Edgar Filing: CHENIERE ENERGY INC

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

(Do not check if a smaller reporting company)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2016

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

For the transition period from to

CHENIERE ENERGY, INC.

(Exact name of registrant as specified in its charter)



Delaware	001-16383	95-4352386
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

700 Milam Street, Suite 1900
Houston, Texas		77002
(Address of principal executive offices)		(Zip code)

(713) 375-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of April 29, 2016, the issuer had 235,503,063 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	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	43

Part II. Other Information
Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 5.	Other Information	45

Item 6.	Exhibits	47

	Signatures	49

DEFINITIONS

As commonly used in the liquefied natural gas industry, to the extent applicable and as used in this quarterly report, the terms listed below have the following meanings:

Common Industry and Other Terms



Bcf/d		billion cubic feet per day
Bcf/yr		billion cubic feet per year
Bcfe		billion cubic feet equivalent
DOE		U.S. Department of Energy
EPC		engineering, procurement and construction
FERC		Federal Energy Regulatory Commission
FTA countries		countries with which the United States has a free trade agreement providing for national treatment for trade in natural gas
GAAP		generally accepted accounting principles in the United States
Henry Hub		the final settlement price (in USD per MMBtu) for the New York Mercantile Exchange’s Henry Hub natural gas futures contract for the month in which a relevant cargo’s delivery window is scheduled to begin
LIBOR		London Interbank Offered Rate
LNG		liquefied natural gas, a product of natural gas consisting primarily of methane (CH₄) that is in liquid form at near atmospheric pressure
MMBtu		million British thermal units, an energy unit
mtpa		million tonnes per annum
non-FTA countries		countries without a free trade agreement providing for national treatment for trade in natural gas and with which trade is permitted
SEC		Securities and Exchange Commission
SPA		LNG sale and purchase agreement
Train		an industrial facility comprised of a series of refrigerant compressor loops used to cool natural gas into LNG
TUA		terminal use agreement

Abbreviated Organizational Structure

The following diagram depicts our abbreviated organizational structure as of March 31, 2016, including our ownership of certain subsidiaries, and the references to these entities used in this quarterly report:

Unless the context requires otherwise, references to “Cheniere,” the “Company,” “we,” “us” and “our” refer to Cheniere Energy, Inc. (NYSE MKT: LNG) and its consolidated subsidiaries, including our publicly traded subsidiaries, Cheniere Partners (NYSE MKT: CQP) and Cheniere Holdings (NYSE MKT: CQH).

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


PART I.	FINANCIAL INFORMATION


ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



	March 31,			December 31,
	2016			2015
ASSETS	(unaudited)
Current assets
Cash and cash equivalents	$	1,094,833		$	1,201,112
Restricted cash	732,551			503,397
Accounts and interest receivable	23,979			5,749
Inventory	31,243			18,125
Other current assets	63,509			54,203
Total current assets	1,946,115			1,782,586

Non-current restricted cash	31,724			31,722
Property, plant and equipment, net	17,674,548			16,193,907
Debt issuance costs, net	409,894			378,677
Non-current derivative assets	29,361			30,887
Goodwill	76,819			76,819
Other non-current assets	262,486			314,455
Total assets	$	20,430,947		$	18,809,053

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	35,398		$	22,820
Accrued liabilities	670,584			427,199
Current debt, net	1,785,318			1,673,379
Deferred revenue	26,669			26,669
Derivative liabilities	50,561			35,201
Other current liabilities	93			—
Total current liabilities	2,568,623			2,185,268

Long-term debt, net	16,348,099			14,920,427
Non-current deferred revenue	8,500			9,500
Non-current derivative liabilities	239,372			79,387
Other non-current liabilities	61,668			53,068

Commitments and contingencies (see Note 14)

Stockholders’ equity
Preferred stock, $0.0001 par value, 5.0 million shares authorized, none issued	—			—
Common stock, $0.003 par value
Authorized: 480.0 million shares at March 31, 2016 and December 31, 2015
Issued and outstanding: 235.5 million shares and 235.6 million shares at March 31, 2016 and December 31, 2015, respectively	707			708
Treasury stock: 11.7 million shares and 11.6 million shares at March 31, 2016 and December 31, 2015, respectively, at cost	(354,903		)	(353,927		)
Additional paid-in-capital	3,088,648			3,075,317
Accumulated deficit	(3,944,786		)	(3,623,948		)
Total stockholders’ deficit	(1,210,334		)	(901,850		)
Non-controlling interest	2,415,019			2,463,253
Total equity	1,204,685			1,561,403
Total liabilities and equity	$	20,430,947		$	18,809,053

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three Months Ended March 31,
	2016			2015
Revenues
Regasification revenues	$	65,551		$	66,802
LNG revenues	2,704			662
Other revenues	826			905
Total revenues	69,081			68,369

Operating costs and expenses
Cost of sales (excluding depreciation and amortization expense shown separately below)	14,507			693
Operating and maintenance expense	36,317			35,706
Development expense	1,547			16,096
Marketing expense	24,978			13,046
General and administrative expense	47,924			44,971
Depreciation and amortization expense	24,089			17,769
Impairment expense	10,166			176
Other	112			156
Total operating costs and expenses	159,640			128,613

Loss from operations	(90,559		)	(60,244		)

Other income (expense)
Interest expense, net of capitalized interest	(76,337		)	(59,612		)
Loss on early extinguishment of debt	(1,457		)	(88,992		)
Derivative loss, net	(180,934		)	(126,690		)
Other income	929			372
Total other expense	(257,799		)	(274,922		)

Loss before income taxes and non-controlling interest	(348,358		)	(335,166		)
Income tax provision	(616		)	(678		)
Net loss	(348,974		)	(335,844		)
Less: net loss attributable to non-controlling interest	(28,136		)	(68,135		)
Net loss attributable to common stockholders	$	(320,838	)	$	(267,709	)

Net loss per share attributable to common stockholders—basic and diluted	$	(1.41	)	$	(1.18	)

Weighted average number of common shares outstanding—basic and diluted	228,138			226,328

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)



