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'd like to turn the call over to Randy Bhatia, VP of Investor Relations.
Thank you, operator. Good morning and welcome to Cheniere Energy's third quarter earnings conference. My 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 two of our presentation contains a discussion of those forward-looking statements and associated risks. In addition, we may include references to non-GAAP financial measures, such as 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, L.P., or CQP. We do not intend to cover CQP's results separately from those of Cheniere Energy, Inc.. The call agenda is shown on slide three. Jack will begin with 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 to 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 am 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 function, with delivery of a portion of that quantity to begin next year. Anatol is 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 customers' 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 to get Train 6 underway prior to our final investment decision. The process of releasing Bechtel under our limited notice to proceed on Corpus Christi Train 3 worked well. We expect that to be the case for Train 6 at Sabine Pass also.
The 3rd 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. 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 have executed three additional long-term SPAs with new high-quality offtakers. 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 cargos from Sabine Pass. As of October 31st, over 215 cargos have been produced, loaded, and exported from the terminal year to date. More than 475 cumulative cargos have been exported since startup, reaching 29 countries and regions worldwide. On the financial front, there are two 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 I identified when I joined Cheniere two and a half 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 six, where I'll give you a brief update on the construction and operations of Sabine Pass in 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 our 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-3 million tons in 2019, ahead of the commencement of the 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 seven. 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. I've spoken on previous calls and in other investor forums on 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.
Today, we're raising our average adjusted run rate production guidance to 4.4 million-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 are 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 infrastructure at very competitive economics, and that project is now 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 creditworthy counterparties and increase our visibility into an FID on Train 6. We are determining the optimal parameters to an FID on our ninth train next year and are pleased to have this project commencing now. Rest assured, it is our number one strategic focus. Our third area of focus is developing additional liquefaction and strategic projects, creating a path for future cash flow growth. We received a 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 are exploring additional liquefaction capacity in Corpus Christi as we seek to leverage our infrastructure to develop new liquefaction capacity with market-leading economics.
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 nine. 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-$2.55 billion and our distributable cash flow guidance to $0.5 billion-$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 BG SPA in effect for the full quarter, and marketing volumes were consistent with the second quarter.
For the third quarter, we recognized an income 228 TBtu of LNG produced at Sabine Pass, consisting of 228 TBtu loaded during the third quarter, plus three TBtu or one cargo loaded in the prior quarter but delivered and recognized in the current quarter, less three TBtu or one cargo sold on a delivered basis that was in transit as of the end of the third quarter. We also recognized an income 23 TBtu or six 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 as 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 in net income. As I mentioned earlier, based on strong operating performance and durable market pricing, we are 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- $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-stocks transaction. The completion of this merger transaction was a key step in simplifying our corporate structure, one that took significant time to complete, but 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 achieve 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 for a one-month change in substantial completion timing for all three trains, which are expected to enter service next year. As Jack discussed earlier, we have identified significant debottlenecking and maintenance optimization opportunities at very attractive economics, today, we are increasing our average adjusted run rate production guidance from 4.3- 4.6 MTPA per train to 4.4- 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 eight-train run rate consolidated adjusted EBITDA guidance to $4.4 billion- $4.9 billion and distributable cash flow to $2.1 billion to $2.6 billion, or $7.25- $8.75 per share.
We are also increasing our run rate CQP distribution guidance to $3.30-$ 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 estimates, a slight acceleration in anticipated completion timing of Corpus Train 3, and decreased non-controlling 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 seven trains in operation in the next year or so.
Development and communication of a capital allocation strategy, along with an anticipated timeline for implementing that strategy, is one of our highest priorities right now. 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're ready to open the line for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Also, please limit yourself to one question and one follow-up question to ensure everybody gets an opportunity to ask questions. Again, that's star 1 to ask a question. We will now take our first question from Jeremy Tonet from JP Morgan. Please go ahead.
Good morning.
Good morning, Jeremy.
Thanks. Congratulations, Jack, on expanding 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. Is this just something that is at SPL or is this at Corpus as well?
