Cheniere Energy Partners, L.P. — Q2 2016 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. The partnership owns the Sabine Pass LNG receiving terminal and pipeline and is developing export liquefaction facilities. Train 1 reached substantial completion in May 2016 and began operating; Train 2 was in commissioning.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $151.2 million | $67.7 million | $218.2 million | $135.2 million |
| Operating income (loss) | $12.6 million | $(4.3) million | $3.1 million | $(14.1) million |
| Net loss | $(100.1) million | $(60.0) million | $(175.0) million | $(238.7) million |
| Net loss per common unit | $(0.21) | $(0.01) | $(0.29) | $(0.62) |
| Net interest expense | $72.0 million | $50.1 million | $115.5 million | $93.0 million |
Q2 operating margin was approximately 8.3%, compared with a 6.4% operating loss margin a year earlier; the six-month operating margin was approximately 1.4%, versus a 10.5% operating loss margin. The filing reports no income tax expense because the partnership is generally not subject to federal or state income tax.
- Cash flow: Six-month net cash provided by operating activities was $11.8 million, versus $2.6 million in 2015. After the increase in restricted cash for operating activities, the filing’s sources-and-uses presentation shows $98.3 million of cash, cash equivalents and restricted cash used in operating activities. Investing activities used $7.1 million net; construction spending was largely funded from restricted cash. Financing activities used $138.6 million net.
- Liquidity: At June 30, cash and cash equivalents were $12.3 million and restricted cash was $464.2 million. Total current assets were $646.0 million and current liabilities $2.165 billion; much of the reported current assets are restricted and not freely available.
- Debt and equity: Total debt, net, was $13.206 billion, up from $11.692 billion at year-end 2015. Partners’ equity was $488.4 million, down from $712.9 million. Current debt, net, was $1.662 billion, principally the $1.664 billion face amount of SPLNG notes due November 2016, net of issuance discount and costs.
- Distributions: The partnership declared a $0.425-per-common-unit distribution for Q2, payable August 12, 2016. Class B units do not receive regular cash distributions; subordinated-unit distributions depend on available cash after senior distribution requirements.
Material changes versus the prior period
- LNG revenue was $85.3 million in Q2 and $85.4 million for the six-month period, versus none recognized in 2015. Commercial LNG revenue began after Train 1’s substantial completion; earlier commissioning-cargo proceeds reduced construction-in-progress. Total revenue rose 123% in Q2 and 61% for the six months.
- Operating costs increased $66.6 million in Q2 and $65.7 million for the six months, primarily reflecting Train 1 operations, including feedstock and other production costs, and higher depreciation after Train 1 entered service.
- Net loss widened in Q2 by $40.1 million, mainly due to higher operating costs, interest expense, debt-extinguishment loss and derivative loss, partly offset by LNG revenue. Six-month net loss narrowed by $63.7 million, chiefly because LNG revenue increased and debt-extinguishment losses were lower than in 2015.
- In June, SPL issued $1.5 billion of 5.875% senior secured notes due 2026 and used approximately $1.3 billion of net proceeds to prepay borrowings under its construction credit facilities. The transaction caused a $26.0 million write-off of debt issuance costs. In February, the partnership entered $2.8 billion of credit facilities and used a $450 million tranche to refinance CTPL’s $400 million term loan.
Outlook, risks and unusual items
- Project schedule: Management reported construction progress ahead of contractual schedules. Train 2 was expected to reach substantial completion in late September 2016; Trains 3 and 4 were expected in 2017, and Train 5 in 2019. Train 6 remained subject to a final investment decision, acceptable commercial arrangements, an EPC contract and adequate financing.
- Project cost and funding: Estimated capital costs for Trains 1–5 were $12.5–$13.5 billion before financing costs and $17–$18 billion including financing costs, owners’ costs and contingencies. Management expected available commitments and operating cash flows to be adequate for completion and anticipated requirements; these are forward-looking estimates, not guarantees.
- Debt, restrictions and rates: The partnership’s facilities impose cash-use and distribution restrictions and include covenants and interest-rate hedging requirements. Variable-rate debt and derivative valuations create interest-rate and market risks. The 2016 CQP facilities require a minimum 1.15x debt-service coverage ratio beginning in 2019 and restrict distributions to once per fiscal quarter subject to conditions.
- Customer and counterparty concentration: Substantially all Q2 and six-month net LNG revenue came from one SPA customer, and the June 30 SPL trade receivable of $67.3 million was entirely due from a single SPA customer. This increases exposure to customer performance and collection risk.
- Other items: Derivative losses were $14.8 million in Q2 and $35.6 million for six months. The filing identifies an LDEQ matter by reference to the prior quarter’s report but provides no clear details here. Management said there were no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and disclosure controls were effective.
Important facts for investors to verify
- Whether Train 2 and subsequent trains meet the stated completion dates and project cost estimates.
- How the LNG ramp-up, feedstock costs and contract terms affect cash generation and margins as more trains enter service.
- The intended refinancing or repayment of the 2016 SPLNG notes and funding of the SPLNG tranche under the 2016 CQP credit facilities.
- Available, unrestricted liquidity after accounting for restricted cash, debt-service reserves, letters of credit and covenant limits.
- Customer concentration, collections on the single-customer trade receivable, and any developments in the referenced LDEQ matter.
- The potential dilution and allocation effects when Class B units convert; the filing expected mandatory conversion within 90 days of Train 3 substantial completion, then anticipated before June 30, 2017.