Cheniere Energy, Inc. - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

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

For the transition period from to

Commission file number 001-16383

CHENIERE ENERGY, INC.

(Exact name of registrant as specified in its charter)



Delaware	95-4352386
(State or other jurisdiction of incorporation or organization)	(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)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $ 0.003 par value	LNG	NYSE American

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 ☒ 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 such files). Yes ☒ 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	☒	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. ☐

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

As of July 31, 2020, the issuer had 252,252,909 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 Statements of Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54

Item 4.	Controls and Procedures	55

Part II. Other Information
Item 1.	Legal Proceedings	56

Item 1A.	Risk Factors	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 6.	Exhibits	57

	Signatures	59

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 June 30, 2020, 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.

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 (1)

(in millions, except share data)



	June 30,			December 31,
	2020			2019
ASSETS	(unaudited)
Current assets
Cash and cash equivalents	$	2,039		$	2,474
Restricted cash	505			520
Accounts and other receivables, net	646			491
Inventory	207			312
Derivative assets	284			323
Other current assets	146			92
Total current assets	3,827			4,212

Property, plant and equipment, net	29,950			29,673
Operating lease assets, net	520			439
Non-current derivative assets	589			174
Goodwill	77			77
Deferred tax assets	337			529
Other non-current assets, net	546			388
Total assets	$	35,846		$	35,492

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	26		$	66
Accrued liabilities	735			1,281
Current debt	237			—
Deferred revenue	23			161
Current operating lease liabilities	179			236
Derivative liabilities	239			117
Other current liabilities	25			13
Total current liabilities	1,464			1,874

Long-term debt, net	30,807			30,774
Non-current operating lease liabilities	347			189
Non-current finance lease liabilities	58			58
Non-current derivative liabilities	161			151
Other non-current liabilities	13			11

Commitments and contingencies (see Note 17)

Stockholders’ equity
Preferred stock, $0.0001 par value, 5.0 million shares authorized, none issued	—			—
Common stock, $0.003 par value, 480.0 million shares authorized
Issued: 272.9 million shares at June 30, 2020 and 270.7 million shares at December 31, 2019
Outstanding: 252.2 million shares at June 30, 2020 and 253.6 million shares at December 31, 2019	1			1
Treasury stock: 20.7 million shares and 17.1 million shares at June 30, 2020 and December 31, 2019, respectively, at cost	(870		)	(674		)
Additional paid-in-capital	4,227			4,167
Accumulated deficit	(2,936		)	(3,508		)
Total stockholders’ equity (deficit)	422			(14		)
Non-controlling interest	2,574			2,449
Total equity	2,996			2,435
Total liabilities and stockholders’ equity	$	35,846		$	35,492

(1)

Amounts presented include balances held by our consolidated variable interest entity (“VIE”), Cheniere Partners, as further discussed in Note 8— Non-controlling Interest and Variable Interest Entity. As of June 30, 2020, total assets and liabilities of Cheniere Partners, which are included in our Consolidated Balance Sheets, were $18.9 billion and $18.1 billion, respectively, including $1.3 billion of cash and cash equivalents and $0.2 billion of restricted cash.

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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Revenues
LNG revenues	$	2,295		$	2,173		$	4,863		$	4,316
Regasification revenues	68			67			135			133
Other revenues	39			52			113			104
Total revenues	2,402			2,292			5,111			4,553

Operating costs and expenses
Cost of sales (excluding items shown separately below)	803			1,277			1,527			2,491
Operating and maintenance expense	355			295			671			516
Development expense	1			3			5			4
Selling, general and administrative expense	73			77			154			150
Depreciation and amortization expense	233			204			466			348
Impairment expense and loss on disposal of assets	—			4			5			6
Total operating costs and expenses	1,465			1,860			2,828			3,515

Income from operations	937			432			2,283			1,038

Other income (expense)
Interest expense, net of capitalized interest	(407		)	(372		)	(819		)	(619		)
Loss on modification or extinguishment of debt	(43		)	—			(44		)	—
Interest rate derivative loss, net	(25		)	(74		)	(233		)	(109		)
Other income, net	5			16			14			32
Total other expense	(470		)	(430		)	(1,082		)	(696		)

Income before income taxes and non-controlling interest	467			2			1,201			342
Income tax provision	(63		)	—			(194		)	(3		)
Net income	404			2			1,007			339
Less: net income attributable to non-controlling interest	207			116			435			312
Net income (loss) attributable to common stockholders	$	197		$	(114	)	$	572		$	27

Net income (loss) per share attributable to common stockholders—basic (1)	$	0.78		$	(0.44	)	$	2.27		$	0.11
Net income (loss) per share attributable to common stockholders—diluted (1)	$	0.78		$	(0.44	)	$	2.26		$	0.11

Weighted average number of common shares outstanding—basic	252.1			257.4			252.6			257.3
Weighted average number of common shares outstanding—diluted	252.4			257.4			253.3			258.6


(1)	Earnings per share in the table may not recalculate exactly due to rounding because it is calculated based on whole numbers, not the rounded numbers presented.

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions)

(unaudited)



Three and Six Months Ended June 30, 2020
	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, 2019	253.6		$	1	17.1	$	(674	)	$	4,167	$	(3,508	)	$	2,449		$	2,435
Vesting of restricted stock units and performance stock units	2.1		—		—	—			—		—			—			—
Share-based compensation	—		—		—	—			29		—			—			29
Issued shares withheld from employees related to share-based compensation, at cost	(0.7	)	—		0.7	(39		)	—		—			—			(39		)
Shares repurchased, at cost	(2.9	)	—		2.9	(155		)	—		—			—			(155		)
Net income attributable to non-controlling interest	—		—		—	—			—		—			228			228
Distributions and dividends to non-controlling interest	—		—		—	—			—		—			(154		)	(154		)
Net income	—		—		—	—			—		375			—			375
Balance at March 31, 2020	252.1		1		20.7	(868		)	4,196		(3,133		)	2,523			2,719
Vesting of restricted stock units and performance stock units	0.1		—		—	—			—		—			—			—
Share-based compensation	—		—		—	—			31		—			—			31
Issued shares withheld from employees related to share-based compensation, at cost	—		—		—	(2		)	—		—			—			(2		)
Net income attributable to non-controlling interest	—		—		—	—			—		—			207			207
Distributions and dividends to non-controlling interest	—		—		—	—			—		—			(156		)	(156		)
Net income	—		—		—	—			—		197			—			197
Balance at June 30, 2020	252.2		$	1	20.7	$	(870	)	$	4,227	$	(2,936	)	$	2,574		$	2,996

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED

(in millions)

(unaudited)



Three and Six Months Ended June 30, 2019
	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, 2018	257.0		$	1	12.8	$	(406	)	$	4,035	$	(4,156	)	$	2,455		$	1,929
Vesting of restricted stock units	0.6		—		—	—			—		—			—			—
Share-based compensation	—		—		—	—			28		—			—			28
Issued shares withheld from employees related to share-based compensation, at cost	(0.2	)	—		0.2	(12		)	—		—			—			(12		)
Net income attributable to non-controlling interest	—		—		—	—			—		—			196			196
Distributions and dividends to non-controlling interest	—		—		—	—			—		—			(144		)	(144		)
Net income	—		—		—	—			—		141			—			141
Balance at March 31, 2019	257.4		1		13.0	(418		)	4,063		(4,015		)	2,507			2,138
Vesting of restricted stock units	0.1		—		—	—			—		—			—			—
Share-based compensation	—		—		—	—			33		—			—			33
Issued shares withheld from employees related to share-based compensation, at cost	—		—		—	(2		)	—		—			—			(2		)
Shares repurchased, at cost	—		—		—	(3		)	—		—			—			(3		)
Net income attributable to non-controlling interest	—		—		—	—			—		—			116			116
Equity portion of convertible notes, net	—		—		—	—			1		—			—			1
Distributions and dividends to non-controlling interest	—		—		—	—			—		—			(146		)	(146		)
Net loss	—		—		—	—			—		(114		)	—			(114		)
Balance at June 30, 2019	257.5		$	1	13.0	$	(423	)	$	4,097	$	(4,129	)	$	2,477		$	2,023

