Edgar Filing: CHENIERE ENERGY INC

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 September 30, 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 every Interactive Data File required to be submitted 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.



Large accelerated filer x	Accelerated filer ¨
Non-accelerated filer ¨	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 November 2, 2018, the issuer had 256,885,068 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 Operations	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	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4.	Controls and Procedures	51

Part II. Other Information
Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6.	Exhibits	53

	Signatures	54

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 September 30, 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 subsidiary, Cheniere Partners.

During the quarter ended September 30, 2018, we closed the previously announced merger of Cheniere Energy Partners LP Holdings, LLC (“Cheniere Holdings”) with and into our wholly owned subsidiary. As a result of the merger, Cheniere Holdings is no longer a publicly-traded company.

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)



	September 30,			December 31,
	2018			2017
ASSETS	(unaudited)
Current assets
Cash and cash equivalents	$	989		$	722
Restricted cash	1,943			1,880
Accounts and other receivables	243			369
Accounts receivable—related party	3			2
Inventory	298			243
Derivative assets	63			57
Other current assets	131			96
Total current assets	3,670			3,369

Non-current restricted cash	—			11
Property, plant and equipment, net	26,499			23,978
Debt issuance costs, net	78			149
Non-current derivative assets	121			34
Goodwill	77			77
Other non-current assets, net	295			288
Total assets	$	30,740		$	27,906

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	80		$	25
Accrued liabilities	987			1,078
Current debt	66			—
Deferred revenue	120			111
Derivative liabilities	96			37
Other current liabilities	1			—
Total current liabilities	1,350			1,251

Long-term debt, net	27,438			25,336
Non-current capital lease obligations	29			—
Non-current derivative liabilities	16			19
Other non-current liabilities	76			60

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 September 30, 2018 and December 31, 2017
Issued: 269.7 million shares and 250.1 million shares at September 30, 2018 and December 31, 2017, respectively
Outstanding: 257.1 million shares and 237.6 million shares at September 30, 2018 and December 31, 2017, respectively	1			1
Treasury stock: 12.6 million shares and 12.5 million shares at September 30, 2018 and December 31, 2017, respectively, at cost	(396		)	(386		)
Additional paid-in-capital	4,009			3,248
Accumulated deficit	(4,223		)	(4,627		)
Total stockholders’ deficit	(609		)	(1,764		)
Non-controlling interest	2,440			3,004
Total equity	1,831			1,240
Total liabilities and equity	$	30,740		$	27,906

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues
LNG revenues	$	1,719		$	1,332		$	5,327		$	3,646
Regasification revenues	66			65			196			195
Other revenues	30			5			73			12
Other—related party	4			1			8			2
Total revenues	1,819			1,403			5,604			3,855

Operating costs and expenses
Cost of sales (excluding depreciation and amortization expense shown separately below)	1,027			824			3,078			2,140
Operating and maintenance expense	170			114			457			309
Development expense	2			3			6			7
Selling, general and administrative expense	74			64			214			179
Depreciation and amortization expense	113			92			333			252
Restructuring expense	—			—			—			6
Impairment expense and loss on disposal of assets	8			9			8			15
Total operating costs and expenses	1,394			1,106			4,096			2,908

Income from operations	425			297			1,508			947

Other income (expense)
Interest expense, net of capitalized interest	(221		)	(186		)	(653		)	(539		)
Loss on modification or extinguishment of debt	(12		)	(25		)	(27		)	(100		)
Derivative gain (loss), net	23			(2		)	132			(37		)
Other income	15			4			32			11
Total other expense	(195		)	(209		)	(516		)	(665		)

Income before income taxes and non-controlling interest	230			88			992			282
Income tax benefit (provision)	(3		)	2			(15		)	1
Net income	227			90			977			283
Less: net income attributable to non-controlling interest	162			379			573			803
Net income (loss) attributable to common stockholders	$	65		$	(289	)	$	404		$	(520	)

Net income (loss) per share attributable to common stockholders—basic	$	0.26		$	(1.24	)	$	1.67		$	(2.24	)
Net income (loss) per share attributable to common stockholders—diluted	$	0.26		$	(1.24	)	$	1.65		$	(2.24	)

