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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to            
Commission file number 001-33366
Cheniere Energy Partners, L.P.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
Delaware
20-5913059
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
700 Milam Street, Suite 1900
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 375-5000
(Registrant’s telephone number, including area code)
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act: 
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Units Representing Limited Partner Interests
CQP
NYSE American
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No 
As of October 25, 2019, the registrant had 348,629,792 common units and 135,383,831 subordinated units outstanding.
 
 
 
 
 



CHENIERE ENERGY PARTNERS, L.P.
TABLE OF CONTENTS


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





i




DEFINITIONS
As used in this quarterly report, the terms listed below have the following meanings: 

Common Industry and Other Terms
Bcf
 
billion cubic feet
Bcf/d
 
billion cubic feet per day
Bcf/yr
 
billion cubic feet per year
Bcfe
 
billion cubic feet equivalent
DOE
 
U.S. Department of Energy
EPC
 
engineering, procurement and construction
FERC
 
Federal Energy Regulatory Commission
FTA countries
 
countries with which the United States has a free trade agreement providing for national treatment for trade in natural gas
GAAP
 
generally accepted accounting principles in the United States
Henry Hub
 
the final settlement price (in USD per MMBtu) for the New York Mercantile Exchange’s Henry Hub natural gas futures contract for the month in which a relevant cargo’s delivery window is scheduled to begin
LIBOR
 
London Interbank Offered Rate
LNG
 
liquefied natural gas, a product of natural gas that, through a refrigeration process, has been cooled to a liquid state, which occupies a volume that is approximately 1/600th of its gaseous state
MMBtu
 
million British thermal units, an energy unit
mtpa
 
million tonnes per annum
non-FTA countries
 
countries with which the United States does not have a free trade agreement providing for national treatment for trade in natural gas and with which trade is permitted
SEC
 
U.S. Securities and Exchange Commission
SPA
 
LNG sale and purchase agreement
TBtu
 
trillion British thermal units, an energy unit
Train
 
an industrial facility comprised of a series of refrigerant compressor loops used to cool natural gas into LNG
TUA
 
terminal use agreement



1




Abbreviated Legal Entity Structure

The following diagram depicts our abbreviated legal entity structure as of September 30, 2019, including our ownership of certain subsidiaries, and the references to these entities used in this quarterly report:
cqpa27.jpg

Unless the context requires otherwise, references to “Cheniere Partners,” “the Partnership,” “we,” “us” and “our” refer to Cheniere Energy Partners, L.P. and its consolidated subsidiaries, including SPLNG, SPL and CTPL

References to “Blackstone Group” refer to The Blackstone Group, L.P. References to “Blackstone CQP Holdco” refer to Blackstone CQP Holdco LP. References to “Blackstone” refer to Blackstone Group and Blackstone CQP Holdco.

2


PART I.
FINANCIAL INFORMATION 
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS 
CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except unit data)




 
 
September 30,
 
December 31,
 
 
2019
 
2018
ASSETS
 
(unaudited)
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
1,707

 
$

Restricted cash
 
185

 
1,541

Accounts and other receivables
 
277

 
348

Accounts receivable—affiliate
 
67

 
114

Advances to affiliate
 
177

 
228

Inventory
 
103

 
99

Derivative assets
 
8

 
6

Other current assets
 
65

 
20

Total current assets
 
2,589

 
2,356

 
 
 
 
 
Property, plant and equipment, net
 
16,338

 
15,390

Operating lease assets, net
 
91

 

Debt issuance costs, net
 
17

 
13

Non-current derivative assets
 
29

 
31

Other non-current assets, net
 
157

 
184

Total assets
 
$
19,221

 
$
17,974

 
 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
17

 
$
15

Accrued liabilities
 
657

 
821

Due to affiliates
 
40

 
49

Deferred revenue
 
169

 
116

Deferred revenue—affiliate
 

 
1

Current operating lease liabilities
 
6

 

Derivative liabilities
 
29

 
66

Total current liabilities
 
918

 
1,068

 
 
 
 
 
Long-term debt, net
 
17,571

 
16,066

Non-current operating lease liabilities
 
84

 

Non-current derivative liabilities
 
32

 
14

Other non-current liabilities
 
4

 
4

Other non-current liabilities—affiliate
 
20

 
22

 
 
 
 
 
Partners’ equity
 
 
 
 
Common unitholders’ interest (348.6 million units issued and outstanding at September 30, 2019 and December 31, 2018)
 
1,692

 
1,806

Subordinated unitholders’ interest (135.4 million units issued and outstanding at September 30, 2019 and December 31, 2018)
 
(1,035
)
 
(990
)
General partner’s interest (2% interest with 9.9 million units issued and outstanding at September 30, 2019 and December 31, 2018)
 
(65
)
 
(16
)
Total partners’ equity
 
592


800

Total liabilities and partners’ equity
 
$
19,221

 
$
17,974


The accompanying notes are an integral part of these consolidated financial statements.

