10-Q 1 cei2017form10q2ndqtr.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended June 30, 2017
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            
colorlogoonwhitecmyka19.gif
CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
Delaware
001-16383
95-4352386
(State or other jurisdiction of incorporation or organization)
(Commission File Number)
(I.R.S. Employer Identification No.)
 
 
 
700 Milam Street, Suite 1900
 
 
Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip code)
(713) 375-5000
(Registrant’s telephone number, including area code)
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
 
 
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨   No  x
As of August 3, 2017, the issuer had 237,827,615 shares of Common Stock outstanding.
 



CHENIERE ENERGY, INC.
TABLE OF CONTENTS







i


DEFINITIONS
As used in this quarterly report, the terms listed below have the following meanings: 

Common Industry and Other Terms
Bcf
 
billion cubic feet
Bcf/d
 
billion cubic feet per day
Bcf/yr
 
billion cubic feet per year
Bcfe
 
billion cubic feet equivalent
DOE
 
U.S. Department of Energy
EPC
 
engineering, procurement and construction
FERC
 
Federal Energy Regulatory Commission
FTA countries
 
countries with which the United States has a free trade agreement providing for national treatment for trade in natural gas
GAAP
 
generally accepted accounting principles in the United States
Henry Hub
 
the final settlement price (in USD per MMBtu) for the New York Mercantile Exchange’s Henry Hub natural gas futures contract for the month in which a relevant cargo’s delivery window is scheduled to begin
LIBOR
 
London Interbank Offered Rate
LNG
 
liquefied natural gas, a product of natural gas that, through a refrigeration process, has been cooled to a liquid state, which occupies a volume that is approximately 1/600th of its gaseous state
MMBtu
 
million British thermal units, an energy unit
mtpa
 
million tonnes per annum
non-FTA countries
 
countries with which the United States does not have a free trade agreement providing for national treatment for trade in natural gas and with which trade is permitted
SEC
 
Securities and Exchange Commission
SPA
 
LNG sale and purchase agreement
TBtu
 
trillion British thermal units, an energy unit
Train
 
an industrial facility comprised of a series of refrigerant compressor loops used to cool natural gas into LNG
TUA
 
terminal use agreement


1


Abbreviated Organizational Structure

The following diagram depicts our abbreviated organizational structure as of June 30, 2017, including our ownership of certain subsidiaries, and the references to these entities used in this quarterly report:
orgcharta48.jpg
Unless the context requires otherwise, references to “Cheniere,” the “Company,” “we,” “us” and “our” refer to Cheniere Energy, Inc. (NYSE American: LNG) and its consolidated subsidiaries, including our publicly traded subsidiaries, Cheniere Partners (NYSE American: CQP) and Cheniere Holdings (NYSE American: CQH).
Unless the context requires otherwise, references to the “CCH Group” refer to CCH HoldCo II, CCH HoldCo I, CCH, CCL and CCP, collectively. References to the “CCL Stage III entities” refer to Corpus Christi Liquefaction Stage III, LLC and Cheniere Corpus Christi Pipeline Stage III, LLC.

2


PART I.
FINANCIAL INFORMATION
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)





 
June 30,
 
December 31,
 
2017
 
2016
ASSETS
(unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
796

 
$
876

Restricted cash
1,032

 
860

Accounts and other receivables
283

 
218

Accounts receivable—related party
1

 

Inventory
150

 
160

Derivative assets
20

 
24

Other current assets
86

 
100

Total current assets
2,368

 
2,238

 
 
 
 
Non-current restricted cash
716

 
91

Property, plant and equipment, net
22,904

 
20,635

Debt issuance costs, net
197

 
277

Non-current derivative assets
43

 
83

Goodwill
77

 
77

Other non-current assets, net
295

 
302

Total assets
$
26,600

 
$
23,703

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Accounts payable
$
62

 
$
49

Accrued liabilities
674

 
637

Current debt

 
247

Deferred revenue
65

 
73

Derivative liabilities
39

 
71

Total current liabilities
840

 
1,077

 
 
 
 
Long-term debt, net
24,654

 
21,688

Non-current deferred revenue
3

 
5

Non-current derivative liabilities
54

 
45

Other non-current liabilities
45

 
49

 
 
 
 
Commitments and contingencies (see Note 15)


 


 
 
 
 
Stockholders’ equity
 

 
 

Preferred stock, $0.0001 par value, 5.0 million shares authorized, none issued

 

Common stock, $0.003 par value
 
 
 

Authorized: 480.0 million shares at June 30, 2017 and December 31, 2016
 
 
 
Issued: 250.1 million shares at June 30, 2017 and December 31, 2016


 


Outstanding: 237.8 million shares and 238.0 million shares at June 30, 2017 and December 31, 2016, respectively
1

 
1

Treasury stock: 12.3 million shares and 12.2 million shares at June 30, 2017 and December 31, 2016, respectively, at cost
(377
)
 
(374
)
Additional paid-in-capital
3,228

 
3,211

Accumulated deficit
(4,465
)
 
(4,234
)
Total stockholders’ deficit
(1,613
)
 
(1,396
)
Non-controlling interest
2,617

 
2,235

Total equity
1,004

 
839

Total liabilities and equity
$
26,600

 
$
23,703


The accompanying notes are an integral part of these consolidated financial statements.

3



CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data) 
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
LNG revenues
$
1,171

 
$
110

 
$
2,314

 
$
113

Regasification revenues
65

 
65

 
130

 
130

Other revenues
4

 
2

 
7

 
3

Other—related party
1

 

 
1

 

Total revenues
1,241

 
177

 
2,452

 
246

 
 
 
 
 
 
 
 
Operating costs and expenses
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization expense shown separately below)
692

 
85

 
1,316

 
100

Operating and maintenance expense
117

 
46

 
195

 
82

Development expense
1

 
1

 
4

 
3

Selling, general and administrative expense
61

 
72

 
115

 
138

Depreciation and amortization expense
90

 
33

 
160

 
57

Restructuring expense

 
16

 
6

 
23

Impairment expense

 

 

 
10

Other
6

 

 
6

 

Total operating costs and expenses
967

 
253

 
1,802

 
413

 
 
 
 
 
 
 
 
Income (loss) from operations
274

 
(76
)
 
650

 
(167
)
 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense, net of capitalized interest
(188
)
 
(106
)
 
(353
)
 
(182
)
Loss on early extinguishment of debt
(33
)
 
(56
)
 
(75
)
 
(57
)
Derivative loss, net
(36
)
 
(91
)
 
(35
)
 
(272
)
Other income (expense)
5

 
(7
)
 
7

 
(6
)
Total other expense
(252
)
 
(260
)
 
(456
)
 
(517
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes and non-controlling interest
22


(336
)

194


(684
)
Income tax benefit (provision)
(1
)

1


(1
)


Net income (loss)
21


(335
)

193


(684
)
Less: net income (loss) attributable to non-controlling interest
306


(37
)

424


(65
)
Net loss attributable to common stockholders
$
(285
)

$
(298
)

$
(231
)

$
(619
)












Net loss per share attributable to common stockholders—basic and diluted
$
(1.23
)

$
(1.31
)

$
(0.99
)

$
(2.71
)
 











Weighted average number of common shares outstanding—basic and diluted
232.5


228.3


232.4


228.2




The accompanying notes are an integral part of these consolidated financial statements.

