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CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Information Regarding Forward-Looking Statements This quarterly report contains certain statements that are, or may be deemed to be, "forward-looking statements." All statements, other than statements of historical facts, included herein or incorporated herein by reference are "forward-looking statements." Because substantially all of our assets consist of our interest in the limited partner interests of Cheniere Energy Partners, L.P. ("Cheniere Partners"), many of these statements primarily relate to Cheniere Partners' business. Included among "forward-looking statements" are, among other things: • statements regarding our ability to pay dividends to our shareholders; • statements regarding Cheniere Partners' ability to pay distributions to its unitholders; • statements regarding our anticipated tax rates and operating expenses; • statements regarding future levels of domestic and international natural gas production, supply or consumption or future levels of liquefied natural gas ("LNG") imports into or exports from North America and other countries worldwide or purchases of natural gas, regardless of the source of such information, or the transportation or other infrastructure or demand for and prices related to natural gas, LNG or other hydrocarbon products; • statements regarding any financing transactions or arrangements, or ability to enter into such transactions; • statements relating to the construction of Cheniere Partners' proposed liquefaction facilities and natural gas liquefaction trains ("Trains"), including statements concerning the engagement of any engineering, procurement and construction ("EPC") contractor or other contractor and the anticipated terms and provisions of any agreement with any EPC or other contractor, and anticipated costs related thereto; • statements regarding any agreement to be entered into or performed substantially in the future, including any revenues anticipated to be received and the anticipated timing thereof, and statements regarding the amounts of total LNG regasification, liquefaction or storage capacities that are, or may become, subject to contracts; • statements regarding counterparties to Cheniere Partners' commercial contracts, construction contracts and other contracts; • statements regarding Cheniere Partners' planned construction of additional Trains, including the financing of such Trains; • statements that Cheniere Partners' Trains, when completed, will have certain characteristics, including amounts of liquefaction capacities; • statements regarding our or Cheniere Partners' business strategy, strengths, business and operation plans or any other plans, forecasts, projections, or objectives, including anticipated revenues and capital expenditures, any or all of which are subject to change; • statements regarding legislative, governmental, regulatory, administrative or other public body actions, approvals, requirements, permits, applications, filings, investigations, proceedings or decisions; • statements regarding Cheniere Partners' anticipated LNG and natural gas marketing activities; and • any other statements that relate to non-historical or future information. All of these types of statements, other than statements of historical fact, are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expect," "plan," "project," "intend," "anticipate," "believe," "estimate," "predict," "potential," "pursue," "target," "continue," the negative of such terms or other comparable terminology. The forward-looking statements contained in this quarterly report are largely based on our and Cheniere Partners' expectations, which reflect estimates and assumptions made by management of the respective entities. These estimates and assumptions reflect our and Cheniere Partners' best judgment based on currently known market conditions and other factors. Although we and Cheniere Partners believe that such estimates are reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond our control. In addition, assumptions may prove to be inaccurate. We caution that the forward-looking statements contained in this quarterly report are not guarantees of future performance and that such statements may not be realized or the forward-looking statements or events may not occur. Actual results may differ materially from those anticipated or implied in forward-looking statements due to factors described in this quarterly report and in the reports and other information that we file with the Securities and Exchange Commission ("SEC"). These forward-looking statements speak only 11 --------------------------------------------------------------------------------as of the date made, and other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 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, 2013 and herein. 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. As used herein, references to "Cheniere Holdings," "we," "our" and "us" refer to Cheniere Energy Partners LP Holdings, LLC. 