UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
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. 001-33366
Cheniere Energy Partners, L.P.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
Delaware
20-5913059
(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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x 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 the definitions 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                    T
Non-accelerated filer    £
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  T
As of July 20, 2013, the issuer had 57,078,848 common units, 145,333,334 Class B units and 135,383,831 subordinated units outstanding.
 
 
 
 
 



CHENIERE ENERGY PARTNERS, L.P.
INDEX TO FORM 10-Q


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




i


PART I.        FINANCIAL INFORMATION 
ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS 
CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)






 
 
June 30,
 
December 31,
 
 
 
2013
 
2012
(1) 
ASSETS
 
(unaudited)
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
 
$
355,304

 
$
419,292

 
Restricted cash and cash equivalents
 
533,057

 
92,519

 
Accounts and interest receivable
 
23,923

 
44

 
Accounts receivable—affiliate
 
3,473

 
2,152

 
Advances to affiliate
 
8,483

 
4,987

 
LNG inventory
 
11,146

 
2,625

 
LNG inventory—affiliate
 
584

 
4,420

 
Prepaid expenses and other
 
9,730

 
7,084

 
Total current assets
 
945,700

 
533,123

 
Non-current restricted cash and cash equivalents
 
1,777,749

 
272,425

 
Property, plant and equipment, net
 
4,831,351

 
3,219,592

 
Debt issuance costs, net
 
351,830

 
220,949

 
Non-current derivative assets
 
81,762

 

 
Other
 
23,206

 
19,698

 
Total assets
 
$
8,011,598

 
$
4,265,787

 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
 
$
19,882

 
$
73,760

 
Accounts payable—affiliate
 

 
1,122

 
Accrued liabilities
 
457,691

 
47,848

 
Accrued liabilities—affiliate
 
44,744

 
5,744

 
Deferred revenue
 
26,585

 
26,540

 
Deferred revenue—affiliate
 
696

 
696

 
Other
 
3,653

 
126

 
Total current liabilities
 
553,251

 
155,836

 
Long-term debt, net of discount
 
5,572,008

 
2,167,113

 
Deferred revenue
 
19,500

 
21,500

 
Deferred revenue—affiliate
 
17,173

 
14,720

 
Long-term derivative liability
 

 
26,424

 
Other non-current liabilities
 
1,212

 
216

 
Commitments and contingencies
 


 


 
 
 
 
 
 
 
Partners' equity
 
 
 
 
 
Creole Trail Pipeline Business equity
 

 
517,170

 
Common unitholders' interest (57.1 million units and 39.5 million units issued and outstanding at June 30, 2013 and December 31, 2012, respectively)
 
806,193

 
448,412

 
Class B unitholders' interest (145.3 million units and 133.3 million units issued and outstanding at June 30, 2013 and December 31, 2012, respectively)
 
(38,216
)
 
(37,342
)
 
Subordinated unitholder's interest (135.4 million units issued and outstanding at June 30, 2013 and December 31, 2012)
 
1,042,320

 
949,482

 
General partner's interest (2% interest with 6.9 million units and 6.3 million units issued and outstanding at June 30, 2013 and December 31, 2012, respectively)
 
38,157

 
29,496

 
Accumulated other comprehensive loss
 

 
(27,240
)
 
Total partners’ equity
 
1,848,454


1,879,978

 
Total liabilities and partners’ equity
 
$
8,011,598

 
$
4,265,787

 
_________________
 
 
 
 
 
(1) Retrospectively adjusted as discussed in Note 2.

The accompanying notes are an integral part of these consolidated financial statements.



1


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit data)
(unaudited)

 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
 
 
 
2013
 
2012
(1) 
2013
 
2012
(1) 
Revenues
 

 

 
 
 
 
 
Revenues
 
$
66,842

 
$
60,767

 
$
132,406

 
$
127,731

 
Revenues—affiliate
 
795

 
656

 
1,341

 
3,044

 
Total revenues
 
67,637

 
61,423

 
133,747

 
130,775

 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 

 
 

 
 
 
 
 
Operating and maintenance expense
 
20,902

 
7,466

 
29,198

 
13,668

 
Operating and maintenance expense—affiliate
 
10,307

 
3,247

 
17,220

 
6,776

 
Depreciation expense
 
14,355

 
14,336

 
28,658

 
28,645

 
Development expense
 
3,318

 
14,472

 
6,803

 
31,141

 
Development expense—affiliate
 
611

 
1,031

 
1,062

 
2,262

 
General and administrative expense
 
2,028

 
2,193

 
5,803

 
4,497

 
General and administrative expense—affiliate
 
36,543

 
5,928

 
59,759

 
11,875

 
Total expenses
 
88,064

 
48,673

 
148,503

 
98,864

 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
(20,427
)
 
12,750

 
(14,756
)
 
31,911

 
 
 
 
 
 
 
 
 
 
 
Other income (expense)
 
 

 
 

 
 
 
 
 
Interest expense, net
 
(42,016
)
 
(43,458
)
 
(82,278
)
 
(86,916
)
 
Loss on early extinguishment of debt
 
(80,510
)
 

 
(80,510
)
 

 
Derivative gain (loss), net
 
95,509

 
261

 
78,041

 
(575
)
 
Other
 
434

 
61

 
760

 
132

 
Total other expense
 
(26,583
)
 
(43,136
)
 
(83,987
)
 
(87,359
)
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(47,010
)
 
$
(30,386
)
 
$
(98,743
)
 
$
(55,448
)
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to the Creole Trail Pipeline Business
 
$
(9,148
)
 
$
(5,525
)
 
$
(18,394
)
 
$
(11,255
)
 
Net loss attributable to partners
 
(37,862
)
 
(24,861
)
 
(80,349
)
 
(44,193
)
 
Net loss
 
$
(47,010
)
 
$
(30,386
)
 
$
(98,743
)
 
$
(55,448
)
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted net income per common unit
 
$
0.11

 
$
0.17

 
$
0.21

 
$
0.40

 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common units outstanding used for basic and diluted net income per common unit calculation
 
57,079

 
31,328

 
51,345

 
31,173

 
 
 
 
 
 
(1) Retrospectively adjusted as discussed in Note 2.











The accompanying notes are an integral part of these consolidated financial statements.



2


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
(1) 
2013
 
2012
(1) 
Net loss
$
(47,010
)
 
$
(30,386
)
 
$
(98,743
)
 
$
(55,448
)
 
Other comprehensive income
 
 
 
 
 
 
 
 
Interest rate cash flow hedges
 
 
 
 
 
 
 
 
Loss on settlements retained in other comprehensive income

 

 
(30
)
 

 
Change in fair value of interest rate cash flow hedges

 

 
21,297

 

 
Losses reclassified into earnings as a result of discontinuance of cash flow hedge accounting
5,973

 

 
5,973

 

 
Total other comprehensive income
5,973

 

 
27,240

 

 
Comprehensive loss
$
(41,037
)
 
$
(30,386
)
 
$
(71,503
)
 
$
(55,448
)
 
 
 
 
 
 
(1) Retrospectively adjusted as discussed in Note 2.



































The accompanying notes are an integral part of these consolidated financial statements.



3


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF PARTNERS’ AND
OWNERS’ EQUITY
(in thousands)
(unaudited)
 
Common Unitholders' Interest
 
Class B Unitholders' Interest
 
Subordinated Unitholder's Interest
 
General Partner's Interest
 
Accumulated Other Comprehensive Loss
 
Creole Trail Pipeline Business Equity
 
Total Partners' Equity
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
 
 
Balance at December 31, 2012 (1)
39,488

 
$
448,412

 
133,333

 
$
(37,342
)
 
135,384

 
$
949,482

 
6,290

 
$
29,496

 
$
(27,240
)
 
$
517,170

 
$
1,879,978

Net loss

 
(21,344
)
 

 

 

 
(56,277
)
 

 
(2,728
)
 

 
(18,394
)
 
(98,743
)
Contributions to Creole Trail Pipeline Business from Cheniere, net

 

 

 

 

 

 

 

 

 
20,705

 
20,705

Acquisition of Creole Trail Pipeline Business

 

 

 

 

 

 

 

 

 
(519,481
)
 
(519,481
)
Excess of acquired assets over the purchase price
 
 
1,988

 

 

 

 
22,498

 

 
1,105

 

 

 
25,591

Issuance of Class B units associated with acquisition of Creole Trail Pipeline Business

 

 
12,000

 
179,126

 

 

 

 

 

 

 
179,126

Sale of common and general partner units
17,590

 
364,795

 

 

 

 

 
604

 
11,122

 

 

 
375,917

Distributions

 
(41,041
)
 

 

 

 

 

 
(838
)
 

 

 
(41,879
)
Interest rate cash flow hedges

 

 

 

 

 

 

 

 
27,240

 

 
27,240

Beneficial conversion feature of Class B units

 
53,383

 

 
(180,000
)
 

 
126,617

 

 

 

 

 

Balance at June 30, 2013
57,078

 
$
806,193

 
145,333

 
$
(38,216
)
 
135,384

 
$
1,042,320

 
6,894

 
$
38,157

 
$

 
$

 
$
1,848,454

 
 
 
 
 
(1) Retrospectively adjusted as discussed in Note 2.





The accompanying notes are an integral part of these consolidated financial statements.



