01—Abstract
Summary
Summary of the 10-K filed March 10, 2005. Cited figures are marked; the original filing is the authoritative source.
Cheniere Energy's FY2004 10-K shows a company in the early, pre-revenue stage of building U.S. Gulf Coast LNG receiving terminals.
Net loss widened to $24.6 milliona ($1.26 per share) from $5.3 million in 2003, driven by LNG terminal development expenses of $17.2 million and G&A of $12.5 million. Revenue is tiny at $2.0 million, almost entirely from a small oil and gas royalty position, and the company has not yet generated positive operating cash flow. Management expects that to change only once the first terminal begins operating, around 2008.
The balance sheet was transformed by a $300 millionb public equity offering in December 2004, which left cash of $308.4 million and working capital of $305.8 million at year end. Deferred revenue of $23 million reflects advance capacity reservation fees from Total and Chevron USA. The main investment case rests on contracted demand and financing.
Sabine Pass LNG (2.6 Bcf/d) has terminal use agreements with Total (about 1.0 Bcf/d) and Chevron USA (about 700 MMcf/d), a fixed-price Bechtel EPC contract of $648.4 millionc, and an $822 million senior secured credit facility signed in February 2005. Freeport LNG, in which Cheniere holds a 30% limited partner interest, is under construction with ConocoPhillips and Dow as anchor tenants. Corpus Christi and Creole Trail have no TUAs yet.
Management puts the four-project capital need above $3 billiond before financing costs, which implies substantial further equity or debt issuance and dilution risk. Key risks are the absence of signed anchor contracts for two of the four projects, dependence on FERC approvals and timely financing, cost overruns and steel price exposure, and the requirement for a U.S. natural gas price of at least $3.00/Mcf to sustain the business case. An informal SEC inquiry into trading in Cheniere's securities around the 2004 Chevron and equity announcements is disclosed as ongoing.
02—Key points
Key Highlights
- Net loss of $24.6 million ($1.26/share) in 2004, versus $5.3 million in 2003; LNG terminal development expenses rose 156% to $17.2 million and G&A rose 391% to $12.5 million.
- Revenue was only $2.0 million, from oil and gas sales, with no LNG revenue yet; the company does not expect positive operating cash flow until at least one terminal is built, expected around 2008.
- Year-end cash of $308.4 million and working capital of $305.8 million after a $300 million public equity offering in December 2004 (5 million shares, net proceeds of about $285.9 million).
- Sabine Pass LNG (2.6 Bcf/d) has TUAs with Total (~1.0 Bcf/d, $0.32/MMBtu) and Chevron USA (~700 MMcf/d), plus a $646.9 million Bechtel lump-sum turnkey EPC contract and an $822 million credit facility.
- Freeport LNG (30% Cheniere interest, 1.5 Bcf/d) received FERC construction authorization in January 2005 and has ConocoPhillips and Dow as anchor tenants; construction began in Q1 2005.
- Corpus Christi and Creole Trail (2.6 and 3.3 Bcf/d) have no signed TUAs; Cheniere acquired the remaining 33.3% of Corpus Christi LNG in February 2005 for 1 million shares.
- Total development cost for the four LNG projects is estimated above $3 billion before financing costs, and management acknowledges that additional financing and equity issuance will be required.
03—Questions
Frequently Asked Questions
Why is Cheniere reporting losses if it has over $300 million in cash?
The company is in the pre-construction phase, so most LNG development costs such as engineering, permitting, and professional fees are expensed rather than capitalized. Revenue is only about $2 million from a small oil and gas royalty position. The cash balance reflects the December 2004 equity raise, which is meant to fund development, not current operations.
When will Cheniere start generating meaningful revenue from its LNG terminals?
Management expects the first terminals, Freeport LNG and Sabine Pass LNG, to begin operations around 2008. Regasification capacity fees are recognized over the terms of the TUAs, and revenue could lag operations by up to a year. Corpus Christi and Creole Trail are expected later, in 2008 and 2009 respectively, and both are contingent on signing TUAs and obtaining permits.
What protects the Sabine Pass project if customers or contractors fail to perform?
Total and Chevron USA provide long-term TUAs with fixed reservation and operating fees, and Total's obligations are backed by a parent guarantee from Total S.A. Chevron's obligations are 80% guaranteed by ChevronTexaco. Both customers paid advance capacity fees, totaling $22 million through year end, which are non-refundable. The Bechtel EPC contract includes liquidated damages, performance guarantees, and a $12 million completion bonus. However, the TUAs can be terminated under certain delay or performance conditions, and Total's commitment depends on financing evidence by June 30, 2005.
What are the main financing risks for the LNG projects?
The four projects need more than $3 billion. Sabine Pass has an $822 million credit facility, but it requires $216 million of equity before the first borrowing, and the facility must be drawn by April 2009. Freeport LNG relies primarily on ConocoPhillips debt financing and capital calls to which Cheniere may not contribute. Corpus Christi and Creole Trail have no committed financing and may depend on future equity or debt offerings, which would dilute shareholders.
Are there any regulatory or legal issues investors should know about?
Each terminal requires FERC authorization under Section 3 of the Natural Gas Act, and Corpus Christi and Creole Trail still need final approvals. Cheniere is also cooperating with an informal, nonpublic SEC inquiry dated December 17, 2004, into trading in its securities around the November and December 2004 press releases and 8-K filings concerning the Chevron agreement and the public offering. The company reports no material pending litigation.
04—Continue