Cheniere Energy Partners, L.P. - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2009
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
File No. 001-33366
CHENIERE
ENERGY PARTNERS, L.P.
(Exact
name of registrant as specified in its charter)
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Delaware
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20-5913059
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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700
Milam Street, Suite 800
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Houston,
Texas
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77002
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(Address
of principal executive offices)
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(Zip
code)
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Registrant’s
telephone number, including area code:
(713) 375-5000
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Units Representing Limited
Partner
Interests
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NYSE
Amex Equities
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(Title
of Class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ¨
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Accelerated filer x
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Non-accelerated filer ¨
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Smaller reporting company ¨
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
aggregate market value of the registrant’s Common Units held by non-affiliates
of the registrant was approximately $192,000,000 as of June 30,
2009.
The
issuer had 26,416,357 common units and 135,383,831 subordinated units
outstanding as of February 17, 2010.
Documents incorporated by reference:
None
CHENIERE
ENERGY PARTNERS, L.P
Index to
Form 10-K
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CAUTIONARY
STATEMENT
REGARDING
FORWARD-LOOKING STATEMENTS
This
annual 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 facts, included herein or
incorporated herein by reference are “forward-looking statements.” Included
among “forward-looking statements” are, among other things:
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statements
regarding our ability to pay distributions to our
unitholders;
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our
expected receipt of cash distributions from Sabine Pass LNG,
L.P.;
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statements
regarding future levels of domestic natural gas production, supply or
consumption; future levels of LNG imports into North America; sales of
natural gas in North America; and the transportation, other infrastructure
or prices related to natural gas, LNG or other energy
sources;
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statements
regarding any financing transactions or arrangements, or ability to enter
into such transactions or
arrangements;
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statements
regarding any terminal use agreement (“TUA”) or other agreements to be
entered into or 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 or storage capacity that are, or may become, subject to
TUAs or other contracts;
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statements
regarding counterparties to our TUAs, construction contracts and other
contracts;
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statements
regarding any business strategy, any business plans or any other plans,
forecasts, projections or objectives, any or all of which are subject to
change;
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statements
regarding legislative, governmental, regulatory, administrative or other
public body actions, requirements, permits, investigations, proceedings or
decisions; and
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any
other statements that relate to non-historical or future
information.
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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. 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 speak only
as of the date of this annual 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 in “Risk Factors.” All forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
these risk factors. These forward-looking statements are made as of the date of
this annual report.
ii
DEFINITIONS
In this
annual report, unless the context otherwise requires:
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Bcf means billion cubic
feet;
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Bcf/d means billion
cubic feet per day;
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EPC means engineering,
procurement and construction;
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EPCM means engineering,
procurement, construction and
management;
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LNG means liquefied
natural gas; and
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TUA means terminal use
agreement.
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ITEMS
1. AND 2. BUSINESS AND
PROPERTIES
General
We are a
Delaware limited partnership formed by Cheniere Energy, Inc. (“Cheniere”).
Through our wholly-owned subsidiary, Sabine Pass LNG, L.P. (“Sabine Pass LNG”),
we own and operate the Sabine Pass LNG receiving terminal located in western
Cameron Parish, Louisiana on the Sabine Pass Channel.
In March
and April 2007, we and Cheniere LNG Holdings, LLC (“Holdings”), a wholly-owned
subsidiary of Cheniere, as a selling untiholder, completed a public offering of
15,525,000 of our common units (the “Offering”). We received $98.4 million of
net proceeds, after deducting the underwriting discount and structuring fees,
upon issuance of 5,054,164 common units to the public in the Offering. We
invested the $98.4 million of net proceeds that we received from the Offering in
U.S. Treasury securities to fund a distribution reserve. As part of the
Offering, Holdings, as a selling unitholder, received $203.9 million of net
proceeds in connection with the sale of 10,470,836 of our common units to the
public. We did not receive any proceeds from the sale of common units by
Holdings. In connection with the Offering and in exchange for our common and
subordinated units and the right to receive the amount, if any, remaining in a
distribution reserve account, Holdings contributed to us the equity interests in
the entity owning the Sabine Pass LNG receiving terminal. As a result of the
Offering, Cheniere’s indirect ownership interest in us is approximately
90.6%.
In
the second quarter of 2009, Sabine Pass LNG purchased Sabine Pass Tug Services,
LLC (“Tug Services”), a wholly-owned subsidiary of Cheniere. As a
result, Sabine Pass LNG acquired a lease for the use of tug boats and marine
services at the Sabine Pass LNG receiving terminal. In connection
with the acquisition, Tug Services entered into agreements with Sabine Pass
LNG’s three TUA customers to provide their LNG cargo vessels with tug boat and
marine services at the Sabine Pass LNG receiving terminal.
LNG is
natural gas that, through a refrigeration process, has been reduced to a liquid
state, which represents approximately 1/600th of its gaseous volume. The
liquefaction of natural gas into LNG allows it to be shipped economically from
areas of the world where natural gas is abundant and inexpensive to produce to
other areas where natural gas demand and infrastructure exist to justify
economically the use of LNG. LNG is transported using oceangoing LNG vessels
specifically constructed for this purpose. LNG receiving terminals offload LNG
from LNG vessels, store the LNG prior to processing, heat the LNG to return it
to a gaseous state and deliver the resulting natural gas into pipelines for
transportation to market.
Our
primary business objectives are to operate the Sabine Pass LNG receiving
terminal and to generate stable cash flows sufficient to pay the initial
quarterly distribution to our unitholders and, over time and upon satisfaction
of these objectives, to increase our quarterly cash distribution. We intend to
achieve these objectives by executing the following strategies:
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successfully
managing the operation of the Sabine Pass LNG receiving terminal;
and
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expanding
our existing asset base through acquisitions from Cheniere or third
parties, or our own development, of complementary businesses or assets,
such as other LNG receiving terminals, natural gas storage assets and
pipelines.
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1
Our
Business
Sabine
Pass LNG has constructed and is now operating the Sabine Pass LNG receiving
terminal in western Cameron Parish, Louisiana, on the Sabine Pass Channel. In
2003, Cheniere formed Sabine Pass LNG to own, develop and operate the Sabine
Pass LNG receiving terminal. Sabine Pass LNG has long-term leases for
three tracts of land consisting of 853 acres in Cameron Parish, Louisiana for
the project site. The Sabine Pass LNG receiving terminal was
designed, and permitted by the Federal Energy Regulatory Commission (“FERC”),
with a regasification capacity of approximately 4.0 Bcf/d (with peak capacity of
4.3 Bcf/d) and aggregate LNG storage capacity of 16.9 Bcf. Construction at the
Sabine Pass LNG receiving terminal was substantially completed in the third
quarter of 2009. As of December 31, 2009, Sabine Pass LNG had
completed construction and attained full operability of the Sabine Pass LNG
receiving terminal, and such was accomplished within our budget.
Customers
The
entire approximately 4.0 Bcf/d of regasification capacity at the Sabine Pass LNG
receiving terminal has been contracted under two 20-year, firm commitment TUAs
with unaffiliated third parties, and a third TUA with Cheniere Marketing, LLC
(“Cheniere Marketing”), a wholly-owned subsidiary of Cheniere. Each
of the three customers at the Sabine Pass LNG receiving terminal must make the
full contracted amount of capacity reservation fee payments under its TUA
whether or not it uses any of its reserved capacity. Capacity
reservation fee TUA payments will be made by the Sabine Pass LNG third-party
customers as follows:
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Total
Gas and Power North America, Inc. (formerly known as Total LNG USA, Inc.)
(“Total”) has reserved approximately 1.0 Bcf/d of regasification capacity
and has agreed to make monthly capacity payments to Sabine Pass LNG
aggregating approximately $125 million per year for 20 years that
commenced on April 1, 2009. Total, S.A. has guaranteed
Total’s obligations under its TUA up to $2.5 billion, subject to certain
exceptions; and
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Chevron
U.S.A., Inc. (“Chevron”) has reserved approximately 1.0 Bcf/d of
regasification capacity and has agreed to make monthly capacity payments
to Sabine Pass LNG aggregating approximately $125 million per year for 20
years that commenced on July 1, 2009. Chevron Corporation
has guaranteed Chevron’s obligations under its TUA up to 80% of the fees
payable by Chevron.
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addition, Cheniere Marketing has reserved the remaining 2.0 Bcf/d of
regasification capacity and is entitled to use any capacity not utilized by
Total and Chevron. Cheniere Marketing began making its TUA capacity
reservation fee payments in the fourth quarter of 2008. Cheniere
Marketing is required to make monthly capacity payments aggregating
approximately $250 million per year for the period from January 1, 2009
through at least September 30, 2028. Cheniere Marketing has a limited operating
history, limited capital and no credit rating. Cheniere, which has guaranteed
the obligations of Cheniere Marketing under its TUA, has a non-investment grade
corporate rating.
Under
each of these TUAs, Sabine Pass LNG is also entitled to retain 2% of the LNG
delivered for the customer’s account, which Sabine Pass LNG will use primarily
as fuel for revaporization and self-generated power at the Sabine Pass LNG
receiving terminal.
Each of
Total and Chevron has paid us $20.0 million in nonrefundable advance capacity
reservation fees, which will be amortized over a 10-year period as a reduction
of each customer’s regasification capacity reservation fees payable under its
TUA.
Competition
Sabine
Pass LNG currently does not experience competition for its LNG terminal capacity
because the entire approximately 4.0 Bcf/d of regasification capacity that is
available at the Sabine Pass LNG receiving terminal has been fully reserved
under three 20-year TUAs, under which each of the terminal’s customers is
generally required to pay monthly fixed capacity reservation fees whether or not
it uses any of its reserved capacity.
If and
when Sabine Pass LNG has to replace any TUAs, we will compete with North
American LNG receiving terminals and their customers. In addition, to the extent
we are required to obtain LNG for cool down of the Sabine Pass LNG receiving
terminal, Sabine Pass LNG must compete in the world LNG market to purchase and
transport cargoes of LNG. Sabine Pass LNG may purchase and transport such
cargoes at costs that may result in losses upon resale of the regasified
LNG.
Governmental
Regulation
The
Sabine Pass LNG receiving terminal operations are subject to extensive
regulation under federal, state and local statutes, rules, regulations and laws.
These laws require that we engage in consultations with appropriate federal and
state agencies and that we
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obtain
and maintain applicable permits and other authorizations. This regulatory burden
increases the cost of operating the Sabine Pass LNG receiving terminal, and
failure to comply with such laws could result in substantial
penalties. We have been in substantial compliance with all
regulations discussed herein.
FERC
In order
to site and construct the Sabine Pass LNG receiving terminal, we received and
are required to maintain authorization from the FERC under Section 3 of the
Natural Gas Act of 1938 (“NGA”). In addition, orders from the FERC authorizing
construction of an LNG receiving terminal are typically subject to specified
conditions that must be satisfied throughout operation of the Sabine Pass LNG
receiving terminal. Throughout the life of the Sabine Pass LNG receiving
terminal, we will be subject to regular reporting requirements to the FERC and
the U.S. Department of Transportation regarding the operation and maintenance of
the facilities.
In 2005,
the Energy Policy Act of 2005 (“EPAct”) was signed into law. The EPAct gave the
FERC exclusive authority to approve or deny an application for the siting,
construction, expansion or operation of an LNG receiving terminal. The EPAct
amended the NGA to prohibit market manipulation. The EPAct increased
civil and criminal penalties for any violations of the NGA, the Natural Gas
Policy Act of 1978 (“NGPA”) and any rules, regulations or orders of the FERC up
to $1.0 million per day per violation. In accordance with the EPAct, the FERC
issued a final rule making it unlawful for any entity, in connection with the
purchase or sale of natural gas or transportation service subject to the FERC’s
jurisdiction, to defraud, make an untrue statement or omit a material fact or
engage in any practice, act or course of business that operates or would operate
as a fraud.
Other
Federal Governmental Permits, Approvals and Consultations
In
addition to the FERC authorization under Section 3 of the NGA, the
operation of the Sabine Pass LNG receiving terminal is also subject to
additional federal permits, approvals and consultations required by other
federal agencies, including: Advisory Counsel on Historic Preservation, U.S.
Army Corps of Engineers, U.S. Department of Commerce, National Marine Fisheries
Services, U.S. Department of the Interior, U.S. Fish and Wildlife Service, U.S.
Environmental Protection Agency (“EPA”) and U.S. Department of Homeland
Security.
The
Sabine Pass LNG receiving terminal is subject to U.S. Department of
Transportation siting requirements and regulations of the U.S. Coast Guard
relating to facility security. Moreover, the Sabine Pass LNG receiving terminal
is subject to local and state laws, rules, and regulations.
Environmental
Regulation
The
Sabine Pass LNG receiving terminal operations are subject to various federal,
state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations may impose substantial
penalties for noncompliance and substantial liabilities for pollution. Many of
these laws and regulations restrict or prohibit the types, quantities and
concentration of substances that can be released into the environment and can
lead to substantial liabilities for non-compliance or releases. Failure to
comply with these laws and regulations may also result in substantial civil and
criminal fines and penalties.
Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA)
CERCLA,
also known as the “Superfund” law, imposes liability, without regard to fault,
on certain classes of persons who are considered to be responsible for the spill
or release of a hazardous substance into the environment. Potentially liable
persons include the owner or operator of the site where the release occurred and
persons who disposed or arranged for the disposal of hazardous substances at the
site. Under CERCLA, responsible persons may be subject to joint and several
liability. Although CERCLA currently excludes petroleum, natural gas, natural
gas liquids and LNG from its definition of “hazardous substances,” this
exemption may be limited or modified by the U.S. Congress in the
future.
Clean
Air Act (CAA)
The
Sabine Pass LNG receiving terminal operations are subject to the federal CAA and
comparable state and local laws. We may be required to incur certain capital
expenditures over the next several years for air pollution control equipment in
connection with maintaining or obtaining permits and approvals addressing other
air emission-related issues. We do not believe, however, that operations of the
Sabine Pass LNG receiving terminal will be materially adversely affected by any
such requirements.
The U.S. Supreme Court has ruled that the EPA has authority under
existing legislation to regulate carbon dioxide and other heat-trapping gases in
mobile source emissions. Mandatory reporting requirements were promulgated by
the EPA and finalized on October 30, 2009. This rule requires
mandatory reporting for greenhouse gases from stationary fuel combustion
sources. An additional section would have required reporting for all
fugitive emissions throughout the Sabine Pass LNG receiving terminal and
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would
have impacted our reporting requirements; however, this section was deferred in
the final rule. In addition, Congress has considered proposed legislation
directed at reducing “greenhouse gas emissions.” It is not possible at this time
to predict how future regulations or legislation may address greenhouse gas
emissions and impact our business. However, future regulations and laws could
result in increased compliance costs or additional operating restrictions and
could have a material adverse effect on our business, financial position,
results of operations and cash flows.
Clean
Water Act (CWA)
The
Sabine Pass LNG receiving terminal operations are also subject to the federal
CWA and analogous state and local laws. Pursuant to certain requirements of the
CWA, the EPA has adopted regulations concerning discharges of wastewater and
storm water runoff. This program requires covered facilities to obtain
individual permits, participate in a group permit or seek coverage under an EPA
general permit.
Resource
Conservation and Recovery Act (RCRA)
The
federal RCRA and comparable state statutes govern the disposal of “hazardous
wastes.” In the event any hazardous wastes are generated in connection with the
Sabine Pass LNG receiving terminal operations, we are subject to regulatory
requirements affecting the handling, transportation, treatment, storage and
disposal of such wastes.
Endangered
Species Act
The
Sabine Pass LNG receiving terminal operations may also be restricted by
requirements under the Endangered Species Act, which seeks to ensure that human
activities neither jeopardize endangered or threatened animal, fish and plant
species nor destroy or modify their critical habitats.
We have
no employees. We rely on our general partner to manage all aspects of the
operation and maintenance of the Sabine Pass LNG receiving terminal and the
conduct of our business. Because our general partner has no employees, it relies
on subsidiaries of Cheniere to provide the personnel necessary to allow it to
meet its management obligations to us and to Sabine Pass LNG. As of
February 17, 2010, Cheniere had 196 full-time employees. See Note
13—“Related Party Transactions” in our Notes to Consolidated Combined Financial
Statements for a discussion of these arrangements. Cheniere considers
its current employee relations to be favorable.
Our
common units have been publicly traded since March 21, 2007, and are traded
on the NYSE Amex Equities, formerly the NYSE Alternext US, under the symbol
“CQP”. Our principal executive offices are located at 700 Milam Street, Suite
800, Houston, Texas 77002, and our telephone number is (713) 375-5000. Our
internet address is http://www.cheniereenergypartners.com. We provide public
access to our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to these reports as soon as
reasonably practicable after we electronically file those materials with, or
furnish those materials to, the Securities and Exchange Commission (“SEC”) under
the Exchange Act. These reports may be accessed free of charge through our
internet website. We make our website content available for informational
purposes only. The website should not be relied upon for investment purposes,
nor is it incorporated by reference into this Form 10-K.
We will
also make available to any stockholder, without charge, copies of our Annual
Report on Form 10-K as filed with the SEC. For copies of this, or any other
filing, please contact: Cheniere Energy Partners, L.P, Investor Relations
Department, 700 Milam Street, Suite 800, Houston, Texas 77002 or call (713)
562-5000. In addition, the public may read and copy any materials we file with
the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580,
Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
internet site (www.sec.gov) that contains reports and other information
regarding issuers, like us, that file electronically with the SEC.
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Limited
partner interests are inherently different from the capital stock of a
corporation, although many of the business risks to which we are subject are
similar to those that would be faced by a corporation engaged in a similar
business. The following are some of the important factors that could affect our
financial performance or could cause actual results to differ materially from
estimates contained in our forward-looking statements. We may encounter risks in
addition to those described below. Additional risks and uncertainties not
currently known to us, or that we currently deem to be immaterial, may also
impair or adversely affect our business, results of operation, financial
condition, liquidity and prospects.
The risk
factors in this report are grouped into the following categories:
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Risks
Relating to Our Financial Matters;
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Risks
Relating to Our Business;
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Risks
Relating to Our Cash Distributions;
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Risks
Relating to an Investment in Us and Our Common Units;
and
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Risks
Relating to Tax Matters.
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We
have substantial indebtedness, which we will need to refinance in whole or in
part at or prior to maturity.
As of
December 31, 2009, we had $2.2 billion of indebtedness outstanding,
consisting primarily of the $550.0 million of 7¼% Senior Secured Notes due 2013
(“2013 Notes”) and $1,633.0 million, net of discount, of 7½% Senior Secured
Notes due 2016 (“2016 Notes” and collectively with the 2013 Notes, the “Senior
Notes”). We will have to refinance, extend or otherwise satisfy, all or a
portion of our indebtedness. We may not be able to refinance, extend or
otherwise satisfy our indebtedness as needed, on commercially reasonable terms
or at all.
Our
substantial indebtedness could adversely affect our ability to operate our
business and prevent us from satisfying or refinancing our debt obligations.
Our
substantial indebtedness could have important adverse consequences,
including:
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limiting
our ability to attract customers;
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limiting
our ability to compete with other companies that are not as highly
leveraged;
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limiting
our flexibility in and ability to plan for or react to changing market
conditions in our industry and to economic downturns, and making us more
vulnerable than our less leveraged competitors to an industry or economic
downturn;
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limiting
our ability to use operating cash flow in other areas of our business
because we must dedicate a substantial portion of these funds to service
debt, including indebtedness that we may incur in the
future;
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limiting
our ability to obtain additional financing to fund our capital
expenditures, working capital, acquisitions, debt service requirements or
liquidity needs for general business or other purposes;
and
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resulting
in a material adverse effect on our business, results of operations and
financial condition if we are unable to service or refinance our
indebtedness or obtain additional financing, as
needed.
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Our
substantial indebtedness and the restrictive covenants contained in our debt
agreements may not allow us the flexibility that we need to operate our business
in an effective and efficient manner and may prevent us from taking advantage of
strategic and financial opportunities that would benefit our
business.
If we are
unsuccessful in operating our business due to our substantial indebtedness or
other factors, we may be unable to repay, refinance, or extend our indebtedness
on commercially reasonable terms or at all.
To
service our indebtedness, we will require significant amounts of
cash.
We will
require significant cash flow from operations in order to make annual interest
payments of approximately $164.8 million on the Senior Notes. Our ability to
make payments on and to refinance our indebtedness, including the Senior Notes,
and to fund capital expenditures, will depend on our ability to generate cash in
the future. Our business may not generate sufficient cash flow from operations,
currently anticipated costs may increase or future borrowings may not be
available to us, which could cause us to be unable to pay or refinance our
indebtedness, including the Senior Notes, or to fund our other liquidity
needs.
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Our
ability to generate needed amounts of cash is substantially dependent upon
Sabine Pass LNG’s TUAs with three customers, and we will be materially and
adversely affected if any customer fails to perform its TUA obligations for any
reason.
We are
dependent, for substantially all of our operating revenues and cash flows, on
TUAs with Chevron and Total, each of which has agreed to pay us approximately
$125 million annually, and with Cheniere Marketing, which is required to pay us
approximately $250 million annually. We are dependent on each customer’s
continued willingness and ability to perform its obligations under its TUA. We
are also exposed to the credit risk of the guarantors of these customers’
obligations under their respective TUAs in the event that we must seek recourse
under a guaranty. If any customer fails to perform its obligations under its
TUA, our business, results of operations, financial condition and prospects
could be materially and adversely affected, even if we were ultimately
successful in seeking damages from that customer or its guarantor for a breach
of the TUA.
Cheniere
Marketing continues to develop its business, has limited capital and lacks a
credit rating. In addition, Cheniere, which has guaranteed Cheniere Marketing’s
TUA obligations, has a non-investment grade corporate rating of CCC+ from
Standard and Poor’s. Accordingly, we believe that Cheniere Marketing and
Cheniere have a higher risk of being financially unable to perform their
obligations under the Cheniere Marketing TUA than either Chevron or Total have
with respect to their TUAs. Although each of the TUA counterparties faces a risk
that it will not be able to enter into commercial arrangements for the use of
its capacity at the Sabine Pass LNG receiving terminal to support the payment of
its obligations under its TUA, due to negative developments in the LNG industry
or for other reasons, that risk and the potential for that risk to adversely
affect us are greater for Cheniere Marketing than for Total and Chevron. The
principal risks attendant to Cheniere Marketing’s future ability to generate
operating cash flow to support its TUA obligations include the
following:
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Cheniere
Marketing does not have unconditional agreements or arrangements for any
supplies of LNG, or for the utilization of capacity that it has contracted
for under its TUA with us and may not be able to obtain such agreements or
arrangements on economical terms, or at
all;
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Cheniere
Marketing does not have unconditional commitments from customers for the
purchase of the natural gas it proposes to sell from the Sabine Pass LNG
receiving terminal, and it may not be able to obtain commitments or other
arrangements on economical terms, or at all;
and
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even
if Cheniere Marketing is able to arrange for supplies and transportation
of LNG to the Sabine Pass LNG receiving terminal, and for transportation
and sales of natural gas to customers, it may experience negative cash
flows and adverse liquidity effects due to fluctuations in supply, demand
and price for LNG, for transportation of LNG, for natural gas and for
storage and transportation of natural
gas.
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In
pursuing each aspect of its planned business, Cheniere Marketing will encounter
intense competition, including competition from major energy companies and other
competitors with significantly greater resources. Cheniere Marketing will also
compete with Sabine Pass LNG’s other customers and may compete with Cheniere and
its other subsidiaries that are developing or operating other LNG receiving
terminals and related infrastructure, which may include vessels, pipelines and
LNG storage. Cheniere Marketing’s regasification capacity at the Sabine Pass LNG
receiving terminal, in particular, will be marketed in competition with existing
capacity and additional future capacity offered by other LNG receiving terminals
that currently exist or that may be completed or expanded in the future by
Cheniere affiliates or others.
Any or
all of these factors, as well as other risk factors that we or Cheniere
Marketing may not be able to anticipate, control or mitigate, could materially
and adversely affect the business, results of operations, financial condition,
prospects and liquidity of Cheniere Marketing, which in turn could have a
material adverse effect upon us.
The
indenture governing the Senior Notes contains restrictions that limit our
flexibility in operating our business.
The
indenture, dated as of November 9, 2006, governing the Senior Notes (the
“Sabine Pass Indenture”) contains several significant covenants that, among
other things, restrict our ability to:
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incur
additional indebtedness;
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create
liens on our assets; and
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engage
in sale and leaseback transactions and mergers or acquisitions and to make
equity investments.
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Under some
circumstances, these restrictive covenants may not allow us the flexibility that
we need to operate our business in an effective and efficient manner and may
prevent us from taking advantage of strategic and financial opportunities that
would benefit our business. See also “—Risks Relating to Our Cash
Distributions—Sabine Pass LNG may be restricted under the terms of
the
6
Sabine
Pass Indenture from making distributions to us and from incurring additional
indebtedness under certain circumstances, which may limit our ability to pay or
increase distributions to our unitholders.”
If we
fail to comply with the restrictions in the Sabine Pass Indenture or any other
subsequent financing agreements, a default may allow the creditors, if the
agreements so provide, to accelerate the related indebtedness as well as any
other indebtedness to which a cross-acceleration or cross-default provision
applies.
We
could incur more indebtedness in the future, which could exacerbate the risks
associated with our substantial leverage.
The
Sabine Pass Indenture does not prohibit us from incurring additional
indebtedness, including additional senior or secured indebtedness, and other
liabilities, or from pledging assets to secure such indebtedness and
liabilities. The incurrence of additional indebtedness and, in particular, the
granting of a security interest to secure additional indebtedness, could
adversely affect our business, results of operations and financial condition if
we are unable to service our indebtedness.
Each
customer’s TUA for capacity at the Sabine Pass LNG receiving terminal is subject
to termination under certain circumstances.
Each of
the long-term TUAs with Total, Chevron and Cheniere Marketing contains various
termination rights. For example, each customer may terminate its TUA if the
Sabine Pass LNG receiving terminal experiences a force majeure delay for
longer than 18 months, fails to redeliver a specified amount of natural gas in
accordance with the customer’s redelivery nominations or fails to accept and
unload a specified number of the customer’s proposed LNG cargoes. We may not be
able to replace these TUAs on desirable terms, or at all, if they are
terminated.
Operation
of our LNG receiving terminal involves significant risks.
Our LNG
receiving terminal faces operational risks, including the
following:
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performing
below expected levels of
efficiency;
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breakdown
or failures of equipment or
systems;
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operational
errors by vessel or tug operators or
others;
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operational
errors by us or any contracted facility operator or
others;
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labor
disputes; and
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weather-related
interruptions of operations.
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To
maintain the cryogenic readiness of the Sabine Pass LNG receiving terminal,
Sabine Pass LNG may need to purchase and process LNG. The cost of such LNG may
exceed our estimates, and we may not be able to acquire it at an affordable
price, or at all. Furthermore, even if Sabine Pass LNG is able to acquire LNG,
it may not be able to resell the regasified LNG for a profit or at
all.
LNG
storage tanks and other equipment at the Sabine Pass LNG receiving terminal must
be maintained in a state of cryogenic readiness for conducting operations and to
provide services under Sabine Pass LNG’s TUAs. Sabine Pass LNG may
need to acquire LNG to maintain the cryogenic readiness of its LNG receiving
terminal to provide services to TUA customers. The actual cost to obtain such
LNG could exceed our estimates, and the cost overrun could be
significant.
Risks
associated with acquiring LNG include the following:
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Sabine
Pass LNG may be unable to enter into contracts for the purchase of the LNG
and may be unable to obtain vessels to deliver such LNG, on terms
reasonably acceptable to it or at
all;
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Sabine
Pass LNG may bear the commodity price risk associated with purchasing the
LNG, holding it in inventory for a period of time and selling the
regasified LNG; and
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Sabine
Pass LNG may be unable to obtain financing for the purchase and shipment
of the LNG on terms that are reasonably acceptable to it or at
all.
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7
The
failure of Sabine Pass LNG to obtain LNG, LNG vessels or both, on economical
terms, or the inability to finance the purchase of LNG for maintenance of
cryogenic readiness to provide services under the TUAs, could provide our TUA
customers with the opportunity to interrupt or terminate their payment under
their respective TUAs. Any of these occurrences could have a material adverse
effect on our business, results of operations, financial condition and
prospects.
Sabine
Pass LNG may be required to purchase natural gas to provide fuel at the Sabine
Pass LNG receiving terminal, which would increase operating costs and could have
a material adverse effect on our results of operations.
Sabine
Pass LNG’s three TUAs provide for an in-kind deduction of 2% of the LNG
delivered to the Sabine Pass LNG receiving terminal, which it uses primarily as
fuel for revaporization and self-generated power and to cover natural gas
unavoidably lost at the facility. There is a risk that this 2% in-kind deduction
will be insufficient for these needs and that Sabine Pass LNG will have to
purchase additional natural gas from third parties. Sabine Pass LNG will bear
the cost and risk of changing prices for any such fuel.
Hurricanes
or other disasters could adversely affect us.
In August
and September of 2005, Hurricanes Katrina and Rita damaged coastal and inland
areas located in Texas, Louisiana, Mississippi and Alabama. Construction at the
Sabine Pass LNG receiving terminal site was temporarily suspended in connection
with Hurricane Katrina, as a precautionary measure. Approximately three weeks
after the occurrence of Hurricane Katrina, the terminal site was again secured
and evacuated in anticipation of Hurricane Rita, the eye of which made landfall
to the east of the site. As a result of these 2005 storms and related matters,
the Sabine Pass LNG receiving terminal experienced construction delays and
increased costs. In September 2008, Hurricane Ike struck the Texas and
Louisiana coast, and we experienced damage at the Sabine Pass LNG receiving
terminal.
Future
storms and related storm activity and collateral effects, or other disasters
such as explosions, fires, floods or accidents, could result in damage to, or
interruption of operations at, the Sabine Pass LNG receiving terminal or related
infrastructure. If there are changes in the global climate, storm
frequency and intensity may increase; should it result in rising seas, our
coastal operations would be impacted.
Failure
to obtain and maintain approvals and permits from governmental and regulatory
agencies with respect to the operation of the Sabine Pass LNG receiving terminal
could impede operations and could have a material adverse effect on
us.
The
operation of the Sabine Pass LNG receiving terminal is a highly regulated
activity. The FERC’s approval under Section 3 of the NGA, as well as
several other material governmental and regulatory approvals and permits, are
required in order to operate the Sabine Pass LNG receiving terminal. Although we
have obtained all of the necessary authorizations to operate the Sabine Pass LNG
receiving terminal, such authorizations are subject to ongoing conditions
imposed by regulatory agencies, and additional approval and permit requirements
may be imposed. Failure to obtain and maintain any of these approvals and
permits could have a material adverse effect on our business, results of
operations, financial condition and prospects.
We
are entirely dependent on Cheniere, including employees of Cheniere and its
subsidiaries, for key personnel, and a loss of key personnel could have a
material adverse effect on our business.
As of
February 15, 2010, Cheniere and its subsidiaries had 196 full-time
employees. We have contracted with subsidiaries of Cheniere to provide the
personnel necessary for the operation, maintenance and management of the Sabine
Pass LNG receiving terminal. We face competition for these highly skilled
employees in the immediate vicinity of the Sabine Pass LNG receiving terminal
and more generally from the Gulf Coast hydrocarbon processing and construction
industries.
Our
general partner’s executive officers are officers and employees of Cheniere and
its affiliates. We do not maintain key person life insurance policies on any
personnel, and our general partner does not have any employment contracts or
other agreements with key personnel binding them to provide services for any
particular term. The loss of the services of any of these individuals could have
a material adverse effect on our business. In addition, our future success will
depend in part on our general partner’s ability to engage, and Cheniere’s
ability to attract and retain, additional qualified personnel.
We
have numerous contractual and commercial relationships, and conflicts of
interest, with Cheniere and its affiliates, including Cheniere
Marketing.
We have
agreements to compensate and to reimburse expenses of affiliates of Cheniere. In
addition, Sabine Pass LNG has entered into a TUA with Cheniere Marketing, under
which Cheniere Marketing will be able to derive substantial economic benefits.
All of these agreements involve conflicts of interest between us, on the one
hand, and Cheniere and its other affiliates, on the other hand.
8
We are
dependent on Cheniere and its affiliates to provide services to
us. If Cheniere or its affiliates are unable or unwilling to perform
according to the negotiated terms and timetable of their respective agreement
for any reason or terminates their agreement, we would be required to engage a
substitute service provider. This would likely result in a
significant interference with operations and increased costs.
Sabine
Pass LNG is subject to significant operating hazards and uninsured risks, one or
more of which may create significant liabilities and losses that could have a
material and adverse effect on us.
The
operation of the Sabine Pass LNG receiving terminal is subject to the inherent
risks associated with this type of operation, including explosions, pollution,
release of toxic substances, fires, hurricanes and adverse weather conditions,
and other hazards, each of which could result in significant delays in
commencement or interruptions of operations and/or in damage to or destruction
of the Sabine Pass LNG receiving terminal or damage to persons and property. In
addition, operations at the Sabine Pass LNG receiving terminal and the
facilities and vessels of third parties on which our operations are dependent
face possible risks associated with acts of aggression or
terrorism.
We do
not, nor do we intend to, maintain insurance against all of these risks and
losses. We may not be able to maintain desired or required insurance in the
future at rates that we consider reasonable. The occurrence of a significant
event not fully insured or indemnified against could have a material adverse
effect on our business, results of operations, financial condition, liquidity
and prospects.