Yeah. Jeremy, thanks by the way. As Michael said, the debottlenecking projects fall really into three categories. 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 number 2, I'd say, is the reliability improvements, which is a real focus on extending that planned maintenance cycle. If you can extend it and push it out, then you can produce more. The third bullet is just an all-out overdesign of the facility. When we add up those three brackets, if you will, we look at the increase in production. We estimate that we could 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. We're very excited about it.
We're working on it now, and we'll continue to work on it. 2019 is going to be a big year for us to move this forward pretty significantly. Michael, do you have anything to add on that? Does that help, Jeremy?
That is helpful. Thank you for that. Just wanted to turn to the guidance here, and it seems like for the implied 4Q guide, if we're looking at that right, implies 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. The guide for 2019, just wondering, any incremental color you could share with regards to shipping rates have moved up a bit, how you think about the price deck for your CMI assumptions there. Is it kind of $250 assumptions you're thinking or anything else that you can share on those points?
Sure. Jeremy, it's Michael. With respect to Q4, we don't see really any significant change in Q4. We said ever since Q1, which Q1 was a volatile quarter given Train IV, but ever since then, we've been in a highly contracted state. 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 three months. We have been really proactive on our shipping position. We took down a lot of tonnage over the summer in anticipation of commissioning and having these three trains really in the CMI book until the DFCD later this year. I think we're probably a beneficiary of ship movement more than anything. We're in a good position there.
Great. Anything else on the CMI assumptions in 2019 that you're willing to share?
Yeah. 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. 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 will be commissioning, so non-P&L. We'll generate a lot of cash from that, it'll just be an offset to PP&E. That gets us to about 6.25 million tons. 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. That's how I would characterize CMI for next year.
Got you. It sounds like there's some upside if you can pull these trains forward, the new ones, as you continue to do.
Definitely.
Absolutely.
That's all for me. Thank you.
We will now take our next question from Christine Cho from Barclays. Please go ahead.
Hi, good morning. This is Mark on for Christine. In the past, you guys have voiced your preference for keeping DES contracts at the CMI level. With today's contract, 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 to proceed. We've locked in budget and schedule at this point. 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 till the middle of next year. 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. It's not out of the question that we wouldn't move some of those down if we didn't have standard FOB business to attach to them.
We'll see how that plays out over the next three or four months, and then make a call ahead of next summer when we need to give Bechtel full NTP.
Got it. Just to clarify, should we think FID is predominantly a function of financing or are there other 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. 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 three or four months.
Okay. Just to clarify with your 2019 guidance, I think you mentioned that it assumes 2.5 million- 3 million tons of early cargo volumes. Just want to clarify, does that assume any early cargoes from Corpus Train 2? Should we assume a base margin of $2.50 as is typical in your projections?
The comment on 2.5, 3 is the early cargoes associated with all three trains that are going to come on next year with Train 5 and Train 1 in the 1st quarter, then we have the Train 2 sometime in the second half. The DFCDs on all of those trains are six to nine 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're assuming more like $4.50- $5.00 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. That's what we've assumed.
Okay, great. Thanks.
If you find your question has been answered, you may remove yourself from the queue at any time by pressing star two. We will now take our next question from Jean Ann Salisbury from Bernstein. Please go ahead.
Hi. Good morning. What is your kind of ideal steady state for the percentage of your cargoes that you're getting a long-term fixed fee for versus spot market price? 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 that.
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.
I think having open capacity at the CMI business is a strategic advantage for us. We don't ever want to be in a state where we're sold out in that business. We've targeted 80%-85% contracted, which that last 10%, 15%, given the size of our platform is 4 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. We like that flexibility. It's part of our business, and we intend to keep some length there.
I would 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.
Yeah. I say one more thing. Our ability to sell without a condition precedent on building a facility is a competitive advantage that we have, right? Our customers don't take the risks that we have to get a project underway when we sell to them, and that differentiates us quite a bit.
Makes sense. Thanks. 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. That's probably better to talk to them about.
Okay. Fair enough. Thanks a lot. That's all for me.