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)



	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Net income	$	1,007		$	339
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	466			348
Share-based compensation expense	57			61
Non-cash interest expense	34			93
Amortization of debt issuance costs, premium and discount	70			44
Non-cash operating lease costs	166			158
Loss on modification or extinguishment of debt	44			—
Total gains on derivatives, net	(361		)	(147		)
Net cash provided by settlement of derivative instruments	117			62
Impairment expense and loss on disposal of assets	5			6
Impairment or loss on equity method investments	1			2
Deferred taxes	192			—
Changes in operating assets and liabilities:
Accounts and other receivables, net	(155		)	59
Inventory	104			33
Other current assets	(37		)	(46		)
Accounts payable and accrued liabilities	(369		)	(80		)
Deferred revenue	(138		)	(2		)
Operating lease liabilities	(145		)	(163		)
Other, net	(30		)	(7		)
Net cash provided by operating activities	1,028			760

Cash flows from investing activities
Property, plant and equipment, net	(983		)	(1,508		)
Investment in equity method investment	(100		)	(34		)
Other	(7		)	—
Net cash used in investing activities	(1,090		)	(1,542		)

Cash flows from financing activities
Proceeds from issuances of debt	2,597			2,021
Repayments of debt	(2,380		)	(630		)
Debt issuance and other financing costs	(59		)	(20		)
Debt extinguishment costs	(40		)	—
Distributions and dividends to non-controlling interest	(310		)	(290		)
Payments related to tax withholdings for share-based compensation	(41		)	(14		)
Repurchase of common stock	(155		)	(3		)
Other	—			2
Net cash provided by (used in) financing activities	(388		)	1,066

Net increase (decrease) in cash, cash equivalents and restricted cash	(450		)	284
Cash, cash equivalents and restricted cash—beginning of period	2,994			3,156
Cash, cash equivalents and restricted cash—end of period	$	2,544		$	3,440

Balances per Consolidated Balance Sheet:



	June 30,
	2020
Cash and cash equivalents	$	2,039
Restricted cash	505
Total cash, cash equivalents and restricted cash	$	2,544

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 operating and constructing two natural gas liquefaction and export facilities at Sabine Pass and Corpus Christi. 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, through its subsidiary SPL, is currently operating five natural gas liquefaction Trains and is constructing one additional Train for a total production capacity of approximately 30 mtpa of LNG (the “SPL Project”) at the Sabine Pass LNG terminal. The Sabine Pass LNG terminal has operational regasification facilities owned by Cheniere Partners’ subsidiary, SPLNG, that include pre-existing infrastructure of five LNG storage tanks, two marine berths and vaporizers and an additional marine berth that is under construction. Cheniere Partners also owns a 94-mile pipeline that interconnects the Sabine Pass LNG terminal with a number of large interstate pipelines (the “Creole Trail Pipeline”) through its subsidiary, CTPL. As of June 30, 2020, we owned 100% of the general partner interest and 48.6% of the limited partner interest in Cheniere Partners.

The Corpus Christi LNG terminal is located near Corpus Christi, Texas and is operated and constructed by our subsidiary, CCL. We are currently operating two Trains and one additional Train is undergoing commissioning for a total production capacity of approximately 15 mtpa of LNG. We also operate a 23-mile natural gas supply pipeline that interconnects the Corpus Christi LNG terminal with several interstate and intrastate natural gas pipelines (the “Corpus Christi Pipeline” and together with the Trains, the “CCL Project”) through our subsidiary, CCP. The CCL Project, once fully constructed, will contain three LNG storage tanks and two marine berths.

Additionally, separate from the CCH Group, we are developing an expansion of the Corpus Christi LNG terminal adjacent to the CCL Project (“Corpus Christi Stage 3”) through our subsidiary CCL Stage III, for up to seven midscale Trains with an expected total production capacity of approximately 10 mtpa of LNG. We received approval from FERC in November 2019 to site, construct and operate the expansion project.

We remain focused on operational excellence and customer satisfaction. Increasing demand of LNG has allowed us to expand our liquefaction infrastructure in a financially disciplined manner. We hold significant land positions at both the Sabine Pass LNG terminal and the Corpus Christi LNG terminal which provide opportunity for further liquefaction capacity expansion. The development of these sites or other projects, including infrastructure projects in support of natural gas supply and LNG demand, will require, among other things, 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 fiscal year ended December 31, 2019. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included.

Results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2020.

Recent Accounting Standards

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance primarily provides temporary optional expedients which simplify the accounting for contract modifications to existing debt agreements expected to arise from the market transition from LIBOR to alternative reference rates. The optional expedients were available to be used upon issuance of this guidance but we have not yet applied the guidance because we have not yet modified any of our existing contracts for reference rate reform. Once we apply an optional expedient to a modified contract and adopt this standard, the guidance will be applied to all subsequent applicable contract modifications until December 31, 2022, at which time the optional expedients are no longer available.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 2—RESTRICTED CASH

Restricted cash consists of funds that are contractually or legally restricted as to usage or withdrawal and have been presented separately from cash and cash equivalents on our Consolidated Balance Sheets. As of June 30, 2020 and December 31, 2019, restricted cash consisted of the following (in millions):



	June 30,		December 31,
	2020		2019
Current restricted cash
SPL Project	$	167	$	181
CCL Project	101		80
Cash held by our subsidiaries restricted to Cheniere	237		259
Total current restricted cash	$	505	$	520

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 (collectively, the “Liquefaction Projects”) and other restricted payments. The majority of the cash held by our subsidiaries restricted to Cheniere relates to advance funding for operation and construction needs of the Liquefaction Projects.

NOTE 3—ACCOUNTS AND OTHER RECEIVABLES

As of June 30, 2020 and December 31, 2019, accounts and other receivables, net consisted of the following (in millions):



	June 30,		December 31,
	2020		2019
Trade receivables
SPL and CCL	$	467	$	328
Cheniere Marketing	41		113
Other accounts receivable	138		50
Total accounts and other receivables, net	$	646	$	491

NOTE 4—INVENTORY

As of June 30, 2020 and December 31, 2019, inventory consisted of the following (in millions):



	June 30,		December 31,
	2020		2019
Natural gas	$	18	$	16
LNG	24		67
LNG in-transit	21		93
Materials and other	144		136
Total inventory	$	207	$	312

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 5—PROPERTY, PLANT AND EQUIPMENT

As of June 30, 2020 and December 31, 2019, property, plant and equipment, net consisted of the following (in millions):



	June 30,			December 31,
	2020			2019
LNG terminal costs
LNG terminal and interconnecting pipeline facilities	$	27,453		$	27,305
LNG site and related costs	322			322
LNG terminal construction-in-process	4,484			3,903
Accumulated depreciation	(2,494		)	(2,049		)
Total LNG terminal costs, net	29,765			29,481
Fixed assets and other
Computer and office equipment	24			23
Furniture and fixtures	19			22
Computer software	114			110
Leasehold improvements	43			42
Land	59			59
Other	25			21
Accumulated depreciation	(154		)	(141		)
Total fixed assets and other, net	130			136
Assets under finance lease
Tug vessels	60			60
Accumulated depreciation	(5		)	(4		)
Total assets under finance lease, net	55			56
Property, plant and equipment, net	$	29,950		$	29,673

Depreciation expense was $231 million and $203 million during the three months ended June 30, 2020 and 2019, respectively, and $463 million and $346 million during the six months ended June 30, 2020 and 2019, respectively.

