2020 Unsecured Note
On April 29, 2020, we issued a zero coupon $56.0 million face amount senior unsecured note (the “2020 Unsecured Note”) to an unrelated third party. Net proceeds raised from the 2020 Unsecured Note were approximately $47.4 million, after deducting approximately $2.6 million in fees and $6.0 million in original issue discount. The 2020 Unsecured Note will be repaid in installments on the first day of every month as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Periodic Amount
|
|
Total Amount
|
June 1, 2020
|
|
$
|
3,500
|
|
|
$
|
3,500
|
|
July 1, 2020 – October 1, 2020
|
|
5,000
|
|
|
20,000
|
|
November 1, 2020
|
|
4,500
|
|
|
4,500
|
|
December 1, 2020 – June 1, 2021
|
|
4,000
|
|
|
28,000
|
|
Face amount of 2020 Unsecured Note
|
|
|
|
$
|
56,000
|
|
In conjunction with the 2020 Unsecured Note, we issued the lender a warrant to purchase 20.0 million shares of our common stock (the “Unsecured Warrant”). The fair value of the Unsecured Warrant of approximately $16.1 million has been recognized as an original issue discount to the 2020 Unsecured Note. For more information about the Unsecured Warrant, see Note 11, Stockholders’ Equity.
The 2020 Unsecured Note contains certain cash sweep provisions requiring that a portion of the proceeds from certain of our equity offerings and convertible securities offerings be used to repay the outstanding principal balance through additional amortization payments not to exceed $8.0 million in total, subject to certain conditions. See Note 16, Subsequent Events, for further information.
The lender may require us to repurchase the 2020 Unsecured Note upon a Fundamental Change (as defined in the 2020 Unsecured Note) or an event of default at 105% and 115%, respectively, of the remaining outstanding principal balance. If an event of default occurs which cannot be cured within certain time periods, we have the right to pay cash, but to the extent that we do not pay in cash, the lender will have the right to convert the outstanding face amount into shares of our common stock based on a calculation defined in the 2020 Unsecured Note. We may prepay the 2020 Unsecured Note in whole or in part from time to time without premium or penalty.
2019 Term Loan
On May 23, 2019, Driftwood Holdings LP, a wholly owned subsidiary of the Company (“Driftwood Holdings”), entered into a senior secured term loan agreement (the “2019 Term Loan”) to borrow an aggregate principal amount of $60.0 million. Fees associated with entering into the 2019 Term Loan of approximately $2.2 million have been capitalized as deferred
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
financing costs. The 2019 Term Loan agreement provided Driftwood Holdings the right to borrow an additional $15.0 million, which it did on July 16, 2019. The 2019 Term Loan bore a fixed annual interest rate of 12%, of which 4% Driftwood Holdings could add to the outstanding principal as paid-in-kind interest at the end of each reporting period. In addition to the fixed annual interest rate, upon maturity or early repayment of the 2019 Term Loan, Driftwood Holdings was also obligated to pay a final fee equal to 20% of the principal amount borrowed less financing costs and cash interest paid (the “Final Payment Fee”) to the lender. On February 28, 2020, Driftwood Holdings entered into an amendment (the “First Amendment”) to the 2019 Term Loan which allowed us to enter into a land lease for the Driftwood Project. The First Amendment had no financial statement impact in regard to accounting for our Borrowings.
On March 23, 2020, Driftwood Holdings entered into a second amendment (the “Second Amendment”) to the 2019 Term Loan. The outstanding principal balance as of the Second Amendment date was $75.0 million. The Second Amendment, among other things, made the following changes to the 2019 Term Loan:
•Extended the maturity date from May 23, 2020 to November 23, 2021;
•Modified the frequency of interest payments from quarterly to monthly;
•Modified the interest rate from 12% per annum, with the ability to defer 4% per annum as paid-in-kind, to 16% per annum, with the ability to defer 8% per annum as paid-in-kind;
•Required a principal payment of $3.0 million by April 22, 2020; and
•Reduced the required month-end collateral amount from $30.0 million to $12.0 million.
Upon entering into the Second Amendment, we repaid $2.0 million of the outstanding principal balance and issued 11,019,298 shares of our common stock in exchange for cancellation of the Final Payment Fee (as defined in the Credit Agreement) and all accrued paid-in-kind interest through March 22, 2020.
The Second Amendment was accounted for as a debt modification with no gain or loss recognized and any differences in fair value for amounts settled or paid being capitalized as part of the 2019 Term Loan debt issuance discount. The Second Amendment resulted in a $0.9 million increase in the debt issuance discount associated with the 2019 Term Loan.
Also, in conjunction with the Second Amendment, the Common Stock Purchase Warrant (the “Original Warrant”) previously issued as part of the 2019 Term Loan was replaced with a new warrant (the “Replacement Warrant”). The difference in fair value between the Original Warrant and the Replacement Warrant was an increase of approximately $0.3 million and has been recognized as a debt issuance discount to the 2019 Term Loan. Refer to Note 11, Stockholders’ Equity, for further details.
On April 28, 2020, Driftwood Holdings entered into a third amendment (the “Third Amendment”) to the 2019 Term Loan, which became effective on April 29, 2020. In conjunction with the Third Amendment, we repaid $17.1 million of the outstanding principal balance. This principal repayment was made with the issuance of 9,348,706 shares of our common stock as well as a cash payment of $2.1 million.
