Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2019

¨ 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)

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

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

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



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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

As of April 30, 2019, the issuer had 257,414,024 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	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	45

Item 4.	Controls and Procedures	46

Part II. Other Information
Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

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

Item 6.	Exhibits	48

	Signatures	49

DEFINITIONS

As used in this quarterly report, the terms listed below have the following meanings:

Common Industry and Other Terms



Bcf		billion cubic feet
Bcf/d		billion cubic feet per day
Bcf/yr		billion cubic feet per year
Bcfe		billion cubic feet equivalent
DOE		U.S. Department of Energy
EPC		engineering, procurement and construction
FERC		Federal Energy Regulatory Commission
FTA countries		countries with which the United States has a free trade agreement providing for national treatment for trade in natural gas
GAAP		generally accepted accounting principles in the United States
Henry Hub		the final settlement price (in USD per MMBtu) for the New York Mercantile Exchange’s Henry Hub natural gas futures contract for the month in which a relevant cargo’s delivery window is scheduled to begin
LIBOR		London Interbank Offered Rate
LNG		liquefied natural gas, a product of natural gas that, through a refrigeration process, has been cooled to a liquid state, which occupies a volume that is approximately 1/600th of its gaseous state
MMBtu		million British thermal units, an energy unit
mtpa		million tonnes per annum
non-FTA countries		countries with which the United States does not have a free trade agreement providing for national treatment for trade in natural gas and with which trade is permitted
SEC		U.S. Securities and Exchange Commission
SPA		LNG sale and purchase agreement
TBtu		trillion British thermal units, an energy unit
Train		an industrial facility comprised of a series of refrigerant compressor loops used to cool natural gas into LNG
TUA		terminal use agreement

Abbreviated Legal Entity Structure

The following diagram depicts our abbreviated legal entity structure as of March 31, 2019, 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

(in millions, except share data)



	March 31,			December 31,
	2019			2018
ASSETS	(unaudited)
Current assets
Cash and cash equivalents	$	1,093		$	981
Restricted cash	1,918			2,175
Accounts and other receivables	390			581
Accounts receivable—related party	3			4
Inventory	279			316
Derivative assets	107			63
Other current assets	106			114
Total current assets	3,896			4,234

Property, plant and equipment, net	27,953			27,245
Operating lease assets, net	542			—
Debt issuance costs, net	58			72
Non-current derivative assets	42			54
Goodwill	77			77
Other non-current assets, net	317			305
Total assets	$	32,885		$	31,987

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	66		$	58
Accrued liabilities	1,101			1,169
Accrued liabilities—related party	5			—
Current debt	—			239
Deferred revenue	108			139
Current operating lease liabilities	325			—
Derivative liabilities	37			128
Other current liabilities	17			9
Total current liabilities	1,659			1,742

Long-term debt, net	28,726			28,179
Non-current operating lease liabilities	207			—
Non-current finance lease liabilities	58			57
Non-current derivative liabilities	39			22
Other non-current liabilities	58			58

Commitments and contingencies (see Note 16)

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, 2019 and December 31, 2018
Issued: 270.4 million shares at March 31, 2019 and 269.8 million shares at December 31, 2018
Outstanding: 257.4 million shares at March 31, 2019 and 257.0 million shares at December 31, 2018	1			1
Treasury stock: 13.0 million shares and 12.8 million shares at March 31, 2019 and December 31, 2018, respectively, at cost	(418		)	(406		)
Additional paid-in-capital	4,063			4,035
Accumulated deficit	(4,015		)	(4,156		)
Total stockholders’ deficit	(369		)	(526		)
Non-controlling interest	2,507			2,455
Total equity	2,138			1,929
Total liabilities and equity	$	32,885		$	31,987

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 March 31,
	2019			2018
Revenues
LNG revenues	$	2,143		$	2,166
Regasification revenues	66			65
Other revenues	48			10
Other—related party	4			1
Total revenues	2,261			2,242

