Cheniere Energy Inc (LNG) 2018 Q3 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to the Cheniere Energy Third Quarter 2018 Earnings Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the call over the Randy Bhatia, VP of Investor Relations.

Thank you, operator. Good morning, and welcome to Cheniere Energy's Third Quarter 2018 Earnings Conference Call. The presentation and access to the webcast for today's call are available at cheniere.com.

Joining me for today's call are Jack Fusco, Cheniere's President and Chief Executive 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 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 non-GAAP measures, such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these measures to the most comparable GAAP measure can be found in the Appendix of the slide presentation. As part of our discussion of Cheniere Energy, Inc.'s results, today's call may also include selected financial information and results for our 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 an overview of recent commercial and strategic developments, a review of third quarter results and an update on construction and operations at our liquefaction projects. Following Jack's comments, Michael will review our financial results and discuss 2018, 2019 and run-rate guidance. After prepared remarks, we will open the call for Q&A. I'll now turn the call over the Jack Fusco, Cheniere's President and CEO.

Thank you, Randy and good morning, everyone. Thanks for joining us as we review Cheniere's results from the third quarter 2018, provide updated financial and operating guidance and discuss some important developments we announced in our earnings release earlier this morning.

I'm pleased to announce exciting commercial and strategic developments today. This morning, we announced a 24-year SPA with Polish oil and gas company, for approximately 1.45 million tons per year of LNG on a delivered basis through our marketing flagship, with delivery of a proportion of that quantity will begin next year. Anatol's in Poland today celebrating with our newest long-term customer. I want to personally thank Anatol, Ramsey and the entire Cheniere team for another win. Execution of this SPA brings the total amount of contracted volume we have signed this year to over 6 million tons, with an average contract tenure of almost 20 years and expected aggregate notional revenue of nearly $50 billion. Our contracting success demonstrates the value buyers place on Cheniere's ability to provide reliable LNG solutions, tailored to customer's needs.

This morning, Cheniere also signed an EPC contract with Bechtel for the Train 6 expansion at Sabine Pass, locking in cost and construction schedule. We are releasing Bechtel to do some early works and get Train 6 underway prior to our final investment decision. The process of releasing Bechtel under a limited notice to proceed at Corpus Christi Train 3 worked well, and we expect that to be the case for Train 6 at Sabine Pass also.

The third quarter was another great quarter for the company, as we generated $425 million in operating income and $569 million in consolidated adjusted EBITDA. Our strong quarterly performance was supported by steady and reliable operations at Sabine Pass and continued strength in LNG supply and demand fundamentals throughout the quarter, which we expect to continue as we approach the peak winter season. Our year-to-date performance continues to outpace our expectations from earlier this year, and today, we are raising and tightening full year 2018 guidance for both consolidated adjusted EBITDA and distributable cash flow. We now expect to generate between $2.45 billion and $2.55 billion of consolidated adjusted EBITDA, and between $500 million and $600 million of distributable cash flow. Michael will cover guidance in more detail later in the call.

Our commercial momentum, which helped enable the FID of Corpus Christi Train 3 earlier this year has accelerated in recent months. Since our last earnings call, we've executed 3 additional long-term SPAs, with new high-quality off-takers. These 3 SPAs total over 4 million tons of LNG and provide significant contracted stable cash flows for Cheniere's investors. On the operational side, during the quarter, we produced and exported 65 LNG cargoes from Sabine Pass, and as of October 31, over 215 cargoes have been produced, loaded and exported from the terminal year-to-date. More than 475 cumulative cargoes have been exported since startup, reaching 29 countries and regions worldwide.

On the financial front, there are 2 major highlights on the quarter that I want to review. First, we closed the merger with CQH, which was originally announced in June of this year. Pursuing accretive opportunities to simplify our structure was one of the first goals identified when I joined Cheniere 2.5 years ago. The CQH deal not only simplifies the Cheniere complex, but does so to the benefit of the LNG shareholders. Second, we have continued to manage our balance sheets well. Michael and his team continue to be strategic and opportunistic on this front. During the third quarter, we refinanced the remaining outstanding CQP term loans due in 2020, with CQP bonds due in 2026. This bond transaction addressed the nearest term maturity in the Cheniere complex in a very cost effective manner.

Now let's turn to Slide 6, where I'll give you a brief update on the construction and operations at Sabine Pass and Corpus Christi. Commissioning of Sabine Pass Train 5 is going very well. We introduced feed gas in September; first LNG was produced in late October; and we expect substantial completion to be achieved during the first quarter of 2019. Commissioning is also going very well for Corpus Train 1. We introduced feed gas in August and expect substantial completion of Train 1 to be achieved also during the first quarter of 2019. Corpus Train 2 continues to progress on an accelerated schedule and we expect substantial completion in the second half of next year. We look forward to placing these 3 Trains into service safely, ahead of schedule and within budget in 2019. Based on current construction schedules for Train 5 and Train 1, our marketing function is expected to gain access to incremental LNG volumes, aggregating between 2.5 million to 3 million tons in 2019, ahead of the commencement of our long-term SPAs related to those Trains. There is also potential for meaningful incremental volumes related to Corpus Train 2 in late 2019.

