Cheniere Energy, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

Derivative Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

DERIVATIVE INSTRUMENTS

We have entered into the following derivative instruments:

•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 and associated economic hedges (collectively, the “Liquefaction Supply Derivatives”);

•LNG derivatives in which we have contractual net settlement and economic hedges on 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, by the fair value hierarchy levels prescribed by GAAP (in millions):


	Fair Value Measurements as of
	September 30, 2023								December 31, 2022
	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


Liquefaction Supply Derivatives asset (liability)	$	19	$	54	$	(3,216)	$	(3,143)	$	(66)	$	(29)	$	(9,924)	$	(10,019)
LNG Trading Derivatives asset (liability)	(29)		7		—		(22)		1		(47)		—		(46)
FX Derivatives asset (liability)	—		7		—		7		—		(28)		—		(28)

We value our Liquefaction Supply Derivatives and LNG Trading Derivatives using a market or option-based approach incorporating present value techniques, as needed, which incorporates 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 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 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 may use in valuing the asset or liability. To the extent valued using an option pricing model, we consider the future prices of energy units for unobservable periods to be a significant unobservable input to estimated net fair value. In estimating the future prices of energy units, we make judgments about market risk related to liquidity of commodity indices and volatility utilizing available market data. Changes in facts and circumstances or additional information may result in revised estimates and judgments, and actual results may differ from these estimates and judgments. We derive our volatility assumptions based on observed historical settled global LNG market pricing or accepted proxies for global LNG market pricing as well as settled domestic natural gas pricing. Such volatility assumptions also contemplate, as of the balance sheet date, observable forward curve data of such indices, as well as evolving available industry data and independent studies. In developing our volatility assumptions, we acknowledge that the global LNG industry is inherently influenced by events such as unplanned supply constraints, geopolitical incidents, unusual climate events including drought and uncommonly mild, by historical standards, winters and summers, and real or threatened disruptive operational impacts to global energy infrastructure. Our current estimate of volatility does not exclude the impact of otherwise rare events unless we believe market participants would exclude such events on account of their assertion that those events were specific to our company and deemed within our control.

The Level 3 fair value measurements of our natural gas positions within our 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 Liquefaction Supply Derivatives as of September 30, 2023:

Net Fair Value Liability

(in millions)

Valuation Approach

Significant Unobservable Input

Range of Significant Unobservable Inputs / Weighted Average (1)

Liquefaction Supply Derivatives

$(3,216)

Market approach incorporating present value techniques

Henry Hub basis spread

$(1.245) - $0.638 / $(0.031)

Option pricing model

International LNG pricing spread, relative to Henry Hub (2)

83% - 422% / 188%

(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 Liquefaction Supply Derivatives.

The following table shows the changes in the fair value of our Level 3 Liquefaction Supply Derivatives and LNG Trading Derivatives (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Balance, beginning of period	$	(4,611)	$	(8,462)	$	(9,924)	$	(4,036)
Realized and change in fair value gains (losses) included in net income (loss) (1):
Included in cost of sales, existing deals (2)	1,197		(5,668)		5,350		(8,825)
Included in cost of sales, new deals (3)	8		—		26		—
Purchases and settlements:
Purchases (4)	—		4		—		(1,390)
Settlements (5)	187		322		1,323		446


Transfers out of level 3 (6)	3		(1)		9		—
Balance, end of period	$	(3,216)	$	(13,805)	$	(3,216)	$	(13,805)
Favorable (unfavorable) changes in fair value relating to instruments still held at the end of the period	$	1,205	$	(5,668)	$	5,376	$	(8,825)

(1)Does not include the realized value associated with derivative instruments that settle through physical delivery, as settlement is equal to contractually fixed price from trade date multiplied by contractual volume. See settlements line item in this table.

(2)Impact to earnings on deals that existed at the beginning of the period and continue to exist at the end of the period.

(3)Impact to earnings on deals that were entered into during the reporting period and continue to exist at the end of the period.

(4)Includes any day one gain (loss) recognized during the reporting period on deals that were entered into during the reporting period which continue to exist at the end of the period, in addition to any derivative contracts acquired from entities at a value other than zero on acquisition date, such as derivatives assigned or novated during the reporting period and continuing to exist at the end of the period.

(5)Roll-off in the current period of amounts recognized in our Consolidated Balance Sheets at the end of the previous period due to settlement of the underlying instruments in the current period.

(6)Transferred out of Level 3 as a result of observable market for the underlying natural gas purchase agreements.

All existing 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.