We will now take our next question from Danilo Juvane from BMO Capital Markets. Please go ahead.
Thanks and good morning. Michael, could you just repeat that? I apologize for missing this in your prepared remarks, what were the upside opportunities that you mentioned with SPL 5 and Corpus Christi 1 for next year?
Movement of the schedule, I think is what he's asking.
In terms of schedule, we have Train Five making LNG and a Q1 substantial completion. We're talking there about weeks movement, not that significant. Corpus hasn't made LNG but is very close to doing it. Again, we have that in Q1. Again, I think that's weeks. There's probably more opportunity on Train Two at Corpus, let's see how Train One goes first. There may be a little bit more opportunity on Train Two.
Did you mean the $200 million in increased EBITDA or EBITDA change from substantial completion?
Yeah.
That is purely a result of raising run rate production guidance.
Gotcha. I guess with the ability to define the contract across in Europe, obviously this is not an Asian customer. Are you seeing now more appetite from European customers to be more willing, I guess, to sign contracts going forward here?
It's a combination of everything. Our business model is different. It's different than other U.S. LNG providers that are currently in construction. 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 flange. That's where we're seeing a big increase. We mentioned CPC in Taiwan, we've mentioned Poland now. Those are delivered straight to their flange or straight to the utility. In most cases, they go straight to a power plant and are used for power generation. Having that full service business model, having the bridging volumes that Michael talked about in the portfolio, it's a competitive advantage for us. We're just getting started.
Yeah, we're very busy, very excited about our opportunities going forward and the opportunity to continue to grow this business.
Thanks for that, Jack. Last question from me is on capital allocation. Obviously, you have a lot of potential upside in the guidance that you outlined for 2019. If you were just to look at 2019 guidance as you currently have it outlined, how would you think about what your capital allocation options could be next year?
Yeah. I think we'll talk about that after we get these two trains up and running. I think the good news is we thought we had $5.8 billion over the next five 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 left over. 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.
Thank you. Those are my questions.
Yeah.
We will now take our next question from Matthew Phillips from Guggenheim. Please go ahead.
Morning, guys. 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 pre-sold, whereas the pre-DFCD cargoes from CCL 1 and SPL 5 would be floating with the curve?
Definitely. Well, like I said, commissioning is kind of 2 million tons next year on the high end. We don't sell those until we know we have them. Those will be purely market-based. The balance of the portfolio, which I said is 6 million tons. You don't go into a year having not put any of that away. We sold some of that earlier this year and continue to do so at present in a rising price environment. 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. Thank you. With regard to long-term contracts, what would you estimate is the range for clearing prices for new offtake? What's kind of driving that in one direction or the other?
Do you want to talk about prices for long-term contracts?
It just depends. It depends on who you're talking to and where they're located. As you see from LNG Canada and the Qataris and the Russians that everybody's got big plans to expand and grow. 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. That's been our focus in making sure that it meets all of our financial hurdles to our shareholders.
Right. 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, as we think train 6 will look like, and more like a 3x, 4x on an equity to cash flow basis. Without getting into what's driving the top line, those are the investment hurdles we're trying to reach, and again, on a heavily contracted basis.
Understood. Thank you.
Thanks, Matt.
We will now take our next question from Craig Shere from Tuohy Brothers. Please go ahead.
Good morning. Congratulations on the fantastic news this morning.
Thank you, Craig.
For Corpus Christi train one early completion, are you potentially more open on originally hedged feedstock gas costs there, such that for a time you can benefit from wider basis differentials?
Sure, there'll be some opportunity there, yeah.
Okay. Kind of carrying that line of questioning forward. Obviously, phase III of Corpus Christi that is going to have full regulatory approvals in the not-too-distant future with 9.5 MTPA of capacity is potentially more advantaged than Sabine Pass allocation. I'm wondering if you're talking about a formal FID by mid-next year, and I guess you're doing prep work right now, and I understand that. Why wouldn't we be thinking about turbocharging phase III at Corpus ahead of Sabine Pass 6?
