Cheniere Energy, Inc. Q2 FY2020 Earnings Call

Good day, and welcome to the Cheniere Energy Inc. 2Q 2020 Earnings Call and Webcast. Today's conference is being recorded. At this time, I'd like to turn the conference over to Randy Bhatia, VP of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning everyone, and welcome to Cheniere's second quarter 2020 earnings conference call. The slide presentation and access to the webcast for today's call are available at cheniere.com. Joining me today are Jack Fusco, Cheniere's President and CEO; Anatol Feygin, Executive Vice President and Chief Commercial Officer; and Zach Davis, Senior Vice President and CFO. Before we begin, I would like to remind all listeners that our remarks, including answers to your questions may contain forward-looking statements and actual results could differ materially from what is described in these statements. Slide 2 of our presentation contains a discussion of those forward-looking statements and associated risks. In addition, we may include references to certain non-GAAP financial measures such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these measures to the most comparable GAAP financial measure can be found in the appendix to the slide presentation. 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 3. 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. After prepared remarks, we will open the call for Q&A. I'll now turn the call over to Jack Fusco, Cheniere's President and CEO.

Thank you, Randy, and good morning everyone. I'm pleased to be here today to review our results from the second quarter of 2020. We had an outstanding quarter, especially considering the impact of the COVID-19 pandemic on the global economy and energy markets, on how people live and work and how companies worldwide have had to adapt through everyday operations. The current environment has presented challenges, but the resiliency of our customer-oriented business and the professionalism and resolute focus of the Cheniere workforce continues to deliver outcomes, which benefit all of our stakeholders. The second quarter was highlighted by a number of significant achievements across multiple phases of our business and our visibility on achieving our 2020 financial targets remains steadfast. Before I get started though, I'm sure you noticed this morning's personnel announcement of the departure of Michael Wortley, as Cheniere's CFO. I want to personally thank Michael for standing by my side over the last four years. And more importantly, for all of his contributions to Cheniere's success over the last close to 16 years. Michael will be missed and we wish him well on his future endeavors. Succession planning and employee development are core principles here at Cheniere and for our Board. And I am pleased to announce that effective immediately Zach Davis, our Senior Vice President of Finance will assume the role of Chief Financial Officer. Zach has been with Cheniere for nearly seven years, during which time he has led our capital markets activities and has also been responsible for capital planning, financial planning and the corporate budget. Please join me in congratulating Zach on his new role and you will hear more from him later on this call. Now turn to slide 5. In the second quarter of 2020, we generated $1.4 billion of consolidated adjusted EBITDA and distributable cash flow of approximately $570 million on revenues of $2.4 billion. This resulted in net income attributable to common stockholders of approximately $200 million. Despite continued challenges in the LNG market environment, driven by short-term supply and demand dynamics that are amplified by the impacts of the pandemic. I'm pleased today to reconfirm our 2020 full year guidance ranges of $3.8 billion to $4.1 billion in consolidated adjusted EBITDA and $1.0 billion to $1.3 billion in distributable cash flow. This further illustrates Cheniere's strength and resiliency of our business model and contract structures and our ability to execute on our plan. During the second quarter our long-term customers further utilized the optionality in their contracts by canceling cargoes at both SBL and CCL. As you know, this results in customers paying us the fixed liquefaction fee related to those cargoes and extinguishes our obligation to produce those cargoes. As we discussed in our call last quarter, when this situation occurs we recognize the revenue associated with those cargoes upon receipt of the notice of cancellation, which creates a timing mismatch when looking at our business on a quarter-to-quarter basis. Zach will discuss this in more detail in his remarks. During the second quarter, we produced and exported 78 cargoes of LNG. Since the start-up of operations, we have produced and exported over 80 million tons of LNG from our projects, which have reached over 35 countries and regions around the world. In May, the date of first commercial delivery or DFCD was reached under the long-term SBAs related to Train 2 at Corpus Christi. We have successfully onboarded these long-term customers and we welcome them to the Cheniere complex. While the environment in the spot LNG market remains relatively weak, I'm encouraged that dynamics in the LNG market are improving and unfolding as we have expected. As worldwide economies have begun to recover from the pandemic, we are beginning to see short-term gas prices stabilize and spreads are beginning to improve as we look into the winter months and beyond. The long-term fundamentals supporting our business remain firmly intact as a structural shift to clean burning natural gas continues to progress. Anatol will provide a more fulsome update on the global LNG market momentarily. Our current construction efforts continue our legacy of best-in-class execution. Bechtel is constructing Corpus Christi Train 3 and Sabine Pass Train 6 on accelerated schedules, well ahead of guaranteed timelines and within budget. Corpus Christi Train 3 is over 90% complete and Bechtel commenced early commissioning activities on Train 3 during the second quarter introduced first fuel gas in early July and is maintaining a substantial completion estimate of the first half of next year. We certainly look forward to taking care custody and control of the eight train from Bechtel ahead of schedule and within budget early next year. Sabine Pass Train 6 is approximately 64% complete. And Bechtel has recently informed us of an acceleration to the Train 6 timeline now projecting substantial completion to be achieved in the second half of 2022 ahead of the previous estimate of the first half of 2023. In addition, we recently issued full notice to proceed to Bechtel on the construction of the third marine berth at Sabine Pass and that project is expected to be complete in the first half of 2023. Our finance team was very busy during the second quarter and they were extremely successful in executing our financial strategy. In aggregate, we raised almost $4.7 billion through early July strategically addressing near-term maturities and replacing higher cost debt across multiple entities within the Cheniere structure. I'll touch upon a couple of the transactions. First, in May, we refinanced the nearest term maturity in our complex by issuing $2 billion, a 4.5% notes due 2030 at Sabine Pass liquefaction. Then we raised a three-year delayed draw term loan at Cheniere of almost $2.7 billion in order to redeem the 2025 convertible notes issued by Corpus Christi Holdco II and a portion of the 2021 convertible notes issued by Cheniere. This flexible cost effective bank capital enables us to settle the convertible notes with cash as opposed to issuing equity, preventing dilution, which we had previously modeled in our run rate guidance. While we did not repurchase shares under our share repurchase program during the second quarter these strategic transactions resulted in a reduction in run rate share count of over 40 million shares. That's all of Zach's thunder that I'll steal on the refinancings. But investors should recognize that these are material accomplishments, which not only address near-term maturities and relatively high cost debt, but also demonstrate our strong ability to access the capital markets even in this period of volatility and uncertainty, which speaks to the reputation and strength of Cheniere's business with our banks and institutional capital providers. Now turn to slide 6. In early July, we published our inaugural corporate responsibility report titled, First and Forward. The publication of this report represents a significant step forward in Cheniere's commitment to transparency and sustainability reporting and will form the foundation of our disclosures around ESG risks and opportunities going forward. The development of this report was led by Chris Smith, our Senior VP of Policy Government and Public Affairs; our dedicated climate and sustainability team; and by a cross-functional team of subject matter experts from nearly every business unit within the company because ESG issues touch nearly every business unit within the company. The report identifies and reports on approximately 70 key disclosures across six key themes; climate, environment, workforce, health and safety, community and governance. Our key themes and disclosures in line with the recommendations of leading reporting standards such as the taskforce on climate related financial disclosures, or TCFD, the sustainability accounting standards board and others. Sustainability is a priority at Cheniere, and our urgency to address the key considerations of ESG issues is core to our operations and shared values. As such we are committed to transparency and how we report on these issues. We have an excellent evolving story to tell on environmental social and governance issues and we hope this message is communicated clearly in our inaugural report. And now, I'll turn the call over to Anatol, who will provide an update on the LNG market.

