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Edited Transcript of LNG earnings conference call or presentation 9-May-19 3:00pm GMT

Q1 2019 Cheniere Energy Inc Earnings Call

Houston May 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Cheniere Energy Inc earnings conference call or presentation Thursday, May 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anatol Feygin

Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer

* Jack A. Fusco

Cheniere Energy, Inc. - President, CEO & Director

* Michael J. Wortley

Cheniere Energy, Inc. - Executive VP & CFO

* Randy Bhatia

Cheniere Energy, Inc. - VP, IR

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Conference Call Participants

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* Christine Cho

Barclays Bank PLC, Research Division - Director & Equity Research Analyst

* Craig Kenneth Shere

Tuohy Brothers Investment Research, Inc. - Director of Research

* Danilo Marcelo Juvane

BMO Capital Markets Equity Research - Analyst

* Fotis Giannakoulis

Morgan Stanley, Research Division - VP, Research

* Jean Ann Salisbury

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research

* Michael Webber

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Michael Jay Lapides

Goldman Sachs Group Inc., Research Division - VP

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Cheniere Energy 1Q 2019 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. Please go ahead.

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Randy Bhatia, Cheniere Energy, Inc. - VP, IR [2]

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Thanks, operator. Good morning, everyone, and welcome to Cheniere Energy's First Quarter 2019 Earnings Conference Call. The slide presentation and access to the webcast for today's call are available at cheniere.com.

Joining me on today's call are Jack Fusco, Cheniere's President and CEO; Anatol Feygin, Executive Vice President and Chief Commercial Officer; and Michael Wortley, Executive Vice President and CFO.

Before we begin, I would like to remind all listeners that our remarks, including answers to your questions, may contain forward-looking statements, and actual results could differ materially from what is described in these statements. Slide 2 of our presentation contains a discussion of those forward-looking statements and associated risks.

In addition, we may include references to non-GAAP financial measures, such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in the appendix of the slide presentation.

As part of our discussion of Cheniere Energy, Inc.'s results, today's call may also include selected financial information and results for Cheniere Energy Partners LP, or CQP. We do not intend to cover CQP's results separately from those of Cheniere Energy, Inc.

The call agenda is shown on Slide 3. Jack will begin with operating and financial highlights, Anatol will provide an update on the LNG market and then Michael will review our financial results. 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.

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [3]

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Thank you, Randy, and good morning, everyone. I'm happy to be here today to discuss our results from the first quarter, which was another excellent quarter and one marked by a number of successes from continued unparalleled execution of our LNG platform to a flawlessly executed maintenance turnaround at Sabine Pass, and financial results in line with our previous forecast. This enables me to reconfirm our full year 2019 financial guidance.

Slide 5 presents a summary of key results from the first quarter. We generated net income of $141 million, consolidated adjusted EBITDA of $650 million and distributable cash flow of over $200 million on revenue of almost $2.3 billion for the first quarter.

Looking forward to the balance of 2019, today, we are reconfirming our full year consolidated EBITDA guidance of $2.9 billion to $3.2 billion and distributable cash flow guidance of $600 million to $800 million. Michael will cover our financial results and outlook in more detail later in the call.

In the first quarter, we produced and exported 87 cargoes, a record number, and the quarter was highlighted by achieving substantial completion of Corpus Christi Train 1 in late February and Sabine Pass Train 5 in early March. The achievement of substantial completion on 2 liquefaction trains only days apart at separate project sites and both ahead of schedule and on budget is one of the best examples yet of our relentless focus on execution. We set the standard for execution in U.S. LNG at Sabine Pass, and we're proud that our reputation and track record are being reinforced as competitive advantages as we begin to bring LNG capacity online at Corpus Christi. We have now demonstrated that execution isn't site-specific, rather it's Cheniere-wide. I'd like to recognize and congratulate the Cheniere and Bechtel teams at both project sites for their performance and contributions to the achievement of these milestones.

Commissioning activities began earlier this year for Train 2 at Corpus Christi, and we expect to introduce feed gas in the coming weeks. We continue to expect Train 2 to be completed in the second half of this year, ahead of schedule and within budget.

Construction continues to progress very well on Train 3 at Corpus Christi with the overall project about 52% complete as of the end of March.

During the first quarter, we also issued full notice to proceed on the MIDSHIP Pipeline project after obtaining all required regulatory approval and closing the debt financing. We entered into the credit facility with total commitments of up to approximately $680 million and expect that project to be completed and placed into service by the end of 2019.

Turn now to Slide 6 where I'll update you on a few priorities as we look forward to the balance of 2019. Entering 2019, one of my key priorities for the year was to place Trains 1 and 2 at Corpus Christi and Train 5 at Sabine Pass all into service safely, ahead of schedule and on budget. We're already 2/3 of the way towards achieving that goal. And as I just mentioned, we are on track to achieve it when we place Train 2 into service in a few months.

Next, we expect to reach a positive FID on Train 6 at Sabine Pass in the first half of 2019. Early engineering procurement and site works for Train 6 continue to progress under limited notices to proceed to Bechtel, giving that project a head start in anticipation of FID while fixing the cost and construction schedules. Pile driving is complete with over 6,000 piles completed, and Bechtel is continuing foundation work and beginning structural steel erection. We are concluding the financing process for Train 6 and supporting infrastructure, and expect to progress that project to FID in the near term.

