CEI 2013 Form 10Q 2nd Qtr
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-16383
CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 95-4352386 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
700 Milam Street, Suite 800 | |
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 o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | |
Large accelerated filer S | Accelerated filer £ |
Non-accelerated filer £ | Smaller reporting company £ |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
239,002,438 shares of the registrant’s Common Stock, $0.003 par value, were issued and outstanding as of July 17, 2013.
CHENIERE ENERGY, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
ASSETS | (unaudited) | | |
Current assets | | | |
Cash and cash equivalents | $ | 396,921 |
| | $ | 201,711 |
|
Restricted cash and cash equivalents | 899,468 |
| | 520,263 |
|
Accounts and interest receivable | 26,935 |
| | 3,486 |
|
LNG inventory | 11,730 |
| | 7,045 |
|
Prepaid expenses and other | 18,847 |
| | 16,058 |
|
Total current assets | 1,353,901 |
| | 748,563 |
|
| | | |
Non-current restricted cash and cash equivalents | 1,778,248 |
| | 272,924 |
|
Property, plant and equipment, net | 4,893,605 |
| | 3,282,305 |
|
Debt issuance costs, net | 351,830 |
| | 220,949 |
|
Non-current derivative assets | 81,762 |
| | — |
|
Goodwill | 76,819 |
| | 76,819 |
|
Intangible LNG assets | 4,366 |
| | 4,356 |
|
Other | 41,699 |
| | 33,169 |
|
Total assets | $ | 8,582,230 |
| | $ | 4,639,085 |
|
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | |
|
Current liabilities | |
| | |
|
Accounts payable | $ | 20,790 |
| | $ | 74,360 |
|
Accrued liabilities | 491,424 |
| | 58,737 |
|
Deferred revenue | 26,585 |
| | 26,540 |
|
Other | 9,496 |
| | 126 |
|
Total current liabilities | 548,295 |
| | 159,763 |
|
| | | |
Long-term debt, net of discount | 5,572,008 |
| | 2,167,113 |
|
Non-current derivative liabilities | — |
| | 26,424 |
|
Long-term deferred revenue | 19,500 |
| | 21,500 |
|
Other non-current liabilities | 3,677 |
| | 2,680 |
|
| | | |
Commitments and contingencies |
|
| |
|
|
| | | |
Stockholders' equity | |
| | |
|
Preferred stock, $0.0001 par value, 5.0 million shares authorized, none issued | — |
| | — |
|
Common stock, $0.003 par value | |
| | |
|
Authorized: 480.0 million shares at June 30, 2013 and December 31, 2012, respectively | |
| | |
|
Issued and outstanding: 238.9 million shares and 223.4 million shares at June 30, 2013 and December 31, 2012, respectively | 718 |
| | 671 |
|
Treasury stock: 7.4 million shares and 4.7 million shares at June 30, 2013 and December 31, 2012, respectively, at cost | (117,709 | ) | | (39,115 | ) |
Additional paid-in-capital | 2,352,741 |
| | 2,168,781 |
|
Accumulated deficit | (1,864,853 | ) | | (1,592,985 | ) |
Accumulated other comprehensive loss | (135 | ) | | (27,351 | ) |
Total stockholders' equity | 370,762 |
| | 510,001 |
|
Non-controlling interest | 2,067,988 |
| | 1,751,604 |
|
Total equity | 2,438,750 |
| | 2,261,605 |
|
Total liabilities and equity | $ | 8,582,230 |
| | $ | 4,639,085 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenues | | | | | | | |
LNG terminal revenues | $ | 66,425 |
| | $ | 66,071 |
| | $ | 132,486 |
| | $ | 133,331 |
|
Marketing and trading revenues | 416 |
| | (4,007 | ) | | (149 | ) | | (1,349 | ) |
Other | 336 |
| | 264 |
| | 746 |
| | 819 |
|
Total revenues | 67,177 |
| | 62,328 |
| | 133,083 |
| | 132,801 |
|
| | | | | | | |
Operating costs and expenses | | | | | | | |
LNG terminal operating expense | 31,068 |
| | 10,993 |
| | 46,327 |
| | 22,550 |
|
LNG terminal development expense | 22,081 |
| | 21,088 |
| | 39,168 |
| | 42,907 |
|
Depreciation, depletion and amortization | 15,173 |
| | 15,478 |
| | 30,286 |
| | 31,768 |
|
General and administrative expense | 135,076 |
| | 20,816 |
| | 220,875 |
| | 40,809 |
|
Other | 57 |
| | 74 |
| | 159 |
| | 166 |
|
Total operating costs and expenses | 203,455 |
| | 68,449 |
| | 336,815 |
| | 138,200 |
|
Loss from operations | (136,278 | ) | | (6,121 | ) | | (203,732 | ) | | (5,399 | ) |
| | | | | | | |
Other income (expense) | | | | | | | |
Interest expense, net | (42,016 | ) | | (55,864 | ) | | (82,278 | ) | | (114,215 | ) |
Loss on early extinguishment of debt | (80,510 | ) | | (14,593 | ) | | (80,510 | ) | | (15,100 | ) |
Derivative gain (loss), net | 95,509 |
| | 261 |
| | 78,041 |
| | (575 | ) |
Other income | 413 |
| | 458 |
| | 889 |
| | 583 |
|
Total other expense | (26,604 | ) | | (69,738 | ) | | (83,858 | ) | | (129,307 | ) |
Loss before income taxes and non-controlling interest | (162,882 | ) | | (75,859 | ) | | (287,590 | ) | | (134,706 | ) |
Income tax provision | (1,022 | ) | | (144 | ) | | (942 | ) | | (150 | ) |
Net loss | (163,904 | ) | | (76,003 | ) | | (288,532 | ) | | (134,856 | ) |
Non-controlling interest | 9,140 |
| | 2,963 |
| | 16,664 |
| | 5,401 |
|
Net loss attributable to common stockholders | $ | (154,764 | ) | | $ | (73,040 | ) | | $ | (271,868 | ) | | $ | (129,455 | ) |
| | | | | | | |
Net loss per share attributable to common stockholders - basic and diluted | $ | (0.71 | ) | | $ | (0.43 | ) | | $ | (1.26 | ) | | $ | (0.86 | ) |
Weighted average number of common shares outstanding - basic and diluted | 217,397 |
| | 171,001 |
| | 216,520 |
| | 151,054 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net loss | $ | (163,904 | ) | | $ | (76,003 | ) | | (288,532 | ) | | $ | (134,856 | ) |
Other comprehensive income (loss) | | | | | | | |
Interest rate cash flow hedges | | | | | | | |
Loss on settlements retained in other comprehensive income | — |
| | — |
| | (30 | ) | | — |
|
Change in fair value of interest rate cash flow hedges | — |
| | — |
| | 21,297 |
| | — |
|
Losses reclassified into earnings as a result of discontinuance of cash flow hedge accounting | 5,973 |
| | — |
| | 5,973 |
| | — |
|
Foreign currency translation | 16 |
| | (33 | ) | | (24 | ) | | (16 | ) |
Total other comprehensive income (loss) | 5,989 |
| | (33 | ) | | 27,216 |
| | (16 | ) |
Comprehensive loss | (157,915 | ) | | (76,036 | ) | | (261,316 | ) | | (134,872 | ) |
Comprehensive loss attributable to non-controlling interest | 7,788 |
| | 2,963 |
| | 14,632 |
| | 5,401 |
|
Comprehensive loss attributable to common stockholders | $ | (150,127 | ) | | $ | (73,073 | ) | | $ | (246,684 | ) | | $ | (129,471 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Stockholders' (Deficit) Equity | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Non- controlling Interest | | Total (Deficit) Equity |
| Shares | | Amount | | Shares | | Amount | | | | | |
Balance—December 31, 2012 | 223,397 |
| | $ | 671 |
| | 4,727 |
| | $ | (39,115 | ) | | $ | 2,168,781 |
| | $ | (1,592,985 | ) | | $ | (27,351 | ) | | $ | 1,751,604 |
| | $ | 2,261,605 |
|
Issuances of stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances of restricted stock | 18,230 |
| | 55 |
| | — |
| | — |
| | (55 | ) | | — |
| | — |
| | — |
| | — |
|
Forfeitures of restricted stock | (117 | ) | | — |
| | 68 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 184,007 |
| | — |
| | — |
| | — |
| | 184,007 |
|
Treasury stock acquired | (2,645 | ) | | (8 | ) | | 2,645 |
| | (78,594 | ) | | 8 |
| | — |
| | — |
| | — |
| | (78,594 | ) |
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (24 | ) | | — |
| | (24 | ) |
Interest rate cash flow hedges | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25,207 |
| | 2,032 |
| | 27,239 |
|
Loss attributable to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (16,664 | ) | | (16,664 | ) |
Sale of common units to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,033 |
| | 361,888 |
| | 363,921 |
|
Distribution to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (30,872 | ) | | (30,872 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (271,868 | ) | | — |
| | — |
| | (271,868 | ) |
Balance—June 30, 2013 | 238,865 |
| | $ | 718 |
| | 7,440 |
| | $ | (117,709 | ) | | $ | 2,352,741 |
| | $ | (1,864,853 | ) | | $ | (135 | ) | | $ | 2,067,988 |
| | $ | 2,438,750 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2013 | | 2012 |
Cash flows from operating activities | | | |
Net loss attributable to common stockholders | $ | (271,868 | ) | | $ | (129,455 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation, depletion and amortization | 30,286 |
| | 31,768 |
|
Loss on early extinguishment of debt | 80,510 |
| | 15,097 |
|
Amortization of debt issuance and discount costs | 4,943 |
| | 14,287 |
|
Non-cash compensation | 176,123 |
| | 4,248 |
|
Non-cash derivative (gain) loss, net | (77,935 | ) | | 1,227 |
|
Net loss attributable to non-controlling interest | (16,664 | ) | | (5,401 | ) |
Use of restricted cash and cash equivalents | 55,842 |
| | 21,978 |
|
Crest royalty | — |
| | (25,664 | ) |
Other | (2,021 | ) | | (2,861 | ) |
Changes in operating assets and liabilities: | | | |
Accounts and interest receivable | (23,250 | ) | | (1,681 | ) |
Accounts payable and accrued liabilities | 25,173 |
| | (19,648 | ) |
LNG inventory, net | 1,289 |
| | 4,243 |
|
Deferred revenue | (1,955 | ) | | (3,480 | ) |
Prepaid expenses and other | (2,316 | ) | | 405 |
|
Net cash used in operating activities | (21,843 | ) | | (94,937 | ) |
| | | |
Cash flows from investing activities | | | |
Investment in Cheniere Partners | (11,122 | ) | | (170,253 | ) |
LNG terminal and pipeline costs, net | (1,271,365 | ) | | (38,985 | ) |
Use of restricted cash and cash equivalents | 1,580,268 |
| | 214,174 |
|
Other | (8,815 | ) | | (8,381 | ) |
Net cash provided by (used in) investing activities | 288,966 |
| | (3,445 | ) |
| | | |
Cash flows from financing activities | | | |
Proceeds from Sabine Pass Liquefaction Senior Notes, net | 3,012,500 |
| | — |
|
Proceeds from CTPL Credit Facility, net | 391,978 |
| | — |
|
Proceeds from sale of common units by Cheniere Partners | 364,795 |
| | 8,793 |
|
Proceeds from 2013 Liquefaction Credit Facilities | 100,000 |
| | — |
|
Proceeds from sale of common stock, net | — |
| | 819,686 |
|
Investment in restricted cash and cash equivalents | (3,520,638 | ) | | (455,033 | ) |
Repurchases and prepayments of debt | — |
| | (571,884 | ) |
Debt issuance and deferred financing costs | (228,882 | ) | | (5,530 | ) |
Repayment of 2012 Liquefaction Credit Facility | (100,000 | ) | | — |
|
Distributions to non-controlling interest | (30,872 | ) | | (16,330 | ) |
Purchase of treasury shares | (71,913 | ) | | (1,893 | ) |
Other | 11,119 |
| | (702 | ) |
Net cash used in financing activities | (71,913 | ) | | (222,893 | ) |
| | | |
Net increase (decrease) in cash and cash equivalents | 195,210 |
| | (321,275 | ) |
Cash and cash equivalents—beginning of period | 201,711 |
| | 459,160 |
|
Cash and cash equivalents—end of period | $ | 396,921 |
| | $ | 137,885 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1—ORGANIZATION AND NATURE OF OPERATIONS
Cheniere Energy, Inc., a Delaware corporation, is a Houston-based energy company primarily engaged in liquefied natural gas ("LNG") related businesses. We own and operate the Sabine Pass liquefied natural gas ("LNG") terminal in Louisiana through our 57.9% ownership interest in and management agreements with Cheniere Energy Partners, L.P. ("Cheniere Partners") (NYSE MKT: CQP), which is a publicly traded partnership that we created in 2007. The Sabine Pass LNG terminal is located on the Sabine Pass deep water shipping channel less than four miles from the Gulf Coast. The Sabine Pass LNG terminal has regasification facilities owned by Cheniere Partners' wholly owned subsidiary, Sabine Pass LNG, L.P. ("Sabine Pass LNG") that includes existing infrastructure of five LNG storage tanks with capacity of approximately 16.9 Bcfe, two docks that can accommodate vessels of up to 265,000 cubic meters and vaporizers with regasification capacity of approximately 4.0 Bcf/d.
