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, 2016
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            
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, 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. (Check one):
Large accelerated filer x
Accelerated filer                    ¨ 
Non-accelerated filer   ¨ 
Smaller reporting company   ¨
          (Do not check if a smaller reporting company)
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 1, 2016, the issuer had 235,689,131 shares of Common Stock outstanding.

 


CHENIERE ENERGY, INC.
TABLE OF CONTENTS


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




i

DEFINITIONS
As commonly used in the liquefied natural gas industry, to the extent applicable and 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 consisting primarily of methane (CH4) that is in liquid form at near atmospheric pressure
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
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, 2016, including our ownership of certain subsidiaries, and the references to these entities used in this quarterly report:
Unless the context requires otherwise, references to “Cheniere,” the “Company,” “we,” “us” and “our” refer to Cheniere Energy, Inc. (NYSE MKT: LNG) and its consolidated subsidiaries, including our publicly traded subsidiaries, Cheniere Partners (NYSE MKT: CQP) and Cheniere Holdings (NYSE MKT: CQH).
Unless the context requires otherwise, references to the “CCH Group” refer to CCH HoldCo II, CCH HoldCo I, CCH, CCL and CCP, collectively.

2

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





 
June 30,
 
December 31,
 
2016
 
2015
ASSETS
(unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,049,478

 
$
1,201,112

Restricted cash
724,458

 
503,397

Accounts and other receivables
74,283

 
5,749

Inventory
66,322

 
18,125

Other current assets
75,941

 
54,203

Total current assets
1,990,482

 
1,782,586

 
 
 
 
Non-current restricted cash
31,726

 
31,722

Property, plant and equipment, net
18,729,177

 
16,193,907

Debt issuance costs, net
336,474

 
378,677

Non-current derivative assets
20,715

 
30,887

Goodwill
76,819

 
76,819

Other non-current assets
251,458

 
314,455

Total assets
$
21,436,851

 
$
18,809,053

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Accounts payable
$
48,676

 
$
22,820

Accrued liabilities
589,604

 
427,199

Current debt, net
1,677,476

 
1,673,379

Deferred revenue
26,709

 
26,669

Derivative liabilities
72,002

 
35,201

Other current liabilities
54

 
—

Total current liabilities
2,414,521

 
2,185,268

 
 
 
 
Long-term debt, net
17,789,074

 
14,920,427

Non-current deferred revenue
7,500

 
9,500

Non-current derivative liabilities
311,207

 
79,387

Other non-current liabilities
50,382

 
53,068

 
 
 
 
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, 2016 and December 31, 2015
 
 
 
Issued and outstanding: 235.7 million shares and 235.6 million shares at June 30, 2016 and December 31, 2015, respectively
707

 
708

Treasury stock: 11.8 million shares and 11.6 million shares at June 30, 2016 and December 31, 2015, respectively, at cost
(357,491
)
 
(353,927
)
Additional paid-in-capital
3,105,728

 
3,075,317

Accumulated deficit
(4,243,204
)
 
(3,623,948
)
Total stockholders’ deficit
(1,494,260
)
 
(901,850
)
Non-controlling interest
2,358,427

 
2,463,253

Total equity
864,167

 
1,561,403

Total liabilities and equity
$
21,436,851

 
$
18,809,053


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

3


CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) 
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Regasification revenues
$
65,622

 
$
66,489

 
$
131,173

 
$
133,291

LNG revenues (losses)
110,735

 
(706
)
 
113,439

 
(44
)
Other revenues
470

 
2,242

 
1,296

 
3,147

Total revenues
176,827

 
68,025

 
245,908

 
136,394

 
 
 
 
 
 
 
 
Operating costs and expenses
 
 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization expense shown separately below)
85,709

 
1,444

 
100,216

 
2,137

Operating and maintenance expense
45,562

 
17,727

 
81,879

 
53,433

Development expense
1,616

 
16,609

 
3,163

 
32,705

Marketing expense
26,225

 
20,379

 
51,203

 
33,425

General and administrative expense
61,409

 
87,477

 
109,333

 
132,448

Depreciation and amortization expense
32,781

 
20,154

 
56,870

 
37,923

Impairment expense (recovery)
(71
)
 
—

 
10,095

 
176

Other
50

 
109

 
162

 
265

Total operating costs and expenses
253,281

 
163,899

 
412,921

 
292,512

 
 
 
 
 
 
 
 
Loss from operations
(76,454
)
 
(95,874
)
 
(167,013
)
 
(156,118
)
 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense, net of capitalized interest
(105,967
)
 
(85,486
)
 
(182,304
)
 
(145,098
)
Loss on early extinguishment of debt
(55,315
)
 
(7,281
)
 
(56,772
)
 
(96,273
)
Derivative gain (loss), net
(90,621
)
 
46,049

 
(271,555
)
 
(80,641
)
Other income (expense)
(6,930
)
 
283

 
(6,001
)
 
655

Total other expense
(258,833
)
 
(46,435
)
 
(516,632
)
 
(321,357
)
 
 
 
 
 
 
 
 
Loss before income taxes and non-controlling interest
(335,287
)

(142,309
)

(683,645
)

(477,475
)
Income tax benefit (provision)
343


507


(273
)

(171
)
Net loss
(334,944
)

(141,802
)

(683,918
)

(477,646
)
Less: net loss attributable to non-controlling interest
(36,526
)

(23,307
)

(64,662
)

(91,442
)
Net loss attributable to common stockholders
$
(298,418
)

$
(118,495
)

$
(619,256
)

$
(386,204
)












Net loss per share attributable to common stockholders—basic and diluted
$
(1.31
)

$
(0.52
)

$
(2.71
)

$
(1.71
)
 











Weighted average number of common shares outstanding—basic and diluted
228,323


226,481


228,231


226,405

 













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

4


CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
(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, 2015
235,639

 
$
708

 
11,649

 
$
(353,927
)
 
$
3,075,317

 
$
(3,623,948
)
 
$
2,463,253

 
$
1,561,403

Issuances of restricted stock
273

 
1

 
—

 
—

 
(1
)
 
—

 
—

 
—

Forfeitures of restricted stock
(96
)
 
