Cheniere Energy Inc (LNG) 2016 Q3 法說會逐字稿

Good morning. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cheniere Energy Inc., third-quarter 2016, conference call.

(Operator Instructions)

Mr. Randy Bhatia, Director of Finance and Investor Relations, you may begin your conference.

Good morning everyone, and welcome to Cheniere Energy's third-quarter 2016 earnings conference call. The slide presentation and access to the webcast for today's call can be found on today's call, located on Cheniere.com. Participating on the call this morning are: Jack Fusco, Cheniere's President and Chief Executive Officer; Anatol Feygin, Executive Vice President and Chief Commercial Officer; and Michael Wortley, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind all listeners that our remarks, including answers to your questions, may contain forward-looking statements. Actual results could differ materially from what is described in these statements.

Slide two of our presentation contains a discussion of those forward-looking statements and associated risks. In addition, we may include references to non-GAAP financial measures such as adjusted EBITDA, net loss as adjusted, and net loss per share as adjusted. The reconciliation of these non-GAAP financial measures, to the most comparable GAAP financial measure, can be found in the appendix of the slide deck.

As part of our discussion on Cheniere Energy Inc.'s results, today's call may also include selected financial information and results for Cheniere Energy Partners LP, or CQP, and Cheniere Energy Partners LP Holdings, or CQH. On this call we do not intend to cover CQP's or CQH's results separately from those of Cheniere Energy. After prepared remarks from each of the participating executives, we will open the call for Q&A.

As shown on the agenda on slide three, Jack will begin with an overview of the quarter, and then give an update on construction and operating progress at our Liquefaction project. Following Jack's comments, we will hear from Anatol on the market, and then from Michael who will review financial results. I will now turn the call over to Jack.

Thank you, Randy. And good morning, everyone. I'm pleased to be here today for Cheniere's third-quarter 2016 earnings call. I've been CEO of Cheniere now, for approximately six months, and since our inaugural call in August, my confidence has only grown in Cheniere as a platform for long-term shareholder value creation.

During the quarter, we achieved some operational and financial milestones, and we implemented some internal initiatives, that not only demonstrate our ability to execute, but also position us for long-term success on multiple fronts. We will cover a number of these items during today's call.

Turn to slide five for an overview of some operational highlights for the third quarter 2016. The third quarter continued to see Cheniere's transition to commercial operations as we took over care, custody, and control of Train 2 at Sabine Pass during the quarter. Lessons learned in the commissionings of Train 1 were applied, and resulted in improved and streamlined commissioning process on Train 2. A total of three commissioning cargoes were produced and exported from Train 2, prior to the declaration of substantial completion. Train 2's substantial completion was achieved on September 15, 2016, ahead of contractual schedule, and on budget.

I'd like to take this opportunity to again recognize the efforts of Cheniere employees, and our EPC partner Bechtel, on the achievement of this milestone, and look forward to continued success as we have begun the commissioning process for Train 3.

Consistent with what we highlighted for the second quarter, slide 5 once again highlights revenue, adjusted EBITDA, and volumes lifted as metrics which are important to watch as we track the business going forward. Revenues for the third quarter were $466 million, and $712 million year-to-date.

Train 1 was in operations nearly the entire quarter. Train 2 achieved substantial completion near the end of the quarter, and just ahead of our scheduled maintenance, so that the vast majority of the LNG sales from that train took place during commissioning, and therefore were not recognized as revenues during the quarter. Michael will cover this, and other details of our financial results, later on this call.

Adjusted EBITDA was $67.3 million for the quarter, and $19.4 million year-to-date. The adjusted EBITDA results for 3Q are a significant tangible result of Cheniere's continued transition into operation.

Including the three commissioning cargoes from Train 2, I mentioned earlier, during the third quarter a total of 18 cargoes were produced and exported from Sabine Pass. To date we have exported to total of 36 cargoes from the terminal, and they continue to be delivered to markets all over the world. Anatol will provide an update on the global LNG market in a few minutes.

Also during the quarter, we continued to execute on our balance sheet strategy of managing our debt maturity profile, by terming out bank loan borrowings and capacity, into the bond market. We issued $1.5 billion of bonds at our Sabine Pass Liquefaction entity during the quarter. The process during 3Q, was highlighted by SPL's upgrade to an investment grade credit rating by Standard & Poor's. The investment grade credit rating is important milestone for the project, which we expect to yield significant long-term benefits.

Slide 6 provides an update on the construction progress at our LNG products at Sabine Pass in Corpus Christi. We remain very pleased with the overall progress of construction at Corpus Christi, and construction and operation at Sabine Pass. As I mentioned on the last call, our number one priority at the sites is to execute on the construction at our LNG platform safely, on-time, and on-budget.

Highlighting the third quarter once again, was the achievement of substantial completion of Train 2 on September 15, [2016], after 49 months of construction and commissioning. Also during the quarter, commissioning activities commenced on Train 3, and we expect that Train to reach substantial completion in mid-year 2017.

On all trains, Bechtel continues to progress construction efforts against the contractual scheduled dates, and we at Cheniere remain focused on transitioning the Trains from construction management, to operations management safely, efficiently, and effectively. Subsequent to the end of the quarter, we completed the required work to the process flares that was discussed on our second-quarter call, that resulted in approximately a four week outage at Sabine Pass.

The scheduled maintenance outage was completed on schedule and budget. Bechtel completed the flare modification safely, and slightly ahead of schedule, and planned maintenance was completed on Trains 1 and 2 during the outage. Planned maintenance included preventive maintenance on equipment, planned maintenance on our gas turbines and warranty work, and both Trains have returned to full production. With the resumption of commercial operations at Trains 1 and 2, we expect to commence BG Shell's 20 year contract, later this month.

