Sabine Pass LNG 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549FORM 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

£TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 333-138916

Sabine Pass LNG, L.P.

(Exact name of registrant as specified in its charter)

Delaware	20-0466069
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
700 Milam Street, Suite 800 Houston, Texas	77002
(Address of principal executive offices)	(Zip Code)

(713) 375-5000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  T    No  £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  T    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                    £
Non-accelerated filer    T	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

Indicate the number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date:    not applicable

SABINE PASS LNG, L.P.

INDEX TO FORM 10-Q

Part I. Financial Information
Item 1.	Consolidated Financial Statements	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Partners' Capital (Deficit)	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
��
Item 4.	Controls and Procedures	17
Part II. Other Information
Item 1.	Legal Proceedings	17
Item 6.	Exhibits	17

i

Part I.        Financial Information

Item 1.        Consolidated Financial Statements

SABINE PASS LNG, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30,			December 31,
	2012			2011
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	4,894		$	4,268
Restricted cash and cash equivalents	54,929			13,732
Accounts and interest receivable	25,120			517
Accounts receivable—affiliate	11,761			314
Advances to affiliate	1,806			556
LNG inventory	5,701			473
Prepaid expenses and other	6,561			6,145
Total current assets	110,772			26,005
Non-current restricted cash and cash equivalents	82,394			82,394
Property, plant and equipment, net	1,486,344			1,514,137
Debt issuance costs, net	14,321			17,622
Other	14,876			12,355
Total assets	$	1,708,707		$	1,652,513
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities
Accrued liabilities	$	59,288		$	14,854
Accrued liabilities—affiliate	4,053			1,075
Deferred revenue	26,525			26,629
Deferred revenue—affiliate	21,730			21,650
Other	—			1,415
Total current liabilities	111,596			65,623
Long-term debt, net of discount	2,195,939			2,192,418
Deferred revenue	22,500			25,500
Deferred revenue—affiliate	14,720			12,266
Other non-current liabilities	293			302
Commitments and contingencies
Partners' deficit	(636,341		)	(643,596		)
Total liabilities and partners' deficit	$	1,708,707		$	1,652,513

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

1

SABINE PASS LNG, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Revenues
Revenues	$	65,939		$	68,393		$	198,928		$	205,237
Revenues—affiliate	63,812			63,645			191,481			191,760
Total revenues	129,751			132,038			390,409			396,997
Expenses
Operating and maintenance expense	6,586			6,288			19,843			15,878
Operating and maintenance expense—affiliate	6,329			2,612			12,267			8,723
Depreciation expense	10,633			10,766			31,818			32,245
General and administrative expense	401			325			1,168			2,054
General and administrative expense—affiliate	3,109			2,281			7,798			6,944
Total expenses	27,058			22,272			72,894			65,844
Income from operations	102,693			109,766			317,515			331,153
Other income (expense)
Interest expense, net	(43,487		)	(43,319		)	(130,403		)	(130,115		)
Derivative gain (loss)	287			(716		)	(288		)	(1,164		)
Other	32			22			111			104
Total other expense	(43,168		)	(44,013		)	(130,580		)	(131,175		)
Net income	$	59,525		$	65,753		$	186,935		$	199,978

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

2

SABINE PASS LNG, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

(in thousands)

(unaudited)

	General Partner Sabine Pass LNG-GP, LLC		Limited Partner Sabine Pass LNG-LP, LLC			Accumulated Other Comprehensive Income		Total Partners' Deficit
Balance at December 31, 2011	$	—	$	(643,596	)	$	—	$	(643,596	)
Distributions to owner	—		(182,889		)	—		(182,889		)
Non-cash contributions	—		3,209			—		3,209
Net income	—		186,935			—		186,935
Balance at September 30, 2012	$	—	$	(636,341	)	$	—	$	(636,341	)

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

3

SABINE PASS LNG, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2012			2011
Cash flows from operating activities
Net income	$	186,935		$	199,978
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	31,818			32,245
Amortization of debt discount	3,521			3,520
Amortization of debt issuance costs	3,301			3,278
Non-cash derivative (gain) loss	(1,475		)	777
Investment in restricted cash and cash equivalents	(41,197		)	(41,197		)
Other	3,209			—
Changes in operating assets and liabilities:
Accounts and interest receivable	(24,603		)	(85		)
Accounts receivable—affiliate	(11,447		)	58
Deferred revenue	(3,104		)	(3,135		)
Accounts payable and accrued liabilities	40,938			40,911
Advances to affiliate	(1,266		)	3,135
Accrued liabilities—affiliate	1,519			(246		)
Other	(515		)	(2,354		)
Net cash provided by operating activities	187,634			236,885
Cash flows from investing activities
LNG terminal construction-in-process, net	(4,014		)	(6,419		)
Other	(105		)	(97		)
Net cash used in investing activities	(4,119		)	(6,516		)
Cash flows from financing activities
Distributions to owner	(182,889		)	(231,734		)
Net cash used in financing activities	(182,889		)	(231,734		)
Net increase (decrease) in cash and cash equivalents	626			(1,365		)
Cash and cash equivalents—beginning of period	4,268			5,926
Cash and cash equivalents—end of period	$	4,894		$	4,561

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

4

SABINE PASS LNG, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Sabine Pass LNG, L.P. have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and 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. As used in these Notes to Consolidated Financial Statements, the terms "Sabine Pass LNG," "we", "us" and "our" refer to Sabine Pass LNG, L.P. and its wholly owned subsidiaries, unless otherwise stated or indicated by context.