We realized offsets to LNG terminal costs of $202 million during the six months ended June 30, 2019 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 Trains of the Liquefaction Projects, during the testing phase for its construction. We did not realize any offsets to LNG terminal costs during the three and six months ended June 30, 2020 and the three months ended June 30, 2019.

NOTE 6—DERIVATIVE INSTRUMENTS

We have entered into the following derivative instruments that are reported at fair value:

•

interest rate swaps (“CCH Interest Rate Derivatives”) to hedge the exposure to volatility in a portion of the floating-rate interest payments on CCH’s amended and restated credit facility (the “CCH Credit Facility”) and to hedge against changes in interest rates that could impact anticipated future issuance of debt by CCH (“CCH Interest Rate Forward Start Derivatives” and, collectively with the CCH Interest Rate Derivatives, the “Interest Rate Derivatives”);


•	commodity derivatives consisting of natural gas supply contracts for the commissioning and operation of the Liquefaction Projects and potential future development of Corpus Christi Stage 3 (“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 or fair value 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 June 30, 2020 and December 31, 2019, 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
	June 30, 2020											December 31, 2019
	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
CCH Interest Rate Derivatives liability	$	—		$	(191	)	$	—	$	(191	)	$	—	$	(81	)	$	—	$	(81	)
CCH Interest Rate Forward Start Derivatives liability	—			(102		)	—		(102		)	—		(8		)	—		(8		)
Liquefaction Supply Derivatives asset (liability)	11			(1		)	590		600			5		6			138		149
LNG Trading Derivatives asset (liability)	(2		)	153			—		151			—		165			—		165
FX Derivatives asset	—			15			—		15			—		4			—		4

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 or option-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 observable and unobservable market commodity prices and, as applicable to our natural gas supply contracts, our assessment of the associated events deriving fair value, including evaluating whether the respective market is available as pipeline infrastructure is developed. The fair value of our Physical Liquefaction Supply Derivatives incorporates risk premiums related to the satisfaction of conditions precedent, such as completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow. As of June 30, 2020 and December 31, 2019, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure was under development to accommodate marketable physical gas flow.

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 incorporate significant unobservable inputs. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks, such as future prices of energy units for unobservable periods, liquidity, volatility and contract duration.

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 and international LNG prices. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of June 30, 2020:



	Net Fair Value Asset (in millions)	Valuation Approach	Significant Unobservable Input	Range of Significant Unobservable Inputs / Weighted Average (1)
Physical Liquefaction Supply Derivatives	$590	Market approach incorporating present value techniques	Henry Hub basis spread	$(0.546) - $0.172 / $(0.023)
		Option pricing model	International LNG pricing spread, relative to Henry Hub (2)	46% - 171% / 126%


(1)	Unobservable inputs were weighted by the relative fair value of the instruments.


(2)	Spread contemplates U.S. dollar-denominated pricing.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Increases or decreases in basis or pricing spreads, in isolation, would decrease or increase, respectively, the fair value of our Physical Liquefaction Supply Derivatives.

The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three and six months ended June 30, 2020 and 2019 (in millions):



	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
Balance, beginning of period	$	674		$	31	$	138		$	(29	)
Realized and mark-to-market gains:
Included in cost of sales	(84		)	7		452			23
Purchases and settlements:
Purchases	(4		)	50		(3		)	50
Settlements	1			1		(1		)	45
Transfers into Level 3, net (1)	3			—		4			—
Balance, end of period	$	590		$	89	$	590		$	89
Change in unrealized gains (losses) relating to instruments still held at end of period	$	(84	)	$	7	$	452		$	23


(1)	Transferred into Level 3 as a result of unobservable market, or out of Level 3 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 the unconditional right of set-off in the event of default. 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, counterparties are at risk that we will be unable to meet our commitments in instances where our derivative instruments are in a liability position. We incorporate both our own nonperformance risk and the respective counterparty’s nonperformance risk in fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of any applicable credit enhancements, such as collateral postings, set-off rights and guarantees.

Interest Rate Derivatives

As of June 30, 2020, we had the following Interest Rate Derivatives outstanding:



	Notional Amounts
	June 30, 2020	December 31, 2019	Term	Weighted Average Fixed Interest Rate Paid	Variable Interest Rate Received
CCH Interest Rate Derivatives	$4.7 billion	$4.5 billion	May 31, 2022 (1)	2.30%	One-month LIBOR
CCH Interest Rate Forward Start Derivatives	$250 million	$250 million	September 30, 2020 (2)	2.05%	Three-month LIBOR
CCH Interest Rate Forward Start Derivatives	$500 million	$500 million	December 31, 2020 (2)	2.06%	Three-month LIBOR


(1)	Represents the maturity date.


(2)	Represents the effective date. These forward start derivatives have terms of 10 years with a mandatory termination date consistent with the effective date.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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



	June 30, 2020									December 31, 2019
	CCH Interest Rate Derivatives			CCH Interest Rate Forward Start Derivatives			Total			CCH Interest Rate Derivatives			CCH Interest Rate Forward Start Derivatives			Total
Consolidated Balance Sheets Location
Derivative liabilities	$	(100	)	$	(102	)	$	(202	)	$	(32	)	$	(8	)	$	(40	)
Non-current derivative liabilities	(91		)	—			(91		)	(49		)	—			(49		)
Total derivative liabilities	$	(191	)	$	(102	)	$	(293	)	$	(81	)	$	(8	)	$	(89	)

The following table shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in interest rate derivative loss, net on our Consolidated Statements of Operations during the three and six months ended June 30, 2020 and 2019 (in millions):



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
CCH Interest Rate Derivatives loss	$	(15	)	$	(67	)	$	(138	)	$	(102	)
CCH Interest Rate Forward Start Derivatives loss	(10		)	(7		)	(95		)	(7		)

Commodity Derivatives

SPL, CCL and CCL Stage III have entered into physical natural gas supply contracts and associated economic hedges to purchase natural gas for the commissioning and operation of the Liquefaction Projects and potential future development of Corpus Christi Stage 3, respectively, which are primarily indexed to the natural gas market and international LNG indices. The remaining terms of the index-based physical natural gas supply contracts range up to approximately 15 years, some of which commence upon the satisfaction of certain events or states of affairs.

We have entered into, and may from time to time enter into, financial LNG Trading Derivatives in the form of swaps, forwards, options or futures to economically hedge exposure to the commodity markets in which we have contractual arrangements to purchase or sell physical LNG. We have entered into LNG Trading Derivatives to secure a fixed price position to minimize future cash flow variability associated with LNG purchase and sale transactions.

