Edgar Filing: CHENIERE ENERGY INC

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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 March 31, 2018

¨ 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, 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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of May 1, 2018, the issuer had 243,605,883 shares of Common Stock outstanding.

CHENIERE ENERGY, INC.

TABLE OF CONTENTS



	Definitions	1
Part I. Financial Information
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statement of Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	46

Part II. Other Information
Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 6.	Exhibits	48

	Signatures	49

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		U.S. 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

Abbreviated Legal Entity Structure

The following diagram depicts our abbreviated legal entity structure as of March 31, 2018, 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. and its consolidated subsidiaries, including our publicly traded subsidiaries, Cheniere Partners and Cheniere Holdings.

Unless the context requires otherwise, references to the “CCH Group” refer to CCH HoldCo II, CCH HoldCo I, CCH, CCL and CCP, collectively.


PART I.	FINANCIAL INFORMATION


ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)



	March 31,			December 31,
	2018			2017
ASSETS	(unaudited)
Current assets
Cash and cash equivalents	$	715		$	722
Restricted cash	1,696			1,880
Accounts and other receivables	606			369
Accounts receivable—related party	2			2
Inventory	123			243
Derivative assets	23			57
Other current assets	103			96
Total current assets	3,268			3,369

Non-current restricted cash	11			11
Property, plant and equipment, net	24,474			23,978
Debt issuance costs, net	138			149
Non-current derivative assets	81			34
Goodwill	77			77
Other non-current assets, net	292			288
Total assets	$	28,341		$	27,906

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	21		$	25
Accrued liabilities	729			1,078
Deferred revenue	120			111
Derivative liabilities	25			37
Total current liabilities	895			1,251

Long-term debt, net	25,656			25,336
Non-current deferred revenue	—			1
Non-current derivative liabilities	9			19
Other non-current liabilities	74			59

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 March 31, 2018 and December 31, 2017
Issued: 250.5 million shares and 250.1 million shares at March 31, 2018 and December 31, 2017, respectively
Outstanding: 237.9 million shares and 237.6 million shares at March 31, 2018 and December 31, 2017, respectively	1			1
Treasury stock: 12.6 million shares and 12.5 million shares at March 31, 2018 and December 31, 2017, respectively, at cost	(392		)	(386		)
Additional paid-in-capital	3,264			3,248
Accumulated deficit	(4,270		)	(4,627		)
Total stockholders’ deficit	(1,397		)	(1,764		)
Non-controlling interest	3,104			3,004
Total equity	1,707			1,240
Total liabilities and equity	$	28,341		$	27,906

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

(unaudited)



	Three Months Ended March 31,
	2018			2017
Revenues
LNG revenues	$	2,166		$	1,143
Regasification revenues	65			65
Other revenues	10			3
Other—related party	1			—
Total revenues	2,242			1,211

Operating costs and expenses
Cost of sales (excluding depreciation and amortization expense shown separately below)	1,178			624
Operating and maintenance expense	140			78
Development expense	1			3
Selling, general and administrative expense	67			54
Depreciation and amortization expense	109			70
Restructuring expense	—			6
Total operating costs and expenses	1,495			835

Income from operations	747			376

Other income (expense)
Interest expense, net of capitalized interest	(216		)	(165		)
Loss on early extinguishment of debt	—			(42		)
Derivative gain, net	77			1
Other income	7			2
Total other expense	(132		)	(204		)

Income before income taxes and non-controlling interest	615			172
Income tax provision	(15		)	—
Net income	600			172
Less: net income attributable to non-controlling interest	243			118
Net income attributable to common stockholders	$	357		$	54

Net income per share attributable to common stockholders—basic	$	1.52		$	0.23
Net income per share attributable to common stockholders—diluted	$	1.50		$	0.23

Weighted average number of common shares outstanding—basic	235.5			232.4
Weighted average number of common shares outstanding—diluted	238.0			232.7

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

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			Additional Paid-in Capital		Accumulated Deficit			Non-controlling Interest			Total Equity
Balance at December 31, 2017	237.6	$	1	12.5	$	(386	)	$	3,248	$	(4,627	)	$	3,004		$	1,240
Issuances of restricted stock	0.3	—		—	—			—		—			—			—
Share-based compensation	—	—		—	—			16		—			—			16
Shares repurchased related to share-based compensation	—	—		0.1	(6		)	—		—			—			(6		)
Net income attributable to non-controlling interest	—	—		—	—			—		—			243			243
Distributions to non-controlling interest	—	—		—	—			—		—			(143		)	(143		)
Net income	—	—		—	—			—		357			—			357
Balance at March 31, 2018	237.9	$	1	12.6	$	(392	)	$	3,264	$	(4,270	)	$	3,104		$	1,707

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)



	Three Months Ended March 31,
	2018			2017
Cash flows from operating activities
Net income	$	600		$	172
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	109			70
Share-based compensation expense	28			24
Non-cash interest expense	15			20
Amortization of debt issuance costs, deferred commitment fees, premium and discount	17			17
Loss on early extinguishment of debt	—			42
Total losses (gains) on derivatives, net	(31		)	44
Net cash used for settlement of derivative instruments	(4		)	(29		)
Other	(10		)	—
Changes in operating assets and liabilities:
Accounts and other receivables	(237		)	(6		)
Inventory	120			54
Accounts payable and accrued liabilities	(156		)	(76		)
Deferred revenue	8			(11		)
Other, net	10			(12		)
Net cash provided by operating activities	469			309

Cash flows from investing activities
Property, plant and equipment, net	(776		)	(1,319		)
Other	—			29
Net cash used in investing activities	(776		)	(1,290		)

