Cheniere Energy, Inc. (LNG) Earnings Call Transcript & Summary

Good day, and welcome to the Cheniere Energy Capital Allocation Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Randy Bhatia, VP of Investor Relations. Please go ahead, sir.

Thanks, operator, and good afternoon, everyone. Welcome to the conference call and webcast to discuss Cheniere's comprehensive long-term capital allocation plan. We issued a press release just after market close and posted a slide presentation, both of which are available at cheniere.com. Joining me this afternoon are Jack Fusco, Cheniere's President and CEO; Zach Davis, Senior Vice President and CFO; and Anatol Feygin, Executive Vice President and Chief Commercial 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 certain non-GAAP financial measures, such as consolidated adjusted EBITDA and distributable cash flow. A reconciliation of these measures to the most comparable GAAP measure can be found in the appendix of the slide presentation. The call agenda is shown on Slide 3. Jack will begin by highlighting Cheniere's achievements over the years and introducing our new capital allocation plan, after which Zach will provide further details surrounding the plan. After prepared remarks, we will open the call for Q&A. I'll now turn the call over to Jack Fusco, Cheniere's President and CEO.

Thank you, Randy. Good afternoon, everyone, and thanks for joining us today on short notice, and thank you all for your continued support of Cheniere. We are excited to be here to discuss the comprehensive long-term capital allocation plan, which we announced earlier this afternoon. I hope you've all had a chance to read our press release and review the slide presentation. The rollout of this plan is enabled by the incredible success we have achieved across the Cheniere platform over the last 5 years. You've often heard us say that we are nearing the free cash flow inflection point. So we have truly reached that point now, and it is due to our relentless focus on execution and operational excellence. Turning now to Slide 5. I'd like to set the stage for the capital allocation by taking a moment to highlight some of the significant growth milestones achieved by our team in terms of execution, operations and financial results. The excellence in execution we have achieved on these fronts illustrates the transformation of Cheniere from a developer into a world-class operator and forms the foundation upon which the capital allocation plan is built. With the liquefaction platform, which will have a capacity of 45 million tonnes early next year, Cheniere has become the second-largest operator of liquefaction capacity in the world. At the bottom of the slide, you can appreciate the quantity and pace of the major milestones we have hit over the last 5 years, achieving FID and bringing trains to substantial completion and rapid succession across both facilities. Since commencing operations in early 2016, we've converted over 6,500 TBtu of nominated volumes and over 1,700 cargoes produced and exported from our Sabine Pass and Corpus Christi facilities combined, currently supplying over 10% of the world's LNG. Cargoes shipped from our facilities have gone to 36 countries and regions around the world. That significant operational scale has resulted in our financial transformation as well. Since early 2016, we have generated approximately $14 billion in cumulative consolidated adjusted EBITDA, and our share price has increased by approximately 200%. Critically, we have done all this while exemplifying the core of Cheniere's culture, which is safety. Our focus on safety throughout the organization has resulted in consistent year-on-year improvements in safety since 2018, which we are on track to once again achieve in 2021, demonstrating our top quartile safety performance, which is a key metric for all Cheniere employees. Turning to Slide 6, which will introduce our comprehensive, all-of-the-above capital allocation plan. This plan is built upon our guiding principles for capital allocation, which are: a strong and sustainable balance sheet, funding financially disciplined growth and returning capital to our shareholders. The plan calls for annual debt paydown of approximately $1 billion until investment-grade metrics are achieved throughout the capital complex. For us, the target is to get consolidated leverage to below 5x, so we expect to pay down approximately $4 billion in debt under this framework. Funding financially disciplined growth is something you should all be accustomed to with Cheniere. We speak often about our capital investment parameters, and we remain committed to these as they provide for cash flow and credit-accretive growth with a risk profile consistent with how we developed and built the existing 9-train platform. And on the capital return to shareholders, I'm pleased to announce the initiation of a quarterly dividend. Today, we are declaring a dividend