4


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six Months Ended
 
 
 
June 30,
 
 
 
2013
 
2012
(1) 
Cash flows from operating activities
 
 
 
 
 
Net loss
 
$
(98,743
)
 
$
(55,448
)
 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation
 
28,658

 
28,645

 
Use of restricted cash and cash equivalents
 
35,070

 

 
Amortization of debt discount
 
2,799

 
2,347

 
Amortization of debt issuance costs
 
2,120

 
2,185

 
Non-cash derivative (gain) loss, net
 
(77,989
)
 
821

 
Loss on early extinguishment of debt
 
80,510

 

 
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts and interest receivable
 
(23,879
)
 
499

 
Accounts receivable—affiliate
 
(1,409
)
 
(629
)
 
Accounts payable and accrued liabilities
 
2,523

 
7,679

 
Accounts payable and accrued liabilities—affiliate
 
31,197

 
3,668

 
Deferred revenue
 
(1,955
)
 
(3,481
)
 
Advances to affiliate
 
(3,027
)
 
(1,508
)
 
LNG inventory—affiliate
 
3,837

 
3,399

 
Other
 
(4,397
)
 
(5,691
)
 
Net cash used in operating activities
 
(24,685
)
 
(17,514
)
 
 
 
 
 
 
 
Cash flows from investing activities
 
 

 
 

 
Use of restricted cash and cash equivalents
 
1,266,347

 

 
LNG terminal costs, net
 
(1,271,830
)
 
(39,161
)
 
Purchase of Creole Trail Pipeline Business, net
 
(313,892
)
 

 
Other
 
(2,990
)
 
(4,714
)
 
Net cash used in investing activities
 
(322,365
)
 
(43,875
)
 
 
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

 
Proceeds from Sabine Pass Liquefaction Senior Notes, net
 
3,012,500

 

 
Proceeds from CTPL Credit Facility, net
 
391,978

 

 
Proceeds from 2013 Liquefaction Credit Facilities
 
100,000

 

 
Proceeds from sale of partnership common and general partner units, net
 
375,917

 
12,379

 
Proceeds from sale of Class B units
 

 
166,667

 
Contributions to Creole Trail Pipeline Business from Cheniere, net
 
20,705

 
4,449

 
Investment in restricted cash and cash equivalents
 
(3,247,277
)
 

 
Debt issuance and deferred financing costs
 
(228,882
)
 
(5,530
)
 
Repayment of 2012 Liquefaction Credit Facility
 
(100,000
)
 

 
Distributions to owners
 
(41,879
)
 
(27,040
)
 
Net cash provided by financing activities
 
283,062

 
150,925

 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
(63,988
)
 
89,536

 
Cash and cash equivalents—beginning of period
 
419,292

 
81,415

 
Cash and cash equivalents—end of period
 
$
355,304

 
$
170,951

 
 
 
 
 
 
(1) Retrospectively adjusted as discussed in Note 2.



The accompanying notes are an integral part of these consolidated financial statements.



5


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


 
NOTE 1—ORGANIZATION AND NATURE OF OPERATIONS

Cheniere Energy Partners, L.P. ("Cheniere Partners") is a publicly-traded Delaware limited partnership formed on November 21, 2006 by Cheniere Energy, Inc. ("Cheniere"). Unless the context requires otherwise, references to "Cheniere Partners", "we", "us" and "our" refer to Cheniere Partners and its subsidiaries.

We were formed to own and operate the Sabine Pass liquefied natural gas ("LNG") terminal located on the Sabine Pass deep water shipping channel less than four miles from the Gulf Coast. The Sabine Pass LNG terminal has regasification facilities owned by our wholly owned subsidiary, Sabine Pass LNG, L.P. ("Sabine Pass LNG"), that includes existing infrastructure of five LNG storage tanks with capacity of approximately 16.9 Bcfe, two docks that can accommodate vessels of up to 265,000 cubic meters and vaporizers with regasification capacity of approximately 4.0 Bcf/d. Approximately one-half of the receiving capacity at the Sabine Pass LNG terminal is contracted to two multinational energy companies.

We are developing natural gas liquefaction facilities (the "Liquefaction Project") at the Sabine Pass LNG terminal adjacent to the existing regasification facilities through a wholly owned subsidiary, Sabine Pass Liquefaction, LLC ("Sabine Pass Liquefaction"). We plan to construct up to six Trains (each in sequence, "Train 1", "Train 2", "Train 3", "Train 4", "Train 5" and "Train 6"), which are in various stages of development. Each Train is expected to have nominal production capacity of approximately 4.5 million tonnes per annum ("mtpa").

In May 2013, we acquired Cheniere's ownership interests in Cheniere Creole Trail Pipeline, L.P. ("CTPL") and Cheniere Pipeline GP Interests, LLC (collectively, "the Creole Trail Pipeline Business"), thereby providing us with ownership of a 94-mile pipeline interconnecting the Sabine Pass LNG terminal with a number of large interstate pipelines (the "Creole Trail Pipeline"). We acquired the Creole Trail Pipeline Business for $480.0 million and reimbursed Cheniere $13.9 million for certain expenditures incurred prior to the closing date.  Concurrent with the Creole Trail Pipeline Business acquisition closing, we issued 12.0 million Class B units to Cheniere at a price of $15.00 per Class B unit for aggregate consideration of $180.0 million pursuant to a unit purchase agreement with Cheniere Class B Units Holdings, LLC, a wholly owned subsidiary of Cheniere.  As a result of the two transactions, we paid Cheniere net cash of $313.9 million. See Note 2—"Basis of Presentation".

NOTE 2—BASIS OF PRESENTATION
 
The accompanying unaudited Consolidated Financial Statements of Cheniere Energy Partners, L.P. have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and with 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. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included.

These consolidated financial statements include our accounts and the assets, liabilities and operations of the Creole Trail Pipeline Business. The effect on reported equity of including the prior results of the Creole Trail Pipeline Business is reported as Creole Trail Pipeline Business equity in our Consolidated Balance Sheets and Consolidated Statements of Partners' and Owners' Equity. This purchase has been accounted for as a transfer of net assets between entities under common control. We recognize transfers of net assets between entities under common control at Cheniere's historical basis in the net assets sold. In addition, transfers of net assets between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior years are retroactively adjusted to furnish comparative information. The difference between the purchase price and Cheniere's basis in the net assets sold, if any, is recognized as an adjustment to partners' equity. Subsequent to the acquisition, we had the ability to control CTPL's operating and financial decisions and policies and have consolidated CTPL in our financial statements.

Our consolidated financial statements and all other financial information included in this report have been retrospectively adjusted to assume that our acquisition of the Creole Trail Pipeline Business from Cheniere had occurred at the date when the Creole Trail Pipeline Business met the accounting requirements for entities under common control (the date of our inception since both we and the Creole Trail Pipeline Business were formed by Cheniere).




6


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

Results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2013.

We are not subject to either federal or state income tax, as the partners are taxed individually on their allocable share of taxable income.

For further information, refer to the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2012, as amended by Amendment No. 1 on Form 10-K/A.

NOTE 3—RESTRICTED CASH AND CASH EQUIVALENTS
 
Restricted cash and cash equivalents consists of cash and cash equivalents that are contractually restricted as to usage or withdrawal, as follows:
 
Sabine Pass LNG Senior Notes Debt Service Reserve

Sabine Pass LNG has consummated private offerings of an aggregate principal amount of $1,665.5 million, before discount, of Senior Secured Notes due 2016 (the "2016 Notes") and $420.0 million of Senior Secured Notes due 2020 (the "2020 Notes"). See Note 7—"Long-Term Debt". Collectively, the 2016 Notes and the 2020 Notes are referred to as the "Sabine Pass LNG Senior Notes." Under the indentures governing the Sabine Pass LNG Senior Notes (the "Sabine Pass LNG Indentures"), except for permitted tax distributions, Sabine Pass LNG may not make distributions until certain conditions are satisfied, including that 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. 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 LNG Indentures.

As of June 30, 2013 and December 31, 2012, we classified $15.0 million and $17.4 million, respectively, as current restricted cash and cash equivalents for the payment of interest due within twelve months. As of June 30, 2013 and December 31, 2012, we classified the permanent debt service reserve fund of $76.1 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.

Liquefaction Reserve

In July 2012, Sabine Pass Liquefaction closed on a $3.6 billion senior secured credit facility (the "2012 Liquefaction Credit Facility"). In February and April 2013, Sabine Pass Liquefaction entered into $2.0 billion, before premium, of Senior Secured Notes due in 2021 (the "2021 Sabine Pass Liquefaction Senior Notes") and $1.0 billion of Senior Secured Notes due in 2023 (the "2023 Sabine Pass Liquefaction Senior Notes" and collectively with the 2021 Sabine Pass Liquefaction Senior Notes, the "Sabine Pass Liquefaction Senior Notes"). In May 2013, Sabine Pass Liquefaction closed four credit facilities aggregating $5.9 billion (collectively the "2013 Liquefaction Credit Facilities"), which amended and restated the 2012 Liquefaction Credit Facility. See Note 7—"Long-Term Debt". Under the terms and conditions of the 2012 Liquefaction Credit Facility and the 2013 Liquefaction Credit Facilities, Sabine Pass Liquefaction is required to deposit all cash received into collateral accounts controlled by a collateral trustee. Therefore, all of Sabine Pass Liquefaction's cash and cash equivalents are shown as restricted cash and cash equivalents on our Consolidated Balance Sheets. As of June 30, 2013 and December 31, 2012, we classified $498.7 million and $75.1 million, respectively, as current restricted cash and cash equivalents held by Sabine Pass Liquefaction and $1,591.1 million and $196.3 million, respectively, as non-current restricted cash and cash equivalents held by Sabine Pass Liquefaction.

