Financial Instruments | 9 Months Ended |
Sep. 30, 2013 |
Financial Instruments [Abstract] | ' |
Financial Instruments | ' |
FINANCIAL INSTRUMENTS |
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Derivative Instruments |
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We have entered into certain 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 exposure to price risk attributable to future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal ("Fuel Derivatives"), and interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under the 2013 Liquefaction Credit Facilities ("Interest Rate Derivatives"). |
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The following table (in thousands) shows the fair value of our derivative assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, which are classified as other current assets, other current liabilities, other non-current assets and other non-current liabilities in our Consolidated Balance Sheets. |
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| Fair Value Measurements as of |
| 30-Sep-13 | | 31-Dec-12 |
| Quoted Prices in Active Markets | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
(Level 1) | (Level 1) |
LNG Inventory Derivatives asset | $ | — | | | $ | 219 | | | $ | — | | | $ | 219 | | | $ | — | | | $ | 232 | | | $ | — | | | $ | 232 | |
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Fuel Derivatives (liability) | — | | | (227 | ) | | — | | | (227 | ) | | — | | | (98 | ) | | — | | | (98 | ) |
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Interest Rate Derivatives asset (liability) | — | | | 56,039 | | | — | | | 56,039 | | | — | | | (26,424 | ) | | — | | | (26,424 | ) |
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The estimated fair values of our LNG Inventory Derivatives and Fuel Derivatives are the amount at which the instruments could be exchanged currently between willing parties. We value these derivatives using observable commodity price curves and other relevant data. We value our Interest Rate Derivatives using valuations based on the initial trade prices. Using an income-based approach, subsequent valuations are based on observable inputs to the valuation model including interest rate curves, risk adjusted discount rates, credit spreads and other relevant data. 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 net settlement. |
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Commodity Derivatives |
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We recognize all derivative instruments that qualify for derivative accounting treatment as either assets or liabilities and measure those instruments at fair value unless they qualify for, and we elect, the normal purchase normal sale exemption. For transactions in which we have elected the normal purchase normal sale exemption, gains and losses are not reflected on our Consolidated Statements of Operations until the period of delivery. For those instruments accounted for as derivatives, including our LNG Inventory Derivatives and certain of our Fuel Derivatives, changes in fair value are reported in earnings. |
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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 where our Fuel Derivatives or our LNG Inventory Derivatives are in an asset position. Except for the fuel hedges with our affiliate described below, our commodity derivative transactions are executed through over-the-counter contracts which are subject to nominal credit risk as these transactions are settled on a daily margin basis with investment grade financial institutions. We are required by these financial institutions to use margin deposits as credit support for our commodity derivative activities. Collateral of $0.9 million deposited for such contracts, which has not been reflected in the derivative fair value tables, is included in the other current assets balance as of September 30, 2013 and December 31, 2012. |
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During the second quarter of 2013, Sabine Pass LNG began to enter into forward contracts under its master service agreement with Cheniere Marketing, LLC ("Cheniere Marketing"), a wholly owned subsidiary of Cheniere, to hedge the exposure to price risk attributable to future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal. Sabine Pass LNG elected to account for these physical hedges of future fuel purchases as normal purchase normal sale transactions, exempt from fair value accounting. Sabine Pass LNG had not posted collateral with Cheniere Marketing for such forward contracts as of September 30, 2013. |
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The following table (in thousands) shows the fair value and location of our LNG Inventory Derivatives and Fuel Derivatives on our Consolidated Balance Sheets: |
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| | | | Fair Value Measurements as of | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | September 30, 2013 | | December 31, 2012 | | | | | | | | | | | | | | | | | | | | | |
