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Text: In addition, we may include references to certain non-GAAP financial measures, such as consolidated adjusted EBITDA and distributable cash flow.
As part of our discussion of Cheniere's results, today's call may also include selected financial information and results for Cheniere Energy Partners LP, or CQP.
We do not intend to cover CQP's results separately from those of Cheniere Energy, Inc. The call agenda is shown on Slide three.
Jack will begin with operating and financial highlights, Anatol will then provide an update on the LNG market, and Zach will review our financial results and guidance.
The second quarter was an extremely productive one for us as we achieved milestones across the enterprise in origination, marketing, operations and engineering and construction, just to name a few.
Global LNG market fundamentals continue to be extremely constructive, and we have begun to see the return of long-term LNG contracts in support of the construction of new liquefaction capacity.
For the second quarter, we generated consolidated adjusted EBITDA of $1.023 billion and distributable cash flow of approximately $340 million on revenue of over $3 billion.
We generated a net loss of approximately $329 million, due primarily to the unrealized derivative accounting treatment required on our hedges and on our Integrated Production Marketing, or IPM transactions, which Zach will discuss in more detail in a few minutes.
For the third consecutive quarter, we're raising our full year 2021 financial guidance.
We now forecast 2021 consolidated adjusted EBITDA of $4.6 billion to $4.9 billion and distributable cash flow of $1.8 billion to $2.1 billion.
This increase in guidance is being driven by a number of factors.
First, the continued strengthening of the LNG market is yielding higher netbacks on open volumes.
For context, since our first quarter earnings call in May, spot margins for 2021 doubled.
And our portfolio optimization team has been able to capitalize on that with our open volumes.
In addition, we've been able to further unlock some additional production for the second half of the year, primarily through maintenance optimization, which has contributed to an upwardly revised production forecast.
And lastly, with Henry Hub moving higher over the past quarter, we made some additional lifting margin.
So our outlook for the balance of 2021 has improved again based on a very strong LNG market and our very strong operational performance.
The fundamentals present in the LNG market are as good or better than at any time since I've been at Cheniere.
Anatol will cover the market in more detail in a few minutes, but market dynamics on both the supply side and demand side continue to move in our favor and support our conviction in the long-term growth prospects for natural gas worldwide.
Just after the quarter ended, we signed our third IPM agreement in support of Corpus Christi Stage 3, this time, with Tourmaline, the largest natural gas producer in Canada.
This transaction progresses our commercialization efforts on a shovel-ready Stage three expansion project and helps validate our view of a constructive macro backdrop for long-term contracts.
In addition, it reinforces Cheniere's record of executing collaborative, innovative solutions to meet the needs of our customers.
We will continue to leverage our infrastructure platform and commercial advantages to further progress Stage three toward FID.
During the second quarter, we continue to have meaningful success under our midterm strategy, placing portfolio volumes into the market under various commercial agreements and increasing the percentage of our total volume that is contracted.
So far in 2021, we've entered into fixed fee sales agreements for portfolio volumes with multiple counterparties aggregating approximately 12 million tons of LNG volume between this year and 2032, in addition to the IPM deal with Tourmaline.
The success of this midterm strategy underscores the strength in the LNG market today and the strategic competitive advantage of our portfolio volumes.
We'll continue to place these flexible volumes in the market, tailoring solutions to meet the growing requirements of LNG customers worldwide.
On the production side, the record we set in the first quarter for LNG exports didn't stand very long as we broke that record in the second quarter with 139 cargoes of LNG exported from our two facilities.
Year-to-date, Asia is the top destination of Cheniere cargoes with approximately 45% of our cargoes exported having landed in Asia, followed by Europe with roughly 35%, and Latin America with about 20%.
South Korea and China are the top two countries importing our LNG so far this year, and those two alone account for over 1/4 of all cargo deliveries.
Our operations and maintenance teams at both Sabine Pass and Corpus Christi have done an exceptional job thus far in 2021, managing our operating plans to maximize asset availability and LNG production in our facilities, enabling us to increase our production forecast for the year, all while ramping Corpus Christi Train three to four rates and stable operations quickly and safely.
