S-1 1 d564653ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on September 20, 2013

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Form S-1

Cheniere Energy Partners LP Holdings, LLC

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   4924   36-4767730

(State or other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

700 Milam Street, Suite 800

Houston, Texas 77002

(713) 375-5000

(Address, including Zip Code, and Telephone Number including Area Code, of Registrant’s Principal Executive Offices)

H. Davis Thames

Chief Financial Officer

700 Milam Street, Suite 800

Houston, Texas 77002

(713) 375-5000

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

Copies to:

 

G. Michael O’Leary

George J. Vlahakos

Andrews Kurth LLP

600 Travis Street

Suite 4200

Houston, Texas 77002

(713) 220-4200

 

T. Mark Kelly

Alan Beck

Vinson & Elkins L.L.P.

1001 Fannin Street

Suite 2500

Houston, Texas 77002

(713) 758-2222

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

  Large accelerated filer ¨    Accelerated filer  ¨
  Non-accelerated filer x    Smaller reporting company  ¨
  (Do not check if a smaller reporting company)   

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum Aggregate
Offering Price(1)(2)

 

Amount of

Registration Fee

Common shares

  $690,000,000   $94,116

 

 

(1) Includes common shares issuable upon exercise of the underwriters’ option to purchase additional common shares.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated September 20, 2013

PROSPECTUS

Cheniere Energy Partners LP Holdings, LLC

             Common Shares

Representing Limited Liability Company Interests

 

 

This is the initial public offering of common shares (“shares”) representing limited liability company interests in Cheniere Energy Partners LP Holdings, LLC (“Cheniere Holdings,” “we,” “us” or “our”). We are offering              shares in this offering. We are a recently formed limited liability company that has elected to be treated as a corporation for U.S. federal income tax purposes. We will use the net proceeds from this offering to repay intercompany indebtedness and payables and to make a distribution to Cheniere Energy, Inc. (“Cheniere”).

No public market currently exists for our shares. We intend to apply to list our shares on the NYSE MKT under the symbol “CQH.”

Immediately following the closing of this offering, Cheniere Holdings’ only assets will be the following equity interests in Cheniere Energy Partners, L.P. (“Cheniere Partners”): 11,963,488 common units representing limited partner interests in Cheniere Partners (the “common units”), 45,333,334 Class B units representing limited partner interests in Cheniere Partners (the “Class B units”) and 135,383,831 subordinated units representing limited partner interests in Cheniere Partners (the “subordinated units” and together with the common units and the Class B units, the “Cheniere Partners units” and each a “Cheniere Partners unit”), as well as a non-economic voting interest in Cheniere GP Holding Company, LLC (“GP Holdco”). The Class B units and subordinated units are convertible into common units under specified circumstances. Given the nature of our business and assets, we anticipate that the initial public offering price will be between $         and $         per share.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and, as such, will be subject to reduced public company reporting requirements.

 

 

Investing in our shares involves risks. Please read “Risk Factors” beginning on page 26 of this prospectus. These risks include the following:

 

  Ÿ  

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 distributions on its units.

 

  Ÿ  

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 of directors.

 

  Ÿ  

There is no existing market for our shares and even if such a market does develop, which we cannot assure you will happen, the market price of our shares may be less than the price you paid for your shares, and the value of our shares may be difficult for investors to accurately assess.

 

  Ÿ  

If we cease to control GP Holdco, we may be deemed an “investment company,” which could impose restrictions on us.

 

 

 

     Per Share      Total  

Price to the public

   $                    $                

Underwriting discounts and commissions

   $                    $                

Proceeds to us

   $                    $                

We have granted the underwriters an option for a period of 30 days to purchase up to an additional              shares on the same terms and conditions set forth above.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2013.

 

Goldman, Sachs & Co.   Morgan Stanley

 

 

Prospectus dated                     , 2013


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[INSIDE FRONT COVER ART TO COME]


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

Overview

     1   

Cheniere Holdings

     1   

Cheniere Partners

     5   

Risk Factors

     11   

Management of Cheniere Holdings

     14   

Ownership of Cheniere Holdings and Cheniere Partners

     16   

Our Principal Executive Offices and Internet Address

     17   

The Offering

     18   

Summary Historical and Pro Forma Financial Data of Cheniere Holdings

     24   

RISK FACTORS

     26   

Risks Relating to the Ownership of Our Shares

     26   

Risks Relating to Cheniere Partners’ Financial Matters

     33   

Risks Relating to Cheniere Partners’ Business

     36   

Risks Relating to Cheniere Partners’ Cash Distributions

     50   

Risks Inherent in Our Investment in Cheniere Partners

     53   

Tax Risks to Shareholders

     58   

USE OF PROCEEDS

     63   

DILUTION

     64   

DIVIDEND AND DISTRIBUTION POLICIES

     65   

Our Dividend Policy

     65   

Cheniere Partners’ Distribution Policy and Restrictions on Distributions

     66   

How Cheniere Partners Makes Cash Distributions

     69   

Cheniere Partners’ Historical Distributions

     82   

SELECTED HISTORICAL FINANCIAL DATA OF CHENIERE HOLDINGS

     83   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     85   

Cheniere Holdings

     85   

Cheniere Partners

     88   

BUSINESS

     109   

Cheniere Holdings

     109   

Cheniere Partners

     113   

MANAGEMENT

     128   

Directors and Executive Officers of Cheniere Holdings

     128   

Committees

     129   

Our Executive Compensation

     130   

Our Director Compensation

     130   

Directors and Executive Officers of Cheniere Partners’ General Partner

     130   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     133   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     134   

Our Relationship with Cheniere

     134   

Our Relationship with Cheniere Partners

     136   

DESCRIPTION OF OUR SHARES

     137   

Voting Rights

     137   

Dividends

     137   

Issuance of Additional Shares

     137   

Transfer Agent and Registrar

     137   

Transfer of Shares

     138   

 

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DESCRIPTION OF OUR COMPANY AGREEMENT AND CHENIERE PARTNERS’ PARTNERSHIP AGREEMENT

     139   

Our Limited Liability Company Agreement

     139   

Cheniere Partners’ Partnership Agreement

     151   

SHARES ELIGIBLE FOR FUTURE SALE

     167   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     168   

Scope of Discussion

     168   

Cheniere Partners’ Partnership Status

     169   

Cheniere Holdings’ U.S. Federal Income Taxation

     170   

Consequences to U.S. Holders

     170   

Consequences to Non-U.S. Holders

     172   

Medicare Tax

     174   

Additional Withholding Tax

     174   

ERISA CONSIDERATIONS

     175   

Fiduciary Requirements

     175   

Prohibited Transaction Issues

     175   

Plan Asset Issues

     176   

Careful Consideration of ERISA and Code Issues Is Recommended

     177   

UNDERWRITING

     178   

Notice to Prospective Investors in the EEA

     179   

VALIDITY OF THE SHARES

     182   

EXPERTS

     182   

WHERE YOU CAN FIND MORE INFORMATION

     182   

FORWARD-LOOKING STATEMENTS

     184   

INDEX TO FINANCIAL STATEMENTS

     F-1   

Appendix A—Glossary of Terms

     A-1   

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data is also based on our good faith estimates.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before buying shares in this offering. Therefore, you should read this entire prospectus carefully, including the risks discussed in the section titled “Risk Factors” beginning on page 26 and the historical financial statements of Cheniere Partners and the notes to those financial statements included elsewhere in this prospectus. This prospectus also contains important information about Cheniere Partners, including information about its businesses and financial and operating data, all of which you should read carefully before buying shares in this offering. Unless indicated otherwise, the information presented in this prospectus assumes (1) an initial public offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus), (2) that the underwriters do not exercise their option to purchase additional shares, and (3) that Cheniere Partners does not sell any common units under its previously announced at-the-market program before the completion of this offering. We include a glossary of some of the terms used in this prospectus as Appendix A.

As used in this prospectus, the term “Cheniere Holdings” and the terms “we,” “our,” “us” and similar terms refer to Cheniere Energy Partners LP Holdings, LLC and our wholly owned subsidiary, unless the context otherwise requires. In addition, the term “Cheniere Partners” refers to Cheniere Energy Partners, L.P. and its subsidiaries, including Sabine Pass LNG, L.P. (“Sabine Pass LNG”), Sabine Pass Liquefaction, LLC (“Sabine Pass Liquefaction”) and Cheniere Creole Trail Pipeline, L.P. (“CTPL”), and the term “Cheniere” refers to Cheniere Energy, Inc., the ultimate parent of each of us and the general partner of Cheniere Partners. In this prospectus, unless the context requires otherwise, we are considered to be an affiliate of Cheniere and Cheniere Partners’ general partner until Cheniere ceases to own greater than 25% of our outstanding shares, or it otherwise relinquishes the sole share entitled to vote in the election of our directors, which we refer to as the “director voting share,” as described herein. As used in this prospectus, the term “shares” refers to common shares representing limited liability company interests in Cheniere Holdings, the term “common units” refers to common units representing limited partner interests in Cheniere Partners, the term “subordinated units” refers to subordinated units in Cheniere Partners, the term “Class B units” refers to Class B units in Cheniere Partners and the common units, subordinated units and Class B units are referred to collectively as the “Cheniere Partners units.” Please read “Dividend and Distribution Policies” and “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement.”

Overview

Cheniere Holdings

Business

We are a Delaware limited liability company that, upon consummation of this offering, will own a 55.9% limited partner interest in Cheniere Partners, a publicly-traded limited partnership (NYSE MKT: CQP). Our only business will consist of owning Cheniere Partners units, and, accordingly, our results of operations and financial condition will be dependent on the performance of Cheniere Partners. Cheniere Partners owns and operates liquefied natural gas (“LNG”) regasification facilities and, adjacent to these facilities, currently has natural gas liquefaction facilities under construction (the “Liquefaction Project”).

Cheniere Holdings was formed to hold the Cheniere Partners limited partner interests that are owned by Cheniere, thereby allowing Cheniere to segregate its lower risk, stable, cash flow generating assets from its higher risk, early stage development projects and marketing activities. Cheniere

 

 

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believes that an initial public offering of equity interests in Cheniere Holdings to fund Cheniere’s early stage development projects and marketing activities will provide Cheniere with a lower-cost source of capital funding than other alternatives. Upon the closing of this offering, Cheniere will continue to own, indirectly through GP Holdco, the general partner of Cheniere Partners and the incentive distribution rights in Cheniere Partners, and Cheniere Holdings will hold all of the limited partner interests in Cheniere Partners that are owned by Cheniere prior to the closing of this offering. In addition, Cheniere Holdings will own a non-economic voting interest in Cheniere GP Holding Company, LLC that will allow Cheniere Holdings 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. Please read “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Cheniere GP Holding Company, LLC.” We believe that Cheniere Holdings will be attractive to investors that desire to invest in Cheniere Partners without the tax and other complexities arising from the ownership of master limited partnership securities.

When Cheniere Partners makes cash distributions to us with respect to our 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. On July 22, 2013, Cheniere Partners declared a regular quarterly cash distribution of $0.425 per common unit, or $1.70 per common unit on an annualized basis, which was paid on August 14, 2013 to common unitholders of record as of August 1, 2013. 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 will not be 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 will be reported on a Form 1099-DIV and subject to U.S. federal income tax, as well as any applicable state or local income tax. Please read “Material U.S. Federal Income Tax Consequences” for additional details.

Upon completion of this offering, our business will consist of owning the following Cheniere Partners units, along with cash or other property that we receive as distributions in respect of such units:

 

  Ÿ  

Common Units.    We will own 11,963,488 common units, which are entitled to quarterly cash distributions from Cheniere Partners. For the quarter ended June 30, 2013, the most recent quarter for which a distribution has been declared for common unitholders, Cheniere Partners declared the initial quarterly distribution amount of $0.425 per common unit. 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.

 

  Ÿ  

Subordinated Units.    We will 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 under “Dividend and Distribution Policies—How Cheniere Partners Makes Cash Distributions—Subordination Period.” 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.

 

 

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  Ÿ  

Class B Units.    We will own 45,333,334 Class B units. The Class B units are not entitled to receive cash distributions except in the event of a liquidation of Cheniere Partners, a merger, consolidation or other combination of Cheniere Partners with another person or the sale of all or substantially all of the assets of Cheniere Partners. The Class B units are subject to conversion, mandatorily or at the option of the holders of the Class B units under specified circumstances, into a number of common units based on the then-applicable conversion value of the Class B units. The conversion value of the Class B units increases at a compounded rate of 3.5% per quarter, subject to additional upward adjustment for certain equity and debt financings. The accreted conversion ratio of the Class B units owned by Cheniere Holdings and Blackstone CQP Holdco LP (“Blackstone”) was 1.15 and 1.13, respectively, as of June 30, 2013. We expect the Class B units to mandatorily convert into common units within 90 days of the substantial completion date of Train 3, which we currently expect to be prior to March 31, 2017. Please read “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement—Cheniere Partners’ Partnership Agreement—Conversion of Class B Units.”

Our Business Purpose

Our primary business purpose is to:

 

  Ÿ  

own and hold Cheniere Partners units;

 

  Ÿ  

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 to pay our company expenses and amounts due under our services agreement with Cheniere (the “Services Agreement”), to service and reduce indebtedness that we may incur and for general business purposes, in each case as permitted by our limited liability company agreement (the “LLC Agreement”);

 

  Ÿ  

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

 

  Ÿ  

designate members of the board of directors of Cheniere Partners’ general partner to oversee the operations of Cheniere Partners as described under “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Cheniere GP Holding Company, LLC.”

Investment Considerations

We believe that certain investment considerations should be given to an investment in our shares, including the following:

 

  Ÿ  

Stable Cash Flows Generated at Cheniere Partners that are Expected to Grow Upon Completion of Trains 1 through 4.    Since 2009, Cheniere Partners has been receiving approximately $250 million of aggregate revenues annually under two third-party terminal use agreements for regasification capacity at the Sabine Pass LNG terminal (“TUAs”) that are effective until at least 2029 with investment grade counterparties. In addition, upon commencement of commercial operations of Cheniere Partners’ first four natural gas liquefaction trains (each, a “Train”) that are currently under construction, Cheniere Partners will receive annual fixed fees of approximately $2.3 billion in the aggregate from third-party customers under 20-year initial term sale and purchase agreements (“SPAs”) currently in place with investment grade counterparties.

 

  Ÿ  

Potential to Expand the Liquefaction Project with Trains 5 and 6.    Sabine Pass Liquefaction has entered into two SPAs with Total Gas & Power North America, Inc., (“Total”) an affiliate of Total S.A., and Centrica plc (“Centrica”) commencing with Train 5, which, if placed into service,

 

 

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would increase the annual fixed fees received by Cheniere Partners to approximately $2.9 billion for Trains 1 through 5. In addition, Sabine Pass Liquefaction is planning to develop Train 6, which, if contracted and placed into service, would result in additional revenue. Cheniere Partners has not made a final investment decision on Train 5 or Train 6.

 

  Ÿ  

Ability to Indirectly Invest in Cheniere Partners Without the Tax Complexities of a Master Limited Partnership Structure.    We will be taxed as a corporation, which will enable our shareholders to invest indirectly in Cheniere Partners without the associated tax-related obligations of owning Cheniere Partners units. For example, our shareholders will receive a Form 1099-DIV rather than a Schedule K-1 and will generally not have unrelated business taxable income (“UBTI”). We expect that all or a portion of the dividends paid on our shares will be taxable as ordinary income to U.S. holders but such dividends (i) are expected to be treated as “qualified dividend income” that is currently subject to reduced rates of U.S. federal income taxation for non-corporate U.S. holders and (ii) may be eligible for the dividends received deduction available to corporate U.S. holders, in each case provided that certain holding period requirements are met.

 

  Ÿ  

Greater Depreciation and Amortization Expense May Increase Dividends.    Cheniere Partners has announced that it has started construction on the first four Trains of the Liquefaction Project, which Cheniere Partners has estimated will result in capital expenditures totaling between $9.0 billion and $10.0 billion and total expenditures of between $12.0 billion to $13.0 billion, of which a significant portion will be capitalized. Cheniere Partners recently began the development of Train 5 and Train 6, which would result in additional capital expenditures if these Trains are constructed. These expenditures will increase the amount of depreciation and amortization expense that Cheniere Partners records in addition to the regular depreciation and amortization expense that it records with respect to its existing regasification facilities and pipeline. We expect depreciation and amortization expense allocated to us as a Cheniere Partners unitholder to offset a portion of our aggregate taxable income from Cheniere Partners once Train 1 commences operations, which has the potential to increase cash available to pay as dividends to our shareholders.

 

  Ÿ  

Dividends May be a Return of Capital.    In certain circumstances, dividends that we pay on our shares will constitute a return of capital and will reduce a shareholder’s tax basis in its shares. In addition, after a shareholder’s tax basis is reduced to zero, any further dividends paid on our shares would, in certain circumstances, be taxable at the applicable capital gains rate.

An investment in our shares should not be considered an alternative to directly investing in Cheniere Partners units. The risks incident to holding our shares are different from those related to a direct investment in Cheniere Partners. Please read “Risk Factors.”

Possible Risk of being Deemed an Investment Company

In the future, Cheniere may sell or otherwise dispose of all or a portion of our shares that it owns. Cheniere does not currently intend to allow us to sell additional shares in any transaction that would result in Cheniere owning less than 80% of our outstanding shares, nor does Cheniere currently intend to sell or otherwise dispose of the shares in us that it owns other than those that may be redeemed upon exercise of the underwriters’ option to purchase additional shares. If, at any time, Cheniere relinquishes the sole share entitled to vote in the election of our directors, which we refer to as the director voting share, or ceases to own greater than 25% of our outstanding shares (a “Cheniere Separation Event”), we may be deemed to be an “investment company” within the meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”). Cheniere GP Holding Company, LLC (“GP Holdco”) holds a 100% interest in Cheniere Partners’ general partner. We have a non-economic voting interest in GP

 

 

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Holdco, which allows us to indirectly control the appointment of four directors to the board of directors of Cheniere Partners’ general partner. Upon a Cheniere Separation Event, our non-economic voting interest in GP Holdco will be extinquished and we may be deemed to be an investment company by the Securities and Exchange Commission (“SEC”). 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” and “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Cheniere GP Holding Company, LLC.”

Cheniere Partners

General

Cheniere Partners is a Delaware limited partnership formed by Cheniere. Through its wholly owned subsidiary, Sabine Pass LNG, Cheniere Partners owns and operates the regasification facilities at the Sabine Pass LNG terminal located on the Sabine Pass deep water shipping channel less than four miles from the Gulf Coast. The Sabine Pass LNG terminal includes existing infrastructure of five LNG storage tanks with capacity of approximately 16.9 Bcfe, two docks that can accommodate vessels of up to 265,000 cubic meter capacity and vaporizers with regasification capacity of approximately 4.0 Bcf/d. Approximately one-half of the LNG receiving capacity at the Sabine Pass LNG terminal is contracted to two multinational energy companies. Cheniere Partners is developing the Liquefaction Project at the Sabine Pass LNG terminal adjacent to the existing regasification facilities through a wholly owned subsidiary, Sabine Pass Liquefaction. Cheniere Partners also owns the 94-mile long Creole Trail Pipeline through a wholly owned subsidiary, CTPL.

Business

Business Strategy

Cheniere Partners’ primary business strategy is to develop, construct, and operate assets supported by long-term, fixed fee contracts. Cheniere Partners plans to implement its strategy by:

 

  Ÿ  

completing construction and commencing operation of its Trains;

 

  Ÿ  

developing and operating its Trains safely, efficiently and reliably;

 

  Ÿ  

making LNG available to its long-term SPA customers to generate steady and reliable revenues and operating cash flows;

 

  Ÿ  

safely maintaining and operating the Sabine Pass LNG terminal;

 

  Ÿ  

utilizing capacity at the Sabine Pass LNG terminal for short-term and spot LNG purchases and sales until such capacity is used in connection with the Liquefaction Project;

 

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developing business relationships for the marketing of additional long-term and short-term agreements for additional LNG volumes at the Sabine Pass LNG terminal; and

 

  Ÿ  

expanding its existing asset base through acquisitions from Cheniere or third parties or its own development of the Liquefaction Project or complementary businesses or assets such as other LNG facilities, natural gas storage assets and natural gas pipelines.

Cheniere Partners’ Competitive Strengths

We believe that the following strengths provide competitive advantages for Cheniere Partners:

 

  Ÿ  

Contracted and Stable Long-Term Cash Flows.    All of the regasification capacity available at the Sabine Pass LNG receiving terminal is reserved under long-term TUAs with investment

 

 

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grade counterparties. Total and Chevron USA Inc. (“Chevron”) have agreed to pay Sabine Pass LNG an aggregate of approximately $250 million per year on a “take-or-pay” basis, whereby Sabine Pass LNG provides a specified amount of regasification capacity and the customer pays a monthly fixed capacity reservation fee plus a monthly operating fee in a fixed amount that is adjusted annually for inflation regardless of whether they utilize that capacity.

 

  Ÿ  

Liquefaction Project Fully Contracted with Investment Grade Counterparties under Long-Term Contracts.    Sabine Pass Liquefaction currently has 20-year SPAs with investment grade counterparties. Upon completion of Train 4, these SPAs will provide aggregate contracted fixed fees of approximately $2.3 billion annually for approximately 89% of the total nominal capacity of those Trains.

 

  Ÿ  

Strategic Location Adjacent to Existing Facilities Near Established Producing Basins.    We believe that the Liquefaction Project’s location at the existing Sabine Pass LNG terminal adjacent to the existing regasification facilities provides significant cost advantages for Cheniere Partners by allowing it to utilize the existing marine facilities, interconnecting pipelines, storage capacity and other infrastructure. Through its recent acquisition of the Creole Trail Pipeline, a 94-mile pipeline that will be used by the Liquefaction Project to source domestic natural gas for processing into LNG, Cheniere Partners has secured an estimated 1.5 Bcf/d of natural gas transportation capacity. In addition, we believe that Cheniere Partners’ facilities are strategically located near established producing natural gas basins, which we believe provides consistent and cost effective access to natural gas.

 

  Ÿ  

First Mover Advantage.    Cheniere Partners has received non-free trade agreement (“FTA”) LNG export authorization from the United States Department of Energy (the “DOE”) approximately two years in advance of any other U.S. LNG export facility in the lower 48 states to receive a similar approval. As of July 31, 2013, the overall project completion for Trains 1 and 2 of the Liquefaction Project was approximately 40%, which is ahead of contractual schedule. No other recipient of an export authorization from the DOE has begun construction.

 

  Ÿ  

Experienced EPC Provider.    Bechtel is constructing the Liquefaction Project pursuant to lump sum turnkey contracts, under which Bechtel charges a lump sum for all work performed rather than charging separately for labor, materials and equipment. Bechtel has constructed one-third of the world’s liquefaction facilities and has the responsibility for constructing the Liquefaction Project on time, on budget and in accordance with performance requirements. We believe that Cheniere has a good historical relationship with Bechtel, which was also the engineering, procurement and construction (“EPC”) contractor for the regasification project at the Sabine Pass LNG terminal that finished on time and on budget in 2009.

 

  Ÿ  

Strong LNG Market Fundamentals.    Global demand for natural gas is projected by the International Energy Agency (the “IEA”) to grow by more than 22.5 Tcf between 2010 and 2020, fueled by the growth of emerging economies. Wood Mackenzie forecasts that global demand for LNG will increase by 49%, or 5.6 Tcf, by 2020 and reach a total of 452 mtpa, or 22 Tcf, by 2025. As the trade in global LNG continues to grow, we believe, based on our experience in the energy industry, that liquefaction capacity along the U.S. Gulf Coast will become increasingly important to meet demand. According to The International Group of Liquefied Natural Gas Importers (“GIIGNL”), as of 2012, there were 93 LNG regasification facilities in 26 countries with a total nominal capacity of 87 Bcf/d. As of 2012, there were 89 Trains in 18 countries capable of producing approximately 13.7 Tcf/yr of LNG, or 38 Bcf/d.

 

 

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  Ÿ  

Relationship with Cheniere.

 

  Ÿ  

Potential for Future Acquisitions.    Cheniere is currently developing an LNG terminal near Corpus Christi, Texas and may in the future acquire additional midstream assets and operations. Cheniere Partners may have future opportunities to acquire some or all of these assets from Cheniere at an appropriate stage of commercialization and development, although we cannot predict whether any acquisitions will be made available to Cheniere Partners or whether Cheniere Partners will pursue or complete any future acquisitions.

 

  Ÿ  

Experienced Management Team.    Cheniere has assembled a team of professionals with extensive experience in the LNG industry to pursue its business plan, including operating the Sabine Pass LNG receiving terminal and developing, financing and constructing the Liquefaction Project. Through tenure with major oil companies, operators of LNG receiving terminals, pipelines and engineering and construction companies, Cheniere’s senior management team has substantial experience in the areas of LNG project development, operation, engineering, technology, transportation and marketing. Through service agreements with wholly owned subsidiaries of Cheniere, Cheniere Partners has access to these professionals not only for the operation and construction of the Sabine Pass LNG terminal and Liquefaction Project but also for future growth opportunities.

Cheniere Partners’ competitive strengths are subject to a number of risks and competitive challenges. Please read “Risk Factors—Risks Relating to Cheniere Partners’ Business” and “Business—Cheniere Partners—Market Factors and Competition.”

Regasification Facilities

The regasification facilities at the Sabine Pass LNG terminal have operational regasification capacity of approximately 4.0 Bcf/d and aggregate LNG storage capacity of approximately 16.9 Bcfe. Approximately 2.0 Bcf/d of the regasification capacity at the Sabine Pass LNG terminal has been reserved under two long-term third-party TUAs, under which Sabine Pass LNG’s customers are required to pay fixed monthly fees, whether or not they use the LNG terminal. Capacity reservation fee TUA payments are made by Sabine Pass LNG’s third-party TUA customers as follows:

 

  Ÿ  

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

 

  Ÿ  

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

The remaining approximately 2.0 Bcf/d of capacity has been reserved under a TUA by Cheniere Partners’ wholly owned subsidiary, Sabine Pass Liquefaction. Sabine Pass Liquefaction is obligated to make monthly capacity payments to Sabine Pass LNG aggregating approximately $250 million annually, continuing until at least 20 years after Sabine Pass Liquefaction delivers its first commercial cargo at Sabine Pass Liquefaction’s facilities under construction, which may occur as early as late 2015. In September 2012, Sabine Pass Liquefaction entered into a partial TUA assignment agreement with Total, whereby Sabine Pass Liquefaction will progressively gain access to Total’s capacity and other services provided under Total’s TUA with Sabine Pass LNG. This agreement will provide Sabine Pass Liquefaction with additional berthing and storage capacity at the Sabine Pass LNG terminal that

 

 

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may be used to accommodate the development of Train 5 and Train 6, provide increased flexibility in managing LNG cargo loading and unloading activity starting with the commencement of commercial operations of Train 3, and permit Sabine Pass Liquefaction to more flexibly manage its LNG storage capacity with the commencement of Train 1. Notwithstanding any arrangements between Total and Sabine Pass Liquefaction, payments required to be made by Total to Sabine Pass LNG will continue to be made by Total to Sabine Pass LNG in accordance with its TUA.

Liquefaction Facilities

The Liquefaction Project is being developed at the Sabine Pass LNG terminal adjacent to the existing regasification facilities. Cheniere Partners plans to construct up to six Trains, which are in various stages of development. Cheniere Partners commenced construction in August 2012 of Train 1 and Train 2 and the related new facilities needed to treat, liquefy, store and export natural gas. Construction of Train 3 and Train 4 and the related facilities commenced in May 2013. Cheniere Partners is developing Train 5 and Train 6 and commenced the regulatory approval process for these Trains in February 2013. Trains 1 through 4 are being designed, constructed and commissioned by Bechtel using the ConocoPhillips Optimized Cascade® technology, a proven technology deployed in numerous LNG projects around the world. Sabine Pass Liquefaction has entered into lump sum turnkey EPC Contracts, as defined under “—Construction” below, with Bechtel for Trains 1 through 4.

Cheniere Partners has received authorization from the Federal Energy Regulatory Commission (the “FERC”) to site, construct and operate Train 1 through Train 4. Cheniere Partners has also received authorization from the FERC to begin the pre-filing review process for the development of Train 5 and Train 6. The DOE has granted Sabine Pass Liquefaction an order authorizing the export of up to the equivalent of 16 mtpa (approximately 803 Bcf/yr) of LNG to all nations with which trade is permitted for a 20-year term beginning on the earlier of the date of first export from Train 1 or August 7, 2017. The DOE further issued two orders authorizing the export of an additional 189.3 Bcf/yr in total of domestically produced LNG from the Sabine Pass LNG terminal to FTA countries providing for national treatment for trade in natural gas for a 20-year term. One order authorized the export of 101 Bcf/yr of domestically produced LNG pursuant to the SPA with Total, beginning on the earlier of the date of first export from Train 5 or July 11, 2021; and the other order authorized the export of 88.3 Bcf/yr of domestically produced LNG pursuant to the SPA with Centrica, beginning on the earlier of the date of first export from Train 5 or July 12, 2021.

As of July 31, 2013, the overall project completion for Train 1 and Train 2 of the Liquefaction Project was approximately 40%, which is ahead of the contractual schedule. Based on Cheniere Partners’ current construction schedule, Cheniere Partners anticipates that Train 1 will produce LNG as early as late 2015, with commercial operations expected to commence in February 2016, and Train 2, Train 3 and Train 4 are expected to commence operations on a staggered basis thereafter.

 

 

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The following table summarizes significant milestones and anticipated completion dates in the development of the Liquefaction Project:

 

Milestone

   Trains
1 & 2
   Trains
3 & 4
  

Trains

5 & 6

DOE export authorization

   Received    Received    Non-FTA authorizations pending; FTA authorization received for Total and Centrica totaling 189.3 Bcf/yr.

