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

Annual report pursuant to Section 13 and 15(d)

Financial Instruments

Financial Instruments

12 Months Ended

Dec. 31, 2013

Financial Instruments [Abstract]

Financial Instruments

FINANCIAL INSTRUMENTS

Derivative Instruments

We have entered into certain instruments to hedge the exposure to variability in expected future cash flows attributable to the future sale of our LNG inventory ("LNG Inventory Derivatives"), to hedge the exposure to price risk attributable to future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal ("Fuel Derivatives"), and interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under the 2013 Liquefaction Credit Facilities ("Interest Rate Derivatives").

The following table (in thousands) shows the fair value of our derivative assets and liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2013 and 2012, which are classified as other current assets, other current liabilities, other non-current assets and other non-current liabilities in our Consolidated Balance Sheets.



	Fair Value Measurements as of
	December 31, 2013										December 31, 2012
	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
LNG Inventory Derivatives asset (liability)	$	—	$	(171	)	$	—	$	(171	)	$	—	$	237		$	—	$	237
Fuel Derivatives asset (liability)	—		126			—		126			—		(98		)	—		(98		)
Interest Rate Derivatives asset (liability)	—		84,639			—		84,639			—		(26,424		)	—		(26,424		)

The estimated fair values of our LNG Inventory Derivatives and Fuel Derivatives are the amount at which the instruments could be exchanged currently between willing parties. We value these derivatives using observable commodity price curves and other relevant data. We value our Interest Rate Derivatives using valuations based on the initial trade prices. Using an income-based approach, subsequent valuations are based on observable inputs to the valuation model including interest rate curves, risk adjusted discount rates, credit spreads and other relevant data. 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.

Commodity Derivatives

We recognize all derivative instruments that qualify for derivative accounting treatment as either assets or liabilities and measure those instruments at fair value. For those instruments accounted for as derivatives, including our LNG Inventory Derivatives and certain of our Fuel Derivatives, changes in fair value are reported in earnings.

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 where our Fuel Derivatives or our LNG Inventory Derivatives are in an asset position. Our commodity derivative transactions 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 commodity derivative activities. Collateral of $5.9 million deposited for such contracts, which has not been reflected in the derivative fair value tables, is included in the other current assets balance as of December 31, 2013 and 2012.

The following table (in thousands) shows the fair value and location of our LNG Inventory Derivatives and Fuel Derivatives on our Consolidated Balance Sheets:



		Fair Value Measurements as of
	Balance Sheet Location	December 31, 2013			December 31, 2012
LNG Inventory Derivatives asset (liability)	Prepaid expenses and other	$	(171	)	$	237
Fuel Derivatives asset (liability)	Prepaid expenses and other	126			(98		)

The following table (in thousands) shows the changes in the fair value and settlements of our LNG Inventory Derivatives and Fuel Derivatives recorded in marketing and trading revenues (losses) on our Consolidated Statements of Operations during the years ended December 31, 2013, 2012 and 2011:



	Year Ended December 31,
	2013			2012		2011
LNG Inventory Derivatives gain (loss)	$	(449	)	$	995	$	2,475
Fuel Derivatives gain	99			—		—

The following table (in thousands) shows the changes in the fair value and settlements of our LNG Inventory Derivatives and Fuel Derivatives recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the years ended December 31, 2013, 2012 and 2011:



	Year Ended December 31,
	2013	2012		2011
LNG Inventory Derivatives gain	476	—		—
Fuel Derivatives gain (loss)	182	(622	)	(2,251	)

Interest Rate Derivatives

In August 2012 and June 2013, Sabine Pass Liquefaction entered into Interest Rate Derivatives to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the 2012 Liquefaction Credit Facility and the 2013 Liquefaction Credit Facilities, respectively. The Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2013 Liquefaction Credit Facilities.