Thanks Jack and good morning everyone. Please turn to slide 8. I'll start by reviewing the trends we observed throughout the first half of 2020, then highlight the factors that we think will continue to impact the global LNG supply and demand dynamics going forward. Many of these factors started to become apparent late in the second quarter. And we believe they bring into focus two main themes, the flexibility of the global LNG supply system and the resilience of LNG as a fuel choice. Global LNG supplies increased 6% year-on-year in the first half of 2020, reaching 188 million tons. The U.S. contributed most of this LNG production growth with exports rising 64% year-on-year to approximately 26 million tons. However, supply growth for the first half of this year was at a lower rate than the significant growth in LNG supply that began several years ago, as the current cycle of supply additions started to slow and as global liquefaction supply adjusted output downwards to adapt to the impact of COVID-19 pandemic on gas demand. Most measures introduced to contain the coronavirus, including city lockdowns and restrictions on travel, impacted gas demand and LNG markets in the second quarter. With weak LNG demand in Asia, more global production was pushed into Europe, resulting in record seasonal gas inventory levels and exerting downward pressure on spot gas prices in Europe and Asia. During the second quarter, TTF averaged $1.76 per MMBtu, approximately 60% lower than the comparable 2019 period, while JKM averaged $2.58 in MMBtu during the second quarter, 50% lower year-on-year. By late May, the combination of supply side flexibility demonstrated by U.S. and global operations with a gradual recovery in LNG demand in India, China, and the Middle East had reduced the flow of surplus LNG cargoes to Europe. Global LNG supply trended down for the third consecutive month in June, dropping slightly below the levels of the second quarter of 2019. The global supply utilization decreased to 82% on average in the second quarter this year versus 93% in the first quarter. As a result, LNG supply growth turned negative in the second quarter, declining by about one million tons, ending a six quarter run of supply additions which averaged close to 10 million tons each quarter. While it’s too early to call this a bullish market, we believe the recent slowdown in production is constructive in the near term and reduces the risk of reaching maximum natural gas storage levels too early in the year at European storage facilities. Now turn to slide 9, where I will address the European market in some more detail. The four residual LNG cargoes to Europe continued through a significant portion of the second quarter despite gas consumption declines, resulting from measures put in place to fight the spread of COVID-19. LNG imports into Europe grew 6.7 million tons or about 15% year-on-year during the first half of 2020. Consumption data, however, suggests that gas demand in Europe declined nearly 8% or 4.5 Bcf a day during this period due to a mix of weather and COVID-19 impact. Sharp declines in LNG imports into Europe began in June and have continued into July. These decreases have played an important role in helping ease the European storage surplus from 15 BCM or over 0.5 trillion cubic feet in May to six BCM or just over 200 Bcf at present. LNG is not the only lever that impacts oversupply risk in the current gas market environment in Europe. As you might expect, pipeline supplies which are the largest component of European gas supply saw a large decline in the first half of 2020, decreasing by 6.8 Bcf a day year-on-year. The reduction in LNG flows into Europe in June is in large part a direct result of the turndown in global supply that I highlighted on the prior slide. The ability of global LNG buyers to exercise load management more effectively whether by lower contract dispatch or lower U.S. cargo nominations in combination with destination flexibility has given them important new tools to help manage the impact of adverse events. As a result, this has helped increase the flexibility and resilience of the global LNG trade. Finally in Europe, despite robust renewables output during the quarter as well as a decline in total electricity demand, the price competitiveness and elasticity of LNG have helped facilitate gas dispatch contributing to its resilience versus pipeline imports and other competing fuels. Now let's move to slide 10 to look at supply-demand dynamics in Asia. Total second quarter LNG imports into Asia remained flat throughout the quarter and only declined slightly year-on-year by less than one million tons as demand declines in Japan and South Korea were largely offset by a swift recovery in Chinese gas demand and double-digit LNG import growth rates in Taiwan and Thailand. Year-on-year LNG imports increased 20% in China, 14% in Taiwan and 10% in Thailand, while Japan and South Korea LNG imports declined by 9% and 8% respectively. In the second quarter, as these markets dealt with the impact of COVID on gas demand as well as demand fallout from a mild winter. However, looking forward, we see some positive factors for these two markets. Recently South Korea's Ministry of Trade, Industry and Energy introduced additional policy measures that are expected to support gas demand. The government plans to lower retail natural gas prices for households and industries by an average of 13.1% beginning in July to reflect lower LNG import costs. In Japan, operational nuclear capacity fell to its lowest level in two years in June and is expected to further decline in the coming months, as capacity is expected to be taken off-line as a result of not meeting antiterrorism requirements. Only four out of nine restarted nuclear power units are expected to be operating by November of this year, which could anchor additional LNG demand. Through the first half of 2020, imports into Asia increased year-on-year with most of the support for demand coming from India, Taiwan, Thailand and China. In China, gas demand in April and May, increased by 8% over 2019 levels compared to a growth rate below 2% in the first quarter. After a steep economic contraction in the Chinese economy in February, China's manufacturing PMI has been in expansion mode for four consecutive months since March. Also, China's second quarter GDP was up 3.2% year-on-year, a rebound from a 6.8% drop in the first quarter. These factors all supported the increase in China's LNG demand which also gained market share by displacing pipe imports from Central Asia. Similarly, in India, despite strict virus containment measures, LNG use in the first half of 2020 increased 15% year-on-year to just over three Bcf a day while domestic gas production declined approximately 15% to an average of just over 2.5 Bcf a day in the January to May period. Overall, gas demand in that same period increased by 6% to about 5.5 Bcf a day. A similar pattern of prioritizing LNG imports over domestic gas production was seen in Thailand, where LNG imports also rose about 14% to just over 3 million tons in the first half of 2020, as a result of favorable economics and the flexible attributes of LNG. To conclude, COVID-19 has impacted industrial activity and has had adverse effects on gas demand worldwide. This was particularly notable in key LNG markets in the second quarter. Towards the end of the quarter, we saw a slowdown in LNG production and decreased flows of excess cargoes to Europe. We believe this supply response is constructive in the near term and reduces the risk of reaching natural gas storage capacity at European storage facilities. While risks still remain in the near-term, as a result of ample storage inventories and reduced overall levels of economic activity, we see some positive factors for gas demand that are supportive of a near-term recovery in key LNG markets. We also reiterate that the long-term fundamentals remain attractive for LNG as a flexible and cleaner fuel. We see a supply-demand gap of over 100 million tons by 2030 driven mainly by requirements from Asia's growing economies to feed new power generation and industrial demand that displaces coal and/or supplements declining domestic gas production. We continue to see interest from global players to enter the LNG import market from new players in existing importing countries to incumbents trying to expand into new markets, such as Africa and East Asia. We believe these markets require sustainable energy solutions including competitive LNG. As more than 150 million tons per annum of potential LNG capacity has been delayed or canceled and as high-risk projects continue to be sidelined, we at Cheniere are well-positioned and ready to address long-term supply shortages and capture demand opportunities for competitively priced LNG in the global market. Before turning the call over to Jack, I'd like to thank Michael for his partnership and tireless contributions to Cheniere and I wish him nothing but the best in the next chapter of his life. Likewise, I'd like to join Jack in congratulating Zach on becoming CFO, and I will now turn the call over to him to review our financial results.

