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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i10-Q
i☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact
name of registrant as specified in its charter)
iDelaware
i27-3235920
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i700 Milam Street, iSuite 1900
iHouston,
iTexasi77002
(Address of principal executive offices) (Zip Code)
(i713) i375-5000
(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
iNone
None
None
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. iYes☒ No ☐
Note: The registrant was a voluntary filer until July 27, 2023. The registrant has filed all reports required pursuant to Sections 13
or 15(d) during the preceding 12 months as if the registrant was subject to such filing requirements.
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). iYes☒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
☐
iNon-accelerated filer
☒
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☐ No ☒
Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date: Not applicable
As used in this quarterly report, the terms listed below have the following meanings:
Common Industry and Other Terms
ASU
Accounting Standards Update
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
ESG
environmental, social and governance
FASB
Financial
Accounting Standards Board
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
IPM agreements
integrated production marketing agreements in which the gas producer sells to us gas on a global LNG index price, less a fixed liquefaction fee, shipping and other costs
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; one British thermal unit measures the amount of energy required to raise the temperature of one pound of water by one degree Fahrenheit
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
SOFR
Secured
Overnight Financing Rate
SPA
LNG sale and purchase agreement
TBtu
trillion British thermal units; one British thermal unit measures the amount of energy required to raise the temperature of one pound of water by one degree Fahrenheit
Train
an industrial facility comprised of a series of refrigerant compressor loops used to cool natural gas into LNG
NOTE 1—iNATURE
OF OPERATIONS AND BASIS OF PRESENTATION
We are a Delaware limited liability company formed by CQP and based in Houston with ione member, Sabine Pass LNG-LP, LLC, an indirect wholly owned subsidiary of CQP. We and SPLNG are each indirect wholly owned subsidiaries of Cheniere Investments, which is a wholly owned subsidiary of CQP, a publicly traded limited partnership (NYSE MKT: CQP). CQP is a i48.6%
owned subsidiary of Cheniere, a Houston-based energy company primarily engaged in LNG-related businesses. Cheniere also owns i100% of the general partner interest in CQP through ownership in Cheniere Energy Partners GP, LLC.
The natural gas liquefaction and export facility located in Cameron Parish, Louisiana at Sabine Pass (the “Sabine Pass LNG Terminal”)
has isix operational Trains, for a total production capacity of approximately i30 mtpa of LNG (the “Liquefaction Project”). The Sabine Pass LNG Terminal also has operational regasification facilities owned by SPLNG.
We
have increased available liquefaction capacity at our Liquefaction Project as a result of debottlenecking and other optimization projects. We hold a significant land position at the Sabine Pass LNG Terminal, which provides opportunity for further liquefaction capacity expansion. In May 2023, we and another subsidiary of CQP entered the pre-filing review process with the FERC under the National Environmental Policy Act for an expansion adjacent to the Liquefaction Project with a potential production capacity of up to i20 mtpa of LNG. This expansion may be developed and constructed by an affiliate of ours outside of the Liquefaction Project. The development
of this site or other projects, including infrastructure projects in support of natural gas supply and LNG demand, will require, among other things, acceptable commercial and financing arrangements before we make a positive final investment decision.
We do not have employees and thus we have various services agreements with affiliates of Cheniere in the ordinary course of business, including services required to construct, operate and maintain the Liquefaction Project, and administrative services. See Note 10—Related Party Transactions for additional details of the activity under these services agreements during the three and nine months ended September 30, 2023 and 2022.
i
Basis
of Presentation
The accompanying unaudited Financial Statements of SPL have been prepared in accordance with GAAP for interim financial information and in accordance with Rule 10-01 of Regulation S-X and reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the financial results for the interim periods presented. 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 Financial Statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2022.
Results
of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2023.
iWe are a disregarded entity for federal and state income tax purposes. Our taxable income or loss is included in the federal income tax return of CQP. CQP is not subject to federal or state income taxes, as its partners are taxed individually on their allocable share of CQP’s taxable income. Accordingly, no provision or liability for federal
or state income taxes is included in the accompanying Financial Statements.
i
Recent Accounting Standards
ASU 2020-04
In March 2020, the FASB issued 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 as a result of the market transition from LIBOR to alternative reference rates. The temporary optional expedients under the standard became effective March 12, 2020 and will be available until December 31, 2024 following a subsequent amendment to the standard.