of $0.33 per share, which starts in the third quarter and is payable in mid-November. We expect to grow the dividend in the mid-single-digit range each year, placing the dividend in line with the S&P 500 in terms of both yield and growth. And lastly, we are resetting our share repurchase authorization in the fourth quarter to $1 billion over 3 years. We have resumed share repurchases under our 2019 authorization this quarter. Our capital allocation plan truly is all of the above: paying down debt to achieve investment-grade metrics, return capital via buybacks and a quarterly dividend and funding cash flow-accretive growth when opportunities meet our disciplined investment parameters, all of which underscores the long-term sustainability of our business model and aims to deliver value to our stakeholders for years to come. Turn now to Slide 7, where I'll provide a brief update on 2021 guidance and Sabine Pass Train 6. Since providing 2021 guidance in November, we have increased EBITDA guidance by $700 million and DCF guidance by $600 million with the most recent raise a month ago on our second quarter call. Since then, our operations have remained stable. The LNG market has remained extremely resilient, and margins have continued to improve. Given that, along with our robust production and forward sales, we are now tracking to the high end of our full year guidance ranges for both EBITDA and DCF. With respect to Train 6 at Sabine Pass, I'm pleased to announce the time line has been accelerated once again, and we now expect Train 6 to achieve substantial completion in the first quarter of next year. The success of the Cheniere-Bechtel relationship is, again, beginning -- being showcased on Train 6, which is tracking about a year ahead of schedule and within budget. Turn now to Slide 8, where I'll spend a quick minute on Cheniere's leadership position on climate and sustainability. You've heard me cover some of these items on earnings calls, but this is critical to think about with respect to capital allocation as we further integrate sustainability into our business. This effort has been underway for years as we establish our Climate and Sustainability Principles and cofounded the collaborative -- Collaboratory to Advance Methane Science back in 2018. We have made significant progress since then, including our recently announced QMRV collaboration and the publication of our greenhouse gas life cycle analysis, which will feed into our Cargo Emission Tags starting next year. Guided by those Climate and Sustainability Principles, we will continue to leverage our scale and position across the LNG value chain to improve the environmental transparency and performance, which has long-term strategic and commercial advantages for Cheniere. Turn now to Slide 9, where I'll provide an update on Corpus Christi Stage 3. Since our operational excellence and debottlenecking efforts have unlocked an additional 5 million tonnes of capacity across our existing trains, our marketing and origination teams have been executing on our midterm strategy with the goal of getting the entire Cheniere platform to around 90% contracted. Through term sales completed with a diverse group of LNG customers, that goal has been achieved through the mid-2020s. This enables Anatol and his best-in-class origination team to focus squarely on completing the commercialization of Corpus Christi Stage 3 going forward. The project possesses significant competitive advantages that reinforce our confidence in commercializing Stage 3, such that it will meet or exceed our investment parameters. We expect Stage 3 to be commercialized with long-term FOB, DES and IPM contracts with diverse, creditworthy customers from Asia, Europe and North America. And lastly, our leadership position on ESG has real commercial application, and we have already seen that benefit in some of our term deals we have signed in 2021. We would expect climate and sustainability to be a further focus with our long-term counterparties. Supported by a very strong LNG market backdrop, significant commercial momentum and major competitive advantages, we expect to FID Corpus Christi Stage 3 next year. Please turn now to Slide 10, where I'll answer the question, what's on my whiteboard after Stage 3. Beyond Corpus Christi Stage 3, the Cheniere platform across both Sabine Pass and Corpus Christi has the potential for significant additional liquefaction capacity. Our land and infrastructure position at both sites can enable significant potential expansion opportunities through both debottlenecking and incremental infrastructure. We can leverage our expertise, people and existing infrastructure of this incredible platform we have built to develop cost-competitive future growth for many, many years to come. The Cheniere story is just getting started. With that, I'll turn the call over to Zach, who will provide further details surrounding our new capital allocation plan.

Thanks, Jack, and good afternoon, everyone. I'm happy to be here today with Jack, Anatol and Randy to finally unveil our comprehensive, long-term capital allocation plan, which is summarized starting with Page 12. Ever since I joined Cheniere in 2013, the vision has always been to build out the LNG platform at Sabine Pass and Corpus Christi to generate a long-term cash flow profile that sustains a comprehensive, all-of-the-above capital allocation plan. And today, as Jack said, we have hit that long-awaited inflection point and have constructed a plan consisting of 4 main pillars, which are debt paydown, initiation of a quarterly dividend, a reset -- share repurchase program and of course, more brownfield and accretive liquefaction growth. The first pillar is our continued commitment to a sustainable balance sheet, which we have long described as being a strategic long-term capital allocation priority. We intend to pay down approximately $1 billion of consolidated debt annually until we have reached investment-grade leverage metrics across our complex. Second, we are initiating a quarterly dividend at LNG starting this quarter with a record date of November 3 and a first payment date of November 17. With the high degree of cash flow visibility going forward, now is the right time to begin what we expect to be a steady and growing return to our shareholders. This Q3 inaugural dividend will be equal to $0.33 per share or $1.32 annualized, resulting in a yield and planned growth rate in line with the S&P 500. Third, we resumed share repurchases under our 2019 program in the third quarter and are extending that commitment with a reloaded $1 billion authorization for the next 3 years beginning in the fourth quarter. Lastly, we are eager to continue our disciplined organic growth. This year, we have made substantial progress towards the FID of Corpus Christi Stage 3, and we believe our development and commercial momentum will enable an FID to occur next year. Our ability to now pursue an all-of-the-above capital allocation plan is the result of our continued construction execution and operational excellence with a uniquely contracted portfolio to underpin such a long-term sustainable cash flow profile. Together, we believe this plan represents a compelling enhancement of the Cheniere platform, creating long-term value for all of our investors. Turning now to Page 13. Following a multiyear period of one of the largest global infrastructure build-outs with approximately $30 billion of capital investment to build Sabine Pass and Corpus Christi, we are now at a point where we anticipate less than $500 million of construction spending remains for the initial 9 trains. Cheniere has 8 of 9 trains operational with the ninth train accelerated again and now expected to be completed in the first quarter of next year. And as a result, our cash flow has already ramped up considerably over the past several years, and we expect the ramp-up to continue into next year. As we approach the completion of our ninth train construction program and the expected increase to run rate cash flow generation, we have unquestionably reached an inflection point at which Cheniere expects to have considerable cash available for allocation. We expect to generate approximately $10 billion of cumulative distributable cash flow just through 2024, which is why today, I'm pleased to be sharing our plan for capital allocation that would enable us to achieve our balance sheet goals, commence steady and growing shareholder returns and position Cheniere to take advantage of growth investment opportunities like Corpus Christi Stage 3. Turning to Page 14, which discusses the effect of the capital allocation plan and how it's designed to efficiently utilize the forecasted cumulative DCF over time. As mentioned, through 2024, we expect to generate approximately $10 billion of cumulative distributable cash flow that will be available for capital allocation. Considering our goal of investment-grade leverage metrics and our plan for approximately $1 billion of annual debt pay down, we expect to repay a total of approximately $4 billion of debt through 2024. We believe this amount will position the company firmly with investment-grade leverage of under 5x and create a sustainable consolidated balance sheet. Next, we are initiating a $0.33 per share dividend for Q3, which corresponds to $1.32 per share dividend annually. Going forward, we are targeting a mid-single-digit growth rate for the dividend until our investment-grade balance sheet goals are reached. Under these assumptions, we see the dividend as an approximately $1 billion return of capital to our shareholders through 2024 with inaugural yield and growth rate in line with the S&P 500. Continuing on with shareholder returns, we are resetting our share repurchase program in the fourth quarter to $1 billion in total size, which we expect to utilize through 2024. The share repurchase program will remain in place to be opportunistic based on our trading price and relative value and will complement the stable and predictable dividend we expect to be paying. As I noted a moment ago, share repurchases under the prior authorization resumed in the third quarter. Finally, as we prepare for FID of Stage 3 next year, we would have approximately $2 billion of equity funding for the project that would be required through 2024. We expect to under lever the project and fund it 50-50 debt and equity as we did with Corpus Christi Train 3 and Sabine Pass Train 6. Stage 3 will benefit both equity holders and creditors, and our financing plans reflect our capital discipline for growth that I will discuss later in the presentation. The last thing on this page that I want to make clear is our intent to be as efficient as possible with our excess cash flow. We expect to deploy all excess cash each year beyond liquidity needs and these highlighted uses to accelerate debt paydown and increase share repurchases, accomplishing our goals on an even more advanced time line. In total, we see about $10 billion through 2024 or approximately $11 per share of annual capital deployment. Please turn to Page 15, which provides further detail on this plan in annual terms as we are quickly approaching 9-train run rate cash flows. We anticipate generating $2.6 billion to $3 billion of run rate distributable cash flow per year, which we expect will be allocated, as follows, each year: on average, approximately $1 billion of that cash flow will be used for debt pay down; approximately $300 million of it will be used to pay dividends; $300 million or so will be used to repurchase shares opportunistically; and approximately $800 million will be for equity contributions to fund Stage 3 assuming FID in 2022 and 50-50 debt to equity funding. That allocation would still leave approximately $200 million to $600 million of projected excess capital per year that we would use to accelerate debt paydown and/or share repurchase goals in the near term, if not already spoken for. Ultimately, we believe this will allow us to achieve investment-grade metrics sooner than we otherwise would and grow our shareholder returns beyond what we are showing you today. Turn now to Page 16 for a summary of these capital allocation priorities and the strategic rationale underlying the pursuit of each item. We will touch on each one of these in more detail on subsequent slides, but at a high level, we see these priorities as crucial to helping us achieve 3 major objectives: one, achieving a long-term sustainable balance sheet; two, providing steady and meaningful shareholder returns; and three, investing in accretive growth responsibly that furthers goals 1 and 2 above. Creating key objectives with follow-through is what has positioned Cheniere as a premier infrastructure company. And we believe with our commitment to this plan, these objectives will elevate Cheniere further. Let's begin with the base of the capital allocation plan, a long-term sustainable balance sheet, on Page 17. Historically, we've been vocal on our commitment to reach consolidated investment-grade metrics. And now that we have reached this critical cash flow inflection point, you can see this plan follows through on that commitment. We believe that consolidated leverage less than 5x is consistent with investment-grade metrics for large infrastructure companies. And in order to achieve this, we need to repay approximately $4 billion of debt by the early to mid-2020s. This year, we have already repaid $500 million through Q2, leaving approximately $3.5 billion of debt to repay going forward. Conservatively, financing growth, like we have done with Corpus Christi Train 3 and Sabine Pass Train 6, accelerates deleveraging across the complex once those projects are completed. Stage 3 will further reduce leverage below 5x as we plan to finance the project conservatively with 50-50 debt and equity. Strategically, it is important to consider Cheniere's scale and size in the LNG value chain. Cheniere is the second-largest global LNG operator, one of the largest U.S. natural gas transportation holders and end consumers and one of the largest global LNG vessel charterers. As a result of this scale, it is strategically imperative for Cheniere to follow a balance sheet strategy that is built for long-term sustainability as we will be competing with SOEs and super majors globally and their fortress balance sheets for decades to come. This goal to reach IG also supports our business model flexibility as our contract offering continues to evolve in lockstep with the LNG market from not only FOB, or free on board, SBAs, but the delivered ex-ship, DES, and Integrated Production Marketing, IPM, transactions as well where credit can become a competitive differentiator. It also allows us to responsibly pursue accretive growth opportunities through commodity cycles and access deeper and more stable capital markets carrying more attractive pricing, all while attracting new investors thanks to a more sustainable balance sheet that will help provide consistent long-term capital returns. And now to the dividend on Page 18. As I mentioned before, the $0.33 per share dividend we are declaring today corresponds to $1.32 per share annual dividend and an approximately 1.5% yield, above the S&P 500 current yield of approximately 1.3%. We intend to grow the dividend at a mid-single-digit growth rate annually over the next few years. Sizing of this initial dividend was important and reflects consideration of other capital allocation needs, such as balance sheet goals and growth opportunities, all of which represent a capital return to our shareholders. As stated previously, we anticipate revising the growth rate upward once our initial capital allocation objectives are reached by the mid-2020s. We believe this dividend represents the start of a meaningful and steady return of capital to our shareholders, and we plan to grow this capital return in the future. Turning to Page 19, you'll see highlights of our share repurchase program. As mentioned, we restarted our share repurchase program in Q3, and we are resetting our repurchase plan to $1 billion for 3 years, starting at the beginning of the fourth quarter. So there will be a full $1 billion authorized starting in Q4. We view this plan as a continuation of our commitment to shareholder returns. In 2020, we opportunistically reduced our forecasted run rate share count by approximately 40 million shares through the redemption of 2 convertible notes with the CEI term loan issuance, which has since been fully repaid. Under our 2019 share repurchase program, we have repurchased a total of approximately 7 million shares with over $400 million from inception, bringing the total share count reduction to approximately 50 million shares. We believe share buybacks are a flexible and tax-efficient tool to further increase our run rate DCF per share, and we expect to complete the $1 billion program ahead of its technical 3-year term as we may allocate a portion of our excess capital to further repurchases over time. Turning to Slide 20, where I'll finally discuss Corpus Christi Stage 3. As a reminder, Stage 3 at Corpus Christi is shovel-ready and once fully constructed, will add over 10 million tonnes of LNG capacity per year. As Jack mentioned when discussing the project's competitive advantages, Stage 3 enjoys brownfield project economics as it will utilize a significant amount of shared infrastructure constructed as part of trains 1 through 3, which we believe makes Stage 3 a tremendous organic growth opportunity for Cheniere. We're confident Stage 3 is well positioned for FID in 2022, but as we have said before, we will maintain our discipline to ensure that the risk and return profile of Stage 3 is consistent with that of the first 9 trains we've built. We remain committed to our growth capital investment parameters, which help ensure discipline in our capital investment decisions and the sanctioning of projects only when they meet the high standard we have set for all FIDs to date. As such, we would expect for any future growth to be highly contracted via long-term contracts with creditworthy counterparties, value-accretive such that it can outearn our cost of equity embedded in our stock price and conservatively funded such that it carries no more than approximately 50% leverage. As it stands right now, we see Stage 3 adding between $1.1 billion to $1.2 billion per year to EBITDA and between $900 million and $1 billion per year to distributable cash flow at of a cost between $600 to $700 per tonne. Again, while we believe the project will be built at around a 6x CapEx to run rate EBITDA ratio, it will be levered to half of that or approximately 3x debt to EBITDA, ensuring it is also credit accretive and enhances our sustainable balance sheet. Page 21 concludes the overview of the capital allocation plan with the overall impacts, starting on the left with our status quo 9-train run rate scenario and moving to the right with implementation of the capital allocation plan and then further to include the forecasted run rate impacts of Stage 3. On its own, Cheniere is a differentiated energy infrastructure company with reliable and steady execution that has enabled us to reach the cash flow inflection point we're at today. We have over $6 billion of third-party annual fixed fees locked in with an 18-year weighted average contract life. We expect to generate $10 billion of cumulative distributable cash flow just through 2024, and this capital allocation plan builds on that compelling foundation and enhances it. Through $1 billion of annual debt paydown, Cheniere expects to achieve leverage below 5x by the early to mid-2020s, which is consistent with an investment-grade profile, further strengthening the business model. Enhanced shareholder returns through the commencement of a regular quarterly dividend initiated at approximately 1.5% yield or $1.32 per share annualized and the resetting of $1 billion share repurchase program for another 3 years are expected to provide steady and reliable returns to shareholders, consistent with the visibility and credit quality of the cash flow that underpins this business. At the same time, we have highly accretive growth opportunities ahead of us that can be pursued in a responsible and sustainable way, protecting and, ultimately, enhancing an already robust balance sheet. With the FID of Stage 3, we'll have line of sight to even greater run rate cash flow generation and credit metrics. Once we complete all these items, we anticipate reaching the ultimate price of approximately $16 of run rate DCF per share, which will enable additional shareholder returns with a sustainable and long-term balance sheet and financial position at its foundation. That concludes our prepared remarks. We're excited to be able to provide this significant update to you today, and thank you for your continued support of Cheniere. Operator, we're ready to open the line for questions.

[Operator Instructions] And our first question comes from Christine Cho with Barclays.

Thanks for the update on the presentation today. I thought if I could start on Slide 14. Will you sort of go through the math of how the $10 billion DCF will be allocated? For the $2 billion additional cash that's available, how should we think about how you weigh whether or not you should accelerate that paydown or buy back stock? And I know the share repurchase program has been reset to $1 billion over the next 3 years. But is there a potential for something beyond that?

Christine, this is Jack. First, thanks, and we thought we would give you some questions that you could ask us for tomorrow morning in just a few hours, so that's why we started with this presentation. But I'll turn that over to Zach.

Christine, thanks for the question. I'd say I think it's fair to say that there should eventually be more than $1 billion allocated to buybacks in this time frame through '24 if things progress as planned just based on this commitment of being as efficient as possible, really, with our excess cash beyond our base allocations. And as the presentation detailed as simply as we could, even with $4 billion going to debt paydown, $2 billion going to Stage 3 and $2 billion are still going to shareholder returns in terms of dividends and buybacks, that still leaves about $2 billion unspoken for. So you can expect even this year, as that excess cash is more than our base plans, to accelerate our allocations to both debt paydown and stock buybacks, which could increase our debt paydown in certain years above $1 billion and speed up our use of that 3-year $1 billion buyback program to be done well before mid to late 2024. Yes, I'd just say that buyback program, the 3-year term is more a technicality, and it will just really depend on the cash flow in the coffers.

Okay. And how do you factor into like where the stock is trading when you determine like buyback -- buying back stock or debt paydown?

I think you should assume that the buyback will just remain opportunistic with a certain amount of funds allocated and, I guess, always available every quarter for buybacks. But the pace of actual purchases will be dependent on the volatility of our share price going forward. I think we're very focused on keeping that opportunistic and not just programmatic each day.

Okay. And then as my follow-up, with all the cash you guys will be generating, we often get asked about why you guys don't pay down debt faster in order to get to IG faster. But would it be fair to say that even if you accelerated debt pay down at LNG, the timing of when LNG can get upgraded is somewhat limited to when CQP can be upgraded because the parent is never IG before the MLP? And with CQP paying out its cash flow and not having much excess cash for debt paydown, the entity has to grow EBITDA to delever, so we need Train 6 to be online for a bit. Is that a fair way to think about it?

I guess you can say that's a fair way to think about it. But Train 6 is literally right around the corner, so there's not much time before we're pretty much at run rate at CQP. But I'd say it's pretty tough to say exactly when the agencies are going to move. But I would say LNG and CQP are probably going to move in lockstep over the coming years, and we feel good that we're allocating more than enough capital to debt paydown in the next few years to comfortably meet those target metrics of under 5x debt to EBITDA at both CQP and LNG. CQP is almost already there. So you're going to see us actually pay down a good portion of debt at Corpus in the coming years to get the whole enterprise to under 5x.

Okay. Got it. And Jack, appreciate the timing of this presentation, as you said in your opening remarks to me.

And our next question comes from Jeremy Tonet with JPMorgan.

I just want to start with your whiteboard there, Jack, on Slide 10, if I could. Just wondering if we might be able to dig in a little bit more as far as what the potential future growth at Corpus and Sabine could be there. Curious on Sabine as well because it seems like we're kind of full there. Just wondering, is this incremental LNG export capacity? Or could this be something else? Just trying to get a feel for, I guess, what's possible, what's on the whiteboard there exactly.

Well, Jeremy, first, you should expect through our operational excellence program that the team is working extremely hard on the debottlenecking and maintenance optimization program to maximize our production across the fleet. So I'll take that one off the table. But for future growth, we found at -- and I'll -- since the picture is of Corpus, I'll talk about Corpus first, that we have enough real estate. There's enough infrastructure being built or is built by our facility, and I'm talking about natural gas infrastructure, that we could easily add another 20 million tonnes. And you can see the space. We just closed on the old Sherwin Alumina facility, which is what we call here additional land for expansion. That's right to the right. That actually has a small berth area. We'd have to do some modifications to the berth if we needed a third berth. We won't need it with Stage 3. But if we continue to grow there, we may want to install it just to keep our shipping going. That's where -- we've planned the existing infrastructure to be able to handle significantly more tonnage than we currently have permitted, quite frankly. And the same with Sabine. Sabine is blessed with 4 big pipes going into it. It will now have 3 berths. We never -- I don't know if we didn't talk about berth 3, but it is well ahead of schedule, and the team is making good progress there. And so there's an opportunity there to not only to continue our debottlenecking efforts but to also add additional capacity at Sabine.

Got it. So just to clarify here, the growth, as you see, it's strictly just on the LNG export side, nothing else at this juncture, just to make sure I'm clear on that.

We're going to stick with our knitting, Jeremy. We're -- we think we do LNG as good as anybody in the world, and we're going to keep it that way.

Got it. Makes sense. And then just want to see, I guess, you talked about the dividend level competitive with the S&P and the growth rate competitive with the S&P. But how do you think, I guess, normalized, what's the right type of payout ratio for the business? Where could it get to over time? Just curious how you think about that.

Jeremy, it's Zach. And I'd just say, today, we're not going to give too much long-term color on where that dividend will go. But let's say it's a little over 10% of our cash flow, what we're paying out. This will be over $300 million of dividends a year, right? And I'd say our peers are closer to 50% or more, and I'm not even sure that's going to be our goal long term. It will definitely go up over time, but it will really depend on what other opportunities we have to deploy that cash. So it could be additional growth like Jack mentioned. Obviously, we're always going to have a buyback program. But we'll definitely be able to grow it more so than a mid-single-digit growth rate after a few years.

Our next question comes from Sean Morgan with Evercore.

So when we kind of look at the slide for the repayments, so $1 billion a year, that's on a net basis, I guess, excluding -- or sort of net of the debt, the 50% debt, you'd be taking on for the Phase 3 expansion. So for Stage 3 expansion, where do you see the debt paydown priorities being? Is it -- are you going to be able to, I guess, build out a new facility, the debt cost will be commensurate with your existing cost so you're able to basically reduce your total, I guess, interest payments by kind of arming up between the new debt you'd be taking out for Stage 3 versus what you already have on the balance sheet?

Yes. I'll just say Slide 21 actually shows it pretty well that just with capital allocation, we're going to pay down $4 billion of debt. We've already paid down $500 million, so $3.5 billion to go. And then it's going to be around $3.5 billion of incremental debt to do $7 billion or so Stage 3, which will be funded 50-50 debt and equity. So while we are paying down debt, we'll also have probably a term loan with our bank group available to us to continue to fund Stage 3 50-50. And as you can tell, funding it just with 50% leverage is only 3x levered. So it's going to bring down the leverage over time as well. I can't really say year-to-year what the netting will be. But yes, we're technically going to pay down $4 billion of debt and maybe add a little over $3 billion of debt at the same time once we FID Stage 3 to build that with only 50% leverage.

Okay. So the debt you're paying down, I guess, we shouldn't think of that as a total $4 billion net reduction because that's not including debt that will be added because you're obviously going to need that 50% debt to build out the new capacity, right?

That's correct. In a 9-train case, we paid down $3.5 billion and we're under 5x easily. And then just by doing Stage 3, we'll be 50% levered on that, and we'll be even further under 5x just because it's going to be under levered. But yes, you're correct.

Okay. Great. And then EPC contractor for Stage 3, that -- I know you haven't announced FID yet, but are you already -- I mean, obviously, this relationship with Bechtel, but is that still an ongoing discussion that -- or is there like a horse that you've already kind of picked in that competition right now?

I feel very good, Sean, with our relationship with Bechtel that it would not be a problem or a headwind for us.

And our next question will come from Mike Webber with Webber Research.

Zach, my first one is for you. First of all, really helpful deck and most of the easy questions are taken, so it's mostly -- or addressed in the deck, so mostly nibbling around the edges here. But to your last answer and the concept, in general, of deleveraging and then versus kind of underleveraging or under levering Phase 3, and my angle here is trying to think about the impact that IPM contracts effectively have on your cost of debt and more aptly, the cost of debt across the space, is -- can you speak to at least early what that relative spread would look like between the debt you're retiring and then what you would budget for leverage on Stage 3 even with that 50% equity contribution? Is it meaningful? Or -- so I guess, are we looking at mostly a sequencing issue in terms of deleveraging and then still leveraging Phase 3? Just trying to get some insight into how you think about that.

Yes. I think it's sequencing. At some point, we'll do FID, and we'll have a term loan. And over the next 3.5 years, we're still going to pay down $3.5 billion of debt regardless. On top of that, we're going to fund $3.5 billion of equity to do a Stage 3 by overequitizing that. In terms of cost of debt, I mean, we just did an amortizing note due 2039, 12.5-year weighted average life at 2.74%. So we put out there in our run rate guidance anything that's refinancing is at 5% in the numbers just because we don't know where treasuries are going to go. But we're crushing that every time we do a deal, and there's no reason that we wouldn't with Stage 3. One, it's under levered. Two, it's IPM deals with investment-grade counterparties as well as DES and FOB deals at the same time, and it will be combined in a full Corpus project. So that's already a BBB- entity. So our debt costs are pretty straightforward, and we keep on showing [ new ] bond deals that are well inside that 5% level.

Yes. Yes. I'm trying to parse a really fine data point out of a blended number there, so I appreciate that. In terms of the commercial...

It won't be blended up, I'll put it that way. All we're [ doing is adding more diversity ], more counterparties to the project.

Yes. Fair enough. In terms of that continued commercialization of Phase 3, can you give a sense of what you think the contract structure likely looks like in terms of counterparties to be added and contracts to be added? Is it likely that we would see primarily IPM contracts added to that mix? And I know technically, CPC and PGNiG would still need to be assigned to Stage 3. Is it a fair assumption that both of those end up landing there or not?

Yes. I'll start and then Zach can speak to the potential contract structure. But in short, like capital allocation, we expect all of the above. It will be underpinned by long-term contracts. As we said early on the call, this midterm strategy has been very successful just a year kind of into implementation and has gotten us to where we want to be from a term contracted standpoint, but that firms up our portfolio. That doesn't, in our view, really build trains. So we need those long-term contracts, and we'll have those. And you've seen the IPM deals. You will see DES and FOB deals in there as well that will be long term to meet our metrics that we've laid out for you.

And in terms of the assignment of contracts, we have a CPC contract and a PGNiG contract. Both, obviously, very creditworthy and large that aren't assigned to either Sabine or Corpus. A safe assumption is one will go to each. That's the safe assumption. And we've committed to adding another investment-grade contract to Sabine around the time it reaches completion on Train 6. So we'll provide more color on that probably early next year.

And moving on to Julien Dumoulin-Smith with Bank of America.

This is Anya stepping in for Julien here. I guess, first, I wanted to ask, on this $600 to $700 a tonne estimate for Stage 3 CapEx costs, could you maybe just provide some more color on what that's based on? What gives you comfort on that estimate? And then any potential breakdown of those costs: steel, labor, et cetera? Just wondering because of the cost inflation pressures.

Anya, thank you. In the future, you can feel free to put your name on the board for us. The $600 to $700 a tonne, we've had 2 different engineering companies do the engineering work and the FEED analysis for us. So all of that FEED work has been done. Those numbers are hard numbers that we have gotten from both firms. We have a relationship with Bechtel, so we have leaned that way pretty heavily. And I feel those numbers will be sustainable even in today's environment. But as far as cost breakdowns, I'm not sure, at least not under my watch in the last 5 years, that Cheniere has ever done that and given you a cost breakdown. We've hit all of our numbers. So I'm not sure why anybody wouldn't believe us at this point, especially since we have 9 very large trains under our belt. And the way I view it is this is really just 2 more trains. So this will take us from 9 to 11 by a [ tonnage-driven ] capacity perspective. So I feel very comfortable that we are not under promising or overpromising and under delivering.

Okay. Great. And just as a follow-up here, I recognize this is a capital allocation call, but just wanted to ask about 2022 EBITDA. Is -- are you able to talk about expectations there as much as you're able to? Just maybe more specifically on that, what kind of uplift could you see from the spot price rally? Because I know historically, I think -- I believe you've said you've had typically like 200 TBtu of marketing volume exposure. Does this seem reasonable today? Or could it be potentially lower or maybe even higher with recent shift in timing of [ some projects ]?

Yes. I think we -- I guess we announced today, too, that now with all the work that Anatol and his team have done on that midterm strategy and some of the long-term deals we've locked up, that we're 90% through the mid-2020s. So that leaves around 10% left, which is around 200 TBtu. And you can imagine that the team over in London is awfully busy putting cargoes away next year as much as operationally feasible, right? We have a train coming online. We'll be in commissioning. It's a year early, so a large portion of our open capacity will be part of Train 6. So as we get more and more comfortable with the timing of that completion, which we obviously are because we brought it into Q1 now, we'll be firming up as much as possible because we're clearly well above our $2 to $2.50 per MMBtu run rate range for CMI or open volumes. So you can imagine, we're awfully busy trying to firm that up. We won't be at 100% ever because that's not operationally prudent, but we'll try to get above 90% by the time we give you true guidance in November after we go through our budget.

And we have no further questions in queue. I will now turn it back over to the management team.

Yes, this is Randy. Thank you, everyone, for joining us. If you have any further questions on what we presented this afternoon, please feel free to reach out to us. We're always available, and we'll talk to you again next time in November. Thank you.

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.