Cheniere Energy Inc

LSE:0HWH

Earnings Call Transcript 2019-Q3

[Operator]

Good morning and welcome to the Cheniere Energy Inc. Third Quarter 2019 Earnings Call and Webcast. Today's conference is being recorded. And at this time, I would like to turn the call over to Randy Bhatia, Vice President of Investor Relations.

[Randy Bhatia, VP, IR]

Thanks operator, good morning everyone. And welcome to Cheniere Energy's third quarter 2019 earnings conference call. The slide presentation and access to the webcast for today's call are available at cheniere.com. Joining me today are Jack Fusco, Cheniere's President and CEO; Anatol Feygin, Executive Vice President and Chief Commercial Officer; and Michael Wortley, Executive Vice President and CFO.

Before we begin, I would like to remind all listeners that our remarks including answers to your questions may contain forward-looking statements, and actual results could differ materially from what is described in these statements. Slide 2 of our presentation contains a discussion of those forward-looking statements and associated risks. In addition, we may include references to certain non-GAAP financial measures such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these measures to the most comparable GAAP financial measure can be found in the appendix 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 Cheniere Energy Partners LP or CQP. We do not intend to cover CQP's results separately from those of Cheniere Energy Inc. The call agenda is shown on Slide 3. Jack will begin with operating and financial highlights, Anatol will then provide an update on the LNG market and Michael will review our financial results and guidance. After prepared remarks, we will open the call for Q&A.

I will now turn the call over to Jack Fusco, Cheniere's President and CEO.

[Jack Fusco, President and CEO]

Thank you, Randy, and good morning everyone. I'm pleased to be here today to discuss our results and accomplishments for the third quarter 2019 as well as our outlook for 2020 which we expect to be a record setting year for Cheniere. The third quarter was yet another quarter highlighted by achievements across multiple facets of our business and operations and across both of our world-scale LNG facilities.

Please turn now to Slide 5. For the third quarter, we generated consolidated adjusted EBITDA of $694 million and distributable cash flow of approximately $200 million and revenue of approximately $2.2 billion. We reported a net loss attributable to common stockholders of $318 million for the quarter, which was impacted by non-cash derivative losses and an impairment to our investment in the Midship project, and certain other items that Michael will discuss in a few minutes.

Looking forward to the rest of the year, we continue to expect our full-year 2019 consolidated adjusted EBITDA to be in the range of $2.9 billion to $3.2 billion and we expect distributable cash flow to be between $600 million and $800 million. For 2020, we expect significant growth in our financial results as compared to 2019 and today we're introducing 2020 guidance for consolidated adjusted EBITDA of $3.8 billion to $4.1 billion, distributable cash flow of $1 billion to $1.3 billion and a CQP distribution of $2.55 to $2.65 per unit.

Michael will cover our financial results and guidance in more detail in a few moments. During the third quarter, we signed our second integrated production marketing or IPM transaction this time with EOG Resources, providing additional commercial support for Corpus Christi Stage 3. Under the terms of this deal, Cheniere will purchase 140,000 MMBtu of natural gas per day from EOG for price linked the JKM for a term of approximately 15 years.

The LNG associated with this gas supply approximately 0.85 million tons per year will be marketed and sold by our marketing affiliate. This transaction represents further progress on the commercialization of Corpus Christi Stage 3 and supports our expectation of a positive final investment decision on that project during the first half of next year.

The success of the IPM structure is another tangible example of Cheniere’s market leading commercial innovation and demonstrates the value of the marketplaces and our ability to tailor solutions to meet the needs of our customers. We continue to pursue additional IPM transactions primarily in the Permian given Corpus Christi’s advantage locations with a focus on large investment grade producers.

Turning to at Corpus Christi, we reached substantial completion on August 28, six months to the day after the completion of Train 1 and became the seventh operational Cheniere Train, Train 2 like the six trains before was completed ahead of schedule and within budget. In the first three quarters of 2019, we reached substantial completion on three trains or approximately 15 million tons of liquefaction capacity, with each train an average of more than nine months ahead of schedule, a product of years of development and the hard work of thousands of dedicated Cheniere and backdoor professionals.

This achievement further reinforces our global reputation for best-in-class project execution. And I'll speak more about the continued progress on our liquefaction project in a few minutes. In September, the data first commercial delivery or DFCD was reached under the 20-year contracts with both Centrica and Total associated with the Train 5 at Sabine Pass. To the transformation of our cash flows continues, as we have meant 13 of our credit worthy customers under their long-term take-or-pay style contracts.

Also during the third quarter, we achieved some significant milestones in the execution of our balance sheet and capital allocation strategies. We recently refinanced debt at both CQP and Corpus Christi and the latter was upgraded to investment grade credit rating by both S&P and Fitch during the quarter, a milestone achievement for the Corpus Christi project.

In addition, we commence debt repayment, prepaying a portion of the Corpus Christi credit facility in support of our long-term balance sheet strategy to achieve consolidated investment grade credit metrics at all rated entities over the next few years. We also continued repurchasing shares in the market opportunistically with approximately 2.5 million shares repurchased in the third quarter. We have now repurchased approximately 1% of our outstanding shares since the program commenced in late June.

Operationally, we produced and exported 108 LNG cargoes during the third quarter, a new quarterly record, and in October we exported our 850th cargo. In addition, we completed additional successful maintenance turnaround at Sabine Pass in support of our 2019 maintenance program. The turnarounds for Trains 3, 4 and 5 involved over 490,000 man hours and 2,700 work orders and like to turn around for Trains 1 and 2 earlier this year was accomplished ahead of schedule, on budget, and most importantly, with no safety incidents.

Congratulations to Aaron Stephenson and the Sabine Pass team on further demonstrating the safety first culture of Cheniere’s operations. Now turn to Slide 6 for an update on liquefaction project operations and development.

This liquefaction operations began in early 2016. We have loaded and exported over 850 cargoes from our two projects, or approximately 60 million tons of LNG. As I mentioned earlier, our seven operating trains have all entered service early on average, over seven months ahead of the guaranteed completion dates.

As a result of the early completions and excellence in operations, our marketing affiliate has been able to sell over 200 cumulative cargoes of incremental LNG into the global market, a significant benefit to Cheniere and our shareholders. We remain laser focused on maintaining excellence in execution as both Sabine Pass Train 6, the Corpus Christi Train 3 progress through construction.