We look forward to the same performance with the addition of Sabine Pass Train six early next year.
Speaking of Train 6, a significant milestone was met last month with the introduction of fuel gas into the train, signaling the start of early commissioning activities.
At the site, 17 systems were turned over to the start-up team in June, another 12 in July.
With the project approximately 90% complete Bechtel continues to progress this project against an accelerated schedule.
Turn now to Slide six where we'll provide a brief review of Stage three and the Corpus Christi site overall as the Stage three project comes into focus with our recent commercial momentum and the constructive market we are in.
As a reminder, our Stage three project at Corpus Christi is fully permitted, and if fully constructed, would have over 10 million tons of LNG capacity per year.
Stage three enjoys brownfield project economics as it will utilize a significant amount of shared infrastructure constructed as part of trains one through three, which we believe make Stage three a very cost-competitive LNG capacity addition.
As for the path to FID, we have said this before, we will maintain our discipline to help ensure that the risk and return profile of Stage three is consistent with that of the first nine trains we've built.
To that end, our origination team is focused on commercializing additional capacity from the project, and we are working closely with Bechtel on finalizing the EPC contract.
We remain committed to our growth capital investment parameters which help ensure discipline in our capital investment decisions and the sanctioning of projects only when they meet the high standard we have set for all FIDs to date.
Our excitement around the potential investment opportunities at the Corpus Christi site doesn't end with Stage 3.
As you may recall, we have acquired approximately 500 acres adjacent to our existing site, which provides us with a platform for major future development potential.
Any future capacity developed at this site may be designed to leverage already in place to provide substantial cost advantages.
As you can see from the aerial view of the land position at Corpus Christi, the site possesses a substantial running room for growth well beyond Stage 3.
And we may develop additional infrastructure there over time, especially as Stage three moves closer to FID.
Turn now to Slide seven.
Last month, we were proud to publish our second annual corporate responsibility report entitled Built for the Challenge.
This report, the product of a deep cross-functional effort across the entire company, provides insight into key actions taken by Cheniere to ensure business resiliency in 2020 and beyond, and is the latest example of our transparency on ESG-related issues and how we are building sustainability into our business model.
Built for the Challenge is the latest milestone in our ESG journey, which has seen tremendous progress in 2021.
Highlights of achievements reached thus far through 2021 include the announcement of our cargo emission tags, the climate scenario analysis we published, our first carbon-neutral LNG cargo we announced last quarter, our participation in the first-ever study to measure methane emissions on an LNG carrier, and our collaboration with leading academic institutions and several of our upstream natural gas suppliers to implement QMRV or greenhouse gas emissions performance at natural gas production sites across several bases.
And finally, earlier today, we announced the publication of our peer-reviewed greenhouse gas life cycle assessment, or LCA, which utilizes greenhouse gas emissions data specific to our LNG supply and will be the foundational analytical tool to estimate greenhouse gas emissions to be included in our CE tags that we provide our customers.
The items highlighted on this slide are all steps on a continuous path, and we look forward to leading our industry forward in this area, helping to ensure the long-term sustainability of natural gas and helping all participants among the LNG value chain realized the full environmental benefits of our LNG.
Globally, the pace of recovery in LNG markets from the COVID-related lows has exceeded most expectations, especially when looking at demand growth in the fourth quarter of 2020 through the first quarter of '21.
This trend continued in the second quarter with not only meaningful growth over the same period in 2020, but also notably well above the five year range, supporting our constructive market views on '21 and subsequent years.
We continue to see a fundamentally tight market over the next several years breaking the trend for seasonal demand norms even with rebounding LNG supply.
As reflected by the historically high LNG prices in both Europe and Asia, markets remain tight through this past winter, with global LNG demand growing by 9% year-over-year in the second quarter, slightly surpassing the fourth quarter demand levels despite the second quarter historically being a shoulder period in the market.
Asia and Europe exited spring with sizable storage deficits as the cold winter in Asia and the colder-than-normal spring in Europe, intensified the interbasin competition for LNG supply.