Now let's turn to Slide 7. We've had an incredibly busy and productive 2018 at Cheniere, and our major efforts tie together to increase our expected future cash flows and strategic position and therefore, our value proposition to our shareholders. First, we are focused on optimizing our existing liquefaction assets. As spoken on previous calls and in other investor forums, we're identifying and prioritizing debottlenecking projects and optimizing our operations to increase LNG production. We've worked over the past months to identify, evaluate and execute on these opportunities. We have now identified significant debottlenecking opportunities at leading economics of approximately $300 a ton as well as maintenance optimization opportunities. And today, we're raising our average adjusted run rate production guidance to 4.4 million to 4.9 million tons per year of LNG per Train. As a result of increased expected production, we're also raising our run-rate consolidated adjusted EBITDA and distributable cash flow guidance by approximately $200 million. Second, we're focused on progressing towards a positive final investment decision on Train 6 at Sabine Pass. We have contracted with Bechtel to construct Train 6 and supporting the infrastructure in very competitive economics, and that project is already underway under limited notice to proceed. As I mentioned earlier, we have had significant commercial success this year, entering into long-term SPAs totaling more than 6 million tons per annum of LNG volumes, including more than 4 million tons per annum signed after the FID of Corpus Train 3.

These SPAs are with credit-worthy counter parties, and increase our visibility into an FID on Train 6. We are determining the optimal parameters to an FID in our ninth train next year, and are pleased to have this project commencing now and rest assured, it is our #1 strategic focus.

Our third area of focus is developing additional liquefaction and strategic projects, creating a path for future cash flow growth. We received the FERC scheduling notice for Corpus Christi Stage 3 in August, and are encouraged with the regulatory progress and pace on that project. Our MIDSHIP pipeline project received a FERC order in August, and we anticipate beginning construction in the near future to meet an in-service date in the second half of 2019.

Finally, we're exploring additional liquefaction capacity in Corpus Christi as we seek to leverage our infrastructure to develop new liquefaction capacity with market-leading economics.

And now I'll turn the call over to Michael who will review our financial results and discuss 2018, 2019 and our run rate guidance in detail.

Thanks, Jack, and good morning, everyone. This morning, I will review some highlights from our third quarter financial results, recap recent financing activity and provide some additional detail regarding our guidance.

Turning to Slide 9. For the third quarter, we generated operating income of $425 million, consolidated adjusted EBITDA of $569 million and distributable cash flow of $111 million. Our operating performance in the third quarter was in-line with our expectations and our financial results were bolstered by stronger-than-expected marketing margins. As a result, we are raising our consolidated adjusted EBITDA guidance for the full year to $2.45 billion to $2.55 billion, and our distributable cash flow guidance to $0.5 billion to $0.6 billion. Year-to-date, we have generated operating income of over $1.5 billion, consolidated adjusted EBITDA of over $2.0 billion and distributable cash flow of more than $470 million. We exported 228 TBtu of LNG from Sabine Pass during the third quarter, none of which were commissioning volumes. These volumes were slightly higher than our exports during the second quarter. During the third quarter, we had less maintenance than during the second quarter, partially offset by some seasonality impact to production due to summer weather. Approximately 86% of the volumes exported during the quarter, or 196 TBtu, were lifted by our third-party long-term SPA customers and the remaining 32 TBtu were lifted by our marketing function. Incremental production volumes were lifted by our long-term SPA customers during the third quarter, with the Train 3 tranche of the VG SPA in effect for the full quarter and marketing volumes were consistent with the second quarter.

For the third quarter, we recognized in income 228 TBtu of LNG produced at Sabine Pass, consisting of 228 TBtu loaded during the third quarter plus 3 TBtu or 1 cargo loaded in the prior quarter but delivered and recognized in the current quarter. Last, 3 TBtu or 1 cargo, sold on a delivered bases that was in transit as of the end of the third quarter. We also recognized in income 23 TBtu or 6 cargoes of LNG sold by our marketing function that was sourced from third parties.

Net income attributable to common stockholders for the third quarter was $65 million or $0.26 per share, an increase of approximately $83 million compared to second quarter 2018. The increase in net income was compared to prior quarter was primarily driven by increased income from operations due to higher pricing on marketing cargoes and less maintenance at the plant. Year-to-date, we have generated over $400 million of net income. As I mentioned earlier, based on strong operating performance and durable market pricing, we're increasing our full year 2018 consolidated adjusted EBITDA and distributable cash flow guidance. We're also raising and tightening our CQP distribution guidance to 2.27 to 2.30 per unit for 2018.

During the third quarter, we closed our previously announced merger transaction with Cheniere Partners Holdings, or CQH, in a stock for stock transaction. The completion of this merger transaction was a key step in simplifying our corporate structure, one that took significant time to complete, and during which, we remained disciplined and focused on creating value for our shareholders. Also during the quarter, Cheniere partners issued $1.1 billion of senior notes due 2026, which priced at par to yield 5.625%. Proceeds of the offering were used to prepay all remaining term-loans under the CQP credit facilities, which had a maturity date of 2020. The nearest long-term debt maturity within the Cheniere complex is now 2021.