In conjunction with the Third Amendment, we issued a common stock purchase warrant (the “Third Amendment Warrant”) to the lender. The fair value of the Third Amendment Warrant of approximately $5.7 million has been recognized as an original issue discount to the 2019 Term Loan.
We may prepay the 2019 Term Loan in whole or in part from time to time without premium or penalty. Borrowings under the 2019 Term Loan are guaranteed by Tellurian Inc. and certain of its subsidiaries and are secured by substantially all of the assets of Tellurian Inc. and certain of its subsidiaries, other than Tellurian Production Holdings LLC (“Production Holdings”) and its subsidiaries, under one or more security agreements and pledge agreements.
2018 Term Loan
On September 28, 2018 (the “Closing Date”), Production Holdings entered into a three-year senior secured term loan credit agreement (the “2018 Term Loan”) in an aggregate principal amount of $60.0 million.
Our use of proceeds from the 2018 Term Loan is predominantly restricted to capital expenditures associated with certain development and drilling activities and fees related to the transaction itself and is presented within Non-current restricted cash on our Condensed Consolidated Balance Sheets. At June 30, 2020, unused proceeds from the 2018 Term Loan totaled $3.5 million and were classified as Non-current restricted cash.
We have the right, but not the obligation, to make voluntary principal repayments starting six months following the Closing Date in a minimum amount of $5 million or any integral multiples of $1 million in excess thereof. If no voluntary principal repayments are made, the principal amount, together with any accrued interest, is payable at the maturity date of September 28, 2021. The 2018 Term Loan can be terminated without penalty, with an early termination payment equal to the outstanding principal plus accrued interest.
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Amounts borrowed under the 2018 Term Loan are guaranteed by Tellurian Inc. and each of Production Holdings’ subsidiaries. The 2018 Term Loan is collateralized by a first priority lien on all assets of Production Holdings and its subsidiaries, including our proved natural gas properties.
Covenant Compliance
As of June 30, 2020, the Company was in compliance with all covenants under its credit agreements. Refer to Note 6, Financial Instruments, for details of hedging transactions, as of and for the period ended June 30, 2020, entered into as required by the 2018 Term Loan described above.
Fair Value
As of June 30, 2020, the fair value of the 2020 Unsecured Note, on a discounted cash flow basis, was approximately $50.0 million as the 2020 Unsecured Note effective interest rate was higher than current market levels. As of June 30, 2020, the fair value of the 2019 Term Loan, on a discounted cash flow basis, was approximately $55.6 million as the 2019 Term Loan effective interest rate was higher than current market levels. As of June 30, 2020, the fair value of the 2018 Term Loan, on a discounted cash flow basis, was approximately $56.2 million as the 2018 Term Loan effective interest rate was higher than current market levels. The 2020 Unsecured Note, 2019 Term Loan and 2018 Term Loan represent Level 3 instruments in the fair value hierarchy.
NOTE 10 — COMMITMENTS AND CONTINGENCIES
On April 23, 2019, we entered into a master LNG sale and purchase agreement and related confirmation notices (collectively, the “SPA”) with an unrelated third-party LNG merchant. Pursuant to the SPA, we committed to purchase one cargo of LNG per quarter through October 2022. The volume of each cargo is expected to range from 3.3 to 3.6 million MMBtu, and each cargo will be purchased under DES terms. The price of each cargo will be based on the JKM price in effect at the time of each purchase.
NOTE 11 — STOCKHOLDERS' EQUITY
Common Stock Issuance
On February 11, 2020, we sold 2,114,591 shares of our common stock in a registered direct offering at a price of $6.36 per share. Net proceeds from this offering, after deducting fees and expenses, were approximately $13.1 million.
At-the-Market Program
We maintain an at-the-market equity offering program pursuant to which we may sell shares of our common stock from time to time on Nasdaq. For the six months ended June 30, 2020, we issued 17,512,604 shares of our common stock under our at-the-market program for net proceeds of approximately $22.9 million. As of June 30, 2020, we have remaining availability under the at-the-market program to raise aggregate gross sales proceeds of up to approximately $365.7 million. See Note 16, Subsequent Events, for further information.
Common Stock Purchase Warrants
2020 Unsecured Note
As discussed in Note 9, Borrowings, on April 29, 2020 (the “Issuance Date”), in conjunction with the issuance of the 2020 Unsecured Note, we issued a warrant providing the lender with the right to purchase up to 20.0 million shares of our common stock at $1.542 per share. The Unsecured Warrant, which vested on the Issuance Date, may not be exercised until October 29, 2020 and will expire five years after it becomes exercisable. The Unsecured Warrant was valued using a Black-Scholes option pricing model that resulted in a relative fair value of approximately $16.1 million on the Issuance Date and is not subject to subsequent remeasurement. The Unsecured Warrant has been classified as equity and is recognized within Additional paid-in capital on our Condensed Consolidated Balance Sheets.