At Sabine Pass Train 6, Bechtel continues to progress construction efforts against an accelerated schedule. Project completion for Train 6 is over 38% as of the end of September, construction is ramping up with headcount now over 500 and activities focused on foundation and column work and commencing structural steel.

Bechtel is currently projecting substantial completion of Train 6 in the first half of 2023. At Corpus Christi Train 3, Bechtel also continues to progress construction efforts against an accelerated timeline. There are over 2,000 workers currently on site for Train 3 and the project is over two-thirds complete as of the end of September. Construction activities are focused on structural steel above ground piping installations, mechanical and instrumentation activities and recently the Concrete Roof 4 was completed on the third LNG storage tank. Bechtel now projects substantial completion of Train 3 in the first half of 2021 and acceleration from the previously projected target for the second half of 2021.

Our development efforts on Corpus Christi Stage 3 continue, and that project remains on the expected timeline where previously communicated. We continue to expect to reach FID for Stage 3 in 2020. We're currently in the process of evaluating EPC bids and we intend to have a cost competitive, fully wrapped, lump sum turnkey, EPC contract in place over the next few months.

On the regulatory front, we continue to expect full regulatory approvals for Stage 3 by the end of the year and on the commercial side, significant progress has been made already with our IPM transactions with Apache and EOG. And Anatol will speak in a minute, and what we see in the market today that gives us confidence in commercial momentum to enable an FID of Stage 3 next year.

Before turning the call over, I'll briefly outline what I see as some of Cheniere’s key priorities for 2020. First and foremost, we plan to deliver on the 2020 financial guidance we rolled out today, we have good visibility into next year and 2020 should feature less volatility than 2019. Given that much more of our overall production next year, we’ll be under long-term contracts, and there are no new train scheduled to enter service next year.

Another key priority for 2020 is to maintain our reputation for operational excellence. Our track record and LNG development execution and operations is a key differentiator and a key competitive advantage, and it is imperative that we keep our eyes on the ball.

In May of 2020, we expect to reach DFCD with respect to Train 2 at Corpus Christi, and commence the long-term SPAs tied to Train 2. In 2019, our teams have done a tremendous job of onboarding new SPA customers with a DFCDs of contracts tied to Corpus Christi Train 1 and Sabine Pass Train 5 as well as some of our marketing SPA and we expect that performance to continue next year.

As I've already mentioned, we expect to reach FID for Corpus Christi Stage 3 next year, Stage 3 is an attractive growth project, which will leverage a significant amount of infrastructure we built in Corpus. We look forward to receiving our permit later this year, and finishing the remaining steps of commercialization and financing ahead of the full FID.

Finally in 2020, we will continue to pursue additional development opportunities to maintain our growth momentum. We have an incredible infrastructure and land position in Corpus Christi, which we expect to enable further Brownfield expansion economics for future liquefaction projects. In addition to our own infrastructure, this location is proximate to significant new pipeline development and natural gas resources.

Our Corpus Christi project is by far the closest LNG project, either in operations or development to the Permian Basin, so our site is an ideal location to match new gas supply with global LNG demand over the long-term. Our project development focus in 2020 is on leveraging those advantages to expand our LNG footprint in Corpus Christi beyond Stage 3. And now I'll turn the call over to Anatol.

[Anatol Feygin, EVP and CMO]

Thanks, Jack and good morning, everyone. Please turn to Slide 9, 2019 has continued to be a year of substantial global LNG supply growth, after adding a record 12 million tons of supply in the second quarter, another 10 million tons of supply was added in the third quarter. Full-year 2019 is on pace to add about 40 million tons of supply, which will be a new yearly record. This year’s supply growth has been driven largely by U.S. projects, including our projects, with substantial completion achieved for Corpus Christi Train 1 and Sabine Pass Train 5 in the first quarter and for Corpus Christi Train 2 in August.

Other U.S. projects have also reached recent milestones, as Freeport Train 1 exported its first cargo in September and the first train in Island recently entered commercial service. Incremental supply during the third quarter was absorbed primarily by Europe. The region continued its global balancing role as we also saw in the first half of the year, Europe imported a record 18.4 million tons during the third quarter, nearly double the import level as compared to a year-ago.

As this year's rapid supply growth has outpaced Asian demand growth, pushing incremental supplies to Europe and driving down spot prices.

We've also seen a convergence of European and Asian spot gas prices. The spot price markers most commonly used in Asia and Europe, JKM and TTF respectively, have occasionally shown some deviations, but generally spreads between the two have narrowed as compared to previous years.

In contrast to the decrease in TTF, and JKM prices, Brent equivalent pricing continued to diverge and generally traded above the $10 and MMBtu level during the third quarter, more than three times higher than Henry Hub and almost double TTF and JKM levels. Please turn to Slide 10.

European imports were lower quarter-on-quarter but remained well above prior-year’s levels. The quarter-on-quarter slowdown in imports was driven by strong storage levels and low gas prices in Europe, and by an increase in imports into traditional counter seasonal markets and emerging Asian market.

European gas storage levels have continued to be above the five-year range and storage was reported to be close to 100% full in the middle of October. These storage levels have allowed spot LNG prices to remain low and the European markets to remain comfortable with supply and demand dynamics heading into the winter withdrawal season.

So negative news flow on Groningen, French nuclear facilities and lack of progress on the Ukraine transit agreement during the quarter are potential tailwinds. Pipeline flows into Europe also fell off during the third quarter helping to balance the market. All three regional flows into Europe from Russia, Algeria, and Norway were lower quarter-on-quarter and Norway had the largest decline flowing 22% less than in the third quarter of last year.

Low gas prices and strong LNG imports have also incentivized increased gas fire power generation. Spain has had the most noticeable response, increasing its gas power generation by 58% in the third quarter as compared to last year. The similar story in Germany where gas power generation rose by 39% year-on-year in the third quarter, while Hydro and renewables have isolated in both countries, natural gas supported by low prices, and a strong carbon price is taking market share away from coal.

Please turn to Slide 11. Asian LNG imports in the third quarter were slightly higher than 2018 and continued to trend above the five-year range. Strong nuclear generation from legacy LNG consumers in Japan, South Korea and Taiwan has placed downward pressure on LNG imports this year.

Lower imports from Japan and South Korea were offset by strong imports in the third quarter from China, India, Bangladesh, Pakistan and Malaysia, all of which have experienced double-digit growth from last year. Looking ahead, there are several developments and themes were falling that are expected to be favorable to Asian LNG demand growth.

