ITEM 1.
BUSINESS
General
We are a publicly traded Delaware limited liability company formed by Cheniere in 2013 to hold its limited partner interests in Cheniere Partners, a publicly traded limited partnership. Our only business consists of owning and holding Cheniere Partners’ limited partner common units, Class B units (“Class B 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 operating results and financial condition are dependent on the performance of Cheniere Partners. Therefore, Cheniere Partners’ Annual Report on Form 10-K for the year ended December 31, 2016, has been included in this filing as Exhibit 99.1 and incorporated herein by reference (the “Cheniere Partners Annual Report”).
Cheniere Partners is developing, constructing and operating natural gas liquefaction facilities at the Sabine Pass LNG terminal located in Cameron Parish, Louisiana, on the Sabine-Neches Waterway less than four miles from the Gulf Coast adjacent to the existing regasification facilities through its wholly owned subsidiary, SPL. The liquefaction of natural gas into LNG allows it to be shipped economically from areas of the world where natural gas is abundant and inexpensive to produce to other areas where natural gas demand and infrastructure exist to economically justify the use of LNG. Cheniere Partners owns and operates the LNG regasification facilities at the Sabine Pass LNG terminal through its wholly owned subsidiary, SPLNG. Cheniere Partners also owns a 94-mile pipeline that interconnects the Sabine Pass LNG terminal with a number of large interstate pipelines through its wholly owned subsidiary, CTPL.
When Cheniere Partners makes cash distributions to us with respect to the Cheniere Partners units, we will pay dividends to our shareholders consisting of the cash that we receive from Cheniere Partners, less income taxes and reserves established by our Board of Directors (our “Board”). Cheniere Partners has paid the initial quarterly distribution amount of $0.425 per common unit, or $1.70 per common unit on an annualized basis, for each fiscal quarter since its initial public offering in March 2007. 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.
We have elected to be treated as a corporation for U.S. federal income tax purposes. As a result, an owner of our shares will not report any of our items of income, gain, loss and deduction on its U.S. federal income tax return, nor will an owner of our shares receive a Schedule K-1. Our shareholders also are not subject to state income tax filings in the various states in which Cheniere Partners conducts operations as a result of owning our shares. Like dividends paid by a corporation, dividends received by our shareholders are reported on a Form 1099-DIV and subject to U.S. federal income tax, as well as any applicable state or local income tax.
As of December 31, 2016, we owned a 55.9% limited partner interest in Cheniere Partners and Cheniere owned, indirectly through GP Holdco, the general partner of Cheniere Partners and the incentive distribution rights in Cheniere Partners. In addition, we owned a non-economic voting interest in GP Holdco that allows us to control GP Holdco and the appointment of four of the eleven members to the board of directors of the general partner of Cheniere Partners 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 (a “Cheniere Separation Event”), our non-economic voting interest in GP Holdco would be extinguished and we would cease to control GP Holdco.
The following diagram depicts our abbreviated capital structure as of December 31, 2016:
Our Business Purpose
Our primary business purpose is to:
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own and hold the Cheniere Partners units;
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pay dividends on our shares from the distributions that we receive from Cheniere Partners, less income taxes and any reserves established by 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”);
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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
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designate members of the board of directors of Cheniere Partners GP to oversee the operations of Cheniere Partners.
Our Business
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
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.
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. 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. The subordination period will extend until the first business day following the distribution of available cash to partners in respect of any quarter that each of the following occurs:
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distributions of available cash from operating surplus on each of the outstanding common units (assuming conversion of the Class B units), subordinated units and any other outstanding units that are senior or equal in right of distribution to the subordinated units equaled or exceeded the sum of the initial quarterly distributions on all of the outstanding common units (assuming conversion of the Class B units), subordinated units, general partner units and any other outstanding units that are senior or equal in right of distribution to the subordinated units for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;
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the “adjusted operating surplus” (as defined in the Third Amended and Restated Agreement of Limited Partnership of Cheniere Partners, dated as of August 9, 2012 (the “Partnership Agreement”)) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the initial quarterly distributions on all of the outstanding common units (assuming conversion of the Class B units), subordinated units, general partner units and any other outstanding units that are senior or equal in right of distribution to the subordinated units during those periods on a fully diluted basis; and
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there are no arrearages in payment of the initial quarterly distribution on the common units.
Expiration of the Subordination Period
When the subordination period expires, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash. In addition, if the Cheniere Partners’ unitholders remove its general partner other than for cause and units held by the general partner and its affiliates are not voted in favor of such removal:
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the subordination period will end and each subordinated unit will immediately convert into one common unit;
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any existing arrearages in payment of the initial quarterly distribution on the common units will be extinguished; and
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the general partner will have the right to convert its general partner units and its incentive distribution rights into common units or to receive cash in exchange for those interests.
Early Conversion of Subordinated Units
The subordination period will automatically terminate and all of the subordinated units will convert into common units on a one-for-one basis on the first business day following the distribution of available cash to partners in respect of any quarter that each of the following occurs:
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in connection with distributions of available cash from operating surplus, the amount of such distributions constituting “contracted adjusted operating surplus” (as defined in the Partnership Agreement) on each outstanding common unit (assuming conversion of the Class B units), subordinated unit and any other outstanding unit that is senior or equal in
right of distribution to the subordinated units equaled or exceeded $0.638 (150% of the initial quarterly distribution) for each quarter in the four-quarter period immediately preceding that date;
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the contracted adjusted operating surplus generated during each quarter in the four-quarter period immediately preceding that date equaled or exceeded the sum of a distribution of $0.638 (150% of the initial quarterly distribution) on all of the outstanding common units (assuming conversion of the Class B units), subordinated units, general partner units, any other units that are senior or equal in right of distribution to the subordinated units, and any other equity securities that are junior to the subordinated units that the board of directors of Cheniere Partners GP deems to be appropriate for the calculation, after consultation with management of Cheniere Partners GP, on a fully diluted basis; and
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there are no arrearages in payment of the initial quarterly distribution on the common units.
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. On a quarterly basis beginning on the initial purchase date 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 December 31, 2016, the accreted conversion ratio of the Class B units owned by us and Blackstone CQP Holdco was 1.86 and 1.83, respectively. The Class B units will mandatorily convert into common units on the first business day following the record date of our first distribution after the substantial completion date of Cheniere Partners’ Train 3, but in any case no earlier than the first business day following the record date of our distribution with respect to the quarter ended June 30, 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 (in thousands) illustrates the number of common units into which the Class B units held by us and Blackstone CQP Holdco would convert at the dates specified below and our and Blackstone CQP Holdco’s percentage ownership of then outstanding Cheniere Partners units, 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:
(1)
This percentage ownership is based solely upon the conversion of Class B units and does not include any common units that may be deemed to be beneficially owned by Blackstone Group, an affiliate of Blackstone CQP Holdco. Based on information from a Schedule 13D/A filed by Blackstone Group and related parties with the SEC on January 15, 2016, Blackstone Group may be deemed to beneficially own 3,758,003 common units.
Employees
We have no employees and rely on Cheniere, via the Services Agreement, to manage all aspects of the conduct of our business. As of January 31, 2017, Cheniere and its subsidiaries had 911 full-time employees.
Available Information
Our common shares have been publicly traded since December 2013 and are traded on the NYSE MKT under the symbol “CQH.” Our principal executive offices are located at 700 Milam Street, Suite 1900, Houston, Texas 77002, and our telephone number is (713) 375-5000. Our internet address is www.cheniere.com. We provide public access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the SEC. Cheniere Partners also provides public
access to its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after the materials are electronically filed with, or furnished to, the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our reports and those of Cheniere Partners may be accessed free of charge through our internet website. We make our website content available for informational purposes only. The website should not be relied upon for investment purposes and is not incorporated by reference into this Form 10-K.
We will also make available to any shareholder, without charge, copies of our annual report on Form 10-K as filed with the SEC. For copies of this, or any other filing, please contact: Cheniere Energy Partners LP Holdings, LLC, Investor Relations Department, 700 Milam Street, Suite 1900, Houston, Texas 77002 or call (713) 375-5000. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (www.sec.gov) that contains reports and other information regarding issuers, like us, that file electronically with the SEC.
ITEM 1A.
ITEM 1A.
RISK FACTORS
The following are some of the important factors that could affect our financial performance or could cause actual results to differ materially from estimates or expectations contained in our forward-looking statements. In addition, the risk factors described in the Cheniere Partners Annual Report could affect the financial performance of Cheniere Partners, and consequently us, or could cause Cheniere Partners’ actual results to differ materially from estimates or expectations contained in Cheniere Partners’ forward-looking statements. We and Cheniere Partners may encounter risks in addition to those described. Additional risks and uncertainties not currently known to us or Cheniere Partners, or that we or Cheniere Partners currently deem to be immaterial, may also impair or adversely affect the business, contracts, financial condition, operating results, cash flows, liquidity and prospects of Cheniere Partners or us. Please also read the “Risk Factors” within the Cheniere Partners Annual Report.
The risk factors in this report are grouped into the following categories:
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Risks Relating to the Ownership of Our Shares; and
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Tax Risks.
Risks Relating to the Ownership of Our Shares
Our only cash-generating assets are our limited partner interests in Cheniere Partners, and our cash flow is therefore completely dependent upon the ability of Cheniere Partners to make cash distributions to its unitholders. Cheniere Partners may not be successful in its efforts to maintain or increase its cash available for distribution on its units.
Our only cash-generating assets are our limited partner interests in Cheniere Partners. Our cash flows are therefore completely dependent upon the ability of Cheniere Partners to make distributions to its unitholders. Cheniere Partners may not be successful in its efforts to maintain or increase its cash available for distribution on its units. The amount of cash that Cheniere Partners can distribute each quarter to its unitholders principally depends upon the items discussed in the Cheniere Partners Annual Report under Item 1.A “Risk Factors-Risks Relating to Our Cash Distributions.” Because of these factors, Cheniere Partners may not have sufficient available cash each quarter to continue to pay quarterly distributions in respect of the common units at its most recently paid amount of $0.425 per unit or any other amount, and Cheniere Partners may not have sufficient available cash each quarter to make any distributions in respect of the subordinated units. In addition, if Cheniere Partners does not continue to pay quarterly distributions, we will not be able to continue to pay dividends to our shareholders. Consistent with the terms of our Partnership Agreement, Cheniere Partners distributes to its partners all of its available cash each quarter. To the extent Cheniere Partners does not have sufficient cash reserves or is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow. Furthermore, to the extent Cheniere Partners issues additional units in connection with any acquisitions or expansion capital projects, the payment of distributions on those additional units may increase the risk that Cheniere Partners will be unable to maintain or increase its per unit distribution level, which in turn may lower the amount of cash that we have available to pay dividends on our outstanding shares.
If we issue additional shares or incur debt, the amount of cash that we have available to pay dividends on our outstanding shares could be reduced.
The amount of cash that we have available to pay dividends on our shares will be reduced by, among other things, income taxes and reserves established by our Board.
