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CQP > SEC Filings for CQP > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for CHENIERE ENERGY PARTNERS, L.P.

Form 10-Q for CHENIERE ENERGY PARTNERS, L.P.


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Information Regarding Forward-Looking Statements
This quarterly report contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical fact, included herein or incorporated herein by reference are "forward-looking statements." Included among "forward-looking statements" are, among other things:
statements regarding our ability to pay distributions to our unitholders;

statements regarding our expected receipt of cash distributions from Sabine Pass LNG, L.P. ("Sabine Pass LNG") or Sabine Pass Liquefaction, LLC ("Sabine Pass Liquefaction");

statements regarding future levels of domestic natural gas production, supply or consumption; future levels of liquefied natural gas ("LNG") imports into North America; sales of natural gas in North America or other markets; exports of LNG from North America; and the transportation, other infrastructure or prices related to natural gas, LNG or other energy sources;

statements regarding any financing or refinancing transactions or arrangements, including the amounts or timing thereof, interest rates thereon or ability to enter into such transactions or arrangements, whether on the part of Cheniere Energy Partners, L.P. or any subsidiary or at the project level;

statements regarding any commercial arrangements presently contracted, optioned or marketed, or potential arrangements, to be performed substantially in the future, including any cash distributions and revenues anticipated to be received and the anticipated timing thereof, and statements regarding the amounts of total LNG regasification, liquefaction or storage capacity that are, or may become, subject to such commercial arrangements;

statements regarding counterparties to our commercial contracts, construction contracts and other contracts;

statements relating to the construction and operations of our liquefaction facilities, including statements concerning the anticipated dates for commencement of construction or operations or at all, the costs related thereto and certain characteristics, including amounts of liquefaction capacity and storage capacity and the number of LNG trains;

statements regarding any business strategy, any business plans or any other plans, forecasts, projections or objectives, including potential revenues and capital expenditures, any or all of which are subject to change;

statements regarding legislative, governmental, regulatory, administrative or other public body actions, requirements, permits, investigations, proceedings or decisions; and

any other statements that relate to non-historical or future information.

These forward-looking statements are often identified by the use of terms and phrases such as "achieve," "anticipate," "believe," "develop," "estimate," "expect," "forecast," "plan," "potential," "project," "propose," "strategy" and similar terms and phrases, or by the use of future tense. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. You should not place undue reliance on these forward-looking statements, which are made as of the date of and speak only as of the date of this quarterly report.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. Other than as required under the securities laws, we assume no obligation to update or revise these forward-looking statements or provide reasons why actual results may differ.

As used herein, the terms "Cheniere Partners," "we," "our" and "us" refer to Cheniere Energy Partners, L.P. and its wholly owned subsidiaries.


Introduction

The following discussion and analysis presents management's view of our business, financial condition and overall performance and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes in Item 1. "Consolidated Financial Statements". This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future. Our discussion and analysis include the following subjects:

Overview of Business

Overview of Significant Events

Liquidity and Capital Resources

Results of Operations

Off-Balance Sheet Arrangements

Summary of Critical Accounting Policies and Estimates

Recent Accounting Standards

Overview of Business

We are a Delaware limited partnership formed by Cheniere Energy, Inc. ("Cheniere"). Through our wholly owned subsidiary, Sabine Pass LNG, we own and operate the Sabine Pass LNG terminal located in western Cameron Parish, Louisiana on the Sabine Pass Channel. Through our wholly owned subsidiary, Sabine Pass Liquefaction, we are constructing liquefaction facilities adjacent to the Sabine Pass LNG terminal.

Overview of Significant Events

In the first nine months of 2012, and through the filing date of this Form 10-Q,
we continue to execute our strategy to operate the Sabine Pass LNG terminal,
generate steady and reliable revenues under Sabine Pass LNG's long-term terminal
use agreements ("TUAs") and develop and construct liquefaction facilities
adjacent to the Sabine Pass LNG terminal (the "Liquefaction Project"). The major
events in our business that have occurred since January 1, 2012 include the
following:
         In January 2012, Sabine Pass Liquefaction entered into an amended and
          restated LNG Sale and Purchase Agreement ("SPA") with BG Gulf Coast
          LNG, LLC ("BG"), a subsidiary of BG Group plc, under which BG agreed to
          purchase an additional 2.0 million tonnes per annum ("mtpa") of LNG,
          bringing BG's total annual contract quantity to 5.5 mtpa of LNG.


