Cheniere Energy (LNG) Jack A. Fusco on Q2 2016 Results - Earnings Call Transcript

| About: Cheniere Energy, (LNG)

Cheniere Energy, Inc. (NYSEMKT:LNG)

Q2 2016 Earnings Call

August 09, 2016 10:00 am ET

Executives

Randy Bhatia - Director-Finance & Investor Relations, Cheniere Energy Partners LP

Jack A. Fusco - President, Chief Executive Officer & Director

Anatol Feygin - Senior VP-Strategy & Corporate Development

Michael J. Wortley - Chief Financial Officer & Senior Vice President

R. Keith Teague - Executive Vice President-Asset Group

Analysts

Christine Cho - Barclays Capital, Inc.

Theodore Durbin - Goldman Sachs & Co.

Jeremy B. Tonet - JPMorgan Securities LLC

James Carreker - USCA Securities LLC

Alex S. Kania - Wolfe Research LLC

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Fotis Giannakoulis - Morgan Stanley & Co. LLC

Sunil K. Sibal - Seaport Global Securities LLC

Operator

Good morning, ladies and gentlemen. My name is Sally, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cheniere Energy, Inc. Second Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I will now turn the conference over to Randy Bhatia, Director of Finance and Investor Relations. Please go ahead, sir.

Randy Bhatia - Director-Finance & Investor Relations, Cheniere Energy Partners LP

Good morning, everyone. I'd like to welcome you to Cheniere Energy's second quarter 2016 earnings conference call. The slide presentation and access to the webcast for today's call can be found on our website located at cheniere.com.

Participating on the call this morning are Jack Fusco, Cheniere's President and Chief Executive Officer; Anatol Feygin, Senior Vice President of Strategy and Corporate Development; and Michael Wortley, Senior Vice President and Chief Financial Officer.

Before we begin, I would like to remind all listeners that our remarks, including answers to your questions, may contain forward-looking statements. Actual results could differ materially from what is described in these statements. Slide two of our presentation contains a discussion of those forward-looking statements and associated risks.

In addition, we may include references to non-GAAP financial measures, such as adjusted EBITDA, net loss as adjusted, and net loss per share as adjusted. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure can be found in the appendix of the slide deck. As part of our discussion of Cheniere Energy, Inc.'s results, the call may also include selected financial information and results for Cheniere Energy Partners L.P., or CQP, and Cheniere Energy Partners LP Holdings, or CQH. On this call we do not intend to cover CQP or CQH's results separately from those of Cheniere Energy, Inc.

After prepared remarks from each of the participating executives, we will open the call for Q&A. As shown in the agenda on slide three, Jack will begin with an overview of the quarter and then give an update on construction and operating progress at our liquefaction projects. Following Jack's comments, we will hear from Anatol on the market and then from Michael, who will review financial results.

I will now turn the call over to Jack.

Jack A. Fusco - President, Chief Executive Officer & Director

Thank you, Randy, and good morning to everyone. I'm pleased to be here today for Cheniere's quarterly earnings call. Since being appointed President and CEO of Cheniere several months ago, I've had the opportunity to meet with many of Cheniere's employees, customers, project partners, investors, regulators and other stakeholders around the world. The caliber of the people associated with this organization is world-class and only reinforces my confidence in the future success of the company. It's truly an exciting time at Cheniere. We are firing on all cylinders and are beginning to see the impact our company is having on the global energy marketplace. I am eager to build upon the positive momentum of the past several years, improving our operational efficiencies, and implementing a strategy for sustainable, long-term shareholder value creation.

Slide five contains a few highlights from the quarter. The second quarter of 2016 is a significant one for the company as it marks the first quarter of operations from one our liquefaction projects. After approximately 45 months of construction, Train 1 at Sabine Pass is now operational. The substantial completion date when we take over care, custody and control of the Train was May 26. I would like to once again recognize both Cheniere's professionals and those of our EPC partner Bechtel, all of whom who have worked tirelessly since 2012 to complete this milestone.

What I've highlighted on slide five are three metrics which I believe are important to watch as we track the business going forward. With the start-up of operations of Train 1, we have begun reporting revenues from LNG sales from liquefaction. Revenues for the second quarter were $177 million and $246 million year-to-date, of which $111 million and $113 million respectively were related to LNG sales. Adjusted EBITDA was a loss of $4 million for the quarter and $48 million year-to-date. However, our earnings and cash flow from liquefaction have just begun. Our ramp-up in earnings, performance, and cash flow generation is tied to construction completion of the Trains over the next several years. I've asked Michael to cover in detail our financial performance for the quarter as well as our balance sheet management later on this call.

Our third metric is volumes. To date we've exported a total of 22 cargoes from Sabine Pass with LNG produced at our facility in Louisiana being delivered to destinations around the globe, including South America, Europe, Asia and the Middle East. I've asked Anatol to cover our marketing efforts and global demand outlook on this call.

Slide six provides an update on construction at Sabine Pass and Corpus Christi. Overall, we are very pleased with the progress of construction at both facilities. Our number one priority is to execute on the construction of our LNG platform safely, timely and on budget. As I noted earlier, substantial completion for Sabine Pass Train 1 was achieved on May 26, 2016, after nearly 45 months of construction and commissioning. Sabine Pass Train 2 began producing LNG on July 28. Commissioning is proceeding well and we expect substantial completion this fall.