Results of operations for the three and nine months endedended September 30, 2012 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2012.

We are a disregarded entity for federal income tax purposes with one general partner, Sabine Pass LNG-GP, LLC ("Sabine Pass LNG-GP"), and one limited partner, Sabine Pass LNG-LP, LLC ("Sabine Pass LNG-LP"). Our taxable income or loss, which may vary substantially from the net income or loss reported on our Consolidated Statements of Operations, is able to be included in the federal income tax return of Cheniere Energy Partners, L.P. ("Cheniere Partners"), a publicly traded partnership which directly owns Sabine Pass LNG-GP and Sabine Pass LNG-LP and indirectly owns us. Accordingly, no provision or liability for federal or state income taxes is included in the accompanying Consolidated Financial Statements.

Certain reclassifications have been made to prior period information to conform to the current presentation.  The reclassifications had no effect on our overall consolidated financial position or results of operations.

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, 2011.

NOTE 2—Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents consist of cash and cash equivalents that are contractually restricted as to usage or withdrawal, as follows:

We have issued an aggregate principal amount of $2,215.5 million of Senior Notes (see Note 5—"Long-Term Debt"). Under the indenture governing the Senior Notes (the "Sabine Pass Indenture"), except for permitted tax distributions, we 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, there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment of $82.4 million and a fixed charge coverage ratio test of 2:1 must be satisfied.

As of September 30, 2012 and December 31, 2011, we classified the permanent debt service reserve fund of $82.4 million as non-current restricted cash and cash equivalents. As of September 30, 2012 and December 31, 2011, we classified $54.9 million and $13.7 million, respectively, as current restricted cash and cash equivalents for the payment of interest due within twelve months. These cash accounts are controlled by a collateral trustee, and, therefore, are shown as restricted cash and cash equivalents on our Consolidated Balance Sheets.

5

SABINE PASS LNG, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

(unaudited)

NOTE 3—Property, Plant and Equipment

Property, plant and equipment consists of liquefied natural gas ("LNG") terminal costs and fixed assets, as follows (in thousands): 

	September 30,			December 31,
	2012			2011
LNG terminal costs
LNG terminal	$	1,641,581		$	1,637,724
LNG terminal construction-in-process	221			286
LNG site and related costs, net	158			163
Accumulated depreciation	(155,989		)	(124,409		)
Total LNG terminal costs, net	1,485,971			1,513,764
Fixed assets
Computers and office equipment	336			227
Vehicles	496			416
Machinery and equipment	1,115			1,068
Other	630			630
Accumulated depreciation	(2,204		)	(1,968		)
Total fixed assets, net	373			373
Property, plant and equipment, net	$	1,486,344		$	1,514,137

Depreciation expense related to our LNG terminal totaled $10.6 million and $10.7 million for the three months endedSeptember 30, 2012 and 2011, respectively. Depreciation expense related to our LNG terminal totaled $31.6 million and $32.0 million for the nine months endedSeptember 30, 2012 and 2011, respectively.

NOTE 4—Accrued Liabilities

As of September 30, 2012 and December 31, 2011, accrued liabilities consisted of the following (in thousands):

	September 30,		December 31,
	2012		2011
Interest expense and related debt fees	$	54,929	$	13,732
LNG terminal costs	869		1,122
Affiliate	4,053		1,075
Other	3,490		—
Total accrued liabilities	$	63,341	$	15,929

NOTE 5—Long-Term Debt

As of September 30, 2012 and December 31, 2011, our long-term debt consisted of the following (in thousands):

	September 30,		December 31,
	2012		2011
Senior Notes, net of discount	$	2,195,939	$	2,192,418

In November 2006, we issued an aggregate principal amount of $2,032 million of Senior Notes (the "Senior Notes"), consisting of $550 million of 7¼% Senior Secured Notes due 2013 (the "2013 Notes") and $1,482 million of 7½% Senior Secured Notes due 2016 (the "2016 Notes"). In September 2008, we issued an additional $183.5 million, before discount, of 2016 Notes whose terms were identical to the previously outstanding 2016 Notes. Interest on the Senior Notes is payable semi-annually in arrears on May 30 and November 30 of each year. The Senior Notes are secured on a first-priority basis by a security interest in all of our equity interests and substantially all of our operating assets.

