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TELLURIAN INC. /DE/ - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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 Number 001-5507
tellurianlogoa36.jpg
Tellurian Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
06-0842255
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
1201 Louisiana Street,
Suite 3100,
Houston,
TX
 
77002
(Address of principal executive offices)
 
(Zip Code)
(832) 962-4000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common stock, par value $0.01 per share
 
TELL
 
NASDAQ
Capital Market
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 ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
 
Accelerated filer
☐
Non-accelerated filer
☐
 
Smaller reporting company
☐
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
As of October 25, 2019, there were 242,207,522 shares of common stock, $0.01 par value, issued and outstanding.


Tellurian Inc.
TABLE OF CONTENTS
 
 
 
 
Page
Item 1.
Condensed Consolidated Financial Statements
 
 
 
Condensed Consolidated Balance Sheets
 
 
Condensed Consolidated Statements of Operations
 
 
Condensed Consolidated Statement of Changes in Stockholders’ Equity
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
 



Cautionary Information About Forward-Looking Statements
The information in this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts, that address activity, events, or developments with respect to our financial condition, results of operations, or economic performance that we expect, believe or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “budget,” “estimate,” “expect,” “forecast,” “initial,” “intend,” “may,” “plan,” “potential,” “project,” “proposed,” “should,” “will,” “would” and similar expressions are intended to identify forward-looking statements. These forward-looking statements relate to, among other things:
•
our businesses and prospects and our overall strategy;
•
planned or estimated capital expenditures;
•
availability of liquidity and capital resources;
•
our ability to obtain additional financing as needed and the terms of financing transactions, including at Driftwood Holdings LP;
•
revenues and expenses;
•
progress in developing our projects and the timing of that progress;
•
future values of the Company’s projects or other interests, operations or rights; and
•
government regulations, including our ability to obtain, and the timing of, necessary governmental permits and approvals.
Our forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. These statements are subject to a number of known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from any future results or performance expressed or implied by the forward-looking statements. Factors that could cause actual results and performance to differ materially from any future results or performance expressed or implied by the forward-looking statements include, but are not limited to, the following:
•
the uncertain nature of demand for and price of natural gas and LNG;
•
risks related to shortages of LNG vessels worldwide;
•
technological innovation which may render our anticipated competitive advantage obsolete;
•
risks related to a terrorist or military incident involving an LNG carrier;
•
changes in legislation and regulations relating to the LNG industry, including environmental laws and regulations that impose significant compliance costs and liabilities;
•
governmental interventions in the LNG industry, including increases in barriers to international trade;
•
uncertainties regarding our ability to maintain sufficient liquidity and attract sufficient capital resources to implement our projects;
•
our limited operating history;
•
our ability to attract and retain key personnel;
•
risks related to doing business in, and having counterparties in, foreign countries;
•
our reliance on the skill and expertise of third-party service providers;
•
the ability of our vendors to meet their contractual obligations;
•
risks and uncertainties inherent in management estimates of future operating results and cash flows;
•
our ability to maintain compliance with our senior secured term loans and other agreements;
•
changes in competitive factors, including the development or expansion of LNG, pipeline and other projects that are competitive with ours;
•
development risks, operational hazards and regulatory approvals;
•
our ability to enter and consummate planned financing and other transactions; and
•
risks and uncertainties associated with litigation matters.
The forward-looking statements in this report speak as of the date hereof. Although we may from time to time voluntarily update our prior forward-looking statements, we disclaim any commitment to do so except as required by securities laws.


DEFINITIONS
To the extent applicable, and as used in this quarterly report, the terms listed below have the following meanings:
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
Bcf
 
Billion cubic feet of natural gas
Bcf/d
 
Bcf per day
Bcfe
 
Billion cubic feet of natural gas equivalent
DD&A
 
Depreciation, depletion and amortization
DES
 
Delivered ex-ship
DOE/FE
 
U.S. Department of Energy, Office of Fossil Energy
EPC
 
Engineering, procurement and construction
FEED
 
Front-End Engineering and Design
FERC
 
U.S. Federal Energy Regulatory Commission
FID
 
Final investment decision as it pertains to the Driftwood Project
FTA countries
 
Countries with which the U.S. has a free trade agreement providing for national treatment for trade in natural gas
GAAP
 
Generally accepted accounting principles in the U.S.
JKM
 
Platts Japan Korea Marker index price for LNG
LNG
 
Liquefied natural gas
LSTK
 
Lump sum turnkey
Mcf
 
Thousand cubic feet of natural gas
MMBtu
 
Million British thermal units
MMcf
 
Million cubic feet of natural gas
MMcf/d
 
MMcf per day
MMcfe
 
Million cubic feet of natural gas equivalent volumes using a ratio of 6 Mcf to 1 barrel of liquid
Mtpa
 
Million tonnes per annum
Nasdaq
 
Nasdaq Capital Market
Non-FTA countries
 
Countries with which the U.S. does not have a free trade agreement providing for national treatment for trade in natural gas and with which trade is permitted
SEC
 
U.S. Securities and Exchange Commission
Train
 
An industrial facility comprised of a series of refrigerant compressor loops used to cool natural gas into LNG
U.S.
 
United States
USACE
 
U.S. Army Corps of Engineers



PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TELLURIAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
 
 
 
 
 
September 30, 2019

December 31, 2018
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
91,057

 
$
133,714

Accounts receivable
4,872

 
1,498

Accounts receivable due from related parties
1,316

 
1,316

Prepaid expenses and other current assets
13,698

 
3,906

Total current assets
110,943

 
140,434

Property, plant and equipment, net
145,714

 
130,580

Deferred engineering costs
96,497

 
69,000

Non-current restricted cash
4,300

 
49,875

Other non-current assets
36,653

 
18,659

Total assets
$
394,107

 
$
408,548

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,334

 
$
11,597

Accrued and other liabilities
33,334

 
41,173

Senior secured term loan
75,322

 
—

Total current liabilities
115,990

 
52,770

Long-term liabilities:
 
 
 
       Senior secured term loan
57,853

 
57,048

Other non-current liabilities
17,312

 
796

Total long-term liabilities
75,165

 
57,844

 
 
 
 
Commitments and contingencies (Note 9)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 100,000,000 authorized:
6,123,782 and 6,123,782 shares outstanding, respectively
61