Slide 10 summarizes our full year 2019 and revised run rate guidance. Consolidated adjusted EBITDA for 2019 is expected to be between $2.9 billion and $3.2 billion, and distributable cash flow between $0.6 billion and $0.8 billion. Our guidance range for next year includes the impact of higher-than-expected average maintenance at Sabine Pass. We have assumed that Sabine Train 5 and Corpus Train 1 achieved substantial completion in the first quarter and Corpus Train 2 is completed in the fourth quarter of 2019. Our actual results for 2019 would be impacted by changes to Train completion timing or LNG market pricing. For 2019, we estimate our EBITDA would change by approximately $130 million for each $1 move in LNG margin, and about $200 million or a 1-month change in the substantial completion timing for all 3 Trains, which are expected to enter service next year. As Jack discussed earlier, we've identified significant debottlenecking and maintenance optimization opportunities at very attractive economics. And today, we're increasing our average adjusted run-rate production guidance from 4.3 to 4.6 mtpa per train to 4.4 to 4.9 mtpa per Train. Maximizing the potential of our existing asset base through debottlenecking projects, maintenance optimization and plant overdesign is expected to unlock additional volumes and drive an increase in EBITDA and cash flow. Today, we are raising our 8 Train run rate consolidated adjusted EBITDA guidance to $4.4 billion to $4.9 billion, and distributable cash flow to $2.1 billion to $2.6 billion, or $7.25 to $8.75 per share. We're also increasing our run rate CQP distribution guidance to $3.30 to $3.60 per unit.

Earlier this year, we showed the investment community consolidated sources and uses of projected available cash for 2018 through 2022, with expected total available discretionary cash generated in that period of approximately $5.8 billion. We now estimate that amount to be approximately 10% higher, driven primarily by increased production of estimates, a slight acceleration and anticipated completion timing of Corpus Train 3, and decreased noncontrolling interest after completion of the CQH merger transaction.

Before turning the call back to the operator for Q&A, I'd like to briefly address capital allocation, an increasingly hot topic among our stakeholders as we anticipate reaching stable operations with 7 Trains in operation in the next year-or-so. Development communication of a capital allocation strategy along with the anticipated timeline for implementing that strategy is one of our highest priorities right now, and we anticipate communicating our plan to you in the first half of next year.

That concludes our prepared remarks. Thank you for your time and your interest in Cheniere. Operator, we are ready to open the line for questions.

(Operator Instructions) We will now take your first question from Jeremy Tonet from JP Morgan.

Congratulations, Jack, on extending the size of the trains there. I was just wondering if you could dive in a little bit more as far as what you guys were able to do to accomplish that? And is this just something that is at SPL or is this at Corpus as well?

Yes, so Jeremy, thanks. As Michael said, the debottlenecking projects fall really into 3 categories: so 1 -- category 1 would be maintenance optimization, which is really trying to reduce our maintenance time, so we can increase production, because it's all about production; category #2, I'd say, is the reliability improvements, which is a real focus on extending that planned maintenance cycle, and if you can extend it and push it out then you can produce more; and then the third bullet is just an all-out overdesign of the facility. So when we add up those 3 brackets, if you will, when we look at the increase in production, we estimate that we can increase production by almost 4 million tons across the platform, which is fairly significant. It's almost a whole Train at around $300 a ton. So we're very excited about it. We're working on it now, and we'll continue to work on it. In 2019, it's going to be a big year for us to move this forward pretty significantly. Michael, do you have anything to add on that? No?

Does that help, Jeremy?

That is helpful. And just wanted to turn on the guidance here, and it seems like the implied 4Q guide, if I'm looking it right, a slight tick down over 3Q at the top-end. Just wondering if there's any kind of headwinds in 4Q that we should be thinking about there? And the guide for 2019, just wondering, any incremental color you can share with regards to shipping rates have moved up a bit, how you think about the price stack for the -- your CMI assumptions there, is it kind of [2 50] assumptions you're thinking? Or anything else you can share on those points.

Sure, Jeremy, it's Michael. With respect to Q4, no, we don't see really any significant change in Q4. So we said, ever since Q1, which Q1 was a volatile quarter, given Train 4. But ever since then, we've been in a highly contracted state. And so delivering $550 million of EBITDA roughly for Q2, Q3, and expect that to be generally the case for Q4. In terms of shipping, rates have moved up quite violently over the past 3 months. We have been really proactive on our shipping position, so we took down a lot of tonnage over the summer in anticipation of commissioning and having these 3 Trains really in the CMI book until DFCD later this year. We're probably a beneficiary of ship movement more than anything, so we're in a good position there.

Great. Anything else on the CMI assumptions in 2019 that you're willing to share?

Yes. Generally we want to -- yes, definitely. Generally, we want to kind of not talk a lot about our CMI position, given the competitive nature of it, but given that it's going to be a huge piece of our business next year, I'll say a little bit about it. So I think the marketing function is going to deal with about a little over 8 million tons next year in our budget, about 8.25 million tons. About 2 million tons of that we'll be commissioning, so non P&L. So we'll generate a lot of cash from that, it will just be an offset to PPNE. So that gets us to about 6.25 million tons. And we've given you how we think EBITDA will change for a $1 move in margin. We've put away a fair amount of that 6.5 million tons, but still have a pretty large open position, which is a good thing given where prices are. So that's how I'd characterize CMI for next year.

Got you. So it sounds like there's some upside if you can pull those trains forward, the new ones that you continue to do?

Definitely.

Absolutely.

We will now take our next question from Christine Cho from Barclays.

This is Marc on for Christine. In the past, you guys have voiced your preference for keeping DES contracts at the CMI level. With today's contracts, and I believe the CPC contract both being DES, how should we think about how the banks are going to view these contracts with respect to financing for Sabine Pass Train 6? Do you think they'll look through to see who's backing the CMI contract when thinking about the bank funding for the Train?

I guess, on Train 6, I would say, we signed the contract with Bechtel, we gave them limited notice of receipt, so we've locked in budget and schedule at this point. So we're day for day on the guaranteed schedule, and we don't have to give them a full notice to proceed under that contract until the middle of next year. So your point is a good one. Ultimately, what contracts we give to Train 6 and show to the banks is kind of TBD. You're right, we prefer to keep the DES business at CMI. That gives us ultimate flexibility to deal with those obligations. But it's not out of the question that we would move some of those down. If we didn't have standard FOB business to attach to them. So we'll see how that plays out over the next 3 or 4 months and then make a call ahead of next summer when we need to give Bechtel full NTP.

Got it. And so just to clarify, should we think FID is generally a function of financing or are the moving pieces there?

Sure. I mean, we need to put the financing in place. I don't feel a ton of pressure to get that done, again, because we've let Bechtel go. But again, we need to decide what we're going to do by the middle of next year and financing is certainly one milestone we need to get sorted out over the next 3 to 4 months?

Okay, and just to clarify with your 2019 guidance, I think you mentioned that it assumes 2.5 million to 3 million tons of early cargo volumes. Just want to clarify, does that assume any early cargoes from Corpus Train 2? And should we assume a base margin of $2.50 as is typical in your projections?

So yes, the comment on 2.5 million, 3 million is the early cargoes associated with all 3 Trains that are going to come on next year, with Train 5 and Train 1 in the first quarter, and then we have said the Train 2 sometime in the second half. So yes, we're going to -- and the DFCDs on all those trains are 6 to 9 months after the time they come on. In terms of margin, no, I don't think $2.50 is the number. Again, for the unsold piece of the marketing book, we are assuming more like $4.50 to $5 on the unsold piece, which is a little bit higher than what the screen would show you today, and that's by virtue of our in-the-money shipping position. So that's what we have assumed.

(Operator Instructions) We will now take our question from Jean Salisbury from Sanford Bernstein.

What is your ideal steady state for the percentage of your cargoes that you're getting a long-term fixed fee for versus spot market price? And does that change kind of year-by-year, I guess, based on your view of the LNG market? Or is there a steady north star?

I didn't hear the first part of it.

Excuse me, Jean, did you say the long-term steady state?

Your ideal steady state for kind of the long-term fixed fee versus spot market, now that you have a little bit more cargoes expected in your run-rate?

Having open capacity at the CMI business is a strategic advantage for us. So we don't ever want to be in a state where we're sold out in that business, and we've targeted 80%, 85% contracted, which that last 10%, 15%, given the size of our platform, is like 4 million or 5 million tons, which is a pretty good book for CMI to have to really tie early cargoes to long-term business and things like that. So we really like that flexibility as part of our business and we intend to keep some length there.

And I'd just add to that. Strategically, having those bridging volumes available that we can start our long-term customers or new customers like the Polish utility that we announced this morning, is very beneficial to them and to us.

And I'll say one more thing. I mean, our ability to sell without a condition precedent on building a facility is a competitive advantage that we have, right? So we don't -- our customers don't take the risk that we have to get a project underway when we sell to them, and that differentiates us quite a bit.

That makes sense. And should we expect that most other U.S. LNG facilities would have kind of similar debottlenecking potential that you showed today? Or do you view some of it as being specific to your site or design?

We have no idea what their design basis are or their reliability, and it's probably better to talk to them about that.

We will now take our next question from Danilo Juvane from BMO Capital Markets.

Michael, I apologize for missing this in your prepared remarks, but what were the upside opportunities that you mentioned with SPL 5 and Corpus Christi 1 for next year?

The movement on the schedule, I think, is what he's asking.

In terms of schedule, so we have Train 5 making LNG in a Q1 substantial completion. So we're talking there about weeks movement, so it's not that significant. Corpus hadn't made LNG, but it's very close to doing it. And again, we have that in Q1. So again, I think that's weeks. There's probably more opportunity on Train 2 at Corpus, but let's see how Train 1 goes first. There maybe a little bit more opportunity on Train 2.

Did you mean that the $200 million in increased EBITDA or EBITDA change for substantial completion?

That is purely a result of raising run-rate production guidance.

Got you. Got you. And I guess, with the ability to sign 3 contracts in Europe, obviously, this is not an Asian customer. Are you seeing now more of an appetite to -- from European -- from European customers to be more willing, I guess, to sign contracts going forward here?

It's a combination of everything. So we -- our business model is different. It's different than other U.S. LNG providers that are currently in construction. So we're a full-service provider, meaning we buy the gas, we transport it, we process it, we load it up on our ships and we'll send it right to your phalange. And that's where we're seeing a big increase. So we mentioned CPC in Taiwan, we've mentioned Poland now. Those are delivered straight to their phalange, or straight to the utility, and in most cases, they go straight to a powerplant and are used for power generation. So having that full-service business model, having the bridging volumes that Michael talked about in the portfolio, that -- it's a competitive advantage for us, and we're just getting started. So yes, we're very, very busy and very excited about our opportunities going forward and the opportunity to continue to grow this business.

Last question for me is on capital allocation. Obviously, you have a lot of potential upside in the guidance that you highlighted for 2019. If you would just look at 2019 guidance as you currently have it outlined, how would you think about what your capital allocation options could be next year?

Yes, I think we'll talk about that after we get these 2 Trains up and running. The good news is we thought we had $5.8 billion over the next 5 years, and with all the things I mentioned in the prepared remarks, we think that's 10% higher, closer to $6.5 billion. We're going to spend as much of that as we can on building more liquefaction Trains, but I think we're going to have some leftover. And we're going to talk to the market in the first half of next year about what we think the best use for that is.

We will now take our next question from Matthew Phillips from Guggenheim.

A follow-up on CMI's impact on 2019 guidance. I understand your reluctance to share your commercial position, but is the right way to think about it, that the volumes you know you'll have from SPL would already be presold, whereas the commissioning -- not the commissioning, but the pre-DFCD cargoes from TCL 1 and SPL 5 would be floating with the curve?

Definitely, yes, we don't -- well, like I said, commissioning is kind of 2 million tons next year on the high-end. And yes, we don't sell those until we know we have them. So those will be purely market-based. The balance of the portfolio, which I said is 6 million tons, I mean, you don't go into a year not having not put any of that away. So we sold some of that earlier this year, and continue to do so at present in a rising price environment. And so I'd say a fair amount is still not sold. All of the commissioning is unsold, and then a portion of the book is put away given the amount of volume for next year.

Understood. And then, with regard to long-term contracts, I mean, what would you estimate is the range for clearing prices for new offtake? And what's kind of driving that in one direction or the other?

You want to talk about prices and long-term contracts?

I would -- it just depends. It depends on who you're talking to and where they're located. But so -- and as you see in from LNG Canada and some -- and the Qataris and the Russians, that everybody's got big plans to expand and grow. So I'd rather not talk about prices on the call, but you should -- rest assured that we're doing our part here for America and for U.S. LNG to continue to grow our business, and that's been our focus, and making sure that it meets all of our financial hurdles to our shareholders.

Right. And on that note, that's really what I'd focus on, we said we're investing at a 6x EBITDA kind of ratio, that's what we did on Train 3, it's what we think Train 6 will look like, and more like a 3, 4x on an equity to cash flow basis. So without getting into the top -- what's driving the top line, those are the investment hurdles we're trying to reach, again, on a heavily contracted basis.

We will now take our next question from Craig Shere from Tuohy Brothers.

So for Corpus Christi Train 1 early completion, are you potentially more open on originally hedged feedstock gas cost there, such that for the time, you can benefit from wider basis differentials?

Sure. There will be some opportunity there, yes.

Okay, and kind of turning that line of questioning forward, obviously Phase 3 of Corpus Christi, that is going to have full regulatory approvals in the not-too-distant future, with 9.5 mtpa capacity is potentially more advantaged than Sabine's location. And I'm wondering if you're talking about a formal FID by mid-next year, and I guess, you're doing prop work right now, and I understand that. But why wouldn't we be thinking about turbocharging Phase 3 of Corpus ahead of Sabine 6?

Well, first off, you all should assume that we're not slowing down, so it's been an extremely productive year in 2018. And I see that going forward in 2019. So it is our goal to continue to expand the business, and it's going to be an easy capital allocation discussion if we continue to be as successful as we have been, because [tie goes] to growth, and we're just want to be investing back into our core business. So the other part of it is, while we're very pleased with the FERC schedule and the review of the permits for Stage 3 at Corpus, which is our midscale project, timing-wise, our customers need LNG now, and we've got to take advantage of that. We have the shovel-ready projects, we have construction forces that are going to be rolling off the Train 5. There's a lot of synergies that Bechtel has given us in cost reductions, et cetera, being able to roll that team right into Train 6. So I would expect that we continue to win our fair share of these contracts, and we continue to grow the business and we move right into the next round of growth, and that growth is going to be back at Corpus after Train 6.

I don't think it's an either/or proposition on either of them. And to your original question on Corpus, absolutely, a better place to be right now from a gas supply standpoint. Permian Highway and Gulf Coast express are each being built directly into our existing infrastructure to feed us, so it's really a great place to be from a supply standpoint.

Great. And last question for me. Without getting into details on specific price points for long-term contracting, couldn't help but notice that some of your press release disclosures this year on new SPAs, some referenced Henry Hub plus a fixed component, and some referenced just Henry Hub plus a fee, which -- and then CPC in Taiwan had said that there's some gross very large price point all-in, obviously, to promote the idea of trade. But the question is, does some of your contracting entail some liquefaction fees that can float for a little bit in the curve against some index?

We didn't mean to -- we weren't trying to trick anybody on the language change. I mean, they're pretty standard contracts with significant fixed fee components. There is a case or 2 where we share in some upside, but still, the fixed fee component is still the dominant factor in the contract, not in any of the contracts that you mentioned, with respect to profit shares, but there are 1 or 2.

We will now take a question from Alex Kania from Wolfe Research.

Just a question on just the overall kind of market environment right now. I mean, in the last probably few weeks, you've seen a flurry of contracts, MOU announcements, so just kind of curious how you characterize what you're seeing in long-term market discussions right now just for buyers and maybe kind of are you kind of seeing maybe elevated competition from these other projects right now? I'm just kind of curious on that.

So the good news is, natural gas demand continues to increase worldwide, especially in Asia. So it goes well beyond just China. You have China, Korea, India, Pakistan, all increasing significantly year-over-year in LNG imports. And so yes, we've been extremely busy. The team has been trying to craft solutions for different customers around the world. And I think in the forecast that I've seen whether it's Wood Mac or others, there's a significant shortfall in the LNG supply outlook. So the shortfall is well over 100 million tons even today, even with some of the announcements worldwide of others that are trying to expand or grow. So I do think there's a huge opportunity for us that the winds at our back and we just need to continue to execute. Michael, you have...

We're coming out of a historic lull in FIDs this last down cycle, and so I think the market is just scurrying to kind of catch up. So even in 2025, it looks to be a 70 million-, 80 million-ton opportunity. And of course, you have to get going on that, from a construction standpoint, in the next year if you're going to hit that window. So I think that's what's driving a lot of this market activity.

We will now take our next question from Julien Dumoulin-Smith from Bank of America.

Well, Jack, I wanted to turn the tables back to this capital allocation question. I know you mentioned on the call, in the prepared remarks, about turning to this 2019, but knowing you, you have a penchant for talking about buy-backs at times. How do you think about this business and whether buy-backs versus dividends make more sense? Obviously, you've got a very stable source of cash flow here. You've now priced, or presumably have visibility on the overall cost of SP 6 given the context that you provided this morning with Bechtel. Can you at least initially give us some thought process on the merits of one versus the other, particularly turning to 2019, and maybe as you think about the evolution of the business from '19 to '20 to '21 kind of? Maybe what else needs to happen for you to get there?

That is a loaded question, but if the stocks keeps staying exactly where it's at, I'm all for buy-backs, if that's what you're asking me. It's going to be a very short capital allocation discussion with the investors. But as Michael pointed out, there's a whole lot of cash that this business is going to generate. And with the stability of our contracts, there's going to be a great opportunity for us to try to get that cash back to the investors. And we're going to figure out, Julian, what to do here, as Michael said, in this first half of next year, and be able to communicate it and we're looking at the most tax effective, efficient way to get it back to our investors and that's about all. But you know my history from Calpine in the past, I'm a big advocate of making sure we get this capital allocation done right up front and be able to communicate to everybody appropriately.

Got it, excellent. And to that point, on SP 6, just to make sure we hit it here, what is the pricing on a per-ton basis? And what kind of advantage do you get given that the efficiencies you alluded to in getting ahead of it before FID. If you can talk to it in more precisely?

Yes, it's going to look a lot like Train 3. Train 3 had a lot of synergies associated with the work we did on Trains 1 and 2, and we did a lot of work on Train 5 in anticipation of Train 6. So all the utilities are all-in for Train 6. So it's going to be really competitive. The EPC contracts in the 500 kind or lower range and all-in, high $500, $600 a ton type number.

And Jack, just to clarify your comment, that means execution in 2019, when you say talking about capital allocation?

That means -- I mean, we're already doing it, Julien. If you look at the amount of cash that we need to put back into our business for our existing growth on these Trains. So if we FID Train 6, you should expect that there's a significant amount of cash in 2019 that's going to go plowed back into our business for growth. So, yes, we're doing it now.

We will now take our next question from Hillary Cacanando, Wells Fargo.

This is Mike Webber on for Hillary here. I wanted to loop back, I think, from -- I think maybe the first question that dealt with rate. Obviously, rates kind of gone parabolic here, you guys got ahead of that in June. But I'm just curious with the expanded production capacity you guys are talking about, was that factored into the budgeting and cargo program you guys went out and kind of captured in June? And to what extent are you fully covered for 2019?

I guess, we'll break our rule on our position, but yes, we took down all the tonnage we need for the 3 Trains that are going to be early. So we're in the low-20s in terms of vessels right now, rapidly would be in the low-30s, and all of that was contracted this summer.