In Japan there have been challenges in complying with anti-terrorism retrofits on time at nuclear facilities, resulting in the potential closure of 12 gigawatts of nuclear capacity. In South Korea there are plans for more temporary closures of coal-fired power plants during winter. A proposal was submitted to the President of South Korea to close 14 coal-fired plants from December to February and another 22 in March, in addition to the five currently scheduled to be closed from March to June.

China recently announced the target to replace this first coal with clean heating options this year, 5.2 million households across 28 cities are targeted to switch to cleaner burning options, 45% higher than in 2018. While the impact on gas demand based on this policy is not yet known, it's a good example of China continuing to implement environmentally driven policies, which should incentivize stronger gas demand going forward.

As we look toward winter and 2020, the market will continue to absorb the recent amounts of new supply that have come online, at 40 million tons, the LNG supply growth this year has been unprecedented. However, this wave is well over 80% behind us, was only 24 million tons or about 17% of incremental supply forecast to come on line between now and the end of next year.

Asian demand has continued to grow and Europe has largely balanced the market, in part by rebuilding the muscle memory of natural gas imports and consumption.

The forward margin curve remains in steep contango and margins will not what I would characterize as robust, are fairly healthy only a couple quarters out on the curve. We continue to expect that the prospects for global natural gas demand growth, our commercial momentum and our advantage position of U.S. Gulf Coast LNG exports will enable us to capture significant additional term economics.

We remain confident that these efforts should aggregate sufficient commercial support for Corpus Christi Stage 3 to move forward next year. Thank you for your time and attention. I'll turn it over to Michael, who will review our financial results.

[Michael Wortley, EVP and CFO]

Thanks, Anatol, and good morning, everyone. Turning to Slide 13, for the third quarter, we reported a net loss of $318 million, consolidated adjusted EBITDA of $694 million and distributable cash flow of approximately $200 million. For the nine months ended September 30, we reported a net loss of $291 million, consolidated adjusted EBITDA of approximately $2 billion and distributable cash flow of approximately $520 million.

As Jack mentioned during the third quarter, net loss was negatively impacted by an impairment of approximately $80 million to our equity investment in the Midship project. This is due to cost overruns and extended construction timelines at the Midship project resulting in a production of the expected fair value of our equity interest. Net loss for the quarter also included an approximately $140 million non-cash loss from changes in the fair value of commodity derivatives primarily related to our gas supply contracts, and an approximately $80 million non-cash loss related to interest rate derivatives.

We exported 383 TBtu of LNG from our liquefaction projects during the third quarter, an increase of 22 TBtu over the second quarter, primarily due to incremental commissioning and operational volumes from Corpus Christi Train 2 which was completed and placed into service in August. We exported 20 TBtu of commissioning volumes during the third quarter related to Train 2. For the nine months ended September 30, we exported over 1050 TBtu from our liquefaction projects. For the third quarter, we recognize an income of 364 TBtu of LNG produced at our liquefaction projects consisting of 364 TBtu loaded during the quarter, plus 36 TBtu loaded in the second quarter, but delivered and recognized in the third quarter, less 36 TBtu sold on a delivered basis and in transit at the end of the third quarter.

We also recognize an income of 8 TBtu of LNG that was sourced from third-parties. Approximately 73% of 364 TBtu recognized an income from our projects during the quarter was sold under long-term SPAs and the remaining 27% was sold by our marketing affiliate, either into the spot market or under short and medium term contracts.

Volume sold under long-term SPAs increased by 38 TBtu compared to the second quarter, driven by a full quarter of volumes under the SPAs related to Corpus Christi Train 1 which reached DFCD on June 1, and by volumes under the SPAs related to Sabine Pass Train 5 which reached DFCD on September 1.

For the nine months ended September 30, we recognized an income of 998 TBtu of LNG produced at our liquefaction projects of which 73% was sold under long-term SPA, we also recognized an income of 31 TBtu of LNG sourced from third-parties. Operating income for the third quarter was $307 million, a decrease of $125 million compared to the second quarter. The decrease in operating income was primarily due decreased total margin, and a slight increase in total operating costs and expenses primarily related to Corpus Christi Train 2 of which revenue and cost began to be recognized in income after substantial completion in late August.

Total margins or total revenues less cost of sales decreased by $112 million in the third quarter as compared to the second quarter due to increased mark-to-market loss from changes in fair value of commodity and FX derivatives, partially offset by an increase in LNG volumes recognized and income.

Margins for MMBtu of LNG recognized an income or materially consistent between quarters as lower LNG market pricing was largely offset by lower natural gas feedstock costs. Regarding the net loss from changes in fair value of commodity and FX derivatives, the impact is primarily related to changes in the fair value of agreements for the future purchase of natural gas.

Certain of our gas supply agreements, including our IPM agreements, qualifies derivatives and require mark-to-market accounting. From period-to-period, we will experience non-cash gains and losses as price or basis movements occur in the underlying commodities related to these forward contracts for purchase of natural gas.

Well, operationally, we seek to eliminate commodity risks by matching our gas purchases and LNG sales on the same pricing index, our long-term LNG SPAs do not currently qualify for mark-to-market accounting, meaning that the fair value impact of only one side of the transaction is recognized until the delivery of natural gas and sale of our LNG occurs.

We anticipate that this accounting treatment mismatch will cause some volatility in our financial statements over time in the form of non-cash gains and losses, which will be reflected primarily in cost of sales.

For the third quarter, the net non-cash impact of changes in fair value of commodity and FX derivatives. It was a loss of approximately $140 million, and year-to-date September 30th the impact was a gain of approximately $40 million.

Net loss attributable to common stock holders for the third quarter was $318 million or $1.25 per share compared to net loss of $114 million or $0.44 per share for the second quarter.

The increase in net loss was driven primarily by decreased operating income, increased other expense related to the impairment of our equity investment in Midship, increased interest expense, and the increase loss on extinguishment of debt partially offset by decrease net income attributable to non-controlling interest.

Net income attributable to non-controlling interest decrease compared to the second quarter due to a decrease in net income recognized by CQP in which the non-controlling interests are held.

Please turn to Slide 14 where I'll discuss 2019 and 2020 guidance. Looking forward to the remainder of 2019 as Jack and Anatol discussed, we continue to see a relatively soft short term LNG market environment. However, we have continued to have strong operating performance and have effectively hedged most expected production volumes for the remainder of the year.

