Cheniere Energy Partners, L.P. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results are for the partnership and consolidated subsidiaries. The partnership owns the Sabine Pass LNG terminal and the Creole Trail Pipeline; Train 6 reached substantial completion in February 2022, bringing the facility to six operational trains and approximately 30 mtpa of capacity.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $4.181bn | $1.889bn | $7.509bn | $3.852bn |
| Income from operations | $555m | $604m | $917m | $1.222bn |
| Net income | $342m | $395m | $501m | $742m |
| Basic and diluted net income per common unit | $0.25 | $0.73 | $0.13 | $1.38 |
| Operating cash flow | Not stated quarterly | $1.586bn | $1.075bn |
Revenue rose substantially, reflecting higher LNG prices—particularly appreciation in Henry Hub—and increased volumes, including capacity from Train 6. LNG volumes recognized as revenue were 375 TBtu in Q2, up from 313 TBtu, and 747 TBtu for the first half, up from 638 TBtu. Costs also increased sharply, principally from higher natural-gas feedstock prices and, to a lesser extent, greater delivered volumes. Operating income and net income declined despite revenue growth. Operating margin, calculated as operating income divided by revenue, was approximately 13% in Q2 and 12% for the first half, versus approximately 32% in each comparable 2021 period.
Net income included significant derivative valuation effects. Management attributed declines of $53m in Q2 and $241m in the first half versus 2021 primarily to losses on the Tourmaline IPM derivative liability assigned to SPL. The filing reports $431m and $862m of related losses for the respective periods. These non-cash fair-value movements can make reported earnings volatile and do not necessarily reflect the economics of future LNG sales in the same period.
Cash flow and investment: First-half operating cash flow was $1.586bn, up $511m year over year, as higher receipts on LNG deliveries more than offset higher operating outflows, including feedstock costs. Investing cash outflow was $239m, mainly property, plant and equipment, compared with $316m in 2021. Financing cash outflow was $1.132bn, principally owner distributions. Cash, cash equivalents and restricted cash totaled $1.189bn at June 30, 2022, up $215m from year-end.
Liquidity and debt: Reported available liquidity was $2.776bn, consisting of $1.111bn cash, $78m restricted cash and $1.587bn of available credit commitments. Total debt principal was $17.332bn; $1.497bn was classified as current, including the 2023 notes. Long-term debt, net of discounts and issuance costs, was $15.693bn. The partnership and SPL reported compliance with debt covenants. Distributions are subject to debt-agreement conditions, including debt-service coverage tests.
Balance sheet: Total assets were $20.130bn. Partners’ equity shifted from $718m at December 31, 2021 to a $2.625bn deficit at June 30, 2022, primarily reflecting a $2.712bn non-cash distribution recorded on the novation of the Tourmaline IPM agreement, in addition to distributions to unitholders and the general partner.
Material changes and outlook
- In March 2022, SPL assumed the Tourmaline IPM agreement, covering 140,000 MMBtu per day of natural-gas purchases indexed to JKM for approximately 15 years beginning in early 2023. The transfer brought substantial derivative liabilities onto SPL’s balance sheet.
- In June, SPLNG agreed to an early termination of Chevron’s terminal use agreement for a $765m lump-sum fee. The agreement became effective July 6, 2022; revenue, including the termination fee, is to be recognized over the remainder of 2022. The termination also ends Chevron’s capacity payments of $125m annually, adjusted for inflation, through 2029.
- In June, SPL entered an SPA to sell Chevron approximately 1.0 mtpa of LNG from 2026 through 2042. The partnership reported approximately 80% of production capacity contracted, with a weighted-average remaining contract life of approximately 16 years.
- The partnership began quarterly distributions with a base and variable component in 2022. On July 25, it declared $1.060 per common unit, comprising $0.775 base and $0.285 variable, payable August 12 to holders of record August 4.
- No quantified earnings, revenue, or cash-flow guidance is provided. Management expects to meet near-term cash requirements with operating cash flow and available liquidity, and longer-term requirements with operating cash flow and potential additional financing. Further projects or expansions depend on acceptable commercial and financing arrangements and a positive final investment decision.
Risks, contingencies, and unusual items
- At June 30, net derivative liabilities were $3.467bn, including $3.456bn of Level 3 physical supply derivative liabilities. Fair value depends in part on unobservable commodity-price assumptions; management’s 10% natural-gas price sensitivity indicated a $550m fair-value change. Changes in market prices, credit risk, and valuation assumptions may materially affect reported results.
- Related-party activity is significant: affiliate LNG revenue was $1.135bn in Q2 and $1.892bn for the first half. Cheniere owns the general partner and incentive distribution rights and held 48.6% of common units as of June 30.
- Two LNG storage tanks had been removed from service following a 2018 incident. One received conditional approval to return to service in March 2022; repair and remediation work and coordination with PHMSA and FERC continue. The company does not expect a material adverse financial or operational impact.
- Subsidiaries remain in discussions with Louisiana environmental regulators regarding self-reported permit deviations from 2012–2016; the company does not expect a material adverse financial impact. The filing reports no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How much future operating cash flow and distributable cash is exposed to feedstock-price movements and the Tourmaline IPM derivative valuation.
- The timing, collection, and 2022 revenue recognition of Chevron’s $765m termination fee, as well as the loss of its inflation-adjusted annual capacity payments through 2029.
- Liquidity available to the parent versus cash restricted at subsidiaries, and the upcoming $1.5bn 2023 notes maturity and refinancing or repayment plan.
- The sustainability of the base and variable distributions given capital needs, debt-service tests, and the partnership’s reported equity deficit.
- Progress restoring the remaining storage tank to service and any developments in environmental or other regulatory matters.