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PART I.
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FINANCIAL INFORMATION
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ITEM 1.
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CONSOLIDATED FINANCIAL STATEMENTS
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CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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June 30,
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December 31,
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2018
|
|
2017
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ASSETS
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|
(unaudited)
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|
|
Current assets
|
|
|
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Cash and cash equivalents
|
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$
|
329
|
|
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$
|
659
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|
Prepaid and other current assets
|
|
326
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|
|
55
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|
Total current assets
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|
655
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|
714
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Deferred tax asset, net
|
|
224
|
|
|
—
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Total assets
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$
|
879
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$
|
714
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities
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Accounts payable and accrued liabilities
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$
|
360
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$
|
76
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|
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Shareholders’ equity
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Common shares: unlimited shares authorized, 231.7 million shares issued and outstanding at June 30, 2018 and December 31, 2017
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664,931
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664,931
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Director voting share: 1 share authorized, issued and outstanding at June 30, 2018 and December 31, 2017
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—
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—
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Additional paid-in-capital
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(271,757
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)
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|
(271,757
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)
|
Accumulated deficit
|
|
(392,655
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)
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(392,536
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)
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Total shareholders’ equity
|
|
519
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|
|
638
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Total liabilities and shareholders’ equity
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$
|
879
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$
|
714
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The accompanying notes are an integral part of these consolidated financial statements.
2
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2018
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2017
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2018
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2017
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Equity income from investment in Cheniere Partners
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$
|
131,930
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$
|
5,085
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$
|
251,866
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$
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10,169
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Expenses
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General and administrative expense
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2,760
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|
345
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3,109
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|
691
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General and administrative expense—affiliate
|
269
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|
263
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|
538
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|
|
527
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Total expenses
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3,029
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|
608
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3,647
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1,218
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Income before income taxes
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128,901
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4,477
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248,219
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8,951
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Income tax provision
|
(3,907
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)
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—
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(419
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)
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—
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Net income
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$
|
124,994
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$
|
4,477
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$
|
247,800
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$
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8,951
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Net income per common share—basic and diluted
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$
|
0.54
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$
|
0.02
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$
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1.07
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$
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0.04
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Weighted average number of common shares outstanding—basic and diluted
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231,700
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231,700
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231,700
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231,700
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Cash dividends declared per common share
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$
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0.560
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$
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0.020
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$
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1.070
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$
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0.040
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The accompanying notes are an integral part of these consolidated financial statements.
3
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
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Common Stock
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Shares
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Amount
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Additional Paid-in-Capital
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Accumulated Deficit
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Total Shareholders’
Equity
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Balance at December 31, 2017
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231,700
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$
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664,931
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$
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(271,757
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)
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$
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(392,536
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)
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$
|
638
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Dividends to shareholders
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—
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—
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—
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(247,919
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)
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(247,919
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)
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Net income
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—
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|
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—
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—
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247,800
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247,800
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Balance at June 30, 2018
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231,700
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$
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664,931
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$
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(271,757
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)
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$
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(392,655
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)
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$
|
519
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|
The accompanying notes are an integral part of these consolidated financial statements.
4
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Six Months Ended June 30,
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2018
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2017
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Cash flows from operating activities
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Net income
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$
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247,800
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$
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8,951
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Adjustments to reconcile net income to net cash used in operating activities:
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Income from equity investment
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(251,866
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)
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(10,169
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)
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Deferred income taxes
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(224
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)
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—
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Changes in operating assets and liabilities:
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Receivables
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—
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153
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Accounts payable and accrued liabilities
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284
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7
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Accrued liabilities—affiliate
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—
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528
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Other, net
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(271
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)
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(137
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)
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Net cash used in operating activities
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(4,277
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)
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(667
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)
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Cash flows from investing activities
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Distributions from equity investment
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251,866
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10,169
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Cash flows from financing activities
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Dividends paid to shareholders
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(247,919
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)
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(9,268
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)
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Net increase (decrease) in cash and cash equivalents
|
(330
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)
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|
234
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Cash and cash equivalents—beginning of period
|
659
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|
219
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Cash and cash equivalents—end of period
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$
|
329
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$
|
453
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The accompanying notes are an integral part of these consolidated financial statements.
