| Derivative Instruments |
DERIVATIVE INSTRUMENTS
We have entered into the following derivative instruments that are reported at fair value:
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interest rate swaps (“CCH Interest Rate Derivatives”) to hedge the exposure to volatility in a portion of the floating-rate interest payments on CCH’s amended and restated credit facility (the “CCH Credit Facility”) and to hedge against changes in interest rates that could impact anticipated future issuance of debt by CCH (“CCH Interest Rate Forward Start Derivatives” and, collectively with the CCH Interest Rate Derivatives, the “Interest Rate Derivatives”);
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commodity derivatives consisting of natural gas supply contracts for the commissioning and operation of the Liquefaction Projects and potential future development of Corpus Christi Stage 3 (“Physical Liquefaction Supply Derivatives”) and associated economic hedges (collectively, the “Liquefaction Supply Derivatives”);
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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
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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”).
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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 or fair value hedging instruments, and changes in fair value are recorded within our Consolidated Statements of Operations 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 June 30, 2020 and December 31, 2019, which are classified as derivative assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Consolidated Balance Sheets (in millions):
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Fair Value Measurements as of |
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June 30, 2020 |
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December 31, 2019 |
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Quoted Prices in Active Markets
(Level 1) |
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Significant Other Observable Inputs
(Level 2) |
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Significant Unobservable Inputs
(Level 3) |
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Total |
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Quoted Prices in Active Markets
(Level 1) |
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Significant Other Observable Inputs
(Level 2) |
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Significant Unobservable Inputs
(Level 3) |
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Total |
CCH Interest Rate Derivatives liability |
$ |
— |
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$ |
(191 |
) |
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$ |
— |
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$ |
(191 |
) |
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$ |
— |
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$ |
(81 |
) |
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$ |
— |
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$ |
(81 |
) |
CCH Interest Rate Forward Start Derivatives liability |
— |
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(102 |
) |
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— |
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(102 |
) |
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— |
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(8 |
) |
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— |
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(8 |
) |
Liquefaction Supply Derivatives asset (liability) |
11 |
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(1 |
) |
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590 |
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600 |
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5 |
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6 |
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138 |
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149 |
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LNG Trading Derivatives asset (liability) |
(2 |
) |
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153 |
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— |
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151 |
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— |
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165 |
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— |
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165 |
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FX Derivatives asset |
— |
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15 |
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— |
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15 |
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— |
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4 |
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— |
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4 |
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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 a market or option-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 observable and unobservable market commodity prices and, as applicable to our natural gas supply contracts, our assessment of the associated events deriving fair value, including evaluating whether the respective market is available as pipeline infrastructure is developed. The fair value of our Physical Liquefaction Supply Derivatives incorporates risk premiums related to the satisfaction of conditions precedent, such as completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow. As of June 30, 2020 and December 31, 2019, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure was under development to accommodate marketable physical gas flow.
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 incorporate significant unobservable inputs. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks, such as future prices of energy units for unobservable periods, liquidity, volatility and contract duration.
The Level 3 fair value measurements of natural gas positions within our Physical Liquefaction Supply Derivatives could be materially impacted by a significant change in certain natural gas and international LNG prices. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of June 30, 2020:
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Net Fair Value Asset
(in millions)
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Valuation Approach |
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Significant Unobservable Input |
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Range of Significant Unobservable Inputs / Weighted Average (1) |
Physical Liquefaction Supply Derivatives |
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$590 |
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Market approach incorporating present value techniques |
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Henry Hub basis spread |
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$(0.546) - $0.172 / $(0.023) |
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Option pricing model |
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International LNG pricing spread, relative to Henry Hub (2) |
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46% - 171% / 126% |
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(1) |
Unobservable inputs were weighted by the relative fair value of the instruments. |
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(2) |
Spread contemplates U.S. dollar-denominated pricing. |
Increases or decreases in basis or pricing spreads, in isolation, would decrease or increase, respectively, the fair value of our Physical Liquefaction Supply Derivatives.
The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three and six months ended June 30, 2020 and 2019 (in millions):
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
Balance, beginning of period |
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$ |
674 |
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$ |
31 |
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$ |
138 |
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$ |
(29 |
) |
Realized and mark-to-market gains: |
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Included in cost of sales |
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(84 |
) |
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7 |
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452 |
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23 |
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Purchases and settlements: |
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Purchases |
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(4 |
) |
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50 |
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(3 |
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50 |
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Settlements |
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1 |
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1 |
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(1 |
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45 |
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Transfers into Level 3, net (1) |
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3 |
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— |
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4 |
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— |
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Balance, end of period |
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$ |
590 |
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$ |
89 |
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$ |
590 |
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$ |
89 |
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Change in unrealized gains (losses) relating to instruments still held at end of period |
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$ |
(84 |
) |
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$ |
7 |
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$ |
452 |
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$ |
23 |
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(1) |
Transferred into Level 3 as a result of unobservable market, or out of Level 3 as a result of observable market, for the underlying natural gas purchase agreements. |
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 the unconditional right of set-off in the event of default. 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, counterparties are at risk that we will be unable to meet our commitments in instances where our derivative instruments are in a liability position. We incorporate both our own nonperformance risk and the respective counterparty’s nonperformance risk in fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of any applicable credit enhancements, such as collateral postings, set-off rights and guarantees.