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):



	June 30, 2020									December 31, 2019
	Liquefaction Supply Derivatives (1)			LNG Trading Derivatives (2)			Total			Liquefaction Supply Derivatives (1)			LNG Trading Derivatives (2)			Total
Consolidated Balance Sheets Location
Derivative assets	$	133		$	138		$	271		$	93		$	225		$	318
Non-current derivative assets	564			23			587			174			—			174
Total derivative assets	697			161			858			267			225			492

Derivative liabilities	(27		)	(10		)	(37		)	(16		)	(60		)	(76		)
Non-current derivative liabilities	(70		)	—			(70		)	(102		)	—			(102		)
Total derivative liabilities	(97		)	(10		)	(107		)	(118		)	(60		)	(178		)

Derivative asset, net	$	600		$	151		$	751		$	149		$	165		$	314

Notional amount, net (in TBtu) (3)	10,264			19						9,177			4


(1)	Does not include collateral posted with counterparties by us of $2 million and $7 million for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively. Includes derivative assets of $5 million and $3 million as of June 30, 2020 and December 31, 2019,

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

respectively, and non-current assets of $2 million as of both June 30, 2020 and December 31, 2019 for natural gas supply contracts that SPL and CCL have with related parties.


(2)	Does not include collateral posted with counterparties by us of $17 million and $5 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively.


(3)	Includes 182 TBtu and 120 TBtu as of June 30, 2020 and December 31, 2019, respectively, for natural gas supply contracts that SPL and CCL have with related parties.

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 six months ended June 30, 2020 and 2019 (in millions):



	Consolidated Statements of Operations Location (1)	Three Months Ended June 30,						Six Months Ended June 30,
	Consolidated Statements of Operations Location (1)	2020			2019			2020			2019
LNG Trading Derivatives gain (loss)	LNG revenues	$	(34	)	$	94		$	106		$	158
LNG Trading Derivatives gain (loss)	Cost of sales	34			(51		)	—			(51		)
Liquefaction Supply Derivatives gain (loss) (2)	LNG revenues	(13		)	(1		)	(14		)	1
Liquefaction Supply Derivatives gain (loss) (2)(3)	Cost of sales	(62		)	57			475			139


(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.

(3)

CCL recorded $25 million and $24 million in cost of sales under a natural gas supply contract with a related party during the three months ended June 30, 2020 and 2019, respectively, including $1 million of Liquefaction Supply Derivatives gain and $1 million of Liquefaction Supply Derivatives loss, respectively. During the six months ended June 30, 2020 and 2019, CCL recorded $48 million and $36 million in cost of sales under a natural gas supply contract with a related party, respectively, including $2 million of Liquefaction Supply Derivatives gain and $3 million of Liquefaction Supply Derivatives loss, respectively. As of June 30, 2020 and December 31, 2019, $8 million and $3 million, respectively, were included in accrued liabilities related to this contract.

FX Derivatives

Cheniere Marketing has entered into FX Derivatives to protect against the volatility in future cash flows attributable to changes in international currency exchange rates. The FX Derivatives economically hedge the foreign currency exposure arising from cash flows expended for both physical and financial LNG transactions.

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 Sheets Location	June 30, 2020		December 31, 2019
FX Derivatives	Derivative assets	$	13	$	5
FX Derivatives	Non-current derivative assets	2		—
FX Derivatives	Derivative liabilities	—		(1		)

The total notional amount of our FX Derivatives was $146 million and $827 million as of June 30, 2020 and December 31, 2019, respectively.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The following table shows the changes in the fair value, settlements and location of our FX Derivatives recorded on our Consolidated Statements of Operations during the three and six months ended June 30, 2020 and 2019 (in millions):



		Three Months Ended June 30,				Six Months Ended June 30,
	Consolidated Statements of Operations Location	2020		2019		2020		2019
FX Derivatives gain	LNG revenues	$	2	$	—	$	27	$	9

Consolidated Balance Sheets 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 June 30, 2020
CCH Interest Rate Derivatives	$	(191	)	$	—		$	(191	)
CCH Interest Rate Forward Start Derivatives	(102		)	—			(102		)
Liquefaction Supply Derivatives	715			(18		)	697
Liquefaction Supply Derivatives	(102		)	5			(97		)
LNG Trading Derivatives	163			(2		)	161
LNG Trading Derivatives	(21		)	11			(10		)
FX Derivatives	22			(7		)	15
As of December 31, 2019
CCH Interest Rate Derivatives	$	(81	)	$	—		$	(81	)
CCH Interest Rate Forward Start Derivatives	(8		)	—			(8		)
Liquefaction Supply Derivatives	281			(14		)	267
Liquefaction Supply Derivatives	(126		)	8			(118		)
LNG Trading Derivatives	229			(4		)	225
LNG Trading Derivatives	(60		)	—			(60		)
FX Derivatives	9			(4		)	5
FX Derivatives	(6		)	5			(1		)

NOTE 7—OTHER NON-CURRENT ASSETS

As of June 30, 2020 and December 31, 2019, other non-current assets, net consisted of the following (in millions):



	June 30,		December 31,
	2020		2019
Advances made to municipalities for water system enhancements	$	86	$	87
Advances and other asset conveyances to third parties to support LNG terminals	61		55
Advances made under EPC and non-EPC contracts	6		29
Equity method investments	206		108
Debt issuance costs and debt discount, net	86		45
Tax-related payments and receivables	20		20
Contract assets, net	58		18
Other	23		26
Total other non-current assets, net	$	546	$	388

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”), which we account for as an equity method investment. See Note 8—Other Non-Current Assets of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the fiscal year ended December 31, 2019 for further information.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Our investment in Midship Holdings, net of impairment losses, was $205 million and $105 million at June 30, 2020 and December 31, 2019, respectively.

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 $3 million during both the three months ended June 30, 2020 and 2019 and $6 million and $7 million in the six months ended June 30, 2020 and 2019, respectively, of other revenues and $2 million and $3 million of accounts receivable as of June 30, 2020 and December 31, 2019, respectively, for services provided to Midship Pipeline under these agreements. CCL has entered into a transportation precedent agreement and a negotiated rate agreement with Midship Pipeline to secure firm pipeline transportation capacity for a period of 10 years commencing May 2020. CCL recorded $2 million in operating and maintenance expense during both the three and six months ended June 30, 2020 and $1 million of accounts payable as of June 30, 2020 under this agreement. In March 2020, CCH and CCL entered into a guaranty agreement whereby CCH absolutely and irrevocably guarantees CCL’s obligation under the transportation precedent agreement with Midship Pipeline.

NOTE 8—NON-CONTROLLING INTEREST AND VARIABLE INTEREST ENTITY

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 (“Blackstone CQP Holdco”) 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 consolidated variable interest entity. See Note 9—Non-Controlling Interest and Variable Interest Entity of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the fiscal year ended December 31, 2019 for further information.

The following table presents the summarized assets and liabilities (in millions) of Cheniere Partners, our consolidated VIE, which are included in our Consolidated Balance Sheets. The assets in the table below may only be used to settle obligations of Cheniere Partners. In addition, there is no recourse to us for the consolidated VIE’s liabilities. The assets and liabilities in the table below include third-party assets and liabilities of Cheniere Partners only and exclude intercompany balances that eliminate in consolidation.