5
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1—NATURE OF BUSINESS
We are a limited liability company formed by Cheniere (NYSE American: LNG) to hold its limited partner interests in Cheniere Partners, a publicly traded limited partnership (NYSE American: CQP). Our only business consists of owning and holding Cheniere Partners’ limited partner common units and subordinated units
(collectively, the “Cheniere Partners units”)
, along with cash or other property that we receive as distributions in respect of such units, and, accordingly, our consolidated operating results and financial condition are dependent on the performance of Cheniere Partners. We expect to have no significant assets or operations other than those related to our interest in Cheniere Partners. As of
June 30, 2018
, we owned a
48.6%
limited partner interest in Cheniere Partners.
NOTE 2—BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of Cheniere Holdings have been prepared in accordance with
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 and should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our
annual report on Form 10-K for the year ended December 31, 2017
. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included.
Results of operations for the
three and six months ended June 30, 2018
are not necessarily indicative of the results of operations that will be realized for the year ending December 31,
2018
.
Accounting for Investment in Cheniere Partners
We have determined that Cheniere Partners is a variable interest entity. As of both
June 30, 2018
and
December 31, 2017
, we owned a
48.6%
limited partner interest in Cheniere Partners. In addition to the
Cheniere Partners units
, we own a non-economic voting interest in GP Holdco, which holds a
100%
indirect interest in Cheniere Partners GP. This non-economic voting interest in GP Holdco allows us to control the appointment of
four
of the
eleven
members to the board of directors of Cheniere Partners GP to oversee the operations of Cheniere Partners. Cheniere owns the sole share entitled to vote in the election of our directors
(the “Director Voting Share”)
. 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. Cheniere may, at any time and without our consent, relinquish the
Director Voting Share
, which would cause our non-economic voting interest in GP Holdco to be extinguished. Because Cheniere may relinquish the
Director Voting Share
at any time and we have
no
variable interest in GP Holdco, we have determined that we cannot consolidate Cheniere Partners and must account for our investment in the
Cheniere Partners units
that we own using the equity method of accounting.
The equity method of accounting requires that our investment in Cheniere Partners be shown in our Consolidated Balance Sheets as a single amount. Our initial investment in Cheniere Partners is recognized at cost. 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
. The carrying amount is also adjusted to reflect the distributions received from Cheniere Partners and accretion of basis differences resulting from our proportionate share of the net assets of Cheniere Partners exceeding the carrying value of our investment in Cheniere Partners as a result of changes in our liquidation rights and priorities following the conversion of our interests in Cheniere Partners from Cheniere Partners Class B units
(“Class B units”)
into common units.
As a result of our historical negative investment in Cheniere Partners and because we are not obligated to fund losses, we had a
zero
investment balance in Cheniere Partners as of both
June 30, 2018
and
December 31, 2017
and had suspended the use of the equity method for additional losses. Equity method losses that we incur increase the suspended loss amount and equity method income decrease the suspended loss amount. Distributions we receive from Cheniere Partners increase the suspended loss amount. Only upon recovery of all suspended losses through future earnings will equity income or loss be reported on our Consolidated Statements of Income and future distributions and our allocated share of income or losses impact the carrying amount of our investment in Cheniere Partners.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
After giving effect to our equity ownership in Cheniere Partners as though we had acquired the
Cheniere Partners units
as a result of a merger of entities under common control, along with activity impacting the basis of our investment in Cheniere Partners, we had suspended losses of approximately
$734 million
and
$785 million
as of
June 30, 2018
and
December 31, 2017
, respectively. The difference between our reported
zero
investment in Cheniere Partners as of both
June 30, 2018
and
December 31, 2017
and our ownership in Cheniere Partners’ reported net assets was due primarily to suspended losses and equity gains from Cheniere Partners’ sales of common units that were not recognized by us. Included in this balance is a remaining basis difference of approximately
$218 million
as of
June 30, 2018
associated with Class B unit conversion which is being accreted into the suspended loss account over a remaining period of approximately
31.1 years
corresponding to the remaining estimated useful lives of the underlying net assets of Cheniere Partners to which the basis difference has been assigned.