On all Trains, Bechtel continues to progress construction efforts against aggressive schedules and contractual guarantees. In consideration of lagging construction progress realized these past months for Train 3, we recently revised the forecasted substantial completion date from April to June 2017, representing a construction and commissioning duration of approximately 49 months. This forecast adjustment results simply from an accumulation of weather delays and various construction challenges encountered over the three-plus years of construction and not any one particular issue.

Train 4 progress will be monitored over the coming months for any potential impact to the August 2017 substantial completion target. It is important to note that Bechtel is still expected to deliver by the guaranteed contractual date and we at Cheniere are focused on transitioning the Trains from construction management to operations management safely, efficiently and effectively.

Furthermore, as there seems to be significant interest in the day to day operation of our Trains, I would like to mention that there is a planned maintenance outage scheduled to begin during September for a duration of approximately four weeks. This outage is necessary to facilitate a design change with our process flares at Sabine Pass. In addition, we will utilize this opportunity to complete additional routine maintenance.

Turning to slide seven, we are transitioning from a development company to an operating one. These near term operational, financial, commercial and organizational goals will help us manage that transition and help take Cheniere to the next level. Foremost, we must ensure our construction and operations continue safely, on time and on budget. We expect to incorporate lessons learned from previous Trains to improve on commissioning efforts, as we continue to bring the Trains online.

Financially, you should expect us to pull all levers to create long-term shareholder value. We will increase our transparency for the investment community, starting with today's call. We won't be providing guidance today, but guidance is something you can look forward to in the future. We will initiate a budget process with a focus on financial discipline and looking for ways to do our jobs faster and cheaper. We will look to identify opportunities to simplify our complex corporate structure. In addition, we expect our ratings momentum at SPL to continue and look to achieve an investment grade rating in the near term. And finally, we are working on defining a sustainable, long-term financial strategy, and we'll be communicating it in the due course.

On the commercial front, we will continue to monetize cargoes produced during the commissioning of our Trains. Our commercial team did an outstanding job on Train 1 commissioning cargoes, and we expect that success to continue. As Trains enter into commercial operations, we expect to fulfill our contractual obligations to our long-term foundation customers. Cheniere will continue to optimize our excess cargoes, and our marketing efforts are focused on building a portfolio of short, mid and long-term contracts. And we will continue to pursue long-term contracts necessary to support the financing of our next Trains, Corpus Christi 3 and Sabine Pass Train 6.

Finally, we will make some changes organizationally to align ourselves with our shareholders. We will strive to have an organizational structure that provides clarity to our professionals' roles and responsibilities, provides clear succession and developmental opportunities, and drives out unnecessary G&A expenses. Our vision is simple, to be recognized by all stakeholders as a premier LNG provider to the marketplace, and the achievement of these goals are critical to that effort.

Turning to slide eight, our investment thesis is clear. First, the world is shifting to a cleaner energy source and reliable natural gas is a leading solution. Global gas demand is growing for both economic and environmental reasons, and LNG demand continues to grow faster than global gas demand.

Second, Cheniere is well positioned to retain and grow its share of the U.S. LNG market. Many companies talk about developing an LNG export project, but Cheniere is the only company to have delivered an LNG export project on time and on budget in the Lower 48. We have the proven track record across all elements of project execution and finance. We're also unique in offering our customers a comprehensive service option, from natural gas procurement, transport, processing, storage and shipping.

Third, as I noted earlier, Cheniere's cash flows from liquefaction have just begun with excellent visibility for long-term growth. Fourth, we will remain financially disciplined while pursuing accretive growth opportunities. Cheniere is well-positioned with additional existing LNG to bring to market with two fully permitted, shovel-ready liquefaction Trains and two more in the development pipeline. I'm confident that we'll be able to build incremental LNG capacity better, faster and cheaper than anyone else.

In addition to building out our existing liquefaction projects, our strategic focus is to leverage our core capabilities on the LNG platform by developing projects within the LNG value chain. We will remain targeted and focused on our core competencies and not stray with your investment. Slide nine highlights one of those projects in the development pipeline, our project in Chile. This is one of the most creative projects I've seen in my career. We are participating in the development of a Chilean gas-to-power solution. The project is a joint venture to build, own and operate a new power plant with a 15-year power purchase agreement in a floating regasification facility. Cheniere will have the exclusive rights to deliver LNG to the FSRU for the power station for 15 years.

While our competitors are talking about developing integrated LNG-to-power projects, Cheniere is once again leading the development of commercially innovative solutions. We expect a final investment decision to take place in the second half of 2016 after all the necessary Chilean regulatory approvals are received. This project is one example of how the Cheniere team is developing creative ways to enter new and growing markets. We have a long-term focus on marketing and market development.

With that, I will now turn the call over to Anatol.

Anatol Feygin - Senior VP-Strategy & Corporate Development

Thanks, Jack, and good morning, everyone. Turning to slide 11, I'd like to shift our focus to LNG marketing. In a volatile commodity environment, it's easy to lose sight of the solid long-term supply-demand fundamentals which underpin long-term global growth prospects for LNG. LNG prices have moderated along with the rest of the energy complex due to a combination of oil market volatility, LNG supply additions and some modestly slower than expected economic growth. However, we're beginning to see evidence of price elasticity of demand. China and India for example, key long-term LNG growth markets, have imported approximately 30% more LNG over the first half of 2016 compared to 2015.

Our differentiated business model as a comprehensive LNG provider positions us well to compete in today's LNG market. The market continues to evolve at a fairly rapid pace. LNG suppliers need to move closer to the end-use customers, and you're seeing us do that most visibly with our project in Chile, which Jack discussed earlier.