CTPL Reserve

As of June 30, 2013, we classified $19.4 million and 110.5 million as current and non-current restricted cash and cash equivalents, respectively, held by CTPL as such funds are to be used to pay for modifications to the Creole Trail Pipeline in order to enable bi-directional natural gas flow and interest during the construction.




7


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

NOTE 4—PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consists of LNG terminal costs and fixed assets, as follows (in thousands):
 
 
June 30,
 
December 31,
 
 
2013
 
2012
LNG terminal costs
 
 
 
 
LNG terminal
 
$
2,224,392

 
$
2,224,230

LNG terminal construction-in-process
 
2,868,812

 
1,228,647

LNG site and related costs, net
 
152

 
156

Accumulated depreciation
 
(262,925
)
 
(234,349
)
Total LNG terminal costs, net
 
4,830,431

 
3,218,684

 
 
 
 
 
Fixed assets
 
 

 
 

Computer and office equipment
 
424

 
368

Vehicles
 
884

 
704

Machinery and equipment
 
1,471

 
1,473

Other
 
750

 
760

Accumulated depreciation
 
(2,609
)
 
(2,397
)
Total fixed assets, net
 
920

 
908

 
 
 
 
 
Property, plant and equipment, net
 
$
4,831,351

 
$
3,219,592

 
Depreciation expense related to the Sabine Pass LNG terminal totaled $14.2 million for each of the three months ended June 30, 2013 and 2012. Depreciation expense related to the Sabine Pass LNG terminal totaled $28.4 million for each of the six months ended June 30, 2013 and 2012.

In June 2012, we satisfied the criteria for capitalizing costs associated with Trains 1 and 2 of the Liquefaction Project, and in May 2013, we satisfied the criteria for capitalizing costs associated with Trains 3 and 4 of the Liquefaction Project. For the three and six months ended June 30, 2013, we capitalized $59.4 million and $94.7 million of interest expense related to the construction of the Liquefaction Project, respectively.

NOTE 5—FINANCIAL INSTRUMENTS

Derivative Instruments

We have entered into certain instruments to hedge the exposure to variability in expected future cash flows attributable to the future sale of our LNG inventory ("LNG Inventory Derivatives"), to hedge the exposure to price risk attributable to future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal ("Fuel Derivatives"), and interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under the 2013 Liquefaction Credit Facilities ("Interest Rate Derivatives").



8


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

The following table (in thousands) shows the fair value of our derivative assets and liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, which are classified as other current assets, other current liabilities and other non-current liabilities in our Consolidated Balance Sheets.
 
Fair Value Measurements as of
 
June 30, 2013
 
December 31, 2012
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
LNG Inventory Derivatives asset
$

 
$
764

 
$

 
$
764

 
$

 
$
232

 
$

 
$
232

Fuel Derivatives (liability)

 
(200
)
 

 
(200
)
 

 
(98
)
 

 
(98
)
Interest Rate Derivatives asset (liability)

 
78,207

 

 
78,207

 

 
(26,424
)
 

 
(26,424
)

The estimated fair values of our LNG Inventory Derivatives and Fuel Derivatives are the amount at which the instruments could be exchanged currently between willing parties. We value these derivatives using observable commodity price curves and other relevant data. We value our Interest Rate Derivatives using valuations based on the initial trade prices. Using an income-based approach, subsequent valuations are based on observable inputs to the valuation model including interest rate curves, risk adjusted discount rates, credit spreads and other relevant data. Derivative assets and liabilities arising from our derivative contracts with the same counterparty are reported on a net basis, as all counterparty derivative contracts provide for net settlement.

Commodity Derivatives

We recognize all derivative instruments that qualify for derivative accounting treatment as either assets or liabilities and measure those instruments at fair value unless they qualify for, and we elect, the normal purchase normal sale exemption.  For transactions in which we have elected the normal purchase normal sale exemption, gains and losses are not reflected on our Consolidated Statements of Operations until the period of delivery. For those instruments accounted for as derivatives, including our LNG Inventory Derivatives and certain of our Fuel Derivatives, changes in fair value are reported in earnings.

The use of derivative instruments exposes us to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments in instances where our Fuel Derivatives or our LNG Inventory Derivatives are in an asset position. Except for the fuel hedges with our affiliate described below, our commodity derivative transactions are executed through over-the-counter contracts which are subject to nominal credit risk as these transactions are settled on a daily margin basis with investment grade financial institutions. We are required by these financial institutions to use margin deposits as credit support for our commodity derivative activities.  Collateral of $0.2 million and $0.9 million deposited for such contracts, which has not been reflected in the derivative fair value tables, is included in the other current assets balance as of June 30, 2013, and December 31, 2012, respectively.

During the second quarter of 2013, Sabine Pass LNG began to enter into forward contracts under its master service agreement with Cheniere Marketing, LLC ("Cheniere Marketing"), a wholly owned subsidiary of Cheniere, to hedge the exposure to price risk attributable to future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal. Sabine Pass LNG elected to account for these physical hedges of future fuel purchases as normal purchase normal sale transactions, exempt from fair value accounting. Sabine Pass LNG had not posted collateral with Cheniere Marketing for such forward contracts as of June 30, 2013.

The following table (in thousands) shows the fair value and location of our LNG Inventory Derivatives and Fuel Derivatives on our Consolidated Balance Sheets:
 
 
 
 
Fair Value Measurements as of
 
Balance Sheet Location
 
June 30, 2013
 
December 31, 2012
LNG Inventory Derivatives asset
Prepaid expenses and other
 
$
764

 
$
232

Fuel Derivatives (liability)
Other current liabilities
 
(200
)
 
(98
)




9


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

The following table (in thousands) shows the changes in the fair value and settlements of our LNG Inventory Derivatives recorded in marketing and trading revenues (losses) on our Consolidated Statements of Operations during the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
LNG Inventory Derivatives gain (loss)
$
884

 
$
(246
)
 
334

 
$
925


The following table (in thousands) shows the changes in the fair value and settlements of our Fuel Derivatives recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Fuel Derivatives gain (loss) (1)
$
(464
)
 
$
261

 
$
52

 
$
(575
)
 
 
 
 
 
(1)Excludes settlements of hedges of the exposure to price risk attributable to future purchases of natural gas to be utilized
as fuel to operate the Sabine Pass LNG terminal for which Sabine Pass LNG has elected the normal purchase normal sale exemption from derivative accounting.
 
Interest Rate Derivatives

In August 2012 and June 2013, Sabine Pass Liquefaction entered into Interest Rate Derivatives to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the 2012 Liquefaction Credit Facility and the 2013 Liquefaction Credit Facilities, respectively. The Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2013 Liquefaction Credit Facilities.

Sabine Pass Liquefaction had elected to designate the Interest Rate Derivatives entered into in August 2012 as hedging instruments which was required in order to qualify for cash flow hedge accounting. As a result of this cash flow hedge designation, we recognized the Interest Rate Derivatives entered into in August 2012 as an asset or liability at fair value, and reflected changes in fair value through other comprehensive income in our Consolidated Statements of Comprehensive Loss. Any hedge ineffectiveness associated with the Interest Rate Derivatives entered into in August 2012 was recorded immediately as derivative gain (loss) in our Consolidated Statements of Operations. The realized gain (loss) on the Interest Rate Derivatives entered into in August 2012 was recorded as an (increase) decrease in interest expense on our Consolidated Statements of Operations to the extent not capitalized as part of the Liquefaction Project. The effective portion of the gains or losses on our Interest Rate Derivatives entered into in August 2012 recorded in other comprehensive income would be reclassified to earnings as interest payments on the 2012 Liquefaction Credit Facility impact earnings. In addition, amounts recorded in other comprehensive income are also reclassified into earnings if it becomes probable that the hedged forecasted transaction will not occur.

Sabine Pass Liquefaction did not elect to designate the Interest Rate Derivatives entered into in June 2013 as cash flow hedging instruments, and changes in fair value are recorded as derivative gain (loss) within the Consolidated Statements of Operations.

During the first quarter of 2013, we determined that it was no longer probable that the forecasted variable interest payments on the 2012 Liquefaction Credit Facility would occur in the time period originally specified based on the continued development of our financing strategy for the Liquefaction Project, and, in particular, the Sabine Pass Liquefaction Senior Notes described in Note 8—"Long-Term Debt". As a result, all of the Interest Rate Derivatives entered into in August 2012 were no longer effective hedges, and the remaining portion of hedge relationships that were designated cash flow hedges as of December 31, 2012, were de-designated as of February 1, 2013. For de-designated cash flow hedges, changes in fair value prior to their de-designation date are recorded as other comprehensive income (loss) within the Consolidated Balance Sheets, and changes in fair value subsequent to their de-designation date are recorded as derivative gain (loss) within the Consolidated Statements of Operations.