Our LLC Agreement requires us to pay dividends on our shares equal to the amount of cash distributions received from Cheniere Partners in respect of the Cheniere Partners units, less income taxes and any reserves established by our Board. Given that our only cash-generating assets are limited partner interests in Cheniere Partners, and we currently have no independent operations separate from those of Cheniere Partners, we may not have enough cash to meet our needs if our general and administrative expenses increase or if Cheniere Partners’ cash needs increase, resulting in a reduction in Cheniere Partners’ distributions.
Furthermore, under the Services Agreement, we pay administrative fees to an affiliate of Cheniere and reimburse it for expenses incurred on our behalf. We may also incur administrative and other expenses directly to operate our company. The payment of fees and the reimbursement of expenses to Cheniere, as well as the incurrence of expenses, reduces our ability to pay cash dividends to our shareholders. We expect the total costs payable under the Services Agreement, together with any third-party costs we pay directly, to be approximately $2.5 million per year. If a Cheniere Separation Event takes place, our directors and officers who are also directors or officers of Cheniere would resign. However, the Services Agreement would not automatically terminate. At such time, we expect that we will have increased costs related to hiring new officers and financial or business consultants.
If we cease to control GP Holdco, we may be deemed an “investment company,” which could impose restrictions on us.
We rely on an exemption from being regulated as an investment company under the Investment Company Act of 1940, as amended (“the Investment Company Act”) available to companies engaged in a non-investment company business through a controlled subsidiary. However, if we cease to control GP Holdco for any reason, we may be deemed to be an “investment company” within the meaning of the Investment Company Act. If Cheniere’s ownership is reduced to less than 25% of our outstanding shares or if Cheniere otherwise relinquishes the Director Voting Share, which it may do in its sole discretion, our non-economic voting interest in GP Holdco will be extinguished. Our non-economic voting interest in GP Holdco allows us to control GP Holdco and indirectly to appoint four of the eleven directors to the board of directors of Cheniere Partners GP. If, for any reason, our non-economic voting interest in GP Holdco is extinguished, we may be subject to regulation as an investment company under the Investment Company Act. As an investment company, we would be subject to restrictions under the Investment Company Act that could be material to our operations and financial flexibility or require changes to our operations, including the following:
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Cheniere Partners could be deemed an affiliated person with respect to us, and holders of more than 5% of our shares would also be affiliated persons of Cheniere Partners, and sales of securities or other property between us and any affiliated person could be prohibited;
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we may be required to modify our Consolidated Financial Statements to reflect a change from the equity method of accounting to the fair value method of accounting, which might result in a change to the way we value our assets;
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we would be restricted from having more than one class of senior debt securities and one class of senior equity securities, such as indebtedness or preferred stock, and we could only issue such senior securities if certain coverage tests are met relative to payments to be made to holders of senior securities, including asset coverage of 300% for debt securities and asset coverage of 200% for preferred stock;
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we would be subject to compliance review and record-keeping requirements that would add to our operating expenses and increase the amount of cash we would have to reserve from the distributions we receive from Cheniere Partners to enable us to pay such expenses;
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there may be restrictions on the extent to which certain types of investors could invest in our shares, such as registered investment companies, Section 3(c)(1) funds and Section 3(c)(7) funds (traditionally hedge funds and private equity funds);
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we would be restricted from selling our shares in subsequent offerings for less than the net asset value of our underlying assets; and
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we would be subject to stricter corporate governance requirements, including the requirement that at least 40% of our directors qualify as “independent.”
In addition to the factors listed above, we believe that we would not be a company with the characteristics that are typically associated with investment companies that the SEC is accustomed to regulating under the Investment Company Act. Therefore,
the SEC might seek to impose additional operational restrictions on us that could have a material adverse effect on our operating results.
Upon a Cheniere Separation Event, we may lose the ability to disclose developments about Cheniere Partners’ business and operating results to our shareholders in a timely manner.
Upon a Cheniere Separation Event, we would no longer have access to information about developments regarding Cheniere Partners’ business and operating results (other than information that Cheniere Partners reports to the public). We would consequently be unable to provide information concerning Cheniere Partners’ business to our shareholders simultaneously with announcements by Cheniere Partners in our annual, quarterly and current reports or in any future offering documents relating to our securities. Any delay in our ability to announce information regarding Cheniere Partners’ business and operating results could have an adverse effect on the market price of our shares.
Cheniere owns a majority of our outstanding shares and the Director Voting Share and therefore is able to amend our LLC Agreement and elect and remove members of our Board without the vote of the holders of any other shares.
Cheniere owns 82.6% of our outstanding shares, as well as the Director Voting Share. By holding the Director Voting Share and more than 50% of our outstanding shares, Cheniere has the ability to control us, including amending our LLC Agreement, without the vote of a holder of any other shares. Furthermore, under Delaware law, Cheniere is able to take certain actions by written consent of the majority of the outstanding shares without calling a meeting of our shareholders. In addition, as the owner of the Director Voting Share, Cheniere has the sole ability to elect our directors until a Cheniere Separation Event. While Cheniere continues to beneficially own a majority of our outstanding shares and the Director Voting Share, shareholders that are not affiliated with Cheniere have limited voting rights on matters affecting our business, which could affect the price at which our shares trade.
If Cheniere transfers its interest in GP Holdco to a non-affiliate, it will lose its ability to appoint the members of our Board.
Cheniere owns the Director Voting Share, the sole share entitled to vote in the election of our directors. In the event Cheniere transfers its interest in GP Holdco to a non-affiliate, it will also be required to transfer the Director Voting Share. Any such change in the ownership of the Director Voting Share could have an adverse impact on the market price of our shares and our financial results.
Our LLC Agreement prohibits us from selling Cheniere Partners units that we own, and we are restricted from selling the Cheniere Partners units that we own by applicable securities laws.
Our LLC Agreement prohibits us from selling, pledging or otherwise transferring any of the common units, subordinated units or Class B units that we own, or the common units into which the subordinated units and Class B units convert. Unlike a business that can sell its assets in order to generate cash or increase liquidity, we would be unable to do so without an amendment of our LLC Agreement. Although Cheniere, through its ownership of a majority of our shares, is able to amend our LLC Agreement, the Cheniere Partners units we hold constitute restricted securities under the Securities Act of 1933, as amended (the “Securities Act”). Absent an amendment to our LLC Agreement and an effective registration statement covering the sale of the Cheniere Partners units, we are unable to generate cash through sales of the Cheniere Partners units we hold, which could affect our liquidity. In addition, until a Cheniere Separation Event, we need Cheniere’s consent to sell any of the Cheniere Partners units that we hold.
Our LLC Agreement does not prohibit us from purchasing additional Cheniere Partners units, although we have no current intention to do so. However, if we did acquire additional Cheniere Partners units, we would be unable to sell any such additional Cheniere Partners units without an effective registration statement covering the sale of those Cheniere Partners units or an exemption from the registration requirements. If we choose to sell Cheniere Partners units pursuant to the exemption from registration provided by Rule 144 under the Securities Act, our sales of such Cheniere Partners units would be subject to volume limitations, regardless of whether we continue to be an “affiliate” of Cheniere Partners (as such term is defined under the Securities Act). However, if we are unable to sell Cheniere Partners units that we acquire on the open market, our liquidity and cash flows could be adversely affected.
We are restricted from acquiring additional Cheniere Partners units with the proceeds of indebtedness, if that indebtedness is secured by Cheniere Partners units that we own, to the extent those secured Cheniere Partners units would constitute margin securities.
If we acquire additional Cheniere Partners units with the proceeds of indebtedness, and we secure that indebtedness with the Cheniere Partners units that we own, we will be restricted from securing the Cheniere Partners units to the extent they would be considered “margin securities” under Regulation T of the Board of Governors of the Federal Reserve System, which generally restricts us from taking on secured debt with an aggregate principal amount of greater than 40% of the value of the Cheniere Partners units securing the debt.
The market price of our shares has fluctuated significantly in the past and is likely to fluctuate in the future. The value of our shares may be difficult for investors to accurately assess.
The market price of our shares has historically experienced and may continue to experience volatility. For example, between January 1, 2016 and December 31, 2016, the market price of our shares ranged between $12.04 and $23.05. Such fluctuations may continue as a result of a variety of factors, some of which are beyond our control, including:
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the trading price of Cheniere Partners units;
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the level of Cheniere Partners’ quarterly distributions (including whether Cheniere Partners is paying distributions on the subordinated units) and our quarterly dividends;
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domestic and worldwide supply of and demand for natural gas and fluctuations in the price of natural gas;
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Cheniere Partners’ quarterly or annual earnings or those of other companies in its industry;
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the loss of a large customer by Cheniere Partners;
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announcements by Cheniere Partners or its competitors of significant contracts or acquisitions;
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changes in accounting standards, policies, guidance, interpretations or principles;
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general conditions in the industries in which Cheniere Partners operates;
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general economic conditions;
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the impact of Investment Company Act regulations on our business;
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future sales of our shares; and
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other factors described in these “Risk Factors” and the “Risk Factors” in the Cheniere Partners Annual Report.
In addition, a number of factors may make it difficult for investors to accurately assess the value of our shares and may adversely impact the market price of our shares. These factors include, but are not limited to, the following:
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we are a limited liability company structured as a non-operating holding company that owns, and our only business consists of owning, Cheniere Partners units;
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our financial condition and operating results are dependent entirely upon the performance of Cheniere Partners, and we do not expect to have any revenues or cash flow other than from distributions that we receive in respect of the Cheniere Partners units;
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due to the illiquid nature of the subordinated and Class B units that we own, it is difficult to value our assets;
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we account for our ownership of the Cheniere Partners units in our Consolidated Financial Statements using the equity method of accounting, which shows historical cost, but items of income and expense related to the Cheniere Partners units are not necessarily reported and our Consolidated Financial Statements may not accurately reflect the value of Cheniere Partners’ assets and operations as they relate to the value of our ownership in Cheniere Partners; and
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we have elected to be treated as a corporation for federal income tax purposes.
If investors are unable to adequately value our shares due to these and other factors, the market price of our shares may not accurately reflect the underlying value of our shares, which could result in a loss of some or all of your investment in us.
Our share price may be substantially different than the market price of the Cheniere Partners units that we own.
We do not expect the price of our shares to be linked to the market price of the Cheniere Partners units for the following reasons:
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our shares are not issued on a one to one ratio with the number of Cheniere Partners units that we hold;
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the aggregate amount of dividends on our shares may be lower than the aggregate amount of distributions we receive because the cash we have to pay dividends may be reduced by income taxes and reserves established by our Board;
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our assets include the subordinated units, which do not currently receive cash distributions, and the Class B units, neither of which is admitted for trading on a national securities exchange nor has a liquid trading market; and
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the other risks described in these Risk Factors.
Upon Cheniere Partners being involved in a cash merger, going private, or selling all or substantially all of its assets (a “Termination Transaction”), the aggregate net proceeds that our shareholders receive from us may, as a result of our corporate income tax liabilities from the transaction and other factors, be substantially lower than the aggregate net proceeds received by us from Cheniere Partners. As a result of these considerations, our shares may trade at a substantial discount to the market price of the Cheniere Partners units, and the trading price of our shares may not be linked to the trading price of the Cheniere Partners units.
We may issue additional shares without shareholder approval, which would dilute your indirect ownership interest in Cheniere Partners.