Cheniere Partners is developing natural gas liquefaction facilities (the "Liquefaction Project") at the Sabine Pass LNG terminal adjacent to the existing regasification facilities through a wholly owned subsidiary, Sabine Pass Liquefaction, LLC ("Sabine Pass Liquefaction"). We plan to construct up to six Trains (each in sequence, "Train 1", "Train 2", "Train 3", "Train 4", "Train 5" and "Train 6"), which are in various stages of development. Each Train is expected to have nominal production capacity of approximately 4.5 million tonnes per annum ("mtpa").
In May 2013, we sold our ownership interests in Cheniere Creole Trail Pipeline, L.P. ("CTPL") and Cheniere Pipeline GP Interests, LLC (collectively, "the Creole Trail Pipeline Business") to Cheniere Partners for $480.0 million and were reimbursed $13.9 million for certain expenditures incurred prior to the closing date. Concurrent with the Creole Trail Pipeline Business sale closing, we acquired 12.0 million Class B units from Cheniere Partners for aggregate consideration of $180.0 million pursuant to a unit purchase agreement between Cheniere Partners and Cheniere Class B Units Holdings, LLC, our wholly owned subsidiary. As a result of the two transactions, we received net cash of $313.9 million.
Approximately one-half of the receiving capacity at the Sabine Pass LNG terminal is contracted to two multinational energy companies. The other half is held by Sabine Pass Liquefaction for use in connection with the Liquefaction Project. One of our wholly owned subsidiaries, Cheniere Marketing, LLC ("Cheniere Marketing"), markets LNG on its own behalf, and through a series of agreements, has the right to utilize the regasification capacity held by Sabine Pass Liquefaction during the construction phase of the Liquefaction Project. Cheniere Marketing also holds a 104 million MMBtu per year LNG sale and purchase agreement ("SPA") with Sabine Pass Liquefaction under which it has the right to purchase LNG from Sabine Pass Liquefaction for a tiered incentive-based fee.
We are also in various stages of developing other projects, including LNG facilities and associated pipelines, each of which, among other things, will require acceptable commercial and financing arrangements before we make a final investment decision.
Unless the context requires otherwise, references to the "Company", "Cheniere", "we", "us" and "our" refer to Cheniere Energy, Inc. and its subsidiaries, including our publicly traded subsidiary partnership, Cheniere Partners.
NOTE 2—BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of Cheniere Energy, Inc. have been prepared in accordance with generally accepted accounting principles in the United States ("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. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included.
Results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2013.
Certain reclassifications have been made to prior period information to conform to the current presentation. The reclassifications had no effect on our overall consolidated financial position, results of operations or cash flows.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
For further information, refer to the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2012, as amended by Amendment No. 1 on Form 10-K/A.
NOTE 3—RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consists of cash and cash equivalents that are contractually restricted as to usage or withdrawal, as follows:
Sabine Pass LNG Senior Notes Debt Service Reserve
Sabine Pass LNG, L.P. ("Sabine Pass LNG") has consummated private offerings of an aggregate principal amount of $1,665.5 million, before discount, of Senior Secured Notes due 2016 (the "2016 Notes") and $420.0 million of Senior Secured Notes due 2020 (the "2020 Notes") (See Note 8—"Long-Term Debt" ). Collectively, the 2016 Notes and the 2020 Notes are referred to as the "Sabine Pass LNG Senior Notes." Under the indentures governing the Sabine Pass LNG Senior Notes (the "Sabine Pass LNG Indentures"), except for permitted tax distributions, Sabine Pass LNG may not make distributions until certain conditions are satisfied, including that there must be on deposit in an interest payment account an amount equal to one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment and there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment. Distributions are permitted only after satisfying the foregoing funding requirements, a fixed charge coverage ratio test of 2:1 and other conditions specified in the Sabine Pass LNG Indentures.
As of June 30, 2013 and December 31, 2012, we classified $15.0 million and $17.4 million, respectively, as current restricted cash and cash equivalents for the payment of interest due within twelve months. As of June 30, 2013 and December 31, 2012, we classified the permanent debt service reserve fund of $76.1 million as non-current restricted cash and cash equivalents. These cash accounts are controlled by a collateral trustee, and, therefore, are shown as restricted cash and cash equivalents on our Consolidated Balance Sheets.
Liquefaction Reserve
In July 2012, Sabine Pass Liquefaction closed on a $3.6 billion senior secured credit facility (the "2012 Liquefaction Credit Facility"). In February and April 2013, Sabine Pass Liquefaction entered into $2.0 billion, before premium, of Senior Secured Notes due in 2021 (the "2021 Sabine Pass Liquefaction Senior Notes") and $1.0 billion of Senior Secured Notes due in 2023 (the "2023 Sabine Pass Liquefaction Senior Notes" and collectively with the 2021 Sabine Pass Liquefaction Senior Notes, the "Sabine Pass Liquefaction Senior Notes"). In May 2013, Sabine Pass Liquefaction closed four credit facilities aggregating $5.9 billion (collectively the "2013 Liquefaction Credit Facilities"), that amended and restated the 2012 Liquefaction Credit Facility. See Note 8—"Long-Term Debt". Under the terms and conditions of the 2012 Liquefaction Credit Facility and the 2013 Liquefaction Credit Facilities, Sabine Pass Liquefaction is required to deposit all cash received into collateral accounts controlled by a collateral trustee. Therefore, all of Sabine Pass Liquefaction's cash and cash equivalents are shown as restricted cash and cash equivalents on our Consolidated Balance Sheets. As of June 30, 2013 and December 31, 2012, we classified $498.7 million and $75.1 million, respectively, as current restricted cash and cash equivalents held by Sabine Pass Liquefaction, and $1,591.1 million and $196.3 million, respectively, as non-current restricted cash and cash equivalents held by Sabine Pass Liquefaction.
CTPL Reserve
As of June 30, 2013, we classified $19.4 million and $110.5 million as current and non-current restricted cash and cash equivalents, respectively, held by CTPL as such funds are to be used to pay for modifications to the Creole Trail Pipeline in order to enable bi-directional natural gas flow and interest during the construction.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
Other Restricted Cash and Cash Equivalents
As of June 30, 2013 and December 31, 2012, $355.3 million and $419.3 million, respectively, of current restricted cash and cash equivalents were held by Sabine Pass LNG and Cheniere Partners that are considered restricted to Cheniere. As of June 30, 2013 and December 31, 2012, $11.1 million and $8.5 million, respectively, had been classified as current restricted cash and cash equivalents on our Consolidated Balance Sheets due to various other contractual restrictions. As of both June 30, 2013 and December 31, 2012, $0.5 million had been classified as non-current restricted cash and cash equivalents due to various other contractual restrictions on our Consolidated Balance Sheets.
NOTE 4—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of LNG terminal costs, investments in oil and gas properties, and fixed assets, as follows (in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
LNG terminal costs | | | |
LNG terminal | $ | 2,233,776 |
| | $ | 2,233,595 |
|
LNG terminal construction-in-process | 2,909,974 |
| | 1,269,798 |
|
LNG site and related costs, net | 5,394 |
| | 5,398 |
|
Accumulated depreciation | (263,977 | ) | | (235,275 | ) |
Total LNG terminal costs, net | $ | 4,885,167 |
| | $ | 3,273,516 |
|
| | | |
Oil and gas properties, successful efforts method | |
| | |
|
Proved | $ | 3,933 |
| | $ | 3,917 |
|
Accumulated depreciation, depletion and amortization | (3,279 | ) | | (3,209 | ) |
Total oil and gas properties, net | $ | 654 |
| | $ | 708 |
|
| | | |
Fixed assets | |
| | |
|
Computer and office equipment | $ | 7,563 |
| | $ | 7,014 |
|
Furniture and fixtures | 4,163 |
| | 4,057 |
|
Computer software | 13,012 |
| | 13,012 |
|
Leasehold improvements | 7,239 |
| | 6,989 |
|
Other | 3,362 |
| | 2,927 |
|
Accumulated depreciation | (27,555 | ) | | (25,918 | ) |
Total fixed assets, net | $ | 7,784 |
| | $ | 8,081 |
|
Property, plant and equipment, net | $ | 4,893,605 |
| | $ | 3,282,305 |
|
LNG Terminal Costs
Depreciation expense related to the Sabine Pass LNG terminal totaled $14.3 million for each of the three months ended June 30, 2013 and 2012. Depreciation expense related to the Sabine Pass LNG terminal totaled $28.6 million and $28.5 million for the six months ended June 30, 2013 and 2012, respectively.
In June 2012, we satisfied the criteria for capitalizing costs associated with Trains 1 and 2 of the Liquefaction Project, and in May 2013, we satisfied the criteria for capitalizing costs associated with Trains 3 and 4 of the Liquefaction Project. For the three months ended June 30, 2013, we capitalized $59.4 million of interest expense related to the construction of the Liquefaction Project. For the six months ended June 30, 2013, we capitalized $94.7 million of interest expense related to the construction of the Liquefaction Project.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
Fixed Assets
Depreciation expense related to our fixed assets totaled $0.8 million and $0.7 million for the three months ended June 30, 2013 and 2012, respectively. Depreciation expense related to our fixed assets totaled $1.6 million and $2.7 million for the six months ended June 30, 2013 and 2012, respectively.
NOTE 5—NON-CONTROLLING INTEREST
We have consolidated Cheniere Partners because we have a controlling interest in the partnership. Therefore, the partnerships’ financial statements are consolidated in our consolidated financial statements and we record the partnerships’ other partners' equity as a non-controlling interest. The following table sets forth the components of our non-controlling interest balance since inception attributable to third-party investors’ interests at June 30, 2013 (in thousands):
|
| | | |
Net proceeds from Cheniere Partners’ issuance of common units (1) | $ | 719,591 |
|
Net proceeds from CLNGH’s sale of Cheniere Partners common units (2) | 203,946 |
|
Distributions to Cheniere Partners’ non-controlling interest | (188,222 | ) |
Net proceeds from Cheniere Partners' issuance of Class B units (3) | 1,387,339 |
|
Non-controlling interest share of loss of Cheniere Partners | (54,666 | ) |
Non-controlling interest at June 30, 2013 | $ | 2,067,988 |
|
| |
(1) | In March and April 2007, we and Cheniere Partners completed a public offering of 15.5 million Cheniere Partners common units (the "Cheniere Partners IPO"). Cheniere Partners received $98.4 million in net proceeds from the issuance of its common units to the public. |
In January 2011, Cheniere Partners initiated an at-the-market program to sell up to 1.0 million common units, the proceeds from which would be used primarily to fund development costs associated with the Liquefaction Project. As of December 31, 2011, Cheniere Partners had sold 0.5 million common units with net proceeds of $9.0 million. During the year ended December 31, 2012, Cheniere Partners sold 0.5 million common units with net proceeds of $11.1 million.
In September 2011, Cheniere Partners sold 3.0 million common units in an underwritten public offering and 1.1 million common units to Cheniere Common Units Holding, LLC, a wholly owned subsidiary of Cheniere, at a price of $15.25 per common unit. Cheniere Partners received net proceeds of $43.3 million and $16.4 million from the public offering and Cheniere Common Units Holding, LLC sale, respectively.