As further detailed in Note 8—Debt, our existing credit facility includes a variable interest rate indexed to SOFR, incorporated through a replacement of the previous credit facility subsequent to the effective date of ASU 2020-04. We elected to apply the optional expedients as applicable; however, the impact of applying the optional expedients was not material, and the transition to SOFR did not have a material impact on our cash flows.
NOTE 2—iRESTRICTED
CASH AND CASH EQUIVALENTS
As of September 30, 2023 and December 31, 2022, we had $i35 million and $i92
million of restricted cash and cash equivalents, respectively, for which the usage or withdrawal of such cash is restricted to the payment of liabilities related to the Liquefaction Project as required under certain debt arrangements.
NOTE 3—iTRADE AND OTHER RECEIVABLES, NET OF CURRENT EXPECTED CREDIT LOSSES
i
Trade
and other receivables, net of current expected credit losses consisted of the following (in millions):
(1)We
recognize 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 6—iDERIVATIVE INSTRUMENTS
We have commodity derivatives consisting of natural gas supply
contracts, including those under our IPM agreement, for the operation of the Liquefaction Project 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 Statements of Operations to the extent not utilized for the commissioning process, in which case such changes are capitalized.
i
The
following table shows the fair value of our derivative instruments that are required to be measured at fair value on a recurring basis, by the fair value hierarchy levels prescribed by GAAP (in millions):
We
value our Liquefaction Supply Derivatives using a market or option-based approach incorporating present value techniques, as needed, which incorporates observable commodity price curves, when available, and other relevant data.
The fair value of our 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, but not limited to, evaluation of whether the respective market exists from the perspective of market participants as infrastructure is developed.
We include a significant portion of our 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 may use in valuing the asset or liability. To the extent valued using an option pricing model, we consider the future prices of energy units for unobservable periods to be a significant unobservable input to estimated net fair value. In estimating the future prices of energy units, we make judgments about market risk related to liquidity of commodity indices and volatility utilizing available market data. Changes in facts and circumstances or additional information may result in revised estimates and judgments, and actual results may differ from these estimates and judgments. We derive our volatility assumptions based on observed historical settled global LNG market pricing or accepted proxies for global LNG
market pricing as well as settled domestic natural gas pricing. Such volatility assumptions also contemplate, as of the balance sheet date, observable forward curve data of such indices, as well as evolving available industry data and independent studies. In developing our volatility assumptions, we acknowledge that the global LNG industry is inherently influenced by events such as unplanned supply constraints, geopolitical incidents, unusual climate events including drought and uncommonly mild, by historical standards, winters and summers, and real or threatened disruptive operational impacts to global energy infrastructure. Our current estimate of volatility does not
exclude the impact of otherwise rare events unless we believe market participants would exclude such events on account of their assertion that those events were specific to our company and deemed within our control.
The Level 3 fair value measurements of our natural gas positions within our Liquefaction Supply Derivatives could be materially impacted by a significant change in certain natural gas and international LNG prices. iThe
following table includes quantitative information for the unobservable inputs for our Level 3 Liquefaction Supply Derivatives as of September 30, 2023:
Net Fair Value Liability
(in millions)
Valuation
Approach
Significant Unobservable Input
Range of Significant Unobservable Inputs / Weighted Average (1)
Liquefaction Supply Derivatives
$(i1,892)
Market approach incorporating
present value techniques
Henry Hub basis spread
$(i0.543) - $i0.510 / $i0.040
Option
pricing model
International LNG pricing spread, relative to Henry Hub (2)
i103% - i422% / i213%
(1)Unobservable
inputs were weighted by the relative fair value of the instruments.
(2)Spread contemplates U.S. dollar-denominated pricing.
Increases or decreases in basis or pricing spreads, in isolation, would decrease or increase, respectively, the fair value of our Liquefaction Supply Derivatives.
i
The following table shows the changes in the fair value
of our Level 3 Liquefaction Supply Derivatives (in millions):
Realized
and change in fair value gains (losses) included in net income (loss) (1):
Included in cost of sales, existing deals (2)
i294
(i1,545)
i1,275
(i155)
Included
in cost of sales, new deals (3)
i8
i—
i23
i—
Purchases
and settlements:
Purchases (4)
i—
i3
i—
(i4,896)
Settlements
(5)
i59
(i24)
i522
(i11)
Transfers
out of level 3 (6)
i2
(i2)
i7
i—
Balance,
end of period
$
(i1,892)
$
(i5,024)
$
(i1,892)
$
(i5,024)
Favorable
(unfavorable) changes in fair value relating to instruments still held at the end of the period
$
i302
$
(i1,545)
$
i1,298
$
(i155)
(1)Does
not include the realized value associated with derivative instruments that settle through physical delivery, as settlement is equal to contractually fixed price from trade date multiplied by contractual volume. See settlements line item in this table.
