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

Good day, and welcome to the 2022 Cheniere Capital Allocation Update. Today's conference is being recorded. At this time, I would like to turn the conference over to Randy Bhatia. Please go ahead.

Thanks, Jenny. Good afternoon, everyone, and welcome to the conference call and webcast to discuss Cheniere's updated 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, Executive 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. 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 our 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. Thanks for joining us today on short notice. We have a lot to cover, and we are pleased to present our new comprehensive long-term capital allocation plan as well as another significant increase to our 2022 guidance. I hope you've had a chance to read our press release from this afternoon and the associated slide presentation. It was almost exactly 1 year ago today that we hosted a similar call announcing our all of the above long-term capital allocation plan. Over the past year, we have executed on that plan aggressively. And like our success in delivering our LNG projects ahead of schedule, we have done just that in terms of capital allocation. The plan was intended to be executed over the course of multiple years, which Cheniere's focus on execution and operational excellence as well as a rising commodity market has resulted in our accelerated completion of our initial financial goals. It is that success that enables us to be here today to provide a revised capital allocation plan which further reinforces our long-standing capital allocation priorities, maintaining a long-term sustainable balance sheet, providing meaningful shareholder returns and enhancing shareholder value through disciplined growth. Please turn to Slide 5. We have built Cheniere into an unrivaled U.S. LNG platform with scale and reach that is truly global. We've invested over $40 billion across our facilities and own and operate the second largest liquefaction platform in the world, representing over 11% of the total LNG market. Our seamless operations have now produced close to 2,400 LNG cargoes, and we have been -- which have been received by 37 countries and regions worldwide. Cheniere's delivery flexibility has never been more important than it is today, as it has enabled more LNG produced by Cheniere to reach Europe in the first half of this year than from any other producer in the world. Most of that volume is directed by our over 30 creditworthy long-term counterparties, which span the globe from right here in the U.S. to Canada, Europe and Asia. This diverse set of customers look to Cheniere for secure, flexible and reliable LNG supply in support of their economic and environmental priorities. As an organization, we pride ourselves in safe, reliable and predictable operations. Now please turn to Slide 6. Our ability to earn and maintain the trust of so many counterparties around the world is founded on our operational excellence at Cheniere. We deliver on our promises. Since starting operations in 2016, we have set the standard for operational excellence, which benefits all of our stakeholders: Our customers, investors, value chain partners and all parties in between. Our track record is a testament to the Cheniere workforce I'm proud to lead, where a safety-first culture and a tireless dedication to performance every day strengthens our position as a premier LNG company in the U.S. Seamless operations helped form the foundation upon which Cheniere is built. And our operating performance has enabled us to outperform on capital allocation. Turn to Slide 7, where I will briefly recap all that we've accomplished under the key pillars of our 2021 plan. In terms of strengthening the balance sheet, we completed our target of $4 billion in debt paydown. On shareholder returns, we're over halfway through our 3-year $1 billion share repurchase authorization. And we have paid our inaugural $1.32 per share in dividends. And of course, on accretive growth, we reached FID on Corpus Christi Stage 3 in June, a homerun project for Cheniere and our stakeholders, which further validated the disciplined capital investment parameters, which guide our project development activities. While our outstanding financial results certainly helped enable our accelerated progress on these priorities, we could not have achieved these successes without the team's execution across the entire company. Cheniere is truly firing all cylinders and what I like to say is Cheniere's 1,500 professionals work in dog years. Turn now to Slide 8, where I'll touch on the commercial momentum. This year, Cheniere signed long-term contracts that amount to over 180 million tonnes of LNG to be delivered through the year 2050. This volume is a combination of long-term FOB, DES and IPM agreements that were signed with all types of creditworthy counterparties from across the globe, including utility end users, portfolio players, super majors and natural gas producers from North America. Our customers in the global LNG market value the flexibility and reliability of the Cheniere product, particularly today as energy security has never been more critical. Last week, I was in Italy for the Gastech Conference and then Brussels for meetings with the European Commission. And the value and criticality of Cheniere's product was a central theme the entire week. Our origination team's ability to continually innovate and construct commercial solutions custom tailored for our customers is one of Cheniere's clear competitive advantages, enabling the successful commercialization of Corpus Christi Stage 3 and setting the stage for additional growth of our platform across both Corpus Christi and Sabine Pass. We've come a long way from the original 12 counterparties that launched Cheniere's LNG platform close to over a decade ago with over 30 foundation customers and term customers today. Please turn to Slide 9. At Cheniere, we believe we are just getting started. While our current platform may seem big to some, we intend to make it bigger on a financially accretive basis. Currently, we operate 45 million tonnes across Sabine and Corpus, which is growing to over 55 million tonnes with Stage 3. We have begun the permitting process for 2 additional Midscale Trains at Corpus, which together with some debottlenecking is expected to bring the total capacity of our platform to approximately 60 million tonnes. These expansion projects are the low-hanging fruit as it satisfies construction, operations and financial optimization. Over the longer term, we see line of sight to growth projects at both sites which could bring our total capacity to approximately 90 million tonnes per year or double our size today. Financially disciplined growth is a guiding principle of our capital allocation, and we will maintain that discipline as we continue to develop organic growth projects. Turn now to Slide 10, where I will introduce Cheniere's Capital Allocation Plan 2.0. This plan is a result of us reaching a new cash flow inflection point and is reinforced and builds upon the same guiding principles as last year's plan, albeit with much bigger numbers, as Zach will go over shortly. First, on the balance sheet. Our priorities are to achieve and maintain sustainable investment-grade metrics. We will continue to pay down debt to improve the resiliency of our leverage profile, enhancing Cheniere's long-term flexibility through commodity cycles. Our goal is to make our balance sheet bulletproof for the cyclical nature of the LNG industry. Second, with respect to shareholder returns, we are augmenting both our share repurchase program and the dividend by recalibrating the allocation to shareholder returns from excess cash flow. Our Board of Directors has approved a significant increase to both the share repurchase program and the dividend, furthering the principle of meaningful and sustainable shareholder returns via both of these programs. And as I mentioned on growth, we will continue to pursue and develop value-creating opportunities, leveraging our infrastructure position in many competitive brownfield advantages to further build upon our world-class platform. We will do so with the same rigor and discipline that has guided us to date to ensure we create long-term shareholder value in the future. This long-term plan is empowered by our incredible success and designed to secure the company's long-term sustainability, provide for significant shareholder return while enabling financially disciplined growth and positions Cheniere as a fundamental investment in any energy investment portfolio. Before I turn the call over to Zach, I'd like to thank our employees as well as our commercial and financial partners for their dedication and support through the years to enable us to be in a position to make these transformational announcements today. Zach, the call is yours.