Next, I'd like to address the higher-than-normal maintenance at Sabine Pass we're managing this year. As you may know, we have recently completed a maintenance turnaround on Trains 1 and 2 that I'd like to highlight. First, my hats off to Aaron Stephenson and his staff since the turnaround was executed flawlessly. Over the course of approximately 3 weeks, over 185,000 man hours were worked, and over 1,000 work orders were completed across multiple equipment packages and processes throughout Trains 1 and 2. Not only was this work completed on schedule, but more importantly, all of this was completed with 0 safety incidents. I'd like to recognize the entire production team, maintenance and operation teams, and all those who helped manage a successful undertaking and for demonstrating that safety is one of Cheniere's core values.

Shifting to the next phase of our growth after Sabine Pass Train 6, we are focused on Corpus Christi Stage 3, a 9.5 million-tonne-per-year expansion project. In March, we received a positive environmental assessment on Stage 3 from FERC, so that project is progressing through the regulatory process better than we expected. We maintain our expectation that Stage 3 while all the required regulatory approvals by the end of 2019. We are actively commercializing Stage 3 and all is progressing well.

Finally, a brief update on the development of our capital allocation framework. This effort is one of the highest priorities for Michael and I and the rest of the executive team as well as our board. We have spent a significant amount of time and effort developing the framework that prioritizes growth investments in our LNG platform, ensures responsible leverage at our project entities and on a consolidated basis over the long term and provides for the return of excess capital to our shareholders in a meaningful and flexible manner.

We expect to finalize and communicate this framework in the coming weeks. In early June, we plan to host meetings with the investment community to review these important strategic items. We will be sending out more information very soon and we hope to see many of you there.

And now, I'll turn the call over to Anatol, who will provide an update on the LNG market.

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [4]

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Thanks, Jack, and good morning, everyone. The LNG market is currently undergoing a phase of strong growth as nearly 11 million tonnes of new LNG supply was added year-over-year in the first quarter of 2019. This is the largest year-over-year quarterly increase since the first quarter of 2010 when Qatar's megatrains were brought into service.

The supply growth followed an equally strong year-on-year increase in the fourth quarter of 2018 when 5 trains began production, more than half of the total capacity that started up last year. Two of those trains were, of course, our trains, Sabine Pass Train 5 and Corpus Christi Train 1, which reached substantial completion in the first quarter ahead of schedule and on budget.

The incremental supply volumes in Q1 coincided with a reduced appetite for spot LNG in Asia as a result of warmer-than-normal winter temperatures and higher storage levels across the region, which led to a flat year-over-year Asian LNG demand number in the first quarter of 2019. The combination of a temperature-driven moderation in Asian demand growth and strong global supply growth resulted in record flows into European regas terminals during the quarter. Q1 imports into Europe reached 21 million tonnes, more than double the level seen in the first quarter of 2018, resulting in higher storage levels. Increased storage levels have led to lower spot gas prices but have underpinned an increase in gas-fired power generation. Increasing carbon prices have also played a role in incentivizing higher gas-fired power generation, especially in countries such as Germany where ample capacity exists to displace coal in the generation stack.

As you can see from the price chart on the bottom right and not surprisingly, recent LNG supply-and-demand dynamics have combined to shift global gas prices lower year-to-date. However, we have already begun to see Asian and European prices rebound as strong carbon prices have provided gas pricing support.

Now please turn to Slide 9 to look at some of the regional trends in more detail. As I mentioned, Asian demand in the first quarter was flat to the first quarter of 2018 and decreased slightly from the fourth quarter of 2018 as mild weather and strong storage levels depressed import demand growth. Temperatures in North Asia were approximately 1 degree Celsius above normal in Q1 resulting in a reduction in heating degree days of over 10% relative to the 30-year average. Imports from the established markets of Japan and South Korea decreased by 9% and 20%, respectively, compared to the first quarter of last year primarily due to ample storage levels achieved in Q4 and greater nuclear power generation.

Looking forward, we see some positive signals for these markets. In South Korea, 2.3 gigawatts of older coal-fired power plants are set to shut down in the first half of 2019, while nuclear maintenance and a change in coal and LNG taxes that incentivize coal-to-gas switching during the back half of the year could spur new LNG demand. The country decreased taxes on LNG and raised them on coal starting April 1 as part of its efforts to curb air pollution.

In Japan, 5 nuclear reactors totaling 5.6 gigawatts are expected to undergo scheduled maintenance between the second and third quarter. Another 4 reactors will have maintenance in the upcoming winter. Looking further out, Japan's new nuclear regulation authority recently announced news out retrofit extensions that could negatively affect 10 reactors, 6 of which are currently online. This increases the uncertainty around nuclear generation output during the early 2020s and could spur an increase in LNG demand.

Emerging LNG markets in Asia exhibited strong year-over-year demand growth in Q1 and helped counterbalance the demand weakness in North Asia. China's imports were up 28% driven by continued economic growth, continuing the significant multiyear growth trend in that country. We spent a significant amount of time in China already this year further solidifying our relationships with key commercial decision-makers of current and prospective counterparties. We remain bullish on Chinese LNG demand growth and believe Henry Hub-linked LNG remains very attractive to Chinese buyers, especially relative to Brent-linked LNG given current market prices and underweighting of Henry Hub-linked LNG into China.