We remain on track to deliver a consolidated adjusted EBITDA for the full year within our guidance range of $2.9 billion to $3.2 billion and distributable cash flow within our guidance range of $0.6 to $0.8 billion.

Today, we are issuing 2020 consolidated adjusted EBITDA guidance of $3.8 to $4.1 billion and distributable cash flow guidance of $1 billion to $1.3 billion in a CQP distribution of $2 55, the $2.65 per unit.

We expect stable operations during 2020 with seven trains in service throughout the whole year and with the SPAs related to six of those trains already in effect and the SPAs related to Corpus Christi Train 2 expected to reach DFCD in May 2020.

The total volume produced at our facilities in 2020 we expect approximately $7.5 million tons to be available to our marketing affiliate down from over $9.5 million tons in 2019 and a significant portion of that capacity has already been hedged either physically or financially. This forecasts considers production efficiencies as well as maintenance optimization. The bottlenecking efforts, which had been implemented throughout this year.

Our marketing volume forecast for next year is weighted towards the first half of the year due to the timing of DFCD for Corpus Train 2 SPAs. We have been actively pre-selling some of these volumes in both the physical and financial markets and currently forecast a $1 change in market margin would impact EBITDA by approximately $100 million for full year 2020.

Turn now to slide 15, during the third quarter we completed several transactions which advanced key initiatives related to our long-term balance sheet management and capital allocation strategy.

In September, CQP issued $1.5 billion of 4.5% senior note due 2029 to prepay all of the outstanding term loan under the CQP credit facilities and to fund future capital expenditures related to construction of Sabine Pass Train 6. The Train 6 the CQP level is allowed us to bolster the resilience of SPL investment grade credit rating and as a step towards our longer term goals of de-securitizing our balance sheets, achieving investment grade credit metrics throughout our corporate structure.

In September, Corpus received investment grade senior secure debt ratings from S&P and Fitch, and in October received an investment grade issue or default rating from Fitch.

Subsequent to Corpus receiving these IgE ratings. We issued $727 million of 4.8% senior notes due 2039 pursuant to the previously announced private place in transaction with Allianz, the closing and funding of which was contingent upon Corpus receiving the IgE rating in October.

We entered into another private placement transaction with accounts managed by BlackRock and MetLife and issued $475 million of 3.9 to 5% senior notes due 2039. The proceeds of these two private placements were used to prepay outstanding amounts under the Corpus credit facility. Those sets of notes are fully amortizing with the weighted average life of 15 years and they help us achieve our broader balance sheet goals is strengthening project level credit metrics and reducing consolidated leverage over time.

Finally, in support of our capital allocation framework during the third quarter, we were repurchased approximately 2.5 million shares of our common stock for a total of $156 million under our share repurchase program and we commenced the elaborating by prepaying approximately $70 million of outstanding borrowings under the Corpus credit facility.

That concludes our prepared remarks. Thank you for your time and your interest in Cheniere. Operator. We're ready to open the line for questions.

[Operator]

[Operator instructions]. We will go first to Jeremy Tonet at JPMorgan.

[Jeremy Tonet, JPMorgan]

Good morning.

[Jack Fusco, President and CEO]

Good morning Jeremy.

[Jeremy Tonet, JPMorgan]

Thanks, want to start off with the 2020 EBITDA guidance. A very strong number it looks like there. And just wondering if you could share any more behind what assumptions are embedded there. You talk about a lot being hedged or being sold forward, and you talk about the sensitivity $1 versus $100 million, but just trying to see does that price deck being employed there, is that the same as the 2019 levels or is that where the strip set now or anything else that you could share us as far as the sensitivities that would drive the top versus bottom of that range?

[Michael Wortley, EVP and CFO]

Sure Jeremy. Hey, it's Michael. I'll start with production I guess for 2020 to be a big production year for us. Obviously we'll end up probably in the mid-30s in terms of NTPA for the year.

We've guided the 4.7 to 5.0 per train, SPL will be at the top end of that range. That range was supposed to be a 20 year average. You know, building in all of the maintenance plans, next year is going to be a low mate. Certainly a low plan maintenance year for Sabine, so that'll drive a lot of production out of that facility.

Corpus will be at the lower end of the range just given where it is and its ramp up. We have some debottlenecking efforts underway that should bear fruit over the next couple of years. But for next year, kind of at the lower end of the range. In terms of percent contracted and kind of EBITDA margin sensitivities, as we said in the remarks in 2020 will be about $7.5 million tons left in the CMI book down from 9.5, almost 10 this year. So down about 20%. Out of 7.5, as we said, you know, we've been actively putting that away. Of course CMI has a fair amount of long-term contracts in this book right now.

So if you back that off and then back off all of the shorter term stuff that we've already put in place for next year, back off the financial hedges we have in place, you know, and that's down to something like a 100 TBtu left or about $2 million tons of unsold. So in terms of margin certainty for us next year, it's kind of in the mid-90s percentage range.

So you know, we feel like 2020s generally put the bed on the margin side. So don't expect really much sensitivity next year. We say a dollar move as a hundred million dollars. to the extent we get into the year, probably be in a position to tighten our EBITDA guidance range down once we get some of that behind us. But that's really the big driver for us at this point. And of course it's not very big,

[Jeremy Tonet, JPMorgan]

Mid-90s that's a great to hear. Jack, just want to have a second question here as far as the stock price, I know that you've talked before as far as frustration and holders of the stock frustrated with the market seeming to not kind of recognize the stability in your cash flows. Just wondering how you think about that now, what levers you have to pull to try to address that or any thoughts you could share there?

[Jack Fusco, President and CEO]

Well, yes, Jeremy, over the long-term, I think our capital allocation strategies is the right one. So, when we see weakness in the stock price, as you can tell from the queue, you know, we're aggressively buying up there. We don't need to sell stock for to raise capital or our plans call for us to generate cash that we can reinvest in the business for our expansion plans and we'll pay down our debt to get our balance sheet and we're going to be continued to be very opportunistic about buying back our stock.

[Jeremy Tonet, JPMorgan]

Yes, that's helpful. That's it for me. Thanks.

[Jack Fusco, President and CEO]

Thanks.

[Operator]

Moving next to Christine Cho at Barclays.

