Business context and reporting period
Cheniere Energy Partners, L.P. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The partnership owns and operates the Sabine Pass LNG import terminal, with approximately 4.0 Bcf/d of regasification capacity and 16.9 Bcf of storage capacity, and is developing export liquefaction facilities. Results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 |
|---|---|---|
| Total revenue | $64.9 million, versus $66.6 million in 2010 | $213.0 million, versus $327.2 million in 2010 |
| Operating income | $29.5 million, versus $36.4 million | $107.6 million, versus $240.1 million |
| Operating margin | Approximately 45.5%, versus 54.6% | Approximately 50.5%, versus 73.4% |
| Net income (loss) | $(14.5) million, versus $(7.0) million | $(23.6) million, versus $110.2 million |
| Net cash from operations | Not separately provided for the quarter | $12.6 million, versus $95.0 million |
At September 30, cash and cash equivalents were $94.5 million; restricted cash was $137.3 million, including an $82.4 million debt-service reserve and $54.9 million set aside for interest. Current assets were $164.5 million and current liabilities $96.8 million. Property, plant and equipment, net, was $1.524 billion. Long-term debt, net of discount, was $2.191 billion; partners’ deficit was $524.1 million.
Net cash used in investing activities was $7.1 million and financing activities provided $35.7 million in the first nine months. The latter included $70.4 million of unit-sale proceeds and $34.7 million of distributions. Cash increased $41.1 million to $94.5 million. Interest paid, net of amounts capitalized, was $82.1 million.
The statement reports basic and diluted net income per common unit of $0.29 for the quarter and $0.93 for the nine months, despite consolidated net losses. The filing explains that distributions are treated as distributed earnings in the per-unit calculation under the partnership agreement; this measure should not be read as equivalent to consolidated net income.
Material changes versus the prior comparable periods
- Nine-month revenue fell $114.2 million and net income declined $133.8 million year over year. The main driver was the 2010 assignment of Cheniere Marketing’s terminal use agreement (TUA) to wholly owned Cheniere Investments: the related capacity revenue is eliminated on consolidation, while the partnership recognizes income under the associated variable capacity rights agreement (VCRA).
- Nine-month development expense, including affiliate expense, rose to $29.5 million from $5.7 million, primarily for the liquefaction project. For the quarter, it rose to $9.9 million from $4.6 million and contributed to the wider net loss.
- Nine-month operating and maintenance expense, including affiliate expense, decreased to $24.6 million from $29.3 million, mainly due to lower fuel costs from LNG inventory-management efficiencies.
- Operating cash flow decreased to $12.6 million from $95.0 million. Management attributed much of the decline to the period’s classification of $41.2 million transferred to restricted interest-payment accounts; the filing says this presentation difference would reverse upon the November 2011 interest payment.
Outlook, risks, and notable items
- Liquefaction project: In October 2011, after quarter-end, the partnership announced a 20-year LNG sale and purchase agreement with BG for approximately 3.5 mtpa, with an extension option of up to 10 years. The contract includes a fixed charge of $2.25/MMBtu (approximately $410 million annually) and a variable price of 115% of the relevant Henry Hub futures settlement. It is subject to regulatory approvals, financing, and a final investment decision.
- The first two trains are currently estimated to cost $4.5–$5.0 billion before financing costs. Management said the estimate remained subject to further engineering and could change with design, materials, labor, overruns, and schedule requirements. Export operations were anticipated as early as 2015; FERC authorization to construct and operate remained pending. DOE export authorizations cover up to approximately 16 mtpa, subject to conditions.
- Liquidity and distributions: Management expected available funds and operating cash flow to cover operating and interest requirements, but distributions from Sabine Pass LNG depend on indenture requirements, including a 2:1 fixed-charge coverage test, debt-service funding, and other conditions. Sabine Pass LNG’s ability to distribute cash also depends on substantial revenues from Cheniere Investments or other customers in addition to Total and Chevron payments.
- Common-unit distributions were $0.425 per unit for each of the first three 2011 quarters. Subordinated-unit distributions have not been paid since the quarter ended March 31, 2010. A further $0.425 common-unit distribution was declared October 21, 2011, for payment November 1.
- Debt and counterparties: Senior notes comprise $550 million of 7.25% notes due 2013 and approximately $1.666 billion of 7.5% notes due 2016, before discount. The notes are secured by Sabine Pass LNG’s equity and substantially all operating assets. The VCRA depends on Cheniere Marketing to monetize affiliate capacity; management noted it lacks a credit rating and its guarantor, Cheniere, has a non-investment-grade rating.
- Related parties and derivatives: The partnership has significant affiliate arrangements for capacity, management, and operating services. Derivatives were not designated for hedge accounting; at quarter-end, fuel derivatives had a $0.8 million liability and LNG inventory derivatives a $0.5 million asset. Nine-month fuel-derivative losses were $1.2 million.
- Controls and legal matters: Management concluded disclosure controls were ineffective because of a material weakness involving earnings-per-unit presentation; related 2010 and first-quarter 2011 reports had been restated. Remediation steps were implemented, but effectiveness testing was still to be completed. Management reported no known pending or threatened legal matters expected to have a material adverse effect and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether FERC approvals, financing, and a final investment decision are obtained, and whether projected liquefaction construction costs and timing hold.
- Whether the BG agreement’s conditions precedent are satisfied and whether additional long-term customer contracts are secured.
- Cash available for distributions after restricted balances, debt-service requirements, and indenture tests; also the continued absence of subordinated-unit distributions.
- The extent to which affiliate capacity monetization and related-party guarantees support operating cash flow, and the creditworthiness of the relevant counterparties.
- Whether the reported per-unit figures and the material weakness remediation are appropriately understood and whether enhanced controls are demonstrated to operate effectively.