Turning to slide 7, you'll see the near-term goals that were laid out on the second-quarter call. There have been a number of announcements we made over the last few months. Many of them addressing our progress on achieving these goals. While we don't intend to review these goals each quarter, we made a tremendous amount of progress during this quarter. And I would like to review a few key successes here, which demonstrate our commitment to achieving these goals.

Operationally, I've already discussed the success we experienced at Sabine Pass during the quarter with the achievement of substantial completion of Train 2. We look forward to continuing to apply lessons learned, as we commission future Trains at our projects.

With regard production, we continue to be encouraged by the performance of the Trains thus far, though it remains to early to adjust any expectations with regard to run rate production, as we are continuing our performance testing and tuning.

Financially, ratings momentum continued at SPL as we achieved our first investment grade rating during the quarter, and on the heels of that, we were able to refinance a portion of the SPL credit facility at attractive rates. As well, we're pursuing a proposed corporate structure simplification, by offering LNG shares in a stock for stock exchange with CQH, for those shares of CQH that we do not already own. Also, we have completed the company's first zero-based budgeting process, with a focus on financial discipline, and Michael will share with you some the initial results of that undertaking.

On the commercial front, we continue to successfully monetize commissioning cargoes, and pursue incremental long-term contracts necessary to support the financing of our next Trains, Corpus Christi Train 3 and Sabine Pass Train 6. From a higher level, we're also pursuing a number of initiatives along the LNG value chain, leveraging our core capabilities on the LNG platform, which I'll touch on in a moment, and Anatol will provide some additional context on that in his comments.

Finally, during the quarter we implemented some organizational changes highlighted by our new executive leadership team, and defining our mission, vision, and values. These changes represent a natural evolution for the company as we continue to move into operations. Our organizational structure should not be thought of as static, rather we will continuously look for ways to best align our organizational structure and philosophy with those of our shareholders.

As result of some of these changes implemented during the third quarter, we expect more cross-functional communication between the groups, and importantly, there is now a more direct reporting line between me and our liquefaction projects. These changes and any future changes we may consider over time, will be driven by our vision to be recognized as a premier global LNG company.

Turning to slide 8, I'd like to point out a few strategic initiatives that are underway at the company. I've been clear in my communications that we won't stray from our core competencies in LNG when it comes to project development, and I'd like to touch on two initiatives underway that leverage those core competencies, and we think will enable us to compete and win incremental business along the LNG value chain.

At the core of these development initiatives, is our belief in the long-term demand growth profile for energy, and specifically LNG. At a recent conference of global LNG players, international consulting firm McKinsey forecasted an over 20% growth in primary energy demand, between 2013 and 2035, with the power and industry sectors, those where LNG play a significant role, expected to account for nearly 75% of the total growth.

Over a similar period of time, LNG demand growth is expected to far outpace competing fields such as gas, oil, and coal, as you can see from the graphic on the right side. The compounded annual growth rate for LNG Worldwide is forecast to be over 4.5% over the next 15 years. Against this backdrop of long-term energy demand growth, which supports sustained LNG market penetration, we remain extremely bullish on the need for incremental liquefaction capacity, and on our position on the cost-curve to compete and win.

First, we have made a commitment to evaluating the mid-scale LNG solution. We have recently completed a competitive bidding process and have awarded a FEED contract to a consortium comprised of KBR, Siemans, and Chart Industries. We are evaluating the true opportunities from smaller-scale LNG plants with regard to their commercial, regulatory, and logistical feasibility and of course, cost.

As the market leader in US LNG, we expect to be able to consistently deliver a competitively priced product to our customers. Corpus Christi Train 3 and Sabine Pass Train 6 are expected to be cost competitive, as they will leverage significant in-place infrastructure, but we are evaluating this opportunity for our growth beyond those two brownfield projects. While we aren't able to provide a significant amount of detail on the project development at this stage, we expect to be able to determine whether to pursue mid-scale as a strategy sometime in the middle of 2017.

Next, as we have discussed we are willing to make investments in infrastructure along the LNG value chain, to a extend and support their core LNG business. Drown-stream of liquefaction, you are all aware of, El Campesino, our project development in Chile, which I covered on the second-quarter call. In addition to the downstream opportunity, we're pursuing a project upstream of the site as well, a domestic pipeline project called MIDSHIP, that if built, will support long-term gas supply efforts for both Sabine Pass and Corpus Christi, by debottlenecking an otherwise takeaway capacity constrained resource in the Anadarko Basin, by connecting it to some of our existing long-term pipeline transport capacity. Cheniere has a demonstrated track record in pipeline development at both products, and our liquefaction terminals provide an attractive demand source for gas producers.

And finally, we indicated on our last call that we would host an analyst Investor Day in 2017. It will be held here in Houston, and we're currently targeting April 19, 2017. We will send more information as we get closer to that date, and I look forward to seeing many of you there. With that, I will now turn the call over to Anatol to give an update on the market.

Thanks Jack, and good morning, everyone. Turning to slide 10, I'd like to provide an update on the current market environment.

Through the third quarter, global LNG volumes are up 7% year over year, with continued strong demand from India, China, and new consumption from the Middle East and Pakistan more than offsetting reduced volumes from the established markets of Japan, South Korea, and Brazil. LNG demand from China and India has continued to surprise to the upside. China's LNG imports up nearly 30% year over year, through the end of the third quarter.