6

SABINE PASS LNG, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

(unaudited)

We may redeem some or all of the Senior Notes at any time, and from time to time, at a redemption price equal to 100% of the principal plus any accrued and unpaid interest plus the greater of:

•1% of the principal amount of the Senior Notes; or

• the excess of: a) the present value at such redemption date of (i) the redemption price of the Senior Notes plus (ii) all required interest payments due on the Senior Notes (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over b) the principal amount of the Senior Notes, if greater.

Under the Sabine Pass Indenture, except for permitted tax distributions, we may not make distributions until certain conditions are satisfied: there must be on deposit in an interest payment account an amount equal to one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment, and there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment of approximately $82.4 million. Distributions are permitted only after satisfying the foregoing funding requirements, a fixed charge coverage ratio test of 2:1 and other conditions specified in the Sabine Pass Indenture. During the nine months endedSeptember 30, 2012 and 2011, we made distributions of $182.9 million and $231.7 million, respectively, after satisfying all the applicable conditions in the Sabine Pass Indenture. 

See Note 8—"Subsequent Events" for a description of the repurchase in October 2012 of the 2013 Notes and our issuance of new notes.

NOTE 6—Financial Instruments

Derivative Instruments

We have entered into certain derivative instruments to hedge the price risk attributable to future purchases of natural gas to be utilized as fuel to operate our LNG terminal ("Fuel Derivatives"). Changes in the fair value of our derivatives instruments are reported in earnings because we have not elected to designate these derivative instruments as a hedging instrument that is required to qualify for cash flow hedge accounting. The estimated fair value of financial instruments is the amount at which the instrument could be exchanged currently between willing parties.

The fair values of our derivative instruments are based on inputs that are quoted prices in active markets for similar assets or liabilities, resulting in Level 2 categorization of such measurements. The following table (in thousands) sets forth, by level within the fair value hierarchy, the fair value of our derivative instruments assets and liabilities at September 30, 2012:  

	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value
Fuel Derivatives asset (1)	$	—	$	60	$	—	$	60

(1) Fuel Derivatives asset is classified as prepaid expenses and other current asset on our Consolidated Balance Sheets. Changes in the fair value of our Fuel Derivatives are classified as derivative gain (loss) on our Consolidated Statements of Operations. We recorded derivative gain of $0.3 million and derivative loss of $0.3 million related to Fuel Derivatives in the three and nine months endedSeptember 30, 2012, respectively. We recorded derivative loss of $0.7 million and $1.2 million related to Fuel Derivatives in the three and nine months endedSeptember 30, 2011, respectively.

Other Financial Instruments

The estimated fair value of financial instruments, including those financial instruments for which the fair value option was not elected are set forth in the table below.  The carrying amounts reported on our Consolidated Balance Sheets for 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.

7

SABINE PASS LNG, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

(unaudited)

Financial Instruments (in thousands):

	September 30, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
2013 Notes (1)	$	550,000	$	585,750	$	550,000	$	555,500
2016 Notes, net of discount (1)	1,645,939		1,773,499		1,642,418		1,650,630

(1) The Level 2 estimated fair value of the Senior Notes, net of discount, was based on quotations obtained from broker-dealers who make markets in these and similar instruments based on the closing trading prices on September 30, 2012 and December 31, 2011, as applicable.

NOTE 7—Related Party Transactions

As of September 30, 2012 and December 31, 2011, we had $1.8 million and $0.6 million of advances to affiliates, respectively. In addition, we have entered into the following related party transactions:

Terminal Use Agreement

In November 2006, Cheniere Marketing, LLC ("Cheniere Marketing"), a wholly owned subsidiary of Cheniere, reserved approximately 2.0 Bcf/d of regasification capacity under a firm commitment terminal use agreement ("TUA") with us and was required to make capacity reservation fee payments aggregating approximately $250 million per year for the period from January 1, 2009, through at least September 30, 2028. Cheniere guaranteed Cheniere Marketing's obligations under its TUA.

Effective July 1, 2010, Cheniere Marketing assigned its existing TUA with us to Cheniere Energy Investments, LLC ("Cheniere Investments"), a wholly owned subsidiary of Cheniere Partners, including all of its rights, titles, interests, obligations and liabilities in and under the TUA. In connection with the assignment, Cheniere's guarantee of Cheniere Marketing's obligations under the TUA was terminated. Cheniere Investments was required to make capacity payments under the TUA aggregating approximately $250 million per year through at least September 30, 2028. Cheniere Partners guaranteed Cheniere Investments' obligations under its TUA.