Definitive commercial agreements

   Completed
7.7 mtpa
   Completed
8.3 mtpa
  

—BG Gulf Coast LNG, LLC

   4.2 mtpa    1.3 mtpa   

—Gas Natural Fenosa

   3.5 mtpa      

—Korea Gas Corporation

      3.5 mtpa   

—GAIL (India) Ltd.

      3.5 mtpa   

—Total

         2.0 mtpa

—Centrica

         1.75 mtpa

EPC contract

   Completed    Completed    2015

Financing

         2015

—Equity

   Completed    Completed   

—Debt commitments

   Received    Received   

FERC authorization

   Completed    Completed    2015

FERC authorization to commence construction

   Received    Received   

Issue notice to proceed

   Completed    Completed    2015

Commence operations

   2015/2016    2016/2017    2018/2019

Customers

Sabine Pass Liquefaction has entered into six fixed price, 20-year SPAs with third parties that in the aggregate equate to approximately 19.75 mtpa of LNG, which represents approximately 88% of the anticipated nominal production capacity of Train 1 through Train 5. Under the SPAs, the customers will purchase LNG from Cheniere Partners for a price consisting of a fixed fee plus 115% of Henry Hub per MMBtu of LNG. In certain circumstances, the customers may elect to cancel or suspend deliveries of LNG cargoes, in which case the customers would still be required to pay the fixed fee with respect to cargoes that are not delivered. A portion of the fixed fee will be subject to annual adjustment for inflation. The SPAs and contracted volumes to be made available under the SPAs are not tied to a specific Train; however, the term of each SPA commences upon the start of operations of the specified Train. Through the date of this prospectus, Sabine Pass Liquefaction has the following third-party SPAs:

 

  Ÿ  

BG Gulf Coast LNG, LLC (“BG”) has entered into an SPA (the “BG SPA”) that commences upon the date of first commercial delivery for Train 1 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $2.25 per MMBtu and includes additional annual contract quantities of 36,500,000 MMBtu, 34,000,000 MMBtu, and 33,500,000 MMBtu upon the date of first commercial delivery for Train 2, Train 3 and Train 4, respectively, with a fixed fee of $3.00 per MMBtu. The total expected annual contracted cash flow from BG from fixed fees is approximately $723 million. In addition, Sabine Pass Liquefaction has agreed to make up to 500,000 MMBtu/d of LNG available to BG to the extent that Train 1 becomes

 

 

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commercially operable prior to the beginning of the first delivery window with a fixed fee of $2.25 per MMBtu, if produced. The obligations of BG are guaranteed by BG Energy Holdings Limited, a company organized under the laws of England and Wales.

 

  Ÿ  

Gas Natural Aprovisionamientos SDG S.A., (“Gas Natural Fenosa”) an affiliate of Gas Natural SDG, S.A., has entered into an SPA (the “Gas Natural Fenosa SPA”) that commences upon the date of first commercial delivery for Train 2 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $2.49 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $454 million. In addition, Sabine Pass Liquefaction has agreed to make up to 285,000 MMBtu/d of LNG available to Gas Natural Fenosa to the extent that Train 2 becomes commercially operable prior to the beginning of the first delivery window with a fixed fee of $2.49 per MMBtu, if produced. The obligations of Gas Natural Fenosa are guaranteed by Gas Natural SDG S.A., a company organized under the laws of Spain.

 

  Ÿ  

Korea Gas Corporation (“KOGAS”) has entered into an SPA (the “KOGAS SPA”) that commences upon the date of first commercial delivery for Train 3 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $548 million. KOGAS is organized under the laws of the Republic of Korea.

 

  Ÿ  

GAIL (India) Limited (“GAIL”) has entered into an SPA (the “GAIL SPA”) that commences upon the date of first commercial delivery for Train 4 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $548 million. GAIL is organized under the laws of India.

 

  Ÿ  

Total has entered into an SPA (the “Total SPA”) that commences upon the date of first commercial delivery for Train 5 and includes an annual contract quantity of 104,750,000 MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $314 million. The obligations of Total are guaranteed by Total S.A., a company organized under the laws of France.

 

  Ÿ  

Centrica has entered into an SPA (the “Centrica SPA”) that commences upon the date of first commercial delivery for Train 5 and includes an annual contract quantity of 91,250,000 MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $274 million. Centrica is organized under the laws of England and Wales.

In aggregate, the fixed fee portion to be paid by these customers is approximately $2.3 billion annually for Trains 1 through 4, and $2.9 billion if Cheniere Partners makes a positive final investment decision with respect of Train 5, with the applicable fixed fees starting from the commencement of commercial operations for the applicable Train. These fixed fees equal approximately $411 million, $564 million, $650 million, $648 million and $588 million for each respective Train.

In addition, Cheniere Marketing, LLC (“Cheniere Marketing”) has entered into an SPA with Sabine Pass Liquefaction to purchase, at Cheniere Marketing’s option, up to 104,000,000 MMBtu/yr of LNG produced from Trains 1 through 4. Sabine Pass Liquefaction has the right each year during the term to reduce the annual contract quantity based on its assessment of how much LNG it can produce in excess of that required for other customers. Cheniere Marketing may purchase incremental LNG volumes at a price of 115% of Henry Hub: plus up to $3.00 per MMBtu for the most profitable 36,000,000 MMBtu of cargoes sold each year by Cheniere Marketing; and then 20% of net profits of the remaining 68,000,000 MMBtu sold each year by Cheniere Marketing.

 

 

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Construction

In November 2011, Sabine Pass Liquefaction entered into the lump sum turnkey contract for the EPC of Train 1 and Train 2 (the “EPC Contract (Trains 1 and 2)”) with Bechtel, under which Bechtel charges a lump sum for all work performed rather than charging separately for labor, materials and equipment. Sabine Pass Liquefaction issued a notice to proceed with construction under the EPC Contract (Trains 1 and 2) in August 2012. In December 2012, Sabine Pass Liquefaction entered into the lump sum turnkey contract for the EPC of Train 3 and Train 4 (the “EPC Contract (Trains 3 and 4),” and together with the EPC Contract (Trains 1 and 2), the “EPC Contracts”) with Bechtel. Sabine Pass Liquefaction issued a notice to proceed with construction under the EPC Contract (Trains 3 and 4) in May 2013. The Trains are in various stages of development, as described above.

The total contract price of the EPC Contract (Trains 1 and 2) and the total contract price of the EPC Contract (Trains 3 and 4) is approximately $4.0 billion and $3.8 billion, respectively, reflecting amounts incurred under change orders through June 30, 2013. Total expected capital costs for Trains 1 through 4 are estimated to be between $9.0 billion and $10.0 billion before financing costs, including estimated owner’s costs and contingencies.

Pipeline Facilities

CTPL owns the Creole Trail Pipeline, a 94-mile pipeline interconnecting the Sabine Pass LNG terminal with a number of large interstate pipelines. CTPL filed an application with the FERC in April 2012 for certain modifications to allow the Creole Trail Pipeline to be able to transport natural gas to the Sabine Pass LNG terminal. In February 2013, the FERC approved the proposed project. A request for rehearing and stay of this approval is currently pending before the FERC. Final FERC approval is expected to be received during the third quarter of 2013. Cheniere Partners estimates that the capital costs to modify the Creole Trail Pipeline will be approximately $100 million. The modifications are expected to be in service in time for the commissioning and testing of Train 1 and Train 2.

Risk Factors

An investment in our shares involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 26 of this prospectus and the other information in this prospectus before deciding whether to invest in our shares.

Risks Relating to the Ownership of Our Shares

 

  Ÿ  

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 distributions on its units.

 

  Ÿ  

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 of directors.

 

  Ÿ  

If we cease to control GP Holdco, we may be deemed an “investment company,” which could impose restrictions on us.

 

  Ÿ  

Upon a Cheniere Separation Event, we may lose the ability to disclose developments about Cheniere Partners’ business and results of operations to our shareholders in a timely manner.

 

 

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  Ÿ  

Cheniere will initially own a majority of our outstanding shares and the director voting share and will therefore be able to amend our LLC Agreement and elect and remove members of our board of directors without the vote of the holders of any shares sold in this offering.

 

  Ÿ  

If Cheniere transfers its interest in GP Holdco to a nonaffiliate, it will lose its ability to appoint the members of our board of directors.

 

  Ÿ  

Our LLC Agreement prohibits us from selling Cheniere Partners units that we will own immediately after the closing of this offering, and we are restricted from selling the Cheniere Partners units that we own by applicable securities laws.

Risks Relating to Cheniere Partners’ Financial Matters

 

  Ÿ  

Cheniere Partners’ existing level of cash resources, negative operating cash flow and significant debt could cause it to have inadequate liquidity and could materially and adversely affect its business, financial condition and prospects.

 

  Ÿ  

Cheniere Partners has not been profitable historically. Cheniere Partners may not achieve profitability or generate positive operating cash flow in the future.

 

  Ÿ  

In order to generate needed amounts of cash, Cheniere Partners may sell equity or equity-related securities, including additional common units. Such sales could dilute Cheniere Partners unitholders’ proportionate indirect interests in its assets, business operations, Liquefaction Project and other projects, and could adversely affect the market price of the common units.

 

  Ÿ  

Cheniere Partners’ ability to generate needed amounts of cash is substantially dependent upon the performance by customers under long-term contracts that it has entered into, and it could be materially and adversely affected if any customer fails to perform its contractual obligations for any reason.

Risks Relating to Cheniere Partners’ Business

 

  Ÿ  

Operation of the Sabine Pass LNG terminal, the Liquefaction Project, the Creole Trail Pipeline and other facilities that Cheniere Partners may construct involves significant risks.

 

  Ÿ  

Cheniere Partners may not be successful in implementing its proposed business strategy to provide liquefaction capabilities at the Sabine Pass LNG terminal adjacent to the existing regasification facilities.

 

  Ÿ  

Cost overruns and delays in the completion of one or more Trains, as well as difficulties in obtaining sufficient financing to pay for such costs and delays, could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

 

  Ÿ  

Delays in the completion of one or more Trains could lead to reduced revenues or termination of one or more of the SPAs by Cheniere Partners’ counterparties.

 

  Ÿ  

Cheniere Partners’ ability to complete development of additional Trains will be contingent on its ability to obtain additional funding.

 

  Ÿ  

To maintain the cryogenic readiness of the Sabine Pass LNG terminal, Sabine Pass LNG may need to purchase and process LNG. Sabine Pass LNG’s TUA customers, including Sabine Pass Liquefaction, have the obligation to procure LNG if necessary for the Sabine Pass LNG terminal to maintain its cryogenic state. If they fail to do so, Sabine Pass LNG may need to procure such LNG.

 

 

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  Ÿ  

Sabine Pass LNG may be required to purchase natural gas to provide fuel at the Sabine Pass LNG terminal, which would increase operating costs and could have a material adverse effect on Cheniere Partners’ results of operations.

Risks Relating to Cheniere Partners’ Cash Distributions

 

  Ÿ  

Cheniere Partners may not be successful in its efforts to maintain or increase its cash available for distribution to cover the distributions on its units.

 

  Ÿ  

The issuance of additional common units will increase the risk that Cheniere Partners will be unable to make the initial quarterly distribution on its common units.

 

  Ÿ  

Cheniere Partners will need to refinance, extend or otherwise satisfy its substantial indebtedness, and principal amortization or other terms of its future indebtedness could limit its ability to pay or increase distributions to its unitholders.

 

  Ÿ  

Cheniere Partners’ subsidiaries may be restricted under the terms of their indebtedness from making distributions to Cheniere Partners under certain circumstances, which may limit Cheniere Partners’ ability to pay or increase distributions to its unitholders and could materially and adversely affect the market price of the common units.

 

  Ÿ  

Restrictions in agreements governing the indebtedness of Cheniere Partners’ subsidiaries may prevent its subsidiaries from engaging in certain beneficial transactions.

 

  Ÿ  

Management fees and cost reimbursements due to Cheniere Partners’ general partner and its affiliates will reduce cash available to pay distributions to Cheniere Partners’ unitholders.

 

  Ÿ  

The amount of cash that Cheniere Partners has available for distributions to its unitholders will depend primarily on its cash flow and not solely on profitability.

 

  Ÿ  

Cheniere Partners may not be able to maintain or increase the distributions on the common units and recommence making distributions on the subordinated units unless it is able to make accretive acquisitions or implement accretive capital expansion projects, which may require it to obtain one or more sources of funding.

Risks Inherent in Our Investment in Cheniere Partners

 

  Ÿ  

Cheniere Partners’ general partner and its affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to the detriment of Cheniere Partners and Cheniere Partners unitholders.

 

  Ÿ  

Cheniere is not restricted from competing with Cheniere Partners and is free to develop, operate and dispose of, and is currently developing, LNG facilities, pipelines and other assets without any obligation to offer Cheniere Partners the opportunity to develop or acquire those assets.

 

  Ÿ  

Cheniere Partners’ Partnership Agreement limits its general partner’s fiduciary duties to Cheniere Partners unitholders and restricts the remedies available to Cheniere Partners unitholders for actions taken by its general partner that might otherwise constitute breaches of fiduciary duty.

 

  Ÿ  

Even if Cheniere Partners unitholders are dissatisfied, they cannot initially remove Cheniere Partners’ general partner.

 

 

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  Ÿ  

Control of Cheniere Partners’ general partner may be transferred to a third party without unitholder consent.

 

  Ÿ  

Cheniere Partners unitholders may not have limited liability if a court finds that unitholder action constitutes control of Cheniere Partners’ business.

Tax Risks to Shareholders

 

  Ÿ  

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.

 

  Ÿ  

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.

 

  Ÿ  

If we cease to be a member of the Cheniere consolidated group for U.S. federal income tax purposes and there is a determination that any of the restructuring transactions completed in connection with this offering are taxable for U.S. federal income tax purposes, then Cheniere could incur significant income tax liabilities for which we could be liable.

 

  Ÿ  

The ability to use net operating loss carryforwards and certain other federal income tax attributes may be limited.

 

  Ÿ  

Upon a Termination Transaction (as defined in “—The Offering”), we may incur substantial corporate income tax liabilities in the transaction or upon the distribution to you of the proceeds from the transaction, 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.

 

  Ÿ  

Your tax gain on the disposition of our shares could be more than expected, or your tax loss on the disposition of our shares could be less than expected.

 

  Ÿ  

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, the value of Cheniere Partners units would be substantially reduced and, as a result, the value of our shares would be substantially reduced.

Management of Cheniere Holdings

Our business and affairs will be managed by our board of directors. All of our directors are elected annually by, and may be removed by, the holder of our director voting share, which will initially be Cheniere. Upon a Cheniere Separation Event, our directors will be elected annually by the affirmative vote of the holders of the lesser of (i) a majority of the outstanding shares or (ii) 67% of the shares present at a meeting at which there is a quorum. Our directors hold office until their successors have been elected or qualified or until their earlier death, resignation, removal or disqualification. Our current directors have been appointed by Cheniere. Executive officers are appointed for one-year terms. Our initial directors will be Charif Souki, H. Davis Thames, R. Keith Teague and Meg A. Gentle. In addition, Cheniere will appoint one independent director to our board of directors prior to the closing of this offering as is required by the rules of the NYSE MKT. In compliance with the rules of the NYSE MKT, Cheniere will appoint two additional independent members to the board of directors within one year of our initial public offering. Please read “Management.” Upon a Cheniere Separation Event, our directors and executive officers who are also directors or executive officers of Cheniere will resign, and our remaining board members will be required to appoint new executive officers.

 

 

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In connection with the closing of this offering, we will enter into the Services Agreement with Cheniere, under which we will pay a fixed fee of $         million per year, subject to upward adjustment for inflation, for certain general and administrative services provided by affiliates of Cheniere, including for the services of our chief executive officer and chief financial officer. In addition, we will pay for or reimburse Cheniere for certain third party expenses, which we expect will not exceed $             in the first year that we are a public company. Please read “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere.”

 

 

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Ownership of Cheniere Holdings and Cheniere Partners

The following diagram depicts Cheniere Partners’ and Cheniere Holdings’ simplified organizational and ownership structure immediately after giving effect to this offering, based on the number of Cheniere Partners units outstanding as of July 20, 2013.

 

Cheniere Holdings

  

Public Shares (                )

         

Shares held by Cheniere (                )

         
  

 

 

 

Total

     100

Cheniere Partners

  

Public Common Units (45,115,360)

     13.1

Common Units held by Cheniere Holdings (11,963,488)

     3.5

Subordinated Units held by Cheniere Holdings (135,383,831)

     39.3

Class B Units held by Cheniere Holdings (45,333,334)(1)

     13.1

Class B Units held by Blackstone CQP Holdco LP (100,000,000)(1)

     29.0

General Partner Units (6,893,796)

     2.0
  

 

 

 

Total

     100

 

 

(1) Does not reflect the accretion of Class B units. The accreted conversion ratio of the Class B units owned by Cheniere Holdings and Blackstone was 1.15 and 1.13, respectively as of June 30, 2013. Please read “Business—Cheniere Holdings—Business.”

 

LOGO

 

 

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Our Principal Executive Offices and Internet Address

Our principal executive offices are located at 700 Milam St., Suite 800, Houston, Texas 77002, and our telephone number is (713) 375-5000. Our website is located at www.chenierepartnersholdings.com and will be activated immediately following consummation of this offering. We expect to make available our periodic reports and other information filed with or furnished to the SEC free of charge through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference herein and does not constitute a part of this prospectus.

 

 

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The Offering

 

Cheniere Holdings

   We are a newly-formed Delaware limited liability company.

Shares offered to the public

                    shares (or                  shares if the underwriters exercise their option to purchase additional shares in full).

Shares held by Cheniere

                    shares (or                  shares if the underwriters exercise their option to purchase additional shares in full).

Shares outstanding after this offering

                    shares.

Cheniere Partners units held by Cheniere
Holdings

  

11,963,488 common units, 135,383,831 subordinated units and 45,333,334 Class B units.

 

Use of proceeds

  

We will use all of the net proceeds from this offering of approximately $         million (or $         million if the underwriters exercise their option to purchase additional shares in full) after deducting underwriting discounts and estimated offering expenses, to:

 

Ÿ     repay intercompany indebtedness and payables, in the aggregate amount of approximately $         million; and

 

Ÿ    make a distribution to Cheniere with the remaining proceeds.

 

The net proceeds from any exercise by the underwriters of their option to purchase additional shares will be used to redeem from Cheniere a number of shares equal to the number of shares issued upon exercise of the option at a price per share equal to the net proceeds per share in this offering. Accordingly, any exercise of the underwriters’ option will not affect the total number of shares outstanding. Please read “Underwriting.”

Proposed NYSE MKT symbol

   We intend to apply to list the shares on the NYSE MKT under the symbol “CQH.”

Our dividend policy

   Our LLC Agreement requires us to declare dividends on our shares in an amount equal to the cash that we receive as distributions in respect of the Cheniere Partners units, less income taxes and reserves established by our board of directors, within ten business days after we receive such distributions. Please read “Risk Factors—Risks Relating to the Ownership of Our Shares—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 of directors.”

 

 

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Cheniere Partners’ cash distribution policy

  

Cheniere Partners must distribute all of its cash on hand at the end of each quarter, less any reserves established by its general partner. Cheniere Partners refers to this as available cash, and defines its meaning in its partnership agreement (the “Partnership Agreement”).

 

The Partnership Agreement also requires that Cheniere Partners distribute all of its available cash from operating surplus each quarter in the following manner:

 

Ÿ    first, 98% to the common unitholders and 2% to its general partner, until each common unit has received the initial quarterly distribution of $0.425 plus any arrearages from prior quarters;

 

Ÿ    second, 98% to the subordinated unitholders and 2% to its general partner, until each subordinated unit has received the initial quarterly distribution of $0.425;

 

Ÿ   third, 98% to all unitholders (excluding Class B unitholders), pro rata, and 2% to its general partner, until each unit has received an aggregate distribution equal to $0.489;

 

Ÿ    fourth, 85% to all unitholders (excluding Class B unitholders), pro rata, and 15% to its general partner, until each unitholder receives a total of $0.531 per unit for that quarter;

 

Ÿ    fifth, 75% to all unitholders (excluding Class B unitholders), pro rata, and 25% to its general partner, until each unitholder receives a total of $0.638 per unit for that quarter; and

 

Ÿ   thereafter, 50% to all unitholders (excluding Class B unitholders), pro rata, and 50% to its general partner. Cash distributions on the common units will generally be made within 45 days after the end of each quarter.

U.S. federal income tax matters associated with our shares

  

Because we will be treated as a corporation for U.S. federal income tax purposes, our shareholders will receive a Form 1099-DIV and will be subject to federal income tax, as well as any applicable state or local income tax, on taxable dividends paid to them. An owner of our shares will not report on its U.S. federal income tax return any of our items of income, gain, loss or deduction. An owner of our shares will not receive a Schedule K-1 and will not be subject to state tax filings in the various states in which Cheniere Partners conducts business as a result of owning our shares. A tax-exempt

investor’s ownership or sale of our shares

generally will not generate income derived from

 

 

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   an unrelated trade or business regularly carried on by the tax exempt investor, which is generally referred to as UBTI. For a regulated investment company or mutual fund, the ownership or sale of our shares will generate qualifying income. Furthermore, the ownership of our shares by a mutual fund will be treated as a qualifying asset. There generally will be no taxes imposed on gain from the sale of our shares by a non-U.S. person provided it has owned no more than 5% of our shares and our shares are regularly traded on the NYSE MKT. Dividends to non-U.S. persons will be subject to withholding tax of 30% (or a lower treaty rate, if applicable). Please read “Material U.S. Federal Income Tax Consequences.”

Our covenants

   Our LLC Agreement provides that our activities generally will be limited to owning Cheniere Partners units, appointing directors to the board of directors of Cheniere Partners’ general partner and activities related to the oversight of the operations of Cheniere Partners as described under “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Cheniere GP Holding Company, LLC—Oversight of Cheniere Partners’ Management and Operations.” Our LLC Agreement also includes covenants that prohibit us from (other than in connection with a Termination Transaction, as defined below, and subject to certain exceptions) taking certain actions outlined below.
  

Actions that cannot be taken without the affirmative vote of the holders of a majority of our outstanding shares at a meeting at which there is a quorum and the affirmative vote or consent of Cheniere, include:

 

Ÿ    selling or otherwise transferring the Cheniere Partners units that we will own as of the closing of this offering; and

  

Ÿ    voting any Cheniere Partners units in favor of the removal of Cheniere Energy Partners GP, LLC as the general partner of Cheniere Partners.

 

Actions that cannot be taken without the affirmative vote of the holders of a majority of our outstanding shares at a meeting at which there is a quorum include:

 

Ÿ     issuing options, warrants or other securities entitling the holder to purchase our shares (other than in connection with employee benefit plans); and

 

 

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Ÿ    revoking or changing our election to be treated as a corporation for U.S. federal income tax purposes.

 

Please read “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement.”

Agreements with Cheniere

  

Services Agreement.    Under the Services Agreement, Cheniere will provide to us certain general and administrative services to be agreed upon by the parties, including the services of our chief executive officer and chief financial officer for so long as Cheniere owns greater than 25% of our outstanding shares and the director voting share. We will pay Cheniere a fixed fee for providing these services. In addition, we will pay directly for, or reimburse Cheniere for, certain third-party expenses, including any fees that Cheniere incurs on our behalf for financial, legal, accounting, tax advisory and financial advisory services, along with any other expenses incurred in connection with this offering or incurred as a result of being a publicly traded entity, including costs associated with annual, quarterly and other reports to holders of our shares, tax returns and Form 1099-DIV preparation and distribution, NYSE MKT listing fees, printing costs, independent auditor fees and expenses, legal counsel fees and expenses, limited liability company governance and compliance expenses and registrar and transfer agent fees. Finally, Cheniere has granted us a license to utilize its trademarks for so long as we hold Cheniere Partners units.

 

Upon a Cheniere Separation Event, our executive officers and our directors who are also directors or executive officers of Cheniere would resign. However, Cheniere would continue to provide services to us under the Services Agreement. At such time, we would expect to have increased costs related to hiring new executive officers and financial or business consultants.

 

Tax Sharing Agreement.    In connection with this offering, we intend to enter into a tax sharing agreement (the “Tax Sharing Agreement”) with Cheniere that will govern 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.

 

 

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Termination Transactions involving Cheniere Partners

  

Cash Consideration.    In a merger involving Cheniere Partners in which we would receive only cash for all Cheniere Partners units that we own, you will be entitled to receive your pro rata share of any cash that we receive for our Cheniere Partners units, less income taxes and reserves established by our board of directors. Following such distribution, we will cancel all of our outstanding shares and dissolve and wind up our affairs.
  

Going Private Transaction.    If at any time Cheniere Partners’ general partner and its affiliates own more than 80% of the outstanding Cheniere Partners units, Cheniere Partners’ general partner may elect to purchase all, but not less than all, of the remaining outstanding Cheniere Partners units at a price equal to the higher of (i) the current market price (as defined in the Partnership Agreement) as of the date three days prior to the date notice was mailed to Cheniere Partners unitholders informing them of such election and (ii) the highest price paid by Cheniere Partners’ general partner and its affiliates for any Cheniere Partners units purchased during the 90-day period preceding the date notice was mailed to Cheniere Partners unitholders informing them of such election. In this case, if a Cheniere Separation Event has occurred, we will be required to tender all of our outstanding Cheniere Partners units and distribute to our shareholders the cash we receive, less income taxes and reserves established by our board of directors. Following such distribution, we will cancel all of our outstanding shares and dissolve and wind up our affairs.

 

Sale of All or Substantially All of Cheniere Partners’ Assets.    If Cheniere Partners sells all or substantially all of its assets in one or more transactions for cash and makes a distribution of such cash to Cheniere Partners unitholders, we will distribute to our shareholders the cash we receive, less income taxes and reserves established by our board of directors. Following such distribution, we will cancel all of our outstanding shares and dissolve and wind up our affairs.

 

The transactions described above are referred to as “Termination Transactions.”

Limited call right

   If at any time Cheniere or any of its affiliates owns 90% or more of our then outstanding securities, Cheniere has the right, which it may assign to any of its affiliates to purchase all, but not less than all, of our remaining outstanding shares as of a

 

 

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record date selected by Cheniere, on at least 10 but not more than 60 days’ notice. If Cheniere elects to exercise this purchase right, the purchase price per share will be the greater of:

 

Ÿ   the highest cash price paid by Cheniere or any of its affiliates for any of our shares purchased within the 90 days preceding the date on which Cheniere first mails notice of its election to our shareholders; and

 

Ÿ    the current market price as of the date three days before the date the notice is mailed.

Voting rights

  

Our board of directors will make decisions with respect to any matter that Cheniere Partners submits to a vote of its unitholders. Although we are prohibited by our LLC Agreement from voting our Cheniere Partners units in favor of the removal of Cheniere Partners’ general partner, the Cheniere Partners units we hold will have the same voting rights as all other Cheniere Partners units of such class.

 

Through our non-economic voting interest in GP Holdco, which we will hold until a Cheniere Separation Event occurs, we indirectly control the appointment of four directors to the board of directors of Cheniere Partners’ general partner. Our shareholders will be entitled to vote on certain fundamental matters affecting Cheniere Holdings. Because Cheniere owns the director voting share, Cheniere will have the sole ability to elect our directors until a Cheniere Separation Event occurs. 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.”

 

 

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Summary Historical and Pro Forma Financial Data of Cheniere Holdings

We are a Delaware limited liability company that, upon consummation of this offering, will own a 55.9% limited partner interest in Cheniere Partners. Our only business will consist of owning Cheniere Partners units, and, accordingly, our results of operations and financial condition will be dependent on the performance of Cheniere Partners. The following tables show our summary pro forma financial data as of and for the six months ended June 30, 2013 and for the year ended December 31, 2012, each of which is derived from the unaudited pro forma financial statements that are included elsewhere in this prospectus.

The following tables also show the summary historical balance sheet of our predecessor, Cheniere Partners, as of the dates and for the periods indicated. The summary historical balance sheet of our predecessor as of December 31, 2012 and 2011 and summary historical statement of operations data for the years ended December 31, 2012 and 2011 are derived from the audited historical financial statements of Cheniere Partners that are included elsewhere in this prospectus. The summary historical financial data of our predecessor as of June 30, 2013 and for the six months ended June 30, 2013 and June 30, 2012 are derived from the unaudited historical financial statements of Cheniere Partners that are included elsewhere in this prospectus. The following tables should be read together with, and are qualified in their entirety by reference to, the audited historical and unaudited interim financial statements and the accompanying notes included elsewhere in this prospectus. The tables should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Cheniere Energy
Partners, L.P.  (Predecessor)
Historical
         Cheniere Energy
Partners LP Holdings, LLC
Pro Forma
 
    Six Months Ended
June 30,
    Year Ended
December 31,
         Six Months
Ended

June 30,
2013
    Year
Ended
December  31,
2012
 
    2013     2012     2012     2011           
    (unaudited)                      (unaudited)  
    (in thousands, except per unit data)  

Statement of Operations Data:

               

Revenues (including transactions with affiliates)

  $ 133,747      $ 130,775      $ 264,498      $ 283,888          $      $   

Expenses (including transactions with affiliates)

    148,503        98,864        226,253        161,803            500        1,000   

Income (loss) from operations

    (14,756     31,911        38,245        122,085            (500     (1,000

Other expense

    (83,987     (87,359     (213,676     (175,645                  

Equity loss from investment in Cheniere Energy Partners, L.P.