Thank you, Jack, and good afternoon. I'm happy to be here today with Jack, Anatol and Randy to review the incredible last 12 months and unveil and update to our long-term capital allocation plan starting with Page 12. Just 1 year ago, we unveiled a comprehensive all of the above capital allocation plan supported by the long-term cash flow profile of our business. Little did we know back then that our 4-year plan would be effectively complete in just 4 quarters. The 4 main pillars of that plan consisted of debt paydown, an inaugural dividend, an upsized share repurchase program and, of course, more accretive brownfield liquefaction growth. Our first commitment was to a long-term sustainable balance sheet and we committed to at least $1 billion of consolidated debt paydown annually for 4 years. Earlier this quarter, we surpassed $4 billion of debt repayment, just 1 year into the 4-year plan. Second, we restarted our share repurchase program in Q3 2021 and extended that commitment with a reloaded $1 billion authorization. To date, we've deployed over half of the program, reducing our share count by approximately 5 million shares. Third, we initiated a quarterly dividend at LNG of $0.33 per share, or $1.32 annualized, having originally targeted a yield that was in line with the S&P 500. We have reached the 1-year mark having paid out 4 consecutive quarterly dividends and look forward to maintaining a stable and growing dividend for our shareholders into the future. Lastly, we reinforced our commitment to financially disciplined organic growth. In June of this year, we announced positive FID on Corpus Christi Stage 3, a project that hit every single one of our disciplined capital investment parameters, officially kicking off Cheniere's next phase of growth. Our ability to design and then surpass the goals of the original capital allocation plan is the result of our operation's excellence and asset positioning within the unique market conditions that have developed since last year. As a whole, we believe this plan has already delivered a compelling enhancement of the Cheniere platform and has created significant long-term value for all of our investors. Turning now to Page 13. Before I get into what our updated capital allocation plan entails, I will provide some more detail around our fourth significant increase to 2022 guidance. We are increasing the midpoint of our guidance ranges for full year 2022 consolidated adjusted EBITDA and distributable cash flow, each by approximately $1.2 billion, bringing expected EBITDA to $11 billion to $11.5 billion and DCF to $8.1 billion to $8.6 billion or over $30 of cash flow per share. Though this has already been a transcendent year for Cheniere, majority of today's increase is due to timing of certain cargoes sold around year-end that are now forecasted to contribute to 2022 EBITDA rather than 2023 as the bulk of our open cargoes continue to get redirected for delivery into Europe versus Asia, which shortens the voyage time. Then the sustained higher margins on open cargoes also contributed to the raise. In addition, our forecast has improved due to other contributing factors such as an additional cargo worth of forecasted production, improved lifting margin with higher Henry Hub prices and overall portfolio optimization. With respect to the EBITDA sensitivity from here, though we have sold much of our total expected production for this year, we still have more or less a similar sensitivity for 2022 open cargoes as we did in August with recent fixed margin sales offset by cargoes coming into '22 from '23 as well as the additional cargo of production. And considering how almost $1 billion of EBITDA can shift from 1 year to another, just based on cargo delivery and in-transit timing at year-end, and the fact that financially trading to lock-in margins for further out in the next couple of months is challenging in this environment, we intend to shift the timing of providing the 2023 financial guidance into Q1 in order to let the dust settle on this banner year first, which will also align our annual guidance timing to be more consistent with the majority of midstream energy. However, to still give folks some insight into 2023, we do intend to provide in November a sense of how much of our approximately 45 million tonne portfolio is currently locked in on a long-term basis for '23 going into the year as well as any major CapEx funding assumptions with Stage 3 in particular, as those items won't be affected much by timing or the market volatility. So as I said on the second quarter call, 2022 continues to prove the power of the Cheniere platform and what can be accomplished when operational excellence and seamless