(2)Impact to earnings on deals that existed at the beginning of the period and continue to exist at the end of the period.
(3)Impact to earnings on deals that were entered into during the reporting period and continue to exist at the end of the period.
(4)Includes any day one gain (loss) recognized during the reporting period on deals that were entered into during the reporting period which continue to exist at the end of the period, in addition to any derivative contracts
acquired from entities at a value other than zero on acquisition date, such as derivatives assigned or novated during the reporting period and continuing to exist at the end of the period.
(5)Roll-off in the current period of amounts recognized in our Balance Sheets at the end of the previous period due to settlement of the underlying instruments in the current period.
(6)Transferred out of Level 3 as a result of observable market for the underlying natural gas purchase agreements.
All counterparty derivative contracts provide for the unconditional right of set-off in the event of default. We have elected to report derivative assets and liabilities arising from our derivative contracts with the same counterparty and the unconditional contractual right of set-off on a net basis. 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 depending on the position of the derivative. 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.
Liquefaction Supply Derivatives
We hold Liquefaction Supply Derivatives which are primarily indexed to the natural gas market and international
LNG indices. The firm terms of the Liquefaction Supply Derivatives range up to approximately i15 years, some of which commence upon the satisfaction of certain events or states of affairs.
The forward notional amount for our Liquefaction Supply Derivatives was approximately i5,642
TBtu and i5,972 TBtu as of September 30, 2023 and December 31, 2022, respectively, excluding notional amounts associated with extension options that were uncertain to be taken as of September 30, 2023.
i
The
following table shows the effect and location of our Liquefaction Supply Derivatives recorded on our Statements of Operations (in millions):
Gain (Loss) Recognized in Statements
of Operations
(1)Does
not include the realized value associated with Liquefaction Supply Derivatives 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.
Fair Value and Location of Derivative Assets and Liabilities on the Balance Sheets
iThe
following table shows the fair value and location of our Liquefaction Supply Derivatives on our Balance Sheets (in millions):
(1)Does
not include collateral posted by counterparties to us of $i1 million as of September 30, 2023, which is included in other current liabilities on our Balance Sheets, and collateral posted with counterparties by us of $i35 million
as of December 31, 2022, which is included in margin deposits on our Balance Sheets.
The
following table shows the fair value of our derivatives outstanding on a gross and net basis (in millions) for our derivative instruments that are presented on a net basis on our Balance Sheets:
(1)In June 2023, we refinanced and replaced the Working Capital Facility with the Revolving Credit Facility, resulting in an extended maturity date, revised borrowing capacity, reduced rate of interest and commitment
fees applicable thereunder and certain other changes to terms and conditions.
(2)The margin on the interest rate and the commitment fees is subject to change based on our credit rating.
/
Restrictive Debt Covenants
The indentures governing our senior notes and other agreements underlying our debt contain customary terms and events of default and certain covenants that, among other things, may limit our ability to make certain investments or pay dividends or distributions. We are restricted from making
distributions under agreements governing our indebtedness generally until, among other requirements, appropriate reserves have been established for debt service using cash or letters of credit and a historical debt service coverage ratio and projected debt service coverage ratio of at least i1.25:1.00 is satisfied.
As of September 30, 2023, we were in compliance with all covenants related to our debt agreements.
Interest
Expense
i
Total interest expense, net of capitalized interest, consisted of the following (in millions):
(1)As
of both September 30, 2023 and December 31, 2022, $ii1.2/ billion
of the fair value of our senior notes were classified as Level 3 since these senior notes were valued by applying an unobservable illiquidity adjustment to the price derived from trades or indicative bids of instruments with similar terms, maturities and credit standing. The remainder of our senior notes are classified as Level 2, based on prices derived from trades or indicative bids of the instruments.
The estimated fair value of our Working Capital Facility and our Revolving Credit Facility approximates the principal amount outstanding because the interest rates are variable and reflective of market rates and the debt may be repaid, in full or in part, at any time without penalty.