Elsewhere in emerging Asian markets, Pakistan and Thailand both recorded double-digit growth percentages to support their growing economies and declining indigenous gas supply. These countries, along with other countries and regions throughout Asia such as Bangladesh, India, Taiwan and others, continued to add new LNG regasification infrastructure to allow for larger LNG import volumes in the future. Based on these regional dynamics, we have seen JKM fall from around 13% of Brent at the beginning of the year to the lower end of the 5-year ranges of April. Strong supply growth has softened the market and pushed down spot prices. We expect lower benchmark gas prices to stimulate a positive LNG demand response in the due time.

To conclude, solid supply growth over the fourth quarter of 2018 and the first quarter of this year exerted some downward pricing pressure on the spot market as it coincided with mild winter temperatures and lower import needs from key Asian buyers. We expect supply to continue to trend upward this year and anticipate Europe will absorb a significant portion of that supply growth. However, we expect the recent softening in spot LNG prices to generate a demand response and incentivize gas and LNG demand growth in Europe and Asia when storage levels normalize.

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

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [5]

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Thanks, Anatol, and good morning, everyone. Turn now to Slide 11. In the first quarter, we generated net income of $141 million, consolidated adjusted EBITDA of $650 million, and distributable available cash flow of over $200 million. We exported 310 TBtu of LNG from our liquefaction projects during the first quarter, of which, 25 TBtu were commissioning volumes.

Total volumes exported were 25 TBtu higher than exports in the fourth quarter of 2018 due to additional commissioning and post-completion production volumes from Sabine Pass Train 5 and Corpus Christi Train 1, partially offset by the planned maintenance turnaround of Trains 1 and 2 at Sabine Pass, which began in March, and a small impact from seasonal fog.

In the first quarter, we recognized in income 282 TBtu of LNG produced at our liquefaction project, consisting of 284 TBtu loaded during the quarter, plus 25 TBtu or 7 cargoes loaded in the prior quarter but delivered and recognized in the current quarter, plus 27 TBtu or 7 cargoes on a delivered basis that were in-transit as of the end of the first quarter. We also recognized in income 18 TBtu or 5 cargoes of LNG that were sourced from third party. Approximately 80% of the 300 TBtu recognized in income during the quarter, or 239 TBtu, were sold under long-term SPAs, and the remaining 61 TBtu were sold by our marketing function under short and medium-term contracts. Volumes sold under long-term SPAs increased from the prior quarter primarily due to increased volumes under certain SPAs held by our marketing affiliates. Short-term marketing volumes also increased due to increased production volumes, primarily driven by Sabine Pass Train 5 and Corpus Christi Train 1.

Eight commissioning cargoes from Sabine Pass Train 5 and Corpus Christi Train 1 totaling 28 TBtu of LNG were recognized on our balance sheet as an offset of $202 million to LNG terminal construction in process during the first quarter.

Operating income for the first quarter was $606 million, an increase of approximately $90 million compared to the fourth quarter of 2018. The increase in operating income was driven primarily by increased net gain from changes in the fair value of commodity derivatives, lower pricing of natural gas feedstock and third-party sourced LNG and an increase in LNG volume sold partially offset by increased volumes of natural gas feedstock, lower LNG market pricing, an increased total operating cost and expenses as a result of additional trains in operation and increased service and maintenance costs from certain maintenance and related activities at Sabine Pass.

Net income attributable to common stockholders for the first quarter was $141 million or $0.54 per share on a diluted basis, an increase of more than $70 million compared to the fourth quarter of 2018. The increase in net income was primarily due to increased operating income and decreased derivative loss related to interest rate swaps, partially offset by increases in interest expense and them attributable to noncontrolling interests.

Turn now to Slide 12. Jack mentioned earlier, our first quarter financial results were in line with our expectations. And today, we are reconfirming our full year consolidated adjusted EBITDA guidance of $2.9 billion to $3.2 billion, distributable cash flow guidance of $0.6 billion to $0.8 billion.

As we look toward the remainder of the year, as Anatol discussed, we're seeing lower prices in the market and that is expected to impact our margin, but that impact is mitigated by an increase in our production forecast for the remainder of the year as a result of maintenance optimization and better-than-expected performance.

As Jack mentioned earlier, we have previously discussed developing and communicating a capital allocation framework within the first half of this year, an effort that has been underway since last 2018 and continues to remain a high priority for myself and the Cheniere team. We're also focused on finalizing the financing for Sabine Pass Train 6 and the continued development and commercialization of Corpus Christi stage 3. We plan to finalize the capital allocation framework in the coming weeks and we'll be hosting some investor meetings in early June to provide more information regarding capital allocation, Sabine Pass Train 6, Corpus Christi Stage 3 and how these items impact our run rate guidance. We'll have more detail for you regarding those meetings in the very near future.

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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Jeremy Tonet with JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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There's been a lot of news out there with regards to China trade with the U.S. And I was just wondering if this uncertainty, does this kind of impact the timing that you guys have had with your communication of the capital allocation policy or the SPL 6 FID? And if China trade issues kind of lead to the LNG market being at a point where it doesn't make sense to FID CCL 3 in the near term, what would you do with your extra cash at that point?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [3]

