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Edited Transcript of LNG earnings conference call or presentation 26-Feb-19 3:00pm GMT

Q4 2018 Cheniere Energy Inc Earnings Call

Houston Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Cheniere Energy Inc earnings conference call or presentation Tuesday, February 26, 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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* Alexis Stephen Kania

Wolfe Research, LLC - Utilities SVP

* 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

* Michael Webber

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

* Michael Jay Lapides

Goldman Sachs Group Inc., Research Division - VP

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Presentation

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Operator [1]

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Good morning, and welcome to the Cheniere Energy Incorporated Fourth Quarter 2018 Earnings Call and Webcast. Today's conference is being recorded.

At this time, I'd like to turn the call over to Mr. Randy Bhatia, VP of Investor Relations. Please go ahead, sir.

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

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Thanks, operator. Good morning, and welcome to Cheniere Energy's Fourth Quarter and Full Year 2018 Earnings Conference Call. The slide presentation and access to the webcast for today's call are available at cheniere.com.

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

Before we begin, I would like to remind all listeners that our remarks, including answers to your questions, may contain forward-looking statements and actual results could differ materially from what is described in these statements. Slide 2 of our presentation contains a discussion of those forward-looking statements and associated risks. In addition, we may include references to non-GAAP financial measures, such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these non-GAAP measures to the most comparable GAAP measures 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 selective 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 an overview of our 2018 operating and financial highlights and perspective on 2019 and beyond. Following Jack's comments, Anatol will provide an update on the LNG market; and 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. Good morning, everyone. I'm pleased to be here this morning to review our significant accomplishments from a very successful 2018 and share my optimism for the continued success as we look forward to 2019 and beyond.

2018 was a truly remarkable year for Cheniere. On last year's call, I described 2017 as our breakthrough year, which it certainly was. In 2018, we maintained our momentum, achieving excellence in reaching new heights in virtually all phases of our business, from commercial success achieved by signing over 7 million tonnes per year in new long-term SPAs, to the FID of Corpus Christi Train 3 in May and the start-up of Corpus Christi Train 1 a few months later, to continued financial discipline and simplification of our corporate structure.

We've achieved those and much more, and in doing so, have cemented our reputation as a reliable full-service LNG operator, which delivers on its promises to its customers, employees and stakeholders.

In 2018, we executed on our strategic growth plans, operational plans and financial plans, and the results of our execution are apparent in the financial results we reported earlier this morning.

Slide 5 presents some key highlights of the fourth quarter of 2018. There are a couple of achievements I'd like to highlight on this slide. We generated consolidated adjusted EBITDA of over $630 million and a distributable cash flow of approximately $130 million and produced and exported a record 80 cargoes on the quarter, almost a cargo a day.

In addition, we reached the commissioning milestone of our first cargo at both Train 5 at Sabine Pass and Train 1 at Corpus Christi. As of year-end, we had exported 4 commissioning cargoes from Train 5 at Sabine Pass and 2 from Train 1 at Corpus Christi.

Our substantial commercial momentum continued in the fourth quarter as we signed long-term SPAs with both Polish Oil and Gas company and PETRONAS for over 2.5 million tonnes per year in aggregate. We look forward to successful long-term relationships with our newest SPA customers and expect these SPAs to support our growth plans.

The market for LNG contracting remains active, and we continue to pursue additional long-term commercial arrangements with new and existing counterparts worldwide.

Turn now to Slide 6, we'll look at some of 2018's most notable highlights. Financial results for the first year of 2018 came in at the top end of our guidance ranges for both consolidated adjusted EBITDA and distributable cash flow, as we generated more than $2.6 billion in consolidated adjusted EBITDA and approximately $600 million in distributable cash flow for the full year. Michael will cover these results in more detail, but our financial performance in 2018 improved throughout the year and we are pleased to deliver full year financial results at or above our upwardly revised guidance range.

In 2018, we executed 2 important market transactions that I'll highlight briefly. First, we closed the merger with CQH, in which we opportunistically and economically simplified our corporate structure. Our corporate structure remains complex and we would prefer it to be simpler. However, we will remain opportunistic and only pursue further simplification transactions to the extent they're economic to LNG shareholders.

In addition to the CQH transaction in 2018, we also refinanced the remaining term loans at CQP into the bond market, economically addressing the nearest term maturity in our complex, and further demonstrating our commitment to managing our balance sheet throughout the corporate structure.

Operationally, in 2018, we produced and exported a total of 273 cargoes, which required over 1 quadrillion BTUs of gas at our terminals. Our teams and gas supply and operations made the significant operational and logistical achievement look easy, and their dedication and commitment to excellence are significant contributors to our reputation as a reliable operator.

