Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.8.0.1
Derivative Instruments
 3 Months Ended
Mar. 31, 2018
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 to hedge the exposure to volatility in a portion of the floating-rate interest payments under certain credit facilities (“Interest Rate Derivatives”);
•
commodity derivatives consisting of natural gas supply contracts for the commissioning and operation of the SPL Project and the CCL Project (“Physical Liquefaction Supply Derivatives”) and associated economic hedges (collectively, the “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”); and
•
foreign currency exchange (“FX”) contracts to hedge exposure to currency risk associated with both LNG Trading Derivatives and operations in countries outside of the United States (“FX Derivatives”).
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 hedging instruments, and changes in fair value are recorded within our Consolidated Statements of Income to the extent not utilized for the commissioning process.

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 March 31, 2018 and December 31, 2017, which are classified as derivative assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Consolidated Balance Sheets (in millions).
 
Fair Value Measurements as of
 
March 31, 2018
 
December 31, 2017
 
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
CQP Interest Rate Derivatives asset
$
—

 
$
27

 
$
—

 
$
27

 
$
—

 
$
21

 
$
—

 
$
21

CCH Interest Rate Derivatives asset (liability)
—

 
43

 
—

 
43

 
—

 
(32
)
 
—

 
(32
)
Liquefaction Supply Derivatives asset
—

 
—

 
10

 
10

 
2

 
10

 
43

 
55

LNG Trading Derivatives asset (liability)
(9
)
 
3

 
—

 
(6
)
 
(13
)
 
5

 
—

 
(8
)
FX Derivatives liability
—

 
(4
)
 
—

 
(4
)
 
—

 
(1
)
 
—

 
(1
)


There have been no changes to our evaluation of and accounting for our derivative positions during the three months ended March 31, 2018. See Note 7—Derivative Instruments of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2017 for additional information.

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 market 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 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 satisfaction of conditions precedent, including 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 supply contracts.

We include 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 may be impacted by inputs that are unobservable in the marketplace. The curves used to generate the fair value of our Physical 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 Physical 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. As of March 31, 2018 and December 31, 2017, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure is under development to accommodate marketable physical gas flow.

The Level 3 fair value measurements of our Physical Liquefaction Supply Derivatives could be materially impacted by a significant change in certain natural gas market basis spreads due to the contractual notional amount represented by our Level 3 positions, which is a substantial portion of our overall Physical Liquefaction Supply portfolio. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of March 31, 2018:
 
 
Net Fair Value Asset
(in millions)
 
Valuation Approach
 
Significant Unobservable Input
 
Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives
 
$10
 
Market approach incorporating present value techniques
 
Basis Spread
 
$(0.725) - $0.095


The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three months ended March 31, 2018 and 2017 (in millions):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Balance, beginning of period
 
$
43

 
$
79

Realized and mark-to-market losses:
 
 
 
 
Included in cost of sales
 
(13
)
 
(41
)
Purchases and settlements:
 
 
 
 
Purchases
 
3

 
4

Settlements
 
(23
)
 
(1
)
Balance, end of period
 
$
10

 
$
41

Change in unrealized gains relating to instruments still held at end of period
 
$
(13
)
 
$
(41
)


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. Additionally, we evaluate our own ability to meet our commitments in instances where our derivative instruments are in a liability position. Our derivative instruments are subject to contractual provisions which provide for the unconditional right of set-off for all derivative assets and liabilities with a given counterparty in the event of default.

Interest Rate Derivatives

During the three months ended March 31, 2018, there were no changes to the terms of the interest rate swaps (“CQP Interest Rate Derivatives”) entered into by CQP to hedge a portion of the variable interest payments on its 2016 CQP Credit Facilities or the interest rate swaps (“CCH Interest Rate Derivatives”) entered into by CCH to protect against volatility of future cash flows and hedge a portion of the variable interest payments on its credit facility (the “2015 CCH Credit Facility”). See Note 7—Derivative Instruments of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2017 for additional information.

SPL had entered into interest rate swaps (“SPL Interest Rate Derivatives”) to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the credit facilities it entered into in June 2015 (the “2015 SPL Credit Facilities”). In March 2017, SPL settled the SPL Interest Rate Derivatives and recognized a derivative loss of $7 million in conjunction with the termination of approximately $1.6 billion of commitments under the 2015 SPL Credit Facilities.


As of March 31, 2018, 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
CQP Interest Rate Derivatives
 
$225 million
 
$1.3 billion
 
March 22, 2016
 
February 29, 2020
 
1.19%
 
One-month LIBOR
CCH Interest Rate Derivatives
 
$29 million
 
$4.9 billion
 
May 20, 2015
 
May 31, 2022
 
2.29%
 
One-month LIBOR


The following table shows the fair value and location of our Interest Rate Derivatives on our Consolidated Balance Sheets (in millions):
 
 
March 31, 2018
 
December 31, 2017
 
 
CQP Interest Rate Derivatives
 
CCH Interest Rate Derivatives
 
Total
 
CQP Interest Rate Derivatives
 
CCH Interest Rate Derivatives
 
Total
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
12

 
$
—

 
$
12

 
$
7

 
$
—

 
$
7

Non-current derivative assets
 
15

 
49

 
64

 
14

 
3

 
17

Total derivative assets
 
27

 
49

 
76

 
21

 
3

 
24

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 
—

 
(6
)
 
(6
)
 
—

 
(20
)
 
(20
)
Non-current derivative liabilities
 
—

 
—

 
—

 
—

 
(15
)
 
(15
)
Total derivative liabilities
 
—

 
(6
)
 
(6
)
 
—

 
(35
)
 
(35
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset (liability), net
 
$
27

 
$
43

 
$
70

 
$
21

 
$
(32
)
 
$
(11
)


The following table shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in derivative gain, net on our Consolidated Statements of Income during the three months ended March 31, 2018 and 2017 (in millions):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
CQP Interest Rate Derivatives gain
 
$
8

 
$
2

CCH Interest Rate Derivatives gain
 
69

 
1

SPL Interest Rate Derivatives loss
 
—

 
(2
)


Commodity Derivatives

The following table shows the fair value and location of our Liquefaction Supply Derivatives and LNG Trading Derivatives (collectively, “Commodity Derivatives”) on our Consolidated Balance Sheets (in millions, except notional amount):
 
March 31, 2018
 
December 31, 2017
 
Liquefaction Supply Derivatives (1)
 
LNG Trading Derivatives (2)
 
Total
 
Liquefaction Supply Derivatives (1)
 
LNG Trading Derivatives (2)
 
Total
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
8

 
$
3

 
$
11

 
$
41

 
$
9

 
$
50

Non-current derivative assets
9

 
7

 
16

 
17

 
—

 
17

Total derivative assets
17

 
10

 
27

 
58

 
9

 
67

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
(4
)
 
(14
)
 
(18
)
 
—

 
(17
)
 
(17
)
Non-current derivative liabilities
(3
)
 
(2
)
 
(5
)
 
(3
)
 
—

 
(3
)
Total derivative liabilities
(7
)
 
(16
)
 
(23
)
 
(3
)
 
(17
)
 
(20
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative asset (liability), net
$
10

 
$
(6
)
 
$
4

 
$
55

 
$
(8
)
 
$
47

 
 
 
 
 
 
 
 
 
 
 
 
Notional amount (in TBtu) (3)
2,573

 
27

 
 
 
2,539

 
25

 
 

 
    
(1)
Does not include a collateral call of $1 million for such contracts, which is included in other current assets in our Consolidated Balance Sheets as of both March 31, 2018 and December 31, 2017.
(2)
Does not include collateral of $25 million and $28 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, respectively.
(3)
SPL had secured up to approximately 2,179 TBtu and 2,214 TBtu of natural gas feedstock through natural gas supply contracts as of March 31, 2018 and December 31, 2017, respectively. CCL has secured up to approximately 2,057 TBtu and 2,024 TBtu of natural gas feedstock through natural gas supply contracts, a portion of which is subject to the achievement of certain project milestones and other conditions precedent, as of March 31, 2018 and December 31, 2017, respectively.

The following table shows the changes in the fair value, settlements and location of our Commodity Derivatives recorded on our Consolidated Statements of Income during the three months ended March 31, 2018 and 2017 (in millions):
 
Statement of Income Location (1)
 
Three Months Ended March 31,
 
 
2018
 
2017
LNG Trading Derivatives gain (loss)
LNG revenues
 
$
7

 
$
(6
)
Liquefaction Supply Derivatives loss (2)
Cost of sales
 
50

 
39

 
(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

The following table shows the fair value and location of our FX Derivatives on our Consolidated Balance Sheets (in millions):
 
 
 
Fair Value Measurements as of
 
Balance Sheet Location
 
March 31, 2018
 
December 31, 2017
FX Derivatives
Non-current derivative assets
 
$
1

 
$
—

FX Derivatives
Derivative liabilities
 
(1
)
 
—

FX Derivatives
Non-current derivative liabilities
 
(4
)
 
(1
)


The total notional amount of our FX Derivatives was $79 million and $27 million as of March 31, 2018 and December 31, 2017, respectively.
    
The following table shows the changes in the fair value of our FX Derivatives recorded on our Consolidated Statements of Income during the three months ended March 31, 2018 and 2017 (in millions):
 
 
 
Three Months Ended March 31,
 
Statement of Income Location
 
2018
 
2017
FX Derivatives loss
LNG revenues
 
$
(3
)
 
$
—



Balance Sheet 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):
 
 
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, 2018
 
 
 
 
 
 
CQP Interest Rate Derivatives
 
$
27

 
$
—

 
$
27

CCH Interest Rate Derivatives
 
49

 
—

 
49

CCH Interest Rate Derivatives
 
(7
)
 
1

 
(6
)
Liquefaction Supply Derivatives
 
25

 
(8
)
 
17

Liquefaction Supply Derivatives
 
(10
)
 
3

 
(7
)
LNG Trading Derivatives
 
16

 
(6
)
 
10

LNG Trading Derivatives
 
(22
)
 
6

 
(16
)
FX Derivatives
 
1

 
—

 
1

FX Derivatives
 
(5
)
 
—

 
(5
)
As of December 31, 2017
 
 
 
 
 


CQP Interest Rate Derivatives
 
$
21

 
$
—

 
$
21

CCH Interest Rate Derivatives
 
3

 
—

 
3

CCH Interest Rate Derivatives
 
(35
)
 
—

 
(35
)
Liquefaction Supply Derivatives
 
64

 
(6
)
 
58

Liquefaction Supply Derivatives
 
(3
)
 
—

 
(3
)
LNG Trading Derivatives
 
9

 
—

 
9

LNG Trading Derivatives
 
(37
)
 
20

 
(17
)
FX Derivatives
 
(1
)
 
—

 
(1
)