While the market for LNG is loose at the moment, we expect it to start tightening between late this and early next decade and for LNG demands to nearly double between now and 2030. Production declines in legacy markets, markets switching to clearer burning natural gas, contract roll-offs and the emergence of new LNG markets primarily enabled by floating re-gas facilities, will continue to offer us attractive opportunities. While traditional LNG buyers like Japan and Korea have been importing less, the rapid emergence of new market entrants – such as Egypt, Jordan, Pakistan – has more than made up the difference, and there are currently about 30 new markets considering LNG import projects.

At Cheniere, our global marketing and origination teams continue to build long-term relationships helping customers identify long-term LNG needs and develop cost-effective and flexible solutions.

Another aspect of the evolving LNG market is that buyers are increasingly seeking nontraditional or nonstandard contracts. We approach these discussions with a competitive advantage given our track record of execution, comprehensive product and flexible contract terms.

Slide 12 is a very busy one but exciting for us, as it represents the scale of existing and potential LNG import projects globally. New LNG importers continue to emerge, and are relying on the growing liquidity in the short-term market to procure LNG supply. In 2015, four new import markets started up: Jordan, Egypt, Pakistan and Poland. Three of the four new markets began importing without long-term supply contracts, and together Jordan, Egypt and Pakistan imported nearly 6 million tons on a spot or short-term basis. These three importers also employed floating re-gas facilities as receiving terminals. These FSRUs have become the import terminal technology of choice for new markets. They require less capital, provide more flexibility and can be brought online much faster than traditional onshore terminals.

The rise in FSRU projects is staggering, as new importers are able to start importing LNG in less than 12 months. The first FSRU was delivered in 2005. Now, there are 24 vessels, representing about 90 million tons of import capacity. Currently, there are another six vessels on order, representing an additional 30 million tons of import capacity. With more than 30 new markets spread across the world considering LNG imports, gas is becoming a more attractive fuel source. LNG is attractively priced, clean and increased supply will ensure demand is able to access supply.

Turning to slide 13, as I mentioned earlier, there is a secular shift to cleaner-burning natural gas for power generation worldwide. Natural gas is becoming the fossil fuel of choice to reduce air pollution and greenhouse gas emissions while still being a reliable and economic supply source. U.S. LNG imports will help markets shift to cleaner-burning natural gas to reach their environmental goals.

In December 2015, 195 countries pledged to address climate change at COP21 in Paris. While the commitments to reduce greenhouse gas emissions in the Paris agreement are voluntary, the agreement signals a shift towards less carbon intensive energy sources is already underway. In 2015, we saw the largest recorded year-on-year drop, down 1.8% for coal use, while gas increased by 1.7% globally year-on-year, taking market share away from coal. The drop was enabled by affordable gas supply, which allowed switching from coal to natural gas in power generation.

In addition to moderate prices driving global demand, a number of countries are looking at natural gas as a policy solution. Natural gas-fired power generation emits about 50% less greenhouse emissions compared to coal, but even more importantly, it emits significantly less traditional pollutants like NOx, SOx, and PMs. For developing countries, dealing with harmful air pollution and increased per capita energy demands, switching from coal to gas can help achieve multiple environmental goals.

Indeed, affordable, reliable U.S. gas supplies have already resulted in coal displacement in power generation and dramatic CO2 reductions. Due in part to cleaner-burning natural gas, total CO2 emissions from the U.S. power stack during 2015 dropped to the lowest level since 1992 and reduced total emissions 20% from the 2007 peak. As part of a wider policy initiative to reduce greenhouse gas emissions, the UK set a carbon price floor which almost immediately resulted in a dramatic increase in gas dispatch versus coal in the power sector. In summary, natural gas is expected to have a key role in policy options to reduce emission, and, therefore, we expect to see a continued increase in natural gas demand worldwide.

Tying the previous two slides back to the LNG market and Cheniere, slide 14 is a look ahead into the near-term LNG market where liquefaction capacity from projects under construction will continue to be built, supply will come on through the balance of the decade. We have already begun to see that supply availability and an increasingly liquid LNG market will stimulate price-elastic demand and attract new importers. A potential supply-demand gap is setting up for the start of next decade. There's been a dramatic slowdown in liquefaction FIDs since mid-2015 and emerging Asian markets are expected to continue to drive incremental LNG demand. Now, liquefaction costs have to be compressed to remain competitive and keep the momentum of the global secular transition to natural gas.

With that, I'll now turn the call over Michael to review our financial results.

Michael J. Wortley - Chief Financial Officer & Senior Vice President

Thank you, Anatol, and good morning, everyone. I'm pleased to announce our financial results for the second quarter of 2016, a summary of which can be found on slide 16.

Before I get into the details, I'd like to say that I've been with the company for over a decade now and this truly is an exciting quarter as we have begun to recognize revenue from LNG sales from liquefaction and that this couldn't have been possible without the many years of hard work by many dedicated people. This is a pivotal time for the company as we move into operations and expect to ramp up our cash flow generation in the upcoming years as we continue to complete construction of the Trains.

We are also excited about moving the company forward and articulating our financial strategy with the long-term goal of value creation through a disciplined capital allocation philosophy. As a reminder, Cheniere Energy consolidates the results of Cheniere Partners, CQP, and Cheniere Partners Holdings, CQH.