Strategically, 2018 was an incredible success as we made a positive Final Investment Decision on Train 3 at Corpus Christi and originated over 7 million tonnes per year of new long-term SPAs, giving us sufficient visibility on Train 6 at Sabine Pass that enable us to finalize the EPC contract and issue limited notices to proceed on that project late last year. Having that project underway, the limited notice to proceed is strategically important for us as we have cost and date certainty on Train 6 ahead of the formal FID, which is where our efforts are concentrated today. The FID of Train 6 is one of my key priorities for 2019, which I'll address on Slide 7.

On this slide, I've included a few key priorities, which highlight that our focus remains centered on growth, execution and being disciplined stewards of capital. We're focused on completing the remaining steps necessary to achieve FID of Train 6, which we expect to occur over the coming months.

As we have previously communicated, we expect to finance Train 6 with approximately 50% debt, 50% equity, which is consistent with our strategy of deleveraging through growth. Ahead of that FID, Bechtel was hard at work of Train 6 and making excellent progress on the scope of work. Bechtel now estimates that Train 6 is approximately 14% complete, highlighted by over the 3,300 piles already driven as part of the site preparation.

Beyond Train 6, we're focused on progressing Stage 3 at Corpus Christi through the permitting process, which we are permitting for approximately 9.5 million tonnes of additional LNG capacity. This project is moving through the process very well. We expect to have all the required regulatory approvals in place by the end of 2019.

We expect to bring 3 trains into commercial operation during 2019. Train 5 at Sabine Pass is the first 2 trains at Corpus Christi. As we have done with all the trains to date, we expect these 3 to be brought online safely, ahead of schedule and within budget.

Completing commissioning and start-up as well as commencing long-term contracts associated with new trains is a significant undertaking and requires a tremendous amount of work and coordination among Cheniere, our EPC partner Bechtel and our foundation customers. These efforts are especially critical for 2019 as we will be starting up 3 trains and commencing long-term SPAs for Train 5 at Sabine Pass, Train 1 at Corpus Christi, and I'm focused on maintaining our track record for seamless transition from construction to operations.

The performance test for Train 1 at Corpus Christi has been successfully completed, and we expect substantial completion to occur in the next few days.

The last priority I'd like to highlight is our plan to communicate the capital allocation policy. This is a high priority for the executive team. We're working closely with our advisers and our Board of Directors to ensure we develop a durable, flexible policy that enables us to allocate capital the most effective impactful way for our shareholders. We look forward to communicating it to the investment community in the coming months.

As I said earlier, 2018 was a remarkable year for Cheniere, and we are proud of the accomplishments we achieved throughout the year. We have many more successes we're pursuing both in 2019 and beyond, and my confidence in our ability to continue delivering on our promises is underscored by our people and the relentless focus on execution that continues to define Cheniere.

And now I'll turn it over to Anatol, who'll provide an update on the 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.

Please turn to Slide 9. 2018 was a banner year for LNG in many regards. Globally, 9 trains started service, increasing global supply by roughly 30 million tonnes, the largest year-on-year increase since 2009 when Cutter began to bring its mega-trains online. New and expansion trains in Australia, Russia and the U.S. pushed total global supplies over the 320 million tonne mark according to preliminary data.

In the U.S., exports from our facilities totaled nearly 19 million tonnes during the year, a 33% increase over 2017. Sabine Pass Train 4 started commercial deliveries in March and Train 5, which is currently undergoing commissioning, exported its first cargo in November. Also in November, we saw start-up of the first greenfield LNG terminal in the Lower 48 US as Train 1 at our Corpus Christi facility started producing LNG and exported 2 commissioning cargoes before the end of the year. We expect LNG production from our facilities and others in the U.S. to continue ramping up in the coming months and contribute to further enhancing the reliability, flexibility and liquidity of the global LNG market.

Strong global LNG supply growth was met with robust demand in 2018 and led to some late year market rebalancing. Demand growth in Asia absorbed virtually all of the incremental supply. The step-up in global production, especially in the fourth quarter when the global complex added more than 10.5 million tonnes year-on-year, ensured adequate supply availability for Asia and the rest of the world as mild winter temperatures kept price spikes in check and supported an uptick in imports into Europe, which added over 4 million tonnes year-on-year in 2018.

The graph on the top right displays the fourth quarter of 2018 demand compared to that what we saw in fourth quarter of '17. As you can see, China, along with the rest of Asia, had strong year-on-year increases in imports. For the month of November, China overtook Japan as the world's top importer, though the position went back to Japan in December. Total European demand increased nearly 7 million tonnes in the quarter, which, as I mentioned, was partially supported by mild weather in Asia, new LNG supply coming online and high shipping rates that incentivized Atlantic-sourced cargoes to target Europe. I'll come back to weather in Europe in just a minute.

