Cheniere Energy Partners, L.P. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; includes unaudited fourth-quarter data. Filed February 24, 2012.
Business context
The partnership owns and operates the Sabine Pass LNG receiving terminal in Louisiana, with about 4.0 Bcf/d of regasification capacity and 16.9 Bcf of storage. Its principal growth initiative is adding up to four liquefaction trains. The existing terminal’s third-party capacity is contracted under long-term, fixed-fee agreements with Total and Chevron; the proposed export project depends on construction, financing, regulatory approvals, and customer agreements becoming effective.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $283.8 million | $399.3 million |
| Operating income | $144.6 million | $280.8 million |
| Operating margin | 51.0% | 70.3% |
| Net income (loss) | $(31.0) million | $107.6 million |
| Operating cash flow | $14.2 million | $104.1 million |
| Cash distributions to owners | $48.1 million | $163.2 million |
At year-end, cash and cash equivalents were $81.4 million; restricted cash was $96.1 million and primarily reserved for debt service. Long-term debt was $2.2155 billion principal ($2.1924 billion net of discount). The notes include $550 million due in 2013 and $1.6655 billion due in 2016. Interest expense, net, was $173.6 million. Total assets were $1.737 billion against a partners’ deficit of $545.0 million.
For Q4 2011, revenue was $70.8 million, operating income $37.0 million, and net loss $7.5 million. Q4 2010 revenue was $72.1 million, operating income $40.7 million, and net loss $2.7 million.
Changes versus the prior comparable period
- FY revenue fell 28.9%, operating income fell 48.5%, and the partnership moved from net income to a net loss. Management attributed the main decline to the 2010 transfer of an affiliate terminal-use agreement to Cheniere Investments: its payments are eliminated in consolidated results. Higher liquefaction development costs also weighed on 2011 results.
- Operating cash flow declined about 86% from 2010, reflecting the agreement structure and increased project-development spending.
- Development expense increased to $36.5 million from $10.6 million. Operating and maintenance expense decreased to $33.7 million from $39.2 million, primarily due to lower fuel costs.
- In 2011, the partnership raised about $70.2 million net from common-unit sales. Outstanding common units increased from 26.4 million to 31.0 million.
Outlook, risks, and unusual items
- Liquefaction project: Management expected construction of trains 1 and 2 to start in the first half of 2012 and operations in 2015. Their estimated cost was $4.5–$5.0 billion before financing costs; the Bechtel EPC contract was $3.9 billion, subject to change orders. The estimated cost for all four trains was $9–$10 billion before financing costs.
- Regulatory and funding conditions: DOE export authorizations had been obtained, but FERC construction and operating authorization remained pending. The filing anticipated a FERC decision in Q1 2012. The company expected to use project financing and debt and equity offerings; the EPC agreement required financing for the contract price by March 31, 2012 to avoid potential contractor change orders.
- Customer commitments: Four SPAs covered approximately 16 Mtpa in aggregate, but were subject to conditions including regulatory approvals, financing, and final investment decisions. Management anticipated annual fixed charges of approximately $2.3 billion once applicable trains were operating; these are prospective contract amounts, not 2011 revenue.
- Debt and distributions: Refinancing or otherwise satisfying the 2013 and 2016 notes is a significant funding risk. Distributions from Sabine Pass LNG are subject to indenture reserves, coverage tests, and other restrictions. Common-unit distributions remained $0.425 per quarter; subordinated-unit distributions had not been paid since the quarter ended March 31, 2010.
- Related-party and operating risks: The partnership depends on Cheniere and affiliates for management, personnel, and commercialization of capacity. Cheniere Marketing had no credit rating and limited access to capital; Cheniere was rated CCC+ by S&P. Other disclosed risks include construction delays or cost overruns, hurricanes, permits, customer or contractor performance, and market or counterparty risks.
- Unusual accounting and controls: The partnership recorded a $10.6 million non-cash lower-of-cost-or-market write-down related to affiliate LNG inventory. Prior 2010 and Q1 2011 filings had been restated for earnings-per-unit presentation after a material weakness was identified. Management and the auditor reported that controls were remediated and effective as of December 31, 2011; the financial-statement audit opinion was unqualified.
- Management reported no pending or threatened legal matter expected to have a material effect. The filing also disclosed litigation concerning the calculation and scope of the Crest Royalty; Cheniere agreed to indemnify the partnership for any obligation.
Important facts for investors to verify
- Whether FERC approval, financing, and final investment decisions were obtained on schedule, and whether project cost and completion estimates changed.
- Progress refinancing the $550 million 2013 notes and addressing the 2016 maturity, including financing terms and liquidity available for construction.
- Whether SPA conditions were satisfied and customers and guarantors remain able to perform; distinguish contracted future charges from realized cash flow.
- Cash available for distributions after debt covenants, reserves, project spending, and affiliate-related obligations; assess the credit exposure tied to the VCRA and Cheniere Marketing.
- The accounting reconciliation for reported FY 2011 net loss versus reported basic and diluted net income per common unit of $1.23, and continued effectiveness of controls following the prior restatement.