Weighted average number of common shares outstanding—basic	247.2			232.6			241.9			232.5
Weighted average number of common shares outstanding—diluted	250.2			232.6			244.6			232.5

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
Vesting of restricted stock units	0.4		—		—	—			—		—			—			—
Issuance of stock to acquire additional interest in Cheniere Holdings and other merger related adjustments	19.2		—		—	—			694		—			(702		)	(8		)
Share-based compensation	—		—		—	—			65		—			—			65
Shares repurchased related to share-based compensation	(0.1	)	—		0.1	(10		)	—		—			—			(10		)
Net income attributable to non-controlling interest	—		—		—	—			—		—			573			573
Equity portion of convertible notes, net	—		—		—	—			2		—			—			2
Distributions to non-controlling interest	—		—		—	—			—		—			(435		)	(435		)
Net income	—		—		—	—			—		404			—			404
Balance at September 30, 2018	257.1		$	1	12.6	$	(396	)	$	4,009	$	(4,223	)	$	2,440		$	1,831

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)



	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities
Net income	$	977		$	283
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	333			252
Share-based compensation expense	89			64
Non-cash interest expense	52			54
Amortization of debt issuance costs, deferred commitment fees, premium and discount	53			53
Loss on modification or extinguishment of debt	27			100
Total losses on derivatives, net	17			108
Net cash used for settlement of derivative instruments	(54		)	(59		)
Impairment expense and loss on disposal of assets	8			15
Other	(5		)	(2		)
Changes in operating assets and liabilities:
Accounts and other receivables	115			(33		)
Accounts receivable—related party	(1		)	(1		)
Inventory	(56		)	35
Other current assets	(35		)	(45		)
Accounts payable and accrued liabilities	(23		)	20
Deferred revenue	8			58
Other, net	(1		)	(7		)
Net cash provided by operating activities	1,504			895

Cash flows from investing activities
Property, plant and equipment, net	(2,712		)	(2,903		)
Investment in equity method investment	(25		)	(41		)
Other	15			18
Net cash used in investing activities	(2,722		)	(2,926		)

Cash flows from financing activities
Proceeds from issuances of debt	3,443			6,537
Repayments of debt	(1,385		)	(3,609		)
Debt issuance and deferred financing costs	(53		)	(85		)
Debt extinguishment costs	(16		)	—
Distributions and dividends to non-controlling interest	(435		)	(60		)
Payments related to tax withholdings for share-based compensation	(10		)	(4		)
Other	(7		)	—
Net cash provided by financing activities	1,537			2,779

Net increase in cash, cash equivalents and restricted cash	319			748
Cash, cash equivalents and restricted cash—beginning of period	2,613			1,827
Cash, cash equivalents and restricted cash—end of period	$	2,932		$	2,575

Balances per Consolidated Balance Sheet:



	September 30, 2018
Cash and cash equivalents	$	989
Restricted cash	1,943
Total cash, cash equivalents and restricted cash	$	2,932

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 undergoing commissioning 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.

We are developing and constructing a second natural gas liquefaction and export facility at the Corpus Christi LNG terminal 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”). Stages 1 and 2 are currently under construction, and construction of the Corpus Christi Pipeline was completed in the second quarter of 2018. Train 1 has commenced commissioning activities.

Additionally, separate from the CCH Group, we are developing an expansion of the Corpus Christi LNG terminal adjacent to the CCL Project and filed an application with FERC in June 2018 for seven midscale Trains with an expected aggregate nominal production capacity of approximately 9.5 mtpa and one LNG storage tank. 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 consolidated financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.