Sabine Pass Liquefaction has also entered into a TUA with us pursuant to which Sabine Pass Liquefaction has reserved approximately 2.0 Bcf/d of regasification capacity and is obligated to make monthly capacity payments to us aggregating approximately $250 million per year, continuing until at least 20 years after one of Sabine Pass Liquefaction's customers delivers its first commercial cargo at Sabine Pass Liquefaction's facilities under construction, which may occur as early as late 2015. Sabine Pass Liquefaction obtained this reserved capacity as a result of an assignment in July 2012 by Cheniere Energy Investments, LLC ("Cheniere Investments") of its rights, title and interest under its TUA. In connection with the assignment, we, Sabine Pass Liquefaction and Cheniere Investments 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 us. Cheniere Partners has guaranteed the obligations of Sabine Pass Liquefaction under its TUA and the obligations of Cheniere Investments under the TURA.

In September 2012, Sabine Pass Liquefaction entered into a partial TUA assignment agreement with Total Gas and Power North America, Inc. ("Total"), whereby Sabine Pass Liquefaction will progressively gain access to Total's capacity and other services provided under Total's TUA with us.  These agreements will provide Sabine Pass Liquefaction with additional berthing and storage capacity at our LNG terminal that may be used to accommodate the development of a fifth LNG train, provide increased flexibility in managing LNG cargo loading and unloading activity starting with the commencement of commercial operations of the third LNG train, and permit Sabine Pass Liquefaction to more flexibly manage its storage with the commencement of the first LNG train. All payments required to be made by Total under the TUA shall continue to be made by Total in accordance with the TUA.

Service Agreements

During the three months endedSeptember 30, 2012 and 2011, we recorded general and administrative expense—affiliate of $2.1 million and $2.0 million, respectively, under the following service agreements. During the nine months endedSeptember 30, 2012 and 2011, we recorded general and administrative expense—affiliate of $6.3 million and $6.1 million, respectively, under the following service agreements.

8

SABINE PASS LNG, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

(unaudited)

We have entered into a long-term operation and maintenance agreement (the "O&M Agreement") with a wholly owned subsidiary of Cheniere pursuant to which we receive all necessary services required to operate and maintain our LNG receiving terminal. We are required to pay a fixed monthly fee of $130,000 (indexed for inflation) under the O&M 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 us and the counterparty at the beginning of each operating year. In addition, we are required to reimburse the counterparty for its operating expenses, which consist primarily of labor expenses.

We have entered into a long-term management services agreement (the "MSA Agreement") with Cheniere LNG Terminals, Inc. ("Cheniere Terminals"), a wholly owned subsidiary of Cheniere, pursuant to which we manage the operation of our LNG receiving terminal, excluding those matters provided for under the O&M Agreement. We are required to pay Cheniere Terminals a monthly fixed fee of $520,000 (indexed for inflation).

Agreement to Fund Our Cooperative Endeavor Agreements

In July 2007, we executed Cooperative Endeavor Agreements ("CEAs") with various Cameron Parish, Louisiana taxing authorities that allow them to collect certain annual property tax payments from us in 2007 through 2016. This ten-year initiative represents an aggregate $25.0 million commitment and will make resources available to the Cameron Parish taxing authorities on an accelerated basis in order to aid in their reconstruction efforts following Hurricane Rita. In exchange for our payments of annual ad valorem taxes, Cameron Parish will grant us a dollar for dollar credit against future ad valorem taxes to be levied against our LNG terminal starting in 2019. In September 2007, we modified our TUA with Cheniere Marketing, pursuant to which Cheniere Marketing would pay us additional TUA revenues equal to any and all amounts payable under the CEAs in exchange for a similar amount of credits against future TUA payments it would owe us under its TUA starting in 2019. These TUA payments were recorded to other assets, and payments from Cheniere Marketing that we utilized to make the ad valorem tax payments were recorded as deferred revenue. As of September 30, 2012 and December 31, 2011, we had $14.7 million and $12.3 million, respectively, of other non-current assets and non-current deferred revenue resulting from our ad valorem tax payments and the advance TUA payments received from Cheniere Marketing.

Contracts for Sale and Purchase of Natural Gas and LNG

We are able to sell and purchase natural gas and LNG under an agreement with Cheniere Marketing. Under this agreement, we purchase 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 our LNG terminal.

We recorded $0.7 million and $1.1 million of natural gas and LNG purchased from Cheniere Marketing under this agreement in the three months endedSeptember 30, 2012 and 2011, respectively. We recorded $1.9 million and $3.2 million of natural gas and LNG purchased from Cheniere Marketing under this agreement in the nine months endedSeptember 30, 2012 and 2011, respectively. We recorded $2.8 million of natural gas sold to Cheniere Marketing under this agreement in the three and nine months endedSeptember 30, 2012.