For the second quarter 2016, we reported consolidated revenue of $177 million compared to $68 million in the corresponding 2015 period. Revenue recognized from LNG sales for the second quarter 2016 was $111 million. Before moving on, I'd like to update some information about our cargo sales during the second quarter as it relates to revenue recognition. During the second quarter we loaded eleven cargoes and sold over $200 million worth of LNG produced at Sabine Pass Liquefaction or SPL. Six of the eleven cargoes were loaded prior to substantial completion and those proceeds are not reflected on the income statement. Rather, they are recorded as an offset to construction in process on the balance sheet because these amounts were earned prior to our taking over care, custody and control of Train 1.

LNG cargoes on future Trains will be treated in the same manner, so it may be difficult to model our revenue accurately and tie out our reported revenue to production in upcoming quarters as we continue to commission Trains at Sabine Pass. Post substantial completion of Train 1, we loaded five cargoes during the second quarter which are reflected on the income statement. Those commercial cargoes were lifted by BG Shell under their contract that gives them access to early volumes produced prior to DFCD at the contract price of 115% of Henry Hub plus 225 (sic) [$2.25].

In addition to revenue, several other line items were impacted during the quarter as a result of substantial completion of Train 1. Certain operating expense line items previously capitalized during construction have begun to be expensed. Depreciation and amortization expense increased during the period as we began depreciating assets related to Train 1 upon reaching substantial completion.

In addition, G&A expense decreased by approximately 30% quarter-over-quarter partially due to some reallocation of resources from G&A to O&M after the commencement of operations. Furthermore, included in the G&A and marketing line items are aggregate share based compensation expenses for the three and six months ended June 30, 2016, of $32 million and $46 million respectively. Amounts remaining under these legacy grants will be recognized over the next two years, and thereafter we expect more normalized run rate levels to prevail.

Consistent with the reporting change we made in the first quarter, we have broken out marketing expense from G&A. Marketing expenses include costs directly associated with our long-term LNG contract origination efforts and the sale and optimization of CMI portfolio volumes. These costs include payroll, benefits and stock compensation costs of marketing and origination personnel, professional services and other support costs.

Net loss attributable to common stockholders was $298 million or $1.31 per share compared to the corresponding 2015 period of $119 million or $0.52 per share. Impacting earnings during the second quarter were significant items totaling approximately $158 million or approximately $0.70 per share. These significant items related to derivative losses primarily due to changes in LIBOR over the period, loss on early extinguishment of debt related to refinancing activities at both liquefaction project entities, and changes in fair value of our commodity derivatives. The management of our consolidated balance sheet is driving much of the impact to EPS, and investors should expect EPS results to continue to be influenced by such financing related items for the foreseeable future. As such, we plan to report adjusted EBITDA and net income as adjusted, which excludes these items. Additional detail on the impact of these items can be found in the reconciliation tables in the appendix of the slide deck.

Adjusted EBITDA for the three and six months ended June 30, 2016, was a loss of $4 million and $48 million compared to a loss of $61 million and $86 million for the comparable 2015 periods. With regard to liquidity, as of June 30, 2016, we had unrestricted cash and cash equivalents at Cheniere of approximately $1.05 billion. In addition we had current and non-current restricted cash of $756 million designated for the following purposes: $223 million for the Corpus Christi project; $263 million for the Sabine Pass project; $110 million restricted under the CQP credit facilities; $91 million for interest payments on SPLNG bonds; and $69 million for other restricted purposes.

As mentioned earlier, we won't be providing any financial guidance on this call, but it is something we expect to begin providing in the near future as we continue to move into operations at our projects. We expect to host an Analyst Investor Day in the first half of next year, and we'll provide you with more information on that in the coming months.

On slide 17, we highlight some key points of our financial philosophy. We are open to exploring opportunities to simplify our corporate structure to reduce complexity for our debt and equity investors. However, we will transact only to the extent it makes economic sense for our shareholders. As well, we will strive to maximize levered cash returns while maintaining a long-term sustainable balance sheet. Over the long term, embedded returns in our equity security will be the benchmark against which capital allocation decisions will be made. We aim to optimize the allocation of capital to growth opportunities, balance sheet management and capital returns to shareholders with a goal of maximizing equity returns.

Next, we will continue to mitigate financial execution risk by utilizing our deep access to capital across the complex in multiple markets. In the first quarter, we raised a $2.8 billion bank facility at CQP to refinance debt related to our SPLNG regasification terminal and our Creole Trail Pipeline. During the second quarter, we continued to proactively manage our debt maturity profile by issuing bonds at both our liquefaction projects to refinance bank debt.

In May, Corpus Christi Holdings, LLC, or CCH, completed its inaugural bond offering with the closing of $1.25 billion of senior secured notes due 2024 which priced at par to yield 7%. CCH used the net proceeds from the offering to repay a portion of the outstanding borrowings under the CCH credit facility. As a result, the CCH bank facility was reduced to $7.35 billion with approximately $2.7 billion drawn as of June 30.

A few weeks after the closing of the CCH notes, SPL completed a bond offering of $1.5 billion of senior secured notes due 2026 which priced at par to yield 5.875%. Following the bond offering, the SPL bank facility was reduced to approximately $3.3 billion with a little over $800 million drawn as of June 30. To-date, we've placed a total of $10 billion of SPL notes in the market with a volume-weighted average coupon inside 6%.

At both projects, we plan to continue to be opportunistic in terming out our bank facilities to better align our maturity profile with projected EBITDA levels. A summary of our current consolidated debt maturity profile can be found on slide 18. Pro forma the repayment of the SPLNG project bonds later this year with proceeds from the CQP bank facility, there will be no maturities in the Cheniere complex until 2020.

