Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.3.0.814
Derivative Instruments
 9 Months Ended
Sep. 30, 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 price risk attributable to future: (1) sales of our LNG inventory and (2) purchases of natural gas to operate the Sabine Pass LNG terminal (“Natural Gas Derivatives”);
•
commodity derivatives consisting of natural gas purchase agreements and associated economic hedges to secure natural gas feedstock for the SPL Project (“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”);
•
interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under the 2015 SPL Credit Facilities (and previously the 2013 SPL Credit Facilities) (“SPL Interest Rate Derivatives”); and
•
interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under the 2015 CCH Credit Facility (“CCH Interest Rate Derivatives” and, collectively with the SPL Interest Rate Derivatives, the “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 September 30, 2015 and December 31, 2014, which are classified as other current assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Consolidated Balance Sheets.
 
Fair Value Measurements as of
 
September 30, 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
Natural Gas Derivatives asset
$
—

 
$
97

 
$
—

 
$
97

 
$
—

 
$
219

 
$
—

 
$
219

Liquefaction Supply Derivatives asset
—

 
—

 
32,546

 
32,546

 
—

 
—

 
342

 
342

LNG Trading Derivatives asset
—

 
113

 
—

 
113

 
—

 
—

 
—

 
—

SPL Interest Rate Derivatives liability
—

 
(15,738
)
 
—

 
(15,738
)
 
—

 
(12,036
)
 
—

 
(12,036
)
CCH Interest Rate Derivatives liability
—

 
(143,092
)
 
—

 
(143,092
)
 
—

 
—

 
—

 
—



The estimated fair values of our Natural Gas Derivatives and the economic hedges related to the LNG Trading 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 the 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 substantially all of the Liquefaction 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 the Liquefaction Supply Derivatives is designated as Level 3 within the valuation hierarchy. The curves used to generate the fair value of the Liquefaction 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 Liquefaction Supply Derivatives contract may exceed the period for which such information is available, resulting in a Level 3 classification. In these instances, the 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 September 30, 2015 and December 31, 2014, some of the Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure has not been developed to accommodate marketable physical gas flow. In the absence of infrastructure to accommodate marketable physical gas flow, our internal fair value models are based on a market price that equates to our own contractual pricing due to: (1) the inactive and unobservable market and (2) 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 Liquefaction 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. Upon the completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow, we recognize a gain or loss based on the fair value of the respective natural gas purchase agreements as of the reporting date.

There were no transfers into or out of Level 3 Liquefaction Supply Derivatives for the three and nine months ended September 30, 2015 and 2014. As all of the physical Liquefaction 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 includes quantitative information for the unobservable inputs for the Level 3 Liquefaction Supply Derivatives as of September 30, 2015:
 
 
Net Fair Value Asset (in thousands)
 
Valuation Technique
 
Significant Unobservable Input
 
Significant Unobservable Inputs Range
Liquefaction Supply Derivatives
 
$32,546
 
Income Approach
 
Basis Spread
 
$ (0.350) - $0.050


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. 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.

Commodity Derivatives

We recognize all commodity derivative instruments, including our Natural Gas Derivatives, Liquefaction Supply Derivatives and LNG Trading 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:
 
 
September 30, 2015
 
December 31, 2014
 
 
Natural Gas Derivatives (1)
 
Liquefaction Supply Derivatives
 
LNG Trading Derivatives
 
Total
 
Natural Gas Derivatives (1)
 
Liquefaction Supply Derivatives
 
LNG Trading Derivatives
 
Total
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other current assets
 
$
97

 
$
2,371

 
$
—

 
$
2,468

 
$
219

 
$
76

 
$
—

 
$
295

Non-current derivative assets
 
—

 
30,657

 
113

 
30,770

 
—

 
586

 
—

 
586

Total derivative assets
 
97

 
33,028

 
113

 
33,238

 
219

 
662

 
—

 
881

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 
—

 
(349
)
 
—

 
(349
)
 
—

 
(53
)
 
—

 
(53
)
Non-current derivative liabilities
 
—

 
(133
)
 
—

 
(133
)
 
—

 
(267
)
 
—

 
(267
)
Total derivative liabilities
 
—

 
(482
)
 
—

 
(482
)
 
—

 
(320
)
 
—

 
(320
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset, net
 
$
97

 
$
32,546

 
$
113

 
$
32,756

 
$
219

 
$
342

 
$
—

 
$
561


 
(1)
Does not include collateral of $5.6 million and $5.7 million deposited for such contracts, which is included in other current assets in our Consolidated Balance Sheets as of September 30, 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 and nine months ended September 30, 2015 and 2014:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Statement of Operations Location
 
2015
 
2014
 
2015
 
2014
Natural Gas Derivatives loss
Marketing and trading revenues (losses)
 
$
(152
)
 
$
(525
)
 
$
(260
)
 
$
(155
)
Natural Gas Derivatives gain (loss)
Operating and maintenance expense (income)
 
857

 
194

 
1,317

 
(64
)
Liquefaction Supply Derivatives gain (1)
Operating and maintenance expense (income)
 
32,103

 
—

 
32,184

 
—

LNG Trading Derivatives gain
Marketing and trading revenues (losses)
 
113

 
—

 
113

 
—

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

Natural Gas Derivatives

Our Natural Gas 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 our Natural Gas Derivatives activities.

