Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.20.2
Derivative Instruments
 9 Months Ended
Sep. 30, 2020
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 (“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”);
•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”);
•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 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 September 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):
Fair Value Measurements as of
September 30, 2020 December 31, 2019
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
CCH Interest Rate Derivatives liability $ —  $ (165) $ —  $ (165) $ —  $ (81) $ —  $ (81)
CCH Interest Rate Forward Start Derivatives liability —  —  —  —  —  (8) —  (8)
Liquefaction Supply Derivatives asset (liability) (7) (5) 533  521  5  6  138  149 
LNG Trading Derivatives asset 12  80  —  92  —  165  —  165 
FX Derivatives asset —  2  —  2  —  4  —  4 

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 September 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 September 30, 2020:
Net Fair Value Asset
(in millions)		 Valuation Approach Significant Unobservable Input Range of Significant Unobservable Inputs / Weighted Average (1)
Physical Liquefaction Supply Derivatives $533 Market approach incorporating present value techniques Henry Hub basis spread
$(0.557) - $0.055 / $(0.030)
Option pricing model International LNG pricing spread, relative to Henry Hub (2)
56% - 173% / 137%
(1)Unobservable inputs were weighted by the relative fair value of the instruments.
(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 nine months ended September 30, 2020 and 2019 (in millions):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Balance, beginning of period $ 590  $ 89  $ 138  $ (29)
Realized and mark-to-market gains (losses):
Included in cost of sales (27) (137) 454  (139)
Purchases and settlements:
Purchases 1  17  2  93 
Settlements (31) —  (61) 44 
Balance, end of period $ 533  $ (31) $ 533  $ (31)
Change in unrealized gains (losses) relating to instruments still held at end of period $ (27) $ (137) $ 454  $ (139)

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

In August 2020, we settled the outstanding CCH Interest Rate Forward Start Derivatives used to hedge against changes in the interest rates of CCH’s debt.

As of September 30, 2020, we had the following Interest Rate Derivatives outstanding:
Notional Amounts
September 30, 2020 December 31, 2019 Maturity Date Weighted Average Fixed Interest Rate Paid Variable Interest Rate Received
CCH Interest Rate Derivatives $4.7 billion $4.5 billion May 31, 2022 2.30% One-month LIBOR

The following table shows the fair value and location of the Interest Rate Derivatives on our Consolidated Balance Sheets (in millions):
September 30, 2020 December 31, 2019
CCH Interest Rate Derivatives CCH Interest Rate Forward Start Derivatives Total CCH Interest Rate Derivatives CCH Interest Rate Forward Start Derivatives Total
Consolidated Balance Sheets Location
Derivative liabilities $ (99) $ —  $ (99) $ (32) $ (8) $ (40)
Non-current derivative liabilities (66) —  (66) (49) —  (49)
Total derivative liabilities $ (165) $ —  $ (165) $ (81) $ (8) $ (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 nine months ended September 30, 2020 and 2019 (in millions):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
CCH Interest Rate Derivatives loss $ —  $ (17) $ (138) $ (119)
CCH Interest Rate Forward Start Derivatives loss —  (61) (95) (68)

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):
September 30, 2020 December 31, 2019
Liquefaction Supply Derivatives (1) LNG Trading Derivatives (2) Total Liquefaction Supply Derivatives (1) LNG Trading Derivatives (2) Total
Consolidated Balance Sheets Location
Derivative assets $ 96  $ 91  $ 187  $ 93  $ 225  $ 318 
Non-current derivative assets 584  8  592  174  —  174 
Total derivative assets 680  99  779  267  225  492 
Derivative liabilities (53) (7) (60) (16) (60) (76)
Non-current derivative liabilities (106) —  (106) (102) —  (102)
Total derivative liabilities (159) (7) (166) (118) (60) (178)
Derivative asset, net $ 521  $ 92  $ 613  $ 149  $ 165  $ 314 
Notional amount, net (in TBtu) (3) 8,818  4  9,177  4 
(1)    Does not include collateral posted with counterparties by us of $20 million and $7 million for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively. Includes derivative assets for natural gas supply contracts that SPL and CCL have with related parties. See Note 13—Related Party Transactions.
(2)    Does not include collateral posted with counterparties by us of zero and $5 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively.
(3)    Includes notional amounts for natural gas supply contracts that SPL and CCL have with related parties. See Note 13—Related Party Transactions.

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 nine months ended September 30, 2020 and 2019 (in millions):
Consolidated Statements of Operations Location (1) Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
LNG Trading Derivatives gain LNG revenues $ 13  $ 22  $ 119  $ 180 
LNG Trading Derivatives loss Cost of sales (5) (17) (5) (68)
Liquefaction Supply Derivatives gain (2) LNG revenues 21  —  7  1 
Liquefaction Supply Derivatives gain (loss) (2) Cost of sales (103) (139) 372  — 
(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

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):
Fair Value Measurements as of
Consolidated Balance Sheets Location September 30, 2020 December 31, 2019
FX Derivatives Derivative assets $ 8  $ 5 
FX Derivatives Derivative liabilities (5) (1)
FX Derivatives Non-current derivative liabilities (1) — 

The total notional amount of our FX Derivatives was $535 million and $827 million as of September 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 nine months ended September 30, 2020 and 2019 (in millions):
Three Months Ended September 30, Nine Months Ended September 30,
Consolidated Statements of Operations Location 2020 2019 2020 2019
FX Derivatives gain (loss) LNG revenues $ (5) $ 43  $ 22  $ 52 

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):
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, 2020
CCH Interest Rate Derivatives $ (165) $ —  $ (165)
Liquefaction Supply Derivatives 687  (7) 680 
Liquefaction Supply Derivatives (177) 18  (159)
LNG Trading Derivatives 111  (12) 99 
LNG Trading Derivatives (14) 7  (7)
FX Derivatives 17  (9) 8 
FX Derivatives (21) 15  (6)
As of December 31, 2019
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)