And finally, we remain focused on execution, which we believe will lead to further positive rating agency actions across the complex. We maintain an active dialogue with the agencies and expect to, over time, achieve investment-grade ratings, first at SPL and later at CCH. Our two projects have been financed from the outset with investment-grade credit metrics. Evidencing our progress to-date, in April, Moody's upgraded the credit rating of SPL from Ba3 to Ba2 due to derisking of the project and construction milestones achieved. This action was on the heels of S&P upgrading Cheniere's rating to BB- from B+ back in Q1.

With that, we would like to thank you for your time today and your interest in Cheniere. We look forward to updating you on our third quarter call in November.

Operator, we are now ready to open the line for questions.

Question-and-Answer Session

Operator

Certainly. Your first question comes from the line of Christine Cho with Barclays. Your line is open..

Christine Cho - Barclays Capital, Inc.

Good morning, everyone. Thanks for hosting the call. I guess I wanted to start with where you left off, Michael. Can you remind us what the credit rating agencies are looking for with respect to a potential upgrade to investment grade for SPL? And you've done some bond issuances to term out the credit facility but given the anxiety with the energy tape and leverage of maturing companies in general, obviously your leverage is often a topic that's brought up by investors given all the contracts roll off in a short time period. And I know it's 20 years out and who knows what the world will be like then but what do you think are the steps the company needs to take today to alleviate some of those concerns that weigh on the stock every time commodity prices are down?

Michael J. Wortley - Chief Financial Officer & Senior Vice President

Hey, Christine. So I think the first thing, the agencies are looking for derisking of the construction process. So we talk about our projects are financed with investment grade credit metrics. They are, they have. Where the agencies are looking for a debt service coverage ratio of something north of 1.4, our two projects are using conservative assumptions, more like 1.6, 1.7. So it's really just a matter of time for us getting there.

So S&P has said they want to see two Trains up and running and then they'll consider us. And the next upgrade from S&P will put us at investment grade. So that's anywhere between now, given that we have two Trains running and the startup of Train 3, which is in the first half of next year. So I think we're in that neighborhood at this point and it's just a matter of time. And then Moody's has said similar things except they want to see four Trains up and running. So seems like a lot more than two but really that's only the second half of next year. So I don't think we're far from that standpoint.

In terms of managing the balance sheet, we've always stayed ahead of the curve, I guess, is what gives us a lot of comfort in dealing with these big bank maturities that we have in 2020 and 2022. So we've been very proactive in putting those into the bond market when the market's open. So we were very active in 2014 and 2015 and even 2013 and then the markets got choppy, so we took our time and that's the benefit of these bank facilities. They're always there to back up the projects. And then the bond market came back here recently and you saw us go back quickly with almost $3 billion of issuances. So we'll proactively manage the debt to ours when the market's open and with no maturities over the next four years, we're very comfortable with our ability to deal with the maturity in 2020 and then the tower in 2022.

In terms of long term balance sheet, you said it. I mean, we have 20-year contracts. All of the debt can be amortized over the contract life at very, very high coverage ratios, as I talked about, 1.6, 1.7. So I think that's the starting point. And then as we look at it, the asset is a 30-year, 40-year lived asset. So it doesn't make sense to pay off every dollar of debt over the 20-year contract. You look at a project like Kenai in Alaska has been making LNG for 45 years. So it's a very long-lived asset. Will we have to pay down some debt over the first 20-year term of the contracts? Probably. But is it all of it? No, probably not. So that's just something we'll have to keep our eye on over the next many, many years.

Christine Cho - Barclays Capital, Inc.

Great. Thank you. And then, I guess my follow-up, you guys have had Train 1 running for a couple of months now. Bechtel has had a strong track record in bringing on Trains at a level higher than the design capacity. Do you guys have a good sense for what the effective capacity is for Train 1 is yet? And what would you say were the biggest surprises and/or challenges with bringing Train 1 up to where it is today?

Jack A. Fusco - President, Chief Executive Officer & Director

So, Christine, this is Jack. So first off, thanks. And thanks for recognizing it's your follow-up question, because the queue is really backing up. So I want to make sure we give everybody an opportunity to ask a question on the call. But we are very pleased with the performance of Train 1. But we're right in the middle of doing, and conducting our testing and getting comfortable with the Train. So we're not going to commit at this point of what we think the design capabilities are of the Train. But you should rest assured it's in very good hands, that the Cheniere operating team is in my classification doing exactly what we need to be doing. They're operating it extremely well, and the handoff from Bechtel has went extremely well. So we're very pleased at this point but not ready yet to commit or comment on the total capabilities. But thank you.

Christine Cho - Barclays Capital, Inc.

Thank you.

Operator

Your next question comes from the line of Ted Durbin with Goldman Sachs. Your line is open.

Theodore Durbin - Goldman Sachs & Co.

Thanks. I just want to talk about the long-term and the near-term contracting strategy. I guess the first question is would you be willing to give on the 350 (sic) [$3.50) that you signed up a lot of your recent contracts on if you saw that some of your competitors were signing up capacity in a more meaningful way? And I guess the follow-up to that, is your appetite to contract out more than the, call it, 87% 88% of the existing Trains that you have under contract?