LNG Terminal Export Agreement

In January 2010, we and Cheniere Marketing entered into an LNG Terminal Export Agreement that provides Cheniere Marketing the ability to export LNG from our LNG terminal.  We recorded revenues—affiliate of zero pursuant to this agreement in the three months endedSeptember 30, 2012 and 2011. We recorded revenues—affiliate of zero and $0.3 million pursuant to this agreement in the nine months endedSeptember 30, 2012 and 2011, respectively

Tug Boat Lease Sharing Agreement

In connection with our tug boat lease, Sabine Pass Tug Services, LLC, our wholly owned subsidiary ("Tug Services"), entered into a tug sharing agreement with Cheniere Marketing to provide its LNG cargo vessels with tug boat and marine services at our LNG terminal. Tug Services recorded revenues—affiliate from Cheniere Marketing of $0.7 million pursuant to this agreement in each of the three months endedSeptember 30, 2012 and 2011. Tug Services recorded revenues—affiliate from Cheniere Marketing of $2.1 million and $2 million pursuant to this agreement in the nine months endedSeptember 30, 2012 and 2011, respectively.

9

SABINE PASS LNG, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

(unaudited)

Temporary Pipeline Compressor Agreement

In August 2010, we entered into an agreement with Cheniere Investments under which Cheniere Investments reimburses us for a portion of the costs of installing, operating and maintaining temporary pipeline compression equipment at our LNG terminal. During the three months endedSeptember 30, 2012 and 2011, we recorded revenues—affiliate from Cheniere Investments of zero and $0.1 million, respectively, pursuant to this agreement. During the nine months endedSeptember 30, 2012 and 2011, we recorded revenues—affiliate from Cheniere Investments of zero and $0.4 million, respectively, pursuant to this agreement.

LNG Site Sublease Agreement

In June 2012, Sabine Pass LNG entered into an agreement with Sabine Pass Liquefaction to subleases a portion its Sabine Pass LNG terminal site lease. During the three and nine months endedSeptember 30, 2012, we recorded $0.1 million sublease revenue from Sabine Pass Liquefaction as a credit to operating and maintenance expense-affiliate on our Consolidated Statements of Operations.

NOTE 8—Subsequent Events

In October 2012, we repurchased approximately 97% of the 2013 Notes. Funds used for the repurchase included proceeds received from newly issued $420.0 million6.50% senior secured notes due in 2020 and from an equity contribution from Cheniere Partners. We have issued a redemption notice for the remaining approximately $16.5 million outstanding 2013 Notes which we expect to redeem in November 2012.

10

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

Information Regarding Forward-Looking Statements

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

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

• statements regarding any financing or refinancing transactions or arrangements, including the amounts or timing thereof, interest rates thereon or ability to enter into such transactions or arrangements; 

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

• statements regarding counterparties to our terminal use agreements ("TUAs") and other contracts;

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

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

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

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

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

11

Introduction

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

Our discussion and analysis includes the following subjects:

•Overview of Business

•Liquidity and Capital Resources

•Results of Operations

•Off-Balance Sheet Arrangements

•Summary of Critical Accounting Policies and Estimates

•Recent Accounting Standards

Overview of Business

In 2003, we were formed by Cheniere Energy, Inc. ("Cheniere") to own, develop and operate the Sabine Pass LNG terminal. We are a Houston-based partnership formed with one general partner, Sabine Pass LNG-GP, LLC ("Sabine Pass GP"), an indirect subsidiary of Cheniere, and one limited partner, Sabine Pass LNG-LP, LLC ("Sabine Pass LNG-LP"), an indirect subsidiary of Cheniere. Cheniere has a 66.4% ownership interest in Cheniere Energy Partners, L.P. ("Cheniere Partners"), which is the 100% parent of Sabine Pass GP and Sabine Pass LNG-LP and, indirectly, us.

Liquidity and Capital Resources

Cash and Cash Equivalents

As of September 30, 2012, we had $4.9 million of cash and cash equivalents and $137.3 million of restricted cash and cash equivalents, which is restricted to pay interest on the Senior Notes described below.

The foregoing funds and cash flows generated from operations are anticipated to be sufficient to fund our operating expenditures and interest requirements for at least the next twelve months. We expect to have sufficient cash flow from payments received under our Total Gas and Power North America, Inc. ("Total") and Chevron U.S.A. Inc. ("Chevron") TUAs to allow us to meet our future operating expenditures and interest payment requirements until maturity of the $550 million outstanding 7.25% Senior Secured Notes due November 2013 (the "2013 Notes").

In October 2012, we repurchased approximately 97% of the 2013 Notes. Funds used for the repurchase included proceeds received from newly issued $420.0 million6.50% senior secured notes due in 2020 and from an equity contribution from Cheniere Partners. We have issued a redemption notice for the remaining approximately $16.5 million outstanding 2013 Notes which we expect to redeem in November 2012.