Asia and Europe's robust demand caused spreads between the two regions to narrow, with European netbacks even surpassing those in Asia in order to attract imports amid insufficient LNG supply availability in Q2.
Global LNG production rebounded 8% year-over-year in Q2, primarily on U.S. volume growing 80% compared to last year when customers were exercising their cargo cancellation rights.
Through the first half of the year, U.S. LNG production is up 43% year-over-year approximately 35 million tons.
However, non-U.S. volumes have lagged more than expected during most of '21 so far and remain below 2020 levels in June.
These non-U.S. volumes were impacted by feed gas constraints in Trinidad, and maintenance and outages in North Africa and other LNG-producing regions.
Consequently, less LNG flowed to Europe year-over-year as it competed for cargoes with Asia and Latin America.
Overall, U.S. LNG flows to Asia increased over 10% in the first half of '21 to 48% of total U.S. exports compared to 38% in the first half of 2020.
Meanwhile, flows to Europe dropped over 15 percentage points from 51% to 34% year-over-year, coinciding with natural gas storage inventories again at multiyear lows.
In Europe, weather-driven demand supported the gas market well into the injection season.
High carbon prices and low wind generation in June further lifted European gas demand for power generation.
However, upstream maintenance across Northwest Europe, flat Russian gas pipeline flows and lower LNG imports, capital market tight and storage inventories at a significant deficit relative to historic norms.
LNG flows into Europe were 9% or roughly 2.1 million tons lower year-on-year in Q2 as a result of tight global LNG supply balances.
European inventories currently stand at record low levels, with a 16 BCM deficit to the five year average, which is equivalent to roughly 170 LNG cargoes.
These supply and demand dynamics were reflected in European gas prices during the second quarter, with Dutch TTF settlement averages increasing by over $6 an MMBtu to $7.82 in MMBtu and almost 350% increase year-over-year.
This average was higher than JKM as the basins competed for import volumes.
Similarly, in Asia, the continued call on LNG imports to satisfy growing natural gas demand was driven by an early start to the summer, a surge in economic recovery and industrial activity in China, along with heavy nuclear maintenance in Korea.
Jack mentioned a moment ago that Korea and China alone imported over 25% of all our LNG production year-to-date.
Asia imported 65 million tons of LNG in the second quarter, an increase of eight million tons or 14% year-on-year.
The JKT region contributed over 20% of that growth despite higher nuclear availability in Japan.
10 nuclear units have restarted in Japan as of July 21, the highest number of operating units since the Fukushima disaster over a decade ago.
Japan's nuclear availability was offset by lower nuclear output in Korea and Taiwan.
A particular note, Taiwan retired 25% of its nuclear fleet in the second quarter and has a stated goal to become nuclear-free by 2025.
So this should continue to support the LNG market in the region for years to come.
The majority of growth in Asian LNG demand, however, came from Mainland China.
Imports in China surged 22% to 20 million tons in the second quarter, making China the largest LNG importer on a global basis surpassing Japan.
LNG imports were supported by hotter-than-normal weather in South China, rising industrial gas demand, and increased power sector demand amid low hydro levels.
In addition to Asia and Europe, we saw a notable uptick in Latin American demand as Brazil's imports reached multiyear highs due to severe drought conditions and the resulting lack of hydropower.
Latin America's imports increased more than 70% year-on-year in the second quarter, with Cheniere-produced cargoes making up nearly 40% of total imports.
Flows into Latin America represented 17% of total U.S. exports, increasing over 5% from the comparable 2020 period.
Clearly, both near-term and long-term dynamics in the LNG market provide a highly constructive backdrop for us to execute on our short-, medium- and long-term LNG origination strategies.
With highly flexible portfolio volumes available today and cost-competitive brownfield incremental capacity that we are actively commercializing, we possess an ideal platform to meet the growing and evolving needs of LNG customers worldwide.
As natural gas solidifies its place as a foundational fuel in a global transition to lower carbon energy sources, LNG consumers and producers are seeking to optimize the environmental performance of LNG throughout the value chain.