	June 30,		December 31,
	2020		2019
ASSETS
Current assets
Cash and cash equivalents	$	1,341	$	1,781
Restricted cash	167		181
Accounts and other receivables, net	291		297
Other current assets	221		184
Total current assets	2,020		2,443

Property, plant and equipment, net	16,584		16,368
Other non-current assets, net	310		309
Total assets	$	18,914	$	19,120

LIABILITIES
Current liabilities
Accrued liabilities	$	410	$	709
Other current liabilities	47		210
Total current liabilities	457		919

Long-term debt, net	17,566		17,579
Other non-current liabilities	92		104
Total liabilities	$	18,115	$	18,602

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 9—ACCRUED LIABILITIES

As of June 30, 2020 and December 31, 2019, accrued liabilities consisted of the following (in millions):



	June 30,		December 31,
	2020		2019
Interest costs and related debt fees	$	249	$	293
Accrued natural gas purchases	202		460
LNG terminals and related pipeline costs	108		327
Compensation and benefits	57		115
Accrued LNG inventory	11		6
Other accrued liabilities	108		80
Total accrued liabilities	$	735	$	1,281

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 10—DEBT

As of June 30, 2020 and December 31, 2019, our debt consisted of the following (in millions):



	June 30,			December 31,
	2020			2019
Long-term debt:
SPL
5.625% Senior Secured Notes due 2021 (“2021 SPL Senior Notes”)	$	—		$	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
4.500% Senior Secured Notes due 2030 (“2030 SPL Senior Notes”)	2,000			—
5.00% Senior Secured Notes due 2037 (“2037 SPL Senior Notes”)	800			800
$1.2 billion SPL Working Capital Facility executed in 2020 (“2020 SPL Working Capital Facility”)	—			—
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			1,100
4.500% Senior Notes due 2029 (“2029 CQP Senior Notes”)	1,500			1,500
CQP Credit Facilities executed in 2019 (“2019 CQP Credit Facilities”)	—			—
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
3.700% Senior Secured Notes due 2029 (“2029 CCH Senior Notes”)	1,500			1,500
4.80% Senior Secured Notes due 2039 (“4.80% CCH Senior Notes”)	727			727
3.925% Senior Secured Notes due 2039 (“3.925% CCH Senior Notes”)	475			475
CCH Credit Facility	3,283			3,283
CCH HoldCo II
11.0% Convertible Senior Secured Notes due 2025 (“2025 CCH HoldCo II Convertible Senior Notes”)	1,278			1,578
Cheniere
4.875% Convertible Unsecured Notes due 2021 (“2021 Cheniere Convertible Unsecured Notes”)	1,216			1,278
4.25% Convertible Senior Notes due 2045 (“2045 Cheniere Convertible Senior Notes”)	625			625
$1.25 billion Cheniere Revolving Credit Facility (“Cheniere Revolving Credit Facility”)	375			—
$2.62 billion Cheniere Term Loan Credit Agreement (“Cheniere Term Loan Facility”)	—			—
Unamortized premium, discount and debt issuance costs, net	(672		)	(692		)
Total long-term debt, net	30,807			30,774

Current debt:
2021 Cheniere Convertible Unsecured Notes	93			—
$1.2 billion SPL Working Capital Facility executed in 2015 (“2015 SPL Working Capital Facility”)	—			—
$1.2 billion CCH Working Capital Facility (“CCH Working Capital Facility”)	141			—
Cheniere Marketing trade finance facilities	6			—
Unamortized premium, discount and debt issuance costs, net	(3		)	—
Total current debt	237			—

Total debt, net	$	31,044		$	30,774

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

2020 Material Debt Activities

Cheniere Term Loan Facility

In June 2020, we entered into the $2.62 billion delayed draw Cheniere Term Loan Facility, which was subsequently increased to $2.695 billion in July 2020. In July 2020, borrowings under the Cheniere Term Loan Facility were used to (1) redeem the remaining outstanding principal amount of the 2025 CCH HoldCo II Convertible Senior Notes, subsequent to the $300 million redemption in March 2020, pursuant to the amended and restated note purchase agreement for the 2025 CCH HoldCo II Convertible Senior Notes which allowed CCH HoldCo II to redeem the outstanding notes with cash at a price of $1,080 per $1,000 principal amount, (2) repurchase $844 million in aggregate principal amount of outstanding 2021 Cheniere Convertible Unsecured Notes at individually negotiated prices from a small number of investors and (3) pay the related fees and expenses. The remaining borrowings under the Cheniere Term Loan Facility are expected to be used to repay and/or repurchase a portion of the remaining principal amount of the 2021 Cheniere Convertible Unsecured Notes and for the payment of related fees and expenses.

Loans under the Cheniere Term Loan 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 and base rate loans range from (1) 2.00% to 2.75% and 1.00% to 1.75% per annum, respectively, in the first year (2) 2.50% to 3.25% and 1.50% to 2.25% per annum, respectively, in the second year and (3) 3.00% to 3.75% and 2.00% to 2.75% per annum, respectively, in the third year until maturity, in each case, based on the credit ratings then in effect assigned to loans under the Cheniere Term Loan Facility. Interest on LIBOR loans is due and payable at the end of each LIBOR period, and interest on base rate loans is due and payable at the end of each calendar quarter.

We will pay a commitment fee equal to 30% of the margin for LIBOR loans multiplied by the average daily amount of undrawn commitments. If the Cheniere Term Loan Facility is still outstanding on the first anniversary of the Closing Date, as defined by the credit agreement, we will pay duration fees in an amount equal to 0.25% of the aggregate amount of commitments as of July 10, 2020, which was the date the loans were first borrowed under the Cheniere Term Loan Facility (the “Payment Date”). Furthermore, if the Cheniere Term Loan Facility is still outstanding on the second anniversary of the Closing Date, as defined by the credit agreement, we will pay 0.50% of the aggregate amount of commitments as of the Payment Date. Annual administrative fees must also be paid to the administrative agent for the Cheniere Term Loan Facility.

The Cheniere Term Loan Facility matures on June 18, 2023. Subject to customary exceptions, we are required to make mandatory prepayments with respect to the Cheniere Term Loan Facility using the net proceeds of certain events on a pro rata basis and on terms consistent with required prepayments under the Cheniere Revolving Credit Facility. Loans under the Cheniere Term Loan Facility may be voluntarily prepaid, in whole or in part, at any time, without premium or penalty. Borrowings under the Cheniere Term Loan Facility are subject to customary conditions precedent. The Cheniere Term Loan Facility includes representations, warranties, affirmative and negative covenants and events of default customary for companies like us with lenders of the type participating in the Cheniere Term Loan Facility and consistent with the equivalent provisions contained in the Cheniere Revolving Credit Facility.

The Cheniere Term Loan Facility is secured by a first priority security interest (subject to permitted liens and other customary exceptions) on a pari passu basis with the Cheniere Revolving Credit Facility in substantially all of our assets and equity interests in direct subsidiaries (other than certain excluded subsidiaries). Upon redemption of the 2025 CCH HoldCo II Convertible Senior Notes in July 2020, the equity interests in CCH HoldCo II were pledged as collateral to secure the obligations under the Cheniere Revolving Credit Facility and the Cheniere Term Loan Facility.

2030 SPL Senior Notes

In May 2020, SPL issued an aggregate principal amount of $2.0 billion of the 2030 SPL Senior Notes. The proceeds of the notes, along with cash on hand, were used to redeem all of SPL’s outstanding 2021 SPL Senior Notes, resulting in the recognition of debt extinguishment costs of $43 million for the three and six months ended June 30, 2020 relating to the payment of early redemption fees and write off of unamortized debt premium and issuance costs.