Thanks, Anatol, and good morning, everyone. I'm excited to be here this morning. Over the past few years, I've met many of you at investor events, conferences, or during our capital markets transactions. I look forward to connecting with more members of the investment community, virtually for now, but hopefully in person soon. Michael certainly leaves big shoes to fill, but I'm starting my role as CFO with the advantage of having had him as both a boss and a mentor for nearly seven years since he hired me at Cheniere in 2013. During his leadership, we've raised over $50 billion in capital and achieved FID on five trains, including the first greenfield LNG project in the Lower 48. Together, we developed Cheniere's capital allocation framework and balance sheet strategy, successfully elevating both Sabine Pass and Corpus Christi to investment grade. I fully intend to continue executing those long-term plans. Michael delivered on Cheniere's long-promised financial transformation that coincided with our transition from development to operations, and Cheniere is now in a strong financial position with investment-grade-rated projects, access to cost-effective capital, and the financial flexibility to reduce debt, grow, provide capital returns, or all of the above. When Michael became CFO, we had no EBITDA, and our financial statements mostly had negative numbers. However, this year we expect to generate around $4 billion of EBITDA, and we are approaching an inflection point regarding free cash flow. I will certainly miss working alongside Michael daily, but with his guidance and mentorship over the past seven years, I'm confident in my ability to lead a smooth transition and continue our progress. For the second quarter, we generated net income of $197 million, consolidated adjusted EBITDA of approximately $1.4 billion, and distributable cash flow of around $570 million. For the first half of the year, our net income was $572 million, consolidated adjusted EBITDA was over $2.4 billion, and distributable cash flow was about $830 million. During the first half of the year, we exported 727 TBtu of LNG from our liquefaction projects. In the second quarter, we exported 274 TBtu of LNG, or 78 cargoes, from our liquefaction projects. Total exports were nearly 40% or about 182 TBtu lower than the first quarter, primarily due to long-term customers choosing not to take delivery of certain cargoes. Additionally, we satisfied some marketing sales using third-party sourced cargoes during the second quarter. For the second quarter, we recorded an income of 305 TBtu of LNG produced at our liquefaction projects and 34 TBtu sourced from third parties. Approximately 77% of the volumes recognized in income during the second quarter were sold under long-term SBAs or IPM agreements, with the remaining 23% sold by our marketing affiliate, either in the spot market or via short and medium-term contracts. Volumes sold under SBA or IPM agreements decreased by around 113 TBtu compared to the first quarter, mainly due to long-term customers not lifting certain cargoes, partially offset by reaching the first commercial delivery under the long-term agreements related to Corpus Christi Train 2 on May 1. In the first half of the year, we recognized an income of 764 TBtu of LNG from our liquefaction projects and 48 TBtu sourced from third parties. As Jack mentioned, our second-quarter results were affected by the timing of revenue recognition related to cargo cancellations. When customers notify us that they do not intend to take specific cargoes, we recognize the associated revenue—the fixed fees for those cargoes—at the time we receive that notice. During the second quarter, we recognized over $700 million in revenue related to canceled cargoes, including $458 million for cargoes scheduled to be lifted in the third quarter that customers declined. Excluding the impact of those canceled cargoes and the $53 million from cancellations recognized in the first quarter, our total revenues for the second quarter would have been $2 billion, and approximately $4.65 billion for the first half of the year. The effect of cargo cancellations on consolidated adjusted EBITDA mirrors the impact on revenue. The timing of how we record fixed fees from canceled cargoes is important, and while fluctuations might occur quarter-to-quarter due to cancellation numbers, the overall effect on our financials remains neutral over time. When the global LNG market stabilizes, the current effects will reverse, and we may experience a quarter with lower EBITDA. For the second quarter, income from operations was $937 million, down over $400 million from the first quarter, mainly due to a lack of net mark-to-market gains from commodity derivatives which we saw in the first quarter, and increased costs related to the COVID-19 pandemic, slightly