Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.22.2.2
Derivative Instruments
 9 Months Ended
Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments DERIVATIVE INSTRUMENTS
 
We have entered into the following derivative instruments:
•interest rate swaps (“Interest Rate Derivatives”) to hedge the exposure to volatility in a portion of the floating-rate interest payments on CCH’s amended and restated term loan credit facility (the “CCH Credit Facility”), with the last of our Interest Rate Derivatives expiring in May 2022;
•commodity derivatives consisting of natural gas and power supply contracts, including those under our IPM agreements, for the development, commissioning and operation of the Liquefaction Projects (“Physical Liquefaction Supply Derivatives”) and associated economic hedges (“Financial Liquefaction Supply Derivatives,” and collectively with the Physical Liquefaction Supply Derivatives, the “Liquefaction Supply Derivatives”);
•physical LNG derivatives in which we have contractual net settlement (“Physical LNG Trading Derivatives”) and financial derivatives to hedge the exposure to the commodity markets in which we have contractual arrangements to purchase or sell physical LNG (collectively, “LNG Trading Derivatives”); and
•foreign currency exchange (“FX”) contracts to hedge exposure to currency risk associated with cash flows denominated in currencies other than United States dollar (“FX Derivatives”), associated with both LNG Trading Derivatives and operations in countries outside of the United States.

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, in which case such changes are capitalized.

The following table shows the fair value of our derivative instruments that are required to be measured at fair value on a recurring basis (in millions):
Fair Value Measurements as of
September 30, 2022 December 31, 2021
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
Interest Rate Derivatives liability $ —  $ —  $ —  $ —  $ —  $ (40) $ —  $ (40)
Liquefaction Supply Derivatives asset (liability) (106) (5) (13,805) (13,916) 7  (9) (4,036) (4,038)
LNG Trading Derivatives liability (14) (113) —  (127) (22) (378) —  (400)
FX Derivatives asset —  51  —  51  —  12  —  12 

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 and LNG Trading Derivatives are 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, but not limited to, evaluation of whether the respective market exists from the perspective of market participants as infrastructure is developed.

We include a significant 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 and volatility.

The Level 3 fair value measurements of our Physical LNG Trading Derivatives and the 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, 2022:
Net Fair Value Liability
(in millions)		 Valuation Approach Significant Unobservable Input Range of Significant Unobservable Inputs / Weighted Average (1)
Physical Liquefaction Supply Derivatives $(13,805) Market approach incorporating present value techniques Henry Hub basis spread
$(2.495) - $0.677 / $(0.090)
Option pricing model International LNG pricing spread, relative to Henry Hub (2)
89% - 943% / 197%
(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 LNG Trading Derivatives and our Physical Liquefaction Supply Derivatives.

The following table shows the changes in the fair value of our Level 3 Physical LNG Trading Derivatives and Physical Liquefaction Supply Derivatives (in millions):
Three Months Ended September 30, Nine Months Ended September 30,
2022
2021 (1)
 2022
2021 (1)
Balance, beginning of period $ (8,462) $ (389) $ (4,036) $ 241 
Realized and mark-to-market losses:
Included in cost of sales (5,668) (2,982) (8,825) (2,898)
Purchases and settlements:
Purchases 4  5  (1,390) (657)
Settlements 322  75  446  23 
Transfers out of Level 3 (2) (1) —  —  — 
Balance, end of period $ (13,805) $ (3,291) $ (13,805) $ (3,291)
Change in unrealized losses relating to instruments still held at end of period $ (5,668) $ (2,982) $ (8,825) $ (2,898)
(1)Includes amounts recorded related to natural gas supply contracts that CCL had with a related party. The agreement ceased to be considered a related party agreement during 2021, as discussed in Note 12—Related Party Transactions.
(2)Transferred out of Level 3 as a result of unobservable market for the underlying natural gas purchase agreements.

Except for Interest Rate Derivatives, all counterparty derivative contracts provide for the unconditional right of set-off in the event of default. We have elected to report derivative assets and liabilities arising from those derivative contracts with the same counterparty and the unconditional contractual right of set-off on a net basis. 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 depending on the position of the derivative. 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

CCH previously entered into the following Interest Rate Derivatives to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the CCH Credit Facility, which expired in May 2022:
Notional Amounts
September 30, 2022 December 31, 2021 Weighted Average Fixed Interest Rate Paid Variable Interest Rate Received
Interest Rate Derivatives $— $4.5 billion 2.30% One-month LIBOR

The following table shows the effect and location of our Interest Rate Derivatives on our Consolidated Statements of Operations (in millions):
Gain (Loss) Recognized in Consolidated Statements of Operations
Consolidated Statements of Operations Location Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Interest Rate Derivatives Derivative gain (loss), net $ —  $ (2) $ 2  $ (3)

Commodity Derivatives

SPL and CCL hold Liquefaction Supply Derivatives which are primarily indexed to the natural gas market and international LNG indices. The remaining minimum terms of the Physical Liquefaction Supply Derivatives range up to approximately 25 years, some of which commence upon the satisfaction of certain events or states of affairs. The terms of the Financial Liquefaction Supply Derivatives range up to approximately three years.