Operating costs and expenses
Cost of sales (excluding depreciation and amortization expense shown separately below)	1,204			1,178
Cost of sales—related party	10			—
Operating and maintenance expense	221			140
Development expense	1			1
Selling, general and administrative expense	73			67
Depreciation and amortization expense	144			109
Impairment expense and loss on disposal of assets	2			—
Total operating costs and expenses	1,655			1,495

Income from operations	606			747

Other income (expense)
Interest expense, net of capitalized interest	(247		)	(216		)
Derivative gain (loss), net	(35		)	77
Other income	16			7
Total other expense	(266		)	(132		)

Income before income taxes and non-controlling interest	340			615
Income tax provision	(3		)	(15		)
Net income	337			600
Less: net income attributable to non-controlling interest	196			243
Net income attributable to common stockholders	$	141		$	357

Net income per share attributable to common stockholders—basic	$	0.55		$	1.52
Net income per share attributable to common stockholders—diluted (1)	$	0.54		$	1.50

Weighted average number of common shares outstanding—basic	257.1			235.5
Weighted average number of common shares outstanding—diluted	258.5			238.0


(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 Months Ended March 31, 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
Shares repurchased related to share-based compensation	(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



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

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)



	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities
Net income	$	337		$	600
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	144			109
Share-based compensation expense	28			28
Non-cash interest expense	33			15
Amortization of debt issuance costs, deferred commitment fees, premium and discount	18			17
Amortization of operating lease assets	79			—
Total gains on derivatives, net	(122		)	(31		)
Net cash provided by (used for) settlement of derivative instruments	16			(4		)
Impairment expense and loss on disposal of assets	2			—
Other	—			(10		)
Changes in operating assets and liabilities:
Accounts and other receivables	98			(237		)
Accounts receivable—related party	1			—
Inventory	44			120
Accounts payable and accrued liabilities	(151		)	(156		)
Accrued liabilities—related party	5			—
Deferred revenue	(31		)	8
Operating lease liabilities	(85		)	—
Finance lease liabilities	1			—
Other, net	(5		)	10
Net cash provided by operating activities	412			469

Cash flows from investing activities
Property, plant and equipment, net	(625		)	(776		)
Investment in equity method investment	(24		)	—
Other	(2		)	—
Net cash used in investing activities	(651		)	(776		)

Cash flows from financing activities
Proceeds from issuances of debt	692			266
Repayments of debt	(441		)	—
Debt issuance and deferred financing costs	—			(1		)
Distributions and dividends to non-controlling interest	(144		)	(143		)
Payments related to tax withholdings for share-based compensation	(12		)	(6		)
Other	(1		)	—
Net cash provided by financing activities	94			116

Net decrease in cash, cash equivalents and restricted cash	(145		)	(191		)
Cash, cash equivalents and restricted cash—beginning of period	3,156			2,613
Cash, cash equivalents and restricted cash—end of period	$	3,011		$	2,422

Balances per Consolidated Balance Sheet:



	March 31,
	2019
Cash and cash equivalents	$	1,093
Restricted cash	1,918
Total cash, cash equivalents and restricted cash	$	3,011

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

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION

We are currently developing and constructing two natural gas liquefaction and export facilities. The Sabine Pass LNG terminal is located in Cameron Parish, Louisiana, on the Sabine-Neches Waterway less than four miles from the Gulf Coast. Cheniere Partners is developing, constructing and operating natural gas liquefaction facilities (the “SPL Project”) at the Sabine Pass LNG terminal adjacent to the existing regasification facilities (described below) through a wholly owned subsidiary, SPL. Cheniere Partners plans to construct up to six Trains, which are in various stages of development, construction and operations. Trains 1 through 5 are operational and early works have begun for Train 6 under limited notices to proceed ahead of an anticipated positive final investment decision (“FID”). The Sabine Pass LNG terminal has operational regasification facilities owned by Cheniere Partners’ wholly owned subsidiary, SPLNG, and a 94-mile pipeline that interconnects the Sabine Pass LNG terminal with a number of large interstate pipelines owned by Cheniere Partners’ wholly owned subsidiary, CTPL.

