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

Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

Derivative Instruments

9 Months Ended

Sep. 30, 2021

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 term loan credit facility (the “CCH Credit Facility”) and previously, to hedge against changes in interest rates that could impact anticipated future issuance of debt by CCH (“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 (“Financial Liquefaction Supply Derivatives,” and collectively with the Physical Liquefaction Supply Derivatives, the “Liquefaction Supply Derivatives”);

•physical derivatives consisting of liquified natural gas contracts in which we have contractual net settlement (“Physical LNG Trading Derivatives”) and financial derivatives to hedge the exposure to the commodity markets in which we have contractual arrangements to purchase or sell physical LNG (collectively, “LNG Trading Derivatives”); and

•foreign currency exchange (“FX”) contracts to hedge exposure to currency risk associated with cash flows denominated in currencies other than United States dollar (“FX Derivatives”), associated with both LNG Trading Derivatives and operations in countries outside of the United States.

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, in which case it is capitalized.

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 September 30, 2021 and December 31, 2020 (in millions):


	Fair Value Measurements as of
	September 30, 2021								December 31, 2020
	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	$	—	$	(67)	$	—	$	(67)	$	—	$	(140)	$	—	$	(140)

Liquefaction Supply Derivatives asset (liability)	(21)		3		(2,611)		(2,629)		5		(6)		241		240
LNG Trading Derivatives asset (liability)	11		(444)		(680)		(1,113)		(3)		(131)		—		(134)
FX Derivatives asset (liability)	—		9		—		9		—		(22)		—		(22)

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 and LNG Trading Derivatives are 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 September 30, 2021 and December 31, 2020, 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 our Physical LNG Trading Derivatives and 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 our Physical LNG Trading Derivatives and the 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 and Physical LNG Trading Derivatives as of September 30, 2021:

Net Fair Value Liability
(in millions)

Valuation Approach

Significant Unobservable Input

Range of Significant Unobservable Inputs / Weighted Average (1)

Physical Liquefaction Supply Derivatives

$(2,611)

Market approach incorporating present value techniques

Henry Hub basis spread

$(1.333) - $0.895 / $(0.006)

Option pricing model

International LNG pricing spread, relative to Henry Hub (2)

158% - 516% / 224%

Physical LNG Trading Derivatives

$(680)

Market approach incorporating present value techniques

International LNG pricing spread, relative to Henry Hub or TTF, as applicable (2)

$(11.275) - $23.458 / $17.777

(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 LNG Trading Derivatives and our Physical Liquefaction Supply Derivatives.

The following table shows the changes in the fair value of our Level 3 Physical LNG Trading Derivatives and Physical Liquefaction Supply Derivatives during the three and nine months ended September 30, 2021 and 2020 (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Balance, beginning of period	$	(389)	$	590	$	241	$	138
Realized and mark-to-market gains (losses):
Included in cost of sales	(2,982)		(27)		(2,898)		454

Purchases and settlements:
Purchases	5		1		(657)		2
Settlements	75		(31)		23		(61)

Balance, end of period	$	(3,291)	$	533	$	(3,291)	$	533
Change in unrealized gains (losses) relating to instruments still held at end of period	$	(2,982)	$	(27)	$	(2,898)	$	454

All counterparty derivative contracts provide for the unconditional right of set-off in the event of default. We have elected to report derivative assets and liabilities arising from our derivative contracts with the same counterparty on a net basis. 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

CCH has entered into interest rate swaps to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the CCH Credit Facility. CCH previously also had interest rate swaps to hedge against changes in interest rates that could impact the anticipated future issuance of debt. In August 2020, we settled the outstanding CCH Interest Rate Forward Start Derivatives.

As of September 30, 2021, we had the following Interest Rate Derivatives outstanding:

Notional Amounts

September 30, 2021

December 31, 2020

Latest Maturity Date

Weighted Average Fixed Interest Rate Paid

Variable Interest Rate Received

CCH Interest Rate Derivatives

$4.5 billion

$4.6 billion

May 31, 2022

2.30%

One-month LIBOR

The following table shows the effect and location of our Interest Rate Derivatives on our Consolidated Statements of Operations during the three and nine months ended September 30, 2021 and 2020 (in millions):


		Gain (Loss) Recognized in Consolidated Statements of Operations
	Consolidated Statements of Operations Location	Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020
CCH Interest Rate Derivatives	Interest rate derivative loss, net	$	(2)	$	—	$	(3)	$	(138)
CCH Interest Rate Forward Start Derivatives	Interest rate derivative loss, net	—		—		—		(95)

Commodity Derivatives

SPL, CCL and CCL Stage III have entered into physical natural gas supply contracts and associated economic hedges, including those associated with our IPM transactions, 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. The terms of the Financial Liquefaction Supply Derivatives range up to approximately three years.