execution are achieved against an elevated commodity backdrop. Thanks to our team's relentless focus on safety and reliability at both of our facilities, we continue to outperform expectations with respect to operational performance and financial results, which enables our ability to unveil such a compelling update to our capital allocation today. Turning now to Page 14. The operational excellence that has powered our significantly accelerated execution under the original capital allocation plan together with a strong long-term contracted profile of our business provides us with 20/20 Vision for this next plan. Today, we have clear line of sight to generate over $20 billion of cash through 2026 in Stage 3 construction and position Cheniere to achieve run rate DCF per share of over $20. Both of these figures represent significant increases over what we presented to you last year and demonstrates the substantial value proposition that Cheniere continues to offer investors in the years ahead. Turning now to Page 15. As a result of the seamless execution, optimization of our operations and an elevated commodity backdrop, we have both revised our 2022 guidance upwards and also seen significant incremental cash flow generation through 2024, the time period used for last year's original capital allocation plan. As a result, our available cash through 2024 has approximately doubled from the $10 billion figure that we showed you last September to over $20 billion today. And then after consideration for the approximately $5 billion of committed spending under the September 2021 plan, we anticipate we will still have over $15 billion of remaining available cash through 2024 for deployment. Adding the expected incremental cash generated in 2025 and '26 to get to Stage 3 completion, we forecast again over $20 billion of available cash through 2026 for deployment in today's outlook which brings us to our balanced capital allocation philosophy that is centered on meaningful and sustainable shareholder returns while also positioning Cheniere for the future. We expect to return approximately 40% of the available cash to shareholders through increased dividends and share repurchases, which on a free cash flow basis after our growth CapEx ends up over 50%. Approximately 1/3 will then be directed towards continued debt paydown to fortify the balance sheet with the remainder allocated to more accretive financially prudent growth. Turning now to Page 16. Of the over $20 billion of available cash that we expect to have through 2026, approximately $3 billion will be used to fund the remaining equity needed for Stage 3, while an additional approximately $1 billion per year will be budgeted to fund other growth including, but not limited to, the incremental growth at Corpus Christi, debottlenecking, ESG and other project development opportunities at SPL and CCL that may present themselves in the coming years. In addition, approximately $2 billion will be allocated to our dividend that we are announcing today, we will be stepping up this quarter while also increasing our annual growth target through construction of Stage 3. After consideration of the growth funding and increased dividend, we still expect to have over $10 billion of remaining excess cash available to deploy for debt paydown and share repurchases. However, that excess cash available number will remain flexible as we will be contingent on the ultimate marketing margin secured on our open capacity as well as whether additional growth opportunities present themselves over time, which may decrease and/or increase that over $10 billion figure through 2026. But now that the initial rightsizing of our balance sheet has been completed through an approximate 4:1 split of debt paydown to share repurchases, going forward, we are targeting a balanced 1:1 ratio on our excess cash flow. This re-rating will still afford us substantial deleveraging with the ability to target long-term leverage of approximately 4x while simultaneously enabling a significant increase in the shareholder returns in the form of an incremental $4 billion 3-year share repurchase program and an increased dividend. And as we complete the upside share buyback program in the coming years, we hope to institute additional buyback programs through this 2026 time period to continue to be efficient and opportunistic with the excess funds that are allocated to shareholder returns. Turn now to Page 17. Building on the success of last year's capital allocation, our updated capital allocation 2.0 consists of the same 4 main pillars: debt paydown, share repurchases, dividends and accretive growth. With the initial step change to our balance sheet complete, we now