Results of operations for the three and nine months ended September 30, 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 September 30, 2018 and December 31, 2017, restricted cash consisted of the following (in millions):



	September 30,		December 31,
	2018		2017
Current restricted cash
SPL Project	$	649	$	544
Cheniere Partners and cash held by guarantor subsidiaries	808		1,045
CCL Project	220		227
Cash held by our subsidiaries restricted to Cheniere	266		64
Total current restricted cash	$	1,943	$	1,880

Non-current restricted cash
Other	$	—	$	11

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

Under Cheniere Partners’ credit facilities (the “CQP Credit Facilities”), Cheniere Partners and each of its subsidiaries other than SPL, as guarantor subsidiaries, are subject to limitations on the use of cash under the terms of the CQP Credit Facilities and the related depositary agreement governing the extension of credit to Cheniere Partners. Specifically, Cheniere Partners may only withdraw funds from collateral accounts held at a designated depositary bank on a limited basis and for specific purposes, including for the payment of operating expenses of Cheniere Partners and its guarantor subsidiaries. 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 September 30, 2018 and December 31, 2017, accounts and other receivables consisted of the following (in millions):



	September 30,		December 31,
	2018		2017
Trade receivables
SPL	$	213	$	185
Cheniere Marketing	16		163
Other accounts receivable	14		21
Total accounts and other receivables	$	243	$	369

NOTE 4—INVENTORY

As of September 30, 2018 and December 31, 2017, inventory consisted of the following (in millions):



	September 30,		December 31,
	2018		2017
Natural gas	$	10	$	17
LNG	42		44
LNG in-transit	181		130
Materials and other	65		52
Total inventory	$	298	$	243

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 5—PROPERTY, PLANT AND EQUIPMENT

As of September 30, 2018 and December 31, 2017, property, plant and equipment, net consisted of the following (in millions):



	September 30,			December 31,
	2018			2017
LNG terminal costs
LNG terminal and interconnecting pipeline facilities	$	13,162		$	12,687
LNG site and related costs	86			86
LNG terminal construction-in-process	14,269			11,932
Accumulated depreciation	(1,192		)	(882		)
Total LNG terminal costs, net	26,325			23,823
Fixed assets and other
Computer and office equipment	17			14
Furniture and fixtures	19			19
Computer software	97			92
Leasehold improvements	41			41
Land	59			59
Other	18			16
Accumulated depreciation	(107		)	(86		)
Total fixed assets and other, net	144			155
Tug vessels under capital lease	30			—
Property, plant and equipment, net	$	26,499		$	23,978

Depreciation expense was $112 million and $91 million during the three months ended September 30, 2018 and 2017, respectively, and $331 million and $250 million during the nine months ended September 30, 2018 and 2017, respectively.

We realized offsets to LNG terminal costs of $82 million and $252 million in the three and nine months ended September 30, 2017, respectively, that were related to the sale of commissioning cargoes because these amounts were earned or loaded prior to the start of commercial operations of the respective Train of the SPL Project, during the testing phase for its construction. We did not realize any offsets to LNG terminal costs in the three and nine months ended September 30, 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 Operations 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 September 30, 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
	September 30, 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	$	—		$	28		$	—	$	28		$	—		$	21		$	—	$	21
CCH Interest Rate Derivatives asset (liability)	—			94			—		94			—			(32		)	—		(32		)
Liquefaction Supply Derivatives asset (liability)	(1		)	4			26		29			2			10			43		55
LNG Trading Derivatives asset (liability)	(19		)	(71		)	—		(90		)	(13		)	5			—		(8		)
FX Derivatives asset (liability)	—			11			—		11			—			(1		)	—		(1		)

There have been no changes to our evaluation of and accounting for our derivative positions during the nine months ended September 30, 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 a 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, as applicable to our natural gas supply contracts, 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 September 30, 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 natural gas positions within 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 Derivatives portfolio. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of September 30, 2018:



	Net Fair Value Asset (in millions)	Valuation Approach	Significant Unobservable Input	Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives	$26	Market approach incorporating present value techniques	Basis Spread	$(0.748) - $0.079

The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three and nine months ended September 30, 2018 and 2017 (in millions):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Balance, beginning of period	$	12		$	40		$	43		$	79
Realized and mark-to-market gains (losses):
Included in cost of sales	5			(8		)	(4		)	(43		)
Purchases and settlements:
Purchases	9			(1		)	14			1
Settlements	1			(2		)	(27		)	(8		)
Transfers out of Level 3 (1)	(1		)	—			—			—
Balance, end of period	$	26		$	29		$	26		$	29
Change in unrealized gains relating to instruments still held at end of period	$	5		$	(8	)	$	(4	)	$	(43	)