	Total Stockholders’ Equity
	Common Stock					Treasury Stock				Additional Paid-in Capital		Accumulated Deficit			Non-controlling Interest			Total Equity
	Shares		Par Value Amount			Shares	Amount			Additional Paid-in Capital		Accumulated Deficit			Non-controlling Interest			Total Equity
Balance at December 31, 2015	235,639		$	708		11,649	$	(353,927	)	$	3,075,317	$	(3,623,948	)	$	2,463,253		$	1,561,403
Forfeitures of restricted stock	(78	)	(1		)	—	—			1		—			—			—
Share-based compensation	—		—			—	—			13,329		—			—			13,329
Shares repurchased related to share-based compensation	(31	)	—			31	(976		)	—		—			—			(976		)
Loss attributable to non-controlling interest	—		—			—	—			—		—			(28,136		)	(28,136		)
Distributions to non-controlling interest	—		—			—	—			—		—			(20,098		)	(20,098		)
Net loss	—		—			—	—			—		(320,838		)	—			(320,838		)
Balance at March 31, 2016	235,530		$	707		11,680	$	(354,903	)	$	3,088,648	$	(3,944,786	)	$	2,415,019		$	1,204,685

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities
Net loss	$	(348,974	)	$	(335,844	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash LNG inventory write-downs	216			17,502
Depreciation and amortization expense	24,089			17,769
Share-based compensation	16,171			16,140
Amortization of debt issuance costs and discount	12,817			9,116
Loss on early extinguishment of debt	1,457			88,992
Total losses on derivatives, net	182,169			126,183
Net cash used for settlement of derivative instruments	(8,817		)	(37,262		)
Impairment expense	10,166			176
Other	303			8,627
Changes in restricted cash for certain operating activities	43,366			75,233
Changes in operating assets and liabilities:
Accounts and interest receivable	1,092			(28,083		)
Inventory	(1,531		)	(29,676		)
Accounts payable and accrued liabilities	(27,831		)	73,002
Deferred revenue	(1,000		)	(1,003		)
Other, net	7,617			(15,052		)
Net cash used in operating activities	(88,690		)	(14,180		)

Cash flows from investing activities
Property, plant and equipment, net	(1,149,827		)	(590,998		)
Use of restricted cash for the acquisition of property, plant and equipment	1,151,073			572,623
Other	(17,861		)	(46,164		)
Net cash used in investing activities	(16,615		)	(64,539		)

Cash flows from financing activities
Proceeds from issuances of debt	1,908,000			2,500,000
Repayments of debt	(415,000		)	—
Debt issuance and deferred financing costs	(49,307		)	(58,395		)
Investment in restricted cash	(1,423,595		)	(1,929,288		)
Distributions and dividends to non-controlling interest	(20,098		)	(20,050		)
Proceeds from exercise of stock options	—			958
Payments related to tax withholdings for share-based compensation	(976		)	(3,771		)
Other	2			20
Net cash provided by (used in) financing activities	(974		)	489,474

Net increase (decrease) in cash and cash equivalents	(106,279		)	410,755
Cash and cash equivalents—beginning of period	1,201,112			1,747,583
Cash and cash equivalents—end of period	$	1,094,833		$	2,158,338

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—BASIS OF PRESENTATION

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

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

•

Cost of sales includes costs incurred directly for the production of LNG from the SPL Project such as natural gas feedstock, variable transportation and storage costs, derivative gains and losses associated with economic hedges to secure natural gas feedstock for the SPL Project, vessel chartering costs and other costs related to converting natural gas into LNG, all to the extent not utilized for the commissioning process. These costs were reclassified from operating and maintenance expense, which now primarily includes costs associated with operating and maintaining the SPL Project such as third-party service and maintenance contract costs, payroll and benefit costs of operations personnel, natural gas transportation and storage capacity demand charges, derivative gains and losses related to the sale and purchase of LNG associated with the regasification terminal, insurance and regulatory costs.

•

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

Additionally, we distinguished and reclassified our historical “LNG terminal revenues” line item into “regasification revenues” and “LNG revenues.” Regasification revenues include LNG regasification capacity reservation fees that are received pursuant to our TUAs and tug services fees that are received by Sabine Pass Tug Services, LLC, a wholly owned subsidiary of SPLNG. LNG revenues include fees that will be received pursuant to our SPAs and related LNG marketing activities.

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

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

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. Restricted cash consisted of the following (in thousands):



	March 31,		December 31,
	2016		2015
Current restricted cash
SPLNG debt service and interest payment	$	115,469	$	77,415
SPL Project	177,609		189,260
CTPL construction and interest payment	—		7,882
CQP and cash held by guarantor subsidiaries	108,894		—
CCL Project	295,316		46,770
Cash held by our subsidiaries restricted to Cheniere	10,511		147,138
Other	24,752		34,932
Total current restricted cash	$	732,551	$	503,397

Non-current restricted cash
SPLNG debt service	$	13,650	$	13,650
Other	18,074		18,072
Total non-current restricted cash	$	31,724	$	31,722

Under the indentures governing the senior notes issued by SPLNG (the “SPLNG Indentures”), except for permitted tax distributions, SPLNG may not make distributions until certain conditions are satisfied, including: (1) there must be on deposit in an interest payment account an amount equal to one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment, and (2) there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment. Distributions are permitted only after satisfying the foregoing funding requirements, a fixed charge coverage ratio test of 2:1 and other conditions specified in the SPLNG Indentures. During the three months ended March 31, 2016 and 2015, SPLNG made distributions of $63.4 million and $70.8 million, respectively, after satisfying all the applicable conditions in the SPLNG Indentures.

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

NOTE 3—INVENTORY

As of March 31, 2016 and December 31, 2015, inventory consisted of the following (in thousands):



	March 31,		December 31,
	2016		2015
Natural gas	$	3,333	$	5,724
LNG	5,546		5,148
Materials and other	22,364		7,253
Total inventory	$	31,243	$	18,125

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 4—PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of LNG terminal costs and fixed assets and other, as follows (in thousands):



	March 31,			December 31,
	2016			2015
LNG terminal costs
LNG terminal	$	2,748,474		$	2,487,759
LNG terminal construction-in-process (1)	15,116,545			13,875,204
LNG site and related costs, net	38,612			33,512
Accumulated depreciation	(430,757		)	(413,545		)
Total LNG terminal costs, net	17,472,874			15,982,930
Fixed assets and other
Computer and office equipment	12,159			12,153
Furniture and fixtures	17,201			17,101
Computer software	72,234			69,340
Leasehold improvements	41,930			40,136
Land	60,612			60,612
Other	38,786			49,376
Accumulated depreciation	(41,248		)	(37,741		)
Total fixed assets and other, net	201,674			210,977
Property, plant and equipment, net	$	17,674,548		$	16,193,907


(1)	As of March 31, 2016, LNG terminal construction-in-process is presented net of amounts received from the sale of commissioning cargoes because the related costs were capitalized as testing costs for the construction of the SPL Project.