First off, you all should assume that we're not slowing down. It's been an extremely productive year in 2018, and I see that going forward in 2019. 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 going to be just investing back into our core business. The other part of it is while we are very pleased with the FERC schedule and the review of the permits for stage 3 at Corpus, which is our mid-scale project. Timing-wise, our customers need LNG now, and we've got to take advantage of that. We have a shovel-ready project. We have construction forces that are going to be rolling off of Train 5.
There's a lot of synergies that Bechtel has given us in cost reductions, et cetera, by being able to roll that team right into Train 6. 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. 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. It's really a great place to be from a supply standpoint.
Great. Last question from 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. Then with CPC in Taiwan had said that there was some gross, very large price point all in, obviously, to promote the idea of trade. 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 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 two where we share in some upside. Still, the fixed fee component is still the dominant factor in the contract. Not many of the contracts that you mentioned with respect to profit shares, but there are one or two.
Great. Thank you.
We will now take our next question from Alex Kania from Wolfe Research. Please go ahead.
Thanks. Just a question on just the overall kind of market environment right now. In the last probably few weeks, we've seen a flurry of contracts and MOU announcements. Just kind of curious how you characterize what you're seeing in long-term market discussions right now, just interest from buyers and maybe kind of are you seeing maybe elevated competition from these other projects right now? Yeah, just kind of curious on that.
The good news is natural gas demand continues to increase worldwide, especially in Asia. It goes well beyond just China. You have China, Korea, India, Pakistan all increasing significantly year-over-year its LNG imports. Yeah, we've been extremely busy. The team has been trying to craft solutions for different customers around the world. I think in the forecast that I've seen, whether it's WoodMac or others, there's a significant shortfall in the LNG supply outlook. 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. I do think there's a huge opportunity for us that the winds are at our back, and we just need to continue to execute. Michael, you have-
If you recall, we're coming out of a historic lull in FIDs through this last down cycle, I think the market is scurrying to kind of catch up. Even in 2025, there looks to be a 70, 80 million ton opportunity. Of course, you got to get going on that from a construction standpoint in the next year if you're going to hit that window. I think that's what's driving a lot of this market activity.
Great. Thanks, guys.
We will now take our next question from Julien Dumoulin-Smith from Bank of America. Please go ahead.
Hey, good morning, team.
Hi, Julien, how are you?
Good. Thank you. 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. Knowing you have a penchant for talking about buybacks at times. How are you thinking about this business and whether buybacks 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 SP6, 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 we think about the evolution of the business from 2019 to 2020 to 2021, kind of? Maybe what else needs to happen to get there?
That is a loaded question. If the stock keeps staying exactly where it's at, I'm all for buybacks, if that's what you're asking me. It's going to be a very short capital allocation discussion with the investors. As Michael pointed out, there's a whole lot of cash that this business is going to generate. 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. We're going to figure out, Julien, what to do here, as Michael said, in this first half of next year and be able to communicate it. We're looking at the most tax effective, efficient way to get it back to our investors. That's about all.
You know my history from Calpine in the past and 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. Actually, to that point on SP6, just to make sure we hit it here. What is the pricing on a per ton basis and what kind of advantage did you get given that the efficiencies you alluded to and getting ahead of it before FID here? If you can talk to it more precisely.
Yeah. 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. All the utilities are all in for Train 6. It's going to be really competitive. The EPC contract in the 500 kind of or lower range and all in, high $500-$600 a ton type number.
Got it. Jack, just to clarify your comment, that means execution in 2019 when you say talking about capital allocation?
Well, 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. If we FID Train 6, you should expect that there's a significant amount of cash in 2019 that's going to go plow back into our business for growth. Yeah, we're doing it now.
All right. Fair enough. Thank you.
Okay.
We'll take our next question from Hilary Cacanando from Wells Fargo. Please go ahead.
Hey, guys. It's actually Michael Webber on for Hilary. Hey, guys, how you doing? The logistics of dialing in from the road. I wanted to loop back, I think from maybe the first question that dealt with rates. Obviously, rates have kind of gone parabolic here. You guys got ahead of that in June. Just curious with the expanded production capacity you guys are talking about, was that factored in to the budgeting and the cargo program you guys went out and kind of captured in June? To what extent are you fully covered for 2019?