Liquefaction Supply Derivatives

SPL has entered into index-based physical natural gas supply contracts and associated economic hedges to secure natural gas feedstock for the SPL Project. The terms of the physical 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 the Liquefaction Supply Derivatives as either assets or liabilities and measure those instruments at fair value. Changes in the fair value of the Liquefaction Supply Derivatives are reported in earnings. As of September 30, 2015, SPL has secured up to approximately 2,156.6 million MMBtu of natural gas feedstock through long-term natural gas purchase agreements, of which the forward notional natural gas buy position of the Liquefaction Supply Derivatives was approximately 1,244.1 million MMBtu, which were recorded as derivatives due to minimum purchase requirements.

LNG Trading Derivatives

As of September 30, 2015, we have entered into certain LNG Trading Derivatives representing a short position of 1.5 million MMBtu, and we may from time to time enter into certain financial 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 such LNG transactions.

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 2015 SPL Credit Facilities. The SPL Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2015 SPL 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 SPL Credit Facilities as discussed in Note 7—Long-Term Debt. In May 2014, SPL settled a portion of the SPL Interest Rate Derivatives and recognized a derivative loss of $9.3 million within our Consolidated Statements of Operations in conjunction with the early termination of approximately $2.1 billion of commitments under the 2013 SPL Credit Facilities.

CCH Interest Rate Derivatives

In February 2015, CCH entered into CCH Interest Rate Derivatives to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the 2015 CCH Credit Facility. The CCH Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2015 CCH Credit Facility. The CCH Interest Rate Derivatives have a seven-year term and were contingent upon reaching a final investment decision with respect to the CCL Project, which was reached in May 2015. Upon meeting the contingency related to the CCH Interest Rate Derivatives in May 2015, we paid $50.1 million related to contingency and syndication premiums, which is included in derivative gain (loss), net on our Consolidated Statements of Operations.

As of September 30, 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
 
$628.8 million
 
August 14, 2012
 
July 31, 2019
 
1.98%
 
One-month LIBOR
CCH Interest Rate Derivatives
 
$28.8 million
 
$5.5 billion
 
May 20, 2015
 
May 31, 2022
 
2.29%
 
One-month LIBOR


The following table (in thousands) shows the fair value and location of the Interest Rate Derivatives on our Consolidated Balance Sheets:
 
 
September 30, 2015
 
December 31, 2014
 
 
SPL Interest Rate Derivatives
 
CCH Interest Rate Derivatives
 
Total
 
SPL Interest Rate Derivatives
 
CCH Interest Rate Derivatives
 
Total
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
 
Non-current derivative assets
 
$
—

 
$
—

 
$
—

 
$
11,158

 
$
—

 
$
11,158

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 
(7,039
)
 
(26,451
)
 
(33,490
)
 
(23,194
)
 
—

 
(23,194
)
Non-current derivative liabilities
 
(8,699
)
 
(116,641
)
 
(125,340
)
 
—

 
—

 
—

Total derivative liabilities
 
(15,738
)
 
(143,092
)
 
(158,830
)
 
(23,194
)
 
—

 
(23,194
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liability, net
 
$
(15,738
)
 
$
(143,092
)
 
$
(158,830
)
 
$
(12,036
)
 
$
—

 
$
(12,036
)


The following table (in thousands) shows the changes in the fair value and settlements of the Interest Rate Derivatives, including contingency and syndication premiums related to the CCH Interest Rate Derivatives, recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
SPL Interest Rate Derivatives gain (loss)
 
$
(10,872
)
 
$
5,379

 
$
(46,541
)
 
$
(89,222
)
CCH Interest Rate Derivatives loss
 
(150,610
)
 
—

 
(195,582
)
 
—



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 September 30, 2015
 
 
 
 
 
 
Natural Gas Derivatives
 
$
513

 
$
(416
)
 
$
97

Liquefaction Supply Derivatives
 
33,028

 
—

 
33,028

Liquefaction Supply Derivatives
 
(482
)
 
—

 
(482
)
LNG Trading Derivatives
 
113

 
—

 
113

SPL Interest Rate Derivatives
 
(15,738
)
 
—

 
(15,738
)
CCH Interest Rate Derivatives
 
(143,092
)
 
—

 
(143,092
)
As of December 31, 2014
 
 
 
 
 
 
Natural Gas Derivatives
 
223

 
(4
)
 
219

Liquefaction Supply Derivatives
 
662

 
—

 
662

Liquefaction Supply Derivatives
 
(320
)
 
—

 
(320
)
SPL Interest Rate Derivatives
 
11,158

 
—

 
11,158

SPL Interest Rate Derivatives
 
(23,194
)
 
—

 
(23,194
)