Commodity Derivatives

SPL and CCL hold Liquefaction Supply Derivatives which are primarily indexed to the natural gas market and international LNG indices. The firm terms of the Liquefaction Supply Derivatives range up to approximately 15 years, some of which commence upon the satisfaction of certain events or states of affairs.

Cheniere Marketing has historically entered into, and may from time to time enter into, LNG transactions that provide for contractual net settlement. Such transactions are accounted for as LNG Trading Derivatives along with financial

commodity contracts in the form of swaps or futures. The terms of LNG Trading Derivatives range up to approximately one year.

The following table shows the notional amounts of our Liquefaction Supply Derivatives and LNG Trading Derivatives (collectively, “Commodity Derivatives”):

September 30, 2023

December 31, 2022

Liquefaction Supply Derivatives (1)

LNG Trading Derivatives

Liquefaction Supply Derivatives

LNG Trading Derivatives

Notional amount, net (in TBtu)

13,542

14,504

(1)Excludes notional amounts associated with extension options that were uncertain to be taken as of September 30, 2023.

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,
		2023		2022		2023		2022

LNG Trading Derivatives	LNG revenues	$	19	$	(237)	$	34	$	(454)
LNG Trading Derivatives	Recovery (cost) of sales	(8)		(4)		(95)		103
Liquefaction Supply Derivatives (2)	LNG revenues	1		(3)		(5)		8
Liquefaction Supply Derivatives (2)	Recovery (cost) of sales	1,403		(5,508)		6,900		(10,008)

(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 Liquefaction Supply Derivatives that settle through physical delivery.

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 are executed primarily to 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 $266 million and $619 million as of September 30, 2023 and December 31, 2022, 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,
		2023		2022		2023		2022
FX Derivatives	LNG revenues	$	13	$	54	$	5	$	121

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, 2023
	Liquefaction Supply Derivatives (1)		LNG Trading Derivatives (2)		FX Derivatives		Total
Consolidated Balance Sheets Location
Current derivative assets	$	62	$	23	$	10	$	95
Derivative assets	620		—		—		620
Total derivative assets	682		23		10		715

Current derivative liabilities	(943)		(45)		(3)		(991)
Derivative liabilities	(2,882)		—		—		(2,882)
Total derivative liabilities	(3,825)		(45)		(3)		(3,873)

Derivative asset (liability), net	$	(3,143)	$	(22)	$	7	$	(3,158)

	December 31, 2022
	Liquefaction Supply Derivatives (1)		LNG Trading Derivatives (2)		FX Derivatives		Total
Consolidated Balance Sheets Location
Current derivative assets	$	36	$	84	$	—	$	120
Derivative assets	35		—		—		35
Total derivative assets	71		84		—		155

Current derivative liabilities	(2,143)		(130)		(28)		(2,301)
Derivative liabilities	(7,947)		—		—		(7,947)
Total derivative liabilities	(10,090)		(130)		(28)		(10,248)

Derivative liability, net	$	(10,019)	$	(46)	$	(28)	$	(10,093)

(1)Does not include collateral posted with counterparties by us of $1 million and $111 million as of September 30, 2023 and December 31, 2022, respectively, which are included in margin deposits on our Consolidated Balance Sheets, and collateral posted by counterparties to us of $1 million and zero as of September 30, 2023 and December 31, 2022, respectively, which are included in other current liabilities on our Consolidated Balance Sheets.

(2)Does not include collateral posted with counterparties by us of $72 million and $23 million, as of September 30, 2023 and December 31, 2022, respectively, which are included in margin deposits on 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, 2023
Gross assets	$	1,161	$	23	$	10
Offsetting amounts	(479)		—		—
Net assets (1)	$	682	$	23	$	10

Gross liabilities	$	(3,911)	$	(51)	$	(3)
Offsetting amounts	86		6		—
Net liabilities (2)	$	(3,825)	$	(45)	$	(3)

As of December 31, 2022
Gross assets	$	76	$	87	$	—
Offsetting amounts	(5)		(3)		—
Net assets (1)	$	71	$	84	$	—

Gross liabilities	$	(10,436)	$	(132)	$	(29)
Offsetting amounts	346		2		1
Net liabilities (2)	$	(10,090)	$	(130)	$	(28)

(1)Includes current and non-current derivative assets of $95 million and $620 million, respectively, as of September 30, 2023 and $120 million and $35 million, respectively, as of December 31, 2022.

(2)Includes current and non-current derivative liabilities of $991 million and $2,882 million, respectively, as of September 30, 2023 and $2,301 million and $7,947 million, respectively, as of December 31, 2022.