4



CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
 
Total Stockholders’ Equity
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Non-controlling Interest
 
Total
Equity
 
Shares
 
Par Value Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2016
238.0

 
$
1

 
12.2

 
$
(374
)
 
$
3,211

 
$
(4,234
)
 
$
2,235

 
$
839

Issuance of stock to acquire additional interest in Cheniere Holdings

 

 

 

 
2

 

 
(2
)
 

Issuances of restricted stock
0.1

 

 

 

 

 

 

 

Forfeitures of restricted stock
(0.2
)
 

 

 

 

 

 

 

Share-based compensation

 

 

 

 
15

 

 

 
15

Shares repurchased related to share-based compensation
(0.1
)
 

 
0.1

 
(3
)
 

 

 

 
(3
)
Net income attributable to non-controlling interest

 

 

 

 

 

 
424

 
424

Distributions to non-controlling interest

 

 

 

 

 

 
(40
)
 
(40
)
Net loss

 

 

 

 

 
(231
)
 

 
(231
)
Balance at June 30, 2017
237.8

 
$
1

 
12.3

 
$
(377
)
 
$
3,228

 
$
(4,465
)
 
$
2,617

 
$
1,004


The accompanying notes are an integral part of these consolidated financial statements.

5



CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income (loss)
$
193

 
$
(684
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization expense
160

 
57

Share-based compensation expense
46

 
52

Non-cash interest expense
38

 
39

Amortization of debt issuance costs, deferred commitment fees, premium and discount
35

 
30

Loss on early extinguishment of debt
75

 
57

Total losses on derivatives, net
79

 
296

Net cash used for settlement of derivative instruments
(55
)
 
(17
)
Impairment expense

 
10

Other
3

 
9

Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables
(63
)
 
(68
)
Accounts receivable—related party
(1
)
 

Inventory
17

 
(34
)
Accounts payable and accrued liabilities
45

 
(17
)
Deferred revenue
(10
)
 
(2
)
Other, net
(26
)
 
(23
)
Net cash provided by (used in) operating activities
536

 
(295
)
 
 
 
 
Cash flows from investing activities
 
 
 
Property, plant and equipment, net
(2,338
)
 
(2,277
)
Investment in equity method investment
(41
)
 

Other
22

 
(22
)
Net cash used in investing activities
(2,357
)
 
(2,299
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from issuances of debt
4,811

 
5,698

Repayments of debt
(2,163
)
 
(2,893
)
Debt issuance and deferred financing costs
(67
)
 
(97
)
Distributions and dividends to non-controlling interest
(40
)
 
(40
)
Payments related to tax withholdings for share-based compensation
(3
)
 
(4
)
Net cash provided by financing activities
2,538

 
2,664

 
 
 
 
Net increase in cash, cash equivalents and restricted cash
717

 
70

Cash, cash equivalents and restricted cash—beginning of period
1,827

 
1,736

Cash, cash equivalents and restricted cash—end of period
$
2,544

 
$
1,806



Balances per Consolidated Balance Sheet:
 
June 30, 2017
Cash and cash equivalents
$
796

Restricted cash
1,032

Non-current restricted cash
716

Total cash, cash equivalents and restricted cash
$
2,544



The accompanying notes are an integral part of these consolidated financial statements.

6


  
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



NOTE 1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION

We are currently developing and constructing two natural gas liquefaction and export facilities. The Sabine Pass LNG terminal is located in Cameron Parish, Louisiana, on the Sabine-Neches Waterway less than four miles from the Gulf Coast. Cheniere Partners is developing, constructing and operating natural gas liquefaction facilities (the “SPL Project”) at the Sabine Pass LNG terminal adjacent to the existing regasification facilities through a wholly owned subsidiary, SPL. Cheniere Partners plans to construct up to six Trains, which are in various stages of development, construction and operations. Trains 1 through 3 are operational, Train 4 is undergoing commissioning, Train 5 is under construction and Train 6 is being commercialized and has all necessary regulatory approvals in place. In the second quarter of 2016, we started production at the SPL Project and began recognizing LNG revenues, which include fees that are received pursuant to our long-term SPAs and our integrated LNG marketing activities and other related revenues.

The Sabine Pass LNG terminal has operational regasification facilities owned by Cheniere Partners’ wholly owned subsidiary, SPLNG, and a 94-mile pipeline that interconnects the Sabine Pass LNG terminal with a number of large interstate pipelines owned by Cheniere Partners’ wholly owned subsidiary, CTPL. Regasification revenues include LNG regasification capacity reservation fees that are received from our two long-term TUA customers. We also recognize tug services fees, which were historically included in regasification revenues but are now included within other revenues on our Consolidated Statements of Operations, that are received by Sabine Pass Tug Services, LLC, a wholly owned subsidiary of SPLNG.

We are developing and constructing a second natural gas liquefaction and export facility at the Corpus Christi LNG terminal, which is on nearly 2,000 acres of land that we own or control near Corpus Christi, Texas, and a pipeline facility (collectively, the “CCL Project”) through wholly owned subsidiaries CCL and CCP, respectively. The CCL Project is being developed in two stages for up to three Trains. Trains 1 and 2 are currently under construction, and Train 3 is being commercialized and has all necessary regulatory approvals in place.

The CCL Stage III entities, our wholly owned subsidiaries, are also developing two additional Trains and one LNG storage tank at the Corpus Christi LNG terminal adjacent to the CCL Project, along with a second natural gas pipeline. We are also in various stages of developing other projects which, among other things, will require acceptable commercial and financing arrangements before we make a final investment decision (“FID”).

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Cheniere have been prepared in accordance with GAAP for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2016. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included. Certain reclassifications have been made to conform prior period information to the current presentation.  The reclassifications had no effect on our overall consolidated financial position, results of operations or cash flows.

Results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2017.

During the first quarter of 2017, we finalized organizational changes to simplify our corporate structure, improve our operational efficiencies and implement a strategy for sustainable, long-term stockholder value creation through financially disciplined development, construction, operation and investment.  As a result of these efforts, we revised the way we manage our business, which resulted in a change to our reportable segments. We previously had two reportable segments: LNG terminal segment and LNG and natural gas marketing segment. We have now determined that we operate as a single operating and reportable segment. Our chief operating decision maker makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis in the delivery of an integrated source of LNG to our customers.


7


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


NOTE 2—RESTRICTED CASH
 
Restricted cash consists of funds that are contractually restricted as to usage or withdrawal and have been presented separately from cash and cash equivalents on our Consolidated Balance Sheets. As of June 30, 2017 and December 31, 2016, restricted cash consisted of the following (in millions):
 
 
June 30,
 
December 31,
 
 
2017
 
2016
Current restricted cash
 
 
 
 
SPL Project
 
$
579

 
$
358

CQP and cash held by guarantor subsidiaries
 
286

 
247

CCL Project
 
103

 
197

Cash held by our subsidiaries restricted to Cheniere
 
64

 
58

Total current restricted cash
 
$
1,032

 
$
860

 
 
 
 
 
Non-current restricted cash
 
 
 
 
SPL Project
 
$
698

 
$

CCL Project
 

 
73

Other
 
18

 
18

Total non-current restricted cash
 
$
716

 
$
91


NOTE 3—ACCOUNTS AND OTHER RECEIVABLES

As of June 30, 2017 and December 31, 2016, accounts and other receivables consisted of the following (in millions):
 
 
June 30,
 
December 31,
 
 
2017
 
2016
Trade receivables
 
 
 
 
SPL
 
$
123

 
$
88

Cheniere Marketing
 
138

 
121

Other accounts receivable
 
22

 
9

Total accounts and other receivables
 
$
283

 
$
218


Pursuant to the accounts agreement entered into with the collateral trustee for the benefit of SPL’s debt holders, SPL is required to deposit all cash received into reserve accounts controlled by the collateral trustee.  The usage or withdrawal of such cash is restricted to the payment of liabilities related to the SPL Project and other restricted payments.

NOTE 4—INVENTORY

As of June 30, 2017 and December 31, 2016, inventory consisted of the following (in millions):
 
 
June 30,
 
December 31,
 
 
2017
 
2016
Natural gas
 
$
17

 
$
15

LNG
 
37

 
50

LNG in-transit
 
49

 
58

Materials and other
 
47

 
37

Total inventory
 
$
150

 
$
160



8


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


NOTE 5—PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment, net consists of LNG terminal costs and fixed assets and other, as follows (in millions):
 
 
June 30,
 
December 31,
 
 
2017
 
2016
LNG terminal costs
 
 
 
 
LNG terminal
 
$
10,436

 
$
7,978

LNG terminal construction-in-process
 
12,926

 
12,995

LNG site and related costs
 
81

 
41

Accumulated depreciation
 
(702
)
 
(555
)
Total LNG terminal costs, net
 
22,741

 
20,459

Fixed assets and other
 
 

 
 

Computer and office equipment
 
13

 
13

Furniture and fixtures
 
17

 
17

Computer software
 
88

 
85

Leasehold improvements
 
40

 
43

Land
 
59

 
61

Other
 
23

 
22

Accumulated depreciation
 
(77
)
 
(65
)
Total fixed assets and other, net
 
163

 
176

Property, plant and equipment, net
 
$
22,904

 
$
20,635


Depreciation expense was $89 million and $32 million in the three months ended June 30, 2017 and 2016, respectively, and $159 million and $56 million in the six months ended June 30, 2017 and 2016, respectively. During the three and six months ended June 30, 2017, we recognized a $5 million loss on sale of assets, which is included in other operating costs and expenses on our Consolidated Statements of Operations.

We realized offsets to LNG terminal costs of $39 million and $132 million in the three months ended June 30, 2017 and 2016, respectively, and $170 million and $146 million in the six months ended June 30, 2017 and 2016, respectively, that were related to the sale of commissioning cargoes because these amounts were earned or loaded prior to the start of commercial operations of the respective Train of the SPL Project, during the testing phase for its construction.

NOTE 6—DERIVATIVE INSTRUMENTS
 
We have entered into the following derivative instruments that are reported at fair value:
interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under certain credit facilities (“Interest Rate Derivatives”);
commodity derivatives consisting of natural gas supply contracts for the commissioning and operation of the SPL Project and the CCL Project (“Physical Liquefaction Supply Derivatives”) and associated economic hedges (collectively, the “Liquefaction Supply Derivatives”);
financial derivatives to hedge the exposure to the commodity markets in which we have contractual arrangements to purchase or sell physical LNG (“LNG Trading Derivatives”); and
foreign currency exchange (“FX”) contracts to hedge exposure to currency risk associated with operations in countries outside of the United States (“FX Derivatives”).
None of our derivative instruments are designated as cash flow hedging instruments, and changes in fair value are recorded within our Consolidated Statements of Operations to the extent not utilized for the commissioning process.

9


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)



The following table (in millions) shows the fair value of our derivative instruments that are required to be measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, which are classified as derivative assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Consolidated Balance Sheets.
 
Fair Value Measurements as of
 
June 30, 2017
 
December 31, 2016
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
SPL Interest Rate Derivatives liability
$

 
$

 
$

 
$

 
$

 
$
(6
)
 
$

 
$
(6
)
CQP Interest Rate Derivatives asset

 
13

 

 
13

 

 
13

 

 
13

CCH Interest Rate Derivatives liability

 
(85
)
 

 
(85
)
 

 
(86
)
 

 
(86
)
Liquefaction Supply Derivatives asset (liability)
2

 

 
40

 
42

 
(4
)
 
(2
)
 
79

 
73

LNG Trading Derivatives asset (liability)
1

 
(1
)
 

 

 
2

 
(5
)
 

 
(3
)
FX Derivatives asset

 

 

 

 

 

 

 


There have been no changes to our evaluation of and accounting for our derivative positions during the six months ended June 30, 2017. See Note 7—Derivative Instruments of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2016 for additional information.

We value our Interest Rate Derivatives using valuations based on the initial trade prices. Using an income-based approach, subsequent valuations are based on observable inputs to the valuation model including interest rate curves, risk adjusted discount rates, credit spreads and other relevant data. The estimated fair values of our economic hedges related to the LNG Trading Derivatives are the amounts at which the instruments could be exchanged currently between willing parties. We value these derivatives using observable commodity price curves and other relevant data. We estimate the fair values of our FX Derivatives with a market approach using observable FX rates and other relevant data.