Existing
and future environmental and similar laws and regulations could result in
increased compliance costs or additional operating costs and
restrictions.
Our
business is and will be subject to extensive federal, state and local laws and
regulations that control, among other things, discharges to air and water; the
handling, storage and disposal of hazardous chemicals, hazardous waste, and
petroleum products; and remediation associated with the release of hazardous
substances. Many of these laws and regulations, such as the CAA, the Oil
Pollution Act, the CWA, and the RCRA, and analogous state laws and regulations,
restrict or prohibit the types, quantities and concentration of substances that
can be released into the environment in connection with the operation of the
Sabine Pass LNG receiving terminal and require us to maintain permits and
provide governmental authorities with access to the facility for inspection and
reports related to our compliance. Violation of these laws and regulations could
lead to substantial fines and penalties or to capital expenditures related to
pollution control equipment that could have a material adverse effect on our
business, results of operations, financial condition, liquidity and prospects.
CERCLA and similar state laws impose liability, without regard to fault or the
lawfulness of the original conduct, for the release of certain types or
quantities of hazardous substances into the environment. As the owner and
operator of the Sabine Pass LNG receiving terminal, we could be liable for the
costs of cleaning up hazardous substances released into the environment and for
damage to natural resources.
There are
numerous regulatory approaches currently in effect or being considered to
address greenhouse gases, including possible future U.S. treaty commitments, new
federal or state legislation that may impose a carbon emissions tax or establish
a cap-and-trade program, and regulation by the EPA. For example, the adoption of
frequently proposed legislation implementing a carbon tax on energy sources that
emit carbon dioxide into the atmosphere may have a material adverse effect on
the ability of Sabine Pass LNG’s customers, particularly Cheniere Marketing,
(i) to import LNG, if imposed on them as importers of potential emission
sources, or (ii) to sell regasified LNG, if imposed on them or their
customers as natural gas suppliers or consumers. In addition, as Sabine Pass LNG
consumes retainage gas at the Sabine Pass LNG receiving terminal, this carbon
tax may also be imposed on Sabine Pass LNG directly.
There
have also been proposals for a mandatory cap and trade program to reduce
greenhouse gas emissions. In June 2009, the U.S. House of Representatives passed
a comprehensive climate change and energy bill, the American Clean Energy and
Security Act, and the U.S. Senate is considering similar legislation that would,
among other things, impose a nationwide cap on greenhouse gas emissions and
require major sources to obtain “allowances” to meet that cap. In September
2009, the EPA promulgated a rule requiring certain emitters of greenhouse gases
to monitor and report their greenhouse gas emissions to the EPA. In addition, in
response to the 2007 U.S. Supreme Court ruling in Massachusetts v. EPA that the
EPA has authority to regulate carbon dioxide emissions under the Clean Air Act,
the EPA has issued and is considering several additional proposals, including
one that would require best available control technology for greenhouse gas
emissions whenever certain stationary sources are built or significantly
modified. In addition, two U.S. federal appeals courts have reinstated lawsuits
permitting individuals, state attorneys general and others to pursue claims
against major utility, coal, oil and chemical companies on the basis that those
companies have created a public nuisance due to their emissions of carbon
dioxide. Climate change initiatives and other efforts to reduce greenhouse gas
emissions like those described above or otherwise may require additional
controls on the operation of the Sabine Pass LNG receiving terminal and
increased costs to implement and maintain such controls.
9
Other
future legislation and regulations, such as those relating to the transportation
and security of LNG imported to the Sabine Pass LNG receiving terminal through
the Sabine Pass Channel, could cause additional expenditures, restrictions and
delays in our business, the extent of which cannot be predicted and which may
require us to limit substantially, delay or cease operations in some
circumstances. Revised, reinterpreted or additional laws and regulations that
result in increased compliance costs or additional operating costs and
restrictions could have a material adverse effect on our business, results of
operations, financial condition, liquidity and prospects.
Failure
of imported LNG to be a competitive source of energy for North American markets
could adversely affect TUA customers, particularly Cheniere Marketing, and could
materially and adversely affect our business, results of operations, financial
condition and prospects.
Operations
at the Sabine Pass LNG receiving terminal will be dependent upon the ability of
terminal customers to import LNG supplies into the U.S., which is primarily
dependent upon LNG being a competitive source of energy in North America. In
North America, due mainly to a historically abundant supply of natural gas,
imported LNG has not historically been a major energy source. Our business plan
is based, in part, on the belief that LNG can be produced internationally and
delivered to North America at a lower cost than the cost to produce some
domestic supplies of natural gas, or other alternative energy sources. Through
the use of improved exploration technologies, additional sources of natural gas
may be discovered in North America, which could further increase the available
supply of natural gas and could result in natural gas being available at a lower
cost than imported LNG. In addition to natural gas, LNG also competes in North
America with other sources of energy, including coal, oil, nuclear,
hydroelectric, wind and solar energy.
Other
continents have a longer history of importing LNG and, due to their geographic
proximity to LNG producers and limited pipeline access to natural gas supplies,
may be willing and able to pay more for LNG, thereby reducing or eliminating the
supply of LNG available in North American markets. Current and futures prices
for natural gas in markets that compete with North America have been higher than
prices for natural gas in North America, which has adversely affected the volume
of LNG imports into North America. If LNG deliveries to North America continue
to be constrained due to stronger demand from these competing markets, the
ability of Sabine Pass LNG’s TUA customers to import LNG into North America on a
profitable basis may be adversely affected.
Political
instability in foreign countries that have supplies of natural gas, or strained
relations between such countries and the U.S., may also impede the willingness
or ability of LNG suppliers and merchants in such countries to export LNG to the
U.S. Furthermore, some foreign suppliers of LNG may have economic or other
reasons to direct their LNG to non-U.S. markets or to competitors’ LNG receiving
terminals in the U.S.
As a
result of these and other factors, LNG may not be a competitive source of energy
in North America. The failure of LNG to be a competitive supply alternative to
domestic natural gas, oil and other alternative energy sources could impede TUA
customers’ ability to import LNG into North America on a commercial basis. Any
significant impediment to the ability to import LNG into the United States
generally or to the Sabine Pass LNG receiving terminal specifically could have a
material adverse effect on TUA customers, particularly Cheniere Marketing, and
on our business, results of operations, financial condition and
prospects.
The
inability to import LNG into the U.S. may also limit the LNG assets being
constructed and, therefore, our potential acquisition opportunities, which may
limit our ability to increase distributions to our unitholders.
Cyclical
or other changes in the demand for LNG regasification capacity may adversely
affect the performance of TUA customers, particularly Cheniere Marketing, and
could reduce our operating revenues and may cause us operating
losses.
The
utilization of the Sabine Pass LNG receiving terminal could be subject to
cyclical swings, reflecting alternating periods of under-supply and over-supply
of LNG importation capacity and available natural gas, principally due to the
combined impact of several factors, including:
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additions
to competitive regasification capacity in North America, Europe, Asia and
other markets, which could divert LNG from the Sabine Pass LNG receiving
terminal;
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insufficient
LNG liquefaction capacity
worldwide;
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insufficient
LNG tanker capacity;
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reduced
demand and lower prices for natural
gas;
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increased
natural gas production deliverable by pipelines, which could suppress
demand for LNG;
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cost
improvements that allow competitors to offer LNG regasification services
at reduced prices;
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changes
in supplies of, and prices for, alternative energy sources such as coal,
oil, nuclear, hydroelectric, wind and solar energy, which may reduce the
demand for natural gas;
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changes
in regulatory, tax or other governmental policies regarding imported LNG,
natural gas or alternative energy sources, which may reduce the demand for
imported LNG and/or natural gas;
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adverse
relative demand for LNG in North America compared to other markets, which
may decrease LNG imports into North America;
and
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cyclical
trends in general business and economic conditions that cause changes in
the demand for natural gas.
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These
factors could materially and adversely affect the ability of TUA customers,
including Cheniere Marketing, to procure supplies of LNG to be imported into
North America and to procure customers for regasified LNG at economical prices,
or at all. In addition, these factors may result in fewer LNG assets being
constructed or available for acquisition by us at any given time and, therefore,
limit our ability to increase distributions to unitholders.
We
face competition from competitors with far greater resources.
Many
competing companies have secured access to, or are pursuing development or
acquisition of, LNG import infrastructure to serve the U.S. natural gas market.
Some industry analysts have predicted substantial excess LNG receiving capacity
in North America for at least several years based on terminals currently in
operation or under construction. Our competitors in the U.S. include major
energy corporations (e.g., BG Group plc, BP plc,
Chevron Corporation, ConocoPhillips and Dow Chemical). In addition, other
competitors have developed or reopened additional LNG receiving terminals in
Europe, Asia and other markets, which also compete with the Sabine Pass LNG
receiving terminal. Almost all of these competitors have longer operating
histories, more development experience, greater name recognition, larger staffs
and substantially greater financial, technical and marketing resources and
access to LNG supply than we and our affiliates do. The superior resources that
these competitors have available for deployment could allow them to compete
successfully against us, which could have a material adverse effect on our
business, results of operations, financial condition, liquidity and
prospects.
Insufficient
development of additional LNG liquefaction capacity worldwide could adversely
affect the performance of TUA customers, particularly Cheniere Marketing, and
could have a material adverse effect on our business, results of operations,
financial condition, liquidity and prospects.
Commercial
development of an LNG liquefaction facility takes a number of years and requires
substantial capital investment. Many factors could negatively affect continued
development of LNG liquefaction facilities, including:
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increased
construction costs;
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economic
downturns, increases in interest rates or other events that may affect the
availability of sufficient financing for LNG projects on commercially
reasonable terms;
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decreases
in the price of LNG and natural gas, which might decrease the expected
returns relating to investments in LNG
projects;
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the
inability of project owners or operators to obtain governmental approvals
to construct or operate LNG
facilities;
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political
unrest in exporting countries or local community resistance in such
countries to the siting of LNG facilities due to safety, environmental or
security concerns; and
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any
significant explosion, spill or similar incident involving an LNG
liquefaction facility or LNG
carrier.
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There
may be shortages of LNG vessels worldwide, which could adversely affect the
performance of TUA customers, particularly Cheniere Marketing, and could have a
material adverse effect on our business, results of operations, financial
condition, liquidity and prospects.
The
construction and delivery of LNG vessels require significant capital and long
construction lead times, and the availability of the vessels could be delayed to
the detriment of the TUA customers because of:
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an
inadequate number of shipyards constructing LNG vessels and a backlog of
orders at these shipyards;
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political
or economic disturbances in the countries where the vessels are being
constructed;
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changes
in governmental regulations or maritime self-regulatory
organizations;
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work
stoppages or other labor disturbances at the
shipyards;
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bankruptcy
or other financial crisis of
shipbuilders;
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quality
or engineering problems;
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weather
interference or a catastrophic event, such as a major earthquake, tsunami
or fire; and
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shortages
of or delays in the receipt of necessary construction
materials.
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Decreases
in the demand for and price of natural gas could lead to reduced development of
LNG projects worldwide, which could adversely affect the performance of TUA
customers, particularly Cheniere Marketing, and could have a material adverse
effect on our business, results of operations, financial condition, liquidity
and prospects.
The
development of domestic LNG receiving terminals and LNG projects generally is
based on assumptions about the future price of natural gas and the availability
of imported LNG. Natural gas prices have been, and are likely to continue to be,
volatile and subject to wide fluctuations in response to one or more of the
following factors:
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relatively
minor changes in the supply of, and demand for, natural gas in relevant
markets;
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political
conditions in international natural gas producing
regions;
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the
extent of domestic production and importation of natural gas in relevant
markets;
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the
level of demand for LNG and natural gas in relevant markets, including the
effects of economic downturns or
upturns;
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weather
conditions;
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the
competitive position of natural gas as a source of energy compared with
other energy sources; and
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the
effect of government regulation on the production, transportation and sale
of natural gas.
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Adverse
trends or developments affecting any of these factors could result in decreases
in the price of natural gas, leading to reduced development of LNG projects
worldwide. Such reductions could adversely affect the performance of TUA
customers, particularly Cheniere Marketing, and could have a material adverse
effect on our business, results of operations, financial condition, liquidity
and prospects.
We
may experience increased labor costs, and the unavailability of skilled workers
or our failure to attract and retain key personnel could adversely affect
us.
We are
dependent upon the available labor pool of skilled employees. We compete with
other energy companies and other employers to attract and retain qualified
personnel with the technical skills and experience required to operate the
Sabine Pass LNG receiving terminal and to provide TUA customers with the highest
quality service. Our affiliates who hire personnel on our behalf are also
subject to the Fair Labor Standards Act, which governs such matters as minimum
wage, overtime and other working conditions. A shortage in the labor pool of
skilled workers or other general inflationary pressures or changes in applicable
laws and regulations could make it more difficult for us to attract and retain
personnel and could require an increase in the wage and benefits packages that
we offer, thereby increasing our operating costs. For example, in the aftermaths
of Hurricanes Katrina and Rita, Bechtel and certain subcontractors temporarily
experienced a shortage of available skilled labor necessary to meet the
requirements of the construction plan. As a result, we agreed to change orders
with Bechtel concerning additional activities and expenditures to mitigate the
hurricanes’ effects on the construction of the Sabine Pass LNG receiving
terminal. Any increase in our operating costs could materially and adversely
affect our business, results of operations, financial condition and
prospects.
Our
lack of diversification could have an adverse effect on our financial condition
and results of operations.
Substantially
all of our anticipated revenue in 2010 will be dependent upon one asset, the
Sabine Pass LNG receiving terminal located in southern Louisiana. Due to our
lack of asset and geographic diversification, an adverse development at the
Sabine Pass LNG receiving terminal or in the LNG industry would have a
significantly greater impact on our financial condition and results of
operations than if we maintained more diverse assets and operating
areas.
Terrorist
attacks or military campaigns may adversely impact our business.
A
terrorist incident may result in temporary or permanent closure of existing LNG
facilities, including the Sabine Pass LNG receiving terminal, which could
increase our costs and decrease our cash flows, depending on the duration of the
closure. Operations at the Sabine Pass LNG receiving terminal could also become
subject to increased governmental scrutiny that may result in additional
security measures at a significant incremental cost to us. In addition, the
threat of terrorism and the impact of military campaigns may
12
lead to
continued volatility in prices for natural gas that could adversely affect TUA
customers, particularly Cheniere Marketing, including their ability to satisfy
their obligations to us under their TUAs.
If
we do not make acquisitions on economically acceptable terms, our future growth
and our ability to increase distributions to our unitholders will be
limited.
Our
ability to grow depends on our ability to make accretive acquisitions. We may be
unable to make accretive acquisitions for any of the following
reasons:
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we
are unable to identify attractive acquisition candidates or negotiate
acceptable purchase contracts with
them;
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we
are unable to obtain necessary governmental
approvals;
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we
are unable to obtain financing for the acquisitions on economically
acceptable terms, or at all;
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we
are unable to secure adequate customer commitments to use the acquired
facilities; or
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we
are outbid by competitors.
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If we are
unable to make accretive acquisitions, then our future growth and ability to
increase distributions to our unitholders will be limited.
We intend
to pursue acquisitions of additional LNG receiving terminals, natural gas
pipelines and related assets in the future, either directly from Cheniere or
from third parties. However, Cheniere is not obligated to offer us any of these
assets. If Cheniere does offer us the opportunity to purchase assets, we may not
be able to successfully negotiate a purchase and sale agreement and related
agreements, we may not be able to obtain any required financing for such
purchase and we may not be able to obtain any required governmental and
third-party consents. The decision whether or not to accept such offer, and to
negotiate the terms of such offer, will be made by the conflicts committee of
our general partner, which may decline the opportunity to accept such offer for
a variety of reasons, including a determination that the acquisition of the
assets at the proposed purchase price would not result in an increase, or a
sufficient increase, in our adjusted operating surplus per unit within an
appropriate timeframe.
If
we make acquisitions, they could adversely affect our business and ability to
make distributions to our unitholders.
If we
make any acquisitions, they will involve potential risks,
including:
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an
inability to integrate successfully the businesses that we acquire with
our existing business;
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a
decrease in our liquidity by using a significant portion of our available
cash or borrowing capacity to finance the
acquisition;
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the
assumption of unknown liabilities;
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limitations
on rights to indemnity from the
seller;
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mistaken
assumptions about the cash generated, or to be generated, by the business
acquired or the overall costs of equity or
debt;
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the
diversion of management’s and employees’ attention from other business
concerns; and
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unforeseen
difficulties encountered in operating new business segments or in new
geographic areas.
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If we
consummate any future acquisitions, our capitalization and results of operations
may change significantly, and our unitholders will not have the opportunity to
evaluate the economic, financial and other relevant information that we will
consider in determining the application of our future funds and other resources.
In addition, if we issue additional units in connection with future growth, our
existing unitholders’ interest in us will be diluted, and distributions to our
unitholders may be reduced.
Sabine
Pass LNG may be restricted under the terms of the Sabine Pass Indenture from
making distributions to us and from incurring additional indebtedness under
certain circumstances, which may limit our ability to pay or increase
distributions to our unitholders.
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The
Sabine Pass Indenture restricts payments that Sabine Pass LNG can make to us in
certain events and limits the indebtedness that Sabine Pass LNG can incur.
Sabine Pass LNG is permitted to pay distributions to us only after the following
payments have been made:
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an
operating account has been funded with amounts sufficient to cover the
succeeding 45 days of operating and maintenance expenses, maintenance
capital expenditures and obligations, if any, under an assumption
agreement and a state tax sharing
agreement;
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one-sixth
of the amount of interest due on the Senior Notes on the next interest
payment date (plus any shortfall from any such month subsequent to the
preceding interest payment date) has been transferred to a debt payment
account;
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outstanding
principal on the Senior Notes then due and payable has been
paid;
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taxes
payable by Sabine Pass LNG or the guarantors of the Senior Notes and
permitted payments in respect of taxes have been paid;
and
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the
debt service reserve account has been replenished with the amount (or
acceptable letters of credit or acceptable guarantees in respect of such
amount) required to make the next interest payment on the Senior Notes,
which amount was approximately $82.4 million as of December 31,
2009.
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In
addition, Sabine Pass LNG will only be able to make distributions to us in the
event that it could, among other things, incur at least $1.00 of additional
indebtedness under the fixed charge coverage ratio test of 2:1 at the time of
payment and after giving pro forma effect to the distribution.
Sabine
Pass LNG is also prohibited under the Sabine Pass Indenture from paying
distributions to us or incurring additional indebtedness upon the occurrence of
any of the following events, among others:
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a
default for 30 days in the payment of interest on, or additional interest,
if any, with respect to, the Senior
Notes;
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a
failure to pay any principal of, or premium, if any, on the Senior
Notes;
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a
failure by Sabine Pass LNG to comply with various covenants in the Sabine
Pass Indenture;
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a
failure to observe any other agreement in the Sabine Pass Indenture beyond
any specified cure periods;
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a
default under any mortgage, indenture or instrument governing any
indebtedness for borrowed money by Sabine Pass LNG in excess of $25.0
million if such default results from a failure to pay principal or
interest on, or results in the acceleration of, such
indebtedness;
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a
final money judgment or decree (not covered by insurance) in excess of
$25.0 million is not discharged or stayed within 60 days following
entry;
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a
failure of any material representation or warranty in the security
documents entered into in connection with the indenture to be
correct;
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the
Sabine Pass LNG receiving terminal project is abandoned;
or
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certain
events of bankruptcy or insolvency.
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Sabine
Pass LNG’s inability to pay distributions to us or to incur additional
indebtedness as a result of the foregoing restrictions in the Sabine Pass
Indenture may inhibit our ability to pay or increase distributions to our
unitholders.
The
fixed charge coverage ratio test contained in the Sabine Pass Indenture could
prevent Sabine Pass LNG from making cash distributions to us. As a result, we
may be prevented from making distributions to our unitholders, which could
materially and adversely affect the market price of our common
units.
Sabine
Pass LNG is not permitted to make cash distributions to us if its consolidated
cash flow is not at least twice its fixed charges, calculated as required in the
indenture. In order to satisfy this fixed charge coverage ratio test, we
estimate that Sabine Pass LNG’s consolidated cash flow, as defined in the Sabine
Pass Indenture, must be greater than approximately $375 million.
Cheniere
Marketing continues to develop its business, has limited capital and lacks a
credit rating. It may never develop its business, assets or revenues
sufficiently to pay its fees under its TUA. Cheniere has guaranteed 100% of the
obligations of Cheniere Marketing under its TUA. Cheniere has a non-investment
grade corporate rating of CCC+ from Standard & Poor’s. If Cheniere does
not receive sufficient future cash flows from businesses that Cheniere is
developing, Cheniere may be unable to perform its guarantee of the Cheniere
Marketing TUA.
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In
addition, even if Sabine Pass LNG receives the contracted payments under the
Cheniere Marketing TUA, the fixed charge coverage test will not be satisfied if
those payments do not constitute revenues under U.S. generally accepted
accounting principles, or GAAP, as then in effect and as provided in the Sabine
Pass Indenture. Because the Cheniere Marketing TUA is an agreement between
related parties, payments under the Cheniere Marketing TUA may not constitute
revenues under GAAP as currently in effect if Cheniere Marketing is determined
to lack economic substance apart from Sabine Pass LNG. We believe Cheniere
Marketing could be determined to lack economic substance apart from Sabine Pass
LNG if, for example, Cheniere Marketing has no substantive business and is not
pursuing, and has no prospect of developing, any substantive business apart from
its TUA with Sabine Pass LNG.
If we do
not receive distributions from Sabine Pass LNG, we may not be able to continue
to make distributions to our unitholders, which could have a material and
adverse effect on the perceived value of our partnership and the market price of
our common units.
The
Sabine Pass Indenture may prevent Sabine Pass LNG from engaging in certain
beneficial transactions.
In
addition to restrictions on the ability of Sabine Pass LNG to make distributions
or incur additional indebtedness, the Sabine Pass Indenture also contains
various other covenants that may prevent it from engaging in beneficial
transactions, including limitations on the ability of Sabine Pass LNG or certain
of its subsidiaries to:
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make
certain investments;
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purchase,
redeem or retire equity interests;
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issue
preferred stock;
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sell
or transfer assets;
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incur
liens;
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enter
into transactions with affiliates;
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consolidate,
merge, sell or lease all or substantially all of its assets;
and
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enter
into sale and leaseback
transactions.
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Management
fees and cost reimbursements due to our general partner and its affiliates will
reduce cash available to pay distributions to our unitholders.
We will
pay significant management fees to our general partner and its affiliates and
reimburse them for expenses incurred on our behalf, which will reduce our cash
available for distribution to our unitholders. These fees and expenses are
payable as follows:
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under
a services agreement, we pay an affiliate of Cheniere an administrative
fee of $10.0 million per year (as adjusted for inflation) for general and
administrative services for our benefit. This fee does not include
reimbursements by us of direct expenses that the affiliate incurs on our
behalf, such as salaries of operational personnel performing services
on-site at the Sabine Pass LNG receiving terminal and the cost of their
employee benefits, including 401(k) plan, pension and health insurance
benefits;
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under
an operation and maintenance agreement with an affiliate of Cheniere,
Sabine Pass LNG pays a fixed monthly fee of $130,000 (indexed for
inflation) and reimburses our general partner for its operating expenses,
which consist primarily of labor expenses. Cheniere’s affiliate, under
certain circumstances, will be entitled to a bonus equal to 50% of the
salary component of labor costs;
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under
a management services agreement with an affiliate of Cheniere, Sabine Pass
LNG pays a fixed monthly fee of $520,000 (indexed for inflation);
and
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we
estimate that our partnership will incur costs of approximately $2.5
million per year, adjusted for inflation at 2½% per year, for tax
compliance and publicly traded partnership tax reporting, accounting, SEC
reporting and other costs of operating as a publicly traded
partnership..
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Our
general partner and its affiliates will also be entitled to reimbursement for
all other direct expenses that they incur on our behalf. The payment of fees to
our general partner and its affiliates and the reimbursement of expenses could
adversely affect our ability to pay cash distributions to our
unitholders.
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The
amount of cash that we have available for distributions to our unitholders will
depend primarily on our cash flow and not solely on profitability.
The
amount of cash that we will have available for distributions will depend
primarily on our cash flow, including cash reserves and working capital or other
borrowings, and not solely on profitability, which will be affected by non-cash
items. As a result, we may make cash distributions during periods when we record
losses, and we may not make cash distributions during periods when we record net
income.
We
may not be able to increase the distributions on our common units unless we are
able to make accretive acquisitions, which would require us to obtain one or
more sources of funding.
We may
not be able to increase distributions on our common units by generating
additional cash flows from the Sabine Pass LNG receiving terminal because the
entire capacity of the Sabine Pass LNG receiving terminal has already been
reserved under fixed fee TUAs with three customers. As a result, we may need to
make accretive acquisitions of additional cash-generating assets and operations
in order to increase the quarterly distributions on our common
units.
To fund
acquisitions, we will need to pursue a variety of sources of funding, including
debt and/or equity financings. Our ability to obtain these or other types of
financing will depend, in part, on factors beyond our control, such as the
status of various debt and equity markets at the time financing is sought and
such markets’ view of our industry and prospects at such time. In particular,
the currently tight lending conditions in the U.S. credit markets may make it
more time consuming and expensive for us to obtain financing, if we can obtain
such financing at all. Accordingly, we may not be able to obtain financing for
acquisitions on terms that are acceptable to us, if at all.
Risks Relating to an
Investment in Us and Our Common Units
Our
general partner and its affiliates have conflicts of interest and limited
fiduciary duties, which may permit them to favor their own interests to the
detriment of us and our unitholders.
Cheniere
controls our general partner, which has sole responsibility for conducting our
business and managing our operations. Some of our general partner’s directors
are also directors of Cheniere, and certain of our general partner’s officers
are officers of Cheniere. Therefore, conflicts of interest may arise between
Cheniere and its affiliates, including our general partner, on the one hand, and
us and our unitholders, on the other hand. In resolving these conflicts, our
general partner may favor its own interests and the interests of its affiliates
over the interests of us and our unitholders. These conflicts include, among
others, the following situations:
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neither
our partnership agreement nor any other agreement requires Cheniere to
pursue a business strategy that favors us. Cheniere’s directors and
officers have a fiduciary duty to make these decisions in favor of the
owners of Cheniere, which may be contrary to our
interests:
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our
general partner controls the interpretation and enforcement of contractual
obligations between us, on one hand, and Cheniere, on the other hand,
including provisions governing administrative services and
acquisitions;
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our
general partner is allowed to take into account the interests of parties
other than us, such as Cheniere and its affiliates, in resolving conflicts
of interest, which has the effect of limiting its fiduciary duty to us and
our unitholders;
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our
general partner has limited its liability and reduced its fiduciary duties
under the partnership agreement, while also restricting the remedies
available to our unitholders for actions that, without these limitations,
might constitute breaches of fiduciary
duty;
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Cheniere
is not limited in its ability to compete with us. Please read “—Cheniere
is not restricted from competing with us and is free to develop, operate
and dispose of, and is currently developing, LNG receiving terminals,
pipelines and other assets without any obligation to offer us the
opportunity to develop or acquire those
assets”
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our
general partner determines the amount and timing of asset purchases and
sales, capital expenditures, borrowings, issuances of additional
partnership securities, and the establishment, increase or decrease in the
amounts of reserves, each of which can affect the amount of cash that is
distributed to our unitholders;
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our
general partner determines the amount and timing of any capital
expenditures and whether a capital expenditure is a maintenance capital
expenditure, which reduces operating surplus, or an expansion capital
expenditure, which does not reduce operating surplus. This determination
can affect the amount of cash that is distributed to our unitholders and
the ability of the subordinated units to convert to common
units;
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our
partnership agreement does not restrict our general partner from causing
us to pay it or its affiliates for any services rendered on terms that are
fair and reasonable to us or entering into additional contractual
arrangements with any of these entities on our
behalf;
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our
general partner intends to limit its liability regarding our contractual
and other obligations and, in some circumstances, is entitled to be
indemnified by us;
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our
general partner may exercise its limited right to call and purchase common
units if it and its affiliates own more than 80% of the common units;
and
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our
general partner decides whether to retain separate counsel, accountants or
others to perform services for us.
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We expect
that there will be additional agreements or arrangements with Cheniere and its
affiliates, including future interconnection, natural gas balancing and storage
agreements with one or more Cheniere-affiliated natural gas pipelines as well as
other agreements and arrangements that cannot now be anticipated. In those
circumstances where additional contracts with Cheniere and its affiliates may be
necessary or desirable, additional conflicts of interest will be
involved.
Cheniere
is not restricted from competing with us and is free to develop, operate and
dispose of, and is currently developing, LNG receiving terminals, pipelines and
other assets without any obligation to offer us the opportunity to develop or
acquire those assets.
Cheniere
and its affiliates are not prohibited from owning assets or engaging in
businesses that compete directly or indirectly with us. Cheniere may acquire,
construct or dispose of its proposed Corpus Christi or Creole Trail LNG
receiving terminals, its proposed pipelines or any other assets without any
obligation to offer us the opportunity to purchase or construct any of those
assets. In addition, under our partnership agreement, the doctrine of corporate
opportunity, or any analogous doctrine, will not apply to Cheniere and its
affiliates. As a result, neither Cheniere nor any of its affiliates will have
any obligation to present new business opportunities to us, and they may take
advantage of such opportunities themselves. Cheniere also has significantly
greater resources and experience than we have, which may make it more difficult
for us to compete with Cheniere and its affiliates with respect to commercial
activities or acquisition candidates.
Our
partnership agreement limits our general partner’s fiduciary duties to
unitholders and restricts the remedies available to unitholders for actions
taken by our general partner that might otherwise constitute breaches of
fiduciary duty.
Our
partnership agreement contains provisions that reduce the standards to which our
general partner would otherwise be held by state fiduciary duty law. For
example, our partnership agreement:
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permits
our general partner to make a number of decisions in its individual
capacity, as opposed to in its capacity as our general partner. This
entitles our general partner to consider only the interests and factors
that it desires, and it has no duty or obligation to give any
consideration to any interest of, or factors affecting, us, our affiliates
or any limited partner. Examples include the exercise of its limited call
right, the exercise of its rights to transfer or vote the units it owns,
the exercise of its registration rights and its determination whether or
not to consent to any merger or consolidation of the partnership or
amendment to the partnership
agreement;
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provides
that our general partner will not have any liability to us or our
unitholders for decisions made in its capacity as general partner, as long
as it acted in good faith, meaning that it believed the decision was in
the best interests of our
partnership;
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generally
provides that affiliated transactions and resolutions of conflicts of
interest not approved by the conflicts committee of the board of directors
of our general partner and not involving a vote of unitholders must be on
terms no less favorable to us than those generally being provided to or
available from unrelated third parties or be “fair and reasonable” to us
and that, in determining whether a transaction or resolution is “fair and
reasonable,” our general partner may consider the totality of the
relationships between the parties involved, including other transactions
that may be particularly favorable or advantageous to us;
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provides
that our general partner, its affiliates and their officers and directors
will not be liable for monetary damages to us or our limited partners for
any acts or omissions unless there has been a final and non-appealable
judgment entered by a court of competent jurisdiction determining that our
general partner or those other persons acted in bad faith or engaged in
fraud, willful misconduct or, in the case of a criminal matter, acted with
knowledge that such conduct was criminal;
and
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provides
that in resolving conflicts of interest, it will be presumed that in
making its decision the conflicts committee or the general partner acted
in good faith, and in any proceeding brought by or on behalf of any
limited partner or us, the person bringing or prosecuting such proceeding
will have the burden of overcoming such
presumption.
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By purchasing
a common unit, a unitholder will become bound by the provisions of our
partnership agreement, including the provisions described above.
Holders
of our common units have limited voting rights and are not entitled to elect our
general partner or its directors, which could reduce the price at which the
common units trade.
Unlike
the holders of common stock in a corporation, unitholders have only limited
voting rights on matters affecting our business and, therefore, limited ability
to influence management’s decisions regarding our business. Unitholders will
have no right to elect our general partner or its board of directors on an
annual or other continuing basis. The board of directors of our general partner
is chosen entirely by Holdings. As a result, the price at which the common units
will trade could be diminished because of the absence or reduction of a control
premium in the trading price.
Even
if unitholders are dissatisfied, they cannot initially remove our general
partner without its consent.
Our
unitholders are unable to remove our general partner without the consent of
Cheniere Subsidiary Holdings, LLC, an affiliate of Cheniere, because Cheniere
Subsidiary Holdings owns a sufficient number of subordinated units to be able to
prevent removal of our general partner. The vote of the holders of at least 66
2/3% of all outstanding
common and subordinated units (including any units owned by our general partner
and its affiliates) voting together as a single class is required to remove our
general partner. Cheniere Subsidiary Holdings owns approximately 82% of our
outstanding common and subordinated units. In addition, if our general partner
is removed without cause during the subordination period and units held by our
general partner and its affiliates are not voted in favor of that removal, all
remaining subordinated units will automatically be converted into common units
and any existing arrearages on the common units will be extinguished. A removal
of our general partner under these circumstances would adversely affect the
common units by prematurely eliminating their distribution and liquidation
preference over the subordinated units, which would otherwise have continued
until we had met certain distribution and performance tests.
Cause is
narrowly defined in our partnership agreement to mean that a court of competent
jurisdiction has entered a final, non-appealable judgment finding our general
partner liable for actual fraud or willful misconduct in its capacity as our
general partner. Cause does not include most cases of poor management of the
business, so the removal of the general partner because of the unitholder’s
dissatisfaction with our general partner’s performance in managing our
partnership will most likely result in the termination of the subordination
period and conversion of all subordinated units to common units.