Global gas price benchmarks in the fourth quarter saw higher levels and increased volatility compared to the same period in 2016 and '17. However, even with a brief spike in Henry Hub prices in December, the U.S. benchmark continues to trade at a heavy discount compared to other global gas price indices. Despite a mild winter and a reduction in the storage deficit seen earlier in the year, TTF prices traded more than $1.50 higher than level seen during the same time a year ago. Similarly, fourth quarter Asian spot prices settled at more than $3 higher on average year-on-year, but the premium decreased over the course of the quarter.

Please now turn to Slide 10. More than 20 countries, almost half of all LNG-importing countries, had record annual LNG import levels in 2018, including China, South Korea, India and Pakistan.

In addition to record import levels, China and Pakistan also set records for LNG demand growth rates in 2018. The graph to the far left highlights how remarkable China's demand has been over the past 2 years. China alone absorbed more than 50% of the worldwide incremental supplies in 2018, adding 16 million tonnes above the 2017 level. China remains an important demand center for our product, and the country's need for natural gas and LNG is expected to continue to rise as the country balances its economic growth needs and environmental commitments.

South Korea's steady demand over the last 2 years has also been impressive. Demand growth was largely due to low nuclear utilization as well as low coal-fired power generation resulting from policies intended to improve air quality. Looking ahead to 2019 for South Korea, LNG consumption taxes are set to decrease, while coal taxes are set to increase, which, of course, is expected to be supportive of LNG demand.

Pakistan, which began importing LNG in 2015, has shown consistent and growing demand and regasification build-out in the early 2020s could make Pakistan a significantly larger importer than it is today.

The middle graph shows the total accumulation of population-weighted heating degree days for the heating season in Asia. Populous areas of East Asia have seen mostly minor cold spells this winter, and the month of January finished on an extremely mild note. Asia's heating degree days, an indicative factor of weather-driven demand, ran close to average at best for much of the early part of the winter. Nonetheless, prices remained fairly robust compared to last year.

The graph on the far right shows spot prices in relation to crude oil for the past 3 years. Price levels in the first half of '18 were higher than in '17, and particularly more bullish from June to November, partly due to China's early buying ahead of the winter in order to secure more LNG and avoid shortages and price spikes in the winter. High Asian LNG storage levels, combined with the arrival of new supply in the fourth quarter and a fairly mild winter, resulted in more moderate prices in the fourth quarter.

Please turn to Slide 11, where I'll highlight the European market. LNG imports to Europe reached record levels in December. European LNG imports during the first 3 quarters of 2018 were actually lower year-on-year, but the fourth quarter showed very strong levels for a number of reasons. Storage levels were at a 17-year low after the 2017/'18 winter in Europe, leaving the region to play catch-up throughout the year.

The relative tightness in the global LNG market through the first 3 quarters left limited opportunities for storage replenishment. Early buying and mild temperatures in Asia left that region adequately supplied and elevated shipping rates. High coal and carbon prices and an uptick in global LNG production incentivized flows into Europe in the fourth quarter. Nuclear maintenance and domestic supply declines also supported imports.

The middle graph shows the total accumulation of population-weighted heating degree days for the heating season in Europe through January 24. Europe has also seen mild weather this winter, particularly in December, making the region's heating degree days below average in the fourth quarter. Cooler temps in the back half of January have helped bring Europe's temperatures closer to average for the season, which should help with the weather-sensitive demand. However, given all of the factors encouraging LNG flows into Europe, we do not view the increase as entirely weather-driven.

The graph on the far right displays storage levels on the left and TTF prices on the right axis. As mentioned earlier, the storage situation Europe faced coming out of the winter of 2017 exerted upward pressure on TTF prices. Europe entered the third quarter with storage levels near the bottom of the 5-year range, which contributed to upward pressure on TTF prices.

In the fourth quarter, prices were still more than $3 an MMBtu higher than level seen in the fourth quarter of '17, although they have moderated particularly after October settlement. Europe is undergoing a structural shift in the overall dynamics of its gas markets, which makes it an increasingly attractive region for both our long-term and shorter-term LNG strategies. There is a debate in Europe heightened in recent weeks about limiting coal use and achieving climate targets that could have a significant positive impact on Europe's appetite for LNG in the longer term. In the near term, a number of the issues that were in play in the fourth quarter could remain in 2019, potentially resulting in continued robust European LNG imports again this year.

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.

Turning to Slide 13. For the fourth quarter, we generated net income of $67 million, consolidated adjusted EBITDA of $634 million and distributable cash flow of approximately $130 million.

Our results for the quarter were positively impacted by higher-than-forecast LNG volumes and revenue and lifting margins as well as lower-than-forecast O&M expenses.

For the full year, we generated net income of $471 million, consolidated adjusted EBITDA of over $2.6 billion and distributable cash flow of approximately $600 million. As Jack mentioned, consolidated adjusted EBITDA and distributable cash flow for the full year were both at the top of the revised guidance ranges we provided on our third quarter call.