 
61

Common stock, $0.01 par value, 400,000,000 authorized:
242,214,647 and 240,655,607 shares outstanding, respectively
2,210

 
2,195

Additional paid-in capital
768,766

 
749,537

Accumulated deficit
(568,085
)
 
(453,859
)
Total stockholders’ equity
202,952

 
297,934

Total liabilities and stockholders’ equity
$
394,107

 
$
408,548


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

1

TELLURIAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019

2018
Revenues
 
 
 
 
 
 
 
Natural gas revenue
$
9,344

 
$
799

 
$
19,637

 
$
2,551

LNG sales
—

 
—

 
—

 
2,689

Other LNG revenue
—

 
—

 
—

 
3,174

Total revenue
9,344

 
799

 
19,637

 
8,414

 
 
 
 
 
 
 
 
Operating costs and expenses
 
 
 
 
 
 
 
Cost of sales
2,241

 
723

 
4,594

 
5,383

Development expenses
15,685

 
11,004

 
46,238

 
32,871

Depreciation, depletion and amortization
7,409

 
315

 
13,988

 
1,034

General and administrative expenses
22,369

 
20,437

 
67,825

 
61,046

Impairment charge and loss on transfer of assets
—

 
2,704

 
—

 
4,513

Total operating costs and expenses
47,704

 
35,183

 
132,645

 
104,847

Loss from operations
(38,360
)
 
(34,384
)
 
(113,008
)
 
(96,433
)
Interest income (expense), net
(6,079
)
 
924

 
(10,065
)
 
1,863

Other income, net
4,832

 
79

 
8,847

 
151

Loss before income taxes
(39,607
)
 
(33,381
)
 
(114,226
)
 
(94,419
)
Income tax benefit
—

 
190

 
—

 
190

Net loss
$
(39,607
)
 
$
(33,191
)
 
$
(114,226
)
 
$
(94,229
)
Net loss per common share:(1)
 
 
 
 
 
 
 
Basic and diluted
$
(0.18
)
 
$
(0.15
)
 
$
(0.52
)
 
$
(0.45
)
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
218,780

 
217,380

 
218,457

 
209,607

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The numerator for both basic and diluted loss per share is net loss. The denominator for both basic and diluted loss per share is the weighted-average shares outstanding during the period.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2

TELLURIAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity
BALANCE AT JANUARY 1, 2019
$
61

 
$
2,195

 
$
749,537

 
$
(453,859
)
 
$
297,934

Share-based compensation (1)
—

 
15

 
15,222

 
—

 
15,237

Share-based payments
—

 
—

 
707

 
—

 
707

Issuance of common stock purchase warrant
—

 
—

 
3,300

 
—

 
3,300

Net loss
—

 
—

 
—

 
(114,226
)
 
(114,226
)
BALANCE AT SEPTEMBER 30, 2019
$
61

 
$
2,210

 
$
768,766

 
$
(568,085
)
 
$
202,952

 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity
BALANCE AT JULY 1, 2019
$
61

 
$
2,210

 
$
767,863

 
$
(528,478
)
 
$
241,656

Share-based compensation
—

 
—

 
741

 
—

 
741

Share-based payments
—

 
—

 
162

 
—

 
162

Net loss
—

 
—

 
—

 
(39,607
)
 
(39,607
)
BALANCE AT SEPTEMBER 30, 2019
$
61

 
$
2,210

 
$
768,766

 
$
(568,085
)
 
$
202,952

 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity
BALANCE AT JANUARY 1, 2018
$
—

 
$
2,043

 
$
549,958

 
$
(328,114
)
 
$
223,887

Issuance of common stock
—

 
135

 
129,575

 
—

 
129,710

Issuance of Series C preferred stock
58

 
—

 
47,458

 
—

 
47,516

Share-based compensation (2)
—

 
15

 
18,254

 
—

 
18,269

Net loss
—

 
—

 
—

 
(94,229
)
 
(94,229
)
BALANCE AT SEPTEMBER 30, 2018
$
58

 
$
2,193

 
$
745,245

 
$
(422,343
)
 
$
325,153

 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity
BALANCE AT JULY 1, 2018
$
43

 
$
2,193

 
$
731,970

 
$
(389,152
)
 
$
345,054

Issuance of Series C preferred stock
15

 
—

 
12,435

 
—

 
12,450

Share-based compensation
—

 
—

 
840

 
—

 
840

Net loss
—

 
—

 
—

 
(33,191
)
 
(33,191
)
BALANCE AT SEPTEMBER 30, 2018
$
58

 
$
2,193

 
$
745,245

 
$
(422,343
)
 
$
325,153

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes settlement of 2018 bonus that was accrued for in 2018.
(2) Includes settlement of 2017 bonus that was accrued for in 2017.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

TELLURIAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
Nine Months Ended September 30,
 
2019

2018
Cash flows from operating activities:
 
 
 
   Net loss
$
(114,226
)
 
$
(94,229
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation, depletion and amortization
13,988

 
1,034

Amortization of debt issuance costs, discounts and fees
6,674

 
—

Share-based compensation
3,526

 
3,279

Share-based payments
707

 
—

Impairment charge and loss on transfer of assets
—

 
4,513

Gain on sale of assets
(2,831
)
 
—

Gain on financial instruments not designated as hedges
(3,497
)
 
—

Other
(1,538
)
 
—

Net changes in working capital (Note 15)
10,516

 
10,591

Net cash used in operating activities
(86,681
)
 
(74,812
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisition and development of natural gas properties
(45,046
)
 
(255
)
Proceeds from sale of assets
6,156

 
167

Deferred engineering costs
(25,997
)
 
—

Purchase of property - land (Note 15)
(180
)
 
—

     Purchase of property, plant and equipment
(2,552
)
 
(4,814
)
Net cash used in investing activities
(67,619
)
 
(4,902
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from borrowing under term loan
75,000

 
59,400

Payments of term loan financing costs
(2,246
)
 
(2,179
)
Proceeds from issuance of common stock
—

 
133,800

Tax payments for net share settlement of equity awards (Note 15)
(6,686
)
 
(5,733
)
Equity offering costs
—

 
(4,090
)
Net cash provided by financing activities
66,068

 
181,198

 
 
 
 
Net (decrease) increase in cash, cash equivalents and restricted cash
(88,232
)
 
