Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments (Notes)

v2.4.1.9
Derivative Instruments (Notes)
 3 Months Ended
Mar. 31, 2015
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:
•
commodity derivatives to hedge the exposure to variability in expected future cash flows attributable to the future sale of our LNG inventory (“LNG Inventory Derivatives”);
•
commodity 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”);
•
commodity derivatives consisting of natural gas purchase agreements to secure natural gas feedstock for the SPL Project (“Term Gas Supply Derivatives”);
•
interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under the 2013 Liquefaction Credit Facilities (“SPL Interest Rate Derivatives”); and
•
contingent interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments that are expected under the credit facilities among Corpus Christi Holdings and various banks (“Contingent Interest Rate Derivatives”).
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.

The following table (in thousands) 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, 2015 and December 31, 2014, which are classified as prepaid expenses and other, non-current derivative assets, derivative liabilities and other non-current liabilities in our Consolidated Balance Sheets.
 
Fair Value Measurements as of
 
March 31, 2015
 
December 31, 2014
 
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
$
—

 
$
367

 
$
—

 
$
367

 
$
—

 
$
1,140

 
$
—

 
$
1,140

Fuel Derivatives liability
—

 
(755
)
 
—

 
(755
)
 
—

 
(921
)
 
—

 
(921
)
Term Gas Supply Derivatives asset
—

 
—

 
342

 
342

 
—

 
—

 
342

 
342

SPL Interest Rate Derivatives liability
—

 
(11,692
)
 
—

 
(11,692
)
 
—

 
(12,036
)
 
—

 
(12,036
)
Contingent Interest Rate Derivatives liability
—

 
(89,552
)
 
—

 
(89,552
)
 
—

 
—

 
—

 
—



The estimated fair values of our LNG Inventory Derivatives and Fuel Derivatives are the amounts 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.

The fair value of SPL’s Term Gas Supply Derivatives is developed through the use of internal models which are impacted by inputs that are unobservable in the marketplace. As a result, the fair value of SPL’s Term Gas Supply Derivatives is designated as Level 3 within the valuation hierarchy. The curves used to generate the fair value of the Term Gas 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 particular Term Gas Supply Derivative contract may exceed the period for which such information is available, resulting in a Level 3 classification. In these instances, 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. Internal fair value models that include contractual pricing with a fixed basis include fixed basis amounts for delivery at locations for which no market currently exists. Internal fair value models also include conditions precedent to the respective long-term natural gas purchase agreements. As of March 31, 2015 and December 31, 2014, the majority of SPL’s Term Gas Supply Derivatives existed within markets for which the pipeline infrastructure has not been developed to accommodate marketable physical gas flow. Therefore, our internal fair value models were based on a market price that equated to our own contractual pricing due to: (i) the inactive and unobservable market and (ii) conditions precedent and their impact on the uncertainty in the timing of our actual receipt of the physical volumes associated with each forward. The fair value of the Term Gas 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.

There were no transfers into or out of Level 3 for the three months ended March 31, 2015 and 2014. As all of our Term Gas Supply Derivatives are either purely index-priced or index-priced with a fixed basis, we do not believe that a significant change in market commodity prices would have a material impact on our Level 3 fair value measurements. The following table (in thousands, except natural gas basis spread) includes quantitative information for the unobservable inputs as of March 31, 2015:
 
 
Net Fair Value Asset
 
Valuation Technique
 
Significant Unobservable Input
 
Significant Unobservable Inputs Range
Term Gas Supply Derivatives
 
$342
 
Income Approach
 
Basis Spread
 
$ (0.350) - $0.046


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 commodity derivative instruments, including our LNG Inventory Derivatives, Fuel Derivatives and Term Gas Supply Derivatives (collectively, “Commodity Derivatives”), as either assets or liabilities and measure those instruments at fair value.  Changes in the fair value of our Commodity Derivatives are reported in earnings.