We exported 285 TBtu of LNG from our liquefaction projects during the fourth quarter, of which 21 TBtu were commissioning volumes. Total volumes exported were higher than exports in the third quarter due to commissioning volumes from Sabine Pass Train 5 and Corpus Christi Train 1 and higher seasonal production from the 4 trains in operation at Sabine Pass.

Approximately 72% of the volumes exported during the quarter, or 206 TBtu, were lifted by our third-party long-term SPA customers, and the remaining 79 TBtu were lifted by our marketing function.

Long-term SPA customer volumes were consistent with prior quarter, and marketing volumes were higher due to increased production in commissioning volumes.

For the full year, we exported 976 TBtu from our liquefaction projects, of which 21 TBtu were commissioning volumes. Approximately 77% of total volumes, 756 TBtu, were lifted by our third-party long-term SPA customers, and 220 TBtu were lifted by our marketing function.

For the fourth quarter, we recognized an income 242 TBtu of LNG produced at Sabine Pass, consisting of 263 TBtu loaded during this quarter, plus 3 TBtu or 1 cargo loaded in the prior quarter, but delivered and recognized in the current quarter, the last 25 TBtu or 7 cargoes sold on a delivered basis that were in transit as of the end of the fourth quarter. We also recognized an income 40 TBtu or 12 cargoes of LNG that was sourced from third parties.

For the full year, we recognized an income 973 TBtu of LNG produced at Sabine Pass and 84 TBtu of LNG that was sourced from third parties. Five commissioning cargoes from Sabine Pass Train 5 and Corpus Christi Train 1 totaling 17 TBtu of LNG were recognized on our balance sheet as an offset of a $140 million to LNG terminal construction and progress during the fourth quarter. One commissioning cargo exported during the fourth quarter was on the water at year-end and will be recognized as an offset to construction and progress during the first quarter of 2019.

Net income attributable to common stockholders for the fourth quarter was $67 million or $0.26 per share, consistent with the third quarter. Increased operating income due to additional LNG volumes recognized in revenue was offset by increased derivative loss related to interest rate swaps.

Full year 2018, we generated net income attributable to common stockholders of $471 million or $1.90 per share on a diluted basis, an increase of more than $860 million from a net loss of $393 million in 2017.

The increase in net income was primarily due to increased income from operations as a result of additional trains in operation at Sabine Pass, decreased loss on modification or extinguishment of debt, increased derivative gain and decreased net income attributable to noncontrolling interest, partially offset by increased interest expense, net of amounts capitalized.

During the fourth quarter, we amended our existing revolving credit facility, increasing total commitments to $1.25 billion and extending the maturity date to December of 2022. This undrawn revolving facility enhances our liquidity position and provides a backstop for our Corpus equity funding obligations.

Turn now to Slide 14, where I'll review our 2019 guidance and touch on the highest priorities for 2019. As Jack mentioned earlier, we remain focused on delivering results. And today, we are reiterating our full year 2019 consolidated adjusted EBITDA guidance of $2.9 billion to $3.2 billion and distributable cash flow guidance of $0.6 billion to $0.8 billion. We're also reconfirming our full year 2019 CQP distribution guidance of $2.35 to $2.55 per unit. Our actual results could be impacted by changes to train completion timing or LNG market pricing.

Before turning the call over to Q&A, I'd like to briefly review our top 3 financial priorities for 2019. The first is to achieve financial results within these guidance ranges. Our second priority is to complete a debt financing transaction for 50% of the total cost at Sabine Pass Train 6. We've kicked off that process, and it is an essential step prior to reaching FID. Jack also mentioned this, but our final key priority for this year is to develop and communicate capital allocation strategy, a process which has been underway for several months now. As we have previously indicated, we expect our capital allocation plan to support our ability to invest in growth, enable us to maintain investment-grade credit metrics at the projects and ensure that consolidated leverage is at an appropriate level and return capital to shareholders in a way most appropriate for Cheniere and our shareholders. We expect to communicate this policy to the investment community in the coming months.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Christine Cho from Barclays.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [2]

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I know it's early for Corpus Christi Stage 3 and it depends on the contracts, but how are you thinking about targeted financing for it, especially as you are in the process of developing your capital allocation policy. Should we also think of it as 50-50 debt/equity similar to Train 6?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [3]

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Yes, Christine, it's Michael. That's how we're thinking about it, continue to deleverage through growth with no more than 50% debt on all incremental projects, and maybe we can bring that down over time.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [4]

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Okay. And then I think on the last quarter call, you said that 2.5 to 3 mtpa was the assumption for early cargoes this year. Has the contracting for this book increased since last quarter? And how should we think about your strategy around this as we move through the year? And should we still think $5 margin for the uncontracted portion is what we should assume?