The 2030 SPL Senior Notes mature on May 15, 2030 and accrue interest at a fixed rate of 4.500% per annum, which is payable semi-annually in cash in arrears. The 2030 SPL Senior Notes are governed by the same base indenture (the “SPL Indenture”) as all other series of the SPL senior notes (collectively, the “SPL Senior Notes”), except for the 2037 SPL Senior Notes, and are further governed by the Eighth Supplemental Indenture and the Eleventh Supplemental Indenture (together with the SPL Indenture,

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

the “2030 SPL Notes Indenture”). The 2030 SPL Notes Indenture contains customary terms and events of default and certain covenants that, among other things, limit SPL’s ability and the ability of SPL’s restricted subsidiaries to incur additional indebtedness or issue preferred stock, make certain investments or pay dividends or distributions, transfer assets, including capital stock of SPL’s restricted subsidiaries, restrict dividends or other payments by restricted subsidiaries, incur liens, sell assets, enter into transactions with affiliates and consolidate, merge or sell, lease or otherwise dispose of all or substantially all of SPL’s assets and enter into certain LNG sales contracts.

The 2030 SPL Senior Notes are SPL’s senior secured obligation, ranking equally in right of payment with its other existing and future unsubordinated debt and senior to any of its future subordinated debt.

At any time prior to November 15, 2029, SPL may redeem all or a part of the 2030 SPL Senior Notes at a redemption price equal to the ‘make-whole’ price set forth in the Eleventh Supplemental Indenture, plus accrued and unpaid interest, if any, to the date of redemption. SPL may also, at any time on or after November 15, 2029, redeem the 2030 SPL Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2030 SPL Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.

In connection with the closing of the 2030 SPL Senior Notes offering, SPL entered into a registration rights agreement (the “SPL Registration Rights Agreement”). Under the SPL Registration Rights Agreement, SPL and any future guarantors of the 2030 SPL Senior Notes, 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 2030 SPL Senior Notes for a like aggregate principal amount of debt securities of SPL with terms identical in all material respects to the 2030 SPL 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 May 8, 2020. Under specified circumstances, SPL has agreed to cause to become effective a shelf registration statement relating to resales of the 2030 SPL Senior Notes. SPL will be obligated to pay additional interest on the 2030 SPL Senior Notes if it fails to comply with its obligations to register the 2030 SPL Senior Notes within the specified time period.

2020 SPL Working Capital Facility

In March 2020, SPL entered into the 2020 SPL Working Capital Facility with aggregate commitments of $1.2 billion, which replaced the 2015 SPL Working Capital Facility. The 2020 SPL Working Capital Facility is intended to be used for loans to SPL (“SPL Revolving Loans”), swing line loans to SPL (“SPL Swing Line Loans”) and the issuance of letters of credit on behalf of SPL, primarily for (1) the refinancing of the 2015 SPL Working Capital Facility, (2) fees and expenses related to the 2020 SPL Working Capital Facility, (3) SPL and its future subsidiaries’ gas purchase obligations and (4) SPL and certain of its future subsidiaries’ general corporate purposes. SPL may, from time to time, request increases in the commitments under the 2020 SPL Working Capital Facility of up to $800 million.

Loans under the 2020 SPL Working Capital Facility accrue interest at a variable rate per annum equal to LIBOR or the base rate (equal to the highest of the senior facility agent’s published prime rate, the federal funds rate, as published by the Federal Reserve Bank of New York, plus 0.50% and one month LIBOR plus 1%), plus the applicable margin. The applicable margin for LIBOR loans under the 2020 SPL Working Capital Facility is 1.125% to 1.750% per annum (depending on the then-current rating of SPL), and the applicable margin for base rate loans under the 2020 SPL Working Capital Facility is 0.125% to 0.750% per annum (depending on the then-current rating of SPL). Interest on LIBOR loans is due and payable at the end of each applicable LIBOR period, and interest on base rate loans is due and payable at the end of each fiscal quarter. Interest on loans deemed to be made in connection with a draw upon a letter of credit is due and payable on the date the loan becomes due.

SPL pays a commitment fee equal to an annual rate of 0.1% to 0.3% (depending on the then-current rating of SPL), which accrues on the daily amount of the total commitment less the sum of (1) the outstanding principal amount of SPL Revolving Loans, (2) letters of credit issued and (3) the outstanding principal amount of SPL Swing Line Loans. If draws are made upon a letter of credit issued under the 2020 SPL Working Capital Facility and SPL does not elect for such draw to be deemed an SPL LC Loan (an “SPL LC Draw”), SPL is required to pay the full amount of the SPL LC Draw on or prior to noon eastern time on the business day of the SPL LC Draw. An SPL LC Draw accrues interest at the base rate plus the applicable margin. As of June 30, 2020, no SPL LC Draws had been made upon any letters of credit issued under the 2020 SPL Working Capital Facility.

The 2020 SPL Working Capital Facility matures on March 19, 2025, but may be extended with consent of the lenders. The 2020 SPL Working Capital Facility provides for mandatory prepayments under customary circumstances.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The 2020 SPL Working Capital Facility contains customary conditions precedent for extensions of credit, as well as customary affirmative and negative covenants. SPL is restricted from making certain distributions under agreements governing its indebtedness generally until, among other requirements, satisfaction of a 12-month forward-looking and backward-looking 1.25:1.00 debt service reserve ratio test. The obligations of SPL under the 2020 SPL Working Capital Facility are secured by substantially all of the assets of SPL as well as a pledge of all of the membership interests in SPL and certain future subsidiaries of SPL on a pari passu basis by a first priority lien with the SPL Senior Notes.

Credit Facilities

Below is a summary of our credit facilities outstanding as of June 30, 2020 (in millions):



	2020 SPL Working Capital Facility		2019 CQP Credit Facilities		CCH Credit Facility		CCH Working Capital Facility		Cheniere Revolving Credit Facility		Cheniere Term Loan Facility (1)
Original facility size	$	1,200	$	1,500	$	8,404	$	350	$	750	$	2,620
Incremental commitments	—		—		1,566		850		500		—
Less:
Outstanding balance	—		—		3,283		141		375		—
Commitments prepaid or terminated	—		750		6,687		—		—		—
Letters of credit issued	409		—		—		392		313		—
Available commitment	$	791	$	750	$	—	$	667	$	562	$	2,620

Interest rate on available balance	LIBOR plus 1.125% - 1.750% or base rate plus 0.125% - 0.750%		LIBOR plus 1.25% - 2.125% or base rate plus 0.25% - 1.125%		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 1.75% - 2.50% or base rate plus 0.75% - 1.50%		(2)
Weighted average interest rate of outstanding balance	n/a		n/a		1.93%		1.43%		1.93%		n/a
Maturity date	March 19, 2025		May 29, 2024		June 30, 2024		June 29, 2023		December 13, 2022		June 18, 2023


(1)	In July 2020, we received incremental commitments of $75 million and borrowed $2,323 million under the Cheniere Term Loan Facility, which reduced the available commitment to $372 million following these transactions.