offset by the $458 million in revenue from canceled cargoes. Excluding the impact of out-of-period cancellations, the total margins on LNG remained roughly consistent from the first to the second quarter, as a minor decrease in volumes sold was balanced by an increase in margins per MMBtu due to a higher proportion of sales under long-term contracts. Net income attributed to common stockholders for the second quarter was $197 million, or $0.78 per share, a decrease of over $175 million from the first quarter. This decline was primarily driven by reduced income from operations and increased losses from debt modifications or extinguishments, slightly countered by decreased losses on interest rate derivatives and a reduction in income tax expenses. During the second quarter, we executed several financial transactions to manage upcoming debt maturities. In May, SPL issued $2 billion in senior secured notes due 2030 and used the proceeds to refinance its senior secured notes maturing in February 2021. In June, we established a $2.62 billion three-year delayed draw term loan credit agreement, which was increased in July to $2.695 billion to address the 11% CCH Holdco II convertible notes due 2025 and our 2021 convertible notes. In July, we utilized the term loan to pay off all outstanding 11% convertible notes at CCH Holdco II with cash at a price of $1,080 per $1,000 principal amount. We also repurchased $844 million of the 2021 convertible notes at negotiated prices from a limited number of investors. We plan to use the remaining capacity under the term loan facility, along with cash on hand, to repay or buy back the remaining 2021 convertible notes. Following these transactions, about $465 million of principal remains outstanding for the 2021 convertible notes, and there's undrawn capacity of $372 million on the CEI term loan. These convertible note transactions address a significant portion of near-term maturities, help eliminate the most expensive debt in our structure, simplify our capital structure, and prevent substantial share dilution that would have occurred if those notes were converted to shares. These actions reduce our expected run rate share count by over 40 million shares, or around 15%, thereby enhancing our anticipated run rate distributable cash flow per share. With the 2021 maturities effectively handled, our next maturity in the Cheniere complex is not until 2022. Meanwhile, we will continue managing our maturity profile by opportunistically refinancing or reducing callable bank debt as market conditions allow. We did not repurchase any shares under our share repurchase program in the second quarter, but we made significant progress in lowering our run rate share count by redeeming convertible notes with cash, albeit with an increase in our consolidated leverage. Nevertheless, we remain committed to the capital allocation priorities outlined in mid-2019, including lowering our consolidated leverage to achieve investment-grade credit metrics across our structure, targeting a consolidated debt-to-EBITDA ratio in the mid to high four times range. Refinancing the convertible notes with debt was not part of our original run rate guidance, and we are dedicated to using excess capital for debt reduction to reach our leverage goals. This will be our short- to medium-term capital allocation focus. Last week, we announced the quarterly distribution for CQP, which will conclude the subordination period and trigger the conversion of $135 million in CQP subordinated units owned by Cheniere into common units of CQP on a one-for-one basis, further streamlining our capital structure. The distribution payment and subordinated unit conversion are expected in mid-August. This week, Moody's Investor Service upgraded its rating of CCH's senior secured debt from Ba1 to Baa3. CCH is now rated investment-grade by all three rating agencies, reflecting the strength of our project economics and the derisking of the project over time through increased equitization and progress in project completion. Before I turn the call over for Q&A, I want to review our 2020 guidance. As Jack mentioned, we are confident in our path to meet our financial objectives for the year, despite ongoing market challenges. Today, we are reaffirming our 2020 full-year guidance of consolidated adjusted EBITDA of $3.8 billion to $4.1 billion and distributable cash flow between $1 billion and $1.3 billion, as we track toward the lower end of the EBITDA guidance range. With nearly all of our LNG production capacity hedged for this year, a $1 change in market margin would lead to an approximate $35 million change in consolidated adjusted EBITDA for the year, with that sensitivity leaning towards the upside given current market margins. That concludes our prepared remarks. Thank you for your time and interest in Cheniere.