Great. Okay, so the expanded production and the early Trains you get recovered for '19?

Yes.

All right, I appreciate that. And then just more broadly on commercial progress. Jack, I think you mentioned some of the progress that you guys are seeing, some of the potential competition you guys are seeing around Stage 3 and Sabine 6. In the last couple FDAs, and last of couple of FIDS really, you guys have had a little niche, a little air pocket here where you're probably consistently competing with Qatar, but some of these big larger global projects are still kind of getting their legs under them. Do you think the competitive subset for Corpus Phase 3 ends up being materially different than Sabine 6? Where maybe you have the market a little bit more to yourself? Or you think are you seeing -- are you bumping into Mozambique, Canada LNG, Arctic 2? Or is that happening now or the gestation process for some of these FDAs so long that you're not really going to bump into them in earnest until you start going after Corpus Phase 3?

No. You should assume we're going after Corpus Phase 3 now. We're not waiting. It's not a binary marketing strategy. But it's extremely competitive worldwide. And so, yes. I mean, we're seeing everybody out there. I'd expect we're going to continue to see people out there as they're trying to get to FID themselves.

I guess, my question is, some of the more high-profile global projects, are you competing with them now? Or are they still yet to come to the table?

No. We're competing with them now. People want diversity in their portfolio, so keep that in mind. Look at the Taiwanese, they're going to have some Mozambique off-take, they want some Gulf Coast off-take, and we won that part of the business. The Polish, another perfect example, they have a big deal with the Qataris already. They want to buy from the U.S. in addition to that, so in that case, we don't really compete with the Qataris because they've already bought from them. So people want to buy -- big buyers want diversity in their book, and when they look to the U.S., they're looking to us right now.

And just one follow-up on that. Polish FDA, they actually signed another FDA earlier this year with a greenfield competitor, I use that in liberal terms -- liberal sense. And when we look at kind of the volumes that are coming out of Sabine, it seems like there's a bit of a shift towards Europe, which should make sense from a global dynamic perspective. Are you seeing that? If you look at your backlog of conversations around new business, without getting too granular, are you seeing any kind of modest shift towards a bit more of the European focus?

Yes. I would say, and unfortunately, Mike, Anatol's not here with us, and he's much more eloquent at the markets. But I would say that we're very excited about the fundamentals that we're seeing going on in Europe right now, whether it's carbon pricing or just the opportunities in Europe, all the way around.

We will now take our next question from Fotis Giannakoulis from Morgan Stanley.

Jack, I wanted to ask about the competitive landscape. You mentioned earlier about LNG Canada and Qatar. These 2 projects and producers are -- they took FIDs without having specific off-takes. If you see this becoming a trend in the future, if you would consider potentially expanding further on new Trains without specific [operation] what does this mean the LNG Canada FID for North American producers especially for the greenfield projects?

So Fortis, if you're asking would we make a shift in our business strategy to go from a contracted portfolio to a merchant portfolio, I have to tell you, I spent my first 40 years in the merchant power business, and it didn't feel good. So that's not high on my list right now. Right now, we are totally focused 100% on customers and new customers and what their needs are and how we can meet their needs. And as you know, in the

(technical difficulty)

business, right, our customers are making long-term bets. So whether it's China, where they've got 10 million tons of additional regas got built year-over-year, and they've got 25 million tons of regas that's under construction right now, they're spending real money to build real infrastructure in -- or Taiwan, with the 5,000-megawatt combined cycle power plant that needs fuel. They need us. They need affordable, reliable energy, and that's really what our focus is. It's not to build for build sake in Cheniere [land], I mean, we don't talk about the scale or being big, we talk about adding value for our customers and for our shareholders.

What I was trying to get is, whether you would consider building first and contracting later in an effort to go ahead of the competition similar to what it seems that the oil majors and the Qataris are doing? And if that makes it harder for a smaller players or greenfield players who are trying to enter the market right now?

No, I think it's the opposite. We contract now and build later. And given our lengths, we sell-off our length and refill it with new construction, so I think we'll just keep doing that.

And Fortis, you'll have to ask the other greenfield LNG folks if it makes it harder for them or not.

We will now take our next question from Michael Lapides from Goldman Sachs.

One quick one, just curious, now that you've gotten CQH squared away and closed, how are you thinking about future changes to the corporate structure and including anything, if possible, at all, with CQP?

You want to take this?

Yes, I mean, it remains an opportunity for us. We don't really feel like there's much to do right now. We don't -- you see all these roll-ups happening in the market, and most of those have real issues with their MLP, right? And we don't feel like we have that issue. And we haven't made distribution promises that we can't keep. We don't have a funding problem down there. We have cash flows to reinvest. So really it will come down to a value decision for us. We don't think it makes sense to have 2 boxes with the same business basically in it. But the roll-up is purely a value proposition for us.

Got it. And then another longer-term question, you obviously raised the export capacity potential for the trains you have now and the ones you're bringing online in the next couple of years. Just curious, when you think about the Corpus site, how do you think about what the total potential size in tons per year could be coming out of Corpus now? And I know this is really long term, so I'm thinking about all the acreage you control there and the infrastructure you control there. I'm just trying to get my arms around how big this could be in kind of a blue sky scenario?