NOTE 5—DERIVATIVE INSTRUMENTS

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


•	interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under certain of our credit facilities (“Interest Rate Derivatives”);


•	commodity derivatives to hedge the exposure to price risk attributable to future: (1) sales of our LNG inventory and (2) purchases of natural gas to operate the Sabine Pass LNG terminal (“Natural Gas Derivatives”);


•	commodity derivatives consisting of natural gas purchase agreements for the commissioning and operation of the SPL Project (“Physical Liquefaction Supply Derivatives”) and associated economic hedges (“Financial Liquefaction Supply Derivatives”, and collectively with the Physical Liquefaction Supply Derivatives, the “Liquefaction Supply Derivatives”);


•	financial derivatives to hedge the exposure to the commodity markets in which we have contractual arrangements to purchase or sell physical LNG (“LNG Trading Derivatives”); and


•	foreign currency exchange (“FX”) contracts to hedge exposure to currency risk associated with operations in countries outside of the United States (“FX Derivatives”).

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.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The following table (in thousands) shows the fair value of our derivative instruments that are required to be measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, which are classified as other current assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Consolidated Balance Sheets.



	Fair Value Measurements as of
	March 31, 2016										December 31, 2015
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
SPL Interest Rate Derivatives liability	$	—	$	(18,009	)	$	—	$	(18,009	)	$	—	$	(8,740	)	$	—	$	(8,740	)
CQP Interest Rate Derivatives liability	—		(9,490		)	—		(9,490		)	—		—			—		—
CCH Interest Rate Derivatives liability	—		(259,305		)	—		(259,305		)	—		(104,999		)	—		(104,999		)
Liquefaction Supply Derivatives asset (liability)	—		(151		)	30,054		29,903			—		(25		)	32,492		32,467
LNG Trading Derivatives asset	—		5,814			—		5,814			—		1,053			—		1,053
Natural Gas Derivatives liability	—		—			—		—			—		(66		)	—		(66		)
FX Derivatives liability	—		(2,527		)	—		(2,527		)	—		—			—		—

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

The fair value of substantially all of our Physical Liquefaction Supply Derivatives is developed through the use of internal models which are impacted by inputs that are unobservable in the marketplace. As a result, the fair value of our Physical Liquefaction Supply Derivatives is designated as Level 3 within the valuation hierarchy. The curves used to generate the fair value of our Physical Liquefaction Supply Derivatives are based on basis adjustments applied to forward curves for a liquid trading point. In addition, there may be observable liquid market basis information in the near term, but terms of a particular Physical Liquefaction Supply Derivatives contract may exceed the period for which such information is available, resulting in a Level 3 classification. In these instances, the fair value of the contract incorporates extrapolation assumptions made in the determination of the market basis price for future delivery periods in which applicable commodity basis prices were either not observable or lacked corroborative market data. Internal fair value models include conditions precedent to the respective long-term natural gas purchase agreements. As of March 31, 2016 and December 31, 2015, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure has not been developed to accommodate marketable physical gas flow. In the absence of infrastructure to accommodate marketable physical gas flow, our internal fair value models are based on a market price that equates to our own contractual pricing due to: (1) the inactive and unobservable market and (2) conditions precedent and their impact on the uncertainty in the timing of our actual receipt of the physical volumes associated with each forward. The fair value of our Physical Liquefaction Supply Derivatives is predominantly driven by market commodity basis prices and our assessment of the associated conditions precedent, including evaluating whether the respective market is available as pipeline infrastructure is developed. Upon the completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow, we recognize a gain or loss based on the fair value of the respective natural gas purchase agreements as of the reporting date.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

There were no transfers into or out of Level 3 Physical Liquefaction Supply Derivatives for the three months ended March 31, 2016 and 2015. As all of our Physical Liquefaction Supply Derivatives are either purely index-priced or index-priced with a fixed basis, we do not believe that a significant change in market commodity prices would have a material impact on our Level 3 fair value measurements. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of March 31, 2016:



	Net Fair Value Asset (in thousands)	Valuation Technique	Significant Unobservable Input	Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives	$30,054	Income Approach	Basis Spread	$ (0.350) - $0.020

The following table (in thousands) shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,
	2016			2015
Balance, beginning of period	$	32,492		$	342
Realized and mark-to-market losses:
Included in cost of sales (1)	(2,653		)	—
Purchases and settlements:
Purchases	215			—
Settlements (1)	—			—
Balance, end of period	$	30,054		$	342
Change in unrealized gains relating to instruments still held at end of period	$	(2,194	)	$	—


(1)	Does not include the decrease in fair value of $0.5 million related to the realized gains capitalized during the three months ended March 31, 2016.

Derivative assets and liabilities arising from our derivative contracts with the same counterparty are reported on a net basis, as all counterparty derivative contracts provide for net settlement. The use of derivative instruments exposes us to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments in instances when our derivative instruments are in an asset position.

Interest Rate Derivatives

SPL Interest Rate Derivatives

SPL has entered into interest rate swaps (“SPL Interest Rate Derivatives”) to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the $4.6 billion credit facilities (the “2015 SPL Credit Facilities”). The SPL Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2015 SPL Credit Facilities.

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

CQP Interest Rate Derivatives

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

CCH Interest Rate Derivatives

CCH has entered into interest rate swaps (“CCH Interest Rate Derivatives”) to protect against volatility of future cash flows and hedge a portion of the variable interest payments on its $8.4 billion credit facility (the “2015 CCH Credit Facility”). The CCH Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2015 CCH Credit Facility.

As of March 31, 2016, we had the following Interest Rate Derivatives outstanding:

Initial Notional Amount

Maximum Notional Amount

Effective Date

Maturity Date

Weighted Average Fixed Interest Rate Paid

Variable Interest Rate Received

SPL Interest Rate Derivatives

$20.0 million

$628.8 million

August 14, 2012

July 31, 2019

1.98

One-month LIBOR

CQP Interest Rate Derivatives

$225.0 million

$1.3 billion

March 22, 2016

February 29, 2020

1.19

One-month LIBOR

CCH Interest Rate Derivatives

$28.8 million

$5.5 billion

May 20, 2015

May 31, 2022

2.29

One-month LIBOR

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



	March 31, 2016												December 31, 2015
	SPL Interest Rate Derivatives			CQP Interest Rate Derivatives			CCH Interest Rate Derivatives			Total			SPL Interest Rate Derivatives			CQP Interest Rate Derivatives		CCH Interest Rate Derivatives			Total
Balance Sheet Location
Derivative liabilities	(6,759		)	(4,530		)	(36,926		)	(48,215		)	(5,940		)	—		(28,559		)	(34,499		)
Non-current derivative liabilities	(11,250		)	(4,960		)	(222,379		)	(238,589		)	(2,800		)	—		(76,440		)	(79,240		)
Total derivative liabilities	(18,009		)	(9,490		)	(259,305		)	(286,804		)	(8,740		)	—		(104,999		)	(113,739		)

