Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Sabine Pass Liquefaction, LLC
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | 333-192373 | 27-3235920 |
(State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
| | |
700 Milam Street, Suite 1900 Houston, Texas | | 77002 |
(Address of principal executive offices) | | (Zip Code) |
(713) 375-5000
(Registrant’s telephone number, including area code) 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 x No ¨
Note: As of January 1, 2018, 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x 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. (Check one):
|
| | | | |
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer x (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
| | | Emerging growth company ¨ |
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 ¨ No x
Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date: Not applicable
SABINE PASS LIQUEFACTION, LLC
TABLE OF CONTENTS
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 |
TUA | | terminal use agreement |
Company Abbreviations
|
| | |
Cheniere | | Cheniere Energy, Inc. |
Cheniere Investments | | Cheniere Energy Investments, LLC |
Cheniere Marketing | | Cheniere Marketing International LLP |
Cheniere Partners | | Cheniere Energy Partners, L.P. |
Cheniere Terminals | | Cheniere LNG Terminals, LLC |
CTPL | | Cheniere Creole Trail Pipeline, L.P. |
SPLNG | | Sabine Pass LNG, L.P. |
Unless the context requires otherwise, references to “SPL,” the “Company,” “we,” “us” and “our” refer to Sabine Pass Liquefaction, LLC.
| |
PART I. | FINANCIAL INFORMATION |
| |
ITEM 1. | FINANCIAL STATEMENTS |
SABINE PASS LIQUEFACTION, LLC
BALANCE SHEETS
(in millions)
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
ASSETS | | (unaudited) | | |
Current assets | | | | |
Cash and cash equivalents | | $ | — |
| | $ | — |
|
Restricted cash | | 846 |
| | 544 |
|
Accounts and other receivables | | 236 |
| | 189 |
|
Accounts receivable—affiliate | | 20 |
| | 163 |
|
Advances to affiliate | | 129 |
| | 26 |
|
Inventory | | 76 |
| | 85 |
|
Other current assets | | 32 |
| | 54 |
|
Other current assets—affiliate | | 21 |
| | 21 |
|
Total current assets | | 1,360 |
| | 1,082 |
|
| | | | |
Property, plant and equipment, net | | 13,007 |
| | 12,920 |
|
Debt issuance costs, net | | 15 |
| | 18 |
|
Non-current derivative assets | | 16 |
| | 17 |
|
Other non-current assets, net | | 189 |
| | 169 |
|
Total assets | | $ | 14,587 |
| | $ | 14,206 |
|
| | | | |
LIABILITIES AND MEMBER’S EQUITY | | | | |
Current liabilities | | | | |
Accounts payable | | $ | 10 |
| | $ | 8 |
|
Accrued liabilities | | 537 |
| | 606 |
|
Due to affiliates | | 43 |
| | 66 |
|
Deferred revenue | | 73 |
| | 84 |
|
Derivative liabilities | | 7 |
| | — |
|
Total current liabilities | | 670 |
| | 764 |
|
| | | | |
Long-term debt, net | | 13,488 |
| | 13,477 |
|
Non-current derivative liabilities | | 7 |
| | 3 |
|
| | | | |
Member’s equity (deficit) | | 422 |
| | (38 | ) |
Total liabilities and member’s equity (deficit) | | $ | 14,587 |
| | $ | 14,206 |
|
The accompanying notes are an integral part of these financial statements.
2
SABINE PASS LIQUEFACTION, LLC
STATEMENTS OF OPERATIONS
(in millions)
(unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Revenues | | | | | | | | |
LNG revenues | | $ | 1,155 |
| | $ | 503 |
| | $ | 2,170 |
| | $ | 995 |
|
LNG revenues—affiliate | | 178 |
| | 422 |
| | 681 |
| | 753 |
|
Total revenues | | 1,333 |
| | 925 |
| | 2,851 |
| | 1,748 |
|
| | | | | | | | |
Operating costs and expenses | | |
| | |
| | | | |
Cost of sales (excluding depreciation and amortization expense shown separately below) | | 695 |
| | 578 |
| | 1,533 |
| | 1,088 |
|
Cost of sales—affiliate | | 7 |
| | 6 |
| | 15 |
| | 10 |
|
Operating and maintenance expense | | 84 |
| | 68 |
| | 162 |
| | 107 |
|
Operating and maintenance expense—affiliate | | 107 |
| | 83 |
| | 210 |
| | 142 |
|
Development expense | | 1 |
| | 1 |
| | 1 |
| | 1 |
|
General and administrative expense | | 1 |
| | — |
| | 3 |
| | 2 |
|
General and administrative expense—affiliate | | 12 |
| | 17 |
| | 24 |
| | 34 |
|
Depreciation and amortization expense | | 87 |
| | 67 |
| | 173 |
| | 114 |
|
Total operating costs and expenses | | 994 |
| | 820 |
| | 2,121 |
| | 1,498 |
|
| | | | | | | | |
Income from operations | | 339 |
| | 105 |
| | 730 |
| | 250 |
|
| | | | | | | | |
Other income (expense) | | |
| | |
| | | | |
Interest expense, net of capitalized interest | | (148 | ) | | (127 | ) | | (299 | ) | | (232 | ) |
Loss on modification or extinguishment of debt | | — |
| | — |
| | — |
| | (42 | ) |
Derivative loss, net | | — |
| | — |
| | — |
| | (2 | ) |
Other income | | 2 |
| | 2 |
| | 4 |
| | 2 |
|
Total other expense | | (146 | ) | | (125 | ) | | (295 | ) | | (274 | ) |
| | | | | | | | |
Net income (loss) | | $ | 193 |
| | $ | (20 | ) | | $ | 435 |
| | $ | (24 | ) |
The accompanying notes are an integral part of these financial statements.
3
SABINE PASS LIQUEFACTION, LLC
STATEMENT OF MEMBER’S EQUITY (DEFICIT)
(in millions)
(unaudited)
|
| | | | | | | |
| Sabine Pass LNG-LP, LLC | | Total Member’s Equity (Deficit) |
Balance at December 31, 2017 | $ | (38 | ) | | $ | (38 | ) |
Capital contributions | 25 |
| | 25 |
|
Net income | 435 |
| | 435 |
|
Balance at June 30, 2018 | $ | 422 |
| | $ | 422 |
|
The accompanying notes are an integral part of these financial statements.
