Business context and reporting period
Cheniere Energy Partners, L.P. (Cheniere Partners) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. Through Sabine Pass LNG, it owns and operates the Sabine Pass LNG import terminal, with approximately 4.0 Bcf/d of regasification capacity and 16.9 Bcf of storage. It is also developing liquefaction facilities to enable LNG exports.
Key financial metrics
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Total revenue | $73.6 million, versus $129.8 million in 2010 | $148.1 million, versus $260.5 million in 2010 |
| Operating income | $36.9 million, versus $102.0 million | $78.1 million, versus $203.7 million |
| Net income (loss) | $(6.9) million, versus $58.4 million | $(9.1) million, versus $117.2 million |
| Operating cash flow | Not separately provided for the quarter | $21.4 million, versus $84.4 million |
Operating margin was approximately 50.2% for Q2 and 52.7% for the first half, compared with approximately 78.6% and 78.2%, respectively, in 2010. Comparability is materially affected by the affiliate TUA assignment described below. Reported net income per common unit was $0.32 for Q2 and $0.66 for the first half despite consolidated net losses; the filing explains that partnership distribution-allocation rules affect this calculation.
- Cash and liquidity: At June 30, cash and cash equivalents were $55.3 million; restricted cash totaled $96.1 million, including an $82.4 million debt-service reserve. Current assets were $78.2 million and current liabilities $55.4 million. Restricted cash is contractually limited and should not be treated as freely available liquidity.
- Debt: Long-term debt, net of discount, was $2.190 billion; the notes have aggregate principal of approximately $2.216 billion. The secured notes carry coupons of 7.25% and 7.5% and mature in 2013 and 2016. Six-month net interest expense was $86.8 million.
- Capital and distributions: Partners’ deficit was $559.0 million. The partnership sold approximately 0.5 million common units under its at-the-market program, raising $9.0 million net, and received $0.2 million from its general partner. It paid $23.0 million in distributions in the first half, including $0.425 per common unit for each of the two covered quarters; subordinated units received no distributions.
Material changes versus the prior comparable period
- Revenue fell $56.2 million in Q2 and $112.5 million in the first half. The main driver was the 2010 assignment of Cheniere Marketing’s approximately $250 million-per-year TUA to wholly owned Cheniere Investments. The resulting intercompany TUA revenue is eliminated in consolidation; revenue from the VCRA partly offsets the change. Affiliate revenue for the first half was $11.2 million, versus $127.7 million in 2010.
- Development expense, including affiliate expense, increased to $12.1 million in Q2 and $19.6 million in the first half, reflecting liquefaction-project development. Lower operating and maintenance costs partly offset the impact, primarily due to lower fuel costs associated with LNG inventory-management efficiencies.
- First-half operating cash flow declined by $63.1 million, chiefly because the company received $62.8 million in Cheniere Marketing TUA payments in the 2010 period and none in 2011. First-half distributions fell from $140.3 million to $23.0 million, and no subordinated-unit distributions have been paid since the quarter ended March 31, 2010.
Outlook, risks, contingencies and unusual items
- The partnership said cash and restricted funds were anticipated to be sufficient for operating expenditures and interest requirements. Sabine Pass LNG expected cash flow from Total and Chevron TUA payments to cover its operating and interest needs through the 2013 notes’ maturity. However, distributions to the partnership depend on satisfying indenture requirements, including reserve funding and a 2:1 fixed-charge coverage test; continued distributions also require substantial revenue from Cheniere Investments or other customers in addition to Total and Chevron.
- Liquefaction plans contemplated up to four trains, each with nominal capacity of approximately 4.0 mtpa, with exports potentially starting as early as 2015. Management estimated construction costs at approximately $400 per metric ton before financing costs, but noted that a site-specific estimate was not complete and costs could change. A final investment decision depends on acceptable commercial contracts, regulatory authorization and adequate financing.
- The DOE authorized exports to eligible non-FTA countries in May 2011, subject to FERC review and other conditions. The FERC application to site, construct and operate the facilities remained pending at the time of the filing. The company intended to secure long-term commercial contracts for at least 3.5 mtpa per train before a final investment decision.
- Related-party exposure is significant. Cheniere Investments’ TUA revenue is eliminated on consolidation, while the partnership guarantees its obligations. Cheniere Marketing’s payment obligations under the VCRA are guaranteed by Cheniere; the filing notes that Cheniere Marketing lacks a credit rating and may have limited access to capital, and that Cheniere has a non-investment-grade rating.
- Natural-gas swap positions hedging terminal fuel purchases had a $0.3 million liability at June 30; reported first-half derivative loss was $0.4 million. Management reported no material off-balance-sheet arrangements and no known pending or threatened legal matters expected to materially harm results, financial position or cash flows. A lawsuit filed against Centerbridge was dismissed without prejudice in June 2011.
- On July 20, 2011, after quarter-end, the partnership declared a $0.425-per-common-unit distribution for Q2, payable August 1. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether TUA and VCRA cash receipts, including affiliate and counterparty performance, support future distributions and debt-service requirements.
- The status and timing of FERC authorization, customer contracts, project financing and a final investment decision for liquefaction; confirm the eventual project cost against the preliminary $400-per-ton estimate.
- Available unrestricted liquidity after required debt-service reserves, and the partnership’s ability to meet debt obligations and maintain common-unit distributions.
- The effect of affiliate transactions and partnership allocation rules when comparing reported revenue, earnings and per-unit results across periods.