Jack A. Fusco - President, Chief Executive Officer & Director

Hi, Ted. It's Jack. I'll give you my piece, and then I'll turn the call or the question over to Anatol. So as far as our prospects on long term contracts or the 350 number (sic) [$3.50] we're going to do whatever makes financial sense. So the way I think about our contracting efforts is there's going to be a portion of whatever the 87% and above is that we feel comfortable that we're going to want to term out. I believe having stability in the cash flows is more important to Cheniere than trying to play some spot market or basis spreads throughout the world on the LNG complex. So you should expect us to be very aggressive with our marketing and our contracting efforts going forward. And Anatol?

Anatol Feygin - Senior VP-Strategy & Corporate Development

Yeah. Thanks, Jack. Thanks, Ted, for the question. As we said in our prepared remarks, this is a cyclical market and right now we have a fair amount of supply coming on. We are very encouraged by the demand response that we're seeing in the market, new markets emerging, price elasticity clearly showing up. And we do believe that over the medium term, towards the end of this decade, early next, those buyers that need ratable supply and need certainty of supply will be in the market for attractive long term contracts. And we believe that our comprehensive service offering where we are responsible for supply and loading at the dock is something that will emerge as a key competitive advantage and we'll be able to capture those long term contracts at that point.

Theodore Durbin - Goldman Sachs & Co.

Okay. Great. And then my other question is, and I realize you're still developing this, but maybe just talk to us about the metrics that you and the management team are targeting both in the near term and the long term EBITDA growth, free cash flow per share. And then as you communicate that to us, how are you thinking about guiding us to those metrics?

Jack A. Fusco - President, Chief Executive Officer & Director

Okay. Michael, you want to..?

Michael J. Wortley - Chief Financial Officer & Senior Vice President

Yeah, I mean we're trying to maximize cash flow per share for the next four years, and so that will be almost totally a function of the Trains coming online and getting the contracts up and running. So I think once we get the first couple Trains and their ramp-up under our belt, we'll be a lot more comfortable with giving guidance sometime early next year when we have a better idea how the Trains ramp up. So that's, I think, where we'll be headed in the near term.

Theodore Durbin - Goldman Sachs & Co.

Is that true for the incentive side as well in terms of how you're incentivizing the management team?

Jack A. Fusco - President, Chief Executive Officer & Director

Well, on incentives, and I'm working closely with the board on this one, is I'm a very traditional person when it comes to long-term incentives and I want to make sure that the management team and the employee base, our incentives are aligned perfectly with the shareholders. So you should expect us to have a majority of our compensation tied to performance metrics that are tied to our share price.

Theodore Durbin - Goldman Sachs & Co.

Understood. I'll leave it at that. Thank you.

Operator

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

Jeremy B. Tonet - JPMorgan Securities LLC

Good morning.

Jack A. Fusco - President, Chief Executive Officer & Director

Good morning, Jeremy.

Jeremy B. Tonet - JPMorgan Securities LLC

Jack, I just wanted to touch base on the opportunity for cost savings and improving operational efficiencies there. I'm just wondering, I know you're early in your tenure at this point, but could you provide any more thoughts as far as what type of scale or magnitude this could present? Or is it more just about kind of shaping a more return-focused culture in general for Cheniere? Any thoughts there would be helpful.

Jack A. Fusco - President, Chief Executive Officer & Director

Yeah. Jeremy, so we're in the process right now of trying to get our budgets in order. So it's a little longer process that we're going through. So we're talking about staffing plans first. We're going through a zero-based budgeting process that Michael and his team are going to kick off here very quickly for next year. And we'll go through what do we need to be successful here at Cheniere if we're focused on being the best LNG provider in the space?

And that process I'm hopeful will deliver some significant results for us. And you should expect us, when we give guidance, to actually give you what we believe a run rate on our G&A budget should be going forward. I'm not capable or willing at this time to actually answer your question directly on this call as far as what I think the magnitude is going to be, but you should expect it from us in the near future.

Jeremy B. Tonet - JPMorgan Securities LLC

Makes sense. That's fair. Thanks for that. And just wondering if you could comment philosophically speaking with the structure. Calpine never employed the yieldco structure or anything like that. And I'm just wondering, philosophically, what you think about the MLP structure here? I know you've talked a bit about simplifying the family structure. That could take a lot of different iterations. But just wondering, philosophically thinking, how you think about the importance of the MLP structure?

Jack A. Fusco - President, Chief Executive Officer & Director

Wow. So I mean, not only in my career have I never been involved in an MLP or a yieldco, I've never paid a dividend either, Jeremy. So this is all new for me and a learning process. It's exciting. I mean, I am appreciative of Michael and his team trying to get me up to speed on all the nuances with the Cheniere capital structure, which is very complicated.

But I think there's a place and a role for the MLP structure. I am pleased and very supportive of trying to get to an investment-grade rating down at SPL, which will be a first in my career also. I've never been associated with anything that's been remotely close to investment grade. So this is an exciting time for me as well as for the company. But I don't have any philosophical positives or negatives against any of the different structures. I've just never had an opportunity to actually employ any of them in the past.

Jeremy B. Tonet - JPMorgan Securities LLC

Thanks for your thoughts there.

Operator

Your next question comes from the line of James Carreker with U.S. Capital Advisors. Your line is open.

James Carreker - USCA Securities LLC

Thanks for taking my questions. Understanding that it's just the five cargoes that have hit the income statement, I was wondering if you could just provide just a little color on the 10 or so pre-commissioning cargoes and how those sold and what prices you're seeing, margins, things like that?

Michael J. Wortley - Chief Financial Officer & Senior Vice President

Yeah. I mean I'll take that. We sold them all over the place, I mean really all over the globe, South America, Middle East. India took a cargo, some in Europe as well, Portugal. So they really – we were excited to see they went to a lot of places and not a lot of traditional markets, also. And then on the pricing side, our guys, as Jack said, did a great job putting the cargoes away and I'd say we got market price. So if you look at what South American prices were or JKM during that time, it was in that neighborhood.