Interest Rate Derivatives
As of June 30, 2020, we had the following Interest Rate Derivatives outstanding:
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Notional Amounts |
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June 30, 2020 |
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December 31, 2019 |
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Term |
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Weighted Average Fixed Interest Rate Paid |
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Variable Interest Rate Received |
CCH Interest Rate Derivatives |
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$4.7 billion |
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$4.5 billion |
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May 31, 2022 (1) |
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2.30% |
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One-month LIBOR |
CCH Interest Rate Forward Start Derivatives |
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$250 million |
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$250 million |
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September 30, 2020 (2) |
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2.05% |
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Three-month LIBOR |
CCH Interest Rate Forward Start Derivatives |
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$500 million |
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$500 million |
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December 31, 2020 (2) |
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2.06% |
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Three-month LIBOR |
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(1) |
Represents the maturity date. |
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(2) |
Represents the effective date. These forward start derivatives have terms of 10 years with a mandatory termination date consistent with the effective date.
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The following table shows the fair value and location of the Interest Rate Derivatives on our Consolidated Balance Sheets (in millions):
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June 30, 2020 |
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December 31, 2019 |
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CCH Interest Rate Derivatives |
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CCH Interest Rate Forward Start Derivatives |
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Total |
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CCH Interest Rate Derivatives |
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CCH Interest Rate Forward Start Derivatives |
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Total |
Consolidated Balance Sheets Location |
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Derivative liabilities |
$ |
(100 |
) |
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$ |
(102 |
) |
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$ |
(202 |
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$ |
(32 |
) |
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$ |
(8 |
) |
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$ |
(40 |
) |
Non-current derivative liabilities |
(91 |
) |
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— |
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(91 |
) |
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(49 |
) |
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— |
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(49 |
) |
Total derivative liabilities |
$ |
(191 |
) |
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$ |
(102 |
) |
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$ |
(293 |
) |
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$ |
(81 |
) |
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$ |
(8 |
) |
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$ |
(89 |
) |
The following table shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in interest rate derivative loss, net on our Consolidated Statements of Operations during the three and six months ended June 30, 2020 and 2019 (in millions):
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
CCH Interest Rate Derivatives loss |
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$ |
(15 |
) |
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$ |
(67 |
) |
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$ |
(138 |
) |
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$ |
(102 |
) |
CCH Interest Rate Forward Start Derivatives loss |
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(10 |
) |
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(7 |
) |
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(95 |
) |
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(7 |
) |
Commodity Derivatives
SPL, CCL and CCL Stage III have entered into physical natural gas supply contracts and associated economic hedges to purchase natural gas for the commissioning and operation of the Liquefaction Projects and potential future development of Corpus Christi Stage 3, respectively, which are primarily indexed to the natural gas market and international LNG indices. The remaining terms of the index-based physical natural gas supply contracts range up to approximately 15 years, some of which commence upon the satisfaction of certain events or states of affairs.
We have entered into, and may from time to time enter into, financial LNG Trading 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 LNG purchase and sale transactions.
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):
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June 30, 2020 |
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December 31, 2019 |
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Liquefaction Supply Derivatives (1) |
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LNG Trading Derivatives (2) |
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Total |
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Liquefaction Supply Derivatives (1) |
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LNG Trading Derivatives (2) |
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Total |
Consolidated Balance Sheets Location |
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Derivative assets |
$ |
133 |
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$ |
138 |
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$ |
271 |
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$ |
93 |
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$ |
225 |
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$ |
318 |
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Non-current derivative assets |
564 |
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23 |
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|
587 |
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|
174 |
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— |
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|
174 |
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Total derivative assets |
697 |
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|
161 |
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|
858 |
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|
267 |
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|
225 |
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|
492 |
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Derivative liabilities |
(27 |
) |
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(10 |
) |
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(37 |
) |
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(16 |
) |
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(60 |
) |
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(76 |
) |
Non-current derivative liabilities |
(70 |
) |
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— |
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(70 |
) |
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(102 |
) |
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— |
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(102 |
) |
Total derivative liabilities |
(97 |
) |
|
(10 |
) |
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(107 |
) |
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(118 |
) |
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(60 |
) |
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(178 |
) |
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Derivative asset, net |
$ |
600 |
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$ |
151 |
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$ |
751 |
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$ |
149 |
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$ |
165 |
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$ |
314 |
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Notional amount, net (in TBtu) (3) |
10,264 |
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19 |
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9,177 |
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4 |
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(1) |
Does not include collateral posted with counterparties by us of $2 million and $7 million for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively. Includes derivative assets of $5 million and $3 million as of June 30, 2020 and December 31, 2019,
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respectively, and non-current assets of $2 million as of both June 30, 2020 and December 31, 2019 for natural gas supply contracts that SPL and CCL have with related parties.
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(2) |
Does not include collateral posted with counterparties by us of $17 million and $5 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively.