While the uptick is in part due to Chinese buyers absorbing new contractual LNG volumes from Australian plants, the country's overall gas demand has grown by about 8% through the end of August. This gas demand growth rate is outpacing China's 6.5% to 7% GDP growth for the year, a turnaround from last year.

Indian LNG buyers through the end of September reached the highest quarterly total on record. Indian LNG buyers, both existing and new importers, have been buying short-term volumes to supplement their long-term purchases. Competitive LNG prices, declining domestic supply, and the government's focus on stimulating gas use in the power sector have underpinned the 35% increase in LNG imports.

While global pricing remains off the highs since several years ago, LNG markets tightened modestly through the quarter, with strong summer demand in the northern hemisphere, at a time of production shortages, driven by force majeure in Nigeria, and declining legacy production in Trinidad and Tobago.

Increased supply from Australia and the United States has been absorbed by the market with LNG imports into Europe, up about 8% through the end of September. Total gas demand in Europe is expected to grow by roughly 6% this year. Against that backdrop, commissioning volumes, namely cargoes made available on very short notice from Sabine Pass Train 2, were sold at premium netbacks to prevailing European pricing with cargoes delivered to India and South America.

As we highlighted last quarter, we believe there is a secular shift to cleaner-burning natural gas and power generation, and in places like United Kingdom, the combination of carbon price floor and almost doubling of coal prices has driven coal almost entirely out of the [numeric] order to natural gas's advantage. For two days in May this year, the UK did not use coal in power generation for the first time since the Industrial Revolution. Current coal use is lowest in the UK since at least 1860.

We've seen initials signs that the same theme will play out in continental Europe, with gas demand continued to grow in places like Germany and France. In the third quarter, German and French combined gas demand in the power sector more than doubled year over year. Importantly, we believe this fuel switching is sticky, and one shutdown older coal plants are unlikely to return to service.

Please turn to slide 11. Over the longer term, we expect these trends to structurally impact demand as supply reliability, availability, and increasing liquidity in the LNG market stimulate price elastic demand and attract new importers. Currently under construction, liquefaction capacity supports a demand outlook until early next decade, after which point, a potential supply-demand gap emerges. The strong demand from China and India, we are currently witnessing, is expected to continue as well as additional demand coming from 30 new markets currently evaluating LNG import options.

During this past quarter, five new markets were enabled by floating infrastructure: Ghana, Jamaica, Columbia, Malta, and Abu Dhabi. Abu Dhabi started importing during the quarter, with the others expected to follow this year or early 2017. Abu Dhabi is the second LNG import terminal operating in the United Arab Emirates, driven by its push to displace liquids in power generation. The continued swift emergence of new importers could tighten the market sooner than expected.

Moving to slide 12, based on historical cyclicality of the LNG market over the past dozen or so years, the slowdown in the number of final investment decisions on new liquefaction capacity, has been followed by tightening of supply. We have started to see a pullback in the number of LNG Trains being sanctioned over the past two years, with only one expansion Train officially moving forward so far in 2016.

This is clearly setting up a scenario where the LNG market will tighten dramatically by the end of the decade. If customers need supply for early next decade, given the lead time even for our fully-permitted brownfield expansion Trains, the final investment decision on new liquefaction capacity would need to come in 2017. With two fully-permitted brownfield expansion Trains, as well as mid-scale modular solutions that we'll discuss in a minute, under evaluation and the experience to efficiently mange US gas supply needs, Cheniere has the speed and competitiveness to be the next LNG to market.

Now turn to slide 13. As Jack mentioned earlier, we have two new strategic initiatives to discuss with you. First, we're evaluating the merits of building smaller, modular liquefaction Trains, and have awarded a FEED contract to a consortium comprised of KBR, Siemens, and Chart.

The FEED process will help us to assess the cost benefits, if any, of building liquefaction Trains using a modular, and more standardized approach to drive capital costs lower through off-site controlled environment manufacturer of significant components. We expect to be in a position to share more information on this modular liquefaction initiative with you sometime in the middle of 2017.

Second, we are developing an approximately 340 mile residue-gas pipeline from central Oklahoma to northeast Texas, designed to provide up to 1.4 Bcf a day of takeaway capacity from the prolific and low-cost STACK and SCOOP plays in the Anadarko Basin. The pipeline will help to serve the gas needs of both the Sabine Pass and Corpus Christi LNG terminals, by connecting the STACK and SCOOP Basins into existing Sabine and Corpus Christi, contracted and owned pipeline infrastructure.

Cheniere would manage both construction operations of the pipeline project, and we are and targeting approximately 750 million a day, of take-or-pay shipper capacity commitments, prior to a launching a binding open season. These growth projects leverage our core competencies in LNG and pipeline project development. As we continue to move through the development process, we will update the market with additional information.

We'd also like to provide you with an update on our Chilean LNG-to-power project. This project encompasses a new LNG receiving terminal, floating storage, and regasification unit, associated pipeline and approximately 600 MW gas-fired combined-cycle power plant.

The plant is underpinned by 15 year power purchase agreements with Chilean public distribution companies. The PPAs were awarded in the Chilean public energy auctions. The power plant will purchase LNG from Cheniere Marketing International, through a 15 year take-or-pay LNG sale and purchase agreement.

The LNG will be delivered to the terminal, regasified, and then transported to the power plant. The power plant has contracted for about 25% of the re-gas terminal's capacity, with the remaining balance available for incremental commercial opportunities. We're currently a 50% owner of the receiving terminal, and at FID we will own 10% of the integrated project, including the power plant.