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So Jeremy, thanks, and thanks for the question. So yes, I think I continue to look forward to a resolution, right, of the current trade tensions between the 2 countries. I don't think the trade tensions or the -- I think the trade tensions and the tariffs are unproductive and create some added costs for our Chinese consumers. But as a company, we're relatively insulated from the current future tariffs, and we don't expect any material impacts. It has had no impact on us at all on FID-ing of Train 6 or on capital allocation or any of that as you know. Out of the 18 foundation customers, we were blessed that PetroChina is one of them, but they're 1.2 million tonnes, so it's relatively small in the portfolio and we continue to deliver to that customer and they continue to pay us. So it hasn't had an impact on us, I don't expect it to have an impact on us either today or going forward.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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That's helpful. And just a quick one with regards to the CMI sensitivity that you guys have provided for. Is that still accurate, that 130 number? Or as the year has progressed, that number is smaller? And is 2020 a similar level of sensitivity? Or is it smaller because you have greater contracted capacity at that point?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [5]

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Jeremy, it's Michael. So yes, with regard to that, obviously, margin has been a pretty significant headwind for us this year. So if you recall, in November, we said we had about $5 of margin in our plan for 2019. On our last call, we said that was -- that it come down to probably $3. And today, it's come down a little bit more, it's probably more like $2 with Q2 and Q3 below that number and Q4 probably above that number, but averaging out at about $2. So that's the headwind.

As I mentioned in the remarks, we've had a pretty significant tailwind on the production side, so we don't control margin. We couldn't really presell these volumes because they were a lot tied to trains coming online, which has been uncertain. But we do control production. And so we said we had about 6 million tonnes in the CMI book this year. It looks like that number is probably more like 8.5 million tonnes given where production -- where our production forecast has gone for the balance of the year. That's really coming from 4 areas. We think Corpus Christi -- the first one, Corpus Christi Train 2 is looking like it's going to come in a little bit earlier relative to what we had in our plan that we laid out in November, still a second half event but a little bit earlier, that's driving some production. Second, a couple debottlenecking things. We told you one was nameplate capacity. We've run Corpus a little bit and now feel like that there's some nameplate gains that are going to be above 100% that we've put in the plan for the balance of this year. The third bucket driving production is maintenance optimization, which has been one of our pieces of debottlenecking we've talked about. We've made some pretty significant strides in that area in terms of how we operate the plant, which has taken out a lot of downtime days for the balance of the year and for the rest of the life at the plant. So that's driving increased production. And then finally, we've seen, as the fourth piece, better ramp-up at the 2 trains that came on earlier this year, so Train 5 at Sabine and Train 1 at Corpus, so both really hit their stride sooner than we thought. So those 4 things are driving a big production tailwind for us, which has made up for much of the -- a lot of the margin erosion, not all of it, that's allowed us to stay within our guidance range.

So really back to your question, we said $1 move is a $130 million. Yes, I would have expected that to erode over the year as we produced. But since we've added so much production for the balance of the year, that number is still about the same, maybe even a little bit higher given the production we've added. So we're busily putting those volumes away in the market right now. We expect that to erode from here on out, but it's still about, for every dollar move from here, probably plus or minus $140 million against EBITDA.

And then you asked about 2020, don't know the -- I don't have that sensitivity in front of me. I would expect volumes, of course, at the marketing business to be significantly lower given the SCDs on Trains 1 and 2 -- 1 and 5 this year and Train 2 next year. So -- but we could probably get you that number later.

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Operator [6]

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We'll take our next question from Christine Cho with Barclays.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [7]

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I wanted to start on the capital allocation policy. Maybe -- I know you're going to give some more color on the specifics, but from a high level, can you talk about how your thoughts on the priorities of reinvestment, stock buyback, debt pay down and dividends have changed with kind of how shareholder preferences have changed, the weaker spot market, the number of projects that have FID-ed in the U.S. and abroad versus what you may have thought a year ago?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [8]

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Christine, I'll start that. This is Jack, and thank you and good morning. So the capital allocation process, as you know, our first and foremost is to fund our growth. We think we have some excellent growth opportunities, and we need to fund that growth near time, and hopefully, we can continue to fund the growth for the long term. But -- so growth is always our #1 priority.

The next one would be our balance sheet. I think it's imperative that we strengthen our balance sheet throughout the capital structure. And then the last -- our last priority would be capital return. We don't intend to hold the money. We intend to give it back to our shareholders in the most tax efficient and effective way that we can. And we're going to talk a lot more about our capital allocation strategy going forward in early June, but I'll turn it over to Michael to see if he has anything to add.

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [9]

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Well, I guess, the other part of your question, I don't think market conditions have really changed our thoughts around this over the past year. As Jack said, growth is #1. We have Stage 3 in our model as happening sometime next year. I think Jeremy asked, what happens if it doesn't happen next year, what are you going to do with the money? I think that's a decision's for next year. But right now, our plan is to continue investing in growth.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [10]

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Okay. Great. And then we saw a period of time where the spot LNG prices actually been -- maybe covered the variable costs of picking up LNG from the U.S. And in the event that we have short periods of this kind of volatility over the near term, can you just remind us how much in advance a customer has to let you know whether or not they're coming to pick up a cargo? And what kind of penalties there are if they decide to cancel something that was scheduled?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [11]

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So just for clarity, there hasn't been any spot cargoes that haven't cleared the U.S. and made a margin. So I just want to make -- help alleviate that fear if that was a fear that you all have had. The spot prices have been extremely volatile. But to answer the question about the customers and the SPAs, it's a 60-day notice period. But we don't anticipate ever having to use that option, especially with where our feed gas and our long-term forecast for natural gas here in America seems to be fairly range bound in the mid- to high 2s.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [12]

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Okay. So just to clarify, you haven't seen any customers, say, not pickup cargoes or do any cancellation in the first quarter?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [13]

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No, not at all. No. We wouldn't expect that at all with where the current gas prices are here in America.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [14]

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Okay. And then last one from me. Can you give us an idea of how much of the marketing portfolio is hedged over the next couple of years? Maybe how we should think about the cadence or a multiyear average? And then, Michael, I think you confirmed -- talked about this with Jeremy's question. But just to confirm, we shouldn't think that any of the early cargoes are hedged, right?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [15]

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What do you mean by early cargoes? You should talk about...

