cqp-20200930

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, 2020

☐ 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 30, 2020, the registrant had 484,019,623 common units outstanding.

CHENIERE ENERGY PARTNERS, L.P.

TABLE OF CONTENTS




























	Definitions	1
Part I. Financial Information
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Partners’ Equity	5
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	40

Part II. Other Information
Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41



Item 6.	Exhibits	41

	Signatures	42

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

Abbreviated Legal Entity Structure

The following diagram depicts our abbreviated legal entity structure as of September 30, 2020, including our ownership of certain subsidiaries, and the references to these entities used in this quarterly report:

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.

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,
	2020		2019
ASSETS	(unaudited)
Current assets
Cash and cash equivalents	$	1,254	$	1,781
Restricted cash	157		181
Accounts and other receivables, net	204		297
Accounts receivable—affiliate	82		105
Advances to affiliate	120		158
Inventory	113		116
Derivative assets	14		17
Other current assets	117		51
Other current assets—affiliate	—		1
Total current assets	2,061		2,707


Property, plant and equipment, net	16,666		16,368
Operating lease assets, net	100		94
Debt issuance costs, net	18		15
Non-current derivative assets	30		32
Other non-current assets, net	155		168

Total assets	$	19,030	$	19,384

LIABILITIES AND PARTNERS’ EQUITY
Current liabilities
Accounts payable	$	17	$	40
Accrued liabilities	564		709
Accrued liabilities—related party	2		—

Due to affiliates	42		46
Deferred revenue	179		155
Deferred revenue—affiliate	—		1
Current operating lease liabilities	7		6
Derivative liabilities	31		9

Total current liabilities	842		966

Long-term debt, net	17,573		17,579

Non-current operating lease liabilities	92		87
Non-current derivative liabilities	25		16
Other non-current liabilities	2		1
Other non-current liabilities—affiliate	18		20



Partners’ equity
Common unitholders’ interest (484.0 million and 348.6 million units issued and outstanding at September 30, 2020 and December 31, 2019, respectively)	627		1,792
Subordinated unitholders’ interest (zero and 135.4 million units issued and outstanding at September 30, 2020 and December 31, 2019, respectively)	—		(996)
General partner’s interest (2% interest with 9.9 million units issued and outstanding at September 30, 2020 and December 31, 2019)	(149)		(81)
Total partners’ equity	478		715
Total liabilities and partners’ equity	$	19,030	$	19,384

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

CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per unit data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues
LNG revenues	$	807	$	1,140	$	3,588	$	3,678
LNG revenues—affiliate	103		257		352		1,017

Regasification revenues	67		66		202		199

Other revenues	5		13		28		36

Total revenues	982		1,476		4,170		4,930

Operating costs and expenses
Cost of sales (excluding items shown separately below)	454		742		1,551		2,501
Cost of sales—affiliate	33		6		38		6
Operating and maintenance expense	146		172		463		472
Operating and maintenance expense—affiliate	34		34		115		100



General and administrative expense	2		3		12		9
General and administrative expense—affiliate	24		34		73		82
Depreciation and amortization expense	137		138		413		390
Impairment expense and loss on disposal of assets	—		1		5		6

Total operating costs and expenses	830		1,130		2,670		3,566

Income from operations	152		346		1,500		1,364

Other income (expense)
Interest expense, net of capitalized interest	(221)		(231)		(691)		(648)
Loss on modification or extinguishment of debt	—		(13)		(43)		(13)

Other income, net	2		8		8		24

Total other expense	(219)		(236)		(726)		(637)

Net income (loss)	$	(67)	$	110	$	774	$	727

Basic and diluted net income (loss) per common unit	$	(0.08)	$	0.19	$	1.55	$	1.38


Weighted average number of common units outstanding used for basic and diluted net income (loss) per common unit calculation	414.8		348.6		370.9		348.6

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

CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

(in millions)

(unaudited)


Three and Nine Months Ended September 30, 2020
	Common Unitholders’ Interest			Subordinated Unitholder’s Interest		General Partner’s Interest			Total Partners’ Equity
	Units	Amount			Units	Amount		Units			Amount
