We are developing and constructing a second natural gas liquefaction and export facility at the Corpus Christi LNG terminal near Corpus Christi, Texas, and 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 liquefaction facilities, the “CCL Project”) through our wholly owned subsidiaries CCL and CCP, respectively. The CCL Project is being developed in stages with the first phase being three Trains (“Phase 1”). The first stage includes Trains 1 and 2, two LNG storage tanks, one complete marine berth and a second partial berth and all of the CCL Project’s necessary infrastructure facilities (“Stage 1”). The second stage includes Train 3, one LNG storage tank and the completion of the second partial berth (“Stage 2”). Train 1 is operational, Train 2 is undergoing commissioning and Train 3 is under construction.

Additionally, separate from the CCH Group, we are developing an expansion of the Corpus Christi LNG terminal adjacent to the CCL Project and filed an application with FERC in June 2018 for seven midscale Trains with an expected aggregate nominal production capacity of approximately 9.5 mtpa and one LNG storage tank.

We remain focused on expansion of our existing sites by leveraging existing infrastructure. We continue to consider development of other projects, including infrastructure projects in support of natural gas supply and LNG demand, which, among other things, will require acceptable commercial and financing arrangements before we make an FID.

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Cheniere have been prepared in accordance with GAAP for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2018. 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 months ended March 31, 2019 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2019.

Recent Accounting Standards

We adopted ASU 2016-02, Leases (Topic 842), and subsequent amendments thereto (“ASC 842”) on January 1, 2019 using the optional transition approach to apply the standard at the beginning of the first quarter of 2019 with no retrospective adjustments to prior periods. The adoption of the standard resulted in the recognition of right-of-use assets and lease liabilities for operating leases of approximately $550 million on our Consolidated Balance Sheets, with no material impact on our Consolidated Statements of Operations or Consolidated Statements of Cash Flows. We have elected the practical expedients to (1) carryforward prior conclusions related to lease identification and classification for existing leases, (2) combine lease and non-lease components of an arrangement for all classes of leased assets, (3) omit short-term leases with a term of 12 months or less from recognition on the balance sheet and (4) carryforward our existing accounting for land easements not previously accounted for as leases. See Note 11—Leases for additional information on our leases following the adoption of this standard.

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 2—RESTRICTED CASH

Restricted cash consists of funds that are contractually restricted as to usage or withdrawal and have been presented separately from cash and cash equivalents on our Consolidated Balance Sheets. As of March 31, 2019 and December 31, 2018, restricted cash consisted of the following (in millions):



	March 31,		December 31,
	2019		2018
Current restricted cash
SPL Project	$	621	$	756
Cheniere Partners and cash held by guarantor subsidiaries	676		785
CCL Project	218		289
Cash held by our subsidiaries restricted to Cheniere	403		345
Total current restricted cash	$	1,918	$	2,175

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

Under Cheniere Partners’ credit facilities (the “CQP Credit Facilities”), Cheniere Partners and each of its subsidiaries other than (1) SPL and (2) certain subsidiaries of Cheniere Partners owning other development projects, as well as certain other specified subsidiaries and members of the foregoing entities, as guarantor subsidiaries, are subject to limitations on the use of cash under the terms of the CQP Credit Facilities and the related depositary agreement governing the extension of credit to Cheniere Partners. Specifically, Cheniere Partners may only withdraw funds from collateral accounts held at a designated depositary bank on a limited basis and for specific purposes, including for the payment of operating expenses of Cheniere Partners and its guarantor subsidiaries. In addition, distributions and capital expenditures may only be made quarterly and are subject to certain restrictions.