3


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per unit data)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues
 

 

 
 
 
 
LNG revenues
 
$
1,140

 
$
1,249

 
$
3,678

 
$
3,419

LNG revenues—affiliate
 
257

 
205

 
1,017

 
886

Regasification revenues
 
66

 
66

 
199

 
196

Other revenues
 
13

 
9

 
36

 
28

Total revenues
 
1,476

 
1,529

 
4,930

 
4,529

 
 
 
 
 
 
 
 
 
Operating costs and expenses
 
 

 
 
 
 
 
 
Cost of sales (excluding depreciation and amortization expense shown separately below)
 
742

 
756

 
2,501

 
2,291

Cost of sales—affiliate
 
6

 

 
6

 

Operating and maintenance expense
 
172

 
113

 
472

 
306

Operating and maintenance expense—affiliate
 
34

 
31

 
100

 
87

Development expense
 

 
1

 

 
2

General and administrative expense
 
3

 
3

 
9

 
9

General and administrative expense—affiliate
 
34

 
18

 
82

 
53

Depreciation and amortization expense
 
138

 
107

 
390

 
318

Impairment expense and loss on disposal of assets
 
1

 
8

 
6

 
8

Total operating costs and expenses
 
1,130

 
1,037

 
3,566

 
3,074

 
 
 
 
 
 
 
 
 
Income from operations
 
346

 
492

 
1,364

 
1,455

 
 
 
 
 
 
 
 
 
Other income (expense)
 
 

 
 
 
 
 
 
Interest expense, net of capitalized interest
 
(231
)
 
(183
)
 
(648
)
 
(552
)
Loss on modification or extinguishment of debt
 
(13
)
 
(12
)
 
(13
)
 
(12
)
Derivative gain, net
 

 
2

 

 
13

Other income
 
8

 
8

 
24

 
19

Total other expense
 
(236
)
 
(185
)
 
(637
)
 
(532
)
 
 
 
 
 
 
 
 
 
Net income
 
$
110

 
$
307

 
$
727

 
$
923

 
 
 
 
 
 
 
 
 
Basic and diluted net income per common unit
 
$
0.19

 
$
0.60

 
$
1.38

 
$
1.82

 
 
 
 
 
 
 
 
 
Weighted average number of common units outstanding used for basic and diluted net income per common unit calculation
 
348.6

 
348.6

 
348.6

 
348.6






The accompanying notes are an integral part of these consolidated financial statements.

4


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY
(in millions)
(unaudited)
Three and Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Unitholders’ Interest
 
Subordinated Unitholder’s Interest
 
General Partner’s Interest
 
Total Partners’ Equity
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
Balance at December 31, 2018
348.6


$
1,806


135.4


$
(990
)

9.9


$
(16
)

$
800

Net income

 
272

 

 
105

 

 
8

 
385

Distributions
 
 
 
 
 
 
 
 
 
 
 
 


Common units, $0.59/unit

 
(206
)
 

 

 

 

 
(206
)
Subordinated units, $0.59/unit

 

 

 
(80
)
 

 

 
(80
)
General partner units

 

 

 

 

 
(18
)
 
(18
)
Balance at March 31, 2019
348.6

 
1,872

 
135.4

 
(965
)
 
9.9

 
(26
)
 
881

Net income

 
164

 

 
64

 

 
4

 
232

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
Common units, $0.60/unit

 
(209
)
 

 

 

 

 
(209
)
Subordinated units, $0.60/unit

 

 

 
(81
)
 

 

 
(81
)
General partner units

 

 

 

 

 
(22
)
 
(22
)
Balance at June 30, 2019
348.6

 
1,827

 
135.4

 
(982
)
 
9.9

 
(44
)
 
801

Net income

 
77

 

 
30

 

 
3

 
110

Distributions
 
 
 
 
 
 
 
 
 
 
 
 


Common units, $0.61/unit

 
(212
)
 

 

 

 

 
(212
)
Subordinated units, $0.61/unit

 

 

 
(83
)
 

 

 
(83
)
General partner units

 

 

 

 

 
(24
)
 
(24
)
Balance at September 30, 2019
348.6

 
$
1,692

 
135.4

 
$
(1,035
)
 
9.9

 
$
(65
)
 
$
592




The accompanying notes are an integral part of these consolidated financial statements.