[Christine Cho, Barclays]

Good morning everyone. The $1 change in market margin changing your 2020 EBITDA by $100 million was helpful. Are you willing to share with us what the average marketing margin is assumed in your guidance after factoring in, all the longer term and short term and financial hedges you've put in? I ask because you know, the 2020 guidance that you gave is the same as the seven train run rate guidance that you gave at your Analyst Day couple of years ago, which you know obviously makes sense because you're running seven trains. But I think in that analysis you had assumed 250 as your CMI margin. So I'm just trying to get a sense of how far off we’re from that initial metrics?

[Michael Wortley, EVP and CFO]

Yes. Hey Christine, it's Michael. I mean you got it. We're not getting 250 obviously the books more like a little under two next year. So that's the headwind versus the guidance we put out. Of course that's offset by the fact that production is much higher than we thought it was going to be back when we put out that guidance in 2017 and updated in 2018. And then the other thing I'll point out, it's kind of along the same lines. The run rate guidance assumed a full year of Train 2 where the next year, obviously we only have until starting in May in terms of DCFD. So all those puts and takes equal out to us being able to stay in that guidance.

[Christine Cho, Barclays]

Okay, great. That's helpful. And then, earlier this year I saw that CMI entered into an agreement with SPL for up to 20 cargos this year, the standard of 115% of Henry Hub plus $2 per MMBtu. My guess is this was driven by trying to create more stability for CQP versus the standard 80-20 sharing agreement you have. But should we think that these sorts of agreements like might continue into the future if spot prices are low or volatile or did it just make more sense for 2019 because you had higher than normal spot exposure?

[Jack Fusco, President and CEO]

Christine, this is Jack. So there's a couple of reasons, and you've touched upon all of them. One is, we feel that CQP gets rewarded on its share price for having stability and its cash flows and this helped deliver that. It also helps us at CMI, cover some of our positions and have some certainty on that price of what that is. So you should expect us to continue to try to work closely and collaboratively with our Board at CQP as well as CMI to make sure that those deals are a win-win for both parties.

[Christine Cho, Barclays]

Okay. So we shouldn't be surprised if we see like this kind of continue going forward?

[Jack Fusco, President and CEO]

No, you shouldn't be surprised.

[Christine Cho, Barclays]

Thank you.

[Operator]

Our next question comes from Ben Nolan at Stifel.

[Benjamin Nolan, Stifel]

Great. Thanks. So my first question relates to something that came up on the BP conference call earlier this week where they indicated that they thought the global gas market was oversupplied and that there was pretty strong chance that, if some of the U.S. capacity might actually need to be backed off a little bit or operate at lower utilizations to help balance the market, and curious if you guys see the same thing or if there might it – how that might play out if there are other locations around the world that might come off first perhaps.

[Jack Fusco, President and CEO]

Ben, this is Jack. I'll all start off and then I'll ask Anatol to give his opinion and it never ceases to amaze me that we keep getting this or having a conversation of U.S. LNG in the part that customers won't lift because we are extremely competitive worldwide. As Anatol mentioned, there's a lot of infrastructure that continues to be built in support of natural gas consumption worldwide. And we feel very, very good about our position in the woods world market in our customer's position on how they, how they are utilizing net gas in that overall cost of production. But - and it's all away.

[Anatol Feygin, EVP and CMO]

Thanks Ben. Yes, just to fall on Jack's comments. Number one, this supply wave from 16 through next year is about $150 million tons as we said in the prepared remarks a little over $20 million tons left to go.

So the global LNG market today is about $360 million, $370 million tons sort of current monthly run rate, that's 50 B's a day or so. Our gas supply team, Corey takes about 5.5 BCF of gas to our plants alone. The U.S. has is 7.5. So, number one, I think we're much closer to the end of the supply of wave obviously.

The question of how quickly the world absorbs that it is in part whether, but certainly we fully expect the emerging markets and actually old World Europe to continue to grow and have fundamental demand growth, and number two, you switch off 15% of global supply it is going to have quite an impact on the Henry Hub here and LNG prices globally. So we don't expect that to happen. We think it's very rapidly self-correcting and of course, the LNG world does not run off the spots spread, right. Neither physically nor financially. So we think there is a good chance that, we're in another 9 to 12 months of a steep contango, and as Michael discussed and Jack discussed earlier, we'll take advantage of that contango and secure margins for ourselves.

[Benjamin Nolan, Stifel]

Great. I appreciate that color. I thought that's what you might say. The other question is about the guidance for 2020 and the EBITDA guidance this came up earlier is as you laid out in terms of the absolute numbers for seven train run rate. But, the DCF guidance was a bit different, which I thought was odd given EBITDA being the same. Any color as to what is happening on the DCF side relative to the EBITDA guidance.

[Michael Wortley, EVP and CFO]

Yes. Ben, it's Michael, thanks for asking that. I should have clarify that in the last question. So the only difference there is some of the same things I mentioned, 250 margin not a full year of DFCD Train 2, but the big one is Train 6 equity down at CQP. So remember we're 50-50 financing that train at CQP that results in slower distribution grow. So we're foregoing some distributions today, which is impacting our DCF, right? We only count what comes out of CQP to us, and CEIDCS. And so we're foregoing that today for much larger distribution later. So that's the reconciling item.

[Benjamin Nolan, Stifel]

Got it. Appreciate it. Thanks guys.

[Operator]

Moving next to Julien Dumoulin-Smith at Bank of America.

[Julien Dumoulin-Smith, Bank of America]

Hi good morning.

[Jack Fusco, President and CEO]

Good morning Julien.

[Julien Dumoulin-Smith, Bank of America]

Okay. So perhaps just to follow up a little bit more in Christine's question, can you talk about some of the sort of, let's call it like this normalized guidance for the multi trained scenarios that you've released in the past. Obviously it was a little bit of a sort of largely in line, but a little bit of a discrepancy relative to that guidance, more on the cash flow side than the EBITDA side. Can you talk about some of those the puts and takes again a little bit more discreetly and then kind of apply that if you can for the other guidance levels that you've articulated for the future trains?

[Michael Wortley, EVP and CFO]

Yes, I mean, it's Michael again, sticking with all of the future train guidance, whether it's, the nine we rolled out and even the stage three preliminary guidance we gave on this year. Again it's those three items for EBITDA minutes. We're not getting 250, which is what's in there, but we have higher production, which is offsetting that, and we don't have a full year of the 350 contracts, which will come with the DFCD of Train 2. Those are both impacting 2019, but leaving us in the same place as the guidance you said in 2017 and DCS has the added difference of a Train 6 equity being funded by withholding distributions from us, which will ultimately come.