(1
)
 
3

 
—

 
1

 
—

 
—

 
—

Share-based compensation
—

 
—

 
—

 
—

 
29,568

 
—

 
—

 
29,568

Shares repurchased related to share-based compensation
(105
)
 
(1
)
 
105

 
(3,564
)
 
1

 
—

 
—

 
(3,564
)
Excess tax benefit (shortfall) from share-based compensation
—

 
—

 
—

 
—

 
(15
)
 
—

 
—

 
(15
)
Loss attributable to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
(64,662
)
 
(64,662
)
Equity portion of convertible notes, net
—

 
—

 
—

 
—

 
857

 
—

 
—

 
857

Distributions to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
(40,164
)
 
(40,164
)
Net loss
—

 
—

 
—

 
—

 
—

 
(619,256
)
 
—

 
(619,256
)
Balance at June 30, 2016
235,711

 
$
707

 
11,757

 
$
(357,491
)
 
$
3,105,728

 
$
(4,243,204
)
 
$
2,358,427

 
$
864,167


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

5


CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net loss
$
(683,918
)
 
$
(477,646
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Non-cash LNG inventory write-downs
—

 
17,366

Depreciation and amortization expense
56,870

 
37,923

Share-based compensation
51,724

 
66,378

Amortization of debt issuance costs and discount
26,906

 
24,900

Loss on early extinguishment of debt
56,772

 
96,273

Total losses on derivatives, net
295,917

 
80,198

Net cash used for settlement of derivative instruments
(16,798
)
 
(88,934
)
Impairment expense
10,095

 
176

Other
8,811

 
28,957

Changes in restricted cash for certain operating activities
151,676

 
(55,410
)
Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables
(67,760
)
 
(2,396
)
Inventory
(34,003
)
 
(28,919
)
Accounts payable and accrued liabilities
(14,226
)
 
42,101

Deferred revenue
(1,960
)
 
(1,985
)
Other, net
15,860

 
(33,937
)
Net cash used in operating activities
(144,034
)
 
(294,955
)
 
 
 
 
Cash flows from investing activities
 
 
 
Property, plant and equipment, net
(2,277,469
)
 
(4,294,814
)
Use of restricted cash for the acquisition of property, plant and equipment
2,279,835

 
4,183,620

Other
(21,623
)
 
(101,836
)
Net cash used in investing activities
(19,257
)
 
(213,030
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from issuances of debt
5,698,219

 
5,205,000

Repayments of debt
(2,892,965
)
 
—

Debt issuance and deferred financing costs
(97,215
)
 
(411,149
)
Investment in restricted cash
(2,652,576
)
 
(4,518,880
)
Distributions and dividends to non-controlling interest
(40,164
)
 
(40,121
)
Proceeds from exercise of stock options
—

 
1,914

Payments related to tax withholdings for share-based compensation
(3,564
)
 
(6,174
)
Other
(78
)
 
19

Net cash provided by financing activities
11,657

 
230,609

 
 
 
 
Net decrease in cash and cash equivalents
(151,634
)
 
(277,376
)
Cash and cash equivalents—beginning of period
1,201,112

 
1,747,583

Cash and cash equivalents—end of period
$
1,049,478

 
$
1,470,207



 





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—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. 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, operating results or cash flows.

In 2016, we started production at our natural gas liquefaction facilities at the Sabine Pass LNG terminal (the “SPL Project”). As a result, we introduced two new line items entitled “Cost of sales” and “Marketing expense”, and modified the components of activity included in “Operating and maintenance expense” and “General and administrative expense” on our Consolidated Statements of Operations. To conform to the new presentation, reclassifications were made to the prior periods. The components of these line items are as follows:

•
Cost of sales includes costs incurred directly for the production and delivery of LNG from the SPL Project such as natural gas feedstock, variable transportation and storage costs, derivative gains and losses associated with economic hedges to secure natural gas feedstock for the SPL Project, vessel chartering costs and other costs related to converting natural gas into LNG, all to the extent not utilized for the commissioning process. These costs were reclassified from operating and maintenance expense. Also included in cost of sales are purchase and delivery costs of our LNG and natural gas marketing business incurred by Cheniere Marketing.

•
Operating and maintenance expense now primarily includes costs associated with operating and maintaining the SPL Project such as third-party service and maintenance contract costs, payroll and benefit costs of operations personnel, natural gas transportation and storage capacity demand charges, derivative gains and losses related to the sale and purchase of LNG associated with the regasification terminal, insurance and regulatory costs.

•
Marketing expense includes costs directly associated with our LNG and natural gas marketing activities by Cheniere Marketing such as payroll and benefit costs of LNG marketing and origination personnel, professional services and other support costs to contract LNG customers throughout the global marketplace for the SPL Project and our second natural gas liquefaction and export facility at the Corpus Christi LNG terminal (the “CCL Project”) and to place volumes in the market for our portfolio. These costs were reclassified from general and administrative expense.

Additionally, we distinguished and reclassified our historical “LNG terminal revenues” line item into “regasification revenues” and “LNG revenues.” Regasification revenues include LNG regasification capacity reservation fees that are received pursuant to our TUAs and tug services fees that are received by Sabine Pass Tug Services, LLC, a wholly owned subsidiary of SPLNG. Substantially all of our regasification revenues, which are generated by our LNG terminal segment, are received from our two long-term TUA customers. LNG revenues include fees that are received pursuant to our SPAs and related LNG marketing activities. During the three and six months ended June 30, 2016, we received 74% and 72%, respectively, of our net LNG revenues from one SPA customer, which were generated by our LNG terminal segment.

Results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the operating results that will be realized for the year ending December 31, 2016.

For further information, refer to the Consolidated Financial Statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2015.