5


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY—CONTINUED
(in millions)
(unaudited)

Three and Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Unitholders’ Interest
 
Subordinated Unitholder’s Interest
 
General Partner’s Interest
 
Total Partners’ Equity
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
Balance at December 31, 2017
348.6

 
$
1,670

 
135.4

 
$
(1,043
)
 
9.9

 
$
12

 
$
639

Net income

 
236

 

 
92

 

 
7

 
335

Distributions
 
 
 
 
 
 
 
 
 
 
 
 


Common units, $0.50/unit

 
(175
)
 

 

 

 

 
(175
)
Subordinated units, $0.50/unit

 

 

 
(68
)
 

 

 
(68
)
General partner units

 

 

 

 

 
(6
)
 
(6
)
Balance at March 31, 2018
348.6

 
1,731

 
135.4

 
(1,019
)
 
9.9

 
13

 
725

Net income

 
199

 

 
77

 

 
5

 
281

Distributions
 
 
 
 
 
 
 
 
 
 
 
 
 
Common units, $0.55/unit

 
(191
)
 

 

 

 

 
(191
)
Subordinated units, $0.55/unit

 

 

 
(74
)
 

 

 
(74
)
General partner units

 

 

 

 

 
(13
)
 
(13
)
Balance at June 30, 2018
348.6

 
1,739

 
135.4

 
(1,016
)
 
9.9

 
5

 
728

Net income

 
216

 

 
84

 

 
7

 
307

Distributions
 
 
 
 
 
 
 
 
 
 
 
 


Common units, $0.56/unit

 
(196
)
 

 

 

 

 
(196
)
Subordinated units, $0.56/unit

 

 

 
(76
)
 

 

 
(76
)
General partner units

 

 

 

 

 
(15
)
 
(15
)
Balance at September 30, 2018
348.6

 
$
1,759

 
135.4

 
$
(1,008
)
 
9.9

 
$
(3
)
 
$
748





The accompanying notes are an integral part of these consolidated financial statements.

6


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
727

 
$
923

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
390

 
318

Amortization of debt issuance costs, deferred commitment fees, premium and discount
23

 
24

Loss on modification or extinguishment of debt
13

 
12

Total losses (gains) on derivatives, net
(30
)
 
29

Net cash provided by (used for) settlement of derivative instruments
11

 

Impairment expense and loss on disposal of assets
6

 
8

Other
8

 
5

Changes in operating assets and liabilities:
 
 
 
Accounts and other receivables
36

 
(33
)
Accounts receivable—affiliate
47

 
140

Advances to affiliate
(47
)
 
(79
)
Inventory
(3
)
 
6

Accounts payable and accrued liabilities
(209
)
 
(77
)
Due to affiliates
(3
)
 
(5
)
Deferred revenue
54

 
6

Other, net
(42
)
 
(10
)
Other, net—affiliate
(4
)
 
(3
)
Net cash provided by operating activities
977

 
1,264

 
 
 
 
Cash flows from investing activities
 

 
 

Property, plant and equipment, net
(1,156
)
 
(578
)
Other
(1
)
 

Net cash used in investing activities
(1,157
)
 
(578
)
 
 
 
 
Cash flows from financing activities
 

 
 

Proceeds from issuances of debt
2,230

 
1,100

Repayments of debt
(730
)
 
(1,090
)
Debt issuance and deferred financing costs
(33
)
 
(8
)
Debt extinguishment costs
(4
)
 
(6
)
Distributions to owners
(935
)
 
(814
)
Other
3

 

Net cash provided by (used in) financing activities
531

 
(818
)
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
351

 
(132
)
Cash, cash equivalents and restricted cash—beginning of period
1,541

 
1,589

Cash, cash equivalents and restricted cash—end of period
$
1,892

 
$
1,457



Balances per Consolidated Balance Sheet:
 
September 30, 2019
Cash and cash equivalents
$
1,707

Restricted cash
185

Total cash, cash equivalents and restricted cash
$
1,892




The accompanying notes are an integral part of these consolidated financial statements.

