Quarterly report pursuant to Section 13 or 15(d)

Note 11 - Financial Instruments

 v2.3.0.11
Note 11 - Financial Instruments
 6 Months Ended
Jun. 30, 2011
Financial Instruments [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]
Financial Instruments

We entered into financial derivatives to hedge the exposure to variability in expected future cash flows attributable to the future sale of LNG inventory and to hedge the price risk attributable to future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal. Changes in the fair value of our derivatives are reported in earnings because they do not meet the criteria to be designated as a hedging instrument that is required to qualify for cash flow hedge accounting.
 
The estimated fair value of financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The fair value of our commodity futures contracts are based on inputs that are quoted prices in active markets for identical assets or liabilities, resulting in Level 1 categorization of such measurements. The following table sets forth, by level within the fair value hierarchy, the fair value of our financial assets and liabilities at June 30, 2011 (in thousands): 
 
 
Quoted Prices in
Active Markets for
Identical Instruments
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Total Carrying
Value
Derivatives asset
 
$
12

 
—

 
—

 
$
12

Derivatives liability
 
$
(331
)
 
—

 
—

 
$
(331
)
 
Derivatives asset reflects natural gas swap positions classified as other current assets on our Consolidated Balance Sheets. These positions were entered into to hedge the exposure to variability in expected future cash flows attributable to the future sale of LNG inventory. Gains or losses in these positions are classified as marketing and trading revenues on our Consolidated Statements of Operations. We recorded marketing and trading revenues (losses) of $0.2 million and ($0.5) million related to these positions in the three and six months ended June 30, 2011, respectively. We recorded marketing and trading revenues (losses) of ($2.1) million and $4.3 million related to these positions in the three and six months ended June 30, 2010, respectively.

Derivatives liability reflects natural gas swap positions classified as other current liabilities on our Consolidated Balance Sheets. These positions were entered into to mitigate the price risk from future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal. Gains or losses in these positions are classified as derivative gain (loss), net on our Consolidated Statements of Operations. We recorded derivative gain (loss), net of ($0.4) million in the three and six months ended June 30, 2011. During the three and six months ended June 30, 2010, Sabine Pass LNG had derivative positions to hedge the exposure to variability in expected future cash flows attributable to the future sale of its LNG inventory. We recorded derivative gain (loss), net of ($0.04) million and $0.5 million related to these positions in the three and six months ended June 30, 2010, respectively.
 
The estimated fair value of 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.
 
Financial Instruments (in thousands):
 
 
June 30, 2011
 
December 31, 2010
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
2013 Notes (1)
 
$
550,000

 
$
563,750

 
$
550,000

 
$
541,750

2016 Notes, net of discount (1)
 
1,640,071

 
1,681,073

 
1,637,723

 
1,523,082

Convertible Senior Unsecured Notes, net of discount (2)
 
186,716

 
170,192

 
179,129

 
131,660

2007 Term Loan (3)
 
298,000

 
298,197

 
298,000

 
297,464

2008 Loans (4)
 
278,284

 
278,284

 
262,657

 
262,657

 
(1)
The fair value of the Senior Notes, net of discount, is based on quotations obtained from broker-dealers who made markets in these and similar instruments as of June 30, 2011 and December 31, 2010, as applicable.
(2)
The fair value of our Convertible Senior Unsecured Notes is based on the closing trading prices on June 30, 2011 and December 31, 2010, as applicable.
(3)
The 2007 Term Loan is closely held by few holders, and purchases and sales are infrequent and are conducted on a bilateral basis without price discovery by us.  This loan is not rated and has unique covenants and collateral packages such that comparisons to other instruments would be imprecise. Nonetheless, we have provided an estimate of the fair value of this loan as of June 30, 2011 and December 31, 2010 based on an index of the yield to maturity of CCC rated debt of other companies in the energy sector.
(4)
In December 2010, the 2008 Loans were amended to, among other things, eliminate the Lenders' Put Rights, allow for the early prepayment of the 2008 Loans, allow Cheniere to sell Cheniere Partners common units held as collateral and prepay the 2008 Loans with the proceeds and release restrictions on prepayments of other indebtedness at Cheniere as certain conditions are met. In addition, 96.6% of the lenders agreed to terminate their rights to convert the 2008 Loans into Series B Preferred Stock of Cheniere. The fair value of the 2008 Loans as of June 30, 2011 and December 31, 2010 was determined to be the same as the carrying amount due to our ability to call the debt at anytime without penalty or a make-whole payment for an early redemption