2019 Term Loan
As discussed in Note 9, Borrowings, we have entered into three amendments to the 2019 Term Loan. Pursuant to the Second Amendment, we replaced the previously issued Original Warrant, which provided the lender with the right to purchase up to 1.5 million shares of our common stock at $10.00 per share with the Replacement Warrant, which provides the lender with the right to purchase 9.0 million shares of our common stock at $1.00 per share. Pursuant to the Third Amendment, we issued the Third Amendment Warrant which provides the lender with the right to purchase approximately 4.7 million shares of our common stock at $1.542 per share. The Third Amendment Warrant expires five years after the date of the Third Amendment. Half of the Third Amendment Warrant vested immediately, but may not be exercised until October 29, 2020, and the remaining half will vest, and become exercisable, on October 29, 2020.
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The aggregate number of unvested shares of our common stock provided to the lender under the Replacement Warrant and the Third Amendment Warrant will be reduced proportionately as a result of any partial repayment of the 2019 Term Loan principal and, in the event the outstanding balance of the 2019 Term Loan is repaid in full, any unvested tranches will be canceled as of the date of such repayment. As of June 30, 2020, the aggregate number of unvested shares of our common stock provided to the lender under the Replacement Warrant and the Third Amendment Warrant has been reduced by 0.2 million shares due to partial repayments of the outstanding principal balance.
The Replacement Warrant expires five years after the date of the Second Amendment and vests as follows (in thousands):
|
|
|
|
|
|
|
|
|
Vesting
|
|
Number of Shares
|
Immediately
|
|
3,000
|
|
September 23, 2020
|
|
1,924
|
|
March 23, 2021
|
|
1,924
|
|
June 23, 2021
|
|
1,924
|
|
Total
|
|
8,772
|
|
The Replacement Warrant was valued using a Black-Scholes option pricing model that resulted in a fair value of approximately $3.6 million on the date of the Second Amendment. The difference between the fair values of the Original Warrant and the Replacement Warrant was an increase of approximately $0.3 million and has been classified as equity and recognized within Additional paid-in capital on our Condensed Consolidated Balance Sheets. However, as the total amount of warrants is no longer fixed, approximately $2.4 million has been recognized within Accrued and other liabilities on our Condensed Consolidated Balance Sheets and will be remeasured every period end until it vests. If the vesting event occurs, the applicable portion of the liability will be reclassified to equity and remeasured on said vesting date.
The Third Amendment Warrant was valued using a Black-Scholes option pricing model that resulted in a fair value of approximately $5.7 million on the date of the Third Amendment. As only half of the Third Amendment Warrant has vested, and is therefore fixed, approximately $2.9 million has been classified as equity and recognized within Additional paid-in capital on our Condensed Consolidated Balance Sheets. The remaining approximately $2.8 million does not meet the fixed for fixed criteria for equity classification, and has been recognized within Accrued and other liabilities on our Condensed Consolidated Balance Sheets and will be remeasured every period end unit it vests. If the vesting event occurs, a portion of the liability will be reclassified to equity and remeasured on said vesting date.
As of June 30, 2020, we have recognized an unrealized loss of approximately $2.0 million within Other income, net, on our Condensed Consolidated Income Statement due to the remeasurement of the unvested portion of the Replacement Warrant and the Third Amendment Warrant.
Preferred Stock
In March 2018, we entered into a preferred stock purchase agreement with BDC Oil and Gas Holdings, LLC (“Bechtel Holdings”), a Delaware limited liability company and an affiliate of Bechtel Oil, Gas and Chemicals, Inc., a Delaware corporation (“Bechtel”), pursuant to which we sold to Bechtel Holdings approximately 6.1 million shares of our Series C convertible preferred stock (the “Preferred Stock”).
The holders of the Preferred Stock do not have dividend rights but do have a liquidation preference over holders of our common stock. The holders of the Preferred Stock may convert all or any portion of their shares into shares of our common stock on a one-for-one basis. At any time after “Substantial Completion” of “Project 1,” each as defined in and pursuant to the LSTK EPC Agreement for the Driftwood LNG Phase 1 Liquefaction Facility, dated as of November 10, 2017, or at any time after March 21, 2028, we have the right to cause all of the Preferred Stock to be converted into shares of our common stock on a one-for-one basis. The Preferred Stock has been excluded from the computation of diluted loss per share because including it in the computation would have been antidilutive for the periods presented.
NOTE 12 — SHARE-BASED COMPENSATION
We have granted restricted stock, restricted stock units and phantom units (collectively, “Restricted Stock”), as well as unrestricted stock and stock options, to employees, directors and outside consultants (collectively, the “grantees”) under the Tellurian Inc. 2016 Omnibus Incentive Compensation Plan, as amended (the “2016 Plan”), and the Amended and Restated Tellurian Investments Inc. 2016 Omnibus Incentive Plan (the “Legacy Plan”). The maximum number of shares of Tellurian common stock authorized for issuance under the 2016 Plan is 40 million shares of common stock, and no further awards can be granted under the Legacy Plan.
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Upon the vesting of restricted stock, shares of common stock will be released to the grantee. Upon the vesting of restricted stock units, the units will be converted into shares of common stock and released to the grantee. In March 2018, we began issuing phantom units that may be settled in either cash, stock, or a combination thereof. As of June 30, 2020, there was no Restricted Stock that would be required to be settled in cash.
