Cheniere Energy, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

9 Months Ended

Sep. 30, 2019

LEASES

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

ASC 842 requires a lessee to recognize leases on its balance sheet by recording a lease liability representing the obligation to make future lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. As our leases generally do not provide an implicit rate, in order to calculate the lease liability, we discounted our expected future lease payments using our relevant subsidiary’s incremental borrowing rate at the later of January 1, 2019 or the commencement date of the lease. The incremental borrowing rate is an estimate of the rate of interest that a given subsidiary would have to pay to borrow on a collateralized basis over a similar term to that of the lease term.

Many of our leases contain renewal options exercisable at our sole discretion. Options to renew a lease are included in the lease term and recognized as part of the right-of-use asset and lease liability only to the extent they are reasonably certain to be exercised, such as when necessary to satisfy obligations that existed at the execution of the lease or when the non-renewal would otherwise result in an economic penalty.

We have elected the practical expedient to omit leases with an initial term of 12 months or less (“short-term lease”) from recognition on the balance sheet. We recognize short-term lease payments on a straight-line basis over the lease term and variable payments under short-term leases in the period in which the obligation is incurred.

Certain of our leases contain non-lease components which are not separated from the lease components when calculating the right-of-use asset and lease liability per our use of the practical expedient to combine both components of an arrangement for all classes of leased assets.

Certain of our leases also contain variable payments, such as inflation, that are not included when calculating the right-of-use asset and lease liability unless the payments are in-substance fixed.

We recognize lease expense for operating leases on a straight-line basis over the lease term. We recognize lease expense for finance leases as the sum of the amortization of the right-of-use assets on a straight-line basis and the interest on lease liabilities using the effective interest method over the lease term.

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



	Consolidated Balance Sheet Location	September 30, 2019
Right-of-use assets—Operating	Operating lease assets, net	$	493
Right-of-use assets—Financing	Property, plant and equipment, net	57
Total right-of-use assets		$	550

Current operating lease liabilities	Current operating lease liabilities	$	275
Current finance lease liabilities	Other current liabilities	2
Non-current operating lease liabilities	Non-current operating lease liabilities	203
Non-current finance lease liabilities	Non-current finance lease liabilities	58
Total lease liabilities		$	538

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



	Consolidated Statement of Operations Location	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost (1)	Operating costs and expenses (2)	$	163	$	440
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization expense	1		3
Interest on lease liabilities	Interest expense, net of capitalized interest	2		7
Total lease cost		$	166	$	450


(1)	Includes $57 million and $150 million of short-term lease costs and $8 million and $21 million of variable lease costs incurred during the three and nine months ended September 30, 2019, respectively.


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

Future annual minimum lease payments for operating and finance leases as of September 30, 2019 are as follows (in millions):



Years Ending December 31,	Operating Leases (1)			Finance Leases
2019	$	113		$	5
2020	218			10
2021	51			10
2022	19			10
2023	19			10
Thereafter	166			146
Total lease payments	586			191
Less: Interest	(106		)	(129		)
Present value of lease liabilities	$	480		$	62


(1)	Does not include $1.6 billion of legally binding minimum lease payments for vessel charters which were executed as of September 30, 2019 but will commence primarily between 2020 and 2021 and have fixed minimum lease terms of up to seven years.

Future annual minimum lease payments for operating and capital leases as of December 31, 2018, prepared in accordance with accounting standards prior to the adoption of ASC 842, were as follows (in millions):



Years Ending December 31,	Operating Leases (1)		Capital Leases (2)
2019 (3)	$	380	$	5
2020	184		5
2021	238		5
2022	264		5
2023	264		5
Thereafter	999		73
Total lease payments	2,329		98
Less: Interest	—		(39		)
Present value of lease liabilities	$	2,329	$	59


(1)	Includes certain lease option renewals that are reasonably assured and payments for certain non-lease components. Also includes $79 million in payments for short-term leases and $1.6 billion in payments for LNG vessel charters which were previously executed but will commence primarily between 2020 and 2021.


(2)	Does not include payments for non-lease components of $98 million.


(3)	Does not include $43 million in aggregate payments we will receive from our LNG vessel subcharters.

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



	September 30, 2019
	Operating Leases	Finance Leases
Weighted-average remaining lease term (in years)	7.1	18.9
Weighted-average discount rate (1)	5.3%	16.2%


(1)	The finance leases commenced prior to the adoption of ASC 842. In accordance with previous accounting guidance, the implied rate is based on the fair value of the underlying assets.

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



	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	280
Operating cash flows from finance leases	6
Financing cash flows from finance leases	—
Right-of-use assets obtained in exchange for new operating lease liabilities	189

LNG Vessel Subcharters

From time to time, we sublease certain LNG vessels under charter to third parties while retaining our existing obligation to the original lessor. We have elected the practical expedient for lessors to combine lease and non-lease components and since the lease component is the predominant component of each arrangement, these subleases are accounted for as operating leases. The subleases have lease terms of up to one year and many contain short-term renewal options exercisable at the discretion of the third party. As of September 30, 2019, we had $3 million in future minimum sublease payments to be received from LNG vessel subcharters, which will be recognized entirely within 2019. We recognize fixed sublease income on a straight-line basis over the lease term of the sublease while variable sublease income is recognized when earned. We recognized $28 million and $96 million of sublease income, including $5 million and $15 million of variable lease payments, during the three and nine months ended September 30, 2019, respectively, in other revenues on our Consolidated Statements of Operations.