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(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. Yes ☐iNo☒
Note:
The registrant is a voluntary filer not subject to the filing requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934. However, 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
Bcf
billion
cubic feet
Bcf/d
billion cubic feet per day
Bcf/yr
billion cubic feet per year
DOE
U.S. Department of Energy
EPC
engineering, procurement and construction
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
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, an energy unit
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
SPA
LNG sale and purchase agreement
TBtu
trillion
British thermal units, an energy unit
Train
an industrial facility comprised of a series of refrigerant compressor loops used to cool natural gas into LNG
The
accompanying notes are an integral part of these financial statements.
5
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1—iNATURE
OF OPERATIONS AND BASIS OF PRESENTATION
We are in various stages of operating and constructing isixnatural gas liquefaction Trains (the “Liquefaction Project”)at the Sabine Pass LNG terminal adjacent to the existing regasification facilities owned and operated by SPLNG. Our
Liquefaction Project is being constructed and operated at the Sabine Pass LNG terminal, which is located on the Sabine-Neches Waterway less than four miles from the Gulf Coast. Trains 1 through 5 are operational and Train 6 is under construction.
i
Basis of Presentation
The accompanying unaudited Financial
Statements of SPL have been prepared in accordance with GAAP for interim financial information and with Rule 10-01 of Regulation S-X. 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 year ended December 31, 2018.
Results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results of operations that will be
realized for the year ending December 31, 2019.
iWe are a disregarded entity for federal and state income tax purposes. Our taxable income or loss, which may vary substantially from the net income reported on our Statements of Income, is able to be included in the federal income tax return of Cheniere Partners, a publicly traded partnership which indirectly owns us. Accordingly, ino/
provision or liability for federal or state income taxes is included in the accompanying Financial Statements.
i
Recent Accounting Standards
We adopted ASU 2016-02, Leases (Topic 842), and subsequent amendments thereto on January 1, 2019 using the optional transition approach to apply the standard at the beginning of the first quarter of 2019 with no retrospective
adjustments to prior periods. This standard requires a lessee to recognize leases on its balance sheet by recording a lease liability representing the obligation to make future lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. The adoption of the standard did not materially impact our Financial Statements. Upon adoption of the standard we recorded right-of-use assets of $i20 million in other non-current
assets, net, and lease liabilities of $i4 million in other non-current liabilities and $i16
million in other non-current liabilities—affiliate.
/
NOTE 2—iRESTRICTED CASH
Restricted cash consists
of funds that are contractually or legally restricted as to usage or withdrawal and have been presented separately from cash and cash equivalents on our Balance Sheets. iAs of September 30, 2019 and December 31, 2018, restricted cash consisted of the following (in millions):
Pursuant
to the accounts agreement entered into with the collateral trustee for the benefit of our debt holders, we are required to deposit all cash received into reserve accounts controlled by the collateral trustee. The usage or withdrawal of such cash is restricted to the payment of liabilities related to the Liquefaction Project and other restricted payments.
Depreciation
expense was $i115 million and $i85 million during the three months ended September 30, 2019 and 2018,
respectively, and $i327 million and $i254 million during the nine months ended September 30, 2019 and 2018,
respectively.
We realized offsets to LNG terminal costs of $i48 million during the nine months ended September 30, 2019 that were 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. We did inot realize any offsets to LNG terminal costs during the three months ended September 30, 2019 and in the three and nine months ended September 30, 2018.
NOTE
6—iDERIVATIVE INSTRUMENTS
We have entered into commodity derivatives consisting of natural gas supply contracts for the commissioning and operation of the Liquefaction Project(“Physical Liquefaction Supply Derivatives”) 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 Income to the extent not utilized for the commissioning process.
7
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
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 as of September 30, 2019 and December 31, 2018, which are classified as derivative assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Balance Sheets (in millions):
We
value our Liquefaction Supply Derivatives using a market-based approach incorporating present value techniques, as needed, using observable commodity price curves, when available and other relevant data.
The fair value of our Physical 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 evaluating whether the respective market is available as pipeline infrastructure is developed. The fair value of our Physical Liquefaction Supply Derivatives incorporates risk premiums related to the satisfaction of conditions precedent,
such as completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow. As of September 30, 2019 and December 31, 2018, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure was under development to accommodate marketable physical gas flow.
We include a portion of our Physical Liquefaction Supply Derivatives as Level 3 within the valuation hierarchy as the fair value is developed through the use of internal models which may be impacted by inputs that are unobservable in the marketplace. The curves used to generate the fair value
of our Physical Liquefaction Supply Derivatives are based on basis adjustments applied to forward curves for a liquid trading point. In addition, there may be observable liquid market basis information in the near term, but terms of a Physical Liquefaction Supply Derivativescontract may exceed the period for which such information is available, resulting in a Level 3 classification. In these instances, the fair value of the contract incorporates extrapolation assumptions made in the determination of the market basis price for future delivery periods in which applicable commodity basis prices were either not observable or lacked corroborative market data.
The
Level 3 fair value measurements of our Physical Liquefaction Supply Derivatives could be materially impacted by a significant change in certain natural gas market basis spreads due to the contractual notional amount represented by our Level 3 positions, which is a substantial portion of our overall Physical Liquefaction Supply Derivatives portfolio. iThe following
table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of September 30, 2019:
Net Fair Value Liability
(in millions)
Valuation
Approach
Significant Unobservable Input
Significant Unobservable Inputs Range
Physical Liquefaction Supply Derivatives
$(i8)
Market
approach incorporating present value techniques
Henry Hub basis spread
$(0.618) - $0.056
8
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
i
The
following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three and nine months ended September 30, 2019 and 2018 (in millions):
Change
in unrealized gains (losses) relating to instruments still held at end of period
$
(i42
)
$
i4
$
(i22
)
$
(i5
)
(1) Transferred
to Level 2 as a result of observable market for the underlying natural gas purchase agreements.