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [16]

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So the cargoes that you guys are producing after it's been commissioned but before the customer contracts start.

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [17]

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Yes, right. As I said, those are hard to presell, right. Because you're never exactly sure when the plant is going to come online. We don't want to get caught really short in a rising market. So yes, those were -- are more driving our spot book right now, we're putting those away now. We actually had made a lot of progress on that and then we added a lot of production given the 4 things I talked about earlier, so we're back in a long position. I think we -- as I've said in the past, I think we generally want to shy away from getting into the status of our book. I'll always give you guys sensitivities at a high level, but certainly not in the current year. On the multiyear, it's always CMI's goal is to ultimately term up and then regrow that book and term up. So I guess that's all I'd say on that.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [18]

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Is there maybe like a target that you would like to be in?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [19]

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In terms of what? Contracted?

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [20]

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Like, percentage. Yes, percentage contracted.

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [21]

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We've said in the past 5% to 20% in the marketing book just given where we are on construction and the SCDs and all that. So I think we'll continue to be in that range over time.

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [22]

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Yes, Christine, I think we've been extremely successful at using those early marketing volumes to sign up long-term contracts, right? I mean, that led to a 7.5 million tonnes of long-term contractual deals last year, and you should expect us to continue to do that and lock in those margins. And I would expect it's going to be a little rocky as far as the CMI volumes just because of the DFCDs that are starting up and the fact that our construction team has done such a great job and has brought these trains in so early that we've had all these cargoes to dispose of in the market. But that's not the long-term strategy for the company.

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Operator [23]

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We'll take our next question from Michael Webber with Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [24]

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Jack, I wanted to start first on kind of China trade and tariff. And maybe kind of combining your answer to the first question with something Michael referenced a bit earlier. But it seems like the existing portfolio, Sabine 6 capital returns, all obviously insulated from what's happening in China. And if anything, it seems like you have probably some business that's probably on the goal line ready to go once that gets resumed. But if we think about what maybe -- what it could impact, and just to be specific, if I think about Corpus stage 3 and, then Michael, your answer about it being in your model for some time next year. Is it realistic to think that -- I guess, do you have enough non-Chinese based business that you could realistically greenlight Stage 3 next year if, I guess, the current scenario just kind of sits through for the next 24 months, if we kind of stay with the status quo?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [25]

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Yes. So Michael, I'll start first. Now China's demand for nat gas and for LNG continues to grow significantly year-over-year. They haven't even begun to pierce the power generation side of natural gas. So as you and I talked about when we were in Shanghai and I saw you on the hallway there, their demand is going to continue to grow. It's going to get filled by somebody, right? Preferably it's coming from the U.S., if not, it's going to come somewhere else. But there's a whole other opportunity if that LNG flows away from the rest of Asia and Europe for us to continue to commercialize. I think we have the best commercial team in the industry, and it's not going to slow us down on commercializing our Stage 3. And I don't know, Anatol, if you have anything else to add?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [26]

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Sure, Jack. Well, thanks. Clearly, we've said before that China is a focus for us. It is, as Jack said, a rapidly growing market and a market that is learning every day that its legacy Brent-linked contracts are less attractive than its potential Henry Hub-linked contracts. So we're not shying away from the opportunity that is China, we continue to pursue that as you know. But as Jack said, we have a robust level of engagement and we are comfortable that Stage 3 is a 2020 event with or without China.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [27]

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Got you. Now that's helpful. And just to remind us around Stage 3, just given that it's inherently going be a bit more flexible, I guess, than some of the previous trains in terms of, I guess, parcel size, if you will. What's the first realistic commercialization hurdle you have for greenlighting, I guess, part of Stage 3? Or would you just need to do it all at once?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [28]

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No, we could do it in stages. And in fact, we're currently working with a couple of different EPC contractors to see what the options are, ultimately. But the permit is for the entire project or at least the regulatory filings are for the entire project, which is around 9.5 million tonnes.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [29]

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Got you. Then how should we think about, I guess, the first realistic commercialization hurdle? Even if it's just kind of a ballpark figure. Is it 3? Is it 5.5, 6, something a bit larger?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [30]

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Yes, Michael. It's Michael. Still working through that. It's probably not 1/7, it's probably more like half.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [31]

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Sure. Okay, that's fair. And just one more from me, if you will, just on the broader industry, at least within the U.S., it seems like there's a bit of a bifurcated market at least for the last couple of years, where you've had some buyers maybe kind of entertaining cheap or extremely low-cost gas almost as kind of optionality, and then you've got buyers kind of willing to pay more for investment-grade quality, if you will. I'm just curious when you look at your mix of buyers over the last 3 to 6 months, have you noticed any shifts with maybe not a flight to quality but maybe a bit of a shift from buyers that were willing to entertain that kind of extremely cheap optionality starting to dig in a bit deeper with you all or more established options?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [32]