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, 2016 and December 31, 2015, restricted cash consisted of the following (in thousands):
 
 
June 30,
 
December 31,
 
 
2016
 
2015
Current restricted cash
 
 
 
 
SPLNG debt service and interest payment
 
$
77,415

 
$
77,415

SPL Project
 
263,114

 
189,260

CTPL construction and interest payment
 
—

 
7,882

CQP and cash held by guarantor subsidiaries
 
109,977

 
—

CCL Project
 
223,117

 
46,770

Cash held by our subsidiaries restricted to Cheniere
 
12,821

 
147,138

Other
 
38,014

 
34,932

Total current restricted cash
 
$
724,458

 
$
503,397

 
 
 
 
 
Non-current restricted cash
 
 
 
 
SPLNG debt service
 
$
13,650

 
$
13,650

Other
 
18,076

 
18,072

Total non-current restricted cash
 
$
31,726

 
$
31,722


Under the indentures governing the senior notes issued by SPLNG (the “SPLNG Indentures”), except for permitted tax distributions, SPLNG may not make distributions until certain conditions are satisfied, including: (1) there must be on deposit in an interest payment account an amount equal to one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment, and (2) there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment. Distributions are permitted only after satisfying the foregoing funding requirements, a fixed charge coverage ratio test of 2:1 and other conditions specified in the SPLNG Indentures. During the six months ended June 30, 2016 and 2015, SPLNG made distributions of $145.3 million and $199.6 million, respectively, after satisfying all the applicable conditions in the SPLNG Indentures.

In February 2016, Cheniere Partners entered into a $2.8 billion credit facility (the “2016 CQP Credit Facilities”). Cheniere Partners, and Cheniere Investments and CTPL as Cheniere Partners’ guarantor subsidiaries, are subject to limitations on the use of cash under the terms of the 2016 CQP Credit Facilities and the related depositary agreement governing the extension of credit to Cheniere Partners. Specifically, Cheniere Partners, Cheniere Investments and CTPL may only withdraw funds from collateral accounts held at a designated depositary bank on a monthly basis and for specific purposes, including for the payment of operating expenses. In addition, distributions and capital expenditures may only be made quarterly and are subject to certain restrictions.

NOTE 3—ACCOUNTS AND OTHER RECEIVABLES

As of June 30, 2016 and December 31, 2015, accounts and other receivables consisted of the following (in thousands):
 
 
June 30,
 
December 31,
 
 
2016
 
2015
SPL trade receivable
 
$
67,266

 
$
—

Interest receivable
 
259

 
95

Other accounts receivable
 
6,758

 
5,654

Total accounts and other receivables
 
$
74,283

 
$
5,749

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. As of June 30, 2016, the entire balance of the SPL trade receivable was from a single SPA customer.


8

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

NOTE 4—INVENTORY

As of June 30, 2016 and December 31, 2015, inventory consisted of the following (in thousands):
 
 
June 30,
 
December 31,
 
 
2016
 
2015
Natural gas
 
$
5,338

 
$
5,724

LNG
 
35,526

 
5,148

Materials and other
 
25,458

 
7,253

Total inventory
 
$
66,322

 
$
18,125


NOTE 5—PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consists of LNG terminal costs and fixed assets and other, as follows (in thousands):
 
 
June 30,
 
December 31,
 
 
2016
 
2015
LNG terminal costs
 
 
 
 
LNG terminal
 
$
5,459,151

 
$
2,487,759

LNG terminal construction-in-process
 
13,487,338

 
13,875,204

LNG site and related costs, net
 
38,753

 
33,512

Accumulated depreciation
 
(456,716
)
 
(413,545
)
Total LNG terminal costs, net
 
18,528,526

 
15,982,930

Fixed assets and other
 
 

 
 

Computer and office equipment
 
12,491

 
12,153

Furniture and fixtures
 
17,393

 
17,101

Computer software
 
76,471

 
69,340

Leasehold improvements
 
44,064

 
40,136

Land
 
60,582

 
60,612

Other
 
37,476

 
49,376

Accumulated depreciation
 
(47,826
)
 
(37,741
)
Total fixed assets and other, net
 
200,651

 
210,977

Property, plant and equipment, net
 
$
18,729,177

 
$
16,193,907


During the three and six months ended June 30, 2016, we realized offsets to LNG terminal costs of $131.8 million and $146.0 million, respectively, that were related to the sale of commissioning cargoes because these amounts were earned prior to the start of commercial operations, during the testing phase for the construction of Train 1 of the SPL Project.

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 of our credit facilities (“Interest Rate Derivatives”);
•
commodity derivatives to hedge the exposure to price risk attributable to future: (1) sales of our LNG inventory and (2) purchases of natural gas to operate the Sabine Pass LNG terminal (“Natural Gas Derivatives”);
•
commodity derivatives consisting of natural gas purchase agreements for the commissioning and operation of the SPL Project (“Physical Liquefaction Supply Derivatives”) and associated economic hedges (“Financial Liquefaction Supply Derivatives”, and collectively with the Physical Liquefaction Supply Derivatives, 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”).

9

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

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.

The following table (in thousands) 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, 2016 and December 31, 2015, which are classified as other current assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Consolidated Balance Sheets.
 
Fair Value Measurements as of
 
June 30, 2016
 
December 31, 2015
 
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
$
—

 
$
(20,666
)
 
$
—

 
$
(20,666
)
 
$
—

 
$
(8,740
)
 
$
—

 
$
(8,740
)
CQP Interest Rate Derivatives liability
—

 
(19,148
)
 
—

 
(19,148
)
 
—

 
—

 
—

 
—

CCH Interest Rate Derivatives liability
—

 
(327,342
)
 
—

 
(327,342
)
 
—

 
(104,999
)
 
—

 
(104,999
)
Liquefaction Supply Derivatives asset (liability)
(2,850
)
 
381

 
22,434

 
19,965

 
—

 
(25
)
 
32,492

 
32,467

LNG Trading Derivatives asset (liability)
(1,443
)
 
(10,907
)
 
—

 
(12,350
)
 
—

 
1,053

 
—

 
1,053

Natural Gas Derivatives liability
—

 
—

 
—

 
—

 
—

 
(66
)
 
—

 
(66
)
FX Derivatives asset
—

 
160

 
—

 
160

 
—

 
—

 
—

 
—


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 and our Natural Gas 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.

We acquired $0.8 million of certain LNG Trading Derivatives during the first three months of 2016, which we transferred into Level 1 during the three months ended June 30, 2016. We transferred these LNG Trading Derivatives to Level 1 due to the use of unadjusted quoted exchange prices to calculate the fair value of these LNG Trading derivative positions, which were previously Level 2 as the fair value was calculated using adjusted quoted exchange prices.