Commencing in the first quarter of 2021, Cheniere Marketing entered into physical LNG transactions that provide for contractual net settlement. Such transactions are accounted for as LNG Trading Derivatives, and are designed to economically hedge exposure to the commodity markets in which we sell LNG. We have historically entered into, and may from time to time enter into, financial LNG Trading Derivatives in the form of swaps, forwards, options or futures. The terms of LNG Trading Derivatives range up to approximately two years.

The following table shows the notional amounts of our Liquefaction Supply Derivatives and LNG Trading Derivatives (collectively, “Commodity Derivatives”):
September 30, 2022 December 31, 2021
Liquefaction Supply Derivatives (1) LNG Trading Derivatives Liquefaction Supply Derivatives LNG Trading Derivatives
Notional amount, net (in TBtu) 13,357  64  11,238  33 
(1)Excludes notional amounts associated with extension options that were uncertain to be taken as of September 30, 2022.
The following table shows the effect and location of our Commodity Derivatives recorded on our Consolidated Statements of Operations (in millions):
Gain (Loss) Recognized in Consolidated Statements of Operations
Consolidated Statements of Operations Location (1) Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
LNG Trading Derivatives LNG revenues $ (237) $ (1,098) $ (454) $ (1,539)
LNG Trading Derivatives Cost of sales (4) 55  103  136 
Liquefaction Supply Derivatives (2) LNG revenues (3) (4) 8  (3)
Liquefaction Supply Derivatives (2) Cost of sales (3) (5,508) (2,444) (10,008) (2,848)
(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.
(3)Includes amounts recorded related to natural gas supply contracts that CCL had with a related party. The agreement ceased to be considered a related party agreement during 2021, as discussed in Note 12—Related Party Transactions.

FX Derivatives

Cheniere Marketing holds 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 that are denominated in a currency other than the United States dollar. The terms of FX Derivatives range up to approximately one year.

The total notional amount of our FX Derivatives was $597 million and $762 million as of September 30, 2022 and December 31, 2021, respectively.

The following table shows the effect and location of our FX Derivatives recorded on our Consolidated Statements of Operations (in millions):
Gain Recognized in Consolidated Statements of Operations
Consolidated Statements of Operations Location Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
FX Derivatives LNG revenues $ 54  $ 11  $ 121  $ 27 
Fair Value and Location of Derivative Assets and Liabilities on the Consolidated Balance Sheets

The following table shows the fair value and location of our derivative instruments on our Consolidated Balance Sheets (in millions):
September 30, 2022
Interest Rate Derivatives
Liquefaction Supply Derivatives (1)
LNG Trading Derivatives (2)
FX Derivatives
 Total
Consolidated Balance Sheets Location
Current derivative assets $ —  $ 50  $ 25  $ 56  $ 131 
Derivative assets —  46  —  —  46 
Total derivative assets —  96  25  56  177 
Current derivative liabilities —  (3,058) (152) (5) (3,215)
Derivative liabilities —  (10,954) —  —  (10,954)
Total derivative liabilities —  (14,012) (152) (5) (14,169)
Derivative asset (liability), net $ —  $ (13,916) $ (127) $ 51  $ (13,992)
December 31, 2021
Interest Rate Derivatives
Liquefaction Supply Derivatives (1)
LNG Trading Derivatives (2)
FX Derivatives
 Total
Consolidated Balance Sheets Location
Current derivative assets $ —  $ 38  $ 2  $ 15  $ 55 
Derivative assets —  69  —  —  69 
Total derivative assets —  107  2  15  124 
Current derivative liabilities (40) (644) (402) (3) (1,089)
Derivative liabilities —  (3,501) —  —  (3,501)
Total derivative liabilities (40) (4,145) (402) (3) (4,590)
Derivative asset (liability), net $ (40) $ (4,038) $ (400) $ 12  $ (4,466)
(1)Does not include collateral posted with counterparties by us of $152 million and $20 million as of September 30, 2022 and December 31, 2021, respectively, which are included in margin deposits in our Consolidated Balance Sheets.
(2)Does not include collateral posted with counterparties by us of $115 million and $745 million, as of September 30, 2022 and December 31, 2021, respectively, which are included in margin deposits in our Consolidated Balance Sheets.
Consolidated Balance Sheets Presentation

The following table shows the fair value of our derivatives outstanding on a gross and net basis (in millions) for our derivative instruments that are presented on a net basis on our Consolidated Balance Sheets:
Liquefaction Supply Derivatives
LNG Trading Derivatives
FX Derivatives
As of September 30, 2022
Gross assets $ 108  $ 35  $ 57 
Offsetting amounts (12) (10) (1)
Net assets $ 96  $ 25  $ 56 
Gross liabilities $ (14,507) $ (165) $ (5)
Offsetting amounts 495  13  — 
Net liabilities $ (14,012) $ (152) $ (5)
As of December 31, 2021
Gross assets $ 155  $ 10  $ 48 
Offsetting amounts (48) (8) (33)
Net assets $ 107  $ 2  $ 15 
Gross liabilities $ (4,382) $ (551) $ (10)
Offsetting amounts 237  149  7 
Net liabilities $ (4,145) $ (402) $ (3)