7


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



 
NOTE 1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Through SPL, we are in various stages of operating and constructing six natural gas liquefaction Trains (the “Liquefaction Project”) at the Sabine Pass LNG terminal located in Cameron Parish, Louisiana, on the Sabine-Neches Waterway less than four miles from the Gulf Coast. Trains 1 through 5 are operational and Train 6 is under construction. The Sabine Pass LNG terminal has operational regasification facilities owned by SPLNG and a 94-mile pipeline owned by CTPL, that interconnects the Sabine Pass LNG terminal with a number of large interstate pipelines.

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of Cheniere Partners have been prepared in accordance with GAAP for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2018.

Results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2019.

We are not subject to either federal or state income tax, as our partners are taxed individually on their allocable share of our taxable income.

Recent Accounting Standards

We adopted ASU 2016-02, Leases (Topic 842), and subsequent amendments thereto (“ASC 842”) on January 1, 2019 using the optional transition approach to apply the standard at the beginning of the first quarter of 2019 with no retrospective adjustments to prior periods. The adoption of the standard resulted in the recognition of right-of-use assets and lease liabilities for operating leases of approximately $100 million on our Consolidated Balance Sheets, with no material impact on our Consolidated Statements of Income or Consolidated Statements of Cash Flows. We have elected the practical expedients to (1) carryforward prior conclusions related to lease identification and classification for existing leases, (2) combine lease and non-lease components of an arrangement for all classes of leased assets, (3) omit short-term leases with a term of 12 months or less from recognition on the balance sheet and (4) carryforward our existing accounting for land easements not previously accounted for as leases. See Note 11—Leases for additional information on our leases following the adoption of this standard.

NOTE 2—UNITHOLDERS’ EQUITY
 
The common units and subordinated units represent limited partner interests in us. The holders of the units are entitled to participate in partnership distributions and exercise the rights and privileges available to limited partners under our partnership agreement. Our partnership agreement requires that, within 45 days after the end of each quarter, we distribute all of our available cash (as defined in our partnership agreement). Generally, our available cash is our cash on hand at the end of a quarter less the amount of any reserves established by our general partner. All distributions paid to date have been made from accumulated operating surplus as defined in the partnership agreement.

The holders of common units have the right to receive initial quarterly distributions of $0.425 per common unit, plus any arrearages thereon, before any distribution is made to the holders of the subordinated units. The holders of subordinated units will receive distributions only to the extent we have available cash above the initial quarterly distribution requirement for our common unitholders and general partner and certain reserves.  Subordinated units will convert into common units on a one-for-one basis when we meet financial tests specified in the partnership agreement. Although common and subordinated unitholders are not obligated to fund losses of the Partnership, their capital accounts, which would be considered in allocating the net assets of the Partnership were it to be liquidated, continue to share in losses.

The general partner interest is entitled to at least 2% of all distributions made by us. In addition, the general partner holds incentive distribution rights (“IDRs”), which allow the general partner to receive a higher percentage of quarterly distributions of available cash from operating surplus after the initial quarterly distributions have been achieved and as additional target levels are

8


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

met, but may transfer these rights separately from its general partner interest. The higher percentages range from 15% to 50%, inclusive of the general partner interest.
 
As of September 30, 2019, Cheniere, Blackstone CQP Holdco and the public owned a 48.6%, 40.3% and 9.1% interest in us, respectively. Cheniere’s ownership percentage includes its subordinated units and Blackstone CQP Holdco’s ownership percentage excludes any common units that may be deemed to be beneficially owned by Blackstone Group, an affiliate of Blackstone CQP Holdco.

NOTE 3—RESTRICTED CASH
 
Restricted cash consists of funds that are contractually or legally restricted as to usage or withdrawal and have been presented separately from cash and cash equivalents on our Consolidated Balance Sheets. As of September 30, 2019 and December 31, 2018, restricted cash consisted of the following (in millions):
 
 
September 30,
 
December 31,
 
 
2019
 
2018
Current restricted cash
 
 
 
 
Liquefaction Project
 
$
185

 
$
756

Cash held by us and our guarantor subsidiaries
 

 
785

Total current restricted cash
 
$
185

 
$
1,541



Pursuant to the accounts agreement entered into with the collateral trustee for the benefit of SPL’s debt holders, SPL is required to deposit all cash received into reserve accounts controlled by the collateral trustee.  The usage or withdrawal of such cash is restricted to the payment of liabilities related to the Liquefaction Project and other restricted payments.