Sabine Pass Liquefaction designated the Interest Rate Derivatives entered into in August 2012 as hedging instruments which was required in order to qualify for cash flow hedge accounting. As a result of this cash flow hedge designation, we recognized the Interest Rate Derivatives entered into in August 2012 as an asset or liability at fair value, and reflected changes in fair value through other comprehensive income in our Consolidated Statements of Comprehensive Loss. Any hedge ineffectiveness associated with the Interest Rate Derivatives entered into in August 2012 was recorded immediately as derivative gain (loss) in our Consolidated Statements of Operations. The realized gain (loss) on the Interest Rate Derivatives entered into in August 2012 was recorded as an (increase) decrease in interest expense on our Consolidated Statements of Operations to the extent not capitalized as part of the Sabine Pass Liquefaction Project. The effective portion of the gains or losses on our Interest Rate Derivatives entered into in August 2012 recorded in other comprehensive income would have been reclassified to earnings as interest payments on the 2012 Liquefaction Credit Facility impact earnings. In addition, amounts recorded in other comprehensive income are also reclassified into earnings if it becomes probable that the hedged forecasted transaction will not occur.

Sabine Pass Liquefaction did not elect to designate the Interest Rate Derivatives entered into in June 2013 as cash flow hedging instruments, and changes in fair value are recorded as derivative gain (loss), net within our Consolidated Statements of Operations.

During the first quarter of 2013, we determined that it was no longer probable that the forecasted variable interest payments on the 2012 Liquefaction Credit Facility would occur in the time period originally specified based on the continued development of our financing strategy for the Sabine Pass Liquefaction Project, and, in particular, the Sabine Pass Liquefaction Senior Notes described in Note 9—"Debt and Debt—Related Parties". As a result, all of the Interest Rate Derivatives entered into in August 2012 were no longer effective hedges, and the remaining portion of hedge relationships that were designated cash flow hedges as of December 31, 2012, were de-designated as of February 1, 2013. For de-designated cash flow hedges, changes in fair value prior to their de-designation date were recorded as other comprehensive income (loss) within our Consolidated Balance Sheets, and changes in fair value subsequent to their de-designation date were recorded as derivative gain (loss) within our Consolidated Statements of Operations.

In June 2013, we concluded that the hedged forecasted transactions associated with the Interest Rate Derivatives entered into in connection with the 2012 Liquefaction Credit Facility had become probable of not occurring based on the issuances of the Sabine Pass Liquefaction Senior Notes, the closing of the 2013 Liquefaction Credit Facilities, the additional Interest Rate Derivatives executed in June 2013, and our intention to continue to issue fixed rate debt to refinance drawn portions of the 2013 Liquefaction Credit Facilities. As a result, the amount remaining in accumulated other comprehensive income ("AOCI") pertaining to the previously designated Interest Rate Derivatives was reclassified out of AOCI and into income. We have presented the reclassification of unrealized losses from AOCI into income and the changes in fair value and settlements subsequent to the reclassification date separate from interest expense as derivative gain (loss), net in our Consolidated Statements of Operations.

At December 31, 2013, Sabine Pass Liquefaction 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

Interest Rate Derivatives - Not Designated

$20.0 million

$2.9 billion

August 14, 2012

July 31, 2019

1.98%

One-month LIBOR

Interest Rate Derivatives - Not Designated

—

$671.0 million

June 5, 2013

May 28, 2020

2.05%

One-month LIBOR

The following table (in thousands) shows the fair value of our Interest Rate Derivatives:



		Fair Value Measurements as of
	Balance Sheet Location	December 31, 2013		December 31, 2012
Interest Rate Derivatives - Not Designated	Non-current derivative assets	$	98,123	$	—
Interest Rate Derivatives - Not Designated	Other current liabilities	13,484		—
Interest Rate Derivatives - Designated	Non-current derivative liabilities	—		21,290
Interest Rate Derivatives - Not Designated	Non-current derivative liabilities	—		5,134

The following table (in thousands) details the effect of our Interest Rate Derivatives included in Other Comprehensive Income ("OCI") and AOCI for the year ended December 31, 2013:



	Gain (Loss) in Other Comprehensive Income						Gain (Loss) Reclassified from Accumulated OCI into Interest Expense (Effective Portion)				Losses Reclassified into Earnings as a Result of Discontinuance of Cash Flow Hedge Accounting
	2013			2012			2013		2012		2013		2012
Interest Rate Derivatives - Designated	$	21,297		$	(21,290	)	$	—	$	—	$	—	$	—
Interest Rate Derivatives - De-designated	—			(5,814		)	—		—		5,807		—
Interest Rate Derivatives - Settlements	(30		)	(136		)	—		—		166		—

The following table (in thousands) shows the changes in the fair value and settlements of our Interest Rate Derivatives - Not Designated recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the years ended December 31, 2013, 2012 and 2011:



	Year Ended December 31,
	2013		2012		2011
Interest Rate Derivatives - Not Designated gain	$	88,596	$	679	$	—

Balance Sheet Presentation

Our commodity and interest rate derivatives are presented on a net basis on our Consolidated Balance Sheets as described above. The following table (in thousands) shows the fair value of our derivatives outstanding on a gross and net basis:



	Gross Amounts Recognized			Gross Amounts Offset in our Consolidated Balance Sheets			Net Amounts Presented in our Consolidated Balance Sheets			Gross Amounts not Offset in our Consolidated Balance Sheets
Offsetting Derivative Assets (Liabilities)	Gross Amounts Recognized			Gross Amounts Offset in our Consolidated Balance Sheets			Net Amounts Presented in our Consolidated Balance Sheets			Derivative Instrument		Cash Collateral Received (Paid)		Net Amount
As of December 31, 2013:
Fuel Derivatives	$	126		$	—		$	126		$	—	$	—	$	126
LNG Inventory Derivatives	(171		)	(171		)	—			—		—		—
Interest Rate Derivatives - Not Designated	98,123			—			98,123			—		—		98,123
Interest Rate Derivatives - Not Designated	(13,484		)	—			(13,484		)	—		—		(13,484		)
As of December 31, 2012:
Fuel Derivatives	(98		)	(98		)	—			—		—		—
LNG Inventory Derivatives	237			—			237			—		—		237
Interest Rate Derivatives - Designated	(21,290		)	—			(21,290		)	—		—		(21,290		)
Interest Rate Derivatives - Not Designated	(5,134		)	—			(5,134		)	—		—		(5,134		)

Other Financial Instruments

The estimated fair value of our other financial instruments, including those financial instruments for which the fair value option was not elected are set forth in the table below. The carrying amounts reported on our Consolidated Balance Sheets for cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, interest receivable and accounts payable approximate fair value due to their short-term nature.

Other Financial Instruments (in thousands):



	December 31, 2013			December 31, 2012
	Carrying Amount		Estimated Fair Value	Carrying Amount		Estimated Fair Value
2016 Notes, net of discount (1)	$	1,651,807	1,868,607	$	1,647,113	$	1,824,177
2020 Notes (1)	420,000		432,600	420,000		437,850
2021 Sabine Pass Liquefaction Senior Notes (1)	2,011,562		1,961,273	—		—
2022 Sabine Pass Liquefaction Senior Notes (1)	1,000,000		982,500	—		—
2023 Sabine Pass Liquefaction Senior Notes (1)	1,000,000		935,000	—		—
2012 Liquefaction Credit Facility (2)	—		—	100,000		100,000
2013 Liquefaction Credit Facilities (2)	100,000		100,000	—		—
CTPL Credit Facility (3)	392,904		400,000	—		—


(1)	The Level 2 estimated fair value was based on quotations obtained from broker-dealers who make markets in these and similar instruments based on the closing trading prices on December 31, 2013 and 2012, as applicable.


(2)	The Level 3 estimated fair value approximates the carrying amount because the interest rates are variable and reflective of market rates and Sabine Pass Liquefaction has the ability to call this debt at anytime without penalty.


(3)	The Level 3 estimated fair value approximates the principal amount because the interest rates are variable and reflective of market rates and CTPL has the ability to call this debt at anytime without penalty.