Jack reviewed some of the recent steps that we at Cheniere have taken and will continue to take as part of our broader strategy focused on data and transparency through the LNG life cycle, with the ultimate goal of emissions abatement in order to maximize the climate benefits of our LNG for all.
The growing focus on environmental stewardship and performance is beginning to be reflected in pricing mechanics for energy.
In the European Union, carbon prices reached all-time highs in the second quarter, reaching over EUR55 per ton during the quarter and continuing higher to nearly EUR60 per ton, or roughly $3.50 an MMBtu equivalent in early July.
Industry commentators view the growth and increased liquidity in the emissions trading market to be an enduring trend as demand for allowances and offsets growth across the globe, driven by decarbonization efforts.
While Europe is by far the most active market for exchange-traded carbon allowances, we're seeing increased activity in other parts of the world as well, especially Asia.
China recently launched its own national emissions trading, market making it the largest carbon market in the world at its onset.
We believe other markets will follow this trend as progress on climate action will continue to buoy demand for cleaner burning fuels.
This is relevant to Cheniere and the LNG market as the appetite for carbon-neutral LNG is increasing, and carbon offsets our necessary tool in certifying cargoes as carbon-neutral.
While this market is nascent today, as of mid-July, there were 12 carbon-neutral LNG cargoes in 2021 globally.
There is significant interest in these offerings among both buyers and sellers.
Given our size, scale and progress to date, leading on data-driven environmental transparency and performance and some of the other efforts Jack highlighted, Cheniere expects to play a prominent role in this regard from our life cycle analysis and the cargo emission tags and our QMRV collaboration, we aim to offer increased environmental transparency while providing low emission solutions and competitively structured products for our buyers.
I'm pleased to be here today to review our second quarter financial results and our increased full year 2021 guidance.
Turning to Slide 13.
For the second quarter, we generated revenue of approximately $3 billion, consolidated adjusted EBITDA of approximately $1 billion and distributable cash flow of approximately $340 million and a net loss of $329 million.
As Jack mentioned, our results for the quarter were negatively impacted by the accounting treatment for our derivative instruments, which includes our IPM agreements.
As we have discussed in prior quarters, our IPM agreements, certain gas supply agreements and certain forward sales of LNG qualify as derivatives and require mark-to-market accounting, meaning that from period to period, we will experience gains and losses as movements occur in the underlying forward commodity curves.
This accounting treatment, coupled with significant volumes, long-term duration and volatility in price basis for certain contracts, most notably our IPM agreements, will result in fluctuations in fair market value from period to period.
While operationally, we seek to eliminate commodity risk by matching our natural gas purchases and LNG sales on the same pricing index, our long-term LNG SPAs do not currently qualify for mark-to-market accounting, meaning that the fair market value impact of only one side of the transaction is often recognized on our financial statements until the sale of LNG occurs.
The unfavorable pre-tax impact from changes in the fair value of our commodity and FX derivatives during second quarter 2021 was approximately $672 million, most of which was noncash, but was the primary driver of our recognized net loss for the second quarter.
For the second quarter, we recognized in income 522 TBtu of physical LNG, including 508 TBtu from our projects and 14 TBtu from third parties.
Approximately 80% of these LNG volumes recognized in income were sold under long-term SPAs or from volumes procured under our IPM agreement.
We received no cargo cancellations and had no impact to revenue recognition timing related to cargo cancellations in the second quarter.
We received $36 million related to sales of commissioning cargoes in the second quarter from LNG, which was in transit at the end of the first quarter, corresponding to six TBtu of LNG.
As a reminder, amounts received from the sale of commissioning cargoes are offset against LNG terminal construction and process, net of the costs associated with production and the delivery of those cargoes.
As you may recall, we established an initial debt reduction for 2021 to pay down at least $500 million of outstanding debt.
During the second quarter, we fully repaid the remaining outstanding borrowings under Cheniere's term loan and fully repaid Cheniere's convertible notes due May 2021, with $500 million of cash-on-hand and the remainder about $130 million from borrowings under the CEI revolver.
So as of June 30, we have already achieved our minimum full year goal of $500 million in debt reduction.