The cash held by us and our guarantor subsidiaries was restricted in use under the terms of the previous $2.8 billion credit facilities (the “2016 CQP Credit Facilities”) and the related depositary agreement governing the extension of credit to us, but is no longer restricted following the termination of the 2016 CQP Credit Facilities. Amounts not classified as restricted have been reserved by our general partner under the terms of our partnership agreement.

NOTE 4—ACCOUNTS AND OTHER RECEIVABLES

As of September 30, 2019 and December 31, 2018, accounts and other receivables consisted of the following (in millions):
 
 
September 30,
 
December 31,
 
 
2019
 
2018
SPL trade receivable
 
$
261

 
$
330

Other accounts receivable
 
16

 
18

Total accounts and other receivables
 
$
277

 
$
348



NOTE 5—INVENTORY

As of September 30, 2019 and December 31, 2018, inventory consisted of the following (in millions):
 
 
September 30,
 
December 31,
 
 
2019
 
2018
Natural gas
 
$
15

 
$
28

LNG
 
7

 
6

Materials and other
 
81

 
65

Total inventory
 
$
103

 
$
99




9


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

NOTE 6—PROPERTY, PLANT AND EQUIPMENT
 
As of September 30, 2019 and December 31, 2018, property, plant and equipment, net consisted of the following (in millions):
 
 
September 30,
 
December 31,
 
 
2019
 
2018
LNG terminal costs
 
 
 
 
LNG terminal and interconnecting pipeline facilities
 
$
16,807

 
$
12,760

LNG terminal construction-in-process
 
1,196

 
3,913

Accumulated depreciation
 
(1,671
)
 
(1,290
)
Total LNG terminal costs, net
 
16,332

 
15,383

Fixed assets
 
 

 
 

Fixed assets
 
26

 
26

Accumulated depreciation
 
(20
)
 
(19
)
Total fixed assets, net
 
6

 
7

Property, plant and equipment, net
 
$
16,338

 
$
15,390

 

Depreciation expense was $136 million and $104 million during the three months ended September 30, 2019 and 2018, respectively, and $386 million and $310 million during the nine months ended September 30, 2019 and 2018, respectively.

We realized offsets to LNG terminal costs of $48 million during the nine months ended September 30, 2019 that were related to the sale of commissioning cargoes because these amounts were earned or loaded prior to the start of commercial operations of the respective Trains of the Liquefaction Project, during the testing phase for its construction. We did not realize any offsets to LNG terminal costs during the three months ended September 30, 2019 and in the three and nine months ended September 30, 2018.

NOTE 7—DERIVATIVE INSTRUMENTS

We have entered into the following derivative instruments that are reported at fair value:
interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under certain credit facilities (“Interest Rate Derivatives”) and
commodity derivatives consisting of natural gas supply contracts for the commissioning and operation of the Liquefaction Project (“Physical Liquefaction Supply Derivatives”) and associated economic hedges (collectively, the “Liquefaction Supply 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 Income 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, 2019 and December 31, 2018, 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, 2019
 
December 31, 2018
 
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)
$
(6
)
 
$
(10
)
 
$
(8
)
 
$
(24
)
 
$
5

 
$
(23
)
 
$
(25
)
 
$
(43
)


We value our Liquefaction Supply Derivatives using a market-based approach incorporating present value techniques, as needed, using observable commodity price curves, when available, and other relevant data.


10


CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)

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, 2019 and December 31, 2018, 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 may be impacted by inputs that are unobservable in the marketplace. The curves used to generate the fair value of our Physical Liquefaction Supply Derivatives are based on basis adjustments applied to forward curves for a liquid trading point. In addition, there may be observable liquid market basis information in the near term, but terms of a Physical Liquefaction Supply Derivatives contract may exceed the period for which such information is available, resulting in a Level 3 classification. In these instances, the fair value of the contract incorporates extrapolation assumptions made in the determination of the market basis price for future delivery periods in which applicable commodity basis prices were either not observable or lacked corroborative market data.

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 market basis spreads due to the contractual notional amount represented by our Level 3 positions, which is a substantial portion of our overall Physical Liquefaction Supply Derivatives portfolio. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of September 30, 2019:
 
 
Net Fair Value Liability
(in millions)
 
Valuation Approach
 
Significant Unobservable Input
 
Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives
 
$(8)