10


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

In June 2013, we concluded that the hedged forecasted transactions associated with the Interest Rate Derivatives entered into in connection with the 2012 Liquefaction Credit Facility had become probable of not occurring based on the issuances of the Sabine Pass Liquefaction Senior Notes, the closing of the 2013 Liquefaction Credit Facilities, the additional Interest Rate Derivatives executed in June 2013, and our intention to continue to issue fixed rate debt to refinance drawn portions of the 2013 Liquefaction Credit Facilities. As a result, the amount remaining in accumulated other comprehensive income ("AOCI") pertaining to the previously designated Interest Rate Derivatives was reclassified out of AOCI and into income. We have presented the reclassification of unrealized losses from AOCI into income and the changes in fair value and settlements subsequent to the reclassification date separate from interest expense as derivative gain (loss), net in our Consolidated Statements of Operations.

At June 30, 2013, Sabine Pass Liquefaction had the following Interest Rate Derivatives outstanding:
 
 
Initial Notional Amount
 
Maximum Notional Amount
 
Effective Date
 
Maturity Date
 
Weighted Average Fixed Interest Rate Paid
 
Variable Interest Rate Received
Interest Rate Derivatives - Not Designated
 
$20.0 million
 
$
2.9
 billion
 
August 14, 2012
 
July 31, 2019
 
1.98%
 
One-month LIBOR
Interest Rate Derivatives - Not Designated
 

 
$
671.0
 million
 
June 5, 2013
 
May 31, 2020
 
2.05%
 
One-month LIBOR

The following table (in thousands) shows the fair value of our Interest Rate Derivatives:
 
 
 
 
Fair Value Measurements as of
 
 
Balance Sheet Location
 
June 30, 2013
 
December 31, 2012
Interest Rate Derivatives - Not Designated
 
Non-current derivative assets
 
$
81,762

 
$

Interest Rate Derivatives - Designated
 
Non-current derivative liabilities
 

 
21,290

Interest Rate Derivatives - Not Designated
 
Other current liabilities
 
3,555

 

Interest Rate Derivatives - Not Designated
 
Non-current derivative liabilities
 

 
5,134


The following table (in thousands) details the effect of our Interest Rate Derivatives included in OCI and AOCI for the three months ended June 30, 2013 and 2012:
 
Gain (Loss) in Other Comprehensive Income
 
Gain (Loss) Reclassified from AOCI into Interest Expense (Effective Portion)
 
Losses Reclassified into Earnings as a Result of Discontinuance of Cash Flow Hedge Accounting
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Interest Rate Derivatives - Designated
$

 
$

 
$

 
$

 
$
(5,806
)
 
$

Interest Rate Derivatives - Settlements

 

 

 

 
(167
)
 


The following table (in thousands) details the effect of our Interest Rate Derivatives included in OCI and AOCI for the six months ended June 30, 2013 and 2012:
 
Gain (Loss) in Other Comprehensive Income
 
Gain (Loss) Reclassified from AOCI into Interest Expense (Effective Portion)
 
Losses Reclassified into Earnings as a Result of Discontinuance of Cash Flow Hedge Accounting
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Interest Rate Derivatives - Designated
$
21,297

 
$

 
$

 
$

 
$
(5,806
)
 
$

Interest Rate Derivatives - Settlements
(30
)
 

 

 

 
(167
)
 





11


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

The following table (in thousands) shows the changes in the fair value of our Interest Rate Derivatives - Not Designated recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Interest Rate Derivatives - Not Designated gain
$
101,263

 
$

 
$
83,279

 
$


Balance Sheet Presentation

Our commodity and interest rate derivatives are presented on a net basis on our Consolidated Balance Sheets as described above. The following table (in thousands) shows the fair value of our derivatives outstanding on a gross and net basis:
 
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Amounts Presented in the Consolidated Balance Sheet
 
Gross Amounts Not Offset in the Consolidated Balance Sheet
 
 
Offsetting Derivative Assets (Liabilities)
 
 
 
 
Derivative Instrument
 
Cash Collateral Received (Paid)
 
Net Amount
As of June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
Fuel Derivatives
 
$
(200
)
 
$
(200
)
 
$

 
$

 
$

 
$

LNG Inventory Derivatives
 
764

 
556

 
208

 

 

 
208

Interest Rate Derivatives - Not Designated
 
81,762

 

 
81,762

 

 

 
81,762

Interest Rate Derivatives - Not Designated
 
(3,555
)
 

 
(3,555
)
 

 

 
(3,555
)
As of December 31, 2012:
 
 

 
 
 
 
 
 
 
 
 
Fuel Derivatives
 
(98
)
 
(98
)
 

 

 

 

LNG Inventory Derivatives
 
232

 

 
232

 

 

 
232

Interest Rate Derivatives - Designated
 
(21,290
)
 

 
(21,290
)
 

 

 
(21,290
)
Interest Rate Derivatives - Not Designated
 
(5,134
)
 

 
(5,134
)
 

 

 
(5,134
)
 
Other Financial Instruments

The estimated fair value of our other 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 cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, interest receivable and accounts payable approximate fair value due to their short-term nature.
Other Financial Instruments (in thousands):
 
 
June 30, 2013
 
December 31, 2012
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
2016 Notes, net of discount (1)
 
$
1,649,460

 
1,781,417

 
$
1,647,113

 
$
1,824,177

2020 Notes (1)
 
420,000

 
427,350

 
420,000

 
437,850

2021 Sabine Pass Liquefaction Senior Notes (1)
 
2,012,118

 
1,951,755

 

 

2023 Sabine Pass Liquefaction Senior Notes (1)
 
1,000,000

 
957,500

 

 

2012 Liquefaction Credit Facility (2)
 

 

 
100,000

 
100,000

2013 Liquefaction Credit Facilities (2)
 
100,000

 
100,000

 

 

CTPL Credit Facility (3)
 
390,429

 
400,000

 

 

 
(1)
The Level 2 estimated fair value was based on quotations obtained from broker-dealers who make markets in these and similar instruments based on the closing trading prices on June 30, 2013 and December 31, 2012, as applicable.



12


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

(2)
The Level 3 estimated fair value was determined to be the carrying amount due to our ability to call this debt at anytime without penalty. 
(3)
The Level 3 estimated fair value was determined to be the principal amount due to our ability to call this debt at anytime without penalty. 

NOTE 6—ACCRUED LIABILITIES
 
As of June 30, 2013 and December 31, 2012, accrued liabilities (including affiliate) consisted of the following (in thousands):
 
 
June 30,
 
December 31,
 
 
2013
 
2012
Interest and related debt fees
 
$
73,919

 
$
16,327

Affiliate
 
44,744

 
5,744

LNG liquefaction costs
 
375,090

 
26,131

LNG terminal costs
 
1,047

 
977

Other
 
7,635

 
4,413

Total accrued liabilities (including affiliate)
 
$
502,435

 
$
53,592


NOTE 7—LONG-TERM DEBT
 
As of June 30, 2013 and December 31, 2012, our long-term debt consisted of the following (in thousands):
 
 
June 30,
 
December 31,
 
 
2013
 
2012
Long-term debt
 
 
 
 
2016 Notes
 
$
1,665,500

 
$
1,665,500

2020 Notes
 
420,000

 
420,000

2021 Sabine Pass Liquefaction Senior Notes
 
2,000,000

 

2023 Sabine Pass Liquefaction Senior Notes
 
1,000,000

 

2012 Liquefaction Credit Facility
 

 
100,000

2013 Liquefaction Credit Facilities
 
100,000

 

CTPL Credit Facility
 
400,000

 

Total long-term debt
 
5,585,500

 
2,185,500

Long-term debt premium (discount)
 
 
 
 
2016 Notes
 
(16,040
)
 
(18,387
)
2021 Sabine Pass Liquefaction Senior Notes
 
12,118

 

CTPL Credit Facility
 
(9,570
)
 

Total long-term debt, net
 
$
5,572,008

 
$
2,167,113


Sabine Pass LNG Senior Notes

As of June 30, 2013 and December 31, 2012, Sabine Pass LNG had an aggregate principal amount of $1,665.5 million, before discount, of the 2016 Notes and $420.0 million of the 2020 Notes outstanding. Borrowings under the 2016 Notes and 2020 Notes bear interest at a fixed rate of 7.50% and 6.50%, respectively. The terms of the 2016 Notes and the 2020 Notes are substantially similar. Interest on the 2016 Notes is payable semi-annually in arrears on May 30 and November 30 of each year. Interest on the 2020 Notes is payable semi-annually in arrears on May 1 and November 1 of each year. Subject to permitted liens, the Sabine Pass LNG 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.

Sabine Pass LNG may redeem some or all of its 2016 Notes at any time, and from time to time, at the redemption prices specified in the indenture governing the 2016 Notes, plus accrued and unpaid interest, if any, to the date of redemption. Sabine Pass LNG may redeem all or part of its 2020 Notes at any time on or after November 1, 2016, at fixed redemption prices specified in the indenture governing the 2020 Notes, plus accrued and unpaid interest, if any, to the date of redemption. Sabine Pass LNG may also, at its option, redeem all or part of the 2020 Notes at any time prior to November 1, 2016, at a "make-whole" price set



13


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

forth in the indenture governing the 2020 Notes, plus accrued and unpaid interest, if any, to the date of redemption. At any time before November 1, 2015, Sabine Pass LNG may redeem up to 35% of the aggregate principal amount of the 2020 Notes at a redemption price of 106.5% of the principal amount of the 2020 Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date, in an amount not to exceed the net proceeds of one or more completed equity offerings as long as Sabine Pass LNG redeems the 2020 Notes within 180 days of the closing date for such equity offering and at least 65% of the aggregate principal amount of the 2020 Notes originally issued remains outstanding after the redemption.

