Current report filing

Derivative Instruments

v3.8.0.1
Derivative Instruments
 12 Months Ended
Dec. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
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 (“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 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.

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 December 31, 2017 and 2016, 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
 
December 31, 2017
 
December 31, 2016
 
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
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(6
)
 
$
—

 
$
(6
)
CQP Interest Rate Derivatives asset
—

 
21

 
—

 
21

 
—

 
13

 
—

 
13

CCH Interest Rate Derivatives liability
—

 
(32
)
 
—

 
(32
)
 
—

 
(86
)
 
—

 
(86
)
Liquefaction Supply Derivatives asset (liability)
2

 
10

 
43

 
55

 
(4
)
 
(2
)
 
79

 
73

LNG Trading Derivatives asset (liability)
(13
)
 
5

 
—

 
(8
)
 
2

 
(5
)
 
—

 
(3
)
FX Derivatives liability
—

 
(1
)
 
—

 
(1
)
 
—

 
—

 
—

 
—



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 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 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 December 31, 2017, 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 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 portfolio. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of December 31, 2017:
 
 
Net Fair Value Asset
(in millions)
 
Valuation Approach
 
Significant Unobservable Input
 
Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives
 
$43
 
Market approach incorporating present value techniques
 
Basis Spread
 
$(0.703) - $0.432


The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the years ended December 31, 2017, 2016 and 2015 (in millions):
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Balance, beginning of period
 
$
79

 
$
32

 
$
—

Realized and mark-to-market gains (losses):
 
 
 
 
 
 
Included in cost of sales (1)
 
(37
)
 
48

 
32

Purchases and settlements:
 
 
 
 
 
 
Purchases
 
14

 
1

 
—

Settlements (1)
 
(12
)
 
(2
)
 
—

Transfers out of Level 3
 
(1
)
 
—

 
—

Balance, end of period
 
$
43

 
$
79

 
$
32

Change in unrealized gains relating to instruments still held at end of period
 
$
(37
)
 
$
49

 
$
32

 
    
(1)
Does not include the decrease in fair value of $1 million related to the realized gains capitalized during the year ended December 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. 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

SPL had 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 credit facilities it entered into in June 2015 (the “2015 SPL Credit Facilities”), based on a portion of the expected outstanding borrowings over the term of the 2015 SPL Credit Facilities. In March 2017, SPL settled the SPL Interest Rate Derivatives and recognized a derivative loss of $7 million in conjunction with the termination of approximately $1.6 billion of commitments under the 2015 SPL Credit Facilities, as discussed in Note 12—Debt.

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 credit facility (the “2015 CCH Credit Facility”), based on a portion of the expected outstanding borrowings over the term of the 2015 CCH Credit Facility. In May 2017, CCH settled a portion of the CCH Interest Rate Derivatives and recognized a derivative loss of $13 million in conjunction with the termination of approximately $1.4 billion of commitments under the 2015 CCH Credit Facility, as discussed in Note 12—Debt.

Cheniere Partners has 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, based on a portion of the expected outstanding borrowings over the term of the 2016 CQP Credit Facilities.

As of December 31, 2017, 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
CQP Interest Rate Derivatives
 
$225 million
 
$1.3 billion
 
March 22, 2016
 
February 29, 2020
 
1.19%
 
One-month LIBOR
CCH Interest Rate Derivatives
 
$29 million
 
$4.9 billion
 
May 20, 2015
 
May 31, 2022
 
2.29%
 
One-month LIBOR


The following table shows the fair value and location of our Interest Rate Derivatives on our Consolidated Balance Sheets (in millions):
 
 
December 31, 2017
 
December 31, 2016
 
 
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 assets
 
$
—

 
$
7

 
$
—

 
$
7

 
$
—

 
$
—

 
$
—

 
$
—

Non-current derivative assets
 
—

 
14

 
3

 
17

 
—

 
16

 
—

 
16

Total derivative assets
 
—

 
21

 
3

 
24

 
—

 
16

 
—

 
16

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 
—

 
—

 
(20
)
 
(20
)
 
(4
)
 
(3
)
 
(43
)
 
(50
)
Non-current derivative liabilities
 
—

 
—

 
(15
)
 
(15
)
 
(2
)
 
—

 
(43
)
 
(45
)
Total derivative liabilities
 
—

 
—

 
(35
)
 
(35
)
 
(6
)
 
(3
)
 
(86
)
 
(95
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset (liability), net
 
$
—

 
$
21

 
$
(32
)
 
$
(11
)
 
$
(6
)
 
$
13

 
$
(86
)
 
$
(79
)


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 years ended December 31, 2017, 2016 and 2015 (in millions):
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
SPL Interest Rate Derivatives loss
 
$
(2
)
 
$
(6
)
 
$
(42
)
CQP Interest Rate Derivatives gain
 
6

 
12

 
—

CCH Interest Rate Derivatives gain (loss)
 
3

 
(16
)
 
(162
)


Commodity Derivatives

Liquefaction Supply Derivatives

SPL and CCL have entered into index-based physical natural gas supply contracts and associated economic hedges, if applicable, to purchase natural gas for the commissioning and operation of the SPL Project and the CCL Project. The terms of the noncurrent physical natural gas supply contracts range from approximately one to seven years, most of which commence upon the satisfaction of certain conditions precedent, if not already met, such as the date of first commercial delivery of specified Trains of the SPL Project and the CCL Project.