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

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Yes, it's Michael again. So I think the number is more like 6 million tonnes, I think, of post-COD volumes with another 1.5 million on top of that, the commissioning volumes, which won't hit the P&L. So I don't know exactly how the portfolio has evolved over the past few months. But certainly, we've been selling. One thing to keep in mind is we don't like to sell volumes until we know we have them, right? And so as we go through this commissioning process, there is always uncertainty about exactly when the train is going to come on, so we don't want to get out of our skis having placed a lot of volume prior to getting the train. So with that starting to become behind us, as Jack mentioned, Corpus passed the performance test recently. So we have more certainty there, so the guys will definitely be more active in putting those volumes away. In terms of market, you guys can all see the screen like we can. I told you for the unsolved piece of our portfolio, we were assuming $4.5 to $5.5 margins when we did our budget 3 or 4 months ago. Clearly, that has come in probably almost $2. And so we gave you that sensitivity on the last call that said for every $1 move in margin, it affects our EBITDA by $130 million. So you can do that math. So if we were in the upper half of our guidance range 3 or 4 months ago, certainly, we're lower in that range today, but still within it.

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Operator [6]

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We'll now take our next question from Jeremy Tonet from JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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I just want to build on SPL 6 a little bit more here and see what else is needed for positive FID. It seems like the contractual support is largely there. Is it just lining up the financing? And then also, it looks like the EPC contract price $2.5 billion is a bit lower than what you have for SPL 5, and I was just wondering what drives the delta there.

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

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Jeremy, thanks. So SPL 6, we're extremely excited about, as I mentioned on my talking points, we've released Bechtel with limited notice to proceed, so we've locked in the price, we've locked in the schedule in regards to that. And Bechtel was making extremely good progress. As you know, there's a lot of synergies with having the workforce just roll-off of 5 into 6. Additionally, what you're seeing are, with the cost of 6, we think it's extremely competitive, just like Corpus Christi Train 3. And we were able to utilize, one, not only the synergies of having the workforce already mobilized and the equipment already there to move right into Train 6, but also into utilizing some of the existing infrastructure that it affords us having the brownfield site. So we've got the infrastructure that was already built for the first 5 trains that we've rolled into Train 6, and that's part of the cost reduction. Michael, I don't know if you have anything to add?

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

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Yes. I mean on the financing, that we're progressing that as we speak. As I said on the last call -- as Jack said, we have Bechtel working, right? They're full speed ahead. We know price. We know schedule. We don't owe them a full NTB until, call it, the summer. And so as I said on the last call, we're just kind of waiting to see what contracts come in and what the best portfolio is. It's really attached to that train for financing purposes. And since the last call, you saw PETRONAS come in. It's a very clean FOB deal, which we like to put them into project. So we have 3 or 4 months to see what else comes in and then decide the optimum mix and close our financing, but that's not the longest down in any way because we're underway on Train 6. And then I'd add to Jack's comments on -- remember when we built Train 5, the first 4 trains leveraged a lot of infrastructure that we had at the regas facility, all the utilities and things like that. With Train 5, we had to really add all of that, and we did that in anticipation of Train 6. So Train 5 was always going to be the higher cost train, Train 6 is far more attractive on a cost perspective because so much infrastructure is in place from the Train 5 build. So yes, just like Train 3.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [10]

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That's helpful. And just want to switch gears over to ESG, it seems like this is a greater focal point for the marketplace or investors going forward here. And I was just wondering if you could tell us how Cheniere thinks about these issues, how you're positioning yourselves and how you guys you see yourself stacking up versus other energy infrastructure companies?

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

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Yes. So we're very excited, here recently, organizationally, we're able to bring on Fiji George, who is from Southwest, who has got a lot of experience in ESG type programs and he's been spearheading our effort as well as Chris Smith, who is our Senior Vice President of External Affairs in Washington D.C. And you all may know Chris, he was the Assistant Secretary of Energy under the previous administrations. So we think we need to be a leader in it. As you know, we feel like we're on the right side of the equation when it comes to ESG. We think natural gas is the solution. It's economic, it's secure and it's sustainable. And what you see around the world is a policy shift. I think there's going to be a secular shift in the way energy is utilized worldwide. And I think you're going to see natural gas and liquefied natural gas take a much more prominent role in that. But we will be rolling out our ESG methodology and program here very soon. But Anatol, do you have anything to add?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [12]

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No, just Jack as you said, we're focused, we are looking to leverage our position on the gas procurement side as well as our ability to supply this clean, reliable fuel to the rest of the world and have the rest of the world achieve the type of carbon dioxide reductions that the U.S. has enjoyed over the last decade.

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Operator [13]

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

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [14]

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Jack, I just wanted to start off with maybe a market-based question. Overnight, we saw tensions escalate in Pakistan and India. I guess, obviously, you have some exposure there to India. I'm just curious, can you maybe -- you run the risk and impact to your business, can you maybe walk us through the impacts theoretically of a force majeure there on your import contracts if we saw a replay of 1999 or broader conflict? And then maybe, I guess, within the context of kind of walking through that, either those volumes just gets put into the spot market and make them up on the back ends. I know it's early, but it seems pretty pressing.