Control
of our general partner may be transferred to a third party without unitholder
consent.
Our
general partner may transfer its general partner interest to a third-party in a
merger or in a sale of all or substantially all of its assets without the
consent of our unitholders. Furthermore, our partnership agreement does not
restrict the ability of the owners of our general partner from transferring all
or a portion of their respective ownership interest in our general partner to a
third party. The new owners of our general partner would then be in a position
to replace the board of directors and officers of our general partner with its
own choices and thereby influence the decisions taken by the board of directors
and officers.
Our
general partner has a limited call right that may require our unitholders to
sell their common units at an undesirable time or price.
An
affiliate of our general partner owns 41.23% of our total common units. If the
subordinated units convert into common units, affiliates of our general partner
will own approximately 90.4% of the common units. If at any time more than 80%
of our outstanding common units are owned by our general partner and its
affiliates, our general partner will have the right, but not the obligation,
which it may assign to any of its affiliates or to us, to acquire all, but not
less than all, of our common units held by unaffiliated persons at a price not
less than their then-current market price, as defined in our partnership
agreement. As a result, our unitholders may be required to sell their common
units at an undesirable time or price and may not receive any return on their
investment. Our unitholders may also incur a tax liability upon a sale of our
common units. Our general partner is not obligated to obtain a fairness opinion
regarding the value of the common units to be repurchased by it upon exercise of
the limited call right. There is no restriction in our partnership agreement
that prevents our general partner from issuing additional common units or other
equity securities and exercising its call right. If our general partner
exercised its limited call right, the effect would be to take us private and, if
the common units were subsequently deregistered, we would no longer be subject
to the reporting requirements of the Exchange Act.
Our
partnership agreement restricts the voting rights of unitholders (other than our
general partner and its affiliates) owning 20% or more of any class of our
units.
Our
partnership agreement restricts unitholders’ voting rights by providing that any
units held by a person that owns 20% or more of any class of units then
outstanding, other than our general partner and its affiliates, their
transferees and persons who acquired
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such
units with the prior approval of the board of directors of our general partner,
cannot vote on any matter. The partnership agreement also contains provisions
limiting the ability of unitholders to call meetings or to acquire information
about our operations, as well as other provisions limiting the unitholders’
ability to influence the manner or direction of management.
Our
partnership agreement prohibits a unitholder (other than our general partner and
its affiliates) who acquires 15% or more of our limited partner units without
the approval of our general partner from engaging in a business combination with
us for three years unless certain approvals are obtained. This provision could
discourage a change of control that our unitholders may favor, which could
negatively affect the price of our common units.
Our
partnership agreement effectively adopts Section 203 of the Delaware
General Corporation Law, or the DGCL. Section 203 of the DGCL as it applies
to us prevents an interested unitholder, defined as a person (other than our
general partner and its affiliates) who owns 15% or more of our outstanding
limited partner units, from engaging in business combinations with us for three
years following the time such person becomes an interested unitholder unless
certain approvals are obtained. Section 203 broadly defines “business
combination” to encompass a wide variety of transactions with or caused by an
interested unitholder, including mergers, asset sales and other transactions in
which the interested unitholder receives a benefit on other than a pro rata
basis with other unitholders. This provision of our partnership agreement could
have an anti-takeover effect with respect to transactions not approved in
advance by our general partner, including discouraging takeover attempts that
might result in a premium over the market price for our common
units.
Our
unitholders may not have limited liability if a court finds that unitholder
action constitutes control of our business.
A general
partner of a partnership generally has unlimited liability for the obligations
of the partnership, except for contractual obligations of the partnership that
are expressly made without recourse to the general partner. We are organized
under Delaware law, and we conduct business in other states. As a limited
partner in a partnership organized under Delaware law, holders of our common
units could be held liable for our obligations to the same extent as a general
partner if a court determined that the right or the exercise of the right by our
unitholders as a group to remove or replace our general partner, to approve some
amendments to the partnership agreement or to take other action under our
partnership agreement constituted participation in the “control” of our
business. In addition, limitations on the liability of holders of limited
partner interests for the obligations of a limited partnership have not been
clearly established in many jurisdictions.
Our
unitholders may have liability to repay distributions wrongfully
made.
Under
certain circumstances, our unitholders may have to repay amounts wrongfully
distributed to them. Under Section 17-607 of the Delaware Revised Uniform
Limited Partnership Act, we may not make a distribution to our unitholders if
the distribution would cause our liabilities to exceed the fair value of our
assets. Delaware law provides that, for a period of three years from the date of
the impermissible distribution, partners who received such a distribution and
who knew at the time of the distribution that it violated Delaware law will be
liable to the partnership for the distribution amount. Liabilities to partners
on account of their partner interests and liabilities that are non-recourse to
the partnership are not counted for purposes of determining whether a
distribution is permitted.
We
may issue additional units without approval of our unitholders, which would
dilute their ownership interest.
At any
time during the subordination period, with the approval of the conflicts
committee of the board of directors of our general partner, we may issue an
unlimited number of limited partner interests of any type without the approval
of our unitholders. After the subordination period, we may issue an unlimited
number of limited partner interests of any type without limitation of any kind.
The issuance by us of additional common units or other equity securities of
equal or senior rank will have the following effects:
|
|
•
|
our
unitholders’ proportionate ownership interest in us will
decrease;
|
|
|
•
|
the
amount of cash available per unit to pay distributions may decrease;
|
|
|
•
|
because
a lower percentage of total outstanding units will be subordinated units,
the risk will increase that a shortfall in the payment of the initial
quarterly distribution will be borne by our common
unitholders;
|
|
|
•
|
the
ratio of taxable income to distributions may
increase;
|
|
|
•
|
the
relative voting strength of each previously outstanding unit may be
diminished; and
|
|
|
•
|
the
market price of the common units may
decline.
|
19
The
price of our common units may fluctuate significantly, and our unitholders could
lose all or part of their investment.
The
market price of our common units may be influenced by many factors, some of
which are beyond our control, including:
|
|
•
|
our
quarterly distributions;
|
|
|
•
|
our
quarterly or annual earnings or those of other companies in our
industry;
|
|
|
•
|
actual
or potential non-performance by any customer under a
TUA;
|
|
|
•
|
announcements
by us or our competitors of significant
contracts;
|
|
|
•
|
changes
in accounting standards, policies, guidance, interpretations or
principles;
|
|
|
•
|
general
economic conditions;
|
|
|
•
|
the
failure of securities analysts to cover our common units or changes in
financial or other estimates by
analysts;
|
|
|
•
|
future
sales of our common units; and
|
|
|
•
|
other
factors described in these “Risk
Factors.”
|
Affiliates
of our general partner may sell common units, which sales could have an adverse
impact on the trading price of the common units.
Sales by
us or any of our existing unitholders, including Holdings, of a substantial
number of our common units, or the perception that such sales might occur, could
have a material adverse effect on the price of our common units or could impair
our ability to obtain capital through an offering of equity securities.
Affiliates of Cheniere own 10,891,357 common units and 135,383,831 subordinated
units. All of the subordinated units will convert into common units at the end
of the subordination period and may convert earlier. The sale of these units
could have an adverse impact on the price of the common units.
Our
tax treatment depends on our status as a partnership for federal income tax
purposes, as well as our not being subject to a material amount of additional
entity level taxation by individual states. If we were to be or become treated
as a corporation for federal income tax purposes or if we were to become subject
to a material amount of additional entity level taxation for state tax purposes,
then our cash available for distribution to our unitholders would be
substantially reduced.
The
anticipated after-tax economic benefit of an investment in our common units
depends largely on our being treated as a partnership for federal income tax
purposes. We have not requested, and do not plan to request, a ruling from the
Internal Revenue Service (“IRS”) on this matter.
If we
were treated as a corporation for federal income tax purposes, we would pay
federal income tax on our taxable income at the corporate tax rate, which is
currently a maximum of 35%, and we likely would pay state taxes as well.
Distributions to our unitholders would generally be taxed again as corporate
distributions, and no income, gains, losses or deductions would flow through to
our unitholders. Because a tax would be imposed upon us as a corporation, the
cash available for distributions to our unitholders would be substantially
reduced. Therefore, treatment of us as a corporation would result in a material
reduction in the anticipated cash flow and after-tax return to our unitholders,
likely causing a substantial reduction in the value of our common
units.
Current
law may change, causing us to be treated as a corporation for federal income tax
purposes or otherwise subjecting us to a material amount of entity level
taxation for federal, state or local income tax purposes. In addition, several
states are evaluating ways to subject partnerships to entity level taxation
through the imposition of state income, franchise or other forms of taxation.
For example, we have become subject to a new entity level tax on the portion, if
any, of our revenue generated in Texas beginning for tax reports due on or after
January 1, 2008. Specifically, the Texas margin tax will be imposed at a
maximum effective rate of 0.7% of our gross income apportioned to Texas.
Imposition of such tax on us by the State of Texas, or any other state, will
reduce the cash available for distribution to our unitholders.
The
tax treatment of public traded partnerships or an investment in our common units
could be subject to potential legislation, judicial or administrative changes
and differing interpretations, possible on a retroactive basis.
The present U.S. federal income tax treatment of publicly traded
partnerships, including us, or an investment in our common units may be modified
by administrative, legislative or judicial interpretation at any
time. Any modification to the U.S. federal income tax laws and
interpretations thereof could make it more difficult or impossible to meet the
exception for us to be treated as a
20
partnership
for U.S. federal income tax purposes that is not taxable as a corporation, or
Qualifying Income Exception, affect or cause us to change our business
activities, affect the tax considerations of an investment in us, change the
character or treatment of portions of our income and adversely affect an
investment in our common units. For example, in response to certain
recent developments, members of Congress are considering substantive changes to
the definition of qualifying income under Section 7704(d) of the Internal
Revenue Code. It is possible that these legislative efforts could
result in changes to the existing U.S. tax laws that affect publicly traded
partnerships, including us. Any modification to the U.S. federal
income tax laws and interpretations thereof may or may not be applied
retroactively. We are unable to predict whether any of these changes,
or other proposals, will ultimately be enacted. Any such changes
could negatively impact the value of an investment in our common
units.
We
prorate our items of income, gain, loss and deduction between transferors and
transferees of our common units each month based upon the ownership of our
common units on the fist day of each month, instead of on the basis of the date
a particular common unit is transferred.
We
prorate our items of income, gain, loss and deduction between transferors and
transferees of our common units each month based upon the ownership of our
common units on the first business day of each month, instead of on the basis of
the date a particular unit is transferred. The use of this proration
method may not be permitted under existing Treasury regulations, and,
accordingly, our counsel is unable to opine as to the validity of this
method. If the IRS were to challenge this method or new Treasury
regulations were issued, we may be required to change the allocation of items of
income, gain, loss and deduction amount our unitholders.
A
change in tax treatment of our partnership, or a successful IRS contest of the
federal income tax positions that we take, may adversely impact the market for
our common units, and the costs of any contests will be borne by our unitholders
and our general partner.
The IRS
may adopt positions that differ from the positions that we take, even positions
taken with advice of counsel. It may be necessary to resort to administrative or
court proceedings to sustain some or all of the positions that we take. A court
may not agree with some or all of the positions that we take. Any contest with
the IRS may materially and adversely impact the market for our common units and
the price at which our common units trade. In addition, the costs of any contest
with the IRS, principally legal, accounting and related fees, will result in a
reduction in cash available for distribution to our unitholders and our general
partner and thus will be borne indirectly by our unitholders and our general
partner.
Our
unitholders may be required to pay taxes on their share of our taxable income
even if they do not receive any cash distributions from us.
Because
our unitholders will be treated as partners to whom we will allocate taxable
income, which could be different in amount from the cash that we distribute, our
unitholders will be required to pay federal income taxes and, in some cases,
state and local income taxes on their share of our taxable income even if they
do not receive any cash distributions from us. Our unitholders may not receive
cash distributions from us equal to their share of our taxable income or even
equal to the actual tax liability which results from their share of our taxable
income.
We intend
to allocate items of income, gain, loss and deduction among the holders of our
common units and subordinated units on or after the date that the subordination
period ends to ensure that common units issued in exchange for our subordinated
units have the same economic and federal income tax characteristics as our other
common units. Any such allocation of items of our income or gain to unitholders,
which may include allocations to holders of our common units, would not be
accompanied by a distribution of cash to such unitholders. In addition, any such
allocation of items of deduction or loss to specific unitholders (for example,
to the holder of the subordinated units) would effectively reduce the amount of
items of deduction or loss that will be allocated to other
unitholders.
Tax
gain or loss on the disposition of our common units could be different than
expected.
If our
unitholders sell common units, they will recognize gain or loss equal to the
difference between the amount realized and their tax basis in those common
units. Prior distributions to our unitholders in excess of the total net taxable
income a unitholder is allocated for a common unit, which decreased their tax
basis in that common unit, will, in effect, become taxable income to them if the
common unit is sold at a price greater than their tax basis in that common unit,
even if the price they receive is less than their original cost. A substantial
portion of the amount realized, whether or not representing gain, may be
ordinary income to our unitholders.
Tax-exempt
entities face unique tax issues from owning common units that may result in
adverse tax consequences to them.
Investments
in common units by tax-exempt entities, such as individual retirement accounts
(known as IRAs), raises issues unique to them. For example, virtually all of our
income allocated to unitholders who are organizations exempt from federal income
21
tax,
including individual retirement accounts and other retirement plans, will be
unrelated business taxable income and will be taxable to them.
Non-U.S.
investors face unique tax issues from owning common units that may result in
adverse tax consequences to them.
Non-U.S.
investors who own common units will be required to file United States federal
income tax returns and pay tax on their share of our taxable income.
Distributions to non-U.S. investors will generally be reduced by withholding
taxes at the highest applicable effective tax rate (currently 35%) whether or
not we have taxable income. The IRS has taken the position that a non-U.S.
investor’s gain on the sale of common units is subject to United States federal
income tax.
We
will treat each holder of our common units as having the same tax benefits
without regard to the actual common units held. The IRS may challenge this
treatment, which could adversely affect the value of our common
units.
Because
we cannot match transferors and transferees of common units, we adopt
depreciation and amortization positions that may not conform with all aspects of
applicable Treasury regulations. A successful IRS challenge to those positions
could adversely affect the amount of tax benefits available to a common
unitholder. It also could affect the timing of these tax benefits or the amount
of gain from a sale of common units and could have a negative impact on the
value of our common units or result in audit adjustments to the common
unitholders’ tax returns.
Our
unitholders will likely be subject to state and local taxes and return filing
requirements as a result of an investment in our common units.
In
addition to federal income taxes, our unitholders will likely be subject to
other taxes, including state and local income taxes, unincorporated business
taxes and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which we do business or own property. We will initially
own property or do business in Louisiana and Texas. Our unitholders will likely
be required to file state and local income tax returns and pay state and local
income taxes in some or all of these various jurisdictions. Furthermore, our
unitholders may be subject to penalties for failure to comply with those
requirements. We may own property or conduct business in other states or foreign
countries in the future. It is the responsibility of our unitholders to file all
United States federal, state and local tax returns.
The
sale or exchange of 50% or more of our capital and profits interests during any
twelve-month period will result in the termination of our partnership for
federal income tax purposes.
We will
be considered to have terminated for federal income tax purposes if there is a
sale or exchange of 50% or more of the total interests in our capital and
profits within a twelve-month period. Our termination would, among other things,
result in the closing of our taxable year for all unitholders and could result
in a deferral of depreciation deductions allowable in computing our taxable
income.
We
may adopt certain valuation methodologies that may result in a shift of income,
gain, loss and deduction between the general partner and the
unitholders. The IRS may challenge this treatment, which could
adversely affect the value of the common units.
When we
issue additional units or engage in certain other transactions, we will
determine the fair market value of our assets and allocate any unrealized gain
or loss attributable to our assets to the capital accounts of our unitholders
and our general partner. Our methodology may be viewed as
understating the value of our assets. In that case, there may be a
shift of income, gain, loss and deduction between certain unitholders and the
general partner, which may be unfavorable to such
unitholders. Moreover, under our methodologies subsequent purchasers
of common units may have a greater portion of their Internal Revenue Code
Section 743(b) adjustment allocated to our tangible assets and a lesser portion
allocated to our intangible assets. The IRS may challenge our
methods, or our allocation of the Section 743(b) adjustment attributable to our
tangible and intangible assets, and allocations of income, gain, loss and
deduction between the general partner and certain of our
unitholders.
A
successful IRS challenge to these methods or allocations could adversely affect
the amount of taxable income or loss being allocated to our
unitholders. It also could affect the amount of gain from our
unitholders’ sale of common units and could have a negative impact on the value
of the common units or results in audit adjustments to our unitholders’ tax
returns without benefit of additional deductions.
22
None.
We may in
the future be involved as a party to various legal proceedings, which are
incidental to the ordinary course of business. We regularly analyze current
information and, as necessary, provide accruals for probable liabilities on the
eventual disposition of these matters. In the opinion of management, as of
December 31, 2009, there were no threatened or pending legal matters that
would have a material impact on our consolidated results of operations,
financial position or cash flows.
None.
ITEM
5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our
common units began trading on the NYSE Amex Equities (formally know as NYSE
Alternext US) under the symbol “CQP” commencing with our initial public offering
on March 21, 2007. The table below presents the high and low daily closing
sales prices per common unit, as reported by the NYSE Amex Equities, and cash
distributions to common unitholders for the period indicated.
|
High
|
Low
|
Cash
Distributions
Per
Unit (1)
|
||||||||||
|
Three
Months Ended
|
||||||||||||
|
March 31,
2008
|
$ | 17.39 | $ | 14.85 | $ | 0.425 | ||||||
|
June 30,
2008
|
16.14 | 8.69 | 0.425 | |||||||||
|
September 30,
2008
|
10.21 | 6.95 | 0.425 | |||||||||
|
December 31,
2008
|
6.98 | 3.71 | 0.425 | |||||||||
|
Three
Months Ended
|
||||||||||||
|
March 31,
2009
|
7.10 | 4.32 | 0.425 | |||||||||
|
June 30,
2009
|
7.99 | 6.03 | 0.425 | |||||||||
|
September 30,
2009
|
9.95 | 6.95 | 0.425 | |||||||||
|
December 31,
2009
|
13.30 | 9.27 | 0.425 | |||||||||
|
(1)
|
We
also paid cash distributions to subordinated unitholders and to our
general partner with respect to its 2% general partner
interest.
|
A
distribution for the quarter ended December 31, 2009 of $0.425 per unit was
paid on February 12, 2010.
As of
February 17, 2010, we had 26,416,357 common units outstanding held by
approximately 19 record owners.
We
consider cash distributions to unitholders on a quarterly basis, although there
is no assurance as to the future cash distributions since they are dependent
upon future earnings, cash flows, capital requirements, financial condition and
other factors. The Sabine Pass Indenture discussed in Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, may
prohibit Sabine Pass LNG from making cash distributions to us under certain
circumstances, which could limit our ability to make distributions.
Upon the
closing of our initial public offering, Cheniere received 135,383,831
subordinated units. Below is a description of our cash distribution policy
regarding common and subordinated units.
Cash Distribution
Policy
Our cash
distribution policy is consistent with the terms of our partnership agreement,
which requires that we distribute all of our available cash
quarterly.
23
Subordination
Period
During
the subordination period, which commenced upon the closing of our initial public
offering, the common units have the right to receive distributions of available
cash from operating surplus in an amount equal to the initial quarterly
distribution of $0.425 per quarter, plus any arrearages in the payment of the
initial quarterly distribution on the common units from prior quarters, before
any distributions of available cash from operating surplus may be made on the
subordinated units. Cheniere owns all of the subordinated units, representing
83.7% of the limited partner interests in us. These units are deemed
“subordinated” because for a period of time, referred to as the subordination
period, the subordinated units will not be entitled to receive any distributions
until after the common units have received the initial quarterly distribution
plus any arrearages from prior quarters. Furthermore, no arrearages will be paid
on the subordinated units. The practical effect of the subordination period is
to increase the likelihood that during this period there will be sufficient
available cash to pay the initial quarterly distribution on the common
units.
Definition
of Subordination Period
The
subordination period will extend until the first business day following the
distribution of available cash to partners in respect of any quarter ending on
or after June 30, 2010 that each of the following occurs:
|
|
•
|
distributions
of available cash from operating surplus on each of the outstanding common
units, subordinated units and general partner units equaled or exceeded
the initial quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that
date;
|
|
|
•
|
the
adjusted operating surplus generated during each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date
equaled or exceeded the sum of the initial quarterly distributions on all
of the outstanding common units, subordinated units and general partner
units during those periods on a fully diluted basis;
and
|
|
|
•
|
there
are no arrearages in payment of the initial quarterly distribution on the
common units.
|
Expiration
of the Subordination Period
When the
subordination period expires, each outstanding subordinated unit will convert
into one common unit and will then participate pro rata with the other common
units in distributions of available cash. In addition, if the unitholders remove
our general partner other than for cause and units held by the general partner
and its affiliates are not voted in favor of such removal:
|
|
•
|
the
subordination period will end and each subordinated unit will immediately
convert into one common unit;
|
|
|
•
|
any
existing arrearages in payment of the initial quarterly distribution on
the common units will be extinguished;
and
|
|
|
•
|
the
general partner will have the right to convert its general partner units
and its incentive distribution rights into common units or to receive cash
in exchange for those interests.
|
Early
Conversion of Subordinated Units
The
subordination period will automatically terminate and all of the subordinated
units will convert into common units on a one-for-one basis on the first
business day following the distribution of available cash to partners in respect
of any quarter ending on or after June 30, 2008 that each of the following
occurs:
|
|
•
|
distributions
of available cash from operating surplus on each outstanding common unit,
subordinated unit and general partner unit equaled or exceeded $2.55 (150%
of the annualized initial quarterly distribution) for the four-quarter
period immediately preceding that
date;
|
|
|
•
|
the
adjusted operating surplus generated during the four-quarter period
immediately preceding that date equaled or exceeded the sum of a
distribution of $2.55 (150% of the annualized initial quarterly
distribution) on all of the outstanding common units, subordinated units
and general partner units on a fully diluted basis;
and
|
|
|
•
|
there
are no arrearages in payment of the initial quarterly distribution on the
common units.
|
General
Partner Units and Incentive Distribution Rights
Incentive
distribution rights represent the right to receive an increasing percentage of
quarterly distributions of available cash from operating surplus after the
initial quarterly distribution and the subsequent target distribution levels
have been achieved. Our general partner currently holds all of our incentive
distribution rights, but may transfer these rights separately from its general
partner interest, subject to restrictions in our partnership
agreement.
24
Assuming
we do not issue any additional classes of units and our general partner
maintains its 2% interest, if we have made distributions to our unitholders from
operating surplus in an amount equal to the initial quarterly distribution for
any quarter, assuming no arrearages, then we will distribute any additional
available cash from operating surplus for that quarter among the unitholders and
our general partner as follows:
|
Total
Quarterly Distribution
Target
Amount
|
Marginal
Percentage
Interest
Distributions
|
||||
|
Common
and Subordinated Unitholders
|
General
Partner
|
||||
|
Initial
quarterly distribution
|
$0.425
|
98%
|
2%
|
||
|
First
Target Distribution
|
Above
$0.425 up to $0.489
|
98%
|
2%
|
||
|
Second
Target Distribution
|
Above
$0.489 up to $0.531
|
85%
|
15%
|
||
|
Third
Target Distribution
|
Above
$0.531 up to $0.638
|
75%
|
25%
|
||
|
Thereafter
|
Above
$0.638
|
50%
|
50%
|
||
25
The
following tables set forth the selected financial data of our combined
predecessor entities for the periods and at the dates indicated. Our combined
predecessor entities refer to us and our wholly-owned subsidiaries, including
Sabine Pass LNG.
The
financial data should be read in conjunction with Management’s Discussion and
Analysis of Financial Condition and Results of Operations and our Consolidated
Combined Financial Statements and Notes thereto included elsewhere in this
report.
|
Cheniere
Energy Partners, L.P.
|
Combined
Predecessor Entities
|
||||||||||||||
|
December
31,
|
|||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||
|
(in
thousands)
|
|||||||||||||||
|
Statement of Operations
Data:
|
|||||||||||||||
|
Revenues
(including transactions with affiliates)
|
$
|
416,790
|
$
|
15,000
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
Expenses
(including transactions with affiliates)
|
88,870
|
32,141
|
12,516
|
10,277
|
4,719
|
||||||||||
|
Income
(loss) from operations
|
327,920
|
(17,141
|
)
|
(12,516
|
)
|
(10,277
|
)
|
(4,719
|
)
|
||||||
|
Other
income (expense) (1)
|
(141,008
|
)
|
(61,203
|
)
|
(36,436
|
)
|
(50,495
|
)
|
456
|
||||||
|
Net
income (loss)
|
186,912
|
(78,344
|
)
|
(48,952
|
)
|
(60,772
|
)
|
(4,263
|
)
|
||||||
|
Cash
Flow Data:
|
|||||||||||||||
|
Cash
flows provided by (used in) operating activities
|
234,311
|
(1,156
|
)
|
(640
|
)
|
(27,912
|
)
|
6,319
|
|||||||
|
Cash
flows provided by (used in) investing activities
|
92,146
|
(560
|
)
|
(74,776
|
)
|
(1,544,408
|
)
|
(246,337
|
)
|
||||||
|
Cash
flows provided by (used in) financing activities
|
(208,922
|
)
|
1,710
|
75,422
|
1,572,222
|
218,201
|
|||||||||
|
Cheniere
Energy Partners, L.P.
|
Combined
Predecessor Entities
|
||||||||||||||
|
December
31,
|
|||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||
|
(in
thousands)
|
|||||||||||||||
|
Balance
Sheet Data:
|
|||||||||||||||
|
Cash
and cash equivalents
|
$
|
117,542
|
$
|
7
|
$
|
13
|
$
|
7
|
$
|
5
|
|||||
|
Restricted
cash and cash equivalents (current)
|
13,732
|
235,985
|
191,179
|
176,324
|
8,871
|
||||||||||
|
Non-current
restricted cash and cash equivalents
|
82,394
|
137,984
|
453,843
|
982,613
|
—
|
||||||||||
|
Non-current
restricted U.S. Treasury securities
|
—
|
20,829
|
63,923
|
—
|
—
|
||||||||||
|
Property,
plant and equipment, net
|
1,588,557
|
1,517,507
|
1,127,289
|
651,676
|
270,740
|
||||||||||
|
Total
assets
|
1,859,473
|
1,978,835
|
1,904,978
|
1,858,114
|
309,139
|
||||||||||
|
Long-term
debt
|
2,110,101
|
2,107,673
|
2,032,000
|
2,032,000
|
72,485
|
||||||||||
|
Long-term
debt—related party
|
72,928
|
70,661
|
—
|
—
|
—
|
||||||||||
|
Long-term
debt—affiliate
|
—
|
2,372
|
645
|
—
|
—
|
||||||||||
|
Deferred
revenue (long-term)
|
33,500
|
37,500
|
40,000
|
40,000
|
40,000
|
||||||||||
|
Deferred
revenue—affiliate (long-term)
|
7,360
|
4,971
|
2,583
|
—
|
—
|
||||||||||
|
(1)
|
The
year ended December 31, 2006 includes a $23.8 million loss related to
the extinguishment of debt issuance costs and a $20.6 million derivative
loss as a result of terminating interest rate swaps, both related to the
termination of the Sabine Pass credit facility in November
2006.
|
26
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. 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 includes the following subjects:
|
|
•
|
Overview
of Business
|
|
|
•
|
Overview
of Significant 2009 Events
|
|
|
•
|
Liquidity
and Capital Resources
|
|
|
•
|
Contractual
Obligations
|
|
|
•
|
Results
of Operations
|
|
|
•
|
Off-Balance
Sheet Arrangements
|
|
|
•
|
Summary
of Critical Accounting Policies
|
|
|
•
|
Recent
Accounting Standards
|
We are a
Delaware limited partnership formed by Cheniere. Through our wholly-owned
subsidiary, Sabine Pass LNG, L.P. (“Sabine Pass LNG”), we own and operate the
Sabine Pass LNG receiving terminal located in western Cameron Parish, Louisiana
on the Sabine Pass Channel.
Following
the achievement of commercial operability of the Sabine Pass LNG receiving
terminal in September 2008, Sabine Pass LNG began receiving capacity reservation
fee payments from Cheniere Marketing, LLC (“Cheniere Marketing”), a wholly-owned
subsidiary of Cheniere, under its TUA. In December 2008, Cheniere Marketing
began paying Sabine Pass LNG its monthly capacity reservation fee payment on a
quarterly basis. Sabine Pass LNG also began receiving capacity
reservation fee payments from Total Gas and Power North America, Inc. (formerly
known as Total LNG USA, Inc.) (“Total”) and Chevron U.S.A., Inc. (“Chevron”)
under their TUAs in March 2009 and June 2009, respectively, when Total and
Chevron made their first monthly capacity reservation fee payments.
LNG
Receiving Terminal Business
The
Sabine Pass LNG receiving terminal has regasification capacity of approximately
4.0 Bcf/d and five liquefied natural gas (“LNG”) storage tanks with an aggregate
LNG storage capacity of approximately 16.9 Bcf along with two unloading docks
capable of handling the largest LNG carriers currently being operated or built.
Construction of the Sabine Pass LNG receiving terminal commenced in March
2005. We achieved full operability with total sendout capacity of
approximately 4.0 Bcf/d and storage capacity of approximately 16.9 Bcf during
the third quarter of 2009.
In the
second quarter of 2009, Sabine Pass LNG purchased Sabine Pass Tug Services, LLC
(“Tug Services”), a wholly-owned subsidiary of Cheniere. As a result, Sabine
Pass LNG acquired a lease (the “Tug Agreement”) for the use of tug boats and
marine services at the Sabine Pass LNG receiving terminal (see Note 14—“Leases”
for further information on the Tug Agreement). In connection with this
acquisition, Tug Services entered into a Terminal Marine Services Agreement (the
“Tug Sharing Agreement”) with our three TUA customers to provide their LNG cargo
vessels with tug boat and marine services at the Sabine Pass LNG receiving
terminal.
27
In 2009,
we maintained commercial operability of the Sabine Pass LNG receiving terminal
and continued to execute our strategy to complete construction of the Sabine
Pass LNG receiving terminal and to generate steady and reliable revenues under
Sabine Pass LNG’s long-term TUAs. The major events of 2009 include the
following:
|
|
•
|
receipt
of capacity reservation fee payments from Cheniere Marketing, Total and
Chevron and successful unloading and processing of LNG for each
customer;
|
|
|
•
|
purchase,
transportation and successful unloading of an additional LNG commissioning
cargo for the Sabine Pass LNG receiving
terminal;
|
|
|
•
|
commencement
of distributions to our subordinated unitholder;
and
|
|
|
•
|
completed
construction and achieved full operability of the Sabine Pass LNG
receiving terminal with approximately 4.0 Bcf/d of total sendout capacity
and five LNG storage tanks with approximately 16.9 Bcf of aggregate
storage capacity.
|
Cash
and Cash Equivalents
As of
December 31, 2009, we had $117.5 million of cash and cash equivalents and $96.1
million of restricted cash and cash equivalents. Of this amount,
$117.4 million of cash and cash equivalents was held in our subsidiary, Sabine
Pass LNG. The restricted cash and cash equivalents of $96.1 million was held by
Sabine Pass LNG to pay interest on the Senior Notes.
The
foregoing funds are anticipated to be sufficient to fund the remaining accrued
liabilities related to construction, operating expenditures and interest
requirements. Regardless whether Sabine Pass LNG receives revenues from Cheniere
Marketing (or Cheniere, as guarantor), Sabine Pass LNG expects to have
sufficient cash flow from payments made under its Total and Chevron TUAs to
allow it to meet its future operating expenditures and interest payment
requirements until maturity of the 2013 Notes. In order for us to fund our
operations and make distributions to our unitholders, we are dependent on the
ability of Sabine Pass LNG to make distributions to us. Sabine Pass LNG must
satisfy certain restrictions under the Sabine Pass Indenture governing the
Sabine Pass Notes before being able to make distributions to us, which will
require that Cheniere Marketing make a substantial portion of its TUA payments
to Sabine Pass LNG. As described below, Cheniere Marketing has a limited
operating history, limited capital and no credit. If Sabine Pass LNG is unable
to make restricted cash distributions to us, then we will likely be unable to
make our anticipated future quarterly cash distributions on our units. Under
such circumstances and absent additional external funding, Cheniere Marketing
and Cheniere would likely be unable to meet their ongoing TUA and guarantee
obligations to Sabine Pass LNG.
Construction
Construction
at the Sabine Pass LNG receiving terminal was substantially completed in the
third quarter of 2009. As of December 31, 2009, we had completed construction
and attained full operability of the Sabine Pass LNG receiving terminal (with
approximately 4.0 Bcf/d of total sendout capacity and five LNG storage tanks
with approximately 16.9 Bcf of aggregate storage capacity), and such was
accomplished within our budget.
TUA
Revenues
The
entire approximately 4.0 Bcf/d of regasification capacity at the Sabine Pass LNG
receiving terminal has been fully reserved under two 20-year, firm commitment
TUAs with unaffiliated third parties, and a third TUA with Cheniere Marketing.