Thank you. We'll take our first question today from Christine Cho with Barclays.

Good morning, everyone. First, I want to congratulate Zach and express my eagerness to collaborate further. I also want to send our best wishes to Michael. Since the second quarter was quite challenging, could you share the opportunities you found for CMI with third-party cargo? I was somewhat surprised by the volume of third-party cargo loads, but I also noticed reports that you issued a tender for LNG supply during the quarter. Was that an opportunity to reduce production costs at your facility by acquiring lower-priced cargoes compared to what you could supply your customers for? Should we expect a dip in prices later this year as well?

Good morning, Christine, it's Anatol. Thanks for the questions. I would say, in general, we are a fairly sizable player in the market and have demonstrated over the last four years a lot of commercial flexibility and ability to respond to market conditions and roll with these punches. As you know, we were quite substantially hedged for this year and that as markets all over the world became volatile and correlated presented a number of opportunities to us. You see that in the numbers of third-party sourced cargoes in the second quarter and allowed us to genuinely optimize the positions that we had on intra-quarter. I won't comment on specific tools and outcomes of attempting to leverage those tools, but suffice it to say that there were a number of bites at the apple that market's presented as they rebalanced throughout this period.

And I'll say Christine, this is Jack. We have tested all aspects of our business model, including the flexibility and reliability of how we design and operate these trains. The supply response from the U.S. LNG industry to low prices is what we were designed to handle, and that’s exactly what we did. We seized opportunities from other facilities that couldn’t respond as quickly, allowing us to purchase LNG at significantly lower prices and have it delivered to meet our CMI requirements.

And assuming that market is stable right now, we shouldn't assume that like this repeats in the future or like for the remainder of the year? Is that correct?

Yes. As Anatol highlighted, we're seeing a strong recovery in LNG demand growth especially in Asia. And I'd say we are cautiously optimistic that the economies around the world will come back. We'll continue to see the growth. Hopefully, we get some cooler weather in this winter and we'll see spreads continue to increase.

Okay. So I guess on that note as we look at the Asia demand, how are you guys thinking about the trajectory of Asia LNG imports specifically in China relative to overall gas demand in the region? And what are the puts and takes to consider for U.S. LNG whether it's trade agreements, I don't know like what the storage position looks like in China and/or commitments that China may have with non-U.S. LNG facilities?

Yes. Thanks, Christine. From a fundamental standpoint, the medium- and long-term fundamentals through this period, we think have actually improved for the business. And as we've said for years now, China is one of the key drivers of that. It is committed to natural gas. It is showing that commitment clearly as GDP rebounded there, gas demand growth rebounded even stronger. We're seeing that across multiple economies as Jack mentioned. And as we've discussed in the past, we are quite sanguine about opportunities for gas into Europe as solid fuel power is retired there. China will continue to be a very important factor for us. As you've seen we've sent cargoes over half a dozen cargoes now to China as things there start to normalize both in terms of demand in terms of tariffs and other opportunities present themselves. Clearly, there is a headwind in terms of the geopolitical backdrop that we're operating in. But commercially there's a massive tailwind. And this is the flexibility and the reliability that we've demonstrated the relationships we've built on the commercial side all position Cheniere quite well to capture substantial share of that market when the stars align. So we continue to be very optimistic. And this 20% growth we saw in Q2 is just the start we think of those tailwinds.

And Christine I'll add our Beijing office is open. They've been extremely busy, back at work, back entertaining different clients and customers. And I'm very pleased with how the relationship is forming with our Chinese counterparts.

Great. Thank you so much.

Next, we'll hear from Jeremy Tonet with JPMorgan.

Hi, good morning.

Good morning, Jeremy.

I know that you guys aren't going to comment on individual cancellations from customers, it's not your policy to do that. But I was just wondering, I guess at a high level if you could discuss with us any trends in cancellations overall. It seems like going into the winter there will be less. And maybe another way of asking this I guess just how do you see the market tightening over time, or how long do you see the market right now?

So first, Jeremy, just on the cancellation of cargoes. So we've given a lot of disclosures in this queue. And there's just some basic rules that you could back calculate the number of cargoes. And I'll ask Zach just to kind of walk through that part of it for you first.

Sure. So I think we mentioned, Jeremy. But I think we mentioned in the prepared remarks, we're reducing production from the facilities from Q1 to Q2 by about 180 TBtu. Just define that by 3.5 TBtu. So that's about 50 cargoes. And then if you look at the numbers that we were talking about, pretty much each cargo is up let's say on average very simple, $10 or so.

$10 million.

$10 million, yes. So when you account for that in Q2 not including what occurred in Q3, there was about $300 million of count cancellation, $250 million that stayed in the quarter and $50 million that were brought forward into Q1. That's about 30 long-term cargoes or so. So you can kind of break out what was CMI and what was the long-term customers.

While we won't discuss specific customers and their cancellations, I want to emphasize that the pandemic, a warm winter, and the shoulder months contributed to a challenging outlook. However, I remain cautiously optimistic that we have moved past that phase and are beginning to see an upward trend. I'll let Anatol share any additional insights he may have.