As of June 30, 2020, we had granted approximately 24.8 million shares of performance-based Restricted Stock, of which approximately 19.4 million shares will vest entirely based upon FID, as defined in the award agreements, and approximately 4.8 million shares will vest in one-third increments at FID and the first and second anniversaries of FID. The remaining shares of performance-based Restricted Stock, totaling approximately 0.6 million shares, will vest based on other criteria. As of June 30, 2020, no expense had been recognized in connection with performance-based Restricted Stock.
As of June 30, 2020, we had granted approximately 12.2 million shares of time-based Restricted Stock. Of the total time-based grants, approximately 9.9 million shares have not yet vested and represent the settlement of the 2019 employee bonuses, which were included in our accrued liabilities balance as of December 31, 2019, and will vest in their entirety by May 31, 2021. The majority of the remaining shares were granted in connection with the Reorganization Plan we undertook and approximately 1.6 million have not yet vested and will vest in their entirety by September 30, 2020. For further information about the Reorganization Plan, see Note 8, Accrued and Other Liabilities.
For the three and six months ended June 30, 2020, the recognized share-based compensation expense related to all share-based awards totaled approximately $0.6 million and $1.2 million, respectively. As of June 30, 2020, unrecognized compensation expense, based on the grant date fair value, for all share-based awards totaled approximately $193.4 million. Further, the approximately 37.0 million shares of performance-based and time-based Restricted Stock, as well as approximately 1.4 million stock options outstanding, have been excluded from the computation of diluted loss per share because including them in the computation would have been antidilutive for the periods presented.
NOTE 13 — INCOME TAXES
Due to our cumulative loss position, historical net operating losses (“NOLs”), and other available evidence related to our ability to generate taxable income, we have recorded a full valuation allowance against our net deferred tax assets as of June 30, 2020 and December 31, 2019. Accordingly, we have not recorded a provision for federal, state or foreign income taxes during the three and six months ended June 30, 2020.
We experienced ownership changes as defined by Internal Revenue Code (“IRC”) Section 382 in 2017, and an analysis of the annual limitation on the utilization of our NOLs was performed at that time. It was determined that IRC Section 382 will not limit the use of our NOLs over the carryover period. We will continue to monitor trading activity in our shares that may cause an additional ownership change, which may ultimately affect our ability to fully utilize our existing NOL carryforwards.
NOTE 14 — LEASES
Finance Leases
Our land leases are classified as financing leases and include one or more options to extend the lease term up to 40 years, as well as to terminate the lease within five years, at our sole discretion. We are reasonably certain that those options will be exercised, and that our termination rights will not be exercised, and we have therefore included those assumptions within our right of use assets and corresponding lease liabilities. As of June 30, 2020, our weighted-average remaining lease term for our financing leases was approximately fifty-one years. As none of our finance leases provide an implicit rate, we have determined our own discount rate, which, on a weighted-average basis at June 30, 2020, was approximately 13%.
As of June 30, 2020, our financing leases had a corresponding right of use asset of approximately $20.2 million recognized within Property, plant and equipment, net, and a total lease liability of approximately $13.5 million which is recognized in Other non-current liabilities, approximately $13.5 million. For the three and six months ended June 30, 2020, our finance lease costs, which are associated with the interest on our lease liabilities, were approximately $0.5 million and $0.8 million, respectively. For the three and six months ended June 30, 2020, we paid approximately $1.8 million and $1.8 million, respectively, in cash for amounts included in the measurement of operating lease liabilities, all of which are presented within the finance section of our cash flows.
Operating Leases
Our office space leases are classified as operating leases and include one or more options to extend the lease term up to 10 years, at our sole discretion. As we are not reasonably certain that those options will be exercised, none are recognized as part of our right of use assets and lease liabilities. As of June 30, 2020, our weighted-average remaining lease term for our operating leases was approximately six years. As none of our operating leases provide an implicit rate, we have determined our own discount rate, which, on a weighted-average basis at June 30, 2020, was approximately 8%.
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
As of June 30, 2020, our operating leases had a corresponding right of use asset of approximately $12.7 million recognized within Other non-current assets and a total lease liability of approximately $14.6 million which is recognized between Accrued and other liabilities, approximately $1.9 million, and Other non-current liabilities, approximately $12.7 million. For the three and six months ended June 30, 2020 and 2019, our operating lease costs were $0.7 million and $0.9 million, respectively, and $1.4 million and $1.8 million, respectively. For the three and six months ended June 30, 2020 and 2019, we paid approximately $0.7 million and $0.8 million, respectively, and $1.4 million, and $1.4 million, respectively, in cash for amounts included in the measurement of operating lease liabilities, all of which are presented within operating cash flows.
