Attached files
file | filename |
---|---|
EX-31.2 - EXHIBIT 31.2 - Sabine Pass LNG, L.P. | exhibit_31-2.htm |
EX-32.2 - EXHIBIT 32.2 - Sabine Pass LNG, L.P. | exhibit_32-2.htm |
EX-32.1 - EXHIBIT 32.1 - Sabine Pass LNG, L.P. | exhibit_32-1.htm |
EX-31.1 - EXHIBIT 31.1 - Sabine Pass LNG, L.P. | exhibit_31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
S
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
to
Commission
File No. 333-138916
Sabine
Pass LNG, L.P.
(Exact
name of registrant as specified in its charter)
Delaware
|
20-0466069
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
700
Milam Street, Suite 800
Houston,
Texas
|
77002
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(713)
375-5000
(Registrant’s
telephone number, including area code)
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 (§232.405 of this
chapter) 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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated filer |
¨
|
||||
Non-accelerated
filer x
|
Smaller reporting company |
¨
|
||||
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Indicate
the number of shares outstanding of the issuer’s classes of common stock, as of
the latest practicable date: not applicable
SABINE
PASS LNG, L.P.
INDEX
TO FORM 10-Q
PART
I. FINANCIAL INFORMATION
Item 1.
|
Consolidated
Financial Statements
|
1
|
Consolidated
Balance Sheets
|
1
|
|
Consolidated
Statements of Operations
|
2
|
|
Consolidated
Statement of Partners’ Deficit
|
3
|
|
Consolidated
Statements of Cash Flows
|
4
|
|
Notes
to Consolidated Financial Statements
|
5
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
20
|
Item 4.
|
Disclosure
Controls and Procedures
|
20
|
PART
II. OTHER INFORMATION
Item 1.
|
Legal
Proceedings
|
21
|
Item 6.
|
Exhibits
|
21
|
i
PART
I. FINANCIAL INFORMATION
Item 1.
|
Consolidated
Financial Statements
|
SABINE
PASS LNG, L.P.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
September
30,
2009
|
December
31,
2008
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 121,402 | $ | 194,827 | ||||
Restricted
cash and cash equivalents
|
54,929 | 41,158 | ||||||
Accounts
and interest receivable
|
4,020 | 361 | ||||||
Accounts
receivable—affiliate
|
360 | 419 | ||||||
Advances
to affiliate
|
6,656 | 2,198 | ||||||
Advances
to affiliate—LNG inventory
|
3,490 | — | ||||||
Prepaid
expenses and other
|
3,953 | 5,407 | ||||||
TOTAL
CURRENT ASSETS
|
194,810 | 244,370 | ||||||
NON-CURRENT
RESTRICTED CASH AND CASH EQUIVALENTS
|
82,394 | 126,056 | ||||||
PROPERTY,
PLANT AND EQUIPMENT, NET
|
1,605,079 | 1,517,507 | ||||||
DEBT
ISSUANCE COSTS, NET
|
27,907 | 30,748 | ||||||
ADVANCES
UNDER LONG-TERM CONTRACTS
|
728 | 10,705 | ||||||
ADVANCES
TO AFFILIATE—LNG HELD FOR COMMISSIONING
|
— | 9,923 | ||||||
OTHER
|
7,666 | 5,036 | ||||||
TOTAL
ASSETS
|
$ | 1,918,584 | $ | 1,944,345 | ||||
LIABILITIES
AND PARTNERS’ DEFICIT
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 19 | $ | 117 | ||||
Accounts
payable—affiliate
|
640 | 514 | ||||||
Accrued
liabilities
|
74,375 | 40,769 | ||||||
Accrued
liabilities—affiliate
|
1,902 | 184 | ||||||
Deferred
revenue
|
26,196 | 2,500 | ||||||
Deferred
revenue—affiliate
|
63,215 | 62,742 | ||||||
Derivative
liabilities
|
409 | — | ||||||
TOTAL
CURRENT LIABILITIES
|
166,756 | 106,826 | ||||||
LONG-TERM
DEBT, NET OF DISCOUNT
|
2,109,493 | 2,107,673 | ||||||
LONG-TERM
DEBT, NET OF DISCOUNT—RELATED PARTY
|
72,362 | 70,661 | ||||||
DEFERRED
REVENUE
|
34,500 | 37,500 | ||||||
DEFERRED
REVENUE—AFFILIATE
|
7,360 | 4,971 | ||||||
OTHER
NON-CURRENT LIABILITIES
|
331 | 340 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
— | — | ||||||
PARTNERS’
DEFICIT
|
(472,218 | ) | (383,626 | ) | ||||
TOTAL
LIABILITIES AND PARTNERS’ DEFICIT
|
$ | 1,918,584 | $ | 1,944,345 |
See
accompanying notes to consolidated financial statements.
1
SABINE
PASS LNG, L.P.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands)
(unaudited)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUES
|
||||||||||||||||
Revenues
|
$ | 65,035 | $ | — | $ | 97,112 | $ | — | ||||||||
Revenues—affiliate
|
63,498 | — | 189,665 | — | ||||||||||||
TOTAL
REVENUES
|
128,533 | — | 286,777 | — | ||||||||||||
EXPENSES
|
||||||||||||||||
Operating
and maintenance expense
|
4,752 | 3,256 | 14,445 | 3,434 | ||||||||||||
Operating
and maintenance expense—affiliate
|
2,810 | 447 | 8,393 | 447 | ||||||||||||
Depreciation
expense
|
8,905 | 1,874 | 22,711 | 1,911 | ||||||||||||
Development
expense
|
— | 364 | — | 1,140 | ||||||||||||
Development
expense—affiliate
|
— | — | — | 1,380 | ||||||||||||
General
and administrative expense
|
415 | 364 | 858 | 1,288 | ||||||||||||
General
and administrative expense—affiliate
|
2,294 | 3,086 | 7,064 | 6,009 | ||||||||||||
TOTAL
EXPENSES
|
19,176 | 9,391 | 53,471 | 15,609 | ||||||||||||
INCOME
(LOSS) FROM OPERATIONS
|
109,357 | (9,391 | ) | 233,306 | (15,609 | ) | ||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
62 | 1,695 | 486 | 10,304 | ||||||||||||
Interest
expense, net
|
(38,089 | ) | (17,704 | ) | (104,370 | ) | (47,557 | ) | ||||||||
Derivative
gain, net
|
1,158 | 14,692 | 4,482 | 2,325 | ||||||||||||
Other
|
— | 5 | 12 | 35 | ||||||||||||
TOTAL
OTHER EXPENSE
|
(36,869 | ) | (1,312 | ) | (99,390 | ) | (34,893 | ) | ||||||||
NET
INCOME (LOSS)
|
$ | 72,488 | $ | (10,703 | ) | $ | 133,916 | $ | (50,502 | ) |
See
accompanying notes to consolidated financial statements.
2
SABINE
PASS LNG, L.P.
CONSOLIDATED
STATEMENTS OF PARTNERS’ DEFICIT
(in
thousands)
(unaudited)
General
Partner
Sabine
Pass
LNG-GP,
Inc.
|
Limited
Partner Sabine Pass
LNG-LP,
LLC
|
Accumulated
Other
Comprehensive Income
|
Total
Partners’
Deficit
|
|||||||||||||
Balance
at December 31, 2008
|
$ | — | $ | (383,626 | ) | $ | — | $ | (383,626 | ) | ||||||
Distribution
to owner
|
— | (222,508 | ) | — | (222,508 | ) | ||||||||||
Net
income
|
— | 133,916 | — | 133,916 | ||||||||||||
Balance
at September 30, 2009
|
$ | — | $ | (472,218 | ) | $ | — | $ | (472,218 | ) |
See accompanying notes to consolidated
financial statements.
3
SABINE
PASS LNG, L.P.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | 133,916 | $ | (50,502 | ) | |||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
|
22,711 | 1,911 | ||||||
Non-cash
derivative gain (loss)
|
1,639 | (3,751 | ) | |||||
Amortization
of debt issuance costs
|
2,863 | 2,890 | ||||||
Amortization
of debt discount
|
3,521 | 196 | ||||||
Interest
income on restricted cash and cash equivalents
|
— | (12,330 | ) | |||||
Use
of (investment in) restricted cash and cash equivalents
|
(41,197 | ) | 36,018 | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
and interest receivable
|
141 | 2,467 | ||||||
Accounts
receivable—affiliate
|
59 | (6,118 | ) | |||||
Accounts
payable and accrued liabilities
|
33,239 | 26,366 | ||||||
Accounts
payable and accrued liabilities—affiliate
|
1,844 | 8,536 | ||||||
Advances
to affiliate
|
(4,458 | ) | (2,544 | ) | ||||
Deferred
revenue
|
21,170 | 17,388 | ||||||
Prepaid
and other
|
227 | (5,527 | ) | |||||
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
175,675 | 15,000 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Use
of restricted cash and cash equivalents
|
71,088 | 466,101 | ||||||
LNG
terminal construction-in-process, net
|
(97,253 | ) | (333,848 | ) | ||||
Advances
under long-term contracts
|
(404 | ) | (7,077 | ) | ||||
Advances
to affiliate—LNG held for commissioning, net of amounts transferred to LNG
receiving terminal construction-in-process
|
— | (16,595 | ) | |||||
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
(26,569 | ) | 108,581 | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Distribution
to owner
|
(222,508 | ) | — | |||||
Proceeds
from issuance of senior notes
|
— | 144,965 | ||||||
Debt
issuance costs
|
(23 | ) | (4,586 | ) | ||||
Use
of restricted cash and cash equivalents
|
— | (99,543 | ) | |||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(222,531 | ) | 40,836 | |||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(73,425 | ) | 164,417 | |||||
CASH
AND CASH EQUIVALENTS—beginning of period
|
194,827 | — | ||||||
CASH
AND CASH EQUIVALENTS—end of period
|
$ | 121,402 | $ | 164,417 |
See
accompanying notes to consolidated financial statements.
4
SABINE
PASS LNG, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1—Basis of Presentation
The
accompanying unaudited Consolidated Financial Statements of Sabine Pass LNG,
L.P. have been prepared in accordance with generally accepted accounting
principles in the United States (“GAAP”) for interim financial information and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
Certain items in the prior year financial statements have been reclassified to
conform to the 2009 presentation. In our opinion, all adjustments, consisting
only of normal recurring adjustments necessary for a fair presentation, have
been included. As used in these Notes to Consolidated Financial Statements, the
terms “Sabine Pass LNG,” “the Company,” “we”, “us” and “our” refer to Sabine
Pass LNG, L.P. and its consolidated subsidiary, unless otherwise stated or
indicated by context.
Results
of operations for the three and nine months ended September 30, 2009 are not
necessarily indicative of the results of operations that will be realized for
the year ended December 31, 2009.
We are
not a taxable entity for federal income tax purposes. As such, we do not
directly pay federal income tax. Our taxable income or loss, which may vary
substantially from the net income or loss reported in the Consolidated
Statements of Operations, is includable in the federal income tax returns of
each partner. The aggregate difference in the basis of our net assets for
financial and income tax purposes cannot be readily determined as we do not have
access to the information about each partner’s tax attributes related to
us.
In the
second quarter of 2009, we purchased Sabine Pass Tug Services, LLC (“Tug
Services”), a wholly owned subsidiary of Cheniere Energy, Inc.
(“Cheniere”). As a result, we acquired a lease (the “Tug Agreement”)
for the use of tug boats and marine services at our LNG receiving terminal (see
Note 9—“Lease”). In connection with this acquisition, Tug Services entered into
a Terminal Marine Services Agreement (the “Tug Sharing Agreement”) with our
three terminal use agreement (“TUA”) customers to provide their LNG cargo
vessels with tug boat and marine services at our LNG receiving terminal (see
Note 9—“Lease”).
