Cheniere Energy Partners, L.P. annual report, FY2014

Cheniere Energy Partners, L.P. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014; the filing also reports fourth-quarter results. Cheniere Partners owns and operates the Sabine Pass LNG regasification terminal and Creole Trail Pipeline, and is building LNG liquefaction facilities at Sabine Pass.

Financial performance and position

Metric	2014	2013
Revenue	$268.7 million	$268.2 million
Operating income (loss)	$(0.9) million	$(32.7) million
Net income (loss)	$(410.0) million	$(258.1) million
Net loss per common unit	$(0.89)	$(0.03)
Cash provided by operations	$11.9 million	$35.7 million
Cash and cash equivalents, year-end	$248.8 million	$351.0 million
Restricted cash, current and non-current	$740.2 million	$1,252.7 million
Total debt, before discounts and premiums	$9.0 billion	$6.6 billion

Revenue was nearly unchanged year over year. Operating loss narrowed substantially; operating margin was approximately negative 0.3%, versus negative 12.2% in 2013.
Net loss worsened despite improved operating results, primarily because derivative results shifted from an $83.4 million gain in 2013 to a $118.0 million loss in 2014. A $114.3 million debt-extinguishment loss also affected 2014.
Net interest expense was $177.0 million. The partnership incurred $580.2 million of interest cost, of which $403.2 million was capitalized for construction.
Operating cash flow declined by $23.7 million, principally due to cash outflows to settle interest-rate swaps. Cash distributions to common unitholders and the general partner totaled approximately $99.0 million.
Cash and restricted cash totaled about $989.0 million, but much of the restricted balance was earmarked for construction, pipeline work, or debt service and was not freely available.
Fourth-quarter revenue was $66.6 million, operating income was $3.8 million, and net loss was $70.8 million. The filing does not provide a clear quarter-specific explanation for the net loss.

Business progress and changes from the prior year

At year-end, Trains 1 and 2 were approximately 81% complete and Trains 3 and 4 approximately 54% complete, ahead of contractual schedules. Management expected Train 1 to produce LNG as early as late 2015, with subsequent trains starting on a staggered basis.
Four 20-year third-party SPAs cover 16 mtpa for Trains 1–4. Two additional SPAs cover 3.75 mtpa for Train 5, subject to approvals, financing, and a final investment decision. Contracted LNG pricing generally comprises a fixed fee plus 115% of Henry Hub.
Fixed fees were expected to total approximately $2.3 billion annually once Trains 1–4 are operating, rising to approximately $2.9 billion if Train 5 proceeds. These are prospective contracted amounts, not 2014 revenue.
In May 2014, Sabine Pass Liquefaction issued $2.5 billion of senior secured notes, repaid borrowings, and reduced commitments under its construction credit facilities. Remaining available commitments were $2.7 billion at year-end.
Expected capital costs for Trains 1–4 were $9–$10 billion before financing costs and $12–$13 billion including financing costs, owners’ costs, and contingencies. Pipeline modifications were estimated at $105 million.
Management expected the first significant liquefaction-project cash flows no earlier than late 2015. The filing cautions that positive operating cash flow and profitability depend on timely completion and operation of the trains.

Outlook, risks, and unusual items

Train 5 and Train 6 remained contingent on acceptable commercial arrangements, regulatory authorization, EPC contracting, and adequate financing. The Train 5 SPAs could be terminated if specified conditions were not met or waived by June 30, 2015.
DOE authorization for exports to non-FTA countries covering an additional 503.3 Bcf per year was pending. FERC authorization for Trains 5 and 6 and related permits were also outstanding.
Debt maturities include approximately $1.7 billion in 2016 and $400 million in 2017. The partnership warned of refinancing, interest-cost, covenant, and future financing risks; significant additional debt or equity could be needed for further trains.
The partnership was not generating enough operating surplus to fund the initial $0.425 quarterly distribution from current operations alone and expected to use accumulated operating surplus. Subordinated units received no distributions; Class B units were not then entitled to distributions and were expected to convert under specified conditions.
Key exposures include construction delays or cost overruns, customer or guarantor non-performance, contract termination rights, permit and export-approval uncertainty, LNG market conditions, weather and operational hazards, derivatives and collateral requirements, and reliance on Cheniere and its affiliates.
Affiliate relationships are significant: 2014 affiliate general and administrative expense was $101.4 million, and affiliate operating and maintenance expense was $21.1 million. The filing identifies potential conflicts of interest and Cheniere’s ability to pursue competing projects.
Management reported no threatened or pending legal matters expected to materially affect results, financial position, or cash flows. The audited financial statements received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.

Important facts for investors to verify

Subsequent construction progress, commercial start dates, final project costs, and any material EPC change orders.
Status of Train 5 and 6 financing, FERC and DOE approvals, and whether the Train 5 SPA conditions were met before the termination deadline.
Unrestricted liquidity available after accounting for restricted project and debt-service funds, ongoing cash burn, and distributions.
Debt refinancing plans and covenant compliance, particularly ahead of the 2016 and 2017 maturities.
Actual SPA fixed-fee receipts after commissioning, customer credit quality, and the potential dilution and distribution effects of Class B unit conversion or new equity issuance.