The table below presents a maturity analysis of our lease liability on an undiscounted basis and reconciles those amounts to the present value of the lease liability as of June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of lease liability
|
Operating
|
|
Finance
|
2020
|
$
|
1,471
|
|
|
$
|
913
|
|
2021
|
2,969
|
|
|
1,826
|
|
2022
|
3,006
|
|
|
1,826
|
|
2023
|
3,044
|
|
|
1,826
|
|
2024
|
3,081
|
|
|
1,826
|
|
After 2024
|
4,980
|
|
|
84,193
|
|
Total lease payments
|
$
|
18,551
|
|
|
$
|
92,410
|
|
Less: discount
|
3,992
|
|
|
78,899
|
|
Present value of lease liability
|
$
|
14,559
|
|
|
$
|
13,511
|
|
NOTE 15 — ADDITIONAL CASH FLOW INFORMATION
The following table provides information regarding the net changes in working capital (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
Accounts receivable
|
$
|
2,331
|
|
|
$
|
(1,847)
|
|
Prepaid expenses and other current assets
|
(396)
|
|
|
(137)
|
|
Accounts payable
|
4,494
|
|
|
(5,249)
|
|
Accounts payable due to related parties (Note 7)
|
2,300
|
|
|
—
|
|
Accrued liabilities
|
6,375
|
|
|
13,867
|
|
Other, net
|
(1,617)
|
|
|
(770)
|
|
Net changes in working capital
|
$
|
13,487
|
|
|
$
|
5,864
|
|
The following table provides supplemental disclosure of cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
Non-cash accruals of property, plant and equipment and other non-current assets
|
$
|
7,955
|
|
|
$
|
415
|
|
Non-cash settlement of Final Payment Fee (Note 9)
|
8,539
|
|
|
—
|
|
Non-cash settlement of withholding taxes associated with the 2018 bonus and vesting of certain awards, respectively
|
—
|
|
|
6,686
|
|
Non-cash settlement of the 2019 and 2018 bonus, respectively
|
1,086
|
|
|
18,396
|
|
The statement of cash flows for the six months ended June 30, 2020, reflects approximately $78.5 million and $2.1 million in non-cash movements related to the 2019 Term Loan and the Replacement Warrant, respectively.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of such amounts shown in the Condensed Consolidated Statements of Cash Flows (in thousands):
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
88,314
|
|
|
$
|
104,005
|
|
Non-current restricted cash
|
3,467
|
|
|
17,968
|
|
Total cash, cash equivalents and restricted cash shown in the statements of cash flows
|
$
|
91,781
|
|
|
$
|
121,973
|
|
NOTE 16 — SUBSEQUENT EVENTS
Equity Offering
On July 24, 2020, we completed a registered direct offering pursuant to which we sold 35,000,000 shares of our common stock at an offering price of $1.00 per share. Net proceeds from this transaction were approximately $32.5 million.
2020 Unsecured Note
As discussed in Note 9, Borrowings, the 2020 Unsecured Note is subject to certain cash sweep provisions. Due to the amount of proceeds generated from the sale of our common stock under our at-the-market program in June, as well as the equity offering completed on July 24, 2020, these cash sweep provisions were triggered on July 1, 2020 and August 3, 2020 requiring us to make a total of $8.0 million in additional repayments of the outstanding principal balance. As a result of these additional repayments, the final payment associated with the 2020 Unsecured Note is scheduled to occur on April 1, 2021 instead of June 1, 2021 as originally scheduled.
At-the-Market Program
Subsequent to June 30, 2020, and through the date of this filing, we issued 2,045,944 shares of common stock under our at-the-market equity offering program for total proceeds of approximately $2.1 million, net of approximately $0.1 million in fees and commissions. As of July 31, 2020, we have remaining capacity under our at-the-market program to raise aggregate gross sales proceeds of approximately $363.5 million.
Tellurian Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Condensed Consolidated Financial Statements and the accompanying notes. This information is intended to provide investors with an understanding of our past development activities, current financial condition and outlook for the future organized as follows:
•Our Business
•Overview of Significant Events
•Liquidity and Capital Resources
•Capital Development Activities
•Results of Operations
•Off-Balance Sheet Arrangements
•Recent Accounting Standards
Our Business
Tellurian Inc. (“Tellurian,” “we,” “us,” “our,” or the “Company”) intends to create value for shareholders by building a low-cost, global natural gas business, profitably delivering natural gas to customers worldwide (the “Business”). We are developing a portfolio of natural gas production, LNG marketing, and infrastructure assets that includes an LNG terminal facility (the “Driftwood terminal”) and three related pipelines (the “Pipeline Network”). We refer to the Driftwood terminal, the Pipeline Network and certain natural gas production assets collectively as the “Driftwood Project”. We currently estimate the total cost of the Driftwood Project to be approximately $28.9 billion, including owners’ costs, transaction costs and contingencies but excluding interest costs incurred during construction of the Driftwood terminal and other financing costs. Our Business may be developed in phases.
The proposed Driftwood terminal will have a liquefaction capacity of approximately 27.6 Mtpa and will be situated on approximately 1,000 acres in Calcasieu Parish, Louisiana. The proposed Driftwood terminal will include up to 20 liquefaction Trains, three full containment LNG storage tanks and three marine berths. We have entered into four LSTK EPC agreements totaling $15.5 billion with Bechtel Oil, Gas and Chemicals, Inc. (“Bechtel”) for construction of the Driftwood terminal.
