Annual report pursuant to Section 13 and 15(d)

Leases

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Leases
 12 Months Ended
Dec. 31, 2012
Leases [Abstract]  
Leases
LEASES

During the years ended December 31, 2012, 2011 and 2010, we recognized rental expense for all operating leases of $12.9 million, $11.5 million and $10.2 million, respectively.
 
Future Annual Minimum Lease Payments
 
Future annual minimum lease payments, excluding inflationary adjustments, are as follows (in thousands): 
Years Ending December 31,
Operating
Leases (2) (3)
2013
$
14,411

2014
12,863

2015
12,900

2016
12,937

2017
11,643

Thereafter (1)
250,684

Total
$
315,438


 
(1)
Includes certain lease option renewals as they are reasonably assured.
(2)
Future annual minimum lease payments do not include $0.7 million expected to be recovered through sublease agreements for our office leases in Houston, Texas.
(3)
Lease payments for Sabine Pass LNG’s tug boat lease represent its lease payment obligation and do not take into account the payments Sabine Pass LNG will receive from third-party TUA customers that effectively offset $75.2 million, or two-thirds, of Sabine Pass LNG's lease payment obligation, as discussed below.

Tug Boat Agreements
 
Sabine Pass Tug Services, LLC ("Tug Services"), Cheniere Partners' wholly owned subsidiary, entered into a Marine Services Agreement (the "Tug Agreement") for the use of tug boats and marine services for the Sabine Pass LNG terminal. The term of the Tug Agreement commenced in January 2008 for a period of 10 years, with an option to renew two additional, consecutive terms of five years each. In accordance with accounting literature on how to determine whether an arrangement contains a lease, we determined that the Tug Agreement contains a lease for the tugs specified in the Tug Agreement. In addition, we concluded that the tug boat lease contained in the Tug Agreement is an operating lease, and as such, the equipment component of the Tug Agreement is charged to expense over the term of the Tug Agreement as it becomes payable.

In the second quarter of 2009, Tug Services entered into a Tug Sharing Agreement with Sabine Pass LNG's three TUA customers to provide their LNG cargo vessels with tug boat and marine services at the Sabine Pass LNG terminal and effectively offset the cost of the tug boat lease. The Tug Sharing Agreement provides for each of our customers to pay Tug Services an annual service fee.
 
LNG Site Leases
  
In January 2005, Sabine Pass LNG exercised its options and entered into three land leases for the site of the Sabine Pass LNG terminal. The leases have an initial term of 30 years, with options to renew for six 10-year extensions with similar terms as the initial term. In February 2005, two of the three leases were amended, thereby increasing the total acreage under lease to 853 acres and increasing the annual lease payments to $1.5 million.  In July 2012, Sabine Pass LNG entered into an additional land lease, thereby increasing the total acreage under lease to 883 acres.  The annual lease payments are adjusted for inflation every 5 years based on a consumer price index, as defined in the lease agreements.

In November 2011, Sabine Pass Liquefaction entered into a land lease of 80.7 acres to be used as the laydown area during the construction of the Liquefaction Project. The annual lease payment is $138,000. The lease has an initial term of five years, with options to renew for five 1-year extensions with similar terms as the initial term. In December 2011, Sabine Pass Liquefaction entered into a land lease of 80.6 acres to be used for the site of the Liquefaction Project. The annual lease payment is $257,800. The lease has an initial term of 30 years, with options to renew for six 10-year extensions with similar terms as the initial term. The annual lease payment is adjusted for inflation every 5 years based on a consumer price index, as defined in the lease agreement.

We recognized $2.3 million, $1.8 million and $1.7 million of site lease expense on our Consolidated Statements of Operations in 2012, 2011 and 2010, respectively.