We have
evaluated subsequent events through November 5, 2009.
For
further information, refer to the financial statements and footnotes included in
our annual report on Form 10-K for the year ended December 31,
2008.
NOTE
2—Advances to Affiliate—LNG Held for Commissioning
Liquified
natural gas (“LNG”) purchased on our behalf by Cheniere Marketing, LLC
(“Cheniere Marketing”), formerly Cheniere Marketing, Inc., a wholly-owned
subsidiary of Cheniere, for commissioning of the LNG storage tanks and other LNG
regasification equipment has been funded by us 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 8 —“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 us. The LNG used in the commissioning process is capitalized net of amounts
received from the sale of natural gas.
As of
September 30, 2009, commissioning activities and construction of our LNG
receiving terminal were substantially complete; therefore we no longer needed
the remaining LNG for commissioning. We had 1,115,000 MMBtu of Advances to
Affiliate—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 the LNG inventory that we retained
for operational needs.
At
December 31, 2008, we had $9.9 million recorded as Advances to
Affiliate—LNG Held for Commissioning on our Consolidated Balance
Sheets.
5
SABINE
PASS LNG, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
NOTE
3—Restricted Cash and Cash Equivalents
Restricted
cash and cash equivalents consist of cash that has been contractually restricted
as to usage or withdrawal, as follows:
Sabine
Pass LNG Receiving Terminal Construction Reserve
In
November 2006, we 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, we 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 6—“Long-term Debt”). Under the terms
and conditions of the Senior Notes, we were required to fund a cash reserve
account for approximately $987 million to pay construction costs for our LNG
receiving terminal. The cash account is controlled by a collateral trustee, and
therefore, was shown as restricted cash and cash equivalents on our Consolidated
Balance Sheets. As of September 30, 2009, the Sabine Pass LNG receiving terminal
construction reserve account balance was zero. As of December 31, 2008,
$27.4 million related to accrued construction costs were classified as part of
current restricted cash and cash equivalents, and $43.7 million related to
remaining construction costs were classified as a non-current asset on our
Consolidated Balance Sheets.
Sabine
Pass LNG Notes Debt Service Reserve
As
described above, we consummated private offerings of an aggregate principal
amount of $2,215.5 million of Senior Notes (See Note 6—“Long-term Debt”). Under
the Sabine Pass Indenture governing the Senior Notes, except for permitted tax
distributions, we 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. In addition,
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 September 30, 2009 and
December 31, 2008, we classified $54.9 million and $13.7 million,
respectively, as current restricted cash and cash equivalents for the payment of
interest due within twelve months. As of September 30, 2009 and
December 31, 2008, we classified $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.
6
SABINE
PASS LNG, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
NOTE
4—Property, Plant and Equipment
Property,
plant and equipment is comprised of LNG terminal construction-in-process
expenditures, LNG site and related costs and fixed assets, as follows (in
thousands):
September
30,
2009
|
December
31,
2008
|
|||||||
LNG
TERMINAL COSTS
|
||||||||
LNG
receiving terminal
|
$ | 1,596,236 | $ | 919,776 | ||||
LNG
terminal construction-in-process
|
38,066 | 604,398 | ||||||
LNG
site and related costs, net
|
178 | 183 | ||||||
Accumulated
depreciation
|
(30,084 | ) | (7,752 | ) | ||||
Total
LNG terminal costs, net
|
1,604,396 | 1,516,605 | ||||||
FIXED
ASSETS
|
||||||||
Computer
and office equipment
|
259 | 200 | ||||||
Vehicles
|
421 | 421 | ||||||
Machinery
and equipment
|
751 | 751 | ||||||
Other
|
359 | 254 | ||||||
Accumulated
depreciation
|
(1,107 | ) | (724 | ) | ||||
Total
fixed assets, net
|
683 | 902 | ||||||
PROPERTY,
PLANT AND EQUIPMENT, NET
|
$ | 1,605,079 | $ | 1,517,507 |
Costs
associated with the construction of our LNG receiving terminal have been
capitalized as construction-in-process since the date the project satisfied our
criteria for capitalization. For the nine-month periods ended September 30, 2009
and 2008, we capitalized $25.6 million and $69.4 million of interest
expense related to the construction of our LNG receiving terminal,
respectively.
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 our 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 our LNG receiving terminal when they
were ready for use in the third quarter of 2009. Our 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 our LNG receiving terminal with similar estimated useful lives have a
depreciable range between 10 and 50 years.
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. Our recognition of
asset retirement obligations is described below:
Sabine
Pass LNG Receiving Terminal
Based on
the real property lease agreement at our LNG receiving terminal, at the
expiration of the term of the lease we are required to surrender our LNG
receiving terminal in good working order and repair, with normal wear and tear
and casualty expected. Our property lease agreement at our 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 our LNG receiving terminal in the required condition will be
minimal, and therefore have not recorded an ARO associated with our LNG
receiving terminal.
7
SABINE
PASS LNG, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
NOTE
5—Accrued Liabilities
As of
September 30, 2009 and December 31, 2008, accrued liabilities consisted of
the following (in thousands):
September
30,
2009
|
December
31,
2008
|
|||||||
Interest
and related debt fees
|
$ | 55,349 | $ | 14,152 | ||||
LNG
terminal construction costs
|
19,026 | 26,617 | ||||||
Affiliate
|
1,902 | 184 | ||||||
Accrued
liabilities
|
$ | 76,277 | $ | 40,953 |
NOTE
6—Long-term Debt
As of
September 30, 2009 and December 31, 2008, our long-term debt consisted of
the following (in thousands):
September
30,
2009
|
December
31,
2008
|
|||||||
Senior
Notes, net of discount
|
$ | 2,109,493 | $ | 2,107,673 | ||||
Senior
Notes, net of discount—related party
|
72,362 | 70,661 | ||||||
Total long-term debt, net of
discount
|
$ | 2,181,855 | $ | 2,178,334 |
In
November 2006, we 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, we 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. One of the lenders of the additional
issuance of the 2016 Notes is GSO Capital Partners, L.P. (“GSO”). GSO, a related
party, did not receive any fees in connection with the additional issuance of
2016 Notes. The additional issuance and the previously outstanding 2016 Notes
are treated as a single series of notes under the Sabine Pass Indenture. We
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 our LNG receiving terminal. In addition, we placed $40.8
million of the remaining net proceeds into an account in accordance with the
cash waterfall requirements of the security deposit agreement we entered into in
connection with the Senior Notes, which are used by us 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 our equity interests and substantially
all of our operating assets. Under the Sabine Pass Indenture, except for
permitted tax distributions, we 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 three and nine-month periods
ended September 30, 2009, we made distributions of $73.2 million and $222.5
million, respectively, to our owners after satisfying all the applicable
conditions in the Sabine Pass Indenture.
NOTE
7—Financial 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”). The net cost (LNG commissioning cargo purchase price less natural
gas sales proceeds) of our LNG commissioning cargoes is capitalized on our
Consolidated Balance Sheets, as it is directly related to the LNG receiving
terminal construction and is 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.
8
SABINE
PASS LNG, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Effective
January 1, 2008, we adopted accounting standards that establish 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 September 30, 2009:
Quoted Prices in
Active Markets for
Identical Instruments
(Level
1)
|
Significant Other
Observable Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Total Carrying
Value
|
|||||||||||||
Derivatives
liability
|
$ | 409 | $ | — | $ | — | $ | 409 |
Derivatives
liability reflect positions held by Cheniere Marketing on our behalf related to
natural gas swaps entered into to hedge the cash flows from the sale of excess
LNG purchased for commissioning.
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
receivable and accounts payable approximate fair value due to their short-term
nature.
Financial
Instruments (in thousands):
September
30,
|
December
31,
|
|||||||||||||||
2009
|
2008
|
|||||||||||||||
Carrying
Amount
|
Estimated
Fair
Value
|
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||||||||
2013
Notes (1)
|
$ | 550,000 | $ | 492,250 | $ | 550,000 | $ | 412,500 | ||||||||
2016
Notes, net of discount (1)
|
1,631,855 | 1,387,077 | 1,628,334 | 1,204,967 |
(1)
|
The
fair value of the Senior Notes, net of discount, is based on quotations
obtained from broker-dealers who made markets in these and similar
instruments as of September 30, 2009 and December 31, 2008, as
applicable.
|
NOTE
8—Related Party Transactions
As of
September 30, 2009 and December 31, 2008, we had $6.7 million and $2.2
million, respectively, of advances to affiliates. 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 the third quarter of 2028. Cheniere has
guaranteed Cheniere Marketing’s obligations under its TUA.
LNG
Lease Agreement
In
September 2008, we entered into an agreement in the form of a lease with
Cheniere Marketing that enabled us to hedge the exposure to variability in
expected future cash flows of our commissioning cargoes. The agreement permits
Cheniere Marketing to deliver LNG to our 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 our LNG receiving terminal. Under the terms
of the agreement, we pay Cheniere Marketing a fixed fee based on the delivered
quantity of LNG in each LNG cargo. We assume full price risk of the purchase and
sale of the LNG and also finance all activities relating to the LNG. Cheniere
Marketing holds title to the LNG at all times and sells all redelivered LNG and
remits the net proceeds from such sales back to us.
9
SABINE
PASS LNG, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
LNG
purchased on our behalf by Cheniere Marketing that has been funded by us 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.
LNG that is lost, used as fuel or sold results 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, we advanced Cheniere Marketing funds to purchase LNG. As of September 30,
2009, commissioning activities and construction of our LNG receiving terminal
were substantially complete; therefore we no longer needed the remaining LNG for
commissioning. We had 1,115,000 MMBtu of Advances to Affiliate—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 the LNG inventory that we retained for operational
needs.
At
December 31, 2008, we had $9.9 million recorded as Advances to
Affiliate—LNG Held for Commissioning on our Consolidated Balance
Sheets.
During
the nine-month periods ended September 30, 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, we 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 our LNG receiving
terminal. Prior to substantial completion of our LNG receiving terminal, as
defined in our engineering, procurement and construction (“EPC”) contract with
Bechtel Corporation (“Bechtel”), we were 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 our 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 us and the
counterparty at the beginning of each operating year. In addition, we are
required to reimburse the counterparty for its operating expenses, which consist
primarily of labor expenses.
In
February 2005, we entered into a 20-year management services agreement with our
general partner, which is a wholly-owned subsidiary of Cheniere Energy Partners,
L.P. (“Cheniere Partners”), pursuant to which our general partner was appointed
to manage the construction and operation of our LNG receiving terminal,
excluding those matters provided for under the operation and maintenance
agreement described in the paragraph above. In August 2008, our general partner
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 our LNG receiving
terminal, as defined in our EPC contract with Bechtel, we were required to pay
Cheniere Terminals a monthly fixed fee of $340,000 (indexed for inflation). With
the achievement of substantial completion of our LNG receiving terminal in March
2009, the monthly fixed fee increased to $520,000 (indexed for
inflation).
During
the three-month periods ended September 30, 2009 and 2008, we paid an aggregate
of $2.0 million and $1.3 million, respectively, under the foregoing service
agreements from cash and restricted cash and cash equivalents. During the
nine-month periods ended September 30, 2009 and 2008, we paid an aggregate of
$6.1 million and $3.9 million, respectively, under the foregoing service
agreements from cash and restricted cash and cash equivalents.
10
SABINE
PASS LNG, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
Agreement
to Fund Our Cooperative Endeavor Agreements
In July
2007, we executed Cooperative Endeavor Agreements (“CEAs”) with various Cameron
Parish, Louisiana taxing authorities that allow them to collect certain annual
property tax payments from us 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 our payments of annual ad valorem taxes, Cameron Parish will grant
us a dollar for dollar credit against future ad valorem taxes to be levied
against our LNG receiving terminal starting in 2019. In September 2007, we
modified our TUA with Cheniere Marketing, pursuant to which Cheniere Marketing
will pay us 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 us under its TUA starting in 2019. These TUA payments were recorded
to other assets, and payments from Cheniere Marketing that we utilized to make
the ad valorem tax payments were recorded as deferred revenue. As of September
30, 2009 and December 31, 2008, we had $7.4 million and $5.0 million of
other assets and deferred revenue resulting from our 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 nine-month periods ended
September 30, 2009 and 2008, we did not sell or purchase any natural gas under
our purchase and sale agreements with Cheniere Marketing.
Contract
for Commissioning Activities
We have
entered into a number of related party agreements for commissioning activities
with Cheniere Marketing. During the three-month periods ended September 30, 2009
and 2008, we paid an aggregate of zero and $1.8 million, respectively, under
these commissioning activities agreements with Cheniere Marketing. During the
nine-month periods ended September 30, 2009 and 2008, we paid an aggregate of
zero and $32.8 million, respectively, under these commissioning activities
agreements with Cheniere Marketing.
NOTE
9—Lease
As
described in Note 1—“Basis of Presentation,” in the second quarter of 2009 we
acquired a lease for the use of tug boats and marine services at our LNG
receiving terminal as a result of our 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 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 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.
NOTE
10—Supplemental Cash Flow Information and disclosures of Non-cash
Transactions
The
following table provides supplemental disclosure of cash flow information (in
thousands):
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Cash
paid for interest, net of amounts capitalized
|
$ | 56,767 | $ | 6,104 | ||||
Construction-in-process
and debt issuance additions funded with accrued
liabilities
|
7,916 | 43,406 |
11
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
This
quarterly report contains certain statements that are, or may be deemed to be,
“forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All
statements, other than statements of historical fact, included herein are
“forward-looking statements.” Included among “forward-looking statements” are,
among other things:
|
•
|
statements
relating to the operation of the Sabine Pass liquefied natural gas (“LNG”)
receiving terminal, including statements concerning the costs related
thereto and certain characteristics, including amounts of regasification
and storage capacity;
|
|
•
|
statements
relating to the construction and operation of facilities related to the
Sabine Pass LNG receiving terminal;
|
|
•
|
statements
regarding any financing transactions or arrangements, or ability to enter
into such transactions or
arrangements;
|
|
•
|
statements
regarding any terminal use agreement (“TUA”) or other agreement 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 LNG regasification
capacity that are, or may become, subject to TUAs or other
contracts;
|
|
•
|
statements
regarding counterparties to our TUAs, construction contracts and other
contracts;
|
|
•
|
statements
regarding any business strategies, any business plans or any other plans,
forecasts, projections or objectives, any or all of which are subject to
change;
|
|
•
|
statements
regarding any assumptions, estimates, projections or
conclusions;
|
|
•
|
statements
regarding conflicts of interest with Cheniere Energy, Inc. (“Cheniere”)
and its affiliates;
|
|
•
|
statements
regarding legislative, governmental, regulatory, administrative or other
public body actions, requirements, permits, investigations, proceedings or
decisions; and
|
|
•
|
any
other statements that relate to non-historical or future
information.
|
These
forward-looking statements are often identified by the use of terms such as
“achieve,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “plan,”
“potential,” “project,” “propose,” “strategy” and similar terms. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, they 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
quarterly report.
Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of a variety of factors, including those
discussed under “Risk Factors” in our annual report on Form 10-K for the year
ended December 31, 2008. All forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
these risk factors. Other than as required under the securities laws, we assume
no obligation to update or revise these forward-looking statements or provide
reasons why actual results may differ.
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 financial statements and the accompanying notes in Item 1.
“Financial Statements.” This information is intended to provide investors with
an understanding of our past performance, current financial condition and
outlook for the future.
12
Overview
In 2003,
we were formed by Cheniere to own, develop and operate the Sabine Pass LNG
receiving terminal. We are a Houston-based partnership formed with one general
partner, Sabine Pass LNG-GP, Inc. (“Sabine Pass GP”), an indirect subsidiary of
Cheniere, and one limited partner, Sabine Pass LNG-LP, LLC (“Sabine Pass
LNG-LP”), an indirect subsidiary of Cheniere. Cheniere has a 90.6% ownership
interest in Cheniere Energy Partners, L.P. (“Cheniere Partners”), which is the
100% parent of Sabine Pass GP and Sabine Pass LNG-LP and, indirectly,
us.
In the
second quarter of 2009, we 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 our
LNG receiving terminal. 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 our LNG receiving terminal.
Following
the achievement of commercial operability of our LNG receiving terminal in
September 2008, we began receiving capacity reservation fee payments from
Cheniere Marketing, LLC (“Cheniere Marketing”), formerly Cheniere Marketing,
Inc., a wholly-owned subsidiary of Cheniere, under its TUA. In December 2008,
Cheniere Marketing began paying us its monthly capacity reservation fee payment
on a quarterly basis. We 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 of $10.3
million.
Overview
of Significant 2009 Events
In the
first nine months of 2009, we maintained commercial operability of our LNG
receiving terminal and continued to execute our strategy to complete
construction of our LNG receiving terminal and to generate steady and reliable
revenues under our long-term TUAs. The major events of the first nine months of
2009 include the following:
|
•
|
receipt
of capacity reservation fee payments from Cheniere Marketing, Total and
Chevron;
|
|
•
|
purchase,
transportation and successful unloading of an additional LNG commissioning
cargo for our LNG receiving terminal;
and
|
|
•
|
substantially
completed construction and achieved full operability of our 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.
|
Liquidity
and Capital Resources
Available
Cash
As of
September 30, 2009, we had $121.4 million in cash and cash equivalents and
$137.3 million in restricted cash and cash equivalents which is restricted 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 we receive revenues from Cheniere Marketing (or
Cheniere, as guarantor), we expect to have sufficient cash flow from payments
made under our Total and Chevron TUAs to meet our future operating expenditures
and our interest payment requirements until maturity of the 2013 Notes.