The proposed Pipeline Network is currently expected to consist of three pipelines, the Driftwood pipeline, the Haynesville Global Access Pipeline and the Permian Global Access Pipeline. The Driftwood pipeline will be a 96-mile large diameter pipeline that will interconnect with 14 existing interstate pipelines throughout southwest Louisiana to secure adequate natural gas feedstock for the Driftwood terminal. The Driftwood pipeline will be comprised of 48-inch, 42-inch and 36-inch diameter pipeline segments and three compressor stations totaling approximately 274,000 horsepower, all as necessary to provide approximately 4 Bcf/d of average daily natural gas transportation service. We estimate construction costs for the Driftwood pipeline of up to approximately $2.3 billion before owners’ costs, financing costs and contingencies.
The Haynesville Global Access Pipeline is expected to run approximately 200 miles from northern to southwest Louisiana. The Permian Global Access Pipeline is expected to run approximately 625 miles from west Texas to southwest Louisiana. Each of these pipelines is expected to have a diameter of 42 inches and be capable of delivering approximately 2 Bcf/d of natural gas. We currently estimate that construction costs will be approximately $1.4 billion for the Haynesville Global Access Pipeline and approximately $4.2 billion for the Permian Global Access Pipeline, in each case before owners’ costs, financing costs and contingencies. We are also considering the potential development of a fourth pipeline, the Delhi Connector Pipeline, which would run approximately 180 miles from Perryville/Delhi in northeast Louisiana to Lake Charles, Louisiana.
Our upstream properties, acquired in a series of transactions during 2017 and 2018, consist of 10,260 net acres and 71 producing wells (21 operated) located in the Haynesville Shale trend of northern Louisiana.
In connection with the implementation of our Business, we are offering limited partnership interests in a subsidiary, Driftwood Holdings LP (“Driftwood Holdings”), which will own the Driftwood Project. Partners will contribute cash in exchange for equity in Driftwood Holdings and will receive LNG volumes at the cost of production, including the cost of debt, for the life of the Driftwood terminal. We plan to retain a portion of the ownership in Driftwood Holdings and have engaged Goldman Sachs & Co. and Société Générale to serve as financial advisors for Driftwood Holdings.
We continue to evaluate, and discuss with potential partners, the scope and other aspects of the Driftwood Project in light of the evolving economic environment, investor needs and other factors. As a result of these discussions, we are evaluating
Tellurian Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
certain potential changes to the project that, among other things, could significantly reduce the overall cost of Phase 1 of the project. Whether we implement changes to the project will be based on a variety of factors, including the results of our continuing analysis, changing business conditions and investor feedback.
Overview of Significant Events
Second and Third Amendments to the 2019 Term Loan
On March 23, 2020, Driftwood Holdings LP (formerly known as Driftwood Holdings LLC), a Delaware limited partnership and an indirect wholly owned subsidiary of Tellurian Inc., entered into the second amendment (the “Second Amendment”) to the 2019 Term Loan. The outstanding principal amount as of the Second Amendment date was $75.0 million. The Second Amendment, among other things, made the following changes to the 2019 Term Loan:
•Extended the maturity date from May 23, 2020 to November 23, 2021;
•Modified the frequency of interest payments from quarterly to monthly;
•Modified the interest rate from 12%, with the ability to defer 4% per quarter as paid-in-kind, to 16%, with the ability to defer 8% per annum as paid-in-kind;
•Required a principal payment of $3.0 million by April 22, 2020; and
•Reduced the required month-end collateral amount from $30.0 million to $12.0 million.
Upon entering into the Second Amendment, we repaid $2.0 million of the outstanding principal balance and issued 11,019,298 shares of our common stock for relief of the Final Payment Fee (as defined in the 2019 Term Loan) and all accrued paid-in-kind interest through March 22, 2020.
On April 28, 2020, Driftwood Holdings entered into the third amendment (the “Third Amendment”) to the 2019 Term Loan which became effective on April 29, 2020. In conjunction with the Third Amendment, we repaid $17.1 million of the outstanding principal balance using approximately 9.3 million shares of our common stock and $2.1 million in cash and a warrant to purchase approximately 4.7 million shares of our common stock at a strike price of $1.542. The number of shares issuable under the warrant may be reduced if we make any partial cash repayment of the 2019 Term Loan principal prior to its vesting in full on October 29, 2020.
2020 Unsecured Note
On April 29, 2020, we issued a zero coupon $56.0 million senior unsecured note (the “2020 Unsecured Note”) to a third party, raising proceeds of approximately $47.4 million, net of approximately $2.6 million in fees. We also issued the lender a warrant to purchase 20.0 million shares of our common stock at a strike price of $1.542 per share. The warrant may be exercised in full beginning on October 29, 2020. The 2020 Unsecured Note is subject to certain cash sweep provisions and a portion of the 2020 Unsecured Note must be paid on the first day of every month, beginning on June 1, 2020. Due to the amount of proceeds generated from the sale of our common stock under our at-the-market program in June, as well as the equity offering completed on July 24, 2020, these cash sweep provisions were triggered on July 1, 2020 and August 3, 2020 requiring us to make a total of $8.0 million in additional repayments of the outstanding principal balance. As a result of these additional repayments, the final payment associated with the 2020 Unsecured Note is scheduled to occur on April 1, 2021 instead of June 1, 2021 as originally scheduled.
Equity Offering
On July 24, 2020, we completed a registered direct offering pursuant to which we sold an aggregate of 35,000,000 million shares of our common stock at an offering price of $1.00 per share. Net proceeds from the transaction were approximately $32.5 million.