I think we can double the size of the company, quite honestly, at that site.

Double from today's run-rate? Or double from your 2021, 2022 run-rate?

From the way I think about it, from today, from the Trains that we're currently building or that are operating. So I think there's probably another 30 million tons at Corpus that can be built in addition to Train 3.

We will now take our next question from Spiro Dounis from Crédit Suisse.

Sorry, if this was covered. I hopped on a bit late. First on, just on potential indexation, may be hard for you to answer just from your side of the aisle, but do you have a sense for how close you guys are to be included in the S&P and maybe what you think it would take to get there from here?

Hey, it's Randy. I've had those conversations with them. It's really not anything that we can just go and do. Some of the issues that were keeping us out, namely their requirements for certain financial metrics, those have -- those are correcting as we speak. So I think we're a reasonable candidate for inclusion but in terms of us getting in, it's really difficult to know.

They made a change last night. Obviously, we weren't a part of it, but they removed EQT and brought in a non-energy company in its place. There's some probably index construction things that they're trying to accomplish as well but we think we are a reasonable candidate and if we do what we've laid out here and I think we'll be in at some point in the future.

Okay, and then just maybe continuing along that context there, just how you guys view yourselves relative to large cap energy peers and tying that to the dividend yields and I realize you can't give specifics but is it fair to look at other large cap energy peers and their yield that are in the index and say you guys at least want to comp to that?

A lot goes into that answer, I guess. That's one way of looking at it. I think we'll hold off until next year to clarify all that.

We will now take our next question from Ryan Levine from Citigroup.

Can you comment on contract duration negotiating environment, given the recent 24-year contract that you are near signing with Poland?

Yes, Ryan, as you can tell, we've been very successful at continuing to negotiate long-term contracts with our counter parties, again, it's because they're building infrastructure, and they need to have an affordable dependable supply of fuel for that infrastructure and since we're full service and we're delivering straight to the utility's doorstep, they are willing to sign up with us and quite honestly, pay a premium for that -- for those services. So we haven't found a need to change our business model at all in regards to our pricing structure or term or tenure of those contracts.

And how would you look at contracting the new volumes that the operational improvements are enabling? Is there any seasonality? Does that average increase volume per Train across your portfolio?

It should actually smooth out some of the seasonality, when we complete with some of the debottlenecking initiatives for us. But we would -- we've added -- we've looked at the -- our output or production as a portfolio. So it's not by individual Train, or it's not even by site, it's -- we try to manage the business as a portfolio. So as we get more production available, we'll look to turn that up and get some stable cash flows from it. And we think that's what the biggest reward will be from our investor base.

And we will now take our next question from Jason Gabelman from Cowen.

Two questions for me. First of all, on the unsold marketing component for next year, you've mentioned the marketing margin you're planning for is $4.50 to $5 per M, which is someone said it's a bit higher than the $2.50 you have historically used. Is that a number that you used in your run-rate guidance as well and what is driving that higher margin realization?

Yes, we've always assumed at least for the past couple of years, several years, $2.50 in a run-rate number. So we're not using current market conditions to say that's what we're going to make in 2, 3, 4 years. We have never used $2.50 in our current plans, right? We do mark that to market, and that's what we've done here for 2019.

Got it. And then just on your CapEx spend. It looks like it jumped up this quarter from about $700 million to $1.2 billion. It looks like there wasn't as high of a corresponding increase for the terminal and construction bucket on your balance sheet. So is there a CapEx being spent on, I don't know, something outside the business? Or is it just an accounting issue for the quarter?

I hope it's not an accounting issue, and I'm not aware of spending anything else than our terminals. So I don't know, Randy, I have to get back to you on that discrepancy but Corpus Train 3 has ramped up for the quarter, so that's probably why we're spending more. The difference I'd have to get back to you on.

We will now take our final question from Ben Nolan from Stifel.

And I really only have one question left. I know you talked -- you guys talked some about the bridging volumes, and obviously, that probably increases through some of the debottlenecking work that you've done. I was curious if you can kind of put a number of how much you sort of view as available as bridging volumes to try to increase your competitive advantage in winning new SPAs from where you sit right now, how much would you call in that category of leveraged volumes?

It's typically, Ben, 3 million to 5 million tons. Right now, it's lower than that because of the DES business we've done. But as we said, we'll likely reload the portfolio as we built Train 6.

So is it -- I guess, this debottlenecking, did it -- it didn't materially add, I guess, or was it offset by the recent SPAs, I guess, is that how to think about it?

Let me clarify. When the DES business starts in earnest, which is still 3, 4 years out, the 4 million tons that our marketing business has, that's what will be utilized. Between now and then, they still have a lot of length to offer to customers in the bridging market. The debottlenecking will absolutely supplement that and has with this latest announcement.

Thank you all and thank you for your support of Cheniere. We really appreciate it.

There are no further -- ladies and gentlemen, this concludes today's call. You may now disconnect.