Construction
Construction
at our LNG receiving terminal was substantially completed in the third quarter
of 2009. Our estimated aggregate construction, commissioning and operating cost
budget through the achievement of full operability of our 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) was
approximately $1,559 million, excluding financing costs. As of September 30,
2009, we had substantially completed construction and attained full operability
of our LNG receiving terminal, and such was accomplished within our
budget.
13
TUA
Revenues
The
entire approximately 4.0 Bcf/d of regasification capacity at our 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 our 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 our 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 us 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 us 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 has agreed to make capacity reservation
fee payments aggregating approximately $250 million per year for the period from
January 2009 through at least the third quarter of 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, we are also entitled to retain 2% of the LNG delivered for
the customer’s account, which we will use primarily as fuel for revaporation and
self-generated power at our receiving terminal.
Each of
Total and Chevron previously paid us $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 fees payable under its
respective TUA.
Sources
and Uses of Cash
The
following table (in thousands) and the explanatory paragraphs following the
table summarize the sources and uses of our cash and cash equivalents for the
nine months ended September 30, 2009 and 2008. 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 document.
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
SOURCES
OF CASH AND CASH EQUIVALENTS
|
||||||||
Operating
cash flow
|
$ | 175,675 | $ | 15,000 | ||||
Use
of restricted cash and cash equivalents
|
71,088 | 466,101 | ||||||
Borrowings
from debt
|
— | 144,965 | ||||||
Total
sources of cash and cash equivalents
|
246,763 | 626,066 | ||||||
USES
OF CASH AND CASH EQUIVALENTS
|
||||||||
Distribution
to owners
|
(222,508 | ) | — | |||||
LNG
terminal construction-in-process, net
|
(97,253 | ) | (333,848 | ) | ||||
Debt
issuance costs
|
(23 | ) | (4,586 | ) | ||||
Advances
under long-term contracts
|
(404 | ) | (7,077 | ) | ||||
Investment
in restricted cash and cash equivalents
|
— | (99,543 | ) | |||||
Advances
to affiliate—LNG held for commissioning, net of transfers to LNG receiving
terminal construction-in-process
|
— | (16,595 | ) | |||||
Total
uses of cash and cash equivalents
|
(320,188 | ) | (461,649 | ) | ||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(73,425 | ) | 164,417 | |||||
CASH
AND CASH EQUIVALENTS—beginning of period
|
194,827 | — | ||||||
CASH
AND CASH EQUIVALENTS—end of period
|
$ | 121,402 | $ | 164,417 |
14
Operating
cash flow
Cash and
cash equivalents from operations increased $160.7 million for the nine months
ended September 30, 2009 compared to the same period in 2008. The increase in
operating cash flow resulted from obtaining TUA reservation fee payments from
Cheniere Marketing, Total and Chevron in the nine-month period ended September
30, 2009.
Use
of restricted cash and cash equivalents
In
November 2006, we 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, we issued an additional $183.5 million, before
discount, of 2016 Notes whose terms were identical to the previously outstanding
2016 Notes. Under the indenture governing the Senior Notes (the “Sabine Pass
Indenture”), a portion of the proceeds from the Senior Notes was required to be
used for scheduled interest payments and to fund the cost to complete
construction of our LNG receiving terminal. Due to these restrictions imposed by
the Sabine Pass Indenture, the proceeds are not presented as cash and cash
equivalents. Therefore, when proceeds from the Senior Notes are used, they are
presented as a source of cash and cash equivalents. In the nine months ended
September 30, 2009 and 2008, the $71.1 million and $466.1 million, respectively,
of restricted cash and cash equivalents were used primarily to pay for scheduled
interest payments and construction activities at our LNG receiving
terminal.
Distribution
to owners
During
the nine months ended September 30, 2009, we made a distribution of $222.5
million to our owners after satisfying conditions in the Sabine Pass Indenture
governing our Senior Notes, discussed below.
LNG terminal
construction-in-process, net
Capital
expenditures for our LNG receiving terminal were $97.3 million and $333.8
million in the nine months ended September 30, 2009 and 2008, respectively. Our
capital expenditures decreased in the nine months ended September 30, 2009
compared to the nine months ended September 30, 2008 as a result of the
achievement of commercial operability of the initial 2.6 Bcf/d of sendout
capacity and 10.1 Bcf of storage capacity in September 2008.
Advances
to affiliate—LNG held for commissioning, net of transfers to LNG receiving
terminal construction-in-process
During
the nine-month periods ended September 30, 2009 and 2008, we made zero and $16.6
million, respectively, in advances to Cheniere Marketing, net of transfers to
LNG terminal construction-in-process. As of September 30, 2009, we reclassified
all LNG utilized in the commissioning process to construction-in-process and the
remaining LNG to Advances to affiliate—LNG inventory, as
commissioning activities and construction of our LNG receiving terminal were
substantially complete. As of September 30, 2008, we acquired several LNG
commissioning cargoes for our LNG receiving terminal and successfully unloaded
the LNG into our LNG receiving terminal under an LNG lease agreement with
Cheniere Marketing.
Advances
under long-term contracts
Advances
under long-term contracts decreased in the nine months ended September 30, 2009
compared to the same period in 2008 primarily as a result of the achievement of
substantial completion of commercial operability of the initial 2.6 Bcf/d of
sendout capacity and 10.1 Bcf of storage capacity of our LNG receiving terminal
in September 2008.
