Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.20.1
Derivative Instruments
 3 Months Ended
Mar. 31, 2020
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 (“CCH Interest Rate Derivatives”) to hedge the exposure to volatility in a portion of the floating-rate interest payments on CCH’s amended and restated credit facility (the “CCH Credit Facility”) and to hedge against changes in interest rates that could impact anticipated future issuance of debt by CCH, which is anticipated by the end of 2020 (“CCH Interest Rate Forward Start Derivatives” and, collectively with the CCH Interest Rate Derivatives, the “Interest Rate Derivatives”);
•
commodity derivatives consisting of natural gas supply contracts for the commissioning and operation of the Liquefaction Projects and potential future development of Corpus Christi Stage 3 (“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 or fair value 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 March 31, 2020 and December 31, 2019, 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, 2020
 
December 31, 2019
 
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 liability
$
—

 
$
(197
)
 
$
—

 
$
(197
)
 
$
—

 
$
(81
)
 
$
—

 
$
(81
)
CCH Interest Rate Forward Start Derivatives liability
—

 
(92
)
 
—

 
(92
)
 
—

 
(8
)
 
—

 
(8
)
Liquefaction Supply Derivatives asset
1

 
3

 
674

 
678

 
5

 
6

 
138

 
149

LNG Trading Derivatives asset (liability)
(3
)
 
188

 
—

 
185

 
—

 
165

 
—

 
165

FX Derivatives asset
—

 
23

 
—

 
23

 
—

 
4

 
—

 
4



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 or option-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 observable and unobservable market commodity prices and, as applicable to our natural gas supply contracts, our assessment of the associated events deriving fair value, including evaluating whether the respective market is available as pipeline infrastructure is developed. The fair value of our Physical Liquefaction Supply Derivatives incorporates risk premiums related to the satisfaction of conditions precedent, such as completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow. As of March 31, 2020 and December 31, 2019, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure was under development to accommodate marketable physical gas flow.

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 incorporate significant unobservable inputs. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks, such as future prices of energy units for unobservable periods, liquidity, volatility and contract duration.

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 and international LNG prices. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of March 31, 2020:
 
 
Net Fair Value Asset
(in millions)
 
Valuation Approach
 
Significant Unobservable Input
 
Range of Significant Unobservable Inputs / Weighted Average (1)
Physical Liquefaction Supply Derivatives
 
$674
 
Market approach incorporating present value techniques
 
Henry Hub basis spread
 
$(0.619) - $0.054 / (0.027)
 
 
 
 
Option pricing model
 
International LNG pricing spread, relative to Henry Hub (2)
 
48% - 154% / 117%

 
(1)    Unobservable inputs were weighted by the relative fair value of the instruments.
(2)    Spread contemplates U.S. dollar-denominated pricing.

Increases or decreases in basis or pricing spreads, in isolation, would decrease or increase, respectively, the fair value of our Physical Liquefaction Supply Derivatives.
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, 2020 and 2019 (in millions):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Balance, beginning of period
 
$
138

 
$
(29
)
Realized and mark-to-market gains:
 
 
 
 
Included in cost of sales
 
534

 
12

Purchases and settlements:
 
 
 
 
Purchases
 
1

 
1

Settlements
 
—

 
47

Transfers out of Level 3 (1)
 
1

 
—

Balance, end of period
 
$
674

 
$
31

Change in unrealized gains relating to instruments still held at end of period
 
$
534

 
$
12

 
(1)    Transferred to Level 2 as a result of observable market for the underlying natural gas purchase agreements.

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 the unconditional right of set-off in the event of default. 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, counterparties are at risk that we will be unable to meet our commitments in instances where our derivative instruments are in a liability position. We incorporate both our own nonperformance risk and the respective counterparty’s nonperformance risk in fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of any applicable credit enhancements, such as collateral postings, set-off rights and guarantees.

Interest Rate Derivatives

As of March 31, 2020, we had the following Interest Rate Derivatives outstanding:
 
 
Notional Amounts
 
 
 
 
 
 
 
 
 
 
March 31, 2020
 
December 31, 2019
 
Effective Date
 
Maturity Date
 
Weighted Average Fixed Interest Rate Paid
 
Variable Interest Rate Received
CCH Interest Rate Derivatives
 
$4.7 billion
 
$4.5 billion
 
May 20, 2015
 
May 31, 2022
 
2.30%
 
One-month LIBOR
CCH Interest Rate Forward Start Derivatives
 
$750 million
 
$750 million
 
September 30, 2020
 
December 31, 2030
 
2.06%
 
Three-month LIBOR

The following table shows the fair value and location of the Interest Rate Derivatives on our Consolidated Balance Sheets (in millions):
 
March 31, 2020
 
December 31, 2019
 
CCH Interest Rate Derivatives
 
CCH Interest Rate Forward Start Derivatives
 
Total
 
CCH Interest Rate Derivatives
 
CCH Interest Rate Forward Start Derivatives
 
Total
Consolidated Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
(92
)
 
$
(92
)
 
$
(184
)
 
$
(32
)
 
$
(8
)
 
$
(40
)
Non-current derivative liabilities
(105
)
 
—

 
(105
)
 
(49
)
 
—

 
(49
)
Total derivative liabilities
$
(197
)

$
(92
)

$
(289
)

$
(81
)

$
(8
)

$
(89
)

The following table shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in interest rate derivative loss, net on our Consolidated Statements of Operations during the three months ended March 31, 2020 and 2019 (in millions):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
CCH Interest Rate Derivatives loss
 
$
(123
)
 
$
(35
)
CCH Interest Rate Forward Start Derivatives loss
 
(85
)
 
—



Commodity Derivatives
SPL, CCL and CCL Stage III have entered into physical natural gas supply contracts and associated economic hedges to purchase natural gas for the commissioning and operation of the Liquefaction Projects and potential future development of Corpus Christi Stage 3, respectively, which are primarily indexed to the natural gas market and international LNG indices. The remaining terms of the index-based physical natural gas supply contracts range up to approximately 15 years, some of which commence upon the satisfaction of certain events or states of affairs.