101,484

Cash, cash equivalents and restricted cash, beginning of period
183,589

 
128,273

Cash, cash equivalents and restricted cash, end of period
$
95,357

 
$
229,757

Supplementary disclosure of cash flow information:
 
 
 
Interest paid
$
5,479

 
$
—


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


NOTE 1 — GENERAL
The terms “we,” “our,” “us,” “Tellurian” and the “Company” as used in this report refer collectively to Tellurian Inc. and its subsidiaries unless the context suggests otherwise. These terms are used for convenience only and are not intended as a precise description of any separate legal entity associated with Tellurian Inc.
Nature of Operations    
We plan to develop, own and operate a global natural gas business and to deliver natural gas to customers worldwide. Tellurian is developing a portfolio of natural gas production, LNG marketing, and infrastructure assets, including an LNG terminal facility (the “Driftwood terminal”) and an associated pipeline (the “Driftwood pipeline”) in southwest Louisiana. Tellurian intends to develop the Driftwood pipeline as part of what we refer to as the “Pipeline Network.” In addition to the Driftwood pipeline, the Pipeline Network is expected to include two pipelines, the Haynesville Global Access Pipeline and the Permian Global Access Pipeline, both of which are currently in the early stages of development. The Driftwood terminal, the Pipeline Network and certain natural gas production assets are collectively referred to as the “Driftwood Project”.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain notes and other information have been condensed or omitted. The accompanying interim financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of our Condensed Consolidated Financial Statements. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates 
To conform with GAAP, we make estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and the accompanying notes. Although these estimates and assumptions are based on our best available knowledge at the time, actual results may differ.
New Accounting Standards Issued and Adopted
We adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, utilizing the optional transition approach to apply the standard at the beginning of the first quarter of 2019 with no retrospective adjustment to prior periods. In addition, we elected the transition package of practical expedients upon adoption which, among other things, allowed us not to reassess the historical lease classification. For additional details, refer to Note 14, Leases.    
New Accounting Standards Issued But Not Yet Adopted
ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), establishes the current expected credit loss model, a new impairment model for certain financial instruments based on expected rather than incurred losses. This ASU will be effective for annual reporting periods beginning after December 15, 2019, as well as interim periods included therein. We continue to evaluate the provisions of this ASU. However, based on our preliminary analysis, we do not believe it will have a material impact on our financial statements.
NOTE 2 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
The components of prepaid expenses and other current assets consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Prepaid expenses
$
1,093

 
$
2,279

Deposits
498

 
1,336

Future proceeds from sale of Magellan Petroleum UK (Note 3)
4,969

 
—

Tradable equity securities (Note 3)
3,731

 
—

Derivative asset, current (Note 6)
3,209

 
—

Other current assets
198

 
291

Total prepaid expenses and other current assets
$
13,698

 
$
3,906



5
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 3 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of fixed assets and oil and natural gas properties, as shown below (in thousands):
 
September 30, 2019
 
December 31, 2018
Land
$
13,808

 
$
13,276

Proved properties
141,898

 
101,459

Unproved properties
—

 
10,204

Wells in progress
324

 
4,660

Corporate and other
5,285

 
2,905

Total property, plant and equipment at cost
161,315

 
132,504

Accumulated DD&A
(15,601
)
 
(1,924
)
Total property, plant and equipment, net
$
145,714

 
$
130,580


Land
We own land in Louisiana for the purpose of constructing the Driftwood Project.
Proved Properties
We own producing and non-producing acreage in northern Louisiana.
Unproved Properties
On September 10, 2019 (the “Sale Closing Date”), we sold our wholly owned subsidiary, Magellan Petroleum (UK) Investments Holdings Limited (“Magellan Petroleum UK”), to a third party for approximately $14.8 million. The assets and liabilities of Magellan Petroleum UK consisted predominantly of our non-operated interests in the Weald Basin, United Kingdom. On the Sale Closing Date, we received $6.2 million in cash and the equivalent of $3.7 million in the purchaser’s publicly traded equity securities (“Tradable Equity Securities”), which have been measured at fair value and represent a Level 1 instrument in the fair value hierarchy. The remaining consideration of approximately $4.9 million (the “Future Proceeds”) will be received as follows:
 
Amount
 
Due Date
December future proceeds
$
3,705

 
On or before December 31, 2019
March future proceeds
1,235

 
On or before March 31, 2020
Total remaining consideration
$
4,940

 
 

The sale of Magellan Petroleum UK generated an overall gain of approximately $4.2 million, of which approximately $2.8 million has been recognized in the current period as Other income, net in our Condensed Consolidated Statements of Operations.
NOTE 4 — DEFERRED ENGINEERING COSTS
As of September 30, 2019, the deferred engineering balance of approximately $96.5 million represents detailed engineering services related to the planned construction of the Driftwood terminal. This balance will be transferred to construction in progress upon reaching FID.
NOTE 5 — OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Land lease and purchase options
$
4,822