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [15]

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Yes, there's no force majeure, Michael, right? It's FOB. So our contract with GAIL, they take up at the flange at Sabine Pass and they can take it whenever they want to take it, and that's one of the benefits of U.S. LNG and the Cheniere model. So from that perspective, we're not -- we don't see anything meaningful one way or the other.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [16]

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Okay. So it wouldn't be applicable to an FOB-based contract, is that basically sort of what you're saying?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [17]

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It's not, no. We would expect them to honor their contract and we would enforce our contract. But so far, relationship with GAIL is extremely strong, and we continue to try to meet their needs.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [18]

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Okay. That's helpful, I appreciate that. And then maybe just around the competitive dynamics in and around the U.S. Gulf. I guess it's been again a bit more crowded in the last quarter or 2 with FID at Golden Pass and VG kind of knocking on the door. With, I guess, maybe a little bit more insight, I guess within the industry in terms of where those deals are getting done, do you have a better sense yet around whether you've been able to price or are you able to command a premium for your volumes relative to your peers in U.S. Gulf? And if so, maybe kind of a vague sense on where you think that is?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [19]

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So a couple of things: one, I think when you see a lot of other folks that want to have a position like Cheniere's then it just reconfirms that our business model, our position is second to none, right, worldwide. And so I'm very excited about that. As you know, we were a first mover, and we've executed extremely well, right? You can compare us to just about everybody else in the U.S. and see that our construction effort has been second to none. Our operating ability in the handoff from construction to operations has been second to none. Our ability to produce real volume in a growing demand market has been second to none. So I feel very good about our ability to execute, and I do think our full-service model and our ability to deliver anywhere around the world has afforded us a slight premium to where the spot market is clearing today.

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Operator [20]

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We will take the next question from Craig Shere from Tuohy Brothers.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [21]

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Michael, in May 2018 at your mini Analyst Day, I think you guided that on a 9-train program that you wouldn't be required to think about debt amortization out of operating cash flows at both the MLP SPL level and also at the LNG Corpus Christi level to the late 2020s. Can you kind of share what may be the all equity funding of $300 a tonne upsizing of all the liquefaction trains and the possible successful addition of a 50-50 Corpus Christi Phase 3 would do to that? Would it push amortization requirements into the 2030s?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [22]

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Yes, absolutely. I don't know what the exact date is, but that we look to get into the details on that when we hit the road, probably after our next call to roll out capital allocation in Train 6 -- the Train 6 numbers and probably add some Stage 3 numbers into the old model. But absolutely, I mean it's -- every piece of equity defers that amortization date.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [23]

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And speaking of Phase 3, since Corpus Christi Train 3, you signed 4 agreements with a total of 5.25 mtpa, which obviously is more than you can possibly need for 4.5 at Sabine 6. How much do you feel like you already have in the bag, so to speak, towards Corpus Phase 3? And what minimum percentage of the 9.5 mtpa would you like to see contracted before perhaps an FID next year?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [24]

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Yes. I mean we definitely have more contracts than we need for Train 6, for sure. We've drawn down kind of some of our CMI inventory to service some of that, but the plan would be to -- we really think that piece of our business is competitive advantage, so to keep some capacity there. How much do we need on Stage 3? I think we're running a couple of cases, one where we build the whole thing and one where we build half of it and certainly, we're making our way towards at least building half of it, but not quite there yet.

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

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And I would say, Craig, we are extremely excited about Corpus Christi and our ability to expand. We think there are no constraints with the site. There's no constraints with nat gas pipeline capacity coming into the site, the amount of infrastructure is there and then our location to the Permian should be a real advantage to us all the way around. So we're not going to slow down on the growth side. I think I've got some of the best originators in this industry and we're going to capitalize upon that.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [26]

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That sounds great. Jack, if I can kind of dovetail on those comments. Do you see prospects related to Corpus Phase 3 for signing both supply and off-take agreements linked to Brent or perhaps a Texas-based gas hub like Waha or Agua Dulce?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [27]

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Anatol, do you want to take the...

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [28]

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Thanks, Jack. Thanks, Craig. I think one of the things that was surprising and, in some sense, amazing in the LNG market in 2018 was that the majority of the contracts that were executed were Henry Hub-linked. And obviously, it was us and our neighbors at VG that had that success. The world has gotten comfortable with this as an attractive model. It offers liquidity, price transparency and it has seen a number of times now when if Henry Hub has a quick excursion to prices above $3, it comes down very rapidly and continues to be very competitive with Brent-linked and other contracts. We continue to think that, that is the right flag to fly. Your question about alternative indices, that's a very long part, and in our view, the world isn't ready to price meaningful volume at Agua Dulce, while it's something that you and we know well just does not have the liquidity, transparency, term structure that would make it marketable internationally.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [29]

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That's very helpful. Very quick last one for Michael. I think May last year at Analyst Day -- mini Analyst Day, you said $1.9 billion of incremental forecast equity funding for Corpus Christi Trains 1 through 3. With things progressing seemingly better than expected, any range of how much that might come under?