Our LLC Agreement does not limit the number of additional shares that we may issue at any time without the approval of our shareholders. The issuance by us of additional shares or other equity securities of equal or senior rank will have the following effects:
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our existing shareholders’ proportionate ownership interest will decrease;
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the amount of cash available for dividends on each share may decrease;
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the relative voting strength of each previously outstanding share may be diminished; and
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the market price of our shares may decline.
Cheniere Partners may issue additional units without our or your approval, which would dilute our direct and your indirect ownership interest in Cheniere Partners. The issuance by Cheniere Partners of additional units or other equity securities of equal or senior rank to the units that we hold will have the following effects:
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our proportionate ownership interest in Cheniere Partners will decrease;
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the amount of cash available for distribution on each Cheniere Partner unit may decrease, resulting in a decrease in the amount of cash available to pay dividends to you;
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the relative voting strength of each previously outstanding unit, including the Cheniere Partners units that we hold, will be diminished; and
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the market price of the Cheniere Partners units may decline, resulting in a decline in the market price of our shares.
We are a “controlled company” within the meaning of the NYSE MKT rules and rely on exemptions from various corporate governance requirements.
Our shares are traded on the NYSE MKT. A company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is a “controlled company” within the meaning of the NYSE MKT rules. A “controlled company” may elect not to comply with various corporate governance requirements of the NYSE MKT, including the requirement that a majority of its board of directors consist of independent directors, the requirement that its nominating and governance committee consist of all independent directors and the requirement that its compensation committee consist of all independent directors.
We are a “controlled company” because Cheniere owns a majority of our outstanding shares and the Director Voting Share. Because we rely on certain of the “controlled company” exemptions and do not have a compensation committee or a nominating and corporate governance committee, owners of our common shares may not have the same corporate governance advantages afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE MKT.
In addition, the rules of the NYSE MKT require us to obtain the affirmative vote from holders of at least a majority of our outstanding shares in order to issue, in a private offering, greater than 20% of our outstanding shares for less than the greater of book and market value of our shares. However, until such time as Cheniere ceases to own a majority of our outstanding shares, we would be able to make such an offering with the written consent of Cheniere and without the vote of any other of our shareholders.
Our Consolidated Financial Statements do not currently, and may not in the future, reflect the value of our assets in a manner familiar to investors.
Cheniere Partners has not been profitable, and because we use the equity method of accounting, as of December 31, 2016, we reflect our investment in Cheniere Partners as having no value. Because Cheniere Partners does not expect to be profitable in the near future, our Consolidated Balance Sheet is likely to continue to reflect our assets as having no value for some period after Cheniere Partners does become profitable. It may therefore be difficult for investors to easily assess our business and operating results, which could adversely affect the trading price of our shares.
Tax Risks
As a member of the Cheniere consolidated group, we will not have complete control over our tax decisions and there could be conflicts of interest.
For so long as Cheniere continues to own at least 80% of the total voting power and value of our shares, we and our U.S. subsidiaries will be included in Cheniere’s consolidated group for U.S. federal income tax purposes. In addition, we or one or more of our U.S. subsidiaries may be included in the combined, consolidated or unitary tax returns of Cheniere or one or more of its subsidiaries for U.S. state or local income tax purposes. On December 18, 2013, we entered into a tax sharing agreement (the “Tax Sharing Agreement”) with Cheniere that provides that 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 unitary return, except that such pro forma tax return will generally include current income, deductions, credits and losses from us and a deemed net operating loss (“NOL”) carryforward amount. The current deemed NOL carryforward amount is the amount of our gross deferred tax liability for financial reporting purposes immediately prior to the initial public offering of our common shares (the “IPO”) increased by any losses or credits that we recognized based on the pro forma tax returns and decreased by any amount we previously utilized on the pro forma tax returns, but in no event will the deemed NOL carryforward amount exceed Cheniere’s available consolidated NOL carryforward. We will be required to reimburse Cheniere for any taxes shown on the pro forma tax returns. In addition, by virtue of Cheniere’s controlling ownership and the Tax Sharing Agreement, Cheniere effectively controls all of our U.S. tax decisions in connection with any consolidated, combined or unitary income tax returns in which we (or any of our subsidiaries) are included. 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. This arrangement may result in conflicts of interest between Cheniere and us. For example, under the Tax Sharing Agreement, Cheniere will be able to choose to contest, compromise or settle any adjustment or deficiency proposed by the relevant taxing authority in a manner that may be beneficial to Cheniere and detrimental to us.
As a member of the Cheniere consolidated group, we will be liable for the tax obligation of the Cheniere consolidated group to the extent any member fails to make any U.S. federal income tax payment.
Notwithstanding the Tax Sharing Agreement, U.S. federal law provides that each member of a consolidated group is liable for the group’s entire tax obligation. Thus, to the extent Cheniere or other members of Cheniere’s consolidated group fail to make any U.S. federal income tax payments required by law, we could be liable for the shortfall. Similar principles may apply for foreign, state or local income tax purposes where we file combined, consolidated or unitary returns with Cheniere or its subsidiaries for foreign, state or local income tax purposes.
If there is a determination that any of the restructuring transactions entered into prior to and in connection with our initial public offering are taxable for U.S. federal income tax purposes and we cease to be a member of the Cheniere consolidated group for U.S. federal income tax purposes, then Cheniere could incur significant income tax liabilities. We could be liable for the tax obligation of the Cheniere consolidated group to the extent any group member fails to make any U.S. federal income tax payment.
Prior to and in connection with our initial public offering, we and other members of the Cheniere consolidated group for U.S. federal income tax purposes participated in a series of restructuring transactions intended to qualify as tax-free for U.S. federal income tax purposes. No ruling from the U.S. Internal Revenue Service was requested in connection with such restructuring transactions.
Under the Internal Revenue Code, we will cease to be a member of the Cheniere consolidated group for U.S. federal income tax purposes (a deconsolidation) if at any time Cheniere owns less than 80% of the vote or 80% of the value of our outstanding shares, whether by issuance of additional shares by us or by Cheniere’s sale or other disposition of our shares.
If any of the restructuring transactions is determined to be taxable for U.S. federal income tax purposes for any reason, following a deconsolidation, Cheniere could incur significant income tax liabilities. In addition, as a member of the Cheniere consolidated group at the time of the restructuring transactions, we could be liable for Cheniere’s U.S. federal income tax liabilities related to the restructuring transactions to the extent Cheniere and other members of the Cheniere consolidated group fail to make any U.S. federal income tax payment.
The ability to use NOL carryforwards and certain other U.S. federal income tax attributes may be limited.
For so long as we are included in Cheniere’s consolidated group for U.S. federal income tax purposes, our taxable income or loss will be included in Cheniere’s consolidated federal income tax return. Cheniere has experienced ownership changes for purposes of Section 382 of the Internal Revenue Code that will subject a significant amount of its consolidated NOL carryforwards to annual utilization limitations for U.S. federal income tax purposes. Although we do not expect it to, the utilization limitations may affect the timing of when these federal NOL carryforwards may be utilized. Subsequent trading activity in Cheniere shares or further changes in the ownership of Cheniere stock may cause additional ownership changes, which may ultimately affect the ability to fully utilize Cheniere’s federal NOL carryforwards.
Upon a Termination Transaction, we may incur substantial corporate income tax liabilities in which case the aggregate amount we have to distribute may be substantially lower than the aggregate net proceeds we receive in respect of the Cheniere Partners units we own.
Upon a liquidation of Cheniere Partners, unitholders will receive distributions in accordance with the positive balance in their respective capital accounts in their units.
We are classified as a corporation for U.S. federal income tax purposes and, in most states in which Cheniere Partners does business, for state income tax purposes. Upon a Termination Transaction, we will be required to liquidate and distribute the net after-tax proceeds of the transaction to you. We may incur substantial corporate income tax liabilities upon a Termination Transaction. The tax liability we incur will depend in part upon the amount by which the value of the Cheniere Partners units that we own exceeds our tax basis in the units. We expect our tax basis in our common units to decrease over time as we receive distributions that exceed the net income allocated to us by Cheniere Partners with respect to those units. As a result, we may incur substantial income tax liabilities upon such a transaction even if Cheniere Partners units decrease in value after we purchase them. The amount of cash or other property available for distribution to you upon our liquidation will be reduced by the amount of any such income taxes paid by us.
As a result of these factors, upon a Termination Transaction, the aggregate amount we have to distribute may be substantially lower than the aggregate net proceeds received by us in respect of the Cheniere Partners units.
If Cheniere Partners were subject to a material amount of entity-level income taxes or similar taxes, whether as a result of being treated as a corporation for U.S. federal income tax purposes or otherwise, its cash available for distribution would be reduced substantially.
The anticipated benefit of an investment in Cheniere Partners units depends largely on the assumption that Cheniere Partners will not be subject to a material amount of entity-level income taxes or similar taxes.
Cheniere Partners may be subject to material entity-level U.S. federal income tax and state income taxes if it is treated as a corporation, rather than as a partnership, for U.S. federal income tax purposes. Because the common units are publicly traded, Section 7704 of the Internal Revenue Code requires that Cheniere Partners derive at least 90% of its gross income each year from the transportation, storage, processing and marketing of crude oil, natural gas and products thereof, or from certain other specified activities, in order to be treated as a partnership for U.S. federal income tax purposes. We believe that Cheniere Partners has satisfied this “qualifying income” requirement and will continue to do so in the future, so we believe Cheniere Partners is and will be treated as a partnership for U.S. federal income tax purposes. Failing to meet the qualifying income requirement or a change in current law could cause Cheniere Partners to be treated as a corporation for U.S. federal income tax purposes or otherwise subject Cheniere Partners to material entity-level taxes. From time to time, the U.S. President and members of the U.S. Congress propose and consider substantive changes to the existing federal income tax laws that would affect certain publicly traded partnerships. Further, final Treasury regulations under Section 7704(d)(1)(E) of the Code recently published in the Federal Register interpret the scope of qualifying income requirements for publicly traded partnerships by providing industry-specific guidance. We are unable to predict whether any changes or other proposals will ultimately be enacted. Any modification to the U.S. federal income tax laws and interpretations thereof may or may not be applied retroactively and could make it more difficult or impossible to meet the requirements for partnership status, affect or cause Cheniere Partners to change its business activities, change the character or treatment of portions of Cheniere Partners’ income and adversely affect our investment in Cheniere Partners units.
If Cheniere Partners were treated as a corporation for federal income tax purposes, it would pay federal income tax on its taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state and local income taxes at varying rates. Distributions from Cheniere Partners would generally be taxed again as corporate dividends, and no income, gains, losses or deductions would flow through to Cheniere Partners unitholders. Because a tax would be imposed upon Cheniere Partners as a corporation, the cash available for distribution to its unitholders would be substantially reduced. Therefore, treatment of Cheniere Partners as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to Cheniere Partners unitholders, likely causing a substantial reduction in the value of Cheniere Partners common units we own and the value of our shares.
The Partnership Agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects it to taxation as a corporation or otherwise subjects it to entity-level taxation for federal income tax purposes, then the initial quarterly distribution amount and the target distribution amounts will be adjusted to reflect the impact of that law on Cheniere Partners.