The appeal periods pertaining to the environmental permits for the power plant and the terminal ended last month. Cheniere, along with its Chilean partner and EDF, is in the process of finalizing the financing, with the expectation of reaching FID on this project in the fourth quarter. With that, I will now turn the call over to Michael, to review financial results.

Thanks, Anatol, and good morning, everyone. I'm pleased to announce our financial results for the third quarter of 2016, a summary of which can be found on slide 15.

Train 1 was in commercial operations for most the entire third quarter, and was brought down for the flare work near the end of the quarter, and therefore, we saw significant progress in our financial results. It's exciting and rewarding to begin to see our financial results transition as Sabine Pass is entering commercial service. We're also excited about moving the company forward, and articulating our financial strategy with the long-term goal of value creation through a disciplined capital allocation philosophy.

As a reminder, Cheniere Energy consolidates the results of Cheniere Energy Partners, CQP, and Cheniere Partners Holdings, CQH. For the third quarter 2016, we reported consolidated revenue of $466 million compared to $67 million in the corresponding 2015 period. Revenue recognized from LNG sales for the second quarter 2016, was approximately $400 million.

Before moving on, I'd like to once again provide some information about our cargo sales during the third quarter, as it relates to revenue recognition. During the third quarter, we loaded and exported 18 cargoes and sold nearly $350 million worth of LNG produced at Sabine Pass liquefaction, or SPL. 3 of the 18 cargoes were loaded prior to substantial completion of Train 2.

As a reminder, proceeds from the sale of commissioning cargoes are not reflected on the income statement, rather they are recorded as an offset to construction and process on the balance sheet, because these amounts were earned prior to our taking over care, custody, and control of Train 2. LNG cargoes on future Trains will be treated in the same manner, so it may be difficult to model our revenue accurately, and tie out our reported revenue to production in the upcoming quarters, as we continue to commission Trains at Sabine Pass. In addition, we can recognize revenue on the income statement without corresponding production from SPL, as Cheniere Marketing can sell cargoes purchased from other supply sources.

We loaded 15 cargoes at SPL during the third quarter, which are reflected on the income statement. Those commercial cargoes were lifted primarily by BG Shell under their contract, that gives them access to early volumes produced prior to DSED, at the contract price 115% of Henry Hub, plus $2.25, and by CMI.

Similar to the second quarter, since Train 2 reached substantial completion during third quarter, several other line items, in addition to revenue, were impacted as result. Certain operating expense line items previously capitalized during construction have begun to be expensed. Depreciation and amortization expense increased during the period as we began depreciating assets related to Train 2, upon reaching substantial completion.

In addition, SG&A expense decreased by approximately 37%, compared to the third quarter 2015, driven primarily by roll-off of certain stock-based compensation expense, restructuring efforts initiated in late 2015, and a reduction in certain professional service fees. Furthermore, included in the as SG&A line item are aggregate share-based compensation expenses for the three months and nine months, ended September 30, 2016, of approximately $7.5 million and $31.2 million respectively. Amounts remaining under these legacy grants will be recognized over the next approximately year and a half, and thereafter we expect more normalized run-rate levels to prevail.

As you may have noticed for the third quarter, we have we recombined marketing expense with G&A, and present selling general and administrative expense. This change was made so the presentation of these expenses was consistent with how we view the business. Expenses associated with our marketing effort are a necessity of our core business, rather than an independent or standalone entity.

During the third quarter we recognized about $25 million in restructuring expenses. These expenses are primarily related to share-based compensation, severance, and employee related costs under restructuring and operational efficiency initiatives initiated in late 2015. These initiatives are ongoing and are expected to be substantially completed by the end of the year.

While we won't be introducing new run-rate guidance across the board on this call, I can say that our recently completed zero-based budgeting process has given us some increased visibility into our protected run rate SG&A. The process was focused on financial discipline and coincided with some the organizational realignment Jack's spoke about a few minutes ago. Those processes enabled us to identify and eliminate some areas of inefficient or redundant spending, and the result will be a reduction in our run rate SG&A guidance from $300 million to approximately $200 million, in both cases excluding stock-compensation expense. We expect to give more comprehensive guidance at our Analyst Day, in April, 2017.

Net loss attributable to common stockholders was $104 million or $0.44 per share compared to corresponding 2015 period of $297.8 million, or $1.31 per share. (sic - see press release "$100.4 million"). Impacting earnings during the third quarter, were significant items totaling approximate $7 million. These significant items related to derivative gains primarily due to changes in LIBOR of the period, loss on early extinguishment of debt related to the SPL refinancing, changes in fair value of our commodity derivatives, restructuring expense, and amortization of the beneficial conversion feature related to the class B units issued by CQP in 2012.

The management of our consolidated balance sheet continue to drive much of the impact to EPS, and investors should expect EPS results to continued to be influenced by such financing related items for the foreseeable future. As such, we also report adjusted EBITDA and net income as adjusted which excludes these items. Additional detail on the impact of these items can be found on the reconciliation tables in the appendix of this slide deck.

Adjusted EBITDA for the three months and nine months ended September 30, 2016, was $67.3 million and $19.4 million compared to a loss of $51.5 million and $138 million for the comparable 2015 period. With regard to liquidity, as of September 30, 2016, we had unrestricted cash and cash equivalents at Cheniere of approximately $1 billion.

On slide 16, I'd like to discuss some highlights from the third quarter on key finance initiatives that are underway. These have all been touched on already, but I'd like to provide a bit more insight into each.