The fair values of our Physical Liquefaction Supply Derivatives are predominantly driven by market commodity basis prices and our assessment of the associated conditions precedent, including evaluating whether the respective markets are available as pipeline infrastructure is developed. Upon the satisfaction of conditions precedent, including completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow, we recognize a gain or loss based on the fair value of the respective natural gas supply contracts as of the reporting date.

The fair value of substantially all of our Physical Liquefaction Supply Derivatives is developed through the use of internal models which are impacted by inputs that are unobservable in the marketplace. As a result, the fair value of our Physical Liquefaction Supply Derivatives is designated as Level 3 within the valuation hierarchy. The curves used to generate the fair value of our Physical Liquefaction Supply Derivatives are based on basis adjustments applied to forward curves for a liquid trading point. In addition, there may be observable liquid market basis information in the near term, but terms of a Physical Liquefaction Supply Derivatives contract may exceed the period for which such information is available, resulting in a Level 3 classification. In these instances, the fair value of the contract incorporates extrapolation assumptions made in the determination of the market basis price for future delivery periods in which applicable commodity basis prices were either not observable or lacked corroborative market data. Internal fair value models include conditions precedent to the respective long-term natural gas supply contracts. As of June 30, 2017 and December 31, 2016, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure is under development to accommodate marketable physical gas flow.


10


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of June 30, 2017:
 
 
Net Fair Value Asset
(in millions)
 
Valuation Technique
 
Significant Unobservable Input
 
Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives
 
$40
 
Income Approach
 
Basis Spread
 
$(0.338) - $0.080

The following table (in millions) shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Balance, beginning of period
 
$
41

 
$
30

 
$
79

 
$
32

Realized and mark-to-market losses:
 
 
 
 
 
 
 
 
Included in cost of sales (1)
 
(1
)
 
(8
)
 
(40
)
 
(10
)
Purchases and settlements:
 
 
 
 
 
 
 
 
Purchases
 
2

 

 
5

 

Settlements (1)
 
(2
)
 

 
(4
)
 

Balance, end of period
 
$
40

 
$
22

 
$
40

 
$
22

Change in unrealized gains relating to instruments still held at end of period
 
$
(1
)
 
$
(8
)
 
$
(40
)
 
$
(9
)
 
    
(1)
Does not include the decrease in fair value of $1 million related to the realized gains capitalized during the six months ended June 30, 2016.
Derivative assets and liabilities arising from our derivative contracts with the same counterparty are reported on a net basis, as all counterparty derivative contracts provide for net settlement. The use of derivative instruments exposes us to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments in instances when our derivative instruments are in an asset position. Our derivative instruments are subject to contractual provisions which provide for the unconditional right of set-off for all derivative assets and liabilities with a given counterparty in the event of default.

Interest Rate Derivatives

SPL had entered into interest rate swaps (“SPL Interest Rate Derivatives”) to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the credit facilities it entered into in June 2015 (the “2015 SPL Credit Facilities”). In March 2017, SPL settled the SPL Interest Rate Derivatives and recognized a derivative loss of $7 million in conjunction with the termination of approximately $1.6 billion of commitments under the 2015 SPL Credit Facilities, as discussed in Note 10—Debt.

CCH has entered into interest rate swaps (“CCH Interest Rate Derivatives”) to protect against volatility of future cash flows and hedge a portion of the variable interest payments on its credit facility (the “2015 CCH Credit Facility”). In May 2017, CCH settled a portion of the CCH Interest Rate Derivatives and recognized a derivative loss of $13 million in conjunction with the termination of approximately $1.4 billion of commitments under the 2015 CCH Credit Facility, as discussed in Note 10—Debt.

During the six months ended June 30, 2017, there were no changes to the terms of the interest rate swaps (“CQP Interest Rate Derivatives”) entered into by CQP to hedge a portion of the variable interest payments on the credit facilities it entered into in February 2016 (the “2016 CQP Credit Facilities”). See Note 7—Derivative Instruments of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2016 for additional information.




11


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


As of June 30, 2017, we had the following Interest Rate Derivatives outstanding:
 
 
Initial Notional Amount
 
Maximum Notional Amount
 
Effective Date
 
Maturity Date
 
Weighted Average Fixed Interest Rate Paid
 
Variable Interest Rate Received
CQP Interest Rate Derivatives
 
$225 million
 
$1.3 billion
 
March 22, 2016
 
February 29, 2020
 
1.19%
 
One-month LIBOR
CCH Interest Rate Derivatives
 
$29 million
 
$4.9 billion
 
May 20, 2015
 
May 31, 2022
 
2.29%
 
One-month LIBOR

The following table (in millions) shows the fair value and location of our Interest Rate Derivatives on our Consolidated Balance Sheets:
 
 
June 30, 2017
 
December 31, 2016
 
 
SPL Interest Rate Derivatives
 
CQP Interest Rate Derivatives
 
CCH Interest Rate Derivatives
 
Total
 
SPL Interest Rate Derivatives
 
CQP Interest Rate Derivatives
 
CCH Interest Rate Derivatives
 
Total
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$

 
$
2

 
$

 
$
2

 
$

 
$

 
$

 
$

Non-current derivative assets
 

 
11

 

 
11

 

 
16

 

 
16

Total derivative assets
 

 
13

 

 
13

 

 
16

 

 
16

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 

 

 
(32
)
 
(32
)
 
(4
)
 
(3
)
 
(43
)
 
(50
)
Non-current derivative liabilities
 

 

 
(53
)
 
(53
)
 
(2
)
 

 
(43
)
 
(45
)
Total derivative liabilities
 

 

 
(85
)
 
(85
)
 
(6
)
 
(3
)
 
(86
)
 
(95
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset (liability), net
 
$

 
$
13

 
$
(85
)
 
$
(72
)
 
$
(6
)
 
$
13

 
$
(86
)
 
$
(79
)

The following table (in millions) shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in derivative loss, net on our Consolidated Statements of Operations during the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
SPL Interest Rate Derivatives loss
 
$

 
$
(5
)
 
$
(2
)
 
$
(16
)
CQP Interest Rate Derivatives loss
 
(3
)
 
(10
)
 
(1
)
 
(20
)
CCH Interest Rate Derivatives loss
 
(33
)
 
(76
)
 
(32
)
 
(236
)


12


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


Commodity Derivatives

The following table (in millions) shows the fair value and location of our Liquefaction Supply Derivatives and LNG Trading Derivatives (collectively, “Commodity Derivatives”) on our Consolidated Balance Sheets:
 
June 30, 2017
 
December 31, 2016
 
Liquefaction Supply Derivatives
 
LNG Trading Derivatives (1)
 
Total
 
Liquefaction Supply Derivatives (2)
 
LNG Trading Derivatives (1)
 