In September 2012, Cheniere Partners sold 8.0 million common units in an underwritten public offering at a price of $25.07 per common unit for net cash proceeds of $194.0 million.
In March 2013, Cheniere Partners sold 17.6 million common units in a registered direct offering to institutional investors at a price of $20.75 per common unit for net proceeds of $364.8 million.
| |
(2) | In conjunction with the Cheniere Partners IPO, Cheniere LNG Holdings, LLC ("CLNGH") sold a portion of the Cheniere Partners common units held by it to the public, realizing net proceeds of $203.9 million, which included $39.4 million of net proceeds realized once the underwriters exercised their option to purchase an additional 2.0 million common units from Holdings. |
| |
(3) | In May 2012, Cheniere Partners, Cheniere and Blackstone CQP Holdco LP ("Blackstone") entered into a unit purchase agreement (the "Blackstone Unit Purchase Agreement") whereby Cheniere Partners agreed to sell to Blackstone in a private placement 100.0 million Class B units of Cheniere Partners ("Class B units") at a price of $15.00 per Class B unit. Cheniere Partners had issued and sold all 100.0 million Class B units to Blackstone as of December 31, 2012. See Note 6—"Variable Interest Entity". |
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
NOTE 6—VARIABLE INTEREST ENTITY
Cheniere Energy Partners
Cheniere Partners is a master limited partnership formed by us to own and operate the Sabine Pass LNG terminal and related assets. As of June 30, 2013, we owned 57.9% of Cheniere Partners in the form of 12.0 million common units, 45.3 million Class B units, 135.4 million subordinated units and a 2% general partner interest. Cheniere Energy Partners GP, LLC ("Cheniere Partners GP"), our wholly owned subsidiary, is the general partner of Cheniere Partners. In May 2012, Cheniere Partners, Cheniere and Blackstone entered into the Blackstone Unit Purchase Agreement whereby Cheniere Partners agreed to sell to Blackstone in a private placement 100.0 million Class B units at a price of $15.00 per Class B unit. In August 2012, all conditions to funding were met and Blackstone purchased its initial 33.3 million Class B units, and as of December 31, 2012, Blackstone had purchased the remaining 66.7 million Class B units. At initial funding, the board of directors of Cheniere Partners GP was modified to include three directors appointed by Blackstone, four directors appointed by us and four independent directors mutually agreed by Blackstone and us and appointed by us. In addition, we have provided Blackstone with a right to maintain one board seat on our board of directors. A quorum consists of a majority of all directors, including at least two directors appointed by Blackstone, two directors appointed by us and two independent directors. Blackstone will no longer be entitled to appoint directors in the event that Blackstone's ownership in Cheniere Partners is less than: (i) 20% of outstanding common units, subordinated units and Class B units, and (ii) 50.0 million Class B units.
As a result of contractual changes in the governance of Cheniere Partners GP in connection with the Blackstone Unit Purchase Agreement, we have determined that Cheniere Partners GP is a variable interest entity and that we, as the holder of the equity at risk, do not have a controlling financial interest due to the rights held by Blackstone. However, we continue to consolidate Cheniere Partners as a result of Blackstone's right to maintain one board seat on our board of directors which creates a de facto agency relationship between Blackstone and us. GAAP requires that when a de facto agency relationship exists, one of the members of the de facto agency relationship must consolidate the variable interest entity based on certain criteria. As a result, we consolidate Cheniere Partners in our consolidated financial statements.
NOTE 7—ACCRUED LIABILITIES
As of June 30, 2013 and December 31, 2012, accrued liabilities consisted of the following (in thousands):
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2013 | | 2012 |
Accrued interest expense and related fees | | $ | 73,919 |
| | $ | 16,327 |
|
Payroll | | 26,830 |
| | 6,369 |
|
LNG liquefaction costs | | 375,143 |
| | 27,919 |
|
LNG terminal costs | | 1,047 |
| | 977 |
|
Other LNG terminal sites and facilities | | 2,383 |
| | — |
|
Other accrued liabilities | | 12,102 |
| | 7,145 |
|
Accrued liabilities | | $ | 491,424 |
| | $ | 58,737 |
|
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
NOTE 8—LONG-TERM DEBT
As of June 30, 2013 and December 31, 2012, our long-term debt consisted of the following (in thousands):
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2013 | | 2012 |
Long-term debt | | | | |
2016 Notes | | $ | 1,665,500 |
| | $ | 1,665,500 |
|
2020 Notes | | 420,000 |
| | 420,000 |
|
2021 Sabine Pass Liquefaction Senior Notes | | 2,000,000 |
| | — |
|
2023 Sabine Pass Liquefaction Senior Notes | | 1,000,000 |
| | — |
|
2012 Liquefaction Credit Facility | | — |
| | 100,000 |
|
2013 Liquefaction Credit Facilities | | 100,000 |
| | — |
|
CTPL Credit Facility | | 400,000 |
| | — |
|
Total long-term debt | | 5,585,500 |
| | 2,185,500 |
|
Long-term debt premium (discount) | | |
| | |
|
2016 Notes | | (16,040 | ) | | (18,387 | ) |
2021 Sabine Pass Liquefaction Senior Notes | | 12,118 |
| | — |
|
CTPL Credit Facility | | (9,570 | ) | | — |
|
Total long-term debt, net | | $ | 5,572,008 |
| | $ | 2,167,113 |
|
Sabine Pass LNG Senior Notes
As of June 30, 2013 and December 31, 2012, Sabine Pass LNG had an aggregate principal amount of $1,665.5 million, before discount, of the 2016 Notes and $420.0 million of the 2020 Notes outstanding. Borrowings under the 2016 Notes and 2020 Notes bear interest at a fixed rate of 7.50% and 6.50%, respectively. The terms of the 2016 Notes and the 2020 Notes are substantially similar. Interest on the 2016 Notes is payable semi-annually in arrears on May 30 and November 30 of each year. Interest on the 2020 Notes is payable semi-annually in arrears on May 1 and November 1 of each year. Subject to permitted liens, the Sabine Pass LNG Senior Notes are secured on a first-priority basis by a security interest in all of Sabine Pass LNG's equity interests and substantially all of its operating assets.
Sabine Pass LNG may redeem some or all of its 2016 Notes at any time, and from time to time, at the redemption prices specified in the indenture governing the 2016 Notes, plus accrued and unpaid interest, if any, to the date of redemption. Sabine Pass LNG may redeem all or part of its 2020 Notes at any time on or after November 1, 2016, at fixed redemption prices specified in the indenture governing the 2020 Notes, plus accrued and unpaid interest, if any, to the date of redemption. Sabine Pass LNG may also, at its option, redeem all or part of the 2020 Notes at any time prior to November 1, 2016, at a "make-whole" price set forth in the indenture governing the 2020 Notes, plus accrued and unpaid interest, if any, to the date of redemption. At any time before November 1, 2015, Sabine Pass LNG may redeem up to 35% of the aggregate principal amount of the 2020 Notes at a redemption price of 106.5% of the principal amount of the 2020 Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date, in an amount not to exceed the net proceeds of one or more completed equity offerings as long as Sabine Pass LNG redeems the 2020 Notes within 180 days of the closing date for such equity offering and at least 65% of the aggregate principal amount of the 2020 Notes originally issued remains outstanding after the redemption.
Under the Sabine Pass LNG Indentures, except for permitted tax distributions, Sabine Pass LNG may not make distributions until certain conditions are satisfied: there must be on deposit in an interest payment account an amount equal to one-sixth of the semi-annual interest payment multiplied by the number of elapsed months since the last semi-annual interest payment, and there must be on deposit in a permanent debt service reserve fund an amount equal to one semi-annual interest payment. Distributions are permitted only after satisfying the foregoing funding requirements, a fixed charge coverage ratio test of 2:1 and other conditions specified in the Sabine Pass LNG Indentures. During the six months ended June 30, 2013 and 2012, Sabine Pass LNG made distributions of $149.1 million and $146.7 million, respectively, after satisfying all the applicable conditions in the Sabine Pass LNG Indentures.
In connection with the issuance of the 2020 Notes, Sabine Pass LNG also entered into a registration rights agreement (the "Sabine Pass LNG Registration Rights Agreement"). Under the Sabine Pass LNG Registration Rights Agreement, Sabine Pass
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
LNG has agreed to use commercially reasonable efforts to file with the Securities and Exchange Commission (the "SEC") and cause to become effective a registration statement relating to an offer to exchange the 2020 Notes for a like aggregate principal amount of SEC-registered notes with terms identical in all material respects to the 2020 Notes (other than with respect to restrictions on transfer or to any increase in annual interest rate) within 360 days after the 2020 Notes were issued in October 2012. Under specified circumstances, we may be required to file a shelf registration statement to cover resales of the 2020 Notes. If we fail to satisfy these obligations, we may be required to pay additional interest to holders of the 2020 Notes under certain circumstances.
Sabine Pass Liquefaction Senior Notes
In February 2013 and April 2013, Sabine Pass Liquefaction issued an aggregate principal amount of $2.0 billion, before premium, of the 2021 Sabine Pass Liquefaction Senior Notes. In April 2013, Sabine Pass Liquefaction also issued $1.0 billion of the 2023 Sabine Pass Liquefaction Senior Notes. Borrowings under the Sabine Pass Liquefaction Senior Notes bear interest at a fixed rate of 5.625%. Interest on the 2021 Sabine Pass Liquefaction Senior Notes is payable semi-annually in arrears on February 1 and August 1 of each year. Interest on the 2023 Sabine Pass Liquefaction Senior Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
The terms of the 2021 Sabine Pass Liquefaction Senior Notes and the 2023 Sabine Pass Liquefaction Senior Notes are governed by a common indenture (the "Indenture"). The Indenture contains customary terms and events of default and certain covenants that, among other things, limit Sabine Pass Liquefaction's ability and the ability of Sabine Pass Liquefaction's restricted subsidiaries to incur additional indebtedness or issue preferred stock, make certain investments or pay dividends or distributions on capital stock or subordinated indebtedness or purchase, redeem or retire capital stock, sell or transfer assets, including capital stock of Sabine Pass Liquefaction's restricted subsidiaries, restrict dividends or other payments by restricted subsidiaries, incur liens, enter into transactions with affiliates, consolidate, merge, sell or lease all or substantially all of Sabine Pass Liquefaction's assets and enter into certain LNG sales contracts. Subject to permitted liens, the Sabine Pass Liquefaction Senior Notes are secured on a pari passu first-priority basis by a security interest in all of the membership interests in Sabine Pass Liquefaction and substantially all of Sabine Pass Liquefaction's assets. Sabine Pass Liquefaction may not make any distributions until, among other requirements, substantial completion of Trains 1 and 2 has occurred, deposits are made into debt service reserve accounts and a debt service coverage ratio for the prior 12-month period and a projected debt service coverage ratio for the upcoming 12-month period of 1.25:1.00 are satisfied.
At any time prior to November 1, 2020, with respect to the 2021 Sabine Pass Liquefaction Senior Notes, or January 15, 2023, with respect to the 2023 Sabine Pass Liquefaction Senior Notes, Sabine Pass Liquefaction may redeem all or a part of the Sabine Pass Liquefaction Senior Notes, at a redemption price equal to the "make-whole" price set forth in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption. Sabine Pass Liquefaction also may at any time on or after November 1, 2020, with respect to the 2021 Sabine Pass Liquefaction Senior Notes, or January 15, 2023, with respect to the 2023 Sabine Pass Liquefaction Senior Notes, redeem the Sabine Pass Liquefaction Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Sabine Pass Liquefaction Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.