Under the Sabine Pass LNG Indentures, 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. 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 LNG Indentures. During the six months ended June 30, 2013 and 2012, Sabine Pass LNG made distributions of $149.1 million and $146.7 million, respectively, after satisfying all the applicable conditions in the Sabine Pass LNG Indentures.

In connection with the issuance of the 2020 Notes, Sabine Pass LNG also entered into a registration rights agreement (the "Sabine Pass LNG Registration Rights Agreement"). Under the Sabine Pass LNG Registration Rights Agreement, Sabine Pass LNG has agreed to use commercially reasonable efforts to file with the Securities and Exchange Commission (the "SEC") and cause to become effective a registration statement relating to an offer to exchange the 2020 Notes for a like aggregate principal amount of SEC-registered notes with terms identical in all material respects to the 2020 Notes (other than with respect to restrictions on transfer or to any increase in annual interest rate) within 360 days after the 2020 Notes were issued in October 2012. Under specified circumstances, we may be required to file a shelf registration statement to cover resales of the 2020 Notes. If we fail to satisfy these obligations, we may be required to pay additional interest to holders of the 2020 Notes under certain circumstances.

Sabine Pass Liquefaction Senior Notes

In February 2013 and April 2013, Sabine Pass Liquefaction issued an aggregate principal amount of $2.0 billion, before premium, of the 2021 Sabine Pass Liquefaction Senior Notes. In April 2013, Sabine Pass Liquefaction also issued $1.0 billion of the 2023 Sabine Pass Liquefaction Senior Notes. Borrowings under the Sabine Pass Liquefaction Senior Notes bear interest at a fixed rate of 5.625%. Interest on the 2021 Sabine Pass Liquefaction Senior Notes is payable semi-annually in arrears on February 1 and August 1 of each year. Interest on the 2023 Sabine Pass Liquefaction Senior Notes is payable semi-annually in arrears on April 15 and October 15 of each year.

The terms of the 2021 Sabine Pass Liquefaction Senior Notes and the 2023 Sabine Pass Liquefaction Senior Notes are governed by a common indenture (the "Indenture"). The Indenture contains customary terms and events of default and certain covenants that, among other things, limit Sabine Pass Liquefaction's ability and the ability of Sabine Pass Liquefaction's restricted subsidiaries to incur additional indebtedness or issue preferred stock, make certain investments or pay dividends or distributions on capital stock or subordinated indebtedness or purchase, redeem or retire capital stock, sell or transfer assets, including capital stock of Sabine Pass Liquefaction's restricted subsidiaries, restrict dividends or other payments by restricted subsidiaries, incur liens, enter into transactions with affiliates, consolidate, merge, sell or lease all or substantially all of Sabine Pass Liquefaction's assets and enter into certain LNG sales contracts. Subject to permitted liens, the Sabine Pass Liquefaction Senior Notes are secured on a pari passu first-priority basis by a security interest in all of the membership interests in Sabine Pass Liquefaction and substantially all of Sabine Pass Liquefaction's assets. Sabine Pass Liquefaction may not make any distributions until, among other requirements, substantial completion of Trains 1 and 2 has occurred, deposits are made into debt service reserve accounts and a debt service coverage ratio for the prior 12-month period and a projected debt service coverage ratio for the upcoming 12-month period of 1.25:1.00 are satisfied.

At any time prior to November 1, 2020, with respect to the 2021 Sabine Pass Liquefaction Senior Notes, or January 15, 2023, with respect to the 2023 Sabine Pass Liquefaction Senior Notes, Sabine Pass Liquefaction may redeem all or a part of the Sabine Pass Liquefaction Senior Notes, at a redemption price equal to the "make-whole" price set forth in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption. Sabine Pass Liquefaction also may at any time on or after November 1, 2020, with respect to the 2021 Sabine Pass Liquefaction Senior Notes, or January 15, 2023, with respect to the 2023 Sabine Pass



14


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

Liquefaction Senior Notes, redeem the Sabine Pass Liquefaction Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Sabine Pass Liquefaction Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.

In connection with the issuances of the Sabine Pass Liquefaction Senior Notes, Sabine Pass Liquefaction also entered into registration rights agreements (the "Liquefaction Registration Rights Agreements"). Under the Liquefaction Registration Rights Agreements, Sabine Pass Liquefaction has agreed to use commercially reasonable efforts to file with the SEC and cause to become effective registration statements relating to an offer to exchange the Sabine Pass Liquefaction Senior Notes for a like aggregate principal amount of SEC-registered notes with terms identical in all material respects to the 2021 Sabine Pass Liquefaction Senior Notes and 2023 Sabine Pass Liquefaction Senior Notes (other than with respect to restrictions on transfer or to any increase in annual interest rate) within 360 days after February 1, 2013 and April 16, 2013, respectively. Under specified circumstances, Sabine Pass Liquefaction may be required to file a shelf registration statement to cover resales of the Sabine Pass Liquefaction Senior Notes. If Sabine Pass Liquefaction fails to satisfy these obligations, Sabine Pass Liquefaction may be required to pay additional interest to holders of the Sabine Pass Liquefaction Senior Notes under certain circumstances.

2013 Liquefaction Credit Facilities

In May 2013, Sabine Pass Liquefaction closed the 2013 Liquefaction Credit Facilities aggregating $5.9 billion. The 2013 Liquefaction Credit Facilities are being used to fund a portion of the costs of developing, constructing and placing into operation the first four LNG trains of the Liquefaction Project. The 2013 Liquefaction Credit Facilities will mature on the earlier of May 28, 2020 or the second anniversary of the completion date of the first four LNG Trains of the Liquefaction Project, as defined in the 2013 Liquefaction Credit Facilities. Borrowings under the 2013 Liquefaction Credit Facilities may be refinanced, in whole or in part, at any time without premium or penalty, except for interest rate hedging and interest rate breakage costs. Sabine Pass Liquefaction made a $100.0 million borrowing under the 2013 Liquefaction Credit Facilities in June 2013 after meeting the required conditions precedent.

Borrowings under the 2013 Liquefaction Credit Facilities bear interest at a variable rate per annum equal to, at Sabine Pass Liquefaction's election, the London Interbank Offered Rate ("LIBOR") or the base rate, plus the applicable margin. The applicable margins for LIBOR loans prior to, and after, the completion of Train 4 range from 2.3% to 3.0% and 2.3% to 3.25%, respectively, depending on the applicable 2013 Liquefaction Credit Facility. Interest on LIBOR loans is due and payable at the end of each LIBOR period. The 2013 Liquefaction Credit Facilities required Sabine Pass Liquefaction to pay certain up-front fees to the agents and lenders in the aggregate amount of approximately $144.0 million and provide for a commitment fee calculated at a rate per annum equal to 40% of the applicable margin for LIBOR loans, multiplied by the average daily amount of the undrawn commitment. Annual administrative fees must also be paid to the agent and the trustee. The principal of loans made under the 2013 Liquefaction Credit Facilities must be repaid in quarterly installments, commencing upon the earlier of the last day of the first calendar quarter ending at least three months following the completion of Train 4 of the Liquefaction Project and September 30, 2018. Scheduled repayments are based upon an 18-year amortization profile, with the remaining balance due upon the maturity of the 2013 Liquefaction Credit Facilities.
Under the terms and conditions of the 2013 Liquefaction Credit Facilities, all cash held by Sabine Pass Liquefaction is controlled by a collateral agent. These funds can only be released by the collateral agent upon satisfaction of certain terms and conditions related to the use of proceeds, and are classified as restricted on our Consolidated Balance Sheets.

The 2013 Liquefaction Credit Facilities contain conditions precedent for the second borrowing and any subsequent borrowings, as well as customary affirmative and negative covenants. The obligations of Sabine Pass Liquefaction under the 2013 Liquefaction Credit Facilities are secured by substantially all of the assets of Sabine Pass Liquefaction as well as all of the membership interests in Sabine Pass Liquefaction on a pari passu basis with the Sabine Pass Liquefaction Senior Notes.

Under the terms of the 2013 Liquefaction Credit Facilities, Sabine Pass Liquefaction is required to hedge not less than 75% of the variable interest rate exposure of its projected outstanding borrowings, calculated on a weighted average basis in comparison to its anticipated draw of principal. See Note 5— "Financial Instruments".




15


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

2012 Liquefaction Credit Facility

In July 2012, Sabine Pass Liquefaction entered into the $3.6 billion 2012 Liquefaction Credit Facility with a syndicate of lenders. The 2012 Liquefaction Credit Facility was to be used to fund a portion of the costs of developing, constructing and placing into operation Trains 1 and 2 of the Liquefaction Project. In May 2013, the 2012 Liquefaction Credit Facility was amended and restated with the 2013 Liquefaction Credit Facilities and $100.0 million of outstanding borrowings under the 2012 Liquefaction Credit Facility were repaid in full.

The 2012 Liquefaction Credit Facility had a maturity date of the earlier of July 31, 2019 or the second anniversary of the completion date of Trains 1 and 2 of the Liquefaction Project, as defined in the 2012 Liquefaction Credit Facility. Borrowings under the 2012 Liquefaction Credit Facility could have been refinanced, in whole or in part, at any time without premium or penalty, except for interest rate hedging and interest rate breakage costs. Sabine Pass Liquefaction made a $100.0 million borrowing under the 2012 Liquefaction Credit Facility in August 2012 after meeting the required conditions precedent.
 