[Julien Dumoulin-Smith, Bank of America]

Got it. So nothing else, different on cost, et cetera. But if I can pivot a little bit, a different direction, maybe more of a Jack question. We've seen dominion out there selling down a stake in their business of late, obviously more discreet to them in their long-term financing decisions. I know that folks and you all just talked to at CQP, but I'd be curious to - could we potentially go back the other way with respect to Corpus Christi, and I know you guys are trying to simplify things, but at the same time, if you find these particularly attractive costs of capital out there that we've seen with some of your peers, is there anything out there on that? Any thoughts?

[Michael Wortley, EVP and CFO]

Yes. Well, Julien I have to tell you, congrats to Dominion. I mean, when we look at that and look back, they got 12 times, EBITDA for non-controlling piece of a LNG facility, which is fantastic for our complex overall. But, I think look different, owners of these LNG terminals will have a different needs, needs for cash. We're pretty pleased with our capital structure and our performance year-to-date and we're happy to give guidance side that is relatively consistent with what we told you we're going to do years ago and we're just going to keep plugging away at our business.

[Julien Dumoulin-Smith, Bank of America]

Okay. Fair enough. All right, thanks guys. I'll leave it there.

[Operator]

Moving next to Weber research and Mike Weber.

[Mike Weber, Weber Research]

Hi, good morning guys. How are you?

[Jack Fusco, President and CEO]

Hi Mike.

[Michael Wortley, EVP and CFO]

Hi, Mike.

[Mike Weber, Weber Research]

Jack, I just wanted to come back to the question around Dominion and maybe kind of think about that from a different angle. Maybe not in the sense that you guys need to offload CapEx to financial buyer but I guess, I don’t know it’s a great way to put this indirectly but if you just think about the multiple there that's implied for Dominion, it’s 12 times you mentioned for not controlling stake but Jack, I'm just curious in terms of how you think about that multiple relative to CQP and kind of the different aspects of it and how it's applicable to obviously what's happening with Corpus or with Sabine and a block that’s getting shop now? There is no great indirect way to ask that. So I'm just going to go ahead, man.

[Jack Fusco, President and CEO]

Yes, look we like both of our businesses. There is a significant spread as we all know, between how CQP trades and how LNG trades, and at some point, the market will figure out which one is right? And we will see what happens there, you can tell from our buyback program that, that, we continue to like buying back our LNG stock at these prices and levels. But I'm not going to get into trying to anticipate what one shareholder may do as far as their stock or their stock position and it really does not matter for us strategically. We continue to perform and execute in our business and that's where we're going to stay focused on is making sure that we hit all of our targets and we meet our commitments to all of you.

[Mike Weber, Weber Research]

Got you. Appreciate that. A follow-up just more in the market in general and it’s a good one, I guess for Jack or for Anatol but just within the context of your ongoing conversations with the Chinese, just gives it a while now. I'm just curious on how have those conversations changed since the trade war started? And then I know we've probably picked up this in each earnings call, but any given point, the demand for LNG is going to be a zero sum game. But over time, you can definitely see value leakage and I'm just wondering, is there a point in time we've already seen the Chinese help underwrite Arctic two as I'm sure they're being aggressively out of West Africa. At what point do you think you start to see permanent market share loss from U.S. gulf as a result of tariffs? Specifically within the context of the Chinese bid?

[Jack Fusco, President and CEO]

Yes, so I'm going to take that in a couple of different ways. I mean, you just saw from Anatol’s presentation that it’s over, they've had over 20 million tons of growth year-over-year.

[Anatol Feygin, EVP and CMO]

20%.

[Jack Fusco, President and CEO]

20%, 10 million tons of growth this year. So they continue to use more and more LNG, we continue to work very closely with our counterparts that are in China. They're very interested in securing more Henry Hub, the trade tensions have gone on a little longer than I think any of us have anticipated. And we continue to work with the administration and our counterpart parts in China to make sure that we're on the right side of relationship when are when things get better. So, I mean, that's been our position from day one, and it's the way we've conducted our business with China but Anatol do you have anything else to.

[Anatol Feygin, EVP and CMO]

No, just to echo Jack’s comments, and Mike as you know, we're continuing to be very committed. We think it's a great opportunity. We want to support China, and it's ambitious to grow gas to 15% of its economy and cleaner skies and have affordable reliable solutions. So we are as engaged as ever and are looking forward to the right opportunities to consummate those.

[Mike Weber, Weber Research]

Yes, I mean maybe the best way to ask is do you think that Chinese bid getting directed elsewhere is helped underwrite any projects that wouldn't have gotten done anyways?

[Jack Fusco, President and CEO]

No, I don't think any wouldn't have gotten done. I think everything has been dispatched to date that has China's involvement, our projects that we fully expected to be dispatched, whether that’s a pipe.

[Mike Weber, Weber Research]

Got you. That's helpful. All right, guys, thanks for the time.

[Jack Fusco, President and CEO]

Thanks Mike.

[Operator]

And we will go next to Michael Lapides of Goldman Sachs.

[Michael Lapides, Goldman Sachs]

Hey guys, thank you for taking my question. One operational one. Do you think and if you do, can you talk about what it would take to achieve this to be able to get above 5 million tons per year per train meaning is there incremental operational upside potential that may exist over the longer-term? And if so, how do you achieve it?

[Jack Fusco, President and CEO]

Yes, I do think, having worked closely with the operational team recently on our debottlenecking initiatives, I think, the debottlenecking plan that that they've put before us for some additional capital, we can achieve over 5 million tons if necessary, but I think what you're hearing from Michael is we're trying to do all of the low hanging fruit first do the debottlenecking that gets us as much LNG as we possibly can without having to invest large quantities of capital. But, yes, Michael, I do think we can achieve numbers above that.

[Michael Lapides, Goldman Sachs]

You said something you think is in the kind of the next three to four years three to five year horizon or you thinking that's kind of a longer-term kind of target?

[Jack Fusco, President and CEO]

I think we will guide you appropriately when we get to that point. But for now we're sticking with our original 20-year guidance.