In connection with the issuances of the Sabine Pass Liquefaction Senior Notes, Sabine Pass Liquefaction also entered into registration rights agreements (the "Liquefaction Registration Rights Agreements"). Under the Liquefaction Registration Rights Agreements, Sabine Pass Liquefaction has agreed to use commercially reasonable efforts to file with the SEC and cause to become effective registration statements relating to an offer to exchange the Sabine Pass Liquefaction Senior Notes for a like aggregate principal amount of SEC-registered notes with terms identical in all material respects to the 2021 Sabine Pass Liquefaction Senior Notes and 2023 Sabine Pass Liquefaction Senior Notes (other than with respect to restrictions on transfer or to any increase in annual interest rate) within 360 days after February 1, 2013 and April 16, 2013, respectively. Under specified circumstances, Sabine Pass Liquefaction may be required to file a shelf registration statement to cover resales of the Sabine Pass Liquefaction Senior Notes. If Sabine Pass Liquefaction fails to satisfy these obligations, Sabine Pass Liquefaction may be required to pay additional interest to holders of the Sabine Pass Liquefaction Senior Notes under certain circumstances.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
2013 Liquefaction Credit Facilities
In May 2013, Sabine Pass Liquefaction closed the 2013 Liquefaction Credit Facilities aggregating $5.9 billion. The 2013 Liquefaction Credit Facilities are being used to fund a portion of the costs of developing, constructing and placing into operation the first four LNG trains of the Liquefaction Project. The 2013 Liquefaction Credit Facilities will mature on the earlier of May 28, 2020 or the second anniversary of the completion date of the first four LNG Trains of the Liquefaction Project, as defined in the 2013 Liquefaction Credit Facilities. Borrowings under the 2013 Liquefaction Credit Facilities may be refinanced, in whole or in part, at any time without premium or penalty, except for interest rate hedging and interest rate breakage costs. Sabine Pass Liquefaction made a $100.0 million borrowing under the 2013 Liquefaction Credit Facilities in June 2013 after meeting the required conditions precedent.
Borrowings under the 2013 Liquefaction Credit Facilities bear interest at a variable rate per annum equal to, at Sabine Pass Liquefaction's election, the London Interbank Offered Rate ("LIBOR") or the base rate, plus the applicable margin. The applicable margins for LIBOR loans prior to, and after, the completion of Train 4 range from 2.3% to 3.0% and 2.3% to 3.25%, respectively, depending on the applicable 2013 Liquefaction Credit Facility. Interest on LIBOR loans is due and payable at the end of each LIBOR period. The 2013 Liquefaction Credit Facilities required Sabine Pass Liquefaction to pay certain up-front fees to the agents and lenders in the aggregate amount of approximately $144.0 million and provide for a commitment fee calculated at a rate per annum equal to 40% of the applicable margin for LIBOR loans, multiplied by the average daily amount of the undrawn commitment. Annual administrative fees must also be paid to the agent and the trustee. The principal of loans made under the 2013 Liquefaction Credit Facilities must be repaid in quarterly installments, commencing upon the earlier of the last day of the first calendar quarter ending at least three months following the completion of Train 4 of the Liquefaction Project and September 30, 2018. Scheduled repayments are based upon an 18-year amortization profile, with the remaining balance due upon the maturity of the 2013 Liquefaction Credit Facilities.
Under the terms and conditions of the 2013 Liquefaction Credit Facilities, all cash held by Sabine Pass Liquefaction is controlled by a collateral agent. These funds can only be released by the collateral agent upon satisfaction of certain terms and conditions related to the use of proceeds, and are classified as restricted on our Consolidated Balance Sheets.
The 2013 Liquefaction Credit Facilities contain conditions precedent for the second borrowing and any subsequent borrowings, as well as customary affirmative and negative covenants. The obligations of Sabine Pass Liquefaction under the 2013 Liquefaction Credit Facilities are secured by substantially all of the assets of Sabine Pass Liquefaction as well as all of the membership interests in Sabine Pass Liquefaction on a pari passu basis with the Sabine Pass Liquefaction Senior Notes.
Under the terms of the 2013 Liquefaction Credit Facilities, Sabine Pass Liquefaction is required to hedge not less than 75% of the variable interest rate exposure of its projected outstanding borrowings, calculated on a weighted average basis in comparison to its anticipated draw of principal. See Note 9— "Financial Instruments".
2012 Liquefaction Credit Facility
In July 2012, Sabine Pass Liquefaction entered into the $3.6 billion 2012 Liquefaction Credit Facility with a syndicate of lenders. The 2012 Liquefaction Credit Facility was to be used to fund a portion of the costs of developing, constructing and placing into operation Trains 1 and 2 of the Liquefaction Project. In May 2013, the 2012 Liquefaction Credit Facility was amended and restated with the 2013 Liquefaction Credit Facilities and $100.0 million of outstanding borrowings under the 2012 Liquefaction Credit Facility were repaid in full.
The 2012 Liquefaction Credit Facility had a maturity date of the earlier of July 31, 2019 or the second anniversary of the completion date of Trains 1 and 2 of the Liquefaction Project, as defined in the 2012 Liquefaction Credit Facility. Borrowings under the 2012 Liquefaction Credit Facility could have been refinanced, in whole or in part, at any time without premium or penalty, except for interest rate hedging and interest rate breakage costs. Sabine Pass Liquefaction made a $100.0 million borrowing under the 2012 Liquefaction Credit Facility in August 2012 after meeting the required conditions precedent.
Borrowings under the 2012 Liquefaction Credit Facility bore interest at a variable rate equal to, at Sabine Pass Liquefaction's election, LIBOR or the base rate, plus the applicable margin. The applicable margin for LIBOR loans was 3.50% during construction and 3.75% during operations. Interest on LIBOR loans was due and payable at the end of each LIBOR period. The 2012 Liquefaction
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
Credit Facility required Sabine Pass Liquefaction to pay certain up-front fees to the agents and lenders in the aggregate amount of approximately $178 million and provided for a commitment fee calculated at a rate per annum equal to 40% of the applicable margin for LIBOR loans, multiplied by the average daily amount of the undrawn commitment. Annual administrative fees were also required to be paid to the agent and the trustee. The principal of loans made under the 2012 Liquefaction Credit Facility had to be repaid in quarterly installments, commencing with the last day of the first calendar quarter ending at least three months following the completion of Trains 1 and 2 of the Liquefaction Project. Scheduled repayments were based upon an 18-year amortization profile, with the remaining balance due upon the maturity of the 2012 Liquefaction Credit Facility.
Under the terms and conditions of the 2012 Liquefaction Credit Facility, all cash held by Sabine Pass Liquefaction was controlled by the collateral agent. These funds could only be released by the collateral agent upon satisfaction of certain terms and conditions related to the use of proceeds, and the cash balance of $100.0 million held in these accounts as of December 31, 2012 was classified as restricted on our Consolidated Balance Sheets.
The 2012 Liquefaction Credit Facility contained conditions precedent for the second borrowing and any subsequent borrowings, as well as customary affirmative and negative covenants. The obligations of Sabine Pass Liquefaction under the 2012 Liquefaction Credit Facility were secured by substantially all of the assets of Sabine Pass Liquefaction as well as all of the membership interests in Sabine Pass Liquefaction, and a security interest in Cheniere Partners' rights under its Unit Purchase Agreement with Blackstone CQP Holdco LP ('Blackstone") dated May 14, 2012 on a pari passu basis with the Sabine Pass Liquefaction Senior Notes.
Under the terms of the 2012 Liquefaction Credit Facility, Sabine Pass Liquefaction was required to hedge not less than 75% of the variable interest rate exposure of its projected outstanding borrowings, calculated on a weighted average basis in comparison to its anticipated draw of principal. See Note 9— "Financial Instruments"
In February 2013, Sabine Pass Liquefaction issued the 2021 Sabine Pass Liquefaction Senior Notes to refinance a portion of the 2012 Liquefaction Credit Facility, and a portion of available commitments pursuant to the 2012 Liquefaction Credit Facility were suspended. In April 2013, Sabine Pass Liquefaction issued an aggregate principal amount of $500.0 million of additional 2021 Sabine Pass Liquefaction Senior Notes and $1.0 billion of 2023 Sabine Pass Liquefaction Senior Notes, and as a result, approximately$1.4 billion of commitments under the 2012 Liquefaction Credit Facility were terminated. The termination of these commitments in April 2013 and the amendment and restatement of the 2012 Liquefaction Credit Facility with the 2013 Liquefaction Credit Facilities in May 2013 resulted in a write-off of debt issuance costs associated with the 2012 Liquefaction Credit Facility of $80.5 million in the three and six months ended June 30, 2013.
CTPL Credit Facility
In May 2013, CTPL entered into a $400.0 million term loan facility (the "CTPL Credit Facility"), which will be used to fund modifications to the Creole Trail Pipeline and for general business purposes. CTPL incurred $10.0 million of direct lender fees that were recorded as a debt discount. The CTPL Credit Facility matures in 2017 when the full amount of the outstanding principal obligations must be repaid. CTPL's loans may be repaid, in whole or in part, at any time without premium or penalty. As of June 30, 2013, CTPL had borrowed the full amount of $400.0 million under the CTPL Credit Facility.
Borrowings under the CTPL Credit Facility bear interest at a variable rate per annum equal to, at CTPL's election, LIBOR or the base rate, plus the applicable margin. The applicable margin for LIBOR loans is 3.25%. Interest on LIBOR loans is due and payable at the end of each LIBOR period.
Under the terms and conditions of the CTPL Credit Facility, all cash reserved to pay interest during construction is controlled by a collateral agent. These funds can only be released by the collateral agent upon satisfaction of certain terms and conditions, and are classified as restricted on our Consolidated Balance Sheets. CTPL is also required to pay annual fees to the administrative and collateral agents.
The CTPL Credit Facility contains customary affirmative and negative covenants. The obligations of CTPL under the CTPL Credit Facility are secured by a first priority lien in substantially all of the personal property of CTPL and all of the general partner and limited partner interests in CTPL.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
Cheniere Partners has guaranteed (i) the obligations of CTPL under the CTPL Credit Facility if the maturity of the CTPL Loans is accelerated following the termination by Sabine Pass Liquefaction of a transportation precedent agreement in limited circumstances and (ii) the obligations of Cheniere Energy Investments, LLC ("Cheniere Investments"), Cheniere Partners' wholly owned subsidiary, in connection with its obligations under an equity contribution agreement (a) to pay operating expenses of CTPL until CTPL receives revenues under a service agreement with Sabine Pass Liquefaction and (b) to fund interest payments on the CTPL Loans after the funds in an interest reserve account have been exhausted.
NOTE 9—FINANCIAL INSTRUMENTS
Derivative Instruments
We have entered into certain instruments to hedge the exposure to variability in expected future cash flows attributable to the future sale of our LNG inventory ("LNG Inventory Derivatives"), to hedge the exposure to price risk attributable to future purchases of natural gas to be utilized as fuel to operate the Sabine Pass LNG terminal ("Fuel Derivatives"), and interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under the 2013 Liquefaction Credit Facilities ("Interest Rate Derivatives").
The following table (in thousands) shows the fair value of our derivative assets and liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, which are classified as other current assets, other current liabilities and other non-current liabilities in our Consolidated Balance Sheets.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of |
| June 30, 2013 | | December 31, 2012 |
| 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 |
LNG Inventory Derivatives asset | $ | — |
| | $ | 755 |
| | $ | — |
| | $ | 755 |
| | $ | — |
| | $ | 237 |
| | $ | — |
| | $ | 237 |
|
Fuel Derivatives (liability) | — |
| | (240 | ) | | — |
| | (240 | ) | | — |
| | (98 | ) | | — |
| | (98 | ) |
Interest Rate Derivatives asset (liability) | — |
| | 78,207 |
| | — |
| | 78,207 |
| | — |
| | (26,424 | ) | | — |
| | (26,424 | ) |
The estimated fair values of our LNG Inventory Derivatives and Fuel Derivatives are the amount at which the instruments could be exchanged currently between willing parties. We value these derivatives using observable commodity price curves and other relevant data. We value our Interest Rate Derivatives using valuations based on the initial trade prices. Using an income-based approach, subsequent valuations are based on observable inputs to the valuation model including interest rate curves, risk adjusted discount rates, credit spreads and other relevant data. 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.
Commodity Derivatives
We recognize all derivative instruments that qualify for derivative accounting treatment as either assets or liabilities and measure those instruments at fair value. For those instruments accounted for as derivatives, including our LNG Inventory Derivatives and certain of our Fuel Derivatives, changes in fair value are reported in earnings.