LNG Inventory Derivatives asset | Prepaid expenses and other | | $ | 219 | | | $ | 232 | | | | | | | | | | | | | | | | | | | | | | |
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Fuel Derivatives liability | Prepaid expenses and other | | (227 | ) | | (98 | ) | | | | | | | | | | | | | | | | | | | | | |
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The following table (in thousands) shows the changes in the fair value and settlements of our LNG Inventory Derivatives recorded in revenues on our Consolidated Statements of Operations during the three and nine months ended September 30, 2013 and 2012: |
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| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | | | | | | | | | | | | | |
| 2013 | | 2012 | | 2013 | | 2012 | | | | | | | | | | | | | | | | |
LNG Inventory Derivatives gain (loss) | $ | — | | | $ | (228 | ) | | $ | (442 | ) | | $ | 697 | | | | | | | | | | | | | | | | | |
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The following table (in thousands) shows the changes in the fair value and settlements of our Fuel Derivatives and LNG Inventory Derivatives recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three and nine months ended September 30, 2013 and 2012: |
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| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | | | | | | | | | | | | | |
| 2013 | | 2012 | | 2013 | | 2012 | | | | | | | | | | | | | | | | |
LNG Inventory Derivatives gain | $ | 201 | | | $ | — | | | $ | 976 | | | $ | — | | | | | | | | | | | | | | | | | |
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Fuel Derivatives gain (loss) (1) | (55 | ) | | 287 | | | (3 | ) | | (288 | ) | | | | | | | | | | | | | | | | |
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(1)Excludes settlements of hedges of the exposure to price risk attributable to future purchases of natural gas to be utilized |
as fuel to operate the Sabine Pass LNG terminal for which Sabine Pass LNG has elected the normal purchase normal sale exemption from derivative accounting. |
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Interest Rate Derivatives |
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In August 2012 and June 2013, Sabine Pass Liquefaction entered into Interest Rate Derivatives to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the 2012 Liquefaction Credit Facility and the 2013 Liquefaction Credit Facilities, respectively. The Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2013 Liquefaction Credit Facilities. |
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Sabine Pass Liquefaction designated the Interest Rate Derivatives entered into in August 2012 as hedging instruments which was required in order to qualify for cash flow hedge accounting. As a result of this cash flow hedge designation, we recognized the Interest Rate Derivatives entered into in August 2012 as an asset or liability at fair value, and reflected changes in fair value through other comprehensive income in our Consolidated Statements of Comprehensive Loss. Any hedge ineffectiveness associated with the Interest Rate Derivatives entered into in August 2012 was recorded immediately as derivative gain (loss) in our Consolidated Statements of Operations. The realized gain (loss) on the Interest Rate Derivatives entered into in August 2012 was recorded as an (increase) decrease in interest expense on our Consolidated Statements of Operations to the extent not capitalized as part of the Liquefaction Project. The effective portion of the gains or losses on our Interest Rate Derivatives entered into in August 2012 recorded in other comprehensive income would have been reclassified to earnings as interest payments on the 2012 Liquefaction Credit Facility impact earnings. In addition, amounts recorded in other comprehensive income are also reclassified into earnings if it becomes probable that the hedged forecasted transaction will not occur. |
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Sabine Pass Liquefaction did not elect to designate the Interest Rate Derivatives entered into in June 2013 as cash flow hedging instruments, and changes in fair value are recorded as derivative gain (loss) within the Consolidated Statements of Operations. |
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During the first quarter of 2013, we determined that it was no longer probable that the forecasted variable interest payments on the 2012 Liquefaction Credit Facility would occur in the time period originally specified based on the continued development of our financing strategy for the Liquefaction Project, and, in particular, the Sabine Pass Liquefaction Senior Notes described in Note 8—"Long-Term Debt". As a result, all of the Interest Rate Derivatives entered into in August 2012 were no longer effective hedges, and the remaining portion of hedge relationships that were designated cash flow hedges as of December 31, 2012, were de-designated as of February 1, 2013. For de-designated cash flow hedges, changes in fair value prior to their de-designation date are recorded as other comprehensive income (loss) within the Consolidated Balance Sheets, and changes in fair value subsequent to their de-designation date are recorded as derivative gain (loss) within the Consolidated Statements of Operations. |