Borrowings under the 2012 Liquefaction Credit Facility bore interest at a variable rate equal to, at Sabine Pass Liquefaction's election, LIBOR or the base rate, plus the applicable margin. The applicable margin for LIBOR loans was 3.50% during construction and 3.75% during operations. Interest on LIBOR loans was due and payable at the end of each LIBOR period. The 2012 Liquefaction Credit Facility required Sabine Pass Liquefaction to pay certain up-front fees to the agents and lenders in the aggregate amount of approximately $178 million and provided for a commitment fee calculated at a rate per annum equal to 40% of the applicable margin for LIBOR loans, multiplied by the average daily amount of the undrawn commitment. Annual administrative fees were also required to be paid to the agent and the trustee. The principal of loans made under the 2012 Liquefaction Credit Facility had to be repaid in quarterly installments, commencing with the last day of the first calendar quarter ending at least three months following the completion of Trains 1 and 2 of the Liquefaction Project. Scheduled repayments were based upon an 18-year amortization profile, with the remaining balance due upon the maturity of the 2012 Liquefaction Credit Facility.
 
Under the terms and conditions of the 2012 Liquefaction Credit Facility, all cash held by Sabine Pass Liquefaction was controlled by the collateral agent. These funds could only be released by the collateral agent upon satisfaction of certain terms and conditions related to the use of proceeds, and the cash balance of $100.0 million held in these accounts as of December 31, 2012 was classified as restricted on our Consolidated Balance Sheets.
 
The 2012 Liquefaction Credit Facility contained conditions precedent for the second borrowing and any subsequent borrowings, as well as customary affirmative and negative covenants. The obligations of Sabine Pass Liquefaction under the 2012 Liquefaction Credit Facility were secured by substantially all of the assets of Sabine Pass Liquefaction as well as all of the membership interests in Sabine Pass Liquefaction, and a security interest in Cheniere Partners' rights under its Unit Purchase Agreement with Blackstone CQP Holdco LP ('Blackstone") dated May 14, 2012 on a pari passu basis with the Sabine Pass Liquefaction Senior Notes.

Under the terms of the 2012 Liquefaction Credit Facility, Sabine Pass Liquefaction was required to hedge not less than 75% of the variable interest rate exposure of its projected outstanding borrowings, calculated on a weighted average basis in comparison to its anticipated draw of principal. See Note 5— "Financial Instruments".

In February 2013, Sabine Pass Liquefaction issued the 2021 Sabine Pass Liquefaction Senior Notes to refinance a portion of the 2012 Liquefaction Credit Facility, and a portion of available commitments pursuant to the 2012 Liquefaction Credit Facility were suspended. In April 2013, Sabine Pass Liquefaction issued an aggregate principal amount of $500.0 million of additional 2021 Sabine Pass Liquefaction Senior Notes and $1.0 billion of 2023 Sabine Pass Liquefaction Senior Notes, and as a result, approximately$1.4 billion of commitments under the 2012 Liquefaction Credit Facility were terminated. The termination of these commitments in April 2013 and the amendment and restatement of the 2012 Liquefaction Credit Facility with the 2013 Liquefaction Credit Facilities in May 2013 resulted in a write-off of debt issuance costs associated with the 2012 Liquefaction Credit Facility of $80.5 million in the three and six months ended June 30, 2013.




16


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

CTPL Credit Facility
In May 2013, CTPL entered into a $400.0 million term loan facility (the "CTPL Credit Facility"), which will be used to fund modifications to the Creole Trail Pipeline and for general business purposes. CTPL incurred $10.0 million of direct lender fees that were recorded as a debt discount. The CTPL Credit Facility matures in 2017 when the full amount of the outstanding principal obligations must be repaid. CTPL's loans may be repaid, in whole or in part, at any time without premium or penalty. As of June 30, 2013, CTPL had borrowed the full amount of $400.0 million under the CTPL Credit Facility.

Borrowings under the CTPL Credit Facility bear interest at a variable rate per annum equal to, at CTPL's election, LIBOR or the base rate, plus the applicable margin. The applicable margin for LIBOR loans is 3.25%. Interest on LIBOR loans is due and payable at the end of each LIBOR period.

Under the terms and conditions of the CTPL Credit Facility, all cash reserved to pay interest during construction is controlled by a collateral agent. These funds can only be released by the collateral agent upon satisfaction of certain terms and conditions, and are classified as restricted on our Consolidated Balance Sheets. CTPL is also required to pay annual fees to the administrative and collateral agents.

The CTPL Credit Facility contains customary affirmative and negative covenants. The obligations of CTPL under the CTPL Credit Facility are secured by a first priority lien in substantially all of the personal property of CTPL and all of the general partner and limited partner interests in CTPL.

Cheniere Partners has guaranteed (i) the obligations of CTPL under the CTPL Credit Facility if the maturity of the CTPL Loans is accelerated following the termination by Sabine Pass Liquefaction of a transportation precedent agreement in limited circumstances and (ii) the obligations of Cheniere Energy Investments, LLC ("Cheniere Investments"), Cheniere Partners' wholly owned subsidiary, in connection with its obligations under an equity contribution agreement (a) to pay operating expenses of CTPL until CTPL receives revenues under a service agreement with Sabine Pass Liquefaction and (b) to fund interest payments on the CTPL Loans after the funds in an interest reserve account have been exhausted.

NOTE 8—DESCRIPTION OF EQUITY INTERESTS
 
The common units, Class B 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.

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 initial quarterly distributions have been achieved and as additional target levels are met. The higher percentages range from 15% up to 50%.

The common units have the right to receive initial quarterly distributions of $0.425, 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 we meet financial tests specified in the partnership agreement. Although common and subordinated unitholders are not obligated to fund losses of the partnership, their capital accounts, which would be considered in allocating the net assets of the partnership were it to be liquidated, continue to share in losses.
 
During 2012, Blackstone and Cheniere completed their purchases of newly created Cheniere Partners Class B units ("Class B units") for total consideration of $1.5 billion and $500.0 million, respectively. Proceeds from the financings are being used to fund a portion of the costs of developing, constructing and placing into service the Liquefaction Project. In May 2013, Cheniere purchased an additional 12.0 million Class B units for consideration of $180.0 million in connection with our acquisition of the Creole Trail Pipeline Business described in Note 1—"Organization and Nature of Operations".  The Class B units are subject to conversion, mandatorily or at the option of the holders of the Class B units under specified circumstances, into a number of common units based on the then-applicable conversion value of the Class B units. On a quarterly basis beginning on the initial purchase of the Class B units, and ending on the conversion date of the Class B units, the conversion value of the Class B units increases at a compounded rate of 3.5% per quarter, subject to an additional upward adjustment for certain equity and debt financings. The



17


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

Class B units are not entitled to cash distributions except in the event of our liquidation, our merger, consolidation or other combination with another person or the sale of all or substantially all of our assets. The holders of Class B units have a preference over the holders of the subordinated units in the event of our liquidation, our merger, consolidation or other combination with another person or the sale of all or substantially all of our assets. The Class B units will mandatorily convert into common units on the first business day following the record date with respect to Cheniere Partners' first distribution (the "Mandatory Conversion Date") after the earlier of the substantial completion date of Train 3 or August 9, 2017, although if a notice to proceed is given to Bechtel for Train 3 prior to August 9, 2017, the Mandatory Conversion Date will be the substantial completion date of Train 3. The notice to proceed was given to Bechtel on May 28, 2013. We currently expect the substantial completion date of Train 3 to occur before March 31, 2017. If the Class B units are not mandatorily converted by July 2019, the holders of the Class B units have the option to convert the Class B units into common units at that time.

NOTE 9—RELATED PARTY TRANSACTIONS
 
As of June 30, 2013 and December 31, 2012, we had $8.5 million and $5.0 million of advances to affiliates, respectively. In addition, we have entered into the following related party transactions:

LNG Terminal Capacity Agreements

Terminal Use Agreement

Sabine Pass Liquefaction obtained approximately 2.0 Bcf/d of regasification capacity under a terminal use agreement ("TUA") with Sabine Pass LNG as a result of an assignment in July 2012 by Cheniere Energy Investments, LLC ("Cheniere Investments"), our wholly owned subsidiary, of its rights, title and interest under its TUA with Sabine Pass LNG. Sabine Pass Liquefaction is obligated to make monthly capacity payments to Sabine Pass LNG aggregating approximately $250 million per year, continuing until at least 20 years after Sabine Pass Liquefaction delivers its first commercial cargo at the Liquefaction Project, which may occur as early as late 2015.
 
Cheniere Investments, Sabine Pass Liquefaction and Sabine Pass LNG entered into a terminal use rights assignment and agreement ("TURA") pursuant to which Cheniere Investments has the right to use Sabine Pass Liquefaction's reserved capacity under the TUA and has the obligation to make the monthly capacity payments required by the TUA to Sabine Pass LNG. However, the revenue earned by Sabine Pass LNG from the capacity payments made under the TUA and the loss incurred by Cheniere Investments under the TURA are eliminated upon consolidation of our financial statements. We have guaranteed the obligations of Sabine Pass Liquefaction under its TUA and the obligations of Cheniere Investments under the TURA.