         In January 2012, Sabine Pass Liquefaction entered into an LNG SPA with
          Korea Gas Corporation ("KOGAS"), under which KOGAS agreed to purchase
          182.5 million MMBtu of LNG per year (approximately 3.5 mtpa).


         In April 2012, Sabine Pass Liquefaction and Sabine Pass LNG received
          authorization under Section 3 of the Natural Gas Act (the "Order") from
          the Federal Energy Regulatory Commission ("FERC") to site, construct
          and operate facilities for the liquefaction and export of domestically
          produced natural gas at the Sabine Pass LNG terminal located in Cameron
          Parish, Louisiana. The Order authorizes the development of up to four
          modular LNG trains.


         In May 2012, we entered into a Unit Purchase Agreement ("Agreement")
          with Blackstone CQP Holdco LP ("Blackstone").  Under the Agreement,
          Blackstone agreed to purchase $1.5 billion of newly issued Cheniere
          Partners Class B units ("Class B Units") from us in a private
          placement.  Cheniere also agreed to purchase $500.0 million of Class B
          Units pursuant to a separate unit purchase agreement.  Proceeds from
          the financings will be used to fund part of the equity portion of the
          costs of developing, constructing and placing into service the
          Liquefaction Project. In August 2012, Blackstone purchased $500.0
          million of Class B Units from Cheniere Partners. In September and
          October 2012, Blackstone purchased $500.0 million and $300.0 million
          additional Class B Units, respectively, for an aggregate investment to
          date of $1.3 billion. In June and July 2012, Cheniere purchased $166.7
          million and $333.3 million of Class B Units for an aggregate investment
          of $500 million.


         In June 2012, we issued a limited notice to proceed to Bechtel Oil, Gas
          and Chemicals, Inc. ("Bechtel") to construct LNG trains 1 and 2 of the
          Liquefaction Project.


         In July 2012, Sabine Pass Liquefaction closed on a $3.6 billion senior
          secured credit facility (the "Liquefaction Credit Facility") that will
          be used to fund a portion of the costs of developing, constructing and
          placing into service LNG trains 1 and 2 of the Liquefaction Project.


         In September 2012, we sold 8.0 million common units in an underwritten
          public offering at a price of $25.07 per common unit for net cash
          proceeds of $194.0 million.


         In October 2012, Sabine Pass LNG repurchased approximately 97% of the
          outstanding $550.0 million 7.25% Senior Secured Notes due 2013 (the
          "2013 Notes"). Funds used for the repurchase included proceeds received
          from newly issued $420.0 million 6.50% senior secured notes due in 2020
          (the "2020 Notes") and from an equity contribution from us. Sabine Pass
          LNG has issued a redemption notice for the remaining approximately
          $16.5 million outstanding 2013 Notes which it expects to redeem in
          November 2012.

Liquidity and Capital Resources

Cash and Cash Equivalents

As of September 30, 2012, we had $369.1 million of cash and cash equivalents and $390.5 million of restricted cash and cash equivalents, which is restricted as described below.

In January 2011, we initiated an at-the-market program to sell up to 1.0 million common units the proceeds from which are used primarily to fund development costs associated with the Liquefaction Project. During the year ended December 31, 2011, we sold 0.5 million common units with net proceeds of $9.0 million. During the nine months ended September 30, 2012, we sold 0.5 million common units in connection with the at-the-market program with net proceeds of $11.1 million. We paid $0.3 million in commissions to Miller Tabak + Co., Inc., as sales agent, in connection with the at-the-market program during the nine months ended September 30, 2012.

In September 2011, we sold 3.0 million common units in an underwritten public offering and 1.1 million common units to Cheniere Common Units Holding, LLC ("Cheniere Common Units Holding") at a price of $15.25 per common unit. We received net proceeds of approximately $60 million that we are using for general business purposes, including development costs associated with the Liquefaction Project. In September 2012, we sold 8.0 million common units in an underwritten public offering at a price of $25.07 per common unit. We received net proceeds of $194.0 million, a portion of which we have used for the partial repayment of the 2013 Notes, and, to the extent not so used, for general business purposes.

During the year ended December 31, 2011, we also received $1.5 million in net proceeds from our general partner in connection with the exercise of its right to maintain its 2% ownership interest in us. We received $34.9 million in net proceeds from our general partner in connection with the exercise of its right to maintain its 2% ownership interest in us during the nine months ended September 30, 2012.

During the nine months ended September 30, 2012, we issued and sold 100 million Class B Units at a price of $15.00 per Class B Unit, resulting in total gross proceeds of $1.5 billion that will be used to fund the equity portion of the costs of developing, constructing and placing into service the Liquefaction Project.


