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| 8-K - FORM 8-K - Sabine Pass LNG, L.P. | form_8-k.htm |
EXHIBIT 99.1
RISK FACTORS
The following are some of the important factors that could affect our financial performance or could cause actual results to differ materially from estimates contained in our forward-looking statements. We may encounter risks in addition to those described below. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also impair or adversely affect our business, results of operation, financial condition, liquidity and prospects.
The risk factors herein are grouped into the following categories:
• Risks Relating to Our Financial Matters; and
• Risks Relating to Our Business.
Risks Relating to Our Financial Matters
We have substantial indebtedness, which we will need to refinance in whole or in part at or prior to maturity.
We will need to refinance, extend or otherwise satisfy $2.2 billion of indebtedness outstanding, consisting primarily of our $550.0 million of 7¼% Senior Secured Notes due 2013 (“2013 Notes”) and $1,666.0 million of 7½% Senior Secured Notes due 2016 (“2016 Notes” and collectively with the 2013 Notes, the “Senior Notes”). We may not be able to refinance, extend or otherwise satisfy our indebtedness as needed, on commercially reasonable terms or at all.
Our substantial indebtedness could adversely affect our ability to operate our business and prevent us from satisfying or refinancing our debt obligations.
Our substantial indebtedness could have important adverse consequences, including:
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limiting our ability to attract customers;
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limiting our ability to compete with other companies that are not as highly leveraged;
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limiting our flexibility in and ability to plan for or react to changing market conditions in our industry and to economic downturns, and making us more vulnerable than our less leveraged competitors to an industry or economic downturn;
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limiting our ability to use operating cash flow in other areas of our business or for distributions to our partners because we must dedicate a substantial portion of these funds to service debt, including indebtedness that we may incur in the future;
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limiting our ability to obtain additional financing to fund our capital expenditures, working capital, acquisitions, debt service requirements or liquidity needs for general business or other purposes; and
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resulting in a material adverse effect on our business, results of operations and financial condition if we are unable to service or refinance our indebtedness or obtain additional financing, as needed.
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Our substantial indebtedness and the restrictive covenants contained in our debt agreements may not allow us the flexibility that we need to operate our business in an effective and efficient manner and may prevent us from taking advantage of strategic and financial opportunities that would benefit our business.
If we are unsuccessful in operating our business due to our substantial indebtedness or other factors, we may be unable to repay, refinance, or extend our indebtedness on commercially reasonable terms or at all.
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To service our indebtedness, we require significant amounts of cash flow from operations.
We require significant cash flow from operations in order to make annual interest payments of approximately $164.8 million on the Senior Notes. Our ability to make payments on and to refinance our indebtedness, including the Senior Notes, and to fund capital expenditures, will depend on our ability to generate cash in the future. Our business may not generate sufficient cash flow from operations, currently anticipated costs may increase or future borrowings may not be available to us, which could cause us to be unable to pay or refinance our indebtedness, including the Senior Notes, or to fund our other liquidity needs.
The indenture governing the Senior Notes contains restrictions that limit our flexibility in operating our business.
The indenture, dated as of November 9, 2006, governing the Senior Notes (the “Sabine Pass Indenture”) contains several significant covenants that, among other things, restrict our ability to:
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incur additional indebtedness;
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create liens on our assets; and
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engage in sale and leaseback transactions and mergers or acquisitions and to make equity investments.
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Under some circumstances, these restrictive covenants may not allow us the flexibility that we need to operate our business in an effective and efficient manner and may prevent us from taking advantage of strategic and financial opportunities that would benefit our business.
If we fail to comply with the restrictions in the Sabine Pass Indenture or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies.
We could incur more indebtedness in the future, which could exacerbate the risks associated with our substantial leverage.
The Sabine Pass Indenture does not prohibit us from incurring additional indebtedness, including additional senior or secured indebtedness, and other liabilities, or from pledging assets to secure such indebtedness and liabilities. The incurrence of additional indebtedness and, in particular, the granting of a security interest to secure additional indebtedness, could adversely affect our business, results of operations and financial condition if we are unable to service our indebtedness.
