Business Context and Reporting Period
This Form 8-K was filed by Cheniere Energy Partners, L.P. on November 11, 2011. The report details the entry into a material definitive agreement by Sabine Pass Liquefaction, LLC, an indirect wholly owned subsidiary of Cheniere, regarding the construction of the Sabine Pass LNG Liquefaction Facility in Cameron Parish, Louisiana.
Key Financial Metrics and Contract Terms
The filing centers on a Lump Sum Turnkey Agreement for Engineering, Procurement, and Construction (EPC) with Bechtel Oil, Gas and Chemicals, Inc. Key financial terms include:
- Contract Price: $3,900,000,000 (subject to adjustment only by change order).
- Project Scope: Construction of two liquefaction trains with a nominal production capacity of approximately 4.5 million tonnes per annum (mtpa) each.
- Termination for Convenience (Pre-Notice to Proceed): Lump sum payment to Bechtel between $1,000,000 and $2,500,000.
- Termination for Convenience (Post-Notice to Proceed): Lump sum payment to Bechtel up to $30,000,000.
- Termination for Delayed Notice to Proceed: If notice is not issued by December 31, 2012, Bechtel is entitled to costs incurred plus a $5,000,000 lump sum.
The filing does not provide specific revenue, profit, cash flow, margin, debt, or liquidity figures for the reporting period.
Material Changes and Contractual Provisions
The primary material change is the execution of the EPC Contract. Significant contractual provisions include:
- Change Orders: Bechtel may request change orders for delays in construction commencement beyond March 31, 2012, changes in law, force majeure, or subsurface soil conditions differing from geotechnical studies.
- Performance Guarantees: Bechtel must achieve 95% of the performance guarantee by the substantial completion date. Failure results in delay liquidated damages and a 10-month correction period.
- Warranty: Bechtel warrants equipment is new and of good quality, with liability to correct defective work for 18 months after substantial completion of each train.
- Liability Limits: Bechtel's liability is limited under the contract, except for indemnification obligations, title warranties, and the obligation to complete work to ensure trains are ready to produce LNG.
Outlook, Risks, and Contingencies
Management commentary is limited to the announcement of the agreement. Key risks and contingencies identified in the contract include:
- Schedule Risk: The contract price is fixed unless construction commencement is delayed beyond March 31, 2012, or the notice to proceed is not issued by December 31, 2012.
- Force Majeure: Either party may terminate if a force majeure event suspends a substantial portion of work for more than 100 consecutive days or exceeds 180 days in aggregate within a 24-month period.
- Default Risks: Termination rights exist for both parties in cases of insolvency, failure to pay, or material non-compliance with obligations.
Investor Verification Checklist
- Verify the status of the "Notice to Proceed" to determine if the March 31, 2012, or December 31, 2012, deadlines are at risk.
- Review the full text of Exhibit 10.1 (EPC Contract) for specific definitions of "delay liquidated damages" and "performance liquidated damages" rates.
- Assess the financial impact of potential change orders related to subsurface soil conditions or regulatory changes.
- Confirm the funding sources for the $3.9 billion contract price and any potential termination payments.