Total
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
13

 
$
5

 
$
18

 
$
13

 
$
7

 
$
20

Non-current derivative assets
32

 

 
32

 
67

 

 
67

Total derivative assets
45

 
5

 
50

 
80

 
7

 
87

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
(2
)
 
(5
)
 
(7
)
 
(7
)
 
(10
)
 
(17
)
Non-current derivative liabilities
(1
)
 

 
(1
)
 

 

 

Total derivative liabilities
(3
)
 
(5
)
 
(8
)
 
(7
)
 
(10
)
 
(17
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset (liability), net
$
42

 
$

 
$
42

 
$
73

 
$
(3
)
 
$
70

 
 
 
 
 
 
 
 
 
 
 
 
Notional amount (in TBtu) (3)
1,704

 
(3
)
 
 
 
1,117

 

 
 
 
    
(1)
Does not include collateral of $13 million and $10 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, respectively.
(2)
Does not include collateral of $6 million deposited for such contracts, which is included in other current assets in our Consolidated Balance Sheet as of December 31, 2016.
(3)
SPL had secured up to approximately 2,220 TBtu and 1,994 TBtu and CCL has secured up to approximately 280 TBtu and zero TBtu of natural gas feedstock through natural gas supply contracts as of June 30, 2017 and December 31, 2016, respectively.

The following table (in millions) shows the changes in the fair value, settlements and location of our Commodity Derivatives recorded on our Consolidated Statements of Operations during the three and six months ended June 30, 2017 and 2016:
 
Statement of Operations Location (1)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
LNG Trading Derivatives gain (loss)
LNG revenues
 
$
2

 
$
(17
)
 
$
(4
)
 
$
(12
)
Liquefaction Supply Derivatives loss (2)
Cost of sales
 
1

 
8

 
40

 
12

 
(1)
Fair value fluctuations associated with commodity derivative activities are classified and presented consistently with the item economically hedged and the nature and intent of the derivative instrument.
(2)
Does not include the realized value associated with derivative instruments that settle through physical delivery.

FX Derivatives

The following table (in millions) shows the fair value and location of our FX Derivatives on our Consolidated Balance Sheets:
 
 
 
Fair Value Measurements as of
 
Balance Sheet Location
 
June 30, 2017
 
December 31, 2016
FX Derivatives
Derivative assets
 
$

 
$
4

FX Derivatives
Derivative liabilities
 

 
(4
)

The total notional amount of our FX Derivatives was $4 million and $11 million as of June 30, 2017 and December 31, 2016, respectively.
    

13


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


The following table (in millions) shows the changes in the fair value of our FX Derivatives recorded on our Consolidated Statements of Operations during the three and six months ended June 30, 2017 and 2016:
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Statement of Operations Location
 
2017
 
2016
 
2017
 
2016
FX Derivatives gain
LNG revenues
 
$

 
$
2

 
$

 
$


Balance Sheet Presentation

Our derivative instruments are presented on a net basis on our Consolidated Balance Sheets as described above. The following table (in millions) shows the fair value of our derivatives outstanding on a gross and net basis:
 
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts Presented in the Consolidated Balance Sheets
Offsetting Derivative Assets (Liabilities)
 
 
 
As of June 30, 2017
 
 
 
 
 
 
CQP Interest Rate Derivatives
 
$
13

 
$

 
$
13

CCH Interest Rate Derivatives
 
(86
)
 
1

 
(85
)
Liquefaction Supply Derivatives
 
49

 
(4
)
 
45

Liquefaction Supply Derivatives
 
(4
)
 
1

 
(3
)
LNG Trading Derivatives
 
7

 
(2
)
 
5

LNG Trading Derivatives
 
(6
)
 
1

 
(5
)
As of December 31, 2016
 
 
 
 
 


SPL Interest Rate Derivatives
 
$
(6
)
 
$

 
$
(6
)
CQP Interest Rate Derivatives
 
16

 

 
16

CQP Interest Rate Derivatives
 
(3
)
 

 
(3
)
CCH Interest Rate Derivatives
 
(95
)
 
9

 
(86
)
Liquefaction Supply Derivatives
 
82

 
(2
)
 
80

Liquefaction Supply Derivatives
 
(11
)
 
4

 
(7
)
LNG Trading Derivatives
 
21

 
(15
)
 
6

LNG Trading Derivatives
 
(17
)
 
8

 
(9
)
FX Derivatives
 
5

 
(1
)
 
4

FX Derivatives
 
(4
)
 

 
(4
)

NOTE 7—OTHER NON-CURRENT ASSETS

As of June 30, 2017 and December 31, 2016, other non-current assets consisted of the following (in millions):
 
 
June 30,
 
December 31,
 
 
2017
 
2016
Advances made under EPC and non-EPC contracts
 
$
19

 
$
69

Advances made to municipalities for water system enhancements
 
99

 
99

Advances and other asset conveyances to third parties to support LNG terminals
 
49

 
53

Tax-related payments and receivables
 
36

 
31

Equity method investments
 
65

 
10

Cost method investments
 
5

 
5

Other
 
22

 
35

Total other non-current assets, net
 
$
295

 
$
302


Equity Method Investments

As of December 31, 2016, our equity method investments consisted of interests in privately-held companies. During the six months ended June 30, 2017, we acquired an equity interest in Midship Holdings, LLC (“Midship Holdings”), which manages the business and affairs of Midship Pipeline Company, LLC (“Midship Pipeline”). Midship Pipeline is pursuing the development, construction, operation and maintenance of an approximately 230-mile natural gas pipeline project (the “Midship Project”) that connects new production in the Anadarko Basin to Gulf Coast markets. Midship Holdings entered into agreements with investment funds managed by EIG Global Energy Partners (“EIG”) under which EIG-managed funds committed to make an investment of

14


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


up to $500 million (the “EIG Investment”) in the Midship Project, subject to the terms and conditions contained in the applicable agreements. The EIG Investment, when combined with equity contributed by us, is intended to ensure the Midship Project has the equity funding expected to be required to develop and construct the project. Midship Holdings requires acceptable financing arrangements and regulatory and other approvals before construction of the proposed Midship Project commences.

We have determined that Midship Holdings is a variable interest entity (“VIE”) because it is thinly capitalized at formation such that the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support. We do not consolidate Midship Holdings because we do not have power to direct the activities that most significantly impact its economic performance. We continually monitor both consolidated and unconsolidated VIEs to determine if any events have occurred that could cause a change in our identification of a VIE or determination of the primary beneficiary to a VIE. We account for our investment in Midship Holdings under the equity method as we have the ability to exercise significant influence over the operating and financial policies of Midship Holdings through our non-controlling voting rights on its board of managers. Our investment in Midship Holdings at June 30, 2017 was $55 million. Obligations to make additional investments in Midship Holdings are not significant and we have not provided financial support to Midship Holdings beyond amounts contractually required.