NOTE 9—iREVENUES
i
The
following table represents a disaggregation of revenue earned (in millions):
The
following table shows our contract assets, net of current expected credit losses, which are classified as other current assets, net and other non-current assets, net on our Balance Sheets (in millions):
Contract assets, net of current expected credit losses
$
i1
$
i1
/
i
The
following table reflects the changes in our contract liabilities, which we classify as deferred revenue and other non-current liabilities on our Balance Sheets (in millions):
The following table reflects the changes in our contract liabilities to affiliate, which we classify as other non-current liabilities—affiliate on our Balance Sheets (in millions):
Transaction Price Allocated to Future Performance Obligations
Because many of our sales contracts have long-term durations, we are contractually entitled to significant future consideration which we have not yet recognized as revenue. iThe
following table discloses the aggregate amount of the transaction price that is allocated to performance obligations that have not yet been satisfied:
(1)The
weighted average recognition timing represents an estimate of the number of years during which we shall have recognized half of the unsatisfied transaction price.
We have elected the following exemptions which omit certain potential future sources of revenue from the table above:
(1)We omit from the table above all performance obligations that are part of a contract that has an original expected duration of one year or less.
(2)The table above excludes substantially all variable consideration under our SPAs. We omit from the table above all variable consideration that is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied
promise to transfer a distinct good or service that forms part of a single performance obligation when that performance obligation qualifies as a series. The amount of revenue from variable fees that is not included in the transaction price will vary based on the future prices of Henry Hub throughout the contract terms, to the extent customers elect to take delivery of their LNG, and adjustments to the consumer price index. Certain of our contracts contain additional variable consideration based on the outcome of contingent events and the movement of various indexes. We have not included such variable consideration in the transaction price to the extent the consideration is considered constrained due to the uncertainty of ultimate pricing and receipt. Additionally, we have excluded
variable consideration related to volumes that contractually are subject to additional liquefaction capacity beyond what is currently in construction or operation. iThe following table summarizes the amount of variable consideration earned under contracts with customers included in the table above:
Below
is a summary of our transactions with our affiliates and other related parties, all in the ordinary course of business, as reported on our Statements of Operations (in millions):
(1)This
related party is partially owned by Brookfield Asset Management, Inc., who indirectly owns a portion of CQP’s limited partner interests.
/
Other Agreements
Cooperation Agreement
We have a cooperation agreement with SPLNG that allows us to retain and acquire certain rights to access the property and facilities that are owned by SPLNG for the purpose of constructing, modifying and operating the Liquefaction Project. In consideration for access given to us, we have agreed to transfer to SPLNG title of certain facilities, equipment and modifications, which SPLNG is obligated
to operate and maintain. The term of this agreement is consistent with our TUA described above. We conveyed $ii4/ million of assets to SPLNG under this agreement
during each of the three and nine months ended September 30, 2023, and expect to convey an additional $i4 million in the fourth quarter of 2023. We did iino/t
convey any assets to SPLNG under this agreement during the three and nine months ended September 30, 2022.
The concentration of our customer credit risk in excess of 10% of total revenues and/or trade and other receivables, net of current expected credit losses and contract assets, net of current expected credit losses was as follows:
Percentage
of Total Revenues from External Customers
Percentage of Trade and Other Receivables, Net and Contract Assets, Net from External Customers
Cash
paid during the period for interest on debt, net of amounts capitalized
$
i524
$
i456
Non-cash
investing and financing activities:
Non-cash distributions to affiliates for conveyance of property, plant, and equipment
i4
i—
Non-cash
contributions related to extinguishment of debt
i2
i—
Unpaid
purchases of property, plant and equipment, net
i19
i143
/
Novation
of IPM Agreement from Corpus Christi Liquefaction Stage III, LLC (“CCL Stage III”)
In March 2022, in connection with a prior commitment from Cheniere to collateralize financing for Train 6 of the Liquefaction Project, we and CCL Stage III, formerly a wholly owned direct subsidiary of Cheniere that merged with and into CCL, entered into an agreement to assign to us an IPM agreement to purchase i140,000 MMBtu per day of natural gas at a price based on the Platts Japan Korea Marker (“JKM”), for a term of approximately
i15 years beginning in early 2023. The transaction was accounted for as a transfer between entities under common control, which required us to recognize the obligations assumed at the historical basis of Cheniere. Upon the transfer, which occurred on March 15, 2022, we recognized $i2.7
billion in distributions within our Statements of Member’s Equity (Deficit) based on our assumption of current derivative liabilities and derivative liabilities of $i142 million and $i2.6 billion, respectively, which represented a non-cash financing
activity.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Regarding Forward-Looking Statements