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 particular 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 purchase agreements. As of June 30, 2016 and December 31, 2015, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure is under development to accommodate marketable physical gas flow. Accordingly, our internal fair value models are based on market prices that equate to our own contractual pricing due to: (1) the inactive and unobservable market and (2) conditions precedent and their impact on the uncertainty in the timing of our actual receipt of the physical volumes associated with each forward. The fair value of our Physical Liquefaction Supply Derivatives is predominantly driven by market commodity basis prices and our assessment of the associated conditions precedent, including evaluating whether the respective market is available as pipeline infrastructure is developed. Upon the completion and placement into service of relevant pipeline

10

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

infrastructure to accommodate marketable physical gas flow, we recognize a gain or loss based on the fair value of the respective natural gas purchase agreements as of the reporting date.

As all of our Physical Liquefaction Supply Derivatives are either purely index-priced or index-priced with a fixed basis, we do not believe that a significant change in market commodity prices would have a material impact on our Level 3 fair value measurements. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of June 30, 2016:
 
 
Net Fair Value Asset
(in thousands)
 
Valuation Technique
 
Significant Unobservable Input
 
Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives
 
$22,434
 
Income Approach
 
Basis Spread
 
$(0.35) - $(0.02)

The following table (in thousands) shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Balance, beginning of period
 
$
30,054

 
$
342

 
$
32,492

 
$
342

Realized and mark-to-market losses:
 
 
 
 
 
 
 
 
Included in cost of sales (1)
 
(7,855
)
 
27

 
(10,204
)
 
27

Purchases and settlements:
 
 
 
 
 
 
 
 
Purchases
 
(16
)
 
71

 
31

 
71

Settlements (1)
 
(71
)
 
—

 
(128
)
 
—

Transfers out of Level 3 (2)
 
322

 
—

 
243

 
—

Balance, end of period
 
$
22,434

 
$
440

 
$
22,434

 
$
440

Change in unrealized gains relating to instruments still held at end of period
 
$
(7,795
)
 
$
27

 
$
(9,484
)
 
$
27

 
    
(1)
Does not include the decrease in fair value of $0.1 million and $0.7 million related to the realized gains capitalized during the three and six months ended June 30, 2016, respectively.
(2)
Transferred to Level 2 as a result of observable market for the underlying natural gas purchase agreements.
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.  

Interest Rate Derivatives

SPL Interest Rate Derivatives

SPL has 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”). The SPL Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2015 SPL Credit Facilities.

In March 2015, SPL settled a portion of the SPL Interest Rate Derivatives and recognized a derivative loss of $34.7 million within our Consolidated Statements of Operations in conjunction with the termination of approximately $1.8 billion of commitments under the previous credit facilities.

CQP Interest Rate Derivatives

In March 2016, Cheniere Partners entered into interest rate swaps (“CQP Interest Rate Derivatives”) to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the 2016 CQP Credit Facilities. The CQP Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2016 CQP Credit Facilities.

11

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


CCH Interest Rate Derivatives

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”). The CCH Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2015 CCH Credit Facility. The CCH Interest Rate Derivatives have a seven-year term and were contingent upon reaching a final investment decision with respect to the CCL Project, which was reached in May 2015. Upon meeting the contingency related to the CCH Interest Rate Derivatives in May 2015, we paid $50.1 million related to contingency and syndication premiums, which is included in derivative gain (loss), net on our Consolidated Statements of Operations.

As of June 30, 2016, 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
SPL Interest Rate Derivatives
 
$20.0 million
 
$628.8 million
 
August 14, 2012
 
July 31, 2019
 
1.98%
 
One-month LIBOR
CQP Interest Rate Derivatives
 
$225.0 million
 
$1.3 billion
 
March 22, 2016
 
February 29, 2020
 
1.19%
 
One-month LIBOR
CCH Interest Rate Derivatives
 
$28.8 million
 
$5.5 billion
 
May 20, 2015
 
May 31, 2022
 
2.29%
 
One-month LIBOR

The following table (in thousands) shows the fair value and location of our Interest Rate Derivatives on our Consolidated Balance Sheets:
 
 
June 30, 2016
 
December 31, 2015
 
 
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 liabilities
 
$
(7,340
)
 
$
(5,570
)
 
$
(45,149
)
 
$
(58,059
)
 
$
(5,940
)
 
$
—

 
$
(28,559
)
 
$
(34,499
)
Non-current derivative liabilities
 
(13,326
)
 
(13,578
)
 
(282,193
)
 
(309,097
)
 
(2,800
)
 
—

 
(76,440
)
 
(79,240
)
Total derivative liabilities
 
$
(20,666
)
 
$
(19,148
)
 
$
(327,342
)
 
$
(367,156
)
 
$
(8,740
)
 
$
—

 
$
(104,999
)
 
$
(113,739
)

The following table (in thousands) shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
SPL Interest Rate Derivatives gain (loss)
 
$
(4,752
)
 
$
1,469

 
$
(16,030
)
 
$
(35,669
)
CQP Interest Rate Derivatives loss
 
(10,040
)
 
—

 
(19,570
)
 
—

CCH Interest Rate Derivatives gain (loss)
 
(75,877
)
 
44,580

 
(236,053
)
 
(44,972
)

Commodity Derivatives

Liquefaction Supply Derivatives

SPL has entered into index-based physical natural gas supply contracts and associated economic hedges to purchase natural gas for the commissioning and operation of the SPL Project. The terms of the physical natural gas supply contracts primarily range from approximately one to seven years and commence upon the satisfaction of certain conditions precedent, including but not limited to the date of first commercial operation of specified Trains of the SPL Project. We recognize our Physical Liquefaction Supply Derivatives as either assets or liabilities and measure those instruments at fair value. Changes in the fair value of our Physical Liquefaction Supply Derivatives are reported in earnings. As of June 30, 2016, SPL has secured up to approximately

12

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

2,027.5 million MMBtu of natural gas feedstock through natural gas purchase agreements. The notional natural gas position of our Physical Liquefaction Supply Derivatives was approximately 1,114.5 million MMBtu as of June 30, 2016.