Yes. As we've mentioned in these slides, we believe the lows are behind us. There has been a significant rebound in global prices, and there is a transmission mechanism from the U.S. to the rest of the world that is currently underutilized. This is contributing to a rally in NYMEX, although it is dampening that value from a spread perspective. However, we do see a strong demand response reflected in GDP numbers, transportation statistics across various economies, and power dispatch. The supply response is adding up in both the U.S. and the rest of the world, showing mid-single digits in the global LNG market. Over the past four years, the LNG market has grown by double digits in three of those years. To put it another way, what we’re seeing now is equivalent to about half a year’s worth of market growth. We are aware of the potential maximum supply additions based on upcoming projects scheduled to come online in the next four to five years. To doubt the market’s rebalancing, one would need to be quite pessimistic about global gas demand, and currently, we do not observe any such signs. Therefore, we see rebalancing as a matter of quarters rather than years. If we experience a favorable weather pattern instead of the adverse conditions we've faced recently, the timeline will be even shorter.

That's very helpful. Thank you. And just want to come back with the second question on capital allocation. And I guess maybe the long-range timing to hit investment-grade or to institute a dividend I think the last June, June last year you talked about a 3 to 5 year range and kind of being in a position to hit that. Obviously as you said taking out the convertibles was not in that plan. It's nicely accretive. I assume that pushes it back a little bit here. But just wondering if you could update us on your thoughts on that timeline?

Hey Jeremy, it's Zach again. We did raise debt, and instead of converting those securities to equity, we've increased the amount of debt we need to pay down to reach investment-grade. However, this doesn't delay our targets for early to mid-2020s. Our main objective is to reach a mid 4x debt-to-EBITDA ratio on a consolidated balance sheet. We believe we can achieve investment-grade status as soon as we drop below 5x and demonstrate our commitment to managing the balance sheet. We've consistently mentioned that the significant debt reduction will really begin in the latter part of our 5-year plan. Once CCL Train 3 and SPL Train 6 are operational, and our excess cash flow increases, you'll see considerable progress in our debt paydown. To give you some perspective, we expect to have around $10 billion in available cash over the next five years. Following the launch of Train 6 in 2022, we anticipate nearly $3 billion a year in distributable cash flow. Thus, we feel confident that we can achieve investment-grade during this timeframe and still have excess cash flow for future capital returns and to advance Stage 3 once it's commercialized.

Got it. That’s very helpful. Thank you.

Our next question will come from Julien Dumoulin-Smith with Bank of America.

This is Anya. I'm substituting for Julien. For the first question, could you discuss cargo cancellations briefly? How do you anticipate cancellation revenues, and will there be any subsequent reversals that affect your position within the 2020 guidance range? Additionally, can you provide any preliminary insights on the impact for 2021 based on your market assessment?

Let me make sure I understand the first part of that question was on cargo cancellations and how we account for them?

The question focuses on cargo cancellations and their impact on cancellation revenues, as well as the reversal of those revenues as cargo cancellations decrease. I'm looking for your assessment of the market overall and its potential effect on EBITDA, specifically regarding the trajectory of carrier cancellations improving.

We generated $450 million in revenue from Q3 into Q2, which typically would have been recorded in Q3. This occurred because we receive about two months' notice for cancellations, at which point our obligations are fulfilled and we can recognize the revenue. To date, our EBITDA is significantly above half of our guidance range. This suggests that Q3 and Q4 will see some reversal since those revenues were anticipated earlier. Based on current trends, we believe our customers will be more active through the winter, leading to that reversal in either Q3 or Q4.

Okay. Great. Thanks. And then also just given more limited growth prospects with the markets of our own. Is there anything you can add on how much you can take out on the cost side? How should we think about run rate O&M just in a no-growth scenario? And then any other de-bottlenecking opportunities that you could add?

I'll start with the de-bottlenecking. So we've taken this opportunity with the customers canceling cargoes to move some maintenance forward. So we're doing a significant amount of work on the trains with our own crews. Because of COVID, we want to minimize the number of outside contract crews at our facilities, but they're doing a great job working around the clock in some cases. And we feel very good about our ability to optimize the output of those trains. In November when we give guidance for 2021 it's my expectation that we'll have a revision to our production guidance also as well as a run rate guidance that Zach had mentioned. Zach, do you have anything you want to add?

Sure. I mean, we're quite transparent on the run rate numbers. And when we go through the budget process, which we're literally kicking off now in preparation to make that guidance in the next quarter. We assume the 9-train program. And only once FID is made on the next project. Do we add those costs or those revenues to the forecast. So that's pretty transparent. But if you just look at this year and the quantum of cancellations that we've had and the fact that we've been able to reaffirm guidance that's all thanks to the great work that our operations team has done to offset a large portion of that lifting margin that we'd normally make on those liftings.

Great. Thank you.

Thank you.

We'll now hear from Michael Webber with Webber Research & Advisory.

Good morning, guys. How are you?

Good morning, Michael.

I will start by wishing Michael well and welcoming Zach. I have two questions for you. First, regarding the impact of COVID, specifically related to construction. You surprisingly advanced the timeline for Train 6 to the second half of 2022. In a market discussing schedule relief and force majeure, you are accelerating the construction timeline for a project. This seems counterintuitive compared to what is happening elsewhere. So my question has two parts: Do you expect competing projects in the U.S. to stay on schedule and meet market expectations, or is your situation more of an outlier? Secondly, what is the primary reason for this advancement? Is it due to slack in the schedule or a difference between union and non-union labor? It’s an interesting situation to be moving forward during the pandemic.

So first, Michael, thanks. I want to acknowledge Bechtel and the Cheniere Engineering and Construction team for quickly isolating crews and implementing policies beyond the CDC recommendations to minimize the impact on our engineering and construction efforts. If there was any impact, it didn't affect our operating teams at our facilities. This approach has worked extremely well. Bechtel has done a commendable job managing their COVID cases and preventing them from spreading throughout the construction project. We experienced favorable weather that enabled Bechtel to make up for lost time, and even with recent tropical storms and some hurricane activity, they have made significant progress on both Corpus Christi Train 3 and Sabine Pass Train 6. I am very pleased with their achievements. Regarding the LNG market, as Anatol mentioned in his prepared remarks, many of our competitors have either delayed or canceled their liquefaction plans, positioning us much stronger in the marketplace than we were before COVID. Now, I'll turn it over to Anatol.