Derivative liability, net	$	(18,009	)	$	(9,490	)	$	(259,305	)	$	(286,804	)	$	(8,740	)	$	—	$	(104,999	)	$	(113,739	)

The following table (in thousands) shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in derivative loss, net on our Consolidated Statements of Operations during the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,
	2016			2015
SPL Interest Rate Derivatives loss	$	(11,278	)	$	(37,138	)
CQP Interest Rate Derivatives loss	(9,530		)	—
CCH Interest Rate Derivatives loss	(160,176		)	(89,552		)

Commodity Derivatives

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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



	March 31, 2016										December 31, 2015
	Liquefaction Supply Derivatives (1)			LNG Trading Derivatives		Natural Gas Derivatives		Total			Liquefaction Supply Derivatives			LNG Trading Derivatives			Natural Gas Derivatives (2)			Total
Balance Sheet Location
Other current assets	$	2,222		$	4,663	$	—	$	6,885		$	2,737		$	640		$	—		$	3,377
Non-current derivative assets	28,210			1,151		—		29,361			30,304			583			—			30,887
Total derivative assets	30,432			5,814		—		36,246			33,041			1,223			—			34,264

Derivative liabilities	(529		)	—		—		(529		)	(490		)	(107		)	(66		)	(663		)
Non-current derivative liabilities	—			—		—		—			(84		)	(63		)	—			(147		)
Total derivative liabilities	(529		)	—		—		(529		)	(574		)	(170		)	(66		)	(810		)

Derivative asset (liabilities), net	$	29,903		$	5,814	$	—	$	35,717		$	32,467		$	1,053		$	(66	)	$	33,454


(1)	Does not include collateral of $1.5 million deposited for such contracts, which is included in other current assets in our Consolidated Balance Sheet as of March 31, 2016.


(2)	Does not include collateral of $5.5 million deposited for such contracts, which is included in other current assets in our Consolidated Balance Sheet as of December 31, 2015.

The following table (in thousands) shows the changes in the fair value and settlements and location of our Commodity Derivatives recorded on our Consolidated Statements of Operations during the three months ended March 31, 2016 and 2015:



		Three Months Ended March 31,
	Statement of Operations Location	2016			2015
Liquefaction Supply Derivatives gain	LNG revenues	$	28		$	—
Liquefaction Supply Derivatives loss (1)	Cost of sales	(3,594		)	—
LNG Trading Derivatives gain	LNG revenues	4,762			—
Natural Gas Derivatives loss	LNG revenues	(5		)	(247		)
Natural Gas Derivatives gain	Operating and maintenance expense	174			754

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

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

Liquefaction Supply Derivatives

SPL has entered into index-based physical natural gas supply contracts and associated economic hedges to purchase natural gas for the commissioning and operation of the SPL Project. The terms of the physical natural gas supply contracts primarily range from approximately one to seven years and commence upon the occurrence of conditions precedent, including the date of first commercial operation of specified Trains of the SPL Project. We recognize our Physical Liquefaction Supply Derivatives as either assets or liabilities and measure those instruments at fair value. Changes in the fair value of our Physical Liquefaction Supply Derivatives are reported in earnings. As of March 31, 2016, SPL has secured up to approximately 2,047.9 million MMBtu of natural gas feedstock through natural gas purchase agreements. The notional natural gas position of our Physical Liquefaction Supply Derivatives was approximately 1,134.9 million MMBtu as of March 31, 2016.

Our Financial Liquefaction Supply Derivatives are executed through over-the-counter contracts which are subject to nominal

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

credit risk as these transactions are settled on a daily margin basis with investment grade financial institutions. We are required by these financial institutions to use margin deposits as credit support for our Financial Liquefaction Supply Derivatives activities.

LNG Trading Derivatives

As of March 31, 2016, we have entered into certain LNG Trading Derivatives representing a short position of 9.2 million MMBtu, and we may from time to time enter into certain financial derivatives in the form of swaps, forwards, options or futures to economically hedge exposure to the commodity markets in which we have contractual arrangements to purchase or sell physical LNG. We have entered into LNG Trading Derivatives to secure a fixed price position to minimize future cash flow variability associated with such LNG transactions.

Natural Gas Derivatives

Our Natural Gas Derivatives were executed through over-the-counter contracts which were subject to nominal credit risk as these transactions settled on a daily margin basis with investment grade financial institutions. We were required by these financial institutions to use margin deposits as credit support for our Natural Gas Derivatives activities. As of March 31, 2016, we did not have any open Natural Gas Derivatives positions or margin deposits at financial institutions.

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 general and administrative expenses and physical and financial LNG transactions related to operations in countries outside of the United States. The total notional amount of our FX Derivatives was approximately $56.7 million as of March 31, 2016.

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



		Fair Value Measurements as of
	Balance Sheet Location	March 31, 2016			December 31, 2015
FX Derivatives	Other current assets	$	73		$	—
FX Derivatives	Derivative liabilities	(1,817		)	—
FX Derivatives	Non-current derivative liabilities	(783		)	—

The following table (in thousands) shows the changes in the fair value of our FX Derivatives recorded on our Consolidated Statements of Operations during the three months ended March 31, 2016 and 2015:



		Three Months Ended March 31,
	Statement of Operations Location	2016			2015
FX Derivatives gain	Derivative loss, net	$	50		$	—
FX Derivatives loss	LNG revenues	(2,600		)	—

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Balance Sheet Presentation

Our Interest Rate Derivatives and Commodity Derivatives are presented on a net basis on our Consolidated Balance Sheets as described above. The following table (in thousands) shows the fair value of our derivatives outstanding on a gross and net basis:



	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
Offsetting Derivative Assets (Liabilities)	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
As of March 31, 2016
SPL Interest Rate Derivatives	$	(18,009	)	$	—		$	(18,009	)
CQP Interest Rate Derivatives	(9,490		)	—			(9,490		)
CCH Interest Rate Derivatives	(259,304		)	—			(259,304		)
Liquefaction Supply Derivatives	30,618			(186		)	30,432
Liquefaction Supply Derivatives	(1,668		)	1,139			(529		)
LNG Trading Derivatives	15,412			(9,598		)	5,814
FX Derivatives	73			—			73
FX Derivatives	(2,600		)	—			(2,600		)
As of December 31, 2015
SPL Interest Rate Derivatives	$	(8,740	)	$	—		$	(8,740	)
CCH Interest Rate Derivatives	(104,999		)	—			(104,999		)
Liquefaction Supply Derivatives	33,636			(595		)	33,041
Liquefaction Supply Derivatives	(574		)	—			(574		)
LNG Trading Derivatives	1,922			(699		)	1,223
LNG Trading Derivatives	(2,826		)	2,656			(170		)
Natural Gas Derivatives	188			(254		)	(66		)

NOTE 6—OTHER NON-CURRENT ASSETS

As of March 31, 2016 and December 31, 2015, other non-current assets consisted of the following (in thousands):



	March 31,		December 31,
	2016		2015
Advances made under EPC and non-EPC contracts	$	19,766	$	83,579
Advances made to municipalities for water system enhancements	88,151		89,953
Tax-related payments and receivables	29,197		31,712
Equity method investments	20,543		20,295
Other	104,829		88,916
Total other non-current assets	$	262,486	$	314,455

NOTE 7—VARIABLE INTEREST ENTITY

Cheniere Holdings

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

Cheniere Holdings is a limited liability company formed by us in 2013 to hold our Cheniere Partners limited partner interests. As of March 31, 2016, we owned 80.1% of Cheniere Holdings as well as a director voting share. The director voting share is the sole share entitled to vote in the election of Cheniere Holdings’ board of directors and allows us to remove members of the board of directors at any time and for any reason. If we cease to own greater than 25% of the common shares of Cheniere Holdings or if we choose to relinquish the director voting share, the director voting share will be extinguished.

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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

NOTE 8—NON-CONTROLLING INTEREST

Cheniere Holdings was formed by us to hold our limited partner interest in Cheniere Partners and in December 2013, completed its initial public offering. As of both March 31, 2016 and December 31, 2015, our ownership interest in Cheniere Holdings was 80.1%, with the remaining non-controlling interest held by the public. Cheniere Holdings owns a 55.9% limited partner interest in Cheniere Partners in the form of 12.0 million common units, 45.3 million Class B units and 135.4 million subordinated units, with the remaining non-controlling interest held by Blackstone CQP Holdco LP and the public. We also own 100% of the general partner interest and the incentive distribution rights in Cheniere Partners.

NOTE 9—ACCRUED LIABILITIES

As of March 31, 2016 and December 31, 2015, accrued liabilities consisted of the following (in thousands):



	March 31,		December 31,
	2016		2015
Interest expense and related debt fees	$	169,921	$	159,968
Compensation and benefits	43,991		99,511
Liquefaction projects costs	434,990		145,105
LNG terminal costs	4,230		3,918
Other accrued liabilities	17,452		18,697
Total accrued liabilities	$	670,584	$	427,199

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 10—DEBT

As of March 31, 2016 and December 31, 2015, our debt consisted of the following (in thousands):



	March 31,			December 31,
	2016			2015
Long-term debt:
SPLNG
6.50% Senior Secured Notes due 2020 (“2020 SPLNG Senior Notes”) (1)	$	420,000		$	420,000
SPL
5.625% Senior Secured Notes due 2021 (“2021 SPL Senior Notes”), net of unamortized premium of $8,341 and $8,718	2,008,341			2,008,718
6.25% Senior Secured Notes due 2022 (“2022 SPL Senior Notes”)	1,000,000			1,000,000
5.625% Senior Secured Notes due 2023 (“2023 SPL Senior Notes”), net of unamortized premium of $6,212 and $6,392	1,506,212			1,506,392
5.75% Senior Secured Notes due 2024 (“2024 SPL Senior Notes”)	2,000,000			2,000,000
5.625% Senior Secured Notes due 2025 (“2025 SPL Senior Notes”)	2,000,000			2,000,000
2015 SPL Credit Facilities	1,505,000			845,000
CTPL
$400.0 million Term Loan Facility (“CTPL Term Loan”), net of unamortized discount of zero and $1,429	—			398,571
Cheniere Partners
2016 CQP Credit Facilities	450,000			—
CCH
2015 CCH Credit Facility	3,386,000			2,713,000
CCH HoldCo II
11.0% Convertible Senior Notes due 2025 (“2025 CCH HoldCo II Convertible Senior Notes”)	1,079,479			1,050,588
Cheniere
4.875% Convertible Unsecured Notes due 2021 (“2021 Cheniere Convertible Unsecured Notes”), net of unamortized discount of $165,738 and $174,095	888,296			879,938
4.25% Convertible Senior Notes due 2045 (“2045 Cheniere Convertible Senior Notes”), net of unamortized discount of $318,535 and $319,062	306,465			305,938
Unamortized debt issuance costs (2)	(201,694		)	(207,718		)
Total long-term debt, net	16,348,099			14,920,427

Current debt:
7.50% Senior Secured Notes due 2016 (“2016 SPLNG Senior Notes”), net of unamortized discount of $3,130 and $4,303 (3)	1,662,370			1,661,197
$1.2 billion SPL Working Capital Facility (“SPL Working Capital Facility”)	125,000			15,000
Unamortized debt issuance costs (2)	(2,052		)	(2,818		)
Total current debt, net	1,785,318			1,673,379

Total debt, net	$	18,133,417		$	16,593,806


(1)	Must be redeemed or repaid concurrently with the 2016 Senior Notes under the terms of the 2016 CQP Credit Facilities if the obligations under the 2016 Senior Notes are satisfied with borrowings under the 2016 CQP Credit Facilities.

(2)

Effective January 1, 2016, we adopted ASU 2015-03 and ASU 2015-15, which require debt issuance costs related to term notes to be presented in the balance sheet as a direct deduction from the debt liability, rather than as an asset, retrospectively for each reporting period presented. As a result, we reclassified $207.8 million and $2.8 million from debt issuance costs, net to long-term debt, net and current debt, net, respectively, as of December 31, 2015.


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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

2016 Debt Issuances and Redemptions

2016 CQP Credit Facilities

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

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

Cheniere Partners incurred $48.7 million of debt issuance costs during the three months ended March 31, 2016, and will incur an additional $21.5 million of debt issuance costs when the SPLNG tranche is funded. The prepayment of the CTPL Term Loan resulted in a write-off of unamortized discount and debt issuance costs of $1.5 million during the three months ended March 31, 2016. Cheniere Partners pays a commitment fee equal to an annual rate of 40% of the margin for LIBOR loans multiplied by the average daily amount of the undrawn commitment, payable quarterly in arrears. The DSR Facility and the revolving credit facility are both available for the issuance of letters of credit, which incur a fee equal to an annual rate of 2.25% of the undrawn portion with a 0.50% step-up beginning on February 25, 2019.