Our Financial Liquefaction Supply Derivatives are executed through over-the-counter contracts which are subject to nominal credit risk as these transactions are settled on a daily margin basis with investment grade financial institutions. We are required by these financial institutions to use margin deposits as credit support for our Financial Liquefaction Supply Derivatives activities.

LNG Trading Derivatives

As of June 30, 2016, we have entered into certain LNG Trading Derivatives representing a short position of 18.2 million MMBtu, and we may from time to time enter into certain financial derivatives in the form of swaps, forwards, options or futures to economically hedge exposure to the commodity markets in which we have contractual arrangements to purchase or sell physical LNG. We have entered into LNG Trading Derivatives to secure a fixed price position to minimize future cash flow variability associated with such LNG transactions.

Natural Gas Derivatives

Our Natural Gas Derivatives were executed through over-the-counter contracts which were subject to nominal credit risk as these transactions settled on a daily margin basis with investment grade financial institutions. We were required by these financial institutions to use margin deposits as credit support for our Natural Gas Derivatives activities. As of June 30, 2016, we did not have any open Natural Gas Derivatives positions or margin deposits at financial institutions.

We recognize all commodity derivative instruments, including our Liquefaction Supply Derivatives, LNG Trading Derivatives and Natural Gas Derivatives (collectively, “Commodity Derivatives”), as either assets or liabilities and measure those instruments at fair value.  Changes in the fair value of our Commodity Derivatives are reported in earnings.

The following table (in thousands) shows the fair value and location of our Commodity Derivatives on our Consolidated Balance Sheets:
 
June 30, 2016
 
December 31, 2015
 
Liquefaction Supply Derivatives (1)
 
LNG Trading Derivatives (2)
 
Natural Gas Derivatives
 
Total
 
Liquefaction Supply Derivatives
 
LNG Trading Derivatives (2)
 
Natural Gas Derivatives (3)
 
Total
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other current assets
$
2,526

 
$
232

 
$
—

 
$
2,758

 
$
2,737

 
$
640

 
$
—

 
$
3,377

Non-current derivative assets
20,472

 
243

 
—

 
20,715

 
30,304

 
583

 
—

 
30,887

Total derivative assets
22,998

 
475

 
—

 
23,473

 
33,041

 
1,223

 
—

 
34,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
(3,033
)
 
(10,778
)
 
—

 
(13,811
)
 
(490
)
 
(107
)
 
(66
)
 
(663
)
Non-current derivative liabilities
—

 
(2,047
)
 
—

 
(2,047
)
 
(84
)
 
(63
)
 
—

 
(147
)
Total derivative liabilities
(3,033
)
 
(12,825
)
 
—

 
(15,858
)
 
(574
)
 
(170
)
 
(66
)
 
(810
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset (liabilities), net
$
19,965

 
$
(12,350
)
 
$
—

 
$
7,615

 
$
32,467

 
$
1,053

 
$
(66
)
 
$
33,454

 
    
(1)
Does not include collateral of $0.5 million deposited for such contracts, which is included in other current assets in our Consolidated Balance Sheet as of June 30, 2016.
(2)
Does not include collateral of $15.6 million and $11.0 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, respectively.
(3)
Does not include collateral of $5.5 million deposited for such contracts, which is included in other current assets in our Consolidated Balance Sheet as of December 31, 2015.

13

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

The following table (in thousands) 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, 2016 and 2015:
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Statement of Operations Location
 
2016
 
2015
 
2016
 
2015
Liquefaction Supply Derivatives loss
LNG revenues (losses)
 
$
(34
)
 
$
—

 
$
(6
)
 
$
—

Liquefaction Supply Derivatives gain (loss) (1)
Cost of sales
 
(8,670
)
 
81

 
(12,264
)
 
81

LNG Trading Derivatives loss
LNG revenues (losses)
 
(16,976
)
 
—

 
(12,214
)
 
—

Natural Gas Derivatives gain (loss)
LNG revenues (losses)
 
—

 
67

 
(5
)
 
(98
)
Natural Gas Derivatives gain (loss)
Operating and maintenance expense
 
—

 
(294
)
 
174

 
460

 
(1)    Does not include the realized value associated with derivative instruments that settle through physical delivery.

The use of Commodity Derivatives exposes us to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments in instances when our Commodity Derivatives are in an asset position.

FX Derivatives

Cheniere Marketing has entered into FX Derivatives to protect against the volatility in future cash flows attributable to changes in international currency exchange rates. The FX Derivatives economically hedge the foreign currency exposure arising from cash flows expended for both physical and financial LNG transactions and general and administrative expenses related to operations in countries outside of the United States. The total notional amount of our FX Derivatives was $102.1 million as of June 30, 2016.

The following table (in thousands) 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, 2016
 
December 31, 2015
FX Derivatives
Other current assets
 
$
355

 
$
—

FX Derivatives
Derivative liabilities
 
(132
)
 
—

FX Derivatives
Non-current derivative liabilities
 
(63
)
 
—


The following table (in thousands) 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, 2016 and 2015:
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
Statement of Operations Location
 
2016
 
2015
 
2016
 
2015
FX Derivatives gain
 
LNG revenues (losses)
 
$
2,641

 
$
—

 
$
40

 
$
—

FX Derivatives gain
 
Derivative gain (loss), net
 
48

 
—

 
98

 
—

FX Derivatives loss
 
Other income (expense)
 
(87
)
 
—

 
(87
)
 
—



14

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

Balance Sheet Presentation

Our derivative instruments are presented on a net basis on our Consolidated Balance Sheets as described above. The following table (in thousands) 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, 2016
 
 
 
 
 
 
SPL Interest Rate Derivatives
 
$
(20,666
)
 
$
—

 
$
(20,666
)
CQP Interest Rate Derivatives
 
(19,148
)
 
—

 
(19,148
)
CCH Interest Rate Derivatives
 
(327,342
)
 
—

 
(327,342
)
Liquefaction Supply Derivatives
 
23,165

 
(167
)
 