(1) 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. 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

Cheniere Partners had entered into interest rate swaps (“CQP Interest Rate Derivatives”) to hedge a portion of the variable interest payments on its CQP Credit Facilities, based on a portion of the expected outstanding borrowings over the term of the CQP Credit Facilities. In September 2018, Cheniere Partners terminated approximately $1.2 billion of commitments under the CQP Credit Facilities, as discussed in Note 10—Debt. In October 2018, Cheniere Partners terminated the CQP Interest Rate Derivatives related to the CQP Credit Facilities, which resulted in a derivative gain of $28 million.

CCH has entered into interest rate swaps (“CCH Interest Rate Derivatives”) to hedge a portion of the variable interest payments on its credit facility (the “CCH Credit Facility”). In June 2018, CCH settled a portion of the CCH Interest Rate Derivatives and recognized a derivative gain of $5 million upon the termination of interest rate swaps associated with the amendment of the CCH Credit Facility, as discussed in Note 10—Debt. In May 2017, CCH settled a portion of the CCH Interest Rate Derivatives and recognized a derivative loss of $13 million in conjunction with the termination of approximately $1.4 billion of commitments under the CCH Credit Facility.

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 “SPL Credit Facilities”), based on a portion of the expected outstanding borrowings over the term of the 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 SPL Credit Facilities.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

As of September 30, 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

$4.7 billion

May 20, 2015

May 31, 2022

2.30%

One-month LIBOR

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



	September 30, 2018						December 31, 2017
	CQP Interest Rate Derivatives		CCH Interest Rate Derivatives		Total		CQP Interest Rate Derivatives		CCH Interest Rate Derivatives			Total
Consolidated Balance Sheet Location
Derivative assets	$	19	$	13	$	32	$	7	$	—		$	7
Non-current derivative assets	9		81		90		14		3			17
Total derivative assets	28		94		122		21		3			24

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

Derivative asset (liability), net	$	28	$	94	$	122	$	21	$	(32	)	$	(11	)

The following table 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 nine months ended September 30, 2018 and 2017 (in millions):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018		2017
CQP Interest Rate Derivatives gain	$	2	$	1		$	13	$	—
CCH Interest Rate Derivatives gain (loss)	21		(3		)	119		(35		)
SPL Interest Rate Derivatives loss	—		—			—		(2		)

Commodity Derivatives

SPL and CCL have 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 and the CCL Project. The terms of the physical natural gas supply contracts range up to eight years, some of which commence upon the satisfaction of certain conditions precedent.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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):



	September 30, 2018									December 31, 2017
	Liquefaction Supply Derivatives (1)			LNG Trading Derivatives (2)			Total			Liquefaction Supply Derivatives (1)			LNG Trading Derivatives (2)			Total
Consolidated Balance Sheet Location
Derivative assets	$	13		$	7		$	20		$	41		$	9		$	50
Non-current derivative assets	27			4			31			17			—			17
Total derivative assets	40			11			51			58			9			67

Derivative liabilities	(6		)	(90		)	(96		)	—			(17		)	(17		)
Non-current derivative liabilities	(5		)	(11		)	(16		)	(3		)	—			(3		)
Total derivative liabilities	(11		)	(101		)	(112		)	(3		)	(17		)	(20		)

Derivative asset (liability), net	$	29		$	(90	)	$	(61	)	$	55		$	(8	)	$	47

Notional amount, net (in TBtu) (3)	4,769			20						2,539			25


(1)	Does not include collateral calls of $3 million and $1 million for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively.


(2)	Does not include collateral of $58 million and $28 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively.


