Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.23.1
Derivative Instruments
 3 Months Ended
Mar. 31, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments DERIVATIVE INSTRUMENTS
 
We have entered into the following derivative instruments:
•commodity derivatives consisting of natural gas and power supply contracts, including those under our IPM agreements, for the development, commissioning and operation of the Liquefaction Projects and associated economic hedges (collectively, “Liquefaction Supply Derivatives”);
•LNG derivatives in which we have contractual net settlement and economic hedges on 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 such changes are 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 (in millions):
Fair Value Measurements as of
March 31, 2023 December 31, 2022
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
Liquefaction Supply Derivatives asset (liability) $ 34  $ 42  $ (5,426) $ (5,350) $ (66) $ (29) $ (9,924) $ (10,019)
LNG Trading Derivatives asset (liability) (16) (49) —  (65) 1  (47) —  (46)
FX Derivatives liability —  (6) —  (6) —  (28) —  (28)

We value our Liquefaction Supply Derivatives and LNG Trading 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 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, but not limited to, evaluation of whether the respective market exists from the perspective of market participants as infrastructure is developed.

We include a significant portion of our 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 and volatility.

The Level 3 fair value measurements of our natural gas positions within our 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 Liquefaction Supply Derivatives as of March 31, 2023:
Net Fair Value Liability
(in millions)		 Valuation Approach Significant Unobservable Input Range of Significant Unobservable Inputs / Weighted Average (1)
Liquefaction Supply Derivatives $(5,426) Market approach incorporating present value techniques Henry Hub basis spread
$(1.173) - $0.370 / $(0.085)
Option pricing model International LNG pricing spread, relative to Henry Hub (2)
86% - 574% / 178%
(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 Liquefaction Supply Derivatives.
The following table shows the changes in the fair value of our Level 3 Liquefaction Supply Derivatives and LNG Trading Derivatives (in millions):
Three Months Ended March 31,
2023
2022
Balance, beginning of period $ (9,924) $ (4,036)
Realized and change in fair value gains (losses) included in net income (1):
Included in cost of sales, existing deals (2) 4,097  (3,540)
Included in cost of sales, new deals (3) 3  — 
Purchases and settlements:
Purchases (4) —  (3)
Settlements (5) 398  156 
Balance, end of period $ (5,426) $ (7,423)
Favorable (unfavorable) changes in fair value relating to instruments still held at the end of the period
 $ 4,100  $ (3,540)
(1)Does not include the realized value associated with derivative instruments that settle through physical delivery, as settlement is equal to contractually fixed price from trade date multiplied by contractual volume.  See settlements line item in this table.
(2)Impact to earnings on deals that existed at the beginning of the period and continue to exist at the end of the period.
(3)Impact to earnings on deals that were entered into during the reporting period and continue to exist at the end of the period.
(4)Includes any day one gain (loss) recognized during the reporting period on deals that were entered into during the reporting period which continue to exist at the end of the period, in addition to any derivative contracts acquired from entities at a value other than zero on acquisition date, such as derivatives assigned or novated during the reporting period and continuing to exist at the end of the period.
(5)Roll-off in the current period of amounts recognized in our Consolidated Balance Sheets at the end of the previous period due to settlement of the underlying instruments in the current period.

All existing 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 those derivative contracts with the same counterparty and the unconditional contractual right of set-off 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 depending on the position of the derivative. 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.
Commodity Derivatives

SPL and CCL hold Liquefaction Supply Derivatives which are primarily indexed to the natural gas market and international LNG indices. The terms of the Liquefaction Supply Derivatives range up to approximately 15 years, some of which commence upon the satisfaction of certain events or states of affairs.

Cheniere Marketing has historically entered into, and may from time to time enter into, LNG transactions that provide for contractual net settlement. Such transactions are accounted for as LNG Trading Derivatives along with financial commodity contracts in the form of swaps or futures. The terms of LNG Trading Derivatives range up to approximately one year.
The following table shows the notional amounts of our Liquefaction Supply Derivatives and LNG Trading Derivatives (collectively, “Commodity Derivatives”):
March 31, 2023 December 31, 2022
Liquefaction Supply Derivatives (1) LNG Trading Derivatives Liquefaction Supply Derivatives LNG Trading Derivatives
Notional amount, net (in TBtu) 14,359  59  14,504  50 
(1)Excludes notional amounts associated with extension options that were uncertain to be taken as of March 31, 2023.