NOTE 3—ACCOUNTS AND OTHER RECEIVABLES

As of March 31, 2019 and December 31, 2018, accounts and other receivables consisted of the following (in millions):



	March 31,		December 31,
	2019		2018
Trade receivables
SPL	$	187	$	330
Cheniere Marketing	152		205
Other accounts receivable	51		46
Total accounts and other receivables	$	390	$	581

NOTE 4—INVENTORY

As of March 31, 2019 and December 31, 2018, inventory consisted of the following (in millions):



	March 31,		December 31,
	2019		2018
Natural gas	$	10	$	30
LNG	67		24
LNG in-transit	81		173
Materials and other	121		89
Total inventory	$	279	$	316

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 5—PROPERTY, PLANT AND EQUIPMENT

As of March 31, 2019 and December 31, 2018, property, plant and equipment, net consisted of the following (in millions):



	March 31,			December 31,
	2019			2018
LNG terminal costs
LNG terminal and interconnecting pipeline facilities	$	23,626		$	13,386
LNG site and related costs	319			86
LNG terminal construction-in-process	5,239			14,864
Accumulated depreciation	(1,433		)	(1,299		)
Total LNG terminal costs, net	27,751			27,037
Fixed assets and other
Computer and office equipment	18			17
Furniture and fixtures	22			22
Computer software	101			100
Leasehold improvements	41			41
Land	59			59
Other	22			21
Accumulated depreciation	(119		)	(111		)
Total fixed assets and other, net	144			149
Assets under finance lease
Tug vessels	60			60
Accumulated depreciation	(2		)	(1		)
Total assets under finance lease, net	58			59
Property, plant and equipment, net	$	27,953		$	27,245

Depreciation expense was $143 million and $108 million during the three months ended March 31, 2019 and 2018, respectively.

We realize offsets to LNG terminal costs for sales of commissioning cargoes that were earned or loaded prior to the start of commercial operations of the respective Train during the testing phase for its construction. We realized offsets to LNG terminal costs of $202 million in the three months ended March 31, 2019 for sales of commissioning cargoes from Train 5 of the SPL Project and Train 1 of the CCL Project. We did not realize any offsets to LNG terminal costs in the three months ended March 31, 2018.

NOTE 6—DERIVATIVE INSTRUMENTS

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


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


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


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


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

We recognize our derivative instruments as either assets or liabilities and measure those instruments at fair value. None of our derivative instruments are designated as cash flow hedging instruments, and changes in fair value are recorded within our Consolidated Statements of 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 March 31, 2019 and December 31, 2018, which are classified as derivative assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Consolidated Balance Sheets (in millions).



	Fair Value Measurements as of
	March 31, 2019											December 31, 2018
	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 asset (liability)	$	—		$	(19	)	$	—	$	(19	)	$	—	$	18		$	—		$	18
Liquefaction Supply Derivatives asset (liability)	1			3			31		35			6		(19		)	(29		)	(42		)
LNG Trading Derivatives asset (liability)	(17		)	51			—		34			1		(25		)	—			(24		)
FX Derivatives asset	—			23			—		23			—		15			—			15

There have been no changes to our evaluation of and accounting for our derivative positions during the three months ended March 31, 2019.

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

The fair value of our Physical Liquefaction Supply Derivatives is predominantly driven by market commodity basis prices and, as applicable to our natural gas supply contracts, our assessment of the associated conditions precedent, including evaluating whether the respective market is available as pipeline infrastructure is developed. Upon the satisfaction of conditions precedent, including completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow, we recognize a gain or loss based on the fair value of the respective natural gas supply contracts.