22,998

Liquefaction Supply Derivatives
 
(4,505
)
 
1,472

 
(3,033
)
LNG Trading Derivatives
 
475

 
—

 
475

LNG Trading Derivatives
 
(22,455
)
 
9,630

 
(12,825
)
FX Derivatives
 
860

 
(505
)
 
355

FX Derivatives
 
(376
)
 
181

 
(195
)
As of December 31, 2015
 
 
 
 
 


SPL Interest Rate Derivatives
 
$
(8,740
)
 
$
—

 
$
(8,740
)
CCH Interest Rate Derivatives
 
(104,999
)
 
—

 
(104,999
)
Liquefaction Supply Derivatives
 
33,636

 
(595
)
 
33,041

Liquefaction Supply Derivatives
 
(574
)
 
—

 
(574
)
LNG Trading Derivatives
 
1,922

 
(699
)
 
1,223

LNG Trading Derivatives
 
(2,826
)
 
2,656

 
(170
)
Natural Gas Derivatives
 
188

 
(254
)
 
(66
)

NOTE 7—OTHER NON-CURRENT ASSETS

As of June 30, 2016 and December 31, 2015, other non-current assets consisted of the following (in thousands):
 
 
June 30,
 
December 31,
 
 
2016
 
2015
Advances made under EPC and non-EPC contracts
 
$
14,000

 
$
83,579

Advances made to municipalities for water system enhancements
 
95,584

 
89,953

Tax-related payments and receivables
 
29,351

 
31,712

Equity method investments
 
11,983

 
20,295

Other
 
100,540

 
88,916

Total other non-current assets
 
$
251,458

 
$
314,455


NOTE 8—VARIABLE INTEREST ENTITY

Cheniere Holdings
On January 1, 2016, we adopted ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This guidance changed (1) the identification of variable interests, (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination.

Cheniere Holdings is a limited liability company formed by us in 2013 to hold our Cheniere Partners limited partner interests. As of June 30, 2016, we owned 80.1% of Cheniere Holdings as well as the director voting share. The director voting share is the sole share entitled to vote in the election of Cheniere Holdings’ board of directors and allows us to remove members of the board of directors at any time and for any reason. If we cease to own greater than 25% of the common shares of Cheniere Holdings or if we choose to relinquish the director voting share, the director voting share will be extinguished.

The board of directors makes all major operating and financial decisions on behalf of Cheniere Holdings. Because ownership of the director voting share allows us to control Cheniere Holdings, irrespective of our majority ownership interest, and the director voting share cannot be removed from our control by the other equity holders of Cheniere Holdings, we have determined that

15

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

Cheniere Holdings is now a variable interest entity. However, this determination has not changed the consolidation of Cheniere Holdings as we have determined that we are its primary beneficiary. Therefore, the determination that Cheniere Holdings is now a variable interest entity had no impact on our Consolidated Financial Statements.

NOTE 9—NON-CONTROLLING INTEREST
 
As of both June 30, 2016 and December 31, 2015, we owned 80.1% of Cheniere Holdings as well as the director voting share, with the remaining non-controlling interest held by the public. Cheniere Holdings owns 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 and the public. We also own 100% of the general partner interest and the incentive distribution rights in Cheniere Partners.

NOTE 10—ACCRUED LIABILITIES
  
As of June 30, 2016 and December 31, 2015, accrued liabilities consisted of the following (in thousands): 
 
 
June 30,
 
December 31,
 
 
2016
 
2015
Interest costs and related debt fees
 
$
173,907

 
$
159,968

Compensation and benefits
 
69,975

 
99,511

SPL Project and CCL Project costs
 
326,788

 
145,759

LNG terminal costs
 
4,795

 
3,918

Other accrued liabilities
 
14,139

 
18,043

Total accrued liabilities
 
$
589,604

 
$
427,199

 

16

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

NOTE 11—DEBT
 
As of June 30, 2016 and December 31, 2015, our debt consisted of the following (in thousands): 
 
 
June 30,
 
December 31,
 
 
2016
 
2015
Long-term debt:
 
 
 
 
SPLNG
 
 
 
 
6.50% Senior Secured Notes due 2020 (“2020 SPLNG Senior Notes”) (1)
 
$
420,000

 
$
420,000

SPL
 
 
 


5.625% Senior Secured Notes due 2021 (“2021 SPL Senior Notes”), net of unamortized premium of $7,959 and $8,718
 
2,007,959

 
2,008,718

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

 
1,000,000

5.625% Senior Secured Notes due 2023 (“2023 SPL Senior Notes”), net of unamortized premium of $6,029 and $6,392
 
1,506,029

 
1,506,392

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

 
2,000,000

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

 
2,000,000

5.875% Senior Secured Notes due 2026 (“2026 SPL Senior Notes”)
 
1,500,000

 
—

2015 SPL Credit Facilities
 
832,695

 
845,000

CTPL
 
 
 
 
$400.0 million Term Loan Facility (“CTPL Term Loan”), net of unamortized discount of zero and $1,429
 
—

 
398,571

Cheniere Partners
 
 
 
 
2016 CQP Credit Facilities
 
450,000

 
—

CCH
 
 
 
 
7.000% Senior Secured Notes due 2024 (“2024 CCH Senior Notes”)
 
1,250,000

 
—

2015 CCH Credit Facility
 
2,730,340

 
2,713,000

CCH HoldCo II
 
 
 
 
11.0% Convertible Senior Notes due 2025 (“2025 CCH HoldCo II Convertible Senior Notes”)
 
1,109,165

 
1,050,588

Cheniere
 
 
 
 
4.875% Convertible Unsecured Notes due 2021 (“2021 Cheniere Convertible Unsecured Notes”), net of unamortized discount of $158,036 and $174,095
 
921,690

 
879,938

4.25% Convertible Senior Notes due 2045 (“2045 Cheniere Convertible Senior Notes”), net of unamortized discount of $317,994 and $319,062
 
307,006

 
305,938

Unamortized debt issuance costs (2)
 
(245,810
)
 
(207,718
)
Total long-term debt, net
 
17,789,074

 
14,920,427

 
 
 
 
 
Current debt:
 
 
 