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

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Credit Facilities

Below is a summary of our credit facilities outstanding as of March 31, 2016 (in thousands):



	2015 SPL Credit Facilities		SPL Working Capital Facility		2016 CQP Credit Facilities		2015 CCH Term Loan Facilities
Total facility size	$	4,600,000	$	1,200,000	$	2,800,000	$	8,403,714
Outstanding balance	1,505,000		125,000		450,000		3,386,000
Letters of credit issued	—		236,459		7,500		—
Available commitment	$	3,095,000	$	838,541	$	2,342,500	$	5,017,714

Interest rate	LIBOR plus 1.30% - 1.75% or base rate plus 1.75%		LIBOR plus 1.75% or base rate plus 0.75%		LIBOR plus 2.25% or base rate plus 1.25% (1)		LIBOR plus 2.25% or base rate plus 1.25% (2)
Maturity date	Earlier of December 31, 2020 or second anniversary of SPL Trains 1 through 5 completion date		December 31, 2020, with various terms for underlying loans		February 25, 2020, with principals due quarterly commencing on February 19, 2019		Earlier of May 13, 2022 or second anniversary of CCL Trains 1 and 2 completion date


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


(2)	There is a 0.25% step-up for both LIBOR and base rate loans following completion of the first two Trains of the CCL Project.

Convertible Notes

Below is a summary of our convertible notes outstanding as of March 31, 2016 (in thousands):



	2021 Cheniere Convertible Unsecured Notes			2025 CCH HoldCo II Convertible Senior Notes			2045 Cheniere Convertible Senior Notes
Aggregate principal	$	1,000,000		$	1,000,000		$	625,000
Debt component, net of discount	$	888,296		$	1,079,479		$	306,465
Equity component	$	203,035		$	—		$	194,082
Interest payment method	Paid-in-kind			Paid-in-kind (1)			Cash
Conversion by us (2)	—			(3)			(4)
Conversion by holders (2)	(5)			(6)			(7)
Conversion basis	Cash and/or stock			Stock			Cash and/or stock
Conversion value in excess of principal	$	—		$	—		$	—
Maturity date	May 28, 2021			March 1, 2025			March 15, 2045
Effective interest rate	9.6		%	11.9		%	9.4		%
Remaining debt discount and debt issuance costs amortization period (8)	5.2 years			4.5 years			29.0 years


(1)	Prior to the substantial completion of Train 2 of the CCL Project, interest will be paid entirely in kind. Following this date, the interest generally must be paid in cash; however, a portion of the interest may be paid in kind under certain specified circumstances.


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

(3)

Convertible on or after the later of March 1, 2020 and the substantial completion of Train 2 of the CCL Project, provided that our market capitalization is not less than $10.0 billion (“Eligible Conversion Date”). The conversion price is the lower of (1) a 10% discount to the average of the daily volume-weighted average price (“VWAP”) of our common stock for the 90 trading day period prior to the date notice is provided, and (2) a 10% discount to the closing price of our common stock on the trading day preceding the date notice is provided.


(4)	Redeemable at any time after March 15, 2020 at a redemption price payable in cash equal to the accreted amount of the 2045 Cheniere Convertible Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to such redemption date.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)


(5)	Initially convertible at $93.64 (subject to adjustment upon the occurrence of certain specified events), provided that the closing price of our common stock is greater than or equal to the conversion price on the conversion date.


(6)	Convertible on or after the six-month anniversary of the Eligible Conversion Date, provided that our total market capitalization is not less than $10.0 billion, at a price equal to the average of the daily VWAP of our common stock for the 90 trading day period prior to the date on which notice of conversion is provided.

(7)

Prior to December 15, 2044, convertible only under certain circumstances as specified in the indenture; thereafter, holders may convert their notes regardless of these circumstances. The conversion rate will initially equal 7.2265 shares of our common stock per $1,000 principal amount of the 2045 Cheniere Convertible Senior Notes, which corresponds to an initial conversion price of approximately $138.38 per share of our common stock (subject to adjustment upon the occurrence of certain specified events).


(8)	We amortize any debt discount and debt issuance costs using the effective interest over the period through contractual maturity except for the 2025 CCH HoldCo II Convertible Senior Notes, which are amortized through the date they are first convertible into our common stock.

Interest Expense

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



	Three Months Ended March 31,
	2016			2015
Interest cost on convertible notes:
Interest per contractual rate	$	49,040		$	13,939
Amortization of debt discount	8,885			6,598
Amortization of debt issuance costs	1,151			14
Total interest cost related to convertible notes	59,076			20,551
Interest cost on other debt	234,216			160,087
Total interest cost	293,292			180,638
Capitalized interest	(216,955		)	(121,026		)
Total interest expense, net	$	76,337		$	59,612

Fair Value Disclosures

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



	March 31, 2016				December 31, 2015
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Senior Notes, net of premium or discount (1)	$	10,596,923	$	10,299,660	$	10,596,307	$	9,525,809
CTPL Term Loan, net of discount (2)	—		—		398,571		400,000
Credit facilities (2) (3)	5,466,000		5,466,000		3,573,000		3,573,000
2021 Cheniere Convertible Unsecured Notes, net of discount (4)	888,296		858,091		879,938		825,413
2025 CCH HoldCo II Convertible Senior Notes (4)	1,079,479		1,071,219		1,050,588		914,363
2045 Cheniere Convertible Senior Notes, net of discount (5)	306,465		334,375		305,938		331,919

(1)

Includes 2016 SPLNG Senior Notes, net of discount; 2020 SPLNG Senior Notes; 2021 SPL Senior Notes, net of premium; 2022 SPL Senior Notes; 2023 SPL Senior Notes, net of premium; 2024 SPL Senior Notes and 2025 SPL Senior Notes (collectively, the “Senior Notes”). The Level 2 estimated fair value was based on quotes obtained from broker-dealers or market makers of our Senior Notes and other similar instruments.


(2)	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.


(3)	Includes 2015 SPL Credit Facilities, SPL Working Capital Facility, 2016 CQP Credit Facilities and 2015 CCH Credit Facility.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)


(4)	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.


(5)	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—INCOME TAXES

We are not presently a taxpayer for federal or state income tax purposes and have not recorded a provision for federal or state income taxes in any of the periods included in the accompanying Consolidated Financial Statements. However, we are presently an international taxpayer and have recorded a net provision of $0.6 million and $0.7 million for the three months ended March 31, 2016 and 2015, respectively, for international income taxes.

We experienced an ownership change within the provisions of Internal Revenue Code (“IRC”) Section 382 in 2008, 2010 and 2012. An analysis of the annual limitation on the utilization of our net operating losses (“NOLs”) was performed in accordance with IRC Section 382. It was determined that IRC Section 382 will not limit the use of our NOLs in full over the carryover period. We will continue to monitor trading activity in our shares which may cause an additional ownership change which could ultimately affect our ability to fully utilize our existing tax NOL carryforwards.

NOTE 12—SHARE-BASED COMPENSATION

We have granted stock, restricted stock, phantom units and options to purchase common stock to employees, outside directors and a consultant under the Amended and Restated 2003 Stock Incentive Plan, as amended (the “2003 Plan”), 2011 Incentive Plan, as amended (the “2011 Plan”) and the 2015 Long-Term Cash Incentive Plan (the “2015 Plan”).

The 2003 Plan and 2011 Plan provide for the issuance of 21.0 million shares and 35.0 million shares, respectively, of our common stock that may be in the form of non-qualified stock options, incentive stock options, purchased stock, restricted (non-vested) stock, bonus (unrestricted) stock, stock appreciation rights, phantom units and other share-based performance awards deemed by the Compensation Committee of our Board of Directors (the “Compensation Committee”) to be consistent with the purposes of the 2003 Plan and 2011 Plan. As of March 31, 2016, all of the shares under the 2003 Plan have been granted and 26.8 million shares, net of cancellations, have been granted under the 2011 Plan. The 2015 Plan generally provides for cash-settled awards in the form of stock appreciation rights, phantom unit awards, performance unit awards, other-stock based awards and cash awards. The 2014-2018 Long-Term Cash Incentive Program (the “2014-2018 LTIP”) is a sub-plan of the 2015 Plan and provides for performance-based phantom unit awards. As of March 31, 2016, 5.4 million phantom units have been granted under the 2015 Plan.

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



	Three Months Ended March 31,
	2016			2015
Total share-based compensation	$	17,525		$	17,991
Capitalized share-based compensation	(1,354		)	(1,851		)
Total share-based compensation expense, net	$	16,171		$	16,140

The total unrecognized compensation cost at March 31, 2016 relating to non-vested share-based compensation arrangements was $132.6 million, which is expected to be recognized over a weighted average period of 2.0 years.

We received zero and $1.0 million in the three months ended March 31, 2016 and 2015, respectively, of proceeds from the exercise of stock options.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 13—NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

Basic net loss per share attributable to common stockholders (“EPS”) excludes dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the potential common shares had been issued.

The following table (in thousands, except for loss per share) reconciles basic and diluted weighted average common shares outstanding for the three months ended March 31, 2016 and 2015:



	Three Months Ended March 31,
	2016			2015
Weighted average common shares outstanding:
Basic	228,138			226,328
Dilutive common stock options (1)	—			—
Diluted	228,138			226,328

Basic and diluted net loss per share attributable to common stockholders	$	(1.41	)	$	(1.18	)

(1)

Stock options and unvested stock of 7.4 million shares and 10.3 million shares as of March 31, 2016 and 2015, respectively, representing securities that could potentially dilute basic EPS in the future, were not included in the diluted net loss per share computations because their effect would have been anti-dilutive. In addition, 82.7 million and 21.1 million shares in aggregate, issuable upon conversion of the 2021 Cheniere Convertible Unsecured Notes, the 2025 CCH HoldCo II Convertible Senior Notes and the 2045 Cheniere Convertible Senior Notes, were not included in the computation of diluted net loss per share for the three months ended March 31, 2016 and 2015, respectively, because the computation of diluted net loss per share utilizing the “if-converted” method at the share price as of March 31, 2016 and 2015, respectively, would be anti-dilutive.

NOTE 14—COMMITMENTS AND CONTINGENCIES

Cheniere has various contractual obligations which are recorded as liabilities in our Consolidated Financial Statements. Other items, such as certain purchase commitments and other executed contracts which do not meet the definition of a liability as of March 31, 2016, are not recognized as liabilities.

Parallax Litigation

In 2015, our wholly owned subsidiary, Cheniere LNG Terminals, LLC (“CLNGT”), entered into discussions with Parallax Enterprises, LLC (“Parallax Enterprises”) regarding the potential joint development of two liquefaction plants in Louisiana (the “Potential Liquefaction Transactions”). While the parties negotiated regarding the Potential Liquefaction Transactions, CLNGT loaned Parallax Enterprises approximately $46 million, as reflected in a secured note dated April 23, 2015, as amended on June 30, 2015, September 30, 2015, and November 4, 2015 (the “Secured Note”). The Secured Note was secured by all assets of Parallax Enterprises and its subsidiary entities. On June 30, 2015, Parallax Enterprises’ parent entity, Parallax Energy LLC (“Parallax Energy”), executed a Pledge and Guarantee Agreement further securing repayment of the Secured Note by providing a parent guaranty and a pledge of all of the equity of Parallax Enterprises in satisfaction of the Secured Note (the “Pledge Agreement”). CLNGT and Parallax Enterprises never executed a definitive agreement to pursue the Potential Liquefaction Transactions. The Secured Note matured on December 11, 2015, and Parallax Enterprises failed to make payment. On February 3, 2016, CLNGT filed an action against Parallax Energy, Parallax Enterprises, and certain of Parallax Enterprises’ subsidiary entities, styled Cause No. 4:16-cv-00286, Cheniere LNG Terminals, LLC v. Parallax Energy LLC, et al., in the United States District Court for the Southern District of Texas (the “Texas Suit”). CLNGT asserted claims in the Texas Suit for (1) recovery of all amounts due under the Secured Note and (2) declaratory relief establishing that CLNGT is entitled to enforce its rights under the Secured Note and Pledge Agreement in accordance with each instrument’s terms and that CLNGT has no obligations of any sort to Parallax Enterprises concerning the Potential Liquefaction Transactions. On March 11, 2016, Parallax Enterprises and the other defendants in the Texas Suit moved to dismiss the suit for lack of subject matter jurisdiction. CLNGT has responded to that motion, and it remains pending before the court.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

