Cheniere Energy Partners, L.P. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The partnership owns and operates the Sabine Pass LNG receiving terminal and is developing adjacent liquefaction facilities. Unaudited interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $61.4 million | $73.6 million | $130.7 million | $148.1 million |
| Operating income | $18.3 million | $36.9 million | $43.2 million | $78.1 million |
| Operating margin | 29.8% | 50.2% | 33.0% | 52.7% |
| Net loss | $24.9 million | $6.9 million | $44.2 million | $9.1 million |
| Net cash from operations | Not separately presented for the quarter | $(13.0) million | $21.4 million |
The filing reports basic and diluted net income per common unit of $0.17 for Q2 and $0.40 for the six-month period, despite consolidated net losses; the partnership’s distribution-based allocation and Class B beneficial conversion feature affect this measure. It should not be read as consolidated net profit.
At June 30, cash and cash equivalents were $171.0 million; restricted cash was $96.1 million ($13.7 million current and $82.4 million non-current). Long-term debt, net of discount, was $2.195 billion. Total assets were $1.873 billion and partners’ deficit was $442.2 million. Distributions to unitholders totaled $27.0 million in the first half; common units received $0.425 per unit for each of the first two quarters.
Changes and drivers
- Q2 revenue fell $12.2 million year over year; first-half revenue fell $17.3 million. Management attributed the decline mainly to lower LNG cargo loading fees and VCRA revenues, plus a provision for a firm LNG inventory purchase commitment.
- Development expense, including affiliate expense, rose to $15.5 million in Q2 from $12.1 million and to $33.4 million for six months from $19.6 million, reflecting liquefaction project development.
- Operating and maintenance expense increased to $7.1 million in Q2 from $3.9 million and to $13.3 million for six months from $9.6 million, primarily due to dredging and prior-period fuel-cost efficiencies.
- First-half operating cash flow declined by $34.4 million to a use of $13.0 million, which management attributed primarily to higher liquefaction development costs and lower LNG cargo export loading fee revenue. Investing cash use was $43.9 million, including $39.2 million of terminal construction-in-process spending.
- Cash rose by $89.5 million in the first half, principally reflecting $166.7 million of Class B unit proceeds; it was not generated by operating activities.
Outlook, financing and risks
- In July 2012, the board made a positive final investment decision for the first two liquefaction trains, subject to financing and equity funding. The project company subsequently closed $3.6 billion of seven-year debt financing; the rate is LIBOR plus 350 basis points during construction and plus 375 basis points during operations. Interest-rate protection is planned for at least 75% of this financing.
- In July, Cheniere purchased an additional $333 million of Class B units, completing its $500 million commitment. Blackstone had agreed to invest up to $1.5 billion in Class B units, with additional contributions callable after an initial $500 million funding. Class B conversion value increases at a compounded 3.5% per quarter, subject to adjustments; the units do not receive ordinary cash distributions.
- Construction of trains 1 and 2 began in Q2 under a Bechtel contract. Management estimated their construction cost at approximately $4–5 billion before financing costs; estimates may change due to change orders, delays, component and material costs, labor escalation, or schedule-related spending. First-train operations were anticipated in late 2015, with the next train expected six to nine months later.
- Four third-party LNG sale agreements cover approximately 16 mtpa. The filing states the customers are to pay approximately $2.3 billion annually plus a gas-price-linked charge; these are future project economics, not current-period revenue. DOE export authorizations were obtained, while the FERC authorization was pending rehearing consideration.
- Existing senior-note covenants restrict distributions from Sabine Pass LNG unless reserve-funding, a 2:1 fixed-charge coverage test, and other conditions are met. The $82.4 million debt-service reserve and $13.7 million current interest reserve are restricted. The 2013 notes mature in 2013, with $550 million principal outstanding.
- Management identified forward-looking risks involving financing, construction timing and cost, permits and regulation, commercial counterparties, and distribution capacity. Cheniere Marketing lacked a credit rating and could be constrained by access to capital; Cheniere’s guarantee was rated non-investment grade. Management reported no pending legal matter expected to have a material adverse effect and no material off-balance-sheet arrangements.
Key facts for investors to verify
- Funding status and conditions for Blackstone’s remaining equity commitment, as well as project liquidity needs and total funding requirements.
- Progress, cost revisions, change orders, and schedule for the first two trains; the $4–5 billion estimate excludes financing costs.
- Regulatory status, including the FERC rehearing, and timing of permits and export approvals.
- Whether contracted LNG volumes, customer obligations, and expected project economics translate into timely operating cash flow.
- Senior-note covenant compliance, refinancing or repayment plans for the 2013 maturity, and conditions supporting future distributions.
- Drivers of lower terminal revenue, the LNG inventory commitment loss provision, and the effect of Class B conversion terms and related-party arrangements on common-unit value and cash available for distribution.