Sabine Pass LNG Terminal
Regasification Facilities
Approximately 2.0 Bcf/d of the regasification capacity at the Sabine Pass LNG terminal has been reserved under two long-term third-party TUAs, under which Sabine Pass LNG's customers are required to pay fixed monthly fees, whether or not they use the LNG terminal. Capacity reservation fee TUA payments are made by Sabine Pass LNG's third-party TUA customers as follows:
Total Gas and Power North America, Inc. ("Total") has reserved approximately 1.0 Bcf/d of regasification capacity and is obligated to make monthly capacity payments to Sabine Pass LNG aggregating approximately $125 million per year for 20 years that commenced April 1, 2009. Total S.A. has guaranteed Total's obligations under its TUA up to $2.5 billion, subject to certain exceptions; and

Chevron U.S.A. Inc. ("Chevron") has reserved approximately 1.0 Bcf/d of regasification capacity and is obligated to make monthly capacity payments to Sabine Pass LNG aggregating approximately $125 million per year for 20 years that commenced July 1, 2009. Chevron Corporation has guaranteed Chevron's obligations under its TUA up to 80% of the fees payable by Chevron.

Each of Total and Chevron previously paid Sabine Pass LNG $20.0 million in nonrefundable advance capacity reservation fees, which are being amortized over a 10-year period as a reduction of each customer's regasification capacity reservation fees payable under its respective TUA.
Sabine Pass Liquefaction has also entered into a TUA with Sabine Pass LNG pursuant to which Sabine Pass Liquefaction has reserved approximately 2.0 Bcf/d of regasification capacity and is obligated to make monthly capacity payments to Sabine Pass LNG aggregating approximately $250 million per year, continuing until at least 20 years after one of Sabine Pass Liquefaction's customers delivers its first commercial cargo at Sabine Pass Liquefaction's facilities under construction, which may occur as early as late 2015. Sabine Pass Liquefaction obtained this reserved capacity as a result of an assignment in July 2012 by Cheniere Energy Investments, LLC ("Cheniere Investments") of its rights, title and interest under its TUA. In connection with the assignment, Sabine Pass Liquefaction, Cheniere Investments and Sabine Pass LNG entered into a terminal use rights assignment and agreement ("TURA") pursuant to which Cheniere Investments has the right to use Sabine Pass Liquefaction's reserved capacity under the TUA and has the obligation to make the monthly capacity payments required by the TUA to Sabine Pass LNG. The revenue earned by Sabine Pass LNG from the capacity payments made under the TUA is eliminated upon consolidation of our financial statements. We have guaranteed the obligations of Sabine Pass Liquefaction under its TUA and the obligations of Cheniere Investments under the TURA.
In September 2012, Sabine Pass Liquefaction entered into a partial TUA assignment agreement with Total, whereby Sabine Pass Liquefaction will progressively gain access to Total's capacity and other services provided under Total's TUA with Sabine Pass LNG. These agreements will provide Sabine Pass Liquefaction with additional berthing and storage capacity at the Sabine Pass LNG terminal that may be used to accommodate the development of a fifth LNG train, provide increased flexibility in managing LNG cargo loading and unloading activity starting with the commencement of commercial operations of the third LNG train, and permit Sabine Pass Liquefaction to more flexibly manage its storage with the commencement of the first LNG train. Notwithstanding any arrangements between Total and Sabine Pass Liquefaction, payments required to be made by Total under the TUA shall continue to be made by Total in accordance with the Sabine Pass LNG TUA.
In connection with the TUA assignment to Sabine Pass Liquefaction, Cheniere Investments entered into an amended and restated variable capacity rights agreement ("VCRA") with Cheniere Marketing, LLC, a wholly owned subsidiary of Cheniere ("Cheniere Marketing"), in order for Cheniere Investments to monetize the capacity rights granted under the TURA. Under the terms of the VCRA, Cheniere Marketing is responsible for monetizing the capacity at the Sabine Pass LNG terminal held by Cheniere Investments under the TURA and has the right to utilize all of the services and other rights at the Sabine Pass LNG terminal available under the TURA. In consideration of these rights, Cheniere Marketing is obligated to pay Cheniere Investments 80% of the expected gross margin of each cargo of LNG delivered to the Sabine Pass LNG terminal. To the extent payments from Cheniere Marketing to Cheniere Investments under the VCRA increase our available cash in excess of the common unit and general partner distributions and certain reserves, the cash would be distributed to Cheniere in the form of distributions on its subordinated units. During the term of the VCRA, Cheniere Marketing is responsible for the payment of taxes and new regulatory costs paid by Cheniere Investments under the TUA. Cheniere Marketing continues to develop its business, lacks a credit rating and may be limited by access to capital. Cheniere, which has guaranteed the obligations of Cheniere Marketing under the VCRA, has a non-investment grade corporate rating.