                                    (193,443     (479,662

Net loss

    (98,743     (55,448     (175,431     (53,560         (193,943     (480,662

Basic and diluted net income per common unit

  $ 0.21      $ 0.40      $ 0.27      $ 1.23                   

Weighted average number of common units outstanding used for basic and diluted net income per common unit calculation

    51,345        31,173        33,470        27,910                   

Basic and diluted net income per share

            $        $     

Number of shares issued and outstanding at initial public offering

             

 

 

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     Cheniere Energy
Partners, L.P. (Predecessor)
Historical
          Cheniere
Energy
Partners
LP
Holdings,
LLC Pro
Forma
 
     As of
June 30,
     As of
December 31,
          As of
June 30,
2013
 
     2013      2012      2011          
     (unaudited)                         (unaudited)  
     (in thousands)              

Balance Sheet Data:

               

Cash and cash equivalents

   $ 355,304       $ 419,292       $ 81,415           $         —   

Restricted cash and cash equivalents (current)

     533,057         92,519         13,732               

Non-current restricted cash and cash equivalents

     1,777,749         272,425         82,394               

Property, plant and equipment, net

     4,831,351         3,219,592         2,044,020               

Total assets

     8,011,598         4,265,787         2,267,990               

Long-term debt, net of discount

     5,572,008         2,167,113         2,192,418               

Long-term deferred revenue

     19,500         21,500         25,500               

Long-term deferred revenue–affiliate

     17,173         14,720         12,266               

Total equity (deficit)

     1,848,454         1,879,978         (14,411            

 

 

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RISK FACTORS

An investment in our shares involves risks. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our shares. If the circumstances described by certain of the following risk factors were to occur, the business, financial condition or results of operations of Cheniere Partners, and, as a result, us, could be materially and adversely affected. In that case, Cheniere Partners might not be able to pay any distribution on its common units, the trading price of our shares could decline and you could lose all or part of your investment in us. In addition, if the circumstances described by certain of the following risk factors were to occur, our financial condition or the price of our shares could be materially and adversely affected.

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 will be our limited partner interests in Cheniere Partners. Our cash flow will therefore be 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 under “Risk Factors—Risks Relating to Cheniere Partners’ 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 the 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 of directors.

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 our Cheniere Partners units, less income taxes and any reserves established by our board of directors. Given that our only cash-generating assets will be 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. Please read “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement.”

 

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Furthermore, under the Services Agreement, we will pay administrative fees to 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, will reduce 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 $         million per year. Upon a Cheniere Separation Event, our directors and executive officers who are also directors or executive 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 executive officers and financial or business consultants. Please read “Certain Relationships and Related Party Transactions.”

If we cease to control GP Holdco, we may be deemed an “investment company,” which could impose restrictions on us.

Immediately after the closing of this offering, we will be relying on an exemption from being regulated as an investment company under 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 after the closing of this offering, 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, 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’ general partner as described under “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Cheniere GP Holding Company, LLC.” 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:

 

  Ÿ  

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;

 

  Ÿ  

we may be required to modify our 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;

 

  Ÿ  

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;

 

  Ÿ  

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;

 

  Ÿ  

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);

 

  Ÿ  

we would be restricted from selling our shares in subsequent offerings for less than the net asset value of our underlying assets; and

 

  Ÿ  

we would be subject to stricter corporate governance requirements, including the requirement that at least 40% of our directors qualify as “independent.”

 

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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 results of operations.

Upon a Cheniere Separation Event, we may lose the ability to disclose developments about Cheniere Partners’ business and results of operations to our shareholders in a timely manner.

If Cheniere relinquishes the director voting share or ceases to own greater than 25% of our outstanding shares, which we refer to as a “Cheniere Separation Event,” our non-economic voting interest in GP Holdco will be extinguished. Upon a Cheniere Separation Event, we would no longer have access to information about developments regarding Cheniere Partners’ business and results of operations (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 results of operations could have an adverse effect on the market price of our shares.

Cheniere will initially own a majority of our outstanding shares and the director voting share and will therefore be able to amend our LLC Agreement and elect and remove members of our board of directors without the vote of the holders of any shares sold in this offering.

After giving effect to this offering, Cheniere will continue to own     % of our outstanding shares, as well as our director voting share. As described under “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement,” by holding the director voting share and more than 50% of our outstanding shares, Cheniere will have the ability to control us, including amending our LLC Agreement, without the vote of a holder of any shares sold in this offering. Furthermore, under Delaware law, Cheniere will be 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 our director voting share, Cheniere will have 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 our director voting share, shareholders that are not affiliated with Cheniere will 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 nonaffiliate, it will lose its ability to appoint the members of our board of directors.

Immediately following this offering, Cheniere will own 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 will own immediately after the closing of this offering, 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 will own immediately after this offering, 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     % of our shares, will

 

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be able to amend our LLC Agreement immediately after this offering, the Cheniere Partners units we hold will 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 our Cheniere Partners units, we will be unable to generate cash through sales of the Cheniere Partners units we will hold immediately after this offering, which could affect our liquidity. In addition, until a Cheniere Separation Event, we will need Cheniere’s consent to sell any of the Cheniere Partners units that we will hold immediately after this offering. Please read “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement—Our Limited Liability Company Agreement—Covenants.”

Our LLC Agreement does not prohibit us from purchasing additional Cheniere Partners units after this offering, although we have no current intention to do so. However, if we did acquire additional Cheniere Partners units after this offering, 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 will be 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.

There is no existing market for our shares and even if such a market does develop, which we cannot assure you will happen, the market price of our shares may be less than the price you paid for your shares, and the value of our shares may be difficult for investors to accurately assess.

Prior to this offering, there has been no public market for our shares. After this offering, we do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Cheniere does not currently intend to allow us to sell additional shares in any transaction that would result in Cheniere owning less than 80% of our outstanding shares, nor does Cheniere currently intend to sell or otherwise dispose of the shares in us that it owns other than those that may be redeemed upon exercise of the underwriters’ option to purchase additional shares, making it less likely that a liquid market may ever develop. You may not be able to resell your shares at or above the initial public offering price.

The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the shares that will prevail in the trading market. The market price of our shares may decline below the initial public offering price. The market price of our shares may also be influenced by many factors, some of which are beyond our control, including:

 

  Ÿ  

the trading price of Cheniere Partners units;

 

  Ÿ  

the level of Cheniere Partners’ quarterly distributions (including whether Cheniere Partners is paying distributions on the subordinated units) and our quarterly dividends;

 

  Ÿ  

Cheniere Partners’ quarterly or annual earnings or those of other companies in its industry;

 

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  Ÿ  

the loss of a large customer by Cheniere Partners;

 

  Ÿ  

announcements by Cheniere Partners or its competitors of significant contracts or acquisitions;

 

  Ÿ  

changes in accounting standards, policies, guidance, interpretations or principles;

 

  Ÿ  

general economic conditions;

 

  Ÿ  

the impact of Investment Company Act regulations on our business;

 

  Ÿ  

future sales of our shares; and

 

  Ÿ  

other factors described in these “Risk Factors.”

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:

 

  Ÿ  

we are a limited liability company structured as a non-operating holding company that owns, and upon completion of this offering our only business will consist of owning, Cheniere Partners units;

 

  Ÿ  

our financial condition and results of operations following this offering will depend 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 our Cheniere Partners units;

 

  Ÿ  

due to the illiquid nature of the subordinated and Class B units that we own, it will be difficult to value our assets;

 

  Ÿ  

we will account for our ownership of the Cheniere Partners units in our financial statements using the equity method of accounting, which will show historical cost, but items of income and expense related to the Cheniere Partners units will not necessarily be reported and our 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

 

  Ÿ  

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:

 

  Ÿ  

our shares will not be issued on a one to one ratio with the number of Cheniere Partners units that we hold;

 

  Ÿ  

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 of directors;

 

  Ÿ  

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

 

  Ÿ  

the risks described under “—Risks Relating to the Ownership of Our Shares,” “—Risks Inherent in Our Investment in Cheniere Partners” and “Tax Risks to Shareholders.”

 

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Upon a Termination Transaction as described under “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement—Our Limited Liability Company Agreement—Termination Transactions Involving Cheniere Partners,” 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:

 

  Ÿ  

our existing shareholders’ proportionate ownership interest will decrease;

 

  Ÿ  

the amount of cash available for dividends on each share may decrease;

 

  Ÿ  

the relative voting strength of each previously outstanding share may be diminished; and

 

  Ÿ  

the market price of our shares may decline.

We will be a “controlled company” within the meaning of the NYSE MKT rules and intend to rely on exemptions from various corporate governance requirements immediately following the closing of this offering.

We intend to apply for the listing of our shares 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.

Following this offering, we believe that we will be a “controlled company” because Cheniere will own a majority of our outstanding shares and the director voting share. Because we intend to rely on certain of the “controlled company” exemptions and will not have a compensation committee or a nominating and corporate governance committee, you 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 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 June 30, 2013, 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 balance sheet is likely to

 

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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 results of operations, which could adversely affect the trading price of our shares.

You will experience immediate and substantial dilution in pro forma net tangible book value of $         per share.

The assumed initial public offering price of $         per share (the mid-point of the range set forth on the cover of this prospectus) exceeds our pro forma net tangible book value of $         per share. Based on the assumed initial public offering price of $         per common share, you will incur immediate and substantial dilution of $         per common share. Please read “Dilution.”

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements, which could make our shares less attractive to investors.

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. In addition, for so long as we are an emerging growth company, we will not be required to:

 

  Ÿ  

have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

 

  Ÿ  

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); and

 

  Ÿ  

submit certain executive compensation matters to shareholder advisory votes, such as “say on pay” and “say on frequency.”

Furthermore, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

Although we intend to rely on the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies. In addition, as our business grows, we may no longer satisfy the conditions of an emerging growth company. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year during which our total annual gross revenues exceed $1 billion or more; (ii) December 31, 2018; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We will be deemed a large accelerated filer on the first day of the fiscal year after the market value of our common equity held by non-affiliates exceeds $700 million, measured as of the previous June 30. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot assure you that we will be able to utilize part or all of the benefits from the JOBS Act. We cannot predict whether investors will find our shares less attractive to the extent that we rely on the exemptions available to emerging growth companies. If some investors find our shares less attractive as a result, there may be a less active trading market for our shares and our share price may be more volatile.

 

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We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act which allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.

We are an emerging growth company as defined in the JOBS Act and will continue to be an emerging growth company until: (i) the last day of our fiscal year following the fifth anniversary of this prospectus, (ii) the date on which we become a large accelerated filer, or (iii) the date on which we have issued an aggregate of $1 billion in non-convertible debt during the preceding three years. As an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

Risks Relating to Cheniere Partners’ Financial Matters

Cheniere Partners’ existing level of cash resources, negative operating cash flow and significant debt could cause it to have inadequate liquidity and could materially and adversely affect its business, financial condition and prospects.

As of June 30, 2013, Cheniere Partners had $355.3 million of cash and cash equivalents, $2.3 billion of restricted cash and cash equivalents and $5.6 billion of total debt outstanding on a consolidated basis (before debt discounts). Cheniere Partners incurs significant interest expense relating to the assets at the Sabine Pass LNG terminal, the Liquefaction Project and the Creole Trail Pipeline, and it anticipates needing to incur substantial additional debt and issue equity to finance the construction of Trains 5 and 6 of the Liquefaction Project. Cheniere Partners’ ability to fund its capital expenditures and refinance its indebtedness will depend on its ability to access the capital markets. Furthermore, its costs could increase or future borrowings or equity offerings may be unavailable to it or unsuccessful, which could cause it to be unable to pay or refinance its indebtedness or to fund its other liquidity needs.

Cheniere Partners has not been profitable historically. Cheniere Partners may not achieve profitability or generate positive operating cash flow in the future.

Cheniere Partners had net losses of $175.4 million and $53.6 million for the years ended December 31, 2012 and 2011, respectively, and net losses of $98.7 million for the six months ended June 30, 2013. In addition, its net cash flow used in operating activities was $24.7 million for the six months ended June 30, 2013 and $37.7 million for the year ended December 31, 2012. In the future, Cheniere Partners may incur operating losses and experience negative operating cash flow. It may not be able to reduce costs, increase revenues, or reduce its debt service obligations sufficiently to maintain its cash resources, which could cause it to have inadequate liquidity to continue its business.

In addition, Cheniere Partners will continue to incur significant capital and operating expenditures while it develops and constructs the Liquefaction Project. It currently expects that it will not begin to receive cash flows from operations under any SPA until late 2015, at the earliest. Any delays beyond the expected development period for Train 1 would prolong, and could increase the level of, Cheniere Partners’ operating losses and negative operating cash flows. Cheniere Partners’ future liquidity may also be affected by the timing of construction financing availability in relation to the incurrence of construction costs and other outflows and by the timing of receipt of cash flows under SPAs in relation to the incurrence of project and operating expenses. Moreover, many factors (including factors beyond

 

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Cheniere Partners’ control) could result in a disparity between liquidity sources and cash needs, including factors such as construction delays and breaches of agreements. Cheniere Partners’ ability to generate positive operating cash flow and achieve profitability in the future is dependent on its ability to successfully and timely complete the applicable Train.

In order to generate needed amounts of cash, Cheniere Partners may sell equity or equity-related securities, including additional common units. Such sales could dilute Cheniere Partners unitholders’ proportionate indirect interests in its assets, business operations, Liquefaction Project and other projects, and could adversely affect the market price of the common units.

Cheniere Partners has pursued and is pursuing a number of alternatives in order to generate needed amounts of cash, including potential issuances and sales of additional equity or equity-related securities. Such sales, in one or more transactions, could dilute the common unitholders’ proportionate indirect interests in its assets, business operations and proposed projects, including the Liquefaction Project. In addition, such sales, or the anticipation of such sales, could adversely affect the market price of the common units.

Cheniere Partners’ ability to generate needed amounts of cash is substantially dependent upon the performance by customers under long-term contracts that it has entered into, and it could be materially and adversely affected if any customer fails to perform its contractual obligations for any reason.

Cheniere Partners’ future results and liquidity are substantially dependent upon performance by Chevron and Total, each of which has entered into a TUA with Sabine Pass LNG and agreed to pay Sabine Pass LNG approximately $125 million annually, and, upon satisfaction of the conditions precedent to payment thereunder, by BG, Gas Natural Fenosa, KOGAS, GAIL, Total and Centrica, each of which has entered into an SPA with Sabine Pass Liquefaction and agreed to pay Sabine Pass Liquefaction approximately $723 million, $454 million, $548 million, $548 million, $314 million and $274 million annually, respectively. Cheniere Partners is dependent on each customer’s continued willingness and ability to perform its obligations under its SPA. Cheniere Partners is also exposed to the credit risk of any guarantor of these customers’ obligations under their respective TUA or SPA in the event that Cheniere Partners must seek recourse under a guaranty. If any customer fails to perform its obligations under its TUA or SPA, Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects could be materially and adversely affected, even if Cheniere Partners were ultimately successful in seeking damages from that customer or its guarantor for a breach of the TUA or SPA.

Each of Cheniere Partners’ customer contracts is subject to termination under certain circumstances.

Each of Sabine Pass LNG’s long-term TUAs contains various termination rights. For example, each customer may terminate its TUA if the Sabine Pass LNG terminal experiences a force majeure delay for longer than 18 months, fails to redeliver a specified amount of natural gas in accordance with the customer’s redelivery nominations or fails to accept and unload a specified number of the customer’s proposed LNG cargoes. Sabine Pass LNG may not be able to replace these TUAs on desirable terms, or at all, if they are terminated.

Each of Sabine Pass Liquefaction’s SPAs contain various termination rights allowing, customers to terminate their SPAs, including, without limitation: (i) upon the occurrence of certain events of force majeure; (ii) if Cheniere Partners fails to make available specified scheduled cargo quantities; (iii) delays in the commencement of commercial operations; and (iv) if the conditions precedent contained in the Total and Centrica SPAs are not met or waived by specified dates. Cheniere Partners may not be able to replace these SPAs on desirable terms, or at all, if they are terminated.

 

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Cheniere Partners’ use of hedging arrangements may adversely affect its future results of operations or liquidity.

To reduce its exposure to fluctuations in the price, volume and timing risk associated with the purchase of natural gas, Cheniere Partners uses futures, swaps and option contracts traded or cleared on the Intercontinental Exchange and the New York Mercantile Exchange (“NYMEX”), or over-the-counter options and swaps with other natural gas merchants and financial institutions. Hedging arrangements would expose Cheniere Partners to risk of financial loss in some circumstances, including when:

 

  Ÿ  

expected supply is less than the amount hedged;

 

  Ÿ  

the counterparty to the hedging contract defaults on its contractual obligations; or

 

  Ÿ  

there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received.

The use of derivatives also may require the posting of cash collateral with counterparties, which can impact working capital when commodity prices change.

The swaps regulatory provisions of the Dodd-Frank Act and the rules adopted thereunder could have an adverse impact on Cheniere Partners’ ability to hedge risks associated with its business and on Cheniere Partners’ results of operations and cash flows.

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) establishes federal oversight and regulation of the over-the-counter (“OTC”) derivatives market and entities, such as Cheniere Partners, that participate in that market. The provisions of that title of the Dodd-Frank Act and the rules of the Commodity Futures Trading Commission (“CFTC”) and the SEC adopted and proposed to be adopted thereunder, regulate certain swaps entities, require clearing of extensive swaps over clearing organizations and execution of the swaps over contract markets, and require certain reporting and recordkeeping of swaps. They also give the CFTC the authority to establish limits on the positions in certain core futures and equivalent swaps contracts for or linked to certain physical commodities, including Henry Hub natural gas, held by market participants, with exceptions for certain bona fide hedging transactions. The CFTC’s rules establishing position limits were vacated by a federal district court in September 2012 and will not go into effect unless and until the CFTC prevails on its appeal of the court’s ruling or the CFTC issues and finalizes revised rules.

The CFTC has designated certain interest rate swaps and certain index credit default swaps for mandatory clearing and set compliance dates for three different categories of market participants who are parties to such swaps, the earliest of which was in March 11, 2013 and the latest of which is September 10, 2013. The CFTC has not yet proposed rules designating any other classes of swaps, including physical commodity swaps, for mandatory clearing. Although Cheniere Partners expects to qualify for the end-user exception from the mandatory clearing and trade execution requirements for Cheniere Partners’ swaps entered to hedge its commercial risks, the application of the mandatory clearing and trade execution requirements to other market participants, such as swap dealers, may change the cost and availability of the swaps that Cheniere Partners uses for hedging. In addition, for uncleared swaps, the CFTC or federal banking regulators may require Cheniere Partners’ counterparties to require that Cheniere Partners enter into credit support documentation and/or post initial and variation margin as collateral; however, the proposed margin rules are not yet final, and therefore the application of those provisions to us is uncertain at this time. Provisions of the Dodd-Frank Act may also cause Cheniere Partners’ derivatives counterparties to spin off some or all of their derivatives activities to a separate entity, which could be Cheniere Partners’ counterparty in future swaps and which entity may not be as creditworthy as the current counterparty.

 

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The Dodd-Frank Act’s swaps regulatory provisions and the related rules could significantly increase the cost of derivative contracts (including through requirements to post collateral which could adversely affect Cheniere Partners’ available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks that Cheniere Partners encounters, reduce Cheniere Partners’ ability to monetize or restructure its existing derivative contracts, and increase Cheniere Partners’ exposure to less creditworthy counterparties. If, as a result of the swaps regulatory regime discussed above, Cheniere Partners were to reduce its use of swaps to hedge its risks, such as commodity price risks that it encounters in its operations, Cheniere Partners’ results of operations and cash flows may become more volatile and could be otherwise adversely affected.

Risks Relating to Cheniere Partners’ Business

Operation of the Sabine Pass LNG terminal, the Liquefaction Project, the Creole Trail Pipeline and other facilities that Cheniere Partners may construct involves significant risks.

As more fully discussed in these risk factors, the Sabine Pass LNG terminal, the Liquefaction Project, the Creole Trail Pipeline and Cheniere Partners’ other existing and proposed facilities face operational risks, including the following:

 

  Ÿ  

the facilities’ performing below expected levels of efficiency;

 

  Ÿ  

breakdown or failures of equipment;

 

  Ÿ  

operational errors by vessel or tug operators;

 

  Ÿ  

operational errors by Cheniere Partners or any contracted facility operator;

 

  Ÿ  

labor disputes; and

 

  Ÿ  

weather-related interruptions of operations.

Cheniere Partners may not be successful in implementing its proposed business strategy to provide liquefaction capabilities at the Sabine Pass LNG terminal adjacent to the existing regasification facilities.

The Liquefaction Project will require very significant financial resources, which may not be available on terms reasonably acceptable to Cheniere Partners or at all. Cheniere Partners’ SPAs with Total and Centrica contain certain conditions precedent, including, but not limited to, receiving regulatory approvals, securing necessary financing arrangements and making a final investment decision to construct Train 5. If these conditions are not met by June 30, 2015, each of Total and Centrica may terminate its respective SPA.

It will take several years to construct Cheniere Partners’ proposed liquefaction facilities, and Cheniere Partners does not expect Train 1 to produce LNG until late 2015 at the earliest. Even if successfully constructed, Cheniere Partners’ proposed liquefaction facilities would be subject to the operating risks described herein. Accordingly, there are many risks associated with the Liquefaction Project, and if Cheniere Partners is not successful in implementing its business strategy, it may not be able to generate cash flows, which could have a material adverse impact on its business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Cost overruns and delays in the completion of one or more Trains, as well as difficulties in obtaining sufficient financing to pay for such costs and delays, could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

The actual construction costs of the Trains may be significantly higher than Cheniere Partners’ current estimates as a result of many factors, including change orders under existing or future

 

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engineering, procurement and construction contracts. Cheniere Partners does not have any prior experience in constructing liquefaction facilities, and no liquefaction facilities have been constructed and placed in service in the United States in over 40 years. As construction progresses, Cheniere Partners may decide or be forced to submit change orders to its contractor that could result in longer construction periods, higher construction costs or both.

Key factors that may affect the timing of, cost of, or Cheniere Partners’ ability to complete, one or more of its proposed Trains include, but are not limited to:

 

  Ÿ  

the issuance and/or continued availability of necessary permits, licenses and approvals from governmental agencies and third parties as are required to construct and operate its proposed liquefaction facilities;

 

  Ÿ  

the availability of sufficient financing on reasonable terms, or at all;

 

  Ÿ  

its ability to satisfy the conditions precedent in SPAs with customers by specified dates;

 

  Ÿ  

its ability to enter into additional satisfactory agreements with contractors and to maintain good relationships with these contractors in order to construct its proposed liquefaction facilities within the expected cost parameters, and the ability of those contractors to perform their obligations under the contracts and to maintain their creditworthiness;

 

  Ÿ  

shortages of materials or delays in delivery of materials;

 

  Ÿ  

local and general economic conditions;

 

  Ÿ  

catastrophes, such as explosions, fires and product spills;

 

  Ÿ  

resistance in the local community to the project to add liquefaction capabilities at the Sabine Pass LNG terminal adjacent to the existing regasification facilities;

 

  Ÿ  

the ability to attract sufficient skilled and unskilled labor, increases in the level of labor costs and the existence of any labor disputes; and

 

  Ÿ  

weather conditions, such as hurricanes.

Delays in the construction of one or more Trains beyond the estimated development periods, as well as change orders to the EPC Contracts with Bechtel or any future engineering, procurement and construction contract related to additional Trains, could increase the cost of completion beyond the amounts that Cheniere Partners currently estimates, which could require it to obtain additional sources of financing to fund its operations until the Liquefaction Project is constructed (which could cause further delays). Cheniere Partners’ ability to obtain financing that may be needed to provide additional funding to cover increased costs will depend, in part, on factors beyond its control. Accordingly, Cheniere Partners may not be able to obtain financing on terms that are acceptable to it, or at all. Even if Cheniere Partners is able to obtain financing, it may have to accept terms that are disadvantageous to it or that may have a material adverse effect on its current or future business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Delays in the completion of one or more Trains could lead to reduced revenues or termination of one or more of the SPAs by Cheniere Partners’ counterparties.

Any delay in completion of a Train could cause a delay in the receipt of revenues projected therefrom, or cause a loss of one or more customers in the event of significant delays. As a result, any significant construction delay, whatever the cause, could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

 

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Cheniere Partners’ ability to complete development of additional Trains will be contingent on its ability to obtain additional funding.

Cheniere Partners will require significant additional funding to be able to commence construction of Train 5 and Train 6, which it may not be able to obtain at a cost that results in positive economics, or at all. The inability to achieve acceptable funding may cause a delay in development of additional Trains. If it is able to obtain funding, the funding may be inadequate to cover any increases in costs or delays in completion of the applicable Train, which may cause a delay in the receipt of revenues projected therefrom or cause a loss of one or more customers in the event of significant delays. As a result, any significant construction delay, whatever the cause, could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

To maintain the cryogenic readiness of the Sabine Pass LNG terminal, Sabine Pass LNG may need to purchase and process LNG. Sabine Pass LNG’s TUA customers, including Sabine Pass Liquefaction, have the obligation to procure LNG if necessary for the Sabine Pass LNG terminal to maintain its cryogenic state. If they fail to do so, Sabine Pass LNG may need to procure such LNG.

Sabine Pass LNG needs to maintain the cryogenic readiness of the Sabine Pass LNG terminal. Together with Sabine Pass Liquefaction, the two third-party TUA customers have the obligation to maintain minimum inventory levels, and, under certain circumstances, to procure LNG to maintain the cryogenic readiness of the terminal. In the event that aggregate minimum inventory levels are not maintained, Sabine Pass LNG has the right to procure a cryogenic readiness cargo or cure a minimum inventory condition, and to be reimbursed by each TUA customer for their allocable share of the LNG acquisition costs. If Sabine Pass LNG is not able to obtain financing on acceptable terms, it will need to maintain sufficient working capital for such a purchase until it receives reimbursement for the allocable costs of the LNG from its TUA customers or sells the regasified LNG.

Sabine Pass LNG may be required to purchase natural gas to provide fuel at the Sabine Pass LNG terminal, which would increase operating costs and could have a material adverse effect on Cheniere Partners’ results of operations.

Sabine Pass LNG’s TUAs provide for an in-kind deduction of 2% of the LNG delivered to the Sabine Pass LNG terminal, which it uses primarily as fuel for revaporization and self-generated power and to cover natural gas unavoidably lost at the facility. There is a risk that this 2% in-kind deduction will be insufficient for these needs and that Sabine Pass LNG will have to purchase additional natural gas from third parties. Sabine Pass LNG will bear the cost and risk of changing prices for any such fuel.

Hurricanes or other disasters could result in an interruption of Cheniere Partners’ operations, a delay in the completion of the Liquefaction Project, higher construction costs, and the deferral of the dates on which payments are due to Sabine Pass Liquefaction under the SPAs, all of which could adversely affect Cheniere Partners.

In August and September of 2005, Hurricanes Katrina and Rita damaged coastal and inland areas located in Texas, Louisiana, Mississippi and Alabama, resulting in the temporary suspension of construction of the Sabine Pass LNG terminal. In September 2008, Hurricane Ike struck the Texas and Louisiana coast, and the Sabine Pass LNG terminal experienced minor damage.

Future storms and related storm activity and collateral effects, or other disasters such as explosions, fires, floods or accidents, could result in damage to, or interruption of operations at, the Sabine Pass LNG terminal and related infrastructure, as well as delays or cost increases in the construction and the development of the Liquefaction Project and related infrastructure. If there are changes in the global climate, storm frequency and intensity may increase; should it result in rising seas, Cheniere Partners’ coastal operations may be impacted.

 

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Failure to obtain and maintain approvals and permits from governmental and regulatory agencies with respect to the design, construction and operation of Cheniere Partners’ facilities could impede operations and construction and could have a material adverse effect on Cheniere Partners.

The design, construction and operation of interstate natural gas pipelines, LNG terminals, including the Liquefaction Project, and other facilities, and the import and export of LNG and the transportation of natural gas, are highly regulated activities. The approval of the FERC under Section 3 and Section 7 of the Natural Gas Act of 1938, as amended (“NGA”), as well as several other material governmental and regulatory approvals and permits, including several under the Clean Air Act (the “CAA”) and the Clean Water Act (the “CWA”), are required in order to construct and operate an LNG facility and an interstate natural gas pipeline. Although the FERC has issued an order under the Section 3 of the NGA authorizing the siting, construction and operation of four Trains, the FERC order requires Cheniere Partners to obtain certain additional approvals in conjunction with ongoing construction and operations of its proposed liquefaction facilities. Authorizations obtained from other federal and state regulatory agencies also contain ongoing conditions, and additional approval and permit requirements may be imposed. Cheniere Partners has no control over the outcome of the review and approval process. It does not know whether or when any such approvals or permits can be obtained, or whether or not any existing or potential interventions or other actions by third parties will interfere with its ability to obtain and maintain such permits or approvals. If it is unable to obtain and maintain the necessary approvals and permits, Cheniere Partners may not be able to recover its investment in its projects. There is no assurance that Cheniere Partners will obtain and maintain these governmental permits, approvals and authorizations, or that it will be able to obtain them on a timely basis, and failure to obtain and maintain any of these permits, approvals or authorizations could have a material adverse effect on its business, financial condition, operating results, liquidity and prospects.

Cheniere Partners is entirely dependent on Cheniere, including employees of Cheniere and its subsidiaries, for key personnel, and a loss of key personnel could have a material adverse effect on its business.

As of August 31, 2013, Cheniere and its subsidiaries had 372 full-time employees, including 203 employees who directly supported the Sabine Pass LNG terminal operations, the Liquefaction Project and CTPL. Cheniere Partners has contracted with subsidiaries of Cheniere to provide the personnel necessary for the operation, maintenance and management of the Sabine Pass LNG terminal, the Creole Trail Pipeline and construction of the Liquefaction Project. Cheniere Partners faces competition for these highly skilled employees in the immediate vicinity of the Sabine Pass LNG terminal and more generally from the Gulf Coast hydrocarbon processing and construction industries. A shortage in the labor pool of skilled workers or other general inflationary pressures or changes in applicable laws and regulations could make it more difficult to attract and retain personnel and could require an increase in the wage and benefits packages that are offered, thereby increasing Cheniere Partners’ operating costs.