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Well, okay. So we had a shift in our strategy that I don't think many people picked up, and that was that we started delivering directly to end use consumers. So we noticed that the utilities, the international utilities weren't being served directly, and that's what led to the CNPC or PetroChina deal, it's what led to CPC in Taiwan, it's what led to PGNiG in Poland, is our ability to be a full-service provider to those utilities' needs. And that's opened up a whole 'nother opportunity for us as far as creditworthy customer base that are looking for long-term reliable, affordable supply. And I think, so every U.S. LNG either -- well, there's not many of us in operations, but every one that's being proposed has a different business model. And our business model is to be flexible with what the customers' needs are and to get close to the customer and deliver whatever aspect they want. And in most case here recently, it's been the full-service provider. And I don't know, Anatol, if you have anything to add to that or if you're seeing a shift?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [33]

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Just to build a little bit on what Jack said, [Porter],back in the 1980s, said there are only 3 ways to compete in the commodity market, and that's low cost, differentiation and niche. Niche is too small, low cost is a business that, at this point, we're not pursuing. And as Jack said, every one of our deals last year was differentiated. You didn't see us do the same plain-vanilla FOB deals. They had -- more than half had bridging volumes, which we spoke to earlier, out of the CMI portfolio. More than half were on a delivered basis, as Jack said. So they all had components that the team came up with that optimally met the customers' needs, and those are offerings that, today, nobody else can come to the table with. So that has proved a very successful formula last year, and we'll continue to innovate and be commercially creative as we continue to grow.

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Operator [34]

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(Operator Instructions) We will now take our question from Shneur Gershuni with UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [35]

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A lot of my questions have been asked and answered, but just a few questions here. With respect to CMI, a lot of focus seems to be on LNG pricing. Anatol, you gave a lot of great color about the market and so forth. And it sort of seems that a lot of investor focus is there. But should we not be thinking about it from netback perspective? And I was wondering if you can sort of talk about how the netbacks have changed relative to headline LNG pricing globally?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [36]

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Sure. And it's Michael. My comments earlier were all netback based. So yes the $5 that we had in our plan for this year in November was a netback that was reflective of much higher LNG prices, high-single digits, probably $10 in the winters. That netback has moved down for us the balance of the year to probably more like $2, which, as I said, is lower than that in the summer months and likely to be higher than that in the winter months. So that's the terminology we use also.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [37]

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Can you sort of discuss how it's changed relative to the headline price? Like has it been shrinking faster than headline price or expanding faster during different seasonal changes? I was just wondering if is it a one-for-one change percentage-wise? Or have you seen different changes?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [38]

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No. Thanks, Shneur. It's Anatol. No. I mean, it's the -- the big component is shipping. As you probably know, shipping went to $200,000 a day over the winter, That was driven in part by the steep contango we saw in the fall and over 30 vessels that were used short term as floating storage that delivered their cargo and then came back to the market. And in the shoulder, we saw shipping rates drop down into the $30,000 range, and they've moved up somewhat from that point. And as Michael said, winters, on the forward curve, are firmer as is shipping in the winter. So those are the little 2 big components, and add them up, add a little bit of noise and that gives you the netback.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [39]

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Okay. Fair enough.

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [40]

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And Henry Hub has been relatively flat.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [41]

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Right. Okay, that makes sense. And just in terms of your O&M performance. Obviously, that was related to the debottlenecking and some of the turnarounds and so forth. Do you have a sense of a schedule for turnarounds? Is it something that should happen every 18 months, 36 months? Just kind of wondering how we should be thinking about them on a go-forward basis?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [42]

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Yes. This is Michael. I mean, they're planned, many months if not years in advance. So there was some commentary around us taking down 1 and 2 opportunistically, that wasn't the case. That turnaround had been planned, when it happened, for a long period of time. So they're in varying degrees over time. I think, the majors are more like 6 years. So we're not -- obviously not there yet. The ones we just had are a little bit more significant but not a major turnaround relative to the 6-year schedule. But yes, they're scheduled long in advance. And I don't think we'll get specific on when the plants are going to be going down, we'll just build that into our guidance for you.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [43]

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Great. And just one final question. There's likely going to be a large energy company exiting the S&P 500 this year due to an acquisition. In your opinion, do you feel that LNG hits all the metrics that S&P requires to bring that conclusion?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [44]

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Go ahead, Randy.

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Randy Bhatia, Cheniere Energy, Inc. - VP, IR [45]

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Shneur, this is Randy. Yes, I mean, as we interpret the requirements for inclusion, we do meet them all. So it's -- in our view, it's a matter of when not if, but we don't control the timing. So it will be up to the committee that makes those determinations.

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Operator [46]

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We'll take our next question from Craig Shere with Tuohy Brothers.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [47]

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Congratulations on the great quarter and the great color that you're providing so far. Michael, how does the better operating results this year feed into the planned upsizing of legacy trains and the $300 a tonne cost to make that happen? And can you specifically comment on what additional benefits we might see going into 2020 and maybe the timing of that spend?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [48]

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Sure. So we have -- we're out with a 4.4 to 4.9 range for the trains. I think, on the last call, Jack said, we were aiming for the high end of that range. I think the results today and what we talked about earlier show progress to the top end of that range. We won't be there this year, obviously. So we're making good progress and would look to update this whole thing for you when we come out in June.

