Cheniere Energy Partners, L.P. quarterly report, Q2 FY2018

Cheniere Energy Partners, L.P. — Q2 2018 Form 10-Q

Reporting period: Three and six months ended June 30, 2018. The partnership develops and operates the Sabine Pass LNG export and regasification facilities. Trains 1–4 were operational; Train 5 was commissioning, and Train 6 was being commercialized.

Financial performance

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Revenue	$1.407 billion	$992 million	$3.000 billion	$1.883 billion
Income from operations	$455 million	$200 million	$963 million	$419 million
Net income	$281 million	$46 million	$616 million	$93 million
Net income (loss) per common unit	$0.55	$(3.71)	$1.22	$(4.50)
Operating cash flow	Not stated for quarter	Not stated for quarter	$805 million	$324 million

Q2 operating margin was approximately 32% (2017: 20%); six-month operating margin was approximately 32% (2017: 22%). These are calculated from reported operating income and revenue. Q2 2017 had positive net income but a reported loss per common unit, reflecting the Class B units’ beneficial conversion feature and related allocation effects; per-unit comparisons are therefore not directly indicative of operating performance.

Revenue drivers: LNG revenue rose to $1.155 billion in Q2 from $503 million, and to $2.170 billion for six months from $995 million. LNG volumes recognized as revenue increased to 222 TBtu in Q2 from 167 TBtu, and to 463 TBtu for six months from 295 TBtu, principally as more trains operated. Affiliate LNG revenue fell to $178 million in Q2 from $422 million.
Costs and interest: Total operating costs rose to $952 million in Q2 from $792 million and to $2.037 billion for six months from $1.464 billion, largely with the expanded operating fleet. Net interest expense increased to $184 million in Q2 and $369 million for six months, as less interest was capitalized to construction.
Cash flow and investment: Six-month operating cash flow was $805 million; capital investment cash outflow was $345 million; distributions were $527 million. Cash, cash equivalents and restricted cash declined by $68 million to $1.521 billion. There was no unrestricted cash balance reported; all reported cash was restricted.
Margins and earnings: Stronger operating income reflected additional operating trains. Cost of sales also increased with higher feed-gas volumes, partly offset by lower feed-gas prices. No commissioning-cargo proceeds were offset against construction costs in 2018, compared with $39 million in Q2 2017 and $163 million in the first half of 2017.

Balance sheet and liquidity

Total assets were $17.542 billion and partners’ equity was $728 million at June 30, 2018. Long-term debt, net, was $16.046 billion, unchanged from year-end 2017.
Restricted cash totaled $1.521 billion, including $846 million designated for the Liquefaction Project and $675 million held by the partnership and guarantor subsidiaries. Credit agreements restrict withdrawals and permitted uses.
Available commitments were $517 million under the $1.2 billion SPL Working Capital Facility and $220 million under the CQP Credit Facilities. The working-capital facility had $683 million of letters of credit and no loans outstanding; the CQP facilities had $1.090 billion outstanding.
The CQP Credit Facilities mature in February 2020, with quarterly principal payments beginning March 2019. The partnership and SPL reported compliance with debt covenants at quarter-end.

Outlook, risks and notable developments

Train 5 was 95.1% complete at June 30, with substantial completion expected in the first half of 2019. Management expected LNG revenue and operating costs to increase when Train 5 becomes operational; costs may not rise proportionately because of expected efficiencies.
Management stated that available commitments and operating cash flows were expected to be adequate for Train 5 completion and anticipated capital, operating and debt-service needs. No specific earnings or cash-flow guidance was provided.
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, owner’s costs and contingencies. Train 6 construction would depend on an EPC contract, commercial arrangements and adequate financing.
Two LNG storage tanks were removed from service after a minor LNG leak from one tank and a minor vapor release from another. A PHMSA consent order replaced the corrective action order; the company did not expect a material adverse effect from the investigation, repairs and remediation.
Customer concentration is significant: four customers each represented at least 10% of third-party revenue in Q2 2018. Long-term future transaction price allocated to unsatisfied performance obligations was reported as $57.5 billion, excluding certain variable consideration and other contract amounts under disclosure exemptions.
Level 3 physical gas-supply derivative valuations rely partly on unobservable market-basis assumptions; management disclosed potential material sensitivity to changes in those spreads. The company also identified a preliminary expected material balance-sheet impact from adopting lease accounting in 2019; effects on earnings and cash flows had not been determined.
The partnership declared a $0.56 per-unit distribution for Q2, payable August 14, 2018. This followed distributions of $0.55 per unit for Q1 2018.

Important facts for investors to verify

Train 5 completion timing, remaining costs and any changes to the first-half 2019 target.
Whether tank repairs and regulatory requirements affect terminal capacity, operating reliability or costs.
Cash available for distribution after restricted-cash limitations, capital spending, debt service and required reserves.
Debt refinancing and repayment plans ahead of the February 2020 CQP facility maturity and March 2019 scheduled principal payments.
Customer concentration, affiliate sales and the assumptions behind long-term contracted revenue and derivative valuations.
The eventual balance-sheet and operating effects of lease-accounting adoption in 2019.