4
SABINE PASS LIQUEFACTION, LLC
STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
Cash flows from operating activities | | | |
Net income (loss) | $ | 435 |
| | $ | (24 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization expense | 173 |
| | 114 |
|
Amortization of debt issuance costs, deferred commitment fees, premium and discount | 11 |
| | 9 |
|
Loss on modification or extinguishment of debt | — |
| | 42 |
|
Total losses on derivatives, net | 52 |
| | 42 |
|
Net cash used for settlement of derivative instruments | (6 | ) | | (14 | ) |
Changes in operating assets and liabilities: | | | |
Accounts and other receivables | (47 | ) | | (47 | ) |
Accounts receivable—affiliate | 142 |
| | 57 |
|
Advances to affiliate | (70 | ) | | (24 | ) |
Inventory | 9 |
| | 13 |
|
Accounts payable and accrued liabilities | (62 | ) | | 66 |
|
Due to affiliates | (10 | ) | | 11 |
|
Deferred revenue | (11 | ) | | (8 | ) |
Other, net | (12 | ) | | (9 | ) |
Other, net—affiliate | — |
| | (7 | ) |
Net cash provided by operating activities | 604 |
| | 221 |
|
| | | |
Cash flows from investing activities | |
| | |
|
Property, plant and equipment, net | (327 | ) | | (891 | ) |
Net cash used in investing activities | (327 | ) | | (891 | ) |
| | | |
Cash flows from financing activities | |
| | |
|
Proceeds from issuances of debt | — |
| | 2,314 |
|
Repayments of debt | — |
| | (703 | ) |
Debt issuance and deferred financing costs | — |
| | (29 | ) |
Capital contributions | 25 |
| | 7 |
|
Net cash provided by financing activities | 25 |
| | 1,589 |
|
| | | |
Net increase in cash, cash equivalents and restricted cash | 302 |
| | 919 |
|
Cash, cash equivalents and restricted cash—beginning of period | 544 |
| | 358 |
|
Cash, cash equivalents and restricted cash—end of period | $ | 846 |
| | $ | 1,277 |
|
Balances per Balance Sheet: |
| | | |
| June 30, 2018 |
Cash and cash equivalents | $ | — |
|
Restricted cash | 846 |
|
Total cash, cash equivalents and restricted cash | $ | 846 |
|
The accompanying notes are an integral part of these financial statements.
5
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION
We were formed by Cheniere Partners to develop, construct and operate natural gas liquefaction facilities in Cameron Parish, Louisiana (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 developed and constructed at the Sabine Pass LNG terminal, which is located on the Sabine-Neches Waterway less than four miles from the Gulf Coast. We plan to construct up to six Trains, which are in various stages of development, construction and operations. Trains 1 through 4 are operational, Train 5 is undergoing commissioning and Train 6 is being commercialized and has all necessary regulatory approvals in place.
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, 2017. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included. Certain reclassifications have been made to conform prior period information to the current presentation. The reclassifications did not have a material effect on our financial position, results of operations or cash flows.
On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequent amendments thereto (“ASC 606”) using the full retrospective method. The adoption of ASC 606 represents a change in accounting principle that will provide financial statement readers with enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of ASC 606 did not impact our previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.
Results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2018.
We are a disregarded entity for federal and state income tax purposes. Our taxable income or loss, which may vary substantially from the net income or loss reported on our Statements of Operations, is able to be included in the federal income tax return of Cheniere Partners, a publicly traded partnership which indirectly owns us. Accordingly, no provision or liability for federal or state income taxes is included in the accompanying Financial Statements.
NOTE 2—RESTRICTED CASH
Restricted cash consists of funds that are contractually restricted as to usage or withdrawal and have been presented separately from cash and cash equivalents on our Balance Sheets. As of June 30, 2018 and December 31, 2017, restricted cash consisted of the following (in millions):
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
Current restricted cash | | | | |
Liquefaction Project | | $ | 846 |
| | $ | 544 |
|
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 3—ACCOUNTS AND OTHER RECEIVABLES
As of June 30, 2018 and December 31, 2017, accounts and other receivables consisted of the following (in millions):
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
Trade receivable | | $ | 219 |
| | $ | 185 |
|
Other accounts receivable | | 17 |
| | 4 |
|
Total accounts and other receivables | | $ | 236 |
| | $ | 189 |
|
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.
NOTE 4—INVENTORY
As of June 30, 2018 and December 31, 2017, inventory consisted of the following (in millions):
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
Natural gas | | $ | 14 |
| | $ | 17 |
|
LNG | | 18 |
| | 26 |
|
Materials and other | | 44 |
| | 42 |
|
Total inventory | | $ | 76 |
| | $ | 85 |
|
NOTE 5—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consists of LNG terminal costs and fixed assets, as follows (in millions):
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
LNG terminal costs | | | | |
LNG terminal | | $ | 9,951 |
| | $ | 9,963 |
|
LNG terminal construction-in-process | | 3,548 |
| | 3,283 |
|
Accumulated depreciation | | (498 | ) | | (330 | ) |
Total LNG terminal costs, net | | 13,001 |
| | 12,916 |
|
Fixed assets | | |
| | |
|
Fixed assets | | 13 |
| | 10 |
|
Accumulated depreciation | | (7 | ) | | (6 | ) |
Total fixed assets, net | | 6 |
| | 4 |
|
Property, plant and equipment, net | | $ | 13,007 |
| | $ | 12,920 |
|
Depreciation expense was $85 million and $66 million during the three months ended June 30, 2018 and 2017, respectively, and $169 million and $111 million during the six months ended June 30, 2018 and 2017, respectively.
We realized offsets to LNG terminal costs of $39 million and $163 million in the three and six months ended June 30, 2017, respectively, 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 Train of the Liquefaction Project, during the testing phase for its construction. We did not realize any offsets to LNG terminal costs in the three and six months ended June 30, 2018.
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 6—DERIVATIVE 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 had previously entered into interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under one of our credit facilities (“Interest Rate Derivatives”), and these Interest Rate Derivatives were settled in March 2017.
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 hedging instruments, and changes in fair value are recorded within our Statements of Operations to the extent not utilized for the commissioning process.
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 June 30, 2018 and December 31, 2017, which are classified as other current assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Balance Sheets (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of |
| June 30, 2018 | | December 31, 2017 |
| Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Liquefaction Supply Derivatives asset (liability) | $ | — |
| | $ | (2 | ) | | $ | 11 |
| | $ | 9 |
| | $ | 2 |
| | $ | 10 |
| | $ | 43 |
| | $ | 55 |
|
There have been no changes to our evaluation of and accounting for our derivative positions during the six months ended June 30, 2018. See Note 7—Derivative Instruments of our Notes to Financial Statements in our annual report on Form 10-K for the year ended December 31, 2017 for additional information.
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 market commodity basis prices and our assessment of the associated conditions precedent, including evaluating whether the respective market is available as pipeline infrastructure is developed. Upon the satisfaction of conditions precedent, including completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow, we recognize a gain or loss based on the fair value of the respective natural gas supply contracts.