First, during the third quarter SPL received its first investment grade credit rating when S&P upgraded the entity to BBB- from BB+. This is significant for a number of reasons. First and foremost, and perhaps most obviously, we expect investment-grade ratings to give SPL access to the investment-grade market, which features significantly more depth than the high yield market, and fixed income products and tenors which can better match the tenor of our long-term foundation customer LNG contracts. This is important as we formulate a long-term deleveraging strategy at SPL.

Second, and perhaps less obvious, are the operational benefits of investment-grade ratings we expect to realize. Currently, a majority of the $1.2 billion of working capital facility we have at SPL, is reserved for letters of credit related to gas procurement activities at the terminal, and third-party transport infrastructure. With investment-grade ratings we expect a significant reduction in these LC postings.

We are in active dialogue with the rating agencies and look forward to the achievement of the second IG rating over the coming months. We have structured our project financings with investment-grade credit metrics and look forward to achieving further investment-grade ratings at both Sabine Pass and Corpus Christie over time.

Shortly after S&P upgraded SPL to BBB-, we launched the bond offering at SPL, where we were able to place $1.5 billion aggregate principal amount of senior-secured notes due 2027 which priced at par to yield 5%, our the lowest coupon at SPL thus far. Pro forma for that issuance there's approximately $2 billion left on the SPL term loan.

To date, we have issued $11.5 billion of bonds at SPL, with a weighted average coupon of approximately 5.65%. We will continue to be opportunistic in terming out the bank facilities of both products to better align our maturity profile with projected annual EBITDA levels. A summary of our current consolidated debt maturity profile can be found in the appendix. Pro forma for the repayment of the SPL and G bonds later this month with proceeds from the CQP bank facility, there will be no maturities in the Cheniere complex until 2020.

For few quarters now, we've discussed our openness to exploring opportunities to simplify our corporate structure to reduce complexity for debt and equity investors, to the extent it makes economic sense for shareholders. As previously reported during third quarter, we made an offer to the board of CQH for those shares of CQH we do not already own, in a stock for stock exchange. We believe this proposed transaction is beneficial to shareholders of both LNG and CQH.

You'll appreciate that we cannot get into more detail than what we have previously reported publicly on this subject, as we are in ongoing negotiations with the conflicts committee of the CQH board. There can be no assurance that such discussions will result in a transaction.

Finally, as I mentioned earlier, the zero-based budgeting process we recently concluded has given increased visibility into a lower projected run rate SG&A level. This process was focused on financial discipline, not specifically cost-cutting. And we were able to identify and eliminate some redundant or inefficient costs, as we align our spending with a streamlined organization.

We're focused on growth initiatives discussed earlier, and look forward to achieving our long-term goals while remaining disciplined in our spending. With that, we'd like to thank you for your time today and your interest in Cheniere, and we look forward to updating you on our next call. Operator we are now ready to open the line for questions.

(Operator Instructions)

Your first question comes from the line of Bhavesh Lodaya, from Credit Suisse. Your line is open, please go ahead.

Hi. Good morning.

Good morning.

First, (inaudible) there is a mid-scale liquefaction project. Congrats on the announcement. Could you give us more color on what kind of contract structures, and percentage of marketing or spot volumes you expect on these Trains? And also how is the permitting process for these? Can you use an existing, Sabine Pass T-6, and Corpus T-3, approvals for these plants?

Hi and thanks for the question. This is Anatol. So one thing we'd like to take this opportunity to discuss, is the separation between the marketing of LNG, and ensuring we have the best cost structure possible to supply those opportunities.

So what we're doing here today is, as Jack mentioned, beyond our efforts with the Train 3, and potentially Train 6, that are fully permitted, and we believe will offer some of the lowest cost opportunities for incremental LNG supply. And at this point we are cautiously optimistic that this mid-scale effort will yield a similar, or perhaps an improved, cost structure.

We will be very disciplined in how we prosecute incremental liquefaction facilities. We continue to have term contracts and off-takes. But given the modular design and the smaller minimum efficiency scale of these plants, it is possible that we have additional degrees of freedom in how we finance them.

So it's too early to tell, we'll know more once we move through the process of really running this opportunity through its paces. As we mentioned a couple times, we'll know a lot more by the time the middle of 2017 rolls around. And we expect that the contract structures will be somewhat more flexible. But, but we're not going to have a meaningful amount of merchant exposure regardless of what technology we pursue.

Thanks. And is it fair to assume mid-scale liquefaction and the MIDSHIP, both these products, as of now are at the LNG level?

That's correct.

Okay maybe my final point or question on MIDSHIP is, could you maybe talk about what kind of -- what are the returns you're targeted -- return profile you're expecting from the MIDSHIP project? And also, were there any other areas in the US midstream you were considering before you decided on the MIDSHIP project?

This is Anatol again, maybe just to take a step back. This is a potential component in our supply portfolio. As you are well aware, we're going to be a very large buyer of molecules to feed both facilities. The already have a very large portfolio of firm capacity, delivering it to both facilities. This will augment that, and will give us potentially increased diversification and degrees of freedom of where to source molecules.

Right now we have, again, a large portfolio already in place. This moves us towards the west, if you will, in terms of shifting our center of mass for where these molecules come from. And right now, we think this incrementally one of the most attractive residue gas opportunities in the country.

As you are well aware, the basins economics are driven primarily by liquids, with a very large residue gas cut, and we like the durability of this resource and, and the ability to access it, and feed it into infrastructure that we currently own and control. So we are constantly on the lookout. We talk to, literally, every major producer in the country. And as new opportunities present themselves to debottleneck and move more molecules to the plants, given the volumes that we will be purchasing, we'll continue to evaluate such options.

Michael, do you have anything to add?

In terms of returns, as we think about financing this project, I'm really comfortable with our liquidity position right now, as a relates to the seven Trains that we have under construction, and were fully financed in that regard. As we look at incremental projects, I think it's too early for us to start allocating some of that liquidity to growth. So we'll be looking to third-party finance this project, and we kicked off a private equity process many months ago.

This week we got a round of indications, and there's a huge bid for this kind of product; infrastructure underpinned by long-term capacity contracts. So I'd say from a rate of return basis, I think the market's finding it pretty attractive. But we'll be relatively capital-light on this project. At least this one. Not large capital commitments really until 2018, but for now that's our position.

Thank you guys.

Thank you.

Your next question comes from the line of Faisel Khan, from Citigroup. Your line is open, please go ahead.

It's Faisal Khan, from Citigroup. I just wanted to understand, on CQH, I know you can't talk about the some of the details around the transaction. But is there a shareholder vote that's needed to complete that transaction?

Yes. The LLC agreement calls for a shareholder vote. Yes.

Okay and then is your 80% that you own, part of that vote, or is it just the 20% of minority holders?

The former.

Okay, so it's the entire ownership position that votes. So if it's more than 50% and that's it?

That's right.

Okay. Understood.

In terms of the priority of cash flows, as they come through, as each Train ramps up, have you guys thought about exactly, what's the -- how are you going to balance the need to pay down debt? And how much capital you return to shareholders versus, now you're thinking about building a pipeline? How is that thought process evolving? And where should we think about the priority of cash flows?

Yes, as I said, right now the priority of cash flows -- early cash flows go back into the projects, right? That's how we finance them from day one. So Train 1, 2, 3 cash flow is really directed to finishing Trains 4 and 5. That was a source of cash from day one. And that's $2 billion to $2.5 billion. That's going to be the first priority.

Then we have another $1 billion we have to put into Corpus. So all of that is set up right now, with liquidity and cash flows that we foresee. So that's where were going to be for the next year or two. So we don't have really much to think about in terms of incremental capital allocation.

We don't have any debt coming due for a longtime, in any case. As relates to dividends and investing in MIDSHIP, as I said earlier, that capital is really spoken for, for now.

Okay and Michael, what do you think is a right debt to EBITDA ratio for the company in the long run? As I look at your cash flows ramp up and they mature, how should I look at the balance sheet over the long run on the debt to EBITDA basis?

We start with the project. The metric that matter to us, and to the rating agencies because we have two very large projects is debt service coverage ratio, over the life of the contracts. That's the key metric they care about.

And debt to EBITDA is then a derivative of managing the DSCR. So our projects are in the 1.6% neighborhood, which is deeply into investment grade land. That's why we always say our projects were financed investment-grade. Just a matter of time before they get there, and we saw that with SPL.

So we target 1.5% to 1.6% at the project, and that turns into a consolidated leverage ratio of, what -- six or seven times, which looks high, but it isn't. Right? Because you've got to really focus -- because our long-dated contracts you have to focus on fully amortizing the SCR. 6% or 7% on a consolidated basis is where we'll be for a while.

Okay, makes sense. And then on the modular LNG FEED contract that you guys -- how many dollars or you guys going to allocate to this FEED study and contract?

It's not much. It's singles of millions of dollars for the FEED.

Okay. And then in terms of marketing Train 6 at Sabine and Train 3 at Corpus Christi, is there a marketing team in place? I know there's been some departures within the management team over the last several months. I just want to understand, what's the process in terms of going out and marketing those volumes to new customers?

Thanks Michael, it's Anatol. No absolutely. We have a full team -- full origination team in place, really all over the globe.

We've staffed up in Asia. We have a tremendous resources in London, Houston, and some in Latin America. We feel very good about our ability to cover the globe and the opportunity set with the team in place.

As with any evolution, as we discussed, as we transition from the development to operation, there's some optimization involved. But we have not cut into any muscle, and have the right people in place to capture the opportunities.

Okay. And in terms of -- Trains 1 and 2 are ramped-up now. How are you guys looking at the future nominations? I believe your customers have to give you those nominations a few months ahead of time? How are you guys looking at -- what is the future demand in terms overall capacity for Trains 1 and 2, given your current nominations?

I'm not really sure I understand that question. Can you --

Sure. In Train is 4.5 million tons per annum. And I believe your customers have to tell you ahead of time, how much gas they need to load out of each one of those facilities. I was is trying to understand, is -- over the next few months, what percentage of that capacity is going to be utilized?

Okay so now I understand what you're saying. So we haven't given -- and that information is competitive information. So the customers have filed their ADP schedules with us, so we know when their ships are coming, and what the expectation is for loading. But we haven't given out any other forecast information of what we may do with the excess cargoes -- if that's what you're asking.

Okay. Got it.

And if I could, I'm sorry. But I need to move on.

Did I ask too many questions? I'll go back in the queue. That's fine. Thanks Jack.

(Operator Instructions)

Your next question comes from the line of Christine Cho, with Barclays. Your line is now open.

Hi everyone. So I actually wanted to go back to this pipeline. Would you go forward with just the [750] million that you have contracted or you would really like to see other contracts on it? And just given that there are number of midstream players who have talked about wanting to build residue gas pipes out of the STACKS/SCOOP, I know, Michael, you talked about private equity being interested. But should we think that you're open either doing a JV with another midstream partner or selling interest in yours?

Hey Christine it's Anatol and perhaps Michael will chime in, as well. But again, we approach all of these gas supply decisions in a robust fashion. We evaluate buy versus build opportunities.

The 750 million to answer the first part of the question, is the amount we would need to go to a binding open season. The project would be scaled at that point for attractive jurisdictional returns. That is something, as Michael said, that there is a tremendous interest in for a number of reasons. We, as well as our partners, would like to see a larger pipeline built pointed at Tex, so could our supply portfolio there.

We think there's very good opportunity for capturing additional commitments, and we think that pointing those SCOOP and STACK volumes in the southeast direction is really optimal for the producers to reach the growing market in the Gulf coast. So we're very optimistic. Again the 750 million we think is just the starting point, and is something that we think both producers and the market will find attractive.

Before we embark on this process, which has been -- we've been at it for the better part of year. We did evaluate dozens of other opportunities, and again, this is something that we are very comfortable with and confident is the right solution to be dialed-in.

And again as Michael said, we have tremendous interest from sponsors that will minimize our financial commitment and will allow us to get the molecules into the right market for us.

Okay great. And then the modular stuff that you're looking at, you guys said 9.5 NTPA, but I was curious, how large is each module Train? And, if successful would you build them one by one? So it's not necessarily like, you need a big portion of at 9.5 day one to move forward with one Train? How should we be thinking about that?

Yes, thanks Christine. Again this is a modular design. We're still early in evaluating. Again, the minimum efficiency scale here is something between 1 million and 1.5 million tons. And the attractiveness here as we will be able to dispatch them as we successfully commercialize them. That's the whole idea behind this.

The 9.5 happens to be a number that matches well with lots of other components and how we think about -- how we grow the business beyond Train 3 and Train 6.

And then, there was some news about one of your neighbors experiencing some sizeable delays on their LNG project due to the flooding. It sounded like it was an issue that was specific to them. But can you just verify that there is no impact to Bechtel facilities and workforce as well as your facility from similar issues?

That's right Christine. We have no impact for Bechtel or for our facilities like they did at one of the other competitor's facilities. So we're very pleased with our relationship with Bechtel. We're pleased that Bechtel is built a majority of these liquefaction facilities around the world. And we intend to meet all of our commitments and get these Trains on budget, on schedule, et cetera.

Thank you.

Our next question comes from the line of Ted Durbin, Goldman Sachs. Your line is now open.

Thanks. Can you tell us how many marketing cargoes, or how much marketing volume you lifted this quarter? And were they all liquefied at Sabine Pass?

So the cargoes that were lifted as part of the commissioning process by Cheniere Marketing, which as Michael said, are not effectively are not reflected in our revenues. We had three of those, before commercial operations. In terms of other commercial activity by Cheniere Marketing, it's not something we want to give any additional detail on at this time.

Okay. I was a little unclear on the El Campesino moving to FID, do have full regulatory approval for that project or not?

We do. We have both -- we have permits issued both for the terminal, as well as the power plant.

Okay so what's next then in terms of FID? You're comfortable with the returns and other things, what's left then?

Absolutely. Well, what's left is reams and reams of documents and agreements, and of course most importantly, the financing.

Okay. Got it.

And then if I could just do one more, on the CapEx itself for all of the Trains, can you just given update on where you are in terms of the change orders. I know you said you're on-time, on-budget. Have you reserved enough versus where you're tracking? And then, if you could give us a sense of the actual CapEx spend, as you're looking at 2017 and 2018, if you could the dollar number on that?

Sure. So, on the contingency side we're still very comfortable and we don't really give that number out month to month or quarter to quarter. But it substantial at SPL and it's really substantial at Corpus still -- really, close to what we started with.

And we're 40% into the project, or so. We're feeling good about contingency. In terms of CapEx next year, it's a couple billion dollars if you include IDC and financing cost for SPL next year. Corpus will be a little north of $2 billion, closer to $2.4 billion. So $4.4 billion nest year CapEx. Then it starts to roll-off a bit. 2018 looks more like $3 billion in total.

That's perfect. Thank you very much.

All right, Ted. Thank you.

Our next question comes from line James Carreker, with US Capital Advisors. Your line is now open.

Most of my questions have been answered. Thank you.

Thanks, James.

Our next question comes from the line of Jeremy Tonet, with JPMorgan. Your line is now open.

Good morning.

Hi, Jeremy.

Jack, you've made some swift progress here in terms of ringing out some efficiencies. I'm just wondering if you could expand a bit more, as far as other opportunities that you've been seeing here, and how we should think about that as we head forward?

Well thanks, Jeremy. First off, it's been a fantastic opportunity for me personally these past six months. It's been rewarding, interesting, getting to know the Cheniere professionals has been fantastic.

We've had a lot of irons in the hopper, and so we've been pulling on a lot of different levers. I'm looking forward to stabilizing the organization, and really seeing what this team is capable of.

So I'm very, very excited about our future going forward. And I'm extremely excited to be working with this group of professionals. Because we all seem to be communicating very well and we're all focused on the right things, which is building the existing Trains, operating the existing Trains, and then growing this business.

So -- but thanks for the recognition. This group has been working really hard this past few months.

Great. And then building on one of the earlier questions, one of your competitors announced construction delays. How do you see this impacting you as far as DC opportunities for Cheniere that arise from this development? Whether it be marketing, or attracting new business, or in any other way?

Well first, Jeremy, thank you. And I would just give a shout out if they need help with some LNG. Cheniere is ready, and willing, and able to provide themselves or the customers with a few tank loads of LNG if they need it. But other than that, I'm not sure there's anything I can say -- or it's not, what were we're experiencing ourselves.

Fair enough. Thanks for that. I'll step back in the queue and give other people a chance. Thanks.

Thanks.

Our next question comes from the line of Fotis Giannakoulis, Morgan Stanley. Your line is now open.

Yes, good morning gentlemen, and thank you. I would like to ask you about the recent development in LNG prices. The $7.00 per MMBtu is significantly higher what we saw of this year. What do you think is driving that? And how sustainable it is?

And if you can also discuss whether prices can affect the FID over Train 6 of Sabine Pass or even the mid-scale. Whether you can take FID without off-takes just by hedging the gas prices -- right now they have moved much higher than earlier this year.

Hey Fotis, it's Anatol. Thanks for the question. The pricing has been very robust. And I'll give a shout out the teams on both sides of the plant that have sourced gas very efficiently and effectively, and have marketed those volumes, as you guys can see from the DOE reports, effectively as well.

You know I will say, you and I have discussed this in the past, and anybody who thinks that price elastic supply and price elastic demand takes a decade to rebalance -- I just disagree with and I think that's a large part of what were seeing here. We're seeing it in the coal market and we're seeing it in the LNG market.

We've had dramatic increase in imports -- increased utilization of existing infrastructure, and this is coming at a time when we are delivering volumes into the market and on our map almost 2/3 of this wave of Australian LNG has come online. Now you can say, that the Trains aren't, in aggregate, running at capacity which is fair. But the market has very effectively absorbed these volumes and I don't think you have a lot of people a year ago prognosticating this rally in European gas prices.

So as you said, the NBP minus 115% of Henry Hub is bopping up around $4.00 now and that is certainly good for our business and continues to position Henry Hub as a supply source very attractively. Now your next question of, is it hedgeable for term and is it something that we would use to underwrite our expansion opportunities?

The answer on that is no. We would need term contracts with credit-worthy counter-parties, and if there's a large portfolio player that is emboldened enough to go into the market and attempt to lock in, this spread, which as you know, as well as anyone, isn't all that liquid beyond a relatively short period. We'll be happy to supply into that contracted capacity, but we would need term and credit in order to FID incremental liquefaction.

Thanks Anatol. Just one follow-up.

What would be the minimum amount that you would need to get enough takers for the mid-scale opportunity that you are discussing?

Well Fotis, thanks.

It's early to tell, because we are still kicking the tires, of course, and evaluating with our partners what the size and cost structure is. But the extent that we're right, and that this minimum efficiency scale number is somewhere in the 1 million to 1.5 million tons range, and we can opportunistically add this capacity in smaller increments -- I would say as a guidepost, you could think about a 2/3 to 3/4 of that capacity of that being committed under term sales in order for us to move forward.

I think we would say that we don't need the 90% contracted capacity for 20 years as we did on the current projects, but substantially firmed up is -- with the majority sold under long-term agreements is our current posture.

Thank you very much Anatol.

Your next question comes from the line of Craig Scheer, with Tuohy Brothers. Your line is now open.

Good morning. Thanks for getting me in.

As a follow-up to Ted's question about the quarter's cargoes, is there any color about foundation customer interest in tapping their early cargo rights?

Yes. It's Anatol again. So foundation customers, as you know, both BG/Shell, as well as Gas Naturale have agreements for pre-commercial cargoes. And they're the only two that have those agreements.

But the Cheniere Marketing organization has been transacting with the entire portfolio of LNG buyers, and those foundation customers are among them. So the answer to your question is, yes on both. Both the pre-commercial cargoes as well as incremental volumes have been sold to foundation customers.

Fair enough. I appreciate that. And the original higher margin contracted position, like a year and a half plus ago, I think it was like 150 million MMBTU through 2018. Are those cargoes ones that you have flexibility on timing of filing or should they rollout methodically over time through 2018?

So all of those sales are at time certain periods, if that's part of your question. And as you said, that margin will flow through our financials over the next year and a half, or so.

And I guess I'm asking, is how lumpy is it or is it pretty methodical?

It's substantially into 2017 with some volumes into 2018.

Okay. And then last question, there with some comment about being very comfortable with the budgeted contingencies at this point. Can you handicap at this point -- combined with prospects for not using all SPL contingencies, and also what debt and financing cost to this point, about coming on the inside of that, $2 billion $2.5 billion back-end equity funding target?

No, I think our assumption right now, conservatively, is that the contingency gets spent. Train 5 is still way out, and Corpus is still relatively early days. So very comfortable with contingency, but we are not taking a victory lap just yet.

Fair enough. Thank you.

Our last question comes from the line of Alex Kania, with Wolfe Research. Your line is now open.

Thanks good morning. I want to go back to the SG&A commentary. So again, I just want to verify that you said in the past, that you'd see a long-term run rate of LNG Cheniere level of $300 million, now you're saying it's going to be closer to $200 million? Is that a fair way think about it?

That's right.

Does it take any additional time to get there? Or do you feel like that a lot of the steps you need to make, have already been made?

Yes. If you strip out stock comp out of our current run rate, we're not that far from the low $200 millions right now. We're going to generally arrest the growth of future G&A. There be some growth, but they'll be some other areas where we'll be more efficient and the net will be a flattish run rate.

Great. Thanks very much.

And there no other questions this time. I'll turn the call back over to presenters for closing comment.

Yes. This is Jack. I just want to say thank you very much for all of your support of Cheniere, and of me, over these last six months and I look forward to working together over the next coming years. So thank you again. Bye-bye.

This concludes today's conference call. You may now disconnect.