Balance at December 31, 2019	348.6	$	1,792		135.4	$	(996)	9.9	$	(81)		$	715
Net income	—	307			—	119		—	9			435
Distributions
Common units, $0.63/unit	—	(220)			—	—		—	—			(220)
Subordinated units, $0.63/unit	—	—			—	(85)		—	—			(85)
General partner units	—	—			—	—		—	(25)			(25)
Balance at March 31, 2020	348.6	1,879			135.4	(962)		9.9	(97)			820
Net income	—	287			—	111		—	8			406
Distributions
Common units, $0.64/unit	—	(223)			—	—		—	—			(223)
Subordinated units, $0.64/unit	—	—			—	(86)		—	—			(86)
General partner units	—	—			—	—		—	(29)			(29)
Balance at June 30, 2020	348.6	1,943			135.4	(937)		9.9	(118)			888
Net income	—	(65)			—	(1)		—	(1)			(67)
Conversion of subordinated units into common units	135.4	(1,026)			(135.4)	1,026		—	—			—
Distributions
Common units, $0.645/unit	—	(225)			—	—		—	—			(225)
Subordinated units, $0.645/unit	—	—			—	(88)		—	—			(88)
General partner units	—	—			—	—		—	(30)			(30)

Balance at September 30, 2020	484.0	$	627		—	$	—	9.9	$	(149)		$	478

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

CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY—CONTINUED

(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.

CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities
Net income	$	774	$	727
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	413		390
Amortization of debt issuance costs, premium and discount	24		23
Loss on modification or extinguishment of debt	43		13
Total losses (gains) on derivatives, net	38		(30)
Net cash provided by (used for) settlement of derivative instruments	(2)		11
Impairment expense and loss on disposal of assets	5		6
Other	10		8

Changes in operating assets and liabilities:
Accounts and other receivables, net	93		36
Accounts receivable—affiliate	23		47
Advances to affiliate	31		(47)
Inventory	2		(3)
Accounts payable and accrued liabilities	(96)		(209)
Accrued liabilities—related party	2		—
Due to affiliates	(3)		(3)
Deferred revenue	24		54
Other, net	(45)		(42)
Other, net—affiliate	(3)		(4)
Net cash provided by operating activities	1,333		977

Cash flows from investing activities
Property, plant and equipment, net	(795)		(1,156)
Other	—		(1)
Net cash used in investing activities	(795)		(1,157)

Cash flows from financing activities
Proceeds from issuances of debt	1,995		2,230
Repayments of debt	(2,000)		(730)
Debt issuance and other financing costs	(34)		(33)
Debt extinguishment costs	(39)		(4)

Distributions to owners	(1,011)		(935)
Other	—		3
Net cash provided by (used in) financing activities	(1,089)		531

Net increase (decrease) in cash, cash equivalents and restricted cash	(551)		351
Cash, cash equivalents and restricted cash—beginning of period	1,962		1,541
Cash, cash equivalents and restricted cash—end of period	$	1,411	$	1,892

Balances per Consolidated Balance Sheet:


	September 30,
	2020
Cash and cash equivalents	$	1,254
Restricted cash	157

Total cash, cash equivalents and restricted cash	$	1,411

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

CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION

The Sabine Pass LNG terminal is located in Cameron Parish, Louisiana, on the Sabine-Neches Waterway less than four miles from the Gulf Coast. Through our subsidiary, SPL, we are currently operating five natural gas liquefaction Trains and are constructing one additional Train for a total production capacity of approximately 30 mtpa of LNG (the “Liquefaction Project”) at the Sabine Pass LNG terminal. Through our subsidiary, SPLNG, we own and operate regasification facilities at the Sabine Pass LNG terminal, which includes pre-existing infrastructure of five LNG storage tanks, two marine berths and vaporizers and an additional marine berth that is under construction. We also own a 94-mile pipeline through our subsidiary, CTPL, that interconnects the Sabine Pass LNG terminal with a number of large interstate pipelines (the “Creole Trail Pipeline”).

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 fiscal year ended December 31, 2019.

Results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2020.

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

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance primarily provides temporary optional expedients which simplify the accounting for contract modifications to existing debt agreements expected to arise from the market transition from LIBOR to alternative reference rates. The optional expedients were available to be used upon issuance of this guidance but we have not yet applied the guidance because we have not yet modified any of our existing contracts for reference rate reform. Once we apply an optional expedient to a modified contract and adopt this standard, the guidance will be applied to all subsequent applicable contract modifications until December 31, 2022, at which time the optional expedients are no longer available.

NOTE 2—UNITHOLDERS’ EQUITY

The common 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.

In July 2020, the board of directors of our general partner confirmed and approved that, following the distribution with respect to the three months ended June 30, 2020, the financial tests required for conversion of our subordinated units had been met under the terms of the partnership agreement. Accordingly, effective August 17, 2020, the first business day following the payment of the distribution, all of our subordinated units were automatically converted into common units on a one-for-one basis and the subordination period was terminated.

Although common unitholders are not obligated to fund losses of the Partnership, its capital account, which would be considered in allocating the net assets of the Partnership were it to be liquidated, continues to share in losses.

CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

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 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, 2020, Cheniere held 48.6% limited partner and 2% general partner interest in us, BX CQP Target Holdco L.L.C. (“BX CQP Target Holdco”) and other affiliates of The Blackstone Group Inc. (“Blackstone”) and Brookfield Asset Management Inc. (“Brookfield”) held 41.9% interest in us and the public held 7.5% interest in us. BX CQP Target Holdco’s equity interests are 50.01% owned by BIP Chinook Holdco L.L.C., an affiliate of Blackstone and 49.99% owned by BIF IV Cypress Aggregator (Delaware) LLC, an affiliate of Brookfield. The ownership of BX CQP Target Holdco, Blackstone and Brookfield are based on their most recent filings with the SEC.

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, 2020 and December 31, 2019, we had $157 million and $181 million of current restricted cash, respectively.

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.

NOTE 4—ACCOUNTS AND OTHER RECEIVABLES

As of September 30, 2020 and December 31, 2019, accounts and other receivables, net consisted of the following (in millions):



	September 30,		December 31,
	2020		2019
SPL trade receivable	$	175	$	283
Other accounts receivable	29		14

Total accounts and other receivables, net	$	204	$	297

NOTE 5—INVENTORY

As of September 30, 2020 and December 31, 2019, inventory consisted of the following (in millions):



	September 30,		December 31,
	2020		2019
Natural gas	$	13	$	9
LNG	18		27
Materials and other	82		80
Total inventory	$	113	$	116

CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

NOTE 6—PROPERTY, PLANT AND EQUIPMENT

As of September 30, 2020 and December 31, 2019, property, plant and equipment, net consisted of the following (in millions):



	September 30,		December 31,
	2020		2019
LNG terminal costs
LNG terminal and interconnecting pipeline facilities	$	16,873	$	16,894

LNG terminal construction-in-process	2,001		1,275
Accumulated depreciation	(2,213)		(1,807)
Total LNG terminal costs, net	16,661		16,362
Fixed assets
Fixed assets	28		27
Accumulated depreciation	(23)		(21)
Total fixed assets, net	5		6
Property, plant and equipment, net	$	16,666	$	16,368

The following table shows depreciation expense and offsets to LNG terminal costs during the three and nine months ended September 30, 2020 and 2019 (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Depreciation expense	$	135	$	136	$	409	$	386
Offsets to LNG terminal costs (1)	—		—		—		48

(1) We realize offsets to LNG terminal costs 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.

NOTE 7—DERIVATIVE INSTRUMENTS

We have entered into 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 Operations 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, 2020 and December 31, 2019, 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, 2020								December 31, 2019
	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)	$	(7)	$	(5)	$	—	$	(12)	$	3	$	(3)	$	24	$	24

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.

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, 2020 and December 31, 2019, 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 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, volatility and contract duration.

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 prices. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of September 30, 2020:

Net Fair Value Asset
(in millions)

Valuation Approach

Significant Unobservable Input

Range of Significant Unobservable Inputs / Weighted Average (1)

Physical Liquefaction Supply Derivatives

$—

Market approach incorporating present value techniques

Henry Hub basis spread

$(0.527) - $0.055 / $0.001

(1) Unobservable inputs were weighted by the relative fair value of the instruments.

Increases or decreases in basis, in isolation, would decrease or increase, respectively, the fair value of our Physical Liquefaction Supply Derivatives.

The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three and nine months ended September 30, 2020 and 2019 (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Balance, beginning of period	$	51	$	34	$	24	$	(25)
Realized and mark-to-market gains (losses):
Included in cost of sales	(47)		(42)		(22)		(22)
Purchases and settlements:
Purchases	5		(1)		4		(4)
Settlements	(8)		1		(6)		43
Transfers into Level 3, net (1)	(1)		—		—		—
Balance, end of period	$	—	$	(8)	$	—	$	(8)
Change in unrealized losses relating to instruments still held at end of period	$	(47)	$	(42)	$	(22)	$	(22)

(1) Transferred into Level 3 as a result of unobservable market, or out of Level 3 as a result of observable market for the underlying natural gas purchase agreements.

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 the unconditional right of set-off in the event of default. 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. 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.

CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Liquefaction Supply Derivatives

SPL has entered into primarily index-based physical natural gas supply contracts and associated economic hedges to purchase natural gas for the commissioning and operation of the Liquefaction Project. The remaining terms of the physical natural gas supply contracts range up to 10 years, some of which commence upon the satisfaction of certain events or states of affairs.

The notional natural gas position of our Liquefaction Supply Derivatives was approximately 3,207 TBtu and 3,663 TBtu as of September 30, 2020 and December 31, 2019, respectively, of which 91 TBtu and zero TBtu, respectively, were for a natural gas supply contract that SPL has with a related party.

The following table shows the fair value and location of our Liquefaction Supply Derivatives on our Consolidated Balance Sheets (in millions):




	Fair Value Measurements as of (1)
Consolidated Balance Sheets Location	September 30, 2020		December 31, 2019
Derivative assets	$	14	$	17
Non-current derivative assets	30		32
Total derivative assets	44		49

Derivative liabilities	(31)		(9)
Non-current derivative liabilities	(25)		(16)
Total derivative liabilities	(56)		(25)

Derivative asset (liability), net	$	(12)	$	24

(1) Does not include collateral posted with counterparties by us of $12 million and $2 million for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively. Includes a natural gas supply contract that SPL has with a related party, which had a fair value of zero as of September 30, 2020.

The following table shows the changes in the fair value, settlements and location of our Liquefaction Supply Derivatives recorded on our Consolidated Statements of Operations during the three and nine months ended September 30, 2020 and 2019 (in millions):


	Consolidated Statements of Operations Location (1)	Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019
Liquefaction Supply Derivatives gain	LNG revenues	$	7	$	1	$	3	$	2
Liquefaction Supply Derivatives gain (loss)	Cost of sales	(74)		(55)		(41)		28

(1) Does not include the realized value associated with derivative instruments that settle through physical delivery. 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.

CHENIERE ENERGY PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(unaudited)

Consolidated Balance Sheets Presentation

Our derivative instruments are presented on a net basis on our Consolidated Balance Sheets as described above. The following table shows the fair value of our derivatives outstanding on a gross and net basis (in millions):


	Gross Amounts Recognized		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets
Offsetting Derivative Assets (Liabilities)
As of September 30, 2020




Liquefaction Supply Derivatives	$	47	$	(3)	$	44
Liquefaction Supply Derivatives	(59)		3		(56)
As of December 31, 2019


Liquefaction Supply Derivatives	$	51	$	(2)	$	49
Liquefaction Supply Derivatives	(27)		2		(25)

NOTE 8—OTHER NON-CURRENT ASSETS

As of September 30, 2020 and December 31, 2019, other non-current assets, net consisted of the following (in millions):



	September 30,		December 31,
	2020		2019
Advances made to municipalities for water system enhancements	$	85	$	87
Advances and other asset conveyances to third parties to support LNG terminal	34		35
Tax-related prepayments and receivables	17		17
Information technology service prepayments	6		6
Advances made under EPC and non-EPC contracts	4		15
Other	9		8
Total other non-current assets, net	$	155	$	168

NOTE 9—ACCRUED LIABILITIES

As of September 30, 2020 and December 31, 2019, accrued liabilities consisted of the following (in millions):



	September 30,		December 31,
	2020		2019
Interest costs and related debt fees	$	264	$	241
Accrued natural gas purchases	212		325
LNG terminal and related pipeline costs	62		135
Other accrued liabilities	26