Each customer’s TUA for capacity at our LNG receiving terminal is subject to termination under certain circumstances.
Each of our long-term TUAs contains various termination rights. For example, each customer may terminate its TUA if our LNG receiving terminal experiences a force majeure delay for longer than 18 months, fails to redeliver a specified amount of natural gas in accordance with the customer’s redelivery nominations or fails to accept and unload a specified number of the customer’s proposed LNG cargoes. We may not be able to replace these TUAs on desirable terms, or at all, if they are terminated.
Our ability to generate needed amounts of cash is substantially dependent upon our TUAs with three customers, and we will be materially and adversely affected if any customer fails to perform its TUA obligations for any reason.
Our future results and liquidity are dependent upon performance by Chevron and Total, each of which has entered into a TUA with us and agreed to pay us approximately $125 million annually, and with Cheniere Investments, which is required to pay us approximately $250 million annually. We are dependent on each customer’s continued willingness and ability to perform its obligations under its TUA. We are also exposed to the credit risk of the guarantors of these customers’ obligations under their respective TUAs in the event that we must
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seek recourse under a guaranty. If any customer fails to perform its obligations under its TUA, our business, results of operations, financial condition and prospects could be materially and adversely affected, even if we were ultimately successful in seeking damages from that customer or its guarantor for a breach of the TUA.
Cheniere Investments has no business, has limited capital and lacks a credit rating. In addition, Cheniere Energy Partners, which has guaranteed Cheniere Investments’ TUA obligations, has no credit rating. Accordingly, we believe that Cheniere Investments and Cheniere have a higher risk of being financially unable to perform their obligations under the Cheniere Investments TUA than either Chevron or Total have with respect to their TUAs. Although each of our TUA counterparties faces a risk that it will not be able to enter into commercial arrangements for the use of its capacity at our LNG receiving terminal to support the payment of its obligations under its TUA, due to negative developments in the LNG industry or for other reasons, that risk and the potential for that risk to adversely affect us are greater for Cheniere Investments than for Total and Chevron. The principal risks attendant to Cheniere Investments future ability to generate operating cash flow to support its TUA obligations include the following:
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neither Cheniere Investments nor Cheniere Marketing, which is required to provide services for, and make payments to, Cheniere Investments, has unconditional agreements or arrangements for any supplies of LNG, or for the utilization of capacity that Cheniere Investments has contracted for under its TUA with us and may not be able to obtain such agreements or arrangements on economical terms, or at all;
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neither Cheniere Investments nor Cheniere Marketing has unconditional commitments from customers for the purchase of the natural gas that they propose to sell from our LNG receiving terminal, and they may not be able to obtain commitments or other arrangements on economical terms, or at all;
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in order to arrange for supplies of LNG, and for transportation, storage and sales of natural gas, Cheniere Investments will require significant credit support and funding, which we may not be able to obtain on terms that are acceptable to us, or at all; and
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even if Cheniere Investments or Cheniere Marketing is able to arrange for supplies and transportation of LNG to our LNG receiving terminal, and for transportation and sales of natural gas to customers, it may experience negative cash flows and adverse liquidity effects due to fluctuations in supply, demand and price for LNG, for transportation of LNG, for natural gas and for storage and transportation of natural gas.
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The business plans of both Cheniere Investments and Cheniere Marketing may be limited by access to capital and their lack of a credit rating. These factors create financial obstacles and exacerbate the risk that neither Cheniere Investments nor Cheniere Marketing will be able to enter into commercial arrangements with third parties to commercially exploit all of Cheniere Investments’ capacity at our LNG receiving terminal on commercially advantageous terms or at all.
Any or all of these factors, as well as other risk factors described elsewhere herein and other risk factors that we or Cheniere Investments may not be able to anticipate, control or mitigate, could materially and adversely affect the business, results of operations, financial condition, prospects and liquidity of Cheniere Investments, which in turn could have a material adverse effect upon us.
Risks Relating to Our Business
Operation of our LNG receiving terminal involves significant risks.