The following table shows the effect and location of our Commodity Derivatives recorded on our Consolidated Statements of Operations (in millions):
Gain (Loss) Recognized in Consolidated Statements of Operations
Consolidated Statements of Operations Location (1) Three Months Ended March 31,
2023 2022
LNG Trading Derivatives LNG revenues $ 61  $ (247)
LNG Trading Derivatives Recovery (cost) of sales (84) 90 
Liquefaction Supply Derivatives (2) LNG revenues (5) (5)
Liquefaction Supply Derivatives (2) Recovery (cost) of sales 4,671  (3,461)
(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 value associated with derivative instruments that settle through physical delivery.

FX Derivatives

Cheniere Marketing holds 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 $484 million and $619 million as of March 31, 2023 and December 31, 2022, respectively.

The following table shows the effect and location of our FX Derivatives recorded on our Consolidated Statements of Operations (in millions):
Gain (Loss) Recognized in Consolidated Statements of Operations
Consolidated Statements of Operations Location Three Months Ended March 31,
2023 2022
FX Derivatives LNG revenues $ (2) $ 28 
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):
March 31, 2023
Liquefaction Supply Derivatives (1)
LNG Trading Derivatives (2)
FX Derivatives
 Total
Consolidated Balance Sheets Location
Current derivative assets $ 75  $ 3  $ —  $ 78 
Derivative assets 200  —  —  200 
Total derivative assets 275  3  —  278 
Current derivative liabilities (1,218) (68) (6) (1,292)
Derivative liabilities (4,407) —  —  (4,407)
Total derivative liabilities (5,625) (68) (6) (5,699)
Derivative liability, net $ (5,350) $ (65) $ (6) $ (5,421)
December 31, 2022
Liquefaction Supply Derivatives (1)
LNG Trading Derivatives (2)
FX Derivatives
 Total
Consolidated Balance Sheets Location
Current derivative assets $ 36  $ 84  $ —  $ 120 
Derivative assets 35  —  —  35 
Total derivative assets 71  84  —  155 
Current derivative liabilities (2,143) (130) (28) (2,301)
Derivative liabilities (7,947) —  —  (7,947)
Total derivative liabilities (10,090) (130) (28) (10,248)
Derivative liability, net $ (10,019) $ (46) $ (28) $ (10,093)
(1)Does not include collateral posted with counterparties by us of $14 million and $111 million as of March 31, 2023 and December 31, 2022, respectively, which are included in margin deposits in our Consolidated Balance Sheets and collateral posted by counterparties to us of $8 million and zero as of March 31, 2023 and December 31, 2022, respectively, which are included in other current liabilities on our Consolidated Balance Sheets.
(2)Does not include collateral posted with counterparties by us of $49 million and $23 million, as of March 31, 2023 and December 31, 2022, respectively, which are included in margin deposits in our Consolidated Balance Sheets.
Consolidated Balance Sheets Presentation

The following table shows the fair value of our derivatives outstanding on a gross and net basis (in millions) for our derivative instruments that are presented on a net basis on our Consolidated Balance Sheets:
Liquefaction Supply Derivatives
LNG Trading Derivatives
FX Derivatives
As of March 31, 2023
Gross assets $ 370  $ 3  $ — 
Offsetting amounts (95) —  — 
Net assets $ 275  $ 3  $ — 
Gross liabilities $ (5,845) $ (73) $ (6)
Offsetting amounts 220  5  — 
Net liabilities $ (5,625) $ (68) $ (6)
As of December 31, 2022
Gross assets $ 76  $ 87  $ — 
Offsetting amounts (5) (3) — 
Net assets $ 71  $ 84  $ — 
Gross liabilities $ (10,436) $ (132) $ (29)
Offsetting amounts 346  2  1 
Net liabilities $ (10,090) $ (130) $ (28)