Restructuring
In March 2020, we implemented a cost reduction and reorganization plan (the “Reorganization Plan”) and incurred approximately $6.4 million of severance and reorganization charges due to a reduction in workforce. The Reorganization Plan has been implemented due to the sharp decline in oil and natural gas prices as well as the growing negative economic effects of the COVID-19 pandemic. We expect to settle the remaining termination benefits by September 30, 2020. The severance and reorganization cash amounts provided to former employees have been settled and the remaining amounts will be settled with the continued transfer of 1.6 million restricted stock units to former employees that may be settled, at our election, with either cash, stock or a combination thereof. For further information regarding the Reorganization Plan, see Note 8, Accrued and Other Liabilities, of our Notes to the Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
Capital Resources
Tellurian Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. We are currently funding our operations, development activities and general working capital needs through our cash on hand. Our current capital resources consist of approximately $88.3 million of cash and cash equivalents as of June 30, 2020, on a consolidated basis, of which approximately $40.1 million is maintained at a wholly owned subsidiary of Tellurian Production Holdings LLC. We have the ability to raise funds through common or preferred stock issuances, debt financings, an at-the-market equity offering program or the sale of assets. We currently maintain our at-the-market equity offering program under which, as of the date of this filing, we have remaining availability to raise aggregate gross sales proceeds of approximately $363.5 million. Since January 1, 2020 we sold approximately 19.6 million shares of common stock under our at-the-market program for total proceeds of approximately $25.0 million, net of approximately $0.8 million in fees and commissions.
Sources and Uses of Cash
The following table summarizes the sources and uses of our cash and cash equivalents and costs and expenses for the periods presented (in thousands):
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Six Months Ended June 30,
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2020
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2019
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Cash used in operating activities
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$
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(47,592)
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|
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$
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(61,074)
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Cash used in investing activities
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(386)
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|
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(51,656)
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Cash provided by financing activities
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71,277
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|
|
51,114
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|
|
|
|
|
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Net increase (decrease) in cash, cash equivalents and restricted cash
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23,299
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|
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(61,616)
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Cash, cash equivalents and restricted cash, beginning of the period
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68,482
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|
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183,589
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Cash, cash equivalents and restricted cash, end of the period
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$
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91,781
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$
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121,973
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|
|
|
|
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Net working (deficit) capital
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$
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(3,762)
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|
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$
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15,623
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Cash used in operating activities for the six months ended June 30, 2020 decreased by approximately $13.5 million compared to the same period in 2019 due to an overall decrease in disbursements in the normal course of business.
Cash used in investing activities for the six months ended June 30, 2020 decreased by approximately $51.3 million compared to the same period in 2019. This decrease is predominantly driven by decreased natural gas development activities.
Cash provided by financing activities for the six months ended June 30, 2020 increased by approximately $20.2 million compared to the same period in 2019. This increase primarily relates to common stock issuances that raised net proceeds of approximately $36.0 million and the absence of approximately $6.7 million in net settlement transactions on employee equity awards. These increases were primarily offset by approximately $10.6 million in principal repayments related to our borrowings. See Note 9, Borrowings, of our Notes to the Condensed Consolidated Financial Statements for further information.
Borrowings
As of June 30, 2020, we had total indebtedness of approximately $166.7 million, of which approximately $114.2 million was secured indebtedness, and we were in compliance with the covenants under all of our credit agreements. For additional details regarding our borrowing activity, refer to Note 9, Borrowings, of our Notes to the Condensed Consolidated Financial Statements.
Capital Development Activities
The activities we have proposed will require significant amounts of capital and are subject to risks and delays in completion. We have received all regulatory approvals and, as a result, our business success will depend to a significant extent upon our ability to obtain the funding necessary to construct assets on a commercially viable basis and to finance the costs of staffing, operating and expanding our company during that process.
We estimate construction costs of approximately $15.5 billion, or $561 per tonne, for the Driftwood terminal and up to approximately $2.3 billion for the Driftwood pipeline, in each case before owners’ costs, financing costs and contingencies. We also are in the preliminary routing stage of developing the Haynesville Global Access Pipeline and the Permian Global Access Pipeline, which combined are estimated to cost approximately $5.6 billion before owners’ costs, financing costs and contingencies. In addition, the natural gas production activities we are pursuing will require considerable capital resources. We
Tellurian Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
anticipate funding our more immediate liquidity requirements relative to the detailed engineering work and other developmental and general and administrative costs through the use of cash proceeds from completed equity issuances, the 2019 Term Loan and 2020 Unsecured Note, each as discussed above, and future issuances of securities by us.
Consistent with its overall financing strategy, the Company has considered, and in some cases discussed with investors, various potential financing transactions, including issuances of debt, equity and equity-linked securities or similar transactions, to support its short- and medium-term capital requirements. The Company will continue to evaluate its cash needs and business outlook, and it may execute one or more transactions of this type in the future.
We currently expect that our long-term capital requirements will be financed by proceeds from future debt, equity and/or equity-linked transactions. In addition, part of our financing strategy is expected to involve seeking equity investments by LNG customers at a subsidiary level. If the types of financing we expect to pursue are not available, we will be required to seek alternative sources of financing, which may not be available on acceptable terms, if at all.