As I said earlier -- the 2 best parts of debottlenecking are getting more out of the plant on a nameplate basis, that's happening, as I said, it costs no money. And then just running the plant more, which is what's really driving the upgraded numbers for this year. And then finally, as I said, the third one involves capital. We haven't -- have not seen results from that yet, but we're getting some pretty good planning now for that to start to have an impact over the next year or 2. And so yes, I think the number you quoted is still a good number for the investment side of it, which will help us to climb higher and higher in that 4.4 to 4.9. So that's what I say now, I think, in a couple -- few weeks when we're out, we'll put some more meat on that bone for you.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [49]

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Wonderful color. And Michael, one more for you. If I'm doing the numbers right, all the foundation customers were obviously at SPLs, so we can kind of back in the $19 million of Corpus Christi equity cargo sales hitting the income statement in the quarter. But LNG C Corp operating cash flow excluding CQP and working capital changes was a positive $100 million. Mind you that's the first positive number versus negative numbers 2Q to 4Q last year. If I do the math, that's 5.25 an M in margin, just dividing the 100 by the 19. It just seems implausible that equity cargo margins off Corpus Christi are explaining that robust cash flow at the C Corp. And I guess, I'm thinking there's 2 other possible explanations, which includes those third-party sourced volume you mentioned or possibly advantaged feedstock pricing in Southeast Texas. Can you provide any more color?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [50]

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You lost me on some of those numbers. I think I can confirm it's none of those 3 things, right? Clearly, we didn't make 5.25 at Corpus, but we did have some hedges on and all that, but we did not make those kind of margins. Third-party wouldn't have done it either, and I think Anatol can talk about our sourcing margins, but we didn't have any blowouts there on the positive. So I think we'll have to get on the phone with Randy afterwards and figure that out for you.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [51]

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Fair enough. No other thoughts about the sourcing?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [52]

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Yes. We keep going back and forth on this. There's nothing meaningfully different from our run rate. We buy from over 100 producers, we don't have spec pipeline capacity, and we're pretty good about having a lot of resources. We have a great team that balances the plants every day, but as you know, that is done at the project level. And at CCL, it was very early days, a lot of volatility, the market is volatile, production is volatile. So that was not a meaningful contribution on the CCL side, but we do think that the tremendous effort we have on that side of the plant is a financial and a very important strategic advantage for us going forward. But no, we're not getting our hands on $9 in the hole Waha molecules.

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Operator [53]

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We'll take our next question from Jean Ann Salisbury with Bernstein.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [54]

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It seems like a recently FID-ed LNG project, so I'm kind of thinking Golden Pass and LNG Canada, less has been definitively sold to real downstream buyers and more to portfolios or not yet sold. I think that's raising some concerns among investors I talked to that this could drive LNG overbuild in the next wave. Is that something that concerns you? Or do think it's too early to say that, that's a trend?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [55]

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Well, I think it's too early to say that's a trend. I mean, those are very specific sites and projects that I've been either working on or in the hopper for an extremely long period of time. LNG Canada actually has off takers, equity off takers, that are really utilities associated with it. There's a sliver there that Shell is hanging on to, which is a portfolio sliver, but not much of it. And then Golden Pass, with the Qataris and Exxon, they could basically do whatever they want to do, but that's a relatively small project, right, at 14 million or 15 million tonnes, in the grand scheme of things in the whole LNG market worldwide. But Anatol, I don't know if you have anything to add.

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [56]

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Well, we are concerned. It's a very competitive market. As Wood Mackenzie says, this LNG market isn't getting any easier. So that's why we continue to innovate, continue to come up with solutions that allow us to maintain this very highly contracted posture. We will not invest or grow our platform without it, but we think we will have it, and we'll continue to grow on that basis. So we're not competing in the merchant LNG space anytime soon.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [57]

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And then as a follow-up, it seems like MIDSHIP pipeline has been successful so far. Would Cheniere have any interest in building or operating a pipe connecting the Permian to Gulf Coast LNG demand? Or is the return on that just not competitive versus Cheniere's other options?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [58]

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Yes, it's Michael. I mean, we always look at that kind of stuff. We have an active pipeline group. But when there are 20 other people trying to do it, we'll just focus on our core business, which is liquefaction. I mean, MIDSHIP was a unique opportunity and is a great project and is well underway, but we didn't see that same kind of opportunity coming out of Permian. We make a build or buy decision on all these things. And right now it's much easier for us to just contract with the Kinders of the world, who do a fine job on that.

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Operator [59]

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We'll take our next question from Danilo Juvane with BMO Capital Markets.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [60]

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One quick one for me with respect to capital allocation. I appreciate that there are a few buckets that you're considering. But did I hear correctly that capital efficiency is what you're going to prioritize for the capital return buckets?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [61]

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I think we said we're going to prioritize growth, yes.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [62]

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No, I get that, but within -- with this capital return component, was capital efficiency paramount with respect to the options confined to just shareholder return?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [63]

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I'm not sure I understand that.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [64]

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I'm sorry, was tax efficiency...

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [65]

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Oh, tax efficiency. Yes. So in regard -- tax efficiency in regards to giving back to our shareholders on the shareholder return, absolutely.