Under each of these TUAs, Sabine Pass LNG is entitled to retain 2% of the LNG delivered for the customer's account.

Liquefaction Facilities

In June 2010, we formed Sabine Pass Liquefaction to own, develop and operate liquefaction facilities adjacent to the Sabine Pass LNG terminal. In constructing the liquefaction facilities, we propose to take advantage of the existing marine and storage facilities that were constructed for the LNG receiving terminal, thereby saving a substantial amount of capital cost compared to the cost of constructing a greenfield facility. We anticipate that LNG exports could commence as early as 2015 with each LNG train commencing operations approximately six to nine months after the previous LNG train.

The Department of Energy ("DOE") has granted Sabine Pass Liquefaction an order authorizing the export of up to the equivalent of 16 mtpa (approximately 800 Bcf) per year of domestically produced LNG by vessel from the Sabine Pass LNG terminal to Free Trade Agreement ("FTA") countries for a 30-year term, beginning on the earlier of the date of first export or September 7, 2020, and another order authorizing the export of up to the equivalent of 803 Bcf per year (approximately 16 mtpa) of domestically produced LNG by vessel from the Sabine Pass LNG terminal to non-FTA countries for a 20-year term, beginning on the earlier of the date of first export or May 20, 2016.

In April 2012, Sabine Pass Liquefaction received authorization from the FERC to site, construct and operate liquefaction and export facilities at the Sabine Pass LNG terminal.

Sabine Pass Liquefaction has entered into four third-party SPAs, under which customers have committed to purchase, in aggregate, 834.0 million MMBtu of LNG per year (approximately 16 mtpa) as follows:
BG Gulf Coast LNG, LLC ("BG") has agreed to purchase 286.5 million MMBtu of LNG per year (approximately 5.5 mtpa);

Gas Natural Aprovisionamientos SDG S.A. ("Gas Natural Fenosa"), an affiliate of Gas Natural SDG S.A., has agreed to purchase 182.5 million MMBtu of LNG per year (approximately 3.5 mtpa);

Korea Gas Corporation ("KOGAS") has agreed to purchase 182.5 million MMBtu of LNG per year (approximately 3.5 mtpa); and

GAIL (India) Limited ("GAIL") has agreed to purchase 182.5 million MMBtu of LNG per year (approximately 3.5 mtpa).

In aggregate, these customers have agreed to pay Sabine Pass Liquefaction approximately $2.3 billion annually, plus an amount per MMBtu of LNG equal to 115% of the final settlement price for the New York Mercantile Exchange natural gas futures contract for the month in which the relevant cargo is scheduled.

In addition, Cheniere Marketing has entered into an SPA to purchase certain excess LNG produced that is not committed to non-affiliate parties, up to a maximum of 104.0 million MMBtu of LNG per year (approximately 2.0 mtpa). The sales price to be paid by Cheniere Marketing will be 115% of the then-current Henry Hub price per MMBtu plus a profit sharing equal to 100% of profits up to $3.00/MMBtu for the first 36 million MMBtu of the most profitable cargoes sold each year to Cheniere Marketing and 20% of profits for the subsequent 68 million MMBtu sold each year to Cheniere Marketing.

In November 2011, Sabine Pass Liquefaction entered into a lump sum turnkey agreement with Bechtel for procurement, engineering, design, installation, training, commissioning and placing into service the first two LNG trains and related facilities adjacent to the Sabine Pass LNG terminal. We issued to Bechtel a limited notice to proceed with construction of LNG trains 1 and 2 in June 2012, and a full notice to proceed with construction of LNG trains 1 and 2 in August 2012. We expect to begin operations of the first LNG train in late 2015, with the second LNG train commencing operations approximately six to nine months after the first LNG train. We expect to complete our construction plan and cost estimates for LNG trains 3 and 4 by the end of 2012 and begin implementing a financing strategy for those LNG trains. Commencement of construction for the third and fourth LNG trains is subject, but not limited to, entering into an EPC contract, obtaining financing and making a final investment decision.

The cost to construct LNG trains 1 and 2 is currently estimated to be approximately $4.5 billion to $5 billion, before financing costs. Our cost estimates are subject to change due to such items as change orders, delays in construction, increased component and material costs, escalation of labor costs and increased spending to maintain our construction schedule.


Financing

In May 2012, we and Blackstone entered into a unit purchase agreement whereby we agreed to sell to Blackstone in a private placement 100 million Class B Units of Cheniere Partners at a price of $15.00 per Class B Unit. Subsequent to an initial funding of $500 million by Blackstone, we can require, based on liquidity needs, that Blackstone make additional capital contributions until Blackstone has funded $1.5 billion in the aggregate. In addition, we and a wholly owned subsidiary of Cheniere entered into a unit purchase agreement whereby we agreed to sell 33.3 million Class B Units at a price of $15.00 per unit, for total consideration of $500 million, of which $166.7 million was sold in June 2012 so that we could issue a limited notice to proceed to Bechtel and the remaining $333.3 million was sold in July 2012. We will use the net proceeds from the private placements to pay for a portion of the cost to construct the first two LNG trains and related facilities and equipment. During the nine months ended September 30, 2012, we issued and sold an aggregate of 100 million Class B Units at a price of $15.00 per Class B Unit, resulting in total gross proceeds of $1.5 billion. In October 2012, Blackstone purchased $300.0 million of additional Class B Units, which, when added to prior Class B Units purchased, equals $1.3 billion total invested.

In July 2012, Sabine Pass Liquefaction entered into the $3.6 billion Liquefaction Credit Facility with a syndicate of lenders. The Liquefaction Credit Facility will be used to fund a portion of the costs of developing, constructing and placing into operation LNG trains 1 and 2 of the Liquefaction Project. The Liquefaction Credit Facility will mature on the earlier of July 31, 2019 or the second anniversary of the completion date of LNG trains 1 and 2 of the Liquefaction Project. Borrowings under the Liquefaction Credit Facility may be refinanced, in whole or in part, at any time without premium or penalty, except for interest hedging and interest rate breakage costs. Sabine Pass Liquefaction made a $100.0 million borrowing under the Liquefaction Credit Facility in August 2012 after meeting the required conditions precedent to the initial advance. The second advance will not be made until Sabine Pass Liquefaction has received an aggregate of at least $1.9 billion of equity or subordinated debt proceeds, and has expended at least $1.8 billion of such funds in payment of costs for LNG trains 1 and 2 of the Liquefaction Project. In addition, the second advance will not be made until Cheniere Creole Trail Pipeline, L.P. has received equity or debt commitments sufficient to fund the pipeline modifications necessary to provide sufficient gas supply for the Liquefaction Project.

Sources and Uses of Cash

The following table summarizes (in thousands) the sources and uses of our cash
and cash equivalents for the nine months ended September 30, 2012 and 2011. The
table presents capital expenditures on a cash basis; therefore, these amounts
differ from the amounts of capital expenditures, including accruals, that are
referred to elsewhere in this report. Additional discussion of these items
follows the table.
                                                               Nine Months Ended
                                                                 September 30,
                                                             2012             2011
Sources of cash and cash equivalents
Proceeds from the sale of Class B Units                 $  1,387,560     $          -
Proceeds from the sale of partnership common and
general partner units                                        240,114           70,360
Proceeds from Liquefaction Credit Facility                   100,000                -
Operating cash flow                                                -           12,634
Total sources of cash and cash equivalents                 1,727,674           82,994

Uses of cash and cash equivalents
LNG terminal construction-in-process, net                   (876,531 )         (6,419 )
Investment in restricted cash and cash equivalents          (289,851 )              -
Debt issuance costs                                         (210,126 )              -
Operating cash flow                                           (6,454 )              -
Distributions to unitholders                                 (40,696 )        (34,704 )
Other                                                        (16,331 )           (722 )
Total uses of cash and cash equivalents                   (1,439,989 )        (41,845 )

Net increase (decrease) in cash and cash equivalents         287,685           41,149
Cash and cash equivalents-beginning of period                 81,415           53,349
Cash and cash equivalents-end of period                 $    369,100     $     94,498


Proceeds from the Sale of Class B Units

During the nine months ended September 30, 2012, we issued and sold an aggregate of 100.0 million Class B Units to Cheniere and Blackstone at a price of $15.00 per Class B Unit, resulting in total net proceeds of $1,387.6 million.

Proceeds from the Sale of Partnership Common and General Partner Units

In September 2012, we sold 8.0 million common units in an underwritten public . . .

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