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In June 2013, we concluded that the hedged forecasted transactions associated with the Interest Rate Derivatives entered into in connection with the 2012 Liquefaction Credit Facility had become probable of not occurring based on the issuances of the Sabine Pass Liquefaction Senior Notes, the closing of the 2013 Liquefaction Credit Facilities, the additional Interest Rate Derivatives executed in June 2013, and our intention to continue to issue fixed rate debt to refinance drawn portions of the 2013 Liquefaction Credit Facilities. As a result, the amount remaining in accumulated other comprehensive income ("AOCI") pertaining to the previously designated Interest Rate Derivatives was reclassified out of AOCI and into income. We have presented the reclassification of unrealized losses from AOCI into income and the changes in fair value and settlements subsequent to the reclassification date separate from interest expense as derivative gain (loss), net in our Consolidated Statements of Operations. |
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At September 30, 2013, Sabine Pass Liquefaction had the following Interest Rate Derivatives outstanding: |
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| | Initial Notional Amount | | Maximum Notional Amount | | Effective Date | | Maturity Date | | Weighted Average Fixed Interest Rate Paid | | Variable Interest Rate Received | | | | | | | | | | | | | | | |
Interest Rate Derivatives - Not Designated | | $ | 20 | million | | $ | 2.9 | billion | | August 14, 2012 | | July 31, 2019 | | 1.98% | | One-month LIBOR | | | | | | | | | | | | | | | |
Interest Rate Derivatives - Not Designated | | — | | $ | 671 | million | | 5-Jun-13 | | 28-May-20 | | 2.05% | | One-month LIBOR | | | | | | | | | | | | | | | |
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The following table (in thousands) shows the fair value of our Interest Rate Derivatives: |
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| | | | Fair Value Measurements as of | | | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Location | | September 30, 2013 | | December 31, 2012 | | | | | | | | | | | | | | | | | | | | | |
Interest Rate Derivatives - Not Designated | | Non-current derivative assets | | $ | 64,309 | | | $ | — | | | | | | | | | | | | | | | | | | | | | | |
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Interest Rate Derivatives - Designated | | Non-current derivative liabilities | | — | | | 21,290 | | | | | | | | | | | | | | | | | | | | | | |
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Interest Rate Derivatives - Not Designated | | Other current liabilities | | 8,270 | | | — | | | | | | | | | | | | | | | | | | | | | | |
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Interest Rate Derivatives - Not Designated | | Non-current derivative liabilities | | — | | | 5,134 | | | | | | | | | | | | | | | | | | | | | | |
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The following table (in thousands) details the effect of our Interest Rate Derivatives included in OCI and AOCI for the three months ended September 30, 2013 and 2012: |
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| Gain (Loss) in Other Comprehensive Income | | Gain (Loss) Reclassified from AOCI into Interest Expense (Effective Portion) | | Losses Reclassified into Earnings as a Result of Discontinuance of Cash Flow Hedge Accounting | | | | | | | | |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | | | | | | | |
Interest Rate Derivatives - Designated | $ | — | | | $ | (29,676 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | |
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The following table (in thousands) details the effect of our Interest Rate Derivatives included in OCI and AOCI for the nine months ended September 30, 2013 and 2012: |
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| Gain (Loss) in Other Comprehensive Income | | Gain (Loss) Reclassified from AOCI into Interest Expense (Effective Portion) | | Losses Reclassified into Earnings as a Result of Discontinuance of Cash Flow Hedge Accounting | | | | | | | | |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | | | | | | | |
Interest Rate Derivatives - Designated | $ | 21,297 | | | $ | (29,676 | ) | | $ | — | | | $ | — | | | $ | (5,806 | ) | | $ | — | | | | | | | | | |
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Interest Rate Derivatives - Settlements | (30 | ) | | — | | | — | | | — | | | (167 | ) | | — | | | | | | | | | |
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The following table (in thousands) shows the changes in the fair value of our Interest Rate Derivatives - Not Designated recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three and nine months ended September 30, 2013 and 2012: |