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

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No. I don't think we're ready to -- I mean, Train 3 obviously has a long way to go, so I would stick with that number for now. Train 6, we're going to end up with probably close to $300 million of contingency, though. And so that will get rolled into Train 6 to help meet our 50-50 debt/equity. Train 5, we had excess contingency which will roll into Train 6 to achieve our 50-50 debt to equity. But on Corpus, I'd stick with the numbers we put out in May.

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Operator [31]

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

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [32]

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My first question is for Michael. You have pretty clear visibility to the contracted portion of your cash flow profile. Just curious, with that in mind, how you're sort of evaluating the various capital allocation decisions going forward?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [33]

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Yes. We do have a lot of visibility. Again, we'll roll that out in a few months. Probably after our next call, we'll hit the road and talk about it. But it's pretty straightforward for us, there's 3 buckets, right? There's the growth bucket, the balance sheet bucket and the shareholder returns bucket. I can tell you, we're really excited about the growth. So that's going to be a big number as we look at not only Train 6 but Stage 3. Reinvesting in the business is the best use of our money at the returns we think we can generate. And then we'll have to decide if we want to do something else on the balance sheet relative to what we've already said publicly, so we're thinking through that. And then there's probably some money leftover for some kind of shareholder return. Flexibility is going to be key for us, so we'll keep that in mind as we think about bucket number 3, but we'll look to put some real numbers to that here in the coming months.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [34]

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And as you think about bucket number 3, is that something that you think you'd be able to actually implement this year or further out assuming some sort of a run rate in your plan?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [35]

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Yes, we'll see. I mean probably both, but we will see.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [36]

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Okay. My other question is for Jack. You spoke earlier in your prepared remarks about being opportunistic to a CQP simplification. I mean, it seems that, that will be a little bit more difficult to achieve versus what you're able to do at CQH. How should we think about how you'll ultimately end up rolling up the MLP?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [37]

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I think I said it fairly clearly, we're going to be very optimistic if the math doesn't work and we're going to have a complicated structure for the foreseeable future until we convince all of you that our growth really is there. I think we'll hopefully get you all comfortable and we can actually execute what we say and that we're a conservative bunch overall. But right now, the exchange ratios just don't work.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [38]

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Got you. And last question from me. With respect to Stage 3, have we ultimately just abandoned mid-scale? That seems to be less talked about now. There seemed to be a shift in tone in terms of just having sort of conventional trains going forward. How should we think about that?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [39]

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No, I mean we're moving full speed ahead with our mid-scale solution right now, which is our Corpus Christi Train 3 -- Stage 3, sorry, not Train 3, Stage 3, that filing which we have in front of FERC right now.

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Operator [40]

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(Operator Instructions) Our next question now comes from Jean Salisbury from Bernstein.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [41]

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How much advanced locking in is there of pricing for spot cargoes? Have we seen the full effect of the fourth quarter winter gas spikes on margins, or will some appear next quarter?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [42]

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It's Anatol. It's really a mix of the -- as Michael said, we have 3 trains coming on with a fair amount of timing uncertainty on cargoes, and we're not in the business of going short in the market. We -- as we've said to you before, we do have some tranches. Obviously, we have early cargoes associated with some term deals that we've executed over last year as well as some medium-term deals for '19 and '20. But for competitive reasons, we're not going to get into the specifics of the volumes quarter by quarter.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [43]

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Okay, fair enough. And then do you see a risk in 2019 that if everything starts up as scheduled, some U.S. LNG facilities won't be running at full capacity for parts of the year?

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

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It's Anatol again. I really cannot envision that scenario. Actually, I have to say, I can't envision the first premise of that scenario either, but even if that did play out, the probability that on a marginal basis, there is no value in exporting a $2.50 Henry Hub molecule to a strong global market is pretty close to 0 to me.

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Operator [45]

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Our next question comes from Fotis Giannakoulis from Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [46]

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Anatol, I have one question for you. The last 3 FIDs, they have been reached without long-term SPAs from the respective parties. Is this a new trend? And how does this change the long-term dynamics of the market and your potential margins and the growth initiatives beyond the Stage 3 of Corpus Christi?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [47]

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Thanks, Fotis. It's not a surprise to you or to us. It's a global and competitive market, and lots of places have attractive molecules that they want to monetize with a different capital allocation algorithm and different risk tolerance than we do. So we're always expecting what in the U.S. we may have called a producer push component, the LNG market calls it the equity lifting model. Those are projects that we always believe would be able to get off the ground, whether that's East Africa, Western Canada, Arctic Russia, et cetera. And we're expecting -- fully expecting to compete with them. We have been competing with them, and they weren't a surprise to anyone in 2018 where we had pretty close to a record year. So we love the hand that we're dealt. We love, as Jack said, the business model and the track record that we've built and we're confident that we'll be able to leverage that into continued success. But it is a competitive market.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [48]

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So from your answer, shall I take that your strategy of backing every new expansion with long-term SPAs will remain intact? Or this new FIDs might change your risk appetite?