Due to our
zero
investment balance in, and suspended losses of, Cheniere Partners as of both
June 30, 2018
and
December 31, 2017
, we have historically and will continue to recognize distributions that we receive as a gain on our Consolidated Statements of Income until recovery of all suspended losses.
NOTE 3—CAPITALIZATION
Our authorized capital structure consists of common shares and the
Director Voting Share
. None of our owners shall be liable for our debts, liabilities or obligations beyond such owner’s capital contribution. At
June 30, 2018
, our issued capitalization consisted of
231.7 million
common shares, of which
213.0 million
common shares were owned by Cheniere and its affiliates and
18.7 million
common shares were owned by the public, and
one
Director Voting Share
owned by Cheniere. We are authorized to issue an unlimited number of common shares. Additional classes or series of securities may be created with the approval of our Board of Directors, provided that any such additional class or series must be approved by a vote of holders of a majority of our outstanding shares.
NOTE 4—INVESTMENT IN CHENIERE PARTNERS
Our business consists of owning the following
Cheniere Partners units
, along with cash or other property that we receive as distributions in respect of such units:
Common Units
As of
June 30, 2018
, we owned
104.5 million
common units. The common units 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.
Subordinated Units
As of
June 30, 2018
, we owned
135.4 million
subordinated units. The subordinated units will convert on a
one
-for-one basis into common units at the expiration of the subordination period as described in the Fourth Amended and Restated Agreement of Limited Partnership of Cheniere Partners, dated as of February 14, 2017. The subordinated units were not entitled to receive distributions until all common units had received at least the initial quarterly distribution, including any arrearages that were accrued. Cheniere Partners did not make any cash distributions on its subordinated units with respect to the quarter ended June 30, 2010 through the quarter ended June 30, 2017, but resumed and has continued to make cash distributions for all quarters since distributions with respect to the quarter ended September 30, 2017.
NOTE 5—SUMMARIZED FINANCIAL INFORMATION FOR CHENIERE PARTNERS
Our consolidated operating results and financial condition are dependent on the performance and cash distributions of Cheniere Partners. The following tables are summarized Consolidated
Statements of Income
and Consolidated Balance Sheets information for Cheniere Partners. Additional information on Cheniere Partners’ operating results and financial position are contained in its
quarterly
report on Form 10-Q for the quarter ended
June 30, 2018
, which is included in this filing as
Exhibit 99.1
and incorporated herein by reference.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
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Summarized Cheniere Partners Consolidated Statements of Income Information
|
(in millions)
|
(unaudited)
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues (including transactions with affiliates)
|
|
$
|
1,407
|
|
|
$
|
992
|
|
|
$
|
3,000
|
|
|
$
|
1,883
|
|
Operating costs and expenses (including transactions with affiliates)
|
|
(952
|
)
|
|
(792
|
)
|
|
(2,037
|
)
|
|
(1,464
|
)
|
Other expense
|
|
(174
|
)
|
|
(154
|
)
|
|
(347
|
)
|
|
(326
|
)
|
Net income
|
|
$
|
281
|
|
|
$
|
46
|
|
|
$
|
616
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
Summarized Cheniere Partners Consolidated Balance Sheets Information
|
(in millions)
|
|
|
June 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(unaudited)
|
|
|
Current assets
|
|
$
|
2,062
|
|
|
$
|
2,139
|
|
Non-current assets
|
|
15,480
|
|
|
15,414
|
|
Total assets
|
|
$
|
17,542
|
|
|
$
|
17,553
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
730
|
|
|
$
|
829
|
|
Non-current liabilities
|
|
16,084
|
|
|
16,085
|
|
Partners’ equity
|
|
728
|
|
|
639
|
|
Total liabilities and partners’ equity
|
|
$
|
17,542
|
|
|
$
|
17,553
|
|
NOTE 6—RELATED PARTY TRANSACTIONS
Services Agreement
We, Cheniere and Cheniere Terminals, a wholly owned subsidiary of Cheniere, entered into a services agreement
(the “Services Agreement”)
pursuant to which we pay Cheniere 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 officers who are also officers of Cheniere. In addition, we pay directly for, or reimburse Cheniere for, certain third-party general and administrative expenses. Cheniere also provides us with cash management services, including treasury services with respect to the payment of dividends and allocation of reserves for taxes. Under the
Services Agreement
, we recorded general and administrative expense—affiliate of
$0.3 million
during each of the
three months ended June 30, 2018 and 2017
and
$0.5 million
during each of the
six months ended June 30, 2018 and 2017
.
The
Services Agreement
has a term of
one
year and automatically renews for additional
one
-year terms unless notice of nonrenewal is provided by any party to the agreement at least
90 days
prior to the next renewal date. Upon the occurrence of certain events resulting in the separation of us and Cheniere, our officers and directors who are also directors and officers of Cheniere would resign. Within
60 days
after such a separation event, we may provide notice to Cheniere to terminate the
Services Agreement
, and the
Services Agreement
will terminate
90 days
after the delivery date of the notice. If we provide notice to terminate at any time after such a separation event, we may request that Cheniere continue to provide services to us for a period of up to
six months
from the termination notice date.
Tax Sharing Agreement
We have entered into a Tax Sharing Agreement
(the “Tax Sharing Agreement”)
with Cheniere that governs the respective rights, responsibilities and obligations of Cheniere and us with respect to tax attributes, tax liabilities and benefits, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes. Under the terms of the
Tax Sharing Agreement
, for each period in which we or any of our subsidiaries are consolidated or combined with Cheniere for purposes of any tax return, Cheniere will prepare a pro forma tax return for us as if we filed our own consolidated, combined or
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
unitary income tax return, which includes an initial deemed net operating loss
(“NOL”)
carryforward amount. We will be required to reimburse Cheniere for any taxes shown on such pro forma tax returns.
Although we and Cheniere are each generally responsible for managing those disputes that relate to the taxes for which both are responsible, the
Tax Sharing Agreement
provides that Cheniere will have the responsibility and discretion to prepare and file all consolidated, combined or unitary income tax returns on our behalf (including the making of any tax elections), to respond to and conduct all tax proceedings (including tax audits) relating to such tax returns and to determine the reimbursement amounts in connection with any pro forma tax returns.
NOTE 7—INCOME TAXES
We are a limited liability company that has elected to be treated as a corporation for U.S. federal income tax purposes. The provision for income taxes, taxes payable and deferred income tax balances has been recorded as if we had filed all tax returns on a separate return basis.
Our federal taxable income or loss is included in the consolidated federal income tax return of Cheniere. We have entered into a Tax Sharing Agreement with Cheniere as discussed in
Note 6—Related Party Transactions.
Any amounts due to Cheniere under the Tax Sharing Agreement in excess of our income tax provision will be recorded as an equity distribution.
We recorded an income tax provision of
$3.9 million
during the
three months ended June 30, 2018
. During the
six months ended June 30, 2018
, we recorded an income tax provision of
$6.7 million
, offset by a
$6.3 million
income tax benefit attributable to the retroactive reinstatement of the investment tax credit during the first quarter of 2018.
At December 31, 2017, we were in an overall net deferred tax asset position for federal and state income tax purposes prior to the application of the valuation allowance. Based on the income realized during the
six months ended June 30, 2018
, and our projected income for the remainder of 2018, we expect to transition from a net deferred tax asset position to a net deferred tax liability position over the course of 2018 for federal income tax purposes. We expect to remain in an overall net deferred tax asset position for state income tax purposes prior to the application of the valuation allowance. The effective tax rates during the
three and six months ended June 30, 2018 and 2017
were lower than the
21%
and
35%
federal statutory rates during the 2018 and 2017 interim periods, respectively, primarily as a result of maintaining a valuation allowance against our federal and state net deferred tax assets. We are not presently a taxpayer for federal income tax purposes as a result of our ability to utilize prior year
NOL
carryforwards.
NOTE 8—DISTRIBUTIONS RECEIVED AND DIVIDENDS PAID
The following provides a summary of distributions received from Cheniere Partners during the
three and six months ended June 30, 2018 and 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Paid
|
|
Period Covered by Distribution
|
|
Distribution Per Common Unit
|
|
Distribution Per Subordinated Unit
|
|
Total Distribution Received
(in thousands)
|
May 15, 2018
|
|
January 1 - March 31, 2018
|
|
$
|
0.550
|
|
|
$
|
0.550
|
|
|
$
|
131,930
|
|
February 14, 2018
|
|
October 1 - December 31, 2017
|
|
0.500
|
|
|
0.500
|
|
|
119,936
|
|
|
|
|
|
|
|
|
|
|
May 15, 2017
|
|
January 1 - March 31, 2017
|
|
0.425
|
|
|
—
|
|
|
5,084
|
|
February 13, 2017
|
|
October 1 - December 31, 2016
|
|
0.425
|
|
|
—
|
|
|
5,084
|
|
On
July 27, 2018
, Cheniere Partners declared a
$0.56
distribution per common unit and subordinated unit for the period from
April 1, 2018
to
June 30, 2018
. The distribution attributable to our interest in Cheniere Partners, totaling
$134.3 million
, is to be paid to us on
August 14, 2018
. We have used the distributions from Cheniere Partners to establish cash reserves to pay general and administrative expenses (including affiliate) and to pay dividends.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The following provides a summary of dividends paid by us during the
three and six months ended June 30, 2018 and 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Date Paid
|
|
Period Covered by Dividend
|
|
Dividend Per Share
|
|
Total Dividend Paid
(in thousands)
|
May 30, 2018
|
|
January 1 - March 31, 2018
|
|
$
|
0.560
|
|
|
$
|
129,752
|
|
March 1, 2018
|
|
October 1 - December 31, 2017
|
|
0.510
|
|
|
118,167
|
|
|
|
|
|
|
|
|
May 30, 2017
|
|
January 1 - March 31, 2017
|
|
0.020
|
|
|
4,634
|
|
February 28, 2017
|
|
October 1 - December 31, 2016
|
|
0.020
|
|
|
4,634
|
|
|
|
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.” All statements, other than statements of historical or present facts or conditions, 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 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 consummate the transaction with Cheniere pursuant to which Cheniere will acquire all of our publicly held shares not already owned by Cheniere in a stock-for-stock transaction;
|
|
|
•
|
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 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’ Trains, including statements concerning the engagement of any 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, natural gas liquefaction or storage capacities that are, or may become, subject to contracts;
|
|
|
•
|
statements regarding Cheniere Partners’ planned development and 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, capital expenditures, maintenance and operating costs and cash flows, 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 or present facts or conditions, 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 as a result of a variety of factors described in this
quarterly
report and in the other reports and other information that we file with the SEC, including those discussed
under “Risk Factors” in our
annual report on Form 10-K for the year ended December 31, 2017
. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. These forward-looking statements speak only as of the date made, and other than as required by law, we undertake no obligation to update or revise any forward-looking statement or provide reasons why actual results may differ, whether as a result of new information, future events or otherwise.
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. 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 Significant Events
|
|
|
•
|
Our Relationship with Cheniere Partners
|
|
|
•
|
Liquidity and Capital Resources
|
|
|
•
|
Off-Balance Sheet Arrangements
|
|
|
•
|
Summary of Critical Accounting Estimates
|
|
|
•
|
Recent Accounting Standards
|
Our Business
We are a Delaware 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 common units and subordinated units
(collectively, the “Cheniere Partners 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
(our “Board”)
to pay our company expenses and amounts due under our services agreement
(the “Services Agreement”)
with a wholly owned subsidiary of 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 GP to oversee the operations of Cheniere Partners.
|
Our business consists of owning the following
Cheniere Partners units
, along with cash or other property that we receive as distributions in respect of such units:
Common Units
As of
June 30, 2018
, we owned
104.5 million
common units. The common units 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.
Subordinated
Units
As of
June 30, 2018
, we owned
135.4 million
subordinated units. The subordinated units were not entitled to receive distributions until all common units had received at least the initial quarterly distribution, including any arrearages that may have
accrued. Cheniere Partners did not make any cash distributions on its subordinated units with respect to the quarter ended June 30, 2010 through the quarter ended June 30, 2017, but resumed and has continued to make cash distributions for all quarters since distributions with respect to the quarter ended September 30, 2017. The subordinated units will convert on a one-for-one basis into common units at the expiration of the subordination period as described in the Fourth Amended and Restated Agreement of Limited Partnership of Cheniere Partners, dated as of February 14, 2017.
Overview of Significant Events
Significant events since January 1,
2018
and through the filing date of this Form 10-Q include the following:
In June 2018, we reached a definitive agreement (the “Merger Agreement”) with Cheniere under which Cheniere will acquire all of our publicly-held shares not already owned by Cheniere in a stock for share transaction (the “Merger”) pursuant to which our shareholders will receive a fixed exchange ratio of 0.4750 Cheniere shares for each of our outstanding publicly-held shares.
Our Relationship with Cheniere Partners
As of
June 30, 2018
, we owned approximately
48.6%
of the outstanding
Cheniere Partners units
. As a result of our non-economic voting interest in GP Holdco, which holds a
100%
interest in Cheniere Partners GP, we control GP Holdco and indirectly control the appointment of four of the eleven members of the board of directors of Cheniere Partners GP to oversee the operations of Cheniere Partners. Cheniere owns the sole share entitled to vote in the election of our directors
(the “Director Voting Share”)
. 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 operating results and financial condition of Cheniere Partners, we believe that the discussion and analysis of Cheniere Partners’ financial condition and operating results is important to our shareholders. Therefore, Cheniere Partners’ quarterly report on Form 10-Q for the quarter ended
June 30, 2018
has been included in this filing as
Exhibit 99.1
and incorporated herein by reference (the “Cheniere Partners Quarterly Report”).
Liquidity and Capital Resources
As of
June 30, 2018
, we had cash and cash equivalents of
$0.3 million
. Our capital structure consists only of common shares, of which
213.0 million
shares are owned by Cheniere and
18.7 million
shares are owned by the public, and one
Director Voting Share
which is held by Cheniere. Pursuant to the Merger Agreement, Cheniere will acquire all of our publicly-held shares not already owned by Cheniere in a stock for share transaction. The Merger is expected to close by the end of third quarter 2018, subject to customary closing conditions. Upon consummation of the Merger, we will merge with and into a wholly owned subsidiary of Cheniere.
Cheniere provides certain general and administrative services pursuant to the
Services Agreement
. We pay Cheniere 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. Cheniere also provides us with cash management services, including treasury services with respect to the payment of dividends and allocation of reserves for taxes. Under the
Services Agreement
, we recorded general and administrative expense—affiliate of
$0.3 million
during each of the
three months ended June 30, 2018 and 2017
and
$0.5 million
during each of the
six months ended June 30, 2018 and 2017
.
We believe that the cash distributions we will receive on the
Cheniere Partners units
will be sufficient to fund our working capital requirements for the next twelve months. On
July 27, 2018
, Cheniere Partners declared a
$0.56
distribution per common unit and subordinated unit to be paid on
August 14, 2018
for the period from
April 1, 2018
to
June 30, 2018
.
Dividends
Our
LLC Agreement
requires us to pay dividends on our common 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
. See
Note 8—Distributions Received and Dividends Paid
of our Notes to Consolidated Financial Statements for a summary of dividends paid by us.
Sources and Uses of Cash
The following table summarizes the sources and uses of our cash and cash equivalents for the
six months ended June 30, 2018 and 2017
(in thousands). Additional discussion of these items follows the table.
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Operating cash flows
|
|
|
|
Net cash used in operating activities
|
$
|
(4,277
|
)
|
|
$
|
(667
|
)
|
|
|
|
|
Investing cash flows
|
|
|
|
Net cash provided by investing activities
|
251,866
|
|
|
10,169
|
|
|
|
|
|
Financing cash flows
|
|
|
|
Net cash used in financing activities
|
(247,919
|
)
|
|
(9,268
|
)
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
(330
|
)
|
|
234
|
|
Cash and cash equivalents—beginning of period
|
659
|
|
|
219
|
|
Cash and cash equivalents—end of period
|
$
|
329
|
|
|
$
|
453
|
|
Operating Cash Flows
Operating cash outflows during the
six months ended June 30, 2018 and 2017
were
$4.3 million
and
$0.7 million
, respectively, primarily as a result of the increase in payments of general and administrative expenses (including affiliate) and state income tax.
Investing Cash Flows
Investing cash inflows during the
six months ended June 30, 2018 and 2017
were
$251.9 million
and
$10.2 million
, respectively, as a result of distributions from Cheniere Partners. The increase in distributions received in 2018 compared to 2017 was due to the additional 92.5 million common units owned by us subsequent to the conversion of the Class B units on August 2, 2017 and the increase in distributions per unit received from Cheniere Partners, from the $0.425 per common unit distributions during the
six months ended June 30, 2017
to the $0.50 per unit distribution in February and the $0.55 distribution in May for both common units and subordinated units during the
six months ended June 30, 2018
.
Financing Cash Flows
Financing cash outflows during the
six months ended June 30, 2018 and 2017
were
$247.9 million
and
$9.3 million
, respectively, as a result of dividends paid to our common shareholders in accordance with our
LLC Agreement
as described above. The increase in dividends paid in 2018 compared to 2017 was due to increased distributions that we received on our
Cheniere Partners units
in 2018.
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 Consolidated 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 historical negative investment in Cheniere Partners and because we are not obligated to fund losses, we had a zero investment
balance in Cheniere Partners recorded on the Consolidated Balance Sheets as of both
June 30, 2018
and
December 31, 2017
and had suspended the use of the equity method for any additional losses. The suspended loss account will be increased or decreased by our share of Cheniere Partners’ future losses or earnings, respectively. We had suspended losses of approximately
$734 million
and
$785 million
as of
June 30, 2018
and
December 31, 2017
, respectively. Due to our zero investment balance in, and suspended losses of, Cheniere Partners as of both
June 30, 2018
and
December 31, 2017
, we have historically and will continue to recognize distributions that we receive as a gain on our Consolidated Statements of Income and a corresponding entry will be made 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 Consolidated Statements of Income. In addition, future distributions we receive from Cheniere Partners would then reduce the carrying amount of our investment in Cheniere Partners. We recognized
$131.9 million
and
$5.1 million
for the
three months ended June 30, 2018 and 2017
, respectively, and
$251.9 million
and
$10.2 million
for the
six months ended June 30, 2018 and 2017
, respectively, of equity income from our investment in Cheniere Partners resulting from quarterly distributions that Cheniere Partners paid to us. The increase in distributions received in 2018 compared to 2017 was due to distributions paid on our subordinated units, the additional 92.5 million common units owned by us subsequent to the conversion of the Class B units on August 2, 2017 and the increase in distributions per unit received from Cheniere Partners, from the $0.425 per common unit distributions during the
six months ended June 30, 2017
to the $0.50 per unit distribution in February and the $0.55 distribution in May for both common units and subordinated units during the
six months ended June 30, 2018
.
The following table summarizes Consolidated
Statements of Income
information for Cheniere Partners. Additional information on Cheniere Partners’ operating results and financial position are contained in the Cheniere Partners Quarterly Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summarized Cheniere Partners Consolidated Statements of Income Information
|
(in millions)
|
(unaudited)
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues (including transactions with affiliates)
|
|
$
|
1,407
|
|
|
$
|
992
|
|
|
$
|
3,000
|
|
|
$
|
1,883
|
|
Operating costs and expenses (including transactions with affiliates)
|
|
(952
|
)
|
|
(792
|
)
|
|
(2,037
|
)
|
|
(1,464
|
)
|
Other expense
|
|
(174
|
)
|
|
(154
|
)
|
|
(347
|
)
|
|
(326
|
)
|
Net income
|
|
$
|
281
|
|
|
$
|
46
|
|
|
$
|
616
|
|
|
$
|
93
|
|
General and Administrative Expenses (including affiliate)
Our general and administrative expenses (including affiliate) are associated with managing our business and affairs. We incurred total general and administrative expenses (including affiliate) of
$3.0 million
and
$0.6 million
for the
three months ended June 30, 2018 and 2017
, respectively, and
$3.6 million
and
$1.2 million
for the
six months ended June 30, 2018 and 2017
, respectively. General and administrative expenses (including affiliate) increased during each of the
three and six months ended June 30, 2018
from the comparable periods in 2017 primarily as a result of
$2.4 million
in fees related to the Merger. General and administrative expense (including affiliate) also included
$0.3 million
for each of the
three months ended June 30, 2018 and 2017
and
$0.5 million
for each of the
six months ended June 30, 2018 and 2017
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.
Income Tax Provision
We recorded an income tax provision of
$3.9 million
during the
three months ended June 30, 2018
. During the
six months ended June 30, 2018
, we recorded an income tax provision of
$6.7 million
, offset by a
$6.3 million
income tax benefit attributable to the retroactive reinstatement of the investment tax credit during the first quarter of 2018.
At December 31, 2017, we were in an overall net deferred tax asset position for federal and state income tax purposes prior to the application of the valuation allowance. Based on the income realized during the
six months ended June 30, 2018
, and our projected income for the remainder of 2018, we expect to transition from a net deferred tax asset position to a net deferred tax liability position over the course of 2018 for federal income tax purposes. We expect to remain in an overall net deferred tax asset position for state income tax purposes prior to the application of the valuation allowance. The effective tax rates during the
three and six months ended June 30, 2018 and 2017
were lower than the 21% and 35% federal statutory rates during the 2018 and 2017 interim periods, respectively, primarily as a result of maintaining a valuation allowance against our federal and state net deferred
tax assets. We are not presently a taxpayer for federal income tax purposes as a result of our ability to utilize prior year net operating loss carryforwards.
Off-Balance Sheet Arrangements
We have interests in an unconsolidated variable interest entity as discussed in
Note 2—Basis of Presentation
of our Notes to Consolidated Financial Statements in this
quarterly
report, which we consider to be an off-balance sheet arrangement.
Summary of Critical Accounting Estimates
The preparation of our Consolidated Financial Statements in conformity with
GAAP
requires management to make certain estimates and assumptions that affect the amounts reported in the Consolidated 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, 2017
.
Recent Accounting Standards
There are currently no new accounting standards that have been issued that will have a significant impact on our financial position, results of operations or cash flows upon adoption.
|
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The nature of our business and operations is such that no activities or transactions are conducted or entered into by us that would require us to have a discussion under this item.
For a discussion of these matters as they pertain to Cheniere Partners, please read Part II, Item 3. “Quantitative and Qualitative Disclosures About Market Risk” in the Cheniere Partners Quarterly Report on Form 10-Q for the quarter ended
June 30, 2018
, which is included in this filing as
Exhibit 99.1
and incorporated herein by reference, as activities of Cheniere Partners have an impact on our consolidated operating results and financial position.
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
Securities Exchange Act of 1934, as amended
(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 management, including our Chief Executive Officer and our 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 Chief Executive Officer and our 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.