target achieving a through-cycle investment-grade balance sheet with consolidated run rate leverage of approximately 4x, accomplished by deploying half of our excess cash flow over time after dividends and growth to debt paydown. As previously mentioned, Capital Allocation 2.0 will provide significantly enhanced shareholder returns via an incremental $4 billion of share buybacks and a significant step up in the dividend and expected growth rate. It's worth noting that while the share repurchase program upsize for the next 3 years is for $4 billion or approximately 10% of our current market cap, there is potential for further incremental share repurchase authorizations once the current plan is completed. As I just indicated, we will be increasing our annualized dividend by 20% from $1.32 per share to $1.58 per share, while also targeting 10% annual growth through Stage 3 construction a sizable increase to the mid-single-digit guidance last year. Not only do we believe that growth rate puts us among the top quartile of the S&P for dividend growth, it positions Cheniere to achieve an approximate 20% payout ratio upon run rate of Stage 3. The final pillar to capital allocation and core to the balance and flexibility of the plan is growth. With the announcement of Stage 3 FID complete and construction underway, we remain relentlessly focused on timely execution of the project and bringing it online as safely and quickly as possible. At the same time, we are looking forward to the next phase of growth in the form of the pre-filed Corpus Christi Midscale Trains 8 and 9 expansion, which combined with some debottlenecking would grow Cheniere's LNG platform to approximately 60 MTPA. The momentum for this growth can be seen through the various contract announcements over the summer tied to additional capacity at Corpus. In addition, as Jack discussed, we're in various stages of development on longer-term expansion projects at both Corpus Christi and Sabine Pass that could grow the platform by another 50% to approximately 90 million tonnes. Turn now to Page 18, where I'll reinforce a few points. First is to establish where we view Cheniere's leverage in context of next leg of debt paydown. We are targeting an investment-grade balance sheet on a through-cycle basis beyond the current commodity environment. This means achieving go-forward targeted run rate leverage of approximately 4x, reflecting long-term CMI margins of $2 to $2.50 per MMBtu. Additionally, through cycle goes beyond commodity cycles, as it also includes maintaining investment-grade leverage levels during periods of growth, such as Stage 3 construction. As the leading natural gas purchaser in North America, and second largest global LNG operator, we believe the strength and flexibility of our balance sheet is and will continue to be a competitive advantage for us operationally, commercially and strategically as we continue to offer not only FOB long-term SPAs, but additional DES and IPM contracts as well. And we believe the achievement of investment-grade ratings across the Cheniere family will only serve to augment those advantages. And then our goal to provide steady and meaningful shareholder returns is supported by the dividend which will see a sizable onetime increase by 20% this quarter, followed by elevated growth of approximately 10% per annum throughout the build out of Stage 3. With this growth trajectory, over time, the dividend will become a more impactful base contributor to Cheniere's shareholder returns. The $4 billion upsize in the share repurchase program will also enhance shareholder returns during this dividend growth period with the 2 together providing significant and sustained returns to our long-term shareholders. Finally, our commitment to financially disciplined growth remains steadfast. It's worth noting that Stage 3 meets all of our investment parameters, a standard and rigor consistent with how any additional growth will also be pursued. Turn now to Page 19. A year ago, we told you we were targeting consolidated leverage of 4.5 to 5x to achieve investment-grade metrics. Today, even with a rock-solid contracted profile, we're reducing our targeted long-term consolidated leverage by almost a full turn. We are to around 4x, thanks to the improved cash flow and outlook that will allow us to further fortify all of our capital allocation goals. We are, therefore, reiterating our commitment to definitively reaching investment-grade credit ratings across the Cheniere complex in the near future and securing those ratings with ample headroom by getting to and staying at around 4x level on a long-term basis. To reiterate, our leverage metrics are based on a long-term through-cycle