/
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 netting and any applicable credit enhancements, such as collateral postings, set-off rights and guarantees.
Liquefaction Supply Derivatives
We have entered into primarily index-based physical natural gas supply contracts
and associated economic hedges to purchase natural gas for the commissioning and operation of the Liquefaction Project. The terms of the physical natural gas supply contracts range up to iten years, some of which commence upon the satisfaction of certain events or states of affairs.
We had secured up to approximately
i4,108TBtu and i3,464TBtu of natural gas feedstock through natural gas supply contracts as of September 30, 2019 and December 31, 2018, respectively. The notional natural gas position of our Liquefaction Supply Derivatives was approximately i3,880TBtu and i2,978TBtu as of September 30, 2019 and December 31, 2018, respectively.
i
The
following table shows the fair value and location of our Liquefaction Supply Derivatives on our Balance Sheets (in millions):
Does
not include collateral calls of $i10 million and $i1
million for such contracts, which are included in other current assets in our Balance Sheets as of September 30, 2019 and December 31, 2018, respectively.
9
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
i
The
following table shows the changes in the fair value, settlements and location of our Liquefaction Supply Derivatives recorded on our Statements of Income during the three and nine months ended September 30, 2019 and 2018 (in millions):
Three
Months Ended September 30,
Nine Months Ended September 30,
Statement of Income Location (1)
2019
2018
2019
2018
Liquefaction Supply Derivatives
gain
LNG revenues
$
i1
$
i—
$
i2
$
i—
Liquefaction
Supply Derivatives gain (loss)
Cost of sales
(i55
)
i10
i28
(i42
)
/
(1)
Does
not include the realized value associated with derivative instruments 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.
Balance Sheet Presentation
Our derivative instruments are presented on a net basis on our Balance Sheets as described above. iThe
following table shows the fair value of our derivatives outstanding on a gross and net basis (in millions):
The
Working Capital Facility was amended in May 2019 in connection with commercialization and financing of Train 6 of the Liquefaction Project. All terms of the Working Capital Facility substantially remained unchanged.
Restrictive Debt Covenants
As of September 30, 2019, we were in compliance with all covenants related to our debt agreements.
Interest Expense
i
Total
interest expense consisted of the following (in millions):
The following table shows the carrying amount, which is net of unamortized premium, discount and debt issuance costs, and estimated fair value of our debt (in millions):
Includes
2021 Senior Notes, 2022 Senior Notes, 2023 Senior Notes, 2024 Senior Notes, 2025 Senior Notes, 2026 Senior Notes, 2027 Senior Notes and 2028 Senior Notes. The Level 2 estimated fair value was based on quotes obtained from broker-dealers or market makers of these senior notes and other similar instruments.
/
(2)
The
Level 3 estimated fair value was calculated based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including interest rates based on debt issued by parties with comparable credit ratings to us and inputs that are not observable in the market.
The following table represents a disaggregation of revenue earned from contracts with customers during the three and nine months ended September 30, 2019 and 2018 (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 as of September 30, 2019 and December 31, 2018:
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.
(2)
Includes future consideration from agreement contractually assigned to us from Cheniere Marketing.
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)
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 table above excludes substantially all variable consideration under our SPAs. 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. Approximately i49% and i55%
of our LNG revenues during the three months ended September 30, 2019 and 2018, respectively, and approximately i53% and i55%
of our LNG revenues during the nine months ended September 30, 2019 and 2018, respectively, were related to variable consideration received from customers. All of our LNG revenues—affiliate were related to variable consideration received from customers during each of the three and nine months ended September 30, 2019 and 2018.
We have entered into contracts to sell LNG that are conditioned upon one or both of the parties achieving certain milestones such as reaching a final investment
decision on a certain liquefaction Train, obtaining financing or achieving substantial completion of a Train and any related facilities. These contracts are considered completed contracts for revenue recognition purposes and are included in the transaction price above when the conditions are considered probable of being met.
13
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE
11—iRELATED PARTY TRANSACTIONS
i
Below is a summary of our related party transactions as reported on our Statements of Income for the three
and nine months ended September 30, 2019 and 2018 (in millions):
Contracts
for Sale and Purchase of Natural Gas and LNG
i2
i—
i2
i—
Total
LNG revenues—affiliate
i257
i205
i1,017
i886
Cost
of sales—affiliate
Cargo loading fees under TUA
i11
i8
i29
i23
Contracts
for Sale and Purchase of Natural Gas and LNG
i6
i—
i6
i—
Total
cost of sales—affiliate
i17
i8
i35
i23
Operating
and maintenance expense—affiliate
TUA
i65
i64
i196
i192
Natural
Gas Transportation Agreement
i20
i20
i60
i61
Services
Agreements
i27
i23
i78
i64
LNG
Site Sublease Agreement
i1
i—
i1
i—
Total
operating and maintenance expense—affiliate
i113
i107
i335
i317
General
and administrative expense—affiliate
Services Agreements
i28
i12
i64
i36
/
As
of September 30, 2019 and December 31, 2018, we had $i66 million and $i113
million of accounts receivable—affiliate, respectively, under the agreements described below.
Terminal Use Agreement
We have a TUA with SPLNG to provide berthing for LNG vessels and for the unloading, loading, storage and regasification of LNG. We have reserved approximately i2.0Bcf/d of regasification capacity and we are obligated to make monthly capacity payments to SPLNG aggregating approximately $i250 million per year (the “TUA Fees”), continuing until at least May 2036.