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Anatol Feygin, Cheniere Energy, Inc. - Executive VP & Chief Commercial Officer [49]

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Well, look, we told you a couple of years ago our model, we've continued to refine that. We think that the range of CMI having this warehouse stuff 5% to 20% sort of as the sideboards of volume in it is a very good number. And we're still comfortable with that, and we've had good success. As Michael mentioned, we've, in essence, drawn down that inventory. We'll look to reallocate volumes to that in order to continue to prosecute the type of bridging volume and secure reliable attractive value proposition that we've been successful with. So there's no reason to change what's been working and is expected to continue working for the foreseeable future.

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Operator [50]

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Our next question comes from Michael Lapides from Goldman Sachs.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [51]

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Two questions. One, on the last quarterly call, you kind of updated the range of potential output or capacity for each train and kind of raised the high end. Can you talk to us about kind of how you get comfortable with hitting that high end and is there even upside to that level? I'd love a response on that, and then I've got a follow-on about the balance sheet.

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [52]

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It's Jack. Yes, so from an operating perspective, I would say that we are very comfortable now with the upper end of the range that we gave all of you. We have some debottlenecking initiatives that we had plans of achieving this year with some of our turnaround in maintenance schedules, and you should expect us to revise our output. But I think most of you are probably on Genscape and can see our gas flows into our facility and know that we're very close to 5 Bcf a day right now. So we're very pleased with the way our trains have been performing.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [53]

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Got it. And then one quick one on the balance sheet. Just curious, how do you think about, let's say, once you get Train 6 online and I know that's we're talking a couple of years down the road, what you think about as a normal credit metric that you'd like to achieve kind of a long run target or a long run goal and whether that's measured on an FFO to debt or a debt-to-EBITDA perspective?

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [54]

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Michael, before Michael Wortley answers that question, I just want to make sure I read your note this morning. You know with the LNTP of Train 6, that the price and the schedule are fixed and not a risk for us. So we haven't had any cost overruns yet. We don't expect to start now on our trains number 8 and 9. So I just want to make sure I got that clear with you.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [55]

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Understood. I've known you for a long time. I've not seen you have very many cost overruns in the 12 to 15 years.

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [56]

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Go ahead, Michael.

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [57]

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The balance sheet, the rating agencies look at it several different ways. The projects, they care about debt service coverage ratios and then deconsolidated numbers, consolidated numbers. For us, I think we need to keep it simple and just communicate, like everybody else, which is just a consolidated debt-to-EBITDA number. And so that -- over the long run, I think that's what we'll start to look at more and more, though the rating agencies are more nuanced given our multiple levels of debt.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [58]

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Do you have the kind of a mental target in mind of where you'd like that debt-to-EBITDA number to be once Train 6 is up and running?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [59]

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Well, it will be part of our grand rollout in a few months. Currently, we're at in a 5 to 6x consolidated, right on the upper end of that range from what we said last time. So that's what we'll stick with for now.

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Operator [60]

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Our final question today will come from Alex Kania from Wolfe Research.

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Alexis Stephen Kania, Wolfe Research, LLC - Utilities SVP [61]

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I just wanted to touch on the commentary related to maybe the financing package for Sabine Pass 6. Michael, I think you talked about thinking about optimizing what contracts you want to attach to that facility. Are you talking mainly about the CMI contracts that you've already got secured? Or maybe is there kind of discussions far enough along on other FOB-type contract that you may want to wait to see play out before you finalize that?

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Michael J. Wortley, Cheniere Energy, Inc. - Executive VP & CFO [62]

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Yes. I mean we have a free option right now, which is that we don't have to give full NTP till summer. So yes, I think we'll just wait and see what happens. I mean I like our position now. If we had to make a decision tomorrow, I don't think we would have any problem with that. But given that we have free time to wait, Bechtel is working hard, yes, we'll wait and see if anything else comes down the pipe between now and then. We have Vitol and PETRONAS, which are FOB deals and then we have a fair amount of gas deals. So yes, we'll just wait.

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Jack A. Fusco, Cheniere Energy, Inc. - President, CEO & Director [63]

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Thank you all for your support of Cheniere.

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Operator [64]

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Ladies and gentlemen, I would like to turn it back to management for additional or closing remarks.

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Randy Bhatia, Cheniere Energy, Inc. - VP, IR [65]

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Thanks, everyone, for joining us today. We look forward to speaking with you next quarter.

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Operator [66]

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