This quarterly report contains certain
statements that are, or may be deemed to be, “forward-looking statements.” All statements, other than statements of historical or present facts or conditions, included herein or incorporated herein by reference are “forward-looking statements.” Included among “forward-looking statements” are, among other things:
•statements that we expect to commence or complete construction of our natural gas liquefaction project, or any expansions or portions thereof, by certain dates, or at all;
•statements regarding future levels of domestic and international natural gas production, supply or consumption or future levels of LNG imports into or exports from North America and other countries worldwide or purchases of natural gas, regardless of the source
of such information, or the transportation or other infrastructure or demand for and prices related to natural gas, LNG or other hydrocarbon products;
•statements regarding any financing transactions or arrangements, or our ability to enter into such transactions;
•statements regarding our future sources of liquidity and cash requirements;
•statements relating to the construction of our Trains, including statements concerning the engagement of any EPC contractor or other contractor and the anticipated terms and provisions of any agreement with any EPC or other contractor, and anticipated costs related thereto;
•statements regarding any SPA or other agreement to be entered
into or performed substantially in the future, including any revenues anticipated to be received and the anticipated timing thereof, and statements regarding the amounts of total natural gas liquefaction or storage capacities that are, or may become, subject to contracts;
•statements regarding counterparties to our commercial contracts, construction contracts and other contracts;
•statements regarding our planned development and construction of additional Trains, including
the financing of such Trains;
•statements that our Trains, when completed, will have certain characteristics, including amounts of liquefaction capacities;
•statements regarding our business strategy, our strengths, our business and operation plans or any other plans, forecasts, projections, or objectives, including anticipated revenues, capital expenditures, maintenance and operating costs and cash flows, any or all of which are subject to change;
•statements regarding legislative, governmental, regulatory, administrative or other public body actions, approvals, requirements, permits, applications, filings, investigations, proceedings or decisions; and
•any other statements that relate to non-historical
or future information.
All of these types of statements, other than statements of historical or present facts or conditions, are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,”“will,”“could,”“should,”“achieve,”“anticipate,”“believe,”“contemplate,”“continue,”“estimate,”“expect,”“intend,”“plan,”“potential,”“predict,”“project,”“pursue,”“target,” the negative of such terms or other comparable terminology. The forward-looking statements contained in this quarterly report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe that
such estimates are reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond our control. In addition, assumptions may prove to be inaccurate. We caution that the forward-looking statements contained in this quarterly report are not guarantees of future performance and that such statements may not be realized or the forward-looking statements or events may not occur. Actual results may differ materially from those anticipated or implied in forward-looking statements as a result of a variety of factors described in this quarterly report and in the other reports and other information that we file with the SEC, including those discussed under “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2022. All
forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. These forward-looking statements speak only as of the date made, and other than as required by law, we undertake no obligation to update or revise any forward-looking statement or provide reasons why actual results may differ, whether as a result of new information, future events or otherwise.
The
following discussion and analysis presents management’s view of our business, financial condition and overall performance and should be read in conjunction with our Financial Statements and the accompanying notes. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future.
Our discussion and analysis includes the following subjects:
We are a Delaware limited liability company formed by CQP. We
provide clean, secure and affordable LNG to integrated energy companies, utilities and energy trading companies around the world. We aspire to conduct our business in a safe and responsible manner, delivering a reliable, competitive and integrated source of LNG to our customers.
LNG is natural gas (methane) in liquid form. The LNG we produce is shipped all over the world, turned back into natural gas (called “regasification”) and then transported via pipeline to homes and businesses and used as an energy source that is essential for heating, cooking, other industrial uses and back up for intermittent energy sources. Natural gas is a cleaner-burning, abundant and affordable source of energy. When LNG is converted back to natural gas, it can be used instead of coal, which reduces the amount of pollution traditionally produced from burning fossil fuels, like sulfur dioxide and
particulate matter that enters the air we breathe. Additionally, compared to coal, it produces significantly fewer carbon emissions. By liquefying natural gas, we are able to reduce its volume by 600 times so that we can load it onto special LNG carriers designed to keep the LNG cold and in liquid form for efficient transport overseas.