We believe that medium to long-term demand will be at or above pre-COVID levels, and the competitive landscape is significantly favorable for us during this period. As we mentioned earlier, the construction and operational execution are critical. I would emphasize that we have built a strong reputation; every counterparty we work with recognizes our ability to complete these projects ahead of schedule, within budget, and operate them reliably and flexibly.

Got you. Okay, that's helpful. Now, this question might be more suitable for Anatol. One of the ongoing themes throughout the pandemic has been the decarbonization efforts in Europe. Several countries, including those with key customers in your base, have announced hydrogen and natural gas blending targets of 10% to 15% by 2030, which could significantly impact the future European natural gas market. I'm interested in your perspective on this as of today. I understand this is a recent development and it's somewhat forward-looking, but I'm curious about its potential impact on the strategies of European buyers. Additionally, is there a chance for Cheniere to seize this as an opportunity to invest downstream and provide more integrated solutions for these customers, considering their plans to blend other molecules with your natural gas?

Michael, if it's all right with you. I'm going to start with the second part of that and then I'll hand it over to Anatol for the first part of it. So as you know, we're always looking for strategic opportunities, especially where we believe we have a competitive advantage. And we can leverage our scale in our platform. And it's not lost on me that we move four hydrogen atoms for every carbon atom that we sell that we're a leader in developing, constructing, operating and owning cryogenic infrastructure here in America. So in addition, we believe that LNG has a major role to play in this whole global decarbonization effort across the globe. And that hydrogen may present an opportunity to complement those environmental benefits, as well as leverage our own core competencies in terms of market access, infrastructure development, operations, construction as Anatol mentioned. So you would expect that I am extremely excited about our prospects and about evaluating our opportunities to participate in the hydrogen market. And I don't know Anatol if you…

Yeah. I'll just add the plug for the team's great efforts in our inaugural CSR report. I think to be perfectly honest before we embarked on this process now probably a good two years ago, we thought we were a part of the solution but we weren't 100% sure. And we didn't have the science and the analysis to back that up. Now we're that much more confident. And you'll see us participating a lot more and taking control of that narrative, which we needed to check a lot of boxes internally and verify that that was the case. So we are now that much more confident that we are part of the solution and you've seen this from a number of players in the industry whether that's the European majors, the European load serving utilities even some of the trading houses are continuing to push LNG and gas as part of the long-term solution to climate issues and we are confident that Cheniere will be at the forefront of that.

Okay. Thanks for the time, guys.

Our next question will come from Shneur Gershuni with UBS.

Good morning everyone. Many of my macro-related questions have already been addressed. I would like to discuss the refinancing you recently undertook. I find it quite interesting and want to ensure I fully understand it. Essentially, you've reduced your coupon rate from 11% to around 3%, resulting in an annual savings of approximately $80 million. Additionally, this also prevents the conversion of debt into 40 million shares. So, can I conclude that this is effectively a backdoor buyback of shares? Furthermore, it sounds like you plan to use the excess cash flow until the potential conversion occurs to pay down debt. Is my understanding correct that this strategy helps offset potential dilution while also decreasing your coupon payment?

I appreciate your interest in our progress this year, so I'll provide a brief recap of our achievements. Firstly, I want to emphasize that our commitment to achieving investment grade status across our entire operations by the early to mid-2020s remains strong. As we mentioned at the beginning of the year, we found ourselves weighing the options between paying down debt and buying back shares. If it made sense to delay debt repayment to take advantage of stock opportunities, that was our approach, and that's exactly what we executed in the first half of this year. In the first quarter, we repurchased more than $150 million in shares and bought back $300 million in EIG notes, which we indicated would be converted. This gave us the option to handle the remaining amount in the next six months. We quickly began addressing this term loan, which offers attractive cost benefits, flexibility, and the opportunity to eliminate both EIG and RRJ obligations, ensuring that we have no debt maturities until 2022. We did reduce our share count on a run-rate basis, and we will update our guidance following the budget review at the November earnings call. This represents a significant decrease of over 40 million shares. Moving forward, we will concentrate on paying down the new debt we have raised. Expect us to focus on debt repayment in the upcoming quarters while maintaining our goal of achieving investment grade status by the early to mid-2020s. Furthermore, I want to highlight that our capital allocation strategy will become more influential once Train 3 is operational. At that stage, we expect to transition from negative to positive free cash flow, which we have all been anticipating. This will make our financial numbers much more substantial, allowing us to pursue investment grade status while considering capital returns again in 2021, and preparing for the commercialization of stage three.

Okay, that makes sense. This approach was a smart way to reduce your coupon payment and manage significant dilution while allowing you to pay down debt with excess cash. I understand the hesitation to update guidance. From earlier comments, it appears that revenue from the third quarter is effectively being brought into the second quarter. Considering Anatol's remarks about improvements, do you foresee a possibility of exceeding your guidance or being at the higher end for this year, or do you feel satisfied with your current reaffirmed guidance for the year?

Well on this call we're reconfirming our guidance for the year. And which as you know we gave that guidance back in November of 2019 which was pre-COVID. And to me that would be a massive success. And I'd be popping a lot of champagne at the end of this year. It has been extremely stressful and a tough year.

Fair enough. Appreciate the color today.