[Michael Lapides, Goldman Sachs]

Okay. And then one follow-up and this may be more of a Michael question. How are you thinking about the balance? Like when you think about your debt capital structure between wanting to have bullet debt versus having amortizing debt and how you would go about changing that balance over time?

[Michael Wortley, EVP and CFO]

Yes, that's a good question. I mean, this foray to private placement markets and amortizing market and we like it, it helps us achieve some of our de-leveraging goals and kind of commits, commits us to it by entering into this, self-amortizing debt rating agencies like that as well.

And the issue is that's not a giant market. So we're going to be a big bullet issuer for a long period of time and we'll opportunistically do these private placements when we can. So, yes, I mean, I think the larger part of our debt pay down is just going to be paying down debt when we have bonds mature. It'll be a mix. I couldn't give you a target.

[Michael Lapides, Goldman Sachs]

Okay, thanks, guys. I much appreciate it.

[Michael Wortley, EVP and CFO]

Thank you.

[Operator]

And we'll go next to Craig Shere at Tuohy Brothers.

[Craig Shere, Tuohy Brothers]

Good morning.

[Jack Fusco, President and CEO]

Good morning, Craig.

[Craig Shere, Tuohy Brothers]

With respect to the unhedged equity cargoes, as we kind of add-up availability given the really good performance with Train 3 Corpus construction. Do any of your EDP, Trophy or Petrochina contracts have automatic step-ups Train 3 completion and a couple other quick ones, would any ultimately finalized Chilean LNG to power agreement be deployed for the first three trains of Corpus or more for Stage 3 and how much aggregate capacity upside you have on debottlenecking heading from 2020 to 2021 because you said most of those efforts aren’t going to be hitting next year, it's just that you have a low maintenance.

[Jack Fusco, President and CEO]

Okay, so there's three, there were three questions in the one, right, Craig, so the first one I'll take which was with the accelerated schedule for Train 3 and our performance, which as we all know, it's really our Train 8 and we should be getting better and better at it as we get more and more of these behind us. Do the contract startup or have the right to start-up early, the answer to that is no. Those early cargoes would be treated the same way we've treated them in the past which would be marketed by CMI affiliate.

The second part of that was Chilean et cetera. All the other contracts for Stage 3 and I'll turn that one over to Anatol.

[Anatol Feygin, EVP and CMO]

Just to follow-in on Jack’s answer, nothing steps up as a function of the trains coming on earlier but as you know, there are bridging volume components to some of the transactions and those do ramp until we get to the radical volume stage in the contract is just not train dependent, in terms of your question on Chile, we're finalizing that agreement.

It's relatively modest in size. It'll be something that that is at CMI, it's on a on a delivered basis as you know, and will contribute to supporting our investment portfolio and has the flexibility for us to do with in essence as we please, with the contract being at CMI but it's very modest in size.

[Jack Fusco, President and CEO]

And for all of those additional contracts, whether they're the two IPMs which is Apache, and in EOG, or the CPC contract in Taiwan, we're trying to put a portfolio of contracts together that support the expansion of our facilities and that next expansion is Stage 3. And then I think there was one more question you had Craig in that long list.

[Craig Shere, Tuohy Brothers]

Yes, the guidance was that you were looking good in 2020 on capacity because it's so low maintenance year, but that you're actually also working on activity debottlenecking efforts that weren't really going to hit mostly next year. So I was just asking about the trend of capacity uplift from debottlenecking from 2020 to 2021?

[Jack Fusco, President and CEO]

I don't know yet, I mean, we've raised our production range per train, three times and hopefully we can continue to do that over time. But for now, we're 4.7 to 5.

[Craig Shere, Tuohy Brothers]

Okay, so perhaps with a little more year-over-year turnarounds or maintenance that might offset the debottlenecking. So we just assume that 2021 is about the same for Train as 2020?

[Jack Fusco, President and CEO]

I mean, that's fine for now. Yes, we'll see 2022 away, but I think it’s fine for now.

[Michael Wortley, EVP and CFO]

You also have another train starting up in 2021, which is Train 3 Corpus.

[Craig Shere, Tuohy Brothers]

Right, but on a per train basis, just for now. We'll keep it static?

[Jack Fusco, President and CEO]

Yes.

[Craig Shere, Tuohy Brothers]

Okay, thank you.

[Operator]

We will move next to Spiro Dounis at Credit Suisse.

[Spiro Dounis, Credit Suisse]

Hey, good morning, everyone. Maybe just starting off on Stage 3, could you just remind us again, how you're thinking about the sizes of that FID, I believe at one point, you kind of left the door open, so maybe a partial FID. So just wanted an update on maybe your current thinking around that. And if you could maybe tie it to Anatol’s confidence here, and maybe what that next set of contracts looks like as we go forward?

[Michael Wortley, EVP and CFO]

Yes, thanks, Spiro it’s Michael, I think we're still open to the possibility of different kinds of FIDs for that project. It's a seven train project of mid-scale, it could probably be five as we look through the numbers, but ultimately, the market will dictate that as you mentioned, so I'll turn it over to Anatol.

[Anatol Feygin, EVP and CMO]

Yes, thanks Spiro, Michael. Yes, so as you guys know and Jack mentioned between EOG, Apache and some of the things we have in the portfolio, each one of these trains is, ballpark 1.5 million tons. So there's no, there's no reason to even discuss a three train solution, but it's possible as Michael said that, that is, 5F7.

[Spiro Dounis, Credit Suisse]

Okay, fair enough. I appreciate that. And then second one, you talked about it little bit, but just maybe getting more specific around Europe and the storage situation there. What do you ultimately think sort of resolve that issue going into next year, is it pretty much close to capacity as we could sort of go through the seasonality? I know Anatol you mentioned some tailwinds. But is that kind of enough to help that market absorb another year of U.S. imports? And what does that ultimately mean for the ARB in 2020?

[Jack Fusco, President and CEO]

Yes, it’s a great question and fair point, right. We don't reset to zero and have Europe able to grow from this space by another 20 million tons plus, that's very fair point. One of the things that has played out is fewer lower volumes on pipes as a function of North African and European supply. Norway's been down pretty significantly. We need a winter cleans us up faster, we have had very robust demand growth on the power gen side. So that is something that is not, not dependent on seasonality, and is back half of 2019 weighted as everything was put in place and as Europe continues to grow that that demand function.

So all those help, again, 2020 will be a very big supply year, right. There's no question, big supply year on a run-rate basis. And of course, you get the full-year effect of the 40 million tons coming on in 2019. So, we're not, as you can tell, we're not that optimistic on 2020 and as Michael said, we've got more or less everything we can have put away by the way. My point is that that's beyond 2020.

There really is no meaningful supplies, literally a couple trains for a number of years with most of those being our trains. So fairly confident that 2020 is the transition year and 2021 through 2023 look much better.

[Spiro Dounis, Credit Suisse]

Understood, appreciate the color. Thank you, gentlemen.

[Jack Fusco, President and CEO]

Thank you.

[Operator]

And we'll hear next from Shneur Gershuni at UBS.

[Shneur Gershuni, UBS]

Hi, good afternoon, everyone. Just wanted to touch on a couple of quick questions here since most of my questions have been asked and answered. I was wondering if you can talk about the path to investment grade at the LNG level. I noticed you've had a lot of positive rating actions at the subs. Is it 2020 a reasonable timeframe to think towards the end of 2020 that you can see IT across the board? Or is 2021 a more realistic target?

[Jack Fusco, President and CEO]

Thank you, we have Michael.

[Michael Wortley, EVP and CFO]

Yes, no it's not going to be next year. I mean, look, what we've said it's a multi-year progression. It's going to take us a while to get down to this high horse number that we're targeting. And if agencies are going to give us credit for getting there before we get there, but that's not next year. And the two-pronged deleveraging strategy, doing Stage 3 at 50% debt equity is highly deleveraging for us, we got to get that done.

And then the balance is just straight that debt pay down, which will happen as the money comes in. And so it's not next year, and we'll see if it's the following year or even the year after that, but that's the best we know right now.

[Shneur Gershuni, UBS]

Okay, that makes total sense. And one other question, appreciate the fact that you've pre-sold your marketing for next year and you're effectively at 95% sold out, and trying to upgrade the quality of the earnings from an investor perspective. I'm just wondering if that's going to be the strategy going forward that when we have this call next year, you'll also be in a 95% sold out position and we can sort of think of it as a more ratable business than it's historically been treated?

[Jack Fusco, President and CEO]

Absolutely. You should expect us to manage the business appropriately and not take a lot of commodity risk if we don't, if we don't have to do so. And I'm not giving, I won’t say that 95% is our target, but you should expect us to be prudent and disciplined.

[Shneur Gershuni, UBS]

Perfect, really appreciate the color guys. Have a great weekend.

[Jack Fusco, President and CEO]

Thanks Shneur.

[Operator]

We will go next to Evercore and Jon Chappell.

[Jon Chappell, Evercore]

Thank you, good morning guys. Michael, one of the key tidbits you gave on the last conference call was the cadence around the buyback up until that point, there was only 3 million in the 6/30 financials but you had said that you'd bought up to $100 million at that point in August. Is there any clarity you can give on what you've done since the end of the third quarter. I know we're only on November 1, but first 31 days?

[Michael Wortley, EVP and CFO]

Yes, I think we're going to get out of the habit of given those updates and just wait for the Q to come out. And we were kind of our first report after starting the program. And so we made an exception last time, but I think from here on out, we’ll rely on the Q.

[Jon Chappell, Evercore]

Okay, that makes sense. And then just a follow-up to one a couple ago, maybe to Anatol, on the -- are you thinking CC 3, it sound I mean Jack's confident as ever FERC EPC, it sounds like we may even have an update on that by the time we speak to you next, is there a percentage threshold on SPA that you're thinking about before you actually trigger FID and also kind of a Part B to that? Do you view IPMs exactly similar to an SPA or they not quite kind of like the long-term contracts in your view?

[Michael Wortley, EVP and CFO]

Hey, it's Michael. Yes, I mean, on the second question I mean for us, they’re very similar. I think they count as underwriting an investment. And then the first question was how much do we need to be sold and we never have really targeted a number we're trying to underwrite our economics on a contracted basis, it’s kind of underwriter downside case.

And so that's always how we've looked at it. But having said that, it'll be similar to our previous projects, two-thirds 85% contracted just depending on the economics.

[Anatol Feygin, EVP and CMO]

We could sell one molecule of couple billion dollars, we'd be done.

[Jon Chappell, Evercore]

I'm sure you're on that, Anatol. Michael, just to be clear, you said you view them kind of similarly, the discussions you've had with banks, as far as underwriting the projects, do, I assume they view them exactly similarly as well?

[Michael Wortley, EVP and CFO]

I think for us, yes, yes. I mean I’m not sure that's the case. If we were, six, seven years ago, but for now, and I just think where we are yes, that is the case.

[Jon Chappell, Evercore]

Okay, that's helpful. Thanks, Michael. Thanks Anatol.

[Operator]

Let's take our last question today from Alex Kania at Wolfe Research.

[Alex Kania, Wolfe Research]

Thanks. I'm at risk of, I guess, getting ahead of myself here a little bit. Jack you just mentioned, expanding a little bit more upon kind of longer-term growth opportunities, presumably beyond Phase 3 at Corpus. I'm just wondering if that's kind of arising from just broader commercial discussions you're having with people right now, in terms of what the opportunity set is, was it very long-term, or is it just hey we're pretty close to getting Phase 3 in the next, let's say, six to nine months. And so, we're kind of thinking about what's further on. I’m just kind of curious how kind of how really you see that right now?

[Jack Fusco, President and CEO]

Yes, thank you. No, I think, it's a combination of things. One is, we're very close to securing another close to 500 acres of property contiguous to our Corpus site. So that'll give us more land and birthing capacity, because it happens to be waterfront and that that transaction should get done early next year. And that really opens up the possibility for quite a bit of additional expansion at Corpus. And the second part of that is the commercialization efforts. As we've said, there's just a lot of interest in that site and its location to the Permian and trying to evacuate some of this associated gas that's going to be coming in greater and greater quantities from the Permian.

And then thirdly, with the infrastructure that we already have there, our additional expansion plans should be extremely competitive worldwide with any other options that that utility customers have. So we're very, very focused on Corpus. We do feel like Stage 3 is going extremely well. And we're looking for Stage 4 and beyond.

[Alex Kania, Wolfe Research]

Great. Thanks very much.

[Jack Fusco, President and CEO]

Thank you, Alex and thank all of you for your support of Cheniere.

[Operator]

And ladies and gentlemen, once again that does conclude today’s conference and again, I would like to thank everyone for joining us today.