Each of the three customers at the Sabine Pass LNG receiving terminal must make
the full contracted amount of capacity reservation fee payments under its TUA
whether or not it uses any of its reserved capacity. Capacity reservation fee
TUA payments are made by the Sabine Pass LNG third-party customers as
follows:
|
|
•
|
Total
has reserved approximately 1.0 Bcf/d of regasification capacity and has
agreed to make monthly capacity payments to Sabine Pass LNG aggregating
approximately $125 million per year for 20 years that commenced on
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
has reserved approximately 1.0 Bcf/d of regasification capacity and has
agreed to make monthly capacity payments to Sabine Pass LNG aggregating
approximately $125 million per year for 20 years that commenced on
July 1, 2009. Chevron Corporation has guaranteed Chevron’s
obligations under its TUA up to 80% of the fees payable by
Chevron.
|
In addition, Cheniere
Marketing has reserved the remaining 2.0 Bcf/d of regasification capacity and is
entitled to use any capacity not utilized by Total and Chevron. Cheniere
Marketing began making its TUA capacity reservation fee payments in the
28
fourth
quarter of 2008. Cheniere Marketing is required to make monthly
capacity payments aggregating approximately $250 million per year for the period
from January 1, 2009 through at least September 30, 2028.
Cheniere
Marketing continues to develop its business, has a limited operating history,
limited capital and lacks a credit rating. Cheniere, which has
guaranteed the obligations of Cheniere Marketing under its TUA, has a
non-investment grade corporate rating. In addition, the LNG and
natural gas marketing business activities of Cheniere Marketing were downsized
during 2008. If Cheniere and its subsidiaries do not have sufficient
liquidity to pay their obligations, including payments to us required under the
Cheniere Marketing TUA, then Sabine Pass LNG will likely be unable to make
restricted cash distributions to our partners under the Sabine Pass Indenture
described below. If Sabine Pass LNG is unable to make such restricted
cash distributions, then we will likely be unable to make our anticipated future
quarterly cash distributions on our units. Under such circumstances
and absent funding of a TUA reserve account, Cheniere Marketing and Cheniere
would likely be unable to meet their TUA and guarantee obligations to Sabine
Pass LNG.
Under
each of these TUAs, Sabine Pass LNG is also entitled to retain 2% of the LNG
delivered for the customer’s account, which Sabine Pass LNG will use primarily
as fuel for revaporization and self-generated power at the Sabine Pass LNG
receiving terminal.
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.
29
Sources
and Uses of Cash
The
following table summarizes (in thousands) the sources and uses of our cash and
cash equivalents for the years ended December 31, 2009, 2008 and 2007. 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:
|
Year
Ended December 31,
|
|||||||||
|
2009
|
2008
|
2007
|
|||||||
|
SOURCES
OF CASH AND CASH EQUIVALENTS
|
|||||||||
|
Use
of restricted cash and cash equivalents
|
$
|
298,673
|
$
|
426,592
|
$
|
460,762
|
|||
|
Operating
cash flow
|
234,311
|
—
|
—
|
||||||
|
Proceeds
from issuance of debt
|
—
|
144,965
|
—
|
||||||
|
Borrowings
under long-term note—affiliate
|
114
|
1,708
|
645
|
||||||
|
Proceeds
from issuance of common units
|
—
|
—
|
98,442
|
||||||
|
Affiliate
payable
|
—
|
1
|
3
|
||||||
|
Total
sources of cash and cash equivalents
|
533,098
|
573,266
|
559,852
|
||||||
|
USES
OF CASH AND CASH EQUIVALENTS
|
|||||||||
|
LNG
receiving terminal construction-in-process
|
(96,918
|
)
|
(402,955
|
)
|
(430,405
|
)
|
|||
|
Distributions
to owners
|
(280,675
|
)
|
(45,824
|
)
|
(23,668
|
)
|
|||
|
Advances
under long-term contracts
|
(601
|
)
|
(14,274
|
)
|
(39,155
|
)
|
|||
|
Repayment
of long-term note—affiliate
|
(2,467
|
)
|
—
|
—
|
|||||
|
Advances
to affiliate—LNG held for commissioning, net of amounts transferred to LNG
receiving terminal construction-in-process
|
—
|
(9,923
|
)
|
—
|
|||||
|
Debt
issuance costs
|
(23
|
)
|
(4,837
|
)
|
(725
|
)
|
|||
|
Operating
cash flow
|
—
|
(1,156
|
)
|
(640
|
)
|
||||
|
Special
rights adjustment
|
(34,879
|
)
|
—
|
—
|
|||||
|
Investments
in restricted cash and cash equivalents
|
—
|
(94,303
|
)
|
—
|
|||||
|
Investment
in restricted U.S. Treasury securities
|
—
|
—
|
(63,923
|
)
|
|||||
|
Other
|
—
|
—
|
(1,330
|
)
|
|||||
|
Total
uses of cash and cash equivalents
|
(415,563
|
)
|
(573,272
|
)
|
(559,846
|
)
|
|||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
117,535
|
(6
|
)
|
6
|
|||||
|
CASH
AND CASH EQUIVALENTS—beginning of year
|
7
|
13
|
7
|
||||||
|
CASH
AND CASH EQUIVALENTS—end of year
|
$
|
117,542
|
$
|
7
|
$
|
13
|
|||
Use
of restricted cash and cash equivalents
In 2009,
2008 and 2007, $298.7 million, $426.6 million and $460.8 million of restricted
cash and cash equivalents, respectively, were primarily used to pay for
scheduled interest payments and construction activities at the Sabine Pass LNG
receiving terminal. Under the Sabine Pass Indenture, a portion of the
proceeds from the Senior Notes was initially required to be used for scheduled
interest payments through May 2009 and to fund the cost to complete construction
of the Sabine Pass LNG receiving terminal. Due to these restrictions imposed by
the indenture, the proceeds are not presented as cash and cash equivalents, and
therefore, when proceeds from the Senior Notes are used, they are presented as a
source of cash and cash equivalents. The decreased use of restricted
cash and cash equivalents in 2008 and 2009 primarily resulted from completing
construction of the initial sendout capacity of approximately 2.6 Bcf/d and
storage capacity of approximately 10.1 Bcf at the Sabine Pass LNG receiving
terminal in September 2008, and the substantial completion of the Sabine Pass
LNG receiving terminal’s construction activities during the third quarter
2009.
Operating
cash flow
In 2009,
Sabine Pass LNG received capacity reservation fee payments from Cheniere
Marketing of approximately $250 million, and received capacity reservation fee
payments from Total and Chevron of approximately $177 million. These operating
cash flows were offset by interest expense, operating and maintenance costs and
general and administrative costs.
In
September 2008, Sabine Pass LNG received $15.0 million from Cheniere Marketing
related to prepaid capacity reservation fee payments for the last three months
of 2008. In addition, Sabine Pass LNG received $62.7 million in December 2008
from Cheniere Marketing related to prepaid capacity reservation fee payments for
the first three months of 2009. These operating cash flows were offset by
interest expense, operating and maintenance costs and general and administrative
costs.
30
Proceeds
from issuance of debt
Proceeds
from issuance of debt were $145.0 million in 2008. The $145.0 million borrowings
during 2008 related to the additional issuance of 2016 Notes, net of
discount.
Proceeds
from issuance of common units
Proceeds
from issuance of common units of $98.4 million relate to the 2007 issuance of
5.1 million of our common units at an initial public offering price of
$21.00 per unit, net of underwriting discounts and commissions of
$7.2 million and a structuring fee of $0.5 million. We used all of the net
proceeds we received to purchase U.S. Treasury securities to fund a distribution
reserve for payment of the initial quarterly distributions through the quarter
ended June 30, 2009.
LNG
receiving terminal construction-in-process, net
Capital
expenditures for the Sabine Pass LNG receiving terminal were $96.9 million,
$403.0 million and $430.4 million in 2009, 2008 and 2007, respectively. Our
capital expenditures decreased in 2009 as a result of the substantial completion
of the construction of the Sabine Pass LNG receiving terminal in the third
quarter of 2009. Our capital expenditures decreased in 2008 as a
result of the winding down and completion of construction of the initial phases
of the Sabine Pass LNG receiving terminal.
Distributions
to owners
We made
$280.7 million of distributions to our common and subordinated unitholders and
to our general partner in 2009. We made $45.8 million and $23.7
million of distributions to common unitholders and to our general partner in
2008 and 2007, respectively.
Advances
under long-term contracts
Sabine
Pass LNG entered into certain contracts and purchase agreements related to the
construction of the Sabine Pass LNG receiving terminal that required Sabine Pass
LNG to make payments to fund costs that will be incurred or equipment that will
be received in the future. Advances made under long-term contracts on purchase
commitments are carried at face value and transferred to property, plant, and
equipment as the costs are incurred or equipment is
received. Advances under long-term contracts were $0.6 million, $14.3
million and $39.2 million at December 31, 2009, 2008 and 2007, respectively. The
decrease in 2009 compared to 2008 resulted from substantially completing
construction of the Sabine Pass LNG receiving terminal in the third quarter of
2009. During 2009, the Sabine Pass LNG receiving terminal received equipment
that it had previously advanced payment for under long-term
contracts. The decrease in 2008 compared to 2007 resulted from Sabine
Pass LNG nearing completion of construction of the initial sendout capacity of
approximately 2.6 Bcf/d and storage capacity of approximately 10.1 Bcf at the
Sabine Pass LNG receiving terminal. During 2008, the Sabine Pass LNG receiving
terminal received equipment that it had previously advanced payment for under
long-term contracts.
Advances
to affiliate—LNG held for commissioning, net of amounts transferred to LNG
receiving terminal construction-in-process
During
2008, we advanced $9.9 million for LNG commissioning cargoes, net of amounts
transferred to LNG receiving terminal construction-in-process.
Special
rights adjustment
In August
2009, we determined that we would not need the remaining balance in the
distribution reserve account to make distributions because we had adequate
available cash from Sabine Pass LNG. We therefore distributed the remaining
balance of $34.9 million in the distribution reserve account to Cheniere
pursuant to the terms of our partnership agreement. This contractual
distribution has been presented as a Special rights adjustment to the equity
accounts of Cheniere’s ownership on our Consolidated Statement of Partners’
Capital (Deficit) as of December 31, 2009.
Investments
in restricted cash and cash equivalents
Investments
in restricted cash and cash equivalents were $94.3 million in 2008. Investments
in restricted cash and cash equivalents are cash and cash equivalents that have
been contractually restricted to be used for a specific purpose. The 2008
investments in restricted cash and cash equivalents were related to borrowings
that were contractually restricted to be used in the construction of the Sabine
Pass LNG receiving terminal, interest payments on the Senior Notes and
establishment of a distribution reserve account pursuant to our partnership
agreement.
31
Investment
in restricted U.S. Treasury securities
Investment
in restricted U.S. Treasury securities was $63.9 million in
2007. Investments in restricted U.S. Treasury securities were
contractually restricted to be used for a specific purpose. We
invested $63.9 million of the proceeds we received from our 2007 initial public
offering to purchase U.S. Treasury securities that were contractually restricted
to fund our distribution reserve account to be used for the payment of initial
quarterly distributions through June 30, 2009.
Cash
Distributions to Unitholders
We
deposited all of the net proceeds that we received from our public offering into
a distribution reserve in a separate account. The deposited amount was invested
in U.S. Treasury securities maturing as to principal and interest at such times
and in such amounts sufficient to pay the $0.425 initial quarterly distribution
per common unit for all common units, as well as related distributions to our
general partner, through the distribution made in respect of the quarter ended
June 30, 2009. As provided under our partnership agreement, any amount remaining
in the distribution reserve was to be distributed to Cheniere. We received
sufficient cash from Sabine Pass LNG to make distributions to all of our
unitholders for the quarter ended June 30, 2009 without withdrawing funds from
the distribution reserve account. We therefore distributed $34.9 million to
Cheniere from the distribution reserve account in August 2009 pursuant to the
terms of our partnership agreement.
Our
partnership agreement requires that, within 45 days after the end of each
quarter, we distribute all of our available cash (as defined in our partnership
agreement). Our available cash is our cash on hand at the end of a quarter less
the amount of any reserves established. All distributions paid to date have been
made from operating surplus. The following provides a summary of distributions
paid by us during the year ended December 31, 2009:
|
Total
Distribution (in thousands)
|
|||||||||||
|
Date
Paid
|
Period
Covered by Distribution
|
Distribution
Per Unit
|
Common
and General Partner Units
|
Subordinated
Units
|
|||||||
|
February
13, 2009
|
October
1 – December 31, 2008
|
$
|
0.425
|
$
|
12,630
|
$
|
57,538
|
||||
|
May
15, 2009
|
January
1 – March 31, 2009
|
0.425
|
$
|
12,630
|
$
|
57,538
|
|||||
|
August
14, 2009
|
April
1 – June 30, 2009
|
0.425
|
$
|
12,630
|
$
|
57,538
|
|||||
|
November
13, 2009
|
July
1, 2009 – September 30, 2009
|
0.425
|
$
|
12,630
|
$
|
57,538
|
|||||
Pursuant
to our partnership agreement, all of the subordinated units will convert into
common units on a one-for-one basis on the first business day following the
distribution of available cash to partners in respect of any quarter ending on
or after June 30, 2010, when certain conditions that are defined in our
partnership agreement are met. Based on our current projections, the
earliest we anticipate that our subordination period may end would be no sooner
than the first business day after the distribution is made in respect of the
quarter ending March 31, 2012.
Debt
Agreements
Senior
Notes
Sabine
Pass LNG has issued an aggregate principal amount of $2,215.5 million of Senior
Notes consisting of $550.0 million of 7¼% Senior Secured Notes due 2013 and
$1,665.5 million of 7½% Senior Secured Notes due 2016. Interest on the Senior
Notes is payable semi-annually in arrears on May 30 and November 30 of
each year. The Senior Notes are secured on a first-priority basis by a security
interest in all of Sabine Pass LNG’s equity interests and substantially all of
its operating assets. Under the Sabine Pass Indenture governing the Senior
Notes, except for permitted tax distributions, Sabine Pass LNG may not make
distributions until certain conditions are satisfied: there must be on deposit
in an interest payment account an amount equal to one-sixth of the semi-annual
interest payment multiplied by the number of elapsed months since the last
semi-annual interest payment, and there must be on deposit in a permanent debt
service reserve fund an amount equal to one semi-annual interest payment of
approximately $82.4 million. Distributions are permitted only after satisfying
the foregoing funding requirements, a fixed charge coverage ratio test of 2:1
and other conditions specified in the Sabine Pass Indenture. During the year
ended December 31, 2009, Sabine Pass LNG made distributions of $295.7 million to
us after satisfying all the applicable conditions in the Sabine Pass
Indenture.
Services
Agreements
In
February 2005, Sabine Pass LNG entered into a 20-year operation and maintenance
agreement with a wholly-owned subsidiary of Cheniere pursuant to which we
receive all necessary services required to construct, operate and maintain the
Sabine Pass LNG receiving terminal. Prior to substantial completion of the
Sabine Pass LNG receiving terminal, as defined in Sabine Pass LNG’s engineering,
procurement and construction (“EPC”) contract with Bechtel Corporation
(“Bechtel”), Sabine Pass LNG was required to pay a fixed monthly fee of $95,000
(indexed for inflation) under the agreement. The fixed monthly fee increased to
$130,000 (indexed
32
for
inflation) upon the achievement of substantial completion of the Sabine Pass LNG
receiving terminal in March 2009, and the counterparty is entitled to a bonus
equal to 50% of the salary component of labor costs in certain circumstances to
be agreed upon between Sabine Pass LNG and the counterparty at the beginning of
each operating year. In addition, Sabine Pass LNG is required to reimburse the
counterparty for its operating expenses, which consist primarily of labor
expenses.
In
February 2005, Sabine Pass LNG entered into a 20-year management services
agreement with its general partner, which is a wholly-owned subsidiary of us,
pursuant to which its general partner was appointed to manage the construction
and operation of the Sabine Pass LNG receiving terminal, excluding those matters
provided for under the operation and maintenance agreement described in the
paragraph above. In August 2008, the general partner of Sabine Pass LNG assigned
all of its rights and obligations under the management services agreement to
Cheniere LNG Terminals, Inc. (“Cheniere Terminals”), a wholly-owned subsidiary
of Cheniere. Prior to substantial completion of the Sabine Pass LNG receiving
terminal, as defined in Sabine Pass LNG’s EPC contract with Bechtel, Sabine Pass
LNG was required to pay Cheniere Terminals a monthly fixed fee of $340,000
(indexed for inflation). With the achievement of substantial completion of the
Sabine Pass LNG receiving terminal in March 2009, the monthly fixed fee
increased to $520,000 (indexed for inflation).
In March
2007, we entered into a services agreement with Cheniere Terminals pursuant to
which we pay Cheniere Terminals an annual administrative fee of $10.0 million
(adjusted for inflation) for the provision of various general and administrative
services for our benefit following the closing of our initial public offering.
Payments under this services agreement commenced January 1, 2009. In
addition, we reimburse Cheniere Terminals for its services in an amount equal to
the sum of all out-of-pocket costs and expenses incurred by Cheniere Terminals
that are directly related to our business or activities.
During
2009, 2008 and 2007, we paid an aggregate of $18.5 million, $5.2 million and
$5.2 million, respectively, under the foregoing service agreements.
State
Tax Sharing Agreement
In
November 2006, Sabine Pass LNG entered into a state tax sharing agreement with
Cheniere effective for tax returns first due on or after January 1, 2008.
Under this agreement, Cheniere has agreed to prepare and file all Texas
franchise tax returns which it and Sabine Pass LNG are required to file on a
combined basis and to timely pay the combined tax liability. If Cheniere, in its
sole discretion, demands payment, Sabine Pass LNG will pay to Cheniere an amount
equal to the Texas franchise tax that Sabine Pass LNG would be required to pay
if its Texas franchise tax liability were computed on a separate company basis.
This agreement contains similar provisions for other state and local taxes that
Cheniere and Sabine Pass LNG are required to file on a combined, consolidated or
unitary basis.
33
We are
committed to make cash payments in the future pursuant to certain of our
contracts. The following table summarizes certain contractual obligations in
place as of December 31, 2009 (in thousands).
|
Payments
Due for Years Ended December 31,
|
|||||||||||||||
|
Total
|
2010
|
2011-
2012
|
2013-
2014
|
Thereafter
|
|||||||||||
|
Operating
lease obligations (1) (2)
|
$
|
274,533
|
$
|
8,905
|
$
|
17,810
|
$
|
17,810
|
$
|
230,008
|
|||||
|
Long-term
debt (excluding interest) (3)
|
2,215,500
|
—
|
—
|
550,000
|
1,665,500
|
||||||||||
|
Service
contracts—
|
|||||||||||||||
|
Affiliate
O&M agreement (4)
|
23,660
|
1,560
|
3,120
|
3,120
|
15,860
|
||||||||||
|
Affiliate
Sabine Pass LNG MSA (4)
|
94,640
|
6,240
|
12,480
|
12,480
|
63,440
|
||||||||||
|
Affiliate
services agreement (4)
|
192,500
|
10,000
|
20,000
|
20,000
|
142,500
|
||||||||||
|
Construction
and purchase obligations (4)
|
7,408
|
7,408
|
—
|
—
|
—
|
||||||||||
|
Cooperative
endeavor agreements (4)
|
17,171
|
2,453
|
4,906
|
4,906
|
4,906
|
||||||||||
|
Other
Obligation (5)
|
3,01
|
979
|
2,039
|
—
|
—
|
||||||||||
|
Total
|
$
|
2,828,430
|
$
|
37,545
|
$
|
60,355
|
$
|
608,316
|
$
|
2,122,214
|
|||||
|
(1)
|
A
discussion of these obligations can be found in Note 14—“Leases” of our
Consolidated Combined Financial Statements.
|
|
(2)
|
Minimum
lease payments have not been reduced by a minimum sublease rental of
$129.6 million due in the future under noncancelable tug boat
subleases.
|
|
(3)
|
Based
on the total debt balance, scheduled maturities and interest rates in
effect at December 31, 2009, our cash payments for interest would be
$164.8 million in 2010, $164.8 million in 2011, $164.8 million in 2012,
$161.5 million in 2013, $124.9 million in 2014 and $239.3 million for the
remaining years for a total of $1,020.1 million. See Note
11—“Long-Term Debt (including related party”) of our Consolidated Combined
Financial Statements.
|
|
(4)
|
A
discussion of these obligations can be found in Note 13—“Related Party
Transactions” to our Consolidated Combined Financial
Statements.
|
|
(5)
|
Other
obligation consists of LNG receiving terminal security
services.
|
Results
of Operations
Overall
Operations
2009
vs. 2008
Our
consolidated net income increased $265.2 million, from a $78.3 million net loss
in 2008 to a $186.9 million net income in 2009. This $265.2 million increase in
net income in 2009 resulted from the commencement of revenues under the Cheniere
Marketing TUA beginning October 1, 2008, the Total TUA on April 1, 2009 and
the Chevron TUA on July 1, 2009.
2008
vs. 2007
Our
consolidated net loss increased $29.3 million, from a $49.0 million net loss in
2007 to a $78.3 million net loss in 2008. The $29.3 million increase in net loss
in 2008 was primarily due to decreased interest income, increased depreciation
expense, increased operating and maintenance expense and increased operating and
maintenance expense-affiliate, which were partially offset by decreased interest
expense and derivative gain.
LNG
TUA Revenue
2009
vs. 2008
Our LNG
TUA revenue increased $163.9 million, from zero in 2008 to $163.9 million in
2009. This $163.9 million increase primarily resulted from the
commencement of revenues under the Total TUA beginning on April 1, 2009 and the
Chevron TUA beginning on July 1, 2009.
34
LNG
TUA Revenue from Affiliate
2009
vs. 2008
Our LNG
TUA revenue from affiliate increased $237.9 million, from $15.0 million in 2008
to $252.9 million in 2009. Cheniere Marketing is required to make capacity
reservation fee payments aggregating approximately $250 million per year for the
period from January 1, 2009, through at least September 30, 2028. Following the
achievement of commercial operability of the Sabine Pass LNG receiving terminal
in September 2008, Cheniere Marketing made a capacity payment of $15.0
million for October, November and December of 2008.
2008
vs. 2007
Our LNG
TUA revenue from affiliate increased from zero in 2007 to $15.0 million in 2008.
Following the achievement of commercial operability of the Sabine Pass LNG
receiving terminal in September 2008, Cheniere Marketing made a capacity
payment of $15.0 million for October, November and December of 2008. We did not
have TUA revenue in 2007, as the Sabine Pass LNG receiving terminal was not yet
completed.
Operating
and Maintenance Expense (including Affiliate Expense)
2009
vs. 2008
Operating
and maintenance expense (including affiliate expense) increased $21.0 million,
from $11.5 million in 2008 to $32.5 million in 2009. This $21.0 million increase
resulted from the achievement of commercial operability of the initial 2.6 Bcf/d
of sendout capacity and 10.1 Bcf of storage capacity of the Sabine Pass LNG
receiving terminal in the third quarter of 2008 and the substantial completion
of construction and achievement of full operability of the Sabine Pass LNG
receiving terminal with approximately 4.0 Bcf/d of total sendout capacity and
five LNG storage tanks with approximately 16.9 Bcf of aggregate storage capacity
in the third quarter of 2009.
2008
vs. 2007
Operating
and maintenance expense (including affiliate expense) increased $11.5 million,
from zero in 2007 to $11.5 million in 2008. This $11.5 million increase resulted
from the achievement of commercial operability of the initial 2.6 Bcf/d of
regassification capacity and the 10.1 Bcf of storage capacity in September 2008
and also included costs to repair damage caused by Hurricane Ike.
Depreciation
Expense
2009
vs. 2008
Depreciation
expense increased $24.7 million, from $8.0 million in 2008 to $32.7 million in
2009. This $24.7 million increase in depreciation expense was primarily related
to beginning depreciation on the costs associated with the initial 2.6 Bcf/d of
sendout capacity and 10.1 Bcf of storage capacity of the Sabine Pass LNG
receiving terminal that was placed into service in the third quarter of 2008. In
addition, depreciation expense increased in 2009 as a result of the substantial
completion of construction and achievement of full operability of the Sabine
Pass LNG receiving terminal with approximately 4.0 Bcf/d of total sendout
capacity and five LNG storage tanks with approximately 16.9 Bcf of aggregate
storage capacity in the third quarter of 2009.
2008
vs. 2007
Depreciation
expense increased $8.0 million, from zero in 2007 to $8.0 million in 2008. This
$8.0 million increase resulted from our having begun depreciating the Sabine
Pass LNG receiving terminal’s initial 2.6 Bcf/d of regassification capacity and
10.1 Bcf of storage capacity commencing in the third quarter of 2008 when it
achieved commercial operability.
General
and Administrative Expense (including Affiliate Expense)
2009
vs. 2008
General
and administrative expense (including affiliate expense) increased $13.3
million, from $10.3 million in 2008 to $23.6 million in 2009. This increase
primarily related to an increase in the amount of service agreement charges due
to the achievement of substantial completion of the Sabine Pass LNG receiving
terminal in March 2009 and due to the commencement of the services agreement
with Cheniere Terminals on January 1, 2009.
35
Interest
Income
2009
vs. 2008
Interest
income decreased $12.9 million, from $13.8 million in 2008 to $0.9 million in
2009. This decrease resulted from less restricted cash and cash equivalents
invested and lower interest rates during 2009 compared to 2008.
2008
vs. 2007
Interest
income decreased $38.4 million, from $52.2 million in 2007 to $13.8 million in
2008. This decrease resulted from less restricted cash and cash equivalents
invested and lower interest rates during 2008 compared to 2007.
Interest
Expense, net
2009
vs. 2008
Interest
expense, net of amounts capitalized, increased $67.3 million, from $79.9 million
in 2008 to $147.2 million in 2009. This increase in interest expense, net of
amount capitalized, primarily resulted from the additional $183.5 million,
before discount, of 2016 Notes issued in September 2008, and a decrease in
interest expense subject to capitalization in 2009 compared to 2008 due to the
costs associated with placing the initial 2.6 Bcf/d of sendout capacity and 10.1
Bcf of storage capacity of the Sabine Pass LNG receiving terminal into service
in September 2008 and achievement of full operability of the Sabine Pass LNG
receiving terminal with approximately 4.0 Bcf/d of total sendout capacity and
five LNG storage tanks with approximately 16.9 Bcf of aggregate storage capacity
in the third quarter of 2009.
2008
vs. 2007
Interest
expense, net of amounts capitalized, decreased $8.8 million, from $88.7 million
in 2007 to $79.9 million in 2008. This decrease in interest expense, net of
amount capitalized, primarily resulted from an increase in construction costs
and consequently an increase in capitalized interest in 2008 compared to
2007.
Derivative
Gain
2008
vs. 2007
Derivative
gain increased $4.7 million, from zero in 2007 to $4.7 million in
2008. On behalf of Sabine Pass LNG, Cheniere Marketing entered into
natural gas swaps to hedge the exposure to variability in expected future cash
flows from sales of excess LNG purchased for commissioning and performance
testing during 2008.
As of
December 31, 2009, we had no “off-balance sheet arrangements” that may have a
current or future material affect on our consolidated financial position or
results of operations.
The
selection and application of accounting policies is an important process that
has developed as our business activities have evolved and as the accounting
rules have developed. Accounting rules generally do not involve a selection
among alternatives but involve an implementation and interpretation of existing
rules, and the use of judgment, to apply the accounting rules to the specific
set of circumstances existing in our business. In preparing our consolidated
combined financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”), we endeavor to comply properly with all
applicable rules on or before their adoption, and we believe that the proper
implementation and consistent application of the accounting rules are critical.
However, not all situations are specifically addressed in the accounting
literature. In these cases, we must use our best judgment to adopt a policy for
accounting for these situations. We accomplish this by analogizing to similar
situations and the accounting guidance governing them.
Accounting
for LNG Activities
Generally,
expenditures for direct construction activities, major renewals and betterments
are capitalized, while expenditures for maintenance and repairs and general and
administrative activities are charged to expense as incurred.
36
We
capitalized interest and other related debt costs during the construction period
of the Sabine Pass LNG receiving terminal. Upon commencement of operations,
capitalized interest, as a component of the total cost, has been amortized over
the estimated useful life of the asset.
Revenue
Recognition
LNG
regasification capacity reservation fees are recognized as revenue over the term
of the respective TUAs. Advance capacity reservation fees are initially deferred
and amortized over a 10-year period as a reduction of a customer’s
regasification capacity reservation fees payable under its TUA. The
retained 2% of LNG delivered for each customer’s account at the Sabine Pass LNG
receiving terminal is recognized as revenues as Sabine Pass LNG performs the
services set forth in each customer’s TUA.
Cash
Flow Hedges
We have
used, and may in the future use, derivative instruments to limit our exposure to
variability in expected future cash flows. Cash flow hedge transactions hedge
the exposure to variability in expected future cash flows. In the case of cash
flow hedges, the hedged item (the underlying risk) is generally unrecognized
(i.e., not recorded on the consolidated balance sheet prior to settlement), and
any changes in the fair value, therefore, will not be recorded within earnings.
Conceptually, if a cash flow hedge is effective, this means that a variable,
such as a movement in interest rates, has been effectively fixed so that any
fluctuations will have no net result on either cash flows or earnings.
Therefore, if the changes in fair value of the hedged item are not recorded in
earnings, then the changes in fair value of the hedging instrument (the
derivative) must also be excluded from the income statement or else a one-sided
net impact on earnings will be reported, despite the fact that the establishment
of the effective hedge results in no net economic impact. To prevent such a
scenario from occurring, U.S. GAAP requires that the fair value of a derivative
instrument designated as a cash flow hedge be recorded as an asset or liability
on the balance sheet, but with the offset reported as part of other
comprehensive income, to the extent that the hedge is effective. We assess, both
at the inception of each hedge and on an on-going basis, whether the derivatives
that are used in our hedging transactions are highly effective in offsetting
changes in cash flows of the hedged items. On an on-going basis, we monitor the
actual dollar offset of the hedges’ market values compared to hypothetical cash
flow hedges. Any ineffective portion of the cash flow hedges will be reflected
in earnings. Ineffectiveness is the amount of gains or losses from derivative
instruments that are not offset by corresponding and opposite gains or losses on
the expected future transaction.
Use
of Estimates
The
preparation of consolidated combined financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
amounts reported in the consolidated combined financial statements and the
accompanying notes. Actual results could differ from our estimates and
assumptions used.
Items
subject to estimates and assumptions include, but are not limited to, the
carrying amount of property, plant and equipment. Actual results could differ
significantly from those estimates.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued a staff position
providing additional guidance on factors to consider in estimating fair value
when there has been a significant decrease in market activity for a financial
asset. The guidance was effective for interim and annual periods ending after
June 15, 2009. The implementation of this standard did not have a material
impact on our financial position, results of operations or cash
flow.
In April
2009, the FASB issued a staff position requiring fair value disclosures in both
interim as well as annual financial statements in order to provide more timely
information about the effects of current market conditions on financial
instruments. The guidance is effective for interim and annual periods ending
after June 15, 2009. The implementation of this standard did not have a material
impact on our financial position, results of operations or cash
flow.
In May 2009, the FASB issued new requirements for reporting
subsequent events. These requirements set forth the period after the balance
sheet date during which management of a reporting entity should evaluate events
or transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements, and disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. Disclosure of the date
through which an entity has evaluated subsequent events and the basis for the
date is also required. This disclosure should alert all users of financial
statements that an entity has not evaluated subsequent events after the date set
forth in the financial statements being presented. The Company started adhering
to these requirements in the second quarter of 2009.
37
In June
2009, the FASB issued SFAS No. 168, FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 168 establishes the FASB Accounting Standards
Codification (the “Codification”) as the single source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. SFAS No. 168 and the
Codification are effective for financial statements issued for interim and
annual periods ending after September 15, 2009. As of July 1, 2009, the
Codification supersedes all existing non-SEC accounting and reporting standards.
We adopted this statement for the period ended September 30, 2009. The adoption
of this statement did not have an impact on our financial position, results of
operations or cash flow.
Cash
Investments
We have
cash investments that we manage based on internal investment guidelines that
emphasize liquidity and preservation of capital. Such cash investments are
stated at historical cost, which approximates fair market value on our
consolidated balance sheet.
Marketing
and Trading Commodity Price Risk
On behalf
of Sabine Pass LNG, Cheniere Marketing has entered into exchange cleared NYMEX
natural gas swaps entered into to hedge the exposure to variability in expected
future cash flows related to commissioning cargoes purchased by Cheniere
Marketing that were or are expected to be sold as part of the testing phase of
the commissioning process and operations. We use value at risk
(“VaR”) and other methodologies for market risk measurement and control
purposes. The VaR is calculated using the Monte Carlo simulation
method. At December 31, 2009 and 2008, the one-day VaR with a 95% confidence
interval on our derivative positions was less than $0.1 million.
As of
December 31, 2009, Cheniere Marketing, on behalf of Sabine Pass LNG, had entered
into a total of 360,851 MMBtu of NYMEX natural gas swaps through February 2010,
for which we will receive fixed prices of $4.903 to $6.158 per
MMBtu. At December 31, 2009, the value of the derivatives was an
asset of $0.1 million.
38
INDEX
TO FINANCIAL STATEMENTS
CHENIERE
ENERGY PARTNERS, L.P.
39
Management’s
Report on Internal Control Over Financial Reporting
As
management, we are responsible for establishing and maintaining adequate
internal control over financial reporting for Cheniere Energy Partners, L.P.
(“Cheniere Partners”) and its subsidiaries. In order to evaluate the
effectiveness of internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act of 2002, we have conducted an
assessment, including testing using the criteria in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Cheniere Partners’ system of internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements and, even when determined to be effective, can only provide
reasonable assurance with respect to financial statement preparation and
presentation.