Debt
Agreements
Senior
Notes
In
November 2006, we 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, we issued an additional $183.5
million, before discount, of 2016 Notes whose terms were identical to the
previously outstanding 2016 Notes. Interest payments of approximately
$82.4 million are due on May 30 and November 30 of each year on the
$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. Under the Sabine Pass Indenture, except for permitted tax distributions,
we 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
semiannual 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 three
and nine months ended September 30, 2009, we made distributions of $73.2 million
and $222.5 million, respectively, to our owners after satisfying all the
applicable conditions in the Sabine Pass Indenture.
15
Services
Agreements
In
February 2005, we 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 our LNG receiving
terminal. Prior to substantial completion of our LNG receiving terminal, as
defined in our engineering, procurement and construction (“EPC”) contract with
Bechtel Corporation (“Bechtel”), we were 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 our 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 us and the
counterparty at the beginning of each operating year. In addition, we are
required to reimburse the counterparty for its operating expenses, which consist
primarily of labor expenses.
In
February 2005, we entered into a 20-year management services agreement with our
general partner, which is a wholly-owned subsidiary of Cheniere Partners,
pursuant to which our general partner was appointed to manage the construction
and operation of our LNG receiving terminal, excluding those matters provided
for under the operation and maintenance agreement described in the paragraph
above. In August 2008, our general partner 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 our LNG receiving terminal, as defined in our EPC
contract with Bechtel, we were required to pay Cheniere Terminals a monthly
fixed fee of $340,000 (indexed for inflation). With the achievement of
substantial completion of our LNG receiving terminal in March 2009, the monthly
fixed fee increased to $520,000 (indexed for inflation).
During
the three-month periods ended September 30, 2009 and 2008, we paid an aggregate
of $2.0 million and $1.3 million, respectively, under the foregoing service
agreements from cash and restricted cash and cash equivalents. During the
nine-month periods ended September 30, 2009 and 2008, we paid an aggregate of
$6.1 million and $3.9 million, respectively, under the foregoing service
agreements from cash and restricted cash and cash equivalents.
State
Tax Sharing Agreement
In
November 2006, we 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 we are required to file on a combined basis and to timely
pay the combined tax liability. If Cheniere, in its sole discretion, demands
payment, we will pay to Cheniere an amount equal to the Texas franchise tax that
we would be required to pay if our Texas franchise tax liability were computed
on a separate company basis. This agreement contains similar provisions for
other state and local taxes that we and Cheniere are required to file on a
combined, consolidated or unitary basis.
Results
of Operations
Three
Months Ended September 30, 2009 vs. Three Months Ended September 30,
2008
Overall
Operations
Net
income increased $83.2 million from a net loss of $10.7 million in the three
months ended September 30, 2008 compared to net income of $72.5 million for the
three months ended September 30, 2009. The increase in net income was the result
of commencement of revenues under the Cheniere Marketing TUA in October 1,
2008, the Total TUA on April 1, 2009 and the Chevron TUA on July 1,
2009. The increase in revenues was offset by an increase in operating
and maintenance expense from third parties and affiliates and an increase in
deprecation related to the commencement of operations after achieving commercial
operability of the initial 2.6 Bcf/d of sendout capacity and 10.1 Bcf of storage
capacity in the third quarter of 2008.
Operating
and maintenance expense (including affiliate expense)
Operating
and maintenance expense increased $3.9 million in the three months ended
September 30, 2009 compared to the three months ended September 30, 2008. The
increase relates to the commencement of operations as a result of the
achievement of commercial operability of the initial 2.6 Bcf/d of sendout
capacity and 10.1 Bcf of storage capacity of our LNG receiving terminal in the
third quarter of 2008.
16
Depreciation
expense
Depreciation
expense increased $7.0 million in the three months ended September 30, 2009
compared to the three months ended September 30, 2008. This increase was
primarily related to beginning deprecation on the costs associated with our LNG
receiving terminal from the initial 2.6 Bcf/d of sendout capacity and 10.1 Bcf
of storage capacity that was placed into service in the third quarter of 2008
and the remaining 1.4 Bcf/d of sendout capacity and 6.8 Bcf of storage capacity
that was placed into service in the third quarter of 2009.
Interest
Income
Interest
income decreased $1.6 million in the three months ended September 30, 2009
compared to the three months ended September 30, 2008. This decrease was a
result of less unrestricted and restricted cash and cash equivalents invested
and lower interest rates during the three months ended September 30, 2009
compared to the three months ended September 30, 2008.
Interest
Expense, net
Interest
expense, net of amounts capitalized, increased $20.4 million in the three months
ended September 30, 2009 compared to the three months ended September 30, 2008.
This increase in interest expense 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 the three months ended
September 30, 2009 compared to the three months ended September 30, 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 our LNG receiving terminal into service in
September 2008.
Derivative
gain, net
Derivative
gain, net decreased $13.5 million in the three months ended September 30, 2009
from a gain of $14.7 million in the three months ended September 30, 2008
compared to a gain of $1.2 million in the three months ended September 30, 2009.
This decrease in derivative gain, net primarily a resulted from settling our
derivative positions as we used our LNG for commissioning. We use
derivative instruments from time to time to reduce cash flow risk related to the
sale of natural gas resulting from the commissioning process and
operations. As the price of natural gas decreases, these derivative
instruments generally will increase in value.
Nine
Months Ended September 30, 2009 vs. Nine Months Ended September 30,
2008
Overall
Operations
Net
income increased $184.4 million from a net loss of $50.5 million in the nine
months ended September 30, 2008 compared to net income of $133.9 million for the
nine months ended September 30, 2009. The increase in net income was the result
of commencement of revenues under the Cheniere Marketing TUA October 1,
2008, the Total TUA on April 1, 2009 and the Chevron TUA on July 1, 2009. The
increase in revenues was offset by increases in operating and maintenance
expense from third parties and affiliates, deprecation and general and
administrative expenses (“G&A”) as a result of the commencement of
operations after achieving commercial operability of the initial 2.6 Bcf/d of
sendout capacity and 10.1 Bcf of storage capacity of our LNG receiving terminal
in the third quarter of 2008.