 
7.50% Senior Secured Notes due 2016 (“2016 SPLNG Senior Notes”), net of unamortized discount of $1,956 and $4,303 (3)
 
1,663,544

 
1,661,197

$1.2 billion SPL Working Capital Facility (“SPL Working Capital Facility”)
 
—

 
15,000

Cheniere Marketing trade finance facilities
 
15,219

 
—

Unamortized debt issuance costs (2)
 
(1,287
)
 
(2,818
)
Total current debt, net
 
1,677,476

 
1,673,379

 
 
 
 
 
Total debt, net
 
$
19,466,550

 
$
16,593,806

 
(1)
Must be redeemed or repaid concurrently with the 2016 SPLNG Senior Notes under the terms of the 2016 CQP Credit Facilities if the obligations under the 2016 SPLNG Senior Notes are satisfied with borrowings under the 2016 CQP Credit Facilities.
(2)
Effective January 1, 2016, we adopted ASU 2015-03 and ASU 2015-15, which require debt issuance costs related to term notes to be presented in the balance sheet as a direct deduction from the debt liability, rather than as an asset, retrospectively for each reporting period presented. As a result, we reclassified $207.8 million and $2.8 million from debt issuance costs, net to long-term debt, net and current debt, net, respectively, as of December 31, 2015.

17

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

(3)
Matures on November 30, 2016. We currently anticipate satisfying this obligation with borrowings under the 2016 CQP Credit Facilities.

2016 Debt Issuances and Redemptions

2026 SPL Senior Notes

In June 2016, SPL issued an aggregate principal amount of $1.5 billion of the 2026 SPL Senior Notes. Net proceeds of the offering of approximately $1.3 billion, after deducting commissions, fees and expenses and incremental interest required under the 2026 SPL Senior Notes during construction, were used to prepay a portion of the outstanding borrowings under the 2015 SPL Credit Facilities, resulting in a write-off of debt issuance costs associated with the 2015 SPL Credit Facilities of $26.0 million during both the three and six months ended June 30, 2016. The 2026 SPL Senior Notes accrue interest at a fixed rate of 5.875% and interest on the 2026 SPL Senior Notes is payable semi-annually in arrears. The terms of the 2026 SPL Senior Notes are governed by the same common indenture as SPL’s other senior notes, which contains customary terms and events of default, covenants and redemption terms.

In connection with the closing of the sale of the 2026 SPL Senior Notes, SPL entered into a Registration Rights Agreement dated June 14, 2016 (the “2026 SPL Registration Rights Agreement”). Under the terms of the 2026 SPL Registration Rights Agreement, SPL has agreed, and any future guarantors of the 2026 SPL Senior Notes will agree, to use commercially reasonable efforts to file with the SEC and cause to become effective a registration statement within 360 days after June 14, 2016 with respect to an offer to exchange any and all of the 2026 SPL Senior Notes for a like aggregate principal amount of debt securities of SPL with terms identical in all material respects to the respective 2026 SPL Senior Notes sought to be exchanged (other than with respect to restrictions on transfer or to any increase in annual interest rate), and that are registered under the Securities Act of 1933, as amended (the “Securities Act”). Under specified circumstances, SPL has also agreed, and any future guarantors will also agree, to use commercially reasonable efforts to cause to become effective a shelf registration statement relating to resales of the 2026 SPL Senior Notes. SPL will be obligated to pay additional interest if it fails to comply with its obligation to register the 2026 SPL Senior Notes within the specified time period.

2024 CCH Senior Notes

In May 2016, CCH issued an aggregate principal amount of $1.25 billion of the 2024 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 “Guarantors”). Net proceeds of the offering of approximately $1.1 billion, after deducting commissions, fees and expenses and incremental interest required under the 2024 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 $29.0 million during both the three and six months ended June 30, 2016. Borrowings under the 2024 CCH Senior Notes accrue interest at a fixed rate of 7.000%, and interest on the 2024 CCH Senior Notes is payable semi-annually in arrears.

The indenture governing the 2024 CCH Senior Notes (the “CCH Indenture”) contains customary terms and events of default and certain covenants that, among other things, limit CCH’s ability and the ability of CCH’s restricted subsidiaries to: incur additional indebtedness or issue preferred stock; make certain investments or pay dividends or distributions on membership interests or subordinated indebtedness or purchase, redeem or retire membership interests; sell or transfer assets, including membership or partnership interests of CCH’s restricted subsidiaries; restrict dividends or other payments by restricted subsidiaries to CCH or any of CCH’s restricted subsidiaries; incur liens; enter into transactions with affiliates; dissolve, liquidate, consolidate, merge, sell or lease all or substantially all of the properties or assets of CCH and its restricted subsidiaries taken as a whole; or permit any Guarantor to dissolve, liquidate, consolidate, merge, sell or lease all or substantially all of its properties and assets.

At any time prior to January 1, 2024, CCH may redeem all or a part of the 2024 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, 2024 through the maturity date of June 30, 2024, redeem the 2024 CCH Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2024 CCH Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.


18

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

In connection with the closing of the sale of the 2024 CCH Senior Notes, CCH and the Guarantors entered into a Registration Rights Agreement dated May 18, 2016 (the “CCH Registration Rights Agreement”). Under the terms of the CCH Registration Rights Agreement, CCH and the Guarantors have agreed, and any future guarantors of the 2024 CCH Senior Notes will agree, to use commercially reasonable efforts to file with the SEC and cause to become effective a registration statement within 360 days after May 18, 2016 with respect to an offer to exchange any and all of the 2024 CCH Senior Notes for a like aggregate principal amount of debt securities of CCH with terms identical in all material respects to the respective 2024 CCH Senior Notes sought to be exchanged (other than with respect to restrictions on transfer or to any increase in annual interest rate), and that are registered under the Securities Act. Under specified circumstances, CCH and the Guarantors have also agreed, and any future guarantors of the 2024 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 2024 CCH Senior Notes. CCH will be obligated to pay additional interest if it fails to comply with its obligation to register the 2024 CCH Senior Notes within the specified time period.