Results of Operations
The following table summarizes revenue, costs and expenses for the periods presented (in thousands):
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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Natural gas sales
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$
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6,329
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$
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5,333
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$
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14,546
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|
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$
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10,293
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Cost of sales
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2,409
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|
|
1,240
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|
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5,288
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|
|
2,353
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Development expenses
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9,123
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|
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18,678
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20,306
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|
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30,553
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Depreciation, depletion and amortization
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4,995
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4,048
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|
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10,827
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6,579
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General and administrative expenses
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15,369
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23,403
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32,608
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45,456
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Impairment charge
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81,065
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—
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81,065
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—
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Severance and reorganization charges
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854
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—
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6,359
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—
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Related party charges
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7,357
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—
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7,357
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—
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Loss from operations
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(114,843)
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(42,036)
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(149,264)
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(74,648)
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Interest expense, net
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(11,195)
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(3,399)
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(17,591)
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(3,986)
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Other income (expense), net
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(2,808)
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4,942
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(2,725)
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4,015
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Income tax benefit
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—
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—
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—
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—
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Net loss
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$
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(128,846)
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$
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(40,493)
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$
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(169,580)
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$
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(74,619)
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Our consolidated net loss was approximately $128.8 million for the three months ended June 30, 2020, compared to a net loss of approximately $40.5 million during the same period in 2019. The increase in net loss of approximately $88.4 million is primarily a result of the following:
•An $81.1 million charge related to the impairment of our proved natural gas properties compared to zero in the prior period. This impairment charge was a result of depressed natural gas prices caused by the combined impact of increased production and falling demand brought about by current economic conditions.. For further information regarding this impairment charge, see Note 3, Property, Plant and Equipment, of our Notes to the Condensed Consolidated Financial Statements.
•Charges of $7.4 million in connection with related party transactions compared to zero in the prior period. These charges were for the payment of reasonable attorneys’ fees and expenses to third parties incurred by the Vice-chairman of our Board of Directors, Mr. Houston, as well as an estimated payment of $2.3 million directly to Mr. Houston for costs he incurred in connection with a lawsuit. For further information regarding these related party charges, see Note 7, Related Party Transactions, of our Notes to the Condensed Consolidated Financial Statements.
•Increase of approximately $7.8 million in interest expense, net, is primarily attributable to both the 2019 Term Loan and 2020 Unsecured Note incurring interest charges during the current period compared to only a portion of the 2019 Term Loan incurring charges during the prior period.
The increase in expenses above were partially offset by a decrease in general and administrative expenses of approximately $8.0 million as well as an approximate $9.6 million decrease in development expenses due to an overall decrease in business activities during the quarter.
Tellurian Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
Our consolidated net loss was approximately $169.6 million for the six months ended June 30, 2020, compared to a net loss of approximately $74.6 million during the same period in 2019. The increase in net loss of approximately $95.0 million is primarily a result of the following:
•An $81.1 million charge related to the impairment of our proved natural gas properties compared to zero in the prior period. This impairment charge was a result of depressed natural gas prices caused by the combined impact of increased production and falling demand brought about by current economic conditions. For further information regarding this impairment charge, see Note 3, Property, Plant and Equipment, of our Notes to the Condensed Consolidated Financial Statements.
•Increases in Cost of sales and DD&A by approximately $2.9 million and $4.2 million, respectively, compared to the same period in 2019 were due to an increase in natural gas production and sales volumes.
•Charges of $7.4 million in connection with related party transactions compared to zero in the prior period. These charges were for the payment of reasonable attorneys’ fees and expenses to third parties incurred by the Vice-chairman of our Board of Directors, Mr. Houston, as well as an estimated payment of $2.3 million directly to Mr. Houston for costs he incurred in connection with a lawsuit. For further information regarding these related party charges, see Note 7, Related Party, of our Notes to the Condensed Consolidated Financial Statements.
•Severance and reorganization charges of approximately $6.4 million were incurred during the period in connection with the Reorganization Plan. For further information regarding the Reorganization Plan, see Note 8, Accrued and Other Liabilities, of our Notes to the Condensed Consolidated Financial Statements.
•Increase of approximately $13.6 million in interest expense, net, is primarily attributable to both the 2019 Term Loan and 2020 Unsecured Note incurring interest charges during the current period compared to only a portion of the 2019 Term Loan incurring charges during the prior period.
The increase in expenses above were partially offset by an increase in natural gas sales of approximately $4.3 million due primarily to higher natural gas production volumes and a decrease in general and administrative expenses of approximately $12.8 million as well as an approximate $10.2 million decrease in development expenses due to an overall decrease in business activities during the quarter.
Off-Balance Sheet Arrangements
None.
Recent Accounting Standards
For descriptions of recently issued accounting standards, see Note 1, General, of our Notes to the Condensed Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that we hold, or are party to, instruments that are subject to market risks that are material to our Business.
ITEM 4. CONTROLS AND PROCEDURES
As indicated in the certifications in Exhibits 31.1 and 31.2 to this report, our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of June 30, 2020. Based on that evaluation, these officers have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There were no changes during our last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.