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 Financial Statements and the accompanying notes in "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: • Our Business • Our Relationship with Cheniere Partners • Liquidity and Capital Resources • Results of Operations • Off-Balance Sheet Arrangements • Summary of Critical Accounting Estimates • Recent Accounting Standards Our Business We are a limited liability company that has elected to be treated as a corporation for U.S. federal income tax purposes. Our primary business purpose is to: • own and hold Cheniere Partners limited partner units; • pay dividends on our shares from the distributions that we receive from Cheniere Partners, less income taxes and any reserves established by our board of directors (the "Board") to pay our company expenses and amounts due under our services agreement (the "Services Agreement") with a wholly owned subsidiary of Cheniere Energy, Inc. ("Cheniere"), to service and reduce indebtedness that we may incur and for company purposes, in each case as permitted by our limited liability company agreement ("LLC Agreement"); • simplify tax reporting requirements for investors by issuing a Form 1099-DIV with respect to the dividends received on our shares rather than a Schedule K-1 that would be received as a unitholder of Cheniere Partners; and • designate members of the board of directors of Cheniere Partners' general partner to oversee the operations of Cheniere Partners. Our business consists of owning the following Cheniere Partners limited partner units, along with cash or other property that we receive as distributions in respect of such limited partner units: Common Units We own 11,963,488 common units, which are entitled to quarterly cash distributions from Cheniere Partners. To the extent that Cheniere Partners is unable to pay the initial quarterly distribution in the future, arrearages in the amount of the initial quarterly distribution (or the difference between the initial quarterly distribution and the amount of the distribution actually paid to common unitholders) may accrue with respect to the common units. 12 --------------------------------------------------------------------------------Subordinated Units We own 135,383,831 subordinated units. The subordinated units are not entitled to receive distributions until all common units have received at least the initial quarterly distribution, including any arrearages that may accrue. The subordinated units will convert on a one-for-one basis into common units at the expiration of the subordination period as described in Cheniere Partners' partnership agreement. Cheniere Partners has not made any cash distributions in respect of the subordinated units with respect to the quarters ended on or after June 30, 2010. Class B Units We own 45,333,334 Class B units. The Class B units are not entitled to receive cash distributions except in the event of a liquidation of Cheniere Partners, a merger, consolidation or other combination of Cheniere Partners with another person or the sale of all or substantially all of the assets of Cheniere Partners. The Class B units are subject to conversion, mandatorily or at the option of the holders of the Class B units under specified circumstances, into a number of common units based on the then-applicable conversion value of the Class B units. The conversion value of the Class B units increases at a compounded rate of 3.5% per quarter subject to additional upward adjustment for certain equity and debt financings. As of September 30, 2014, the accreted conversion ratio of the Class B units owned by us and Blackstone CQP Holdco LP ("Blackstone") was 1.37 and 1.34, respectively. We expect the Class B units to mandatorily convert into common units within 90 days of the substantial completion date of Train 3, which we currently expect to be prior to March 31, 2017. If the Class B units are not mandatorily converted by July 2019, the holders of the Class B units have the option to convert the Class B units into common units at that time. The following table illustrates the number of common units into which the Class B units held by us and Blackstone would convert at the dates specified below (amounts in thousands) and our and Blackstone's percentage ownership of Cheniere Partners' then outstanding limited partner interests, assuming that none of the outstanding Class B units are optionally converted prior to the dates set forth in the table and that no additional limited partner interests are issued by Cheniere Partners prior to such dates: December 31, December 31, December 31, December 31, December 31, July 9, 2014(1) 2015(1) 2016 2017 2018 2019 Cheniere Holdings: Number of Common Units 64,050 73,491 84,357 96,792 110,060 119,362 Percentage Ownership 52.4% 50.9% 49.4% 47.9% 46.5% 45.8% Blackstone: Number of Common Units 138,934 159,371 182,881 209,782 240,640 258,550 Percentage Ownership 34.4% 36.7% 39.0% 41.2% 43.3% 44.4% (1) Information as of December 31, 2014 and 2015 is presented for informational purposes only. We do not believe that the Class B units will convert, either mandatorily or optionally, into common units prior to such dates. Our Relationship with Cheniere Partners We own common units, Class B units and subordinated units of Cheniere Partners (collectively, the "Cheniere Partners units") representing an aggregate of approximately 55.9% of the outstanding Cheniere Partners units. As a result of our non-economic voting interest in Cheniere GP Holding Company, LLC ("GP Holdco"), which holds a 100% interest in Cheniere Partners' general partner, we control GP Holdco and indirectly control the appointment of four of the eleven members of the board of directors of Cheniere Partners' general partner. If Cheniere relinquishes the director voting share, which it may do in its sole discretion, or ceases to own greater than 25% of our outstanding shares, our non-economic voting interest in GP Holdco would be extinguished and we would cease to control GP Holdco. Because our only assets are limited partner interests in Cheniere Partners and we are therefore dependent on the results of operations and financial condition of Cheniere Partners, we believe that the discussion and analysis of Cheniere Partners' financial condition and results of operations is important to our shareholders. Therefore, Cheniere Partners' Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 has been included in this filing as Exhibit 99.1 and incorporated herein by reference. 13--------------------------------------------------------------------------------Liquidity and Capital Resources As of September 30, 2014, we had cash and cash equivalents of $0.2 million. Our capital structure consists only of common shares, of which 195.7 million shares are owned by Cheniere and 36.0 million shares were sold by us in our IPO and are owned by the public, and one director voting share, which is held by Cheniere. We are authorized to issue an unlimited number of additional common shares. Additional classes or series of securities may be created with the approval of the Board, provided that any such additional class or series must be approved by a vote of holders of a majority of our outstanding shares. Our shareholders will not have preemptive or preferential rights to acquire additional common shares or other classes of our securities. In August 2014, we filed a registration statement with the SEC with respect to an offering of 10.1 million of our common shares. Once completed, we expect to use the net proceeds of the offering of these common shares to redeem 10.1 million shares that are currently owned by Cheniere. Upon completion of this offering, Cheniere will own 185.6 million of our common shares. Cheniere provides certain general and administrative services pursuant to the Services Agreement. We pay a fixed fee of $1.0 million per year (payable quarterly in installments of $250,000 per quarter, in arrears), subject to adjustment for inflation, for certain general and administrative services, including the services of our directors and officers who are also directors and executive officers of Cheniere. In addition, we pay directly for, or reimburse Cheniere for, certain third-party general and administrative expenses incurred. Cheniere also provides us with cash management services, including treasury services with respect to the payment of dividends and allocation of reserves for taxes. During the three and nine months ended September 30, 2014, we recorded general and administrative expense-affiliate of $0.3 million and $0.8 million, respectively, under the Services Agreement. We believe that the cash distributions we will receive on our Cheniere Partners units will be sufficient to fund fees and expenses due under the Services Agreement and our working capital requirements for the next twelve months. Cheniere Holdings Initial Public Offering On December 18, 2013, we completed our initial public offering of our common shares as discussed in Note 1-"Nature of Business" of our Notes to Financial Statements and used the net proceeds to repay intercompany debt and payables owed to Cheniere and paid a distribution of the remaining proceeds to Cheniere. Dividends Our LLC Agreement requires us to pay dividends on our shares equal to the amount of cash that we receive as distributions in respect of the Cheniere Partners units that we own, less income taxes and reserves established by our Board. 14 --------------------------------------------------------------------------------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 ended September 30, 2014, and the period from July 29, 2013 (date of inception) through September 30, 2013. Additional discussion of these items follows the table. Period from July 29, 2013 (Date of Inception) Nine Months Ended Through September 30, September 30, 2014 2013 Sources of cash and cash equivalents Distributions from equity investment $ 15,253 $ - Uses of cash and cash equivalents Dividends paid to common shareholders (12,744 ) - Operating cash flow (1,659 ) - Other (604 ) Total uses of cash and cash equivalents (15,007 ) - Net increase in cash and cash equivalents 246 - Cash and cash equivalents-beginning of period - - Cash and cash equivalents-end of period $ 246 $ - Distributions from Equity Investment During the nine months ended September 30, 2014, we received cash distributions of $15.3 million from Cheniere Partners. Dividends Paid to Common Shareholders During the nine months ended September 30, 2014, we paid cash dividends of $12.7 million to our common shareholders in accordance with our LLC Agreement as described above. Operating Cash Flow Operating cash flow is primarily the result of the payment of general and administrative expenses (including affiliate). Results of Operations Equity Income from Investment in Cheniere Partners We use the equity method of