(2)	LIBOR plus (1) 2.00% to 2.75% per annum in the first year, (2) 2.50% to 3.25% per annum in the second year and (3) 3.00% to 3.75% per annum in the third year until maturity, or base rate plus (1) 1.00% to 1.75% per annum in the first year, (2) 1.50% to 2.25% per annum in the second year and (3) 2.00% to 2.75% per annum in the third year until maturity.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Convertible Notes

Below is a summary of our convertible notes outstanding as of June 30, 2020 (in millions):



	2021 Cheniere Convertible Unsecured Notes (1)			2025 CCH HoldCo II Convertible Senior Notes			2045 Cheniere Convertible Senior Notes
Aggregate original principal	$	1,000		$	1,000		$	625
Add: interest paid-in-kind	309			578			—
Less: aggregate principal redeemed	—			(300		)	—
Aggregate remaining principal	$	1,309		$	1,278		$	625

Debt component, net of discount and debt issuance costs	$	1,271		$	1,264		$	316
Equity component	$	211		$	—		$	194
Interest payment method	Paid-in-kind			Paid-in-kind / cash (2)			Cash
Conversion by us (3)	—			(4)			(5)
Conversion by holders (3)	(6)			(4)			(7)
Conversion basis	Cash and/or stock			Cash and/or stock			Cash and/or stock
Conversion value in excess of principal	$	—		n/a			$	—
Maturity date	May 28, 2021			May 13, 2025			March 15, 2045
Contractual interest rate	4.875		%	11.0		%	4.25		%
Effective interest rate (8)	8.1		%	15.6		%	9.4		%
Remaining debt discount and debt issuance costs amortization period (9)	0.9 years			0.3 years			24.7 years

(1)

In July 2020, we subsequently repurchased $844 million in aggregate principal amount of outstanding notes at individually negotiated prices from a small number of investors. The aggregate remaining principal after this repurchase was $465 million, which exceeded the remaining commitments under the Cheniere Term Loan Facility by $93 million. As such, $93 million has been reflected as current debt on our Consolidated Balance Sheet as of June 30, 2020.


(2)	Prior to the substantial completion of Train 2 of the CCL Project in August 2019, interest was paid entirely in kind. Following substantial completion, the interest has been paid in cash; however, a portion of the interest may, in the future, be paid in kind under certain specified circumstances.


(3)	Conversion is subject to various limitations and conditions.

(4)

Convertible into cash or stock at our option on or after March 1, 2020 until September 2, 2020, and into stock upon conversion notice by us or note holders after September 2, 2020, provided that our market capitalization is not less than $10.0 billion (“Eligible Conversion Date”). The conversion price for stock 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. The conversion price for cash is $1,080 per $1,000 principal amount of the notes. We redeemed an aggregate outstanding principal amount of $300 million in March 2020 and redeemed the remaining outstanding principal amount in July 2020, both with cash.


(5)	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.


(6)	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.

(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).

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)


(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 June 30, 2020, each of our issuers was in compliance with all covenants related to their respective debt agreements.

Interest Expense

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Interest cost on convertible notes:
Interest per contractual rate	$	57		$	64		$	120		$	126
Amortization of debt discount	20			9			34			19
Amortization of debt issuance costs	4			3			7			6
Total interest cost related to convertible notes	81			76			161			151
Interest cost on debt and finance leases excluding convertible notes	388			382			779			755
Total interest cost	469			458			940			906
Capitalized interest	(62		)	(86		)	(121		)	(287		)
Total interest expense, net of capitalized interest	$	407		$	372		$	819		$	619

Fair Value Disclosures

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



	June 30, 2020				December 31, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Senior notes (1)	$	22,700	$	24,698	$	22,700	$	24,650
2037 SPL Senior Notes (2)	800		948		800		934
4.80% CCH Senior Notes (2)	727		841		727		830
3.925% CCH Senior Notes (2)	475		502		475		495
Credit facilities (3)	3,805		3,805		3,283		3,283
2021 Cheniere Convertible Unsecured Notes (2)	1,309		1,332		1,278		1,312
2025 CCH HoldCo II Convertible Senior Notes (2)	1,278		1,495		1,578		1,807
2045 Cheniere Convertible Senior Notes (4)	625		394		625		498

(1)

Includes (1) the SPL Senior Notes except the 2037 SPL Senior Notes, (2) all series of the CQP senior notes including the 2025 CQP Senior Notes, 2026 CQP Senior Notes and 2029 CQP Senior Notes and (3) the CCH senior notes sold on a private placement basis in reliance on Section 4(a)(2) of the Securities Act and Rule 144A and Regulation S thereunder including the 2024 CCH Senior Notes, 2025 CCH Senior Notes, 2027 CCH Senior Notes and 2029 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 2015 SPL Working Capital Facility, 2020 SPL Working Capital Facility, 2019 CQP Credit Facilities, CCH Credit Facility, CCH Working Capital Facility, Cheniere Revolving Credit Facility, Cheniere Term Loan Facility and Cheniere

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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—LEASES

Our leased assets consist primarily of (1) LNG vessel time charters (“vessel charters”), (2) tug vessels, (3) office space and facilities and (4) land sites, all of which are classified as operating leases except for our tug vessels at the Corpus Christi LNG terminal, which are classified as finance leases.

The following table shows the classification and location of our right-of-use assets and lease liabilities on our Consolidated Balance Sheets (in millions):



	Consolidated Balance Sheets Location	June 30, 2020		December 31, 2019
Right-of-use assets—Operating	Operating lease assets, net	$	520	$	439
Right-of-use assets—Financing	Property, plant and equipment, net	55		56
Total right-of-use assets		$	575	$	495

Current operating lease liabilities	Current operating lease liabilities	$	179	$	236
Current finance lease liabilities	Other current liabilities	1		1
Non-current operating lease liabilities	Non-current operating lease liabilities	347		189
Non-current finance lease liabilities	Non-current finance lease liabilities	58		58
Total lease liabilities		$	585	$	484

The following table shows the classification and location of our lease cost on our Consolidated Statements of Operations (in millions):



	Consolidated Statements of Operations Location	Three Months Ended June 30,				Six Months Ended June 30,
	Consolidated Statements of Operations Location	2020		2019		2020		2019
Operating lease cost (1)	Operating costs and expenses (2)	$	98	$	140	$	239	$	277
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization expense	1		1		2		2
Interest on lease liabilities	Interest expense, net of capitalized interest	3		3		5		5
Total lease cost		$	102	$	144	$	246	$	284

(1)

Includes short-term lease costs of $16 million and $46 million during the three months ended June 30, 2020 and 2019, respectively, and $51 million and $93 million during the six months ended June 30, 2020 and 2019, respectively. Also includes variable lease costs paid to the lessor of $4 million and $8 million during the three months ended June 30, 2020 and 2019, respectively, and $9 million and $13 million during the six months ended June 30, 2020 and 2019, respectively.


(2)	Presented in cost of sales, operating and maintenance expense or selling, general and administrative expense consistent with the nature of the asset under lease.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Future annual minimum lease payments for operating and finance leases as of June 30, 2020 are as follows (in millions):



Years Ending December 31,	Operating Leases (1)			Finance Leases
2020	$	135		$	5
2021	121			10
2022	85			10
2023	71			10
2024	71			10
Thereafter	221			136
Total lease payments	704			181
Less: Interest	(178		)	(122		)
Present value of lease liabilities	$	526		$	59


(1)	Does not include $1.7 billion of legally binding minimum lease payments primarily for vessel charters which were executed as of June 30, 2020 but will commence in future period primarily in the next two years and have fixed minimum lease terms of up to seven years.

The following table shows the weighted-average remaining lease term and the weighted-average discount rate for our operating leases and finance leases:



	June 30, 2020		December 31, 2019
	Operating Leases	Finance Leases	Operating Leases	Finance Leases
Weighted-average remaining lease term (in years)	8.6	18.2	8.4	18.7
Weighted-average discount rate (1)	7.4%	16.2%	5.2%	16.2%


(1)	The finance leases commenced prior to the adoption of the current leasing standard under GAAP. In accordance with previous accounting guidance, the implied rate is based on the fair value of the underlying assets.