 
$
4,115

Permitting costs
12,838

 
12,585

Right of use asset - leases (Note 14)
16,381

 
—

Other
2,612

 
1,959

Total other non-current assets
$
36,653

 
$
18,659



6
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

Land Lease and Purchase Options
We hold lease and purchase option agreements (the “Options”) for certain tracts of land and associated river frontage that provide for four or five-year terms. Upon exercise of the Options, the leases are subject to maximum terms of 60 years, inclusive of various renewals which are at our sole discretion. Costs of the Options will be amortized over the life of the lease once obtained, or capitalized into the land if purchased.
Permitting Costs
Permitting costs primarily represent the purchase of wetland credits in connection with our permit application to the USACE in 2017 and 2018. These wetland credits will be applied to our permit in accordance with the Clean Water Act and the Rivers and Harbors Act, which require us to mitigate the impact to Louisiana wetlands caused by the construction of the Driftwood Project. In May 2019, we received the USACE permit. The permitting costs will be transferred to construction in progress upon reaching FID.
NOTE 6 — FINANCIAL INSTRUMENTS
As discussed in Note 8, Borrowings, as part of entering into the senior secured term loan credit agreement in 2018, we are required to enter into and maintain certain hedging transactions. As a result, we use derivative financial instruments, namely over the counter (“OTC”) commodity swap instruments (“commodity swaps”), to maintain compliance with this covenant. We do not hold or issue derivative financial instruments for trading purposes.
Commodity swap agreements involve payments to or receipts from counterparties based on the differential between two prices for the commodity, and include basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices, as required by the negative covenant of the senior secured term loan credit agreement. The fair value of our commodity swaps is classified as Level 2 in the fair value hierarchy and is based on standard industry income approach models that use significant observable inputs, including but not limited to New York Mercantile Exchange (NYMEX) natural gas forward curves and basis forward curves, all of which are validated against external sources at least monthly.
The Company recognizes all derivative instruments as either assets or liabilities at fair value on a net basis as they are with a single counterparty and subject to a master netting arrangement. These derivative instruments are reported as either current or non-current assets or current or non-current liabilities, based on their maturity dates. The Company can net settle its derivative instruments at any time. As of September 30, 2019, we had a current asset of $3.2 million, net, with respect to the fair value of the current portion of our commodity swaps. In addition, as of September 30, 2019, we had a non-current asset of $0.4 million, net, with respect to the fair value of the non-current portion of our commodity swaps. The current and the non-current asset are classified within Prepaid expenses and other current assets and Other non-current assets, respectively, on the Condensed Consolidated Balance Sheets. Gross current asset and current liability amounts are $3.2 million and $0.0 million, respectively. Gross non-current asset and non-current liability amounts are $0.7 million and $0.3 million, respectively.
We do not apply hedge accounting for our commodity swaps; therefore, all changes in fair value of the Company’s derivative instruments are recognized within Other income, net, in the Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2019, we recognized a realized gain of $2.0 million and $2.5 million, respectively, and an unrealized gain of $0.0 million and $3.5 million, respectively, related to the changes in fair value of the commodity swaps in our Condensed Consolidated Statements of Operations. Derivative contracts which result in physical delivery of a commodity expected to be used or sold by the Company in the normal course of business are designated as normal purchases and sales and are exempt from derivative accounting. OTC arrangements require settlement in cash. Settlements of commodity derivative instruments are reported as a component of cash flows from operations in the Condensed Consolidated Statements of Cash Flows.
With respect to the commodity swaps, the Company hedged portions of expected sales of equity production and portions of its basis exposure to cover approximately 12.2 Bcf and 12.2 Bcf of natural gas, respectively, as of September 30, 2019. The open positions at September 30, 2019 had maturities extending through September 2021. For additional details, refer to Note 8, Borrowings.

7
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 7 — ACCRUED AND OTHER LIABILITIES
The components of accrued and other liabilities consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Project development activities
$
3,745

 
$
8,879

Payroll and compensation
19,492

 
23,286

Accrued taxes
1,026

 
2,507

Professional services (e.g., legal, audit)
3,300

 
2,423

Lease liability - current (Note 14)
2,217

 
—

Other
3,554

 
4,078

Total accrued and other liabilities
$
33,334

 
$
41,173


NOTE 8 — BORROWINGS
 
 
 
 
September 30, 2019
 
December 31, 2018
 
 
Maturity
 
Interest Rate
 
Amount
 
Interest Rate
 
Amount
2019 Term Loan
 
May 2020 (1)
 
12% (2)
 
$
86,508

 
—

 
$
—

2018 Term Loan
 
September 2021
 
5%-8% + LIBOR (3)
 
60,000

 
5%-8% + LIBOR (3)
 
60,000

Unamortized deferred financing costs, discounts and fees
 
 
 
 
 
(13,333
)
 
 
 
(2,952
)
Total borrowings
 
 
 
 
 
$
133,175

 
 
 
$
57,048

(1) Subject to two six-month extensions if specific criteria are met.
(2) Of this amount, we may defer up to 4% each quarter as paid-in-kind interest.
(3) The applicable margin is 5% through the end of the first year from September 28, 2018 (the “Closing Date”), 7% through the end of the second year following the Closing Date and 8% thereafter.
As of September 30, 2019, the Company is in compliance with all covenants under its two credit agreements. Refer to Note 6, Financial Instruments, for details of hedging transactions, as of and for the period ended September 30, 2019, entered into as required by the 2018 Term Loan described below.
Short-term Borrowings — 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 financing costs.
The 2019 Term Loan agreement provided Driftwood Holdings the right to borrow an additional $15.0 million by August 31, 2019, subject to certain criteria. On July 11, 2019, all of the criteria were met and on July 16, 2019, Driftwood Holdings received these funds.
Borrowings under the 2019 Term Loan bear a fixed annual interest rate of 12%, of which 4% Driftwood Holdings may add to the outstanding principal as paid-in-kind interest at the end of each reporting period. This election was made in both June and September of 2019, which resulted in adding approximately $1.0 million to the outstanding principal of the 2019 Term Loan. The 2019 Term Loan can be terminated prior to maturity, only in full, without an early termination penalty.
Upon maturity or early repayment of the 2019 Term Loan, Driftwood Holdings will also pay a final fee that is equal to 20% of the principal amount borrowed less financing costs and cash interest paid (the “Final Payment Fee”) to the lender. As of September 30, 2019, approximately $7.9 million related to the Final Payment Fee have been recognized as a discount to the 2019 Term Loan within our Condensed Consolidated Balance Sheets.
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 and its subsidiaries, under one or more security agreements and pledge agreements.
In conjunction with the 2019 Term Loan, the Company issued a Common Stock Purchase Warrant (the “Warrant”) to the lender. The fair value of the Warrant of approximately $3.3 million has been recognized as an original issue discount to the 2019 Term Loan. Refer to Note 10, Stockholders’ Equity, for further details.