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 where our Fuel Derivatives or our LNG Inventory Derivatives are in an asset position. Our commodity derivative transactions are executed through over-the-counter contracts which are subject to nominal credit risk as these transactions are settled on a daily margin basis with investment grade financial institutions. We are required by these financial institutions to use margin deposits as credit support for our commodity derivative activities. Collateral of $5.3 million and $5.9 million deposited for such contracts, which has not been reflected in the derivative fair value tables, is included in the other current assets balance as of June 30, 2013, and December 31, 2012, respectively.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
The following table (in thousands) shows the fair value and location of our LNG Inventory Derivatives and Fuel Derivatives on our Consolidated Balance Sheets:
|
| | | | | | | | | | |
| | | | Fair Value Measurements as of |
| Balance Sheet Location | | June 30, 2013 | | December 31, 2012 |
LNG Inventory Derivatives asset | Prepaid expenses and other | | $ | 755 |
| | $ | 237 |
|
Fuel Derivatives (liability) | (Other current liabilities) | | (240 | ) | | (98 | ) |
The following table (in thousands) shows the changes in the fair value and settlements of our LNG Inventory Derivatives recorded in marketing and trading revenues (losses) on our Consolidated Statements of Operations during the three and six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
| Three Month Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
LNG Inventory Derivatives gain (loss) | $ | 892 |
| | $ | (995 | ) | | $ | 368 |
| | $ | 864 |
|
The following table (in thousands) shows the changes in the fair value and settlements of our Fuel Derivatives recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three and six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
| Three Month Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Fuel Derivatives gain (loss) | $ | (504 | ) | | $ | 261 |
| | $ | 11 |
| | $ | (575 | ) |
Interest Rate Derivatives
In August 2012 and June 2013, Sabine Pass Liquefaction entered into Interest Rate Derivatives to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the 2012 Liquefaction Credit Facility and the 2013 Liquefaction Credit Facilities, respectively. The Interest Rate Derivatives hedge a portion of the expected outstanding borrowings over the term of the 2013 Liquefaction Credit Facilities.
Sabine Pass Liquefaction had elected to designate the Interest Rate Derivatives entered into in August 2012 as hedging instruments which was required in order to qualify for cash flow hedge accounting. As a result of this cash flow hedge designation, we recognized the Interest Rate Derivatives entered into in August 2012 as an asset or liability at fair value, and reflected changes in fair value through other comprehensive income in our Consolidated Statements of Comprehensive Loss. Any hedge ineffectiveness associated with the Interest Rate Derivatives entered into in August 2012 was recorded immediately as derivative gain (loss) in our Consolidated Statements of Operations. The realized gain (loss) on the Interest Rate Derivatives entered into in August 2012 was recorded as an (increase) decrease in interest expense on our Consolidated Statements of Operations to the extent not capitalized as part of the Liquefaction Project. The effective portion of the gains or losses on our Interest Rate Derivatives entered into in August 2012 recorded in other comprehensive income would be reclassified to earnings as interest payments on the 2012 Liquefaction Credit Facility impact earnings. In addition, amounts recorded in other comprehensive income are also reclassified into earnings if it becomes probable that the hedged forecasted transaction will not occur.
Sabine Pass Liquefaction did not elect to designate the Interest Rate Derivatives entered into in June 2013 as cash flow hedging instruments, and changes in fair value are recorded as derivative gain (loss) within the Consolidated Statements of Operations.
During the first quarter of 2013, we determined that it was no longer probable that the forecasted variable interest payments on the 2012 Liquefaction Credit Facility would occur in the time period originally specified based on the continued development of our financing strategy for the Liquefaction Project, and, in particular, the Sabine Pass Liquefaction Senior Notes described in Note 8—"Long-Term Debt". As a result, all of the Interest Rate Derivatives entered into in August 2012 were no longer effective hedges, and the remaining portion of hedge relationships that were designated cash flow hedges as of December 31, 2012, were de-designated as of February 1, 2013. For de-designated cash flow hedges, changes in fair value prior to their de-designation date
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
are recorded as other comprehensive income (loss) within the Consolidated Balance Sheets, and changes in fair value subsequent to their de-designation date are recorded as derivative gain (loss) within the Consolidated Statements of Operations.
In June 2013, we concluded that the hedged forecasted transactions associated with the Interest Rate Derivatives entered into in connection with the 2012 Liquefaction Credit Facility had become probable of not occurring based on the issuances of the Sabine Pass Liquefaction Senior Notes, the closing of the 2013 Liquefaction Credit Facilities, the additional Interest Rate Derivatives executed in June 2013, and our intention to continue to issue fixed rate debt to refinance drawn portions of the 2013 Liquefaction Credit Facilities. As a result, the amount remaining in accumulated other comprehensive income ("AOCI") pertaining to the previously designated Interest Rate Derivatives was reclassified out of AOCI and into income. We have presented the reclassification of unrealized losses from AOCI into income and the changes in fair value and settlements subsequent to the reclassification date separate from interest expense as derivative gain (loss), net in our Consolidated Statements of Operations.
At June 30, 2013, Sabine Pass Liquefaction had the following Interest Rate Derivatives outstanding:
|
| | | | | | | | | | | | |
| | Initial Notional Amount | | Maximum Notional Amount | | Effective Date | | Maturity Date | | Weighted Average Fixed Interest Rate Paid | | Variable Interest Rate Received |
Interest Rate Derivatives - Not Designated | | $20.0 million | | $2.9 billion | | August 14, 2012 | | July 31, 2019 | | 1.98% | | One-month LIBOR |
Interest Rate Derivatives - Not Designated | | — | | $671.0 million | | June 5, 2013 | | May 31, 2020 | | 2.05% | | One-month LIBOR |
The following table (in thousands) shows the fair value of our Interest Rate Derivatives:
|
| | | | | | | | | | |
| | | | Fair Value Measurements as of |
| | Balance Sheet Location | | June 30, 2013 | | December 31, 2012 |
Interest Rate Derivatives - Not Designated | | Non-current derivative assets | | $ | 81,762 |
| | $ | — |
|
Interest Rate Derivatives - Designated | | Non-current derivative liabilities | | — |
| | 21,290 |
|
Interest Rate Derivatives - Not Designated | | Other current liabilities | | 3,555 |
| | — |
|
Interest Rate Derivatives - Not Designated | | Non-current derivative liabilities | | — |
| | 5,134 |
|
The following table (in thousands) details the effect of our Interest Rate Derivatives included in OCI and AOCI for the three months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gain (Loss) in Other Comprehensive Income | | Gain (Loss) Reclassified from AOCI into Interest Expense (Effective Portion) | | Losses Reclassified into Earnings as a Result of Discontinuance of Cash Flow Hedge Accounting |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
Interest Rate Derivatives - Designated | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (5,806 | ) | | $ | — |
|
Interest Rate Derivatives - Settlements | — |
| | — |
| | — |
| | — |
| | (167 | ) | | — |
|
The following table (in thousands) details the effect of our Interest Rate Derivatives included in OCI and AOCI for the six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gain (Loss) in Other Comprehensive Income | | Gain (Loss) Reclassified from AOCI into Interest Expense (Effective Portion) | | Losses Reclassified into Earnings as a Result of Discontinuance of Cash Flow Hedge Accounting |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
Interest Rate Derivatives - Designated | $ | 21,297 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (5,806 | ) | | $ | — |
|
Interest Rate Derivatives - Settlements | (30 | ) | | — |
| | — |
| | — |
| | (167 | ) | | — |
|
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
The following table (in thousands) shows the changes in the fair value of our Interest Rate Derivatives - Not Designated recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three and six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
| Three Month Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Interest Rate Derivatives - Not Designated gain | $ | 101,263 |
| | $ | — |
| | $ | 83,279 |
| | $ | — |
|
Balance Sheet Presentation
Our commodity and interest rate derivatives are presented on a net basis on our Consolidated Balance Sheets as described above. The following table (in thousands) shows the fair value of our derivatives outstanding on a gross and net basis:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts Recognized | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | |
Offsetting Derivative Assets (Liabilities) | | | | | Derivative Instrument | | Cash Collateral Received (Paid) | | Net Amount |
As of June 30, 2013: | | | | | | | | | | | | |
Fuel Derivatives | | $ | (240 | ) | | $ | (240 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
LNG Inventory Derivatives | | 755 |
| | — |
| | 755 |
| | — |
| | — |
| | 755 |
|
Interest Rate Derivatives - Not Designated | | 81,762 |
| | — |
| | 81,762 |
| | — |
| | — |
| | 81,762 |
|
Interest Rate Derivatives - Not Designated | | (3,555 | ) | | — |
| | (3,555 | ) | | — |
| | — |
| | (3,555 | ) |
As of December 31, 2012: | | | | | | | | | | | | |
Fuel Derivatives | | (98 | ) | | (98 | ) | | — |
| | — |
| | — |
| | — |
|
LNG Inventory Derivatives | | 237 |
| | — |
| | 237 |
| | — |
| | — |
| | 237 |
|
Interest Rate Derivatives - Designated | | (21,290 | ) | | — |
| | (21,290 | ) | | — |
| | — |
| | (21,290 | ) |
Interest Rate Derivatives - Not Designated | | (5,134 | ) | | — |
| | (5,134 | ) | | — |
| | — |
| | (5,134 | ) |
Other Financial Instruments
The estimated fair value of our other financial instruments, including those financial instruments for which the fair value option was not elected, are set forth in the table below. The carrying amounts reported on our Consolidated Balance Sheets for cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, interest receivable and accounts payable approximate fair value due to their short-term nature.
Other Financial Instruments (in thousands):
|
| | | | | | | | | | | | | | | | |
| | June 30, 2013 | | December 31, 2012 |
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
2016 Notes, net of discount (1) | | $ | 1,649,460 |
| | $ | 1,781,417 |
| | $ | 1,647,113 |
| | $ | 1,824,177 |
|
2020 Notes (1) | | 420,000 |
| | 427,350 |
| | 420,000 |
| | 437,850 |
|
2021 Sabine Pass Liquefaction Senior Notes (1) | | 2,012,118 |
| | 1,951,755 |
| | — |
| | — |
|
2023 Sabine Pass Liquefaction Senior Notes (1) | | 1,000,000 |
| | 957,500 |
| | — |
| | — |
|
2012 Liquefaction Credit Facility (2) | | — |
| | — |
| | 100,000 |
| | 100,000 |
|
2013 Liquefaction Credit Facilities (2) | | 100,000 |
| | 100,000 |
| | — |
| | — |
|
CTPL Credit Facility (3) | | 390,429 |
| | 400,000 |
| | — |
| | — |
|
| |
(1) | The Level 2 estimated fair value was based on quotations obtained from broker-dealers who make markets in these and similar instruments based on the closing trading prices on June 30, 2013 and December 31, 2012, as applicable. |
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
| |
(2) | The Level 3 estimated fair value was determined to be the carrying amount due to our ability to call this debt at anytime without penalty. |
| |
(3) | The Level 3 estimated fair value was determined to be the principal amount due to our ability to call this debt at anytime without penalty. |
NOTE 10—INCOME TAXES
We are not presently a taxpayer for federal or state income tax purposes and have not recorded a net liability for federal or state income taxes in any of the periods included in the accompanying financial statements. However, we are presently an international taxpayer and have recorded a net expense of $1.0 million and $0.1 million for international income taxes for the three months ended June 30, 2013 and 2012, respectively. We recorded a net expense of $0.9 million and $0.2 million for international income taxes for the six months ended June 30, 2013 and 2012, respectively.
We experienced an ownership change within the provisions of Internal Revenue Code ("IRC") Section 382 in 2008, 2010 and 2012. An analysis of the annual limitation on the utilization of our net operating losses ("NOLs") was performed in accordance with IRC Section 382. It was determined that IRC Section 382 will not limit the use of our NOLs in full over the carryover period. We will continue to monitor trading activity in our shares which may cause an additional ownership change which could ultimately affect our ability to fully utilize our existing tax NOL carryforwards.
NOTE 11—NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net loss per share attributable to common stockholders ("EPS") excludes dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the potential common shares had been issued.