The executive officers of Cheniere Partners’ general partner are officers and employees of Cheniere and its affiliates. Cheniere Partners does not maintain key person life insurance policies on any personnel, and its general partner does not have any employment contracts or other agreements with key personnel binding them to provide services for any particular term. The loss of the services of any of these individuals could have a material adverse effect on Cheniere Partners’ business. In addition, Cheniere Partners’ future success will depend in part on the ability of its general partner to engage, and Cheniere’s ability to attract and retain, additional qualified personnel.

 

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Cheniere Partners has numerous contractual and commercial relationships, and conflicts of interest, with Cheniere and its affiliates, including Cheniere Marketing.

Cheniere Partners has agreements to compensate and to reimburse expenses of affiliates of Cheniere. In addition, Cheniere Energy Investments, LLC (“Cheniere Investments”), a wholly owned subsidiary of Cheniere Partners, has entered into a variable capacity rights agreement (“VCRA”) with Cheniere Marketing, under which Cheniere Marketing will be able to derive economic benefits to the extent it assists Cheniere Investments in commercializing Cheniere Investments’ access to capacity at the Sabine Pass LNG terminal through its terminal use rights assignment and agreement (“TURA”) with Sabine Pass Liquefaction, which has a TUA with Sabine Pass LNG. In addition, Cheniere Marketing has entered into an SPA to purchase, at its option, up to 104,000,000 MMBtu/yr of LNG produced from Train 1 through Train 4. All of these agreements involve conflicts of interest between Cheniere Partners, on the one hand, and Cheniere and its other affiliates, on the other hand.

Cheniere Partners expects that there will be additional agreements or arrangements with Cheniere and its affiliates, including future transportation, interconnection and gas balancing agreements with one or more Cheniere-affiliated natural gas pipelines as well as other agreements and arrangements that cannot now be anticipated. In those circumstances where additional contracts with Cheniere and its affiliates may be necessary or desirable, additional conflicts of interest will be involved.

Cheniere Partners is dependent on Cheniere and its affiliates to provide services to it. If Cheniere or its affiliates are unable or unwilling to perform according to the negotiated terms and timetable of their respective agreement for any reason or terminates their agreement, Cheniere Partners would be required to engage a substitute service provider. This could result in a significant interference with operations and increased costs.

Cheniere Partners is dependent on Bechtel and other contractors for the successful completion of the Liquefaction Project.

Timely and cost-effective completion of the Liquefaction Project in compliance with agreed specifications is central to Cheniere Partners’ business strategy and is highly dependent on Bechtel’s and the performance of other Cheniere Partners’ contractors under their agreements. The ability of Bechtel and other contractors of Cheniere Partners to perform successfully under their agreements is dependent on a number of factors, including their ability to:

 

  Ÿ  

design and engineer each Train to operate in accordance with specifications;

 

  Ÿ  

engage and retain third-party subcontractors and procure equipment and supplies;

 

  Ÿ  

respond to difficulties such as equipment failure, delivery delays, schedule changes and failure to perform by subcontractors, some of which are beyond their control;

 

  Ÿ  

attract, develop and retain skilled personnel, including engineers;

 

  Ÿ  

post required construction bonds and comply with the terms thereof;

 

  Ÿ  

manage the construction process generally, including coordinating with other contractors and regulatory agencies; and

 

  Ÿ  

maintain their own financial condition, including adequate working capital.

Although some agreements may provide for liquidated damages, if the contractor fails to perform in the manner required with respect to certain of its obligations, the events that trigger a requirement to pay liquidated damages may delay or impair the operation of the applicable liquefaction facility, and any liquidated damages that Cheniere Partners receives may not be sufficient to cover the damages that Cheniere Partners suffers as a result of any such delay or impairment. The obligations of Bechtel

 

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and Cheniere Partners’ other contractors to pay liquidated damages under their agreements are subject to caps on liability, as set forth therein. Furthermore, Cheniere Partners may have disagreements with its contractors about different elements of the construction process, which could lead to the assertion of rights and remedies under their contracts and increase the cost of the applicable liquefaction facility or result in a contractor’s unwillingness to perform further work on the Liquefaction Project. If any contractor is unable or unwilling to perform according to the negotiated terms and timetable of its respective agreement for any reason or terminates its agreement, Cheniere Partners would be required to engage a substitute contractor. This would likely result in significant project delays and increased costs, which could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Cheniere Partners is relying on third-party engineers to estimate the future capacity ratings and performance capabilities of its proposed liquefaction facilities, and these estimates may prove to be inaccurate.

Cheniere Partners is relying on third parties, principally Bechtel, for the design and engineering services underlying its estimates of the future capacity ratings and performance capabilities of its proposed liquefaction facilities. If any Train, when actually constructed, fails to have the capacity ratings and performance capabilities that Cheniere Partners intends, its estimates may not be accurate. Failure of any of the Trains to achieve its intended capacity ratings and performance capabilities could prevent Cheniere Partners from achieving the commercial start dates under its SPAs and could have a material adverse effect on its business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

If third-party pipelines and other facilities interconnected to Cheniere Partners’ pipelines and facilities are or become unavailable to transport natural gas, this could have a material adverse effect on its business, financial condition, operating results, liquidity and prospects.

Cheniere Partners will depend upon third-party pipelines and other facilities that will provide gas delivery options to its Liquefaction Project and to and from the Creole Trail Pipeline. If the construction of new or modified pipeline connections is not completed on schedule or any pipeline connection were to become unavailable for current or future volumes of natural gas due to repairs, damage to the facility, lack of capacity or any other reason, Cheniere Partners’ ability to meet its SPA obligations and continue shipping natural gas from producing regions or to end markets could be restricted, thereby reducing its revenues. Any permanent interruption at any key pipeline interconnect which caused a material reduction in volumes transported on the Creole Trail Pipeline could have a material adverse effect on Cheniere Partners’ business, financial condition, operating results, liquidity and prospects.

Cheniere Partners may not be able to purchase or receive physical delivery of sufficient natural gas to satisfy its delivery obligations under the SPAs, which could have a material adverse effect on it.

Under the SPAs with its liquefaction customers, Cheniere Partners is required to deliver to them a specified amount of LNG at specified times. However, Cheniere Partners may not be able to purchase or receive physical delivery of sufficient quantities of natural gas to satisfy those delivery obligations, which may provide affected SPA customers with the right to terminate their SPAs. Cheniere Partners’ failure to purchase or receive physical delivery of sufficient quantities of natural gas could have a material adverse effect on its business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

 

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Cheniere Partners is subject to significant operating hazards and uninsured risks, one or more of which may create significant liabilities and losses for it.

The operation of the Sabine Pass LNG terminal, the construction and operation of the Liquefaction Project and the operation of the Creole Trail Pipeline is and will be subject to the inherent risks associated with these types of operations, including explosions, pollution, release of toxic substances, fires, hurricanes and adverse weather conditions, and other hazards, each of which could result in significant delays in commencement or interruptions of operations and/or in damage to or destruction of Cheniere Partners’ facilities or damage to persons and property. In addition, Cheniere Partners’ operations and the facilities and vessels of third parties on which its operations are dependent face possible risks associated with acts of aggression or terrorism.

Cheniere Partners does not, nor does it intend to, maintain insurance against all of these risks and losses. It may not be able to maintain desired or required insurance in the future at rates that it considers reasonable. The occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Decreases in the demand for and price of LNG and natural gas could affect the performance of Cheniere Partners’ customers and could have a material adverse effect on its business, contracts, financial condition, operating results, cash flows, liquidity and prospects.

The development of domestic LNG facilities and projects generally is based on assumptions about the future availability of natural gas, price of natural gas and LNG, and the prospects for international natural gas and LNG markets. Natural gas prices have been, and are likely to continue to be, volatile and subject to wide fluctuations in response to one or more of the following factors:

 

  Ÿ  

relatively minor changes in the supply of, and demand for, natural gas in relevant markets;

 

  Ÿ  

political conditions in natural gas producing regions;

 

  Ÿ  

the extent of domestic production and importation of natural gas in relevant markets;

 

  Ÿ  

the level of demand for LNG and natural gas in relevant markets, including the effects of economic downturns or upturns;

 

  Ÿ  

weather conditions;

 

  Ÿ  

the competitive position of natural gas as a source of energy compared with other energy sources; and

 

  Ÿ  

the effect of government regulation on the production, transportation and sale of natural gas.

Adverse trends or developments affecting any of these factors could result in decreases in the price of LNG and natural gas, which could adversely affect the performance of Cheniere Partners’ customers, and could have a material adverse effect on its business, contracts, financial condition, operating results, cash flows, liquidity and prospects.

Cyclical or other changes in the demand for LNG and natural gas may adversely affect Cheniere Partners’ LNG businesses and the performance of its customers and could reduce its operating revenues and may cause it operating losses.

The economics of Cheniere Partners’ LNG businesses could be subject to cyclical swings, reflecting alternating periods of under-supply and over-supply of LNG import or export capacity and available natural gas, principally due to the combined impact of several factors, including:

 

  Ÿ  

additions to competitive regasification capacity in North America, Europe, Asia and other markets, which could divert LNG from the Sabine Pass LNG terminal;

 

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  Ÿ  

competitive liquefaction capacity in North America, which could divert natural gas from Cheniere Partners’ proposed liquefaction facilities;

 

  Ÿ  

insufficient or oversupply of LNG liquefaction or receiving capacity worldwide;

 

  Ÿ  

insufficient LNG tanker capacity;

 

  Ÿ  

reduced demand and lower prices for natural gas;

 

  Ÿ  

increased natural gas production deliverable by pipelines, which could suppress demand for LNG;

 

  Ÿ  

cost improvements that allow competitors to offer LNG regasification services or provide liquefaction capabilities at reduced prices;

 

  Ÿ  

changes in supplies of, and prices for, alternative energy sources such as coal, oil, nuclear, hydroelectric, wind and solar energy, which may reduce the demand for natural gas;

 

  Ÿ  

changes in regulatory, tax or other governmental policies regarding imported or exported LNG, natural gas or alternative energy sources, which may reduce the demand for imported or exported LNG and/or natural gas;

 

  Ÿ  

adverse relative demand for LNG compared to other markets, which may decrease LNG imports into or exports from North America; and

 

  Ÿ  

cyclical trends in general business and economic conditions that cause changes in the demand for natural gas.

These factors could materially and adversely affect Cheniere Partners’ ability, and the ability of its current and prospective customers, to procure supplies of LNG to be imported into North America, to procure customers for LNG or regasified LNG, or to procure natural gas to be liquefied and exported to international markets, at economical prices, or at all.

Failure of imported or exported LNG to be a competitive source of energy could adversely affect Cheniere Partners’ customers and could materially and adversely affect its business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Current operations at the Sabine Pass LNG terminal are dependent upon the ability of Cheniere Partners’ TUA customers to import LNG supplies into the United States, which is primarily dependent upon LNG being a competitive source of energy in North America. In North America, due mainly to a historically abundant supply of natural gas and recent discoveries of substantial quantities of unconventional, or shale, natural gas, imported LNG has not developed into a significant energy source. The success of the regasification services component of Cheniere Partners’ business plan is dependent, in part, on the extent to which LNG can, for significant periods and in significant volumes, be produced internationally and delivered to North America at a lower cost than the cost to produce some domestic supplies of natural gas, or other alternative energy sources. Through the use of improved exploration technologies, additional sources of natural gas have recently been and may continue to be discovered in North America, which could further increase the available supply of natural gas and could result in natural gas being available at a lower cost than imported LNG.

Operations at Cheniere Partners’ proposed liquefaction facilities will be dependent upon the ability of its SPA customers to deliver LNG supplies from the United States, which is primarily dependent upon LNG being a competitive source of energy internationally. The success of Cheniere Partners’ business plan is dependent, in part, on the extent to which LNG can, for significant periods and in significant volumes, be supplied from North America and delivered to international markets at a lower cost than the cost of other alternative energy sources. Through the use of improved exploration technologies, additional sources of natural gas have recently been and may continue to be discovered outside North America, which could further increase the available supply of natural gas and could result in natural gas being available at a lower cost than LNG exported to these markets.

 

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Political instability in foreign countries that import or export natural gas, or strained relations between such countries and the United States, may also impede the willingness or ability of LNG suppliers and merchants in such countries to import or export LNG from or to the United States. Furthermore, some foreign suppliers of LNG may have economic or other reasons to obtain their LNG from, or direct their LNG to, non-U.S. markets or from or to competitors’ LNG facilities in the United States. In addition to natural gas, LNG also competes with other sources of energy, including coal, oil, nuclear, hydroelectric, wind and solar energy, which can be or become available at a lower cost in certain markets.

As a result of these and other factors, LNG may not be a competitive source of energy in the United States or internationally. The failure of LNG to be a competitive supply alternative to local natural gas, oil and other alternative energy sources could adversely affect the ability of Cheniere Partners’ customers to deliver LNG from the United States or to the United States on a commercial basis. Any significant impediment to the ability to deliver LNG to or from the United States generally, or to the Sabine Pass LNG terminal or from Cheniere Partners’ proposed liquefaction facilities specifically, could have a material adverse effect on its customers and on its business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Various economic and political factors could negatively affect the development of LNG facilities, including the Liquefaction Project, which could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Commercial development of an LNG facility takes a number of years, requires a substantial capital investment and may be delayed by factors such as:

 

  Ÿ  

increased construction costs;

 

  Ÿ  

economic downturns, increases in interest rates or other events that may affect the availability of sufficient financing for LNG projects on commercially reasonable terms;

 

  Ÿ  

decreases in the price of LNG, which might decrease the expected returns relating to investments in LNG projects;

 

  Ÿ  

the inability of project owners or operators to obtain governmental approvals to construct or operate LNG facilities;

 

  Ÿ  

political unrest or local community resistance to the siting of LNG facilities due to safety, environmental or security concerns; and

 

  Ÿ  

any significant explosion, spill or similar incident involving an LNG facility or LNG vessel.

There may be shortages of LNG vessels worldwide, which could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

The construction and delivery of LNG vessels require significant capital and long construction lead times, and the availability of the vessels could be delayed to the detriment of Cheniere Partners’ LNG business and its customers because of:

 

  Ÿ  

an inadequate number of shipyards constructing LNG vessels and a backlog of orders at these shipyards;

 

  Ÿ  

political or economic disturbances in the countries where the vessels are being constructed;

 

  Ÿ  

changes in governmental regulations or maritime self-regulatory organizations;

 

  Ÿ  

work stoppages or other labor disturbances at the shipyards;

 

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  Ÿ  

bankruptcy or other financial crisis of shipbuilders;

 

  Ÿ  

quality or engineering problems;

 

  Ÿ  

weather interference or a catastrophic event, such as a major earthquake, tsunami or fire; and

 

  Ÿ  

shortages of or delays in the receipt of necessary construction materials.

Cheniere Partners may not be able to secure firm pipeline transportation capacity on economic terms that is sufficient to meet its feed gas transportation requirements which could have a material adverse effect on it.

Cheniere Partners believes that there is sufficient capacity on the Creole Trail Pipeline to accommodate all of its natural gas supply requirements for Train 1 and Train 2 but not for additional Trains. It plans to secure additional pipeline transportation capacity but it may not be able to do so on commercially reasonable terms or at all, which would impair its ability to fulfill its obligations under certain of its SPAs and could have a material adverse effect on its business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Cheniere Partners faces competition based upon the international market price for LNG.

The Liquefaction Project is subject to the risk of LNG price competition at times when Cheniere Partners needs to replace any existing SPA, whether due to natural expiration, default or otherwise, or enter into new SPAs with respect to Train 6. Should Cheniere Partners find it necessary to replace an existing SPA, factors relating to competition may prevent it from entering into a replacement SPA on economically comparable terms, or at all. Such an event could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects. Factors which may negatively affect potential demand for LNG from the Liquefaction Project are diverse and include, among others:

 

  Ÿ  

increases in worldwide LNG production capacity and availability of LNG for market supply;

 

  Ÿ  

increases in demand for LNG but at levels below those required to maintain current price equilibrium with respect to supply;

 

  Ÿ  

increases in the cost to supply natural gas feedstock to the Liquefaction Project;

 

  Ÿ  

decreases in the cost of competing sources of natural gas or alternate fuels such as coal, heavy fuel oil and diesel;

 

  Ÿ  

increases in capacity and utilization of nuclear power and related facilities; and

 

  Ÿ  

displacement of LNG by pipeline natural gas or alternate fuels in locations where access to these energy sources is not currently available.

Terrorist attacks or military campaigns may adversely impact Cheniere Partners’ business.

A terrorist or military incident involving an LNG facility or LNG vessel may result in delays in, or cancellation of, construction of new LNG facilities, including one or more of the Trains, which would increase Cheniere Partners’ costs and decrease its cash flows. A terrorist incident may also result in temporary or permanent closure of existing LNG facilities, including the Sabine Pass LNG terminal or the Creole Trail Pipeline, which could increase Cheniere Partners’ costs and decrease its cash flows, depending on the duration of the closure. Cheniere Partners’ operations could also become subject to increased governmental scrutiny that may result in additional security measures at a significant incremental cost to it. In addition, the threat of terrorism and the impact of military campaigns may lead to continued volatility in prices for natural gas that could adversely affect Cheniere Partners’ business and its customers, including their ability to satisfy their obligations to it under its commercial agreements. Instability in the financial markets as a result of terrorism or war could also materially adversely affect Cheniere Partners’ ability to raise capital. The continuation of these developments

 

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may subject Cheniere Partners’ construction and its operations to increased risks, as well as increased costs, and, depending on their ultimate magnitude, could have a material adverse effect on its business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Existing and future environmental and similar laws and governmental regulations could result in increased compliance costs or additional operating costs or construction costs and restrictions.

Cheniere Partners’ business is and will be subject to extensive federal, state and local laws and regulations that regulate and restrict, among other things, discharges to air, land and water, with particular respect to the protection of the environment; the handling, storage and disposal of hazardous materials, hazardous waste, and petroleum products; and remediation associated with the release of hazardous substances. Many of these laws and regulations, such as the CAA, the Oil Pollution Act, the CWA and the Resource Conservation and Recovery Act (the “RCRA”), and analogous state laws and regulations, restrict or prohibit the types, quantities and concentration of substances that can be released into the environment in connection with the construction and operation of Cheniere Partners’ facilities, and require it to maintain permits and provide governmental authorities with access to its facilities for inspection and reports related to its compliance. Violation of these laws and regulations could lead to substantial liabilities, fines and penalties or to capital expenditures related to pollution control equipment that could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects. Federal and state laws impose liability, without regard to fault or the lawfulness of the original conduct, for the release of certain types or quantities of hazardous substances into the environment. As the owner and operator of its facilities, Cheniere Partners could be liable for the costs of cleaning up hazardous substances released into the environment and for damage to natural resources.

There are numerous regulatory approaches currently in effect or being considered to address greenhouse gases, including possible future U.S. treaty commitments, new federal or state legislation that may impose a carbon emissions tax or establish a cap-and-trade program, and regulation by the Environmental Protection Agency (the “EPA”). In addition, as Cheniere Partners consumes natural gas at the Sabine Pass LNG terminal, this carbon tax may also be imposed on it directly.

Other future legislation and regulations, such as those relating to the transportation and security of LNG imported to or exported from the Sabine Pass LNG terminal through the Sabine Pass deep water shipping channel less than four miles from the Gulf Coast, could cause additional expenditures, restrictions and delays in Cheniere Partners’ business and to its proposed construction, the extent of which cannot be predicted and which may require it to limit substantially, delay or cease operations in some circumstances. Revised, reinterpreted or additional laws and regulations that result in increased compliance costs or additional operating or construction costs and restrictions could have a material adverse effect on Cheniere Partners’ business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

The Creole Trail Pipeline and its FERC gas tariffs are subject to FERC regulation.

The Creole Trail Pipeline is subject to regulation by the FERC under the NGA and under the Natural Gas Policy Act of 1978. The FERC regulates the transportation of natural gas in interstate commerce, including the construction and operation of the Creole Trail Pipeline, the rates and terms of conditions of service and abandonment of facilities. Under the NGA, the rates charged by the Creole Trail Pipeline must be just and reasonable, and Cheniere Partners is prohibited from unduly preferring or unreasonably discriminating against any person with respect to pipeline rates or terms and conditions of service. If Cheniere Partners fails to comply with all applicable statutes, rules, regulations and orders, the Creole Trail Pipeline could be subject to substantial penalties and fines.

 

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Cheniere Partners’ FERC gas tariffs, including its pro forma transportation agreements, must be filed and approved by the FERC. Before Cheniere Partners enters into a transportation agreement with a shipper that contains a term that materially deviates from Cheniere Partners’ tariff, Cheniere Partners must seek the FERC’s approval. The FERC may approve the material deviation in the transportation agreement; however, in that case, the materially deviating terms must be made available to Cheniere Partners’ other similarly-situated customers. If Cheniere Partners fails to seek the FERC’s approval of a transportation agreement that materially deviates from its tariff, or if the FERC audits Cheniere Partners’ contracts and finds deviations that appear to be unduly discriminatory, the FERC could conduct a formal enforcement investigation, resulting in serious penalties and/or onerous ongoing compliance obligations.

Should Cheniere Partners fail to comply with all applicable FERC-administered statutes, rules, regulations and orders, it could be subject to substantial penalties and fines. Under the Energy Policy Act of 2005 (“EPAct”), the FERC has civil penalty authority under the NGA to impose penalties for current violations of up to $1.0 million per day for each violation.

Pipeline safety integrity programs and repairs may impose significant costs and liabilities on Cheniere Partners.

The Federal Office of Pipeline Safety requires pipeline operators to develop integrity management programs to comprehensively evaluate certain areas along their pipelines and to take additional measures to protect pipeline segments located in “high consequence areas” where a leak or rupture could potentially do the most harm. As an operator, Cheniere Partners is required to:

 

  Ÿ  

perform ongoing assessments of pipeline integrity;

 

  Ÿ  

identify and characterize applicable threats to pipeline segments that could impact a high consequence area;

 

  Ÿ  

improve data collection, integration and analysis;

 

  Ÿ  

repair and remediate the pipeline as necessary; and

 

  Ÿ  

implement preventative and mitigating actions.

Cheniere Partners is required to maintain pipeline integrity testing programs that are intended to assess pipeline integrity. Any repair, remediation, preventative or mitigating actions may require significant capital and operating expenditures. Should Cheniere Partners fail to comply with the Federal Office of Pipeline Safety’s rules and related regulations and orders, it could be subject to significant penalties and fines.

Cheniere Partners’ business could be materially and adversely affected if it loses the right to situate the Creole Trail Pipeline on property owned by third parties.

Cheniere Partners does not own the land on which the Creole Trail Pipeline is situated, and it is subject to the possibility of increased costs to retain necessary land use rights. If Cheniere Partners were to lose these rights or be required to relocate the Creole Trail Pipeline, its business could be materially and adversely affected.

Cheniere Partners’ lack of diversification could have an adverse effect on its business, contracts, financial condition, operating results, cash flow, liquidity and prospects.

Substantially all of Cheniere Partners’ anticipated revenue in 2013 will be dependent upon one facility, the Sabine Pass LNG receiving terminal located in southern Louisiana. Due to its lack of asset and geographic diversification, an adverse development at the Sabine Pass LNG terminal, or in the

 

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LNG industry, would have a significantly greater impact on Cheniere Partners’ financial condition and results of operations than if Cheniere Partners maintained more diverse assets and operating areas.

Cheniere Partners may engage in operations or make substantial commitments and investments located, or enter into agreements with counterparties located, outside the United States, which would expose it to political, governmental and economic instability and foreign currency exchange rate fluctuations.

Conducting operations or making commitments and investments located, or entering into agreements with counterparties located, outside of the United States will cause it to be affected by economic, political and governmental conditions in the countries where Cheniere Partners engages in business. Any disruption caused by these factors could harm Cheniere Partners’ business. Risks associated with operations, commitments and investments outside of the United States include the risks of:

 

  Ÿ  

currency fluctuations;

 

  Ÿ  

war;

 

  Ÿ  

expropriation or nationalization of assets;

 

  Ÿ  

renegotiation or nullification of existing contracts;

 

  Ÿ  

changing political conditions;

 

  Ÿ  

changing laws and policies affecting trade and investment;

 

  Ÿ  

multiple taxation due to different tax structures; and

 

  Ÿ  

the general hazards associated with the assertion of sovereignty over certain areas in which operations are conducted.

Because Cheniere Partners’ reporting currency is the United States dollar, any of its operations conducted outside the United States or denominated in foreign currencies would face additional risks of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. Cheniere Partners would be subject to the impact of foreign currency fluctuations and exchange rate changes on its reporting for results from those operations in its consolidated financial statements.

If Cheniere Partners does not make acquisitions or implement capital expansion projects on economically acceptable terms, its future growth and its ability to increase distributions to its unitholders will be limited.

Cheniere Partners’ ability to grow depends on its ability to make accretive acquisitions or implement accretive capital expansion projects, such as the Liquefaction Project. Cheniere Partners may be unable to make accretive acquisitions or implement accretive capital expansion projects for any of the following reasons:

 

  Ÿ  

if Cheniere Partners is unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them;

 

  Ÿ  

if Cheniere Partners is unable to identify attractive capital expansion projects or negotiate acceptable engineering procurement and construction arrangements for them;

 

  Ÿ  

if Cheniere Partners is unable to obtain necessary governmental approvals;

 

  Ÿ  

if Cheniere Partners is unable to obtain financing for the acquisitions or capital expansion projects on economically acceptable terms, or at all;

 

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  Ÿ  

if Cheniere Partners is unable to secure adequate customer commitments to use the acquired or expansion facilities; or

 

  Ÿ  

if Cheniere Partners is outbid by competitors.

If Cheniere Partners is unable to make accretive acquisitions or implement accretive capital expansion projects, then its future growth and ability to increase distributions to its unitholders will be limited.

Cheniere Partners intends to pursue acquisitions of additional LNG terminals, natural gas pipelines and related assets in the future, either directly from Cheniere or from third parties. However, Cheniere is not obligated to offer Cheniere Partners any of these assets other than, in certain circumstances under an investors rights agreement with Blackstone, its proposed Corpus Christi liquefaction project. If Cheniere does offer Cheniere Partners the opportunity to purchase assets, Cheniere Partners may not be able to successfully negotiate a purchase and sale agreement and related agreements, it may not be able to obtain any required financing for such purchase and it may not be able to obtain any required governmental and third-party consents. The decision whether or not to accept such offer, and to negotiate the terms of such offer, will be made by the conflicts committee of Cheniere Partners’ general partner, which may decline the opportunity to accept such offer for a variety of reasons, including a determination that the acquisition of the assets at the proposed purchase price would not result in an increase, or a sufficient increase, in Cheniere Partners’ adjusted operating surplus per unit within an appropriate timeframe.

If Cheniere Partners makes acquisitions, such acquisitions could adversely affect its business and ability to make distributions to its unitholders.

If Cheniere Partners makes any acquisitions, they will involve potential risks, including:

 

  Ÿ  

an inability to integrate successfully the businesses that Cheniere Partners acquires with its existing business;

 

  Ÿ  

a decrease in its liquidity by using a significant portion of its available cash or borrowing capacity to finance the acquisition;

 

  Ÿ  

the assumption of unknown liabilities;

 

  Ÿ  

limitations on rights to indemnity from the seller;

 

  Ÿ  

mistaken assumptions about the cash generated, or to be generated, by the business acquired or the overall costs of equity or debt;

 

  Ÿ  

the diversion of management’s and employees’ attention from other business concerns; and

 

  Ÿ  

unforeseen difficulties encountered in operating new business segments or in new geographic areas.

If Cheniere Partners consummates any future acquisitions, its capitalization and results of operations may change significantly, and its unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that Cheniere Partners will consider in determining the application of its future funds and other resources. In addition, if Cheniere Partners issues additional Cheniere Partners units in connection with future growth, its existing Cheniere Partners unitholders’ interest in it will be diluted, and distributions to its unitholders may be reduced.

 

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Risks Relating to Cheniere Partners’ Cash Distributions

Cheniere Partners may not be successful in its efforts to maintain or increase its cash available for distribution to cover the distributions on its units.

Cheniere Partners is currently paying the initial quarterly distribution of $0.425 on each of its common units and the related distribution on the general partner units. Cheniere Partners is currently not paying any distributions on the subordinated units. The Class B units are not entitled to receive distributions until they convert into common units. As of July 20, 2013, Cheniere Partners had 57,078,848 common units outstanding. The aggregate initial quarterly distribution on these common units and the related general partner units is approximately $99.0 million per year. Cheniere Partners is not currently generating sufficient operating surplus each quarter to pay the initial quarterly distribution on all of these units and therefore intends to use a portion of its accumulated operating surplus each quarter to enable it to make this distribution. Cheniere Partners may not have sufficient operating surplus to continue paying the initial quarterly distribution on all of its common units before Train 1 and Train 2 commence commercial operations, which is not expected to occur until at least 2016 or thereafter. Furthermore, if Train 1 and Train 2 do not commence commercial operations as expected and the outstanding Class B units convert into common units, Cheniere Partners may not have sufficient operating surplus to be able to pay the initial quarterly distribution on all common units then outstanding.

Accordingly, at least until Train 1 and Train 2 commence commercial operations, the amount of cash that Cheniere Partners can distribute on its common units principally will depend upon the amount of cash that Cheniere Partners generates from its existing operations, which will be based on, among other things:

 

  Ÿ  

performance by counterparties of their obligations under the TUAs;

 

  Ÿ  

performance by Sabine Pass LNG of its obligations under the TUAs;

 

  Ÿ  

performance by, and the level of cash receipts received from, Cheniere Marketing under the VCRA; and

 

  Ÿ  

the level of Cheniere Partners’ operating costs, including payments to its general partner and its affiliates.