Commencing in first quarter of 2021, we have entered into physical LNG transactions that provide for contractual net settlement. Such transactions are accounted for as LNG Trading Derivatives, and are designed to economically hedge exposure to the commodity markets in which we sell LNG. 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. The terms of LNG Trading Derivatives range up to approximately two years.

The following table shows the notional amounts of our Liquefaction Supply Derivatives and LNG Trading Derivatives (collectively, “Commodity Derivatives”):

September 30, 2021

December 31, 2020

Liquefaction Supply Derivatives

LNG Trading Derivatives

Liquefaction Supply Derivatives

LNG Trading Derivatives

Notional amount, net (in TBtu) (1)

11,291

(14)

10,483

(1)Includes notional amounts for natural gas supply contracts that SPL and CCL have with related parties. See Note 1 2 —Related Party Transactions.

The following table shows the effect and location of our Commodity Derivatives recorded on our Consolidated Statements of Operations during the three and nine months ended September 30, 2021 and 2020 (in millions):


		Gain (Loss) Recognized in Consolidated Statements of Operations
	Consolidated Statements of Operations Location (1)	Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020

LNG Trading Derivatives	LNG revenues	$	(1,098)	$	13	$	(1,539)	$	119
LNG Trading Derivatives	Cost of sales	55		(5)		136		(5)
Liquefaction Supply Derivatives (2)	LNG revenues	(4)		21		(3)		7
Liquefaction Supply Derivatives (2)	Cost of sales	(2,444)		(103)		(2,848)		372

(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 that are denominated in a currency other than the United States dollar. The terms of FX Derivatives range up to approximately one year.

The total notional amount of our FX Derivatives was $499 million and $786 million as of September 30, 2021 and December 31, 2020, respectively.

The following table shows the effect and location of our FX Derivatives recorded on our Consolidated Statements of Operations during the three and nine months ended September 30, 2021 and 2020 (in millions):


		Gain (Loss) Recognized in Consolidated Statements of Operations
	Consolidated Statements of Operations Location	Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020
FX Derivatives	LNG revenues	$	11	$	(5)	$	27	$	22

Fair Value and Location of Derivative Assets and Liabilities on the Consolidated Balance Sheets

The following table shows the fair value and location of our derivative instruments on our Consolidated Balance Sheets (in millions):


	September 30, 2021
	CCH Interest Rate Derivatives		Liquefaction Supply Derivatives (1)		LNG Trading Derivatives (2)		FX Derivatives		Total
Consolidated Balance Sheets Location
Current derivative assets	$	—	$	88	$	163	$	15	$	266
Derivative assets	—		71		—		—		71
Total derivative assets	—		159		163		15		337

Current derivative liabilities	(67)		(630)		(1,276)		(6)		(1,979)
Derivative liabilities	—		(2,158)		—		—		(2,158)
Total derivative liabilities	(67)		(2,788)		(1,276)		(6)		(4,137)

Derivative asset (liability), net	$	(67)	$	(2,629)	$	(1,113)	$	9	$	(3,800)

	December 31, 2020
	CCH Interest Rate Derivatives		Liquefaction Supply Derivatives (1)		LNG Trading Derivatives (2)		FX Derivatives		Total
Consolidated Balance Sheets Location
Current derivative assets	$	—	$	27	$	—	$	5	$	32
Derivative assets	—		376		—		—		376
Total derivative assets	—		403		—		5		408

Current derivative liabilities	(100)		(54)		(134)		(25)		(313)
Derivative liabilities	(40)		(109)		—		(2)		(151)
Total derivative liabilities	(140)		(163)		(134)		(27)		(464)

Derivative asset (liability), net	$	(140)	$	240	$	(134)	$	(22)	$	(56)

(1)Does not include collateral posted with counterparties by us of $47 million and $9 million, which are included in margin deposits and other current assets in our Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, respectively. Includes derivative assets for natural gas supply contracts that SPL and CCL have with related parties. See Note 1 2 —Related Party Transactions.

(2)Does not include collateral posted with counterparties by us of $287 million and $7 million, which are included in margin deposits and other current assets in our Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, respectively.

Consolidated Balance Sheets 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):


	CCH Interest Rate Derivatives		Liquefaction Supply Derivatives		LNG Trading Derivatives		FX Derivatives

As of September 30, 2021
Gross assets	$	—	$	179	$	174	$	30
Offsetting amounts	—		(20)		(11)		(15)
Net assets	$	—	$	159	$	163	$	15

Gross liabilities	$	(67)	$	(2,816)	$	(1,427)	$	(34)
Offsetting amounts	—		28		151		28
Net liabilities	$	(67)	$	(2,788)	$	(1,276)	$	(6)

As of December 31, 2020
Gross assets	$	—	$	452	$	—	$	6
Offsetting amounts	—		(49)		—		(1)
Net assets	$	—	$	403	$	—	$	5

Gross liabilities	$	(140)	$	(184)	$	(163)	$	(62)
Offsetting amounts	—		21		29		35
Net liabilities	$	(140)	$	(163)	$	(134)	$	(27)