CHENIERE ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED 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 and international LNG prices. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of December 31, 2019: Increases or decreases in basis or pricing spreads, 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 years ended December 31, 2019, 2018 and 2017 (in millions): 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. CCH has entered into interest rate swaps to protect against volatility of future cash flows and hedge a portion of the variable interest payments on its amended and restated credit facility (the “CCH Credit Facility”). In June and July of 2019, we entered into CCH Interest Rate Forward Start Derivatives to hedge against changes in interest rates that could impact anticipated future issuance of debt by CCH, which is anticipated by the end of 2020. In November 2019, CCH settled a portion of the CCH Interest Rate Forward Start Derivatives in conjunction with the prepayment of $1.5 billion of 86 Interest Rate Derivatives (1) Transferred to Level 2 as a result of observable market for the underlying natural gas purchase agreements. (1) Spread contemplates U.S. dollar-denominated pricing. Net Fair Value Asset (in millions) Valuation Approach Significant Unobservable Input Significant Unobservable Inputs Range Physical Liquefaction Supply Derivatives $138 Market approach incorporating present value techniques Henry Hub basis spread $(0.718) - $0.058 Option pricing model International LNG pricing spread, relative to Henry Hub (1) 86% - 213% Year Ended December 31, 2019 2018 2017 Balance, beginning of period $ (29 ) $ 43 $ 79 Realized and mark-to-market gains (losses): Included in cost of sales (77 ) (13 ) (37 ) Purchases and settlements: Purchases 199 (31 ) 14 Settlements 44 (29) (12) Transfers out of Level 3 (1) 1 1 (1 ) Balance, end of period $ 138 $ (29) $ 43 Change in unrealized losses relating to instruments still held at end of period $ (77 ) $ (13 ) $ (37 )