Cheniere Energy, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

Components of income before income taxes and non-controlling interest on our Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017 are as follows (in millions):



	Year Ended December 31,
	2019		2018		2017
U.S.	$	289	$	997	$	30
International	426		230		536
Total income before income taxes and non-controlling interest	$	715	$	1,227	$	566

Income tax provision (benefit) included in our reported net income consisted of the following (in millions):



	Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	—		$	—		$	—
State	—			2			—
Foreign	4			30			6
Total current	4			32			6

Deferred:
Federal	(475		)	—			—
State	(46		)	—			—
Foreign	—			(5		)	(3		)
Total deferred	(521		)	(5		)	(3		)
Total income tax provision (benefit)	$	(517	)	$	27		$	3

The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows:



	Year Ended December 31,
	2019		2018		2017
U.S. federal statutory tax rate	21.0	%	21.0	%	35.0	%
Non-controlling interest	(17.2	)%	(11.4	)%	2.9	%
State tax rate	(5.4	)%	(0.4	)%	(0.2	)%
U.S. tax reform rate change	—	%	—	%	71.4	%
Executive compensation	1.3	%	0.5	%	0.9	%
Share-based compensation	(0.3	)%	(0.5	)%	(6.2	)%
Nondeductible interest expense	5.0	%	2.6	%	8.5	%
Foreign earnings taxed in the U.S.	6.7	%	1.4	%	—	%
Foreign rate differential	(11.4	)%	(1.1	)%	(0.7	)%
Tax credits	(5.2	)%	(0.6	)%	(1.0	)%
Other	1.7	%	0.5	%	(0.4	)%
Valuation allowance	(68.5	)%	(9.8	)%	(109.7	)%
Effective tax rate	(72.3	)%	2.2	%	0.5	%

Significant components of our deferred tax assets and liabilities at December 31, 2019 and 2018 are as follows (millions):



	December 31,
	2019			2018
Deferred tax assets
Net operating loss carryforwards and credits
Federal	$	2,860		$	848
Foreign	5			7
State	249			189
Federal and state tax credits	64			28
Disallowed business interest expense carryforward	154			19
Deferred gain	46			46
Other	97			50
Less: valuation allowance	(196		)	(686		)
Total deferred tax assets	3,279			501

Deferred tax liabilities
Investment in limited partnership	(554		)	(375		)
Convertible debt	(51		)	(59		)
Property, plant and equipment	(2,110		)	(48		)
Other	(35		)	(11		)
Total deferred tax liabilities	(2,750		)	(493		)

Net deferred tax assets	$	529		$	8

We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss (“NOL”) carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets as of each reporting date, weighing all positive and negative evidence, and establish a valuation allowance if we determine that it is more likely than not that some or all of our deferred tax assets will not be realized. The assessment requires significant judgment and is performed in each of our applicable jurisdictions. In making such determination, we consider various factors such as historical profitability, future projections of sustained profitability, reversal of existing deferred tax liabilities, construction and operational milestones reached on our Liquefaction Projects and our long-term SPAs achieving date of first commercial delivery. We recorded a valuation allowance of $686 million in 2018 against our deferred tax assets due to being in a three-year cumulative loss position at the time, in addition to ongoing construction and performance risks related to our Liquefaction Projects. After weighing 2019 positive and negative evidence, we determined that sufficient positive evidence existed to support releasing the valuation allowance against significantly all of our federal deferred tax assets and a portion of our state deferred tax assets. The positive evidence supporting such conclusion included successful completion and subsequent operations of Trains 1 and 2 of the CCL Project and Train 5 of the SPL Project, our transitioning from a three-year cumulative loss position in 2018 to a three-year cumulative income position

in 2019, commencing commercial delivery on 13 of our long term customer SPAs and forecasts of sustained future profitability. As a result, we recorded a decrease in valuation allowance of $490 million comprised of a $493 million federal valuation allowance release and a $49 million state valuation allowance release, partially offset by an increase in the valuation allowance of $52 million in various other state and foreign tax jurisdictions. We maintained a valuation allowance of $196 million at December 31, 2019 primarily against state NOL carryforward deferred tax assets, for which we continue to believe the more likely than not recognition threshold was not met.

At December 31, 2019, we had federal and state NOL carryforwards of approximately $13.6 billion and $3.1 billion, respectively. These NOL carryforwards will expire between 2021 and 2039. At December 31, 2019, we had federal and state tax credit carryforwards of $61 million and $3 million, respectively. The federal tax credit carryforwards include investment tax credit carryforwards of $52 million related to capital equipment placed in service for our Liquefaction Projects. We account for our federal investment tax credits under the flow-through method. The federal and state tax credit carryforwards will expire between 2027 and 2039.

Changes in the balance of unrecognized tax benefits are as follows (in millions):



	Year Ended December 31,
	2019		2018
Balance at beginning of the year	$	61	$	62
Additions based on tax positions related to current year	—		—
Additions for tax positions of prior years	—		—
Reductions for tax positions of prior years	—		(1		)
Settlements	—		—
U.S. tax reform rate change	—		—
Balance at end of the year	$	61	$	61

If recognized, $52 million of unrecognized tax benefits would affect our effective tax rate in future periods. Currently, we do not recognize any accrued liabilities, interest and penalties associated with the unrecognized tax benefits provided above in our Consolidated Statements of Operations or our Consolidated Balance Sheets because any settlement of uncertain tax positions would result in an adjustment to our NOL carryforward. We recognize interest and penalties related to income tax matters as part of income tax expense.

We experienced an ownership change within the provisions of U.S. Internal Revenue Code (“IRC”) Section 382 in 2008, 2010 and 2012. An analysis of the annual limitation on the utilization of our NOLs was performed in accordance with IRC Section 382. It was determined that IRC Section 382 will not limit the use of our NOLs over the carryover period. We 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 NOL carryforwards.

We are subject to tax in the U.S. and various state and foreign jurisdictions and we remain subject to periodic audits and reviews by taxing authorities. Federal and state tax returns for the years after 2015 remain open for examination. Tax authorities may have the ability to review and adjust carryover attributes that were generated prior to these periods if utilized in an open tax year.