In addition, the actual amount of cash that Cheniere Partners will have available for distribution will depend on other factors such as:

 

  Ÿ  

the restrictions contained in its debt agreements and its debt service requirements, including the ability of Sabine Pass LNG to pay distributions to it under the indentures governing the Sabine Pass LNG Senior Notes as a result of requirements for a debt service reserve account, a debt payment account and satisfaction of a fixed charge coverage ratio and the ability of Sabine Pass Liquefaction to pay distributions to it under its credit facilities and the Sabine Pass Liquefaction Senior Notes, all as more fully described below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

 

  Ÿ  

the costs and capital requirements of acquisitions, if any;

 

  Ÿ  

fluctuations in its working capital needs;

 

  Ÿ  

its ability to borrow for working capital or other purposes; and

 

  Ÿ  

the amount, if any, of cash reserves established by its general partner.

Cheniere Partners may not be successful in its efforts to maintain or increase its cash available for distribution to cover the distributions on its units. Any reductions in distributions to Cheniere Partners unitholders because of a shortfall in cash flow or other events will result in a decrease of the

 

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quarterly distribution on its common units below the initial quarterly distribution. Any portion of the initial quarterly distribution that is not distributed on the common units will accrue and be paid to the common unitholders in accordance with the Partnership Agreement, if at all.

The issuance of additional common units will increase the risk that Cheniere Partners will be unable to make the initial quarterly distribution on its common units.

Under the Partnership Agreement, Cheniere Partners has the ability to issue additional common units, as described under “Risks Inherent in Our Investment in Cheniere Partners—Cheniere Partners may issue additional units without our approval, which would dilute our ownership interest in Cheniere Partners.” In the event Cheniere Partners issues additional common units, those units would increase the aggregate impact to Cheniere Partners of paying its quarterly distributions, which may in turn result in Cheniere Partners being unable to pay at least the initial quarterly distribution on its common units. Any inability of Cheniere Partners to continue paying the initial quarterly distribution on its common units would affect the amount of cash that we will be able to pay as dividends to our shareholders.

Cheniere Partners will need to refinance, extend or otherwise satisfy its substantial indebtedness, and principal amortization or other terms of its future indebtedness could limit its ability to pay or increase distributions to its unitholders.

As of December 31, 2012 and June 30, 2013, Cheniere Partners had $2.2 billion and $5.6 billion, respectively, of total consolidated indebtedness (before debt discounts). Approximately $1.7 billion of Cheniere Partners’ indebtedness will mature in 2016, $400.0 million will mature in 2017, $420.0 million will mature in 2020, $2.0 billion will mature in 2021 and $1.0 billion will mature in 2023. In addition, Sabine Pass Liquefaction’s $5.9 billion credit facilities will mature on the earlier of May 28, 2020 or the second anniversary of the Train 4 completion date. Cheniere Partners is not generally required to make principal payments on any of its long-term indebtedness prior to maturity other than its credit facility. Its ability to refinance, extend or otherwise satisfy its indebtedness, and the principal amortization, interest rate and other terms on which Cheniere Partners may be able to do so, will depend among other things on its then contracted or otherwise anticipated future cash flows available for debt service. Cheniere Partners’ TUAs with Total and Chevron, which provide substantially all of its current operating cash flows, will expire in 2029 unless extended. Cheniere Partners’ ability to pay or increase distributions to its unitholders in future years could be limited by principal amortization, interest rate or other terms of its future indebtedness. If Cheniere Partners is unable to refinance, extend or otherwise satisfy its debt as it matures, that would have a material adverse effect on Cheniere Partners’ business, financial condition, operating results and liquidity.

Cheniere Partners’ subsidiaries may be restricted under the terms of their indebtedness from making distributions to Cheniere Partners under certain circumstances, which may limit Cheniere Partners’ ability to pay or increase distributions to its unitholders and could materially and adversely affect the market price of the common units.

The agreements governing Cheniere Partners’ indebtedness restrict payments that its subsidiaries can make to it in certain events and limit the indebtedness that its subsidiaries can incur. For example, Sabine Pass LNG may not make distributions under the indentures governing its senior notes (the “Sabine Pass LNG Indentures”) until, among other requirements, a deposit has been made in an interest payment account for one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment, a deposit has been made to a permanent debt service reserve fund for one semi-annual interest payment and a fixed charge coverage ratio test of 2:1 is satisfied. Sabine Pass Liquefaction is likewise restricted from making distributions under the indentures governing its senior notes until, among other requirements, substantial completion of Train 1 and Train 2 has occurred, deposits are made into debt service reserve accounts and a debt service coverage ratio of 1.25:1.00 is satisfied.

 

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Sabine Pass LNG also is not permitted to make cash distributions if its consolidated cash flow is not at least twice its fixed charges, calculated as required in the Sabine Pass LNG Indentures. In order to satisfy this fixed charge coverage ratio test, Cheniere Partners estimates that Sabine Pass LNG’s consolidated cash flow, as defined in such indentures, must be greater than approximately $340 million. Thus, TUA payments from Sabine Pass Liquefaction and either Chevron or Total are needed to satisfy the test. If the fixed charge coverage ratio test is not satisfied, Sabine Pass LNG will not be permitted by the Sabine Pass LNG Indentures to make distributions to Cheniere Partners, which may prevent Cheniere Partners from making distributions to us and its other unitholders, which could have a material adverse effect on Cheniere Partners’ business, financial condition, operating results, liquidity and prospects.

If the subsidiaries of Cheniere Partners are unable to pay distributions to Cheniere Partners or incur indebtedness as a result of the foregoing restrictions in agreements governing their indebtedness, Cheniere Partners may be inhibited in its ability to pay or increase distributions to its unitholders.

Restrictions in agreements governing the indebtedness of Cheniere Partners’ subsidiaries may prevent its subsidiaries from engaging in certain beneficial transactions.

In addition to restrictions on the ability of Sabine Pass LNG and Sabine Pass Liquefaction to make distributions or incur additional indebtedness, the agreements governing their indebtedness also contain various other covenants that may prevent them from engaging in beneficial transactions, including limitations on their ability to:

 

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make certain investments;

 

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purchase, redeem or retire equity interests;

 

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issue preferred stock;

 

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sell or transfer assets;

 

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incur liens;

 

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enter into transactions with affiliates;

 

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consolidate, merge, sell or lease all or substantially all of its assets; and

 

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enter into sale and leaseback transactions.

Management fees and cost reimbursements due to Cheniere Partners’ general partner and its affiliates will reduce cash available to pay distributions to Cheniere Partners’ unitholders.

Cheniere Partners pays significant management fees to its general partner and its affiliates and reimburses them for expenses incurred on its behalf, which reduces its cash available for distribution to its unitholders. Please read Note 13—“Related Party Transactions” in the Notes to Consolidated Financial Statements of Cheniere Partners for the six months ended June 30, 2013 contained elsewhere in this prospectus for a description of these fees and expenses. Cheniere Partners’ general partner and its affiliates will also be entitled to reimbursement for all other direct expenses that they incur on Cheniere Partners’ behalf. The payment of fees to Cheniere Partners’ general partner and its affiliates and the reimbursement of expenses could adversely affect Cheniere Partners’ ability to pay cash distributions to Cheniere Partners unitholders.

 

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The amount of cash that Cheniere Partners has available for distributions to its unitholders will depend primarily on its cash flow and not solely on profitability.

The amount of cash that Cheniere Partners will have available for distributions will depend primarily on its cash flow, including cash reserves and working capital or other borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, Cheniere Partners may make cash distributions during periods when it records losses, and it may not make cash distributions during periods when it records net income.

As a result of the assignment of the Cheniere Marketing TUA to Cheniere Investments in June 2010, Cheniere Partners’ available cash for distributions was reduced. Therefore, Cheniere Partners has not paid any distributions on its subordinated units with respect to the quarters ended on or after June 30, 2010. Cheniere Partners may not have sufficient cash available for distributions on its subordinated units in the future. Any further reduction in the amount of cash available for distributions could impact Cheniere Partners’ ability to pay the initial quarterly distribution on the common units in full or at all.

Cheniere Partners may not be able to maintain or increase the distributions on the common units and recommence making distributions on the subordinated units unless it is able to make accretive acquisitions or implement accretive capital expansion projects, which may require it to obtain one or more sources of funding.

Cheniere Partners may not be able to make accretive acquisitions or implement accretive capital expansion projects, including its proposed liquefaction facilities, that would result in sufficient cash flow to fully pay distributions to the subordinated unitholder and allow it to maintain or increase common unitholder distributions. To fund acquisitions or capital expansion projects, Cheniere Partners will need to pursue a variety of sources of funding, including debt and/or equity financings. Cheniere Partners’ ability to obtain these or other types of financing will depend, in part, on factors beyond its control, such as its ability to obtain commitments from users of the facilities to be acquired or constructed, the status of various debt and equity markets at the time financing is sought and such markets’ view of its industry and prospects at such time. Any restrictive lending conditions in the U.S. credit markets may make it more time consuming and expensive for Cheniere Partners to obtain financing, if it can obtain such financing at all. Accordingly, Cheniere Partners may not be able to obtain financing for acquisitions or capital expansion projects on terms that are acceptable to it, if at all.

Risks Inherent in Our Investment in Cheniere Partners

Cheniere Partners’ general partner and its affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to the detriment of Cheniere Partners and Cheniere Partners unitholders.

Cheniere owns and, indirectly through us, controls Cheniere Partners’ general partner as described under “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Cheniere GP Holding Company, LLC”, which has sole responsibility for conducting Cheniere Partners’ business and managing its operations. Some of the directors of Cheniere Partners’ general partner are also directors of Cheniere, and certain of its general partner’s officers are officers of Cheniere. Therefore, conflicts of interest may arise between Cheniere and its affiliates, including Cheniere Partners’ general partner, on the one hand, and Cheniere Partners and Cheniere Partners unitholders on the other hand. In resolving these conflicts, Cheniere Partners’ general partner may favor its own interests and the interests of its affiliates over the interests of Cheniere Partners and its unitholders. These conflicts include, among others, the following situations:

 

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neither the Partnership Agreement nor any other agreement requires Cheniere to pursue a business strategy that favors Cheniere Partners. Cheniere’s directors and officers have a

 

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fiduciary duty to make these decisions in favor of the owners of Cheniere, which may be contrary to Cheniere Partners’ interests;

 

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Cheniere Partners’ general partner controls the interpretation and enforcement of contractual obligations between Cheniere Partners, on the one hand, and Cheniere, on the other hand, including provisions governing administrative services and acquisitions;

 

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Cheniere Partners’ general partner is allowed to take into account the interests of parties other than Cheniere Partners, such as Cheniere and its affiliates, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to it and Cheniere Partners unitholders;

 

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Cheniere Partners’ general partner has limited its liability and reduced its fiduciary duties under the Partnership Agreement, while also restricting the remedies available to Cheniere Partners unitholders for actions that, without these limitations, might constitute breaches of fiduciary duty;

 

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Cheniere is not limited in its ability to compete with Cheniere Partners. Please read “—Cheniere is not restricted from competing with Cheniere Partners and is free to develop, operate and dispose of, and is currently developing, LNG facilities, pipelines and other assets without any obligation to offer Cheniere Partners the opportunity to develop or acquire those assets”;

 

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Cheniere Partners’ general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuances of additional partnership securities, and the establishment, increase or decrease in the amounts of reserves, each of which can affect the amount of cash that is distributed to Cheniere Partners unitholders;

 

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Cheniere Partners’ general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to Cheniere Partners unitholders and the ability of the subordinated units to convert into common units;

 

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The Partnership Agreement does not restrict Cheniere Partners’ general partner from causing Cheniere Partners to pay its general partner or its affiliates for any services rendered on terms that are fair and reasonable to Cheniere Partners or entering into additional contractual arrangements with any of these entities on Cheniere Partners’ behalf;

 

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Cheniere Partners’ general partner intends to limit its liability regarding its contractual and other obligations and, in some circumstances, is entitled to be indemnified by Cheniere Partners;

 

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Cheniere Partners’ general partner may exercise its limited right to call and purchase common units if it and its affiliates own more than 80% of the common units; and

 

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Cheniere Partners’ general partner decides whether to retain separate counsel, accountants or others to perform services for Cheniere Partners.

Cheniere Partners expects that there will be additional agreements or arrangements with Cheniere and its affiliates, including future interconnection, natural gas balancing and storage agreements with one or more Cheniere-affiliated natural gas pipelines, services agreements, as well as other agreements and arrangements that cannot now be anticipated. In those circumstances where additional contracts with Cheniere and its affiliates may be necessary or desirable, additional conflicts of interest will be involved.

In the event Cheniere favors its interests over the interests of Cheniere Partners, Cheniere Partners may have less available cash to make distributions on the Cheniere Partners units than it otherwise would have in Cheniere had favored Cheniere Partners’ interests.

 

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Cheniere is not restricted from competing with Cheniere Partners and is free to develop, operate and dispose of, and is currently developing, LNG facilities, pipelines and other assets without any obligation to offer Cheniere Partners the opportunity to develop or acquire those assets.

Cheniere and its affiliates are not prohibited from owning assets or engaging in businesses that compete directly or indirectly with Cheniere Partners. Cheniere may acquire, construct or dispose of its proposed Corpus Christi LNG terminal, its proposed pipelines or any other assets without any obligation to offer Cheniere Partners the opportunity to purchase or construct any of those assets, other than, in certain circumstances under an investors rights agreement with Blackstone, its proposed Corpus Christi liquefaction project. In addition, under the Partnership Agreement, the doctrine of corporate opportunity, or any analogous doctrine, will not apply to Cheniere and its affiliates. As a result, neither Cheniere nor any of its affiliates will have any obligation to present new business opportunities to Cheniere Partners, and they may take advantage of such opportunities themselves. Cheniere also has significantly greater resources and experience than Cheniere Partners has, which may make it more difficult for Cheniere Partners to compete with Cheniere and its affiliates with respect to commercial activities or acquisition candidates.

Cheniere Partners’ Partnership Agreement limits its general partner’s fiduciary duties to Cheniere Partners unitholders and restricts the remedies available to Cheniere Partners unitholders for actions taken by its general partner that might otherwise constitute breaches of fiduciary duty.

The Partnership Agreement contains provisions that reduce the standards to which Cheniere Partners’ general partner would otherwise be held by state fiduciary duty law. For example, the Partnership Agreement:

 

  Ÿ  

permits its general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as its general partner. This entitles its general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, Cheniere Partners, its affiliates or any limited partner. Examples include the exercise of its limited call right, the exercise of its rights to transfer or vote the units it owns, the exercise of its registration rights and its determination whether or not to consent to any merger or consolidation of the partnership or amendment to the Partnership Agreement;

 

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provides that its general partner will not have any liability to Cheniere Partners or Cheniere Partners unitholders for decisions made in its capacity as general partner, as long as it acted in good faith, meaning that it believed the decision was in the best interests of Cheniere Partners;

 

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generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of its general partner and not involving a vote of unitholders must be on terms no less favorable to Cheniere Partners than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to Cheniere Partners and that, in determining whether a transaction or resolution is “fair and reasonable,” its general partner may consider the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or advantageous to Cheniere Partners;

 

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provides that Cheniere Partners’ general partner, its affiliates and their officers and directors will not be liable for monetary damages to Cheniere Partners or Cheniere Partners’ limited partners for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that Cheniere Partners’ general partner or those other persons acted in bad faith or engaged in fraud, willful misconduct or, in the case of a criminal matter, acted with knowledge that such conduct was criminal; and

 

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  Ÿ  

provides that in resolving conflicts of interest, it will be presumed that in making its decision the conflicts committee or the general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or Cheniere Partners, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.

As the owner of limited partner interests, Cheniere Holdings is bound by the provisions of the Partnership Agreement, including the provisions described above.

Even if Cheniere Partners unitholders are dissatisfied, they cannot initially remove Cheniere Partners’ general partner.

The vote of the holders of at least 66 2/3% of all outstanding common units, subordinated units and Class B units (including any units owned by Cheniere Partners’ general partner and its affiliates), voting together as a single class is required to remove Cheniere Partners’ general partner. Affiliates of Cheniere own approximately 57.0% of Cheniere Partners’ outstanding common units, subordinated units and Class B units and, by the terms of our LLC Agreement we are prohibited from voting the Cheniere Partners units that we hold in favor of the removal of Cheniere Partners’ general partner. In addition, if Cheniere Partners’ general partner is removed without cause during the subordination period and units held by its general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically be converted into common units and any existing arrearages on the common units will be extinguished. A removal of Cheniere Partners’ general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until Cheniere Partners had met certain distribution and performance tests.

Cause is narrowly defined in the Partnership Agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding its general partner liable for actual fraud or willful misconduct in its capacity as its general partner. Cause does not include most cases of poor management of the business, so the removal of the general partner because of the unitholders’ dissatisfaction with the performance of Cheniere Partners’ general partner in managing the partnership will most likely result in the termination of the subordination period and conversion of all subordinated units to common units.

Control of Cheniere Partners’ general partner may be transferred to a third party without unitholder consent.

Cheniere Partners’ general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of Cheniere Partners unitholders. Furthermore, the Partnership Agreement does not restrict the ability of the owners of Cheniere Partners’ general partner from transferring all or a portion of their respective ownership interest in Cheniere Partners’ general partner to a third party. The new owners of Cheniere Partners’ general partner would then be in a position to replace the board of directors and officers of Cheniere Partners’ general partner with its own choices and thereby influence the decisions taken by the board of directors and officers.

Cheniere Partners unitholders may not have limited liability if a court finds that unitholder action constitutes control of Cheniere Partners’ business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for contractual obligations of the partnership that are expressly made without recourse to the general partner. Cheniere Partners is organized under Delaware law, and it conducts business in other states. As a limited partner in a partnership organized under Delaware law, holders of the Cheniere Partners units could be held liable for Cheniere Partners’ obligations to the same extent

 

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as a general partner if a court determined that the right or the exercise of the right by the Cheniere Partners unitholders as a group to remove or replace Cheniere Partners’ general partner, to approve some amendments to the Partnership Agreement or to take other action under the Partnership Agreement constituted participation in the “control” of its business. In addition, limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in many jurisdictions.

Cheniere Partners unitholders may have liability to repay distributions wrongfully made.

Under certain circumstances, Cheniere Partners unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Revised Uniform Limited Partnership Act of the State of Delaware (the “LPA”), Cheniere Partners may not make a distribution to Cheniere Partners unitholders if the distribution would cause Cheniere Partners’ liabilities to exceed the fair value of its assets. Delaware law provides that, for a period of three years from the date of the impermissible distribution, partners who received such a distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the partnership for the distribution amount. Liabilities to partners on account of their partner interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted. If we are ever required to repay any distribution that is determined not to have been permitted, that will reduce the amount available for distribution to our shareholders in future quarters.

Cheniere Partners may issue additional units without our approval, which would dilute our ownership interest in Cheniere Partners.

At any time during the subordination period, with the approval of the conflicts committee of the board of directors of its general partner, Cheniere Partners may issue an unlimited number of limited partner interests of any type without the approval of Cheniere Partners unitholders. After the subordination period, Cheniere Partners may issue an unlimited number of limited partner interests of any type without limitation of any kind. The issuance by Cheniere Partners of additional common units or other equity securities of equal or senior rank will have the following effects:

 

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Cheniere Partners unitholders’ proportionate ownership interest in Cheniere Partners will decrease;

 

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the amount of cash available per unit to pay distributions may decrease;

 

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because a lower percentage of total outstanding units will be subordinated units, the risk will increase that a shortfall in the payment of the initial quarterly distributions will be borne by common unitholders;

 

  Ÿ  

the ratio of taxable income to distributions may increase;

 

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the relative voting strength of each previously outstanding unit may be diminished; and

 

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the market price of the common units may decline.

The effects of dilution on the Cheniere Partners units could in turn have an adverse effect on the market price of our shares.

The price of the common units may fluctuate significantly, and we could lose all or part of our investment.

The market price of the common units may be influenced by many factors, some of which are beyond Cheniere Partners’ control, including:

 

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its quarterly distributions;

 

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its quarterly or annual earnings or those of other companies in its industry;

 

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  Ÿ  

actual or potential non-performance by any customer or a counterparty under any agreement;

 

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announcements by it or its competitors of significant contracts;

 

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changes in accounting standards, policies, guidance, interpretations or principles;

 

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general economic conditions;

 

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the failure of securities analysts to cover its common units or changes in financial or other estimates by analysts;

 

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future sales of its common units; and

 

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other factors described in these “Risk Factors.”

If Cheniere Partners’ general partner exercises its limited call right with respect to the Cheniere Partners units and a Cheniere Separation Event has not occurred, we will not be eligible to tender our Cheniere Partners units to Cheniere.

If at any time Cheniere Partners’ general partner and its affiliates own more than 80% of the outstanding Cheniere Partners units, Cheniere Partners’ general partner may elect to purchase all, but not less than all, of the remaining outstanding Cheniere Partners units. Please read “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement—Cheniere Partners’ Partnership Agreement—Limited Call Right.” If Cheniere Partners elects to exercise this limited call right and Cheniere has not ceased to own at least 25% of our outstanding shares or otherwise relinquished the director voting share, we, as an affiliate of Cheniere, would not be eligible to tender our Cheniere Partners units to Cheniere and receive cash consideration. After such a transaction, Cheniere Partners would no longer be required to file current, quarterly or annual reports with the SEC. In addition, because there would no longer be an active trading market for the common units, the value of our Cheniere Partners units could change and such changes may make it difficult for investors to accurately assess the value of our shares. Any of these factors could have an adverse effect on the market price and liquidity of our shares.

Tax Risks to Shareholders

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. Under the Tax Sharing Agreement we expect to enter into with Cheniere in connection with the closing of this offering, 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 carryforward amount). We will generally be required to reimburse Cheniere for any taxes shown on the pro forma tax returns. The initial deemed net operating loss will equal the amount of our gross deferred tax liability for financial reporting purposes immediately prior to the consummation of this offering and will be increased by any current losses or credits that we recognize based on the pro forma tax returns but in no event will the deemed net operating loss carryforward exceed Cheniere’s available net operating loss carryforward. In addition, by virtue of Cheniere’s controlling ownership and the Tax Sharing Agreement, Cheniere will effectively control all of our U.S. tax decisions in connection with any consolidated, combined or unitary income

 

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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. Please read “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Tax Sharing Agreement.”

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 federal, 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 this 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 this offering, we and other members of the Cheniere consolidated group for U.S. federal income tax purposes will participate 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 (the “IRS”) has been requested in connection with the restructuring transactions that will be undertaken prior to and in connection with this offering.

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 entered into prior to and in connection with this offering 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.

 

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The ability to use net operating loss carryforwards and certain other 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 net operating loss carryforwards to annual utilization limitations for federal income tax purposes. Although we do not expect it to, the utilization limitations may affect the timing of when these federal net operating loss 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 these federal net operating loss carryforwards.

Upon a Termination Transaction, we may incur substantial corporate income tax liabilities in the transaction or upon the distribution to you of the proceeds from the transaction, 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. Please read “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement—Cheniere Partners’ Partnership Agreement—Liquidation and Distribution of Proceeds.”

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. Please read “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement—Our Limited Liability Company Agreement—Termination Transactions Involving Cheniere Partners.” We may incur substantial corporate income tax liabilities upon such a transaction or upon our distribution to you of the proceeds of the 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. Please read “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement—Our Limited Liability Company Agreement—Termination Transactions Involving Cheniere Partners.”

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 our Cheniere Partners units.

Your tax gain on the disposition of our shares could be more than expected, or your tax loss on the disposition of our shares could be less than expected.

If you sell your shares, or you receive a liquidating distribution from us, you will recognize a gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized and your tax basis in those shares. Because distributions in excess of your allocable share of our earnings and profits decrease your tax basis in your shares, the amount, if any, of such prior excess distributions with respect to the shares you sell or dispose of will, in effect, become taxable gain to you if you sell such shares at a price greater than your tax basis in those shares, even if the price you receive is less than your original cost. Please read “Material U.S. Federal Income Tax Consequences.”

 

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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, the value of Cheniere Partners units would be substantially reduced and, as a result, the value of our shares would be substantially reduced.

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, and the anticipated benefit of an investment in our shares depends largely upon the value of Cheniere Partners units.

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 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. However, Cheniere Partners has not obtained a ruling from the IRS regarding Cheniere Partners’ treatment as a partnership for U.S. federal income tax purposes. Moreover, current law or the business of Cheniere Partners may change so as to 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 U.S. federal income taxes, state income taxes or similar taxes. For example, from time to time, members of the U.S. Congress propose and consider substantive changes to the existing federal income tax laws that affect certain publicly traded partnerships. We are unable to predict whether any such proposals will ultimately be enacted. However, it is possible that a change in law may 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 U.S. federal income tax purposes, it would be subject to U.S. federal income tax at rates of up to 35% (and a 20% alternative minimum tax in certain cases), and to state income tax at rates that vary from state to state, on its taxable income. Distributions from Cheniere Partners would generally be taxed again as corporate distributions, and no income, gain, loss, deduction or credit would flow through to Cheniere Partners unitholders. Any income taxes or similar taxes imposed on Cheniere Partners as an entity, whether as a result of Cheniere Partners’ treatment as a corporation for U.S. federal income tax purposes or otherwise, would reduce Cheniere Partners’ cash available for distribution to its common unitholders. Any material reduction in the anticipated cash flow and after-tax return to Cheniere Partners unitholders would reduce the value of the Cheniere Partners units we own and the value of our shares. In addition, if Cheniere Partners were treated as a corporation for U.S. federal income tax purposes, that would constitute a Termination Transaction. Please read “Description of Our Company Agreement and Cheniere Partners’ Partnership Agreement—Our Limited Liability Company Agreement—Termination Transactions Involving Cheniere Partners.”

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 are 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

 

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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.

If you are a U.S. holder of our shares, the Form 1099-DIV that you receive from your broker may over-report your dividend income with respect to our shares for U.S. federal income tax purposes, and failure to over-report your dividend income in a manner consistent with the Form 1099-DIV that you receive from your broker may cause the IRS to assert audit adjustments to your U.S. federal income tax return. If you are a non-U.S. holder of our shares, your broker or other withholding agent may overwithhold taxes from dividends paid to you, in which case you would have to file a U.S. tax return if you wanted to claim a refund of the overwithheld tax.

Dividends that we pay with respect to our shares will constitute “dividends” for U.S. federal income tax purposes only to the extent of our current and accumulated earnings and profits. Dividends that we pay in excess of our earnings and profits will not be treated as “dividends” for U.S. federal income tax purposes; instead, they will be treated first as a tax-free return of capital to the extent of your tax basis in your shares and then as capital gain realized on the sale or exchange of such shares. Please read “Material U.S. Federal Income Tax Consequences.” We may be unable to timely determine the portion of our distributions that is a “dividend” for U.S. federal income tax purposes.

If you are a U.S. holder of our shares, we may be unable to persuade brokers to prepare the Form 1099-DIV that they send to you in a manner that is consistent with our determination of the amount that constitutes a “dividend” to you for U.S. federal income tax purposes or you may receive a corrected Form 1099-DIV (and you may therefore need to file an amended federal, state or local income tax return). We will attempt to timely notify you of available information to assist you with your income tax reporting (such as posting the correct information on our website). However, the information that we provide to you may be inconsistent with the amounts reported to you by your broker on Form 1099-DIV, and the IRS may disagree with any such information and may make audit adjustments to your tax return.

If you are a non-U.S. holder of our shares, “dividends” for U.S. federal income tax purposes will be subject to withholding of U.S. federal income tax at a 30% rate (or such lower rate as may be specified by an applicable income tax treaty) unless the dividends are effectively connected with your conduct of a U.S. trade or business. Please read “Material U.S. Federal Income Tax Consequences—Consequences to Non-U.S. Holders.” Because we may be unable to timely determine the portion of our distributions that is a “dividend” for U.S. federal income tax purposes or we may be unable to persuade your broker or withholding agent to withhold taxes from distributions in a manner consistent with our determination of the amount that constitutes a “dividend” for such purposes, your broker or other withholding agent may overwithhold taxes from distributions paid to you. In such a case, you would have to file a U.S. tax return to claim a refund of the overwithheld tax.

 

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USE OF PROCEEDS

We will use the estimated net proceeds of approximately $         from this offering ($         if the underwriters exercise their option to purchase additional shares in full), after deducting underwriting discounts and estimated offering expenses, to:

 

  Ÿ  

repay intercompany indebtedness and payables, in the aggregate amount of approximately $         million; and

 

  Ÿ  

make a distribution to Cheniere with the remaining proceeds.

Immediately prior to the consummation of this offering, we will have approximately $         million of intercompany indebtedness outstanding with a weighted average interest rate of     %. This indebtedness was incurred more than 12 months ago.

Our estimated net proceeds assume an initial public offering price of $         per share and no exercise of the underwriters’ option to purchase additional shares. An increase or decrease in the initial public offering price of $1.00 per share would cause net proceeds from this offering, after deducting underwriting discounts, to increase or decrease by $         million. If our net proceeds are reduced, we will reduce our distribution to Cheniere.

The net proceeds from any exercise by the underwriters of their option to purchase additional shares will be used to redeem from Cheniere a number of shares equal to the number of shares issued upon exercise of the option at a price per share equal to the net proceeds per share in this offering. Accordingly, any exercise of the underwriters’ option will not affect the total number of shares outstanding. Please read “Underwriting.”