If Cheniere Partners were subjected to a material amount of additional entity-level taxation by individual states, it would reduce the cash available for distribution to Cheniere Partners’ unitholders.
Changes in current state law may subject Cheniere Partners to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce the cash available for distribution to Cheniere Partners’ unitholders and, therefore, negatively impact the value of an investment in our shares. The Partnership Agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects it to additional amounts of entity-level taxation for state or local income tax purposes, the initial quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on Cheniere Partners.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2.
PROPERTIES
We have no properties. Our assets consist of a small amount of working capital, the Cheniere Partners limited partner interests that we own and the non-economic voting interest in GP Holdco that we hold. See Item 1. Business for additional information.
ITEM 3.
ITEM 3.
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 December 31, 2016, there were no pending legal matters that would reasonably be expected to have a material impact on our consolidated operating results, financial position or cash flows.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURE
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common shares are listed on the NYSE MKT under the symbol “CQH” and began trading in December 2013, after the pricing of our IPO. The table below presents the high and low sales prices per common share, as reported by the NYSE MKT, and cash dividends to common shareholders for each quarter during 2016 and 2015.
As of February 17, 2017, there were approximately 3 shareholders of record.
Dividends
After we receive a distribution on the Cheniere Partners units, we will pay dividends on our shares of the cash that we receive as distributions in respect of the Cheniere Partners units, less income taxes and any reserves established by our Board to pay company expenses and amounts due under the Services Agreement, to service and reduce indebtedness that we may incur and for company purposes, in each case as permitted by our LLC Agreement. Pursuant to the Services Agreement, we have agreed to pay an administrative fee to reimburse Cheniere for the costs and expenses incurred on our behalf. If distributions are made on the Cheniere Partners units that we own other than in cash, we may, but are not required to, pay a dividend on our shares in substantially the same form. However, if Cheniere Partners makes a distribution on Cheniere Partners units in the form of additional Cheniere Partners units, we will be required to hold any units we receive as a distribution on the Cheniere Partners units.
Because we have elected to be treated as a corporation for U.S. federal income tax purposes, we are obligated to pay U.S. federal income tax on the net income allocated to us by Cheniere Partners with respect to the Cheniere Partners units that we own, and we may be subject to a 20% alternative minimum tax on our alternative minimum taxable income to the extent that the alternative minimum tax exceeds our regular income tax. We are also classified as a corporation in most states in which Cheniere Partners does business for state income tax purposes and will be subject to state income tax at rates that vary from state to state on the net income allocated to us by Cheniere Partners with respect to the Cheniere Partners units that we own.
The reserves for income taxes payable by us will account for the U.S. federal income taxes, any alternative minimum taxes and the state income taxes described in the preceding paragraph.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Selected financial data set forth below (in thousands, except per share data) are derived from our audited Consolidated Financial Statements for the period indicated. The financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and the accompanying notes thereto included elsewhere in this report.
Selected financial data of Cheniere Partners is found in Part II, Item 6. “Selected Financial Data” of the Cheniere Partners Annual Report, which is included in this filing as Exhibit 99.1 and incorporated herein by reference as our consolidated operating results, financial position and cash flows are dependent on the operating results, financial position and cash flows of Cheniere Partners.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 “Financial Statements and Supplementary Data.” 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
•
Overview of Significant Events
•
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 common units, Class B units (“Class B 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
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.
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 the Third Amended
and Restated Agreement of Limited Partnership of Cheniere Partners, dated as of August 9, 2012. 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. On a quarterly basis beginning on the initial purchase date 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 December 31, 2016, the accreted conversion ratio of the Class B units owned by us and Blackstone CQP Holdco was 1.86 and 1.83, respectively. The Class B units will mandatorily convert into common units on the first business day following the record date of our first distribution after the substantial completion date of Cheniere Partners’ Train 3, but in any case no earlier than the first business day following the record date of our distribution with respect to the quarter ended June 30, 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 (in thousands) illustrates the number of common units into which the Class B units held by us and Blackstone CQP Holdco would convert at the dates specified below and our and Blackstone CQP Holdco’s percentage ownership of then outstanding Cheniere Partners units, 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:
(1)
This percentage ownership is based solely upon the conversion of Class B units and does not include any common units that may be deemed to be beneficially owned by Blackstone Group, an affiliate of Blackstone CQP Holdco. Based on information from a Schedule 13D/A filed by Blackstone Group and related parties with the SEC on January 15, 2016, Blackstone Group may be deemed to beneficially own 3,758,003 common units.
Overview of Significant Events
Our significant accomplishments since January 1, 2016 and through the filing date of this Form 10-K include the following:
•
In May 2016, the Board appointed Jack A. Fusco as our Chairman of the Board and President and Chief Executive Officer. Mr. Fusco replaced our former Chairman of the Board and Interim Chief Executive Officer and President, Neal A. Shear.
•
In September 2016, the Board appointed Anatol Feygin and Doug Shanda as members of the Board.
•
In December 2016, Cheniere terminated negotiations with the conflicts committee of our Board regarding Cheniere’s previously announced non-binding proposal to acquire all of our publicly held shares not already owned by Cheniere in a stock for stock exchange transaction. Subsequent to the termination of negotiations, Cheniere has acquired a total of 5,785,161 shares of our common shares through individually negotiated transactions with our shareholders.
Our Relationship with Cheniere Partners
We own approximately 55.9% 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’ annual report on Form 10-K for the fiscal year ended December 31, 2016 has been included in this filing as Exhibit 99.1 and incorporated herein by reference (the “Cheniere Partners Annual Report”).
Liquidity and Capital Resources
As of December 31, 2016, we had cash and cash equivalents of $0.2 million. Our capital structure consists only of common shares, of which 191.4 million shares are owned by Cheniere and 40.3 million shares 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 our 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.
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. Under the Services Agreement, we recorded general and administrative expense-affiliate of $1.0 million during each of the years ended December 31, 2016, 2015 and 2014.
We believe that the cash distributions we will receive on the 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.
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. See Note 8-Distributions Received and Dividends Paid of our Notes to Consolidated Financial Statements for a summary of dividends paid by us during the years ended December 31, 2016 and 2015.
Sources and Uses of Cash
The following table (in thousands) summarizes the sources and uses of our cash and cash equivalents for the years ended December 31, 2016, 2015 and 2014. Additional discussion of these items follows the table.
Operating Cash Flows
Operating cash outflows during the years ended December 31, 2016, 2015 and 2014 were $2.5 million, $2.2 million and $2.1 million, respectively, primarily as a result of the payment of general and administrative expenses (including affiliate).
Investing Cash Flows
Investing cash inflows during each of the years ended December 31, 2016, 2015 and 2014 were $20.3 million, as a result of distributions from Cheniere Partners.
Financing Cash Flows
Financing cash outflows during the years ended December 31, 2016, 2015 and 2014 were $18.5 million, $18.5 million and $16.9 million, respectively, primarily as a result of dividends paid to our common shareholders in accordance with our LLC Agreement as described above. Additionally, during the year ended December 31, 2014, we completed a public offering of 10,100,000 common shares for net proceeds of $229.9 million. The net proceeds were used to redeem from Cheniere the same number of common shares, which reduced their ownership of our common shares.
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 December 31, 2016 and 2015 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 $938 million and $789 million as of December 31, 2016 and 2015, respectively. Due to our zero investment balance in, and suspended losses of, Cheniere Partners as of both December 31, 2016 and 2015, 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 income statements. In addition, future distributions we receive from Cheniere Partners would then reduce the carrying amount of our investment in Cheniere Partners. We recognized $20.3 million for each of the years ended December 31, 2016, 2015 and 2014 of equity income from our investment in Cheniere Partners resulting from quarterly distributions that Cheniere Partners paid to us.
The following table summarizes Consolidated Statements of Operations information for Cheniere Partners. Additional information on Cheniere Partners’ operating results and financial position are contained in the Cheniere Partners Annual Report.
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 $2.5 million for the year ended December 31, 2016 and $2.2 million for each of the years ended December 31, 2015 and 2014. The $0.3 million increase in the year ended December 31,
2016 related to expenses incurred in connection with the negotiations with Cheniere regarding the proposed stock for stock exchange transaction, which was terminated in December 2016. These expenses included $1.0 million for each of the years ended December 31, 2016, 2015 and 2014 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.
Off-Balance Sheet Arrangements
As of December 31, 2016, we had no transactions that met the definition of off-balance sheet arrangements that may have a current or future material effect on our consolidated financial position or operating results.
Summary of Critical Accounting Estimates
The preparation of 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. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. Management considers the following to be its most critical accounting estimates that involve significant judgment.
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 had been recorded as if we had filed all tax returns on a separate return basis (“hypothetical carve-out basis”) from Cheniere. The amount of income taxes we record requires interpretations of complex rules and regulations of various tax jurisdictions. We have recognized deferred tax assets and liabilities for temporary differences, operating losses and tax-credit carryforwards. The accruals for deferred tax assets and liabilities, including deferred state income tax assets and liabilities, are subject to significant judgment by management and are reviewed and adjusted routinely based on changes in facts and circumstances. We routinely assess the realizability of our deferred tax assets and reduce such assets by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. This assessment requires significant judgment and is based upon our assessment of our ability to generate future taxable income, among other factors.
Although management considers its tax accruals adequate, material changes in these accruals may occur in the future, based on the progress of ongoing tax audits, changes in legislation and resolution of pending tax matters.
Recent Accounting Standards
For descriptions of recently issued accounting standards, see Note 9-Recent Accounting Standards of our Notes to Consolidated Financial Statements.
ITEM 7A.
ITEM 7A.
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 7A. “Quantitative and Qualitative Disclosures About Market Risk” in the Cheniere Partners Annual Report as activities of Cheniere Partners have an impact on our consolidated operating results and financial position.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
Management’s Report to the Shareholders of Cheniere Energy Partners LP Holdings, LLC
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplemental Information to Consolidated Financial Statements-Summarized Quarterly Financial Data
MANAGEMENT’S REPORT TO THE SHAREHOLDERS OF
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
Management’s Report on Internal Control Over Financial Reporting
As management, we are responsible for establishing and maintaining adequate internal control over financial reporting for Cheniere Energy Partners LP Holdings, LLC (“Cheniere Holdings”). In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, we have conducted an assessment, including testing using the criteria in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Cheniere Holdings’ system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.
Based on our assessment, we have concluded that Cheniere Holdings maintained effective internal control over financial reporting as of December 31, 2016, based on criteria in Internal Control-Integrated Framework (2013) issued by the COSO.
Cheniere Holdings’ independent registered public accounting firm, KPMG LLP, has issued an audit report on Cheniere Holdings’ internal control over financial reporting as of December 31, 2016, which is contained in this Form 10-K.
Management’s Certifications
The certifications of Cheniere Holdings’ Chief Executive Officer and Chief Financial Officer required by the Sarbanes-Oxley Act of 2002 have been included as Exhibits 31 and 32 in Cheniere Holdings’ Form 10-K.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
By:
/s/ Jack A. Fusco
By:
/s/ Michael J. Wortley
Jack A. Fusco
Michael J. Wortley
President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cheniere Energy Partners LP Holdings, LLC:
We have audited the accompanying consolidated balance sheets of Cheniere Energy Partners LP Holdings, LLC and subsidiary (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cheniere Energy Partners LP Holdings, LLC and subsidiary as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cheniere Energy Partners LP Holdings, LLC’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
KPMG LLP
Houston, Texas
February 24, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cheniere Energy Partners LP Holdings, LLC:
We have audited Cheniere Energy Partners LP Holdings, LLC’s (the Company) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cheniere Energy Partners LP Holdings, LLC’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cheniere Energy Partners LP Holdings, LLC maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cheniere Energy Partners LP Holdings, LLC and subsidiary as of December 31, 2016 and 2015, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated February 24, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
Houston, Texas
February 24, 2017
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND NATURE OF BUSINESS
We are a Delaware limited liability company formed by Cheniere (NYSE MKT: LNG) to hold its limited partner interests in Cheniere Partners, a publicly traded limited partnership (NYSE MKT: CQP). Our only business consists of owning and holding Cheniere Partners’ limited partner common units, Class B units (“Class B 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.
In November 2014, we completed a public offering of 10.1 million common shares to the public at a price of $22.76 per share for net proceeds of approximately $229 million, after deducting the underwriting discount and offering expenses. The net proceeds from the offering were used to redeem from Cheniere the same number of common shares, which reduced Cheniere’s ownership of our common shares from 84.5% to 80.1%.
In December 2016, Cheniere purchased 5,785,161 of our common shares in exchange for unregistered common shares of Cheniere at an exchange ratio of 0.5205 common shares of Cheniere for each our common shares in privately negotiated stock-for-stock exchange transactions, increasing Cheniere’s ownership of our common shares from 80.1% to 82.6%.
At no time prior to the IPO did we have any operations or own any interest in Cheniere Partners. After the IPO and as of December 31, 2016, our sole purpose was to own the Cheniere Partners units and we expect to have no significant assets or operations other than those related to our interest in Cheniere Partners.
As of December 31, 2016, we owned a 55.9% limited partner interest in Cheniere Partners. No owner of Cheniere Holdings shall be liable for Cheniere Holdings’ debts, liabilities or obligations beyond such owners’ capital contribution.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our Consolidated Financial Statements were prepared in accordance with GAAP. Investments in non-controlled entities, over which Cheniere Holdings has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost, and subsequently adjusted for the Company’s proportionate share of earnings, losses and distributions.
Use of Estimates
The preparation of 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. Management evaluates its estimates and related assumptions regularly, including those related to fair value measurements. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. As future events and their effects cannot be determined accurately, actual results could differ significantly from our estimates.
Accounting for Investment in Cheniere Partners
As of both December 31, 2016 and 2015, we owned a 55.9% 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
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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.
We record our share of Cheniere Partners’ net income (loss) in the period in which it is earned. The difference between our reported zero investment in Cheniere Partners as of both December 31, 2016 and 2015 and our ownership in Cheniere Partners’ reported net assets, excluding the beneficial conversion feature associated with the Class B units as reported by Cheniere Partners, was due primarily to suspended losses and equity gains from Cheniere Partners’ sales of common units that were not recognized by us.
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, 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 as of both December 31, 2016 and 2015 and had 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 $938 million and $789 million as of December 31, 2016 and 2015, respectively. Additional equity method losses that we incur increase the suspended loss amount.
Due to our zero investment balance in, and suspended losses of, Cheniere Partners as of both December 31, 2016 and 2015, 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. Only upon recovery of all suspended losses through future earnings will equity income be reported on our Consolidated Statements of Income and future distributions reduce the carrying amount of our investment in Cheniere Partners.
Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Dividends
Within ten business days after we receive a distribution on the Cheniere Partners units, we will declare dividends on our shares of the cash that we receive as distributions in respect of the Cheniere Partners units, less income taxes and any reserves established by our Board of Directors (our “Board”) to pay expenses and amounts due under the Services Agreement, to service and reduce indebtedness that we may incur and for company purposes, in each case as permitted by our LLC Agreement.
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 (“hypothetical carve-out basis”) from Cheniere. We record deferred taxes for federal and state income taxes. We have a gross deferred tax liability as a result of the tax basis of our investment in Cheniere Partners being substantially less than our book basis. That deferred tax liability is fully offset by federal and state net operating loss (“NOL”) carryforwards generated primarily by our investment in Cheniere Partners. A valuation allowance equal to our federal and state net deferred tax asset balance has been established due to the uncertainty of realizing the tax benefits related to our federal and state net deferred tax assets.
Earnings Per Share
Both basic and diluted earnings per share are computed by dividing net earnings attributable to shareholders by the weighted average number of shares outstanding during each period. There are no securities outstanding that may be converted into or exercised for shares.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
NOTE 3-CAPITALIZATION
Cheniere Holdings’ authorized capital structure consists of common shares and the Director Voting Share. No owner of Cheniere Holdings shall be liable for Cheniere Holdings’ debts, liabilities or obligations beyond such owner’s capital contribution. At December 31, 2016, our issued capitalization consisted of 231.7 million common shares, of which 191.4 million common shares were owned by Cheniere and its affiliates and 40.3 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, 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
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.
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 the Third Amended and Restated Agreement of Limited Partnership of Cheniere Partners, dated as of August 9, 2012. 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. On a quarterly basis beginning on the initial purchase date 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 December 31, 2016, the accreted conversion ratio of the Class B units owned by us and Blackstone CQP Holdco was 1.86 and 1.83, respectively. The Class B units will mandatorily convert into common units on the first business day following the record date of our first distribution after the substantial completion date of Cheniere Partners’ Train 3, but in any case no earlier than the first business day following the record date of our distribution with respect to the quarter ended June 30, 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.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The following table (in thousands) illustrates the number of common units into which the Class B units held by us and Blackstone CQP Holdco would convert at the dates specified below and our and Blackstone CQP Holdco’s percentage ownership of then outstanding Cheniere Partners units, 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:
(1)
This percentage ownership is based solely upon the conversion of Class B units and does not include any common units that may be deemed to be beneficially owned by Blackstone Group, an affiliate of Blackstone CQP Holdco. Based on information from a Schedule 13D/A filed by Blackstone Group and related parties with the SEC on January 15, 2016, Blackstone Group may be deemed to beneficially own 3,758,003 common units.
NOTE 5-SUMMARIZED FINANCIAL INFORMATION FOR CHENIERE PARTNERS
Our consolidated operating results and financial condition are dependent on the performance of Cheniere Partners. The following tables are summarized Consolidated Statements of Operations and Consolidated Balance Sheets information for Cheniere Partners. Additional information on Cheniere Partners’ operating results and financial position are contained in its annual report on Form 10-K for the fiscal year ended December 31, 2016, which is included in this filing as Exhibit 99.1 and incorporated herein by reference.
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
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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 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. Under the Services Agreement, we recorded general and administrative expense-affiliate of $1.0 million during each of the years ended December 31, 2016, 2015 and 2014.
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 unitary income tax return, which includes an initial deemed 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
The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows:
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Significant components of our deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows (in thousands):
The federal deferred tax assets presented above do not include the state tax benefits as our net deferred state tax assets are offset with a full valuation allowance.
At December 31, 2016, we had federal and state NOL carryforwards of approximately $1.7 billion and $2.1 billion, respectively. These NOL carryforwards will expire between 2025 and 2036.
Due to our history of NOLs, current year NOLs and significant risk factors related to our ability to generate taxable income, we have established a valuation allowance to fully offset our federal and state deferred tax assets as of December 31, 2016 and 2015. We will continue to evaluate our ability to release the valuation allowance in the future. The decrease in the valuation allowance was $1.4 million for the year ended December 31, 2016. Deferred tax assets and deferred tax liabilities are classified as non-current in our Consolidated Balance Sheets.
Changes in the balance of unrecognized tax benefits are as follows (in thousands):
Our effective tax rate will not be affected if the unrecognized federal income tax benefits provided above were recognized. Currently, we do not recognize any accrued liabilities, interest and penalties associated with the unrecognized tax benefits provided above in our Consolidated Statements of Income or our Consolidated Balance Sheets. We recognize interest and penalties related to income tax matters as part of income tax expense.
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 calculated on a hypothetical carve-out basis will be recorded as an equity distribution.
Our taxable income or loss is included in the consolidated federal income tax return of Cheniere. Cheniere experienced an ownership change within the provisions of Internal Revenue Code (“IRC”) Section 382 in 2008, 2010 and 2012. An analysis of the annual limitation on the utilization of Cheniere’s NOLs was performed in accordance with IRC Section 382. It was determined that IRC Section 382 will not limit the use of Cheniere’s NOLs in full over the carryover period. Cheniere will continue to monitor trading activity in its respective shares which may cause an additional ownership change which could ultimately affect our ability to fully utilize Cheniere’s existing NOL carryforwards.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
NOTE 8-DISTRIBUTIONS RECEIVED AND DIVIDENDS PAID
The following provides a summary of distributions received from Cheniere Partners during the years ended December 31, 2016 and 2015:
On January 20, 2017, the board of directors of Cheniere Partners GP declared a cash distribution of $0.425 per common unit with respect to the fourth quarter of 2016. The distribution attributable to our interest in Cheniere Partners, totaling $5.1 million, is to be paid to us on February 13, 2017. We have used these distributions from Cheniere Partners to establish cash reserves to pay general and administrative expenses (including affiliate) and to pay dividends.
The following provides a summary of dividends paid by us during the years ended December 31, 2016 and 2015:
On February 8, 2017, our Board declared a cash dividend of $0.020 per common share with respect to the fourth quarter of 2016. The dividend, totaling $4.6 million, will be paid by us on February 28, 2017.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
NOTE 9-RECENT ACCOUNTING STANDARDS
The following table provides a brief description of recent accounting standards that were adopted by the Company during the reporting period:
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARIZED QUARTERLY FINANCIAL DATA
(unaudited)
Summarized Quarterly Financial Data-(in thousands, except per share amounts)
(1)
The sum of the quarterly net income per common share may not equal the full year amount as the computations of the weighted average common shares outstanding for basic and diluted shares outstanding for each quarter and the full year are performed independently.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on their evaluation as of the end of the fiscal year ended December 31, 2016, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are (1) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
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.
Management’s Report on Internal Control Over Financial Reporting
Our Management’s Report on Internal Control Over Financial Reporting is included in our Consolidated Financial Statements on page 22 and is incorporated herein by reference.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
Compliance Disclosure
Pursuant to Section 13(r) of the Exchange Act, if during the fiscal year ended December 31, 2016, we or any of our affiliates had engaged in certain transactions with Iran or with persons or entities designated under certain executive orders, we would be required to disclose information regarding such transactions in our annual report on Form 10-K as required under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”). During the fiscal year ended December 31, 2016, we did not engage in any transactions with Iran or with persons or entities related to Iran.
Blackstone CQP Holdco LP, an affiliate of Blackstone Group, is a holder of more than 29% of the outstanding equity interests of Cheniere Partners and has three representatives on the board of directors of Cheniere Partners’ general partner. Accordingly, Blackstone Group may be deemed an “affiliate” of Cheniere Partners, as that term is defined in Exchange Act Rule 12b-2. During the fiscal year ended December 31, 2016, Blackstone Group included in its quarterly reports on Form 10-Q for the quarterly periods ended March 31, 2016 and June 30, 2016 disclosures pursuant to ITRA regarding two of its portfolio companies that may be deemed to be affiliates of Blackstone Group during the period covered by the reports. Because of the broad definition of “affiliate” in Exchange Act Rule 12b-2, these portfolio companies of Blackstone Group, through Blackstone Group’s ownership of Cheniere Partners, may also be deemed to have been affiliates of ours. We have not independently verified the disclosure described in the following paragraphs.
Blackstone Group disclosed that Travelport Worldwide Limited (“Travelport”) has engaged in the following activities during the quarterly period ended March 31, 2016: as part of its global business in the travel industry, Travelport provides certain passenger travel related Travel Commerce Platform and Technology Services to Iran Air. Travelport also provides certain airline Technology Services to Iran Air Tours. The gross revenues and net profits attributable to such activities by Travelport during the quarter ended March 31, 2016 were approximately $156,000 and $109,000, respectively. Blackstone Group informed us that
Travelport intended to continue these business activities with Iran Air and Iran Air Tours as such activities were either exempt from applicable sanctions prohibitions or specifically licensed by the Office of Foreign Assets Control (the “OFAC”).
Blackstone Group disclosed that NCR Corporation (“NCR”) has engaged in the following activities during the quarterly periods ended March 31, 2016 and June 30, 2016: NCR reported that during the period from January 1, 2016 through April 30, 2016, NCR continued to maintain a bank account and guarantees at the Commercial Bank of Syria (“CBS”), which was designated as a Specially Designated National pursuant to Executive Order 13382 (“EO 13382”) on August 10, 2011. This bank account and the guarantees at CBS were maintained in the normal course of business prior to the listing of CBS pursuant to EO 13382. NCR reported that the last known account balance as of April 30, 2016, was approximately $3,468. The bank account did not generate interest from January 1, 2016 through April 30, 2016, and the guarantees did not generate any revenue or profits for NCR. Pursuant to a license granted to NCR by the OFAC on January 3, 2013, and subsequent licenses granted on April 29, 2013, July 12, 2013, February 28, 2014, November 12, 2014, and October 24, 2015, NCR had been winding down its past operations in Syria. NCR’s last such license expired on April 30, 2016. In addition, NCR’s application to renew the license to transact business with CBS, which was submitted to OFAC on May 18, 2015, was not acted upon prior to the expiration of NCR’s last such license. As a result, and in connection with the license expiration, NCR abandoned its remaining property in Syria, which, including the CBS account, was commercially insignificant, and ended the employment of its final two employees in Syria, who had remained employed by NCR to assist with the execution of the Company’s wind-down activities pursuant to authority granted by the OFAC licenses. NCR did not intend to engage in any further business activities with CBS.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Management of Cheniere Energy Partners LP Holdings, LLC
Our business and affairs are managed by our Board. Our current directors are Jack A. Fusco, Michael J. Wortley, Anatol Feygin, Doug Shanda, Don A. Turkleson, Jonathan S. Gross and Zurab S. Kobiashvili. Our Board has determined Messrs. Turkleson, Gross and Kobiashvili to be independent. All of our directors have been elected by, and may be removed by, Cheniere (as the holder of the Director Voting Share).
Because we are a controlled company under NYSE MKT rules, we are not required to have (and have elected not to have) a board of directors composed of a majority of independent members. Our Board is generally required to have at least three independent directors serving at all times.
Our Board has appointed Mr. Fusco as our Chairman of the Board and President and Chief Executive Officer effective May 12, 2016, replacing our former Chairman of the Board and Interim Chief Executive Officer and President, Neal A. Shear. Our Board has appointed Mr. Wortley as our Chief Financial Officer. Executive officers are appointed annually.
Upon a Cheniere Separation Event, our directors and officers who are also directors or officers of Cheniere will resign, and our remaining board members will be required to appoint new officers and may choose to hire an investment advisor or other financial or business consultants.
Audit Committee
Our Board has appointed an audit committee composed of Messrs. Turkleson, Gross and Kobiashvili, each of whom is an independent director and satisfies the additional independence and other requirements for audit committee members provided for in the listing standards of the NYSE MKT and the Exchange Act. In addition, our Board has determined that Mr. Turkleson meets the qualifications of a “financial expert” and is “financially sophisticated” as such terms are defined by the SEC and the NYSE MKT, respectively. Mr. Turkleson serves as the chairman of the audit committee.
The audit committee assists our Board in its oversight of the integrity of our Consolidated Financial Statements and our compliance with legal and regulatory requirements and company policies and controls. The audit committee has the sole authority to retain and terminate our independent registered public accounting firm, approve all audit services and related fees and the terms thereof and pre-approve any non-audit services to be rendered by our independent registered public accounting firm. The audit committee is also responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public accounting firm has been given unrestricted access to the audit committee. Our audit committee charter is posted at http://www.cheniere.com/about-us/cheniere-holdings/governance-and-ethics/audit-committee-cheniere-holdings/.
Other Committees
We do not have a nominating committee. This is permitted under NYSE MKT rules because we are a controlled company (as a result of Cheniere holding approximately 80% of our common shares and the Director Voting Share). Holders of our common shares are not presently entitled to elect our Board.
We also do not have a compensation committee. This is likewise permitted under NYSE MKT rules because we are a controlled company. Certain of our directors and all of our executive officers are also executive officers of Cheniere. Cheniere compensates these individuals for the performance of their duties as executive officers of Cheniere, which includes acting as directors and officers of Cheniere Holdings. Cheniere does not allocate this compensation between services for us and services for Cheniere and its affiliates, including us.
Directors and Executive Officers
The following sets forth information, as of February 17, 2017, regarding the individuals who currently serve as directors and executive officers of Cheniere Holdings. Mr. Turkleson was elected as a director in 2013. Messrs. Wortley, Gross and
Kobiashvili were elected as directors in 2014. Mr. Fusco has served as the Chairman of the Board and President and Chief Executive Officer since May 12, 2016. Messrs. Feygin and Shanda were elected as directors in September 2016.
Jack A. Fusco
Chairman of the Board and President and Chief Executive Officer
Mr. Fusco serves as a director, President and Chief Executive Officer of Cheniere; Chairman of the Board and President and Chief Executive Officer of Cheniere Energy Partners GP; Chief Executive Officer of SPL and a manager, President and Chief Executive Officer of the general partner of SPLNG. Mr. Fusco served as the Executive Chairman of Calpine Corporation (“Calpine”) from May 14, 2014 through May 11, 2016, Chief Executive Officer of Calpine from August 2008 to May 14, 2014 and President of Calpine from August 2008 to December 2012. Mr. Fusco has also been a director of Calpine since August 10, 2008. From July 2004 to February 2006, Mr. Fusco served as the Chairman and Chief Executive Officer of Texas Genco LLC. From 2002 through July 2004, Mr. Fusco was an exclusive energy investment advisor for Texas Pacific Group. From November 1998 until February 2002, he served as founder, President and Chief Executive Officer of Orion Power Holdings, Inc. Prior to his founding of Orion Power Holdings, Inc., Mr. Fusco was a Vice President at Goldman Sachs Power, an affiliate of Goldman, Sachs & Co. Prior to joining Goldman, Sachs & Co., Mr. Fusco was employed by Pacific Gas & Electric Company or its affiliates in various engineering and management roles for approximately 13 years. Mr. Fusco obtained a Bachelor of Science degree in Mechanical Engineering from California State University, Sacramento. Mr. Fusco served as a director on the board of Foster Wheeler Ltd., a global engineering and construction contractor and power equipment supplier, until February 2009 and on the board of Graphics Packaging Holdings, a paper and packaging company, until 2008. It was determined that Mr. Fusco should serve as a director of our general partner because of his prior experience leading successful energy industry companies and his perspective as President and Chief Executive Officer of Cheniere.
Michael J. Wortley
Director and Chief Financial Officer
Mr. Wortley has been Executive Vice President and Chief Financial Officer of Cheniere since September 2016. Mr. Wortley also serves as a Director and Executive Vice President and Chief Financial Officer of Cheniere Energy Partners GP. Mr. Wortley served as Senior Vice President and Chief Financial Officer of Cheniere from January 2014 to September 2016. Mr. Wortley served as Vice President-Strategy and Risk of Cheniere from January 2013 to January 2014 and as Vice President-Business Development of Cheniere and President of Corpus Christi Liquefaction, LLC, a wholly owned subsidiary of Cheniere, from September 2011 to January 2013. Mr. Wortley served as Cheniere’s Vice President-Strategic Planning from January 2009 to September 2011 and Manager-Strategic New Business from August 2007 to January 2009. Mr. Wortley is also Chief Financial Officer of the general partner of SPLNG and a manager and Chief Financial Officer of SPL. Prior to joining Cheniere in February 2005, Mr. Wortley spent five years in oil and gas corporate development, mergers, acquisitions and divestitures with Anadarko Petroleum Corporation (“Anadarko”), a publicly traded oil and gas exploration and production company. Mr. Wortley began his career with Union Pacific Resources Corporation, a publicly traded oil and gas exploration and production company subsequently acquired by Anadarko. Mr. Wortley received a B.B.A. in Finance from Southern Methodist University. It was determined that Mr. Wortley should serve as a director of our general partner because of his financial expertise and his perspective as Chief Financial Officer of Cheniere and certain of its affiliates. Other than Cheniere Energy Partners GP, Mr. Wortley has not held any other directorship positions in the past five years.
Anatol Feygin
Director
Mr. Feygin joined Cheniere in March 2014 as Senior Vice President, Strategy and Corporate Development. Mr. Feygin currently serves as Executive Vice President and Chief Commercial Officer of Cheniere. Mr. Feygin also serves as Executive Vice President and Chief Commercial Officer of Cheniere Energy Partners GP. Prior to joining Cheniere, Mr. Feygin worked with Loews Corporation from November 2007 to March 2014, most recently as their Vice President, Energy Strategist and Senior Portfolio Manager. Prior to joining Loews, Mr. Feygin spent three years at Bank of America, most recently as Head of Global
Commodity Strategy. Mr. Feygin began his career in banking at J.P. Morgan Securities Inc. as Senior Analyst, Natural Gas Pipelines and Distributors. Mr. Feygin earned a B.S. in Electrical Engineering from Rutgers University and his M.B.A. in Finance from the Leonard N. Stern School of Business at NYU. It was determined that Mr. Feygin should serve as one of our directors because of his commercial and commodity experience and his perspective as Chief Commercial Officer of Cheniere and certain of its affiliates. Mr. Feyin has not held any other directorship positions in the past five years.