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 Derivatives contract 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 portfolio. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of June 30, 2018:
|
| | | | | | | | |
| | Net Fair Value Asset (in millions) | | Valuation Approach | | Significant Unobservable Input | | Significant Unobservable Inputs Range |
Physical Liquefaction Supply Derivatives | | $11 | | Market approach incorporating present value techniques | | Basis Spread | | $(0.632) - $0.180 |
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three and six months ended June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Balance, beginning of period | | $ | 10 |
| | $ | 41 |
| | $ | 43 |
| | $ | 79 |
|
Realized and mark-to-market losses: | | | | | | | | |
Included in cost of sales | | (1 | ) | | (1 | ) | | (13 | ) | | (40 | ) |
Purchases and settlements: | | | | | | | | |
Purchases | | 6 |
| | 2 |
| | 6 |
| | 5 |
|
Settlements | | (4 | ) | | (2 | ) | | (25 | ) | | (4 | ) |
Balance, end of period | | $ | 11 |
| | $ | 40 |
| | $ | 11 |
| | $ | 40 |
|
Change in unrealized gains relating to instruments still held at end of period | | $ | (1 | ) | | $ | (1 | ) | | $ | (13 | ) | | $ | (40 | ) |
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 net settlement. 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, we evaluate our own ability to meet our commitments in instances where our derivative instruments are in a liability position. Our derivative instruments are subject to contractual provisions which provide for the unconditional right of set-off for all derivative assets and liabilities with a given counterparty in the event of default.
Interest Rate Derivatives
We had entered into Interest Rate Derivatives to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the credit facilities we entered into in June 2015 (the “Credit Facilities”), based on a portion of the expected outstanding borrowings over the term of the Credit Facilities. In March 2017, we settled the Interest Rate Derivatives and recognized a derivative loss of $7 million in conjunction with the termination of approximately $1.6 billion of commitments under the Credit Facilities.
The following table shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in derivative loss, net on our Statements of Operations during the three and six months ended June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Interest Rate Derivatives loss | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) |
Liquefaction Supply Derivatives
We have entered into index-based physical natural gas supply contracts and associated economic hedges, if applicable, to purchase natural gas for the commissioning and operation of the Liquefaction Project. The terms of the noncurrent physical natural gas supply contracts range from approximately one to six years, some of which commence upon the satisfaction of certain conditions precedent, if not already met.
We had secured up to approximately 2,163 TBtu and 2,214 TBtu of natural gas feedstock through natural gas supply contracts as of June 30, 2018 and December 31, 2017, respectively. The notional natural gas position of our Liquefaction Supply Derivatives was approximately 1,606 TBtu and 1,520 TBtu as of June 30, 2018 and December 31, 2017, respectively.
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The following table shows the fair value and location of our Liquefaction Supply Derivatives on our Balance Sheets (in millions):
|
| | | | | | | | |
| | Fair Value Measurements as of (1) |
Balance Sheet Location | | June 30, 2018 | | December 31, 2017 |
Other current assets | | $ | 7 |
| | $ | 41 |
|
Non-current derivative assets | | 16 |
| | 17 |
|
Total derivative assets | | 23 |
| | 58 |
|
| | | | |
Derivative liabilities | | (7 | ) | | — |
|
Non-current derivative liabilities | | (7 | ) | | (3 | ) |
Total derivative liabilities | | (14 | ) | | (3 | ) |
| | | | |
Derivative asset, net | | $ | 9 |
| | $ | 55 |
|
| |
(1) | Does not include collateral calls of $6 million and $1 million for such contracts, which are included in other current assets in our Balance Sheets as June 30, 2018 and December 31, 2017, respectively. |
The following table shows the changes in the fair value and settlements of our Liquefaction Supply Derivatives recorded in cost of sales on our on our Statements of Operations during the three and six months ended June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Liquefaction Supply Derivatives loss (1) | $ | (2 | ) | | $ | (1 | ) | | $ | (52 | ) | | $ | (40 | ) |
| |
(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. The following table shows the fair value of our derivatives outstanding on a gross and net basis (in millions):
|
| | | | | | | | | | | | |
| | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheets | | Net Amounts Presented in the Balance Sheets |
Offsetting Derivative Assets (Liabilities) | | | |
As of June 30, 2018 | | | | | | |
Liquefaction Supply Derivatives | | $ | 28 |
| | $ | (5 | ) | | $ | 23 |
|
Liquefaction Supply Derivatives | | (17 | ) | | 3 |
| | (14 | ) |
As of December 31, 2017 | | | | | | |
Liquefaction Supply Derivatives | | $ | 64 |
| | $ | (6 | ) | | $ | 58 |
|
Liquefaction Supply Derivatives | | (3 | ) | | — |
| | (3 | ) |
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 7—OTHER NON-CURRENT ASSETS
As of June 30, 2018 and December 31, 2017, other non-current assets, net consisted of the following (in millions):
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
Advances made under EPC and non-EPC contracts | | $ | 49 |
| | $ | 26 |
|
Advances made to municipalities for water system enhancements | | 93 |
| | 93 |
|
Advances and other asset conveyances to third parties to support LNG terminals | | 29 |
| | 30 |
|
Tax-related payments and receivables | | — |
| | 1 |
|
Information technology service assets | | 18 |
| | 19 |
|
Total other non-current assets, net | | $ | 189 |
| | $ | 169 |
|
NOTE 8—ACCRUED LIABILITIES
As of June 30, 2018 and December 31, 2017, accrued liabilities consisted of the following (in millions):
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
Interest costs and related debt fees | | $ | 230 |
| | $ | 230 |
|
Liquefaction Project costs | | 307 |
| | 376 |
|
Total accrued liabilities | | $ | 537 |
| | $ | 606 |
|
NOTE 9—DEBT
As of June 30, 2018 and December 31, 2017, our debt consisted of the following (in millions):
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
Long-term debt | | | | |
5.625% Senior Secured Notes due 2021 (“2021 Senior Notes”) | | $ | 2,000 |
| | $ | 2,000 |
|
6.25% Senior Secured Notes due 2022 (“2022 Senior Notes”) | | 1,000 |
| | 1,000 |
|
5.625% Senior Secured Notes due 2023 (“2023 Senior Notes”) | | 1,500 |
| | 1,500 |
|
5.75% Senior Secured Notes due 2024 (“2024 Senior Notes”) | | 2,000 |
| | 2,000 |
|
5.625% Senior Secured Notes due 2025 (“2025 Senior Notes”) | | 2,000 |
| | 2,000 |
|
5.875% Senior Secured Notes due 2026 (“2026 Senior Notes”) | | 1,500 |
| | 1,500 |
|
5.00% Senior Secured Notes due 2027 (“2027 Senior Notes”) | | 1,500 |
| | 1,500 |
|
4.200% Senior Secured Notes due 2028 (“2028 Senior Notes”) | | 1,350 |
| | 1,350 |
|
5.00% Senior Secured Notes due 2037 (“2037 Senior Notes”) | | 800 |
| | 800 |
|
Unamortized discount, premium and debt issuance costs, net | | (162 | ) | | (173 | ) |
Total long-term debt, net | | $ | 13,488 |
| | $ | 13,477 |
|
| | | | |
Current debt | | | | |
$1.2 billion Working Capital Facility (“Working Capital Facility”) | | — |
| | — |
|
Total debt, net | | $ | 13,488 |
|
| $ | 13,477 |
|
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
Working Capital Facility
Below is a summary of our Working Capital Facility as of June 30, 2018 (in millions):
|
| | | | |
| | Working Capital Facility |
Original facility size | | $ | 1,200 |
|
Less: | | |
Outstanding balance | | — |
|
Letters of credit issued | | 683 |
|
Available commitment | | $ | 517 |
|
| | |
Interest rate | | LIBOR plus 1.75% or base rate plus 0.75% |
Maturity date | | December 31, 2020, with various terms for underlying loans |
Restrictive Debt Covenants
As of June 30, 2018, we were in compliance with all covenants related to our debt agreements.
Interest Expense
Total interest expense consisted of the following (in millions):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Total interest cost | | $ | 198 |
| | $ | 197 |
| | $ | 396 |
| | $ | 383 |
|
Capitalized interest | | (50 | ) | | (70 | ) | | (97 | ) | | (151 | ) |
Total interest expense, net | | $ | 148 |
| | $ | 127 |
| | $ | 299 |
| | $ | 232 |
|
Fair Value Disclosures
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):
|
| | | | | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
Senior notes (1) | | $ | 12,698 |
| | $ | 13,259 |
| | $ | 12,687 |
| | $ | 13,955 |
|
2037 Senior Notes (2) | | 790 |
| | 837 |
| | 790 |
| | 871 |
|
| |
(1) | 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. |
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 10—REVENUES FROM CONTRACTS WITH CUSTOMERS
The following table represents a disaggregation of revenue earned from contracts with customers during the three and six months ended June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
LNG revenues | | $ | 1,121 |
| | $ | 493 |
| | $ | 2,117 |
| | $ | 978 |
|
LNG revenues—affiliate | | 178 |
| | 422 |
| | 681 |
| | 753 |
|
Total revenues from customers | | 1,299 |
| | 915 |
| | 2,798 |
| | 1,731 |
|
Revenues from derivative instruments (1) | | 34 |
| | 10 |
| | 53 |
| | 17 |
|
Total revenues | | $ | 1,333 |
| | $ | 925 |
| | $ | 2,851 |
| | $ | 1,748 |
|
| |
(1) | Includes the realized value associated with a portion of derivative instruments that settle through physical delivery. |
LNG Revenues
We have entered into numerous SPAs with third party customers for the sale of LNG on a Free on Board (“FOB”) (delivered to the customer at the Sabine Pass LNG terminal) basis. Our customers generally purchase LNG 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. The fixed fee component is the amount payable to us regardless of a cancellation or suspension of LNG cargo deliveries by the customers. The variable fee component is the amount generally payable to us only upon delivery of LNG plus all future adjustments to the fixed fee for inflation. 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.
Revenues from the sale of LNG are recognized at a point in time when the LNG is delivered to the customer, at the Sabine Pass LNG terminal, which is the point legal title, physical possession and the risks and rewards of ownership transfer to the customer. Each individual molecule of LNG is viewed as a separate performance obligation. The stated contract price (including both fixed and variable fees) per MMBtu in each LNG sales arrangement is representative of the stand-alone selling price for LNG at the time the sale was negotiated. We have concluded that the variable fees meet the optional exception for allocating variable consideration. As such, the variable consideration for these contracts is allocated to each distinct molecule of LNG and recognized when that distinct molecule of LNG is delivered to the customer. Because of the use of the optional exception, variable consideration related to the sale of LNG is also not included in the transaction price.
Fees received pursuant to SPAs are recognized as LNG revenues only after substantial completion of the respective Train. Prior to substantial completion, sales generated during the commissioning phase are offset against the cost of construction for the respective Train, as the production and removal of LNG from storage is necessary to test the facility and bring the asset to the condition necessary for its intended use.
Deferred Revenue Reconciliation
The following table reflects the changes in our contract liabilities, which we classify as “Deferred revenue” on our Balance Sheets (in millions):
|
| | | | |
| | Six Months Ended June 30, 2018 |
Deferred revenues, beginning of period | | $ | 84 |
|
Cash received but not yet recognized | | 73 |
|
Revenue recognized from prior period deferral | | (84 | ) |
Deferred revenues, end of period | | $ | 73 |
|
We record deferred revenue when we receive consideration, or such consideration is unconditionally due from a customer, prior to transferring goods or services to the customer under the terms of a sales contract. Changes in deferred revenue during the six months ended June 30, 2018 are primarily attributable to differences between the timing of revenue recognition and the receipt of advance payments related to delivery of LNG under certain SPAs.
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
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. The following table discloses the aggregate amount of the transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2018:
|
| | | | | | |
| | Unsatisfied Transaction Price (in billions) | | Weighted Average Recognition Timing (years) (1) |
LNG revenues | | $ | 54.7 |
| | 9.9 |
| |
(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 optional 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 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. During each of the three and six months ended June 30, 2018, approximately 55% of our LNG revenues and 100% of our LNG revenues—affiliate in both periods were related to variable consideration received from customers. |
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.
We have elected the practical expedient to omit the disclosure of the transaction price allocated to future performance obligations and an explanation of when the entity expects to recognize the amount as revenue as of December 31, 2017.
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 11—RELATED PARTY TRANSACTIONS
Below is a summary of our related party transactions as reported on our Statements of Operations for the three and six months ended June 30, 2018 and 2017 (in millions):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
LNG revenues—affiliate |
Cheniere Marketing SPA and Cheniere Marketing Master SPA | $ | 178 |
| | $ | 422 |
| | $ | 681 |
| | $ | 753 |
|
|
Cost of sales—affiliate |
Cargo loading fees under TUA | 7 |
| | 6 |
| | 15 |
| | 10 |
|
|
Operating and maintenance expense—affiliate |
TUA | 64 |
| | 48 |
| | 128 |
| | 81 |
|
Natural Gas Transportation Agreement | 21 |
| | 20 |
| | 41 |
| | 36 |
|
Services Agreements | 22 |
| | 15 |
| | 41 |
| | 25 |
|
Total operating and maintenance expense—affiliate | 107 |
|
| 83 |
| | 210 |
|
| 142 |
|
|
General and administrative expense—affiliate |
Services Agreements | 12 |
| | 17 |
| | 24 |
| | 34 |
|
LNG Terminal-Related Agreements
Terminal Use Agreements
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 2.0 Bcf/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 20 years after May 2016. 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 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. 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 SPA
Cheniere Marketing has an 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 115% of Henry Hub plus $3.00 per MMBtu of LNG.
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.
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
Commissioning Confirmation
Under the Cheniere Marketing Master SPA, we executed a confirmation with Cheniere Marketing that obligates Cheniere Marketing in certain circumstances to buy LNG cargoes produced during the period while Bechtel Oil, Gas and Chemicals, Inc. has control of, and is commissioning, Train 5 of the Liquefaction Project.
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 20 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 1 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 two consecutive ten-year terms. 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 June 30, 2018 and December 31, 2017, we had $129 million and $26 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 0.6% 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 $83,333 (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 2.4% of the capital expenditures incurred in the previous month. After substantial completion of each Train, we will pay a fixed monthly fee of $541,667 (indexed for inflation) for services with respect to such Train.
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 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.
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
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 $1 million. The initial terms of the subleases expire on December 31, 2034, with options to renew for multiple 10-year extensions with similar terms as the initial terms. The annual sublease payments will be adjusted for inflation every five 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 did not convey any assets to SPLNG under this agreement during the three and six months ended June 30, 2018 and 2017.
Contract for Sale and Purchase of Natural Gas and LNG
We have an agreement with SPLNG that allows us to sell and purchase natural gas and LNG with SPLNG. Natural gas and LNG purchased under this agreement are recorded as inventory, except for purchases related to commissioning activities which are capitalized as LNG terminal construction-in-process.
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 no 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.
NOTE 12—CUSTOMER CONCENTRATION
The following table shows customers with revenues of 10% or greater of total third-party revenues and customers with accounts receivable balances of 10% or greater of total accounts receivable from third parties:
|
| | | | | | | | | | | | |
| | Percentage of Total Third-Party Revenues | | Percentage of Accounts Receivable from Third Parties |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | June 30, | | December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Customer A | | 28% | | 53% | | 31% | | 57% | | 35% | | 39% |
Customer B | | 23% | | 30% | | 25% | | 32% | | 20% | | 32% |
Customer C | | 24% | | 15% | | 25% | | * | | 29% | | 27% |
Customer D | | 21% | | —% | | 16% | | —% | | * | | —% |
* Less than 10%
NOTE 13—SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow information (in millions):
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2018 | | 2017 |
Cash paid during the period for interest, net of amounts capitalized | | $ | 285 |
| | $ | 231 |
|
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The balance in property, plant and equipment, net funded with accounts payable and accrued liabilities (including affiliate) was $249 million and $261 million, as of June 30, 2018 and 2017, respectively.
NOTE 14—RECENT ACCOUNTING STANDARDS
The following table provides a brief description of a recent accounting standard that had not been adopted by us as of June 30, 2018:
|
| | | | | | |
Standard | | Description | | Expected Date of Adoption | | Effect on our Financial Statements or Other Significant Matters |
ASU 2016-02, Leases (Topic 842), and subsequent amendments thereto | | 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. A lessee is permitted to make an election not to recognize lease assets and liabilities for leases with a term of 12 months or less. The standard also modifies the definition of a lease and requires expanded disclosures. This guidance may be early adopted, and may be adopted using either a modified retrospective approach to apply the standard at the beginning of the earliest period presented in the financial statements or an optional transition approach to apply the standard at the date of adoption with no retrospective adjustments to prior periods. Certain additional practical expedients are also available. | | January 1, 2019
| | We continue to evaluate the effect of this standard on our Financial Statements. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedients and assessing opportunities to make certain changes to our lease accounting information technology system in order to determine the best implementation strategy. Preliminarily, we expect that the requirement to recognize all leases on our Balance Sheets will be a significant change from current practice but will not have a material impact on our Balance Sheets. Because this assessment is preliminary and the accounting for leases is subject to significant judgment, this conclusion could change as we finalize our assessment. We have not yet determined the impact of the adoption of this standard upon our results of operations or cash flows. We anticipate electing the optional transition method to initially apply the standard at the January 1, 2019 adoption date. We expect to elect the package of practical expedients permitted under the transition guidance which, among other things, allows the carryforward of prior conclusions related to lease identification and classification. We have not yet determined whether we will elect any other practical expedients upon transition. |
SABINE PASS LIQUEFACTION, LLC
NOTES TO FINANCIAL STATEMENTS—CONTINUED
(unaudited)
Additionally, the following table provides a brief description of recent accounting standards that were adopted by us during the reporting period:
|
| | | | | | |
Standard | | Description | | Date of Adoption | | Effect on our Financial Statements or Other Significant Matters |
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequent amendments thereto
| | This standard provides a single, comprehensive revenue recognition model which replaces and supersedes most existing revenue recognition guidance and requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard requires that the costs to obtain and fulfill contracts with customers should be recognized as assets and amortized to match the pattern of transfer of goods or services to the customer if expected to be recoverable. The standard also requires enhanced disclosures. This guidance may be adopted either retrospectively to each prior reporting period presented subject to allowable practical expedients (“full retrospective approach”) or as a cumulative-effect adjustment as of the date of adoption (“modified retrospective approach”). | | January 1, 2018 | | We adopted this guidance on January 1, 2018, using the full retrospective method. The adoption of this guidance represents a change in accounting principle that will provide financial statement readers with enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of this guidance did not impact our previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings. See Note 10—Revenues from Contracts with Customers for additional disclosures.
|
ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory | | This standard requires the immediate recognition of the tax consequences of intercompany asset transfers other than inventory. This guidance may be early adopted, but only at the beginning of an annual period, and must be adopted using a modified retrospective approach. | | January 1, 2018
| | The adoption of this guidance did not have an impact on our Financial Statements or related disclosures. |
| |
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 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 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,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” 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, 2017. 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.
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:
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• | Overview of Significant Events |
| |
• | Liquidity and Capital Resources |
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• | Off-Balance Sheet Arrangements |
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• | Summary of Critical Accounting Estimates |
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• | Recent Accounting Standards |
Overview of Business
We were formed by Cheniere Partners to develop, construct and operate natural gas liquefaction facilities in Cameron Parish, Louisiana (the “Liquefaction Project”) at the Sabine Pass LNG terminal adjacent to the existing regasification facilities owned and operated by SPLNG. Our vision is to 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 areas of the world where natural gas is abundant and inexpensive to produce to other areas where natural gas demand and infrastructure exist to economically justify the use of LNG. We plan to construct up to six Trains, which are in various stages of development, construction and operations. Trains 1 through 4 are operational, Train 5 is undergoing commissioning and Train 6 is being commercialized and has all necessary regulatory approvals in place. Each Train is expected to have a nominal production capacity, which is prior to adjusting for planned maintenance, production reliability and potential overdesign, of approximately 4.5 mtpa of LNG and an adjusted nominal production capacity of approximately 4.3 to 4.6 mtpa of LNG.
Overview of Significant Events
Our significant accomplishments since January 1, 2018 and through the filing date of this Form 10-Q include the following:
Operational
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• | As of July 31, 2018, approximately 150 cargoes have been produced, loaded and exported from the Liquefaction Project year to date. To date, approximately 400 cumulative LNG cargoes have been exported from the Liquefaction Project, with deliveries to 28 countries and regions worldwide. |
Financial
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• | In June 2018, the date of first commercial delivery was reached under the 20-year SPA with BG Gulf Coast LNG, LLC (“BG”) relating to Train 3 of the SPL Project. |
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• | In March 2018, the date of first commercial delivery was reached under the 20-year SPA with GAIL (India) Limited (“GAIL”) relating to Train 4 of the Liquefaction Project. |
Liquidity and Capital Resources
The following table provides a summary of our liquidity position at June 30, 2018 and December 31, 2017 (in millions):
|
| | | | | | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
Cash and cash equivalents | $ | — |
| | $ | — |
|
Restricted cash designated for the Liquefaction Project | 846 |
| | 544 |
|
Available commitments under the $1.2 billion Working Capital Facility (“Working Capital Facility”) | 517 |
| | 470 |
|
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, 2017.
Liquefaction Facilities
We are developing, 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 and 4 of the Liquefaction Project and commenced operating activities in May 2016, September 2016, March 2017 and October 2017, respectively. The following table summarizes the status of Train 5 of the Liquefaction Project as of June 30, 2018:
|
| | | |
| | Train 5 |
Overall project completion percentage | | 95.1% |
Completion percentage of: | | |
Engineering | | 100% |
Procurement | | 100% |
Subcontract work | | 81.1% |
Construction | | 91.4% |
Date of expected substantial completion | | 1H 2019 |
The following orders have been issued by the DOE authorizing the export of domestically produced LNG by vessel from the Sabine Pass LNG terminal:
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• | 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). |
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• | 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). |
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• | 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).
Customers
We have entered into six fixed price SPAs with terms of at least 20 years (plus extension rights) with third parties to make available an aggregate amount of LNG that is between approximately 80% to 95% of the expected aggregate adjusted nominal production capacity of Trains 1 through 5. 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 except for the SPA with BG related to Trains 3 and 4, which commence approximately one year after the date of first commercial delivery for the respective Train.
In aggregate, the annual fixed fee portion to be paid by the third-party SPA customers is approximately $2.2 billion for Trains 1 through 3 and the SPA with GAIL for Train 4, increasing to $2.3 billion upon the date of first commercial delivery under the SPA with BG for Train 4 and to $2.9 billion upon the date of first commercial delivery of Train 5, with the applicable fixed fees starting from the date of first commercial delivery from the applicable Train, as specified in each SPA.
In addition, Cheniere Marketing has entered into an SPA with us to purchase, at Cheniere Marketing’s option, any LNG produced by us in excess of that required for other customers.
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 volatility 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 June 30, 2018, we have secured up to approximately 2,163 TBtu of natural gas feedstock through long-term and short-term natural gas supply contracts.
Construction
We have entered into lump sum turnkey contracts with Bechtel Oil, Gas and Chemicals, Inc. (“Bechtel”) for the engineering, procurement and construction of Trains 1 through 5 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 5 of the Liquefaction Project is approximately $3.1 billion reflecting amounts incurred under change orders through June 30, 2018. Total expected capital costs for Trains 1 through 5 are estimated to be between $12.5 billion and $13.5 billion before financing costs and between $17.5 billion and $18.5 billion after financing costs, including, in each case, estimated owner’s costs and contingencies.
Final Investment Decision on Train 6
We will contemplate making a final investment decision to commence construction of Train 6 of the Liquefaction Project based upon, among other things, entering into an EPC contract, entering into acceptable commercial arrangements and obtaining adequate financing to construct Train 6.
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 2.0 Bcf/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 20 years after May 2016. 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 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 June 30, 2018 and 2017, we recorded operating and maintenance expense—affiliate of $64 million and $48 million, respectively, for the TUA Fees and cost of sales—affiliate of $7 million and $6 million, respectively, for cargo loading services incurred under the TUA. During the six months ended June 30, 2018 and 2017, we recorded operating and maintenance expense—affiliate of $128 million and $81 million, respectively, for the TUA Fees and cost of sales—affiliate of $15 million and $10 million, respectively, for cargo loading services incurred under the TUA.
Additionally, we have entered into a partial TUA assignment agreement with Total Gas & Power North America, Inc. (“Total”), another TUA customer, whereby upon substantial completion of Train 3, we gained access to a portion 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 Trains 5 and 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 June 30, 2018 and 2017, we recorded $7 million and $8 million, respectively, and during the six months ended June 30, 2018 and 2017, we recorded $15 million and $8 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 Trains 1 through 5 of the Liquefaction Project will be financed through project debt and borrowings and cash flows under the SPAs. We believe that with the net proceeds of borrowings, available commitments under the Working Capital Facility and cash flows from operations, we will have adequate financial resources available to complete Train 5 of the Liquefaction Project and to meet our currently anticipated capital, operating and debt service requirements. 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 and 4 subsequently achieved substantial completion in September 2016, March 2017 and October 2017, respectively. We realized offsets to LNG terminal costs of $39 million and $163 million in the three and six months ended June 30, 2017, respectively, that were related to the sale of commissioning cargoes because these amounts were earned or loaded prior to the start of commercial operations, during the testing phase for the construction of those Trains of the Liquefaction Project. We did not realize any offsets to LNG terminal costs in the three and six months ended June 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 June 30, 2018 and December 31, 2017 (in millions):
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| | | | | | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
Senior notes (1) | | $ | 13,650 |
| | $ | 13,650 |
|
Working Capital Facility outstanding balance | | — |
| | — |
|
Letters of credit issued under Working Capital Facility | | 683 |
| | 730 |
|
Available commitments under Working Capital Facility | | 517 |
| | 470 |
|
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, 2017.
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 Notes Indenture”) 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 Notes Indenture 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. As of June 30, 2018, we were in compliance with all covenants related to the Senior Notes. 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, 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 June 30, 2018 and December 31, 2017, we had $517 million and $470 million of available commitments, $683 million and $730 million aggregate amount of issued letters of credit under the Working Capital Facility, respectively. As of both June 30, 2018 and December 31, 2017, we had no loans outstanding under the Working Capital Facility.
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. As of June 30, 2018, we were in compliance with all covenants related to the Working Capital Facility. 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.
Sources and Uses of Cash
The following table summarizes the sources and uses of our cash, cash equivalents and restricted cash for the six months ended June 30, 2018 and 2017 (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.
