Quarterly report pursuant to Section 13 or 15(d)

NOTE 8—Financial Instruments

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NOTE 8—Financial Instruments
 9 Months Ended
Sep. 30, 2011
Financial Instruments [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]
Financial Instruments

Derivative Instruments

We have entered into certain derivative instruments to hedge the price risk attributable to future purchases of natural gas to be utilized as fuel to operate our LNG terminal ("Fuel Derivatives") and to hedge the exposure to variability in expected future cash flows attributable to the future sale of our LNG inventory ("LNG Inventory 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 value 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 September 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
LNG Inventory Derivatives asset (1)
$
—
 
 
$
476
 
 
$
—
 
 
$
476
 
Fuel Derivatives liability (2)
$
—
 
 
$
777
 
 
$
—
 
 
$
777
 
 
 
 
 
 
 
(1)
LNG Inventory Derivatives asset is classified as other current assets on our Consolidated Balance Sheets. Changes in the fair value of LNG Inventory Derivatives are classified as revenues on our Consolidated Statements of Operations. We recorded revenues of $0.5 million related to LNG Inventory Derivatives in each of the three and nine months ended September 30, 2011.
(2)
Fuel Derivatives liability is classified as other current liabilities on our Consolidated Balance Sheets. Changes in the fair value of our Fuel Derivatives are classified as derivative gain (loss) on our Consolidated Statements of Operations. We recorded derivative loss of $0.7 million and $1.2 million related to Fuel Derivatives in the three and nine months ended September 30, 2011, respectively. We recorded derivative gain of zero and $0.5 million in the three and nine months ended September 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):
 
September 30, 2011
 
December 31, 2010
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
2013 Notes (1)
$
550,000

 
$
534,875

 
$
550,000

 
$
541,750

2016 Notes, net of discount (1)
1,641,244

 
1,530,460

 
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 make markets in these and similar instruments.