| Financial Instruments Disclosure |
Financial Instruments
Derivative Instruments
We have entered into certain derivative instruments to hedge the exposure to variability in expected future cash flows attributable to the future sale of our LNG inventory ("LNG Inventory Derivatives"), 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 ("Fuel Derivatives"). Changes in the fair value of our derivatives instruments are reported in earnings because we have not elected to designate these derivative instruments 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 values of our derivative instruments are based on inputs that are quoted prices in active markets for similar assets or liabilities, resulting in Level 2 categorization of such measurements. The following table (in thousands) sets forth, by level within the fair value hierarchy, the fair value of our derivative instruments assets and liabilities at June 30, 2012:
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Quoted Prices in Active Markets for Identical Instruments
(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 Carrying
Value
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LNG Inventory Derivatives liability (1) |
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$ |
— |
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$ |
28 |
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$ |
— |
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$ |
28 |
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Fuel Derivatives liability (2) |
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— |
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664 |
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— |
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664 |
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(1) |
LNG Inventory Derivatives liability is classified as other current liabilities on our Consolidated Balance Sheets. Changes in the fair value of LNG Inventory Derivatives are recorded in marketing and trading revenues on our Consolidated Statements of Operations. We recorded marketing and trading losses of $1.0 million and marketing and trading revenues of $0.9 million related to LNG Inventory Derivatives in the three and six months ended June 30, 2012, respectively. We recorded marketing and trading revenues of $0.2 million and marketing and trading losses of $0.5 million related to LNG Inventory Derivatives in the three and six months ended June 30, 2011, respectively.
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(2) |
Fuel Derivatives liability is classified as other current liabilities on our Consolidated Balance Sheets. Changes in the fair value of Fuel Derivatives are classified as derivative gain (loss) on our Consolidated Statements of Operations. We recorded derivative gain of $0.3 million and derivative loss of $0.6 million related to Fuel Derivatives in the three and six months ended June 30, 2012 , respectively. We recorded derivative loss of $0.4 million related to Fuel Derivatives in the three and six months ended June 30, 2011.
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Other Financial Instruments
The estimated fair value of financial instruments, including those financial instruments for which the fair value option was not elected are set forth in the table below. The carrying amounts reported on our Consolidated Balance Sheets for cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, interest receivable, and accounts payable approximate fair value due to their short-term nature.
Financial instruments (in thousands):
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June 30, 2012 |
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December 31, 2011 |
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Carrying
Amount
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Estimated
Fair Value
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Carrying
Amount
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Estimated
Fair Value
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2013 Notes (1) |
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$ |
550,000 |
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$ |
569,250 |
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$ |
550,000 |
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$ |
555,500 |
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2016 Notes, net of discount (1) |
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1,644,765 |
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1,722,892 |
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1,642,418 |
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1,650,630 |
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Convertible Senior Unsecured Notes, net of discount (2) |
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203,176 |
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200,637 |
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194,724 |
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186,740 |
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2007 Term Loan (3) |
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— |
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— |
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298,000 |
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292,728 |
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2008 Loans (4) |
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— |
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— |
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282,293 |
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282,293 |
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(1) |
The Level 2 estimated fair value of the Senior Notes, net of discount, was based on quotations obtained from broker-dealers who make markets in these and similar instruments based on the closing trading prices on June 30, 2012 and December 31, 2011, as applicable.
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(2) |
The Level 2 estimated fair value of our Convertible Senior Unsecured Notes was based on the closing trading prices on June 30, 2012 and December 31, 2011, as applicable.
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(3) |
The 2007 Term Loan was closely held by few holders, and purchases and sales were infrequent and were conducted on a bilateral basis without price discovery by us. This loan was not rated and had unique covenants and collateral packages such that comparisons to other instruments were imprecise. Nonetheless, we provided an estimate of the fair value of this loan as of December 31, 2011 based on an index of the yield to maturity of CCC rated debt of other companies in the energy sector, resulting in Level 3 categorization. In January 2012, the 2007 Term Loan was paid in full.
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(4) |
In December 2010, the 2008 Loans were amended to, among other things: eliminate the "put rights" which had allowed the lenders to demand repayment of the 2008 Loans on the third, fifth, and seventh anniversaries thereof; allow for the early prepayment of the 2008 Loans; allow Cheniere for a limited period 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 of Cheniere as certain conditions are met. In addition, 96.6% of the lenders agreed to terminate their rights to exchange the 2008 Loans for Series B Preferred Stock of Cheniere. Pursuant to an amendment to the 2008 Loans adopted in September 2011, the outstanding principal amount of the 2008 Loans held by Scorpion was exchangeable for shares of Cheniere common stock at a price of $5.00 per share. The Level 3 estimated fair value of the 2008 Loans as of December 31, 2011 was determined to be the same as the carrying amount due to our ability to call the debt (other than the debt held by Scorpion) at anytime without penalty or a make-whole payment for an early redemption. In June 2012, the 2008 Loans were paid in full. Upon such payment, the credit agreement and related agreements were terminated.
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