approach and size based on margins that are modest in today's market. Cheniere's trailing 12-month leverage as of the second quarter prior to any of the debt paydown completed this quarter is 3.5x, and we anticipate reducing that to well below 3x by year-end. Overall, we believe our disciplined balance sheet management in addition to our contracted profile highlighted on the page, which is in the class of its own, will allow us to achieve IG ratings across the Cheniere complex in the near term and more than maintain those ratings through future cycles. Turning now to Page 20. Since 2019, we have repurchased approximately 50 million shares via the opportunistic redemption of 2 convertible notes and share repurchases completed prior to Q4 2021. Between the shares repurchased under the $1 billion share repurchase program authorized last September and the $4 billion upsize we are announcing today, we believe we can reduce the share count by an incremental approximately 30 million shares. We also believe we should have the opportunity to further reduce our run rate share count over time with future authorizations through 2026 to around 200 million, approximately 33% lower than our original run rate share count from 2019. And despite recent changes in legislation, we believe share repurchases remain a flexible avenue for shareholder return while further increasing DCF per share potential. Our upsized share repurchase program will continue to provide the opportunity to enhance baseline shareholder returns while also being more opportunistic and even more aggressive during market dislocations. Turning now to Page 21. Last year, we announced the inaugural dividend of $1.32 per share with a target growth rate in the mid-single digits, which allowed us to prudently allocate a majority of our capital to debt paydown and pursue growth via Stage 3. Both of these goals have been achieved providing greater vision for the years ahead. Today, we announced both a step-up of the dividend by 20% to $1.58 per share annualized for the third quarter and an increase in our annual growth target to approximately 10%. Together, these enhancements will position Cheniere to reach an attractive payout ratio of approximately 20% by the completion of Stage 3. The meaningful increase to our dividend this quarter and upwardly revised annual growth rate target still provides us most importantly with the financial flexibility to pursue all of the capital allocation objectives we are laying out here today for you and into the future through cycles. Turn now to Page 22, where we will cover the final pillar of capital allocation that underpins how we have thought through the balance and flexibility in the planned growth. Stage 3 at Corpus Christi reached positive FID in June and will add over 10 million tonnes of LNG capacity per year once completed. Stage 3 enjoyed brownfield project economics as it will utilize a significant amount of shared infrastructure constructed as part of Corpus Trains 1 through 3 and making it a tremendous organic growth project for Cheniere. On future growth projects, both near term and longer term, we will maintain our discipline to ensure the risk and return profile of those opportunities consistent with that of the first 55 million-plus tonnes we've reached FID with equity funding coming from internally generated cash flow. 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 to ensure credit accretion as well. Currently, we expect Stage 3 to add between $1.1 billion to $1.2 billion of EBITDA per year. With the Pre-Filed Midscale Trains 8 and 9 expansion project plus CCL debottlenecking opportunities, adding roughly another $400 million of EBITDA per year under reasonable assumptions today with respect to the LNG market, project costs and execution. Page 23 concludes the overview of the capital allocation plan with what we believe our 20/20 Vision can accomplish to further enhance Cheniere's long-term value proposition for all stakeholders. Starting on the left, with our original 9 Train run rate scenario and moving to the right to reflect the run rate impact of Stage 3, the impact of capital returns and then finally the impact of incremental growth beyond Stage 3. Through the deployment of over $20 billion of available cash through 2026, we anticipate reaching the ultimate price of over $20 of run rate DCF per share at CMI margins of $2 to $2.50 per MMBtu. We believe our 20/20 Vision further enhances and fortify Cheniere's balance sheet and financial foundation, represents an attractive return of capital to shareholders, all while enabling the disciplined and accretive growth of the Cheniere platform. 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.