Operating
and maintenance expense (including affiliate expense)
Operating
and maintenance expense increased $19.0 million in the nine months ended
September 30, 2009 compared to the nine months ended September 30, 2008. The
increase relates to the commencement of operations as a result of the
achievement of commercial operability of the initial 2.6 Bcf/d of sendout
capacity and 10.1 Bcf of storage capacity of our LNG receiving terminal in the
third quarter of 2008.
Depreciation
expense
Depreciation
expense increased $20.8 million in the nine months ended September 30, 2009
compared to the nine months ended September 30, 2008. This increase was
primarily related to beginning deprecation on the costs associated with the
initial 2.6 Bcf/d of sendout capacity and 10.1 Bcf of storage capacity of our
LNG receiving terminal that was placed into service in the third quarter of
2008.
Interest
Income
Interest
income decreased $9.8 million in the nine months ended September 30, 2009
compared to the nine months ended September 30, 2008. This decrease was a result
of less unrestricted and restricted cash and cash equivalents invested and lower
interest rates during the nine months ended September 30, 2009 compared to the
nine months ended September 30, 2008.
17
Interest
Expense, net
Interest
expense, net of amounts capitalized, increased $56.8 million in the nine months
ended September 30, 2009 compared to the nine months ended September 30, 2008.
This increase in interest expense 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 the nine months ended September
30, 2009 compared to the nine months ended September 30, 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 our LNG receiving terminal into service in September
2008.
Derivative
gain, net
Derivative
gain, net increased $2.2 million in the nine months ended September 30, 2009
from a gain of $2.3 million in the nine months ended September 30, 2008 compared
to a gain of $4.5 million in the nine months ended September 30, 2009. This
increase in derivative gain, net is primarily a result of the decrease in
natural gas commodity prices. We use derivative instruments from time
to time to reduce cash flow risk related to the sale of natural gas resulting
from the commissioning process and operations. As the price of
natural gas decreases, these derivative instruments generally will increase in
value.
Off-Balance
Sheet Arrangements
As of
September 30, 2009, we had no “off-balance sheet arrangements” that may have a
current or future material affect on our financial position or results of
operations.
Summary
of Critical Accounting Policies
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 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. Beginning in 2006,
site rental costs have been expensed.
We
capitalize interest and other related debt costs during the construction period
of our LNG receiving terminal. Upon commencement of operations, capitalized
interest, as a component of the total cost, will be amortized over the estimated
useful life of the asset. Upon commencement of operations, capitalized interest,
as a component of the total cost, will be amortized over the estimated useful
life of the asset.
Revenue
Recognition
LNG
regasification capacity 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 fees payable under its TUA.
18
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 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.
New
Accounting Standards and Recently Issued Accounting Standards Not Yet
Adopted
In April
2009, the Financial Accountings Standard 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 that date is also
required. This disclosure should alert all users of financial statements that an
entity has not evaluated subsequent events after that date set forth in the
financial statements being presented. The Company started adhering to these
requirements in the second quarter of 2009.
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
Codification does not change or alter existing GAAP and it does not have an
impact on our financial position, results of operations or cash
flow.
19
Item 3. Quantitative
And Qualitative Disclosures About Market Risk
|
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 balance
sheet.
|
Marketing
and Trading Commodity Price Risk
|
On our
behalf, Cheniere Marketing has entered into exchange cleared NYMEX natural gas
swaps accounted for as derivatives. The NYMEX natural gas swaps were entered
into to hedge the exposure to variability in expected future cash flows related
to commissioning cargoes purchased by Cheniere Marketing that are expected to be
sold as part of the testing phase of the commissioning process. As of September
30, 2009, Cheniere Marketing, on our behalf, had entered into a total of 979,458
MMBtu of NYMEX natural gas swaps through October 31, 2009 for which we will
receive fixed prices of $4.300 to $5.983 per MMBtu. At September 30, 2009, the
value of the derivatives was a liability of $0.4 million.
Item 4. Disclosure
Controls and Procedures
Based on
their evaluation as of the end of the quarter ended September 30,
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.
20
PART
II. OTHER INFORMATION
Item 1.
|
Legal
Proceedings
|
In the
future, we may 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 of our
general partner and legal counsel, as of September 30, 2009, there were no known
threatened or pending legal matters that could reasonably be expected to have a
material adverse impact on our results of operations, financial position or cash
flows.
Item 6.
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Exhibits
|
(a)
|
Each
of the following exhibits is filed
herewith:
|
10.1
|
Change
Order 61 to Lump Sum Turnkey Engineering, Procurement and Construction
Agreement dated December 18, 2004, between Sabine Pass LNG, L.P. and
Bechtel Corporation (Incorporated by reference to Exhibit 10.1 to Cheniere
Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-16383), for
the quarter ended September 30, 2009)
|
10.2
|
Change
Order 62 to Lump Sum Turnkey Engineering, Procurement and Construction
Agreement dated December 18, 2004, between Sabine Pass LNG, L.P. and
Bechtel Corporation (Incorporated by reference to Exhibit 10.2 to Cheniere
Energy, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-16383), for
the quarter ended September 30, 2009)
|
10.3
|
Change
Orders 13, 14, 15 and 16 to Engineer, Procure and Construct (EPC) LNG Unit
Rates Soil Contract, dated July 21, 2006, between Sabine Pass LNG, L.P.
and Remedial Construction Services, 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), for the quarter ended September 30,
2009)
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31.1
|
Certification
by Chief Executive Officer required by Rule 13a-14(a) and 15d-14(a) under
the Exchange Act.
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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.
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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.
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21
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SABINE
PASS LNG, L.P.
|
|
By:
Sabine Pass LNG-GP, Inc., its general partner
|
|
/s/ JERRY D. SMITH
|
|
Jerry
D. Smith
Chief
Accounting Officer of Sabine Pass LNG-GP, Inc., general partner of SABINE
PASS LNG, L.P.
|
|
(on
behalf of the registrant and as principal accounting
officer)
|
|
Date:
November 5, 2009
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22