The following table (in thousands) shows the fair value and location of our Commodity Derivatives on our Consolidated Balance Sheets:
 
 
March 31, 2015
 
December 31, 2014
 
 
LNG Inventory Derivatives (1)
 
Fuel Derivatives (1)
 
Term Gas Supply Derivatives
 
Total Commodity Derivatives
 
LNG Inventory Derivatives (1)
 
Fuel Derivatives (1)
 
Term Gas Supply Derivatives
 
Total Commodity Derivatives
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other
 
$
367

 
$
(755
)
 
$
190

 
$
(198
)
 
$
1,140

 
$
(921
)
 
$
76

 
$
295

Non-current derivative assets
 
—

 
—

 
472

 
472

 
—

 
—

 
586

 
586

Total derivative assets
 
367

 
(755
)
 
662

 
274

 
1,140

 
(921
)
 
662

 
881

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 
—

 
—

 
(133
)
 
(133
)
 
—

 
—

 
(53
)
 
(53
)
Other non-current liabilities
 
—

 
—

 
(187
)
 
(187
)
 
—

 
—

 
(267
)
 
(267
)
Total derivative liabilities
 
—

 
—

 
(320
)
 
(320
)
 
—

 
—

 
(320
)
 
(320
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net derivative assets (liabilities)
 
$
367

 
$
(755
)
 
$
342

 
$
(46
)
 
$
1,140

 
$
(921
)
 
$
342

 
$
561


 
(1)
Does not include collateral of $5.9 million and $5.7 million deposited for such contracts, which is included in prepaid expenses and other current assets in our Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, respectively.

The following table (in thousands) shows the changes in the fair value and settlements and location of our Commodity Derivatives recorded on our Consolidated Statements of Operations during the three months ended March 31, 2015 and 2014:
 
 
 
Three Months Ended March 31,
 
Statement of Operations Location
 
2015
 
2014
LNG Inventory Derivatives gain (loss)
Marketing and trading revenues
 
$
(206
)
 
$
184

Fuel Derivatives gain (loss)
Marketing and trading revenues
 
(41
)
 
165

LNG Inventory Derivatives gain (loss)
Derivative loss, net
 
754

 
(435
)
Fuel Derivatives gain
Derivative loss, net
 
—

 
242

Term Gas Supply Derivatives gain (loss) (1)
Operating and maintenance expense
 
—

 
—

 
(1)    There were no settlements during the reporting period.

The use of Commodity Derivatives exposes us to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments in instances when our Commodity Derivatives are in an asset position.

LNG Inventory and Fuel Derivatives

Our LNG Inventory Derivatives and Fuel 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 these commodity derivative activities.

Term Gas Supply Derivatives

SPL has entered into index-based physical natural gas supply contracts to secure natural gas feedstock for the SPL Project. The terms of these contracts range from approximately one to seven years and commence upon the occurrence of conditions precedent, including the date of first commercial operation of specified Trains of the SPL Project. We recognize SPL’s Term Gas Supply Derivatives as either assets or liabilities and measure those instruments at fair value. Changes in the fair value of SPL’s Term Gas Supply Derivatives are reported in earnings. As of March 31, 2015, SPL has secured up to approximately 2,161.9 million MMBtu of natural gas feedstock through long-term natural gas purchase agreements, of which the forward notional natural gas buy position of SPL’s Term Gas Supply Derivatives was approximately 1,249.4 million MMBtu.

Interest Rate Derivatives

SPL Interest Rate Derivatives

SPL has entered into SPL Interest Rate Derivatives to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the 2013 Liquefaction Credit Facilities. The SPL Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2013 Liquefaction Credit Facilities.

In March 2015, SPL settled a portion of the SPL Interest Rate Derivatives and recognized a derivative loss of $34.7 million within our Consolidated Statements of Operations in conjunction with the termination of approximately $1.8 billion of commitments under the 2013 Liquefaction Credit Facilities as discussed in Note 7—Long-Term Debt.

Contingent Interest Rate Derivatives

In February 2015, Corpus Christi Holdings entered into Contingent Interest Rate Derivatives to protect against volatility of future cash flows and hedge a portion of the variable interest payments on anticipated debt facilities that will be used to pay for a portion of the costs of developing, constructing and placing into service the natural gas liquefaction and export facility and pipeline facility near Corpus Christi, Texas (the “CCL Project”). The Contingent Interest Rate Derivatives have a seven-year term and its settlement is conditional upon reaching a final investment decision with respect to the CCL Project. We will contemplate making this final investment decision based upon, among other things, entering into acceptable commercial arrangements, receiving regulatory authorizations and obtaining adequate financing to construct the facility. Upon reaching a final investment decision to commence construction of the CCL Project, we estimate that we will pay $46.1 million to $65.4 million related to contingency and syndication premiums.

As of March 31, 2015, 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
SPL Interest Rate Derivatives
 
$20.0 million
 
$691.0 million
 
August 14, 2012
 
July 31, 2019
 
1.98%
 
One-month LIBOR
Contingent Interest Rate Derivatives (1)
 
$28.8 million
 
$5.4 billion
 
May 8, 2015
 
May 31, 2022
 
2.32%
 
One-month LIBOR

 
(1)
The effective date represents management’s estimate of commencement of first monthly settlement of the contingent interest rate derivative instruments, and the maturity date is based on the contractual term of the instruments once effective.

The following table (in thousands) shows the fair value of our interest rate derivatives:
 
 
March 31, 2015
 
December 31, 2014
 
 
SPL Interest Rate Derivatives
 
Contingent Interest Rate Derivatives
 
Total
 
SPL Interest Rate Derivatives
 
Contingent Interest Rate Derivatives
 
Total
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
 
Non-current derivative assets
 
$
—

 
$
—

 
$
—

 
$
11,158

 
$
—

 
$
11,158

Total derivative assets
 
—

 
—

 
—

 
11,158

 
—

 
11,158

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 
(7,119
)
 
(10,794
)
 
(17,913
)
 
(23,194
)
 
—

 
(23,194
)
Other non-current liabilities
 
(4,573
)
 
(78,758
)
 
(83,331
)
 
—

 
—

 
—

Total derivative liabilities
 
(11,692
)
 
(89,552
)
 
(101,244
)
 
(23,194
)
 
—

 
(23,194
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities, net
 
$
(11,692
)
 
$
(89,552
)
 
$
(101,244
)
 
$
(12,036
)
 
$
—

 
$
(12,036
)


The following table (in thousands) shows the changes in the fair value and settlements of our interest rate derivatives recorded in derivative loss, net on our Consolidated Statements of Operations during the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31,
 
2015
 
2014
SPL Interest Rate Derivatives loss
$
(37,138
)
 
$
(34,479
)
Contingent Interest Rate Derivatives loss
(89,552
)
 
—



Balance Sheet Presentation

Our Commodity Derivatives 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 the Consolidated Balance Sheets
 
Net Amounts Presented in the Consolidated Balance Sheets
Offsetting Derivative Assets (Liabilities)
 
 
 
As of March 31, 2015:
 
 
 
 
 
 
LNG Inventory Derivatives
 
$
367

 
$
(4
)
 
$
371

Fuel Derivatives
 
(755
)
 
(755
)
 
—

Term Gas Supply Derivatives
 
662

 
—

 
662

Term Gas Supply Derivatives
 
(320
)
 
—

 
(320
)
SPL Interest Rate Derivatives
 
(11,692
)
 
—

 
(11,692
)
Contingent Interest Rate Derivatives
 
(89,552
)
 
—

 
(89,552
)
As of December 31, 2014:
 
 
 
 
 
 
LNG Inventory Derivatives
 
1,140

 
1,056

 
84

Fuel Derivatives
 
(921
)
 
(921
)
 
—

Term Gas Supply Derivatives
 
662

 
—

 
662

Term Gas Supply Derivatives
 
(320
)
 
—

 
(320
)
SPL Interest Rate Derivatives
 
11,158

 
—

 
11,158

SPL Interest Rate Derivatives
 
(23,194
)
 
—

 
(23,194
)