The following table reconciles basic and diluted weighted average common shares outstanding for the three and six months ended June 30, 2013 and 2012 (in thousands except for loss per share):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Weighted average common shares outstanding: | | | | | | | |
Basic | 217,397 |
| | 171,001 |
| | 216,520 |
| | 151,054 |
|
Dilutive common stock options (1) | — |
| | — |
| | — |
| | — |
|
Dilutive Convertible Senior Unsecured Notes (2) | — |
| | — |
| | — |
| | — |
|
Dilutive 2008 Loans (3) | — |
| | — |
| | — |
| | — |
|
Diluted | 217,397 |
| | 171,001 |
| | 216,520 |
| | 151,054 |
|
| | | | | | | |
Basic and diluted net loss per share attributable to common stockholders | $ | (0.71 | ) | | $ | (0.43 | ) | | $ | (1.26 | ) | | $ | (0.86 | ) |
| |
(1) | Stock options, phantom stock and unvested stock of 19.1 million shares and 16.6 million shares representing securities that could potentially dilute basic EPS in the future were not included in the diluted net loss per share computations for the three and six months ended June 30, 2013, respectively, because they would have been anti-dilutive. Stock options, phantom stock and unvested stock of 2.0 million shares and 1.9 million shares representing securities that could potentially dilute basic EPS in the future were not included in the diluted net loss per share computations for the three and six months ended June 30, 2012, respectively, because they would have been anti-dilutive. |
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
| |
(2) | In July 2005, we consummated a private offering of $325.0 million aggregate principal amount of Convertible Senior Unsecured Notes due August 1, 2012. Common shares of 5.8 million issuable upon conversion of the Convertible Senior Unsecured Notes for the three and six months ended June 30, 2013 and 2012 were not included in the diluted net loss per share computation because the computation of diluted net loss per share attributable to common stockholders utilizing the "if-converted" method would be anti-dilutive. The Convertible Senior Unsecured Notes were repaid in full in August 2012. |
| |
(3) | In August 2008, we entered into a credit agreement pursuant to which we obtained $250.0 million in convertible term loans (the "2008 Loans"). Common shares of 1.7 million issuable upon exchange of the 2008 Loans for the three and six months ended June 30, 2012 were not included in the diluted computation because the computation of diluted net loss per share attributable to common stockholders utilizing the "if-converted" method would be anti-dilutive. The 2008 Loans were repaid in full in June 2012. |
NOTE 12—SHARE-BASED COMPENSATION
We have granted options to purchase common stock to employees, consultants and outside directors under the Cheniere Energy, Inc. Amended and Restated 1997 Stock Option Plan (the "1997 Plan"), Amended and Restated 2003 Stock Incentive Plan, as amended (the "2003 Plan"), and 2011 Incentive Plan, as amended (the "2011 Plan"). We recognize our share-based payments to employees in the consolidated financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization) over the requisite service period, net of estimated forfeitures, using the straight-line or accelerated recognition methods.
For the three months ended June 30, 2013 and 2012, the total share-based compensation expense recognized in our net loss (net of capitalization) was $112.4 million and $1.9 million, respectively. For the six months ended June 30, 2013 and 2012, the total share-based compensation expense recognized in our net loss (net of capitalization) was $176.1 million and $4.2 million, respectively. For the three months ended June 30, 2013 and 2012, the total share-based compensation cost capitalized as part of the cost of capital assets was $5.0 million and zero, respectively. For the six months ended June 30, 2013 and 2012, the total share-based compensation cost capitalized as part of the cost of capital assets was $7.3 million and zero, respectively.
The total unrecognized compensation cost at June 30, 2013 relating to non-vested share-based compensation arrangements granted under the 1997 Plan, 2003 Plan and 2011 Plan was $299.1 million. That cost is expected to be recognized over 5.8 years, with a weighted average period of 3.5 years.
We received zero proceeds from the exercise of stock options in the three and six months ended June 30, 2013 and 2012.
Long-Term Commercial Bonus Awards for Trains 3 and 4 under the 2011-2013 Bonus Plan
On December 12, 2012, pursuant to the 2011-2013 Bonus Plan, the Compensation Committee approved a Long-Term Bonus Pool for 2012 for all employees of the Company consisting of a total of 18 million shares of restricted stock. The Long-Term Commercial Bonus Awards for Trains 3 and 4 of the Liquefaction Project were granted to employees in February 2013 under the 2003 Plan and 2011 Plan. A portion of each employee's Long-Term Commercial Bonus Award for Trains 3 and 4 of the Liquefaction Project was granted as a milestone award ("Milestone Award"), with vesting of the Milestone Award conditional on certain performance milestones relating to financing and constructing Trains 3 and 4 of the Liquefaction Project, and a portion was granted as a stock price award ("Stock Price Award"), with vesting of the Stock Price Award conditional on the achievement of minimum average Company stock price hurdles.
On May 22, 2013, the $25 stock price hurdle was achieved. Following certification by a subcommittee of the compensation committee, fifty percent (50%) of the Stock Price Awards vested. The remaining Stock Price Awards will vest if the average 120-day closing stock price of the Company is $35.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
On May 28, 2013, the first performance milestone was achieved when Sabine Pass Liquefaction closed the financing, and issued notice to proceed with construction under the engineering, procurement and construction contract for the construction of Trains 3 and 4 of the Liquefaction Project (the "EPC Contract (Trains 3 and 4)"). Following certification of the achievement of the performance milestone by a subcommittee of the compensation committee, thirty percent (30%) of the Milestone Awards vested. The remaining Milestone Awards will vest based on the achievement of the following performance milestones:
| |
• | 20% upon payment of 60% of the original contract price of the EPC Contract (Trains 3 and 4); |
| |
• | 20% upon substantial completion, as defined in the EPC Contract (Trains 3 and 4), of Train 4 of the Liquefaction Project; and |
| |
• | 30% on the first anniversary of substantial completion of Train 4 of the Liquefaction Project. |
NOTE 13—BUSINESS SEGMENT INFORMATION
We have two operating business segments: LNG terminal business and LNG and natural gas marketing business. We determine our reporting units by identifying each unit that engaged in business activities from which it may earn revenues and incur expenses, had operating results regularly reviewed by the entities' chief operating decision makers for purposes of resource allocation and performance assessment, and had discrete financial information.
Our LNG terminal business segment consists of the operational Sabine Pass LNG terminal, approximately 57.9% owned (at June 30, 2013), located on the Sabine Pass deep water shipping channel less than four miles from the Gulf Coast, and two other LNG terminals that are in various stages of development at the following locations: Corpus Christi LNG, 100% owned, near Corpus Christi, Texas; and Creole Trail LNG, 100% owned, at the mouth of the Calcasieu Channel in central Cameron Parish, Louisiana. The Sabine Pass LNG terminal includes existing infrastructure of five LNG storage tanks with capacity of approximately 16.9 Bcfe, two docks that can accommodate vessels of up to 265,000 cubic meters and vaporizers with regasification capacity of approximately 4.0 Bcf/d, and pipeline facilities interconnecting the Sabine Pass LNG terminal with a number of large interstate pipelines. Cheniere Partners is currently developing the Liquefaction Project at the Sabine Pass LNG terminal adjacent to the existing regasification facilities. During the fourth quarter of 2012, we merged our natural gas pipeline business segment into our LNG terminal business segment because we were no longer developing or making resource allocation decisions on other pipeline projects not primarily related to our LNG terminals. We have adjusted the corresponding items of segment information for 2012 to reflect this change.
Our LNG and natural gas marketing business segment consists of Cheniere Marketing marketing LNG and natural gas on its own behalf and on behalf of Cheniere Partners in an effort to utilize the receiving capacity held at the Sabine Pass LNG terminal during construction of the Liquefaction Project.
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
The following table summarizes revenues, net income (loss) from operations and total assets for each of our operating segments (in thousands):
|
| | | | | | | | | | | | | | | |
| Segments |
| LNG Terminal | | LNG & Natural Gas Marketing | | Corporate and Other (1) | | Total Consolidation |
As of or for the Three Months Ended June 30, 2013 | | | | | | | |
Revenues (2) | $ | 67,221 |
| | $ | 12,314 |
| | $ | (12,358 | ) | | $ | 67,177 |
|
Intersegment revenues (losses) (3) (4) | 795 |
| | 11,898 |
| | (12,693 | ) | | — |
|
Depreciation, depletion and amortization | 14,444 |
| | 251 |
| | 478 |
| | 15,173 |
|
Non-cash compensation | 13,042 |
| | 20,578 |
| | 83,775 |
| | 117,395 |
|
Income (loss) from operations | (48,230 | ) | | (21,795 | ) | | (66,253 | ) | | (136,278 | ) |
Interest expense, net | (49,350 | ) | | — |
| | 7,334 |
| | (42,016 | ) |
Loss before income taxes and non-controlling interest | 330,525 |
| | (21,951 | ) | | (471,456 | ) | | (162,882 | ) |
Goodwill | 76,819 |
| | — |
| | — |
| | 76,819 |
|
Total assets | 8,162,729 |
| | 62,341 |
| | 357,160 |
| | 8,582,230 |
|
Expenditures for additions to long-lived assets | 1,084,233 |
| | (4 | ) | | 296 |
| | 1,084,525 |
|
| | | | | | | |
As of or for the Three Months Ended June 30, 2012 | | | | | | | |
Revenues (2) | $ | 69,115 |
| | $ | (4,341 | ) | | $ | (2,446 | ) | | $ | 62,328 |
|
Intersegment revenues (losses) (3) (4) | 656 |
| | 1,096 |
| | (1,752 | ) | | — |
|
Depreciation, depletion and amortization | 14,856 |
| | 256 |
| | 366 |
| | 15,478 |
|
Non-cash compensation | 253 |
| | 420 |
| | 1,286 |
| | 1,959 |
|
Income (loss) from operations | 9,152 |
| | (8,580 | ) | | (6,693 | ) | | (6,121 | ) |
Interest expense, net | (54,976 | ) | | — |
| | (888 | ) | | (55,864 | ) |
Loss before income taxes and non-controlling interest | (45,202 | ) | | (8,738 | ) | | (21,919 | ) | | (75,859 | ) |
Goodwill | 76,819 |
| | — |
| | — |
| | 76,819 |
|
Total assets | 2,541,053 |
| | 67,625 |
| | 419,652 |
| | 3,028,330 |
|
Expenditures for additions to long-lived assets | 46,699 |
| | 965 |
| | 260 |
| | 47,924 |
|
| | | | | | | |
For the Six Months Ended June 30, 2013 | | | | | | | |
Revenues (2) | $ | 133,851 |
| | $ | 11,157 |
| | $ | (11,925 | ) | | $ | 133,083 |
|
Intersegment revenues (losses) (3) (4) | 1,364 |
| | 11,305 |
| | (12,669 | ) | | — |
|
Depreciation, depletion and amortization | 28,824 |
| | 500 |
| | 962 |
| | 30,286 |
|
Non-cash compensation | 19,330 |
| | 31,640 |
| | 132,437 |
| | 183,407 |
|
Income (loss) from operations | (54,054 | ) | | (42,462 | ) | | (107,216 | ) | | (203,732 | ) |
Interest expense, net | (101,266 | ) | | — |
| | 18,988 |
| | (82,278 | ) |
Loss before income taxes and non-controlling interest | 255,643 |
| | (42,607 | ) | | (500,626 | ) | | (287,590 | ) |
Expenditures for additions to long-lived assets | 1,640,808 |
| | (4 | ) | | 904 |
| | 1,641,708 |
|
| | | | | | |
|
For the Six Months Ended June 30, 2012 | | | | | | |
|
Revenues (2) | $ | 136,381 |
| | $ | (1,684 | ) | | $ | (1,896 | ) | | $ | 132,801 |
|
Intersegment revenues (losses) (3) (4) | 3,044 |
| | (335 | ) | | (2,709 | ) | | — |
|
Depreciation, depletion and amortization | 29,244 |
| | 1,558 |
| | 966 |
| | 31,768 |
|
Non-cash compensation | 459 |
| | 1,401 |
| | 2,388 |
| | 4,248 |
|
Income (loss) from operations | 23,683 |
| | (15,326 | ) | | (13,756 | ) | | (5,399 | ) |
Interest expense, net | (109,918 | ) | | — |
| | (4,297 | ) | | (114,215 | ) |
Loss before income taxes and non-controlling interest | (86,681 | ) | | (15,286 | ) | | (32,739 | ) | | (134,706 | ) |
Expenditures for additions to long-lived assets | 47,744 |
| | 1,665 |
| | 496 |
| | 49,905 |
|
| |
(1) | Includes corporate activities, oil and gas exploration, development and exploitation activities and certain intercompany eliminations. Our oil and gas exploration, development and exploitation operating activities have been included in the |
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
(unaudited)
corporate and other column due to the lack of a material impact that these activities have on our consolidated financial statements.
