Cheniere Energy Partners, L.P. annual report, FY2017

Cheniere Energy Partners, L.P. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. The Partnership develops and operates the Sabine Pass LNG terminal and liquefaction facilities in Louisiana, along with the Creole Trail Pipeline. Trains 1–4 were operational, Train 5 was under construction, and Train 6 remained subject to commercial arrangements, financing and a final investment decision.

Financial performance and liquidity

Metric	2017	2016
Revenue	$4.304 billion	$1.100 billion
Operating income	$1.156 billion	$250 million
Net income (loss)	$490 million	$(171) million
Operating cash flow	$977 million	$0
Investing cash flow	$(1.290) billion	$(2.353) billion
Financing cash flow	$1.297 billion	$2.524 billion
Interest expense, net of capitalized interest	$614 million	$357 million

Fourth-quarter revenue was $1.518 billion, operating income $540 million and net income $374 million. Basic and diluted net income per common unit was $0.76 for the quarter.
Revenue growth primarily reflected more operating trains and higher LNG sales volumes. LNG revenue recognized was 684 TBtu, compared with 151 TBtu in 2016. Affiliate LNG revenue was $1.389 billion of the 2017 total.
Derived operating margin was approximately 26.9% in 2017, versus 22.7% in 2016; derived net margin was approximately 11.4% in 2017. These ratios are calculated from reported revenue and income.
At year-end, total assets were $17.553 billion and property, plant and equipment, net, was $15.139 billion. Debt was $16.240 billion before discounts, premiums and issuance costs; balance-sheet debt, net, was $16.046 billion.
Cash and cash equivalents were zero. Restricted cash was $1.589 billion, including $1.045 billion held by the Partnership and guarantor subsidiaries and $544 million designated for the liquefaction project. Available commitments were $470 million under SPL’s working-capital facility and $220 million under the CQP credit facilities. Restricted cash is not equivalent to unrestricted liquidity.
Cash distributions to owners totaled $294 million in 2017. The fourth-quarter distribution of $0.50 per common and subordinated unit was paid in February 2018.

Per-unit reporting caveat: Despite consolidated net income of $490 million, the annual filing reports a $1.32 net loss per common unit. The Partnership’s allocation and distribution rules, including amortization of the Class B units’ beneficial conversion feature, affected the common-unit result; investors should consult the per-unit reconciliation rather than infer common-unit earnings from consolidated net income.

Material changes versus the prior year

Revenue increased $3.204 billion and operating income increased $906 million, as Trains 1 and 2 operated for more of the year and Trains 3 and 4 began operations in March and October 2017, respectively.
Operating cash flow rose from zero to $977 million, primarily due to increased receipts from LNG cargo sales. Investing outflows declined as construction spending slowed from the prior year.
Operating costs rose to $3.148 billion from $850 million, principally due to additional operating trains, higher feed-gas volumes and costs, and increased maintenance and depreciation.
Net interest expense increased $257 million. Management attributed this to higher debt and a smaller portion of interest being capitalized as trains completed construction.
The Partnership issued $1.5 billion of 5.25% notes due 2025 and used proceeds to repay part of the CQP credit facilities. SPL issued $800 million of 5.00% notes due 2037 and approximately $1.35 billion of 4.20% notes due 2028, among other project financings.
Class B units converted into common units in August 2017. Common units outstanding increased to 348.6 million at year-end; 135.4 million subordinated units remained outstanding.

Outlook, risks and unusual items

Train 5 was 83.1% complete at year-end, with substantial completion expected in the first half of 2019. Estimated total capital costs for Trains 1–5 were $12.5–$13.5 billion before financing costs and $17.5–$18.5 billion including financing costs, owners’ costs and contingencies. Management said available project financing, commitments and operating cash flows were expected to fund Train 5 and anticipated requirements.
Fixed-fee SPAs cover approximately 80%–95% of expected adjusted nominal production capacity of Trains 1–5. Annual third-party fixed fees were expected to rise to approximately $2.9 billion upon first commercial delivery from Train 5. The contracts generally include a variable component tied to approximately 115% of Henry Hub and fixed fees that may remain payable when deliveries are canceled or suspended, subject to contract terms.
Train 6 had regulatory approvals but no FID. Proceeding depended on acceptable commercial arrangements, an EPC contract and adequate financing. Management identified potential future LNG demand but did not provide a committed Train 6 schedule or financial forecast.
Debt, refinancing and liquidity are central risks: approximately $1.1 billion of debt was scheduled to mature in 2020 and $2.0 billion in 2021. Debt agreements restrict subsidiary distributions and require specified debt-service coverage tests. The filing reported covenant compliance at December 31, 2017.
Customer and affiliate exposure is significant. BG, Gas Natural Fenosa and KOGAS represented 39%, 27% and 23% of 2017 third-party revenue, respectively. Affiliate LNG revenue was also substantial. Cheniere manages the Partnership and provides personnel and services; the filing describes related-party arrangements and potential conflicts of interest.
In August 2017, Hurricane Harvey temporarily suspended construction and LNG loading; the terminal sustained no significant damage and the financial impact was not material. In February 2018, PHMSA issued a Corrective Action Order after minor leaks/releases at two tanks; both tanks were removed from service for analysis and remediation. Management did not expect a material effect, but the matter was ongoing.
Other disclosed matters include discussions with Louisiana regulators over self-reported Title V permit deviations, a pending challenge to one Louisiana property-tax exemption contract, and an unresolved EPA petition concerning a Title V permit. Management did not expect the LDEQ matter to materially affect results and assessed the tax-exemption lawsuit’s material-adverse-effect likelihood as remote.
The Tax Cuts and Jobs Act’s effects on the Partnership and unitholders were described as uncertain. The filing also flagged environmental and regulatory changes, construction delays or cost overruns, customer nonperformance, commodity and LNG-market conditions, operating incidents, and dependence on the single Sabine Pass facility.

Important facts for investors to verify

Whether Train 5 meets its expected completion date and capital-cost range, and whether any change orders or delays alter the estimates.
How much of reported restricted cash is available for general obligations, and the current usable capacity of credit facilities after letters of credit and covenants.
Debt maturities, refinancing plans, interest costs and the capacity of subsidiaries to upstream cash under debt covenants.
Customer credit and concentration, SPA fixed-fee protections and the actual timing and amount of contracted fees as each train enters commercial service.
The status and operational impact of the two tanks subject to the February 2018 PHMSA order, and any resulting remediation or compliance costs.
Progress on Train 6 contracts, financing and FID; the filing provides no committed FID or completion date.
The common-unit earnings allocation and distribution waterfall, including the effect of the beneficial conversion feature and subordinated units.