Cheniere LNG O&M Services, LLC (“O&M Services”), our wholly owned subsidiary, provides the development, construction, operation and maintenance services associated with the Midship Project pursuant to agreements in which O&M Services receives an agreed upon fee and reimbursement of costs incurred. O&M Services recorded $1 million of income in other—related party during each of the three and six months ended June 30, 2017 and $1 million of accounts receivable—related party as of June 30, 2017 for services provided to Midship Pipeline under these agreements. CCL has entered into transportation precedent agreements with Midship Pipeline to secure firm pipeline transportation capacity for a period of 10 years following commencement of the Midship Project.

Cost Method Investments

Our cost method investments consist of interests in privately-held companies without a readily determinable fair value. The Company’s cost method investments are assessed for impairment quarterly. We determined that it is not practicable to estimate the fair value of these investments on a regular basis and do not reassess the fair value of cost method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. We did not identify events or changes in circumstances that may have a significant adverse effect on the fair value of these investments during the three and six months ended June 30, 2017.

NOTE 8—NON-CONTROLLING INTEREST
 
As of June 30, 2017 and December 31, 2016, we owned 82.7% and 82.6%, respectively, of Cheniere Holdings as well as the director voting share, with the remaining non-controlling interest held by the public. As of June 30, 2017 and December 31, 2016, Cheniere Holdings owned a 55.9% limited partner interest in Cheniere Partners in the form of 12.0 million common units, 45.3 million Class B units and 135.4 million subordinated units, with the remaining non-controlling interest held by Blackstone CQP Holdco LP (“Blackstone CQP Holdco”) and the public. We also own 100% of the general partner interest and the incentive distribution rights in Cheniere Partners. Both Cheniere Holdings and Cheniere Partners are accounted for as variable interest entities. For further information regarding variable interest entities, refer to our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2016.

NOTE 9—ACCRUED LIABILITIES
  
As of June 30, 2017 and December 31, 2016, accrued liabilities consisted of the following (in millions): 
 
 
June 30,
 
December 31,
 
 
2017
 
2016
Interest costs and related debt fees
 
$
207

 
$
273

Compensation and benefits
 
80

 
56

LNG terminals and related pipeline costs
 
346

 
284

Other accrued liabilities
 
41

 
24

Total accrued liabilities
 
$
674

 
$
637

 

15


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


NOTE 10—DEBT
 
As of June 30, 2017 and December 31, 2016, our debt consisted of the following (in millions): 
 
 
June 30,
 
December 31,
 
 
2017
 
2016
Long-term debt:
 
 
 
 
SPL
 
 
 


5.625% Senior Secured Notes due 2021 (“2021 SPL Senior Notes”), net of unamortized premium of $6 and $7
 
$
2,006

 
$
2,007

6.25% Senior Secured Notes due 2022 (“2022 SPL Senior Notes”)
 
1,000

 
1,000

5.625% Senior Secured Notes due 2023 (“2023 SPL Senior Notes”), net of unamortized premium of $5 and $6
 
1,505

 
1,506

5.75% Senior Secured Notes due 2024 (“2024 SPL Senior Notes”)
 
2,000

 
2,000

5.625% Senior Secured Notes due 2025 (“2025 SPL Senior Notes”)
 
2,000

 
2,000

5.875% Senior Secured Notes due 2026 (“2026 SPL Senior Notes”)
 
1,500

 
1,500

5.00% Senior Secured Notes due 2027 (“2027 SPL Senior Notes”)
 
1,500

 
1,500

4.200% Senior Secured Notes due 2028 (“2028 SPL Senior Notes”), net of unamortized discount of $1 and zero
 
1,349

 

5.00% Senior Secured Notes due 2037 (“2037 SPL Senior Notes”)
 
800

 

2015 SPL Credit Facilities
 

 
314

Cheniere Partners
 
 
 
 
2016 CQP Credit Facilities
 
2,560

 
2,560

CCH
 
 
 
 
7.000% Senior Secured Notes due 2024 (“2024 CCH Senior Notes”)
 
1,250

 
1,250

5.875% Senior Secured Notes due 2025 (“2025 CCH Senior Notes”)
 
1,500

 
1,500

5.125% Senior Secured Notes due 2027 (“2027 CCH Senior Notes”)
 
1,500

 

2015 CCH Credit Facility
 
1,942

 
2,381

CCH HoldCo II
 
 
 
 
11.0% Convertible Senior Notes due 2025 (“2025 CCH HoldCo II Convertible Senior Notes”)
 
1,236

 
1,171

Cheniere
 
 
 
 
4.875% Convertible Unsecured Notes due 2021 (“2021 Cheniere Convertible Unsecured Notes”), net of unamortized discount of $134 and $146
 
999

 
960

4.25% Convertible Senior Notes due 2045 (“2045 Cheniere Convertible Senior Notes”), net of unamortized discount of $316 and $317
 
309

 
308

$750 million Cheniere Revolving Credit Facility (“Cheniere Revolving Credit Facility”)
 

 

Unamortized debt issuance costs
 
(302
)
 
(269
)
Total long-term debt, net
 
24,654

 
21,688

 
 
 
 
 
Current debt:
 
 
 
 
$1.2 billion SPL Working Capital Facility (“SPL Working Capital Facility”)
 

 
224

$350 million CCH Working Capital Facility (“CCH Working Capital Facility”)
 

 

Cheniere Marketing trade finance facilities
 

 
23

Total current debt
 

 
247

 
 
 
 
 
Total debt, net
 
$
24,654

 
$
21,935


2017 Debt Issuances and Redemptions

SPL Senior Notes

In February 2017, SPL issued an aggregate principal amount of $800 million of the 2037 SPL Senior Notes on a private placement basis in reliance on the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended. In March 2017, SPL issued an aggregate principal amount of $1.35 billion, before discount, of the 2028 SPL Senior Notes. Net proceeds of the offerings of the 2037 SPL Senior Notes and the 2028 SPL Senior Notes were $789 million and $1.33

16


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


billion, respectively, after deducting the initial purchasers’ commissions (for the 2028 SPL Senior Notes) and estimated fees and expenses. The net proceeds of the 2037 SPL Senior Notes, after provisioning for incremental interest required during construction, were used to repay the then outstanding borrowings of $369 million under the 2015 SPL Credit Facilities and, along with the net proceeds of the 2028 SPL Senior Notes, the remainder is being used to pay a portion of the capital costs in connection with the construction of Trains 1 through 5 of the SPL Project in lieu of the terminated portion of the commitments under the 2015 SPL Credit Facilities.
  
In connection with the issuance of the 2037 SPL Senior Notes and the 2028 SPL Senior Notes, SPL terminated the remaining available balance of $1.6 billion under the 2015 SPL Credit Facilities, resulting in a write-off of debt issuance costs associated with the 2015 SPL Credit Facilities of $42 million during the six months ended June 30, 2017.

The 2037 SPL Senior Notes and the 2028 SPL Senior Notes accrue interest at fixed rates of 5.00% and 4.200%, respectively, and interest is payable semi-annually in arrears. The terms of the 2037 SPL Senior Notes are governed by an indenture which contains customary terms and events of default and certain covenants that, among other things, limit SPL’s ability and the ability of SPL’s restricted subsidiaries to incur additional indebtedness or issue preferred stock, make certain investments or pay dividends or distributions on capital stock or subordinated indebtedness or purchase, redeem or retire capital stock, sell or transfer assets, including capital stock of SPL’s restricted subsidiaries, restrict dividends or other payments by restricted subsidiaries, incur liens, enter into transactions with affiliates, dissolve, liquidate, consolidate, merge, sell or lease all or substantially all of SPL’s assets and enter into certain LNG sales contracts. The 2028 SPL Senior Notes are governed by the same common indenture as the senior notes of SPL other than the 2037 SPL Senior Notes, which also contains customary terms and events of default, covenants and redemption terms.

At any time prior to six months before the respective dates of maturity of the 2037 SPL Senior Notes and the 2028 SPL Senior Notes, SPL may redeem all or part of such notes at a redemption price equal to the “optional redemption” price for the 2037 SPL Senior Notes or the “make-whole” price for the 2028 SPL Senior Notes, as set forth in the respective indentures governing the notes, plus accrued and unpaid interest, if any, to the date of redemption. SPL may also, at any time within six months of the respective maturity dates for the 2037 SPL Senior Notes and the 2028 SPL Senior Notes, redeem all or part of such notes at a redemption price equal to 100% of the principal amount of such notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.

2027 CCH Senior Notes

In May 2017, CCH issued an aggregate principal amount of $1.5 billion of the 2027 CCH Senior Notes, which are jointly and severally guaranteed by its subsidiaries, CCL, CCP and Corpus Christi Pipeline GP, LLC (“CCP GP”, and collectively with CCL and CCP, the “CCH Guarantors”). Net proceeds of the offering of approximately $1.4 billion, after deducting commissions, fees and expenses and provisioning for incremental interest required under the 2027 CCH Senior Notes during construction, were used to prepay a portion of the outstanding borrowings under the 2015 CCH Credit Facility, resulting in a write-off of debt issuance costs associated with the 2015 CCH Credit Facility of $33 million during both the three and six months ended June 30, 2017. Borrowings under the 2027 CCH Senior Notes accrue interest at a fixed rate of 5.125%, and interest on the 2027 CCH Senior Notes is payable semi-annually in arrears. The 2027 CCH Senior Notes are governed by the same common indenture as the other senior notes of CCH (the “CCH Indenture”), which contains customary terms and events of default, covenants and redemption terms.

At any time prior to January 1, 2027, CCH may redeem all or a part of the 2027 CCH Senior Notes at a redemption price equal to the “make-whole” price set forth in the CCH Indenture, plus accrued and unpaid interest, if any, to the date of redemption. CCH also may at any time on or after January 1, 2027 through the maturity date of June 30, 2027, redeem the 2027 CCH Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2027 CCH Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.

In connection with the closing of the sale of the 2027 CCH Senior Notes, CCH and the CCH Guarantors entered into a registration rights agreement (the “CCH Registration Rights Agreement”). Under the terms of the CCH Registration Rights Agreement, CCH and the CCH Guarantors have agreed, and any future guarantors of the 2027 CCH Senior Notes will agree, to use commercially reasonable efforts to file with the SEC and cause to become effective a registration statement relating to an offer to exchange any and all of the 2027 CCH Senior Notes for a like aggregate principal amount of debt securities of CCH with terms identical in all material respects to the 2027 CCH Senior Notes sought to be exchanged (other than with respect to restrictions on

17


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


transfer or to any increase in annual interest rate), within 360 days after May 19, 2017. Under specified circumstances, CCH and the CCH Guarantors have also agreed, and any future guarantors of the 2027 CCH Senior Notes will also agree, to use commercially reasonable efforts to cause to become effective a shelf registration statement relating to resales of the 2027 CCH Senior Notes. CCH will be obligated to pay additional interest on the 2027 CCH Senior Notes if it fails to comply with its obligation to register the 2027 CCH Senior Notes within the specified time period.

Cheniere Revolving Credit Facility

In March 2017, we entered into the Cheniere Revolving Credit Facility that may be used to fund, through loans and letters of credit, equity capital contributions to CCH HoldCo II and its subsidiaries for the development of the CCL Project and, provided that certain conditions are met, for general corporate purposes. No advances or letters of credit under the Cheniere Revolving Credit Facility are available until either (1) Cheniere’s unrestricted cash and cash equivalents are less than $500 million or (2) Train 4 of the SPL Project has achieved substantial completion. We incurred $16 million of debt issuance costs related to the Cheniere Revolving Credit Facility during the six months ended June 30, 2017.

Loans under the Cheniere Revolving Credit Facility accrue interest at a variable rate per annum equal to LIBOR or the base rate (equal to the highest of (1) the prime rate, (2) the federal funds rate plus 0.50% and (3) one month LIBOR plus 1.00%), plus the applicable margin. The applicable margin for LIBOR loans is 3.25% per annum, and the applicable margin for base rate loans is 2.25% per annum. Interest on LIBOR loans is due and payable at the end of each LIBOR period, and interest on base rate loans is due and payable at the end of each calendar quarter. We will also pay (1) a commitment fee on the average daily amount of undrawn commitments at an annual rate of 0.75%, payable quarterly in arrears, and (2) a letter of credit fee at an annual rate equal to the applicable margin for LIBOR loans on the undrawn portion of all letters of credit issued under the Cheniere Revolving Credit Facility. Draws on any letters of credit will accrue interest at an annual rate equal to the base rate plus 2.0%.
 
The Cheniere Revolving Credit Facility matures on March 2, 2021 and contains representations, warranties and affirmative and negative covenants customary for companies like Cheniere with lenders of the type participating in the Cheniere Revolving Credit Facility that limit our ability to make restricted payments, including distributions, unless certain conditions are satisfied, as well as limitations on indebtedness, guarantees, hedging, liens, investments and affiliate transactions. Under the terms of the Cheniere Revolving Credit Facility, we are required to ensure that the sum of our unrestricted cash and the amount of undrawn commitments under the Cheniere Revolving Credit Facility is at least equal to the lesser of (1) 20% of the commitments under the Cheniere Revolving Credit Facility and (2) $100 million.