James Carreker - USCA Securities LLC

Okay. And then I guess for the balance of the year going forward on the marketing side, you had some sales done I think in the 2014 timeframe. Are those going to start hitting, I guess, in Q2, Q3, Q4? Have some of those already hit? I guess a little color on what you might see for the rest of the year on marketing?

Michael J. Wortley - Chief Financial Officer & Senior Vice President

Yeah. I mean, the answer's yes. I don't want to get too granular into that kind of stuff, but one cargo did hit this quarter that was sold a couple years ago. So that one showed up, and then there'll be more later this year. And then the bulk of them are next year.

James Carreker - USCA Securities LLC

Okay. So for the most part, this year's going to be spottish type marketing sales?

Michael J. Wortley - Chief Financial Officer & Senior Vice President

I wouldn't say that. I mean there are some cargoes that have been put away couple years ago that are going to go today. There will be the occasional spot cargo. And remember we're in commissioning, so sometimes the production guys show up with a cargo on short notice.

Jack A. Fusco - President, Chief Executive Officer & Director

Go ahead, Anatol.

Anatol Feygin - Senior VP-Strategy & Corporate Development

And also, just obviously, BG pre-commercial cargoes are going now as well, as Michael said. So that's the bulk of the volume that you'll see moving out of the plant for the balance of the year.

James Carreker - USCA Securities LLC

Thank you. And then if I could just follow up real quickly on – I was wondering if you could maybe bridge the gap a little bit on the delta between LNG's EBITDA and CQP's EBITDA for the quarter and what's driving the delta there?

Michael J. Wortley - Chief Financial Officer & Senior Vice President

Yeah. There's a lot of cost stuff at CEI, G&A or otherwise, that aren't borne by the partnership, right? I mean, we have the marketing business up at CEI. We have a group of folks running our Corpus project. And so that's what's driving the difference.

James Carreker - USCA Securities LLC

Okay. And I mean, is that a good run rate delta? Is that the right way to think about it?

Michael J. Wortley - Chief Financial Officer & Senior Vice President

Yeah. I mean, it'll be a function of what our cost structure ultimately is. But, yeah, I think so.

James Carreker - USCA Securities LLC

Okay. Thank you.

Operator

Your next question comes from the line of Alex Kania with Wolfe Research. Your line is open.

Alex S. Kania - Wolfe Research LLC

Great. Thanks. Good morning. A question on the El Campesino contract. What are the remaining regulatory approvals that you might need there in Chile? I'm just curious about maybe a little more granularity on maybe the timing of the FID.

Anatol Feygin - Senior VP-Strategy & Corporate Development

Thanks, Alex. This is Anatol. Thanks for the question. So the project, the way to think about it is actually two projects. There's the terminal and the power plant. Our partner in Chile is doing a fabulous job of moving this through its paces and through the regulatory process. It is a very robust regulatory process with lots of involvement, lots of comment periods, and so on. Just yesterday, we received a favorable vote on the power plant itself. That vote has already taken place for the terminal. We are very comfortable that we will reach FID on this project in the second half of this year. And again, it's moving through the paces of a commission vote, a recommendation that's issued, comment period on that recommendation, and then ultimately, the permits issued for the terminal and the power plant. And we expect that in the next few months.

Alex S. Kania - Wolfe Research LLC

Great. Thanks very much.

Operator

Your next question comes from the line of Jean Ann Salisbury with Bernstein. Your line is open.

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Hi, guys. At low global LNG prices, it should make sense for Cheniere to continue to sell as long as you're profitable on a very low cost basis. So I have an estimate of a variable OpEx, but what would be helpful is your perspective on how easy or difficult it is to run these Trains at 70% or 80% utilization. Are there high costs associated with that which might make Cheniere's willingness to lift (47:00) go to an even lower price than it might appear?

Jack A. Fusco - President, Chief Executive Officer & Director

Hi. No. It's not. And I mean the variable cost should be relatively constant throughout the Train and the Train's production.

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Okay. Thank you. And then I just wanted to follow up on your comment earlier about wanting to term out some of that spot. I guess most market observers think that the LNG market is oversupplied through the end of the decade. Buyers maybe come back in mass in 2018 or so. Is that the timeframe of what you're thinking? Or are you targeting earlier and that's exactly what you mean by not trying to time the spot market?

Jack A. Fusco - President, Chief Executive Officer & Director

Yeah. So first off, as far as the LNG market is concerned, we went through and I spent a little bit of time on my prepared remarks talking about the 45 months for Train 1 and the 49 months for Train 2, and that was not by accident. So if you think about the amount of time and effort it takes to build a Train, those folks that are thinking they're going to need LNG in 2021 are late. So if you think the market, like WoodMac and some of the others consultants have talked about, starts to get very tight again in 2021 to 2023. They better start talking to us sooner rather than later or we won't have any to sell them. And that's kind of what we're seeing and feeling with our marketing efforts, that there's much more interest, again, a lot of discussions with our core customers about the next decade.

So Anatol, do you have anything to add?

Anatol Feygin - Senior VP-Strategy & Corporate Development

No. I would just add to the previous commentary that we are early in the process of putting the Train through its paces. We're about to start doing that for Train 2. To the extent that, from a marketing standpoint, we're comfortable with ratable volumes being available for medium-term transactions, that's clearly something we would consider at that point.