The next question will come from Sean Morgan with Evercore.

Hi, everyone. Thank you for the question. I recognize that you've made significant efforts to address the dilution by repaying these notes. However, I noticed that in 2045, there is still $625 million in convertibles that can start being redeemed as of March 2020. I'm curious if there's a longer timeline you are considering for handling these or why they are being managed differently compared to the others you have been more proactive in paying down to minimize dilution.

Yes. This is Zach. Thanks for the question Sean. Those are unsecured notes at CEI due in 2045 with a rate around 4%. And what we just focused on was something due within a year and the most expensive debt on the whole balance sheet of 11%. So it's like another world those converts. So they're really not the priority for quite some time. So they're going to sit there. I think the conversion price is in the 140s. And when we get closer to that we can talk. But in the meantime we're going to focus on paying down debt in the bank deals. Those are totally callable and they're both secured at CEI and BCH. And that's the type of debt that we want to get rid of first.

Okay. Is there any evidence that customers who have canceled their long-term cargoes are returning to the spot market and purchasing at a discount rate? Is that something you are observing?

Well again as we mentioned earlier, the market has been quite volatile. This is an unprecedented time in terms of the flexibility that this U.S. Cheniere model has brought into the market. One of the things that you saw publicly was a buyer cancel and prepay some cargoes to an entity that happens to be a foundation customer of ours. So there are lots of tools being deployed by the market at the margin to properly position themselves. And again this option to cancel the cargoes, not pay the commodity charge is a great flexible tool that obviously our customers have taken advantage of as have we ourselves. So again, at the margin, you see lots of activity to optimize portfolios. And that's what our business model allows the customers to do.

Okay. Yeah. And I guess the lower utilization some of those are kind of going unfilled. But that's interesting. Thanks a lot. I’m going to turn it over.

Thanks, Sean.

Next, we'll hear from James Carreker with U.S. Capital Advisors.

Hi. Thanks for taking the question. Just a quick accounting question. I understood you're bringing forward the revenue recognition for canceled cargoes. When do you actually receive the cash for that?

So when we receive the cash is the normal time period. So, even if they canceled now or let's say in Q2 for Q3 delivery the actual cash will come in Q3.

So your cash from operations for Q2 may be significantly lower than the adjusted EBITDA but then that reverses next quarter as well?

Yeah. It all comes together over a few months. Got you. And I was wondering if I could get a quick update on how you see remaining capital spend for both Train 3 and Train 6?

Sure. So for Train 6, I think we said last quarter we had $1.4 billion left of unlevered costs before contingency. And that's down to $1.1 billion at this point. And then, in terms of Train 3, it was around $600 million or so. Let's just say, we're under $600 million at this point with – for Corpus before contingency and most of that will be spent this year with us being really deep in commissioning by early next year.

Got it. And then if I could fit one more quick one in. I guess, how should we think about capital spend kind of post train construction with nine trains assuming there'll be some de-bottlenecking projects kind of ongoing, but what order of magnitude kind of – what do you expect that number to be once you complete the build out?

Sure. In 2019, when we gave that investor update we said Cheniere share of these de-bottlenecking projects and some development costs would be around $700 million. I'd say that number is a few hundred – a couple or a few hundred million dollars less at this point just because we did spend some of that money to get to the higher ranges of our production at both sites. But that's over a five-year period. So, it's not a huge amount of money when we're talking about over $10 billion of available cash.

Okay. Thank you. That's all I had.

Our final question will come from Ben Nolan with Stifel.

Yeah. Hey, thanks, guys. So I have a couple of commercial questions. The first is maybe could you just talk through – we've heard a lot of noise about maybe a little bit of an improvement in the appetite for incremental long-term contracts. And I was curious if you might be able to frame whether there's any change in the dynamics there. People looking for more flexibility or shorter terms or sort of anything to kind of break the ice in terms of incremental new business.

Thanks, Ben. Yeah, this is Anatol. I guess the answer is all of the above. We've demonstrated commercial flexibility over the last 2.5, three years, as contrasted with our original very innovative, but very static 115% plus x-type transactions. We're going to continue to do that. That includes lots of different levers tenor is one of them. How we structure those offtake agreements and the flexibility we provide to them is another. These are, as you know, multibillion-dollar transactions. They're not consummated over the phone. They do require a lot of time and effort especially to get it over the proverbial finish line. And the entire world has been working from home. So, we've continued to be engaged and make progress on a number of fronts, but to get them across the finish line requires a market that has some level of normalcy both in terms of pricing as well as in terms of being able to finalize negotiations. So, we're very well-positioned. We're very excited, as you can tell from these remarks and the charts that we put in front of you lots of green shoots and good engagement. But, to get it over the finish line, the precise timing is really anybody's guess.

Okay. I appreciate that. And then sort of similar, but in a different direction over the last, I don't know, quarters to really few maybe a month, the U.S. is approved LNG by rail. You have a smaller downstream developer looking to do big ISO container development. Is there a possibility or has there been any thinking about maybe adding a little infrastructure to your facilities to be able to maybe facilitate or service maybe some of those smaller well small-scale kind of projects and development and that so thing?

Ben, we've spent considerable time exploring our role in the bunkering market. Personally, I’m not convinced about the viability of shipping LNG by rail, but that doesn’t rule out opportunities for others. However, the volume of LNG we produce and ship daily is substantial, so such an option would represent a very small segment of our operations.

I appreciate that. I was just curious if it was an area that you were looking into. Thank you, everyone.

This makes a lot. And I want to thank everybody for their support over this quarter. And I hope everyone stays safe and healthy.

That will conclude today's conference. Thank you for your participation. You may now disconnect.