[Operator Instructions] And we will go to our first question at this time from Jeremy Tonet of JPMorgan.

Looking forward to the annual capital allocation update. Hopefully, a great another message next September. But maybe just starting off here with regards to the 4-year plan. I was wondering if you could help us think through a little bit more of the assumptions baked in as it relates to the LNG commodity price expectations. Now granted 95% hedged for some time now means it's not a lot open, but I want to think of what pricing you're using in your assumptions there, particularly as it relates to 2025, 2026.

Go ahead, Zach.

Yes, sure. Jeremy, it's Zach. What I would direct you to is you can actually see in the appendix of the presentation, we showed the curves. And that's what's difficult about getting guidance ever is the fact that the curves are so volatile. But the curves in the back is a snapshot of what we are seeing when we devised the plan. But you could tell strategically, we're not breaking it out year-by-year what the available cash flow is, and we're not giving you the exact number over $20 in terms of the available cash. But that's basically it. And as I said before on previous calls, we're about 95% contracted for the next decade. But the next year or so as the rest of the contracts for the first 9 trains come online, we have some that come online in the middle of next year, late next year and even a couple that start in the beginning of '24. So there's a good amount of open capacity next year that at these levels that are over $30 in terms of the netbacks -- the U.S. netbacks are pretty meaningful. So yes, we tried to give you a little guidance in the back with where we saw the curves at this moment. But again, that's why the plan is so flexible that if margins go up, there's going to be even more excess cash to deploy. And if not, yes, maybe it will be closer to $10 billion instead of over $10 billion.

Got it. That's very helpful. So as we think about, I guess, EBITDA for next year, and you're not giving guidance here, but it seems like next year EBITDA could shape up to be similar to this year. And so just wondering if there's any rules of thumb or anything you can provide us with as far as open capacities next year relative to this year or other ways we can think about how '23 might line up compared to '22.