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of shares sold in this offering will exceed the pro forma net tangible book value per share after this offering. On a pro forma basis as of June 30, 2013, after giving effect to this offering of shares and the application of the related net proceeds, and assuming the underwriters’ option to purchase additional common units is not exercised, our net tangible book value would have been $         million, or $         per share. Purchasers of shares in this offering will experience substantial and immediate dilution in net tangible book value per share for financial accounting purposes, as illustrated in the following table:

 

Initial public offering price per share

      $                

Net tangible book value per share before this offering(1)

   $                   

Decrease in net tangible book value per share attributable to purchasers in this offering

     
  

 

 

    

Less: Pro forma net tangible book value per share after this offering(2)

     
     

 

 

 

Immediate dilution in tangible net book value per share to purchasers in this offering(3)

      $     
     

 

 

 

 

(1) Determined by dividing the number of shares (            ) owned by Cheniere immediately prior to the consummation of this offering into the net tangible book value of our assets and liabilities.
(2) Determined by dividing the total number of shares to be outstanding after this offering (            ) into our pro forma net tangible book value.
(3) Because the total number of shares outstanding following the consummation of this offering will not be impacted by any exercise of the underwriters’ option to purchase additional shares and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per share to purchasers in this offering due to any such exercise of the underwriters’ option to purchase additional shares.

The following table sets forth the number of shares that we will issue and the total consideration contributed to us by Cheniere and by the purchasers of shares in this offering upon the closing of the transactions contemplated by this prospectus:

 

     Shares Acquired     Total Consideration  
     Number    Percent     Amount
(in thousands)
     Percent  

Cheniere and affiliates(1)(2)(3)

                   $                              

Purchasers in this offering

                                
  

 

  

 

 

   

 

 

    

 

 

 

Total

                   $                   
  

 

  

 

 

   

 

 

    

 

 

 

 

(1) The shares acquired by Cheniere and its affiliates consist of             common shares and one director voting share.
(2) The assets contributed by Cheniere and its affiliates were recorded at historical cost in accordance with generally accepted accounting principles in the United States (“GAAP”). Book value of the consideration provided by Cheniere and its affiliates, as of June 30, 2013, after giving effect to the application of the net proceeds of this offering, would have equaled $         million.
(3) Assumes the underwriters’ option to purchase additional shares is not exercised.

 

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DIVIDEND AND DISTRIBUTION POLICIES

In addition to the following discussion of our dividend policy and Cheniere Partners’ distribution policy, please read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in Cheniere Partners’ business and our shares. For additional information regarding our pro forma financial data and the historical operating results of Cheniere Partners, you should refer to our pro forma financial statements and the historical financial statements of Cheniere Partners included elsewhere in this prospectus.

Our Dividend Policy

Within ten business days after we receive a distribution on our Cheniere Partners units, we will declare dividends on our shares of the cash that we receive as distributions in respect of our Cheniere Partners units, less income taxes and any reserves established by our board of directors to pay company expenses and amounts due under the Services Agreement, to service and reduce indebtedness that we may incur and for general business 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. Please read “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Services Agreement.” If distributions are made on the Cheniere Partners units that we own as of the closing of this offering 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 we will hold immediately after the closing of this offering.

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. Please read “Material U.S. Federal Income Tax Consequences.” 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. We have estimated that for each of the periods ending December 31, 2013 and 2014, we will have no income tax liability on the cash we receive as distributions in respect of our Cheniere Partners units. This estimate is based on a number of assumptions regarding Cheniere Partners’ earnings from its operations, the expected amount of the net operating loss carryforward, the amount of those earnings allocated to us, our income tax liabilities and the amount of the distributions paid to us by Cheniere Partners that may prove incorrect.

Events inconsistent with our assumptions could cause our tax liabilities to be substantially higher than estimated (and, therefore, cause our reserves for taxes to be higher than estimated and dividends on our shares to be lower than estimated). Please read “Material U.S. Federal Income Tax Consequences—Consequences to U.S. Holders—Distributions on the Shares.”

 

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Cheniere Partners’ Distribution Policy and Restrictions on Distributions

You should read the following discussion of Cheniere Partners’ cash distribution policy in conjunction with the specific assumptions included in this section. You should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in Cheniere Partners’ business.

General

Rationale for Cheniere Partners’ Cash Distribution Policy

Cheniere Partners’ cash distribution policy reflects a basic judgment that its unitholders will be better served by Cheniere Partners distributing its cash available after expenses and reserves rather than retaining it. Because Cheniere Partners is not subject to entity level federal income tax, it will have more cash to distribute to its unitholders than would be the case were it subject to tax. Cheniere Partners’ cash distribution policy is consistent with the terms of its Partnership Agreement, which requires that it distribute all of its available cash quarterly.

Limitations on Cheniere Partners’ Ability to Pay Quarterly Distributions

There is no guarantee that unitholders will receive quarterly distributions from Cheniere Partners. Cheniere Partners’ distribution policy may be changed at any time and is subject to certain restrictions and uncertainties, including:

 

  Ÿ  

Cheniere Partners’ ability to pay distributions to its unitholders will depend in part on the performance of Sabine Pass LNG and its ability to distribute funds to Cheniere Partners. In general, Sabine Pass LNG may make distributions under its indentures only if:

 

  Ÿ  

no default or event of default under the indentures has occurred and is continuing or would occur as a consequence of such distribution;

 

  Ÿ  

Sabine Pass LNG would, at the time of such distribution and after giving pro forma effect thereto as if such distribution had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional indebtedness pursuant to the 2.0 to 1.0 fixed charge coverage ratio test described in the indentures;

 

  Ÿ  

Sabine Pass LNG has on deposit in a debt payment account an amount equal to 1/6th of the amount of interest due on the Sabine Pass LNG Senior Notes on the next interest payment date multiplied by the number of elapsed months since the last interest payment date (plus any shortfall from any such month subsequent to the preceding interest payment date); and

 

  Ÿ  

Sabine Pass LNG has on deposit in a debt service reserve account an amount no less than the amount required to make the interest payments on the Sabine Pass LNG Senior Notes on the next succeeding interest payment date.

 

  Ÿ  

Cheniere Partners’ ability to pay distributions to its unitholders will also depend in part on the performance of Sabine Pass Liquefaction and its ability to distribute funds to Cheniere Partners.

 

  Ÿ  

Prior to completion of the first four Trains, Sabine Pass Liquefaction may make distributions under its credit facilities from cash flows generated from sales except sales of LNG permitted or required to be sold pursuant to the BG SPA, Gas Natural Fenosa SPA, GAIL SPA and KOGAS SPA only if:

 

  Ÿ  

no default or event of default under the credit facility has occurred and is continuing or would occur as a consequence of such distribution;

 

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  Ÿ  

Train 1 and Train 2 have been completed and the modifications enabling the Creole Trail Pipeline to transport natural gas to the Sabine Pass LNG terminal have been completed;

 

  Ÿ  

an independent engineer has confirmed that Sabine Pass Liquefaction has sufficient cash on hand, sufficient cash flow expected from the sale of LNG permitted or required to be sold pursuant to the BG SPA, Gas Natural Fenosa SPA, GAIL SPA and KOGAS SPA, and access to other funds to achieve commercial operation of Train 1, Train 2, Train 3 and Train 4;

 

  Ÿ  

an independent engineer has confirmed that Sabine Pass Liquefaction has reserved sufficient funds in a designated reserve account to complete construction of Train 3;

 

  Ÿ  

Sabine Pass Liquefaction has a projected debt service coverage ratio of at least 1.50 to 1.00 for the 12 month period commencing on the first quarterly date on which Sabine Pass Liquefaction is required to pay the principal amortization under its credit facilities, with the calculation of projected cash flows being limited to those generated from sales of LNG permitted or required to be sold pursuant to the BG SPA, Gas Natural Fenosa SPA, GAIL SPA and KOGAS SPA;

 

  Ÿ  

Sabine Pass Liquefaction has on deposit in a debt service reserve account an amount equal to the projected debt service payments with respect to its senior secured debt for the next six months; and

 

  Ÿ  

the aggregate of all outstanding loans and undrawn commitments under its credit facilities is less than $4.0 billion.

 

  Ÿ  

Following the completion of the first four Trains, Sabine Pass Liquefaction may make additional distributions of its cash flow as long as: no default or event of default has occurred and is continuing under its credit facilities; Sabine Pass Liquefaction has achieved a debt service coverage ratio determined as of the end of the most recent calendar quarter of at least 1.25 to 1.00, calculated on a trailing 12 month basis; Sabine Pass Liquefaction has a projected debt service coverage ratio for the next 12 month period of at least 1.25 to 1.00, with the calculation of projected cash flows being limited to those generated from sales of LNG permitted or required to be sold pursuant to the BG SPA, Gas Natural Fenosa SPA, GAIL SPA and KOGAS SPA; Sabine Pass Liquefaction has on deposit in a debt service reserve account an amount equal to the projected debt service payments with respect to its senior secured debt for the next six months; the first principal amortization payment owing under the credit facilities has been paid; any such distribution is paid no later than 25 business days following the last day of the most recent calendar quarter; and any such distribution must be paid prior to the last calendar quarter immediately preceding the maturity date of the credit facilities.

 

  Ÿ  

Cheniere Partners’ ability to pay distributions to its unitholders will also depend on the ability of Sabine Pass Liquefaction to distribute funds to Cheniere Partners under the indenture governing the Sabine Pass Liquefaction Senior Notes. In general, Sabine Pass Liquefaction may make distributions under its indenture as long as: Train 1 and Train 2 have been completed; Sabine Pass Liquefaction has achieved a debt service coverage ratio determined as of the end of the most recent calendar month of at least 1.25 to 1.00, calculated on a trailing 12 month basis; Sabine Pass Liquefaction has a projected debt service coverage ratio for the next 12 month period of at least 1.25 to 1.00; and Sabine Pass Liquefaction has on deposit in a debt service reserve account an amount equal to the projected debt service payments with respect to its senior secured debt for the next six months.

 

  Ÿ  

Cheniere Partners’ ability to pay distributions to its unitholders will also depend on the ability of CTPL to distribute funds to Cheniere Partners under CTPL’s $400 million term loan facility (the “CTPL Credit Facility”). The CTPL Credit Facility does not allow CTPL to make distributions other than the distribution of excess loan proceeds from its credit facility and certain tax distributions.

 

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  Ÿ  

Cheniere Partners may lack sufficient cash to pay distributions to its unitholders due to a number of factors that could adversely affect Cheniere Partners. Please read “Risk Factors” for more information regarding these factors.

 

  Ÿ  

Cheniere Partners’ general partner has broad discretion to establish reserves for the prudent conduct of Cheniere Partners’ business, and the establishment of those reserves could result in a reduction of its cash distributions to its unitholders from levels it currently anticipates pursuant to its stated distribution policy.

 

  Ÿ  

Even if Cheniere Partners’ cash distribution policy is not modified, the amount of distributions that it pays under its cash distribution policy and the decision to pay any distribution is determined by its general partner, taking into consideration the terms of its Partnership Agreement.

 

  Ÿ  

Although the Partnership Agreement requires Cheniere Partners to distribute its available cash, the Partnership Agreement may be amended. During the subordination period, with certain exceptions, the Partnership Agreement may not be amended without the approval of a majority of nonaffiliated common unitholders and nonaffiliated holders of Class B units voting as a class. However, the Partnership Agreement can be amended with the consent of the general partner and the approval of a majority of the outstanding common units and Class B units, voting together as a single class, after the subordination period has ended. Affiliates of Cheniere Partners’ general partner own approximately 28.3% of the outstanding common units and Class B units as of July 20, 2013. If the subordinated units were converted into common units, affiliates of the general partner would own approximately 57.0% of the outstanding common units and Class B units as of July 20, 2013.

 

  Ÿ  

Under Section 17-607 of the LPA, Cheniere Partners may not make a distribution to its unitholders if the distribution would cause its liabilities to exceed the fair value of its assets.

Cheniere Partners’ Cash Distribution Policy May Limit Its Ability to Grow

Cheniere Partners must distribute on a quarterly basis all of its available cash (as defined below under “—How Cheniere Partners Makes Cash Distributions—Distributions of Available Cash—Definition of Available Cash”) to its unitholders. As a result, it expects to rely primarily upon external financing sources, including commercial borrowings and issuances of debt or equity securities, to fund its acquisition and capital investment expenditures. The incurrence of additional commercial borrowings or other debt to finance Cheniere Partners’ operations would result in increased interest expense, which in turn may impact the available cash that it has to distribute to its unitholders. If it is unable to finance growth externally, Cheniere Partners’ cash distribution policy could significantly impair its ability to grow.

Impact of Additional Unit Issuances

After the subordination period, there are no limitations in the Partnership Agreement on Cheniere Partners’ ability to issue additional units, including units ranking senior to the common units. To the extent Cheniere Partners issues additional units, the payment of distributions on those additional units may increase the risk that it will be unable to maintain or increase its per unit distribution level, which in turn may impact the available cash that it has to distribute on each unit.

Cash Distributions

The amount of the initial quarterly distribution on Cheniere Partners’ common units is $0.425 per unit, or $1.70 per year.

 

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Until the end of the subordination period, before Cheniere Partners makes any quarterly distributions to subordinated unitholders, its common unitholders are entitled to receive payment of the full initial quarterly distribution plus any arrearages from prior quarters. Subordinated units do not accrue arrearages. Please read “—How Cheniere Partners Makes Cash Distributions—Subordination Period.”

Cheniere Partners’ general partner is entitled to 2% of all distributions that it makes prior to its liquidation. The general partner’s 2% interest in these distributions may be reduced if Cheniere Partners issues additional units in the future and the general partner does not contribute a proportionate amount of capital to it to maintain its 2% general partner interest. Cheniere Partners’ general partner has the right, but not the obligation, to contribute a proportionate amount of capital to Cheniere Partners to maintain its current general partner interest.

Distributions on the Class B Units

In 2012 and 2013, Cheniere Partners issued Class B units, a new class of equity interests representing limited partner interests in Cheniere Partners, in connection with the development of its project to add liquefaction capabilities adjacent to the Sabine Pass LNG terminal. 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 of the Class B units, and ending on the conversion 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 an additional upward adjustment for certain equity and debt financings. The holders of Class B units will have a preference over the holders of the subordinated units 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.

How Cheniere Partners Makes Cash Distributions

Distributions of Available Cash

General

The Partnership Agreement requires that, within 45 days after the end of each quarter, Cheniere Partners distribute all of its available cash to unitholders of record on the applicable record date. In this section, references to “unitholders” refer to Cheniere Partners’ common unitholders and subordinated unitholders and not to holders of Class B units unless otherwise specified herein.

Definition of Available Cash

Cheniere Partners defines available cash in its Partnership Agreement, and it generally means, for each fiscal quarter, the sum of all cash and cash equivalents on hand at the end of the quarter:

 

  Ÿ  

less the amount of cash reserves established by Cheniere Partners’ general partner to:

 

  Ÿ  

provide for the proper conduct of Cheniere Partners’ business;

 

  Ÿ  

comply with applicable law, any of Cheniere Partners’ debt instruments, or other agreements; and

 

  Ÿ  

provide funds for distributions to Cheniere Partners unitholders and to Cheniere Partners’ general partner for any one or more of the next four quarters;

 

  Ÿ  

plus all additional cash and cash equivalents on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the

 

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quarter. Working capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners and with the intent of the borrower to repay such borrowings within 12 months.

Initial Quarterly Distribution

Cheniere Partners distributes to the holders of common units and subordinated units on a quarterly basis at least the initial quarterly distribution of $0.425 per unit, or $1.70 per year, to the extent that it has sufficient cash from its operations after establishment of cash reserves and payment of fees and expenses, including payments to its general partner. However, there is no guarantee that Cheniere Partners will pay the initial quarterly distribution on the units in any quarter. Even if its cash distribution policy is not modified or revoked, the amount of distributions paid under Cheniere Partners’ policy and the decision to make any distribution is determined by its general partner, taking into consideration the terms of its Partnership Agreement. Cheniere Partners has not paid distributions on its subordinated units since the distribution made with respect to the quarter ended March 31, 2010. Please read “—Cheniere Partners’ Distribution Policy and Restrictions on Distributions” for a discussion of the restrictions that may restrict Cheniere Partners’ ability to make distributions.

General Partner Interest and Incentive Distribution Rights

Cheniere Partners’ general partner is currently entitled to 2% of all quarterly distributions that it makes prior to its liquidation. This general partner interest is represented by 6,893,796 general partner units as of July 20, 2013. Cheniere Partners’ general partner has the right, but not the obligation, to contribute a proportionate amount of capital to Cheniere Partners to maintain its current general partner interest. In connection with the issuances of Class B units prior to the date of this prospectus, Cheniere Partners’ general partner made cash contributions to Cheniere Partners to maintain its 2% general partner interest. Upon the conversion of such Class B units (after taking into account the effect of accretion), Cheniere Partners’ general partner will be issued additional general partner units to maintain its percentage interest without any further capital contribution. The general partner’s 2% interest in these distributions may be reduced if Cheniere Partners issues additional units in the future and Cheniere Partners’ general partner does not contribute a proportionate amount of capital to Cheniere Partners to maintain its 2% general partner interest.

Cheniere Partners’ general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48%, of the cash that Cheniere Partners distributes from operating surplus (as defined below) in excess of $0.489 per unit per quarter. Please read “—Incentive Distribution Rights” for additional information.

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. Please read “—Distributions of Cash Upon Liquidation.”

Operating Surplus and Capital Surplus

Overview

All cash distributed to Cheniere Partners unitholders will be characterized as either “operating surplus” or “capital surplus.” Cheniere Partners treats distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.

 

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Definition of Operating Surplus

Cheniere Partners defines operating surplus in its Partnership Agreement, and for any period it generally means:

 

  Ÿ  

$30 million (as described below); plus

 

  Ÿ  

all of Cheniere Partners’ cash receipts, excluding cash from:

 

  Ÿ  

borrowings that are not working capital borrowings,

 

  Ÿ  

sales of equity securities and debt securities,

 

  Ÿ  

sales or other dispositions of assets outside the ordinary course of business,

 

  Ÿ  

the termination of commodity hedge contracts or interest rate swap agreements prior to the termination date specified therein,

 

  Ÿ  

capital contributions received, and

 

  Ÿ  

corporate reorganizations or restructurings; plus

 

  Ÿ  

working capital borrowings made after the end of a quarter but on or before the date of determination of operating surplus for the quarter; plus

 

  Ÿ  

cash distributions paid on equity issued in connection with the construction or development of a capital improvement or replacement asset during the period beginning on the date that Cheniere Partners enters into a binding commitment to commence the construction or development of such capital improvement or replacement asset and ending on the earlier to occur of the date the capital improvement or replacement asset is placed into service and the date that it is abandoned or disposed of; less

 

  Ÿ  

all of Cheniere Partners’ operating expenditures (as defined below); less

 

  Ÿ  

the amount of cash reserves established by its general partner to provide funds for future operating expenditures; less

 

  Ÿ  

all working capital borrowings not repaid within twelve months after having been incurred or repaid within such twelve-month period with the proceeds of additional working capital borrowings.

If a working capital borrowing, which increases operating surplus, is not repaid during the twelve month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital is in fact repaid, it will not be treated as a reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

Cheniere Partners defines operating expenditures in its Partnership Agreement, and it generally means all of Cheniere Partners’ expenditures, including, but not limited to, taxes, payments to its general partner, reimbursements of expenses incurred by its general partner on Cheniere Partners behalf, non-pro rata repurchases of units, repayment of working capital borrowings, debt service payments, interest payments, payments made in the ordinary course of business under commodity hedge contracts and maintenance capital expenditures, provided that operating expenditures will not include, among others, the following:

 

  Ÿ  

repayment of working capital borrowings deducted from operating surplus pursuant to the last bullet point of the definition of operating surplus above when such repayment actually occurs;

 

  Ÿ  

payments (including prepayments) of principal of and premium on indebtedness other than working capital borrowings;

 

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  Ÿ  

expansion capital expenditures;

 

  Ÿ  

investment capital expenditures;

 

  Ÿ  

payment of transaction expenses (including taxes) relating to interim capital transactions;

 

  Ÿ  

distributions to Cheniere Partners’ partners;

 

  Ÿ  

non-pro rata repurchases of units of any class made with the proceeds of an interim capital transaction (as defined below); and

 

  Ÿ  

cash expenditures made to acquire, own, operate or maintain the operating capacity of the Creole Trail Pipeline prior to the date of first commercial delivery under the Gas Natural Fenosa SPA.

Capital Expenditures

Maintenance capital expenditures are those capital expenditures required to maintain, including over the long-term, Cheniere Partners’ operating capacity or asset base. Maintenance capital expenditures include interest (and related fees) on debt incurred and distributions on equity issued to finance the construction or development of a replacement asset during the period from the date Cheniere Partners enters into a binding obligation to commence constructing or developing a replacement asset until the earlier to occur of the date any such replacement asset is placed into service and the date that it is abandoned or disposed.

Expansion capital expenditures are those capital expenditures that Cheniere Partners expects will increase its operating capacity or asset base. Expansion capital expenditures include interest (and related fees) on debt incurred and distributions on equity issued to finance the construction or development of a capital improvement during the period from the date Cheniere Partners enters into a binding commitment to commence construction or development of a capital improvement until the earlier to occur of the date any such capital improvement is placed into service and the date that it is abandoned or disposed.

Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes, but which is not expected to expand Cheniere Partners’ asset base for more than the short-term.

Neither investment capital expenditures nor expansion capital expenditures are subtracted from operating surplus. Because maintenance capital expenditures and expansion capital expenditures include interest payments (and related fees) on debt incurred and distributions on equity issued to finance the construction or development of a capital improvement or replacement asset during the period from such financing until the earlier to occur of the date any such capital improvement or replacement asset is placed into service or the date that it is abandoned or disposed, such interest payments and equity distributions are also not subtracted from operating surplus (except, in the case of maintenance capital expenditures, to the extent such interest payments and distributions are included in maintenance capital expenditures).

Capital expenditures that are made in part for maintenance capital purposes and in part for investment capital or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditures by Cheniere Partners’ general partner, based upon its good faith determination, subject to concurrence by Cheniere Partners’ conflicts committee.

 

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Definition of Capital Surplus

Cheniere Partners also defines capital surplus in its Partnership Agreement and in “—Characterization of Cash Distributions” below, and it will generally be generated only by the following, which Cheniere Partners calls “interim capital transactions:”

 

  Ÿ  

borrowings other than working capital borrowings;

 

  Ÿ  

sales of debt and equity securities;

 

  Ÿ  

sales or other dispositions of assets for cash, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of normal retirements or replacements of assets;

 

  Ÿ  

the termination of commodity hedge contracts or interest rate swap agreements prior to the termination date specified therein;

 

  Ÿ  

capital contributions received; and

 

  Ÿ  

corporate reorganizations or restructurings.

Characterization of Cash Distributions

The Partnership Agreement requires that Cheniere Partners treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since it began operations equals the operating surplus as of the most recent date of determination of available cash. Cheniere Partners will treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As reflected above, operating surplus includes a $30 million “basket.” This amount does not reflect actual cash on hand that is available for distribution to Cheniere Partners unitholders. It is instead a provision that enables Cheniere Partners, if it chooses, to distribute as operating surplus up to $30 million of cash that it may receive from interim capital transactions that would otherwise be distributed as capital surplus. Cheniere Partners does not anticipate that it will make any distributions from capital surplus.

Subordination Period

General

During the subordination period, the common units have the right to receive distributions of available cash from operating surplus in an amount equal to the initial quarterly distribution of $0.425 per quarter, plus any arrearages in the payment of the initial quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Upon the closing of this offering, we will own all of the 135,383,831 subordinated units, representing 40.1% of the limited partner interests in Cheniere Partners as of July 20, 2013. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units are not entitled to receive any distributions until after the common units have received the initial quarterly distribution plus any arrearages from prior quarters. Furthermore, no arrearages will accrue or be paid on the subordinated units. The practical effect of the subordination period is to increase the likelihood that during this period there will be sufficient available cash to pay the initial quarterly distribution on the common units.

Cheniere Partners has not paid distributions on its subordinated units since the distribution made with respect to the quarter ended March 31, 2010.

 

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Definition of Subordination Period

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:

 

  Ÿ  

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 initial quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

  Ÿ  

the “adjusted operating surplus” (as defined below) 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

 

  Ÿ  

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 unitholders remove Cheniere Partners’ general partner other than for cause and units held by the general partner and its affiliates are not voted in favor of such removal:

 

  Ÿ  

the subordination period will end and each subordinated unit will immediately convert into one common unit;

 

  Ÿ  

any existing arrearages in payment of the initial quarterly distribution on the common units will be extinguished; and

 

  Ÿ  

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:

 

  Ÿ  

in connection with distributions of available cash from operating surplus, the amount of such distributions constituting “contracted adjusted operating surplus” (as defined below) 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;

 

  Ÿ  

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’ general partner deems to be appropriate for the calculation, after consultation with management of the general partner, on a fully diluted basis; and

 

  Ÿ  

there are no arrearages in payment of the initial quarterly distribution on the common units.

 

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Definition of Adjusted Operating Surplus

Cheniere Partners defines adjusted operating surplus in its Partnership Agreement, and for any period, it generally means:

 

  Ÿ  

operating surplus generated with respect to that period; less

 

  Ÿ  

any net increase in working capital borrowings with respect to that period; less

 

  Ÿ  

any net reduction in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

  Ÿ  

any net decrease in working capital borrowings with respect to that period; plus

 

  Ÿ  

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes the $30 million operating surplus “basket,” net increases in working capital borrowings, net drawdowns of reserves of cash generated in prior periods.

Definition of Contracted Adjusted Operating Surplus

Cheniere Partners defines contracted adjusted operating surplus in its Partnership Agreement and it generally means:

 

  Ÿ  

adjusted operating surplus derived solely from SPAs and TUAs, in each case, with a minimum term of three years with counterparties who are not affiliates of Cheniere; and

 

  Ÿ  

excludes revenues and expenses attributable to the portion of payments made under the LNG sale and purchase agreements related to the final settlement price for NYMEX’s Henry Hub natural gas futures contract for the month in which the relevant cargo’s delivery window is scheduled.

Distributions of Available Cash from Operating Surplus During the Subordination Period

Cheniere Partners will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

  Ÿ  

First, 98% to the common unitholders, pro rata, and 2% to its general partner, until it distributes for each outstanding common unit an amount equal to the initial quarterly distribution for that quarter;

 

  Ÿ  

Second, 98% to the common unitholders, pro rata, and 2% to its general partner, until it distributes for each outstanding common unit an amount equal to any arrearages in payment of the initial quarterly distribution on the common units for any prior quarters during the subordination period;

 

  Ÿ  

Third, 98% to the subordinated unitholders, pro rata, and 2% to its general partner, until it distributes for each outstanding subordinated unit an amount equal to the initial quarterly distribution for that quarter; and

 

  Ÿ  

Thereafter, in the manner described in “—Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that Cheniere Partners’ general partner maintains its 2% general partner interest and that Cheniere Partners does not issue additional classes of equity securities.

 

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Distributions of Available Cash from Operating Surplus After the Subordination Period

Cheniere Partners will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

  Ÿ  

First, 98% to all unitholders (other than holders of Class B units), pro rata, and 2% to the general partner, until it distributes for each outstanding unit an amount equal to the initial quarterly distribution for that quarter; and

 

  Ÿ  

Thereafter, in the manner described in “—Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that Cheniere Partners’ general partner maintains its 2% general partner interest and that Cheniere Partners does not issue additional classes of equity securities.

Incentive Distribution Rights

Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus in excess of the initial quarterly distribution. Cheniere Partners’ general partner currently holds the incentive distribution rights but may transfer these rights separately from its general partner interest, subject to restrictions in the Partnership Agreement.

If for any quarter:

 

  Ÿ  

Cheniere Partners has distributed available cash from operating surplus to the unitholders in an amount equal to the initial quarterly distribution; and

 

  Ÿ  

Cheniere Partners has distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the initial quarterly distribution to the common units;

then Cheniere Partners will distribute any additional available cash from operating surplus for that quarter among the unitholders and its general partner in the following manner:

 

  Ÿ  

First, 98% to all unitholders (other than holders of Class B units), pro rata, and 2% to its general partner, until each unitholder receives a total of $0.489 per unit for that quarter (the “first target distribution”);

 

  Ÿ  

Second, 85% to all unitholders (other than holders of Class B units), pro rata, and 15% to its general partner, until each unitholder receives a total of $0.531 per unit for that quarter (the “second target distribution”);

 

  Ÿ  

Third, 75% to all unitholders (other than holders of Class B units), pro rata, and 25% to its general partner, until each unitholder receives a total of $0.638 per unit for that quarter (the “third target distribution”); and

 

  Ÿ  

Thereafter, 50% to all unitholders (other than holders of Class B units), pro rata, and 50% to its general partner.

In each case, the amount of the target distribution set forth above is exclusive of any distributions to common unitholders to eliminate any cumulative arrearages in payment of the initial quarterly distribution to the common unitholders. The preceding discussion is based on the assumptions that Cheniere Partners’ general partner maintains its 2% general partner interest and has not transferred its incentive distribution rights and that Cheniere Partners does not issue additional classes of equity securities. Notwithstanding the foregoing, if Cheniere Partners distributes available cash from operating surplus as a result of the refinancing of its indebtedness for borrowed money, then the holder of the incentive distribution rights will not be entitled to any such distributions with respect thereto.

 

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Percentage Allocations of Available Cash from Operating Surplus

The following table illustrates the percentage allocations of the additional available cash from operating surplus between the unitholders and Cheniere Partners’ general partner up to the various target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of the general partner and the unitholders in any available cash from operating surplus that Cheniere Partners distributes up to and including the corresponding amount in the column “Total Quarterly Distribution,” until available cash from operating surplus that Cheniere Partners distributes reaches the next target distribution level, if any. The percentage interests shown for the unitholders and the general partner for the initial quarterly distribution are also applicable to quarterly distribution amounts that are less than the initial quarterly distribution. The percentage interests set forth below for the general partner include its 2% general partner interest and assume that the general partner maintains its 2% general partner interest and has not transferred its incentive distribution rights.

