Business context and reporting period
Cheniere Energy Partners, L.P. filed this Form 10-K for the fiscal year ended December 31, 2012. It owns and operates the Sabine Pass LNG receiving terminal in Louisiana and is developing LNG export facilities there. The existing terminal has approximately 4.0 Bcf/d of regasification capacity and 16.9 Bcfe of storage; Train 1 and Train 2 were under construction.
Key financial metrics
- Revenue: $264.3 million in 2012, down 6.9% from $283.8 million in 2011.
- Operating income: $63.5 million, compared with $144.6 million. Operating margin was approximately 24.0%, down from 51.0%.
- Net result: Net loss of $150.1 million, versus a $31.0 million loss in 2011. Net margin was approximately -56.8%, versus -10.9%. 2012 included a $42.6 million loss on early debt extinguishment.
- Cash flow: Operating cash flow was negative $26.2 million, compared with positive $14.2 million in 2011. Investing cash flow was negative $4.5 million; financing cash flow was positive $368.5 million.
- Liquidity: Year-end cash and cash equivalents were $419.3 million, with an additional $364.9 million restricted. Restricted balances were subject to debt and project-use controls.
- Debt: Gross consolidated debt was approximately $2.19 billion at year-end; long-term debt net of discount was $2.17 billion. In February 2013, the partnership’s subsidiary issued a further $1.5 billion of 5.625% secured notes due 2021.
- Assets and investment: Total assets were $3.75 billion, including $2.70 billion of net property, plant and equipment. Cash capital expenditures for the LNG terminal and project were $1.12 billion in 2012.
- Distribution: Common units received $0.425 per unit each quarter in 2012. No distributions were paid on subordinated units; management cautioned that available cash may not support the common-unit distribution indefinitely before liquefaction operations begin.
Material changes versus the prior comparable period
- Revenue fell by $19.5 million, primarily due to lower LNG cargo-loading fees and VCRA revenue, and a provision for an LNG purchase commitment.
- Expenses rose to $200.8 million from $139.2 million. Higher construction-management, operating and maintenance, and development costs contributed; affiliate general and administrative expense increased substantially.
- Operating cash flow declined by $40.5 million, reflecting higher liquefaction-project development and management costs and lower cargo-loading fee revenue.
- The partnership raised $1.89 billion net from Class B unit sales and $250.0 million net from common and general partner unit sales. Sabine Pass LNG issued $420 million of 6.5% notes and repurchased its $550 million 2013 notes.
- Train 1 and Train 2 construction-in-progress increased materially; the project was approximately 18% complete at year-end.
Outlook, management commentary, risks and unusual items
- Management expected Train 1 to produce LNG as early as the end of 2015; operating cash flow under SPAs was not expected before then. Timing and costs remain subject to construction, financing, permitting, labor, weather and other risks.
- Train 1 and Train 2 estimated capital costs were $4.5–$5.0 billion before financing costs and $5.5–$6.0 billion all-in. The Train 3 and Train 4 EPC contract was priced at $3.77 billion, subject to change orders; their construction depended on financing and a positive final investment decision.
- Five third-party SPAs covered substantially all capacity of Trains 1–5 and were expected to provide approximately $2.6 billion in annual fixed fees at full contracted operation. These amounts depend on construction, contract conditions and commencement of operations; they are not current-period revenue.
- Management said available financing, customer performance and timely project completion are central to liquidity and profitability. The partnership reported historical net losses and no positive operating cash flow in 2012, and anticipated substantial additional debt and equity needs for later trains.
- Distribution capacity is constrained by debt covenants, reserves, project cash needs and the lack of liquefaction cash flows. Subsidiary debt agreements limit distributions to the partnership unless specified reserve and coverage tests are met.
- Material risks include cost overruns or delays, SPA termination rights, counterparty credit risk, dependence on a single terminal and LNG markets, regulatory approvals, pipeline and vessel availability, severe weather, derivatives and collateral needs, and conflicts of interest with Cheniere and its affiliates.
- Other notable items: the partnership reported no material pending legal proceedings, no material off-balance-sheet arrangements, effective disclosure controls and internal control over financial reporting, and unqualified audit opinions from Ernst & Young.
Important facts for investors to verify
- Progress, schedule and remaining funding requirements for Train 1 and Train 2, including actual costs against estimates and the timing of first LNG production.
- Availability and terms of financing for later trains, and the effect of the February 2013 notes and any further debt or equity issuance on leverage and dilution.
- Whether customer conditions precedent, permits and construction milestones are met, and whether contracted fixed fees commence as projected.
- Unrestricted liquidity after excluding restricted cash, ongoing operating cash burn, debt-service obligations and compliance with distribution covenants.
- The sustainability of the $0.425 quarterly common-unit distribution and potential conversion or dilution from Class B units, which accrue conversion value at 3.5% per quarter.
- Affiliate arrangements, fees, guarantees and conflicts of interest, including agreements with Cheniere and its subsidiaries.