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, 2020
 
December 31, 2019
 
Liquefaction Supply Derivatives (1)
 
LNG Trading Derivatives (2)
 
Total
 
Liquefaction Supply Derivatives (1)
 
LNG Trading Derivatives (2)
 
Total
Consolidated Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
113

 
$
190

 
$
303

 
$
93

 
$
225

 
$
318

Non-current derivative assets
665

 
35

 
700

 
174

 
—

 
174

Total derivative assets
778

 
225

 
1,003

 
267

 
225

 
492

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
(19
)
 
(40
)
 
(59
)
 
(16
)
 
(60
)
 
(76
)
Non-current derivative liabilities
(81
)
 
—

 
(81
)
 
(102
)
 
—

 
(102
)
Total derivative liabilities
(100
)
 
(40
)
 
(140
)
 
(118
)
 
(60
)
 
(178
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset, net
$
678

 
$
185

 
$
863

 
$
149

 
$
165

 
$
314

 
 
 
 
 
 
 
 
 
 
 
 
Notional amount, net (in TBtu) (3)
10,988

 
22

 
 
 
9,177

 
4

 
 

 
    
(1)
Does not include collateral posted with counterparties by us of $11 million and $7 million for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, respectively. Includes derivative assets of $4 million and $3 million as of March 31, 2020 and December 31, 2019, respectively, and non-current assets of $2 million as of both March 31, 2020 and December 31, 2019 for natural gas supply contracts that SPL and CCL have with related parties.
(2)
Does not include collateral posted with counterparties by us of $11 million and $5 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, respectively.
(3)
Includes 198 TBtu and 120 TBtu as of March 31, 2020 and December 31, 2019, respectively, for natural gas supply contracts that SPL and CCL have with related parties.

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 three months ended March 31, 2020 and 2019 (in millions):
 
Consolidated Statements of Operations Location (1)
 
Three Months Ended March 31,
 
 
2020
 
2019
LNG Trading Derivatives gain
LNG revenues
 
$
140

 
$
64

LNG Trading Derivatives loss
Cost of sales
 
(34
)
 
—

Liquefaction Supply Derivatives gain (loss) (2)
LNG revenues
 
(1
)
 
2

Liquefaction Supply Derivatives gain (2)(3)
Cost of sales
 
537

 
82

 
(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.
(3)
CCL recorded $23 million and $10 million in cost of sales under a natural gas supply contract with a related party during the three months ended March 31, 2020 and 2019, respectively, including $1 million of Liquefaction Supply Derivatives gain and $2 million of Liquefaction Supply Derivatives loss, respectively. As of March 31, 2020 and December 31, 2019, $7 million and $3 million, respectively, were included in accrued liabilities related to this contract.

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.

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
 
Consolidated Balance Sheet Location
 
March 31, 2020
 
December 31, 2019
FX Derivatives
Derivative assets
 
$
19

 
$
5

FX Derivatives
Non-current derivative assets
 
5

 
—

FX Derivatives
Derivative liabilities
 
(1
)
 
(1
)


The total notional amount of our FX Derivatives was $496 million and $827 million as of March 31, 2020 and December 31, 2019, respectively.
    
The following table shows the changes in the fair value, settlements and location of our FX Derivatives recorded on our Consolidated Statements of Operations during the three months ended March 31, 2020 and 2019 (in millions):
 
 
 
Three Months Ended March 31,
 
Consolidated Statements of Operations Location
 
2020
 
2019
FX Derivatives gain
LNG revenues
 
$
25

 
$
9



Consolidated 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 March 31, 2020
 
 
 
 
 
 
CCH Interest Rate Derivatives
 
$
(197
)
 
$
—

 
$
(197
)
CCH Interest Rate Forward Start Derivatives
 
(92
)
 
—

 
(92
)
Liquefaction Supply Derivatives
 
796

 
(18
)
 
778

Liquefaction Supply Derivatives
 
(104
)
 
4

 
(100
)
LNG Trading Derivatives
 
225

 
—

 
225

LNG Trading Derivatives
 
(47
)
 
7

 
(40
)
FX Derivatives
 
27

 
(3
)
 
24

FX Derivatives
 
(1
)
 
—

 
(1
)
As of December 31, 2019
 
 
 
 
 


CCH Interest Rate Derivatives
 
$
(81
)
 
$
—

 
$
(81
)
CCH Interest Rate Forward Start Derivatives
 
(8
)
 
—

 
(8
)
Liquefaction Supply Derivatives
 
281

 
(14
)
 
267

Liquefaction Supply Derivatives
 
(126
)
 
8

 
(118
)
LNG Trading Derivatives
 
229

 
(4
)
 
225

LNG Trading Derivatives
 
(60
)
 
—

 
(60
)
FX Derivatives
 
9

 
(4
)
 
5

FX Derivatives
 
(6
)
 
5

 
(1
)