Business Context and Reporting Period
Company: Cheniere Energy Partners, L.P. (Cheniere Partners)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Cheniere Partners owns and operates the Sabine Pass LNG terminal in Louisiana through its subsidiary, Sabine Pass LNG, L.P. The terminal has a regasification capacity of approximately 4.0 Bcf/d. In June 2010, the partnership initiated a project to add liquefaction facilities to transform the terminal into a bi-directional import/export facility. The partnership is managed by Cheniere Energy Partners GP, LLC, an affiliate of Cheniere Energy, Inc.
Key Financial Metrics
| Metric (in thousands) | 2010 | 2009 |
|---|---|---|
| Total Revenues | $399,282 | $416,790 |
| Net Income | $107,568 | $186,912 |
| Operating Cash Flow | $104,137 | $234,311 |
| Long-Term Debt | $2,187,724 | $2,110,101 |
| Cash and Cash Equivalents | $53,349 | $117,542 |
| Restricted Cash | $96,126 | $96,126 |
| Distributions Paid | $163,249 | $280,675 |
Note: The filing does not explicitly state a profit margin percentage; however, operating income was $280.8 million in 2010 versus $327.9 million in 2009.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $17.5 million (4.2%) from 2009 to 2010. This was primarily due to the June 2010 assignment of a Terminal Use Agreement (TUA) from Cheniere Marketing (an affiliate) to Cheniere Investments (a wholly-owned subsidiary). Consequently, $250 million in annual affiliate revenue is now eliminated upon consolidation, partially offset by full-year payments from third-party customers Total and Chevron.
- Net Income Decrease: Net income fell by $79.3 million (42.4%) to $107.6 million. The reduction was driven by the intercompany revenue elimination mentioned above, increased interest expense ($174.0 million vs. $147.2 million), and higher depreciation and development costs related to the new liquefaction project.
- Cash Flow Reduction: Operating cash flow dropped significantly by $130.2 million to $104.1 million, largely reflecting the shift in TUA payments from an external affiliate to an internal subsidiary.
- Distribution Policy Change: Due to reduced available cash following the TUA assignment, the partnership ceased paying distributions on subordinated units effective the quarter ended June 30, 2010. Common unit distributions remained at $0.425 per quarter.
Guidance, Outlook, and Risks
Outlook and Projects
- Liquefaction Project: The partnership is developing a bi-directional liquefaction project at Sabine Pass. As of February 2011, eight non-binding memoranda of understanding (MOUs) were in place representing up to 9.8 mtpa of capacity. Construction costs are estimated at approximately $400 per metric ton. Export is anticipated to commence as early as 2015.
- Regulatory Status: The U.S. Department of Energy (DOE) granted an order in September 2010 authorizing exports to Free Trade Agreement (FTA) countries. An application to expand this to non-FTA countries was filed. The Federal Energy Regulatory Commission (FERC) pre-filing process was completed in January 2011.
- Capital Raising: In January 2011, the partnership initiated an at-the-market program to sell up to 1.0 million common units to fund liquefaction development costs.
Risks and Contingencies
- Debt Refinancing: The partnership has substantial indebtedness ($2.2 billion) consisting of Senior Notes due 2013 ($550 million) and 2016 ($1.666 billion). Refinancing is required at maturity, and failure to do so could materially adversely affect operations.
- Customer Concentration: Future results depend heavily on performance by Total and Chevron under their TUAs. Failure by either to perform could materially impact liquidity.
- Subordination Period: The subordination period for subordinated units (held by Cheniere) has been extended indefinitely until specific financial tests are met, delaying their conversion to common units.
- Regulatory and Environmental: Operations are subject to extensive federal, state, and local regulations, including potential future greenhouse gas regulations that could increase compliance costs.
Investor Verification Checklist
- Debt Maturity Profile: Verify the ability to refinance $550 million of notes due in 2013 and $1.666 billion due in 2016 given current credit market conditions.
- Liquefaction Project Progress: Monitor the conversion of non-binding MOUs into definitive commercial agreements and the receipt of final FERC and DOE approvals for non-FTA exports.
- Subordinated Unit Status: Track the "adjusted operating surplus" and distribution metrics required to end the subordination period and convert subordinated units to common units.
- Related Party Transactions: Review the Variable Capacity Rights Agreement (VCRA) with Cheniere Marketing to assess the monetization of the 2.0 Bcf/d capacity held by Cheniere Investments.
- Cash Distribution Sustainability: Confirm that cash flow from Total and Chevron TUAs is sufficient to cover debt service and maintain the $0.425 quarterly distribution to common unitholders without reliance on subordinated unit cash flows.