Cheniere
Partners has guaranteed our obligations under our TUA. Cargo loading fees incurred under the TUA are recorded as cost of sales—affiliate, except for the portion related to commissioning activities which is capitalized as LNG terminal construction-in-process.
In connection with our TUA, we are required to pay for a portion of the cost to maintain the cryogenic readiness of the regasification facilities at the Sabine Pass LNG terminal, which is based on our share of the commercial LNG storage capacity at the Sabine Pass LNG terminal.
Cheniere Marketing Agreements
Cheniere
Marketing SPA
Cheniere Marketing has an SPA (“Base SPA”) with us to purchase, at Cheniere Marketing’s option, any LNG produced by us in excess of that required for other customers at a price of i115%
of Henry Hub plus $i3.00 per MMBtu of LNG.
In May 2019, we and Cheniere Marketing entered into an amendment to the Base SPA
to remove certain conditions related to the sale of LNG from Trains 5 and 6 of the Liquefaction Project and provide that cargoes rejected by Cheniere Marketing under
14
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
the Base SPA can be sold by us to Cheniere Marketing at a contract price equal to a portion of the estimated net profits from the sale of such cargo.
Cheniere
Marketing Master SPA
We have an agreement with Cheniere Marketing that allows us to sell and purchase LNG with Cheniere Marketing by executing and delivering confirmations under this agreement. We executed a confirmation with Cheniere Marketing that obligated Cheniere Marketing in certain circumstances to buy LNG cargoes produced during the period while Bechtel Oil, Gas and Chemicals, Inc. had control of, and was commissioning, Train 5 of the Liquefaction Project.
Cheniere Marketing Letter Agreement
In May 2019, we and Cheniere Marketing entered into a letter agreement for the sale of up to i20
cargoes totaling approximately i70 millionMMBtu scheduled for delivery between May 3 and December 31, 2019 at a price of i115%
of Henry Hub plus $i2.00 per MMBtu.
Natural Gas Transportation Agreements
To ensure we are able to transport adequate natural gas feedstock to the Sabine Pass LNG
terminal, we have a transportation precedent agreement and a negotiated rate agreement to secure firm pipeline transportation capacity with CTPL, a wholly owned subsidiary of Cheniere Partners, and third-party pipeline companies. These agreements have a primary term of i20 years from commercial operation of Train 2 and thereafter continue in effect from year to year until terminated by either party upon written notice of ione
year or the term of the agreements, whichever is less. In addition, we have the right to elect to extend the term of the agreements for up to itwo consecutive terms of i10
years. Maximum rates, charges and fees shall be applicable for the entitlements and quantities delivered pursuant to the agreements unless CTPL has advised us that it has agreed otherwise.
Services Agreements
As of September 30, 2019 and December 31, 2018, we had $i154
million and $i210 million of advances to affiliates, respectively, under the services agreements described below. The non-reimbursement amounts incurred under these agreements are recorded in general and administrative expense—affiliate.
Liquefaction O&M Agreement
We have
an operation and maintenance agreement (the “Liquefaction O&M Agreement”) with Cheniere Investments, a wholly owned subsidiary of Cheniere Partners, pursuant to which we receive all of the necessary services required to construct, operate and maintain the Liquefaction Project. Before each Train of the Liquefaction Project is operational, the services to be provided include, among other services, obtaining governmental approvals on our behalf, preparing an operating plan for certain periods, obtaining insurance, preparing staffing plans and preparing status reports. After each Train is operational, the services include all necessary services required to operate and maintain the Train. Prior to the substantial completion of each Train of the Liquefaction Project, in addition
to reimbursement of operating expenses, we are required to pay a monthly fee equal to i0.6% of the capital expenditures incurred in the previous month. After substantial completion of each Train, for services performed while the Train is operational, we will pay, in addition to the reimbursement of operating expenses, a fixed monthly fee
of $i83,333 (indexed for inflation) for services with respect to the Train.
Liquefaction MSA
We have a management services agreement (the “Liquefaction
MSA”) with Cheniere Terminals pursuant to which Cheniere Terminals manages the construction and operation of the Liquefaction Project, excluding those matters provided for under the Liquefaction O&M Agreement. The services include, among other services, exercising the day-to-day management of our affairs and business, managing our regulatory matters, managing bank and brokerage accounts and financial books and records of our business and operations, entering into financial derivatives on our behalf and providing contract administration services for all contracts associated with the Liquefaction Project. Prior to the substantial completion of each Train of the Liquefaction
Project, we pay a monthly fee equal to i2.4% of the capital expenditures incurred in the previous month. After substantial completion of each Train, we will pay a fixed monthly fee of $i541,667
(indexed for inflation) for services with respect to such Train.
15
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
Cheniere Investments Information Technology Services Agreement
Cheniere Investments has an information technology services agreement with Cheniere, pursuant to which Cheniere Investment’s subsidiaries, including us, receive certain information technology services. On a quarterly basis, the various
entities receiving the benefit are invoiced by Cheniere Investments according to the cost allocation percentages set forth in the agreement. In addition, Cheniere is entitled to reimbursement for all costs incurred by Cheniere that are necessary to perform the services under the agreement.
LNG Site Sublease Agreement
We have agreements with SPLNG to sublease a portion of the Sabine Pass LNG terminal site for the Liquefaction Project. The aggregate annual sublease payment is $i1
million. The initial terms of the subleases expire on December 31, 2034, with options to renew for multiple periods of i10 years with similar terms as the initial terms. The annual sublease payments will be adjusted for inflation every ifive
years based on a consumer price index, as defined in the sublease 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 $i348
million in assets to SPLNG under this agreement during the nine months ended September 30, 2019. We did not convey any assets to SPLNG under this agreement during the three months ended September 30, 2019 and three and nine months ended September 30, 2018.
Contracts for Sale and Purchase of Natural Gas and LNG
We have agreements with
SPLNG that allow us to sell and purchase natural gas and LNG with SPLNG. Natural gas and LNG purchased under these agreements are recorded as inventory, except for purchases related to commissioning activities which are capitalized as LNG terminal construction-in-process.
We also have an agreement with CCL that allows us to sell and purchase natural gas with CCL. Natural gas sold and purchased under this agreement are recorded as LNG revenues—affiliate and cost of sales—affiliate, respectively.
State Tax Sharing Agreement
We have a state tax sharing agreement with Cheniere. Under this agreement, Cheniere has agreed to prepare and file all state and local tax returns which we and Cheniere are required to file on a combined basis and to timely
pay the combined state and local tax liability. If Cheniere, in its sole discretion, demands payment, we will pay to Cheniere an amount equal to the state and local tax that we would be required to pay if our state and local tax liability were calculated on a separate company basis. There have been ino state and local taxes paid by Cheniere for which Cheniere could have demanded payment from us under this agreement;
therefore, Cheniere has not demanded any such payments from us. The agreement is effective for tax returns due on or after August 2012.
16
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 12—iCUSTOMER
CONCENTRATION
i
The following table shows customers with revenues of 10% or greater of total revenues from external customers and customers with accounts receivable balances of 10% or greater of total accounts receivable from external customers:
Percentage
of Total Revenues from External Customers
Percentage of Accounts Receivable from External Customers
Cash
paid during the period for interest, net of amounts capitalized
$
i542
$
i510
Non-cash
distributions to affiliates for conveyance of assets
i348
i—
/
The
balance in property, plant and equipment, net funded with accounts payable and accrued liabilities (including affiliate) was $i287 million and $i195
million, as of September 30, 2019 and 2018, respectively.
17
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” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 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 such 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 year ended December 31, 2018. 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.
18
Introduction
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:
•
Overview of Business
•
Overview of Significant Events
•
Liquidity
and Capital Resources
•
Results of Operations
•
Off-Balance Sheet Arrangements
•
Summary of Critical Accounting Estimates
•
Recent
Accounting Standards
Overview of Business
We are in various stages of operating and constructing sixnatural gas liquefaction Trains (the “Liquefaction Project”)at the Sabine Pass LNG terminaladjacent to the existing regasification facilities owned and operated by SPLNG. Our Liquefaction Project is being constructed and operated at the Sabine Pass LNG terminal, which is located on the Sabine-Neches Waterway less than
four miles from the Gulf Coast. We provide clean, secure and affordable energy to the world, while responsibly delivering a reliable, competitive and integrated source of LNG, in a safe and rewarding work environment. The liquefaction of natural gas into LNG allows it to be shipped economically from the United States where natural gas is abundant and inexpensive to produce to our international customers in areas where natural gas demand and infrastructure exist. Trains 1 through 5 are operational and Train 6 is under construction. Each Train is expected to have a nominal production capacity, which is prior to adjusting for planned maintenance, production reliability, potential overdesign and debottlenecking opportunities, of approximately 4.5 mtpa of LNG per Train.
Overview
of Significant Events
Our significant accomplishments since January 1, 2019 and through the filing date of this Form 10-Q include the following:
Strategic
•
In May 2019, the board of directors of the general partner of Cheniere Partners made a positive final investment decision with respect to Train 6 of the Liquefaction Project and issued a full notice to proceed with construction to Bechtel Oil, Gas and Chemicals,
Inc.(“Bechtel”) in June 2019.
Operational
•
As of October 25, 2019, approximately 800 cumulative LNG cargoes totaling approximately 55 million tonnes of LNG have been produced, loaded and exported from the Liquefaction Project.
•
In March 2019, we achieved
substantial completion of Train 5 of the Liquefaction Project and commenced operating activities.
Financial
•
In September 2019, the date of first commercial delivery was reached under the 20-year SPAs with Centrica plc and Total Gas & Power North America, Inc. (“Total”) relating to Train 5 of the Liquefaction Project.
•
In March
2019, the date of first commercial delivery was reached under the 20-year SPA with BG Gulf Coast LNG, LLC relating to Train 4 of the Liquefaction Project.
Restricted
cash designated for the Liquefaction Project
185
756
Available commitments under the $1.2 billion Working Capital Facility (“Working Capital Facility”)
786
775
For
additional information regarding our debt agreements, see Note 9—Debt of our Notes to Financial Statements in this quarterly report and Note 10—Debt of our Notes to Financial Statements in our annual report on Form 10-K for the year ended December 31, 2018.
Liquefaction Facilities
We are in various stages of constructing and operating the Liquefaction Project
at the Sabine Pass LNG terminal adjacent to the existing regasification facilities. We have received authorization from the FERC to site, construct and operate Trains 1 through 6. We have achieved substantial completion of Trains 1, 2, 3, 4 and 5 of the Liquefaction Project and commenced operating activities in May 2016, September 2016, March 2017, October 2017 and March 2019, respectively. The following table summarizes the status of Train 6 of the Liquefaction Project as of September 30, 2019:
Train
6
Overall project completion percentage
38.1%
Completion percentage of:
Engineering
83.8%
Procurement
54.1%
Subcontract
work
34.3%
Construction
5.5%
Date of expected substantial completion
1H 2023
The following orders have been issued by the DOE authorizing the export of domestically produced LNG by vessel from the Sabine Pass LNG terminal:
•
Trains
1 through 4—FTA countries for a 30-year term, which commenced on May 15, 2016, and non-FTA countries for a 20-year term, which commenced on June 3, 2016, in an amount up to a combined total of the equivalent of 16 mtpa (approximately 803 Bcf/yr of natural gas).
•
Trains 1 through 4—FTA countries for a 25-year term and non-FTA countries for a 20-year term in an amount up to a combined total of the equivalent of approximately
203 Bcf/yr of natural gas (approximately 4 mtpa).
•
Trains 5 and 6—FTA countries and non-FTA countries for a 20-year term, in an amount up to a combined total of 503.3 Bcf/yr of natural gas (approximately 10 mtpa).
In each case, the terms of these authorizations begin on the earlier of the date of first export thereunder or the date specified in the particular order, which ranges from five to 10 years from the date the order was issued. In addition, we
received an order providing for a three-year makeup period with respect to each of the non-FTA orders for LNG volumes we were authorized but unable to export during any portion of the initial 20-year export period of such order.
In January 2018, the DOE issued orders authorizing us to export domestically produced LNG by vessel from the Sabine Pass LNG terminal to FTA countries and non-FTA countries over a two-year period commencing January 2018, in an aggregate amount up to the equivalent of 600 Bcf of natural gas (however, exports under this order, when combined with exports under the orders above, may not exceed 1,509 Bcf/yr).
20
Customers
We
have entered into fixed price SPAs generally with terms of at least 20 years (plus extension rights) with eight third parties for Trains 1 through 6 of the Liquefaction Project, including an agreement anticipated to be assigned from Cheniere Marketing, to make available an aggregate amount of LNG that is between approximately 75% to 85% of the expected aggregate adjusted nominal production capacity from these Trains. Under these SPAs, the customers will purchase LNG from us for a price consisting of a fixed fee per MMBtu of LNG (a portion of which is subject to annual adjustment for inflation) plus a variable fee per MMBtu of LNG equal to approximately
115% of Henry Hub. In certain circumstances, the customers may elect to cancel or suspend deliveries of LNG cargoes, in which case the customers would still be required to pay the fixed fee with respect to the contracted volumes that are not delivered as a result of such cancellation or suspension. We refer to the fee component that is applicable regardless of a cancellation or suspension of LNG cargo deliveries under the SPAs as the fixed fee component of the price under our SPAs. We refer to the fee component that is applicable only in connection with LNG cargo deliveries as the variable fee component of the price under our SPAs. The variable fees under our SPAs were sized at the time of entry into each SPA with the intent to cover the costs of gas purchases and transportation related to, and operating and maintenance costs to produce, the LNG to be sold under each such
SPA. The SPAs and contracted volumes to be made available under the SPAs are not tied to a specific Train; however, the term of each SPA generally commences upon the date of first commercial delivery of a specified Train.
In aggregate, the annual fixed fee portion to be paid by the third-party SPA customers is approximately $2.3 billion for Trains 1 through 4 and increasing to $2.9 billion upon the date of first commercial delivery of Train 5, which occurred in September 2019. After giving effect to an SPA that Cheniere has committed to provide to us by the end of 2020, the annual fixed fee portion to be paid by the third-party SPA customers would increase to at least $3.3 billion upon the date
of first commercial delivery of Train 6.
In addition, Cheniere Marketing has agreements with us to purchase: (1) at Cheniere Marketing’s option, any LNG produced by us in excess of that required for other customers and (2) up to 20 cargoes totaling approximately 70 million MMBtu scheduled for delivery between May 3 and December 31, 2019 at a price of 115% of Henry Hub plus $2.00 per MMBtu.
Natural Gas Transportation, Storage and Supply
To ensure we are able to transport adequate natural gas feedstock to the Sabine Pass LNG terminal, we have entered into transportation precedent and other agreements to secure firm pipeline transportation capacity
with CTPL, a wholly owned subsidiary of Cheniere Partners, and third-party pipeline companies. We have entered into firm storage services agreements with third parties to assist in managing variability in natural gas needs for the Liquefaction Project. We have also entered into enabling agreements and long-term natural gas supply contracts with third parties in order to secure natural gas feedstock for the Liquefaction Project. As of September 30, 2019, we had secured up to approximately 4,108TBtu of natural gas feedstock through long-term and short-term natural gas supply contracts
that range up to ten years.
Construction
We have entered into lump sum turnkey contracts with Bechtel for the engineering, procurement and construction of Trains 1 through 6 of the Liquefaction Project, under which Bechtel charges a lump sum for all work performed and generally bears project cost risk unless certain specified events occur, in which case Bechtel may cause us to enter into a change order, or we agree with Bechtel
to a change order.
The total contract price of the EPC contract for Train 6 of the Liquefaction Project is approximately $2.5 billion, including estimated costs for an optional third marine berth.
Terminal Use Agreements
We have entered into a TUA with SPLNG to provide berthing for LNG vessels and for the unloading, loading, storage and regasification of LNG. We have reserved
approximately 2.0Bcf/d of regasification capacity and we are obligated to make monthly capacity payments to SPLNG aggregating approximately $250 million per year (the “TUA Fees”), continuing until at least May 2036. We obtained this reserved capacity as a result of an assignment in July 2012 by Cheniere Investments of its rights, title and interest under its TUA. In connection with the assignment, we, Cheniere Investments and SPLNG also entered into a terminal use rights assignment and agreement (the “TURA”) pursuant to which Cheniere Investments had the right to use our reserved capacity under the TUA and had the obligation to pay the
TUA Fees required by the TUA to SPLNG. Cheniere Investments’ right to use
21
our capacity at the Sabine Pass LNG terminal and its respective percentage of TUA Fees payable was reduced from 100% to zero as each of Trains 1 through 4 reached commercial operations.
Cheniere Partners has guaranteed our obligations under our TUA and the obligations of Cheniere Investments under the TURA. During the three months ended September
30, 2019 and 2018, we recorded operating and maintenance expense—affiliate of $65 million and $64 million, respectively, for the TUA Fees and cost of sales—affiliate of $11 million and $8 million, respectively, for cargo loading services incurred under the TUA. During the nine months ended September 30, 2019 and 2018, we recorded operating and maintenance expense—affiliate of $196 million and $192 million,
respectively, for the TUA Fees and cost of sales—affiliate of $29 million and $23 million, respectively, for cargo loading services incurred under the TUA.
Additionally, we have entered into a partial TUA assignment agreement with Total, another TUA customer, whereby upon substantial completion of Train 5 of the Liquefaction Project, we gained access to substantially all of Total’s capacity and other services provided under Total’s TUA with SPLNG. This agreement provides us with additional berthing and storage capacity
at the Sabine Pass LNG terminal that may be used to provide increased flexibility in managing LNG cargo loading and unloading activity, permit us to more flexibly manage our LNG storage capacity and accommodate the development of Train 6. Notwithstanding any arrangements between Total and us, payments required to be made by Total to SPLNG will continue to be made by Total to SPLNG in accordance with its TUA. During the three months ended September 30, 2019 and 2018, we recorded $32 million and $7.5 million, respectively, and during the nine months ended September
30, 2019 and 2018, we recorded $72 million and $23 million, respectively, as operating and maintenance expense under this partial TUA assignment agreement.
Capital Resources
We currently expect that our capital resources requirements with respect to the Liquefaction Project will be financed through project debt and borrowings, cash flows under the SPAs and equity contributions from Cheniere Partners. We believe that with the net proceeds of borrowings, available commitments under the Working Capital Facility,
cash flows from operations and equity contributions from Cheniere Partners, we will have adequate financial resources available to meet our currently anticipated capital, operating and debt service requirements with respect to Trains 1 through 6 of the Liquefaction Project. We began generating cash flows from operations from the Liquefaction Project in May 2016, when Train 1 achieved substantial completion and initiated operating activities. Trains 2, 3, 4 and 5 subsequently achieved substantial completion in September 2016, March 2017, October 2017 and March 2019, respectively. We realized offsets to LNG terminal costs of $48 million in the nine months ended September 30, 2019 that were related to the sale of commissioning cargoes because
these amounts were earned or loaded prior to the start of commercial operations of Train 5 of the Liquefaction Project during the testing phase for its construction. We did not realize any offsets to LNG terminal costs in the three months ended September 30, 2019 and in the three and nine months ended September 30, 2018.
The following table provides a summary of our capital resources from borrowings and available commitments for the Liquefaction Project, excluding equity contributions from Cheniere Partners and cash flows from operations (as described in Sources and Uses
of Cash), at September 30, 2019 and December 31, 2018 (in millions):
Letters of credit issued under Working Capital Facility
414
425
Available
commitments under Working Capital Facility
786
775
Total capital resources from borrowings and available commitments
$
14,850
$
14,850
(1)
Includes
5.625% Senior Secured Notes due 2021, 6.25% Senior Secured Notes due 2022, 5.625% Senior Secured Notes due 2023, 5.75% Senior Secured Notes due 2024, 5.625% Senior Secured Notes due 2025, 5.875% Senior Secured Notes due 2026 (the “2026 Senior Notes”), 5.00% Senior Secured Notes due 2027 (the “2027 Senior Notes”), 4.200% Senior Secured Notes due 2028 (the “2028 Senior Notes”) and 5.00% Senior Secured Notes due 2037 (the “2037 Senior Notes”)(collectively, the “Senior Notes”).
For additional information regarding our debt agreements related to the Liquefaction Project,
see Note 9—Debt of our Notes to Financial Statements in this quarterly report and Note 10—Debt of our Notes to Financial Statements in our annual report on Form 10-K for the year ended December 31, 2018.
22
Senior Notes
The Senior Notes are secured on a pari
passu first-priority basis by a security interest in all of our membership interests and substantially all of our assets.
At any time prior to three months before the respective dates of maturity for each series of the Senior Notes (except for the 2026 Senior Notes, 2027 Senior Notes, 2028 Senior Notes and 2037 Senior Notes, in which case the time period is six months before the respective dates of maturity), we may redeem all or part of such series of the Senior Notes at a redemption price equal to the “make-whole” price (except for the 2037 Senior Notes,
in which case the redemption price is equal to the “optional redemption” price) set forth in the respective indentures governing the Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption. We may also, at any time within three months of the respective maturity dates for each series of the Senior Notes (except for the 2026 Senior Notes, 2027 Senior Notes, 2028 Senior Notes and 2037 Senior Notes, in which case the time period is within six months of the respective dates of maturity), redeem all or part of such series of the Senior Notes
at a redemption price equal to 100% of the principal amount of such series of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.
Both the indenture governing the 2037 Senior Notes (the “2037 Senior NotesIndenture”) and the common indenture governing the remainder of the Senior Notes(the “Indenture”)
include restrictive covenants. We may incur additional indebtedness in the future, including by issuing additional notes, and such indebtedness could be at higher interest rates and have different maturity dates and more restrictive covenants than our current outstanding indebtedness, including the Senior Notes and the Working Capital Facility. Under the 2037 Senior NotesIndenture and the Indenture, we may not make any distributions until, among other requirements, deposits are made into debt service reserve accounts as required and a debt service coverage ratio test of 1.25:1.00 is satisfied. Semi-annual
principal payments for the 2037 Senior Notes are due on March 15 and September 15 of each year beginning September 15, 2025.
Working Capital Facility
In September 2015, we entered into the Working Capital Facility, which is intended to be used for loans (“Working Capital Loans”), the issuance of letters of credit on our behalf, as well as for swing line loans (“Swing Line Loans”), primarily for certain working capital requirements related to developing and placing into operation the Liquefaction Project. We
may, from time to time, request increases in the commitments under the Working Capital Facility of up to $760 million and, upon the completion of the debt financing of Train 6 of the Liquefaction Project, request an incremental increase in commitments of up to an additional $390 million. As of September 30, 2019 and December 31, 2018, we had $786 million and $775 million of available commitments and $414 million and $425 million aggregate amount of issued letters of credit under the Working
Capital Facility, respectively. We did not have any outstanding borrowings under the Working Capital Facility as of both September 30, 2019 and December 31, 2018.
The Working Capital Facility matures on December 31, 2020, and the outstanding balance may be repaid, in whole or in part, at any time without premium or penalty upon three business days’ notice. Loans deemed made in connection with a draw upon a letter of credit have a term of up to one year. Swing
Line Loans terminate upon the earliest of (1) the maturity date or earlier termination of the Working Capital Facility, (2) the date 15 days after such Swing Line Loan is made and (3) the first borrowing date for a Working Capital Loan or Swing Line Loan occurring at least three business days following the date the Swing Line Loan is made. We are required to reduce the aggregate outstanding principal amount of all Working Capital Loans to zero for a period of five consecutive business days at least once each year.
The Working Capital Facility contains conditions precedent for extensions of credit, as well as customary affirmative and negative covenants. Our obligations under the Working Capital
Facility are secured by substantially all of our assets as well as all of our membership interests on a pari passu basis with the Senior Notes.
Restrictive Debt Covenants
As of September 30, 2019, we were in compliance with all covenants related to our respective debt agreements.
23
Sources and Uses of Cash
The following
table summarizes the sources and uses of our cash, cash equivalents and restricted cash for the nine months ended September 30, 2019 and 2018 (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 cash, cash equivalents and restricted cash
(571
)
105
Cash, cash equivalents and restricted cash—beginning of period
756
544
Cash,
cash equivalents and restricted cash—end of period
$
185
$
649
Operating Cash Flows
Our operating cash net inflows during the nine months ended September 30, 2019
and 2018 were $656 million and $928 million, respectively. The $272 million decrease in operating cash inflows in 2019 compared to 2018 was primarily related to increased operating costs and expenses, partially offset by increased cash receipts from the sale of LNG cargoes, as a result of an additional Train that was operating at the Liquefaction Project in 2019. In addition to Trains 1 through 4 of the Liquefaction Project that were operational during both the nine months ended September 30, 2019 and 2018, Train 5 was operational for approximately seven months during the nine months ended September
30, 2019.
Investing Cash Flows
Investing cash net outflows during the nine months ended September 30, 2019 and 2018 were $1,124 million and $554 million, respectively, and were primarily used to fund the construction costs for the Liquefaction Project. These costs are capitalized as construction-in-process until achievement of substantial completion.
Financing Cash Flows
Financing
cash net outflows during the nine months ended September 30, 2019 were $103 million, as a result of:
•
$949 million of equity contributions from Cheniere Partners; and
•
$1,052 million of distributions to Cheniere Partners.
Financing cash outflows
during the nine months ended September 30, 2018 were $269 million, primarily as a result of:
•
$81 million of equity contributions from Cheniere Partners; and
•
$350 million of distributions to Cheniere Partners.
Results
of Operations
Our net income was $48 million in the three months ended September 30, 2019, compared to $243 million in the three months ended September 30, 2018. This $195 milliondecrease in net income was primarily a result of increased operating and maintenance expense, increased depreciation and amortization expense, and decreased margins due to decreased pricing on LNG but higher volumes of LNG sold, and increased interest expense, net of capitalized interest, due to a decrease in the portion of total
interest costs that could be capitalized as Train 5 of the Liquefaction Project completed construction in March 2019.
Our net income was $506 million in the nine months ended September 30, 2019, compared to $678 million in the nine months ended September 30, 2018. This $172 milliondecrease in net income was primarily a result of increased operating and maintenance expense, increased interest expense, net of capitalized interest and increased depreciation and
amortization expense, partially offset by increased margins due to higher volumes of LNG sold but decreased pricing on LNG.
24
We enter into derivative instruments to manage our exposure to commodity-related marketing and price risk. Derivative instruments are reported at fair value on our Financial Statements. In some cases, the underlying transactions economically hedged receive accrual accounting treatment, whereby revenues and expenses are recognized only upon delivery, receipt 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, use of derivative instruments may increase the volatility of our results of operations
based on changes in market pricing, counterparty credit risk and other relevant factors.
Revenues
Three Months Ended September 30,
Nine
Months Ended September 30,
(in millions, except volumes)
2019
2018
Change
2019
2018
Change
LNG
revenues
$
1,140
$
1,249
$
(109
)
$
3,678
$
3,419
$
259
LNG
revenues—affiliate
257
205
52
1,017
886
131
Total
revenues
$
1,397
$
1,454
$
(57
)
$
4,695
$
4,305
$
390
LNG
volumes recognized as revenues (in TBtu)
277
228
49
845
691
154
We
begin recognizing LNG revenues from the Liquefaction Project following the substantial completion and the commencement of operating activities of the respective Trains. In addition to Trains 1 through 4 of the Liquefaction Project that were operational during both the nine months ended September 30, 2019 and 2018, Train 5 of the Liquefaction Project was operational for approximately seven months during the nine months ended September 30, 2019. The decrease in revenues during the three months ended September 30, 2019
from the three months ended September 30, 2018 was due to the decreased revenues per MMBtu, which was partially offset by the increased volumes of LNG sold following the achievement of substantial completion of Train 5 of the Liquefaction Project. The increase in revenues during the nine months ended September 30, 2019 from the nine months ended September 30, 2018 was primarily attributable to the increased volumes of LNG, partially offset by decreased revenues per MMBtu. We expect our LNG revenues to increase in the future upon Train 6 of the Liquefaction Project becoming operational.
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. We realized offsets to LNG terminal costs of $48 million corresponding to 10TBtu of LNG in the nine months ended September 30, 2019 that related to the sale of commissioning cargoes. We did not realize any offsets to LNG terminal costs in the three months ended September 30, 2019 and in the three and nine months
ended September 30, 2018.
Also included in LNG revenues are gains and losses from derivative instruments, which include the realized value associated with a portion of derivative instruments that settle through physical delivery, and the sale of natural gas procured for the liquefaction process. During the three months ended September 30, 2019 and 2018, we realized $35 million and $67 million, respectively, of gains and other revenues from these transactions. During the nine months ended September 30,
2019 and 2018, we realized $114 million and $127 million, respectively, of gains and other revenues from these transactions.
Operating costs and expenses
Three
Months Ended September 30,
Nine Months Ended September 30,
(in millions)
2019
2018
Change
2019
2018
Change
Cost
of sales
$
742
$
758
$
(16
)
$
2,501
$
2,291
$
210
Cost
of sales—affiliate
17
8
9
35
23
12
Operating
and maintenance expense
150
96
54
398
258
140
Operating
and maintenance expense—affiliate
113
107
6
335
317
18
Development
expense
—
—
—
—
1
(1
)
General
and administrative expense
1
1
—
4
4
—
General
and administrative expense—affiliate
28
12
16
64
36
28
Depreciation
and amortization expense
117
88
29
331
261
70
Impairment
expense and loss on disposal of assets
1
—
1
6
—
6
Total
operating costs and expenses
$
1,169
$
1,070
$
99
$
3,674
$
3,191
$
483
25
Our
total operating costs and expenses increased during the three and nine months ended September 30, 2019 from the three and nine months ended September 30, 2018, primarily as a result of an additional Train that was operating between each of the periods, increased TUA reservation charges paid to SPLNG and to Total from payments under the partial TUA assignment agreement and increased third-party service and maintenance costs from additional maintenance and related activities at the Liquefaction Project.
Cost of sales includes costs incurred directly for the production and delivery of LNG from the
Liquefaction Project, to the extent those costs are not utilized for the commissioning process. Cost of sales decreased during the three months ended September 30, 2019 from the three months ended September 30, 2018 due to decreased pricing of natural gas feedstock between the quarterly periods, partially offset by increased volumes of natural gas feedstock for our LNG sales as a result of substantial completion of Train 5 of the Liquefaction Project. Additionally, there was a decrease in costs associated with a portion of derivative instruments that settle through physical delivery. Partially offsetting these decreases was increased derivative losses from a decrease in fair value of the
derivatives associated with economic hedges to secure natural gas feedstock for the Liquefaction Project. Cost of sales increased during the nine months ended September 30, 2019 from the nine months ended September 30, 2018 due to increased volumes of natural gas feedstock for our LNG sales as a result of substantial completion of Train 5 of the Liquefaction Project, partially offset by decreased pricing of natural gas feedstock between the periods. Partially offsetting the increase in cost of natural gas feedstock was decreased derivative losses from an increase in fair value of the derivatives associated with hedges to secure natural gas feedstock for the Liquefaction
Project, due to a favorable shift in the long-term forward prices. Cost of sales also includes variable transportation and storage costs and other costs to convert natural gas into LNG.
Operating and maintenance expense primarily includes costs associated with operating and maintaining the Liquefaction Project. The increase in operating and maintenance expense (including affiliates) during the three and nine months ended September 30, 2019 from the three and nine months ended September 30, 2018 was primarily related to: (1) increased TUA reservation charges paid to SPLNG and to Total
from payments under the partial TUA assignment agreement, (2) increased cost of turnaround and related activities at the Liquefaction Project and (3) increased natural gas transportation and storage capacity demand charges paid to third parties from operating Train 5 of the Liquefaction Project following its substantial completion. Operating and maintenance expense (including affiliates) also includes payroll and benefit costs of operations personnel, insurance and regulatory costs and other operating costs.
Depreciation and amortization expense increased during the three and nine months ended September 30, 2019 from the three and nine months ended September
30, 2018 as a result of commencing operations of Train 5 of the Liquefaction Project, as the related assets began depreciating upon reaching substantial completion.
Other expense (income)
Three
Months Ended September 30,
Nine Months Ended September 30,
(in millions)
2019
2018
Change
2019
2018
Change
Interest
expense, net of capitalized interest
$
183
$
146
$
37
$
524
$
445
$
79
Other
income
(3
)
(5
)
2
(9
)
(9
)
—
Total
other expense
$
180
$
141
$
39
$
515
$
436
$
79
Interest
expense, net of capitalized interest, increased during the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 primarily as a result of a decrease in the portion of total interest costs that could be capitalized as an additional Train of the Liquefaction Project completed construction between the periods. For the three months ended September 30, 2019 and 2018, we incurred $198 million and $198 million of total interest cost, respectively, of
which we capitalized $15 million and $52 million, respectively, which was primarily related to the construction of the Liquefaction Project. For the nine months ended September 30, 2019 and 2018, we incurred $593 million and $594 million of total interest cost, respectively, of which we capitalized $69 million and $149 million, respectively, which was primarily related to the construction of the Liquefaction Project.
Off-Balance
Sheet Arrangements
As of September 30, 2019, we had no transactions that met the definition of off-balance sheet arrangements that may have a current or future material effect on our financial position or operating results.
26
Summary of Critical Accounting Estimates
The preparation of our 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 year ended December 31, 2018.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Marketing and Trading Commodity Price Risk
We have entered into commodity derivatives consisting of natural gas supply contracts
for the commissioning and operation of the Liquefaction Project(“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):
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 voluntarily filed by us under 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.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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.