Based on
our assessment, we have concluded that Cheniere Partners maintained effective
internal control over financial reporting as of December 31, 2009, based on
criteria in Internal
Control—Integrated Framework issued by the COSO.
Cheniere
Partners’ independent auditors, Ernst & Young LLP, have issued an audit
report on Cheniere Partners’ internal control over financial
reporting
Management’s
Certifications
The
certifications of Cheniere Partners’ Chief Executive Officer and Chief Financial
Officer required by the Sarbanes-Oxley Act of 2002 have been included as
Exhibits 31 and 32 in Cheniere Partners’ Form 10-K.
| Cheniere Energy Partners, L.P. | |
|
By:
|
Cheniere
Energy Partners GP, LLC,
|
|
Its
general partner
|
|
|
By:
|
/s/ CHARIF SOUKI
|
By:
|
/s/
Meg A. Gentle
|
|
|
Charif
Souki
|
Meg
A. Gentle
|
|||
|
Chief
Executive Officer
(Principal
Executive Officer)
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
40
|
|
The
Board of Directors of Cheniere Energy Partners GP, LLC,
and
|
|
|
Unitholders
of Cheniere Energy Partners, L.P.
|
We have
audited the accompanying consolidated balance sheets of Cheniere Energy
Partners, L.P. and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated combined statements of operations, partners’ and owners’
capital (deficit), and cash flows for each of the three years in the period
ended December 31, 2009. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Cheniere Energy
Partners, L.P. and subsidiaries at December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Cheniere Energy Partners, L.P.’s internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated
February 25, 2010 expressed an unqualified opinion thereon.
|
/s/ ERNST
& YOUNG LLP
|
|
ERNST &
YOUNG LLP
|
Houston, Texas
February 25, 2010
41
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors of Cheniere Energy Partners, GP, LLC, and
Unitholders
of Cheniere Energy Partners, L.P.
We have
audited Cheniere Energy Partners, L. P. and subsidiaries’ internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Cheniere Energy
Partners, L.P. and subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Cheniere Energy Partners, L.P. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Cheniere
Energy Partners, L.P. and subsidiaries as of December 31, 2009 and 2008,
and the related consolidated combined statements of operations, partners’ and
owners’ capital (deficit), and cash flows for each of the three years in the
period ended December 31, 2009 and our reported dated February 25, 2010
expressed an unqualified opinion thereon.
|
/s/ ERNST
& YOUNG LLP
|
|
ERNST &
YOUNG LLP
|
Houston, Texas
February 25,
2010
42
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
(in
thousands, except unit data)
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$
|
117,542
|
$
|
7
|
||||
|
Restricted
cash and cash equivalents
|
13,732
|
235,985
|
||||||
|
Accounts
and interest receivable
|
5,037
|
2,087
|
||||||
|
Accounts
receivable—affiliate
|
3,586
|
419
|
||||||
|
Advances
to affiliate
|
5,358
|
2,198
|
||||||
|
Advances
to affiliate—LNG inventory
|
1,319
|
—
|
||||||
|
LNG
inventory
|
1,521
|
—
|
||||||
|
Prepaid
expenses and other
|
4,836
|
5,407
|
||||||
|
Total
current assets
|
152,931
|
246,103
|
||||||
|
NON-CURRENT
RESTRICTED CASH AND CASH EQUIVALENTS
|
82,394
|
137,984
|
||||||
|
NON-CURRENT
RESTRICTED U.S. TREASURY SECURITIES
|
—
|
20,829
|
||||||
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
1,588,557
|
1,517,507
|
||||||
|
DEBT
ISSUANCE COSTS, NET
|
26,953
|
30,748
|
||||||
|
ADVANCES
UNDER LONG-TERM CONTRACTS
|
1,021
|
10,705
|
||||||
|
ADVANCES
TO AFFILIATE—LNG HELD FOR COMMISSIONING
|
—
|
9,923
|
||||||
|
OTHER
|
7,617
|
5,036
|
||||||
|
Total
assets
|
$
|
1,859,473
|
$
|
1,978,835
|
||||
|
LIABILITIES
AND PARTNERS’ DEFICIT
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable
|
$
|
39
|
$
|
137
|
||||
|
Accounts
payable—affiliate
|
306
|
514
|
||||||
|
Accrued
liabilities
|
22,181
|
40,926
|
||||||
|
Accrued
liabilities—affiliate
|
3,095
|
184
|
||||||
|
Deferred
revenue
|
26,456
|
2,500
|
||||||
|
Deferred
revenue—affiliate
|
63,507
|
62,742
|
||||||
|
Total
current liabilities
|
115,584
|
107,003
|
||||||
|
LONG-TERM
DEBT, NET OF DISCOUNT
|
2,110,101
|
2,107,673
|
||||||
|
LONG-TERM
DEBT—RELATED PARTY, NET OF DISCOUNT
|
72,928
|
70,661
|
||||||
|
LONG-TERM
DEBT—AFFILIATE
|
—
|
2,372
|
||||||
|
DEFERRED
REVENUE
|
33,500
|
37,500
|
||||||
|
DEFERRED
REVENUE—AFFILIATE
|
7,360
|
4,971
|
||||||
|
OTHER
NON-CURRENT LIABILITIES
|
327
|
340
|
||||||
|
COMMITMENTS
AND CONTINGENCIES
|
—
|
—
|
||||||
|
PARTNERS’
DEFICIT
|
||||||||
|
Common
unitholders (26,416,357 units issued and outstanding at December 31, 2009
and 2008)
|
(41,494
|
)
|
(23,520
|
)
|
||||
|
Subordinated
unitholders (135,383,831 units issued and outstanding at December 31, 2009
and 2008)
|
(427,026
|
)
|
(318,994
|
)
|
||||
|
General
partner interest (2% interest with 3,302,045 units issued and outstanding
at December 31, 2009 and 2008)
|
(11,807
|
)
|
(9,171
|
)
|
||||
|
Total
partners’ deficit
|
(480,327
|
)
|
(351,685
|
)
|
||||
|
Total
liabilities and partners’ deficit
|
$
|
1,859,473
|
$
|
1,978,835
|
||||
See
accompanying notes to consolidated combined financial statements.
43
CONSOLIDATED
COMBINED STATEMENTS OF OPERATIONS
(in
thousands, except per unit data)
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
REVENUES
|
||||||||||||
|
Revenues
|
$ | 163,862 | $ | — | $ | — | ||||||
|
Revenues—affiliate
|
252,928 | 15,000 | — | |||||||||
|
TOTAL
REVENUE
|
416,790 | 15,000 | — | |||||||||
|
EXPENSES
|
||||||||||||
|
Operating
and maintenance expense
|
20,683 | 6,345 | — | |||||||||
|
Operating
and maintenance expense—affiliate
|
11,833 | 5,125 | — | |||||||||
|
Depreciation
expense
|
32,742 | 7,994 | 35 | |||||||||
|
Development
expense
|
— | 1,184 | 1,542 | |||||||||
|
Development
expense—affiliate
|
— | 1,158 | 3,943 | |||||||||
|
General
and administrative expense
|
3,722 | 4,843 | 2,716 | |||||||||
|
General
and administrative expense—affiliate
|
19,890 | 5,492 | 4,280 | |||||||||
|
TOTAL
EXPENSES
|
88,870 | 32,141 | 12,516 | |||||||||
|
INCOME
(LOSS) FROM OPERATIONS
|
327,920 | (17,141 | ) | (12,516 | ) | |||||||
|
OTHER
INCOME (EXPENSE)
|
||||||||||||
|
Interest
income
|
930 | 13,778 | 52,225 | |||||||||
|
Interest
expense, net
|
(147,201 | ) | (79,887 | ) | (88,661 | ) | ||||||
|
Interest
expense—affiliate
|
(13 | ) | — | — | ||||||||
|
Derivative
gain, net
|
5,277 | 4,653 | — | |||||||||
|
Other
|
(1 | ) | 253 | — | ||||||||
|
TOTAL
OTHER EXPENSE
|
(141,008 | ) | (61,203 | ) | (36,436 | ) | ||||||
|
NET
INCOME (LOSS)
|
$ | 186,912 | $ | (78,344 | ) | $ | (48,952 | ) | ||||
|
Less:
|
||||||||||||
|
Net
loss through March 25, 2007
|
(12,128 | ) | ||||||||||
|
Net
loss for partners from March 26, 2007 through December 31,
2007
|
$ | (36,824 | ) | |||||||||
|
Allocation
of net income (loss):
|
||||||||||||
|
Limited
partners’ interest
|
183,174 | (76,777 | ) | (36,088 | ) | |||||||
|
General
partner’s interest
|
3,738 | (1,567 | ) | (736 | ) | |||||||
|
Net
income (loss) for partners
|
$ | 186,912 | $ | (78,344 | ) | $ | (36,824 | ) | ||||
|
Basic
and diluted net income (loss) per limited partner unit
|
$ | 1.13 | $ | (0.48 | ) | $ | (0.23 | ) | ||||
|
Weighted
average number of limited partner units outstanding used for basic and
diluted net income (loss) per unit calculation:
|
||||||||||||
|
Common
units
|
26,416 | 26,416 | 26,416 | |||||||||
|
Subordinated
units
|
135,384 | 135,384 | 135,384 | |||||||||
See
accompanying notes to consolidated combined financial statements.
44
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
OWNERS’
CAPITAL (DEFICIT)
(in
thousands)
|
Partners’/Owners’
Deficit
|
Common
Units
|
Subordinated
Units
|
General
Partner
Units
|
Total
|
||||||||||||||||
|
Balance
at December 31, 2006
|
$ | (253,338 | ) | $ | — | $ | — | $ | — | $ | (253,338 | ) | ||||||||
|
Net
loss through March 25, 2007
|
(12,128 | ) | — | — | — | (12,128 | ) | |||||||||||||
|
Balance
at March 25, 2007
|
(265,466 | ) | — | — | — | (265,466 | ) | |||||||||||||
|
Contribution
of net deficit investment to unitholders
|
265,466 | (35,434 | ) | (224,556 | ) | (5,476 | ) | — | ||||||||||||
|
Proceeds
from initial public offering, net of issuance costs
|
— | 98,442 | — | — | 98,442 | |||||||||||||||
|
Net
loss from March 26, 2007 through December 31,
2007
|
— | (5,892 | ) | (30,196 | ) | (736 | ) | (36,824 | ) | |||||||||||
|
Distributions
|
— | (23,193 | ) | — | (476 | ) | (23,669 | ) | ||||||||||||
|
Balance
at December 31, 2007
|
— | 33,923 | (254,752 | ) | (6,688 | ) | (227,517 | ) | ||||||||||||
|
Net
loss
|
— | (12,535 | ) | (64,242 | ) | (1,567 | ) | (78,344 | ) | |||||||||||
|
Distributions
|
— | (44,908 | ) | — | (916 | ) | (45,824 | ) | ||||||||||||
|
Balance
at December 31, 2008
|
— | (23,520 | ) | (318,994 | ) | (9,171 | ) | (351,685 | ) | |||||||||||
|
Net
income
|
— | 29,907 | 153,268 | 3,737 | 186,912 | |||||||||||||||
|
Distributions
|
— | (44,909 | ) | (230,153 | ) | (5,613 | ) | (280,675 | ) | |||||||||||
|
Special
rights adjustment
|
— | (2,972 | ) | (31,147 | ) | (760 | ) | (34,879 | ) | |||||||||||
|
Balance
at December 31, 2009
|
$ | — | $ | (41,494 | ) | $ | (427,026 | ) | $ | (11,807 | ) | $ | (480,327 | ) | ||||||
See
accompanying notes to consolidated combined financial statements.
45
CONSOLIDATED
COMBINED STATEMENTS OF CASH FLOWS
(in
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income (loss)
|
$ | 186,912 | $ | (78,344 | ) | $ | (48,952 | ) | ||||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
||||||||||||
|
Depreciation
|
32,742 | 7,994 | 35 | |||||||||
|
Amortization
of debt discount
|
4,695 | 1,369 | — | |||||||||
|
Amortization
of debt issuance costs
|
3,818 | 3,984 | 3,793 | |||||||||
|
Non-cash
derivative (gain) loss
|
1,106 | (1,230 | ) | — | ||||||||
|
Interest
income on restricted cash and cash equivalents
|
— | (16,210 | ) | (49,638 | ) | |||||||
|
Use
of (investment in) restricted cash and cash equivalents
|
— | (1,932 | ) | 103,043 | ||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
and interest receivable
|
1,526 | 3,498 | — | |||||||||
|
Accounts
receivable—affiliate
|
(3,167 | ) | (419 | ) | — | |||||||
|
Accounts
payable and accrued liabilities
|
(11,517 | ) | 21,973 | (11,875 | ) | |||||||
|
Accounts
payable and accrued liabilities—affiliate
|
2,685 | (350 | ) | 408 | ||||||||
|
Deferred
revenue—affiliate
|
765 | 65,130 | 2,583 | |||||||||
|
Deferred
revenue
|
19,955 | — | — | |||||||||
|
Advances
to affiliate
|
(3,160 | ) | (491 | ) | — | |||||||
|
Prepaid
and other
|
(2,049 | ) | (6,128 | ) | (37 | ) | ||||||
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
234,311 | (1,156 | ) | (640 | ) | |||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Use
of restricted cash and cash equivalents
|
189,665 | 426,592 | 460,037 | |||||||||
|
LNG
terminal construction-in-process
|
(96,918 | ) | (402,955 | ) | (430,405 | ) | ||||||
|
Advances
under long-term contracts
|
(601 | ) | (14,274 | ) | (39,155 | ) | ||||||
|
Advances
to affiliate—LNG held for commissioning, net of amounts transferred to LNG
receiving terminal construction-in-process
|
— | (9,923 | ) | — | ||||||||
|
Investment
in restricted U.S. Treasury securities
|
— | — | (63,923 | ) | ||||||||
|
Other
|
— | — | (1,330 | ) | ||||||||
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
92,146 | (560 | ) | (74,776 | ) | |||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Distributions
to owners
|
(280,675 | ) | (45,824 | ) | (23,668 | ) | ||||||
|
Use
of (investment in) restricted cash and cash equivalents
|
109,008 | (94,303 | ) | 725 | ||||||||
|
Special
rights adjustment
|
(34,879 | ) | — | — | ||||||||
|
Repayment
of long-term note—affiliate
|
(2,467 | ) | — | — | ||||||||
|
Borrowings
under long-term note—affiliate
|
114 | 1,708 | 645 | |||||||||
|
Debt
issuance costs
|
(23 | ) | (4,837 | ) | (725 | ) | ||||||
|
Proceeds
from issuance of Sabine Pass LNG notes
|
— | 144,965 | — | |||||||||
|
Proceeds
from issuance of common units
|
— | — | 98,442 | |||||||||
|
Affiliate
payable
|
— | 1 | 3 | |||||||||
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(208,922 | ) | 1,710 | 75,422 | ||||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
117,535 | (6 | ) | 6 | ||||||||
|
CASH
AND CASH EQUIVALENTS—beginning of year
|
7 | 13 | 7 | |||||||||
|
CASH
AND CASH EQUIVALENTS—end of year
|
$ | 117,542 | $ | 7 | $ | 13 | ||||||
See
accompanying notes to consolidated combined financial statements.
46
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS
NOTE
1—NATURE OF OPERATIONS
Cheniere
Energy Partners, L.P. (“Cheniere Partners”) is a publicly-held limited
partnership. As of December 31, 2009, Cheniere Energy, Inc. (“Cheniere”)
owned 90.6% of the limited partnership through its wholly-owned subsidiaries,
Cheniere LNG Holdings, LLC (“Holdings”), Cheniere Common Units Holdings, LLC,
Cheniere Subsidiary Holdings, LLC (“Subsidiary Holdings”) and Cheniere Energy
Partners GP, LLC (the “General Partner”). Cheniere Partners is a Delaware
limited partnership formed on November 21, 2006 to own and operate the
Sabine Pass liquefied natural gas (“LNG”) receiving and regasification facility
in western Cameron Parish, Louisiana on the Sabine Pass Channel (the “Sabine
Pass LNG receiving terminal”). Cheniere Partners and Holdings, as a selling
unitholder, completed an initial public offering (the “Cheniere Partners
Offering”) of Cheniere Partners’ common units on March 26,
2007.
The
following entities were included on a combined basis in the accompanying
Consolidated Combined Financial Statements for periods prior to the Cheniere
Partners Offering because they were entities under common control:
|
|
•
|
Cheniere
Partners;
|
|
|
•
|
Cheniere
Energy Investments, LLC (“Cheniere Investments”) is a Delaware limited
liability company owned by Cheniere Partners and was formed on
November 21, 2006 to hold 100% of the ownership interests in Sabine
Pass GP and Sabine Pass LP;
|
|
|
•
|
Sabine
Pass LNG-GP, Inc. (“Sabine Pass GP”) is a Delaware corporation that was
owned by Holdings and was formed in 2004 to be the general partner of
Sabine Pass LNG, L.P.;
|
|
|
•
|
Sabine
Pass LNG-LP, LLC (“Sabine Pass LP”) is a Delaware limited liability
company that was owned by Holdings and was formed in 2004 to be the
limited partner of Sabine Pass LNG;
and
|
|
|
•
|
Sabine
Pass LNG, L.P. (“Sabine Pass LNG”) is a Delaware limited partnership
formed with one general partner, Sabine Pass GP, and one limited partner,
Sabine Pass LP, which owns the entire interest in the Sabine Pass LNG
receiving terminal. The purpose of this limited partnership is to own and
operate the Sabine Pass LNG receiving
terminal.
|
At the
closing of the Cheniere Partners Offering on March 26, 2007, the equity
interests in Sabine Pass GP and Sabine Pass LP were contributed to Cheniere
Investments, thereby resulting in Sabine Pass GP, Sabine Pass LP and Sabine Pass
LNG becoming indirect, wholly-owned subsidiaries of Cheniere Partners. From and
after the closing of the Cheniere Partners Offering, Cheniere Investments and
these subsidiaries are consolidated with Cheniere Partners in the accompanying
consolidated combined financial statements. As used in these Notes to
Consolidated Combined Financial Statements, the terms “Cheniere Partners”, “we”,
“us” and “our” refer to Cheniere Partners and its consolidated subsidiaries
effective with the closing of the Cheniere Partners Offering and the foregoing
entities on a combined basis (the “Combined Predecessor Entities”) prior to the
closing of the Cheniere Partners Offering, unless otherwise stated or indicated
by context.
In the
second quarter of 2009, Sabine Pass LNG purchased Sabine Pass Tug Services, LLC
(“Tug Services”), a wholly-owned subsidiary of Cheniere. As a result,
we acquired a lease (the “Tug Agreement”) for the use of tug boats and marine
services at the Sabine Pass LNG receiving terminal (see Note
14—“Leases”). In connection with the acquisition, Tug Services
entered into a Terminal Marine Services Agreement (the “Tug Sharing Agreement”)
with Sabine Pass LNG’s three terminal use agreement (“TUA”) customers to provide
their LNG cargo vessels with tug boat and marine services at the Sabine Pass LNG
receiving terminal (see Note 14—“Leases”).
With the
exception of Sabine Pass GP, we are not subject to either federal or state
income tax, as the partners are taxed individually on their proportionate share
of our earnings. Sabine Pass GP is a corporation and is subject to both federal
and state income tax. However, since Sabine Pass GP’s inception, its activities
have been strictly limited to holding a non-income or loss bearing general
partner interest in Sabine Pass LNG and, thus, this entity has not realized any
taxable net income to date and is not expected to realize any taxable net income
in the future.
We have
evaluated subsequent events through February 25, 2010.
47
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
NOTE
2—INITIAL PUBLIC OFFERING
We and
Holdings, as a selling unitholder, completed an offering of 13,500,000 Cheniere
Partners common units for $21.00 per common unit on March 26, 2007. We
received $98.4 million of net proceeds, after deducting the underwriting
discount and structuring fee, upon issuance of 5,054,164 common units to the
public in the Cheniere Partners Offering. Holdings received $164.5 million of
net proceeds, after deducting the underwriting discount and structuring fee,
upon its sale of 8,445,836 common units. We did not receive any proceeds from
the sale of common units by Holdings. Our common units are traded on the NYSE
Alternext US under the symbol “CQP.”
Upon the
closing of the Cheniere Partners Offering on March 26, 2007, the following
transactions occurred:
|
|
•
|
Holdings
contributed through us to our wholly-owned subsidiary, Cheniere
Investments, all of its equity interests in Sabine Pass GP and Sabine Pass
LP, which own all of the equity interests in Sabine Pass
LNG;
|
|
|
•
|
we
issued to Holdings 21,362,193 common units and 135,383,831 subordinated
units;
|
|
|
•
|
we
issued to our general partner, a direct wholly-owned subsidiary of
Holdings, 3,302,045 general partner units representing a 2% general
partner interest in us and all of our incentive distribution rights, which
will entitle our general partner to increasing percentages of the cash
that we distribute in excess of $0.489 per unit per
quarter;
|
|
|
•
|
we
issued 5,054,164 common units to the public in the Cheniere Partners
Offering;
|
|
|
•
|
Holdings
sold 8,445,836 common units to the public in the Cheniere Partners
Offering, after which Holdings and the public held an aggregate 89.8% and
8.2% limited partner interest in us,
respectively;
|
|
|
•
|
our
general partner entered into a services agreement with an affiliate of
Cheniere under which the affiliate provides various general and
administrative services for an annual administrative fee of $10.0 million
(adjusted for inflation after January 1, 2007), with payment having
commenced January 1, 2009; and
|
|
|
•
|
we
entered into a services and secondment agreement with an affiliate of
Cheniere pursuant to which certain employees of the Cheniere affiliate
have been seconded to our general partner to provide operating and routine
maintenance services with respect to the Sabine Pass LNG receiving
terminal.
|
We used
all of our net proceeds of $98.4 million from the sale of our common units in
the Cheniere Partners Offering to purchase U.S. Treasury securities that funded
a distribution reserve for payment of initial quarterly distributions of $0.425
per common unit, as well as related quarterly distributions to our general
partner, through the quarterly distribution made in respect of the quarter ended
June 30, 2009.
NOTE
3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
Our
Consolidated Combined Financial Statements were prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”). Certain items in the consolidated combined financial statements have
been reclassified to conform to the current presentation.
Cash
and Cash Equivalents
We
consider all highly liquid investments with an original maturity of three months
or less to be cash equivalents.
Accounting
for LNG Activities
Generally,
expenditures for direct construction activities, major renewals and betterments
are capitalized, while expenditures for maintenance and repairs and general and
administrative activities are charged to expense as incurred.
48
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
We
capitalized interest and other related debt costs during the construction period
of the Sabine Pass LNG receiving terminal. Upon commencement of operations,
capitalized interest, as a component of the total cost, has been amortized over
the estimated useful life of the asset.
Advances
to Affiliate-LNG Held for Commissioning
In
connection with the construction of the Sabine Pass LNG receiving terminal, we
required LNG to perform certain commissioning activities. LNG
purchased on behalf of Sabine Pass LNG by Cheniere Marketing has been funded by
Sabine Pass LNG and is recorded at historical cost and classified as a
non-current asset on our Consolidated Balance Sheets as advances to
affiliate—LNG held for commissioning (See Note 13—“Related Party Transactions”);
for this LNG, Cheniere Marketing holds title to the LNG at all times, sells all
regasified LNG and remits the net proceeds from such sales back to Sabine Pass
LNG. The LNG used in the commissioning process is capitalized net of amounts
received from the sale of natural gas.
Revenue
Recognition
LNG
regasification capacity reservation fees are recognized as revenue over the term
of the respective TUAs. Advance payments of capacity reservation fees are
initially deferred and recognized into revenue, which are being amortized over a
10-year period as a reduction of each customer’s regasification capacity
reservation fees payable under its TUA. For a discussion of potential revenue
from related parties, please read Note 13—“Related Party
Transactions.” The retained 2% of LNG delivered for each customer’s
account at the Sabine Pass LNG receiving terminal is recognized as revenues as
Sabine Pass LNG performs the services set forth in each customer’s
TUA.
Debt
Issuance Costs
Debt
issuance costs consist primarily of fees incurred that are directly related to
the issuance of the Senior Notes (See Note 11—“Long-Term Debt (including related
party)”). These costs are capitalized and are being amortized to interest
expense over the terms of the Senior Notes.
Income
Taxes
With the
exception of Sabine Pass GP, the Combined Predecessor Entities are not subject
to either federal or state income taxes, as the partners are taxed individually
on their proportionate share of our earnings. Sabine Pass GP is a corporation
and is subject to both federal and state income tax. However, since Sabine Pass
GP’s inception, its activities have been strictly limited to holding a
non-income or loss bearing general partner interest in Sabine Pass LNG, and
thus, this entity has not realized any taxable net income to date and is not
expected to realize any taxable net income in the future. At December 31,
2009, the tax basis of our assets and liabilities was $198.2 million greater
than the reported amounts of our assets and liabilities.
Pursuant
to the Sabine Pass Indenture, Sabine Pass LNG is permitted to make distributions
(“Tax Distributions”) for any fiscal year or portion thereof in which Sabine
Pass LNG is a limited partnership, disregarded entity or other substantially
similar pass-through entity for federal and state income tax purposes. The
permitted Tax Distributions are equal to the tax that Sabine Pass LNG would owe
if Sabine Pass LNG were a corporation subject to federal and state income tax
that filed separate federal and state income tax returns, excluding the amounts
covered by the State Tax Sharing Agreement discussed immediately below. The Tax
Distributions are limited to the amount of federal and/or state income taxes
paid by Cheniere to the appropriate taxing authorities and are payable by Sabine
Pass LNG within 30 days of the date that Cheniere is required to make federal or
state income tax payments to the appropriate taxing authorities.
In
November 2006, Sabine Pass LNG and Cheniere entered into a state franchise tax
sharing agreement (the “State Tax Sharing Agreement”) pursuant to which Cheniere
has agreed to prepare and file all Texas franchise tax returns which Sabine Pass
LNG and Cheniere are required to file on a combined basis and to timely pay the
combined Texas franchise tax liability. If Cheniere, in its sole discretion,
demands payment, then Sabine Pass LNG will pay to Cheniere an amount equal to
the Texas franchise tax that Sabine Pass LNG would be required to pay if its
Texas franchise tax liability were computed on a separate company basis. The
State Tax Sharing Agreement contains similar provisions for other state and
local taxes required to be filed by Cheniere and Sabine Pass LNG on a combined,
consolidated or unitary basis. The State Tax Sharing Agreement is effective for
tax returns first due on or after January 1, 2008.
49
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
Concentration
of Credit Risk
Financial
instruments that potentially subject us to a concentration of credit risk
consist principally of cash and cash equivalents and restricted cash. We
maintain cash balances at financial institutions, which may at times be in
excess of federally insured levels. We have not incurred losses related to these
balances to date.
Sabine
Pass LNG has entered into certain long-term TUAs with unaffiliated third parties
for regasification capacity at our Sabine Pass LNG receiving terminal. We are
dependent on the respective counterparties’ creditworthiness and their
willingness to perform under their respective TUAs. We have mitigated this
credit risk by securing TUAs for a significant portion of our regasification
capacity with creditworthy third-party customers with a minimum
Standard & Poor’s rating of AA.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Expenditures for construction
activities, major renewals and betterments are capitalized, while expenditures
for maintenance and repairs and general and administrative activities are
charged to expense as incurred. Interest costs incurred on debt obtained for the
construction of property, plant and equipment are capitalized as
construction-in-process over the construction period or related debt term,
whichever is shorter. We began depreciating equipment and facilities associated
with the initial 2.6 Bcf/d of sendout capacity and 10.1 Bcf of storage capacity
of the Sabine Pass LNG receiving terminal when they were ready for use in the
third quarter of 2008. We began depreciating equipment and facilities associated
with the remaining 1.4 Bcf/d of sendout capacity and 6.8 Bcf of storage capacity
of the Sabine Pass LNG receiving terminal when they were ready for use in the
third quarter of 2009. The Sabine Pass LNG receiving terminal is depreciated
using the straight-line depreciation method applied to groups of LNG receiving
terminal assets with varying useful lives. The identifiable components of the
Sabine Pass LNG receiving terminal with similar estimated useful lives have a
depreciable range between 15 and 50 years. Depreciation of computer and office
equipment, computer software, leasehold improvements and vehicles is computed
using the straight-line method over the estimated useful lives of the assets,
which range from two to ten years. Upon retirement or other disposition of
property, plant and equipment, the cost and related accumulated depreciation are
removed from the account, and the resulting gains or losses are recorded in
operations.
Management
reviews property, plant and equipment for impairment periodically and whenever
events or changes in circumstances have indicated that the carrying amount of
property, plant and equipment might not be recoverable. No such impairment was
recorded for December 31, 2009, 2008 or 2007.
Asset
Retirement Costs
We
recognize asset retirement obligations (“AROs”) for legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or normal use of the asset and for conditional
AROs in which the timing or method of settlement are conditional on a future
event that may or may not be within our control. The fair value of a liability
for an ARO is recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset. This additional carrying amount is
depreciated over the estimated useful life of the asset.
Based on
the real property lease agreement at the Sabine Pass LNG receiving terminal, at
the expiration of the term of the lease we are required to surrender the LNG
receiving terminal in good working order and repair, with normal wear and tear
and casualty expected. The property lease agreement at the Sabine Pass LNG
receiving terminal has a term of up to 90 years including renewal options. Due
to the language in the real property lease agreement, we have determined that
the cost to surrender the LNG receiving terminal in the required condition will
be minimal, and therefore have not recorded an ARO associated with the Sabine
Pass LNG receiving terminal.
Cash
Flow Hedges
We have
used, and may in the future use, derivative instruments to limit our exposure to
variability in expected future cash flows. Cash flow hedge transactions hedge
the exposure to variability in expected future cash flows. In the case of cash
flow hedges, the hedged item (the underlying risk) is generally unrecognized
(i.e., not recorded on the balance sheet prior to settlement), and any changes
in the fair value, therefore, will not be recorded within earnings.
Conceptually, if a cash flow hedge is effective, this means that a variable,
such as a movement in interest rates, has been effectively fixed so that any
fluctuations will have no net result on either cash flows or earnings.
Therefore, if the changes in fair value of the hedged item are not recorded in
earnings, then the changes in fair
50
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
value of
the hedging instrument (the derivative) must also be excluded from the income
statement or else a one-sided net impact on earnings will be reported, despite
the fact that the establishment of the effective hedge results in no net
economic impact. To prevent such a scenario from occurring, U.S. GAAP requires
that the fair value of a derivative instrument designated as a cash flow hedge
be recorded as an asset or liability on the balance sheet, but with the offset
reported as part of other comprehensive income, to the extent that the hedge is
effective. We assess, both at the inception of each hedge and on an on-going
basis, whether the derivatives that are used in our hedging transactions are
highly effective in offsetting changes in cash flows of the hedged items. On an
on-going basis, we monitor the actual dollar offset of the hedges’ market values
compared to hypothetical cash flow hedges. Any ineffective portion of the cash
flow hedges will be reflected in earnings. Ineffectiveness is the amount of
gains or losses from derivative instruments that are not offset by corresponding
and opposite gains or losses on the expected future transaction.
Use
of Estimates
The
preparation of consolidated combined financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
amounts reported in the consolidated combined financial statements and the
accompanying notes. Actual results could differ from our estimates and
assumptions used.
Items
subject to estimates and assumptions include, but are not limited to, the
carrying amount of property, plant and equipment. Actual results could differ
significantly from those estimates.
NOTE
4—RESTRICTED CASH AND CASH EQUIVALENTS
Restricted
cash and cash equivalents and U.S. Treasury securities are comprised of cash
that has been contractually restricted as to usage or withdrawal, as
follows:
Sabine
Pass LNG Receiving Terminal Construction Reserve
In
November 2006, Sabine Pass LNG issued an aggregate principal amount of $2,032.0
million of Senior Secured Notes consisting of $550.0 million of 7¼% Senior
Secured Notes due 2013 (the “2013 Notes”) and $1,482.0 million of 7½% Senior
Secured Notes due 2016 (the “2016 Notes” and collectively with the 2013 Notes,
the “Senior Notes”). In September 2008, Sabine Pass LNG issued an additional
$183.5 million, before discount, of 2016 Notes whose terms were identical to the
previously outstanding 2016 Notes. The additional issuance and the previously
outstanding 2016 Notes are treated as a single series of notes under the
indenture governing the Senior Notes (“Sabine Pass Indenture”) (See Note
11—“Long-Term Debt (including related party)”). Under the terms and conditions
of the Senior Notes, Sabine Pass LNG was required to fund a cash reserve account
for approximately $987 million to pay the remaining costs to complete
construction of the Sabine Pass LNG receiving terminal. The cash accounts are
controlled by a collateral trustee, and therefore, are shown as restricted cash
and cash equivalents on our Consolidated Balance Sheets. As of December 31,
2009, the Sabine Pass LNG receiving terminal construction reserve account
balance was zero. As of December 31, 2008, the Sabine Pass LNG receiving
terminal construction reserve account balance was $71.1 million, of which $27.4
million of the construction reserve account related to accrued construction
costs that had been classified as part of current restricted cash and cash
equivalents, and $43.7 million of the construction reserve account related to
remaining construction costs had been classified as a non-current asset on our
Consolidated Balance Sheets.
Senior
Notes Debt Service Reserve
As
described above, Sabine Pass LNG consummated private offerings of an aggregate
principal amount of $2,215.5 million of Senior Notes (See Note 11—“Long-Term
Debt (including related party)”). Under the Sabine Pass Indenture governing the
Senior Notes, except for permitted tax distributions, Sabine Pass LNG may not
make distributions until certain conditions are satisfied: there must be on
deposit in an interest payment account an amount equal to one-sixth of the
semi-annual interest payment multiplied by the number of elapsed months since
the last semi-annual interest payment, and there must be on deposit in a
permanent debt service reserve fund an amount equal to one semi-annual interest
payment of approximately $82.4 million. Distributions are permitted only after
satisfying the foregoing funding requirements, a fixed charge coverage ratio
test of 2:1 and other conditions specified in the Sabine Pass Indenture. As of
December 31, 2009 and 2008, we classified $13.7 million as current
restricted cash and cash equivalents for the payment of interest due within
twelve months. As of December 31, 2009 and 2008, we classified the
permanent debt service reserve fund of $82.4 million as non-current restricted
cash and cash equivalents. These cash accounts are controlled by a collateral
trustee, and therefore, are shown as restricted cash and cash equivalents on our
Consolidated Balance Sheets.
51
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
Distribution
Reserve
At the
closing of our initial public offering, we funded a distribution reserve of
$98.4 million, which was invested in U.S. Treasury securities. The distribution
reserve, including interest earned thereon, was available to be used to pay
quarterly distributions of $0.425 per common unit for all common units, as well
as related distributions to Cheniere Partners’ general partner, through the
distribution made in respect of the quarter ended June 30, 2009. The U.S.
Treasury securities were acquired at a discount from their maturity values equal
to an average of approximately 4.87% per year.
In August
2009, we determined that we would not need the remaining balance in the
distribution reserve account to make distributions because we had adequate
available cash from Sabine Pass LNG. We therefore distributed the remaining
balance of $34.9 million in the distribution reserve account to Cheniere
pursuant to the terms of our partnership agreement. This contractual
distribution has been presented as a Special rights adjustment to the equity
accounts of Cheniere’s ownership on our Consolidated Combined Statement of
Partners’ Capital (Deficit) as of December 31, 2009.
As of
December 31, 2009 and 2008, we classified $0.1 million and zero as current
restricted cash and cash equivalents that may be utilized to pay quarterly
distributions. As of December 31, 2009 and 2008, we classified
zero and $12.0 million as non-current restricted cash that may be utilized to
pay quarterly distributions, respectively. In addition, as of December 31,
2009 and 2008, we classified zero and $20.8 million as non-current restricted
U.S. Treasury securities on our Consolidated Balance Sheets that may be utilized
to pay quarterly distributions, as these securities had original maturities
greater than three months.
NOTE
5—ADVANCES UNDER LONG-TERM CONTRACTS
We
entered into certain EPC contracts and purchase agreements related to the
construction of the Sabine Pass LNG receiving terminal that require us to make
payments to fund costs that will be incurred or equipment that will be received
in the future. Advances made under long-term contracts on purchase commitments
are carried at face value and transferred to property, plant and equipment as
the costs are incurred or equipment is received. As of December 31,
2009 and 2008, our advances under long-term contracts were $1.0 million and
$10.7 million, respectively.
52
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
NOTE
6—PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consists of LNG terminal costs, LNG site and related costs
and fixed assets, as follows (in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
LNG
TERMINAL COSTS
|
||||||||
|
LNG
receiving terminal
|
$ | 1,627,564 | $ | 919,776 | ||||
|
LNG
receiving terminal construction-in-process
|
— | 604,398 | ||||||
|
LNG
site and related costs, net
|
176 | 183 | ||||||
|
Accumulated
depreciation
|
(39,975 | ) | (7,752 | ) | ||||
|
Total
LNG receiving terminal costs
|
1,587,765 | 1,516,605 | ||||||
|
FIXED
ASSETS
|
||||||||
|
Computer
and office equipment
|
259 | 200 | ||||||
|
Vehicles
|
421 | 421 | ||||||
|
Machinery
and equipment
|
931 | 751 | ||||||
|
Other
|
419 | 254 | ||||||
|
Accumulated
depreciation
|
(1,238 | ) | (724 | ) | ||||
|
Total
fixed assets, net
|
792 | 902 | ||||||
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
$ | 1,588,557 | $ | 1,517,507 | ||||
As of
December 31, 2009, the Sabine Pass LNG receiving terminal had been placed into
service, and all costs associated with the construction of the Sabine Pass LNG
receiving terminal are presented in the table above as LNG receiving terminal.
For 2009, 2008 and 2007, we capitalized $26.1 million, $80.7 million and $66.2
million, respectively, of interest expense related to the construction of the
Sabine Pass LNG receiving terminal.
We began
depreciating equipment and facilities associated with the initial 2.6 Bcf/d of
sendout capacity and 10.1 Bcf of storage capacity of the Sabine Pass LNG
receiving terminal when they were ready for use in the third quarter of 2008. We
began depreciating equipment and facilities associated with the remaining 1.4
Bcf/d of sendout capacity and 6.8 Bcf of storage capacity of the Sabine Pass LNG
receiving terminal when they were ready for use in the third quarter of 2009.
The Sabine Pass LNG receiving terminal is depreciated using the straight-line
depreciation method applied to groups of LNG receiving terminal assets with
varying useful lives. The identifiable components of the Sabine Pass LNG
receiving terminal with similar estimated useful lives have a depreciable range
between 15 and 50 years, as follows:
|
Components
|
Useful
life (yrs)
|
|||
|
LNG
storage tanks
|
50 | |||
|
Marine
berth, electrical, facility and roads
|
35 | |||
|
Regassification
processing equipment (recondensers, vaporization and
vents)
|
30 | |||
|
Sendout
pumps
|
20 | |||
|
Others
|
15-30 | |||
Our ARO
assessment is based on the real property lease agreements for the Sabine Pass
LNG receiving terminal site. At the expiration of the term of the
leases, we are required to surrender the Sabine Pass LNG receiving terminal in
good working order and repair, with normal wear and tear and casualty expected.
Sabine Pass LNG’s property lease agreements have a term of up to 90 years
including renewal options. Due to the language in the real property lease
agreements, we have determined that the cost to surrender the Sabine Pass LNG
receiving terminal in the required condition will be minimal, and therefore have
not recorded an ARO associated with the Sabine Pass LNG receiving
terminal.
NOTE
7—DEBT ISSUANCE COSTS
We have
incurred debt issuance costs in connection with our long-term debt. These costs
are capitalized and are being amortized over the term of the related debt. The
amortization of the debt issuance cost was recorded as interest expense and
subsequently capitalized as construction-in-process during the construction
period of the Sabine Pass LNG receiving terminal. As of
December 31,
53
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
2009
and 2008, we had capitalized $27.0 million and $30.7 million (net of accumulated
amortization of $12.5 million and $8.6 million), respectively, of costs directly
associated with the Senior Notes, as follows (in thousands):
As of
December 31, 2009:
|
Long-Term
Debt
|
Debt
Issuance Costs
|
Amortization
Period
|
Accumulated
Amortization
|
Net
Costs
|
||||||||
|
2013
Notes
|
$
|
9,353
|
7
years
|
$
|
(3,993
|
)
|
$
|
5,360
|
||||
|
2016
Notes
|
30,057
|
10
years
|
(8,464
|
)
|
21,593
|
|||||||
|
$
|
39,410
|
$
|
(12,457
|
)
|
$
|
26,953
|
Scheduled
amortization of these debt issuance costs related to the Senior Notes for the
next five years is estimated to be $23.4 million.
NOTE
8—FINANCIAL INSTRUMENTS
Derivative
Instruments
On our
behalf, Cheniere Marketing has entered into financial derivatives to hedge the
exposure to variability in expected future cash flows attributable to the future
sale of natural gas from our LNG commissioning cargoes (“LNG commissioning cargo
derivatives”). Prior to September 30, 2009, the net cost (LNG commissioning
cargo purchase price less natural gas sales proceeds) of our LNG commissioning
cargoes was capitalized on our Consolidated Balance Sheets as it was directly
related to the LNG receiving terminal construction and was incurred to place the
LNG receiving terminal in usable condition. However, changes in the fair value
of our LNG commissioning cargo derivatives are reported in earnings because they
do not meet the criteria to be designated as a hedging instrument that is
required to qualify for cash flow hedge accounting.
Effective
January 1, 2008, we adopted accounting standards that established a
framework for measuring fair value, expanded disclosures about fair value
measurements and permitted entities to choose to measure many financial
instruments and certain other items at fair value. We elected not to
measure any additional financial assets or liabilities at fair value, other than
those which were recorded at fair value prior to adoption.
The
estimated fair value of financial instruments is the amount at which the
instrument could be exchanged currently between willing parties. The fair value
of our commodity futures contracts are based on inputs that are quoted prices in
active markets for identical assets or liabilities, resulting in Level 1
categorization of such measurements. The following table (in thousands) sets
forth, by level within the fair value hierarchy, the fair value of our financial
assets and liabilities at December 31, 2009:
|
Quoted
Prices in Active Markets for Identical Instruments
(Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Other Observable Inputs (Level 3)
|
Total
Carrying Value at December 31, 2009
|
|||||||||
|
Derivatives
asset
|
$
|
124
|
$
|
—
|
$
|
—
|
$
|
124
|
||||
Derivatives
asset reflect LNG commissioning cargo derivative positions held by Cheniere
Marketing on behalf of Sabine Pass LNG related to natural gas swaps entered into
to mitigate the price risk from sales of excess LNG purchased for commissioning
and performance testing.
54
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
Other
Financial Instruments
The
estimated fair value of financial instruments, including those financial
instruments for which the fair value option was not elected are set forth in the
table below. The carrying amounts reported on our Consolidated
Balance Sheets for restricted cash and cash equivalents, accounts receivable,
interest receivables and accounts payable approximate fair value due to their
short-term nature.
Financial
Instruments (in thousands):
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
Carrying
Amount
|
Estimated
Fair
Value
|
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||||||||
|
2013
Notes (1)
|
$ | 550,000 | $ | 503,250 | $ | 550,000 | $ | 412,500 | ||||||||
|
2016
Notes, net of discount (1)
|
1,633,029 | 1,371,744 | 1,628,334 | 1,204,967 | ||||||||||||
|
Note
to affiliate (2)
|
— | — | 2,372 | 2,379 | ||||||||||||
|
Restricted
U.S. Treasury securities (3)
|
— | — | 20,829 | 22,901 | ||||||||||||
|
(1)
|
The
fair value of the Senior Notes was based on quotations obtained from
broker-dealers who made markets in these and similar instruments as of
December 31, 2009 and December 31,
2008.
|
|
(2)
|
The
note to affiliate bears interest at a fixed 7½% rate. Management estimates
that the carrying amount is a reasonable approximation of the fair value
as of December 31, 2009 and
2008.
|
|
(3)
|
The
fair value of our restricted U.S. Treasury securities was based on
quotations obtained from broker-dealers who made markets in these and
similar instruments as of December 31, 2009 and
2008.
|
NOTE
9—ACCRUED LIABILITIES
As of
December 31, 2009 and 2008, accrued liabilities consisted of the following
(in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Interest
and related debt fees
|
$ | 14,152 | $ | 14,152 | ||||
|
LNG
terminal construction costs
|
7,850 | 26,617 | ||||||
|
Affiliate
|
3,095 | 184 | ||||||
|
Other
|
179 | 157 | ||||||
|
Accrued
liabilities
|
$ | 25,276 | $ | 41,110 | ||||
NOTE
10—DEFERRED REVENUE
In
November 2004, Total Gas and Power North America, Inc. (formerly known as Total
LNG USA, Inc.) (“Total”) paid Sabine Pass LNG a nonrefundable advance capacity
reservation fee of $10.0 million in connection with the reservation of
approximately 1.0 Bcf/d of LNG regasification capacity at the Sabine Pass LNG
receiving terminal. An additional advance capacity reservation fee payment of
$10.0 million was paid by Total to Sabine Pass LNG in April 2005. The advance
capacity reservation fee payments are being amortized as a reduction of Total’s
regasification capacity reservation fee under its TUA over a 10-year period
beginning with the commencement of its TUA on April 1, 2009. As a result, we
recorded the advance capacity reservation fee payments that Sabine Pass LNG
received, although non-refundable, as deferred revenue to be amortized to income
over the corresponding 10-year period.
In
November 2004, Sabine Pass LNG also entered into a TUA to provide Chevron
U.S.A., Inc. (“Chevron”) with approximately 0.7 Bcf/d of LNG regasification
capacity at the Sabine Pass LNG receiving terminal. In December 2005, Chevron
exercised its option to increase its reserved capacity by approximately 0.3
Bcf/d to approximately 1.0 Bcf/d, making advance capacity reservation fee
payments to Sabine Pass LNG totaling $20.0 million. The advance capacity
reservation fee payments are being amortized as a reduction of Chevron’s
regasification capacity reservation fee under its TUA over a 10-year period
beginning with the commencement of its TUA on July 1, 2009. As a result, we
recorded the advance capacity reservation fee payments that Sabine Pass LNG
received, although non-refundable, as deferred revenue to be amortized to income
over the corresponding 10-year period.
As of
December 31, 2009 and 2008, we had recorded $26.5 million and $2.5 million
as current deferred revenue, respectively, and $33.5 million and $37.5 million
as non-current deferred revenue related to Total and Chevron advance capacity
reservation fee payments.
Following the achievement of commercial operability of the Sabine
Pass LNG receiving terminal in September 2008, Sabine
55
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
Pass LNG
began receiving capacity reservation fee payments from Cheniere Marketing under
its TUA. As of December 31, 2009 and 2008, we had recorded $63.5 million
and $62.7 million as current deferred revenue, respectively, primarily related
to Cheniere Marketing’s advance capacity reservation fee payments.
In July
2007, Sabine Pass LNG executed Cooperative Endeavor Agreements (“CEAs”) with
various Cameron Parish, Louisiana taxing authorities that allow them to
accelerate certain of its property tax payments scheduled to begin in 2019. This
ten-year initiative represents an aggregate $25.0 million commitment, and will
make resources available to the Cameron Parish taxing authorities on an
accelerated basis in order to aid in their reconstruction efforts following
Hurricane Rita. In exchange for Sabine Pass LNG’s advance payments of ad valorem
taxes, Cameron Parish will grant Sabine Pass LNG a dollar for dollar credit
against future ad valorem taxes to be levied against its LNG receiving terminal
starting in 2019. In September 2007, Sabine Pass LNG entered into an agreement
with Cheniere Marketing, pursuant to which Cheniere Marketing will advance it
any and all amounts payable under the CEAs in exchange for a similar amount of
credits against future ad valorem reimbursements it would owe to Sabine Pass LNG
under its TUA starting in 2019. These advance ad valorem tax payments were
recorded to other assets, and payments from Cheniere Marketing that Sabine Pass
LNG utilized to make the early payment of taxes were recorded as deferred
revenue. As of December 31, 2009 and 2008, we had $7.4 million and $5.0
million, respectively, of other assets and deferred revenue resulting from
accelerated ad valorem tax payments.
NOTE
11—LONG-TERM DEBT (including related party)
As of
December 31, 2009 and 2008, our long-term debt consisted of the following
(in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Senior
Notes, net of discount
|
$ | 2,110,101 | $ | 2,107,673 | ||||
|
Senior
Notes—related party, net of discount
|
72,928 | 70,661 | ||||||
|
Long-term
note—affiliate
|
— | 2,372 | ||||||
|
Total
long-term debt
|
$ | 2,183,029 | $ | 2,180,706 | ||||
Senior
Notes
In
November 2006, Sabine Pass LNG issued an aggregate principal amount of $2,032.0
million of Senior Notes, consisting of $550.0 million of the 2013 Notes and
$1,482.0 million of the 2016 Notes. In September 2008, Sabine Pass LNG issued an
additional $183.5 million, before discount, of 2016 Notes whose terms were
identical to the previously outstanding 2016 Notes. The net proceeds received
from the additional issuance of 2016 Notes were $145.0 million. The
additional issuance and the previously outstanding 2016 Notes are treated as a
single series of notes under the Sabine Pass Indenture. Sabine Pass LNG placed
$100.0 million of the $145.0 million of net proceeds from the additional
issuance of the 2016 Notes into a construction account to pay construction
expenses of cost overruns related to the construction, cool down, commissioning
and completion of the Sabine Pass LNG receiving terminal. In addition, Sabine
Pass LNG placed $40.8 million of the remaining net proceeds into an account in
accordance with the cash waterfall requirements of the security deposit
agreement Sabine Pass LNG entered into in connection with the Senior Notes,
which are used by Sabine Pass LNG for working capital and other general business
purposes.
Interest
on the Senior Notes is payable semi-annually in arrears on May 30 and
November 30 of each year. The Senior Notes are secured on a first-priority
basis by a security interest in all of Sabine Pass LNG’s equity interests and
substantially all of its operating assets. Under the Sabine Pass Indenture,
except for permitted tax distributions, Sabine Pass LNG may not make
distributions until certain conditions are satisfied: there must be on deposit
in an interest payment account an amount equal to one-sixth of the semi-annual
interest payment multiplied by the number of elapsed months since the last
semi-annual interest payment, and there must be on deposit in a permanent debt
service reserve fund an amount equal to one semi-annual interest payment of
approximately $82.4 million. Distributions are permitted only after satisfying
the foregoing funding requirements, a fixed charge coverage ratio test of 2:1
and other conditions specified in the Sabine Pass Indenture. During the years
ended December 31, 2009 and 2008, Sabine Pass LNG made distributions of $295.7
million and zero, respectively, to us after satisfying all the applicable
conditions in the Sabine Pass Indenture.
Long-Term
Note—Affiliate
In March
2007, we entered into a $12.0 million unsecured revolving credit note with
Cheniere LNG Financial Services, Inc., a wholly-owned subsidiary of Cheniere, to
be paid upon demand but no sooner than January 1, 2010, or the date on
which we have sufficient available cash. The purpose of this note was to provide
funds for the payment of certain public company and other expenses that could
not be funded by the Senior Notes. Interest on borrowings under this note was at
a fixed rate of 7½% with unpaid interest compounded semi-annually. In January
2009, we repaid the $2.5 million outstanding balance on our $12.0 million
unsecured revolving credit note.
56
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
NOTE
12—DESCRIPTION OF EQUITY INTERESTS
The
common units and subordinated units represent limited partner interests in us.
The holders of the units are entitled to participate in partnership
distributions and exercise the rights and privileges available to limited
partners under our partnership agreement. On May 31, 2007, Cheniere LNG
Holdings, LLC (“Holdings”) contributed all of its 135,383,831 subordinated units
to Cheniere Subsidiary Holdings, LLC.
The
common units and general partner units have the right to receive minimum
quarterly distributions of $0.425 and $0.069 per unit, respectively, plus any
arrearages thereon, before any distribution is made to the holders of the
subordinated units. Subordinated units will convert into common units on a
one-for-one basis when the subordination period ends. The subordination period
will end when we meet financial tests specified in the partnership
agreement.
The
general partner interest is entitled to at least 2% of all distributions made by
us. In addition, the general partner holds incentive distribution rights, which
allow the general partner to receive a higher percentage of quarterly
distributions of available cash from operating surplus after the minimum
distributions have been achieved and as additional target levels are met. The
higher percentages range from 15% up to 50%.
NOTE
13—RELATED PARTY TRANSACTIONS
As of
December 31, 2009 and 2008, we had $5.4 million and $2.2 million of
advances to affiliates, respectively. In addition, we have entered
into the following related party transactions:
TUA Agreement
Cheniere
Marketing has reserved approximately 2.0 Bcf/d of regasification capacity under
a firm commitment TUA and is required to make capacity reservation fee payments
aggregating approximately $250 million per year for the period from
January 1, 2009, through at least September 30, 2028. Cheniere has
guaranteed Cheniere Marketing’s obligations under its TUA.
LNG
Lease Agreement
In
September 2008, Sabine Pass LNG entered into an agreement in the form of a lease
with Cheniere Marketing that enabled Sabine Pass LNG to hedge the exposure to
variability in expected future cash flows of its commissioning cargoes. The
agreement permitted Cheniere Marketing to deliver LNG to the Sabine Pass LNG
receiving terminal and to receive regasified LNG for redelivery as natural gas
in exchange for the use of the properties of the LNG to cool down the Sabine
Pass LNG receiving terminal. Under the terms of the agreement, Sabine Pass LNG
paid Cheniere Marketing a fixed fee based on the delivered quantity of LNG in
each LNG cargo. Sabine Pass LNG assumed full price risk of the purchase and sale
of the LNG and also financed all activities relating to the LNG. Cheniere
Marketing held title to the LNG at all times and sold all redelivered LNG and
remitted the net proceeds from such sales back to Sabine Pass LNG.
LNG purchased on
behalf of Sabine Pass LNG by Cheniere Marketing that was funded by Sabine Pass
LNG was recorded at historical cost and classified as a non-current asset on our
Consolidated Balance Sheets as Advances to Affiliate—LNG Held for Commissioning.
LNG that was lost, used as fuel or sold resulted in the reduction of Advances to
Affiliate—LNG Held for Commissioning on our Consolidated Balance Sheets at
historical cost. During the second quarter of 2008 and the first quarter of
2009, Sabine Pass LNG advanced Cheniere Marketing funds to purchase LNG. As of
September 30, 2009, commissioning activities and construction of the Sabine Pass
LNG receiving terminal were substantially complete; therefore we no longer
needed the remaining LNG for commissioning. We had 1,115,000 MMBtu of LNG Held
for Commissioning remaining at September 30, 2009 which was reclassified to
current assets as $3.5 million of Advances to Affiliate—LNG inventory,
representing the market value of LNG inventory that we have retained for
operations. LNG inventory is recorded at cost and is subject to lower of cost or
market adjustments at the end of each period. Inventory cost is
determined using the average cost method. Recoveries of losses resulting from
interim period LCM adjustments are made due to market price recoveries on the
same inventory in the same fiscal year and are recognized as gains in later
interim periods with such gains not exceeding previously recognized losses. At
December 31, 2009, we had $1.3 million Advances to Affiliate—LNG inventory and
zero Advances to Affiliate—LNG Held for Commissioning on our Consolidated
Balance Sheets. At December 31, 2008, we had $9.9 million recorded as
Advances to Affiliate—LNG Held for Commissioning on our Consolidated Balance
Sheets.
57
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
During
the years ended December 31, 2009 and 2008, Sabine Pass LNG incurred fixed fees
from Cheniere Marketing of $0.3 million and $0.6 million, respectively, which we
capitalized as property, plant and equipment on our Consolidated Balance
Sheets.
Service
Agreements
In
February 2005, Sabine Pass LNG entered into a 20-year operation and maintenance
agreement with a wholly-owned subsidiary of Cheniere pursuant to which we
receive all necessary services required to construct, operate and maintain the
Sabine Pass LNG receiving terminal. Prior to substantial completion of the
Sabine Pass LNG receiving terminal, as defined in Sabine Pass LNG’s engineering,
procurement and construction (“EPC”) contract with Bechtel Corporation
(“Bechtel”), Sabine Pass LNG was required to pay a fixed monthly fee of $95,000
(indexed for inflation) under the agreement. The fixed monthly fee increased to
$130,000 (indexed for inflation) upon the achievement of substantial completion
of the Sabine Pass LNG receiving terminal in March 2009, and the counterparty is
entitled to a bonus equal to 50% of the salary component of labor costs in
certain circumstances to be agreed upon between Sabine Pass LNG and the
counterparty at the beginning of each operating year. In addition, Sabine Pass
LNG is required to reimburse the counterparty for its operating expenses, which
consist primarily of labor expenses.
In
February 2005, Sabine Pass LNG entered into a 20-year management services
agreement with its general partner, which is a wholly-owned subsidiary of us,
pursuant to which its general partner was appointed to manage the construction
and operation of the Sabine Pass LNG receiving terminal, excluding those matters
provided for under the operation and maintenance agreement described in the
paragraph above. In August 2008, the general partner of Sabine Pass LNG assigned
all of its rights and obligations under the management services agreement to
Cheniere LNG Terminals, Inc. (“Cheniere Terminals”), a wholly-owned subsidiary
of Cheniere. Prior to substantial completion of the Sabine Pass LNG receiving
terminal, as defined in Sabine Pass LNG’s EPC contract with Bechtel, Sabine Pass
LNG was required to pay Cheniere Terminals a monthly fixed fee of $340,000
(indexed for inflation). With the achievement of substantial completion of the
Sabine Pass LNG receiving terminal in March 2009, the monthly fixed fee
increased to $520,000 (indexed for inflation).
In March
2007, we entered into a services agreement with Cheniere Terminals pursuant to
which we pay Cheniere Terminals an annual administrative fee of $10.0 million
(adjusted for inflation) for the provision of various general and administrative
services for our benefit following the closing of our initial public offering.
Payments under this services agreement commenced January 1, 2009. In
addition, we reimburse Cheniere Terminals for its services in an amount equal to
the sum of all out-of-pocket costs and expenses incurred by Cheniere Terminals
that are directly related to our business or activities.
During
the years ended December 31, 2009, 2008 and 2007, we paid an aggregate of $18.5
million, $5.2 million and $5.2 million, respectively, under the foregoing
service agreements from restricted cash and cash equivalents.
Agreement
to Fund Sabine Pass LNG’s Cooperative Endeavor Agreements (“CEAs”)
In July
2007, Sabine Pass LNG executed Cooperative Endeavor Agreements (“CEAs”) with
various Cameron Parish, Louisiana taxing authorities that allow them to collect
certain annual property tax payments from Sabine Pass LNG in 2007 through 2016.
This ten-year initiative represents an aggregate $25.0 million commitment and
will make resources available to the Cameron Parish taxing authorities on an
accelerated basis in order to aid in their reconstruction efforts following
Hurricane Rita. In exchange for Sabine Pass LNG’s payments of annual ad valorem
taxes, Cameron Parish will grant Sabine Pass LNG a dollar for dollar credit
against future ad valorem taxes to be levied against the Sabine Pass LNG
receiving terminal starting in 2019. In September 2007, Sabine Pass LNG modified
its TUA with Cheniere Marketing, pursuant to which Cheniere Marketing will pay
Sabine Pass LNG additional TUA revenues equal to any and all amounts payable
under the CEAs in exchange for a similar amount of credits against future TUA
payments it would owe Sabine Pass LNG under its TUA starting in 2019. These TUA
payments were recorded to other assets, and payments from Cheniere Marketing
that Sabine Pass LNG utilized to make the ad valorem tax payments were recorded
as deferred revenue. As of December 31, 2009 and 2008, we had $7.4 million
and $5.0 million of other assets and deferred revenue resulting from Sabine Pass
LNG’s ad valorem tax payments and the advance TUA payments received from
Cheniere Marketing, respectively.
Contracts
for Sale and Purchase of Natural Gas
In 2007,
we entered into a number of related party agreements for the purchase and sale
of natural gas with Cheniere Marketing. During the years ended December 31, 2009
and 2008, Sabine Pass LNG did not sell or purchase any natural gas under its
purchase and sale agreements with Cheniere Marketing.
58
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
Contract
for Commissioning Activities
Sabine
Pass LNG has entered into a number of related party agreements for commissioning
activities with Cheniere Marketing. During the years ended December 31, 2009 and
2008, Sabine Pass LNG paid an aggregate of zero and $34.6 million, respectively,
under these commissioning activities agreements with Cheniere
Marketing.
NOTE
14—LEASES
The
following is a schedule by years of future minimum rental payments, excluding
inflationary adjustments, required as of December 31, 2009 under the land
leases and tug boat lease described below (in thousands):
|
Year
ending December 31:
|
Lease
Payments (2)
|
||
|
2010
|
$
|
8,905
|
|
|
2011
|
8,905
|
||
|
2012
|
8,905
|
||
|
2013
|
8,905
|
||
|
2014
|
8,905
|
||
|
Later
years (1)
|
230,009
|
||
|
Total
minimum payments required
|
$
|
274,534
|
|
(1)
|
The
later years include the remaining initial term and six 10-year extensions
of Sabine Pass LNG’s land leases and the remaining initial term and two
5-year extensions of Sabine Pass LNG’s tug boat lease, as the lease option
renewals were reasonably assured.
|
|
(2)
|
Lease
payments for Sabine Pass LNG’s tug boat lease represent its lease payment
obligation and do not take into account the $129.6 million of sublease
payments Sabine Pass LNG will receive from its three TUA customers that
effectively offset this lease payment obligation, as discussed
below.
|
Land
Leases
In
January 2005, Sabine Pass LNG exercised its options and entered into three land
leases for the site of the Sabine Pass LNG receiving terminal. The
leases have an initial term of 30 years, with options to renew for six 10-year
extensions with similar terms as the initial term. In February 2005, two of the
three leases were amended, increasing the total acreage under lease to 853 acres
and increasing the annual lease payments to $1.5 million. The annual
lease payment is adjusted for inflation every five years based on a consumer
price index, as defined in the lease agreements.
Tug
Boat Lease
As
described in Note 1—“Nature of Operations,” in the second quarter of 2009 Sabine
Pass LNG acquired a lease for the use of tug boats and marine services at the
Sabine Pass LNG receiving terminal as a result of its purchase of Tug
Services. The term of the Tug Agreement commenced in January 2008 for
a period of 10 years, with an option to renew two additional, consecutive terms
of five years each. We have determined that the Tug Agreement
contains a lease for the tugs specified in the Tug Agreement. In
addition, we have concluded that the tug lease contained in the Tug Agreement is
an operating lease, and
as such, the equipment component of the Tug Agreement will be charged to expense
over the term of the Tug Agreement as it becomes payable.
In
connection with this acquisition, Tug Services entered into a Tug Sharing
Agreement with our three TUA customers to provide their LNG cargo vessels with
tug boat and marine services at our LNG receiving terminal and effectively
offset the cost of our lease. The Tug Sharing Agreement provides for each of our
customers to pay Tug Services an annual service fee.
59
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
NOTE
15—COMMITMENTS AND CONTINGENCIES
Construction
Agreements
In July
2006, Sabine Pass LNG entered into various construction agreements to expand the
Sabine Pass LNG receiving terminal to approximately 4.0 Bcf/d with storage
capacity of approximately 16.9 Bcf, some of which include the
following:
Sabine
Pass LNG entered into an engineering, procurement, construction and management
(“EPCM”) agreement with Bechtel Corporation (“Bechtel”) pursuant to which
Bechtel provided design and engineering services for the Sabine Pass LNG
receiving terminal expansion project, except for such portions to be designed by
other contractors and suppliers of equipment, materials and services that Sabine
Pass LNG contracts with directly; construction management services to manage the
construction of the Sabine Pass LNG receiving terminal; and a portion of the
construction services. Under the initial terms of the EPCM agreement, Bechtel
was paid on a cost reimbursable basis, plus a fixed fee in the initial amount of
$18.5 million. A discretionary bonus was paid to Bechtel at Sabine Pass LNG’s
sole discretion upon completion. As of December 31, 2009, Sabine Pass LNG
was committed to make cash payments of approximately $2.6 million in the future
pursuant to this contract.
Sabine
Pass LNG entered into an EPC LNG tank contract with Zachry Construction
Corporation (“Zachry”) and Diamond LNG LLC (“Diamond”), pursuant to which Zachry
and Diamond furnished all plant, labor, materials, tools, supplies, equipment,
transportation, supervision, technical, professional and other services, and
performed all operations necessary and required to satisfactorily engineer,
procure materials for and construct two additional storage tanks. The EPC LNG
tank contract provided that Zachry and Diamond would receive a lump-sum, total
fixed price payment for the two storage tanks of approximately $140.9 million,
which was subject to adjustment based on fluctuations in the cost of labor and
certain materials, including the steel used in the additional storage tanks, and
change orders. As of December 31, 2009, Sabine Pass LNG was committed to
make cash payments of approximately $3.6 million in the future pursuant to this
contract.
LNG
Commitments
Sabine
Pass LNG has entered into TUAs with Total, Chevron and Cheniere Marketing to
provide berthing for LNG vessels and for the unloading, storage and
regasification of LNG at the Sabine Pass LNG receiving terminal.
Services
Agreements
We have
entered into certain services agreements with affiliates. See Note 13—“Related
Party Transactions” for information regarding such agreements.
Public
Company Expenses
We and
Sabine Pass LNG are reporting entities under the Exchange Act. As a result, our
combined total annual general and administrative expenses will include costs
related to compliance with the Sarbanes-Oxley Act of 2002, filing annual and
quarterly reports with the SEC, increased audit fees, tax compliance and
publicly traded partnership tax reporting, investor relations, director
compensation, directors’ and officers’ insurance, legal fees, registrar and
transfer agent fees and stock exchange fees. Cheniere has advanced us funds to
pay public company expenses associated with being a publicly traded partnership
through 2008, after which time we will use available cash to pay such expenses
directly and, after payment of the initial quarterly distribution on all units,
to reimburse Cheniere.
Crest Royalty
Under a
settlement agreement dated as of June 14, 2001, Cheniere agreed to pay a
royalty, which we refer to as the Crest Royalty. This Crest Royalty is
calculated based on the volume of natural gas processed through covered LNG
facilities. The Freeport LNG Development, L.P. (“Freeport LNG”) and Sabine Pass
LNG receiving terminals are covered facilities. Freeport LNG has assumed the
obligation to pay the Crest Royalty for natural gas processed at Freeport LNG’s
receiving terminal. Cheniere has agreed to indemnify us against any Crest
Royalty obligation and to pay any Crest Royalty amounts that may be due and not
paid by Freeport LNG. The Crest Royalty is subject to a maximum of approximately
$11.0 million per production year at throughput of approximately 1.0 Bcf/d and a
minimum of $2.0 million. The first production year began in April
2009.
60
CHENIERE
ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS—CONTINUED
Restricted Net Assets
At
December 31, 2009, our restricted net assets of consolidated subsidiaries
were approximately ($481) million.
Other
Commitments
State
Tax Sharing Agreement
In
November 2006, Sabine Pass LNG entered into a state tax sharing agreement with
Cheniere. Under this agreement, Cheniere has agreed to prepare and file all
Texas franchise tax returns which it and Sabine Pass LNG are required to file on
a combined basis and to timely pay the combined Texas franchise tax liability.
If Cheniere, in its sole discretion, demands payment, Sabine Pass LNG will pay
to Cheniere an amount equal to the Texas franchise tax that Sabine Pass LNG
would be required to pay if its Texas franchise tax liability were computed on a
separate company basis. This agreement contains similar provisions for other
state and local taxes that Cheniere and Sabine Pass LNG are required to file on
a combined, consolidated or unitary basis. The agreement is effective for tax
returns first due on or after January 1, 2008. As of December 31, 2009, we
had made no payments to Cheniere under this agreement.
Cooperative
Endeavor Agreements
See
description of CEAs in Note 13—“Related Party Transactions.”
Legal
Proceedings
We may in
the future be involved as a party to various legal proceedings, which are
incidental to the ordinary course of business. We regularly analyze current
information and, as necessary, provide accruals for probable liabilities on the
eventual disposition of these matters. In the opinion of management, as of
December 31, 2009, there were no threatened or pending legal matters that
would have a material impact on our consolidated results of operations,
financial position or cash flows.
NOTE
16—SUPPLEMENTAL CASH FLOW INFORMATION AND DISCLOSURES OF NON-CASH
TRANSACTIONS
The
following table provides supplemental disclosure of cash flow information (in
thousands):
|
Year Ended December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
paid for interest, net of amounts capitalized
|
$ | 138,659 | $ | 77,243 | $ | 93,642 | ||||||
|
Non-cash
equity contribution
|
— | — | — | |||||||||
|
Construction-in-process
and debt issuance additions funded with accrued
liabilities
|
(66 | ) | 9,893 | 60,555 | ||||||||
61
SUMMARIZED
QUARTERLY FINANCIAL DATA
(unaudited)
Quarterly
Financial Data—(in thousands, except per unit amounts)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Year
ended December 31, 2009:
|
||||||||||||||||
|
Revenues
|
$ | 62,549 | $ | 95,695 | $ | 128,533 | $ | 130,013 | ||||||||
|
Income
from operations
|
43,396 | 74,282 | 106,367 | 103,875 | ||||||||||||
|
Net
income
|
13,588 | 41,951 | 69,501 | 61,872 | ||||||||||||
|
Net
income per limited partner unit
|
$ | 0.08 | $ | 0.26 | $ | 0.43 | $ | 0.37 | ||||||||
|
Year
ended December 31, 2008:
|
||||||||||||||||
|
Revenues
|
$ | — | $ | — | $ | — | $ | 15,000 | ||||||||
|
Loss
from operations
|
(4,100 | ) | (2,748 | ) | (10,026 | ) | (267 | ) | ||||||||
|
Net
loss
|
(14,515 | ) | (24,513 | ) | (10,897 | ) | (28,419 | ) | ||||||||
|
Net
loss per limited partner unit
|
$ | (0.09 | ) | $ | (0.15 | ) | $ | (0.07 | ) | $ | (0.17 | ) | ||||
ITEM 9.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A.
CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Based on
their evaluation as of the end of the fiscal year ended December 31, 2009, our
general partner’s principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that
information required to be disclosed in reports that we file or submit under the
Exchange Act are (i) accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
During
the most recent fiscal quarter, there have been no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Management
Report on Internal Control Over Financial Reporting
Our
Management Report on Internal Control Over Financial Reporting is included in
the Consolidated Combined Financial Statements on page 41 and is incorporated
herein by reference.
ITEM 9B.
OTHER
INFORMATION
None.
62
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS
OF OUR GENERAL PARTNER AND CORPORATE GOVERNANCE
Management
of Cheniere Energy Partners, L.P.
Cheniere
Energy Partners GP, LLC (“Cheniere GP”), as our general partner, manages our
operations and activities. Our general partner is not elected by our unitholders
and is not subject to re-election on a regular basis in the future. The
directors of our general partner are elected by the sole member of the general
partner. Unitholders are not entitled to elect the directors of our
general partner or to participate directly or indirectly in our management or
operations.
Audit
Committee
The board
of directors of our general partner has appointed an audit committee composed of
Mike Bock, Lon McCain and Robert Sutcliffe, each of whom is an independent
director and satisfies the additional independence and other requirements for
audit committee members provided for in the listing standards of the NYSE Amex
and the Exchange Act. In addition, the board of directors of our general partner
has determined that Mike Bock and Lon McCain meet the qualifications of a
“financial expert” and are “financially sophisticated” as such terms are defined
by the SEC and the NYSE Amex, respectively.
The audit
committee assists the board of directors of our general partner in its oversight
of the integrity of our financial statements and our compliance with legal and
regulatory requirements and partnership policies and controls. The audit
committee has the sole authority to retain and terminate our independent
registered public accounting firm, approve all audit services and related fees
and the terms thereof, and pre-approve any non-audit services to be rendered by
our independent registered public accounting firm. The audit committee is also
responsible for confirming the independence and objectivity of our independent
registered public accounting firm. Our independent registered public accounting
firm has been given unrestricted access to the audit committee.
Conflicts
Committee
Under our
partnership agreement, the board of directors of our general partner has
appointed a conflicts committee composed of the independent directors, Mike
Bock, Lon McCain and Robert Sutcliffe, to review specific matters that the board
believes may involve conflicts of interest. The conflicts committee will
determine if the resolution of a conflict of interest is fair and reasonable to
us. The members of the conflicts committee may not be security holders, officers
or employees of our general partner, directors, officers, or employees of
affiliates of the general partner or holders of any ownership interest in us
other than common units or other publicly traded units and must meet the
independence standards established by the NYSE Amex, the Exchange Act and other
federal securities laws. Any matter approved by the conflicts committee is
conclusively deemed to be fair and reasonable to us, approved by all of our
partners and not a breach by our general partner of any duties that it may owe
us or our unitholders.
Other
We do not
have a nominating committee because the directors of our general partner manage
our operations. The directors of our general partner are not elected by our
unitholders and are not subject to re-election on a regular basis. Unitholders
are not entitled to elect the directors of our general partner or to participate
directly or indirectly in our management or operations.
We also
do not have a compensation committee. We have no employees, directors or
officers. We are managed by our general partner, Cheniere GP. Our general
partner has paid no cash compensation to its executive officers since its
inception. All of the executive officers of our general partner are also
executive officers of Cheniere. Cheniere compensates these officers for the
performance of their duties as executive officers of Cheniere, which includes
managing our partnership. Cheniere does not allocate this compensation between
services for us and services for Cheniere and its affiliates.
63
Directors
and Executive Officers of Our General Partner
We have
no employees, directors or officers. We are managed by our general partner,
Cheniere GP. The following sets forth information, as of February 15, 2010,
regarding the individuals who currently serve on the board of directors and as
executive officers of our general partner. Charif Souki, Don Turkleson and
Walter Williams have served as directors of the general partner since 2006. Meg
Gentle, Lon McCain and Robert Sutcliffe have served as directors of the general
partner since 2007. Keith Teague and James Bennett have served as directors of
the general partner since 2008. Mike Bock was elected as a director
of the general partner in 2009.
|
Name
|
Age
|
Position
with Our General Partner
|
|
Charif
Souki
|
57
|
Director,
Chairman of the Board and Chief Executive Officer
|
|
R.
Keith Teague
|
45
|
Director,
President and Chief Operating Officer
|
|
Meg
A. Gentle
|
35
|
Director,
Senior Vice President and Chief Financial Officer
|
|
James
D. Bennett
|
40
|
Director
|
|
Michael
E. Bock
|
44
|
Director
|
|
Lon
McCain
|
62
|
Director
|
|
Robert
J. Sutcliffe
|
58
|
Director
|
|
Don
A. Turkleson
|
55
|
Director
|
|
Walter
L. Williams
|
82
|
Director
|
Charif
Souki is Chairman of the Board of Directors and Chief Executive Officer
of our general partner and has held that officer position since January 2007.
Mr. Souki, a co-founder of Cheniere, is Chairman of Cheniere’s board of
directors and Chief Executive Officer and President of Cheniere. Since December
2002, Mr. Souki has been the Chief Executive Officer of Cheniere, and he
was also President of Cheniere from that time until April 2005. He was
re-elected as President in April 2008. From June 1999 to December 2002, he was
Chairman of the board of directors of Cheniere and an independent investment
banker. From September 1997 until June 1999, he was co-chairman of the board of
directors of Cheniere, and he served as Secretary of Cheniere from July 1996
until September 1997. Mr. Souki has over 20 years of independent
investment banking experience in the oil and gas industry and has specialized in
providing financing for small capitalization companies with an emphasis on the
oil and gas industry. Mr. Souki received a B.A. from Colgate University and
an M.B.A. from Columbia University. Mr. Souki is also a director and Chief
Executive Officer of the general partner of Sabine Pass LNG, L.P. It was
determined that Mr. Souki should serve as a director of our general partner
because he is the Chief Executive Officer of Cheniere, Cheniere GP and the
general partner of Sabine Pass LNG, L.P. and is responsible for developing the
companies’ overall strategy and vision and implementing the business
plans. In addition, with twenty years of experience as an investment
banker specializing in the oil and gas industry, Mr. Souki brings a unique
perspective to the board of directors of the general partner. Mr.
Souki has not held any other directorship positions in the past five
years.
R. Keith
Teague is a director and President and Chief Operating Officer of our
general partner and has held those officer positions since June 2008. He has
served as Senior Vice President—Asset Group of Cheniere since April 2008. Prior
to that time, he served as Vice President—Pipeline Operations of Cheniere
beginning in May 2006. He has also served as President of Cheniere Pipeline
Company, a wholly-owned subsidiary of Cheniere, since January 2005.
Mr. Teague began his career with Cheniere in February 2004 as Director of
Facility Planning. Prior to joining Cheniere, Mr. Teague served as the
Director of Strategic Planning for the CMS Panhandle Companies from December
2001 until September 2003. Mr. Teague is also President of the general
partner of Sabine Pass LNG, L.P. and is responsible for the development,
construction and operation of Cheniere’s LNG receiving terminal and pipeline
assets. With Mr. Teague’s knowledge and expertise relating
to the Sabine Pass LNG receiving terminal, it was determined that he should
serve as a director of our general partner. Mr. Teague received a B.S. in
civil engineering from Louisiana Tech University and an M.B.A. from Louisiana
State University. Mr. Teague has not held any other directorship positions in
the past five years.
Meg A.
Gentle is a director and Senior Vice President and Chief Financial
Officer of our general partner and has held that officer position since March
2009. She served as Senior Vice President of our general partner from June 2008
to March 2009. She has served as Senior Vice President and Chief
Financial Officer of Cheniere since March 2009. She served as Senior Vice
President – Strategic Planning and Finance from February 2008 to March
2009. Prior to that time, she served as Vice President of Strategic
Planning since September 2005 and Manager of Strategic Planning since June
2004. Prior to joining Cheniere, Ms. Gentle spent eight years in
energy market development, economic evaluation and long-range planning. She
conducted international business development and strategic planning for Anadarko
Petroleum Corporation, an oil and gas exploration and production company, for
six years and energy market analysis for Pace Global Energy Services, an energy
management and consulting firm, for two years. Ms. Gentle received her B.A.
in economics and international affairs from James Madison University and an
M.B.A. from Rice University. Ms. Gentle is also Chief Financial
Officer of the general partner of Sabine Pass LNG, L.P. It was
determined that Ms. Gentle should serve as a director of our general partner
because of her experience with strategic planning and finance in the energy
industry and because of the perspective she brings as the Chief Financial
Officer of Cheniere, Cheniere GP and the general partner of Sabine Pass LNG,
L.P. Ms. Gentle has not held any other directorship positions in the
past five years.
64
James D.
Bennett is a director of our general partner. Mr. Bennett is a
Managing Director with GSO Capital Partners LP (“GSO”) and has been involved in
many of GSO’s private equity and mezzanine investments in the energy industry.
Prior to joining GSO Capital Partners in 2005, Mr. Bennett served as Chief
Financial Officer of Aquilex Service Corporation, which provides specialty
repair services to refining and power generation facilities worldwide. Prior to
that time, Mr. Bennett was vice president of operations at Exario Networks,
a provider of telecommunications solutions, from 2000 to 2001. Before that time,
Mr. Bennett was in the investment banking group of Donaldson,
Lufkin & Jenrette where he was involved in transactions for companies
in all segments of the energy industry from 1995 to 2000. Mr. Bennett
started his career in corporate banking at NationsBank in 1993. Mr. Bennett
received a B.B.A. in Finance from Texas Tech University and currently serves as
a director of United Engines, LLC, an oil field equipment manufacturer and
repair services provider, and Crestwood Midstream Partners, LLC, a midstream
energy company. Mr. Bennett was nominated by GSO to serve on the
board of directors of our general partners pursuant to the Investors’ Agreement,
dated August 15, 2008, among Cheniere, Cheniere Common Units Holding, LLC, GSO
and the other investors named therein. Under the terms and conditions
of the Investors’ Agreement, the investors have the right to cause the election
of one nominee to the board of directors of Cheniere GP. In addition,
Mr. Bennett brings an investor’s perspective to board decisions.
Michael E.
Bock is a director of our general partner. He also is a member
of the Audit Committee and the Conflicts Committee. Mr. Bock was a
Managing Director in the Global Energy and Power Group at Merrill Lynch from
December 2006 to April 2009. Prior to that time, he was a Principal
and head of Corporate Finance at Petrie Parkman & Co., an investment banking
specializing in the energy industry. Mr. Bock earned a bachelor of
arts from Harvard University in 1987. He is also a Chartered
Financial Analyst and a member of CFA Institute and the CFA Society of
Colorado. It was determined that Mr. Bock should serve as a director
of our general partner because of his fifteen years of experience as an
investment banker in the energy industry as well as his expertise as a Chartered
Financial Analyst. Mr. Bock has not held any other directorship
positions in the past five years.
Lon McCain
is a director of our general partner and serves as the Chairman of the Audit
Committee and a member of the Conflicts Committee. He is Executive Vice
President and Chief Financial Officer of Ellora Energy Inc., a private,
independent exploration and production company. Prior to that, he was
Vice President, Treasurer and Chief Financial Officer of Westport Resources
Corporation, a publicly traded exploration and production company, from 2001
until the sale of that company to Kerr-McGee Corporation in 2004. From 1992
until joining Westport, Mr. McCain was Senior Vice President and Principal
of Petrie Parkman & Co., an investment banking firm specializing in the
oil and gas industry. From 1978 until joining Petrie Parkman, Mr. McCain
held senior financial management positions with Presidio Oil Company,
Petro-Lewis Corporation and Ceres Capital. He is currently on the board of
directors of Transzap, Inc., a provider of digital data and electronic payment
solutions, Crimson Exploration, Inc., a publicly traded oil and natural gas
exploration and production company, and Continental Resources, Inc., a publicly
traded oil and natural gas exploration and production company. He
previously served on the board of directors of GulfWest Energy, Inc. until it
merged with Crimson Exploration, Inc., its wholly-owned subsidiary, in June
2005. Mr. McCain received a B.S. in business administration and
a Masters of Business Administration/Finance from the University of Denver.
Mr. McCain was also an Adjunct Professor of Finance at the University of
Denver from 1982 to 2005. It was determined that Mr. McCain should
serve as a director of our general partners because of his experience as a chief
financial officer for energy companies and his background as an investment
banker in the energy industry.
Robert J.
Sutcliffe is a director of our general partner and serves as the Chairman
of the Conflicts Committee and a member of the Audit Committee. He is a lawyer
and business advisor based in Los Angeles and is the Managing Director of
Craftsman Capital Advisors LLC, a private financial advisory and business
consulting firm specializing in the representation of entrepreneurs and venture
investors. Mr. Sutcliffe was, until 1989, a partner and chairman of the
corporate practice group in the Los Angeles office of Brobeck,
Phleger & Harrison, where his practice focused on venture capital,
corporations and securities. He then served as Congressional Chief of Staff to
the Honorable Christopher Cox of California until 1990. During the past five
years, Mr. Sutcliffe served as a director of Innovative Card Technologies, Inc.,
a public company that develops technologies to enhance payment card
functionality, and as non-executive Chairman of Miravant Medical Technologies, a
pharmaceutical development company. Mr. Sutcliffe received a
B.A. in political science and international relations from the University of
California, Los Angeles and a J.D. from Harvard Law School. It was
determined that Mr. Sutcliffe should serve as a director of our general partner
because of his experience as an advisor providing financial and business
consulting services and because of his legal background.
Don A. Turkleson is a
director of our general partner. He is Chief Financial Officer of
Laurus Energy, Inc., a privately held underground coal gasification
company. He became Senior Vice President of Cheniere in May 2004, and
served as Treasurer and Secretary of Cheniere until December 2004 and September
2006, respectively. He served as Senior Vice President and Chief
Financial Officer through March 2009. Prior to joining Cheniere in
1997, Mr. Turkleson was employed by PetroCorp Incorporated from 1983 to 1996, as
Controller until 1986 and then as Vice President-Finance, Secretary and
Treasurer. From 1975 to 1983, he worked as a Certified Public
Accountant in the natural resources division of Arthur Andersen & Co. in
Houston. Mr. Turkleson received a B.S. in accounting from Louisiana
State University. It was determined that Mr. Turkleson should serve
as a director of our general partner because of his experience and insight as
the former Chief Financial Officer of Cheniere, Cheniere GP and the general
65
partner
of Sabine Pass LNG, L.P. and his background as a Certified Public
Accountant. Mr. Turkleson is a director and past Chairman of the
Board of Neighborhood Centers, Inc., a nonprofit organization. He has
not held any other directorship positions in the past five years.
Walter L.
Williams is a director of our general partner. Mr. Williams served
as Vice Chairman of the board of directors of Cheniere from June 1999 until June
2008. He served as President and Chief Executive Officer of Cheniere from
September 1997 until June 1999 and as Vice Chairman of the board of directors of
Cheniere from July 1996 until September 1997. Prior to joining Cheniere,
Mr. Williams spent 32 years as a founder and later Chairman and Chief
Executive Officer of Texoil Company, a publicly-held Gulf Coast exploration and
production company. Prior to that time, he was an independent petroleum
consultant. Mr. Williams received a B.S. in petroleum engineering from
Texas A&M University and is a Registered Engineer in Louisiana and Texas. It
was determined that Mr. Williams should serve as a director of our general
partner because of his combined knowledge and expertise of Cheniere and its
subsidiaries based on his long history with Cheniere serving as former Chief
Executive Officer of the Company for two years and serving as Vice Chairman of
the Board of Directors for over 12 twelve years. Mr. Williams currently
serves on the Dwight Look College of Engineering Advisory Council at Texas
A&M University. Mr. Williams has not held any other directorship positions
in the past five years.
Code
of Ethics
Our Code
of Business Conduct and Ethics covers a wide range of business practices and
procedures and furthers our fundamental principles of honesty, loyalty, fairness
and forthrightness. The Code of Business Conduct and Ethics was approved by the
directors of our general partner. Our Code of Business Conduct and Ethics is
posted at www.cheniereenergypartners.com.
We also intend to post any changes to or waivers of our Code of Business
Conduct and Ethics for the executive officers of our general partner on our
website.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16
of the Exchange Act requires the directors and executive officers of our general
partner and persons who own more than 10% of a registered class of our equity
securities to file initial reports of ownership and reports of changes in
ownership with the SEC. Such persons are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file. Based solely on our
review of the copies of such forms furnished to us and written representations
from the directors and executive officers of our general partner, we believe
that all Section 16(a) filing requirements were met during 2009 in a timely
manner.
ITEM 11.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Our
general partner has paid no cash compensation to its executive officers since
its inception. All of the executive officers of our general partner are also
executive officers of Cheniere. Cheniere compensates these officers for the
performance of their duties as executive officers of Cheniere, which includes
managing our partnership. Cheniere does not allocate this compensation between
services for us and services for Cheniere and its affiliates. Instead, an
affiliate of Cheniere provides us various general and administrative services,
such as technical, commercial, regulatory, financial, accounting, treasury, tax
and legal staffing and related support services, pursuant to a services
agreement for which we pay a non-accountable administrative fee of $10 million
per year, subject to adjustment for inflation. For a description of the services
agreement, see Note 13 of our Notes to Consolidated Combined Financial
Statements in Part II, Item 8. of this annual report on Form
10-K.
In 2007,
the board of directors of our general partner adopted the Cheniere Energy
Partners, L.P. Long-Term Incentive Plan for employees, consultants and directors
of our general partner, employees of its affiliates and consultants to its
subsidiaries. The purpose of the plan is to enhance attraction and retention of
qualified individuals who are essential for the successful operation of our
partnership and to encourage them to align their interests with our interests
through an equity ownership stake in us. The plan allows for the grant of
options, restricted units, phantom units and unit appreciation rights. Up to
1,250,000 units may be granted under the plan. The only awards that have been
granted under the plan have been made to the board of directors of our general
partner in the form of phantom units to be settled in cash over a four-year
vesting period.
Compensation
Committee Report
As
discussed above, the board of directors of our general partner does not have a
compensation committee. In fulfilling its responsibilities, the board of
directors of our general partner, acting in lieu of a compensation committee,
has reviewed and discussed the Compensation Discussion and Analysis with
management. Based on this review and discussion, the board of directors of our
general partner recommended that the Compensation Discussion and Analysis be
included in this annual report on Form 10-K.
66
By the
members of the board of directors of our general partner:
Charif
Souki
R. Keith
Teague
Meg A.
Gentle
James D.
Bennett
Mike
Bock
Lon
McCain
Robert J.
Sutcliffe
Don A.
Turkleson
Walter L.
Williams
Compensation
Committee Interlocks and Insider Participation
As
discussed above, the board of directors of our general partner does not have a
compensation committee. If any compensation is to be paid to our officers, the
compensation would be reviewed and approved by the entire board of directors of
our general partner because they perform the functions of a compensation
committee. None of the directors or executive officers of our general partner
served as a member of a compensation committee of another entity that has or has
had an executive officer who served as a member of the board of directors of our
general partner during 2009.
Director
Compensation
On
May 29, 2007, the board of directors of our general partner approved an
annual fee of $50,000 to each non-management director of our general partner for
services as a director. Also approved were annual fees of $30,000 for the
chairman of the audit committee; $15,000 for the members of the audit committee
other than the chairman; and $5,000 for the chairman of the conflicts committee.
All directors’ fees are pro-rated from the date of election to the board and are
payable quarterly. On May 29, 2007 (the “Grant Date”), the board of directors of
the general partner also granted Lon McCain and Robert Sutcliffe 12,000 phantom
units pursuant to the terms of the Cheniere Energy Partners, L.P. Long-Term
Incentive Plan. Mr. Bennett and Mr. Bock were elected to the board of
directors of our general partner on August 15, 2008 and June 10, 2009,
respectively. Mr. Williams and Mr. Turkleson became non-management
directors of our general partner effective August 1, 2008 and June 1, 2009,
respectively. In addition to the annual fees paid to the
non-management directors, Messrs. Bennett, Bock, Williams and Turkleson each
received 12,000 phantom units. The grants have the same terms as those grants
made to Messrs. McCain and Sutcliffe, except that the Grant Date for each grant
is as follows: September 10, 2008 for Mr. Williams, December 10, 2008
for Mr. Bennett and June 10, 2009 for Messrs. Bock and
Turkleson. Each director will receive an additional 3,000 phantom
units annually on each anniversary of the Grant Date. Vesting will occur for
one-fourth of the phantom units on each anniversary of the Grant Date beginning
on the first anniversary of the Grant Date. Upon vesting, the phantom units will
be payable in cash in an amount equal to the fair market value of a common unit
on such date. The directors receive no distributions, and no distributions
accrue, on the outstanding phantom units.
Each
director will be fully indemnified by us for actions associated with being a
director to the extent permitted under Delaware law.
67
The
following table shows the compensation of the board of directors of our general
partner for the 2009 fiscal year:
|
Name
|
Fees
Earned
or
Paid
in
Cash
|
Unit
Awards
(1)
|
Option
Awards
|
Non-Equity
Incentive
Plan
Compensation
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All
Other
Compensation
|
Total
|
||||||||||||||
|
Charif
Souki (2)
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||
|
R.
Keith Teague(2)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||
|
Meg
A. Gentle (2)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||
|
James
D. Bennett (3)
|
62,500
|
32,100
|
—
|
—
|
—
|
—
|
94,600
|
||||||||||||||
|
Mike
Bock (4)
|
32,500
|
93,600
|
—
|
—
|
—
|
—
|
126,100
|
||||||||||||||
|
Lon
McCain (5)
|
80,000
|
22,320
|
—
|
—
|
—
|
—
|
102,320
|
||||||||||||||
|
Robert
J. Sutcliffe (6)
|
70,000
|
22,320
|
—
|
—
|
—
|
—
|
92,320
|
||||||||||||||
|
Don
A. Turkleson (7)
|
25,000
|
93,600
|
—
|
—
|
—
|
665
|
119,265
|
||||||||||||||
|
Walter
L. Williams (8)
|
50,000
|
26,520
|
—
|
—
|
—
|
11,556
|
88,076
|
||||||||||||||
|
(1)
|
Reflects
aggregate grant date fair value. The phantom units are to be
settled in cash. The units are valued using the closing unit price on the
date of grant and are revalued on a quarterly basis through the date of
vesting.
|
|
(2)
|
Charif
Souki, Keith Teague and Meg Gentle are executive officers of our general
partner and are also executive officers of Cheniere. Cheniere compensates
these officers for the performance of their duties as executive officers
of Cheniere, which includes managing our partnership. They do not receive
additional compensation for service as
directors.
|
|
(3)
|
Mr. Bennett
was granted 3,000 phantom units in 2009 with a grant date fair value of
$32,100. As of December 31, 2009, he held a total of 12,000 phantom
units. Mr. Bennett disclaims beneficial ownership of these
units. Mr. Bennett is an employee of GSO Capital Partners LP or
one of its affiliates (“GSO”). Under the terms of such
employment, Mr. Bennett is required to transfer to GSO or its clients, as
applicable, any and all compensation received in connection with his
directorship for any portfolio companies managed by GSO. GSO
received $32,100 in cash upon the vesting of Mr. Bennett’s 3,000 phantom
units in December 2009.
|
|
(4)
|
Mr. Bock
was granted 12,000 phantom units in 2009 with a grant date fair value of
$93,600. As of December 31, 2009, he held a total of 12,000 phantom
units.
|
|
(5)
|
Mr. McCain
was granted 3,000 phantom units in 2009 with a grant date fair value of
$22,320. As of December 31, 2009, he held a total of 11,250 phantom
units. Mr. McCain received $27,900 in cash upon the vesting of 3,750
phantom units in May 2009.
|
|
(6)
|
Mr. Sutcliffe
was granted 3,000 phantom units in 2009 with a grant date fair value of
$22,320. As of December 31, 2009, he held a total of 11,250 phantom
units. Mr. Sutcliffe received $27,900 in cash upon the vesting of
3,750 phantom units in May 2009.
|
|
(7)
|
Mr.
Turkleson became a non-employee director, effective as of June 1, 2009,
and was granted 12,000 phantom units in 2009 with a grant date fair value
of $93,600. As of December 31, 2009, he held a total of 12,000
phantom units. Mr. Turkleson also had use of a blackberry
provided by Cheniere during 2009. The blackberry expense was
approximately $665.
|
|
(8)
|
Mr.
Williams was granted 3,000 phantom units in 2009 with a grant date fair
value of $26,520. As of December 31, 2009, he held a total of 12,000
phantom units. Mr. Williams received $26,520 in cash upon the vesting of
3,000 phantom units in September 2009. Mr. Williams also had
use of an office, parking space, laptop and blackberry at Cheniere’s
headquarters during 2009. The pro rata amount of office lease expense
related to that space was approximately $3,308. The parking
expense was approximately $3,248 and the laptop blackberry expense was
approximately $5,000.
|
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED UNITHOLDER
MATTERS
The
limited partner interest in our partnership is divided into units. As of
February 15, 2010, there were 26,416,357 common units outstanding and
135,383,831 subordinated units outstanding. The following table sets forth the
beneficial ownership of our units owned of record and beneficially as of
February 15, 2010 by:
|
|
•
|
each
person who beneficially owns more than 5% of the units;
|
|
|
•
|
each
of the directors of our general partner;
|
|
|
•
|
each
of the executive officers of our general partner; and
|
|
|
•
|
all
directors and executive officers of our general partner as a
group.
|
The amounts and percentage of units beneficially owned are
reported on the basis of regulations of the SEC governing the determination of
beneficial ownership of securities. Under the rules of the SEC, a person is
deemed to be a “beneficial owner” of a security if that person has or shares
“voting power,” which includes the power to vote or to direct the voting of such
security, or
68
“investment
power,” which includes the power to dispose of or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
securities of which that person has a right to acquire beneficial ownership
within 60 days. Under these rules, more than one person may be deemed a
beneficial owner of the same securities, and a person may be deemed a beneficial
owner of securities as to which he has no economic interest.
Except as
indicated by footnote, the persons named in the table below have sole voting and
investment power with respect to all units shown as beneficially owned by them,
subject to community property laws where applicable. The address for the
beneficial owners listed below is 700 Milam Street, Suite 800, Houston, Texas
77002.
|
Name
of Beneficial Owner
|
Common
Units
Beneficially
Owned
|
Percentage
of
Common
Units
Beneficially
Owned
|
Subordinated
Units
Beneficially
Owned
|
Percentage
Of
Subordinated
Units
Beneficially
Owned
|
Percentage
of
Total
Equity
Securities
Beneficially
Owned
|
|
Cheniere
Energy, Inc. (1)(2)
|
10,891,357
|
41%
|
135,383,831
|
100%
|
89%
|
|
Cheniere
LNG Holdings, LLC (2)(3)
|
10,891,357
|
41%
|
135,383,831
|
100%
|
89%
|
|
Cheniere
Subsidiary Holdings, LLC (2)(3)
|
—
|
—
|
135,383,831
|
100%
|
82%
|
|
Cheniere
Common Units Holding, LLC (2)(3)
|
10,891,357
|
41%
|
—
|
100%
|
7%
|
|
Charif
Souki (4)
|
373,496
|
1%
|
—
|
—
|
*
|
|
R.
Keith Teague
|
—
|
—
|
—
|
—
|
—
|
|
Meg
A. Gentle
|
8,035
|
*
|
—
|
—
|
*
|
|
James
D. Bennett
|
—
|
— |
—
|
— | — |
|
Mike
Bock
|
—
|
—
|
—
|
—
|
—
|
|
Lon
McCain
|
—
|
—
|
—
|
—
|
—
|
|
Robert
J. Sutcliffe
|
—
|
—
|
—
|
—
|
—
|
|
Don
A. Turkleson
|
25,000
|
*
|
—
|
—
|
*
|
|
Walter
L. Williams
|
15,388
|
*
|
—
|
—
|
—
|
|
All
executive officers and directors as a group
(9 persons)
|
421,919
|
1%
|
—
|
—
|
*
|
|
*
|
Less
than 1%
|
|
(1)
|
Cheniere
Energy, Inc. is the ultimate parent company of Cheniere LNG Holdings, LLC,
Cheniere Subsidiary Holdings, LLC and Cheniere Common Units Holding, LLC
and may, therefore, be deemed to beneficially own the units held by
Cheniere LNG Holdings, LLC, Cheniere Subsidiary Holdings, LLC and Cheniere
Common Units Holding, LLC.
|
|
(2)
|
Cheniere
LNG Holdings, LLC owns 100% of the equity interests in our general partner
and an 89% limited partner interest in us either directly or through
Cheniere Subsidiary Holdings, LLC and Cheniere Common Units Holding, LLC,
each a wholly-owned subsidiary, and may, therefore, be deemed to
beneficially own the units held by Cheniere Subsidiary Holdings, LLC and
Cheniere Common Units Holding, LLC.
|
|
(3)
|
All
of Cheniere LNG Holdings, LLC’s subordinated units are pledged as
collateral to The Bank of New York Mellon, as administrative agent under
the Credit Agreement, dated May 31, 2007. All of Cheniere LNG
Holdings, LLC’s common units are pledged as collateral to The Bank of New
York Mellon, as collateral agent, under the 2008 Convertible
Loans.
|
|
(4)
|
Mr. Souki
holds 90,396 units directly and his wife owns 283,100
units.
|
Equity
Compensation Plan Information
In 2007,
the board of directors of our general partner adopted the Cheniere Energy
Partners, L.P. Long-Term Incentive Plan. The following table provides certain
information as of December 31, 2009 with respect to this plan:
|
Plan
Category
|
Number of securities
to be issued upon exercise of outstanding options, warrants and
rights (1)
|
Weighted-average exercise
price of outstanding
options,
warrants and rights
|
Number of securities
remaining available for future issuance under equity compensation plans
(excluding securities reflected in the first column)
|
||||||
|
Equity
compensation plans approved by security holders
|
—
|
N/A
|
—
|
||||||
|
Equity
compensation plans not approved by security holders
|
—
|
N/A
|
1,250,000
|
||||||
|
Total
|
—
|
N/A
|
1,250,000
|
||||||
|
(1)
|
The
phantom units that have been granted are payable in cash at the time of
vesting in an amount equal to the fair market value of a common unit on
such date.
|
69
For more
information regarding the Long-Term Incentive Plan, see “Compensation Discussion
and Analysis” in Item 11 of this annual report on Form 10-K.