(3)	SPL had secured up to approximately 2,755 TBtu and 2,214 TBtu and CCL had secured up to approximately 2,640 TBtu and 2,024 TBtu of natural gas feedstock through natural gas supply contracts as of September 30, 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 Operations during the three and nine months ended September 30, 2018 and 2017 (in millions):



	Consolidated Statements of Operations Location (1)	Three Months Ended September 30,						Nine Months Ended September 30,
	Consolidated Statements of Operations Location (1)	2018			2017			2018			2017
LNG Trading Derivatives loss	LNG revenues	$	(58	)	$	(16	)	$	(128	)	$	(20	)
Liquefaction Supply Derivatives gain (loss) (2)	Cost of sales	21			(11		)	(32		)	(51		)


(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
	Consolidated Balance Sheet Location	September 30, 2018		December 31, 2017
FX Derivatives	Derivative assets	$	11	$	—
FX Derivatives	Non-current derivative liabilities	—		(1		)

The total notional amount of our FX Derivatives was $227 million and $27 million as of September 30, 2018 and December 31, 2017, respectively.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The following table shows the changes in the fair value of our FX Derivatives recorded in LNG revenues on our Consolidated Statements of Operations during the three and nine months ended September 30, 2018 and 2017 (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
FX Derivatives gain	$	1	$	—	$	11	$	—

Consolidated 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 September 30, 2018
CQP Interest Rate Derivatives	$	28		$	—		$	28
CCH Interest Rate Derivatives	94			—			94
Liquefaction Supply Derivatives	46			(6		)	40
Liquefaction Supply Derivatives	(22		)	11			(11		)
LNG Trading Derivatives	50			(39		)	11
LNG Trading Derivatives	(154		)	53			(101		)
FX Derivatives	21			(10		)	11
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 September 30, 2018 and December 31, 2017, other non-current assets, net consisted of the following (in millions):



	September 30,		December 31,
	2018		2017
Advances made under EPC and non-EPC contracts	$	15	$	26
Advances made to municipalities for water system enhancements	90		97
Advances and other asset conveyances to third parties to support LNG terminals	48		48
Tax-related payments and receivables	21		29
Equity method investments	92		64
Other	29		24
Total other non-current assets, net	$	295	$	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 200-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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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. Construction of the Midship Project will commence based upon, among other things, obtaining the required authorization from the FERC and adequate financing to construct the proposed project.

We have determined that Midship Holdings is a variable interest entity (“VIE”) because it is thinly capitalized at formation such that the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support. We do not consolidate Midship Holdings because we do not have power to direct the activities that most significantly impact its economic performance. We continually monitor both consolidated and unconsolidated VIEs to determine if any events have occurred that could cause a change in our identification of a VIE or determination of the primary beneficiary to a VIE. We account for our investment in Midship Holdings under the equity method as we have the ability to exercise significant influence over the operating and financial policies of Midship Holdings through our non-controlling voting rights on its board of managers. Our investment in Midship Holdings was $84 million and $55 million at September 30, 2018 and December 31, 2017, respectively. Our obligations to make additional investments in Midship Holdings are not significant.

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 $4 million and $1 million in the three months ended September 30, 2018 and 2017, respectively, and $8 million and $2 million in the nine months ended September 30, 2018 and 2017, respectively, of revenues in other—related party and $3 million and $2 million of accounts receivable—related party as of September 30, 2018 and December 31, 2017, respectively, for services provided to Midship Pipeline under these agreements. CCL has entered into a transportation precedent agreement with Midship Pipeline to secure firm pipeline transportation capacity for a period of 10 years following commencement of the Midship Project. In May 2018, CCL issued a letter of credit to Midship Pipeline for drawings up to an aggregate maximum amount of $16 million. Midship Pipeline had not made any drawings on this letter of credit as of September 30, 2018.

NOTE 8—NON-CONTROLLING INTEREST

During the three and nine months ended September 30, 2018, we acquired 8.1% and 17.3%, respectively, of additional interest in Cheniere Holdings previously held by the public, and closed the previously announced merger of Cheniere Holdings with and into our wholly owned subsidiary. As a result of the merger, all of the publicly-held shares of Cheniere Holdings not owned by us were canceled and shareholders other than Cheniere received shares of our common stock in a stock-for-share exchange. As of December 31, 2017, we owned 82.7% of Cheniere Holdings. Because the transactions represented a combination of ownership interests under common control, changes in Cheniere’s ownership interest in Cheniere Holdings were accounted for as an equity transaction and no gain or loss was recognized.

We own 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. Cheniere Partners is accounted for as a variable interest entity. 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 September 30, 2018 and December 31, 2017, accrued liabilities consisted of the following (in millions):



	September 30,		December 31,
	2018		2017
Interest costs and related debt fees	$	252	$	397
Accrued natural gas purchases	251		298
LNG terminals and related pipeline costs	228		192
Compensation and benefits	113		141
Accrued LNG inventory	76		1
Other accrued liabilities	67		49
Total accrued liabilities	$	987	$	1,078

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 10—DEBT

As of September 30, 2018 and December 31, 2017, our debt consisted of the following (in millions):



	September 30,			December 31,
	2018			2017
Long-term debt:
SPL
5.625% Senior Secured Notes due 2021 (“2021 SPL Senior Notes”)	$	2,000		$	2,000
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”)	1,500			1,500
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”)	1,350			1,350
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
5.625% Senior Notes due 2026 (“2026 CQP Senior Notes”)	1,100			—
CQP Credit Facilities	—			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
CCH Credit Facility	4,492			2,485
CCH HoldCo II
11.0% Convertible Senior Notes due 2025 (“2025 CCH HoldCo II Convertible Senior Notes”)	1,416			1,305
Cheniere
4.875% Convertible Unsecured Notes due 2021 (“2021 Cheniere Convertible Unsecured Notes”)	1,189			1,161
4.25% Convertible Senior Notes due 2045 (“2045 Cheniere Convertible Senior Notes”)	625			625
$750 million Cheniere Revolving Credit Facility (“Cheniere Revolving Credit Facility”)	—			—
Unamortized premium, discount and debt issuance costs, net	(784		)	(730		)
Total long-term debt, net	27,438			25,336

Current debt:
$1.2 billion SPL Working Capital Facility (“SPL Working Capital Facility”)	—			—
$1.2 billion CCH Working Capital Facility (“CCH Working Capital Facility”)	—			—
Cheniere Marketing trade finance facilities	66			—
Total current debt	66			—

Total debt, net	$	27,504		$	25,336

2018 Debt Issuances and Redemptions

2026 CQP Senior Notes

In September 2018, Cheniere Partners issued an aggregate principal amount of $1.1 billion of the 2026 CQP Senior Notes, which are jointly and severally guaranteed by each of Cheniere Partners’ subsidiaries other than SPL (the “CQP Guarantors”) and, subject to certain conditions governing its guarantee, Sabine Pass LP. Net proceeds of the offering of approximately $1.1 billion, after deducting the initial purchasers’ commissions and estimated fees and expenses, were used to prepay all of the outstanding indebtedness under the CQP Credit Facilities, resulting in the recognition of debt modification and extinguishment costs of $12 million for the three and nine months ended September 30, 2018 relating to the incurrence of third party fees and write off of

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

unamortized debt issuance costs. As of September 30, 2018, only a $115 million revolving credit facility, all of which is undrawn, remains as part of the CQP Credit Facilities.

Borrowings under the 2026 CQP Senior Notes accrue interest at a fixed rate of 5.625%, and interest on the 2026 CQP Senior Notes is payable semi-annually in arrears. The 2026 CQP Senior Notes are governed by the same base indenture as the 2025 CQP Senior Notes (the “CQP Base Indenture”), and are further governed by the Second Supplemental Indenture (together with the CQP Base Indenture, the “2026 CQP Notes Indenture”), which contains customary terms and events of default and certain covenants that, among other things, limit the ability of Cheniere Partners and the CQP Guarantors to incur liens and sell assets, enter into transactions with affiliates, enter into sale-leaseback transactions and consolidate, merge or sell, lease or otherwise dispose of all or substantially all of the applicable entity’s properties or assets.

At any time prior to October 1, 2021, Cheniere Partners may redeem all or a part of the 2026 CQP Senior Notes at a redemption price equal to 100% of the aggregate principal amount of the 2026 CQP Senior Notes redeemed, plus the “applicable premium” set forth in the 2026 CQP Notes Indenture, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to October 1, 2021, Cheniere Partners may redeem up to 35% of the aggregate principal amount of the 2026 CQP Senior Notes with an amount of cash not greater than the net cash proceeds from certain equity offerings at a redemption price equal to 105.625% of the aggregate principal amount of the 2026 CQP Senior Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption. At any time on or after October 1, 2021 through the maturity date of October 1, 2026, Cheniere Partners may redeem the 2026 CQP Senior Notes, in whole or in part, at the redemption prices set forth in the 2026 CQP Notes Indenture.

The 2026 CQP Senior Notes are Cheniere Partners’ senior obligations, ranking equally in right of payment with Cheniere Partners’ other existing and future unsubordinated debt and senior to any of its future subordinated debt. After applying the proceeds from the 2026 CQP Senior Notes, the 2026 CQP Senior Notes and the 2025 CQP Senior Notes (collectively, the “CQP Senior Notes”) became unsecured. In the event that the aggregate amount of Cheniere Partners’ secured indebtedness and the secured indebtedness of the CQP Guarantors (other than the CQP Senior Notes or any other series of notes issued under the CQP Base Indenture) outstanding at any one time exceeds the greater of (1) $1.5 billion and (2) 10% of net tangible assets, the CQP Senior Notes will be secured to the same extent as such obligations under the CQP Credit Facilities. The obligations under the CQP Credit Facilities are secured on a first-priority basis (subject to permitted encumbrances) with liens on (1) substantially all the existing and future tangible and intangible assets and rights of Cheniere Partners and the CQP Guarantors and equity interests in the CQP Guarantors (except, in each case, for certain excluded properties set forth in the CQP Credit Facilities) and (2) substantially all of the real property of SPLNG (except for excluded properties referenced in the CQP Credit Facilities).

In connection with the closing of the 2026 CQP Senior Notes offering, Cheniere Partners and the CQP Guarantors entered into a registration rights agreement (the “CQP Registration Rights Agreement”). Under the CQP Registration Rights Agreement, Cheniere Partners and the CQP Guarantors have agreed to file with the SEC and cause to become effective a registration statement relating to an offer to exchange any and all of the 2026 CQP Senior Notes for a like aggregate principal amount of debt securities of Cheniere Partners with terms identical in all material respects to the 2026 CQP Senior Notes sought to be exchanged (other than with respect to restrictions on transfer or to any increase in annual interest rate), within 360 days after the notes issuance date of September 11, 2018. Under specified circumstances, Cheniere Partners and the CQP Guarantors have also agreed to cause to become effective a shelf registration statement relating to resales of the 2026 CQP Senior Notes. Cheniere Partners will be obligated to pay additional interest on the 2026 CQP Senior Notes if it fails to comply with its obligation to register the 2026 CQP Senior Notes within the specified time period.

CCH Credit Facility

In May 2018, CCH amended and restated the CCH Credit Facility to increase total commitments under the credit facility to $6.1 billion. Borrowings are used to fund a portion of the costs of developing, constructing and placing into service the three Trains and the related facilities of the CCL Project and for related business purposes.

The CCH Credit Facility matures on June 30, 2024, with principal payments due quarterly commencing on the earlier of (1) the first quarterly payment date occurring more than three calendar months following the completion of the CCL Project as defined in the common terms agreement and (2) a set date determined by reference to the date under which a certain LNG buyer linked to the last Train of the CCL Project to become operational is entitled to terminate its SPA for failure to achieve the date of first commercial delivery for that agreement. Scheduled repayments will be based upon a 19-year tailored amortization,

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

commencing the first full quarter after the completion of Trains 1 through 3 and designed to achieve a minimum projected fixed debt service coverage ratio of 1.50:1.

Loans under the CCH Credit Facility accrue interest at a variable rate per annum equal to, at CCH’s election, LIBOR or the base rate, plus the applicable margin. The applicable margin for LIBOR loans is 1.75% and for base rate loans is 0.75%. Interest on LIBOR loans is due and payable at the end of each applicable interest period and interest on base rate loans is due and payable at the end of each quarter. CCH was required to pay certain upfront fees to the agents and lenders under the CCH Credit Facility together with additional transaction fees and expenses in the aggregate amount of $53 million.

All other terms of the CCH Credit Facility substantially remained the same to those described in Note 12—Debt of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2017. The amendment and restatement of the CCH Credit Facility resulted in the recognition of $15 million of debt modification and extinguishment costs during the nine months ended September 30, 2018 relating to the incurrence of third party fees and write off of unamortized debt issuance costs.

CCH Working Capital Facility

In June 2018, CCH amended and restated the CCH Working Capital Facility to increase total commitments under the CCH Working Capital Facility to $1.2 billion. Borrowings will be used for certain working capital requirements related to developing and placing into operations the CCL Project and for related business purposes.

Loans under the CCH Working Capital Facility accrue interest at a variable rate per annum equal to LIBOR or the base rate plus the applicable margin. The applicable margin for LIBOR loans ranges from 1.25% to 1.75% per annum, and the applicable margin for base rate loans ranges from 0.25% to 0.75% per annum. CCH was required to pay certain upfront fees to the agents and lenders under the CCH Working Capital Facility together with additional transaction fees and expenses in the aggregate amount of $14 million.

The CCH Working Capital Facility matures on June 29, 2023. All other terms of the CCH Working Capital Facility substantially remained the same to those described in Note 12—Debt of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2017.

2025 CCH HoldCo II Convertible Senior Notes

In May 2018, the amended and restated note purchase agreement under which the 2025 CCH HoldCo II Convertible Senior Notes were issued was subsequently amended in connection with commercialization and financing of Train 3 of the CCL Project. All terms of the 2025 CCH HoldCo II Convertible Senior Notes substantially remained the same to those described in Note 12—Debt of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2017.

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 September 30, 2018 (in millions):



	SPL Working Capital Facility		CQP Credit Facilities		CCH Credit Facility		CCH Working Capital Facility		Cheniere Revolving Credit Facility
Original facility size	$	1,200	$	2,800	$	8,404	$	350	$	750
Incremental commitments	—		—		1,566		850		—
Less:
Outstanding balance	—		—		4,492		—		—
Commitments prepaid or terminated	—		2,685		3,832		—		—
Letters of credit issued	494		—		—		316		—
Available commitment	$	706	$	115	$	1,646	$	884	$	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 1.75% or base rate plus 0.75%		LIBOR plus 1.25% - 1.75% or base rate plus 0.25% - 0.75%		LIBOR plus 3.25% or base rate plus 2.25%
Maturity date	December 31, 2020, with various terms for underlying loans		February 25, 2020		June 30, 2024		June 29, 2023		March 2, 2021


(1)	There is a 0.50% step-up for both LIBOR and base rate loans beginning on February 25, 2019.

Convertible Notes

Below is a summary of our convertible notes outstanding as of September 30, 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 and debt issuance costs	$	1,090		$	1,390		$	310
Equity component	$	207		$	—		$	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			May 13, 2025			March 15, 2045
Contractual interest rate	4.875		%	11.0		%	4.25		%
Effective interest rate (8)	8.4		%	11.9		%	9.4		%
Remaining debt discount and debt issuance costs amortization period (9)	2.7 years			2.0 years			26.5 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.

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)	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 September 30, 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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Interest cost on convertible notes:
Interest per contractual rate	$	60		$	55		$	176		$	162
Amortization of debt discount	9			8			25			22
Amortization of debt issuance costs	3			2			7			5
Total interest cost related to convertible notes	72			65			208			189
Interest cost on debt excluding convertible notes	354			324			1,034			931
Total interest cost	426			389			1,242			1,120
Capitalized interest	(205		)	(203		)	(589		)	(581		)
Total interest expense, net	$	221		$	186		$	653		$	539

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Fair Value Disclosures

The following table shows the carrying amount, which is net of unamortized premium, discount and debt issuance costs, and estimated fair value of our debt (in millions):



	September 30, 2018				December 31, 2017
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Senior notes (1)	$	19,457	$	20,552	$	18,350	$	20,075
2037 SPL Senior Notes (2)	791		831		790		871
Credit facilities (3)	4,466		4,466		3,574		3,574
2021 Cheniere Convertible Unsecured Notes (2)	1,090		1,267		1,040		1,136
2025 CCH HoldCo II Convertible Senior Notes (2)	1,390		1,597