Cheniere Energy Partners, L.P. quarterly report, Q3 FY2012

Cheniere Energy Partners, L.P. — Q3 2012 Form 10-Q

Reporting period: Three and nine months ended September 30, 2012. The partnership owns and operates the Sabine Pass LNG receiving terminal and is developing liquefaction facilities at the site. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.

Financial performance and position

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Total revenue	$66.3	$64.9	$197.0	$213.0
Operating income	$0.8	$29.5	$43.9	$107.6
Net loss	$(42.4)	$(14.5)	$(86.6)	$(23.6)
Operating cash flow	Not provided for quarter	Not provided for quarter	$(6.5)	$12.6
Interest expense, net	$43.6	$43.3	$130.6	$130.1

Revenue declined 7.5% in the first nine months, primarily from lower LNG cargo loading fees, lower VCRA revenue and a provision for a firm LNG inventory purchase commitment. Q3 revenue rose 2.2% year over year.
Operating margin was approximately 1.2% in Q3 2012 versus 45.5% in Q3 2011; for the nine-month periods it was 22.3% versus 50.5%. Consolidated net losses widened substantially.
Reported basic and diluted net income per common unit was $0.04 for Q3 and $0.36 for the nine months, despite consolidated net losses. The filing’s partnership allocation and distribution methodology, including the Class B beneficial conversion feature, affects per-unit allocations.
At September 30, cash and cash equivalents were $369.1; restricted cash was $390.5. Current assets were $536.4 and current liabilities $177.5, but a substantial portion of cash was contractually restricted and unavailable for general use.
Long-term debt, net of discount, totaled $2,295.9: $2,195.9 of Senior Notes and $100.0 drawn under the Liquefaction Credit Facility. Total assets were $3,470.9 and partners’ capital was $930.5.
Nine-month capital spending on LNG terminal construction-in-process was $876.5. Cash from financing was $299.1, including $1,387.6 net Class B unit proceeds, $240.1 from partnership units and $100.0 of facility borrowing; uses included construction, restricted-cash funding, debt issuance costs and $40.7 of distributions.

Material changes and significant events

Net loss increased by $27.9 in Q3 and by $63.1 for the first nine months compared with 2011. Management cited higher costs to manage liquefaction construction; nine-month results also reflected lower revenue, higher development expense and higher operating and maintenance expense.
Q3 general and administrative expense, including affiliate expense, rose to $37.5 from $5.8; nine-month expense rose to $51.2 from $19.0. Management attributed the increase primarily to construction-management costs. Operating and maintenance expense, including affiliate expense, also increased, principally due to dredging.
In June 2012, trains 1 and 2 met capitalization criteria; costs thereafter were recorded as construction-in-process. Nine-month development expense nevertheless increased to $35.4 from $26.8.
The partnership sold 100 million Class B units for $1.5 billion gross proceeds during the nine months. The units have a compounded quarterly conversion-value increase of 3.5%, subject to specified adjustments, and are not entitled to cash distributions before conversion other than in liquidation.
Sabine Pass Liquefaction closed a $3.6 billion senior secured credit facility in July and drew $100 million in August. A further advance requires specified equity or subordinated-debt funding and spending thresholds, as well as pipeline financing commitments.
After quarter-end, Blackstone bought an additional $300 million of Class B units. Sabine Pass LNG repurchased approximately 97% of its $550 million 2013 Notes, using proceeds from $420 million of 6.50% notes due 2020 and an approximately $194 million partnership equity contribution; it planned to redeem the remaining approximately $16.5 million in November.

Outlook, risks and contingencies

Management expected the first liquefaction train to begin operating in late 2015, with the second following approximately six to nine months later. Construction of trains 1 and 2 was estimated at $4.5–$5.0 billion before financing costs; the estimate could change due to delays, change orders, material or labor cost increases and schedule-related spending.
Four third-party LNG sale agreements cover approximately 16 mtpa in aggregate. The customers are expected to pay approximately $2.3 billion annually plus a gas-price-linked amount once deliveries begin. These are future contracted revenues, not reported-period revenue.
DOE export authorizations and FERC construction and operating authorization had been received as described in the filing. Construction and operating timing remains subject to execution and project risks; trains 3 and 4 require, among other things, an EPC contract, financing and a final investment decision.
Management warned that current operating cash generation was insufficient each quarter to fund the initial $0.425 quarterly common-unit distribution and related general-partner distribution; accumulated operating surplus was being used. The filing cautions that the distribution may not be sustainable before the first two trains operate, and that future Class B conversion could increase the number of common units.
Cash distributions from subsidiaries are subject to debt-reserve, coverage-ratio and other restrictions. The Liquefaction Credit Facility also limits subsidiary distributions until project completion and satisfaction of specified coverage and debt-service conditions.
Interest-rate swaps are intended to hedge at least 75% of projected facility borrowings on a weighted-average basis; they fixed the LIBOR component at approximately 1.98% for forecast borrowings up to $2.9 billion. A 10% change in the forward one-month LIBOR curve was estimated to change swap fair value by $19.1 million. The recorded swap liability was $29.7 million.
The filing reports significant related-party arrangements and affiliate service costs. Management reported no pending legal matter expected to have a material adverse effect, no material off-balance-sheet arrangements, and effective disclosure controls.

Important facts for investors to verify

Construction schedule, remaining funding needs and whether trains 1 and 2 stay within the $4.5–$5.0 billion estimate.
Availability of further Liquefaction Credit Facility advances and compliance with funding, spending, pipeline-commitment and covenant conditions.
Cash actually available for distributions after debt restrictions, reserves, project spending and affiliate-related costs; the sustainability of the $0.425 quarterly common-unit distribution.
Final terms and completion of the 2013 Notes refinancing and redemption, including any effects on debt service and liquidity.
Class B unit conversion timing, conversion value and resulting potential dilution to common unitholders.
Performance of LNG customers and other counterparties, required export and construction approvals, and the timing of contracted LNG sales and associated cash receipts.