Sure. So one thing I'll note is with the $1.2 billion increase in EBITDA guidance today for '22, a majority of that was literally timing. In previous years, cargoes have been in transit over 2 years' eve, and that's mainly going to the Far East. But with all those cargoes at the moment being redirected to Europe with what we sold, we have more cargoes coming into this year and having shorter voyages, right? So with over -- I mean half of that $1.2 billion just being timing, that takes away from '23 guidance and why it makes it a little difficult to guide you exactly on where we'll be when we officially provide you guidance early next year. But a rule of thumb, with 45 million tonnes operating portfolio prior to Stage 3 and just assuming 10% open capacity or 5% to 10%, that's like 100 to 200 TBtu open. So that would be 100 million to 200 million per dollar move based on that open capacity in that range. So that's probably the best I can give you. And clearly, margins are well above even $30 next year at the moment. So you can see that we're definitely going to be able to have a good shot at beating the run rate guidance again next year.

And we'll go next to Marc Solecitto of Barclays.

Maybe just to start, can you walk through the considerations on how you arrived at the $1.58 dividend level? And then you also upsized the buyback authorization by $4 billion, have another roughly $0.5 billion available on the existing authorization. And then assuming 50-50 allocation to further debt reduction, it kind of gets to $1 billion to $2 billion of excess available cash through '26, if my math is correct. So I was wondering if you could walk through how we should think about that remaining bucket?

Sure. So I'd direct you back to the presentation. So how it's going to work is look, we're going to have a certain amount for Stage 3. That's already baked in. The dividend, that's baked in as well with the guidance we gave you. But not only we're increasing it by 20% today, but we're going to grow it by approximately 10% for almost 4 to 5 years, and that will get us to around a 20% payout ratio. And then the rest of the money is going to be split based on a 1:1 ratio between buybacks and debt paydown. And as I mentioned in the prepared remarks, the $4 billion for the buyback, that's not all of the excess cash we see through 2026. And let us make a meaningful dent in that next $4 billion of buybacks on top of the rest of the $1 billion program that we haven't deployed yet and we'll probably be increasing the buyback program again before 2026. So we're really going to be efficient with the cash. And the best guidance we can give you today is that we've set up a mechanic that if there is excess cash over time, we're going to deploy it 1:1 to debt paydown to get to 4x and then to share buybacks to continue to boost that DCF per share run rate.

Got it. That's helpful. And then on the 60 million tonnes of run rate production, including incremental growth referenced in the deck, can you just talk about what that assumes around debottlenecking? And it looks to imply roughly 2 million tonnes. And then if you execute on growth beyond Stage 3, does that potentially open up additional debottlenecking within the context of your authorization for up to 5.5 million tonnes per train?

Yes, I'll handle that one, Zach. So with the trains, as you know, we pay Bechtel for not only for schedule and cost but also for performance guarantees. So what we found is there's always a level of additional capacity that Bechtel is designing in their trains and that my staff has been able to get out of the trains. And when we look at the percentages, we've increased our production -- guaranteed level of the production by already 12%, and I would expect that to be the same as some of our other trains or new trains that come online.

We'll go next to Matt Taylor with Tudor, Pickering, Holt & Co.

I wanted to go back to the dividend and your comments around the growth rate looking compelling. But in terms of absolute yield, it's still well below midstream peers. So I'm just trying to get a handle on your contracted cash flows going to be more than 90%, very strong payout ratio, lower leverage target, and you're going to have that $10 billion as you're talking about back of allocating it in various ways. So why don't make your dividend yield more compelling versus peers out of the gate here and even compare to S&P and then layer on the growth?