| |
(2) | Substantially all of the LNG terminal revenues relate to regasification capacity reservation fee payments made by Total Gas & Power North America, Inc. and Chevron U.S.A. Inc. |
| |
(3) | Intersegment revenues related to our LNG terminal business segment are primarily from tug revenues from Cheniere Marketing and the receipt of 80% of gross margins earned by Cheniere Marketing in an effort to utilize Cheniere Energy Investments, LLC ("Cheniere Investments") reserved capacity under its terminal use rights assignment and agreement ("TURA") pursuant to which Cheniere Investments has the right to use Sabine Pass Liquefaction's reserved capacity at the Sabine Pass LNG terminal under Sabine Pass Liquefaction's TUA in the three and six months ended June 30, 2013 and 2012. These LNG terminal business segment intersegment revenues are eliminated with intersegment expenses in our Consolidated Statements of Operations. |
| |
(4) | Intersegment revenues (losses) related to our LNG and natural gas marketing business segment are primarily from Cheniere Marketing's tug costs and the payment of 80% of gross margins earned by Cheniere Marketing in an effort to utilize the TUA capacity of Cheniere Investments at the Sabine Pass LNG terminal in the three and six months ended June 30, 2013 and 2012. These LNG and natural gas marketing business segment intersegment costs are eliminated with intersegment revenues in our Consolidated Statements of Operations. |
NOTE 14—SUPPLEMENTAL CASH FLOW INFORMATION AND DISCLOSURES OF NON-CASH TRANSACTIONS
The following table provides supplemental disclosure of cash flow information (in thousands):
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2013 | | 2012 |
Cash paid during the year for interest, net of amounts capitalized | | $ | 9,347 |
| | $ | 120,130 |
|
LNG terminal costs funded with accounts payable and accrued liabilities | | 450,767 |
| | 8,588 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Information Regarding Forward-Looking Statements
This quarterly report contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical fact, included herein or incorporated herein by reference are "forward-looking statements." Included among "forward-looking statements" are, among other things:
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• | statements that we expect to commence or complete construction of our proposed liquefied natural gas ("LNG") terminals or our proposed pipelines, liquefaction facilities or other projects, or any expansions thereof, by certain dates, or at all; |
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• | 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, regardless of the source of such information, or the transportation or demand for and prices related to natural gas, LNG or other hydrocarbon products; |
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• | statements regarding any financing transactions or arrangements, or ability to enter into such transactions; |
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• | statements relating to the construction of our natural gas liquefaction trains ("Trains"), including statements concerning the engagement of any engineering, procurement and construction ("EPC") contractor or other contractor and the anticipated terms and provisions of any agreement with any EPC or other contractor, and anticipated costs related thereto; |
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• | statements regarding any 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 LNG regasification, liquefaction or storage capacities that are, or may become, subject to contracts; |
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• | statements regarding counterparties to our commercial contracts, construction contracts and other contracts; |
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• | statements regarding our planned construction of additional Trains, including the financing of such Trains; |
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• | statements that our Trains, when completed, will have certain characteristics, including amounts of liquefaction capacities; |
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• | statements regarding our business strategy, our strengths, our business and operation plans or any other plans, forecasts, projections or objectives, including anticipated revenues and capital expenditures, any or all of which are subject to change; |
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• | statements regarding legislative, governmental, regulatory, administrative or other public body actions, requirements, permits, investigations, proceedings or decisions; |
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• | statements regarding our anticipated LNG and natural gas marketing activities; and |
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• | any other statements that relate to non-historical or future information. |
These forward-looking statements are often identified by the use of terms and phrases such as "achieve," "anticipate," "believe,"contemplate," "develop," "estimate," "expect," "forecast," "plan," "potential," "project," "propose," "strategy" and similar terms and phrases, or by the use of future tense. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. You should not place undue reliance on these forward-looking statements, which are made as of the date of this quarterly report and speak only as of the date of this quarterly report.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, as amended by Amendment No. 1 on Form 10-K/A. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. Other than as required under the securities laws, we assume no obligation to update or revise these forward-looking statements or provide reasons why actual results may differ.
As used herein, the terms "Cheniere," "the Company," "we," "our" and "us" refer to Cheniere Energy, Inc. and its wholly owned or controlled subsidiaries.
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 Consolidated Financial Statements and the accompanying notes in "Financial Statements and Supplementary Data." 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 include the following subjects:
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• | Overview of Significant Events |
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• | Liquidity and Capital Resources |
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• | Off-Balance Sheet Arrangements |
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• | Summary of Critical Accounting Policies and Estimates |
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• | Recent Accounting Standards |
Overview of Business
We own and operate the Sabine Pass LNG terminal in Louisiana through our 57.9% ownership interest in and management agreements with Cheniere Energy Partners, L.P. ("Cheniere Partners") (NYSE MKT: CQP), which is a publicly traded partnership that we created in 2007. The Sabine Pass LNG terminal is located on the Sabine Pass deep water shipping channel less than four miles from the Gulf Coast. The Sabine Pass LNG terminal has regasification facilities owned by Cheniere Partners' wholly owned subsidiary, Sabine Pass LNG, L.P. ("Sabine Pass LNG"), that includes existing infrastructure of five LNG storage tanks with capacity of approximately 16.9 Bcfe, two docks that can accommodate vessels of up to 265,000 cubic meter capacity and vaporizers with regasification capacity of approximately 4.0 Bcf/d. Cheniere Partners is developing natural gas liquefaction facilities (the "Liquefaction Project") at the Sabine Pass LNG terminal adjacent to the existing regasification facilities through a wholly owned subsidiary, Sabine Pass Liquefaction, LLC ("Sabine Pass Liquefaction"). We plan to construct up to six Trains (each in sequence, "Train 1", "Train 2", "Train 3", "Train 4", "Train 5" and "Train 6"), which are in various stages of development. Each Train is expected to have nominal production capacity of approximately 4.5 million tonnes per annum ("mtpa"). In May 2013, we sold to Cheniere Partners our ownership interests in Cheniere Creole Trail Pipeline, L.P. ("CTPL") and Cheniere Pipeline GP Interests, LLC (collectively, "the Creole Trail Pipeline Business"), thereby providing Cheniere Partners with ownership of a 94-mile pipeline interconnecting the Sabine Pass LNG terminal with a number of large interstate pipelines (the "Creole Trail Pipeline").
Approximately one-half of the receiving capacity at the Sabine Pass LNG terminal is contracted to two multinational energy companies. The other half is held by Sabine Pass Liquefaction for use in connection with the Liquefaction Project. One of our wholly owned subsidiaries, Cheniere Marketing, LLC ("Cheniere Marketing"), markets LNG on its own behalf, and through a series of agreements, has the right to utilize the regasification capacity held by Sabine Pass Liquefaction during the construction phase of the Liquefaction Project. Cheniere Marketing also holds a 104 million MMBtu per year LNG sale and purchase agreement ("SPA") with Sabine Pass Liquefaction under which it has the right to purchase LNG from Sabine Pass Liquefaction for a tiered incentive-based fee.
We are also in various stages of developing other projects, including LNG facilities and associated pipelines, each of which, among other things, will require acceptable commercial and financing arrangements before we make a final investment decision.
Overview of Significant Events
Our significant accomplishments since January 1, 2013 and through the filing date of this Form 10-Q include the following:
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• | Sabine Pass Liquefaction issued an aggregate principal amount of $2.0 billion of 5.625% Senior Secured Notes due 2021 (the "2021 Sabine Pass Liquefaction Senior Notes") and an aggregate principal amount of $1.0 billion of 5.625% Senior Secured Notes due 2023 (the "2023 Sabine Pass Liquefaction Senior Notes"). Net proceeds from these offerings are intended to be used to pay a portion of the capital costs incurred in connection with the construction of the Liquefaction Project; |
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• | Cheniere Partners sold 17.6 million common units to institutional investors for net proceeds, after deducting expenses, of $372.4 million, which includes the general partner's proportionate capital contribution of approximately $7.4 million. Cheniere Partners intends to use the proceeds from this offering for costs associated with the Liquefaction Project and for general business purposes; |
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• | Sabine Pass Liquefaction entered into four credit facilities totaling $5.9 billion to be used for costs associated with Trains 1 through 4 of the Liquefaction Project; |
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• | Sabine Pass Liquefaction issued a notice to proceed to Bechtel Oil, Gas and Chemicals, Inc. ("Bechtel") under the lump sum turnkey contract for the engineering, procurement and construction of Trains 3 and 4 (the "EPC Contract (Trains 3 and 4)"); |
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• | Sabine Pass Liquefaction entered into an LNG sale and purchase agreement ("SPA") with Centrica plc that commences upon the date of first commercial delivery for Train 5 and includes an annual contract quantity of 91.25 million MMBtu of LNG with a fixed fee of $3.00 per MMBtu, equating to expected annual contracted cash flow from fixed fees of $274 million; |
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• | We sold our ownership interests in the Creole Trail Pipeline Business to Cheniere Partners for $480.0 million and were reimbursed $13.9 million for certain expenditures incurred prior to the closing date. Concurrent with the Creole Trail Pipeline Business sale closing, we acquired 12.0 million Class B units from Cheniere Partners for aggregate consideration of $180.0 million pursuant to a unit purchase agreement between Cheniere Partners and Cheniere Class B Units Holdings, LLC, our wholly owned subsidiary. As a result of the two transactions, we received net cash of $313.9 million; and |
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• | CTPL entered into a $400 million term loan credit facility to fund capital expenditures on the Creole Trail Pipeline and for general business purposes. |
Liquidity and Capital Resources
Although consolidated for financial reporting, Cheniere, Sabine Pass LNG and Cheniere Partners operate with independent capital structures. We expect the cash needs for Sabine Pass LNG's operating activities for at least the next twelve months will be met through its operating cash flows and existing unrestricted cash. We expect the cash needs for Cheniere Partners' operating activities and capital expenditures for at least the next twelve months will be met through operating cash flows from Sabine Pass LNG, existing unrestricted cash, project debt and equity financings. We expect the cash needs of Cheniere's operating activities and capital expenditures for at least the next twelve months will be met by utilizing existing unrestricted cash, management fees from Cheniere Partners, distributions from our investment in Cheniere Partners and operating cash flows from our LNG and natural gas marketing business.
The following table presents (in thousands) Cheniere's restricted and unrestricted cash and cash equivalents for each portion of our capital structure as of June 30, 2013. All restricted and unrestricted cash and cash equivalents held by Cheniere Partners and Sabine Pass LNG are considered restricted as to usage or withdrawal by Cheniere:
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| | | | | | | | | | | | | | | | |
| | Sabine Pass LNG | | Cheniere Partners | | Other Cheniere | | Consolidated Cheniere |
Cash and cash equivalents | | $ | — |
| | $ | — |
| | $ | 396,921 |
| | $ | 396,921 |
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Restricted cash and cash equivalents | | 105,848 |
| (1) | 2,560,262 |
| (2) | 11,606 |
| | 2,677,716 |
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Total | | $ | 105,848 |
| | $ | 2,560,262 |
| | $ | 408,527 |
| | $ | 3,074,637 |
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(1) | All cash and cash equivalents presented above for Sabine Pass LNG are considered restricted to us, but $14.8 million is considered unrestricted for Sabine Pass LNG. |
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(2) | All cash and cash equivalents presented above for Cheniere Partners are considered restricted to us, but $355.3 million is considered unrestricted for Cheniere Partners, including the $14.8 million considered unrestricted for Sabine Pass LNG. |
As of June 30, 2013, we had unrestricted cash and cash equivalents of $396.9 million available to Cheniere. In addition, we had consolidated restricted cash and cash equivalents of $2,677.7 million (which included cash and cash equivalents available to Cheniere Partners, in which we own a 57.9% interest, and Sabine Pass LNG) designated for the following purposes: $2,089.8 million for the Liquefaction Project; $116.0 million for the Creole Trail Pipeline and $340.5 million for Cheniere Partners' working capital; $105.0 million for interest payments related to the Sabine Pass LNG Senior Secured Notes and CTPL Credit Facility described below; $14.8 million for Sabine Pass LNG's working capital; and $11.6 million for other restricted purposes.