We include a portion of our Physical Liquefaction Supply Derivatives as Level 3 within the valuation hierarchy as the fair value is developed through the use of internal models which may be impacted by inputs that are unobservable in the marketplace. The curves used to generate the fair value of our Physical Liquefaction Supply Derivatives are based on basis adjustments applied to forward curves for a liquid trading point. In addition, there may be observable liquid market basis information in the near term, but terms of a Physical Liquefaction Supply Derivatives contract may exceed the period for which such information is available, resulting in a Level 3 classification. In these instances, the fair value of the contract incorporates extrapolation assumptions made in the determination of the market basis price for future delivery periods in which applicable commodity basis prices were either not observable or lacked corroborative market data. As of March 31, 2019 and December 31, 2018, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure is under development to accommodate marketable physical gas flow.

The Level 3 fair value measurements of natural gas positions within our Physical Liquefaction Supply Derivatives could be materially impacted by a significant change in certain natural gas market basis spreads due to the contractual notional amount represented by our Level 3 positions, which is a substantial portion of our overall Physical Liquefaction Supply Derivatives portfolio. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of March 31, 2019:



	Net Fair Value Asset (in millions)	Valuation Approach	Significant Unobservable Input	Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives	$31	Market approach incorporating present value techniques	Basis Spread	$(0.703) - $0.082

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three months ended March 31, 2019 and 2018 (in millions):



	Three Months Ended March 31,
	2019			2018
Balance, beginning of period	$	(29	)	$	43
Realized and mark-to-market gains (losses):
Included in cost of sales	12			(13		)
Purchases and settlements:
Purchases	1			3
Settlements	47			(23		)
Balance, end of period	$	31		$	10
Change in unrealized gains (losses) relating to instruments still held at end of period	$	12		$	(13	)

Derivative assets and liabilities arising from our derivative contracts with the same counterparty are reported on a net basis, as all counterparty derivative contracts provide for net settlement. The use of derivative instruments exposes us to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments in instances when our derivative instruments are in an asset position. Additionally, we evaluate our own ability to meet our commitments in instances where our derivative instruments are in a liability position. Our derivative instruments are subject to contractual provisions which provide for the unconditional right of set-off for all derivative assets and liabilities with a given counterparty in the event of default.

Interest Rate Derivatives

During the three months ended March 31, 2019, there were no changes to the terms of the interest rate swaps (“CCH Interest Rate Derivatives”) entered into by CCH to protect against volatility of future cash flows and hedge a portion of the variable interest payments on its credit facility (the “CCH Credit Facility”).

Cheniere Partners previously had interest rate swaps (“CQP Interest Rate Derivatives”) to hedge a portion of the variable interest payments on its CQP Credit Facilities, which were terminated in October 2018.

As of March 31, 2019, 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

CCH Interest Rate Derivatives

$29 million

$4.7 billion

May 20, 2015

May 31, 2022

2.30%

One-month LIBOR

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



	March 31,			December 31,
	2019			2018
Consolidated Balance Sheet Location
Derivative assets	$	4		$	10
Non-current derivative assets	—			8
Total derivative assets	4			18

Non-current derivative liabilities	(23		)	—

Derivative asset (liability), net	$	(19	)	$	18

CHENIERE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

The following table shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three months ended March 31, 2019 and 2018 (in millions):



	Three Months Ended March 31,
	2019			2018
CCH Interest Rate Derivatives gain (loss)	$	(35	)	$	69
CQP Interest Rate Derivatives gain	—			8

Commodity Derivatives

SPL and CCL have entered into primarily index-based physical natural gas supply contracts and associated economic hedges to purchase natural gas for the commissioning and operation of the SPL Project and the CCL Project. The terms of the physical natural gas supply contracts range up to eight years, some of which commence upon the satisfaction of certain conditions precedent.

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):



	March 31, 2019						December 31, 2018
	Liquefaction Supply Derivatives (1)		LNG Trading Derivatives (2)		Total		Liquefaction Supply Derivatives (1)		LNG Trading Derivatives (2)		Total
Consolidated Balance Sheet Location
Derivative assets	$	21	$	58	$	79	$	13	$	24	$	37
Non-current derivative assets	42		—		42		46		—		46
Total derivative assets	63		58		121		59