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(3) |
Includes 182 TBtu and 120 TBtu as of June 30, 2020 and December 31, 2019, respectively, for natural gas supply contracts that SPL and CCL have with related parties.
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The following table shows the changes in the fair value, settlements and location of our Commodity Derivatives recorded on our Consolidated Statements of Operations during the three and six months ended June 30, 2020 and 2019 (in millions):
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Consolidated Statements of Operations Location (1) |
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
LNG Trading Derivatives gain (loss) |
LNG revenues |
|
$ |
(34 |
) |
|
$ |
94 |
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$ |
106 |
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$ |
158 |
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LNG Trading Derivatives gain (loss) |
Cost of sales |
|
34 |
|
|
(51 |
) |
|
— |
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|
(51 |
) |
Liquefaction Supply Derivatives gain (loss) (2) |
LNG revenues |
|
(13 |
) |
|
(1 |
) |
|
(14 |
) |
|
1 |
|
Liquefaction Supply Derivatives gain (loss) (2)(3) |
Cost of sales |
|
(62 |
) |
|
57 |
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|
475 |
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|
139 |
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(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. |
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(2) |
Does not include the realized value associated with derivative instruments that settle through physical delivery. |
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(3) |
CCL recorded $25 million and $24 million in cost of sales under a natural gas supply contract with a related party during the three months ended June 30, 2020 and 2019, respectively, including $1 million of Liquefaction Supply Derivatives gain and $1 million of Liquefaction Supply Derivatives loss, respectively. During the six months ended June 30, 2020 and 2019, CCL recorded $48 million and $36 million in cost of sales under a natural gas supply contract with a related party, respectively, including $2 million of Liquefaction Supply Derivatives gain and $3 million of Liquefaction Supply Derivatives loss, respectively. As of June 30, 2020 and December 31, 2019, $8 million and $3 million, respectively, were included in accrued liabilities related to this contract.
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FX Derivatives
Cheniere Marketing has entered into FX Derivatives to protect against the volatility in future cash flows attributable to changes in international currency exchange rates. The FX Derivatives economically hedge the foreign currency exposure arising from cash flows expended for both physical and financial LNG transactions.
The following table shows the fair value and location of our FX Derivatives on our Consolidated Balance Sheets (in millions):
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Fair Value Measurements as of |
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Consolidated Balance Sheets Location |
|
June 30, 2020 |
|
December 31, 2019 |
FX Derivatives |
Derivative assets |
|
$ |
13 |
|
|
$ |
5 |
|
FX Derivatives |
Non-current derivative assets |
|
2 |
|
|
— |
|
FX Derivatives |
Derivative liabilities |
|
— |
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(1 |
) |
The total notional amount of our FX Derivatives was $146 million and $827 million as of June 30, 2020 and December 31, 2019, respectively.
The following table shows the changes in the fair value, settlements and location of our FX Derivatives recorded on our Consolidated Statements of Operations during the three and six months ended June 30, 2020 and 2019 (in millions):
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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Consolidated Statements of Operations Location |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
FX Derivatives gain |
LNG revenues |
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
27 |
|
|
$ |
9 |
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Consolidated Balance Sheets 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):
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Gross Amounts Recognized |
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Gross Amounts Offset in the Consolidated Balance Sheets |
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Net Amounts Presented in the Consolidated Balance Sheets |
Offsetting Derivative Assets (Liabilities) |
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As of June 30, 2020 |
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CCH Interest Rate Derivatives |
|
$ |
(191 |
) |
|
$ |
— |
|
|
$ |
(191 |
) |
CCH Interest Rate Forward Start Derivatives |
|
(102 |
) |
|
— |
|
|
(102 |
) |
Liquefaction Supply Derivatives |
|
715 |
|
|
(18 |
) |
|
697 |
|
Liquefaction Supply Derivatives |
|
(102 |
) |
|
5 |
|
|
(97 |
) |
LNG Trading Derivatives |
|
163 |
|
|
(2 |
) |
|
161 |
|
LNG Trading Derivatives |
|
(21 |
) |
|
11 |
|
|
(10 |
) |
FX Derivatives |
|
22 |
|
|
(7 |
) |
|
15 |
|
As of December 31, 2019 |
|
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|
|
|
|
|
CCH Interest Rate Derivatives |
|
$ |
(81 |
) |
|
$ |
— |
|
|
$ |
(81 |
) |
CCH Interest Rate Forward Start Derivatives |
|
(8 |
) |
|
— |
|
|
(8 |
) |
Liquefaction Supply Derivatives |
|
281 |
|
|
(14 |
) |
|
267 |
|
Liquefaction Supply Derivatives |
|
(126 |
) |
|
8 |
|
|
(118 |
) |
LNG Trading Derivatives |
|
229 |
|
|
(4 |
) |
|
225 |
|
LNG Trading Derivatives |
|
(60 |
) |
|
— |
|
|
(60 |
) |
FX Derivatives |
|
9 |
|
|
(4 |
) |
|
5 |
|
FX Derivatives |
|
(6 |
) |
|
5 |
|
|
(1 |
) |
|