Doug Shanda
Director
Mr. Shanda joined Cheniere in October 2012 as Vice President, Sabine Pass Operations leading the effort to prepare for liquefaction operations. His role was expanded to include Corpus Christi Operations in 2015. Mr. Shanda currently serves as Senior Vice President, Operations of Cheniere, President of SPL and Senior Vice President, Terminal Operations of Corpus Christi Liquefaction, LLC. Mr. Shanda is responsible for safe, reliable operations at Cheniere’s terminals. Mr. Shanda has been professionally involved in the power, chemical, petrochemical, refining and LNG industries for over 22 years. Mr. Shanda is currently a director of Cheniere Energy Partners GP. Prior to joining Cheniere, Mr. Shanda served as the Senior Project Engineer, Technical Manager and Plant Manager of the PERU LNG liquefaction plant in Melchorita, Peru where he was responsible for the overall management of the facility including production, marine, maintenance, technical services, EHS, security and administration. Mr. Shanda has 22 years of experience in project management and operations management. Mr. Shanda has a B.S. degree in Electrical Engineering from Iowa State University. It was determined that Mr. Shanda should serve as a director of our general partner because of his background in the LNG industry. Other than Cheniere Energy Partners GP, Mr. Shanda has not held any other directorship positions in the past five years.
Don A. Turkleson
Director and Chairman of our Audit Committee
From April 2012 until his retirement in April 2015, Mr. Turkleson served as the Vice President and Chief Financial Officer of Gulf Coast Energy Resources, LLC, a privately held energy exploration and production company. From January 2010 to April 2012, he served as the Chief Financial Officer of Laurus Energy, Inc., a privately held underground coal gasification company. He served as Senior Vice President and Chief Financial Officer of Cheniere Energy Partners GP from November 2006 to March 2009 and was a member of the board of directors of Cheniere Partners GP from November 2006 until September 2012. He became Senior Vice President of Cheniere in May 2004, and served as Treasurer and Secretary of Cheniere until December 2004 and September 2006, respectively. He served as Senior Vice President and Chief Financial Officer of Cheniere through March 2009. Prior to joining Cheniere in 1997, Mr. Turkleson was employed by PetroCorp Incorporated from 1983 to 1996, as Controller until 1986 and then as Vice President-Finance, Secretary and Treasurer. From 1975 to 1983, he worked as a Certified Public Accountant in the natural resources division of Arthur Andersen & Co. in Houston. Mr. Turkleson received a B.S. in Accounting from Louisiana State University. Since October 2016, Mr. Turkleson has served on the board of directors, on the executive committee and as chairman of the finance and audit committees of ACCEL Energy Canada Limited, a privately held company formed to develop, construct and operate facilities in Western Canada for the delivery of energy, ultra-clean fuels and specialty products. From November 2013 until the partnership was sold in July 2015, he served on the board of directors of the general partner of QEP Midstream Partners, L.P., a publicly traded master limited partnership formed to own, acquire and develop midstream assets. In addition, he served on the board of directors and as the chairman of the audit committee of the board of directors of Miller Energy Resources, Inc., a publicly traded oil and natural gas exploration, production and drilling company, from January 2011 to April 2014. It was determined that Mr. Turkleson should serve as one of our directors because of his background and experience in the energy industry and his background as a Certified Public Accountant.
Jonathan S. Gross
Director and a member of our Audit Committee
Mr. Gross is an oil and gas consultant. Since June 2009, his company, Jexco LLC, has provided upstream exploration geological and geophysical technical services for clients with projects in domestic and international basins. From June 2010 to January 2011, Mr. Gross served as Senior Vice President of Energy Partners, Ltd., a public exploration and production company. From July 2008 to April 2009, he served as Chief Operating Officer for Houston Exploration Services, Inc., a subsidiary of Kuwait Energy Company, a private exploration and production company based in Kuwait. From May 2004 to April 2008, Mr. Gross served as Senior Vice President Exploration of Cheniere with responsibilities for its domestic exploration program and international LNG sourcing. Mr. Gross served as Vice President Exploration of Cheniere from 2000 to May 2004. Prior to joining Cheniere in June 1999, Mr. Gross worked for Zydeco Energy, Inc. from January 1998 to May 1999, and Amoco Production Company as a technical contributor and team leader from 1981 to 1998. Mr. Gross received his B.A. in Geophysical Science from the University of Chicago in 1981. From April 2010 to July 2012, Mr. Gross served on the board of directors of Miller Energy Resources, Inc., a publicly traded oil and gas exploration and production company, where he was Chairman of the Nominating and Corporate
Governance Committee. He is a member of the Society of Exploration Geophysicists, the Houston Geological Society and the American Association of Petroleum Geologists where he is a Certified Geologist. It was determined that Mr. Gross should serve as one of our directors because of his background and experience in the energy industry and IT matters.
Zurab S. Kobiashvili
Director and a member of our Audit Committee
Mr. Kobiashvili served as Senior Vice President and General Counsel of Cheniere from 2004 until his retirement in February 2009. Prior to joining Cheniere, Mr. Kobiashvili was employed by Apache Corporation, a publicly traded global exploration and production company, initially as Vice President and General Counsel, beginning in 1994, and then as Senior Vice President and General Counsel. Prior to Apache Corporation, Mr. Kobiashvili served initially as a consultant and subsequently as an officer and general counsel of a number of public and private companies involved in the oil and gas exploration and production industry and in the development and operation of cogeneration power facilities. Mr. Kobiashvili earned a degree in Physics from Brown University and received his law degree from the University of Virginia. It was determined that Mr. Kobiashvili should serve as one of our directors because of his background as a senior executive and general counsel for a number of public and private companies involved in the energy industry. Mr. Kobiashvili has not held any other directorship positions in the past five years.
Code of Ethics
Our Code of Business Conduct and Ethics covers a wide range of business practices and procedures and furthers our fundamental principles of honesty, loyalty, fairness and forthrightness. The Code of Business Conduct and Ethics was approved by our Board. Our Code of Business Conduct and Ethics, which is applicable to all directors, officers and employees of the Company, is posted at http://www.cheniere.com/about-us/cheniere-holdings/governance-and-ethics/. We also intend to post any changes to or waivers of our Code of Business Conduct and Ethics for our executive officers on this website.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Exchange Act requires our directors and executive officers and persons who own more than 10% of a registered class of our equity securities to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms furnished to us and written representations from our directors and executive officers (or otherwise based on our knowledge), we believe that all Section 16(a) filing requirements were met during 2016 in a timely manner.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
We have paid no cash compensation to our executive officers since our inception. We do not have any equity incentive or non-equity incentive plans and have not granted any options, restricted stock or other plan-based awards. All of our executive officers are also executive officers of Cheniere. Cheniere compensates these officers for the performance of their duties as executive officers of Cheniere, which includes managing Cheniere Holdings. Cheniere does not allocate this compensation between services for us and services for Cheniere and its affiliates. Instead, an affiliate of Cheniere provides us various general and administrative services, such as technical, commercial, regulatory, financial, accounting, treasury, tax and legal staffing and related support services, pursuant to a services agreement for which we pay a non-accountable overhead reimbursement charge of $1.0 million per year (indexed for inflation). For a description of the services agreement, see “Item 13. Certain Relationships and Related Transactions, and Director Independence-Related Party Transactions-Relationship to Cheniere-Services Agreement.”
If Cheniere ceases to control us, our executive officers will resign, and we expect that we will have to begin paying the officers that would be appointed to replace our outgoing officers. We have not yet made any determinations with respect to salaries, bonuses and equity awards we would expect to pay, but we would not expect the incremental costs due to Cheniere ceasing to control us to exceed $5.0 million.
Compensation Committee Report
As discussed above, we do not have a compensation committee. In fulfilling its responsibilities, our Board, acting in lieu of a compensation committee, has reviewed and discussed the Compensation Discussion and Analysis with management. Based on this review and discussion, our Board recommended that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.
By the members of our Board:
Jack A. Fusco
Michael J. Wortley
Anatol Feygin
Doug Shanda
Don A. Turkleson
Jonathan S. Gross
Zurab S. Kobiashvili
Compensation Committee Interlocks and Insider Participation
As discussed above, our Board does not have a compensation committee. If any compensation is to be paid to our officers by Cheniere Holdings, the compensation would be reviewed and approved by our entire Board because they perform the functions of a compensation committee in the event such committee is needed. None of our directors or executive officers served as a member of a compensation committee of another entity that has or has had an executive officer who served as a member of our Board during 2016.
Director Compensation
Each independent director receives an annual fee of $200,000 for his or her services to us. In addition, the Chairman of the conflicts committee received a one-time fee of $70,000 and each conflicts committee member received a one-time fee of $60,000. Each independent director will be reimbursed for out-of-pocket expenses incurred in connection with attending meetings of our Board or committees of our Board. Officers or employees of Cheniere and its affiliates who also serve as our directors do not receive additional compensation.
The table below summarizes the compensation we paid to our directors for service on our Board for the fiscal year ended December 31, 2016:
(1)
Mr. Fusco has served as our Chairman of the Board and President and Chief Executive Officer since May 12, 2016.
(2)
Mr. Shear served as our Chairman of the Board and Interim Chief Executive Officer and President until May 12, 2016.
(3)
Mr. Wortley served as an executive officer and director of Cheniere Holdings during fiscal year 2016.
(4)
Ms. Gentle and Mr. Teague served as executive officers of Cheniere and directors of Cheniere Holdings until August 26 and September 15, 2016, respectively.
(5)
Messrs. Feygin and Shanda served as executive officers of Cheniere and directors of Cheniere Holdings since September 15, 2016.
Indemnification of Directors
Under our LLC Agreement and subject to specified limitations, we will indemnify to the fullest extent permitted by law, from and against all losses, expenses (including attorneys’ fees), judgments, fines, damages, penalties, interest, liabilities and settlement amounts actually and reasonably incurred by any director or officer, or while serving as a director or officer, any person who is or was serving as a director, officer, employee, partner, manager, fiduciary or trustee of Cheniere Holdings or any other entity. However, such directors, officers and persons are only entitled to indemnification if they acted in good faith and, with respect to any criminal proceeding or action, had no knowledge that such conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere shall not of itself create a presumption that such good faith standard was not met. In addition, we may indemnify any person who is or was an employee (other than an officer) or agent of us or any other person who is a party to a threatened, pending or completed action, suit or proceeding, to the extent permitted by law and authorized by our Board.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED SHAREHOLDER MATTERS
As of February 17, 2017, there were 231,700,000 common shares outstanding.
The amounts and percentage of equity securities beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities, and a person may be deemed a beneficial owner of securities as to which he has no economic interest.
Except as indicated by footnote, the persons named in the tables below have sole voting and investment power with respect to all equity securities shown as beneficially owned by them, subject to community property laws where applicable. Except as indicated by footnote, the address for the beneficial owners listed in the tables below is 700 Milam Street, Suite 1900, Houston, Texas 77002.
Owners of More than Five Percent of Outstanding Shares
The following table shows the beneficial owner known by us to own more than five percent of our common shares as of February 17, 2017.
(1)
Cheniere also owns the Director Voting Share of Cheniere Holdings.
Directors and Executive Officers
The following table sets forth the beneficial ownership of our common shares outstanding as of February 17, 2017 and held by each director, executive officer and all directors and executive officers as a group. On February 17, 2017, the directors and executive officers of Cheniere Holdings beneficially owned none of our common shares.