Cheniere Partners
Our ownership interest in the Sabine Pass LNG terminal is held through Cheniere Partners. We own approximately 57.9% of Cheniere Partners in the form of 12.0 million common units, 45.3 million Class B units, 135.4 million subordinated units and a 2% general partner interest. Cheniere Partners owns a 100% interest in Sabine Pass LNG, which is operating the regasification facilities at the Sabine Pass LNG terminal, a 100% interest in Sabine Pass Liquefaction, which is constructing the Liquefaction Project and a 100% interest in CTPL, which is operating and modifying the Creole Trail Pipeline in order to enable bi-directional natural gas flow.
We receive quarterly equity distributions from Cheniere Partners, and we receive management fees for managing Sabine Pass LNG, Sabine Pass Liquefaction, CTPL and Cheniere Partners. For the six months ended June 30, 2013, we received $10.2 million in distributions on our common units, no cash distributions on our subordinated units or Class B units and $0.8 million in distributions on our general partner interest. During the six months ended June 30, 2013, we received fees of $4.2 million, $20.2 million, zero and $5.6 million under our management agreements with Sabine Pass LNG, Sabine Pass Liquefaction, CTPL and Cheniere Partners, respectively.
Cheniere Partners' common unit and general partner distributions are being funded from accumulated operating surplus. We have not received distributions on our subordinated units since the distribution made with respect to the quarter ended March 31, 2010. Cheniere Partners will not make distributions on our subordinated units unless it generates additional cash flow from Sabine Pass LNG's excess capacity or new business. Therefore, distributions to us on our subordinated units and conversion of the subordinated units into common units will depend upon the future business development of Cheniere Partners. We expect that additional cash flows generated by the Liquefaction Project or other new Cheniere Partners' business would be used to make quarterly distributions on our subordinated units before any increase in distributions to the common unitholders.
Our Class B units are subject to conversion, mandatorily or at our option under specified circumstances, into a number of common units based on the then-applicable conversion value of the Class B units. On a quarterly basis beginning on the initial purchase of the Class B units and ending on the conversion date of the Class B units, the conversion value of the Class B units increases at a compounded rate of 3.5% per quarter, subject to an additional upward adjustment for certain equity and debt financings. The Class B units are not entitled to cash distributions except in the event of a liquidation of Cheniere Partners, a merger, consolidation or other combination of Cheniere Partners with another person or the sale of all or substantially all of the assets of Cheniere Partners. The Class B units will mandatorily convert into common units on the first business day following the record date with respect to Cheniere Partners' first distribution (the "Mandatory Conversion Date") after the earlier of the substantial completion date of Train 3 or August 9, 2017, although if a notice to proceed is given to Bechtel for Train 3 prior to August 9, 2017, the Mandatory Conversion Date will be the substantial completion date of Train 3. The notice to proceed was given to Bechtel on May 28, 2013. We currently expect the substantial completion date of Train 3 to occur before March 31, 2017. If the Class B units are not mandatorily converted by July 2019, the holders of the Class B units have the option to convert the Class B units into common units at that time.
We have entered into a services agreement with Cheniere Partners pursuant to which Cheniere Partners pays us a quarterly non-accountable overhead reimbursement charge of $2.8 million (adjusted for inflation) for providing various general and administrative services for Cheniere Partners' benefit. In addition, Cheniere Partners reimburses us for all audit, tax, legal and finance fees incurred by us that are necessary to perform the services under the agreement.
LNG Terminal Business
Sabine Pass LNG Terminal
Regasification Facilities
The Sabine Pass LNG terminal has operational regasification capacity of approximately 4.0 Bcf/d and aggregate LNG storage capacity of approximately 16.9 Bcfe. Approximately 2.0 Bcf/d of the regasification capacity at the Sabine Pass LNG terminal has been reserved under two long-term third-party terminal use agreements ("TUAs"), under which Sabine Pass LNG’s customers are required to pay fixed monthly fees, whether or not they use the LNG terminal. Capacity reservation fee TUA payments are made by Sabine Pass LNG's third-party TUA customers as follows:
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• | Total Gas & Power North America, Inc. ("Total") has reserved approximately 1.0 Bcf/d of regasification capacity and is obligated to make monthly capacity payments to Sabine Pass LNG aggregating approximately $125 million annually for 20 years that commenced April 1, 2009. Total, S.A. has guaranteed Total’s obligations under its TUA of approximately $2.5 billion, subject to certain exceptions; and |
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• | Chevron U.S.A. Inc. ("Chevron") has reserved approximately 1.0 Bcf/d of regasification capacity and is obligated to make monthly capacity payments to Sabine Pass LNG aggregating approximately $125 million annually for 20 years that commenced July 1, 2009. Chevron Corporation has guaranteed Chevron’s obligations under its TUA up to 80% of the fees payable by Chevron. |
The remaining approximately 2.0 Bcf/d of capacity has been reserved under a TUA by Sabine Pass Liquefaction. Sabine Pass Liquefaction is obligated to make monthly capacity payments to Sabine Pass LNG aggregating approximately $250 million annually, continuing until at least 20 years after Sabine Pass Liquefaction delivers its first commercial cargo at Sabine Pass Liquefaction's facilities under construction, which may occur as early as late 2015. Cheniere Energy Investments, LLC ("Cheniere Investments"), a wholly owned subsidiary of Cheniere Partners, Sabine Pass Liquefaction and Sabine Pass LNG entered into a terminal use rights assignment and agreement ("TURA") pursuant to which Cheniere Investments has the right to use Sabine Pass Liquefaction's reserved capacity under the TUA and has the obligation to make the monthly capacity payments required by the TUA to Sabine Pass LNG. In an effort to utilize Cheniere Investments’ reserved capacity under its TURA during construction of the Liquefaction Project, Cheniere Marketing, LLC ("Cheniere Marketing"), a wholly owned subsidiary of Cheniere, has entered into an amended and restated variable capacity rights agreement ("amended and restated VCRA") pursuant to which Cheniere Marketing is obligated to pay Cheniere Investments 80% of the expected gross margin of each cargo of LNG that Cheniere Marketing arranges for delivery to the Sabine Pass LNG terminal. The revenue earned by Sabine Pass LNG from the capacity payments made under the TUA, the loss incurred by Cheniere Investments under the TURA and the revenue earned by Cheniere Investments under the VCRA are eliminated upon consolidation of our financial statements. Cheniere Partners has guaranteed the obligations of Sabine Pass Liquefaction under its TUA and the obligations of Cheniere Investments under the TURA.
In September 2012, Sabine Pass Liquefaction entered into a partial TUA assignment agreement with Total, whereby Sabine Pass Liquefaction will progressively gain access to Total's capacity and other services provided under Total's TUA with Sabine Pass LNG. This agreement will provide Sabine Pass Liquefaction with additional berthing and storage capacity at the Sabine Pass LNG terminal that may be used to accommodate the development of Trains 5 and 6, provide increased flexibility in managing LNG cargo loading and unloading activity starting with the commencement of commercial operations of Train 3, and permit Sabine Pass Liquefaction to more flexibly manage its LNG storage capacity with the commencement of Train 1. Notwithstanding any arrangements between Total and Sabine Pass Liquefaction, payments required to be made by Total to Sabine Pass LNG will continue to be made by Total to Sabine Pass LNG in accordance with its TUA.
Under each of these TUAs, Sabine Pass LNG is entitled to retain 2% of the LNG delivered to the Sabine Pass LNG terminal.
Liquefaction Facilities
The Liquefaction Project is being developed at the Sabine Pass LNG terminal adjacent to the existing regasification facilities. We plan to construct up to six Trains, which are in various stages of development. In August 2012, we commenced construction of Trains 1 and 2 and the related new facilities needed to treat, liquefy, store and export natural gas. In May 2013, we commenced construction of Trains 3 and 4 and the related facilities. We are developing Trains 5 and 6 and commenced the regulatory approval process for these Trains in February 2013. Trains 1 through 4 are being designed, constructed and commissioned by Bechtel using
the ConocoPhillips Optimized Cascade® technology, a proven technology deployed in numerous LNG projects around the world. Sabine Pass Liquefaction has entered into a lump sum turnkey contract for the engineering, procurement and construction of Trains 1 and 2 (the "EPC Contract (Trains 1 and 2)") and the EPC Contract (Trains 3 and 4) with Bechtel in November 2011 and December 2012, respectively.
Cheniere Partners has received authorization from the Federal Energy Regulatory Commission (the "FERC") to site, construct and operate Trains 1 through 4. Cheniere Partners has also received authorization from the FERC to begin the pre-filing review process for the development of the additional two Trains. The Department of Energy (the "DOE") has granted Sabine Pass Liquefaction an order authorizing the export of up to the equivalent of 16 mtpa of LNG to all nations with which trade is permitted. The DOE further issued two orders authorizing the export of an additional 189.3 Bcf in total of domestically produced LNG from the Sabine Pass LNG terminal to FTA countries for a 20-year term. One order authorized the export of 101 Bcf of domestically produced LNG pursuant to the SPA with Total, beginning on the earlier of the date of first export or July 11, 2021; and the other order authorized the export of 88.3 Bcf of domestically produced LNG pursuant to the SPA with Centrica, beginning on the earlier of the date of first export or July 12, 2021.
As of June 30, 2013, the overall project completion for Train 1 and Train 2 of the Liquefaction Project, consisting of engineering, procurement and construction, was approximately 38%, which is ahead of the contractual schedule. Based on our current construction schedule, we anticipate that Train 1 will produce LNG as early as late 2015, with commercial operations expected to commence in February 2016, and Trains 2 through 5 are expected to commence operations on a staggered basis thereafter.
Customers
Sabine Pass Liquefaction has entered into six fixed price, 20-year SPAs with third parties that in the aggregate equate to approximately 19.75 mtpa, which represents approximately 88% of the expected nominal production capacity of Trains 1 through 5. Under the SPAs, the customers will purchase LNG from us on an FOB basis for a price consisting of a fixed fee plus 115% of Henry Hub per MMBtu of LNG. 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 cargoes that are not delivered. A portion of the fixed fee will be subject to annual adjustment 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 commences upon the start of operations of the specified Train.
To date, Sabine Pass Liquefaction has the following third-party SPAs:
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• | BG Gulf Coast LNG, LLC ("BG") has entered into an SPA that commences upon the date of first commercial delivery for Train 1 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $2.25 per MMBtu and includes additional annual contract quantities of 36,500,000 MMBtu, 34,000,000 MMBtu, and 33,500,000 MMBtu upon the date of first commercial delivery for Train 2, Train 3 and Train 4, respectively, with a fixed fee of $3.00 per MMBtu. The total expected annual contracted cash flow from BG from the fixed fee component is approximately $723 million. In addition, Sabine Pass Liquefaction has agreed to make up to 500,000 MMBtu per day of LNG available to BG to the extent that Train 1 becomes commercially operable prior to the beginning of the first delivery window priced at 115% of the Henry Hub price plus $2.25 per MMBtu, if produced. The obligations of BG are guaranteed by BG Energy Holdings Limited, a company organized under the laws of England and Wales, with a credit rating of A2/A. |
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• | Gas Natural Aprovisionamientos SDG S.A.("Gas Natural Fenosa"), an affiliate of Gas Natural SDG, S.A., has entered into an SPA that commences upon the date of first commercial delivery for Train 2 and includes an annual contract quantity of 182,500,000 MMBtu of LNG with a fixed fee of $2.49 per MMBtu, equating to expected annual contracted cash flow from the fixed fee component of approximately $454 million. In addition, Sabine Pass Liquefaction has agreed to make up to 285,000 MMBtu per day of LNG available to Gas Natural Fenosa to the extent that Train 2 becomes commercially operable prior to the beginning of the first delivery window priced at 115% of the Henry Hub price plus $2.49 per MMBtu, if produced. The obligations of Gas Natural Fenosa are guaranteed by Gas Natural SDG S.A., a company organized under the laws of Spain, with a credit rating of Baa2/BBB. |