accounting for our limited partner ownership interest in Cheniere Partners. The equity method of accounting requires that our investment in Cheniere Partners be shown in our balance sheets as a single amount. Our initial investment in Cheniere Partners was recognized at cost, and this carrying amount is increased or decreased to recognize our share of income or loss of Cheniere Partners after the date of our initial investment in the Cheniere Partners units. As a result of our negative investment in Cheniere Partners and because we are not obligated to fund losses, we have a zero investment balance in Cheniere Partners as of both September 30, 2014 and December 31, 2013, and have suspended the use of the equity method for additional losses. After giving effect to our equity ownership in Cheniere Partners as though we had acquired the Cheniere Partners units we owned as a result of a merger of entities under common control, we had suspended losses of approximately $472 million and $203 million as of September 30, 2014 and December 31, 2013, respectively. The suspended loss account will be increased or decreased by our share of Cheniere Partners' future losses or earnings, respectively. Due to our zero investment balance in, and suspended losses of, Cheniere Partners as of both September 30, 2014 and December 31, 2013, we have historically and will continue to recognize distributions that we receive as a gain on our Statements of Income and a corresponding entry will be made 15 -------------------------------------------------------------------------------- to increase the suspended loss account. Once we have recovered all suspended losses through our share of Cheniere Partners' future earnings, the equity income or loss from our share of Cheniere Partners' future earnings will be reported on our income statements. In addition, future distributions we receive from Cheniere Partners would then reduce the carrying amount of our investment in Cheniere Partners. For the three and nine months ended September 30, 2014, we recognized $5.1 million and $15.3 million, respectively, of equity income from our investment in Cheniere Partners resulting from quarterly distributions from Cheniere Partners paid to us in 2014. The following table summarizes Consolidated Statements of Operations information for Cheniere Partners. Additional information on Cheniere Partners' results of operations and financial position are contained in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, included in this filing as Exhibit 99.1 and incorporated herein by reference. Cheniere Energy Partners, L.P. and Subsidiaries (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 (unaudited) Revenues (including transactions $ 201,192 with affiliates) $ 67,590 $ 67,446 $ 202,139 Expenses (including transactions with affiliates) (69,646 ) (90,803 ) (206,835 ) (239,306 ) Other expense (41,184 ) (74,752 ) (334,501 ) (158,737 ) Net loss $ (43,240 ) $ (98,109 ) $ (339,197 ) $ (196,851 ) General and Administrative Expenses (including affiliate) Our general and administrative expenses (including affiliate) are associated with managing our business and affairs. For the three and nine months ended September 30, 2014, we incurred total general and administrative expenses (including affiliate) of $0.5 million and $1.7 million, respectively. These expenses included $0.3 million and $0.8 million for the three and nine months ended September 30, 2014, respectively, related to services provided by Cheniere under the Services Agreement necessary for the conduct of our business, such as accounting, legal, tax, information technology and other expenses. The remaining expenses were primarily related to professional services rendered by third parties. There was no general and administrative cost prior to our IPO. Off-Balance Sheet Arrangements As of September 30, 2014, we had no "off-balance sheet arrangements" that may have a current or future material effect on our financial position or results of operations. Summary of Critical Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. There have been no significant changes to our critical accounting estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. Recent Accounting Standards In May 2014, the Financial Accounting Standards Board ("FASB") amended its guidance on revenue recognition. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. This guidance can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the impact of the provisions of this guidance on our financial position, results of operations and cash flows. 16-------------------------------------------------------------------------------- In August 2014, the FASB issued authoritative guidance that requires an entity's management to evaluate, for each reporting period, whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements are issued. Additional disclosures are required if management concludes that conditions or events raise substantial doubt about the entity's ability to continue as a going concern. This guidance is effective for annual reporting periods ending after December 15, 2016, and for annual periods and interim periods thereafter, with earlier adoption permitted. The adoption of this guidance is not expected to have an impact on our financial statements or related disclosures. |