We own a natural gas liquefaction and export facility located in Cameron Parish, Louisiana at Sabine Pass (the “Sabine Pass LNG Terminal”), one of the largest LNG production facilities in the world, which has six operational Trains, for a total production capacity of approximately 30 mtpa of LNG (the “Liquefaction Project”). The Sabine Pass LNG Terminal also has operational regasification facilities owned and operated by SPLNG.
Our
long-term customer arrangements form the foundation of our business and provide us with significant, stable, long-term cash flows. We have contracted most of our anticipated production capacity under SPAs, in which our customers are generally required to pay a fixed fee with respect to the contracted volumes irrespective of their election to cancel or suspend deliveries of LNG cargoes, and under an IPM agreement, in which the gas producer sells natural gas to us on a global LNG index price, less a fixed liquefaction fee, shipping and other costs. Through our SPAs and IPM agreement, we have contracted approximately 85% of the total production capacity from the Liquefaction Project with approximately 14 years of weighted average remaining life as of September 30, 2023.
We remain focused on safety, operational excellence and customer
satisfaction. Increasing demand for LNG has allowed us to expand our liquefaction infrastructure in a financially disciplined manner. We have increased available liquefaction capacity at our Liquefaction Project as a result of debottlenecking and other optimization projects. We hold a significant land position at the Sabine Pass LNG Terminal, which provides opportunity for further liquefaction capacity expansion. In May 2023, we and another subsidiary of CQP entered the pre-filing review process with the FERC under the National Environmental Policy Act (“NEPA”) for an expansion adjacent to the Liquefaction Project with a potential production capacity of up to 20 mtpa of LNG (the “Expansion Project”). This expansion may be developed and constructed by an affiliate of ours outside of the Liquefaction Project. The development of this site or other projects,
including infrastructure projects in support of natural gas supply and LNG demand, will require, among other things, acceptable commercial and financing arrangements before we make a positive final investment decision.
Additionally, we are committed to the management of our most important ESG impacts, risks and opportunities. In August 2023, Cheniere published The Power of Connection, its fourth Corporate Responsibility (“CR”) report, which details its approach and progress on ESG issues, including its collaboration
with natural gas midstream companies, technology providers and leading academic institutions on life-cycle assessment (“LCA”) models, quantification, monitoring, reporting and verification (“QMRV”) of greenhouse gas emissions and other research and development projects. Cheniere also co-founded and sponsored the Energy Emissions Modeling and Data Lab (“EEMDL”), a multidisciplinary research and education initiative led by the University of Texas at Austin in collaboration with Colorado State University and the Colorado School of Mines. In addition, Cheniere commenced providing Cargo Emissions Tags (“CE Tags”) to our long-term customers in June 2022, and in October 2022 joined the Oil and Gas Methane Partnership (“OGMP”)
2.0, the United Nations Environment Programme’s (“UNEP”) flagship oil and gas methane emissions reporting and mitigation initiative. Cheniere’s CR report is available at cheniere.com/our-responsibility/reporting-center. Information on Cheniere’s website, including the CR report, is not incorporated by reference into this Quarterly Report on Form 10-Q.
Overview of Significant Events
Our significant events since January
1, 2023 and through the filing date of this Form 10-Q include the following:
Strategic
•In May 2023, we and another subsidiary of CQP entered the pre-filing review process with the FERC under the NEPA for the Expansion Project, and in April 2023, the other CQP subsidiary executed a contract with Bechtel Energy Inc. to provide the front end engineering and design work on the project. This expansion may be developed and constructed by an affiliate of ours outside of the Liquefaction Project.
Operational
•As of October 26,
2023, approximately 2,270 cumulative LNG cargoes totaling approximately 155 million tonnes of LNG have been produced, loaded and exported from the Liquefaction Project.
Financial
•We completed the following debt transactions:
◦In September 2023, we redeemed $50 million of our 5.75% Senior Secured Notes due 2024 (the “2024 Senior Notes”).
◦In July 2023, we redeemed $1.4 billion of aggregate principal amount outstanding of our 2024 Senior Notes using contributions received from CQP and cash on hand.
◦In
June 2023, we entered into a $1.0 billion Senior Secured Revolving Credit and Guaranty Agreement (the “Revolving Credit Facility”). The Revolving Credit Facility refinanced and replaced our existing credit facility to, among other things, (1) extend the maturity date thereunder, (2) reduce the rate of interest and commitment fees applicable thereunder and (3) make certain other changes to the terms and conditions of the prior credit facility.