Yeah, again, I guess we'll break our rule on our position. Yeah, we took down all the tonnage we need for the 3 trains that are going to be early. We're in the low 20s in terms of vessels right now. Rapidly be in the low 30s. All of that was contracted this summer.
Right. Okay. The expanded production and the early trains you guys are covered for 2019.
Yes.
Yes.
All right. I appreciate that. Just more broadly on commercial progress. Jack, I think you mentioned some of the progress you guys are seeing, some of the competition you guys are seeing around Stage 3 and Sabine Pass 6. The last couple of FDAs and the last couple of FIDs, really, you guys have kind of had a little niche, kind of a little air pocket here where you're probably consistently competing with Qatar. Some of these big, larger global projects are still kind of getting their legs under them. Do you think the competitive subset for Corpus Stage 3 ends up being materially different than Sabine Pass 6, or maybe you have the market a little bit more to yourself? Are you bumping into Mozambique, LNG Canada, Arctic 2?
Is that happening now or is the gestation process for some of these FIDs so long that you're not really going to bump into them in earnest until you start going after Corpus Phase III?
No. You should assume we're going after Corpus Phase III now. We're not waiting. It's not a binary marketing strategy. It's extremely competitive worldwide. Yeah, 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.
Yeah, I guess my question is some of the more high-profile global projects, are you competing with them now, or do they still yet to come to the table?
No, we're competing with them now. People want diversity in their portfolio, keep that in mind. Look at the Taiwanese, they're going to have some Mozambique offtake. They want some Gulf Coast offtake, 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. In that case, we don't really compete with the Qataris because they've already bought from them. Big buyers want diversity in their book, and when they look to the U.S., they're looking to us right now.
Thank you. Just one follow-up on that. The Polish FID, did they actually sign another FID earlier this year with a greenfield competitor, to use it in a liberal sense? When we look at kind of the volumes that have been coming out of Sabine, it seems like there's a bit of a shift towards Europe, which would make sense from a
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 a European focus?
Yeah, I would say, unfortunately, Mike, Anatol is not here with us, and he's much more eloquent at the markets. I would say that we are 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.
Fair enough.
We will now take our next question from Fotis Giannakoulis from Morgan Stanley. Please go ahead.
Yes. Good morning, gentlemen. Congratulations for your announcement today. Jack, I want to ask you about the competitive landscape. You mentioned earlier about LNG Canada and Qatar. These two projects and producers, they took FIDs without having specific offtakes. If you see this becoming a trend in the future, if you would consider potentially expanding further on new trains without specific offtakes, and what does this mean, the LNG Canada FID for North American producers, especially for the greenfield projects?
Yeah. Fotis, 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, it didn't feel good. 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. As you know, in the utility business, our customers are making long-term bets. Whether it's China, where they've got 10 million tons of additional regas got built year-over-year, they've got 25 million tons of regas that's under construction right now. They're spending real money to build real infrastructure. Taiwan with a 5,000-megawatt combined cycle power plant that needs fuel. They need us.
They need affordable, reliable energy, and that's really where our focus is. It's not to build for build's sake. In Cheniere land, we don't talk about scale or being big. We talk about adding value for our customers and for our shareholders.
Thank you, Jack. 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. If that makes it harder for smaller players or greenfield players as they are trying to enter the market right now.
No, I think it's the opposite. We contract now and build later. Given our length, we sell off our length and refill it with new construction. I think we just keep doing that.
Okay. Thank you. I appreciate it.
Fotis, you'll have to ask the other greenfield LNG folks if it makes it harder for them or not.
Thank you, Jack.
We will now take our next question from Michael Lapides from Goldman Sachs. Please go ahead.
Hey, guys. 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, including anything, if possible at all, with CQP?
You want to take that?