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Great. That's really helpful. Thank you.

Operator

Your next question comes from the line of Fotis Giannakoulis with Morgan Stanley. Your line is open.

Fotis Giannakoulis - Morgan Stanley & Co. LLC

Yes. Hello. And thank you for taking my question. You talked about the number of potential FSRU projects that are out there and the fact that most of the consultants are agreeing that the market is going to tighten after 2020, 2021. What would it take for you to take additional FIDs? Is this just timing more long-term (50:00) contacts? And I wanted to ask if you would be willing to move laterally in the value chain and potentially participating in some of these projects?

Anatol Feygin - Senior VP-Strategy & Corporate Development

Thanks, Fotis. It's Anatol. As Jack mentioned, we are big fans of this Chile project construct. We want to enable our downstream partners to have a very successful and profitable project and we are at the ready to provide them with term supply. So to the extent that that requires us supporting the developer to some modest extent downstream of our value chain, we are happy to entertain that. And with a proper risk mitigation and return profile that's something that we clearly would consider as we have in Chile and we are pursuing those constructs really on a global basis.

So as you are, we are fans of the FSRU as a component of this value change solution. We are very encouraged by how rapidly they come to market and can absorb meaningful amounts of volumes and we look forward to incremental term supply deals that ultimately will come with incremental liquefaction that's constructed on our side of the value chain. So we like what we see and we think as the market continues to grow, we'll see more of those structures.

Fotis Giannakoulis - Morgan Stanley & Co. LLC

Thank you, Anatol. I just want to follow up. You talked that you might be willing to invest capital in some of these projects, and I'm talking also about the potential power process. If you can also give us an idea of the economics of a new power plant in this opportunity that you have identified, at what prices of natural gas do these projects work based on today's prevailing electricity prices?

Anatol Feygin - Senior VP-Strategy & Corporate Development

Well it's really a global market and there are no two projects and no two constructs that are alike. It's very – one of the things that we bring to the table is we are very creative and we are willing to work with our downstream partners in finding the right solutions and having the right economics to, again, enable them to be successful and creditworthy, of course, and allow us to market our supply. But our primary objective is to market our supply into those solutions. And for the most part the, whether the project moves forward or not and whether it has economics that are attractive enough is a function of the in-country process, whether that's a PPA or any other construct that's awarded to it and that enables the entire value chain to be put into existence. But the economics in those local markets are all over the map.

Fotis Giannakoulis - Morgan Stanley & Co. LLC

Thank you very much.

Operator

Your next question comes from the line of Sunil Sibal with Seaport Global Securities. Your line is open.

Sunil K. Sibal - Seaport Global Securities LLC

Hi. Good morning, guys, and thanks for hosting this call and taking my question. So a couple of questions from me. I think you mentioned previously that you are expecting a four-week turnaround on Train 1 and taking care of some items there. I was kind of curious, how should we be thinking about these kind of turnarounds or maintenance activities on a more normalized run rate going forward?

Jack A. Fusco - President, Chief Executive Officer & Director

First off, it's a four-week outage for Sabine and it's to correct a design issue that we've had with our process flares, Sunil. So you shouldn't read anything more or less into that. We're taking care of it now so we don't have to continue to take care of it in the future. There is normal maintenance, but the Trains have significant redundancy built into them, so it shouldn't impact us like this in the future going forward, if that's what you're asking.

Sunil K. Sibal - Seaport Global Securities LLC

Yeah. No, that's fair. So basically then one turnaround per Train every three years or something is the normalized expectation?

Jack A. Fusco - President, Chief Executive Officer & Director

One – I didn't hear that.

R. Keith Teague - Executive Vice President-Asset Group

One turnaround per three years. I mean the production capacity is more than sufficient to meet our contractual obligations. I don't know how...

Jack A. Fusco - President, Chief Executive Officer & Director

Go ahead.

R. Keith Teague - Executive Vice President-Asset Group

This is Keith Teague, just commenting that our production capacity is sufficient to meet our contractual obligations. The outage and turnaround schedule itself has a number of variables, and I don't know to what extent going forward we're going to be publicizing our maintenance plans. This last time around it got into the market so we're talking a little bit about it now. But we're comfortable with the maintenance planning that we've got in place and our ability to meet our contractual obligations.

Sunil K. Sibal - Seaport Global Securities LLC

Okay. Got that. And then just one clarification with regard to your discussions with the rating agencies. I was just curious, in addition to the construction schedule, are there any other requirements with regard to amortizing features on the debt which will facilitate your transition to an investment grade?

Michael J. Wortley - Chief Financial Officer & Senior Vice President

No. I mean those features are built into the existing debt we have, those bonds we've put in. They require certain debt incurrence tests to us which meet the IG thresholds that they're looking for. So no, it's just getting the early Trains up and running, which is what will give them ultimate comfort to move the rating.

Sunil K. Sibal - Seaport Global Securities LLC

Okay. Got it. Thanks, guys.

Jack A. Fusco - President, Chief Executive Officer & Director

Thank you.

Operator

Thank you, ladies and gentlemen, for your questions today. I will now turn the call back over to Mr. Jack Fusco.

Jack A. Fusco - President, Chief Executive Officer & Director

Yes. Thank you all. I just wanted to close with saying I really appreciate all of your support and your interest in Cheniere, and we look forward to working together here in the future. So thank you.

Operator

Thank you, ladies and gentlemen, for your time and participation. This concludes today's conference call. You may now disconnect.

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