    

Total Quarterly Distribution

   Marginal Percentage Interest
in Distributions
 
  

Target Amount

   Common and
Subordinated
Unitholders
    General
Partner
 

Initial quarterly distribution

   $0.425      98     2

First target distribution

   above $0.425 up to $0.489      98     2

Second target distribution

   above $0.489 up to $0.531      85     15

Third target distribution

   above $0.531 up to $0.638      75     25

Thereafter

   above $0.638      50     50

Distributions from Capital Surplus

How Distributions from Capital Surplus Will Be Made

Cheniere Partners will make distributions of available cash from capital surplus, if any, in the following manner:

 

  Ÿ  

First, 98% to all unitholders (other than holders of Class B units), pro rata, and 2% to its general partner, until Cheniere Partners distributes for each common unit that was issued in Cheniere Partners’ initial public offering an amount of available cash from capital surplus equal to the initial public offering price;

 

  Ÿ  

Second, 98% to the common unitholders, pro rata, and 2% to its general partner, until Cheniere Partners distributes for each common unit an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the initial quarterly distribution on the common units; and

 

  Ÿ  

Thereafter, Cheniere Partners will make all distributions of available cash from capital surplus as if they were from operating surplus.

The preceding discussion is based on the assumptions that the general partner maintains its 2% general partner interest and that Cheniere Partners does not issue additional classes of equity securities.

Effect of a Distribution from Capital Surplus

The Partnership Agreement treats a distribution of capital surplus as the repayment of the initial unit price from Cheniere Partners’ initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a distribution of capital surplus is made, the initial quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in the

 

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unrecovered initial unit price. Because distributions of capital surplus will reduce the initial quarterly distribution, after any of these distributions are made, it may be easier for Cheniere Partners’ general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the initial quarterly distribution or any arrearages.

Once Cheniere Partners distributes capital surplus on a unit in an amount equal to the initial unit price, it will reduce the initial quarterly distribution and the target distribution levels to zero. Cheniere Partners will then make all future distributions from operating surplus, with 50% being paid to the unitholders, pro rata, and 50% to the general partner. The percentage interests shown for the general partner include its 2% general partner interest and assume that the general partner maintains its 2% general partner interest and has not transferred its incentive distribution rights.

Adjustment to the Initial Quarterly Distribution and Target Distribution Levels

In addition to adjusting the initial quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if Cheniere Partners combines its units into fewer units or subdivides its units into a greater number of units, Cheniere Partners will proportionately adjust:

 

  Ÿ  

the initial quarterly distribution;

 

  Ÿ  

the target distribution levels;

 

  Ÿ  

the unrecovered initial unit price; and

 

  Ÿ  

the number of common units into which a subordinated unit is convertible.

For example, if a two-for-one split of the common units should occur, the initial quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50% of its initial level and each subordinated unit would be convertible into two common units. Cheniere Partners will not make any adjustment by reason of the issuance of additional units for cash or property.

In addition, if legislation is enacted or if existing law is modified or interpreted by a court of competent jurisdiction so that Cheniere Partners becomes taxable as a corporation or otherwise subjects it to a material amount of entity level taxation for federal, state or local income tax purposes, the general partner may reduce the initial quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (after deducting the general partner’s estimate of Cheniere Partners’ aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation) and the denominator of which is the sum of available cash for that quarter plus the general partner’s estimate of Cheniere Partners’ aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in subsequent quarters.

Distributions of Cash Upon Liquidation

General

If Cheniere Partners dissolves in accordance with its Partnership Agreement, it will sell or otherwise dispose of its assets in a process called liquidation. Cheniere Partners will first apply the proceeds of liquidation to the payment of its creditors. Cheniere Partners will distribute any remaining proceeds to the unitholders, including the holders of the Class B units and the general partner in accordance with their capital account balances, as adjusted below to reflect any income, gain, loss and deduction for the current period and gain or loss upon the sale or other disposition of its assets in liquidation.

 

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Cheniere Partners’ allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of Class B units to receive, in preference over the holders of outstanding subordinated units and equal in right to the holders of common units, an amount equal to the issue price of the Class B units multiplied annually by 8.5% during the period beginning on the applicable Class B funding date and ending on the date of liquidation (the “non-converted liquidation value”).

The allocations of gain and loss upon liquidation are further intended, to the extent possible, to entitle the holders of outstanding common units to a preference over the holders of outstanding subordinated units upon Cheniere Partners’ liquidation, to the extent required to permit common unitholders to receive their unrecovered initial unit price plus the initial quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the initial quarterly distribution on the common units. However, there may not be sufficient gain upon Cheniere Partners’ liquidation to enable the holders of Class B units or common units to fully recover all of these amounts, although there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights currently owned by Cheniere Partners’ general partner.

Manner of Adjustments for Gain

The manner of the adjustment for gain is set forth in the Partnership Agreement. In the event of a liquidation, Cheniere Partners will allocate items of its income, gain, loss and deduction to the capital accounts of holders of Class B units such that, to the maximum extent possible, the holders of Class B units would be entitled to receive (equal in right to the holders of common units and prior and in preference to any distributions to the holders of subordinated units) distributions in the following manner:

 

  Ÿ  

First, an amount equal to the then non-converted liquidation value of such Class B units, and

 

  Ÿ  

Second, to each Class B unit and each common unit pro rata until the amount distributed to each common unit and Class B unit equals the issue price of the Class B units.

If Cheniere Partners’ liquidation occurs before the end of the subordination period, it will then allocate any remaining gain to the partners in the following manner:

 

  Ÿ  

First, to the general partner and the holders of units who have negative balances in their capital accounts to the extent of and in proportion to those negative balances;

 

  Ÿ  

Second, 98% to the common unitholders, pro rata, and 2% to the general partner, until the capital account for each common unit is equal to the sum of:

 

  (1) the unrecovered initial unit price;

 

  (2) the amount of the initial quarterly distribution for the quarter during which Cheniere Partners’ liquidation occurs; and

 

  (3) any unpaid arrearages in payment of the initial quarterly distribution;

 

  Ÿ  

Third, 98% to the subordinated unitholders, pro rata, and 2% to the general partner, until the capital account for each subordinated unit is equal to the sum of:

 

  (1) the unrecovered initial unit price; and

 

  (2) the amount of the initial quarterly distribution for the quarter during which Cheniere Partners’ liquidation occurs;

 

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  Ÿ  

Fourth, 98% to all unitholders, pro rata, and 2% to the general partner, until Cheniere Partners allocates under this paragraph an amount per unit equal to:

 

  (1) the sum of the excess of the first target distribution per unit over the initial quarterly distribution per unit for each quarter of Cheniere Partners’ existence; less

 

  (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the initial quarterly distribution per unit that Cheniere Partners distributed 98% to the unitholders, pro rata, and 2% to the general partner, for each quarter of Cheniere Partners’ existence;

 

  Ÿ  

Fifth, 85% to all unitholders, pro rata, and 15% to the general partner, until Cheniere Partners allocates under this paragraph an amount per unit equal to:

 

  (1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of its existence; less

 

  (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that Cheniere Partners distributed 85% to the unitholders, pro rata, and 15% to the general partner for each quarter of Cheniere Partners’ existence;

 

  Ÿ  

Sixth, 75% to all unitholders, pro rata, and 25% to the general partner, until Cheniere Partners allocates under this paragraph an amount per unit equal to:

 

  (1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of its existence; less

 

  (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that Cheniere Partners distributed 75% to the unitholders, pro rata, and 25% to the general partner for each quarter of Cheniere Partners’ existence; and

 

  Ÿ  

Thereafter, 50% to all unitholders, pro rata, and 50% to the general partner.

If the allocations described above would result in the common unitholders not being entitled to receive, in the aggregate, an amount equal to 3% of Cheniere Partners’ assets available for distribution to its partners upon any dissolution and winding up of the partnership (the “common minimum allocation”), items of income, gain, loss and deduction will be reallocated to cause the capital accounts of the common unitholders to equal, in the aggregate, the common minimum allocation.

The percentages set forth above are based on the assumptions that the general partner maintains its 2% general partner interest and has not transferred its incentive distribution rights and that Cheniere Partners does not issue additional classes of equity securities.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the third bullet point above will no longer be applicable.

Manner of Adjustments for Losses

If Cheniere Partners’ liquidation occurs before the end of the subordination period, it will generally allocate any loss to its general partner and the unitholders in the following manner:

 

  Ÿ  

First, 98% to holders of subordinated units in proportion to the positive balances in their capital accounts and 2% to its general partner, until the capital accounts of the subordinated unitholders have been reduced to zero;

 

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  Ÿ  

Second, 98% to the holders of common units in proportion to the positive balances in their capital accounts and 2% to its general partner, until the capital accounts of the common unitholders have been reduced to zero; and

 

  Ÿ  

Thereafter, 100% to its general partner.

The 2% interests set forth in the first and second bullet points above for the general partner are based on the assumptions that the general partner maintains its 2% general partner interest and that Cheniere Partners does not issue additional classes of equity securities.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

Adjustments to Capital Accounts

Cheniere Partners will make adjustments to capital accounts upon the issuance of additional units or upon conversion of the Class B units into common units. In the event of an issuance of additional units, Cheniere Partners will allocate any unrealized and, for tax purposes, unrecognized gain or loss resulting from the adjustments to the unitholders, holders of Class B units and the general partner in the same manner as Cheniere Partners allocates gain or loss upon liquidation. In the event that Cheniere Partners makes positive adjustments to the capital accounts upon the issuance of additional units, it will allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon its liquidation in a manner which results, to the extent possible, in the general partner’s capital account balances equaling the amount which they would have been if no earlier positive adjustments to the capital accounts had been made. Upon conversion of any Class B unit, Cheniere Partners will allocate, to the extent possible, any unrealized gain, and for tax purposes, unrecognized gain or loss resulting from the adjustments to the unitholders, holders of Class B units and the general partner such that (i) the capital account with respect to each converted Class B unit will equal the per unit capital account of a common unit, (ii) the general partner will maintain its percentage interest with respect to any general partner units issued in connection with such conversion, and (iii) any remaining gain or loss will be allocated in the same manner as Cheniere Partners allocates gain or loss upon liquidation.

 

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Cheniere Partners’ Historical Distributions

The following sets forth Cheniere Partners’ historical quarterly distributions on its common units, subordinated units and Class B units for the years ended December 31, 2012 and 2011 and for the six months ended June 30, 2013. Distributions declared during each quarter are presented.

 

     Cash
Distributions
Declared
Per Unit
     Total Distribution (in thousands)  

Quarter

      Common Units      Class B Units      Subordinated Units  

2013:(1)

           

April 1—June 30

   $ 0.425       $ 24,259                   

January 1—March 31

   $ 0.425       $ 24,259                   

2012:

           

October 1—December 31

   $ 0.425       $ 16,783                   

July 1—September 30

   $ 0.425       $ 16,783                   

April 1—June 30

   $ 0.425       $ 13,383                   

January 1—March 31

   $ 0.425       $ 13,323                   

2011:

           

October 1—December 31

   $ 0.425       $ 13,176                   

July 1—September 30

   $ 0.425       $ 13,176                   

April 1—June 30

   $ 0.425       $ 11,446                   

January 1—March 31

   $ 0.425       $ 11,335                   

 

(1) On July 22, 2013, Cheniere Partners declared a cash distribution of $0.425 per common unit, which was paid on August 14, 2013, to unitholders of record at the close of business on August 1, 2013.

 

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SELECTED HISTORICAL FINANCIAL DATA OF CHENIERE HOLDINGS

We are a Delaware limited liability company that, upon consummation of this offering, will own a 55.9% limited partner interest in Cheniere Partners. Our only business will consist of owning Cheniere Partners units, and, accordingly, our results of operations and financial condition will be dependent on the performance of Cheniere Partners. The following tables show our selected pro forma financial data as of and for the six months ended June 30, 2013 and for the year ended December 31, 2012, each of which is derived from the unaudited pro forma financial statements that are included elsewhere in this prospectus.

The following tables also show the selected historical balance sheet of our predecessor, Cheniere Partners, as of the dates and for the periods indicated. The selected historical balance sheet of our predecessor as of December 31, 2012 and 2011 and selected historical statement of operations data for the years ended December 31, 2012 and 2011 are derived from the audited historical financial statements of Cheniere Partners that are included elsewhere in this prospectus. The selected historical financial data of our predecessor as of June 30, 2013 and for the six months ended June 30, 2013 and June 30, 2012 are derived from the unaudited historical financial statements of Cheniere Partners that are included elsewhere in this prospectus. The following tables should be read together with, and are qualified in their entirety by reference to, the audited historical and unaudited interim financial statements and the accompanying notes included elsewhere in this prospectus. The tables should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Cheniere Energy
Partners, L.P.  (Predecessor)
Historical
         Cheniere Energy
Partners LP Holdings, LLC Pro
Forma
 
    Six Months Ended
June 30,
    Year Ended
December 31,
         Six Months
Ended

June 30,
2013
    Year
Ended
December  31,
2012
 
    2013     2012     2012     2011           
    (unaudited)                      (unaudited)  
    (in thousands, except per unit data)  

Statement of Operations Data:

               

Revenues (including transactions with affiliates)

  $ 133,747      $ 130,775      $ 264,498      $ 283,888          $      $   

Expenses (including transactions with affiliates)

    148,503        98,864        226,253        161,803            500        1,000   

Income (loss) from operations

    (14,756     31,911        38,245        122,085            (500     (1,000

Other expense

    (83,987     (87,359     (213,676     (175,645                  

Equity loss from investment in Cheniere Energy Partners, L.P.

                                    (193,443     (479,662

Net loss

    (98,743     (55,448     (175,431     (53,560         (193,943     (480,662

Basic and diluted net income per common unit

  $ 0.21      $ 0.40      $ 0.27      $ 1.23                   

Weighted average number of common units outstanding used for basic and diluted net income per common unit calculation

    51,345        31,173        33,470        27,910                   

Basic and diluted net income per share

            $        $     

Number of shares issued and outstanding at initial public offering

             

 

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     Cheniere Energy
Partners, L.P. (Predecessor)
Historical
          Cheniere
Energy
Partners
LP
Holdings,
LLC Pro
Forma
 
     As of
June 30,
     As of
December 31,
          As of
June 30,
2013
 
     2013      2012      2011          
     (unaudited)                         (unaudited)  
     (in thousands)              

Balance Sheet Data:

               

Cash and cash equivalents

   $ 355,304       $ 419,292       $ 81,415           $         —   

Restricted cash and cash equivalents (current)

     533,057         92,519         13,732               

Non-current restricted cash and cash equivalents

     1,777,749         272,425         82,394               

Property, plant and equipment, net

     4,831,351         3,219,592         2,044,020               

Total assets

     8,011,598         4,265,787         2,267,990               

Long-term debt, net of discount

     5,572,008         2,167,113         2,192,418               

Long-term deferred revenue

     19,500         21,500         25,500               

Long-term deferred revenue–affiliate

     17,173         14,720         12,266               

Total equity (deficit)

     1,848,454         1,879,978         (14,411            

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion analyzes the financial condition and results of operations of Cheniere Holdings and Cheniere Partners. The historical financial statements and the unaudited interim financial statements included in this prospectus reflect the assets, liabilities and operations of Cheniere Partners. You should read the following discussion and analysis of financial condition and results of operations of Cheniere Holdings and Cheniere Partners in conjunction with the historical financial statements, the unaudited interim financial statements, and the notes thereto, included elsewhere in this prospectus.

Cheniere Holdings

We are a recently formed limited liability company that has elected to be treated as a corporation for U.S. federal income tax purposes.

Our Business

Our primary business purpose is to:

 

  Ÿ  

own and hold Cheniere Partners units;

 

  Ÿ  

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 to pay our company expenses and amounts due under our Services Agreement, to service and reduce indebtedness that we may incur and for general business purposes, in each case as permitted by our LLC Agreement;

 

  Ÿ  

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

 

  Ÿ  

designate members of the board of directors of Cheniere Partners’ general partner to oversee the operations of Cheniere Partners as described under “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Cheniere GP Holding Company, LLC.”

Our Relationship with Cheniere Partners

Upon completion of this offering, we will own common units, Class B units and subordinated units representing an aggregate of approximately 55.9% of the outstanding Cheniere Partners units. As a result of our non-economic voting interest in GP Holdco, we control GP Holdco and indirectly control the appointment of four of the eleven members of the board of directors of Cheniere Partners’ general partner as described under “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Cheniere GP Holding Company, LLC.” Because our only assets are limited partner interests in Cheniere Partners and our results of operations are therefore dependent on the results of operations and financial condition of Cheniere Partners, we believe that the discussion and analysis of Cheniere Partners’ financial condition and operations is important to our shareholders. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cheniere Partners.”

Liquidity and Capital Resources

At July 29, 2013, our capitalization consisted of $1,000 that Cheniere has agreed to contribute to us in connection with our formation in exchange for all of our membership interests. After giving effect to a     -to-1 split of our common shares to be effected prior to the closing of this offering, our capital

 

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structure will consist only of common shares, of which                      will be owned by Cheniere (or                      if the underwriters exercise their option to purchase additional shares in full) and                      will be sold by us in this offering (or                      if the underwriters exercise their option to purchase additional shares in full), and our director voting share, which will initially be held by Cheniere. We are authorized to issue an unlimited number of additional common shares. Additional classes or series of securities may be created with the approval of the board, provided that any such additional class or series must be approved by a vote of holders of a majority of our outstanding shares. Our shareholders will not have preemptive or preferential rights to acquire additional shares or other securities of us.

Cheniere has agreed to provide certain general and administrative services pursuant to the Services Agreement. We will pay a fixed fee of $         per year (payable quarterly in installments of $         per quarter, in arrears) for certain general and administrative services including the services of our directors and executive officers who are also directors and executive officers of Cheniere. In addition, we will pay directly for, or reimburse Cheniere for, certain third-party expenses, including financial, legal, accounting, tax advisory and financial advisory services, any expenses incurred in connection with printing costs and other administrative and out-of-pocket expenses, and any other expenses that are incurred in connection with this offering or as a result of being a publicly traded entity, including costs associated with annual, quarterly and other reports to our shareholders, tax return and Form 1099-DIV preparation and distribution, exchange listing fees, printing costs, limited liability company governance and compliance expenses and registrar and transfer agent fees. Cheniere will also provide us with cash management services, including treasury services with respect to the payment of dividends and allocation of reserves for taxes. Please read “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere.”

Our LLC Agreement requires us to declare 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 of directors, within ten business days after we receive such distributions.

We believe that the cash distributions we will receive on our Cheniere Partners units will be sufficient to fund fees and expenses due under the Services Agreement and our working capital requirements for the next twelve months.

Results of Operations

Upon completion of the initial public offering of our shares, our results of operations will consist of our equity in earnings of Cheniere Partners. Our equity ownership in Cheniere Partners will consist of 11,963,488 common units, 45,333,334 Class B units and 135,383,831 subordinated units.

In addition to the Cheniere Partners units, we will also own a non-economic voting interest in GP Holdco. 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’ general partner to oversee the operations of Cheniere Partners. Please read “Certain Relationships and Related Party Transactions—Our Relationship with Cheniere—Cheniere GP Holding Company, LLC.” 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 thus we have no variable interest in GP Holdco, we have determined that we cannot consolidate Cheniere Partners and must account for our investment in the Cheniere Partners units that we own using the equity method of accounting.

The equity method of accounting requires that our investment in Cheniere Partners be shown in the balance sheet as a single amount. Our initial investment in Cheniere Partners is recognized at cost,

 

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and this carrying amount is increased or decreased to recognize our share of the income or loss of Cheniere Partners after the date of our initial investment in the Cheniere Partners units. Our share of Cheniere Partners’ income or loss is recognized in our statement of operations. Distributions received from Cheniere Partners reduce the carrying amount of our investment in Cheniere Partners. As a result of our historical negative investment in Cheniere Partners, we have suspended the use of the equity method for losses. On a pro forma basis, 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 as of June 30, 2013, we have suspended losses of approximately $120 million. Additional equity method losses that we incur will be credited directly to the suspended loss account. We will recognize all distributions that we receive as a loss on our statement of operations and a corresponding entry will be made to the suspended loss account. Only when we have recovered all losses through future earnings will equity income be reported on the statement of operations.

JOBS Act

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.0 billion will, in general, qualify as an “emerging growth company” until the earliest of:

 

  Ÿ  

the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

 

  Ÿ  

the last day of its fiscal year in which it has annual gross revenue of $1.0 billion or more;

 

  Ÿ  

the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

 

  Ÿ  

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (a) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (b) has been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (c) has filed at least one annual report pursuant to the Exchange Act.

Under this definition, we will be an “emerging growth company” upon completion of this offering and could remain an emerging growth company until as late as December 31, 2018.

As an “emerging growth company,” we have chosen to rely on such exemptions and are therefore not required, among other things to, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation.

Critical Accounting Policies

As an “emerging growth company,” we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

 

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Cheniere Partners

Introduction

The following discussion and analysis presents the view of Cheniere Partners’ management regarding its business, financial condition and overall performance and should be read in conjunction with its annual and quarterly Consolidated Financial Statements included elsewhere in this prospectus and the accompanying notes. This information is intended to provide investors with an understanding of Cheniere Partners’ past performance, current financial condition and outlook for the future. Cheniere Partners’ discussion and analysis includes the following subjects:

 

  Ÿ  

Overview of Business

 

  Ÿ  

Overview of Significant Events

 

  Ÿ  

Liquidity and Capital Resources

 

  Ÿ  

Contractual Obligations

 

  Ÿ  

Results of Operations

 

  Ÿ  

Off-Balance Sheet Arrangements

 

  Ÿ  

Summary of Critical Accounting Policies and Estimates

 

  Ÿ  

Recent Accounting Standards

Overview of Business

Cheniere Partners is a Delaware limited partnership formed by Cheniere. Through its wholly owned subsidiary, Sabine Pass LNG, it owns and operates the regasification facilities at the Sabine Pass LNG terminal located on the Sabine Pass deep water shipping channel less than four miles from the Gulf Coast. The Sabine Pass LNG terminal includes existing infrastructure of five LNG storage tanks with capacity of approximately 16.9 Bcfe, two docks that can accommodate vessels of up to 265,000 cubic meter capacity and vaporizers with regasification capacity of approximately 4.0 Bcf/d. Approximately one-half of the receiving capacity at the Sabine Pass LNG terminal is contracted to two multinational energy companies. Cheniere Partners is developing the Liquefaction Project at the Sabine Pass LNG terminal adjacent to the existing regasification facilities through a wholly owned subsidiary, Sabine Pass Liquefaction. Cheniere Partners plans to construct up to six Trains, which are in various stages of development. Each Train is expected to have a nominal production capacity of approximately 4.5 mtpa of LNG. Cheniere Partners also owns the 94-mile long Creole Trail Pipeline through its wholly owned subsidiary, CTPL, which interconnects the Sabine Pass LNG terminal with a number of large interstate pipelines.

Overview of Significant Events

Cheniere Partners’ significant accomplishments since January 1, 2013 and through the date of this prospectus include the following:

 

  Ÿ  

Sabine Pass Liquefaction issued an aggregate principal amount of $2.0 billion of 5.625% Senior Secured Notes due 2021 (the “2021 Sabine Pass Liquefaction Senior Notes”) and an aggregate principal amount of $1.0 billion of 5.625% Senior Secured Notes due 2023 (the “2023 Sabine Pass Liquefaction Senior Notes”). Net proceeds from those offerings are intended to be used to pay a portion of the capital costs incurred in connection with the construction of the Liquefaction Project;

 

  Ÿ  

Cheniere Partners sold 17.6 million common units to institutional investors for net proceeds, after deducting expenses, of $372.4 million, which includes the general partner’s proportionate capital contribution of approximately $7.4 million. Cheniere Partners used the proceeds from that offering to purchase the Creole Trail Pipeline Business;

 

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  Ÿ  

Sabine Pass Liquefaction entered into four credit facilities totaling $5.9 billion to be used for costs associated with Train 1 through Train 4 of the Liquefaction Project;

 

  Ÿ  

Sabine Pass Liquefaction issued a notice to proceed to Bechtel under the EPC Contract (Trains 3 and 4);

 

  Ÿ  

Sabine Pass Liquefaction entered into the Centrica SPA that commences upon the date of first commercial delivery for Train 5 and includes an annual contract quantity of 91.25 million MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of $274.0 million;

 

  Ÿ  

Cheniere Partners completed the acquisition of 100% of the equity interests in Cheniere Pipeline GP Interests, LLC held by Cheniere Pipeline Company, and the limited partner interest in CTPL held by Grand Cheniere Pipeline, LLC (the “Creole Trail Pipeline Business”). In May 2013, Cheniere Partners completed the acquisition of the Creole Trail Pipeline Business for $480.0 million and reimbursed Cheniere $13.9 million for certain expenditures incurred prior to the closing date. Concurrent with the Creole Trail Pipeline Business acquisition closing, Cheniere Partners issued 12.0 million Class B units to Cheniere for aggregate consideration of $180.0 million pursuant to a unit purchase agreement with Cheniere Class B Units Holdings, LLC, a wholly owned subsidiary of Cheniere. As a result of the two transactions, Cheniere Partners paid Cheniere net cash of $313.9 million;

 

  Ÿ  

CTPL entered into a $400.0 million term loan credit facility to fund capital expenditures on the Creole Trail Pipeline and for general business purposes; and

 

  Ÿ  

Cheniere Partners entered into an equity distribution agreement with Mizuho Securities USA Inc., under which Cheniere Partners may sell up to $500.0 million of common units through an at-the-market program.

Liquidity and Capital Resources

Cash and Cash Equivalents

As of June 30, 2013, Cheniere Partners had $355.3 million of cash and cash equivalents and $2,310.8 million of restricted cash and cash equivalents.

Sabine Pass LNG Terminal

Regasification Facilities

The Sabine Pass LNG terminal has operational regasification capacity of approximately 4.0 Bcf/d and aggregate LNG storage capacity of approximately 16.9 Bcfe. Approximately 2.0 Bcf/d of the regasification capacity at the Sabine Pass LNG terminal has been reserved under two long-term third-party TUAs, under which Sabine Pass LNG’s customers are required to pay fixed monthly fees, whether or not they use the LNG terminal. Capacity reservation fee TUA payments are made by Sabine Pass LNG’s third-party TUA customers as follows:

 

  Ÿ  

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

 

  Ÿ  

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

 

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The remaining approximately 2.0 Bcf/d of capacity has been reserved under a TUA by Sabine Pass Liquefaction. Sabine Pass Liquefaction is obligated to make monthly capacity payments to Sabine Pass LNG aggregating approximately $250 million annually, continuing until at least 20 years after Sabine Pass Liquefaction delivers its first commercial cargo at Sabine Pass Liquefaction’s facilities under construction, which may occur as early as late 2015. Cheniere Investments, Sabine Pass Liquefaction and Sabine Pass LNG entered into a TURA pursuant to which Cheniere Investments has the right to use Sabine Pass Liquefaction’s reserved capacity under the TUA and has the obligation to make the monthly capacity payments required by the TUA to Sabine Pass LNG. In an effort to utilize Cheniere Investments’ reserved capacity under its TURA during construction of the Liquefaction Project, Cheniere Marketing has entered into an amended and restated VCRA pursuant to which Cheniere Marketing is obligated to pay Cheniere Investments 80% of the expected gross margin of each cargo of LNG that Cheniere Marketing arranges for delivery to the Sabine Pass LNG terminal. The revenue earned by Sabine Pass LNG from the capacity payments made under the TUA and the loss incurred by Cheniere Investments under the TURA are eliminated upon consolidation of Cheniere Partners’ financial statements. Cheniere Partners has guaranteed the obligations of Sabine Pass Liquefaction under its TUA and the obligations of Cheniere Investments under the TURA.

In September 2012, Sabine Pass Liquefaction entered into a partial TUA assignment agreement with Total, whereby Sabine Pass Liquefaction will progressively gain access to Total’s capacity and other services provided under Total’s TUA with Sabine Pass LNG. This agreement will provide Sabine Pass Liquefaction with additional berthing and storage capacity at the Sabine Pass LNG terminal that may be used to accommodate the development of Train 5 and Train 6, provide increased flexibility in managing LNG cargo loading and unloading activity starting with the commencement of commercial operations of Train 3, and permit Sabine Pass Liquefaction to more flexibly manage its LNG storage capacity with the commencement of Train 1. Notwithstanding any arrangements between Total and Sabine Pass Liquefaction, payments required to be made by Total to Sabine Pass LNG will continue to be made by Total to Sabine Pass LNG in accordance with its TUA.

Under each of these TUAs, Sabine Pass LNG is entitled to retain 2% of the LNG delivered to the Sabine Pass LNG terminal.

Liquefaction Facilities

The Liquefaction Project is being developed at the Sabine Pass LNG terminal adjacent to the existing regasification facilities. Cheniere Partners plans to construct up to six Trains, which are in various stages of development. In August 2012, Cheniere Partners commenced construction of Train 1 and Train 2 and the related new facilities needed to treat, liquefy, store and export natural gas. In May 2013, Cheniere Partners commenced construction of Train 3 and Train 4 and the related facilities. Cheniere Partners is developing Train 5 and Train 6 and commenced the regulatory approval process for these Trains in February 2013. The Trains are being designed, constructed and commissioned by Bechtel using the ConocoPhillips Optimized Cascade® technology, a proven technology deployed in numerous LNG projects around the world. Sabine Pass Liquefaction has entered the EPC Contract (Trains 1 and 2) and EPC Contract (Trains 3 and 4) with Bechtel in November 2011 and December 2012, respectively.

