Cheniere Energy Partners, L.P. quarterly report, Q3 FY2013

Cheniere Energy Partners, L.P. — Q3 2013 Form 10-Q

Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. Comparative 2012 figures were retrospectively adjusted to include the Creole Trail Pipeline Business, acquired in May 2013 as a common-control transaction.

Business context and operating progress

The partnership operates the Sabine Pass LNG regasification terminal and is building LNG export facilities, while also owning the 94-mile Creole Trail Pipeline. The liquefaction project is planned for up to six trains; construction of Trains 1–2 began in 2012 and Trains 3–4 in May 2013. At September 30, management reported Trains 1–2 were 45% complete and Trains 3–4 were 10% complete, both ahead of contractual schedules.

Financial results

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Total revenue	$67.4 million	$66.4 million	$201.2 million	$197.1 million
Operating income (loss)	$(23.4) million	$(8.2) million	$(38.1) million	$23.7 million
Net loss	$(98.1) million	$(51.4) million	$(196.9) million	$(106.8) million
Net loss attributable to partners	$(98.4) million	$(42.4) million	$(178.7) million	$(86.6) million
Operating cash flow	Not separately presented for the quarter	$(16.1) million	$(14.9) million

Q3 revenue increased about 2%, but expenses rose faster: operating and maintenance expense, including affiliate expense, increased $15.8 million, while general and administrative expense, including affiliate expense, rose $3.3 million. The larger quarterly loss also reflected a $22.6 million adverse year-over-year change in derivative results. For the nine-month period, the loss widened primarily because of an $80.5 million debt-extinguishment charge and higher affiliate G&A and operating costs; improved derivative results and lower development expense partly offset those items.

Operating and maintenance expense was $29.9 million in Q3 and $76.3 million for the first nine months. General and administrative expense, including affiliate amounts, was $45.0 million and $110.5 million, respectively. Interest expense, net, was $52.5 million in Q3 and $134.8 million for nine months. The filing reports basic and diluted net loss per common unit of $(0.20) for Q3 and $(0.01) for nine months; the allocation of partnership losses among unit classes is affected by the partnership agreement and Class B unit accounting.

Balance sheet, liquidity and financing

• At September 30, cash and cash equivalents were $339.9 million; restricted cash was $1.038 billion, much of it held for project construction, debt service or pipeline work and not freely available for general use. Current assets were $623.2 million and current liabilities $233.9 million.
• Long-term debt, net of discount, was $5.574 billion, versus $2.167 billion at year-end 2012. Principal outstanding was $5.586 billion: $2.086 billion of Sabine Pass LNG notes, $3.0 billion of liquefaction senior notes, $100 million under the 2013 liquefaction facilities and $400 million under the CTPL facility.
• During 2013, the liquefaction subsidiary issued $2.0 billion of 5.625% notes due 2021 and $1.0 billion of 5.625% notes due 2023, and closed $5.9 billion of credit facilities; CTPL borrowed $400 million under a facility maturing in 2017. The 2012 liquefaction facility was refinanced, resulting in the $80.5 million write-off of associated issuance costs.
• Nine-month investing cash outflow was $323.1 million, including $2.449 billion of terminal costs largely funded from restricted cash and $313.9 million net cash paid for the pipeline acquisition. Financing provided $259.8 million. Cash declined $79.4 million during the period.
• The partnership paid quarterly distributions of $0.425 per common unit for the first two 2013 quarters; a $0.425 distribution for Q3 was declared October 22, payable November 15. Class B units receive no regular cash distributions but accrue conversion value.

Outlook, risks and unusual items

• Management expected initial LNG production from Train 1 as early as late 2015 and commercial operations in February 2016, with later trains starting on a staggered basis. These are forward-looking estimates, not assurances.
• Estimated capital costs for Trains 1–4 were $9–10 billion before financing costs and $12–13 billion including financing costs, owner costs and contingencies. Management stated that available proceeds and commitments under the 2013 credit facilities were expected to fund completion of Trains 1–4 and anticipated requirements.
• Six third-party long-term SPAs covered about 19.75 mtpa, approximately 88% of anticipated nominal production capacity for Trains 1–5. Fixed-fee revenues depend on the relevant trains reaching commercial operation; construction delay, cost, financing and counterparty risks remain material.
• Related-party general and administrative expense was $42.2 million in Q3 and $102.0 million for nine months. Management attributed the increases largely to affiliate charges for managing liquefaction construction. The Sabine Pass Liquefaction terminal-use agreement carries approximately $250 million of annual capacity payments, with related obligations guaranteed by the partnership.
• Derivative accounting created substantial period-to-period earnings volatility. The filing reported a $55.7 million net derivative gain for nine months, while the Q3 derivative result was a $22.3 million loss. Interest-rate hedges were partly undesignated and prior hedge losses were reclassified into earnings after forecast transactions were deemed probable not to occur.
• The large Class B unit conversion value accretes at 3.5% per quarter and is expected to convert after Train 3 completion, which management expected before March 31, 2017, or under specified alternative timing provisions. Conversion could materially dilute existing common unitholders.
• Management reported no pending legal matters expected to have a material adverse effect and no material off-balance-sheet arrangements. Disclosure controls were assessed as effective.

Important facts for investors to verify

• Construction progress, schedule, total cost and remaining funding needs for each train and the Creole Trail Pipeline modifications.
• How much reported cash is restricted and the conditions and timing for release of project cash and distributions from subsidiaries.
• Debt maturities, variable-rate exposure, refinancing needs, covenant compliance and the effect of further interest-rate or derivative valuation changes.
• Affiliate service charges, guarantees and other related-party commitments, including the terminal-use and management-service arrangements.
• Expected timing and dilution from Class B unit conversion, and the partnership’s ability to sustain distributions before liquefaction operations generate cash.