Cash flows from financing activities
Proceeds from issuances of debt	266			2,862
Repayments of debt	—			(703		)
Debt issuance and deferred financing costs	(1		)	(43		)
Distributions and dividends to non-controlling interest	(143		)	(20		)
Payments related to tax withholdings for share-based compensation	(6		)	(1		)
Net cash provided by financing activities	116			2,095

Net increase (decrease) in cash, cash equivalents and restricted cash	(191		)	1,114
Cash, cash equivalents and restricted cash—beginning of period	2,613			1,827
Cash, cash equivalents and restricted cash—end of period	$	2,422		$	2,941

Balances per Consolidated Balance Sheet:



	March 31,
	2018
Cash and cash equivalents	$	715
Restricted cash	1,696
Non-current restricted cash	11
Total cash, cash equivalents and restricted cash	$	2,422

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

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 (described below) 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 4 are operational, Train 5 is under construction and Train 6 is being commercialized and has all necessary regulatory approvals in place. 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 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 stages. The first stage includes Trains 1 and 2, two LNG storage tanks, one complete marine berth and a second partial berth and all of the CCL Project’s necessary infrastructure facilities (“Stage 1”). The second stage includes Train 3, one LNG storage tank and the completion of the second partial berth (“Stage 2”). The CCL Project also includes a 23-mile natural gas supply pipeline that will interconnect the Corpus Christi LNG terminal with several interstate and intrastate natural gas pipelines (the “Corpus Christi Pipeline”), which is being constructed concurrently with the first stage. Trains 1 and 2 are currently under construction, and Train 3 is being commercialized and has all necessary regulatory approvals in place. The construction of the Corpus Christi Pipeline is expected to be completed in second quarter of 2018.

Additionally, we are developing an expansion of the Corpus Christi LNG terminal adjacent to the CCL Project and recently amended our regulatory filings with FERC to incorporate a project design change, from two Trains with an expected aggregate nominal production capacity of approximately 9.0 mtpa to up to seven midscale Trains with an expected aggregate nominal production capacity of approximately 9.5 mtpa. We remain focused on leveraging infrastructure through the expansion of our existing sites. We are also in various stages of developing other projects, including infrastructure projects in support of natural gas supply and LNG demand, 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, 2017. 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 did not have a material effect on our consolidated financial position, results of operations or cash flows.

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequent amendments thereto (“ASC 606”) using the full retrospective method. The adoption of ASC 606 represents a change in accounting principle that will provide financial statement readers with enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of ASC 606 did not impact our previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.

Results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2018.

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 March 31, 2018 and December 31, 2017, restricted cash consisted of the following (in millions):



	March 31,		December 31,
	2018		2017
Current restricted cash
SPL Project	$	561	$	544
Cheniere Partners and cash held by guarantor subsidiaries	916		1,045
CCL Project	83		227
Cash held by our subsidiaries restricted to Cheniere	136		64
Total current restricted cash	$	1,696	$	1,880

Non-current restricted cash
Other	$	11	$	11

Under Cheniere Partners’ $2.8 billion credit facilities (the “2016 CQP Credit Facilities”), Cheniere Partners, as well as Cheniere Investments, SPLNG 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, SPLNG 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 March 31, 2018 and December 31, 2017, accounts and other receivables consisted of the following (in millions):



	March 31,		December 31,
	2018		2017
Trade receivables
SPL	$	232	$	185
Cheniere Marketing	351		163
Other accounts receivable	23		21
Total accounts and other receivables	$	606	$	369

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 March 31, 2018 and December 31, 2017, inventory consisted of the following (in millions):



	March 31,		December 31,
	2018		2017
Natural gas	$	16	$	17
LNG	24		44
LNG in-transit	30		130
Materials and other	53		52
Total inventory	$	123	$	243

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):



	March 31,			December 31,
	2018			2017
LNG terminal costs
LNG terminal	$	12,675		$	12,687
LNG terminal construction-in-process	12,547			11,932
LNG site and related costs	86			86
Accumulated depreciation	(983		)	(882		)
Total LNG terminal costs, net	24,325			23,823
Fixed assets and other
Computer and office equipment	14			14
Furniture and fixtures	19			19
Computer software	93			92
Leasehold improvements	41			41
Land	59			59
Other	16			16
Accumulated depreciation	(93		)	(86		)
Total fixed assets and other, net	149			155
Property, plant and equipment, net	$	24,474		$	23,978

Depreciation expense was $108 million and $70 million during the three months ended March 31, 2018 and 2017, respectively.

We realized offsets to LNG terminal costs of $131 million in the three months ended March 31, 2017 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. We did not realize any offsets to LNG terminal costs in the three months ended March 31, 2018.

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 both LNG Trading Derivatives and operations in countries outside of the United States (“FX Derivatives”).

We recognize our derivative instruments as either assets or liabilities and measure those instruments at fair value. None of our derivative instruments are designated as cash flow hedging instruments, and changes in fair value are recorded within our Consolidated Statements of Income to the extent not utilized for the commissioning process.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The following table shows the fair value of our derivative instruments that are required to be measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, which are classified as derivative assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Consolidated Balance Sheets (in millions).



	Fair Value Measurements as of
	March 31, 2018											December 31, 2017
	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
CQP Interest Rate Derivatives asset	$	—		$	27		$	—	$	27		$	—		$	21		$	—	$	21
CCH Interest Rate Derivatives asset (liability)	—			43			—		43			—			(32		)	—		(32		)
Liquefaction Supply Derivatives asset	—			—			10		10			2			10			43		55
LNG Trading Derivatives asset (liability)	(9		)	3			—		(6		)	(13		)	5			—		(8		)
FX Derivatives liability	—			(4		)	—		(4		)	—			(1		)	—		(1		)

There have been no changes to our evaluation of and accounting for our derivative positions during the three months ended March 31, 2018. 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, 2017 for additional information.

