Quarterly report pursuant to Section 13 or 15(d)

NOTE 8—Financial Instruments

 v2.3.0.11
NOTE 8—Financial Instruments
 6 Months Ended
Jun. 30, 2011
Financial Instruments [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]
Financial Instruments

Derivative Instruments

Sabine Pass LNG has entered into financial derivatives to hedge the price risk attributable to future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal. Changes in the fair value of our derivatives are reported in earnings because they do not meet the criteria to be designated 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 value of our commodity futures contracts are based on inputs that are quoted prices in active markets for identical assets or liabilities, resulting in Level 1 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 at June 30, 2011:  
 
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total Carrying Value
Derivatives liability
$
331

 
$
—

 
$
—

 
$
331


Derivatives liability reflects natural gas swap positions held by Sabine Pass LNG and are classified as other current liabilities on our Consolidated Balance Sheets. These positions were entered into to mitigate the price risk from future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal. Gains or losses in these positions are classified as derivative gain (loss), net on our Consolidated Statements of Operations. We recorded derivative gain (loss), net of ($0.4) million in the three and six months ended June 30, 2011. During the three and six months ended June 30, 2010, Sabine Pass LNG had derivative positions to hedge the exposure to variability in expected future cash flows attributable to the future sale of its LNG inventory. We recorded derivative gain (loss), net of ($0.04) million and $0.5 million related to these positions in the three and six months ended June 30, 2010, respectively.

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 restricted cash and cash equivalents, accounts receivable, interest receivables and accounts payable approximate fair value due to their short-term nature.
 
Financial Instruments (in thousands):
 
June 30, 2011
 
December 31, 2010
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
2013 Notes (1)
$
550,000

 
$
563,750

 
$
550,000

 
$
541,750

2016 Notes, net of discount (1)
1,640,071

 
1,681,073

 
1,637,724

 
1,523,083

 
 
 
 
 
 
(1)    The fair value of the Senior Notes, net of discount, was based on quotations obtained from broker-dealers who made markets in these and similar instruments as of June 30, 2011 and December 31, 2010, as applicable.