In an effort to utilize Cheniere Investments’ reserved capacity under its TURA during construction of the Liquefaction Project, Cheniere Marketing has entered into an amended and restated variable capacity rights agreement with Cheniere Investments ("amended and restated VCRA") pursuant to which Cheniere Marketing is obligated to pay Cheniere Investments 80% of the expected gross margin of each cargo of LNG that Cheniere Marketing arranges for delivery to the Sabine Pass LNG terminal. During the term of the amended and restated VCRA, Cheniere Marketing is responsible for the payment of taxes and new regulatory costs paid by Cheniere Investments under the TURA. We recorded zero revenues—affiliate from Cheniere Marketing in each of the three months ended June 30, 2013 and 2012 related to the amended and restated VCRA. We recorded zero and $1.7 million of revenues—affiliate from Cheniere Marketing in the six months ended June 30, 2013 and 2012, respectively, related to the amended and restated VCRA.

LNG Sale and Purchase Agreement ("SPA")

Cheniere Marketing has entered into an SPA with Sabine Pass Liquefaction to purchase, at Cheniere Marketing's option, up to 104,000,000 MMBtu of LNG per annum produced from Trains 1 through 4. Sabine Pass Liquefaction has the right each year during the term to reduce the annual contract quantity based on its assessment of how much LNG it can produce in excess of that required for other customers. Cheniere Marketing may purchase incremental LNG volumes at a price of 115% of Henry Hub plus up to $3.00 per MMBtu for the first 36,000,000 MMBtu of the most profitable cargoes sold each year by Cheniere Marketing, and then 20% of net profits of the remaining 68,000,000 MMBtu sold each year by Cheniere Marketing.




18


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

LNG Lease Agreement

In September 2011, Cheniere Investments entered into an agreement in the form of a lease (the "LNG Lease Agreement") with Cheniere Marketing that enables Cheniere Investments to supply the Sabine Pass LNG terminal with LNG to maintain proper LNG inventory levels and temperature. The LNG Lease Agreement also enables Cheniere Investments to hedge the exposure to variability in expected future cash flows of its LNG inventory. Under the terms of the LNG Lease Agreement, Cheniere Marketing funds all activities related to the purchase and hedging of the LNG, and Cheniere Investments reimburses Cheniere Marketing for all costs and assumes full price risk associated with these activities.
 
As a result of Cheniere Investments assuming full price risk associated with the LNG Lease Agreement, LNG inventory purchased by Cheniere Marketing under this arrangement is classified as LNG inventory—affiliate on our Consolidated Balance Sheets, and is recorded at cost and subject to lower-of-cost-or-market ("LCM") adjustments at the end of each period. LNG inventory—affiliate 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 LNG inventory—affiliate in the same fiscal year and are recognized as gains in later interim periods with such gains not exceeding previously recognized losses. Gains or losses on the sale of LNG inventory—affiliate and LCM adjustments are recorded as revenues on our Consolidated Statements of Operations. As of June 30, 2013, we had 180,798 MMBtu of LNG inventory—affiliate recorded at $0.6 million on our Consolidated Balance Sheets, and as of December 31, 2012, we had 1,369,000 MMBtu of LNG inventory—affiliate recorded at $4.4 million on our Consolidated Balance Sheets. During the three months ended June 30, 2013 and 2012, we recognized a gain of zero and $0.3 million, respectively, as a result of LCM adjustments to our LNG inventory—affiliate. During the six months ended June 30, 2013 and 2012, we recognized a loss of zero and $0.6 million, respectively, as a result of LCM adjustments to our LNG inventory—affiliate.

Cheniere Marketing has entered into financial derivatives, on our behalf, to hedge the exposure to variability in expected future cash flows attributable to the future sale of our LNG inventory under the LNG Lease Agreement. The fair value of these derivative instruments at June 30, 2013 and December 31, 2012 was a derivative asset of $0.1 million and $0.2 million, respectively, and was classified as other current assets on our Consolidated Balance Sheets, respectively. Changes in the fair value of these derivative instruments are classified as revenues on our Consolidated Statements of Operations. We recorded revenues of $0.1 million and losses of $0.2 million related to LNG inventory—affiliate derivatives in the three months ended June 30, 2013 and 2012, respectively. We recorded losses of $0.4 million and revenues of $0.9 million related to LNG inventory—affiliate derivatives in the six months ended June 30, 2013 and 2012, respectively.

Service Agreements
During the three months ended June 30, 2013 and 2012, we recorded general and administrative expense—affiliate of $29.2 million and $4.8 million, respectively, under the following service agreements. During the six months ended June 30, 2013 and 2012, we recorded general and administrative expense—affiliate of $47.6 million and $9.8 million, respectively, under the following service agreements.

Cheniere Partners Services Agreement

We have entered into a services agreement with Cheniere LNG Terminals, LLC ("Cheniere Terminals"), a wholly owned subsidiary of Cheniere, pursuant to which we pay Cheniere Terminals a quarterly non-accountable overhead reimbursement charge of $2.8 million (adjusted for inflation) for the provision of various general and administrative services for our benefit. In addition, we reimburse Cheniere Terminals for all audit, tax, legal and finance fees incurred by Cheniere Terminals that are necessary to perform the services under the agreement.

Sabine Pass LNG O&M Agreement

Sabine Pass LNG has entered into a long-term operation and maintenance agreement (the "Sabine Pass LNG O&M Agreement") with a wholly owned subsidiary of Cheniere pursuant to which we receive all necessary services required to operate and maintain the Sabine Pass LNG receiving terminal. Sabine Pass LNG is required to pay a fixed monthly fee of $130,000 (indexed for inflation) under the agreement, 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



19


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

operating year. In addition, Sabine Pass LNG is required to reimburse the counterparty for its operating expenses, which consist primarily of labor expenses.
 
Sabine Pass LNG MSA

Sabine Pass LNG has entered into a long-term management services agreement (the "Sabine Pass LNG MSA") with Cheniere Terminals, pursuant to which Cheniere Terminals manages the operation of the Sabine Pass LNG receiving terminal, excluding those matters provided for under the Sabine Pass LNG O&M Agreement. Sabine Pass LNG is required to pay Cheniere Terminals a monthly fixed fee of $520,000 (indexed for inflation).

Sabine Pass Liquefaction O&M Agreement

In May 2012, Sabine Pass Liquefaction entered into an operation and maintenance agreement (the "Liquefaction O&M Agreement") with a wholly owned subsidiary of Cheniere and our general partner pursuant to which we receive all of the necessary services required to construct, operate and maintain the liquefaction facilities. Before the liquefaction facilities are operational, the services to be provided include, among other services, obtaining governmental approvals on behalf of Sabine Pass Liquefaction, preparing an operating plan for certain periods, obtaining insurance, preparing staffing plans and preparing status reports. After the liquefaction facilities are operational, the services include all necessary services required to operate and maintain the liquefaction facilities.
Before the liquefaction facilities are operational, in addition to reimbursement of operating expenses, Sabine Pass Liquefaction is required to pay a monthly fee equal to 0.6% of the capital expenditures incurred in the previous month. After substantial completion of each Train, for services performed while the liquefaction facilities are operational, Sabine Pass Liquefaction will pay in addition to the reimbursement of operating expenses, a fixed monthly fee of $83,333 (indexed for inflation) for services with respect to such Train.

Sabine Pass Liquefaction MSA

In May 2012, Sabine Pass Liquefaction entered into a management services agreement (the "Liquefaction MSA") with a wholly owned subsidiary of Cheniere pursuant to which such subsidiary was appointed to manage the construction and operation of the liquefaction facilities, excluding those matters provided for under the Liquefaction O&M Agreement. The services to be provided include, among other services, exercising the day-to-day management of Sabine Pass Liquefaction's affairs and business, managing Sabine Pass Liquefaction's regulatory matters, managing bank and brokerage accounts and financial books and records of Sabine Pass Liquefaction's business and operations, and providing contract administration services for all contracts associated with the liquefaction facilities. Sabine Pass Liquefaction will pay a monthly fee equal to 2.4% of the capital expenditures incurred in the previous month. After substantial completion of each Train, Sabine Pass Liquefaction pays a fixed monthly fee of $541,667 for services with respect to such Train.

CTPL O&M Agreement

In May 2013, CTPL entered into an amended long-term operation and maintenance agreement (the "CTPL O&M Agreement") with a wholly owned subsidiary of Cheniere pursuant to which we receive all necessary services required to operate and maintain the Creole Trail Pipeline. CTPL is required to reimburse the counterparty for its operating expenses, which consist primarily of labor expenses.
 
CTPL MSA

In May 2013, CTPL entered into a management services agreement (the "CTPL MSA") with a wholly owned subsidiary of Cheniere pursuant to which such subsidiary was appointed to manage the modification and operation of the Creole Trail Pipeline, excluding those matters provided for under the CTPL O&M Agreement. The services to be provided include, among other services, exercising the day-to-day management of CTPL's affairs and business, managing CTPL's regulatory matters, managing bank and brokerage accounts and financial books and records of CTPL's business and operations, and providing contract administration services for all contracts associated with the liquefaction facilities. CTPL pays a monthly fee equal to 3.0% of the capital expenditures to enable bi-directional natural gas flow on the Creole Trail Pipeline incurred in the previous month.