8
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

Long-term Borrowings — 2018 Term Loan
On September 28, 2018 (the “Closing Date”), Tellurian Production Holdings LLC (“Production Holdings”), our wholly owned subsidiary, 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 September 30, 2019, unused proceeds from the 2018 Term Loan totaled $4.3 million and were classified as Non-current restricted cash.
We have the right, but not the obligation, to make voluntary principal payments 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 payments 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.
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 domestic properties described in Note 3, Property, Plant and Equipment.
Fair Value
As of September 30, 2019, the outstanding principal of the 2018 Term Loan approximated fair value as the interest rate for the 2018 Term Loan was reflective of market rates. As of September 30, 2019, the fair value of the 2019 Term Loan, on a discounted cash flow basis, was approximately $81.5 million as the 2019 Term Loan effective interest rate was higher than current market levels after giving effect to the Final Payment Fee. Both the 2018 Term Loan and the 2019 Term Loan represent Level 3 instruments in the fair value hierarchy.
NOTE 9 — COMMITTMENTS 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 beginning in June 2020 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 10 — STOCKHOLDERS' EQUITY
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 through Credit Suisse Securities (USA) LLC acting as sales agent. We have remaining availability under the at-the-market program to raise aggregate sales proceeds of up to $189.7 million.  
Common Stock Purchase Warrant
As discussed in Note 8, Borrowings, on May 23, 2019 (the “Issuance Date”), in conjunction with the 2019 Term Loan, the Company issued the Warrant providing the lender with the right to purchase up to 1.5 million shares of our common stock at $10.00 per share. The Warrant is immediately exercisable and will expire five years after the Issuance Date. The Warrant was valued using a Black-Scholes option pricing model that resulted in a relative fair value of approximately $3.3 million on the Issuance Date and is not subject to subsequent remeasurement. The Warrant has been classified as equity and is recognized within Additional paid-in capital within our Condensed Consolidated Balance Sheets.
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”). In exchange for the Preferred Stock, Bechtel provided $50.0 million in detailed engineering services for the Driftwood Project. See Note 4, Deferred Engineering Costs, for further information regarding the costs associated with the detailed engineering services.


9
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

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.
Public Equity Offering and Exercise of Overallotment    
In June 2018, we sold 12.0 million shares of common stock for proceeds of approximately $115.2 million, net of approximately $3.6 million in fees and commissions. The underwriters were granted an option to purchase up to an additional 1.8 million shares of common stock within 30 days, which was not exercised.
In January 2018, in connection with the Company’s December 2017 equity offering, the underwriters exercised their option to purchase an additional 1.5 million shares of our common stock for proceeds of approximately $14.5 million, net of approximately $0.5 million in fees and commissions.
NOTE 11 — REVENUE
For the sale of commodities, we view the delivery of each unit (MMBtu) to be a separate performance obligation that is satisfied upon delivery. These contracts are either fixed price contracts or contracts with a fixed differential to an index price, both of which are deemed fixed consideration that is allocated to each performance obligation and represents the relative standalone selling price basis.
Purchases and sales of LNG inventory with the same counterparty that are entered into in contemplation of one another (including buy/sell arrangements) are combined and recorded on a net basis and reported in LNG sales on the Condensed Consolidated Statements of Operations. For such LNG sales, we require payment within 10 days from delivery. Other LNG revenue represents revenue earned from sub-charter agreements and is accounted for outside of ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
In our judgment, the performance obligations for the sale of natural gas and LNG are satisfied at a point in time because the customer obtains control and legal title of the asset when the natural gas or LNG is delivered to the designated sales point. We exclude all taxes from the measurement of transaction price.
Because our performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, we have recognized amounts due from contracts with customers of $4.2 million and $0.5 million as Accounts receivable within the Condensed Consolidated Balance Sheet as of September 30, 2019 and December 31, 2018, respectively.
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.
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 September 30, 2019, there was no Restricted Stock that would be required to be settled in cash.
As of September 30, 2019, we had granted approximately 24.7 million shares of performance-based Restricted Stock, of which approximately 19.7 million shares will vest entirely based upon FID, as defined in the award agreements, and approximately 4.3 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 0.7 million shares, will vest based on other criteria. As of September 30, 2019, no expense had been recognized in connection with performance-based Restricted Stock.




10
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

For the three and nine months ended September 30, 2019, the recognized share-based compensation expense related to all share-based awards totaled approximately $0.7 million and $3.5 million, respectively. As of September 30, 2019, unrecognized compensation expense, based on the grant date fair value, for all share-based awards totaled approximately $196.8 million. Further, the approximately 24.7 million shares of performance-based Restricted Stock and approximately 2.0 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 September 30, 2019 and December 31, 2018. Accordingly, we have not recorded a provision for federal, state or foreign income taxes during the three and nine months ended September 30, 2019.
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
As outlined in Note 1, General, on January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), utilizing the optional transition approach to apply the standard at the beginning of the first quarter of 2019 with no retrospective adjustment to prior periods. In addition, we elected the transition package of practical expedients to:
i.carry-forward prior conclusions related to lease identification and classification for existing leases;
ii.combine lease and non-lease components of an arrangement for all classes of our leased assets; and
iii.omit short-term leases with a term of 12 months or less from recognition on the balance sheet.
Adoption of the new lease standard resulted in the recording of an additional right of use asset and a lease liability of approximately $17.9 million and $19.8 million, respectively, as of January 1, 2019. The difference between the right of use asset and lease liability, net of the deferred tax impact, represents the relief of the previously recorded rent accrual. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.     
We are a lessee of office space. Certain of our leases include one or more options to renew, with renewal terms that can extend the lease term from five to 10 years. The exercise of lease renewal options is at our sole discretion, and, as we are not reasonably certain that those options will be exercised, none are recognized as part of our right to use asset and lease liability. All of our leases are classified as operating. As of September 30, 2019, our weighted-average remaining lease term is approximately six years.
As at September 30, 2019, our right of use asset and lease liability is as follows (in thousands):
Lease
 
Presentation
 
September 30, 2019
Right of use asset
 
Other non-current assets
 
16,381

     Total lease asset
 
 
 
$
16,381

Lease liability - current
 
Accrued and other liabilities
 
2,217

Lease liability - non-current
 
Other non-current liabilities
 
16,266

     Total lease liability
 
 
 
$
18,483


For the three and nine months ended September 30, 2019 and 2018, our operating lease costs related to our office space were $0.9 million and $0.8 million, respectively, and $2.7 million and $2.1 million, respectively. As none of our leases provide an implicit rate, we have determined our own discount rate, which, on a weighted-average basis at September 30, 2019, was approximately 8%.
For the three and nine months ended September 30, 2019, we paid approximately $0.9 million and $2.3 million, respectively, in cash for amounts included in the measurement of lease liabilities, all of which are presented within operating cash flows. In addition, a lease liability arising from obtaining a right of use asset is treated as a non-cash item in our Condensed Consolidated Statements of 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 at September 30, 2019 (in thousands):

11
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

Maturity of lease liability
 
2019
$
900

2020
3,626

2021
3,491

2022
3,793

2023
4,059

After 2023
8,061

Total lease payments
$
23,930

Less: discount
5,447

Present value of lease liability
$
18,483


At December 31, 2018, future undiscounted minimum rental payments due under noncancelable operating lease agreements pursuant to ASC Topic 840 were: 
2019
$
3,126

2020
3,510

2021
3,440

2022
3,718

2023
3,993

Thereafter
8,061

Total
$
25,848


NOTE 15 — ADDITIONAL CASH FLOW INFORMATION

The following table provides information regarding the net changes in working capital (in thousands):
 
Nine Months Ended September 30,
 
2019

2018
Accounts receivable
$
(3,374
)
 
$
99

Accounts receivable due from related parties
—

 
62

Prepaid expenses and other current assets
1,653

 
1,036

Accounts payable and accrued liabilities
14,187

 
13,548

Other, net
(1,950
)
 
(4,154
)
Net changes in working capital
$
10,516

 
$
10,591


The following table provides supplemental disclosure of cash flow information (in thousands):
 
Nine Months Ended September 30,
 
2019
 
2018
Non-cash accruals of property, plant and equipment and other non-current assets
$
7,875

 
$
3,529

Accrued term loan issuance costs
—

 
441

2019 Term Loan paid-in-kind election
996

 
—

Future proceeds from sale of Magellan Petroleum UK
4,940

 
—

Tradable equity securities
3,705

 
—

Non-cash settlement of withholding taxes associated with the 2018 and 2017 bonus paid and vesting of certain awards, respectively
6,686

 
5,733

Non-cash settlement of the 2018 and 2017 bonus paid, respectively
18,396

 
15,202


The statement of cash flows for the nine months ended September 30, 2019 reflects a $0.4 million non-cash movement for funds deposited in escrow in December 2018 that were cleared in March 2019 for the purchase of land.

12
Tellurian Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

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):
 
Nine Months Ended September 30,
 
2019
 
2018
Cash and cash equivalents
$
91,057

 
$
172,317

Non-current restricted cash
4,300

 
57,440

Total cash, cash equivalents and restricted cash shown in the statements of cash flows
$
95,357

 
$
229,757



13
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 $28.7 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, 36-inch and 30-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 approximately $2.2 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 66 producing wells (21 operated) located in the Haynesville Shale trend of northern Louisiana. These wells have net current production of approximately 34.2 MMcf/d. As of December 31, 2018, our estimate of net reserves in these properties was approximately 265 Bcfe. We began drilling certain locations on our properties in the fourth quarter of 2018, which were completed during the first half of 2019 using the proceeds from the senior secured term loan obtained in 2018 (the “2018 Term Loan” as described in Note 8, Borrowings, of our Notes to Condensed Consolidated Financial Statements).


14
Tellurian Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

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. In July 2019, as described below in “Overview of Significant Events”, Total Delaware, Inc. (“Total”) and Total Gas & Power North America, Inc. (“Total Gas & Power”), subsidiaries of TOTAL S.A., entered into a series of definitive agreements with the Company pursuant to which, among other things, Total agreed to become the first partner in Driftwood Holdings. 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 also continue to develop our LNG marketing activities as described below in “Overview of Significant Events.”
Overview of Significant Events
Significant Transactions
Common Stock Purchase Agreement. On April 3, 2019, we entered into a Common Stock Purchase Agreement (the “CSPA”) with Total, pursuant to which Total agreed to purchase, and the Company agreed to issue and sell in a private placement to Total, approximately 19.9 million shares of our common stock in exchange for a cash purchase price of approximately $10.06 per share, which will generate aggregate gross proceeds of approximately $200.0 million (the “Private Placement”). The closing of the Private Placement is subject to the satisfaction of certain closing conditions, including Tellurian reaching an affirmative FID with respect to “Phase I” of the Driftwood Project.
Regulatory Developments. On April 18, 2019, FERC issued the order granting authorization for the Company to construct and operate the Driftwood terminal and the Driftwood pipeline. On May 2, 2019, the DOE/FE issued an order authorizing the Company to export to Non-FTA countries. On May 3, 2019, USACE issued the Section 10/Section 404 permit authorizing activities within “Waters of the U.S.” These three permits, along with the DOE/FE authorization for FTA countries issued in February 2017, air permits issued by the Louisiana Department of Environmental Quality in March 2017 and May 2018, and the coastal use permit issued by the Louisiana Department of Natural Resources in July 2018, comprise all the major permits required for construction and operation of the Driftwood terminal and Driftwood pipeline.
LNG Marketing.    On April 23, 2019, in furtherance of our strategy of developing our LNG marketing activities, 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 have committed to purchase one cargo of LNG per quarter beginning in June 2020 through October 2022. The quantity 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 for each cargo will be based on the JKM price in effect at the time of each purchase. Refer to “—Driftwood Project” below for additional SPAs executed in conjunction with the development of our business.
Term Loan. On May 23, 2019, Driftwood Holdings entered into a one-year senior secured term loan credit agreement (the “2019 Term Loan”) in the principal amount of $60.0 million. Fees of approximately $2.2 million were capitalized as deferred financing costs. The 2019 Term Loan agreement provided Driftwood Holdings the right to borrow an additional $15.0 million by August 31, 2019, subject to certain criteria being met. On July 11, 2019, all of the criteria were met and on July 16, 2019, Driftwood Holdings received these funds. Amounts borrowed under the 2019 Term Loan bear a fixed annual interest rate of 12%, of which 4% Driftwood Holdings may add to the principal as paid-in-kind interest. Furthermore, upon the maturity of the 2019 Term Loan, Driftwood Holdings will incur a final payment fee equal to 20% of the principal amount funded less certain deferred financing costs and cash interest paid. In conjunction with the 2019 Term Loan, the Company issued a Common Stock Purchase Warrant (the “Warrant”) to the lender. As discussed in Note 10, Stockholders’ Equity, of our Notes to Condensed Consolidated Financial Statements, the estimated fair value of the Warrant of approximately $3.3 million has been recognized as an original issue discount related to the 2019 Term Loan.
Driftwood Project. On July 10, 2019, Driftwood Holdings entered into an equity capital contribution agreement (the “Contribution Agreement”) with Total, whereby Total agreed to make a $500.0 million capital commitment to Driftwood Holdings in exchange for Class A limited partnership interests in Driftwood Holdings. The closing of the transactions contemplated by the Contribution Agreement is subject to the satisfaction of certain closing conditions, including Tellurian reaching an affirmative FID with respect to “Phase 1” of the Driftwood Project. Subject to the terms and conditions of the Contribution Agreement, upon the occurrence of FID with respect to Phase 1 of the Driftwood Project, Total Gas & Power and Driftwood LNG LLC, a subsidiary of the Company (“Driftwood LNG”), will enter into a sale and purchase agreement (the “LNG SPA”) pursuant to which Total Gas & Power will have the right to purchase from Driftwood LNG approximately 1.0 Mtpa of LNG from the Driftwood terminal.
Also on July 10, 2019, Tellurian Trading UK Ltd, a wholly owned subsidiary of the Company (“Tellurian Trading”), and Total Gas & Power entered into a sale and purchase agreement pursuant to which Total Gas & Power has the right to purchase from Tellurian Trading approximately 1.5 Mtpa of LNG on a free on board basis at prices based on the JKM index price, subject to the terms and conditions of the agreement.


15
Tellurian Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources
Capital Resources
We are currently funding our operations, development activities and general working capital needs through our cash on hand. Pursuant to the 2018 Term Loan, we are funding our specific upstream development and drilling activities with the proceeds from the 2018 Term Loan and approximately $15.4 million of cash and cash equivalents as of September 30, 2019, maintained at a wholly-owned subsidiary of Tellurian Production Holdings LLC. Our current capital resources consist of approximately $91.1 million of cash and cash equivalents as of September 30, 2019 on a consolidated basis, which are primarily the result of issuances of common stock in 2017 and in the first half of 2018, proceeds received under the 2019 Term Loan and from the sale of Magellan Petroleum UK, approximately $3.7 million in Tradable equity securities also received from the sale of Magellan Petroleum UK and approximately $4.3 million of non-current restricted cash from the 2018 Term Loan. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Pursuant to the terms of the 2019 Term Loan, we are required to maintain an aggregate $30.0 million balance in accounts constituting collateral. Furthermore, and as discussed above in “Overview of Significant Events”, the Company agreed to issue and sell in a private placement to Total approximately 19.9 million shares of our common stock for approximately $10.06 per share, resulting in aggregate gross proceeds of approximately $200.0 million, which is subject to the satisfaction of certain closing conditions, including Tellurian reaching an affirmative FID with respect to “Phase I” of the Driftwood Project.
We also 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 maintain an at-the-market equity offering program through Credit Suisse Securities (USA) LLC under which we have remaining availability to raise aggregate sales proceeds of up to $189.7 million.  
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):
 
 
Nine Months Ended September 30,
 
 
 
 
2019
 
2018
Cash used in operating activities
 
$
(86,681
)
 
$
(74,812
)
Cash used in investing activities
 
(67,619
)
 
(4,902
)
Cash provided by financing activities
 
66,068

 
181,198

 
 
 
 
 
Net (decrease) increase in cash, cash equivalents and restricted cash
 
(88,232
)
 
101,484

Cash, cash equivalents and restricted cash, beginning of the period
 
183,589

 
128,273

Cash, cash equivalents and restricted cash, end of the period
 
$
95,357

 
$
229,757

 
 
 
 
 
Net working capital
 
$
(5,047
)
 
$
138,205

Cash used in operating activities for the nine months ended September 30, 2019 increased by approximately $11.9 million compared to the same period in 2018 due to an overall increase in disbursements in the normal course of business.
Cash used in investing activities for the nine months ended September 30, 2019 increased by approximately $62.7 million compared to the same period in 2018. This increase is predominantly driven by increased natural gas development activities of $44.8 million and payments of $26.0 million related to deferred engineering costs that were settled as a non-cash transaction through the issuance of preferred stock in the prior period. The deferred engineering costs included a partial payment of approximately $10.0 million for the preservation of the manufacturing and supply schedule under the EPC. This increase was partially offset by approximately $6.2 million of cash consideration received in connection with the sale of Magellan Petroleum UK, as discussed in Note 3, Property, Plant and Equipment, of our Notes to Condensed Consolidated Financial Statements.
Cash provided by financing activities for the nine months ended September 30, 2019 decreased by approximately $115.1 million compared to the same period in 2018. This decrease primarily relates to the absence of a public equity offering, including the exercise of an overallotment option, totaling approximately $129.7 million, as discussed in Note 10, Stockholders’ Equity, of our Notes to Condensed Consolidated Financial Statements. This decrease was partially offset by approximately $15.5 million of net proceeds from the 2019 Term Loan relative to the net proceeds from the 2018 Term Loan in the same period in 2018.


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Tellurian Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Borrowings
As of September 30, 2019, we had total indebtedness of approximately $133.2 million, all of which was secured indebtedness. At September 30, 2019, we were in compliance with the covenants under both our 2018 and 2019 senior secured term loan credit agreements. For additional details regarding our borrowing activity, refer to Note 8, Borrowings, of our Notes to 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 plan to commence construction of the Driftwood terminal and Driftwood pipeline in 2020, produce the first LNG in 2023 and achieve full operations in 2026. 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 approximately $2.2 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 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 from the completed equity issuances and the 2019 Term Loan discussed above and future issuances of equity or debt securities by us.
We currently expect that our long-term capital requirements will be financed by proceeds from future debt and equity 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):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Total revenue
 
$
9,344

 
$
799

 
$
19,637

 
$
8,414

Cost of sales
 
2,241

 
723

 
4,594

 
5,383

Development expenses
 
15,685

 
11,004

 
46,238

 
32,871

Depreciation, depletion and amortization
 
7,409

 
315

 
13,988

 
1,034

General and administrative expenses
 
22,369

 
20,437

 
67,825

 
61,046

Impairment charge and loss on transfer of assets
 
—

 
2,704

 
—

 
4,513

Loss from operations
 
(38,360
)
 
(34,384
)
 
(113,008
)
 
(96,433
)
Interest income (expense), net
 
(6,079
)
 
924

 
(10,065
)
 
1,863

Other income, net
 
4,832

 
79

 
8,847

 
151

Income tax benefit
 
—

 
190

 
—

 
190

Net loss
 
$
(39,607
)
 
$
(33,191
)
 
$
(114,226
)
 
$
(94,229
)
Our consolidated net loss was approximately $39.6 million for the three months ended September 30, 2019, compared to a net loss of approximately $33.2 million during the same period in 2018. This $6.4 million increase in net loss is primarily a result of the following:
•
Cost of sales during the period increased by approximately $1.5 million compared to the same period in 2018 due to an increase in natural gas sales as a result of an increase in production volumes.
•
Development expenses during the period increased by approximately $4.7 million compared to the same period in 2018 as a result of an overall increase in development activities associated with the Driftwood Project.
•
DD&A during the period increased by approximately $7.1 million compared to the same period in 2018 due to the increase in natural gas production as discussed earlier.