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Operator [66]

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We'll take our next question from Michael Lapides with Goldman Sachs.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [67]

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Just a follow up on capital allocation. I went back and looked at your proxy, and the reality is you guys probably don't really have true peers. Like if you look at the peer groups in your proxy, it's got a mix of purely regulated utilities to pipeline companies that have gone through multiple years of kind of quasi-forced deleveraging. How should investors, as we walk into the June meeting, think about how you and how the board are looking around and saying, what are your real true peers from a leverage standpoint, from a potential cash flow generating standpoint and from just a broader business structure standpoint?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [68]

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Yes. So Michael, that's a good questions. So when you say -- the frustration that I have is there's a couple of different peer groups. So ISS uses one peer group that is heavily loaded with regulated utilities. Glass Lewis uses a different peer group, and then we have our own peer group. In our peer group in our proxy, we try to get a lot of the regulated utilities out of there because those aren't the folks we're competing with day in and day out, and it's not the way we compare ourselves to it. So there aren't many true peers that have our long-term contracts with creditworthy entities. So when you look at midstream, that's not quite a good fit with us in most cases. And we tend to lean towards larger energy companies that we compete with day in and day out as our peer. But I don't know, Michael, do you have anything to add?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [69]

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No. I mean, it is difficult. There's not -- we're not in anybody else's peer group, by the way. So it is something we struggle with. The agencies are going to compare us to very high-quality midstream and infrastructure companies, so.

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Operator [70]

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We'll take our next question from Fotis Giannakoulis with Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [71]

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I would like to ask you about the competitive landscape particularly here in the U.S. We've been hearing that some of the Asian buyers, they might be over contracted the Henry Hub volume. And we see, at the same time, some of the newcomers in the space trying to position themselves, offering index-linked volume or Brent-linked volume. Can you give us a comment about your potential interest in taking this type of contract and if you can hedge these contracts? And what kind of a difficulty these parties that they offer these contracts which are not linked to Henry Hub, they might have in getting financing for their projects?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [72]

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So I'll just tell you, Fotis, I'll start and then I'll hand it over to Anatol. So I was in Asia the last 2 weeks and -- traveling around Asia, visiting with real customers, real utilities. And I got to tell you, it was pretty clear, like Anatol said in his comments, that they appreciate now what the Henry Hub-linked contract can deliver to them. How -- gas prices in America and Henry Hub in particular are very flat and stable and could be hedged out for over 10 years in a very liquid market, and they're feeling the shock, the oil shock and the oil-linked shock of LNG. So I got a warm reception that -- just the opposite of what you said, that a lot of the Asian buyers now are looking for Henry Hub-linked product, not the other way around. But I'll let Anatol handle the other indexes and what he sees in the marketplace.

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [73]

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Yes. Thanks for this. We've always said that we're sort of the Henry Ford, right? You can have our LNG very commercially creatively, but it's always Henry Hub. We've also said that we're working on ways to change that. The challenge is, as you know, is nobody can hedge both sides of that in size for term. So you need to come up with a way to source based on the same index that you are then selling on. So that's the challenge. Of course, we're all well aware of the transactions that have been announced -- potential transactions that have been announced. And we'll see if there is a path to find the other side of that.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [74]

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And a follow-up for me. I would like to ask you about your volumes that you have already presold. I noticed that you reported 236 TBtu of long-term agreements, which is quite higher than the SPA -- the 20-year SPAs that you have announced in detail. Can you give us some more color about your portfolio of contracts beyond the 20-year SPAs?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [75]

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Well, as Michael said, we do have a strategy to manage the risk that we're walking into for the year or 2 ahead. As you know, '19 is an exceptional year, we always knew it would be an exceptional year with 3 trains starting up. We've talked a lot about what a great job the team did of bringing them online early, that said, the CMI portfolio and Michael gave you the numbers of that incremental volume in the portfolio. So whatever percentage we thought we had laid off going into the year, clearly was much lower in reality because of the volumetric outperformance. But we do have some midterm volumes, and we do have some bridging volumes that are not part of the long-term deals, and those are starting to feed into the book that is outside of the long-term SPAs. So yes, there are other components in there, but they will be relatively lumpy and opportunistic, again, as we've mentioned before, more than half of our long-term deals last year included these bridging volumes.

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Operator [76]

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We'll take our last question from Julien Dumoulin-Smith with Bank of America.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [77]

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I am just following up a couple of details quickly. I know you already elaborated to a good extent on CMI marketing volumes for the year. With respect to 2Q just perhaps give a little bit of the puts and takes, if you will. I know you affirmed '19, but just how -- what should we be expecting here particularly given the depressed JKM and global trends we're talking about? And then maybe if I can throw this second question in, just for the sake of time, very quickly. Jack, you alluded to investment-grade counterparties. What kind of metrics are they looking from you now in turn as you shift your contracting focus here, if you can elaborate a little bit?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [78]

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First, Julien, as you know, we give you an annual number and then we give you our run rate numbers. With our contracted portfolio as strong as it is, we're not going to give you quarterly numbers. So you all can do the math on a quarterly basis for guidance. And then lastly, as you know, we're investment grade at Sabine Pass. We feel very comfortable that Corpus, with Train 2, that hopefully we'll get to investment grade relatively quickly. And that's where a lot of our trading happens, either our long-term contracting with the SPAs or our gas supply is done at that level. I do think, though, it's imperative that we look forward as part of our capital allocation strategy, and we look to strengthen our balance sheet throughout the rest of our capital structure. And that's what Michael intends to talk in detail about in June.

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Operator [79]

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At this time, I'd like to turn the conference back over to our management for any additional or closing remarks.

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [80]

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Look, everybody, I'm very appreciative of all the support that you've given Cheniere, and thanks for your interest.

We look forward to talking to you again in early June.

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Operator [81]

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This concludes today's call. Thank you for your participation. You may now disconnect...