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

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):
 
December 31, 2017
 
December 31, 2016
 
Liquefaction Supply Derivatives (1)
 
LNG Trading Derivatives (2)
 
Total
 
Liquefaction Supply Derivatives (1)
 
LNG Trading Derivatives (2)
 
Total
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
41

 
$
9

 
$
50

 
$
13

 
$
7

 
$
20

Non-current derivative assets
17

 
—

 
17

 
67

 
—

 
67

Total derivative assets
58

 
9

 
67

 
80

 
7

 
87

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
—

 
(17
)
 
(17
)
 
(7
)
 
(10
)
 
(17
)
Non-current derivative liabilities
(3
)
 
—

 
(3
)
 
—

 
—

 
—

Total derivative liabilities
(3
)
 
(17
)
 
(20
)
 
(7
)
 
(10
)
 
(17
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset (liability), net
$
55

 
$
(8
)
 
$
47

 
$
73

 
$
(3
)
 
$
70

 
 
 
 
 
 
 
 
 
 
 
 
Notional amount (in TBtu) (3)
2,539

 
25

 
 
 
1,117

 
—

 
 

 
    
(1)
Does not include collateral call of $1 million and collateral deposit of $6 million for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of December 31, 2017 and 2016, respectively.
(2)
Does not include collateral of $28 million and $10 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of December 31, 2017 and 2016, respectively.
(3)
SPL had secured up to approximately 2,214 TBtu and 1,994 TBtu of natural gas feedstock through natural gas supply contracts as of December 31, 2017 and 2016, respectively. CCL has secured up to approximately 2,024 TBtu and zero TBtu of natural gas feedstock through natural gas supply contracts, a portion of which is subject to the achievement of certain project milestones and other conditions precedent, as of December 31, 2017 and 2016, respectively.

The following table shows the changes in the fair value, settlements and location of our Commodity Derivatives recorded on our Consolidated Statements of Operations during the years ended December 31, 2017, 2016 and 2015 (in millions):
 
Statement of Operations Location (1)
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
LNG Trading Derivatives gain (loss)
LNG revenues
 
$
(44
)
 
$
(4
)
 
1

Liquefaction Supply Derivatives loss (gain) (2)
Cost (cost recovery) of sales
 
24

 
(42
)
 
(33
)
 
(1)
Fair value fluctuations associated with commodity derivative activities are classified and presented consistently with the item economically hedged and the nature and intent of the derivative instrument.
(2)
Does not include the realized value associated with derivative instruments that settle through physical delivery.

FX Derivatives

Cheniere Marketing has entered into FX Derivatives to protect against the volatility in future cash flows attributable to changes in international currency exchange rates. The FX Derivatives economically hedge the foreign currency exposure arising from cash flows expended for both physical and financial LNG transactions and selling, general and administrative expenses related to operations in countries outside of the United States.

The following table shows the fair value and location of our FX Derivatives on our Consolidated Balance Sheets (in millions):
 
 
 
Fair Value Measurements as of
 
Balance Sheet Location
 
December 31, 2017
 
December 31, 2016
FX Derivatives
Derivative assets
 
$
—

 
$
4

FX Derivatives
Derivative liabilities
 
—

 
(4
)
FX Derivatives
Non-current derivative liabilities
 
(1
)
 
—



The total notional amount of our FX Derivatives was $27 million and $11 million as of December 31, 2017 and 2016, respectively.
    
The following table shows the changes in the fair value of our FX Derivatives recorded on our Consolidated Statements of Operations during the years ended December 31, 2017, 2016 and 2015 (in millions):
 
 
 
Year Ended December 31,
 
Statement of Operations Location
 
2017
 
2016
 
2015
FX Derivatives loss
LNG revenues
 
$
(1
)
 
$
—

 
$
—

FX Derivatives loss
Other income
 
—

 
(1
)
 
—



Balance Sheet Presentation

Our derivative instruments are presented on a net basis on our Consolidated Balance Sheets as described above. The following table shows the fair value of our derivatives outstanding on a gross and net basis (in millions):
 
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts Presented in the Consolidated Balance Sheets
Offsetting Derivative Assets (Liabilities)
 
 
 
As of December 31, 2017
 
 
 
 
 
 
CQP Interest Rate Derivatives
 
$
21

 
$
—

 
$
21

CCH Interest Rate Derivatives
 
3

 
—

 
3

CCH Interest Rate Derivatives
 
(35
)
 
—

 
(35
)
Liquefaction Supply Derivatives
 
64

 
(6
)
 
58

Liquefaction Supply Derivatives
 
(3
)
 
—

 
(3
)
LNG Trading Derivatives
 
9

 
—

 
9

LNG Trading Derivatives
 
(37
)
 
20

 
(17
)
FX Derivatives
 
(1
)
 
—

 
(1
)
As of December 31, 2016
 
 
 
 
 


SPL Interest Rate Derivatives
 
$
(6
)
 
$
—

 
$
(6
)
CQP Interest Rate Derivatives
 
16

 
—

 
16

CQP Interest Rate Derivatives
 
(3
)
 
—

 
(3
)
CCH Interest Rate Derivatives
 
(95
)
 
9

 
(86
)
Liquefaction Supply Derivatives
 
82

 
(2
)
 
80

Liquefaction Supply Derivatives
 
(11
)
 
4

 
(7
)
LNG Trading Derivatives
 
21

 
(15
)
 
6

LNG Trading Derivatives
 
(17
)
 
8

 
(9
)
FX Derivatives
 
5

 
(1
)
 
4

FX Derivatives
 
(4
)
 
—

 
(4
)