We value our Interest Rate Derivatives using an income-based approach utilizing observable inputs to the valuation model including interest rate curves, risk adjusted discount rates, credit spreads and other relevant data. We value our LNG Trading Derivatives and our Liquefaction Supply Derivatives using market based approach incorporating present value techniques, as needed, using observable commodity price curves, when available, and other relevant data. We value our FX Derivatives with a market approach using observable FX rates and other relevant data.

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 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.

We include a portion of our Physical Liquefaction Supply Derivatives as Level 3 within the valuation hierarchy as the fair value is developed through the use of internal models which may be impacted by inputs that are unobservable in the marketplace. 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. As of March 31, 2018 and December 31, 2017, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure is under development to accommodate marketable physical gas flow.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The Level 3 fair value measurements of our Physical Liquefaction Supply Derivatives could be materially impacted by a significant change in certain natural gas market basis spreads due to the contractual notional amount represented by our Level 3 positions, which is a substantial portion of our overall Physical Liquefaction Supply portfolio. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of March 31, 2018:



	Net Fair Value Asset (in millions)	Valuation Approach	Significant Unobservable Input	Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives	$10	Market approach incorporating present value techniques	Basis Spread	$(0.725) - $0.095

The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three months ended March 31, 2018 and 2017 (in millions):



	Three Months Ended March 31,
	2018			2017
Balance, beginning of period	$	43		$	79
Realized and mark-to-market losses:
Included in cost of sales	(13		)	(41		)
Purchases and settlements:
Purchases	3			4
Settlements	(23		)	(1		)
Balance, end of period	$	10		$	41
Change in unrealized gains relating to instruments still held at end of period	$	(13	)	$	(41	)

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. Additionally, we evaluate our own ability to meet our commitments in instances where our derivative instruments are in a liability 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

During the three months ended March 31, 2018, 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 its 2016 CQP Credit Facilities or the interest rate swaps (“CCH Interest Rate Derivatives”) entered into by CCH 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”). 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, 2017 for additional information.

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 of March 31, 2018, 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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The following table shows the fair value and location of our Interest Rate Derivatives on our Consolidated Balance Sheets (in millions):



	March 31, 2018								December 31, 2017
	CQP Interest Rate Derivatives		CCH Interest Rate Derivatives			Total			CQP Interest Rate Derivatives		CCH Interest Rate Derivatives			Total
Balance Sheet Location
Derivative assets	$	12	$	—		$	12		$	7	$	—		$	7
Non-current derivative assets	15		49			64			14		3			17
Total derivative assets	27		49			76			21		3			24

Derivative liabilities	—		(6		)	(6		)	—		(20		)	(20		)
Non-current derivative liabilities	—		—			—			—		(15		)	(15		)
Total derivative liabilities	—		(6		)	(6		)	—		(35		)	(35		)

Derivative asset (liability), net	$	27	$	43		$	70		$	21	$	(32	)	$	(11	)

The following table shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in derivative gain, net on our Consolidated Statements of Income during the three months ended March 31, 2018 and 2017 (in millions):



	Three Months Ended March 31,
	2018		2017
CQP Interest Rate Derivatives gain	$	8	$	2
CCH Interest Rate Derivatives gain	69		1
SPL Interest Rate Derivatives loss	—		(2		)

Commodity Derivatives

The following table shows the fair value and location of our Liquefaction Supply Derivatives and LNG Trading Derivatives (collectively, “Commodity Derivatives”) on our Consolidated Balance Sheets (in millions, except notional amount):



	March 31, 2018									December 31, 2017
	Liquefaction Supply Derivatives (1)			LNG Trading Derivatives (2)			Total			Liquefaction Supply Derivatives (1)			LNG Trading Derivatives (2)			Total
Balance Sheet Location
Derivative assets	$	8		$	3		$	11		$	41		$	9		$	50
Non-current derivative assets	9			7			16			17			—			17
Total derivative assets	17			10			27			58			9			67

Derivative liabilities	(4		)	(14		)	(18		)	—			(17		)	(17		)
Non-current derivative liabilities	(3		)	(2		)	(5		)	(3		)	—			(3		)
Total derivative liabilities	(7		)	(16		)	(23		)	(3		)	(17		)	(20		)

Derivative asset (liability), net	$	10		$	(6	)	$	4		$	55		$	(8	)	$	47

Notional amount (in TBtu) (3)	2,573			27						2,539			25


(1)	Does not include a collateral call of $1 million for such contracts, which is included in other current assets in our Consolidated Balance Sheets as of both March 31, 2018 and December 31, 2017.


(2)	Does not include collateral of $25 million and $28 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, respectively.


(3)	SPL had secured up to approximately 2,179 TBtu and 2,214 TBtu of natural gas feedstock through natural gas supply contracts as of March 31, 2018 and December 31, 2017, respectively. CCL has secured up to approximately 2,057 TBtu and 2,024 TBtu of natural gas feedstock through natural gas supply contracts, a portion of which is subject to the

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

achievement of certain project milestones and other conditions precedent, as of March 31, 2018 and December 31, 2017, respectively.

