Business Context and Reporting Period
Company: Cheniere Energy Partners, L.P. (CQP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: CQP is a Delaware limited partnership formed to own and operate the Sabine Pass LNG receiving terminal in Cameron Parish, Louisiana. The terminal, constructed by subsidiary Sabine Pass LNG, L.P., achieved full operability in the third quarter of 2009 with a regasification capacity of approximately 4.0 Bcf/d and storage capacity of 16.9 Bcf. The partnership has no employees and relies on Cheniere Energy, Inc. ("Cheniere") and its affiliates for management and operations.
Key Financial Metrics
| Metric (in thousands) | 2009 | 2008 |
|---|---|---|
| Total Revenues | $416,790 | $15,000 |
| Net Income (Loss) | $186,912 | $(78,344) |
| Operating Income (Loss) | $327,920 | $(17,141) |
| Cash Flow from Operations | $234,311 | $(1,156) |
| Total Debt (Long-term) | $2,183,029 | $2,180,706 |
| Cash and Cash Equivalents | $117,542 | $7 |
| Restricted Cash | $96,126 | $373,969 |
Note: 2009 revenues include $252.9 million from affiliate Cheniere Marketing and $163.9 million from third-party customers (Total and Chevron). 2008 revenues were solely from affiliate Cheniere Marketing.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased by $401.8 million (2,679%) compared to 2008. This was driven by the commencement of Terminal Use Agreements (TUAs) with Total (April 2009) and Chevron (July 2009), in addition to the existing TUA with Cheniere Marketing.
- Profitability Turnaround: The company moved from a net loss of $78.3 million in 2008 to a net income of $186.9 million in 2009. Operating income improved from a loss of $17.1 million to a profit of $327.9 million.
- Construction Completion: Construction of the Sabine Pass LNG terminal was substantially completed in Q3 2009, resulting in a significant decrease in capital expenditures (from $403.0 million in 2008 to $96.9 million in 2009) and an increase in depreciation expense (from $8.0 million to $32.7 million).
- Liquidity: Cash and cash equivalents increased significantly to $117.5 million, while restricted cash decreased as construction reserves were utilized and the distribution reserve was returned to Cheniere.
Guidance, Outlook, Risks, and Contingencies
Outlook and Management Commentary
Management expects to maintain commercial operability and generate steady revenues under long-term TUAs. The partnership aims to increase quarterly cash distributions over time, contingent upon accretive acquisitions or increased operating surplus. The subordination period for subordinated units is expected to end no sooner than the first business day after the distribution for the quarter ending March 31, 2012, subject to meeting specific financial tests.
Key Risks
- Customer Concentration: The company is entirely dependent on three TUAs for revenue. A significant portion ($250 million/year) is from Cheniere Marketing, an affiliate with limited capital and no credit rating, guaranteed by Cheniere (rated CCC+). Failure of Cheniere Marketing to perform could materially impact cash flows.
- Debt Obligations: The company has substantial indebtedness ($2.2 billion) consisting of Senior Notes due 2013 and 2016. Refinancing risk exists, and debt covenants restrict distributions and additional borrowing.
- Regulatory and Environmental: Operations are subject to extensive FERC, EPA, and state regulations. Future climate change legislation or carbon taxes could increase compliance costs or reduce demand for LNG.
- Operational Hazards: Risks include hurricanes, equipment failure, and the need to purchase LNG to maintain cryogenic readiness, which carries commodity price risk.
Unusual Items
In August 2009, the company distributed the remaining $34.9 million balance of its distribution reserve account to Cheniere, as it was no longer needed to fund initial quarterly distributions. This was recorded as a "Special rights adjustment" to equity.
Investor Verification Checklist
- Cheniere Marketing Solvency: Verify the financial health and ability of Cheniere Marketing (and its guarantor, Cheniere) to meet its $250 million annual TUA obligations, given its non-investment grade rating and limited operating history.
- Debt Covenant Compliance: Confirm that Sabine Pass LNG continues to meet the fixed charge coverage ratio (2:1) and debt service reserve requirements ($82.4 million) necessary to permit distributions to the partnership.
- Third-Party TUA Performance: Monitor the performance of Total and Chevron under their respective TUAs, which commenced in 2009, to ensure they are meeting capacity reservation fee payments.
- Subordination Period Status: Track the progress toward the end of the subordination period, which determines when subordinated units convert to common units and begin receiving distributions.
- Regulatory Changes: Assess the potential impact of pending U.S. climate change legislation or EPA greenhouse gas regulations on LNG import economics and operating costs.