Business context and reporting period
Cheniere Energy Partners, L.P. (CQP) filed this audited Form 10-K for the fiscal year ended December 31, 2018. The partnership owns and operates the Sabine Pass LNG terminal, liquefaction facilities and the Creole Trail Pipeline. Trains 1–4 were operational; Train 5 was commissioning; Train 6 remained subject to final investment decision and financing. The filing also reports fourth-quarter 2018 results.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $6.426 billion | $4.304 billion |
| Income from operations | $1.979 billion | $1.156 billion |
| Operating margin | 30.8% | 26.9% |
| Net income | $1.274 billion | $490 million |
| Net margin | 19.8% | 11.4% |
| Net income (loss) per common unit, annual | $2.51 | $(1.32) |
| Operating cash flow | $1.874 billion | $977 million |
| Investing cash flow | $(804) million | $(1.290) billion |
| Financing cash flow | $(1.118) billion | $1.297 billion |
The annual 2017 per-unit loss reflects partnership allocation and the Class B unit beneficial conversion feature; it does not match the year’s positive consolidated net income. Fourth-quarter results were revenue of $1.897 billion, operating income of $524 million, net income of $351 million and net income per common unit of $0.69. For fourth-quarter 2017, the comparable figures were $1.518 billion, $540 million, $374 million and $0.76, respectively.
At year-end, CQP reported no cash and cash equivalents, $1.541 billion of current restricted cash and $16.3 billion of gross consolidated debt ($16.066 billion net on the balance sheet). Restricted cash and subsidiary debt agreements constrain access to liquidity. Available commitments were $775 million under SPL’s working-capital facility and $115 million under CQP’s revolving facility. Net interest expense was $733 million, versus $614 million in 2017. Total interest cost was $936 million, of which $203 million was capitalized. The partnership paid $1.113 billion in distributions in 2018.
Material changes versus the prior period
- Revenue rose $2.122 billion, primarily as more trains operated for more of the year; LNG volumes recognized as revenue increased to 955 TBtu from 684 TBtu.
- Net income increased $784 million, principally from higher operating income as additional trains entered service and lower debt extinguishment losses, partly offset by higher net interest expense.
- Operating cash flow increased $897 million, while investing outflows decreased as construction spending declined.
- In September 2018, CQP issued $1.1 billion of 5.625% senior notes due 2026 and used the proceeds to repay CQP Credit Facilities borrowings. The remaining CQP facility was an undrawn $115 million revolver.
- 2018 distributions totaled approximately $1.1 billion, up from $294 million in 2017. The quarterly distribution increased during 2018; a $0.59 per-unit distribution for fourth-quarter 2018 was declared in January 2019.
Outlook, management commentary, risks and unusual items
- Train 5 was 99.7% complete at December 31, 2018; substantial completion was expected in first-quarter 2019. Commissioning LNG production and shipments began in November 2018. Management expected revenue and operating costs to increase as Train 5 became operational.
- In December 2018, SPL signed a conditional 20-year SPA with PETRONAS for approximately 1.1 mtpa from Train 6. Train 6’s EPC contract price was approximately $2.5 billion; FID and full notice to proceed depend, among other things, on acceptable commercial arrangements and adequate financing. No specific completion or financial guidance is provided.
- Third-party SPAs covered approximately 80%–95% of expected adjusted nominal capacity from Trains 1–5. Fixed annual customer fees were approximately $2.2 billion for Trains 1–3 and the GAIL Train 4 SPA, rising to $2.3 billion after the BG Train 4 delivery milestone and $2.9 billion after Train 5’s first commercial delivery. LNG prices also include variable components linked to Henry Hub.
- Customer concentration remains material: four buyers accounted individually for 28%, 23%, 21% and 19% of 2018 external-customer revenue. Performance and creditworthiness of buyers, as well as operational availability and LNG market competitiveness, are important risks.
- Gross debt maturities include $2.0 billion in 2021, $1.0 billion in 2022 and $1.5 billion in 2023; most remaining principal is due from 2024 through 2028. Refinancing needs, debt covenants, restricted cash and distribution limits could affect liquidity and distributions.
- In February 2018, PHMSA issued a corrective action order after minor LNG leaks/releases involving two tanks. The tanks were removed from service for analysis, repair and remediation; a consent order superseded the corrective action order. Management did not expect a material effect on results or operations. Subsidiaries were also working with LDEQ on self-reported permit deviations; management did not expect a material financial impact.
- Other exposures include construction delays or cost changes, Train 6 funding, hurricanes and other operating hazards, regulation and permitting, commodity and interest-rate risks, and related-party conflicts. CQP reported $425 million of letters of credit and $30.7 billion of contractual obligations, including debt, interest, purchase and affiliate obligations.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Adoption of ASC 606 had no impact on previously reported statements or retained earnings. The filing reports no material off-balance-sheet arrangements and no pending legal matters expected by management to materially affect results, financial position or cash flows.
Important facts for investors to verify
- Whether Train 5 achieved substantial completion on schedule and delivered the expected operating and cash-flow contribution.
- Whether Train 6 obtains FID, contracted volumes and financing on acceptable terms, and how its funding affects debt, dilution and distributions.
- How much reported restricted cash is available for specific uses, and whether operating cash generation covers interest, capital spending and distributions.
- Customer concentration, buyer credit quality, SPA fixed-fee protections and the impact of variable gas-linked fees on margins and cash flow.
- The status and operational consequences of the PHMSA tank remediation and LDEQ permit matter.
- The partnership’s debt maturity and covenant position, refinancing options, and ability to maintain distributions under subsidiary restrictions.