The following table shows the changes in the fair value, settlements and location of our Commodity Derivatives recorded on our Consolidated Statements of Income during the three months ended March 31, 2018 and 2017 (in millions):



	Statement of Income Location (1)	Three Months Ended March 31,
	Statement of Income Location (1)	2018		2017
LNG Trading Derivatives gain (loss)	LNG revenues	$	7	$	(6	)
Liquefaction Supply Derivatives loss (2)	Cost of sales	50		39


(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 shows the fair value and location of our FX Derivatives on our Consolidated Balance Sheets (in millions):



		Fair Value Measurements as of
	Balance Sheet Location	March 31, 2018			December 31, 2017
FX Derivatives	Non-current derivative assets	$	1		$	—
FX Derivatives	Derivative liabilities	(1		)	—
FX Derivatives	Non-current derivative liabilities	(4		)	(1		)

The total notional amount of our FX Derivatives was $79 million and $27 million as of March 31, 2018 and December 31, 2017, respectively.

The following table shows the changes in the fair value of our FX Derivatives recorded on our Consolidated Statements of Income during the three months ended March 31, 2018 and 2017 (in millions):



		Three Months Ended March 31,
	Statement of Income Location	2018			2017
FX Derivatives loss	LNG revenues	$	(3	)	$	—

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 shows the fair value of our derivatives outstanding on a gross and net basis (in millions):



	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
Offsetting Derivative Assets (Liabilities)	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
As of March 31, 2018
CQP Interest Rate Derivatives	$	27		$	—		$	27
CCH Interest Rate Derivatives	49			—			49
CCH Interest Rate Derivatives	(7		)	1			(6		)
Liquefaction Supply Derivatives	25			(8		)	17
Liquefaction Supply Derivatives	(10		)	3			(7		)
LNG Trading Derivatives	16			(6		)	10
LNG Trading Derivatives	(22		)	6			(16		)
FX Derivatives	1			—			1
FX Derivatives	(5		)	—			(5		)
As of December 31, 2017
CQP Interest Rate Derivatives	$	21		$	—		$	21
CCH Interest Rate Derivatives	3			—			3
CCH Interest Rate Derivatives	(35		)	—			(35		)
Liquefaction Supply Derivatives	64			(6		)	58
Liquefaction Supply Derivatives	(3		)	—			(3		)
LNG Trading Derivatives	9			—			9
LNG Trading Derivatives	(37		)	20			(17		)
FX Derivatives	(1		)	—			(1		)

NOTE 7—OTHER NON-CURRENT ASSETS

As of March 31, 2018 and December 31, 2017, other non-current assets, net consisted of the following (in millions):



	March 31,		December 31,
	2018		2017
Advances made under EPC and non-EPC contracts	$	18	$	26
Advances made to municipalities for water system enhancements	93		97
Advances and other asset conveyances to third parties to support LNG terminals	53		48
Tax-related payments and receivables	28		29
Equity method investments	64		64
Other	36		24
Total other non-current assets, net	$	292	$	288

Equity Method Investments

Our equity method investments consist of interests in privately-held companies. In 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 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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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 was $55 million at both March 31, 2018 and December 31, 2017. 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 and zero of income in other—related party during the three months ended March 31, 2018 and 2017, respectively, and $2 million of accounts receivable—related party as of both March 31, 2018 and December 31, 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.

NOTE 8—NON-CONTROLLING INTEREST

As of both March 31, 2018 and December 31, 2017, we owned 82.7% of Cheniere Holdings as well as the director voting share, with the remaining non-controlling interest held by the public. Cheniere Holdings owns a 48.6% limited partner interest in Cheniere Partners in the form of 104.5 million common 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. Both Cheniere Holdings and Cheniere Partners are accounted for as variable interest entities. See Note 9—Variable Interest Entities of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2017 for further information.

NOTE 9—ACCRUED LIABILITIES

As of March 31, 2018 and December 31, 2017, accrued liabilities consisted of the following (in millions):



	March 31,		December 31,
	2018		2017
Interest costs and related debt fees	$	251	$	397
Compensation and benefits	47		141
LNG terminals and related pipeline costs	380		490
Other accrued liabilities	51		50
Total accrued liabilities	$	729	$	1,078

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 10—DEBT

As of March 31, 2018 and December 31, 2017, our debt consisted of the following (in millions):



	March 31,			December 31,
	2018			2017
Long-term debt:
SPL
5.625% Senior Secured Notes due 2021 (“2021 SPL Senior Notes”), net of unamortized premium of $5 and $6	$	2,005		$	2,006
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 $5	1,505			1,505
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 $1	1,349			1,349
5.00% Senior Secured Notes due 2037 (“2037 SPL Senior Notes”)	800			800
Cheniere Partners
5.250% Senior Notes due 2025 (“2025 CQP Senior Notes”)	1,500			1,500
2016 CQP Credit Facilities	1,090			1,090
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			1,500
2015 CCH Credit Facility	2,751			2,485
CCH HoldCo II
11.0% Convertible Senior Notes due 2025 (“2025 CCH HoldCo II Convertible Senior Notes”)	1,341			1,305
Cheniere
4.875% Convertible Unsecured Notes due 2021 (“2021 Cheniere Convertible Unsecured Notes”), net of unamortized discount of $114 and $121	1,047			1,040
4.25% Convertible Senior Notes due 2045 (“2045 Cheniere Convertible Senior Notes”), net of unamortized discount of $314 and $314	311			311
$750 million Cheniere Revolving Credit Facility (“Cheniere Revolving Credit Facility”)	—			—
Unamortized debt issuance costs	(293		)	(305		)
Total long-term debt, net	25,656			25,336

Current debt:
$1.2 billion SPL Working Capital Facility (“SPL Working Capital Facility”)	—			—
$350 million CCH Working Capital Facility (“CCH Working Capital Facility”)	—			—
Cheniere Marketing trade finance facilities	—			—
Total current debt	—			—

Total debt, net	$	25,656		$	25,336

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 March 31, 2018 (in millions):



	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
Less:
Outstanding balance	—		1,090		2,751		—		—
Commitments prepaid or terminated	—		1,470		3,832		—		—
Letters of credit issued	706		20		—		289		—
Available commitment	$	494	$	220	$	1,821	$	61	$	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 principal payments due quarterly commencing on March 31, 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


(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 the completion of Trains 1 and 2 of the CCL Project as defined in the common terms agreement.

Convertible Notes

Below is a summary of our convertible notes outstanding as of March 31, 2018 (in millions):



	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	$	1,047		$	1,341		$	311
Equity component	$	206		$	—		$	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)	8.3		%	11.9		%	9.4		%
Remaining debt discount and debt issuance costs amortization period (9)	3.2 years			2.5 years			27.0 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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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)	Rate to accrete the discounted carrying value of the convertible notes to the face value over the remaining amortization period.


(9)	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.

Restrictive Debt Covenants

As of March 31, 2018, each of our issuers was in compliance with all covenants related to their respective debt agreements.

Interest Expense

Total interest expense, including interest expense related to our convertible notes, consisted of the following (in millions):



	Three Months Ended March 31,
	2018			2017
Interest cost on convertible notes:
Interest per contractual rate	$	58		$	53
Amortization of debt discount	8			7
Amortization of debt issuance costs	2			2
Total interest cost related to convertible notes	68			62
Interest cost on debt excluding convertible notes	336			292
Total interest cost	404			354
Capitalized interest	(188		)	(189		)
Total interest expense, net	$	216		$	165

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Fair Value Disclosures

The following table shows the carrying amount and estimated fair value of our debt (in millions):



	March 31, 2018				December 31, 2017
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Senior notes, net of premium or discount (1)	$	18,609	$	19,557	$	18,610	$	20,075
2037 SPL Senior Notes (2)	800		838		800		871
Credit facilities (3)	3,841		3,841		3,575		3,575
2021 Cheniere Convertible Unsecured Notes, net of discount (2)	1,047		1,152		1,040		1,136
2025 CCH HoldCo II Convertible Senior Notes (2)	1,341		1,521		1,305		1,535
2045 Cheniere Convertible Senior Notes, net of discount (4)	311		485		311		447

(1)

Includes 2021 SPL Senior Notes, 2022 SPL Senior Notes, 2023 SPL Senior Notes, 2024 SPL Senior Notes, 2025 SPL Senior Notes, 2026 SPL Senior Notes, 2027 SPL Senior Notes, 2028 SPL Senior Notes, 2025 CQP Senior Notes, 2024 CCH Senior Notes, 2025 CCH Senior Notes and 2027 CCH Senior Notes. The Level 2 estimated fair value was based on quotes obtained from broker-dealers or market makers of these senior notes and other similar instruments.


(2)	The Level 3 estimated fair value was calculated based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including our stock price and interest rates based on debt issued by parties with comparable credit ratings to us and inputs that are not observable in the market.

(3)

Includes SPL Working Capital Facility, 2016 CQP Credit Facilities, 2015 CCH Credit Facility, CCH Working Capital Facility, Cheniere Revolving Credit Facility and Cheniere Marketing trade finance facilities. The Level 3 estimated fair value approximates the principal amount because the interest rates are variable and reflective of market rates and the debt may be repaid, in full or in part, at any time without penalty.


(4)	The Level 1 estimated fair value was based on unadjusted quoted prices in active markets for identical liabilities that we had the ability to access at the measurement date.

NOTE 11—REVENUES FROM CONTRACTS WITH CUSTOMERS

The following table represents a disaggregation of revenue earned from contracts with customers during the three months ended March 31, 2018 and 2017 (in millions):



	Three Months Ended March 31,
	2018		2017
LNG revenues	$	2,143	$	1,143
Regasification revenues	65		65
Other revenues	10		1
Other—related party	1		—
Total revenues from customers	2,219		1,209
Revenues from derivative instruments	23		2
Total revenues	$	2,242	$	1,211

LNG Revenues

We have entered into numerous SPAs with third party customers for the sale of LNG on a Free on Board (“FOB”) (delivered to the customer at either the Sabine Pass or Corpus Christi LNG terminal) or Delivered at Terminal (“DAT”) (delivered to the customer at their LNG receiving terminal) basis. Our customers generally purchase LNG for a price consisting of a fixed fee per MMBtu of LNG (a portion of which is subject to annual adjustment for inflation) plus a variable fee per MMBtu of LNG equal to approximately 115% of Henry Hub. The fixed fee component is the amount payable to us regardless of a cancellation or suspension of LNG cargo deliveries by the customers. The variable fee component is the amount generally payable to us only upon delivery of LNG plus all future adjustments to the fixed fee for inflation. The SPAs and contracted volumes to be made available under the SPAs are not tied to a specific Train; however, the term of each SPA generally commences upon the date of first commercial delivery of a specified Train.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

We intend to primarily use LNG sourced from our Sabine Pass or Corpus Christi terminal to provide contracted volumes to our customers. However, we supplement this LNG with volumes procured from third parties. We recognized $110 million and $48 million in LNG revenues from LNG that was procured from third parties for the three months ended March 31, 2018 and 2017.

Revenues from the sale of LNG are recognized at a point in time when the LNG is delivered to the customer, either at the Sabine Pass LNG terminal or at the customer’s LNG receiving terminal, based on the terms of the contract, which is the point legal title, physical possession and the risks and rewards of ownership transfers to the customer. Each individual molecule of LNG is viewed as a separate performance obligation. The stated contract price (including both fixed and variable fees) per MMBtu in each LNG sales arrangement is representative of the stand-alone selling price for LNG at the time the sale was negotiated. We have concluded that the variable fees meet the optional exception for allocating variable consideration. As such, the variable consideration for these contracts is allocated to each distinct molecule of LNG and recognized when that distinct molecule of LNG is delivered to the customer. Because of the use of the optional exception, variable consideration related to the sale of LNG is also not included in the transaction price.

When we sell LNG on a DAT basis, we consider all transportation costs, including vessel chartering, loading/unloading and canal fees, as fulfillment costs and not as separate services provided to the customer within the arrangement, regardless of whether or not such activities occur prior to or after the customer obtains control of the LNG. We expense fulfillment costs as incurred unless otherwise dictated by GAAP.

Fees received pursuant to SPAs are recognized as LNG revenues only after substantial completion of the respective Train. Prior to substantial completion, sales generated during the commissioning phase are offset against the cost of construction for the respective Train, as the production and removal of LNG from storage is necessary to test the facility and bring the asset to the condition necessary for its intended use.

Regasification Revenues

The Sabine Pass LNG terminal has operational regasification capacity of approximately 4.0 Bcf/d. Approximately 2.0 Bcf/d of the regasification capacity at the Sabine Pass LNG terminal has been reserved under two long-term TUAs with unaffiliated third-party customers, under which they are required to pay fixed monthly fees regardless of their use of the LNG terminal. Each of the customers has reserved approximately 1.0 Bcf/d of regasification capacity. The customers are each obligated to make monthly capacity payments to SPLNG aggregating approximately $125 million annually for 20 years that commenced in 2009, which is representative of fixed consideration in the contract. A portion of this fee is adjusted annually for inflation which is considered variable consideration. The remaining capacity of the Sabine Pass LNG terminal has been reserved by SPL, for which the associated revenues are eliminated in consolidation.

Because SPLNG is continuously available to provide regasification service on a daily basis with the same pattern of transfer, we have concluded that SPLNG provides a single performance obligation to its customers on a continuous basis over time. We have determined that an output method of recognition based on elapsed time best reflects the benefits of this service to the customer and accordingly, LNG regasification capacity reservation fees are recognized as regasification revenues on a straight-line basis over the term of the respective TUAs. We have concluded that the inflation element within the contract meets the optional exception for allocating variable consideration and accordingly the inflation adjustment is not included in the transaction price and will be recognized over the year in which the inflation adjustment relates on a straight-line basis.

In 2012, SPL entered into a partial TUA assignment agreement with Total Gas & Power North America, Inc. (“Total”), whereby SPL would progressively gain access to Total’s capacity and other services provided under its TUA with SPLNG. This agreement provides SPL with additional berthing and storage capacity at the Sabine Pass LNG terminal that may be used to provide increased flexibility in managing LNG cargo loading and unloading activity, permit SPL to more flexibly manage its LNG storage capacity and accommodate the development of Trains 5 and 6.

Upon substantial completion of Train 3, SPL gained access to a portion of Total’s capacity and other services provided under Total’s TUA with SPLNG. Upon substantial completion of Train 5, SPL will gain access to substantially all of Total’s capacity. Notwithstanding any arrangements between Total and SPL, payments required to be made by Total to SPLNG will continue to be made by Total to SPLNG in accordance with its TUA and we continue to recognize the payments received from Total as revenue.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

During the three months ended March 31, 2018 and 2017, SPL recorded $8 million and zero as operating and maintenance expense under this partial TUA assignment agreement.

Deferred Revenue Reconciliation

The following table reflects the changes in our contract liabilities, which we classify as “Deferred revenue” (in millions):



	Three Months Ended March 31,
	2018			2017
Deferred revenues, beginning of period	$	111		$	73
Cash received but not yet recognized	120			61
Revenue recognized from prior period deferral	(111		)	(71		)
Deferred revenues, end of period	$	120		$	63

We record deferred revenue when we receive consideration, or such consideration is unconditionally due from a customer, prior to transferring goods or services to the customer under the terms of a sales contract. Changes in deferred revenue during the three months ended March 31, 2018 and 2017 are primarily attributable to differences between the timing of revenue recognition and the receipt of advance payments related to delivery of LNG under certain SPAs.

Transaction Price Allocated to Future Performance Obligations

Because many of our sales contracts have long-term durations, we are contractually entitled to significant future consideration which we have not yet recognized as revenue. The following table discloses the aggregate amount of the transaction price that is allocated to performance obligations that have not yet been satisfied as of March 31, 2018:


(1)	The weighted average recognition timing represents an estimate of the number of years during which we shall have recognized half of the unsatisfied transaction price.

We have elected the following optional exemptions which omit certain potential future sources of revenue from the table above:


(1)	We omit from the table above all performance obligations that are part of a contract that has an original expected duration of one year or less.

(2)

We omit from the table above all variable consideration that is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation when that performance obligation qualifies as a series. The table above excludes all variable consideration under our SPAs and TUAs. The amount of revenue from variable fees that is not included in the transaction price will vary based on the future prices of Henry Hub throughout the contract terms, to the extent customers elect to take delivery of their LNG, and adjustments to the consumer price index. Certain of our contracts contain additional variable consideration based on the outcome of contingent events and the movement of various indexes. The receipt of such variable consideration is considered constrained due to the uncertainty of ultimate pricing and receipt and we have not included such variable consideration in the transaction price. During the three months ended March 31, 2018, approximately 56% of our LNG Revenues from contracts with a duration of over one year and approximately 3% of our Regasification Revenues were related to variable consideration received from customers.

We have entered into contracts to sell LNG that are conditioned upon one or both of the parties achieving certain milestones such as reaching FID on a certain liquefaction Train or obtaining financing. These contracts are considered completed contracts for revenue recognition purposes and are included in the transaction price above.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

We have elected the practical expedient to omit the disclosure of the transaction price allocated to future performance obligations and an explanation of when the entity expects to recognize the amount as revenue as of March 31, 2017.

NOTE 12—INCOME TAXES

During the three months ended March 31, 2018, we recorded a $15 million income tax provision, which was primarily related to increased profitability in the U.K. We have elected to account for the tax on global intangible low-taxed income (“GILTI”) as a tax expense in the period in which it is incurred.

Due to historical losses and other available evidence related to our ability to generate taxable income, we have established a valuation allowance to fully offset our federal and state net deferred tax assets at March 31, 2018 and December 31, 2017.

NOTE 13—SHARE-BASED COMPENSATION

We have granted restricted stock shares, restricted stock units, performance stock units and phantom units to employees and non-employee directors under the Amended and Restated 2003 Stock Incentive Plan, as amended, the 2011 Incentive Plan, as amended (the “2011 Plan”), the 2015 Employee Inducement Incentive Plan and the 2015 Long-Term Cash Incentive Plan.

For the three months ended March 31, 2018, we granted 1.5 million restricted stock units and 0.2 million performance stock units at target performance under the 2011 Plan to certain employees. Restricted stock units are stock awards that vest over a three-year service period and entitle the holder to receive shares of our common stock upon vesting, subject to restrictions on transfer and to a risk of forfeiture if the recipient terminates employment with us prior to the lapse of the restrictions. Performance stock units provide for three-year cliff vesting with payouts based on our cumulative distributable cash flow per share from January 1, 2018 through December 31, 2020 compared to a pre-established performance target. The number of shares that may be earned at the end of the vesting period ranges from 50 to 200 percent of the target award amount if the threshold performance is met. Both restricted stock units and performance stock units will be settled in Cheniere common stock (on a one-for-one basis) and are classified as equity awards.

Total share-based compensation consisted of the following (in millions):



	Three Months Ended March 31,
	2018			2017
Share-based compensation costs, pre-tax:
Equity awards	$	17		$	5
Liability awards	17			27
Total share-based compensation	34			32
Capitalized share-based compensation	(6		)	(8		)
Total share-based compensation expense	$	28		$	24
Tax benefit associated with share-based compensation expense	$	2		$	—

For further discussion of our equity incentive plans, see Note 15—Share-Based Compensation of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2017.

NOTE 14—NET INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

Basic net income per share attributable to common stockholders (“EPS”) excludes dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the potential common shares had been issued. The dilutive effect of unvested stock is calculated using the treasury-stock method and the dilutive effect of convertible securities is calculated using the if-converted method.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The following table reconciles basic and diluted weighted average common shares outstanding for the three months ended March 31, 2018 and 2017 (in millions, except per share data):



	Three Months Ended March 31,
	2018		2017
Weighted average common shares outstanding:
Basic	235.5		232.4
Dilutive unvested stock	2.5		0.3
Diluted	238.0		232.7

Basic net income per share attributable to common stockholders	$	1.52	$	0.23
Diluted net income per share attributable to common stockholders	$	1.50	$	0.23

Potentially dilutive securities that were not included in the diluted net income per share computations because their effects would have been anti-dilutive were as follows (in millions):



	Three Months Ended March 31,
	2018	2017
Unvested stock (1)	2.0	1.2
Convertible notes (2)	17.1	16.5
Total potentially dilutive common shares	19.1	17.7


(1)	Does not include 0.4 million shares and 5.1 million shares for the three months ended March 31, 2018 and 2017, respectively, of unvested stock because the performance conditions had not yet been satisfied as of March 31, 2018 and 2017, respectively.

(2)

Includes number of shares in aggregate issuable upon conversion of the 2021 Cheniere Convertible Unsecured Notes and the 2045 Cheniere Convertible Senior Notes. There were no shares included in the computation of diluted net income per share for the 2025 CCH HoldCo II Convertible Senior Notes because substantive non-market-based contingencies underlying the eligible conversion date have not been met as of March 31, 2018.

NOTE 15—COMMITMENTS AND CONTINGENCIES

We have various contractual obligations which are recorded as liabilities in our Consolidated Financial Statements. Other items, such as certain purchase commitments and other executed contracts which do not meet the definition of a liability as of March 31, 2018, are not recognized as liabilities but require disclosures in our Consolidated Financial Statements.

Obligations under Certain Guarantee Contracts

Cheniere and certain of its subsidiaries enter into guarantee arrangements in the normal course of business to facilitate transactions with third parties. These arrangements include financial guarantees, letters of credit and debt guarantees. As of March 31, 2018 and December 31, 2017, there were no liabilities recognized under these guarantee arrangements.

Legal Proceedings

We may in the future be involved as a party to various legal proceedings, which are incidental to the ordinary course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters.

Parallax Litigation

In 2015, our wholly owned subsidiary, Cheniere LNG Terminals, LLC (“CLNGT”), entered into discussions with Parallax Enterprises, LLC (“Parallax Enterprises”) regarding the potential joint development of two liquefaction plants in Louisiana (the “Potential Liquefaction Transactions”). While the parties negotiated regarding the Potential Liquefaction Transactions, CLNGT loaned Parallax Enterprises approximately $46 million, as reflected in a secured note dated April 23, 2015, as amended on June

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

30, 2015, September 30, 2015 and November 4, 2015 (the “Secured Note”). The Secured Note was secured by all assets of Parallax Enterprises and its subsidiary entities. On June 30, 2015, Parallax Enterprises’ parent entity, Parallax Energy LLC (“Parallax Energy”), executed a Pledge and Guarantee Agreement further securing repayment of the Secured Note by providing a parent guaranty and a pledge of all of the equity of Parallax Enterprises in satisfaction of the Secured Note (the “Pledge Agreement”). CLNGT and Parallax Enterprises never executed a definitive agreement to pursue the Potential Liquefaction Transactions. The Secured Note matured on December 11, 2015, and Parallax Enterprises failed to make payment. On February 3, 2016, CLNGT filed an action against Parallax Energy, Parallax Enterprises and certain of Parallax Enterprises’ subsidiary entities, styled Cause No. 4:16-cv-00286, Cheniere LNG Terminals, LLC v. Parallax Energy LLC, et al., in the United States District Court for the Southern District of Texas (the “Texas Federal Suit”). CLNGT asserted claims in the Texas Federal Suit for (1) recovery of all amounts due under the Secured Note and (2) declaratory relief establishing that CLNGT is entitled to enforce its rights under the Secured Note and Pledge Agreement in accordance with each instrument’s terms and that CLNGT has no obligations of any sort to Parallax Enterprises concerning the Potential Liquefaction Transactions. On March 11, 2016, Parallax Enterprises and the other defendants in the Texas Federal Suit moved to dismiss the suit for lack of subject matter jurisdiction. On August 2, 2016, the court denied the defendants’ motion to dismiss without prejudice and permitted the parties to pursue jurisdictional discovery.

On March 11, 2016, Parallax Enterprises filed a suit against us and CLNGT styled Civil Action No. 62-810, Parallax Enterprises LLP v. Cheniere Energy, Inc. and Cheniere LNG Terminals, LLC, in the 25th Judicial District Court of Plaquemines Parish, Louisiana (the “Louisiana Suit”), wherein Parallax Enterprises asserted claims for breach of contract, fraudulent inducement, negligent misrepresentation, detrimental reliance, unjust enrichment and violation of the Louisiana Unfair Trade Practices Act. Parallax Enterprises predicated its claims in the Louisiana Suit on an allegation that we and CLNGT breached a purported agreement to jointly develop the Potential Liquefaction Transactions. Parallax Enterprises sought $400 million in alleged economic damages and rescission of the Secured Note. On April 15, 2016, we and CLNGT removed the Louisiana Suit to the United States District Court for the Eastern District of Louisiana, which subsequently transferred the Louisiana Suit to the United States District Court for the Southern District of Texas, where it was assigned Civil Action No. 4:16-cv-01628 and transferred to the same judge presiding over the Texas Federal Suit for coordinated handling. On August 22, 2016, Parallax Enterprises voluntarily dismissed all claims asserted against CLNGT and us in the Louisiana Suit without prejudice to refiling.

On July 27, 2017, the Parallax entities named as defendants in the Texas Federal Suit reurged their motion to dismiss and simultaneously filed counterclaims against CLNGT and third party claims against us for breach of contract, breach of fiduciary duty, promissory estoppel, quantum meruit and fraudulent inducement of the Secured Note and Pledge Agreement, based on substantially the same factual allegations Parallax Enterprises made in the Louisiana Suit. These Parallax entities also simultaneously filed an action styled Cause No. 2017-49685, Parallax Enterprises, LLC, et al. v. Cheniere Energy, Inc., et al., in the 61st District Court of Harris County, Texas (the “Texas State Suit”), which asserts substantially the same claims these entities asserted in the Texas Federal Suit. On July 31, 2017, CLNGT withdrew its opposition to the dismissal of the Texas Federal Suit without prejudice on jurisdictional grounds and the federal court subsequently dismissed the Texas Federal Suit without prejudice. We and CLNGT simultaneously filed an answer and counterclaims in the Texas State Suit, asserting the same claims CLNGT had previously asserted in the Texas Federal Suit. Additionally, CLNGT filed third party claims against Parallax principals Martin Houston, Christopher Bowen Daniels, Howard Candelet and Mark Evans, as well as Tellurian Investments, Inc., Driftwood LNG, LLC, Driftwood LNG Pipeline LLC and Tellurian Services LLC, formerly known as Parallax Services LLC, including claims for tortious interference with CLNGT’s collateral rights under the Secured Note and Pledge Agreement, fraudulent transfer, conspiracy/aiding and abetting. Discovery in the Texas State Suit is ongoing. Trial is currently set for September 2018.

We do not expect that the resolution of this litigation will have a material adverse impact on our financial results.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 16—CUSTOMER CONCENTRATION

The following table shows customers with revenues of 10% or greater of total third-party revenues and customers with accounts receivable balances of 10% or greater of total accounts receivable from third parties:



	Percentage of Total Third-Party Revenues			Percentage of Accounts Receivable from Third Parties
		Three Months Ended March 31,		March 31,	December 31,
		2018	2017	2018	2017
Customer A		17%	33%	13%	28%
Customer B		12%	13%	7%	16%
Customer C		24%	—%	18%	14%
Customer D		*	—%	10%	—%
Customer E		*	10%	21%	15%
Customer F		*	—%	11%	—%

* Less than 10%

NOTE 17—SUPPLEMENTAL CASH FLOW INFORMATION

The following table provides supplemental disclosure of cash flow information (in millions):



	Three Months Ended March 31,
	2018		2017
Cash paid during the period for interest, net of amounts capitalized	$	282