On March 11, 2016, Parallax Enterprises filed a suit against us and CLNGT styled Civil Action No. 62-810, Parallax Enterprises LLP v. Cheniere Energy, Inc. and Cheniere LNG Terminals, LLC, in the 25th Judicial District Court of Plaquemines Parish, Louisiana (the “Louisiana Suit”), wherein Parallax Enterprises asserted claims for breach of contract, fraudulent inducement, negligent misrepresentation, detrimental reliance, unjust enrichment, and violation of the Louisiana Unfair Trade Practices Act. Parallax Enterprises predicated its claims in the Louisiana Suit on an allegation that we and CLNGT breached a purported agreement to jointly develop the Potential Liquefaction Transactions. Parallax Enterprises seeks $400 million in alleged economic damages and rescission of the Secured Note. On April 11, 2016, we and CLNGT removed the Louisiana Suit to the United States District Court for the Eastern District of Louisiana, where it is pending as Civil Action No. 2:16-cv-03209-CJB-SS. On April 18, 2016, we and CLNGT filed a motion in the Louisiana Suit seeking (1) dismissal of all claims against us for lack of personal jurisdiction, (2) dismissal, stay, or transfer of the suit to the United States District Court for the Southern District of Texas in deference to the first-filed Texas Suit, and (3) alternatively, transfer of the suit for convenience of the parties and witnesses. Our motion is set for oral argument on May 18, 2016. We do not expect that the resolution of this litigation will have a material adverse impact on our financial results.

Obligations under Certain Guarantee Contracts

Cheniere and certain of its subsidiaries enter into guarantee arrangements in the normal course of business to facilitate transactions with third parties. These arrangements include financial guarantees, letters of credit and debt guarantees. As of March 31, 2016 and December 31, 2015, there were no liabilities recognized under these guarantee arrangements.

NOTE 15—BUSINESS SEGMENT INFORMATION

We have two reportable segments: LNG terminal segment and LNG and natural gas marketing segment. We determine our reportable segments by identifying each segment that engaged in business activities from which it may earn revenues and incur expenses, had operating results regularly reviewed by the entities’ chief operating decision maker for purposes of resource allocation and performance assessment, and had discrete financial information. Substantially all of our revenues from external customers are attributed to the United States. Substantially all of our long-lived assets are located in the United States.

Our LNG terminal segment consists of the Sabine Pass and Corpus Christi LNG terminals. We own and operate the Sabine Pass LNG terminal located on the Sabine-Neches Waterway less than four miles from the Gulf Coast through our ownership interest in and management agreements with Cheniere Partners. We own 100% of the general partner interest in Cheniere Partners and 80.1% of the common shares of Cheniere Holdings, which owns a 55.9% limited partner interest in Cheniere Partners. We are also developing and constructing a second natural gas liquefaction and export facility at the Corpus Christi LNG terminal near Corpus Christi, Texas.

Our LNG and natural gas marketing segment consists of LNG and natural gas marketing activities by Cheniere Marketing. Cheniere Marketing is developing a platform for LNG sales to international markets with professional staff based in the United States, United Kingdom, Singapore and Chile.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The following table (in thousands) summarizes revenues (losses) and loss from operations for each of our reporting segments:



	Segments
	LNG Terminal			LNG & Natural Gas Marketing			Corporate and Other (1)			Total Consolidation
Three Months Ended March 31, 2016
Revenues from external customers (2)	$	65,551		$	2,704		$	826		$	69,081
Intersegment revenues (losses) (3)	918			7,594			(8,512		)	—
Depreciation and amortization expense	17,973			315			5,801			24,089
Loss from operations	(12,549		)	(30,547		)	(47,463		)	(90,559		)
Interest expense, net of capitalized interest	(51,366		)	—			(24,971		)	(76,337		)
Loss before income taxes and non-controlling interest (4)	(240,971		)	(30,680		)	(76,707		)	(348,358		)
Share-based compensation	2,777			4,889			9,859			17,525
Expenditures for additions to long-lived assets	1,501,378			235			6,446			1,508,059

Three Months Ended March 31, 2015
Revenues from external customers (2)	$	66,802		$	662		$	905		$	68,369
Intersegment revenues (losses) (3)	103			7,017			(7,120		)	—
Depreciation and amortization expense	14,941			200			2,628			17,769
Loss from operations	(24,335		)	(5,183		)	(30,726		)	(60,244		)
Interest expense, net of capitalized interest	(42,845		)	—			(16,767		)	(59,612		)
Loss before income taxes and non-controlling interest (4)	(277,655		)	(5,390		)	(52,121		)	(335,166		)
Share-based compensation	3,197			4,035			10,759			17,991
Expenditures for additions to long-lived assets	590,245			714			28,781			619,740


(1)	Includes corporate activities, business development, oil and gas exploration, development and exploitation, strategic activities and certain intercompany eliminations. These activities have been included in the corporate and other column due to the lack of a material impact that these activities have on our Consolidated Financial Statements.


(2)	Substantially all of the LNG terminal revenues relate to regasification capacity reservation fee payments made by Total Gas & Power North America, Inc. and Chevron U.S.A. Inc. LNG and natural gas marketing and trading revenue consists primarily of the domestic marketing of natural gas imported into the Sabine Pass LNG terminal.


(3)	Intersegment revenues (losses) related to our LNG and natural gas marketing segment are primarily a result of international revenue allocations using a cost plus transfer pricing methodology. These LNG and natural gas marketing segment intersegment revenues (losses) are eliminated with intersegment revenues (losses) in our Consolidated Statements of Operations.


(4)	Items to reconcile loss from operations and loss before income taxes and non-controlling interest include consolidated other income (expense) amounts as presented on our Consolidated Statements of Operations primarily related to our LNG terminal segment.

The following table (in thousands) shows total assets for each of our reporting segments:



	March 31,		December 31,
	2016		2015
LNG Terminal	$	19,068,923	$	17,363,750
LNG & Natural Gas Marketing	549,509		550,896
Corporate and Other	812,515		894,407
Total Consolidation	$	20,430,947	$	18,809,053

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 16—SUPPLEMENTAL CASH FLOW INFORMATION

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



	Three Months Ended March 31,
	2016		2015
Cash paid during the period for interest, net of amounts capitalized and deferred	$	15,251	$	—

The balance in property, plant and equipment, net funded with accounts payable and accrued liabilities was $577.3 million and $150.6 million as of March 31, 2016 and 2015, respectively.

NOTE 17—RECENT ACCOUNTING STANDARDS

The following table provides a brief description of recent accounting standards that had not been adopted by the Company as of March 31, 2016: