1 2018 / prior date
Total revenue	$2,261	$2,242
Operating income	$606	$747
Net income	$337	$600
Net income attributable to common stockholders	$141; $0.55 basic EPS, $0.54 diluted	$357; $1.52 basic EPS, $1.50 diluted
Operating cash flow	$412	$469
Cash capital spending on property, plant and equipment	$625	$776
Cash, cash equivalents and restricted cash	$3,011, including $1,918 restricted	$3,156 at Dec. 31, 2018
Debt	$28,726 net carrying amount; approximately $29.5 billion before unamortized discounts, premiums and issuance costs	$28,418 net at Dec. 31, 2018

Total operating costs and expenses rose to $1,655 from $1,495. Operating margin was approximately 26.8%, down from 33.3%; common-stockholder net margin was approximately 6.2%, down from 15.9%.
Net cash used in investing was $651, principally project construction spending, and financing provided $94. Cash, cash equivalents and restricted cash decreased $145 during the quarter. Operating cash flow less cash property, plant and equipment spending was approximately negative $213.
At March 31, current assets were $3,896 and current liabilities $1,659. The company reported $28,726 of long-term debt and no current debt. Cash includes substantial project and other restricted balances, so it is not all freely available to the parent.
Undrawn credit commitments totaled about $3.5 billion across listed facilities, subject to facility terms, letters of credit and other restrictions. Issuers were reported in compliance with debt covenants.

Material changes and operating developments

Revenue increased only $19 year over year despite additional operating capacity. LNG revenue declined $23; other revenue increased $38, primarily from LNG vessel subcharters. LNG sales volume recognized as revenue rose to 300 TBtu from 284 TBtu.
Long-term agreement LNG revenue increased to $1,517 from $993, while integrated-marketing short-term LNG revenue fell to $339 from $1,021. Management attributed the overall result to higher volumes offset by lower revenue per MMBtu, including market-priced marketing sales.
Common-stockholder net income fell $216. Management cited lower LNG margins, higher cost of sales and operating and maintenance costs, a $112 unfavorable year-over-year swing in net derivative results, and higher net interest expense. Lower income attributable to non-controlling interests partly offset the decline.
Trains 1–5 at Sabine Pass were operational; Train 5 achieved substantial completion in March. Corpus Christi Train 1 achieved substantial completion in February and began operations; Train 2 was in commissioning and Train 3 under construction. Corpus Christi Stage 1 was 98.4% complete and Stage 2 was 51.6% complete at quarter-end.
Property, plant and equipment, net, rose to $27,953 from $27,245. The company recorded $202 of commissioning-cargo proceeds as offsets to construction-in-process, rather than revenue, because the cargoes related to testing before commercial operations.
Adoption of the new lease standard on January 1, 2019 added approximately $550 of operating lease assets and liabilities, with no material effect on reported operations or cash flows. Q1 operating lease cost was $137. The filing also discloses $1.6 billion of legally binding minimum vessel-charter payments expected to commence primarily in 2020–2021.

Outlook, risks and contingencies

The filing gives no consolidated earnings or cash-flow guidance. Management expects LNG revenue and operating costs generally to increase as Corpus Christi Trains 2 and 3 enter service; Train 2 substantial completion was expected in the second half of 2019 and Train 3 in the second half of 2021.
Train 6 at Sabine Pass had limited early works underway, but final investment decision and full notice to proceed remained conditional on acceptable commercial arrangements and adequate financing. Corpus Christi Stage 3 remained subject to regulatory, commercial and financing steps; FERC issued a positive environmental assessment in March 2019.
Management said anticipated cash needs for at least the next 12 months were expected to be met through a combination of project financing, operating cash flows, available credit and, for the CCH Group, potential equity contributions. This is subject to each entity’s separate capital structure and restrictions on cash movement.
Market risks include natural gas and LNG prices, floating interest rates and foreign exchange. Derivative valuations include Level 3 natural-gas basis assumptions; the filing warns that significant basis-spread changes could materially affect those positions. Derivatives also involve counterparty credit exposure.
Customer concentration is notable: four customers each represented at least 10% of Q1 external revenue; the largest represented 20%. LNG revenues and cash generation also depend on project execution, customer performance, commodity economics and the timing of new train completions.
Parallax-related litigation includes claims seeking $400 million in alleged economic damages and other relief; a Texas state trial was scheduled for October 2019. Cheniere stated it did not expect resolution of the litigation to have a material adverse impact on financial results. The company reported no material changes to previously disclosed risk factors or legal proceedings.
The effective tax rate was 0.9%, partly because of a valuation allowance against federal and state deferred tax assets. Management said sufficient positive evidence might become available within approximately 12–24 months to release a significant portion, but timing and amount were uncertain.

Important facts for investors to verify

How much reported cash is available to the parent versus restricted to project entities, and whether facility availability remains accessible under its conditions.
Whether Corpus Christi Train 2 and Train 3 and Sabine Pass Train 6 meet completion, financing and commercial milestones on schedule and within expected costs.
Whether additional operating capacity improves LNG margins and operating cash flow, given the quarter’s lower earnings and negative operating-cash-flow-less-capital-spending measure.
Debt service, refinancing needs, interest-rate exposure and the effect of project-level covenants and restrictions on distributions.
Developments in the Parallax litigation, regulatory approvals for Corpus Christi Stage 3, and the timing and effect of any deferred-tax-asset valuation-allowance release.