The Cheniere Revolving Credit Facility is secured by a first priority security interest (subject to permitted liens and other customary exceptions) in substantially all of our assets, including our interests in our direct subsidiaries (excluding CCH HoldCo II).

Credit Facilities

Below is a summary (in millions) of our credit facilities outstanding as of June 30, 2017:
 
 
SPL Working Capital Facility
 
2016 CQP Credit Facilities
 
2015 CCH Credit Facility
 
CCH Working Capital Facility
 
Cheniere Revolving Credit Facility
Original facility size
 
$
1,200

 
$
2,800

 
$
8,404

 
$
350

 
$
750

Outstanding balance
 

 
2,560

 
1,942

 

 

Commitments prepaid or terminated
 

 

 
3,832

 

 

Letters of credit issued
 
366

 
50

 

 
82

 

Available commitment

$
834


$
190


$
2,630


$
268


$
750

 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
LIBOR plus 1.75% or base rate plus 0.75%
 
LIBOR plus 2.25% or base rate plus 1.25% (1)
 
LIBOR plus 2.25% or base rate plus 1.25% (2)
 
LIBOR plus 1.50% - 2.00% or base rate plus 0.50% - 1.00%
 
LIBOR plus 3.25% or base rate plus 2.25%
Maturity date
 
December 31, 2020, with various terms for underlying loans
 
February 25, 2020, with principals due quarterly commencing on February 19, 2019
 
Earlier of May 13, 2022 or second anniversary of CCL Trains 1 and 2 completion date
 
December 14, 2021, with various terms for underlying loans
 
March 2, 2021

18


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


 
(1)
There is a 0.50% step-up for both LIBOR and base rate loans beginning on February 25, 2019.
(2)
There is a 0.25% step-up for both LIBOR and base rate loans following completion of Trains 1 and 2 of the CCL Project.

Convertible Notes

Below is a summary (in millions) of our convertible notes outstanding as of June 30, 2017:
 
 
2021 Cheniere Convertible Unsecured Notes
 
2025 CCH HoldCo II Convertible Senior Notes
 
2045 Cheniere Convertible Senior Notes
Aggregate original principal
 
$
1,000

 
$
1,000

 
$
625

Debt component, net of discount
 
$
999

 
$
1,236

 
$
309

Equity component
 
$
205

 
$

 
$
194

Interest payment method
 
Paid-in-kind

 
Paid-in-kind (1)

 
Cash

Conversion by us (2)
 

 
(3)

 
(4)

Conversion by holders (2)
 
(5)

 
(6)

 
(7)

Conversion basis
 
Cash and/or stock

 
Stock

 
Cash and/or stock

Conversion value in excess of principal
 
$

 
$

 
$

Maturity date
 
May 28, 2021

 
March 1, 2025

 
March 15, 2045

Contractual interest rate
 
4.875
%
 
11.0
%
 
4.25
%
Effective interest rate
 
8.3
%
 
11.9
%
 
9.4
%
Remaining debt discount and debt issuance costs amortization period (8)
 
3.9 years

 
3.3 years

 
27.7 years

 
(1)
Prior to the substantial completion of Train 2 of the CCL Project, interest will be paid entirely in kind. Following this date, the interest generally must be paid in cash; however, a portion of the interest may be paid in kind under certain specified circumstances.
(2)
Conversion is subject to various limitations and conditions.
(3)
Convertible on or after the later of March 1, 2020 and the substantial completion of Train 2 of the CCL Project, provided that our market capitalization is not less than $10.0 billion (“Eligible Conversion Date”). The conversion price is the lower of (1) a 10% discount to the average of the daily volume-weighted average price (“VWAP”) of our common stock for the 90 trading day period prior to the date notice is provided, and (2) a 10% discount to the closing price of our common stock on the trading day preceding the date notice is provided.
(4)
Redeemable at any time after March 15, 2020 at a redemption price payable in cash equal to the accreted amount of the 2045 Cheniere Convertible Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to such redemption date.
(5)
Initially convertible at $93.64 (subject to adjustment upon the occurrence of certain specified events), provided that the closing price of our common stock is greater than or equal to the conversion price on the conversion date.
(6)
Convertible on or after the six-month anniversary of the Eligible Conversion Date, provided that our total market capitalization is not less than $10.0 billion, at a price equal to the average of the daily VWAP of our common stock for the 90 trading day period prior to the date on which notice of conversion is provided.
(7)
Prior to December 15, 2044, convertible only under certain circumstances as specified in the indenture; thereafter, holders may convert their notes regardless of these circumstances. The conversion rate will initially equal 7.2265 shares of our common stock per $1,000 principal amount of the 2045 Cheniere Convertible Senior Notes, which corresponds to an initial conversion price of approximately $138.38 per share of our common stock (subject to adjustment upon the occurrence of certain specified events).
(8)
We amortize any debt discount and debt issuance costs using the effective interest over the period through contractual maturity except for the 2025 CCH HoldCo II Convertible Senior Notes, which are amortized through the date they are first convertible by holders into our common stock.


19


CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)


Interest Expense

Total interest expense, including interest expense related to our convertible notes, consisted of the following (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest cost on convertible notes:
 
 
 
 
 
 
 
 
Interest per contractual rate
 
$
54

 
$
50

 
$
107

 
$
99

Amortization of debt discount
 
7

 
9

 
14

 
18

Amortization of debt issuance costs
 
2

 
1

 
3

 
2

Total interest cost related to convertible notes
 
63


60

 
124

 
119

Interest cost on debt excluding convertible notes
 
314


256

 
607


490

Total interest cost
 
377

 
316

 
731

 
609

Capitalized interest
 
(189
)
 
(210
)
 
(378
)
 
(427
)
Total interest expense, net
 
$
188


$
106

 
$
353

 
$
182


Fair Value Disclosures

The following table (in millions) shows the carrying amount and estimated fair value of our debt:
 
 
June 30, 2017
 
December 31, 2016
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Senior notes, net of premium or discount (1)
 
$
17,110

 
$
18,558

 
$
14,263

 
$
15,210

2037 SPL Senior Notes (2)
 
800

 
860

 

 

Credit facilities (3)
 
4,502

 
4,502

 
5,502

 
5,502

2021 Cheniere Convertible Unsecured Notes, net of discount (2)
 
999

 
1,064

 
960

 
983

2025 CCH HoldCo II Convertible Senior Notes (2)
 
1,236

 
1,468

 
1,171