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| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | | | | | | | | | | | | | |
| 2013 | | 2012 | | 2013 | | 2012 | | | | | | | | | | | | | | | | |
Interest Rate Derivatives - Not Designated gain (loss) | $ | (22,481 | ) | | $ | — | | | $ | 60,707 | | | $ | — | | | | | | | | | | | | | | | | | |
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Balance Sheet Presentation |
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Our commodity and interest rate derivatives are presented on a net basis on our Consolidated Balance Sheets as described above. The following table (in thousands) shows the fair value of our derivatives outstanding on a gross and net basis: |
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| | Gross Amounts Recognized | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | | | |
Offsetting Derivative Assets (Liabilities) | | | | | Derivative Instrument | | Cash Collateral Received (Paid) | | Net Amount | | | | | | |
As of September 30, 2013: | | | | | | | | | | | | | | | | | | |
Fuel Derivatives | | $ | (227 | ) | | $ | (227 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | |
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LNG Inventory Derivatives | | 219 | | | — | | | 219 | | | — | | | — | | | 219 | | | | | | | |
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Interest Rate Derivatives - Not Designated | | 64,309 | | | — | | | 64,309 | | | — | | | — | | | 64,309 | | | | | | | |
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Interest Rate Derivatives - Not Designated | | (8,270 | ) | | — | | | (8,270 | ) | | — | | | — | | | (8,270 | ) | | | | | | |
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As of December 31, 2012: | | | — | | | | | | | | | | | | | | | | |
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Fuel Derivatives | | (98 | ) | | (98 | ) | | — | | | — | | | — | | | — | | | | | | | |
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LNG Inventory Derivatives | | 232 | | | — | | | 232 | | | — | | | — | | | 232 | | | | | | | |
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Interest Rate Derivatives - Designated | | (21,290 | ) | | — | | | (21,290 | ) | | — | | | — | | | (21,290 | ) | | | | | | |
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Interest Rate Derivatives - Not Designated | | (5,134 | ) | | — | | | (5,134 | ) | | — | | | — | | | (5,134 | ) | | | | | | |
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Other Financial Instruments |
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The estimated fair value of our other 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. |
Other Financial Instruments (in thousands): |
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| | September 30, 2013 | | December 31, 2012 | | | | | | | | | | | | | | | |
| | Carrying | | Estimated | | Carrying | | Estimated | | | | | | | | | | | | | | | |
Amount | Fair Value | Amount | Fair Value | | | | | | | | | | | | | | | |
2016 Notes, net of discount (1) | | $ | 1,650,634 | | | $ | 1,811,570 | | | $ | 1,647,113 | | | $ | 1,824,177 | | | | | | | | | | | | | | | | |
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2020 Notes (1) | | 420,000 | | | 425,250 | | | 420,000 | | | 437,850 | | | | | | | | | | | | | | | | |
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2021 Sabine Pass Liquefaction Senior Notes (1) | | 2,011,897 | | | 1,951,540 | | | — | | | — | | | | | | | | | | | | | | | | |
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2023 Sabine Pass Liquefaction Senior Notes (1) | | 1,000,000 | | | 952,500 | | | — | | | — | | | | | | | | | | | | | | | | |
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2012 Liquefaction Credit Facility (2) | | — | | | — | | | 100,000 | | | 100,000 | | | | | | | | | | | | | | | | |
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2013 Liquefaction Credit Facilities (2) | | 100,000 | | | 100,000 | | | — | | | — | | | | | | | | | | | | | | | | |
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CTPL Credit Facility (3) | | 391,665 | | | 400,000 | | | — | | | — | | | | | | | | | | | | | | | | |
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-1 | The Level 2 estimated fair value was based on quotations obtained from broker-dealers who make markets in these and similar instruments based on the closing trading prices on September 30, 2013 and December 31, 2012, as applicable. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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-2 | The Level 3 estimated fair value approximates the carrying amount because the interest rates are variable and reflective of market rates and Sabine Pass Liquefaction has the ability to call this debt at anytime without penalty. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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-3 | The Level 3 estimated fair value approximates the principal amount because the interest rates are variable and reflective of market rates and CTPL has the ability to call this debt at anytime without penalty. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |