Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

v2.4.0.6
Financial Instruments
 6 Months Ended
Jun. 30, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Disclosure
Financial Instruments

Derivative Instruments

We have entered into certain derivative 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 price risk attributable to future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal ("Fuel 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 values 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 June 30, 2012:  
 
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)
$
—
 
 
 
38

 
$
—
 
 
$
38
 
Fuel Derivatives liability (2)
—
 
 
 
664

 
—
 
 
664
 
 
 
 
 
 
 

(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 $(0.2) million and zero related to LNG Inventory Derivatives in the three months ended June 30, 2012 and 2011, respectively. We recorded revenues of $0.9 million and zero related to LNG Inventory Derivatives in the six months ended June 30, 2012 and 2011, respectively.
(2)
Fuel Derivatives liability is classified as other current liabilities on our Consolidated Balance Sheets. Changes in the fair value of Fuel Derivatives are classified as derivative gain (loss) on our Consolidated Statements of Operations. We recorded derivative gain of $0.3 million and derivative loss of $0.4 million related to Fuel Derivatives in the three months ended June 30, 2012 and 2011, respectively. We recorded derivative loss of $0.6 million and $0.4 million related to Fuel Derivatives in the six months ended June 30, 2012 and 2011, 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 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.
Financial Instruments (in thousands):
 
June 30, 2012
 
December 31, 2011
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
2013 Notes (1)
$
550,000

 
$
569,250

 
$
550,000

 
$
555,500

2016 Notes, net of discount (1)
1,644,765

 
1,722,892

 
1,642,418

 
1,650,630

 
 
 
 
 
(1)
The Level 2 estimated 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 based on the closing trading prices on June 30, 2012 and December 31, 2011, as applicable.