Our LNG receiving terminal faces operational risks, including the following:
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performing below expected levels of efficiency;
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breakdown or failures of equipment or systems;
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operational errors by vessel or tug operators or others;
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operational errors by us or any contracted facility operator or others;
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labor disputes; and
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weather-related interruptions of operations.
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To maintain the cryogenic readiness of our LNG receiving terminal, we may need to purchase and process LNG. Our third party customers have the obligation to procure LNG if necessary for our terminal to maintain its cryogenic state. If they fail to do so, we may need to procure such LNG.
We will need to maintain the cryogenic readiness of our LNG receiving terminal. Our two third party customers have the obligation to procure LNG to maintain the cryogenic readiness of the terminal. If a third party customer procures the LNG, the other third party customer and we will reimburse the procuring customer for each of our allocable share of the LNG acquired to maintain the cryogenic readiness of the terminal. We may bear the commodity price risk of purchasing our allocable portion of the LNG, holding it in our inventory for a period of time and selling the regasified LNG.
Should such third party customers fail to procure the necessary LNG, we have the right to procure the LNG. If it becomes necessary for us to procure LNG and we are unable to obtain financing on acceptable terms for its purchase, then we will need to maintain sufficient working capital so that we can purchase such LNG until we (i) receive reimbursement for the allocable costs of the LNG from our third party customers, or (ii) see the regasified LNG.
We may be required to purchase natural gas to provide fuel at our LNG receiving terminal, which would increase operating costs and could have a material adverse effect on our results of operations.
Our three TUAs provide for an in-kind deduction of 2% of the LNG delivered to our LNG receiving terminal, which we use primarily as fuel for revaporization and self-generated power and to cover natural gas unavoidably lost at the facility. There is a risk that this 2% in-kind deduction will be insufficient for these needs and that we will have to purchase additional natural gas from third parties. We will bear the cost and risk of changing prices for any such fuel.
Hurricanes or other disasters could adversely affect us.
In August and September of 2005, Hurricanes Katrina and Rita damaged coastal and inland areas located in Texas, Louisiana, Mississippi and Alabama. Construction at our LNG receiving terminal site was temporarily suspended in connection with Hurricane Katrina, as a precautionary measure. Approximately three weeks after the occurrence of Hurricane Katrina, the receiving terminal site was again secured and evacuated in anticipation of Hurricane Rita, the eye of which made landfall to the east of the site. As a result of these 2005 storms and related matters, our receiving terminal experienced construction delays and increased costs. In September 2008, Hurricane Ike struck the Texas and Louisiana coast, and we experienced damage at our LNG receiving terminal.
Future storms and related storm activity and collateral effects, or other disasters such as explosions, fires, floods or accidents, could result in damage to, or interruption of operations at, our LNG receiving terminal or related infrastructure. If there are changes in the global climate, storm frequency and intensity may increase; should it result in rising seas, our coastal operations would be impacted.
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Failure to obtain and maintain approvals and permits from governmental and regulatory agencies with respect to the operation of our LNG receiving terminal could impede operations and could have a material adverse effect on us.
The operation of our LNG receiving terminal is a highly regulated activity. The FERC’s approval under Section 3 of the NGA, as well as several other material governmental and regulatory approvals and permits, are required in order to operate our LNG receiving terminal. Although we have obtained all of the necessary authorizations to operate our LNG receiving terminal, such authorizations are subject to ongoing conditions imposed by regulatory agencies, and additional approval and permit requirements may be imposed. Failure to obtain and maintain any of these approvals and permits could have a material adverse effect on our business, results of operations, financial condition and prospects.
We are entirely dependent on Cheniere, including employees of Cheniere and its subsidiaries, for key personnel, and a loss of key personnel could have a material adverse effect on our business.
As of August 1, 2010, Cheniere and its subsidiaries had 191 full-time employees. We have contracted with subsidiaries of Cheniere to provide the personnel necessary for the operation, maintenance and management of our LNG receiving terminal. We face competition for these highly skilled employees in the immediate vicinity of our LNG receiving terminal and more generally from the Gulf Coast hydrocarbon processing and construction industries.
Our general partner’s executive officers are officers and employees of Cheniere and its affiliates. We do not maintain key person life insurance policies on any personnel, and our general partner does not have any employment contracts or other agreements with key personnel binding them to provide services for any particular term. The loss of the services of any of these individuals could have a material adverse effect on our business. In addition, our future success will depend in part on our general partner’s ability to engage, and Cheniere’s ability to attract and retain additional qualified personnel.
We have numerous contractual and commercial relationships, and conflicts of interest, with Cheniere and its affiliates, including Cheniere Investments.
We have agreements to compensate and to reimburse expenses of affiliates of Cheniere. In addition, we have entered into a TUA with Cheniere Investments, under which Cheniere Investments will be able to derive substantial economic benefits. All of these agreements involve conflicts of interest between us, on the one hand, and Cheniere and its other affiliates, on the other hand.
We are dependent on Cheniere and its affiliates to provide services to us. If Cheniere or its affiliates are unable or unwilling to perform according to the negotiated terms and timetable of their respective agreement for any reason or terminates their agreement, we would be required to engage a substitute service provider. This would likely result in a significant interference with operations and increased costs.
We may not be able to provide proposed liquefaction services at our LNG receiving terminal.
Cheniere Partners’ proposed addition of liquefaction facilities and services at our LNG receiving terminal will require very significant financial resources, which may not be available on terms reasonably acceptable to us or at all. Cost overruns or delays could adversely affect permitting or construction of the liquefaction facilities. We also may not be able to obtain customer commitments to use the liquefaction services, without which we would not be able to finance the construction of liquefaction facilities. Even if successfully constructed, the liquefaction facilities would be subject to many of the same operating risks described herein with respect to the our LNG receiving terminal. Accordingly, there are many risks associated with Cheniere Partners’ proposed liquefaction facility, and it may not be successful implementing its business strategy.
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We are subject to significant operating hazards and uninsured risks, one or more of which may create significant liabilities and losses that could have a material and adverse effect on us.
The operation of our LNG receiving terminal is subject to the inherent risks associated with this type of operation, including explosions, pollution, release of toxic substances, fires, hurricanes and adverse weather conditions, and other hazards, each of which could result in significant delays in commencement or interruptions of operations and/or in damage to or destruction of our LNG receiving terminal or damage to persons and property. In addition, operations at our LNG receiving terminal and the facilities and vessels of third parties on which our operations are dependent face possible risks associated with acts of aggression or terrorism.
We do not, nor do we intend to, maintain insurance against all of these risks and losses. We may not be able to maintain desired or required insurance in the future at rates that we consider reasonable. The occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
Existing and future environmental and similar laws and regulations could result in increased compliance costs or additional operating costs and restrictions.
Our business is and will be subject to extensive federal, state and local laws and regulations that control, among other things, discharges to air and water; the handling, storage and disposal of hazardous chemicals, hazardous waste, and petroleum products; and remediation associated with the release of hazardous substances. Many of these laws and regulations, such as the CAA, the Oil Pollution Act, the CWA, and the RCRA, and analogous state laws and regulations, restrict or prohibit the types, quantities and concentration of substances that can be released into the environment in connection with the operation of our LNG receiving terminal and require us to maintain permits and provide governmental authorities with access to the facility for inspection and reports related to our compliance. Violation of these laws and regulations could lead to substantial fines and penalties or to capital expenditures related to pollution control equipment that could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects. CERCLA and similar state laws impose liability, without regard to fault or the lawfulness of the original conduct, for the release of certain types or quantities of hazardous substances into the environment. As the owner and operator of our LNG receiving terminal, we could be liable for the costs of cleaning up hazardous substances released into the environment and for damage to natural resources.
There are numerous regulatory approaches currently in effect or being considered to address greenhouse gases, including possible future U.S. treaty commitments, new federal or state legislation that may impose a carbon emissions tax or establish a cap-and-trade program, and regulation by the EPA. For example, the adoption of frequently proposed legislation implementing a carbon tax on energy sources that emit carbon dioxide into the atmosphere may have a material adverse effect on the ability of our customers, particularly Cheniere Investments, (i) to import LNG, if imposed on them as importers of potential emission sources, or (ii) to sell regasified LNG, if imposed on them or their customers as natural gas suppliers or consumers. In addition, as we consume retainage gas at our LNG receiving terminal, this carbon tax may also be imposed on us directly.
There have also been proposals for a mandatory cap and trade program to reduce greenhouse gas emissions. In June 2009, the U.S. House of Representatives passed a comprehensive climate change and energy bill, the American Clean Energy and Security Act, and the U.S. Senate is considering similar legislation that would, among other things, impose a nationwide cap on greenhouse gas emissions and require major sources to obtain “allowances” to meet that cap. In May 2010, a draft bill, the American Power Act, was introduced which included a cap and trade program and other measures to reduce greenhouse gas emissions. In September 2009, the EPA promulgated a rule requiring certain emitters of greenhouse gases to monitor and report their greenhouse gas emissions to the EPA. In April 2010, the EPA issued proposed rules that would specifically add oil and natural gas systems to those emitters required to monitor and report greenhouse gases. In addition, in response to the 2007 U.S. Supreme Court ruling in Massachusetts v. EPA that the EPA has authority to regulate carbon dioxide emissions under the Clean Air Act, the EPA has issued and is considering several additional rules and proposals. In May 2010, the EPA issued a final rule that describes which stationary sources will be required to install best available control technology for greenhouse gas emissions whenever such stationary sources are built or significantly modified. The rule, also known as the “tailoring rule”, increases the initial threshold for greenhouse gas emissions to 75,000 tons
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per year starting January 1, 2010 for those entities that must have a construction or operating permit under the CAA Prevention of Significant Deterioration or Title V programs. In addition, one U.S. federal appeals courts has reinstated a lawsuit permitting individuals, state attorneys general and others to pursue claims against major utility companies on the basis that those companies have created a public nuisance due to their emissions of carbon dioxide. Climate change initiatives and other efforts to reduce greenhouse gas emissions like those described above or otherwise may require additional controls on the operation of the our LNG receiving terminal and increased costs to implement and maintain such controls.
Other future legislation and regulations, such as those relating to the transportation and security of LNG imported to our LNG receiving terminal through the Sabine Pass Channel, could cause additional expenditures, restrictions and delays in our business, the extent of which cannot be predicted and which may require us to limit substantially, delay or cease operations in some circumstances. Revised, reinterpreted or additional laws and regulations that result in increased compliance costs or additional operating costs and restrictions could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
Failure of imported LNG to be a competitive source of energy for North American markets could adversely affect our customers, particularly Cheniere Investments, and could materially and adversely affect our business, results of operations, financial condition and prospects.
Operations at our LNG receiving terminal will be dependent upon the ability of our customers to import LNG supplies into the U.S., which is primarily dependent upon LNG being a competitive source of energy in North America. In North America, due mainly to a historically abundant supply of natural gas, imported LNG has not historically been a major energy source. The success of the regasification services component of our business plan is dependent, in part, on the extent to which LNG can, for significant periods and in significant volumes, be produced internationally and delivered to North America at a lower cost than the cost to produce some domestic supplies of natural gas, or other alternative energy sources. Through the use of improved exploration technologies, additional sources of natural gas have recently been may continue to be discovered in North America, which could further increase the available supply of natural gas and could result in natural gas being available at a lower cost than imported LNG. In addition to natural gas, LNG also competes in North America with other sources of energy, including coal, oil, nuclear, hydroelectric, wind and solar energy.
Other continents have a longer history of importing LNG and, due to their geographic proximity to LNG producers and limited pipeline access to natural gas supplies, may be willing and able to pay more for LNG, thereby reducing or eliminating the supply of LNG available in North American markets. Current and futures prices for natural gas in markets that compete with North America have been higher than prices for natural gas in North America, which has adversely affected the volume of LNG imports into North America. If LNG deliveries to North America continue to be constrained due to stronger demand from these competing markets, the ability of our TUA customers to import LNG into North America on a profitable basis may be adversely affected.
Political instability in foreign countries that have supplies of natural gas, or strained relations between such countries and the U.S., may also impede the willingness or ability of LNG suppliers and merchants in such countries to export LNG to the U.S. Furthermore, some foreign suppliers of LNG may have economic or other reasons to direct their LNG to non-U.S. markets or to competitors’ LNG receiving terminals in the U.S.
As a result of these and other factors, LNG may not be a competitive source of energy in North America. The failure of LNG to be a competitive supply alternative to domestic natural gas, oil and other alternative energy sources could impede our customers’ ability to import LNG into North America on a commercial basis. Any significant impediment to the ability to import LNG into the United States generally or to our LNG receiving terminal specifically could have a material adverse effect on our customers, particularly Cheniere Investments, and on our business, results of operations, financial condition and prospects.
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Decreases in the demand for and price of natural gas could lead to reduced development of LNG projects worldwide, which could adversely affect the performance of our TUA customers, particularly Cheniere Investments, and could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
The development of domestic LNG receiving terminals and LNG projects generally is based on assumptions about the future price of natural gas and the availability of imported LNG. Natural gas prices have been, and are likely to continue to be, volatile and subject to wide fluctuations in response to one or more of the following factors:
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relatively minor changes in the supply of, and demand for, natural gas in relevant markets;
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political conditions in international natural gas producing regions;
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the extent of domestic production and importation of natural gas in relevant markets;
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the level of demand for LNG and natural gas in relevant markets, including the effects of economic downturns or upturns;
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weather conditions;
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the competitive position of natural gas as a source of energy compared with other energy sources; and
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the effect of government regulation on the production, transportation and sale of natural gas.
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Adverse trends or developments affecting any of these factors could result in decreases in the price of natural gas, leading to reduced development of LNG projects worldwide. Such reductions could adversely affect the performance of our TUA customers, particularly Cheniere Investments, and could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
Cyclical or other changes in the demand for LNG regasification capacity may adversely affect the performance of our TUA customers, particularly Cheniere Investments, and could reduce our operating revenues and may cause us operating losses.
The utilization of our LNG receiving terminal could be subject to cyclical swings, reflecting alternating periods of under-supply and over-supply of LNG importation or export capacity and available natural gas, principally due to the combined impact of several factors, including:
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additions to competitive regasification capacity in North America, Europe, Asia and other markets, which could divert LNG from our LNG receiving terminal;
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competitive liquefaction capacity in North America, which could divert natural gas from proposed liquefaction facilities at our LNG receiving terminal;
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insufficient LNG liquefaction or receiving capacity worldwide;
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insufficient LNG tanker capacity;
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reduced demand and lower prices for natural gas;
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increased natural gas production deliverable by pipelines, which could suppress demand for LNG;
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cost improvements that allow competitors to offer LNG regasification or liquefaction services at reduced prices;
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changes in supplies of, and prices for, alternative energy sources such as coal, oil, nuclear, hydroelectric, wind and solar energy, which may reduce the demand for natural gas;
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changes in regulatory, tax or other governmental policies regarding imported or exported LNG, natural gas or alternative energy sources, which may reduce the demand for imported or exported LNG and/or natural gas;
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adverse relative demand for LNG compared to other markets, which may decrease LNG imports into and exports from North America; and
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cyclical trends in general business and economic conditions that cause changes in the demand for natural gas.
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These factors could materially and adversely affect the ability of our customers, including Cheniere Investments, to procure supplies of LNG to be imported into North America and to procure customers for regasified LNG at economical prices, or at all.
We may face competition from competitors with far greater resources.
Many competing companies have secured access to, or are pursuing development or acquisition of, LNG import infrastructure to serve the U.S. natural gas market. Some industry analysts have predicted substantial excess LNG receiving capacity in North America for at least several years based on terminals currently in operation or under construction. Our LNG importation services competitors in the U.S. include major energy corporations (e.g., Exxon Mobil Corporation, BG Group plc, BP plc, Chevron Corporation, ConocoPhillips and Dow Chemical). In addition, other competitors have developed or reopened additional LNG receiving terminals in Europe, Asia and other markets, which also compete with our LNG receiving terminal. We will also face competition from major energy companies and others in providing liquefaction services at our LNG receiving terminal. Almost all of these competitors have longer operating histories, more development experience, greater name recognition, larger staffs and substantially greater financial, technical and marketing resources and access to natural gas and LNG supplies than we and our affiliates do. The superior resources that these competitors have available for deployment could allow them to compete successfully against us, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
Insufficient development of additional LNG liquefaction capacity worldwide could adversely affect the performance of our TUA customers, particularly Cheniere Investments, and could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
Commercial development of an LNG liquefaction facility takes a number of years and requires substantial capital investment. Many factors could negatively affect continued development of LNG liquefaction facilities, including:
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increased construction costs;
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economic downturns, increases in interest rates or other events that may affect the availability of sufficient financing for LNG projects on commercially reasonable terms;
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decreases in the price of LNG and natural gas, which might decrease the expected returns relating to investments in LNG projects;
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the inability of project owners or operators to obtain governmental approvals to construct or operate LNG facilities;
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political unrest in exporting countries or local community resistance in such countries to the siting of LNG facilities due to safety, environmental or security concerns; and
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any significant explosion, spill or similar incident involving an LNG liquefaction facility or LNG carrier.
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There may be shortages of LNG vessels worldwide, which could adversely affect the performance of our customers, particularly Cheniere Investments, and could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
The construction and delivery of LNG vessels require significant capital and long construction lead times, and the availability of the vessels could be delayed to the detriment of our TUA customers because of:
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an inadequate number of shipyards constructing LNG vessels and a backlog of orders at these shipyards;
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political or economic disturbances in the countries where the vessels are being constructed;
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changes in governmental regulations or maritime self-regulatory organizations;
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work stoppages or other labor disturbances at the shipyards;
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bankruptcy or other financial crisis of shipbuilders;
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quality or engineering problems;
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weather interference or a catastrophic event, such as a major earthquake, tsunami or fire; and
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shortages of or delays in the receipt of necessary construction materials.
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We may experience increased labor costs, and the unavailability of skilled workers or our failure to attract and retain key personnel could adversely affect us.
We are dependent upon the available labor pool of skilled employees. We compete with other energy companies and other employers to attract and retain qualified personnel with the technical skills and experience required to operate our LNG receiving terminal and to provide our customers with the highest quality service. Our affiliates who hire personnel on our behalf are also subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions. A shortage in the labor pool of skilled workers or other general inflationary pressures or changes in applicable laws and regulations could make it more difficult for us to attract and retain personnel and could require an increase in the wage and benefits packages that we offer, thereby increasing our operating costs. For example, in the aftermaths of Hurricanes Katrina and Rita, Bechtel and certain subcontractors temporarily experienced a shortage of available skilled labor necessary to meet the requirements of our construction plan. As a result, we agreed to change orders with Bechtel concerning additional activities and expenditures to mitigate the hurricanes’ effects on the construction of our LNG receiving terminal. Any increase in our operating costs could materially and adversely affect our business, results of operations, financial condition and prospects.
Our lack of diversification could have an adverse effect on our financial condition and results of operations.
Substantially all of our anticipated revenue in 2010 will be dependent upon one facility: our LNG receiving terminal in southern Louisiana. Due to our lack of asset and geographic diversification, an adverse development at our LNG receiving terminal or in the LNG industry would have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets and operating areas.
Terrorist attacks or military campaigns may adversely impact our business.
A terrorist incident may result in temporary or permanent closure of existing LNG facilities, including our LNG receiving terminal, which could increase our costs and decrease our cash flows, depending on the duration of
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the closure. Operations at our LNG receiving terminal could also become subject to increased governmental scrutiny that may result in additional security measures at a significant incremental cost to us. In addition, the threat of terrorism and the impact of military campaigns may lead to continued volatility in prices for natural gas that could adversely affect our customers, particularly Cheniere Investments, including their ability to satisfy their obligations to us under their TUAs.
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