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Tellurian Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

•
General and administrative expenses increased by approximately $1.9 million during the period due primarily to an increase in employee headcount when compared to the same period in 2018.
•
The $7.0 million increase in interest expense, net, is primarily attributable to (i) the recognition of interest expenses on the 2018 Term Loan, which was only partially present in the prior period, and (ii) the 2019 Term Loan, which was not in place in the prior period.
The above factors were partially offset by (i) an increase in revenues of approximately $8.5 million due to higher natural gas production volumes that have led to the increase in natural gas sales; (ii) the absence of an impairment charge and loss on transfer of assets of approximately $2.7 million in the prior period; and (iii) an increase in other income of approximately $4.8 million predominantly due to (a) the recognition of approximately $2.8 million of gain on the sale of Magellan Petroleum UK, and (b) the approximately $2.0 million of gains on financial instruments not designated as hedges, each as outlined in Note 3, Property, Plant and Equipment, and Note 6, Financial Instruments, respectively, of our Notes to the Condensed Consolidated Financial Statements.
Our consolidated net loss was approximately $114.2 million for the nine months ended September 30, 2019, compared to a net loss of approximately $94.2 million during the same period in 2018. This $20.0 million increase in net loss is primarily a result of the following:
•
Development expenses during the period increased by approximately $13.4 million compared to the same period in 2018 as a result of an overall increase in development activities associated with the Driftwood Project.
•
DD&A during the period increased by approximately $13.0 million compared to the same period in 2018 due to the increase in natural gas production as discussed earlier.
•
General and administrative expenses increased by approximately $6.8 million during the period, due primarily to an increase in employee headcount when compared to the same period in 2018.
•
Interest expense, net, increased by approximately $11.9 million during the period primarily due to (i) the recognition of interest expenses on the 2018 Term Loan, which was only partially present in the prior period, and (ii) the 2019 Term Loan, which was not in place in the prior period.
The above factors were partially offset by (i) an approximately $11.2 million increase in revenues due to higher natural gas sales and an approximately $0.8 million decrease in cost of sales due to the absence of costs related to LNG marketing transactions; (ii) the absence of an impairment charge and loss on transfer of assets of approximately $4.5 million in the prior period; and (iii) an increase in other income of approximately $8.7 million predominantly due to (a) the recognition of approximately $2.8 million of gain on the sale of Magellan Petroleum UK and (b) the approximately $6.0 million of gains on financial instruments not designated as hedges, each as outlined in Note 3, Property, Plant and Equipment, and Note 6, Financial Instruments, respectively, of our Notes to the Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements
As of September 30, 2019, we had no transactions that met the definition of off-balance sheet arrangements that may have a current or future material effect on our consolidated financial position or operating results.
Recent Accounting Standards
For descriptions of recently issued accounting standards, see Note 1, General, of our Notes to 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 September 30, 2019. 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.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the legal proceedings disclosed in Part I, Item 3, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except that the trial date, previously set for June 2019, has been changed to February 2020.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None that occurred during the three months ended September 30, 2019.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None that occurred during the three months ended September 30, 2019.
ITEM 5. OTHER INFORMATION
Compliance Disclosure
Pursuant to Section 13(r) of the Exchange Act, if during the quarter ended September 30, 2019, we or any of our affiliates had engaged in certain transactions with Iran or with persons or entities designated under certain executive orders, we would be required to disclose information regarding such transactions in our quarterly report on Form 10-Q as required under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “ITRSHRA”). Disclosure is generally required even if the activities were conducted outside the United States by non-U.S. entities in compliance with applicable law. During the quarter ended September 30, 2019, we did not engage in any transactions with Iran or with persons or entities related to Iran.
Total Delaware, Inc. and TOTAL S.A. have beneficial ownership of approximately 19% of the outstanding Tellurian common stock. Total Delaware, Inc. has the right to designate for election one member of Tellurian’s board of directors, and Eric Festa is the current Total Delaware, Inc. designee. Total Delaware, Inc. will retain this right for so long as its percentage ownership of Tellurian voting stock is at least 10%. On March 20, 2019, TOTAL S.A. included information in its Annual Report on Form 20-F for the year ended December 31, 2018 (the “Total 2018 Annual Report”) regarding activities during 2018 that require disclosure under the ITRSHRA. The relevant disclosures were reproduced in Exhibit 99.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed with the SEC on May 8, 2019 and are incorporated by reference herein. We have no involvement in or control over such activities, and we have not independently verified or participated in the preparation of the disclosures made in the Total 2018 Annual Report.


19

ITEM 6. EXHIBITS
Exhibit No.
 
Description
10.1††
 
10.2††
 
10.3††*
 
10.4††*
 
10.5††*
 
10.6*
 
10.7*
 
10.8†*
 
10.9†*
 
31.1*
 
31.2*
 
32.1**
 
32.2**
 
99.1
 
101.INS*
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
 
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
 
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL
 
*
Filed herewith.
**
Furnished herewith.
†
Management contract or compensatory plan or arrangement.
††

Portions of this exhibit have been omitted in accordance with Item 601(b)(10) of Regulation S-K. The omitted information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
TELLURIAN INC.
 
 
 
 
Date:
November 6, 2019
By:
/s/ Antoine J. Lafargue
 
 
 
Antoine J. Lafargue
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
(as Principal Financial Officer)
 
 
 
Tellurian Inc.
 
 
 
 
Date:
November 6, 2019
By:
/s/ Khaled A. Sharafeldin
 
 
 
Khaled A. Sharafeldin
 
 
 
Chief Accounting Officer
 
 
 
(as Principal Accounting Officer)
 
 
 
Tellurian Inc.
    

21