Sabine Pass Liquefaction has received authorization from the FERC to site, construct and operate Train 1, Train 2, Train 3 and Train 4. Sabine Pass Liquefaction has also received authorization from the FERC to begin the pre-filing review process for the development of the additional two Trains. The DOE has granted Sabine Pass Liquefaction an order authorizing the export of up to the equivalent of 16 mtpa (approximately 803 Bcf/yr) of LNG to all nations with which trade is permitted for a 20-year term beginning on the earlier of the date of first export from Train 1 or August 7, 2017. The DOE further issued two orders authorizing the export of an additional 189.3 Bcf/yr in total of domestically produced LNG from the Sabine Pass LNG terminal to FTA countries for a 20-year term. One order authorized the

 

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export of 101 Bcf/yr of domestically produced LNG pursuant to the SPA with Total, beginning on the earlier of the date of first export from Train 5 or July 11, 2021; and the other order authorized the export of 88.3 Bcf/yr of domestically produced LNG pursuant to the SPA with Centrica, beginning on the earlier of the date of first export from Train 5 or July 12, 2021.

As of July 31, 2013, the overall project completion for Train 1 and Train 2 of the Liquefaction Project was approximately 40%, which is ahead of the contractual schedule. Based on Cheniere Partners’ current construction schedule, Cheniere Partners anticipates that Train 1 will produce LNG as early as late 2015, with commercial operations expected to commence in February 2016, and Trains 2 through Train 5 are expected to commence operations on a staggered basis thereafter.

Customers

Sabine Pass Liquefaction has entered into six fixed price, 20-year SPAs with third parties that in the aggregate equate to approximately 19.75 mtpa of LNG, which represents approximately 88% of the anticipated nominal production capacity of Train 1 through Train 5. Under the SPAs, the customers will purchase LNG from Cheniere Partners on an FOB basis for a price consisting of a fixed fee plus 115% of Henry Hub per MMBtu of LNG. In certain circumstances, the customers may elect to cancel or suspend deliveries of LNG cargoes, in which case the customers would still be required to pay the fixed fee with respect to cargoes that are not delivered. A portion of the fixed fee will be subject to annual adjustment for inflation. The SPAs and contracted volumes to be made available under the SPAs are not tied to a specific Train; however, the term of each SPA commences upon the start of operations of the specified Train.

As of the date of this prospectus, Sabine Pass Liquefaction has the following third-party SPAs:

 

  Ÿ  

The BG SPA commences upon the date of first commercial delivery for Train 1 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $2.25 per MMBtu and includes additional annual contract quantities of 36,500,000 MMBtu, 34,000,000 MMBtu, and 33,500,000 MMBtu upon the date of first commercial delivery for Train 2, Train 3 and Train 4, respectively, with a fixed fee of $3.00 per MMBtu. The total expected annual contracted cash flow from BG from fixed fees is approximately $723 million. In addition, Sabine Pass Liquefaction has agreed to make up to 500,000 MMbtu/d of LNG available to BG to the extent that Train 1 becomes commercially operable prior to the beginning of the first delivery window with a fixed fee of $2.25 per MMBtu, if produced. The obligations of BG are guaranteed by BG Energy Holdings Limited, a company organized under the laws of England and Wales.

 

  Ÿ  

The Gas Natural Fenosa SPA commences upon the date of first commercial delivery for Train 2 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $2.49 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $454 million. In addition, Sabine Pass Liquefaction has agreed to make up to 285,000 MMBtu/d of LNG available to Gas Natural Fenosa to the extent that Train 2 becomes commercially operable prior to the beginning of the first delivery window with a fixed fee of $2.49 per MMBtu, if produced. The obligations of Gas Natural Fenosa are guaranteed by Gas Natural SDG S.A., a company organized under the laws of Spain.

 

  Ÿ  

The KOGAS SPA commences upon the date of first commercial delivery for Train 3 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $548 million. KOGAS is organized under the laws of the Republic of Korea.

 

  Ÿ  

The GAIL SPA commences upon the date of first commercial delivery for Train 4 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $548 million. GAIL is organized under the laws of India.

 

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  Ÿ  

The Total SPA commences upon the date of first commercial delivery for Train 5 and includes an annual contract quantity of 104,750,000 MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $314 million. The obligations of Total are guaranteed by Total S.A., a company organized under the laws of France.

 

  Ÿ  

The Centrica SPA commences upon the date of first commercial delivery for Train 5 and includes an annual contract quantity of 91,250,000 MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of approximately $274 million. Centrica is organized under the laws of England and Wales.

In aggregate, the fixed fee portion to be paid by these customers is approximately $2.3 billion annually for Trains 1 through 4, and $2.9 billion annually if Cheniere Partners makes a positive final investment decision with respect to Train 5, with the applicable fixed fees starting from the commencement of commercial operations for the applicable Train. These fixed fees equal approximately $411 million, $564 million, $650 million, $648 million and $588 million for each respective Train.

In addition, Cheniere Marketing has entered into an SPA with Sabine Pass Liquefaction to purchase, at Cheniere Marketing’s option, up to 104,000,000 MMBtu/yr of LNG produced from Trains 1 through 4. Sabine Pass Liquefaction has the right each year during the term to reduce the annual contract quantity based on its assessment of how much LNG it can produce in excess of that required for other customers. Cheniere Marketing may purchase incremental LNG volumes at a price of 115% of Henry Hub: plus up to $3.00 per MMBtu for the most profitable 36,000,000 MMBtu of cargoes sold each year by Cheniere Marketing; and then 20% of net profits of the remaining 68,000,000 MMBtu sold each year by Cheniere Marketing.

Construction

In November 2011, Sabine Pass Liquefaction entered into the EPC Contract (Trains 1 and 2) with Bechtel. Sabine Pass Liquefaction issued a notice to proceed with construction under the EPC Contract (Trains 1 and 2) in August 2012. In December 2012, Sabine Pass Liquefaction entered into the EPC Contract (Trains 3 and 4) with Bechtel. Sabine Pass Liquefaction issued a notice to proceed with construction under the EPC Contract (Trains 3 and 4) in May 2013. The Trains are in various stages of development, as described below under “Business—Cheniere Partners—Business—Liquefaction Facilities.”

The total contract price of the EPC Contract (Trains 1 and 2) and the total contract price of the EPC Contract (Trains 3 and 4) is approximately $4.0 billion and $3.8 billion, respectively, reflecting amounts incurred under change orders through June 30, 2013. Total expected capital costs for Trains 1 through 4 are estimated to be between $9.0 billion and $10.0 billion before financing costs, and between $12.0 billion and $13.0 billion after financing costs, including, in each case, estimated owner’s costs and contingencies. Sabine Pass Liquefaction’s Trains will require significant amounts of capital to construct and operate and are subject to risks and delays in completion.

The liquefaction technology to be employed under the EPC Contracts is the ConocoPhillips Optimized Cascade® Process, which was first used at the ConocoPhillips Petroleum Kenai plant built by Bechtel in 1969 in Kenai, Alaska. Bechtel has since designed and/or constructed LNG facilities using the ConocoPhillips Optimized Cascade® technology in Angola, Australia, Egypt, Equatorial Guinea and Trinidad. The design and technology has been proven in over four decades of operation.

Cheniere Partners currently expects that Sabine Pass Liquefaction’s capital resources requirements with respect to Train 1 through Train 4 will be financed through borrowings, equity contributions from Cheniere Partners and cash flows under the SPAs. Cheniere Partners believes that

 

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with the net proceeds of borrowings and unfunded commitments under the 2013 Liquefaction Credit Facilities (as defined below), Sabine Pass Liquefaction will have adequate financial resources available to complete Train 1 through Train 4 and to meet its currently anticipated capital, operating and debt service requirements. Cheniere Partners currently projects that Sabine Pass Liquefaction will generate cash flow by late 2015, when Train 1 is anticipated to achieve initial LNG production.

Pipeline Facilities

CTPL owns the Creole Trail Pipeline, a 94-mile pipeline interconnecting the Sabine Pass LNG terminal with a number of large interstate pipelines, including Natural Gas Pipeline Company of America, Transcontinental Gas Pipeline Corporation, Tennessee Gas Pipeline Company, Florida Gas Transmission Company, Texas Eastern Gas Transmission, and Trunkline Gas Company, as well as the intrastate pipeline system of Bridgeline Holdings, L.P. Sabine Pass Liquefaction has entered into transportation precedent agreements to secure firm pipeline transportation capacity with CTPL and two other pipeline companies.

CTPL will need to obtain the FERC’s approval prior to making any modifications to the Creole Trail Pipeline as it is a regulated, interstate pipeline. An application for authorization to construct, own, operate and maintain certain new facilities in order to enable bi-directional natural gas flow on the Creole Trail Pipeline system was submitted to the FERC by CTPL in April 2012. In February 2013, the FERC approved the proposed project, and a request for rehearing and stay of this approval is currently pending before the FERC. Final FERC approval is expected to be received during the third quarter of 2013. In addition, in April 2012, CTPL applied for new permits from the Louisiana Department of Environmental Quality for the proposed modifications to the Creole Trail Pipeline system. Cheniere Partners anticipates, but cannot guarantee, that these permits will be issued in the second half of 2013. Cheniere Partners estimates the capital costs to modify the Creole Trail Pipeline will be approximately $100 million. The modifications are expected to be in service in time for the commissioning and testing of Trains 1 and 2.

Capital Resources

Senior Secured Notes

Cheniere Partners currently has four series of senior notes outstanding:

 

  Ÿ  

$1,665.5 million of 7.50% Senior Secured Notes due 2016 issued by Sabine Pass LNG (the “2016 Notes”);

 

  Ÿ  

$420.0 million of 6.50% Senior Secured Notes due 2020 issued by Sabine Pass LNG (the “2020 Notes” and collectively with the 2016 Notes, the “Sabine Pass LNG Senior Notes”);

 

  Ÿ  

$2,000.0 million of the 2021 Sabine Pass Liquefaction Senior Notes; and

 

  Ÿ  

$1,000.0 million of the 2023 Sabine Pass Liquefaction Senior Notes (collectively with the 2021 Sabine Pass Liquefaction Notes, the “Sabine Pass Liquefaction Senior Notes”).

Interest on the 2016 Notes is payable semi-annually in arrears on May 30 and November 30 of each year, interest on the 2020 Notes is payable semi-annually in arrears on May 1 and November 1 of each year, interest on the 2021 Sabine Pass Liquefaction Senior Notes is payable semi-annually in arrears on February 1 and August 1 of each year and interest on the 2023 Sabine Pass Liquefaction Senior Notes is payable semi-annually in arrears on April 15 and October 15 of each year. Subject to permitted liens, the Sabine Pass LNG Senior Notes are secured on a pari passu first-priority basis by a security interest in all of Sabine Pass LNG’s equity interests and substantially all of Sabine Pass LNG’s operating assets, and the Sabine Pass Liquefaction Senior Notes are secured on a first-priority basis by a security interest in all of the membership interests in Sabine Pass Liquefaction and substantially all of Sabine Pass Liquefaction’s assets.

 

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Sabine Pass LNG may redeem some or all of its 2016 Notes at any time, and from time to time, at the redemption prices specified in the indenture governing the 2016 Notes, plus accrued and unpaid interest, if any, to the date of redemption. Sabine Pass LNG may redeem some or all of the 2020 Notes at any time on or after November 1, 2016 at fixed redemption prices specified in the indenture governing the 2020 Notes, plus accrued and unpaid interest, if any, to the date of redemption. Sabine Pass LNG may also redeem some or all of the 2020 Notes at any time prior to November 1, 2016 at a “make-whole” price set forth in the indenture, plus accrued and unpaid interest, if any, to the date of redemption. At any time before November 1, 2015, Sabine Pass LNG may redeem up to 35% of the aggregate principal amount of the 2020 Notes at a redemption price of 106.5% of the principal amount of the 2020 Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date, in an amount not to exceed the net proceeds of one or more completed equity offerings as long as Sabine Pass LNG redeems the 2020 Notes within 180 days of the closing date for such equity offering and at least 65% of the aggregate principal amount of the 2020 Notes originally issued remains outstanding after the redemption.

At any time prior to November 1, 2020, with respect to the 2021 Sabine Pass Liquefaction Senior Notes, or January 15, 2023, with respect to the 2023 Sabine Pass Liquefaction Senior Notes, Sabine Pass Liquefaction may redeem all or a part of the Sabine Pass Liquefaction Senior Notes, at a redemption price equal to the “make-whole” price set forth in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption. Sabine Pass Liquefaction also may at any time on or after November 1, 2020, with respect to the 2021 Sabine Pass Liquefaction Senior Notes, or January 15, 2023, with respect to the 2023 Sabine Pass Liquefaction Senior Notes, redeem the Sabine Pass Liquefaction Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Sabine Pass Liquefaction Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.

Under the indentures governing the Sabine Pass LNG Senior Notes, except for permitted tax distributions, Sabine Pass LNG may not make distributions until, among other requirements, deposits are made into debt service reserve accounts and a fixed charge coverage ratio test of 2:1 is satisfied. Under the indentures governing the Sabine Pass Liquefaction Senior Notes, Sabine Pass Liquefaction may not make any distributions until, among other requirements, substantial completion of Train 1 and Train 2 has occurred, deposits are made into debt service reserve accounts and a debt service coverage ratio for the prior 12-month period and a projected debt service coverage ratio for the upcoming 12-month period of 1.25:1.00 are satisfied.

2013 Liquefaction Credit Facilities

Sabine Pass Liquefaction has four credit facilities aggregating $5.9 billion (collectively, the “2013 Liquefaction Credit Facilities”), which will be used to fund a portion of the costs of developing, constructing and placing into operation Train 1 through Train 4 of the Liquefaction Project. The principal of the loans made under the 2013 Liquefaction Credit Facilities must be repaid in quarterly installments, commencing with the earlier of the last day of the full calendar quarter after the Train 4 completion date and September 30, 2018. Loans under the 2013 Liquefaction Credit Facilities bear interest at a variable rate per annum equal to, at Sabine Pass Liquefaction’s election, the London Interbank Offered Rate (“LIBOR”) plus the applicable margin. The applicable margins for LIBOR loans prior to, and after, the completion of Train 4 range from 2.3% to 3.0% and 2.3% to 3.25%, respectively, depending on the applicable 2013 Liquefaction Credit Facility. Interest on LIBOR loans is due and payable at the end of each LIBOR period.

2012 Liquefaction Credit Facility

In July 2012, Sabine Pass Liquefaction entered into a construction/term loan facility in an amount up to $3.6 billion (the “2012 Liquefaction Credit Facility”), which was available to Sabine Pass

 

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Liquefaction in four tranches solely to fund Liquefaction Project costs for Train 1 and Train 2, the related debt service reserve account up to an amount equal to six months of scheduled debt service and the return of equity and affiliate subordinated debt funding to Cheniere or its affiliates up to an amount that would result in senior debt being no more than 65% of Cheniere Partners’ total capitalization. Borrowings under the 2012 Liquefaction Credit Facility were based on LIBOR plus 3.50% during construction and 3.75% during operations. Sabine Pass Liquefaction was also required to pay commitment fees on the undrawn amount. The 2012 Credit Facility was amended and restated with the 2013 Liquefaction Credit Facilities.

CTPL Credit Facility

CTPL has a $400 million term loan facility (the “CTPL Credit Facility”), which will be used to fund modifications to the Creole Trail Pipeline and general business purposes. Loans under the CTPL Credit Facility bear interest at a variable rate per annum equal to, at CTPL’s election, LIBOR or the base rate, plus the applicable margin. The applicable margin for LIBOR loans under the CTPL Credit Facility is 3.25%. The CTPL Credit Facility matures in 2017 when the full amount of the outstanding principal obligations must be repaid.

 

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Sources and Uses of Cash

The following table summarizes (in thousands) the sources and uses of Cheniere Partners’ cash and cash equivalents for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010. The table presents capital expenditures on a cash basis; therefore, these amounts differ from the amounts of capital expenditures, including accruals, that are referred to elsewhere in this prospectus. Additional discussion of these items follows the table.

 

    Six Months Ended June 30,     Year Ended December 31,  
            2013                     2012             2012     2011     2010  

Sources of cash and cash equivalents

         

Proceeds from debt issuances

  $ 3,504,478      $      $ 520,000      $      $   

Proceeds from sale of partnership common and general partner units

    375,917        12,379        250,022        70,157          

Proceeds from sale of Class B units

           166,667        1,887,342                 

Contributions to Creole Trail Pipeline Business from Cheniere, net

    20,705        4,449        11,857        7,666        4,321   

Operating Cash Flow

                         6,840        99,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total sources of cash and cash equivalents

    3,901,100        183,495        2,669,221        84,663        104,165   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Uses of cash and cash equivalents

         

Investment in restricted cash and cash equivalents

    (1,980,930            (343,877              

LNG terminal costs, net

    (1,271,830     (39,223     (1,118,787     (7,394     (4,983

Purchase of Creole Trail Pipeline Business, net

    (313,892                            

Debt issuance and deferred financing costs

    (228,882     (5,530     (222,378              

Repayment of Debt

    (100,000       (550,000              

Distributions to unitholders

    (41,879     (27,040     (57,821     (48,149     (163,249

Operating cash flow

    (24,685     (17,452     (37,741              

Other

    (2,990     (4,714     (740     (1,054     (126
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total uses of cash and cash equivalents

    (3,965,088     (93,959     (2,331,344     (56,597     (168,358
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    (63,988     89,536        337,877        28,066        (64,193

Cash and cash equivalents—beginning of period

    419,292        81,415        81,415        53,349        117,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents—end of period

  $ 355,304      $ 170,951      $ 419,292      $ 81,415      $ 53,349   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proceeds from Debt Issuances

In February 2013 and April 2013, Sabine Pass Liquefaction issued an aggregate principal amount of $2.0 billion, before premium, of the 2021 Sabine Pass Liquefaction Senior Notes. In April 2013, Sabine Pass Liquefaction also issued $1.0 billion of the 2023 Sabine Pass Liquefaction Senior Notes. Net proceeds from those offerings are intended to be used to pay a portion of the capital costs incurred

 

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in connection with the construction of the Liquefaction Project. In May 2013, CTPL entered into the $400.0 million CTPL Credit Facility, which will be used to fund modifications to the Creole Trail Pipeline and for general business purposes. In May 2013, Sabine Pass Liquefaction closed the 2013 Liquefaction Credit Facilities aggregating $5.9 billion. Sabine Pass Liquefaction made a $100.0 million borrowing under the 2013 Liquefaction Credit Facilities in June 2013 after meeting the required conditions precedent.

Proceeds from the Sale of Partnership Common and General Partner Units

The increase in proceeds from the sale of partnership common and general partner units in the six months ended June 30, 2013 primarily related to a February 2013 common unit purchase agreement with institutional investors to sell 17.6 million common units for net proceeds, after deducting expenses, of $372.4 million, which included the general partner’s proportionate capital contribution of approximately $7.4 million. Cheniere Partners used the proceeds from the February 2013 offering to purchase the Creole Trail Pipeline Business.

In September 2012, Cheniere Partners sold 8.0 million common units in an underwritten public offering at a price of $25.07 per common unit for net cash proceeds of $194.0 million. Cheniere Partners also received $45.1 million in net cash proceeds from its general partner in connection with the exercise of its right to maintain its 2% ownership interest in Cheniere Partners during the year ended December 31, 2012.

In September 2011, Cheniere Partners sold 3.0 million common units in an underwritten public offering and 1.1 million common units to Cheniere Common Units Holding, LLC at a price of $15.25 per common unit. Cheniere Partners received net cash proceeds of $70.2 million from such offering (including proceeds from its general partner in connection with the exercise of its right to maintain its 2% ownership interest in Cheniere Partners), which were used for general business purposes, including development costs for the Liquefaction Project.

In January 2011, Cheniere Partners initiated an at-the-market program to sell up to 1.0 million common units, the proceeds from which are used primarily to fund development costs associated with the Liquefaction Project. During the year ended December 31, 2011, 0.5 million common units for net cash proceeds of $9.0 million were sold. During the year ended December 31, 2012, Cheniere Partners sold 0.5 million common units for net cash proceeds of $11.1 million. Cheniere Partners paid $0.3 million in commissions to Miller Tabak + Co., Inc., as sales agent, in connection with the at-the-market program during each of the years ended December 31, 2012 and 2011.

Proceeds from the Sale of Class B Units

Concurrent with the Creole Trail Pipeline Business acquisition in May 2013, Cheniere Partners issued 12.0 million Class B units to Cheniere for aggregate consideration of $180.0 million. Please read “—Purchase of Creole Trail Pipeline Business, net” below.

During the year ended December 31, 2012, Blackstone and Cheniere completed their acquisitions of 100.0 million and 33.3 million Class B units, respectively, under their unit purchase agreements for total consideration of $1.5 billion and $500.0 million, respectively, before fees. Proceeds from the Class B unit sales are being used to fund the equity portion of the costs of developing, constructing and placing into service the Liquefaction Project.

Contributions to Creole Trail Pipeline Business, net

Contributions to Creole Trail Pipeline Business, net relate to equity contributions provided by Cheniere to the entities owning the Creole Trail Pipeline that Cheniere Partners purchased in May

 

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2013. The acquisition has been accounted for as a transfer of net assets between entities under common control. During the period from January 1, 2013 to the purchase date, Cheniere contributed $20.7 million to the Creole Trail Pipeline entities that Cheniere Partners acquired. During the six months ended June 30, 2012, Cheniere contributed $4.4 million to the Creole Trail Pipeline entities that Cheniere Partners acquired.

Operating Cash Flow

Operating cash flow decreased $44.6 million from 2011 to 2012. The decrease in operating cash flow primarily resulted from increased costs incurred to develop and manage the construction of Train 1 and Train 2, and decreased LNG cargo export loading fee revenue.

Operating cash flow decreased $93.0 million from 2010 to 2011 primarily due to the June 2010 TUA assignment from Cheniere Marketing to Cheniere Investments, effective July 1, 2010, that resulted in the TUA payments being made by Cheniere Investments, a wholly owned subsidiary of Cheniere Partners, instead of being received from Cheniere Marketing. In addition, operating cash flow decreased from 2010 to 2011 as a result of increased development costs in 2011 associated with the Liquefaction Project.

LNG Terminal Costs, net

LNG terminal costs, net primarily related to the construction of Trains 1 through 4 of the Liquefaction Project. Trains 1 and 2 and Trains 3 and 4 of the Liquefaction Project satisfied the criteria for capitalization in June 2012 and May 2013, respectively. Accordingly, costs associated with the construction of Trains 1 through 4 of the Liquefaction Project have been recorded as construction-in-process since those dates.

Capital expenditures for the Sabine Pass LNG terminal were $1,118.5 million, $7.1 million and $5.0 million in the years ended December 31, 2012, 2011 and 2010, respectively. Cheniere Partners began capitalizing costs associated with the construction of Train 1 and Train 2 of the Liquefaction Project as construction-in-process during the second quarter of 2012.

Purchase of the Creole Trail Pipeline, net

In May 2013, Cheniere Partners completed the acquisition of the Creole Trail Pipeline Business for $480.0 million and reimbursed Cheniere $13.9 million for certain expenditures incurred prior to the closing date. Concurrent with the Creole Trail Pipeline Business acquisition closing, Cheniere Partners issued 12.0 million Class B units to Cheniere for aggregate consideration of $180.0 million pursuant to a unit purchase agreement with Cheniere Class B Units Holdings, LLC, a wholly owned subsidiary of Cheniere. As a result of the two transactions, Cheniere Partners paid net cash of $313.9 million.

Debt Issuance and Deferred Financing Costs

Debt issuance and deferred financing costs in the six months ended June 30, 2013 resulted from amounts paid by Sabine Pass Liquefaction related to the 2013 Liquefaction Credit Facilities and the Sabine Pass Liquefaction Senior Notes and amounts paid by CTPL related to the CTPL Credit Facility.

Repayment of the 2012 Liquefaction Credit Facility

During the six months ended June 30, 2013, the 2012 Liquefaction Credit Facility was amended and restated with the 2013 Liquefaction Credit Facilities described above and the $100.0 million of outstanding borrowings under the 2012 Liquefaction Credit Facility were repaid in full.

 

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Repayment of 2013 Notes

During the fourth quarter of 2012, Sabine Pass LNG repurchased its $550.0 million of 2013 Notes. Funds used for the repurchase included proceeds received from the 2020 Notes and from an equity contribution from Cheniere Partners.

Use of (Investment in) Restricted Cash and Cash Equivalents

In the six months ended June 30, 2013, Cheniere Partners invested a net $1,980.9 million in restricted cash and cash equivalents. This investment in restricted cash and cash equivalents is primarily a result of the $3,247.3 million investment in restricted cash and cash equivalents primarily related to the net proceeds from the Sabine Pass Liquefaction Senior Notes, the CTPL Credit Facility and the 2013 Liquefaction Credit Facilities. This investment in restricted cash and cash equivalents was partially offset by the use of $1,266.3 million of restricted cash and cash equivalents primarily related to the construction of the Liquefaction Project.

During 2012, Cheniere Partners invested $343.9 million in restricted cash and cash equivalents. This investment was a result of the $1,458.6 million of restricted cash and cash equivalents from the proceeds of Class B unit sales that was partially offset by the use of $1,114.7 million of restricted cash for the construction of Train 1 and Train 2 of the Liquefaction Project.

Distributions to Unitholders

During the six months ended June 30, 2013 and 2012, Cheniere Partners distributed $41.9 million and $27.0 million, respectively, to its common and general partner unitholders.

Cheniere Partners made $57.8 million, $48.1 million and $163.2 million of distributions to its common and subordinated unitholders and to its general partner in the years ended December 31, 2012, 2011 and 2010, respectively. The decreased amount of distributions to owners from the year ended December 31, 2010 as compared to the years ended December 31, 2011 and 2012 primarily resulted from the TUA assignment from Cheniere Marketing to Cheniere Investments, effective July 1, 2010, which resulted in the TUA payments being made by Cheniere Investments, a wholly owned subsidiary of Cheniere Partners, instead of Cheniere Marketing and decreased Cheniere Partners’ available cash in excess of the common unit and general partner distributions. As a result of Cheniere Marketing’s assignment of its TUA to Cheniere Investments, Cheniere Partners has not paid distributions on its subordinated units since the distribution made with respect to the quarter ended March 31, 2010.

Cash Distributions to Unitholders

The Partnership Agreement requires that, within 45 days after the end of each quarter, Cheniere Partners distribute all of its available cash (as defined in the Partnership Agreement). Cheniere Partners’ available cash is its cash on hand at the end of a quarter less the amount of any reserves established by its general partner. All distributions paid to date have been made from accumulated operating surplus. The following provides a summary of distributions paid by Cheniere Partners during the six months ended June 30, 2013:

 

                    Total Distribution (in thousands)  

Date Paid

  Period Covered by
Distribution
  Distribution
Per Common
Unit
    Distribution Per
Subordinated
Unit
    Common
Units
    Class B
Units
    Subordinated
Units
    General
Partner
Units
 

February 14, 2013

  October 1 - December 31, 2012   $ 0.425      $      $ 16,783      $      $      $ 342   

May 15, 2013

  January 1 - March 31, 2013     0.425               24,259                      495   

 

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The subordinated units will receive distributions only to the extent Cheniere Partners has available cash above the initial quarterly distributions requirement for its common unitholders and general partner along with certain reserves. Such available cash could be generated through new business development or fees received from Cheniere Marketing under the amended and restated VCRA. The ending of the subordination period and conversion of the subordinated units into common units will depend upon future business development.

In 2012, Cheniere Partners issued Class B units in connection with the development of the Liquefaction Project. The Class B units are not entitled to cash distributions except in the event of Cheniere Partners’ liquidation or merger, consolidation or other combination with another person or the sale of all or substantially all of Cheniere Partners’ assets. 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 of the Class B units, and ending on the conversion 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 an additional upward adjustment for certain equity and debt financings. The accreted conversion ratio of the Class B units owned by Cheniere and Blackstone was 1.15 and 1.13, respectively, as of June 30, 2013. The Class B units will mandatorily convert into common units on the first business day following the record date with respect to Cheniere Partners’ first distribution (the “Mandatory Conversion Date”) after the earlier of the substantial completion date of Train 3 or August 9, 2017, although if a notice to proceed is given to Bechtel for Train 3 prior to August 9, 2017, the Mandatory Conversion Date will be the substantial completion date of Train 3. The notice to proceed was given to Bechtel on May 28, 2013. Cheniere Partners currently expects the substantial completion date of Train 3 to occur before March 31, 2017. If the Class B units are not mandatorily converted by July 2019, the holders of the Class B units have the option to convert the Class B units into common units at that time.

On July 22, 2013, Cheniere Partners declared a cash distribution of $0.425 per common unit and the related distribution to its general partner, which was paid on August 14, 2013 to owners of record at the close of business on August 1, 2013 for the period from April 1, 2013 to June 30, 2013.

 

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Contractual Obligations

Cheniere Partners is committed to make cash payments in the future pursuant to certain of its contracts. The following table summarizes certain contractual obligations in place as of December 31, 2012 (in thousands).

 

    Payments Due for Years Ended December 31,  
    Total     2013     2014-2015     2016-2017     Thereafter  

Construction and purchase obligations(1)

  $ 3,044,606      $ 1,286,184      $ 1,532,576      $ 225,846      $   

Long-term debt

    2,185,500                      1,665,500        520,000   

Interest payments(2)

    1,029,160        202,790        403,153        267,831        155,386   

Operating lease obligations(3)(4)

    285,049        9,841        19,660        19,469        236,079   

Service contracts:

         

Affiliate Sabine Pass LNG O&M Agreement(5)

    28,176        1,682        3,365        3,365        19,764   

Affiliate Sabine Pass LNG MSA(5)

    112,771        6,729        13,458        13,458        79,066   

Affiliate Sabine Pass Liquefaction O&M Agreement(5)

    62,769        7,828        10,676        7,432        36,833   

Affiliate Sabine Pass Liquefaction MSA(5)

    351,910        31,313        42,704        38,477        239,419   

Affiliate services agreement(5)

    190,366        11,198        22,396        22,396        134,376   

Cooperative endeavor agreements(5)

    9,813        2,453        4,907        2,453