Yeah. It remains an opportunity for us. We don't really feel like there's much to do right now. You see all these roll-ups happening in the market, Most of those have real issues with their MLP. We don't feel like we have that issue. 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. Really, it'll come down to a value decision for us. We don't think it makes sense to have two boxes with the same businesses basically in it. The roll-up is purely a value proposition for us.
Got it. 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? I know this is really long-term, so I'm thinking about all of 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 their 2021, 2022 run rate?
The way I think about it from today, from the trains that we're currently building or that are operating. I think there's probably another 30 million tons at Corpus that can be built in addition to train 3.
Got it. Thank you, Jack. Much appreciated.
All right, Michael. Thank you.
We will now take our next question from Spiro Dounis from Credit Suisse. Please go ahead.
Hey, good morning. Sorry if this was covered. Hopped on a bit late. First one just on potential indexation. Maybe 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 being included in the S&P and maybe what you think it would take to get there from here?
Spiro, 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 are correcting as we speak. I think we're a reasonable candidate for inclusion. 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. 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. We think we're a reasonable candidate, and we do what we've laid out here. I think we'll be in at some point in the future.
Okay. Then maybe continuing along that context there, just in how you guys view yourselves relative to large cap energy peers and tying that to the dividend yield. 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?
I don't know. Randy, you go.
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.
Totally understand. Appreciate the time.
We will now take our next question from Ryan Levine from Citi. Please go ahead.
Hi. Can you comment on the contract duration negotiating environment given the recent 24-year contract that Cheniere signed with Poland?
Ryan, as you can tell, we've been very successful at continuing to negotiate long-term contracts with our counterparties. It's because they're building infrastructure, and they need to have an affordable, dependable supply of fuel for that infrastructure. 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 those services. 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.
Okay. Then one follow-up. How would you look at contracting the new volumes that the operational improvements are enabling? Is there any seasonality to that average increase in volume per train across your portfolio?
It should actually smooth out some of the seasonality when we are complete with some of the debottlenecking initiatives for us. We look at our output or production as a portfolio. It's not by individual train or it's not even by site. We try to manage the business as a portfolio. As we get more production available, we'll look to turn that up and get some stable cash flows from it. We think that's what the biggest reward will be from our investor base.
Thank you.
We will now take our next question from Jason Gabelman from Cowen. Please go ahead.
Yeah. Hey, guys. How's it going? Two questions for me. First of all, on the unsold marketing component for next year, you had mentioned the marketing margin you're planning for is $4.50- $5 per M, which is, as someone said, a bit higher than the $2.50 you've historically used. Is that a number that you use in your run rate guidance as well? What is driving that higher marketing realization?
Yeah, we've always assumed, at least for the past couple years, several years, $2.50 in our run rate numbers. We're not using current market conditions to say that's what we're going to make in two, three, four 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. Just on your CapEx spend, it looked like it jumped up this quarter from about $700 million- $1.2 billion. It looks like there wasn't as high of a corresponding increase for the terminal in construction bucket on your balance sheet. Was there a CapEx being spent on, I don't know, something outside the business, or is it just an accounting issue for the quarter?
Yeah. I hope it's not an accounting issue. I'm not aware of spending anything else than our terminals. I don't know. Randy, I have to get back to you on that discrepancy. Corpus Train 3 has ramped up for the quarter, so that probably
Is why we're spending more. The difference, we have to get back to you on.
All right, great. Thanks a lot.
We will now take our final question from Ben Nolan from Stifel. Please go ahead.
Oh, I made it in. Great. I really only have one question left. I know you guys talked some about the bridging volumes, and obviously that probably increases through some of the debottlenecking work that you've done. 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 leverage volumes?
It's typically been three to five million tons. Right now it's lower than that because of all the DES business we've done. As we said, likely reload the portfolio as we build train 6.
Okay. I guess this debottlenecking, it didn't materially add, I guess, or it was offset by the recent SPAs, I guess, is how to think about that.
Let me clarify. When the DES business starts in earnest, which is still three, four 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.
Okay. All right. That'll do it. Thank you.
Thank you all. Thanks for your support of Cheniere. We really appreciate it.
Ladies and gentlemen, this concludes today's call. You may now disconnect.