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2018 | | 2017 |
Operating cash flows | | $ | 604 |
| | $ | 221 |
|
Investing cash flows | | (327 | ) | | (891 | ) |
Financing cash flows | | 25 |
| | 1,589 |
|
| | | | |
Net increase in cash, cash equivalents and restricted cash | | 302 |
|
| 919 |
|
Cash, cash equivalents and restricted cash—beginning of period | | 544 |
| | 358 |
|
Cash, cash equivalents and restricted cash—end of period | | $ | 846 |
| | $ | 1,277 |
|
Operating Cash Flows
Our operating cash inflows during the six months ended June 30, 2018 and 2017 were $604 million and $221 million, respectively. The $383 million increase in operating cash inflows in 2018 compared to 2017 was primarily related to increased cash receipts from the sale of LNG cargoes, partially offset by increased operating costs and expenses as a result of the of additional Trains that were operating at the Liquefaction Project in 2018. During the six months ended June 30, 2018, Trains 1 through 4 were operational, whereas during the six months ended June 30, 2017, Trains 1 and 2 were operational for six months and Train 3 was operational for approximately three months.
Investing Cash Flows
Investing cash outflows during the six months ended June 30, 2018 and 2017 were $327 million and $891 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 inflows during the six months ended June 30, 2018 were $25 million as a result of equity contributions from Cheniere Partners.
Financing cash inflows during the six months ended June 30, 2017 were $1.6 billion, primarily as a result of:
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• | issuances of senior notes for an aggregate principal amount of $2.15 billion; |
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• | $55 million of borrowings and $369 million of repayments made under the credit facilities we entered into in June 2015; |
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• | $110 million of borrowings and $334 million of repayments made under the Working Capital Facility; |
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• | $29 million of debt issuance costs related to up-front fees paid upon the closing of these transactions; and |
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• | $7 million of equity contributions from Cheniere Partners. |
Results of Operations
Our net income was $193 million in the three months ended June 30, 2018, compared to a net loss of $20 million in the three months ended June 30, 2017. This $213 million increase in net income in 2018 was primarily a result of increased income from operations due to additional Trains operating between the periods and decreased loss on modification or extinguishment of debt, which were partially offset by increased interest expense, net of amounts capitalized.
Our net income was $435 million in the six months ended June 30, 2018, compared to a net loss of $24 million in the six months ended June 30, 2017. This $459 million increase in net income in 2018 was primarily a result of increased income from operations due to additional Trains operating between the periods and decreased loss on modification or extinguishment of debt, which were partially offset by increased interest expense, net of amounts capitalized.
Revenues
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except volumes) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
LNG revenues | $ | 1,155 |
| | $ | 503 |
| | $ | 652 |
| | $ | 2,170 |
| | $ | 995 |
| | $ | 1,175 |
|
LNG revenues—affiliate | 178 |
| | 422 |
| | (244 | ) | | 681 |
| | 753 |
| | (72 | ) |
Total revenues | $ | 1,333 |
| | $ | 925 |
| | $ | 408 |
| | $ | 2,851 |
| | $ | 1,748 |
| | $ | 1,103 |
|
| | | | | | | | | | | |
LNG volumes recognized as revenues (in TBtu) | 222 |
| | 167 |
| | 55 |
| | 463 |
| | 295 |
| | 168 |
|
We begin recognizing LNG revenues from the Liquefaction Project following the substantial completion and the commencement of operating activities of the respective Trains. During the six months ended June 30, 2018, Trains 1 through 4 were operational, whereas during the six months ended June 30, 2017, Trains 1 and 2 were operational for six months and Train 3 was operational for approximately three months. The increase in revenues for the three and six months ended June 30, 2018 from the comparable period in 2017 was primarily attributable to the increased volume of LNG sold following the achievement of substantial completion of these Trains. We expect our LNG revenues to increase in the future upon Train 5 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 $39 million corresponding to 8 TBtu of LNG in the three months ended June 30, 2017 and $163 million corresponding to 26 TBtu of LNG in the six months ended June 30, 2017 that was related to the sale of commissioning cargoes. There were no commissioning cargoes sold that were realized as offsets to LNG terminal costs in the three and six months ended June 30, 2018.
Operating costs and expenses
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Cost of sales | $ | 695 |
| | $ | 578 |
| | $ | 117 |
| | $ | 1,533 |
| | $ | 1,088 |
| | $ | 445 |
|
Cost of sales—affiliate | 7 |
| | 6 |
| | 1 |
| | 15 |
| | 10 |
| | 5 |
|
Operating and maintenance expense | 84 |
| | 68 |
| | 16 |
| | 162 |
| | 107 |
| | 55 |
|
Operating and maintenance expense—affiliate | 107 |
| | 83 |
| | 24 |
| | 210 |
| | 142 |
| | 68 |
|
Development expense | 1 |
| | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
|
General and administrative expense | 1 |
| | — |
| | 1 |
| | 3 |
| | 2 |
| | 1 |
|
General and administrative expense—affiliate | 12 |
| | 17 |
| | (5 | ) | | 24 |
| | 34 |
| | (10 | ) |
Depreciation and amortization expense | 87 |
| | 67 |
| | 20 |
| | 173 |
| | 114 |
| | 59 |
|
Total operating costs and expenses | $ | 994 |
| | $ | 820 |
| | $ | 174 |
| | $ | 2,121 |
| | $ | 1,498 |
| | $ | 623 |
|
Our total operating costs and expenses increased during the three and six months ended June 30, 2018 from the three and six months ended June 30, 2017, primarily as a result of additional Trains that were operating between the periods. There were four Trains operating during the six months ended June 30, 2018, whereas two Trains were operating for six months and a third Train was operating for approximately three months during the comparable periods in 2017.
Cost of sales increased during the three and six months ended June 30, 2018 from the comparable periods in 2017, primarily as a result of the increase in operating Trains during 2018. 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. The increase during the three and six months ended June 30, 2018 from the comparable periods in 2017 was primarily related to the increase in the volume of natural gas feedstock, partially offset by lower prices of natural gas feedstock between the periods. Cost of sales also includes gains and losses from derivatives associated with economic hedges to secure natural gas feedstock for the Liquefaction Project, variable transportation and storage costs and other costs to convert natural gas into LNG.
Operating and maintenance expense (including affiliates) increased during the three and six months ended June 30, 2018 from the three and six months ended June 30, 2017, as a result of the increase in operating Trains during 2018. Operating and maintenance expense includes costs associated with operating and maintaining the Liquefaction Project. The increase during the three and six months ended June 30, 2018 from the comparable periods in 2017 was primarily related to TUA reservation charges paid to SPLNG and to Total from payments under the partial TUA assignment agreement, natural gas transportation and storage capacity demand charges paid to CTPL and third parties, third-party service and maintenance contract costs and payroll and benefit costs of operations personnel. Operating and maintenance expense (including affiliates) also includes insurance and regulatory costs and other operating costs.
Depreciation and amortization expense increased during the three and six months ended June 30, 2018 from the three and six months ended June 30, 2017 as a result of an increased number of operational Trains, as the assets related to the Trains of the Liquefaction Project began depreciating upon reaching substantial completion.
We expect our operating costs and expenses to generally increase in the future upon Train 5 achieving substantial completion, although certain costs will not proportionally increase with the number of operational Trains as cost efficiencies will be realized.
Other expense (income)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Interest expense, net of capitalized interest | $ | 148 |
| | $ | 127 |
| | $ | 21 |
| | $ | 299 |
| | $ | 232 |
| | $ | 67 |
|
Loss on modification or extinguishment of debt | — |
| | — |
| | — |
| | — |
| | 42 |
| | (42 | ) |
Derivative loss, net | — |
| | — |
| | — |
| | — |
| | 2 |
| | (2 | ) |
Other income | (2 | ) | | (2 | ) | | — |
| | (4 | ) | | (2 | ) | | (2 | ) |
Total other expense | $ | 146 |
| | $ | 125 |
| | $ | 21 |
| | $ | 295 |
| | $ | 274 |
| | $ | 21 |
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Interest expense, net of capitalized interest, increased during the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 primarily as a result of a decrease in the portion of total interest costs that could be capitalized as additional Trains of the Liquefaction Project completed construction between the periods. For the three months ended June 30, 2018 and 2017, we incurred $198 million and $197 million of total interest cost, respectively, of which we capitalized $50 million and $70 million, respectively, which was directly related to the construction of the Liquefaction Project. For the six months ended June 30, 2018 and 2017, we incurred $396 million and $383 million of total interest cost, respectively, of which we capitalized $97 million and $151 million, respectively, which was directly related to the construction of the Liquefaction Project.
Loss on modification or extinguishment of debt decreased during the six months ended June 30, 2018, as compared to the six months ended June 30, 2017. Loss on modification or extinguishment of debt recognized during the six months ended June 30, 2017 was attributable to the $42 million write-off of debt issuance costs in March 2017 upon termination of the remaining available balance of $1.6 billion under the previous credit facilities in connection with the issuance of the 2028 Senior Notes and the 2037 Senior Notes.
Off-Balance Sheet Arrangements
As of June 30, 2018, 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.
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, 2017.
Recent Accounting Standards
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ITEM 3. | 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):
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| | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Fair Value | | Change in Fair Value | | Fair Value | | Change in Fair Value |
Liquefaction Supply Derivatives | $ | 9 |
| | $ | 1 |
| | $ | 55 |
| | $ | 5 |
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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 voluntarily filed by us under 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.
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PART II. | OTHER INFORMATION |
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ITEM 1. | LEGAL PROCEEDINGS |
We may in the future be involved as a party to various legal proceedings, which are incidental to the ordinary course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. Other than as discussed below, there have been no material changes to the legal proceedings disclosed in our annual report on Form 10-K for the year ended December 31, 2017.
In February 2018, the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) issued a Corrective Action Order (the “CAO”) to us in connection with a minor LNG leak from one tank and minor vapor release from a second tank at the Sabine Pass LNG terminal. These two tanks have been taken out of operational service while we conduct analysis, repair and remediation. On April 20, 2018, we and PHMSA executed a Consent Agreement and Order (the “Consent Order”) that replaces and supersedes the CAO. We continue to work with PHMSA and other appropriate regulatory authorities to address the matters identified in the Consent Order. We do not expect that the Consent Order and related analysis, repair and remediation will have a material adverse impact on our financial results or operations.
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Exhibit No. | | Description |
10.1 | | Third Omnibus Amendment, dated as of May 23, 2018 to (a) the Second Amended and Restated Common Terms Agreement, dated as of June 30, 2015, by and among the Company, Société Générale, as the Common Security Trustee and as the Intercreditor Agent, The Bank of Nova Scotia, and each other party thereto from time to time and (b) the Amended and Restated Senior Working Capital Revolving Credit and Letter of Credit Reimbursement Agreement, dated as of September 4, 2015, by and among the Company, Société Générale as the Swing Line Lender and as the Common Security Trustee, The Bank of Nova Scotia as the Senior Issuing Bank and Senior Facility Agent and the other agents and lenders from time to time party thereto (Incorporated by reference to Exhibit 10.3 to Cheniere Partners’ Registration Statement on Form S-4 (SEC File No. 333-225684) filed on June 15, 2018) |
10.2 | | Change orders to the Lump Sum Turnkey Agreement for the Engineering, Procurement and Construction of the Sabine Pass LNG Stage 3 Liquefaction Facility, dated as of May 4, 2015, between SPL and Bechtel Oil, Gas and Chemicals, Inc.: (i) the Change Order CO-00029 Existing Jetty Structural Steel Analysis – Tanks 104 & 105, dated March 28, 2018, (ii) the Change Order CO-00030 Train 5 JT Valve PV-16002 Internals Modification, Eaton Switchgear Bus Repairs & Inspection Isometrics, dated April 18, 2018, (iii) the Change Order CO-00031 Blind and Spacer Set for Feed Gas Header, dated April 18, 2018, and (iv) the Change Order CO-00032 Additional GTG Testing, dated April 18, 2018 (Incorporated by reference to Exhibit 10.1 to CQP’s Registration Statement on S-4 (SEC File No. 333-225684), filed on June 15, 2018) |
10.3* | | Change orders to the Lump Sum Turnkey Agreement for the Engineering, Procurement and Construction of the Sabine Pass LNG Stage 3 Liquefaction Facility, dated as of May 4, 2015, between SPL and Bechtel Oil, Gas and Chemicals, Inc.: (i) the Change Order CO-00033 System Inspection Isometrics, dated May 24, 2018, (ii) the Change Order CO-00034 Site Evacuation, dated May 31, 2018, (iii) the Change Order CO-00035 Stage 3 - Existing & Stages 1 and 2 Liquefaction Facility Labor Provisional Sum True-Up, dated June 7, 2018, and (iv) the Change Order CO-00036 General Electric, Instrument and Valve Spares, dated June 7, 2018 |
31.1* | | |
31.2* | | |
32.1** | | |
32.2** | | |
101.INS* | | XBRL Instance Document |
101.SCH* | | XBRL Taxonomy Extension Schema Document |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
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* | Filed herewith. |
** | Furnished herewith. |
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.
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| | SABINE PASS LIQUEFACTION, LLC |
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Date: | August 8, 2018 | By: | /s/ Michael J. Wortley |
| | | Michael J. Wortley |
| | | Chief Financial Officer |
| | | (on behalf of the registrant and as principal financial officer) |
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Date: | August 8, 2018 | By: | /s/ Leonard E. Travis |
| | | Leonard E. Travis |
| | | Chief Accounting Officer |
| | | (on behalf of the registrant and as principal accounting officer) |