Cheniere Energy Partners, L.P. quarterly report, Q2 FY2020

Cheniere Energy Partners, L.P. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. The Partnership operates the Sabine Pass LNG terminal, with five liquefaction trains operating and Train 6 under construction. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Financial performance

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$1,470	$1,705	$3,188	$3,454
Income from operations	$684	$455	$1,348	$1,018
Net income	$406	$232	$841	$617
Net income per common unit	$0.78	$0.44	$1.62	$1.19
Operating margin, approximate	46.5%	26.7%	42.3%	29.5%
Net margin, approximate	27.6%	13.6%	26.4%	17.9%

Revenue fell year over year, while operating income and net income rose. Management attributed the earnings improvement chiefly to revenue recognized for LNG cargoes customers elected not to take, alongside lower natural-gas feedstock costs. These cancellation-related revenues were $388 million in Q2 and $404 million for the first half; $244 million of the first-half amount would otherwise have been recognized after June 30. Management cautioned that accelerated recognition may reduce revenue in later periods when those cargoes were scheduled for delivery.

Cash flow: First-half operating cash flow was $874 million, versus $640 million in 2019. Investing cash outflow was $581 million, principally for construction; financing cash outflow was $747 million, including $668 million of distributions. Cash, cash equivalents and restricted cash ended at $1,508 million, down from $1,962 million at year-end 2019.
Liquidity: June 30 cash and cash equivalents were $1,341 million, with $167 million restricted. Available commitments were $791 million under SPL’s working-capital facility and $750 million under CQP’s credit facilities. SPL’s facility also had $409 million of letters of credit outstanding and no borrowings.
Debt and interest: Long-term debt, net, was $17,566 million, compared with $17,579 million at year-end 2019. First-half interest expense, net of capitalized interest, was $470 million, up from $417 million. The Partnership and SPL reported compliance with debt covenants at June 30.
Distributions and equity: The Partnership declared a $0.645 per-unit distribution for Q2, payable August 14, 2020. Partners’ equity was $888 million at June 30, compared with $715 million at year-end 2019.

Material changes and unusual items

Total revenue decreased $235 million in Q2 and $266 million in the first half. Affiliate LNG revenue declined substantially year over year, while non-affiliate LNG revenue increased. LNG volumes recognized as revenue were 207 TBtu in Q2 versus 305 TBtu, and 534 TBtu for the first half versus 568 TBtu.
Lower natural-gas feedstock costs and volumes reduced cost of sales, contributing to the improvement in operating income. First-half operating and maintenance costs, including affiliate costs, increased; the filing cites COVID-19 response expenses, Train 5-related costs and other operating factors.
In May, SPL issued $2.0 billion of 4.5% senior secured notes due 2030 and used proceeds plus cash on hand to redeem all $2.0 billion of 5.625% notes due 2021. The refinancing produced a $43 million debt-modification/extinguishment loss in the first half. In March, SPL replaced its prior working-capital facility with a $1.2 billion facility maturing in 2025.
Train 6 was 63.9% complete at June 30; substantial completion was expected in the second half of 2022. The EPC contract price was approximately $2.5 billion, of which $1.6 billion had been incurred by June 30.
Following payment of the Q2 distribution, all subordinated units were to convert one-for-one into common units, effective August 17, 2020, and the subordination period was to end.

Outlook, commentary and risks

Management said COVID-19, weaker energy markets, high storage inventories and lower LNG prices had moderated 2020 LNG demand expectations. It did not expect customer cargo cancellations to materially adversely affect its 2020 forecasted financial results, citing the contracted business model and customers’ continuing obligation to pay fixed fees when they cancel or suspend deliveries.
Cheniere had incurred approximately $35 million of pandemic-related costs through June 30 and expected incremental operating costs to continue while pandemic risks persisted. Management also noted that weaker demand and cargo cancellations could affect production and future-period revenue.
Management expected LNG revenue to increase when Train 6 becomes operational. It stated that available cash, operating cash flows, credit commitments and other identified resources were expected to be adequate for currently anticipated capital, operating and debt-service needs.
Key exposures include LNG market and customer conditions, counterparty creditworthiness, derivative valuation and commodity-price risk, construction execution and financing, and LIBOR transition. The filing reports $50 million net fair value of supply derivatives; a modeled 10% natural-gas price change would change fair value by approximately $1 million.
No material change to previously reported legal proceedings or risk factors was reported in this filing. No material off-balance-sheet arrangements were identified.

Important facts for investors to verify

Whether cancelled or deferred LNG cargoes, fixed-fee collections and customer credit quality evolve consistently with management’s expectations—and how accelerated revenue recognition affects subsequent periods.
Train 6 schedule, remaining construction cost, financing needs and expected operational start date.
Liquidity availability, debt-service requirements, covenant compliance and the effect of the 2030 refinancing on future interest expense.
Cash available for distributions, the effects of subordinated-unit conversion, and whether future distributions remain supportable.
Actual duration and cost of COVID-19 measures, and exposure to LNG demand, price, derivative and LIBOR-transition risks.