TUA Revenues

The entire approximately 4.0 Bcf/d of the regasification capacity at our LNG terminal has been fully reserved under three 20-year, firm commitment TUAs. Approximately 2.0 Bcf/d is contracted with unaffiliated third parties, and approximately 2.0 Bcf/d is contracted with Sabine Pass Liquefaction, LLC ("Sabine Pass Liquefaction"), a wholly owned subsidiary of Cheniere Partners. Each of the three customers at our LNG terminal must make the full contracted amount of capacity reservation fee payments under its TUA whether or not it uses any of its reserved capacity. Capacity reservation fee TUA payments are made by our third-party TUA customers as follows:

• Total has reserved approximately 1.0 Bcf/d of regasification capacity and is obligated to make monthly capacity payments to us aggregating approximately $125 million per year for 20 years that commenced April 1, 2009. Total S.A. has guaranteed Total’s obligations under its TUA up to $2.5 billion, subject to certain exceptions; and 

12

• Chevron has reserved approximately 1.0 Bcf/d of regasification capacity and is obligated to make monthly capacity payments to us aggregating approximately $125 million per year for 20 years that commenced July 1, 2009. Chevron Corporation has guaranteed Chevron’s obligations under its TUA up to 80% of the fees payable by Chevron.

Each of Total and Chevron previously paid us $20.0 million in nonrefundable advance capacity reservation fees, which are being amortized over a 10-year period as a reduction of each customer's regasification capacity reservation fees payable under its respective TUA.

Sabine Pass Liquefaction has also entered into a TUA with us pursuant to which Sabine Pass Liquefaction has reserved approximately 2.0 Bcf/d of regasification capacity and is obligated to make monthly capacity payments to us aggregating approximately $250 million per year, continuing until at least 20 years after one of Sabine Pass Liquefaction's customers delivers its first commercial cargo at Sabine Pass Liquefaction's facilities under construction, which may occur as early as late 2015. Sabine Pass Liquefaction obtained this reserved capacity as a result of an assignment in July 2012 by Cheniere Energy Investments, LLC ("Cheniere Investments") of its rights, title and interest under its TUA. In connection with the assignment, we, Sabine Pass Liquefaction and Cheniere Investments 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 us. Cheniere Partners has guaranteed the obligations of Sabine Pass Liquefaction under its TUA and the obligations of Cheniere Investments under the TURA.

In September 2012, Sabine Pass Liquefaction entered into a partial TUA assignment agreement with Total, whereby Sabine Pass Liquefaction will progressively gain access to Total's capacity and other services provided under Total's TUA with us.  These agreements will provide Sabine Pass Liquefaction with additional berthing and storage capacity at our LNG terminal that may be used to accommodate the development of a fifth LNG train, provide increased flexibility in managing LNG cargo loading and unloading activity starting with the commencement of commercial operations of the third LNG train, and permit Sabine Pass Liquefaction to more flexibly manage its storage with the commencement of the first LNG train. All payments required to be made by Total under the TUA shall continue to be made by Total in accordance with the TUA.

Under each of these TUAs, we are entitled to retain 2% of the LNG delivered for the customer’s account ("2% Retainage LNG").

Sources and Uses of Cash

The following table summarizes (in thousands) the sources and uses of our cash and cash equivalents for the nine months endedSeptember 30, 2012 and 2011. The table presents capital expenditures on a cash basis; therefore, these amounts differ from the amounts of capital expenditures, including accruals, that are referred to elsewhere in this report. Additional discussion of these items follows the table.

	Nine Months Ended
	September 30,
	2012			2011
Sources of cash and cash equivalents
Operating cash flow	$	187,634		$	236,885
Uses of cash and cash equivalents
Distributions to owner	(182,889		)	(231,734		)
Other	(4,119		)	(6,516		)
Total uses of cash and cash equivalents	(187,008		)	(238,250		)
Net increase (decrease) in cash and cash equivalents	626			(1,365		)
Cash and cash equivalents—beginning of period	4,268			5,926
Cash and cash equivalents—end of period	$	4,894		$	4,561

13

Operating Cash Flow

The decrease in operating cash flow is primarily a result of the July 2012 purchase of LNG inventory used to restore the heating value of vaporized LNG to conform to natural gas pipeline specifications. Our TUA customers are obligated to fully reimburse us for this cost and we have recorded accounts receivables and account receivables—affiliate for their pro-rata share as of September 30, 2012. In addition, operating cash flow decreased as a result of decreased LNG cargo export loading fee revenue.

Distributions to Owner

During the nine months endedSeptember 30, 2012 and 2011, we made $182.9 million and $231.7 million, respectively, in distributions to our owner after satisfying conditions in the Sabine Pass Indenture as discussed and defined below.

Debt Agreements

Senior Notes

In November 2006, we issued an aggregate principal amount of $2,032.0 million of Senior Notes (the "Senior Notes"), consisting of $550.0 million of 7¼% Senior Secured Notes due 2013 (the "2013 Notes") and $1,482.0 million of 7½% Senior Secured Notes due 2016 (the "2016 Notes"). In September 2008, we issued an additional $183.5 million, before discount, of 2016 Notes whose terms were identical to the previously outstanding 2016 Notes. Interest on the Senior Notes is payable semi-annually in arrears on May 30 and November 30 of each year. The Senior Notes are secured on a first-priority basis by a security interest in all of our equity interests and substantially all of our operating assets.

We may redeem some or all of the Senior Notes at any time, and from time to time, at a redemption price equal to 100% of the principal plus any accrued and unpaid interest plus the greater of:

•1.0% of the principal amount of the Senior Notes; or

• the excess of: a) the present value at such redemption date of (i) the redemption price of the Senior Notes plus (ii) all required interest payments due on the Senior Notes (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over b) the principal amount of the Senior Notes, if greater.

Under the indenture governing the Senior Notes (the "Sabine Pass Indenture"), except for permitted tax distributions, we may not make distributions until certain conditions are satisfied: there must be on deposit in an interest payment account an amount equal to one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment, and  there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment of approximately $82.4 million. Distributions are permitted only after satisfying the foregoing funding requirements, a fixed charge coverage ratio test of 2:1 and other conditions specified in the Sabine Pass Indenture. During the nine months endedSeptember 30, 2012 and 2011, we made distributions of $182.9 million and $231.7 million, respectively, after satisfying all of the applicable conditions in the Sabine Pass Indenture. 

In October 2012, we repurchased approximately 97% of the 2013 Notes, as described above.

Services Agreements

During the three months endedSeptember 30, 2012 and 2011, we recorded general and administrative expense—affiliate of $2.1 million and $2.0 million, respectively, under the following service agreements. During the nine months endedSeptember 30, 2012 and 2011, we recorded general and administrative expense—affiliate of $6.3 million and $6.1 million, respectively, under the following service agreements.

We have entered into a long-term operation and maintenance agreement with a wholly owned subsidiary of Cheniere pursuant to which we receive all necessary services required to operate and maintain our LNG receiving terminal. We are 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 us and the counterparty at the beginning of each operating year. In addition, we are required to reimburse the counterparty for its operating expenses, which consist primarily of labor expenses.

14

We have entered into a long-term management services agreement with Cheniere LNG Terminals, Inc. ("Cheniere Terminals"), a wholly owned subsidiary of Cheniere, pursuant to which Cheniere Terminals manages the operation of our LNG receiving terminal, excluding those matters provided for under the operation and maintenance agreement described in the paragraph above. We are required to pay Cheniere Terminals a monthly fixed fee of $520,000 (indexed for inflation).

State Tax Sharing Agreement

In November 2006, we entered into a state tax sharing agreement with Cheniere effective for tax returns first due on or after January 1, 2008. Under this agreement, Cheniere has agreed to prepare and file all Texas franchise tax returns which it and we are required to file on a combined basis and to timely pay the combined tax liability. If Cheniere, in its sole discretion, demands payment, we will pay to Cheniere an amount equal to the Texas franchise tax that we would be required to pay if our Texas franchise tax liability were computed on a separate company basis. This agreement contains similar provisions for other state and local taxes that we and Cheniere are required to file on a combined, consolidated or unitary basis.

Results of Operations

Three Months Ended September 30, 2012 vs. Three Months Ended September 30, 2011

Overall Operations

Our net income decreased $6.3 million, from $65.8 million in the three months endedSeptember 30, 2011 to $59.5 million in the three months endedSeptember 30, 2012. This decrease in net income primarily resulted from decreased LNG cargo export loading fee revenue and increased operating and maintenance expense.

Revenues (including Revenues—Affiliate)

Revenues (including revenues—affiliate) from our LNG terminal decreased $2.2 million, from $132.0 million in the three months endedSeptember 30, 2011 to $129.8 million in the three months endedSeptember 30, 2012. This decrease is primarily a result of decreased LNG cargo export loading fee revenue.

Operating and Maintenance Expense (including Operating and Maintenance Expense—Affiliate)

Our operating and maintenance expense includes costs incurred to operate and maintain our LNG terminal. Operating and maintenance expense (including operating and maintenance expense—affiliate) increased $4.0 million, from $8.9 million in the three months endedSeptember 30, 2011 to $12.9 million in the three months endedSeptember 30, 2012. This increase is primarily a result of increased dredging services in the three months endedSeptember 30, 2012.

Nine Months EndedSeptember 30, 2012 vs. Nine Months EndedSeptember 30, 2011

Overall Operations

Our consolidated net income decreased $13.1 million, from $200.0 million in the nine months endedSeptember 30, 2011 to $186.9 million in the nine months endedSeptember 30, 2012. This decrease in net income primarily resulted from decreased LNG cargo export loading fee revenue and increased operating and maintenance expense.

Revenues (including Revenues—Affiliate)

Revenues (including revenues—affiliate) from our LNG terminal decreased $6.6 million, from $397.0 million in the nine months endedSeptember 30, 2011 to $390.4 million in the nine months endedSeptember 30, 2012. This decrease is primarily a result of decreased LNG cargo export loading fee revenue.

Operating and Maintenance Expense (including Operating and Maintenance Expense—Affiliate)

Operating and maintenance expense (including operating and maintenance expense—affiliate) increased $7.5 million, from $24.6 million in the nine months endedSeptember 30, 2011 to $32.1 million in the nine months endedSeptember 30, 2012. This increase is primarily a result of increased dredging services in the nine months endedSeptember 30, 2012.