With our cash flow profile only improving in the back half of the year, we are poised to exceed that amount this year, along with broadening out our capital allocation plans.
Continuing with the balance sheet management, since our last call, we have locked in a further $200 million of long-term amortizing fixed rate notes at SPL on a private placement basis, with multiple counterparties.
Year-to-date, we have locked in approximately $347 million of such notes, which will fund on a delayed draw basis in late 2021 and will economically refinance a portion of SBL's outstanding 6.25% notes due 2022.
This continued progress on prudently managing the balance sheet through this new structure, which goes hand-in-hand with our efforts on execution and operational performance, was once again recognized by the credit rating agencies during the second quarter, as S&P Global Ratings changed the outlook on the credit ratings of both Cheniere and CQP to positive from negative, as we mentioned on the May call.
S&P cited the EBITDA and cash flow growth resulting from the successful completion of eight trains, accelerated schedule of Train 6, and the expectation of significant improvement in leverage levels over the next two years as we execute on our stated deleveraging plan.
Jack and Anatol have both discussed the success we've had so far in 2021 on marketing and origination, with 12 million tons of midterm deals done as well as the recent 15-year Tourmaline IPM transaction.
The execution of these transactions not only bring Stage three into greater focus, but also supports our long-term balance sheet management priorities by bringing significantly increased cash flow visibility out into the 2030s, given the fixed fees that have always been the bedrock of our commercial strategy.
Aggregating the midterm and IPM transactions we've completed year-to-date, we have sold approximately 25 million tons of LNG which will generate over $3 billion in fixed fees into the next decade, which clearly has derisked our cash flows further.
Turning now to Slide 14.
As previously mentioned, today, we are increasing our guidance ranges for full year 2021 consolidated adjusted EBITDA and distributable cash flow by $300 million and $200 million, respectively, bringing total increases to $700 million and $600 million, respectively, above the original ranges we provided in November of last year.
Our revised guidance ranges are $4.6 billion to $4.9 billion in consolidated adjusted EBITDA and $1.8 billion to $2.1 billion in distributable cash flow.
Today's increase in guidance is largely driven by the continued improvement in global LNG market, pricing and our ability to capture higher netbacks on our open portfolio volume.
A production forecast we have again revised upward due primarily to maintenance optimization.
And lastly, some added lifting margin due to higher Henry Hub prices.
DCF guidance isn't moving up quite as much as EBITDA guidance due to some incremental EBITDA accruing at CQP and SBL, where we have accelerated capital spend at Sabine since Train six is ahead of schedule.
So we expect to realize the benefits over time in DCF as CQP's distributions increased further in the coming years once fully operational.
When we updated guidance on the last call, one of the primary drivers was an improvement in market margins from approximately $2 in February to approximately $3 in May.
Since then, that margin has gone up by another over $3, and our production forecast has increased as well.
The incremental volume that's been added to the production forecast is all in the third and fourth quarters.
And although it's single-digit number of cargoes in terms of quantity, the impact on the financial forecast is meaningful with netbacks where they are.
We currently forecast that the dollar change in market margin would impact EBITDA by less than $25 million for the rest of the full year 2021.
As we have now sold almost all of our production for the remainder of the year, we would only provide another update if that were to change materially.
As well, given the little remaining exposure to the market we have, we are confident in our ability to deliver results within these upwardly revised guidance ranges for the full year.
While we don't guide to free cash flow for over a year now, we have described 2021 as Cheniere's free cash flow inflection point, and that is certainly materializing in the results we've generated so far this year and in our forecast for the balance of the year.
Entering 2021, we forecasted free cash flow at around $1 billion for the year.
As Bcf guidance has moved up $600 million in the subsequent six months, it's reasonable to think our FCF forecast has moved up largely in lockstep with DCF.
So over $1.5 billion.
This incremental cash flow puts us in a great position from a capital allocation perspective, especially as we work to finalize our comprehensive capital allocation strategy and framework.
With that process nearing completion, we expect to be able to provide that to you in the coming months and before the 3Q earnings call in early November, where we will provide you with the first look at 2022 guidance.

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cheniere energy second quarter earnings.

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