2016 CQP Credit Facilities

In February 2016, Cheniere Partners entered into the $2.8 billion 2016 CQP Credit Facilities, which consist of: (1) a $450.0 million CTPL tranche term loan that was used to prepay the $400.0 million CTPL Term Loan in February 2016, (2) an approximately $2.1 billion SPLNG tranche term loan that will be used to redeem or repay the approximately $2.1 billion of the 2016 SPLNG Senior Notes and the 2020 SPLNG Senior Notes (which must be redeemed or repaid concurrently under the terms of the 2016 CQP Credit Facilities), (3) a $125.0 million debt service reserve credit facility (the “DSR Facility”) that may be used to satisfy a six-month debt service reserve requirement and (4) a $115.0 million revolving credit facility that may be used for general business purposes.

The 2016 CQP Credit Facilities accrue interest at a variable rate per annum equal to LIBOR or the base rate (equal to the highest of the prime rate, the federal funds effective rate, as published by the Federal Reserve Bank of New York, plus 0.50% and adjusted one month LIBOR plus 1.0%), plus the applicable margin. The applicable margin for LIBOR loans is 2.25% per annum, and the applicable margin for base rate loans is 1.25% per annum, in each case with a 0.50% step-up beginning on February 25, 2019. Interest on LIBOR loans is due and payable at the end of each applicable LIBOR period (and at the end of every three month period within the LIBOR period, if any), and interest on base rate loans is due and payable at the end of each calendar quarter.

Cheniere Partners incurred $48.7 million of debt issuance costs during the six months ended June 30, 2016, and will incur an additional $21.5 million of debt issuance costs when the SPLNG tranche is funded. The prepayment of the CTPL Term Loan resulted in a write-off of unamortized discount and debt issuance costs of $1.5 million during the six months ended June 30, 2016. Cheniere Partners pays a commitment fee equal to an annual rate of 40% of the margin for LIBOR loans multiplied by the average daily amount of the undrawn commitment, payable quarterly in arrears. The DSR Facility and the revolving credit facility are both available for the issuance of letters of credit, which incur a fee equal to an annual rate of 2.25% of the undrawn portion with a 0.50% step-up beginning on February 25, 2019.

The 2016 CQP Credit Facilities mature on February 25, 2020, and the outstanding balance may be repaid, in whole or in part, at any time without premium or penalty, except for interest hedging and interest rate breakage costs. The 2016 CQP Credit Facilities contain conditions precedent for extensions of credit, as well as customary affirmative and negative covenants and limit Cheniere Partners’ ability to make restricted payments, including distributions, to once per fiscal quarter as long as certain conditions are satisfied. Under the terms of the 2016 CQP Credit Facilities, Cheniere Partners is required to hedge not less than 50% of the variable interest rate exposure on its projected aggregate outstanding balance, maintain a minimum debt service coverage ratio of at least 1.15x at the end of each fiscal quarter beginning March 31, 2019 and have a projected debt service coverage ratio of 1.55x in order to incur additional indebtedness to refinance a portion of the existing obligations.

The 2016 CQP Credit Facilities are unconditionally guaranteed by each subsidiary of Cheniere Partners other than: (1) SPL, (2) SPLNG until funding of its tranche term loan and (3) certain of the subsidiaries of Cheniere Partners owning other development projects, as well as certain other specified subsidiaries and members of the foregoing entities.



19

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

Credit Facilities

Below is a summary of our credit facilities outstanding as of June 30, 2016 (in thousands):
 
 
2015 SPL Credit Facilities
 
SPL Working Capital Facility
 
2016 CQP Credit Facilities
 
2015 CCH Term Loan Facilities
Original facility size
 
$
4,600,000

 
$
1,200,000

 
$
2,800,000

 
$
8,403,714

Outstanding balance
 
832,695

 
—

 
450,000

 
2,730,340

Commitments terminated
 
1,287,305

 
—

 
—

 
1,050,660

Letters of credit issued
 
—

 
237,270

 
7,500

 
—

Available commitment
 
$
2,480,000

 
$
962,730

 
$
2,342,500

 
$
4,622,714

 
 
 
 
 
 
 
 
 
Interest rate
 
LIBOR plus 1.30% - 1.75% or base rate plus 1.75%
 
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)
Maturity date
 
Earlier of December 31, 2020 or second anniversary of SPL Trains 1 through 5 completion 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
 
(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 the first two Trains of the CCL Project.

Convertible Notes

Below is a summary of our convertible notes outstanding as of June 30, 2016 (in thousands):
 
 
2021 Cheniere Convertible Unsecured Notes
 
2025 CCH HoldCo II Convertible Senior Notes
 
2045 Cheniere Convertible Senior Notes
Aggregate original principal
 
$
1,000,000

 
$
1,000,000

 
$
625,000

Debt component, net of discount
 
$
921,690

 
$
1,109,165

 
$
307,006

Equity component
 
$
203,892

 
$
—

 
$
194,082

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
 
9.1
%
 
11.9
%
 
9.4
%
Remaining debt discount and debt issuance costs amortization period (8)
 
4.9 years

 
4.3 years

 
28.7 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.

20

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

(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 into our common stock.

Interest Expense

Total interest expense, including interest expense related to our convertible notes, consisted of the following (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Interest cost on convertible notes:
 
 
 
 
 
 
 
 
Interest per contractual rate
 
$
49,853

 
$
33,603

 
$
98,893

 
$
47,542

Amortization of debt discount
 
9,100

 
7,116

 
17,985

 
13,714

Amortization of debt issuance costs
 
1,254

 
601

 
2,405

 
615

Total interest cost related to convertible notes
 
60,207


41,320

 
119,283

 
61,871

Interest cost on other debt
 
255,853


199,911

 
490,069


359,998

Total interest cost
 
316,060

 
241,231

 
609,352

 
421,869

Capitalized interest
 
(210,093
)
 
(155,745
)
 
(427,048
)
 
(276,771
)
Total interest expense, net
 
$
105,967


$
85,486

 
$
182,304

 
$
145,098


Fair Value Disclosures

The following table (in thousands) shows the carrying amount and estimated fair value of our debt:
 
 
June 30, 2016
 
December 31, 2015
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Senior Notes, net of premium or discount (1)
 
$
13,347,532