The table also presents the ownership of common units of Cheniere Partners and shares of common stock of Cheniere owned of record or beneficially as of February 17, 2017, by each director, named executive officer and all of our directors and executive officers as a group. As of February 17, 2017, Cheniere owned 82.6% of our common shares. As of February 17, 2017, Cheniere Holdings owned 11,963,488 of Cheniere Partners’ common units (approximately 21%), 45,333,334 of Cheniere Partners’ Class B units (approximately 31%) and 135,383,831 of its subordinated units (100%); on an aggregate basis, we owned approximately 57% of Cheniere Partners’ common, Class B and subordinated units.
* Less than 1%
(1)
None of Cheniere Holdings’ directors or executive officers owned any units of Cheniere Partners other than common units.
(2)
Mr. Fusco has served as our Chairman of the Board and President and Chief Executive Officer since May 12, 2016.
(3)
Mr. Shear served as our Chairman of the Board and Interim Chief Executive Officer and President from December 2015 to May 2016.
(4)
Messrs. Feygin and Shanda served as executive officers since September 15, 2016.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related-Party Transactions
Procedures for Review, Approval and Ratification of Transactions with Related Persons
The Audit Committee, under the Audit Committee Charter, has the responsibility to review and approve any transactions or series of related financial transactions, arrangements or relationships involving amounts exceeding $120,000 between Cheniere Holdings and our directors, executive officers and their immediate family members. The following related-party transactions are in addition to those related-party transactions described in Note 6-Related Party Transactions of our Notes to Consolidated Financial Statements which is herein incorporated by reference. The Audit Committee will only approve related party transactions when it determines such transactions are in the best interests of the Company and its shareholders. In reviewing a transaction, the Audit Committee considers facts and circumstances which it considers relevant to its determination. In determining whether to approve or ratify a related party transaction, the Audit Committee will apply the following standards and such other standards it deems appropriate:
•
whether the related party transaction is on terms no less favorable than the terms generally available to an unaffiliated third party under the same or similar circumstances;
•
whether the transaction is material to the Company or the related party; and
•
the extent of the related person’s interest in the transaction.
In addition, pursuant to our Code of Business Conduct and Ethics, our directors, officers and employees will bring any conflict or potential conflict of interest to the attention of our Chief Compliance Officer. If a conflict or potential conflict of interest arises between us and a director, officer or any of our affiliates, the resolution of any such conflict or potential conflict will be addressed by our Board in accordance with the provisions of our limited liability company agreement.
Share Redemption Agreement
On November 13, 2014, we entered into a Share Redemption Agreement with Cheniere providing for our redemption of 10,100,000 common shares held by Cheniere. Pursuant to the terms of the Share Redemption Agreement, the redemption price
per share was subject to being reduced retroactively if the actual expenses in connection with our offering of common shares exceeded the estimated expenses disclosed in the registration statement filed by us with the SEC on November 10, 2014 relating to such offering. On November 19, 2014, pursuant to the Share Redemption Agreement, we redeemed from Cheniere 10,100,000 common shares for an aggregate redemption price of approximately $229 million, which represents the net proceeds to us from our public offering of common shares consummated on November 19, 2014, after deducting underwriting discounts and expenses of the offering.
Relationship to Cheniere GP Holding Company, LLC
GP Holdco is a limited liability company formed for the purpose of holding a 100% interest in Cheniere Partners GP.
Cheniere owns 100% of the economic interests in GP Holdco, and we own a non-economic voting interest in GP Holdco. We control GP Holdco through our non-economic voting interest in GP Holdco, which entitles us to appoint three of the four members of the board of directors of GP Holdco. The board of directors of GP Holdco has the powers customarily held by a corporate board of directors, such as the authority to elect the officers of GP Holdco, set its policies and oversee its operations. Since we can appoint a majority of GP Holdco’s board, we have a controlling influence over the management and policies of GP Holdco.
If, at any time, 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 will be extinguished, and we will cease to oversee the operations and management of Cheniere Partners, as described below, which may result in our being deemed an investment company within the meaning of the Investment Company Act. Please read “Risk Factors-Risks Relating to the Ownership of Our Shares-If we cease to control GP Holdco, we may be deemed an ‘investment company,’ which could impose restrictions on us.”
Through the participation on the board of directors of Cheniere Partners GP of the individuals appointed by GP Holdco, GP Holdco also oversees, at the board level, the business and operations of Cheniere Partners GP through the receipt of reports on the operations, finances and plans for significant corporate transactions, the ability to act upon such reports, propose and/or approve significant corporate transactions and the ability to otherwise influence the management and policies of Cheniere Partners GP. Furthermore, the individuals appointed by GP Holdco to the board of directors of Cheniere Partners GP are actively involved in the operation and management of Cheniere Partners GP and, through Cheniere Partners GP, Cheniere Partners itself.
The number of directors constituting the board of directors of Cheniere Partners GP is currently eleven. Currently, Cheniere and its affiliates are entitled to appoint four of the eleven members of the board of directors of Cheniere Partners GP, which does not constitute a majority of the board of directors. If, at any time, the number of members of the board of directors of Cheniere Partners GP that Cheniere and its affiliates are entitled to appoint increases, GP Holdco will have the right to appoint those additional members subject to the procedures described in this section.
The members of the board of directors of Cheniere Partners GP that GP Holdco appoints must be approved by a majority of GP Holdco’s board of directors. Because our non-economic voting interest in GP Holdco entitles us to appoint three of the four members of GP Holdco’s board of directors, the directors that we appoint to the board of GP Holdco will have the ability to appoint each member of the board of directors of Cheniere Partners GP that GP Holdco is entitled to appoint.
Upon the occurrence of a Cheniere Separation Event, our non-economic voting interest in GP Holdco will be extinguished. We would cease to control GP Holdco if, among other events, Cheniere makes future sales or otherwise disposes of our shares that it owns as described under “Risk Factors-Risks Relating to the Ownership of Our Shares-If we cease to control GP Holdco, we may be deemed an ‘investment company,’ which could impose restrictions on us.”
If our non-economic voting interest in GP Holdco is extinguished, Cheniere will be the sole owner of GP Holdco and will be entitled to elect each of the members of the board of directors of GP Holdco. At this time, Cheniere would control the appointment of all of the members of the board of directors of Cheniere Partners GP that Cheniere and its affiliates are entitled to appoint, which is currently four of the eleven board members, and we would not be entitled to appoint any members of the board of directors of Cheniere Partners GP.
Relationship to Cheniere Energy Partners, L.P.
We own common units, Class B units and subordinated units in Cheniere Partners representing approximately 21%, 31% and 100%, respectively, of the units of each such class outstanding. Our ownership of common units, Class B units and subordinated
units represents approximately 4%, 13% and 40% of all of the common units, Class B units and subordinated units outstanding on an aggregate basis. As a result of our ownership of GP Holdco, we indirectly control the appointment of four of the eleven members of the board of directors of Cheniere Partners GP as described above under “Relationship to Cheniere GP Holding Company, LLC.” Three of the appointees also will be our directors. Through these appointees, we will be able to oversee the operations of Cheniere Partners GP and Cheniere Partners. If Cheniere relinquishes control of GP Holdco at any time, at its sole discretion, or Cheniere ceases to own 25% of our outstanding shares, our control of GP Holdco would be extinguished and we would cease to control GP Holdco.
Independent Directors
Because we are a controlled company, the NYSE MKT does not require our Board to be composed of a majority of directors who meet the criteria for independence required by the NYSE MKT. Our Board has determined that Messrs. Turkleson, Gross and Kobiashvili are independent directors in accordance with the following NYSE MKT independence standards. A director would not be independent if any of the following relationships exists:
•
a director who is, or during the past three years was, employed by the Company or by any parent or subsidiary of the Company, other than prior employment as an interim executive officer (provided the interim employment did not last longer than one year);
•
a director who accepts, or has an immediate family member who accepts, any compensation from the Company or any parent or subsidiary of the Company in excess of $120,000 during any twelve consecutive-month period within the three years preceding the determination of independence, other than compensation for board or committee services, or compensation paid to an immediate family member who is a non-executive employee of the Company or any parent or subsidiary of the Company, among other exceptions;
•
a director who is an immediate family member of an individual who is, or at any time during the past three years was, employed by the Company or any parent or subsidiary of the Company as an executive officer;
•
a director who is, or has an immediate family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the Company or any parent or subsidiary of Company made, or from which the Company or any parent or subsidiary of the Company received, payments (other than those arising solely from investments in our securities or payments under non-discretionary charitable contribution matching programs) that exceed 5% of the organization’s consolidated gross revenues for that year, or $200,000, whichever is more, in any of the most recent three fiscal years;
•
a director who is, or has an immediate family member who is, employed as an executive officer of another entity where, at any time during the most recent three fiscal years, any of the executive officers of the Company or any parent or subsidiary of the Company serves on the compensation committee of such other entity; or
•
a director who is, or has an immediate family member who is, a current partner of the outside auditor of the Company or parent or subsidiary of the Company, or was a partner or employee of the outside auditor of the Company or any parent or subsidiary of the Company who worked on our audit at any time during any of the past three years.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG LLP served as our independent auditor for the fiscal years ended December 31, 2016 and 2015. The following table (in thousands) sets forth the fees paid to KPMG LLP for professional services rendered for 2016 and 2015:
Audit Fees-Audit fees for 2016 and 2015 include fees associated with the integrated audit of our annual Consolidated Financial Statements, reviews of our interim Consolidated Financial Statements and services performed in connection with registration statements, including comfort letters and consents.
Audit-Related Fees-There were no audit-related fees in 2016 and 2015.
Tax Fees-There were no tax fees in 2016 and 2015.
Other Fees-There were no other fees in 2016 and 2015.
Auditor Pre-Approval Policy and Procedures
Under the audit committee’s charter, the audit committee is required to review and approve in advance all audit and lawfully permitted non-audit services to be provided by the independent accountants and the fees for such services. Pre-approval of non-audit services (other than review and attestation services) shall not be required if such services fall within exceptions established by the SEC. All audit and non-audit services provided to us during the fiscal years ended December 31, 2016 and 2015 were pre-approved.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements and Exhibits
(1)
Financial Statements-Cheniere Energy Partners LP Holdings, LLC:
Management’s Report to the Shareholders of Cheniere Energy Partners LP Holdings, LLC
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplemental Information to Consolidated Financial Statements-Quarterly Financial Data
(2)
Financial Statement Schedules:
All financial statement schedules have been omitted because they are not required, are not applicable, or the required information has been included elsewhere within this Form 10-K.
(3)
Exhibits:
Certain of the agreements filed as exhibits to this Form 10-K contain representations, warranties, covenants and conditions by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations, warranties, covenants and conditions:
•
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•
may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;
•
may apply standards of materiality that differ from those of a reasonable investor; and
•
were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. These agreements are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. Investors should not rely on them as statements of fact.
*
Filed herewith.
**
Furnished herewith.
†
Management contract or compensatory plan or arrangement.
ITEM 16.
FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CHENIERE ENERGY PARTNERS LP HOLDINGS, LLC
By:
/s/ Jack A. Fusco
Jack A. Fusco
President and Chief Executive Officer
(Principal Executive Officer)
Date:
February 24, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the general partner of the registrant and in the capacities and on the dates indicated.