20


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


Agreement to Fund Sabine Pass LNG's Cooperative Endeavor Agreements
 
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 terminal starting in 2019. In September 2007, Sabine Pass LNG modified its TUA with Cheniere Marketing, pursuant to which Cheniere Marketing would 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. In June 2010, Cheniere Marketing assigned its TUA to Cheniere Investments and concurrently entered into a VCRA, allowing Cheniere Marketing to utilize Cheniere Investments' capacity under the TUA after the assignment. In July 2012, Cheniere Investments entered into an amended and restated VCRA with Cheniere Marketing in order for Cheniere Investments to utilize the capacity rights granted under the TURA during construction of the Liquefaction Project. The amended and restated VCRA provides that Cheniere Marketing will continue to fund the CEAs during the term of the amended and restated VCRA and, in exchange, Cheniere Marketing will receive any future credits.

On a consolidated basis, these advance tax 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 June 30, 2013 and December 31, 2012, we had $17.2 million and $14.7 million of other non-current assets and non-current deferred revenue—affiliate resulting from Sabine Pass LNG's ad valorem tax payments and the advance tax payments received from Cheniere Marketing, respectively.
 
Contracts for Sale and Purchase of Natural Gas and LNG
 
Sabine Pass LNG is able to sell and purchase natural gas and LNG under agreements with Cheniere Marketing. Under these agreements, Sabine Pass LNG purchases natural gas or LNG from Cheniere Marketing at a sales price equal to the actual purchase cost paid by Cheniere Marketing to suppliers of the natural gas or LNG, plus any third-party costs incurred by Cheniere Marketing in respect of the receipt, purchase, and delivery of the natural gas or LNG to the Sabine Pass LNG terminal.

Sabine Pass LNG recorded $0.9 million and $0.5 million of natural gas and LNG purchased from Cheniere Marketing under this agreement in the three months ended June 30, 2013 and 2012, respectively. Sabine Pass LNG recorded $1.8 million and $1.2 million of natural gas and LNG purchased from Cheniere Marketing under this agreement in the six months ended June 30, 2013 and 2012, respectively.

Sabine Pass LNG recorded $1.9 million and zero of natural gas sold to Cheniere Marketing under this agreement in the three months ended June 30, 2013 and 2012, respectively. Sabine Pass LNG recorded $2.8 million and zero of natural gas sold to Cheniere Marketing under this agreement in the six months ended June 30, 2013 and 2012, respectively.

Tug Boat Lease Sharing Agreement

In connection with its tug boat lease, Sabine Pass Tug Services, LLC, a wholly owned subsidiary of Sabine Pass LNG ("Tug Services"), entered into a tug sharing agreement with Cheniere Marketing to provide its LNG cargo vessels with tug boat and marine services at the Sabine Pass LNG terminal. Tug Services recorded revenues—affiliate from Cheniere Marketing of $0.7 million pursuant to this agreement in each of the three months ended June 30, 2013 and 2012. Tug Services recorded revenues—affiliate from Cheniere Marketing of $1.4 million pursuant to this agreement in each of the six months ended June 30, 2013 and 2012.




21


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

NOTE 10—SUPPLEMENTAL CASH FLOW INFORMATION AND DISCLOSURES OF NON-CASH TRANSACTIONS
 
The following table provides supplemental disclosure of cash flow information (in thousands):
 
 
Six Months Ended June 30,
 
 
2013
 
2012
LNG terminal costs funded with accounts payable and accrued liabilities (including affiliate)
 
$
450,767

 
$
8,588

Cash paid during the period for interest, net of amounts capitalized

 
$
9,347

 
$
82,383


NOTE 11—CASH DISTRIBUTIONS AND NET INCOME (LOSS) PER COMMON UNIT

Cash Distributions

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). Generally, our available cash is our cash on hand at the end of a quarter less the amount of any reserves established by our general partner. All distributions paid to date have been made from operating surplus as defined in the partnership agreement. The following provides a summary of distributions paid by us during the six months ended June 30, 2013:
 
 
 
 
 
 
 
 
Total Distribution (in thousands)
Date Paid
 
Period Covered by Distribution
 
Distribution Per Common Unit
 
Distribution Per Subordinated Unit
 
Common Units
 
Class B Units
 
Subordinated Units
 
General Partner Units
February 14, 2013
 
October 1 - December 31, 2012
 
$
0.425

 
$

 
$
16,783

 

 

 
$
342

May 15, 2013
 
January 1 - March 31, 2013
 
0.425

 

 
24,259

 

 

 
495


The subordinated units will receive distributions only to the extent we have available cash above the initial quarterly distribution requirement for our common unitholders and general partner and certain reserves. 

In 2012, we issued and sold 133.3 million Class B units to Blackstone and Cheniere at a price of $15.00 per Class B unit, resulting in total gross proceeds of $2.0 billion. In connection with our purchase of the Creole Trail Pipeline Business in May 2013, we issued and sold 12.0 million Class B units to Cheniere at a price of $15.00 per Class B unit. The Class B units were issued at a discount to the market price of the common units into which they are convertible.  This discount totaling $2,130.0 million represents a beneficial conversion feature and is reflected as an increase in common and subordinated unitholders’ equity and a decrease in Class B unitholders’ equity to reflect the fair value of the Class B units at issuance on our consolidated statement of partners’ and owners' equity (deficit).  The beneficial conversion feature is considered a dividend that will be distributed ratably with respect to any Class B unit from its issuance date through its conversion date, resulting in an increase in Class B unitholders' equity and a decrease in common and subordinated unitholders’ equity.  The impact of the beneficial conversion feature is also included in earnings per unit for the three and six months ended June 30, 2013.

Net Income (Loss) per Common Unit
 
Net income (loss) per common unit for a given period is based on the distributions that will be made to the unitholders with respect to the period plus an allocation of undistributed net income (loss) based on provisions of the partnership agreement, divided by the weighted average number of common units outstanding. The two class method dictates that net income (loss) for a period be reduced by the amount of available cash that will be distributed with respect to that period and that any residual amount representing undistributed net income be allocated to common unitholders and other participating unitholders to the extent that each unit may share in net income as if all of the net income for the period had been distributed in accordance with the partnership agreement. Undistributed income is allocated to participating securities based on the distribution waterfall for available cash specified in the partnership agreement. Undistributed losses (including those resulting from distributions in excess of net income) are allocated to common units and other participating securities on a pro rata basis based on provisions of the partnership agreement. Distributions are treated as distributed earnings in the computation of earnings per common unit even though cash distributions are not necessarily derived from current or prior period earnings.     



22


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

Under our partnership agreement, the incentive distribution rights ("IDRs") participate in net income (loss) only to the extent of the amount of cash distributions actually declared, thereby excluding the IDRs from participating in undistributed net income (loss). We did not allocate earnings or losses to IDR holders for the purpose of the two class method earnings per unit calculation for any of the periods presented. The following table provides a reconciliation of net income (loss) and the allocation of net income (loss) to the common units and the subordinated units for purposes of computing net income (loss) per unit (in thousands, except per unit data):
 
 
 
 
Limited Partner Units
 
 
 
 
Total
 
Common Units
 
Class B Units
 
Subordinated Units
 
General Partner
Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
Net loss attributable to partners
 
$
(37,862
)
 
 
 
 
 
 
 
 
Declared distributions
 
24,754

 
24,259

 

 

 
495

Assumed allocation of undistributed net loss
 
$
(62,616
)
 
(18,199
)
 

 
(43,165
)
 
(1,252
)
Assumed allocation of net income (loss)
 
 
 
$
6,060

 
$

 
$
(43,165
)
 
$
(757
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average units outstanding
 
 
 
57,079

 
137,817

 
135,384

 
 
Net income (loss) per unit
 
 
 
$
0.11

 
$

 
$
(0.32
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
Net loss attributable to partners
 
$
(24,861
)
 
 
 
 
 
 
 
 
Declared distributions
 
13,612

 
13,340

 

 

 
272

Amortization of beneficial conversion feature of Class B Units
 

 
(892
)
 
4,737

 
(3,845
)
 
 
Assumed allocation of undistributed net loss
 
$
(38,473
)
 
(7,096
)
 

 
(30,608
)
 
(769
)
Assumed allocation of net income (loss)
 
 
 
$
5,352

 
$
4,737

 
$
(34,453
)
 
$
(497
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average units outstanding
 
 
 
31,328

 
2,442

 
135,384

 
 
Net income (loss) per unit
 
 
 
$
0.17

 
$
1.94

 
$
(0.25
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
Net loss attributable to partners
 
$
(80,349
)
 
 
 
 
 
 
 
 
Declared distributions
 
49,508

 
48,518

 

 

 
990

Assumed allocation of undistributed net loss
 
$
(129,857
)
 
(37,741
)
 

 
(89,519
)
 
(2,597
)
Assumed allocation of net income (loss)
 
 
 
$
10,777

 
$

 
$
(89,519
)
 
$
(1,607
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average units outstanding
 
 
 
51,345

 
135,587

 
135,384

 
 
Net income (loss) per unit
 
 
 
$
0.21

 
$

 
$
(0.66
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
Net loss attributable to partners
 
$
(44,193
)
 
 
 
 
 
 
 
 
Declared distributions
 
27,207

 
26,663

 

 

 
544

Amortization of beneficial conversion feature of Class B Units
 

 
(892
)
 
4,737

 
(3,845
)
 
 
Assumed allocation of undistributed net loss
 
$
(71,400
)
 
(13,169
)
 

 
(56,803
)
 
(1,428
)
Assumed allocation of net income (loss)
 
 
 
$
12,602

 
$
4,737

 
$
(60,648
)
 
$
(884
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average units outstanding
 
 
 
31,173

 
1,221

 
135,384

 
 
Net income (loss) per unit