•In August 2023, Fitch Ratings upgraded our senior secured debt and issuer credit ratings from BBB to BBB+ with a stable outlook.
•In February 2023, S&P Global Ratings upgraded our issuer credit rating from BBB to BBB+ with a stable outlook.
LNG
volumes loaded and recognized as revenues (in TBtu)
362
363
(1)
1,118
1,110
8
Net
income (loss)
The increases of $1.7 billion and $3.9 billion for the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022, were primarily attributable to the favorable variances of $2.0 billion and $4.3 billion, respectively, from changes in fair value and settlements of derivatives. During the three and nine months ended September 30, 2023, we recognized gains of $217 million and $1.5 billion, respectively, due to non-cash favorable changes in fair value of the IPM agreement with Tourmaline Oil Marketing Corp. (the “Tourmaline IPM Agreement”) as a result of lower volatility in international gas prices compared to the same periods of 2022 and declines in international forward commodity
curves, as compared to losses of $1.3 billion and $2.2 billion in the three and nine months ended September 30, 2022, respectively, following the assignment of the Tourmaline IPM Agreement to us from Corpus Christi Liquefaction Stage III, LLC (“CCL Stage III”) in March 2022. The 2022 losses following the assignment were primarily attributed to our lower credit risk profile relative to that of CCL Stage III, resulting in a higher derivative liability given reduced risk of our own nonperformance and shifts in the international forward commodity curve. The increaseswere partially offset by a reduction in LNG revenues, net of
cost of sales and excluding the effect of derivatives (as further described above), of $265 million and $343 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022, the majority of which was attributable to lower margins on LNG delivered.
The following is additional discussion of the significant drivers of the variance in net income (loss) by line item:
Revenues
The $2.4 billion and $5.0 billion decreases between the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022 were attributable to lower pricing per MMBtu as a result
of decreased Henry Hub pricing.
Operating costs and expenses
The $4.1 billion and $8.9 billion decreases between the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022 were attributable to:
•$2.0 billion and $4.3 billion favorable variances between the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022, from changes in fair value and settlements of derivatives included in cost of sales, from losses of $1.6 billion and $2.4 billion in the three and nine months ended September 30, 2022,
respectively, to gains of $365 million and $1.9 billion in the three and nine months ended September 30, 2023, respectively, primarily due to decreased international gas prices resulting in non-cash favorable changes in fair value of our commodity derivatives indexed to such prices, specifically associated with the Tourmaline IPM Agreement as discussed above under Net income (loss); and
•$2.2 billion and $4.7 billion decreases between the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022, in cost of sales excluding the effect of derivative changes described above, primarily as a result of $2.2 billion and $4.6 billion decreases, respectively, in cost of natural gas feedstock largely due to lower U.S. natural
gas prices.
The favorable variances were partially offset by increases in third party operating and maintenance expense of $17 million and $116 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022. For the nine months ended September 30, 2023, increases in third party operating and maintenance expense were primarily due to the completion of planned large-scale maintenance activities on two trains at the Liquefaction Project during June 2023. Further contributing to the increase in third party operating and maintenance expense during the three and nine months ended September 30, 2023 was other third party service and maintenance contract
costs and natural gas transportation and storage capacity demand charges.
Significant factors affecting our results of operations
Below are significant factors that affect our results of operations.
Gains and losses on derivative instruments
Derivative instruments are utilized to manage our exposure to commodity-related marketing and price risks and are reported at fair value on our Financial Statements. For commodity derivative instruments related to our IPM agreement, the underlying LNG sales being economically hedged are accounted for under the accrual method of accounting, whereby revenues expected to be derived from the future
LNG sales are recognized only upon delivery or realization of the underlying transaction. Because the recognition of derivative instruments at fair value has the effect of recognizing gains or losses relating to future period exposure, and given the significant volumes, long-term duration and volatility in price basis for certain of our derivative contracts, use of derivative instruments may result in continued volatility of our results of operations based on changes in market pricing, counterparty credit risk and other relevant factors that may be outside of our control, notwithstanding the operational intent to mitigate risk exposure over time.
Commissioning cargoes
Prior to substantial completion of a Train,
amounts received from the sale of commissioning cargoes from that Train are offset against LNG terminal construction-in-process, because these amounts are earned or loaded during the testing phase for
the construction of that Train. During the nine months ended September 30, 2022, we realized offsets to LNG terminal costs of $148 million corresponding to 13 TBtu attributable to the sale of commissioning cargoes from Train 6 of the Liquefaction Project. We did not have any commissioning cargoes during the three months ended September
30, 2022 or the three and nine months ended September 30, 2023.
Liquidity and Capital Resources
The following information describes our ability to generate and obtain adequate amounts of cash to meet our requirements in the short term and the long term. In the short term, we expect to meet our cash requirements using operating cash flows and available liquidity, consisting of restricted cash and cash equivalents and available commitments under our credit facility. Additionally, we expect to meet our long term cash requirements by using operating cash flows and other future potential sources of liquidity, which may include debt
offerings. The table below provides a summary of our available liquidity (in millions). Future material sources of liquidity are discussed below.
Restricted cash and cash equivalents designated for the Liquefaction Project
$
35
Revolving
Credit Facility (1)
716
Total available liquidity
$
751
(1)Available commitments represent total commitments less loans outstanding and letters of credit issued under the Revolving Credit Facility as of September
30, 2023. See Note 8—Debt of our Notes to Financial Statements for additional information on the Revolving Credit Facility and other debt instruments.
Our liquidity position subsequent to September 30, 2023 will be driven by future sources of liquidity and future cash requirements. Future sources of liquidity are expected to be composed of (1) cash receipts from executed contracts, under which we are contractually entitled to future consideration, and (2) additional sources of liquidity, from which we expect to receive cash although the cash is not underpinned by executed contracts. Future
cash requirements are expected to be composed of (1) cash payments under executed contracts, under which we are contractually obligated to make payments, and (2) additional cash requirements, under which we expect to make payments although we are not contractually obligated to make the payments under executed contracts. For further discussion of our future sources and uses of liquidity, see the liquidity and capital resources disclosures in our annual report on Form 10-K for the fiscal year ended December 31, 2022.
Sources
and Uses of Cash
The following table summarizes the sources and uses of our restricted cash and cash equivalents (in millions). The table presents capital expenditures on a cash basis; therefore, these amounts differ from the amounts of capital expenditures, including accruals, which are referred to elsewhere in this report. Additional discussion of these items follows the table.
Net
increase (decrease) in restricted cash and cash equivalents
$
(57)
$
97
Operating Cash Flows
The
$171 million decrease between the periods was primarily related to lower cash receipts from the sale of LNG cargoes from lower pricing per MMBtu as a result of decreased Henry Hub pricing, which was partially offset by lower cash outflows for natural gas feedstock, mostly due to lower U.S. natural gas prices.
Investing Cash Flows
Cash outflows for property, plant and equipment during the nine months ended September 30, 2023 were primarily related to optimization and other site improvement projects. Cash outflows for property, plant and equipment during the nine months ended September 30, 2022 were primarily related to the construction costs for Train 6 of the Liquefaction Project,
which achieved substantial completion on February 4, 2022, and the construction of the third marine berth at the Liquefaction Project, which achieved substantial completion on October 27, 2022 and which we immediately conveyed to SPLNG.
Financing Cash Flows
During the nine months ended September 30, 2023 and 2022, we made distributions to CQP of $1.4 billion and $1.7 billion, respectively. During the nine months ended September
30, 2023, we received $1.2 billion of contributions from CQP, which were used with cash on hand to redeem $1.4 billion of the 2024 Senior Notes. Additionally, during the nine months ended September 30, 2023, we purchased $200 million of the 2024 SPL Senior Notes in the open market and redeemed an additional $50 million of the 2024 Senior Notes, which leaves only $350 million to be repaid for debt maturing in 2024. We did not have any debt activity during the nine months ended September 30, 2022.
Summary of Critical Accounting Estimates
The preparation of Financial Statements in conformity with GAAP requires management
to make certain estimates and assumptions that affect the amounts reported in the Financial Statements and the accompanying notes. There have been no significant changes to our critical accounting estimates from those disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2022.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Marketing and Trading Commodity Price Risk
We have commodity derivatives consisting of natural gas supply contracts for the operation of the Liquefaction Project (the “Liquefaction Supply Derivatives”). In order to test the sensitivity
of the fair value of the Liquefaction Supply Derivatives to changes in underlying commodity prices, management modeled a 10% change in the commodity price for natural gas for each delivery location as follows (in millions):
See Note 6—Derivative Instruments of our Notes to Financial Statements for additional details about our derivative instruments.
ITEM 4.CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective.
During the most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