The following table includes other quantitative information for our operating and finance leases (in millions):



	Six Months Ended June 30,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	157	$	174
Operating cash flows from finance leases	5		5
Right-of-use assets obtained in exchange for new operating lease liabilities	246		106

LNG Vessel Subcharters

From time to time, we sublease certain LNG vessels under charter to third parties while retaining our existing obligation to the original lessor. As of June 30, 2020 and December 31, 2019, we had $1 million and $9 million in future minimum sublease payments to be received from LNG vessel subcharters, respectively, which will be recognized entirely within 2020. We recognized $23 million and $31 million of sublease income, including $8 million and $5 million of variable lease payments, during the three months ended June 30, 2020 and 2019, respectively, in other revenues on our Consolidated Statements of Operations. We recognized $75 million and $68 million of sublease income, including $23 million and $10 million of variable lease payments, during the six months ended June 30, 2020 and 2019, respectively, in other revenues on our Consolidated Statements of Operations.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 12—REVENUES FROM CONTRACTS WITH CUSTOMERS

The following table represents a disaggregation of revenue earned from contracts with customers during the three and six months ended June 30, 2020 and 2019 (in millions):



	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020		2019
LNG revenues (1)	$	2,340		$	2,080	$	4,744	$	4,147
Regasification revenues	68			67		135		133
Other revenues	16			21		38		36
Total revenues from customers	2,424			2,168		4,917		4,316
Net derivative gains (losses) (2)	(45		)	93		119		169
Other (3)	23			31		75		68
Total revenues	$	2,402		$	2,292	$	5,111	$	4,553

(1)

LNG revenues include revenues for LNG cargoes in which our customers exercised their contractual right to not take delivery but remained obligated to pay fixed fees irrespective of such election. LNG revenues during the three and six months ended June 30, 2020 included $708 million and $761 million, respectively, in revenues associated with LNG cargoes for which customers have notified us that they will not take delivery, of which $458 million would have otherwise been recognized subsequent to June 30, 2020, if the cargoes were lifted pursuant to the delivery schedules with the customers. LNG revenues during the three months ended June 30, 2020 excluded $53 million that would have otherwise been recognized during the quarter if the cargoes were lifted pursuant to the delivery schedules with the customers. Revenue is generally recognized upon receipt of irrevocable notice that a customer will not take delivery because our customers have no contractual right to take delivery of such LNG cargo in future periods and our performance obligations with respect to such LNG cargo have been satisfied.


(2)	See Note 6—Derivative Instruments for additional information about our derivatives.


(3)	Includes revenues from LNG vessel subcharters. See Note 11—Leases for additional information about our subleases.

Contract Assets and Liabilities

The following table shows our contract assets, net, which are classified as other non-current assets, net on our Consolidated Balance Sheets (in millions):



	June 30,		December 31,
	2020		2019
Contract assets, net	$	58	$	18

Contract assets represent our right to consideration for transferring goods or services to the customer under the terms of a sales contract when the associated consideration is not yet due. Changes in contract assets during the six months ended June 30, 2020 were primarily attributable to revenue recognized due to the delivery of LNG under certain SPAs for which the associated consideration was not yet due.

The following table reflects the changes in our contract liabilities, which we classify as deferred revenue on our Consolidated Balance Sheets (in millions):



	Six Months Ended June 30, 2020
Deferred revenues, beginning of period	$	161
Cash received but not yet recognized	23
Revenue recognized from prior period deferral	(161		)
Deferred revenues, end of period	$	23

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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 June 30, 2020 and December 31, 2019:



	June 30, 2020			December 31, 2019
	Unsatisfied Transaction Price (in billions)		Weighted Average Recognition Timing (years) (1)	Unsatisfied Transaction Price (in billions)		Weighted Average Recognition Timing (years) (1)
LNG revenues	$	103.7	10	$	106.4	11
Regasification revenues	2.3		5	2.4		5
Total revenues	$	106.0		$	108.8


(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 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 delivery duration of one year or less.

(2)

The table above excludes substantially all variable consideration under our SPAs and TUAs. 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 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. We have not included such variable consideration in the transaction price to the extent the consideration is considered constrained due to the uncertainty of ultimate pricing and receipt. Approximately 26% and 52% of our LNG revenues from contracts included in the table above during the three months ended June 30, 2020 and 2019, respectively, and approximately 34% and 55% of our LNG revenues from contracts included in the table above during the six months ended June 30, 2020 and 2019, respectively, were related to variable consideration received from customers. During each of the three and six months ended June 30, 2020 and 2019, approximately 3% of our regasification revenues were related to variable consideration received from customers.

We may enter 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, obtaining financing or achieving substantial completion of a Train and any related facilities. These contracts are considered completed contracts for revenue recognition purposes and are included in the transaction price above when the conditions are considered probable of being met.

NOTE 13—INCOME TAXES

We recorded an income tax provision of $63 million and zero during the three months ended June 30, 2020 and 2019, respectively, and an income tax provision of $194 million and $3 million during the six months ended June 30, 2020 and 2019, respectively. The effective tax rate for the three and six months ended June 30, 2020 was 13.5% and 16.2%, respectively, which were lower than the 21% federal statutory rate primarily due to income allocated to non-controlling interest that is not taxable to Cheniere. The effective tax rate decreased for the three months ended June 30, 2020 from the six months ended June 30, 2020 due to an additional tax expense of $38 million recorded during the first quarter related to a one-time discrete event related to an internal tax restructuring. The effective tax rate for the three and six months ended June 30, 2019 was 0% and 0.9%, which are lower than the 21% federal statutory rate primarily due to maintaining a valuation allowance against our federal and state net deferred tax assets.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 14—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 2011 Incentive Plan, as amended (the “2011 Plan”), the 2015 Employee Inducement Incentive Plan and the 2020 Incentive Plan that was approved by our shareholders in May 2020.

For the six months ended June 30, 2020, we granted 1.2 million restricted stock units and 0.3 million performance stock units at target performance under the 2011 Plan to certain employees. Additionally, 0.2 million incremental shares of our common stock were issued based on performance results from previously-granted performance stock unit awards. Restricted stock units are stock awards that vest over a service period of three years 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 cliff vesting after a period of three years with payouts based on metrics dependent upon market and performance achieved over the period from January 1, 2020 through December 31, 2022 compared to pre-established performance targets. The settlement amounts of the awards are based on market and performance metrics which include cumulative distributable cash flow per share, and in certain circumstances, absolute total shareholder return (“ATSR”) of our common stock. Where applicable, the compensation for performance stock units is based on fair value assigned to the market metric of ATSR using a Monte Carlo model upon grant, which remains constant through the vesting period, and a performance metric, which will vary due to changing estimates regarding the expected achievement of the performance metric of cumulative distributable cash flow per share. The number of shares that may be earned at the end of the vesting period ranges from 0% up to 300% of the target award amount. 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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Share-based compensation costs, pre-tax:
Equity awards	$	31		$	32		$	60		$	61
Liability awards	1			2			1			5
Total share-based compensation	32			34			61			66
Capitalized share-based compensation	(3		)	(1		)	(4		)	(5		)
Total share-based compensation expense	$	29		$	33		$	57		$	61
Tax benefit associated with share-based compensation expense	$	1		$	—		$	19		$	1

NOTE 15—NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

Basic net income (loss) per share attributable to common stockholders (“EPS”) excludes dilution and is computed by dividing net income (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 income (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 and six months ended June 30, 2020 and 2019 (in millions, except per share data):



Three Months Ended June 30,		Six Months Ended June 30,
2020	2019