ITEM 13.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related-Party
Transactions
Prior to
the completion of our initial public offering of common units in 2007, the
managers of our general partner approved the distributions and payments to be
made to our general partner and its affiliates in connection with our ongoing
operations and, in the event of, our liquidation. During our operational stage,
we will generally make cash distributions to our unitholders, including our
affiliates, as described in Part II, Item 5, of this annual report on Form
10-K. Upon our liquidation, our partners, including our general partner, will be
entitled to receive liquidating distributions according to their respective
capital account balances.
Under the
audit committee charter, the audit committee of our general partner is required
to review and approve all transactions or series of related financial
transactions, arrangements or relationships between the partnership and any
related-party, if the amount involved exceeds $120,000 and such transactions
have not been reviewed by the conflicts committee of our general partner. The
following related-party transactions are in addition to those related-party
transactions described in Note 13 of our Notes to Consolidated Combined
Financial Statements Part II, Item 8, of this annual report on Form 10-K.
Except as described below, such related-party transactions were approved by the
members of the board of directors of our general partner, which includes each
member of the audit committee.
ISDA
Master Agreement
In
September 2007, Cheniere Marketing and Sabine Pass LNG entered into an
International Swaps and Derivatives Association (“ISDA”) Master Agreement that
provides Sabine Pass LNG with the ability to hedge its future price risk from
time to time. The ISDA Master Agreement was entered into in the event Sabine
Pass LNG chooses to hedge some of its LNG purchases or gas sales and elects to
implement such hedges through Cheniere Marketing, which already has ISDA
agreements in place with third parties and accounts with futures brokers. There
are no current transactions under this agreement. No amounts were paid to
Cheniere Marketing under this agreement during the fiscal years ended
December 31, 2009 and 2008.
Operational
Balancing Agreement
In
December 2007, Sabine Pass LNG and Cheniere Creole Trail Pipeline, L.P. entered
into an Operational Balancing Agreement that provides for the resolution of any
operational imbalances (i) during the term of the agreement on an in-kind
basis and (ii) upon termination of the agreement by cash-out at a rate
equivalent to the average of the midpoint prices for Henry Hub, Louisiana
pricing published in “Gas Daily’s-Daily Price Survey” for each day of the month
following termination. This agreement became effective following the achievement
of commercial operability of the Sabine Pass LNG receiving terminal in September
2008. Cheniere Creole Trail Pipeline, L.P. owed natural gas volumes valued at
$197,628 and $53,862 to Sabine Pass LNG related to operational imbalances under
this agreement at December 31, 2009 and 2008, respectively
LNG
Terminal Export Agreement
In
January 2010, Sabine Pass LNG and Cheniere Marketing entered into an LNG
Terminal Export Agreement that provides Cheniere Marketing the ability to export
LNG from the Sabine Pass LNG receiving terminal. No amounts were paid
to Sabine Pass LNG under this agreement during the fiscal years ended December
31, 2009 and 2008.
The
following related-party transaction was not approved by the board of directors
or audit committee of our general partner:
Letter
Agreement regarding the Cooperative Endeavor Agreement and Payment in Lieu of
Taxes Agreement
In July
2007, Sabine Pass LNG entered into Cooperative Endeavor Agreements with various
Cameron Parish, Louisiana taxing authorities and a related agreement with
Cheniere Marketing, each as described in Note 13 of our Notes to Consolidated
Combined Financial Statements in Part II, Item 8, of this annual report on
Form 10-K. During the years ended December 31, 2009 and 2008, Cheniere Marketing
paid Sabine Pass LNG $2.4 million and $5.0 million, respectively, under the
related agreement.
Independent
Directors
Because
we are a limited partnership, the NYSE Amex does not require our general
partner’s board of directors to be composed of a majority of directors who meet
the criteria for independence required by NYSE Amex. The board of our general
partner has
70
determined
that Mike Bock, Lon McCain and Robert Sutcliffe are independent directors in
accordance with the following NYSE Amex US independence standards. A director
would not be independent if any of the following relationships
exists:
|
|
•
|
a
director who is, or during the past three years was, employed by the
partnership, general partner or by any parent or subsidiary of the
partnership or general partner;
|
|
|
•
|
a
director who accepts, or has an immediate family member who accepts, any
compensation from the partnership, general partner or by any parent or
subsidiary of the partnership or general partner in excess of $120,000
during any twelve consecutive-month period or any of the past three fiscal
years, other than compensation for board or committee services, or
compensation paid to an immediate family member who is a non-executive
employee of the partnership, general partner or by any parent or
subsidiary of the partnership or general partner, among other exceptions;
|
|
|
•
|
a
director who is an immediate family member of an individual who is, or has
been in any of the past three years, employed by the partnership, general
partner or by any parent or subsidiary of the partnership or general
partner as an executive officer;
|
|
|
•
|
a
director who is, or has an immediate family member who is, a partner in,
or a controlling shareholder or an executive officer of, any organization
to which the partnership, general partner or any parent or subsidiary of
the partnership or general partner made, or from which the partnership,
general partner or any parent or subsidiary of the partnership or general
partner received, payments (other than those arising solely from
investments in our common units or payments under non-discretionary
charitable contribution matching programs) that exceed 5% of the
organization’s consolidated gross revenues for that year, or $200,000,
whichever is more, in any of the most recent three fiscal years;
|
|
|
•
|
a
director who is, or has an immediate family member who is, employed as an
executive officer of another entity where at any time during the most
recent three fiscal years any of the executive officers of the
partnership, general partner or of any parent or subsidiary of the
partnership or general partner serves on the compensation committee of
such other entity; or
|
|
|
•
|
a
director who is, or has an immediate family member who is, a current
partner of the outside auditor of the partnership, general partner or
parent or subsidiary of the partnership or general partner, or was a
partner or employee of the outside auditor of the partnership, general
partner or any parent or subsidiary of the partnership or general partner
who worked on our audit at any time during any of the past three
years.
|
Mr. Bock
served as a managing director at Merrill Lynch from December 2006 to April 2009
and, prior to that, he served as a principal and head of Corporate Finance at
Petrie Parkman & Co. Cheniere paid fees to Merrill Lynch in 2007
and 2008 and to Petrie Parkman in 2006; however, the payments did not exceed
five percent of Merrill Lynch or Petrie Parkman’s gross revenues for those
years. The board of directors of our general partner reviewed the
fees paid to Merrill Lynch and Petrie Parkman and has determined, after
reviewing this information, that Mr. Bock is an independent
director.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Ernst &
Young LLP served as our independent auditor for the fiscal years ending
December 31, 2009 and 2008. The following table sets forth the fees paid to
Ernst & Young LLP, for professional services rendered for 2009 and
2008:
|
Ernst
& Young LLP
|
||||||||
|
Fiscal
2009
|
Fiscal
2008
|
|||||||
|
Audit
Fees
|
$ | 800,000 | $ | 750,002 | ||||
|
Audit-Related
Fees
|
— | 77,661 | ||||||
|
Total
|
$ | 800,000 | $ | 827,663 | ||||
Audit Fees—Audit fees for
2009 and 2008 include attestation services and review of documents filed with
the SEC in addition to audit, review and all other services performed to comply
with generally accepted auditing standards.
Audit-Related
Fees—Audit-related fees for 2008 were for services rendered in connection
with the offering of securities in a private placement.
There
were no tax or other fees in 2009 or 2008.
Auditor
Pre-Approval Policy and Procedures
Under the
audit committee’s charter, the audit committee is required to review and approve
in advance all audit and lawfully permitted non-audit services to be provided by
the independent accountants and the fees for such services. Pre-approval of
non-audit services (other than review and attestation services) shall not be
required if such services fall within exceptions established by the SEC. All
audit and non-audit services provided to us during the fiscal year ended
December 31, 2009 and 2008 were pre-approved.
71
ITEM 15.
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
|
(a)
|
Financial
Statements and Exhibits
|
|
(1)
|
Financial
Statements—Cheniere Energy Partners,
L.P.:
|
|
(2)
|
Financial
Statement Schedules:
|
|
(3)
|
Exhibits
|
|
Exhibit
No.
|
Description
|
|
2.1*
|
Contribution
and Conveyance Agreement. (Incorporated by reference to Exhibit 10.4 to
Cheniere Energy Partners, L.P.’s Current Report on Form 8-K (SEC File No.
001-33366), filed on March 26, 2007)
|
|
3.1*
|
Certificate
of Limited Partnership of Cheniere Energy Partners, L.P. (Incorporated by
reference to Exhibit 3.1 to Cheniere Energy Partners, L.P.’s Registration
Statement on Form S-1 (SEC File No. 333-139572), filed on December 21,
2006)
|
|
3.2*
|
First
Amended and Restated Agreement of Limited Partnership of Cheniere Energy
Partners, L.P. (Incorporated by reference to Exhibit 3.1 to Cheniere
Energy Partners, L.P.’s Current Report on Form 8-K (SEC File No.
001-33366), filed on March 26, 2007)
|
|
3.3*
|
Certificate
of Formation of Cheniere Energy Partners GP, LLC. (Incorporated by
reference to Exhibit 3.3 to Cheniere Energy Partners, L.P.’s Registration
Statement on Form S-1 (SEC File No. 333-139572), filed on December 21,
2006)
|
|
3.4*
|
Second
Amended and Restated Limited Liability Company Agreement of Cheniere
Energy Partners GP, LLC. (Incorporated by reference to Exhibit 3.1 to
Cheniere Energy Partners, L.P.’s Quarterly Report on Form 10-Q (SEC File
No. 001-33366), filed on August 8, 2007)
|
|
4.1*
|
Form
of common unit certificate. (Incorporated by reference to Exhibit A to
Exhibit 3.2 above)
|
|
4.2*
|
Indenture,
dated as of November 9, 2006, between Sabine Pass LNG, L.P., as issuer,
and The Bank of New York, as trustee. (Incorporated by reference to
Exhibit 4.1 to Cheniere Energy, Inc.’s Current Report on Form 8-K (SEC
File No. 001-16383), filed on November 16, 2006)
|
|
4.3*
|
Form
of 7.25% Senior Secured Note due 2013 (Included as Exhibit A1 to Exhibit
4.2 above)
|
|
4.4*
|
Form
of 7.50% Senior Secured Note due 2016 (Included as Exhibit A1 to Exhibit
4.2 above)
|
|
10.1*
|
LNG
Terminal Use Agreement, dated September 2, 2004, by and between Total LNG
USA, Inc. and Sabine Pass LNG, L.P. (Incorporated by reference to Exhibit
10.1 to Cheniere Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File
No. 001-16383), filed on November 15, 2004)
|
|
10.2*
|
Amendment
of LNG Terminal Use Agreement, dated January 24, 2005, by and between
Total LNG USA, Inc. and Sabine Pass LNG, L.P. (Incorporated by reference
to Exhibit 10.40 to Cheniere Energy, Inc.’s Annual Report on Form 10-K
(SEC File No. 001-16383), filed on March 10, 2005)
|
| 10.3* | Omnibus Agreement, dated September 2, 2004, by and between Total LNG USA, Inc. and Sabine Pass LNG, L.P. (Incorporated by reference to Exhibit 10.2 to Cheniere Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-16383), filed on November 15, 2004) |
72
|
Exhibit
No.
|
Description
|
|
|
|
|
|
|
10.4*
|
Guaranty,
dated as of November 9, 2004, by Total S.A. in favor of Sabine Pass LNG,
L.P. (Incorporated by reference to Exhibit 10.3 to Cheniere Energy, Inc.’s
Quarterly Report on Form 10-Q (SEC File No. 001 16383), filed on November
15, 2004)
|
|
|
10.5*
|
LNG
Terminal Use Agreement, dated November 8, 2004, between Chevron U.S.A.
Inc. and Sabine Pass LNG, L.P. (Incorporated by reference to Exhibit 10.4
to Cheniere Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File No.
001-16383), filed on November 15, 2004)
|
|
|
10.6*
|
Amendment
to LNG Terminal Use Agreement, dated December 1, 2005, by and between
Chevron U.S.A., Inc. and Sabine Pass LNG, L.P. (Incorporated by reference
to Exhibit 10.28 to Sabine Pass LNG, L.P.’s Registration Statement on Form
S-4 (SEC File No. 333-138916), filed on November 22,
2006)
|
|
|
10.7*
|
Omnibus
Agreement, dated November 8, 2004, between Chevron U.S.A., Inc. and Sabine
Pass LNG, L.P. (Incorporated by reference to Exhibit 10.5 to Cheniere
Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-16383),
filed on November 15, 2004)
|
|
|
10.8*
|
Guaranty
Agreement, dated as of December 15, 2004, from ChevronTexaco Corporation
to Sabine Pass LNG, L.P. (Incorporated by reference to Exhibit 10.12 to
Sabine Pass LNG, L.P.’s Registration Statement on Form S-4 (SEC File No.
333-138916), filed on November 22, 2006)
|
|
|
10.9*
|
Amended
and Restated Terminal Use Agreement, dated November 9, 2006, by and
between Cheniere Marketing, Inc. and Sabine Pass LNG, L.P. (Incorporated
by reference to Exhibit 10.6 to Cheniere Energy, Inc.’s Current Report on
Form 8-K (SEC File No. 001-16383), filed on November 16,
2006)
|
|
|
10.10*
|
Amendment
of LNG Terminal Use Agreement, dated June 25, 2007, by and between
Cheniere Marketing, Inc. and Sabine Pass LNG, L.P. (Incorporated by
reference to Exhibit 10.1 to Cheniere Energy, Inc.’s Current Report on
Form 8-K (SEC File No. 001-16383), filed on June 26,
2007)
|
|
|
10.11*
|
Cooperative
Endeavor Agreement & Payment in Lieu of Tax Agreement, dated October
23, 2007 (amending the Amended and Restated Terminal Use Agreement, dated
November 9, 2006, by and between Cheniere Marketing, Inc. and Sabine Pass
LNG, L.P.). (Incorporated by reference to Exhibit 10.7 to Cheniere Energy,
Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-16383), filed on
November 6, 2007)
|
|
|
10.12*
|
LNG
Lease Agreement, dated June 24, 2008, between Cheniere Marketing, Inc. and
Sabine Pass LNG, L.P. (Incorporated by reference to Exhibit 10.7 to
Cheniere Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File No.
001-16383), filed on August 11, 2008)
|
|
|
10.13*
|
Guarantee
Agreement, dated as of November 9, 2006, by Cheniere Energy, Inc.
(Incorporated by reference to Exhibit 10.7 to Cheniere Energy, Inc.’s
Current Report on Form 8-K (SEC File No. 001-16383), filed on November 16,
2006)
|
|
|
10.14*
|
Collateral
Trust Agreement, dated November 9, 2006, by and among Sabine Pass LNG,
L.P., The Bank of New York, as collateral trustee, Sabine Pass LNG-GP,
Inc. and Sabine Pass LNG-LP, LLC. (Incorporated by reference to Exhibit
10.1 to Cheniere Energy, Inc.’s Current Report on Form 8-K (SEC File No.
001-16383), filed on November 16, 2006)
|
|
|
10.15*
|
Amended
and Restated Parity Lien Security Agreement, dated November 9, 2006, by
and between Sabine Pass LNG, L.P. and The Bank of New York, as collateral
trustee. (Incorporated by reference to Exhibit 10.2 to Cheniere Energy,
Inc.’s Current Report on Form 8-K (SEC File No. 001-16383), filed on
November 16, 2006)
|
|
|
10.16*
|
Third
Amended and Restated Multiple Indebtedness Mortgage, Assignment of Rents
and Leases and Security Agreement, dated November 9, 2006, between the
Sabine Pass LNG, L.P. and The Bank of New York, as collateral trustee.
(Incorporated by reference to Exhibit 10.3 to Cheniere Energy, Inc.’s
Current Report on Form 8-K (SEC File No. 001-16383), filed on November 16,
2006)
|
|
| 10.17* | Amended and Restated Parity Lien Pledge Agreement, dated November 9, 2006, by and among Sabine Pass LNG, L.P., Sabine Pass LNG-GP, Inc., Sabine Pass LNG-LP, LLC and The Bank of New York, as collateral trustee. (Incorporated by reference to Exhibit 10.4 to Cheniere Energy, Inc.’s Current Report on Form 8-K (SEC File No. 001-16383), filed on November 16, 2006) | |
| 10.18* | Security Deposit Agreement, dated November 9, 2006, by and among Sabine Pass LNG, L.P., The Bank of New York, as collateral trustee, and The Bank of New York, as depositary agent. (Incorporated by reference to Exhibit 10.5 to Cheniere Energy, Inc.’s Current Report on Form 8-K (SEC File No. 001-16383), filed on November 16, 2006) | |
|
10.19*
|
Letter Agreement, dated May 8, 2007, between Cheniere Marketing, Inc. and Sabine Pass LNG, L.P. (Incorporated by reference to Exhibit 10.8 to Cheniere Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-16383), filed | |
73
|
Exhibit
No.
|
Description
|
|
|
|
|
|
| on May 8, 2007), and Form of LNG Terminal Use Agreement between J&S Cheniere S.A. and Sabine Pass LNG, L.P. (Incorporated by reference to Exhibit B of Exhibit 8.2(a) of Exhibit 10.8 to Cheniere Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-16383), filed on May 8, 2007) | ||
|
10.20*
|
Operation
and Maintenance Agreement, dated February 25, 2005, between Sabine Pass
LNG, L.P. and Cheniere LNG O&M Services, L.P. (Incorporated by
reference to Exhibit 10.5 to Cheniere Energy, Inc.’s Current Report on
Form 8-K (SEC File No. 001-16383), filed on March 2,
2005)
|
|
|
10.21*
|
Assignment,
Assumption, Consent and Release Agreement, dated March 26, 2007, among
Cheniere LNG O&M Services, L.P., Cheniere Energy Partners GP, LLC and
Sabine Pass LNG, L.P. (Incorporated by reference to Exhibit 10.53 to the
Cheniere Energy Partners, L.P. Annual Report on Form 10-K (SEC File No.
001-33366) filed on February 27, 2009)
|
|
|
10.22*
|
Services
and Secondment Agreement, dated March 26, 2007, between Cheniere LNG
O&M Services, L.P. and Cheniere Energy Partners GP, LLC. (Incorporated
by reference to Exhibit 10.2 to Cheniere Energy Partners, L.P.’s Current
Report on Form 8-K (SEC File No. 001-33366), filed on March 26,
2007)
|
|
|
10.23*
|
CQP
GP Consent and Agreement (Operation and Maintenance Agreement), dated
August 15, 2008, among Cheniere LNG O&M Services, LLC, Cheniere Energy
Partners GP, LLC and The Bank of New York Mellon. (Incorporated by
reference to Exhibit 10.2 to Cheniere Energy, Inc.’s Quarterly Report on
Form 10-Q (SEC File No. 001-16383), filed on November 7,
2008)
|
|
|
10.24*
|
Sabine
Consent and Agreement (Operation and Maintenance Agreement), dated August
15, 2008, among Cheniere Energy Partners GP, LLC, Sabine Pass LNG, L.P.
and The Bank of New York Mellon. (Incorporated by reference to Exhibit
10.4 to Cheniere Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File
No. 001-16383), filed on November 7, 2008)
|
|
|
10.25*
|
Management
Services Agreement, dated February 25, 2005, between Sabine Pass
LNG-GP, Inc. and Sabine Pass LNG, L.P. (Incorporated by reference to
Exhibit 10.6 to Cheniere Energy, Inc.’s Current Report on Form 8-K (SEC
File No. 001-16383), filed on March 2, 2005)
|
|
|
10.26*
|
Letter
Agreement (Management Services Agreement), dated September 1, 2006,
between Sabine Pass LNG-GP, Inc. and Cheniere LNG Terminals, Inc.
(Incorporated by reference to Exhibit 10.29 to Cheniere Energy Partners,
L.P.’s Registration Statement on Form S-1 (SEC File No. 333-139572), filed
on February 14, 2007)
|
|
|
10.27*
|
Assignment,
Assumption, Consent and Release Agreement (Management Services Agreement),
dated August 15, 2008, between Sabine Pass LNG-GP, Inc., Cheniere LNG
Terminals, Inc. and Sabine Pass LNG, L.P. (Incorporated by reference to
Exhibit 10.1 to Cheniere Energy, Inc.’s Quarterly Report on Form 10-Q (SEC
File No. 001-16383), filed on November 7, 2008)
|
|
|
10.28*
|
Sabine
Consent and Agreement (Management Services Agreement), dated August 15,
2008, among Cheniere LNG Terminals, Inc., Sabine Pass LNG, L.P. and The
Bank of New York Mellon. (Incorporated by reference to Exhibit 10.5 to
Cheniere Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File No.
001-16383), filed on November 7, 2008)
|
|
|
10.29*
|
Management
and Administrative Services Agreement, dated March 26,2 007, between
Cheniere Energy Partners, L.P. and Cheniere LNG Terminals, Inc.
(Incorporated by reference to Exhibit 10.1 to Cheniere Energy Partners,
L.P.’s Current Report on Form 8-K (SEC File No. 001-33366), filed on March
26, 2007)
|
|
|
10.30*
|
CQP
Consent and Agreement (Management and Administrative Services Letter
Agreement), dated August 15, 2008, among Cheniere LNG Terminals, Inc.,
Cheniere Energy Partners, L.P. and The Bank of New York Mellon.
(Incorporated by reference to Exhibit 10.3 to Cheniere Energy, Inc.’s
Quarterly Report on Form 10-Q (SEC File No. 001-16383), filed on November
7, 2008)
|
|
|
10.31*
|
Settlement
and Purchase Agreement dated as of June 14, 2001, by and among Cheniere
Energy, Inc., CXY Corporation, Crest Energy, L.L.C., Crest Investment
Company and Freeport LNG Terminal, LLC, and two related letter agreements,
each dated February 27, 2003. (Incorporated by reference to Exhibit 10.36
to Cheniere Energy Partners, L.P.’s Registration Statement on Form S-1
(SEC File No. 333-139572), filed on January 25, 2007)
|
|
|
10.32*
|
Letter
regarding Assumption and Adoption of Obligations under Settlement and
Purchase Agreement, dated May 9, 2005, and Indemnification Agreement,
dated May 9, 2005, by Cheniere Energy, Inc. (Incorporated by reference to
Exhibit 10.29 to Sabine Pass LNG, L.P.’s Registration Statement on Form
S-4/A (SEC File No. 333-138916), filed on January 10,
2007)
|
|
|
10.33*†
|
Cheniere
Energy Partners, L.P. 2007 Long-Term Incentive Plan. (Incorporated by
reference to Exhibit 10.3 to
|
|
74
|
Exhibit
No.
|
Description
|
|
|
|
|
|
| Cheniere Energy Partners, L.P.’s Current Report on Form 8-K (SEC File No. 001-33366), filed on March 26, 2007) | ||
|
10.34*†
|
Form
of Restricted Units Agreement for employees, consultants and directors
(three-year). (Incorporated by reference to Exhibit 10.39 to Cheniere
Energy Partners, L.P.’s Registration Statement on Form S-1 (SEC File No.
333-139572), filed on March 2, 2007)
|
|
|
10.35*†
|
Form
of Restricted Units Agreement for employees, consultants and directors
(four-year). (Incorporated by reference to Exhibit 10.40 to Cheniere
Energy Partners, L.P.’s Registration Statement on Form S-1 (SEC File No.
333-139572), filed on March 2, 2007)
|
|
|
10.36*†
|
Form
of Director Units Option Agreement for employees and consultants
(four-year). (Incorporated by reference to Exhibit 10.41 to Cheniere
Energy Partners, L.P.’s Registration Statement on Form S-1 (SEC File No.
333-139572), filed on March 2, 2007)
|
|
|
10.37*†
|
Form
of Units Option Agreement for employees and consultants (three-year).
(Incorporated by reference to Exhibit 10.42 to Cheniere Energy Partners,
L.P.’s Registration Statement on Form S-1 (SEC File No. 333-139572), filed
on March 2, 2007)
|
|
|
10.38*†
|
Form
of Units Option Agreement for employees and consultants (four-year).
(Incorporated by reference to Exhibit 10.43 to Cheniere Energy Partners,
L.P.’s Registration Statement on Form S-1 (SEC File No. 333-139572), filed
on March 2, 2007)
|
|
|
10.39*†
|
Form
of Phantom Units Agreement for employees, consultants and directors
(four-year). (Incorporated by reference to Exhibit 10.44 to Cheniere
Energy Partners, L.P.’s Registration Statement on Form S-1 (SEC File No.
333-139572), filed on March 2, 2007)
|
|
|
10.40*†
|
Form
of Phantom Units Agreement for employees, consultants and directors
(three-year). (Incorporated by reference to Exhibit 10.45 to Cheniere
Energy Partners, L.P.’s Registration Statement on Form S-1 (SEC File No.
333-139572), filed on March 2, 2007)
|
|
|
10.41*†
|
Form
of Phantom Units Agreement. (Incorporated by reference to Exhibit 10.2 to
Cheniere Energy Partners, L.P.’s Current Report on Form 8-K (SEC File No.
001-33366), filed on June 4, 2007)
|
|
|
10.42*†
|
Summary
of Compensation to Independent Directors. (Incorporated by reference to
Exhibit 10.1 to Cheniere Energy Partners, L.P.’s Current Report on Form
8-K (SEC File No. 001-33366), filed on June 4,
2007)
|
|
|
10.43*†
|
Form
of Indemnification Agreement for officers and/or directors of Cheniere
Energy Partners GP, LLC. (Incorporated by reference to Exhibit 10.1 to
Cheniere Energy Partners, L.P.’s Current Report on Form 8-K (SEC File No.
001-33366), filed on April 6,
2009)
|
|
|
|
|
|
21.1
|
Subsidiaries
of Cheniere Energy Partners, L.P.
|
|
23.1
|
Consent
of Ernst & Young LLP
|
|
31.1
|
Certification
by Chief Executive Officer required by Rule 13a-14(a) and 15d-14(a) under
the Exchange Act
|
|
31.2
|
Certification
by Chief Financial Officer required by Rule 13a-14(a) and 15d-14(a) under
the Exchange Act
|
|
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*
|
Incorporated
by reference
|
|
†
|
Management
contract or compensatory plan or
arrangement
|
75
CHENIERE
ENERGY PARTNERS, L.P.
CONDENSED
BALANCE SHEET
(in
thousands)
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 130 | $ | 6 | ||||
|
Interest
receivable
|
— | 1,726 | ||||||
|
Prepaid
expenses and other
|
242 | — | ||||||
|
Total
current assets
|
372 | 1,732 | ||||||
|
Non-current
restricted cash and cash equivalents
|
— | 11,928 | ||||||
|
Non-current
restricted treasury securities
|
— | 20,829 | ||||||
|
Total
assets
|
$ | 372 | $ | 34,489 | ||||
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
$ | 170 | $ | 177 | ||||
|
LONG-TERM
DEBT—RELATED PARTY
|
— | 2,347 | ||||||
|
INVESTMENT
IN AND EQUITY IN LOSSES OF AFFILIATES
|
480,529 | 383,650 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
— | — | ||||||
|
STOCKHOLDERS’
(DEFICIT) EQUITY
|
(480,327 | ) | (351,685 | ) | ||||
|
Total
liabilities and stockholders’ equity
|
$ | 372 | $ | 34,489 | ||||
See
accompanying notes to condensed financial statements.
76
SCHEDULE
I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT—
CHENIERE
ENERGY PARTNERS, L.P.
CONDENSED
STATEMENT OF OPERATIONS
(in
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
| Revenues | $ | — | $ | — | $ | — | ||||||
|
Operating
costs and expenses
|
12,286 | 1,742 | 882 | |||||||||
|
Loss
from operations
|
(12,286 | ) | (1,742 | ) | (882 | ) | ||||||
|
Interest
expense, net
|
(13 | ) | (114 | ) | (13 | ) | ||||||
|
Interest
income
|
406 | 2,225 | 3,308 | |||||||||
|
Other
income
|
— | 234 | — | |||||||||
|
Equity income
(losses) of affiliates
|
198,805 | (78,947 | ) | (51,365 | ) | |||||||
|
Net income
(loss)
|
$ | 186,912 | $ | (78,344 | ) | $ | (48,952 | ) | ||||
See
accompanying notes to condensed financial statements.
77
SCHEDULE
I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT—
CHENIERE
ENERGY PARTNERS, L.P.
CONDENSED
STATEMENT OF CASH FLOWS
(in
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
$ | (10,411 | ) | $ | (1,707 | ) | $ | (621 | ) | |||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Iinvestment
in restricted cash and cash equivalents
|
— | — | (10,851 | ) | ||||||||
|
Investment
in restricted U.S. Treasury securities
|
— | — | (63,923 | ) | ||||||||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
— | — | (74,774 | ) | ||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Distributions
received from Sabine Pass LNG, L.P.
|
295,684 | — | — | |||||||||
|
Distributions
to owners
|
(280,674 | ) | (45,824 | ) | (23,668 | ) | ||||||
|
Use
of restricted cash and cash equivalents
|
32,757 | 45,824 | — | |||||||||
|
Special
rights adjustment
|
(34,879 | ) | — | — | ||||||||
|
Repayment
of long-term note—affiliate
|
(2,467 | ) | — | — | ||||||||
|
Borrowings
under long-term note—affiliate
|
114 | 1,708 | 632 | |||||||||
|
Proceeds
from issuance of common units
|
— | — | 98,442 | |||||||||
|
Other
|
— | (3 | ) | (3 | ) | |||||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
10,535 | 1,705 | 75,403 | |||||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
124 | (2 | ) | 8 | ||||||||
|
CASH
AND CASH EQUIVALENTS—BEGINNING OF YEAR
|
6 | 8 | — | |||||||||
|
CASH
AND CASH EQUIVALENTS—END OF YEAR
|
$ | 130 | $ | 6 | $ | 8 | ||||||
See
accompanying notes to condensed financial statements.
78
CHENIERE
ENERGY PARTNERS, L.P.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
NOTE
1—Summary of Significant Accounting Policies
The
condensed financial statements represent the financial information required by
Securities and Exchange Commission Regulation S-X 5-04 for Cheniere Energy
Partners, L.P. (“Cheniere Energy Partners”).
In the
condensed financial statements, Cheniere Energy Partners’ investments in
affiliates are presented under the equity method of accounting. Under this
method, the assets and liabilities of affiliates are not consolidated. The
investments in net assets of the affiliates are recorded in the balance sheets.
The gain/(loss)loss from operations of the affiliates is reported on a net basis
as equity in net gains/(losses) of affiliates.
A
substantial amount of Cheniere Energy Partners’ operating, investing, and
financing activities are conducted by its affiliates. The condensed financial
statements should be read in conjunction with Cheniere Energy Partners’
Consolidated Combined Financial Statements in Part II, Item 8. of this
annual report on Form 10-K.
NOTE 2—SUPPLEMENTAL CASH FLOW
INFORMATION AND DISCLOSURES OF NON-CASH TRANSACTIONS
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Non-cash
capital contributions (1)
|
$ | 198,805 | $ | (78,947 | ) | $ | (51,365 | ) | ||||
|
(1)
|
Amounts
represent equity gains (losses) of affiliates not funded by Cheniere
Energy Partners.
|
79
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
CHENIERE ENERGY PARTNERS,
L.P.
|
||
|
By:
|
Cheniere
Energy Partners GP, LLC,
its
general partner
|
|
|
By:
|
/s/ CHARIF SOUKI
|
|
|
Charif
Souki
Chief
Executive Officer and
Chairman
of the Board
|
||
|
|
Date:
February 25, 2010
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the general partner of the
registrant and in the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ CHARIF SOUKI
|
Chief
Executive Officer & Chairman of the Board
(Principal
Executive Officer)
|
February 25,
2010
|
|
Charif
Souki
|
||
|
/s/ R.
KEITH TEAGUE
|
President
and Chief Operating Officer,
Director (Principal Operating Officer)
|
February 25,
2010
|
|
R.
Keith Teague
|
||
|
/s/ Meg A. Gentle
|
Senior
Vice President & Chief Financial Officer,
Director
(Principal Financial Officer))
|
February 25,
2010
|
|
Meg
A. Gentle
|
||
|
/s/ JERRY D. SMITH
|
Chief
Accounting Officer
(Principal
Accounting Officer)
|
February 25,
2010
|
|
Jerry
D. Smith
|
||
|
/s/ JAMES D. BENNETT
|
Director
|
February 25,
2010
|
|
James
D. Bennett
|
||
|
/s/ Michael E. Bock
|
Director
|
February 25,
2010
|
|
Michael
E. Bock
|
||
|
/s/ LON MCCAIN
|
Director
|
February 25,
2010
|
|
Lon
McCain
|
||
|
/s/ ROBERT J. SUTCLIFFE
|
Director
|
February 25,
2010
|
|
Robert
J. Sutcliffe
|
||
|
/s/ ROBERT J. SUTCLIFFE
|
Director
|
February 25,
2010
|
|
Robert
J. Sutcliffe
|
||
| /s/ WALTER L. WILLIAMS | Director | February 25, 2010 |
| Walter L. Williams | ||
| /s/ Don A. Turkleson | Director | February 25, 2010 |
|
Don
A. Turkleson |
80