15

Off-Balance Sheet Arrangements

As of September 30, 2012, we had no "off-balance sheet arrangements" that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Summary of Critical Accounting Policies and Estimates

The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have developed. Accounting rules generally do not involve a selection among alternatives but involve an implementation and interpretation of existing rules, and the use of judgment, to apply the accounting rules to the specific set of circumstances existing in our business. In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"), we endeavor to comply with all applicable rules on or before their adoption, and we believe that the proper implementation and consistent application of the accounting rules are critical. However, not all situations are specifically addressed in the accounting literature. In these cases, we must use our best judgment to adopt a policy for accounting for these situations. We accomplish this by analogizing to similar situations and the accounting guidance governing them. There have been no significant changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Recent Accounting Standards

In May 2011, the Financial Accounting Standards Board ("FASB") issued guidance that further addresses fair value measurement accounting and related disclosure requirements.  The guidance clarifies the FASB's intent regarding the application of existing fair value measurement and disclosure requirements, changes the fair value measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair value measurements.  The guidance is to be applied prospectively and is effective for periods beginning after December 15, 2011.  We adopted this guidance effective January 1, 2012.  The adoption of this guidance did not have an impact on our consolidated financial position, results of operations or cash flows, as it only expanded disclosures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Cash Investments

We have cash investments that we manage based on internal investment guidelines that emphasize liquidity and preservation of capital. Such cash investments are stated at historical cost, which approximates fair market value on our Consolidated Balance Sheets.

Marketing and Trading Commodity Price Risk

We have entered into certain instruments to hedge the price risk attributable to future purchases of natural gas to be utilized as fuel to operate our LNG terminal ("Fuel Derivatives"). We use one-day value at risk ("VaR") with a 95% confidence interval and other methodologies for market risk measurement and control purposes. The VaR is calculated using the Monte Carlo simulation method. The table below provides information about our derivative instruments that are sensitive to changes in natural gas prices as of September 30, 2012 (in thousands except for volume and price range data).

Hedge Description	Hedge Instrument	Contract Volumes (MMBtu)	Price Range ($/MMBtu)	Final Hedge Maturity Date	Fair Value ($)		VaR ($)
Fuel Derivatives	Fixed price natural gas swaps	1,086,500	$3.230 - $4.275	October 2013	$	60	$	3

16

Item 4. Controls and Procedures

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As of the end of the period covered by this report, we evaluated, under the supervision and with the participation of our general partner's management, including our general partner's Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our general partner's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

During the most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

We may in the future be involved as a party to various legal proceedings, which are incidental to the ordinary course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. In the opinion of management, as of September 30, 2012, there were no pending legal matters that could reasonably be expected to have a material adverse impact on our consolidated results of operations, financial position or cash flows.

Item 6. Exhibits

10.1	Letter Agreement, dated September 11, 2012, between Total Gas & Power North America, Inc. and Sabine Pass LNG, L.P. (incorporated by reference to Exhibit 10.1 to Cheniere Energy Partners, L.P.'s Quarterly Report on Form 10-Q (SEC File No. 001-33366), filed on November 2, 2012).
10.2	Amended and Restated Operation and Maintenance Agreement (Sabine Pass LNG Facilities), dated as of August 9, 2012, by and among Cheniere LNG O&M Services, LLC, Cheniere Energy Partners GP, LLC and Sabine Pass LNG, L.P. (incorporated by reference to Exhibit 10.5 to Cheniere Energy Partners, L.P.'s Quarterly Report on Form 10-Q (SEC File No. 001-33366), filed on November 2, 2012).
10.3	Amended and Restated Management Services Agreement, dated as of August 9, 2012, by and between Cheniere LNG Terminals, Inc. and Sabine Pass LNG, L.P. (incorporated by reference to Exhibit 10.6 to Cheniere Energy Partners, L.P.'s Quarterly Report on Form 10-Q (SEC File No. 001-33366), filed on November 2, 2012).
31.1*	Certification by Chief Executive Officer required by Rule 13a-14(a) and 15d-14(a) under the Exchange Act
31.2*	Certification by Chief Financial Officer required by Rule 13a-14(a) and 15d-14(a) under the Exchange Act
32.1**	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS+	XBRL Instance Document
101.SCH+	XBRL Taxonomy Extension Schema Document
101.CAL+	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF+	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB+	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE+	XBRL Taxonomy Extension Presentation Linkbase Document

17

*	Filed herewith.
**	Furnished herewith.
+	Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

18

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SABINE PASS LNG, L.P.
By:	Sabine Pass LNG-GP, LLC, its general partner
By:	/s/ Jerry D. Smith
	Jerry D. Smith Chief Accounting Officer
	(on behalf of the registrant and as principal accounting officer)
Date:	November 2, 2012