Sure, I'll take that one. And I think I'll make clear is we're really just not going to be focused on the yield, and we're trying to grow into a healthy payout ratio over time. And if you look at the S&P 500 and payout ratios around 20% or so, that's where we're getting ourselves to by increasing the dividend by 20% today, committing to already 4 to 5 years of 10% growth and then being able to do all these other parts of the capital allocation plan. And I think it comes back to just priorities. Clearly, when we have the opportunity to pursue growth like Corpus Stage 3 and Midscale Trains 8 and 9 and the debottlenecking that will come with that, we're all in, and we need the flexibility to have billions of dollars ready to deploy to do so. And then on top of that, we have a great opportunity here to right size the balance sheet to a level that gives us even headroom with investment-grade ratings for the long term. And then on top of that, we have the buyback program. We're finally at a point where we can have a truly meaningful buyback program. That's around 10% of the market cap. And we see that as a huge opportunity to think about once we get to 2026 and a run rate for 20, 30 years that we can be at $20 plus per share. So then after all that, we look at the dividend and thought we could be this aggressive with it while we're maintaining all the flexibility that we seek for those other pillars. So it's really just a balancing act, as Jack mentioned earlier.

Yes. And I would just add, Matt, that we look at total shareholder return. I'm not big on just pure dividend yield, and we have a significant amount of organic growth left in this business. So I want to make sure that we can continue to deliver on all cylinders.

Yes. Yes, that makes sense. And as a follow-on, if you're still thinking about that, a comparative dividend versus S&P with a better balance sheet and now a dividend, have you had any conversations with S&P about that mark-to-market accounting issue that's preventing you from being included in the S&P 500?

No, I wouldn't say we've directly spoken to them. But again, we just showed a print in the quarter even with an unrealized derivative loss on those IPM deals of over $700 million in Q2. And it's just going to come with time. At the rate we're going and the amount of money we're making, we're going to easily have positive net income before more unrealized derivative moves. And at the same time, we're going to get to investment grade as well. So the hope is we're going to have 2 really nice milestones and getting to investment grade and getting into the S&P 500 no later than some point in 2023, and we look forward to seeing that.

We'll hear next from Sean Morgan with Evercore.

So I was just thinking about the CCL Midscale T8 and 9. So if I'm looking at this correctly, then it'd be about 5 MTPA that you're contemplating for those, based on that chart on 9. So you already have, I think, 3 MTPAs signed up with SPAs contingent on some form of FID. So if you file for the preapproval, what's the earliest that you think the government would approve that? And do you view 3 out of 5 as being effectively fully subscribed in terms of the desired offtake?

Yes. Sean, you're a little high on the 5 as far as the guaranteed design. It's probably closer to 3.5 in total and then the rest will come from debottlenecking. So just to clarify with that. So we are fully commercialized for those trains for trains 8 and 9, and we're ready to run. We think it checks all the boxes for governmental review. But as it typically has, it usually takes a couple of years before you get full permits to proceed. But you should expect us to do what we've always done, which is make sure that the groundwork is done and we're ready to roll as soon as we get the authorization to proceed so we're not being delayed and we can just move. The idea is to make sure that Bechtel is always busy and that every 4 to 6 months, there's another train being started up.

Okay. And then as you kind of look to the longer term on the right-hand side of that chart on Page 9, are you guys seeing increased sort of pencil sharpening by the Europeans to sort of get back into this market and start signing up kind of beyond the flow of SPAs we've seen so far in '22. Is that like coming soon, would you say?

We already have a good contingent of Europeans. We have -- as you know, besides the first 11 foundation customers, we were able to add Equinor and ENGIE back into the fold. We've had some good conversations there with the Europeans. And there, I would say, I felt very warmly received by the European Commission for everything that we're trying to do now. But I think ultimately, it takes two to tango. So when you have them building regas terminals, they're going to need to have supply at the end of the day. And I think we're very well positioned to meet their demands.

And we'll go next to Michael Blum of Wells Fargo.

I wanted to talk about the $4 billion of incremental growth spending that you outlined on, I think it's on Slide 16. If I look -- if I understand it correctly, on Slide 22, you're saying that's going to generate an incremental roughly $400 million of EBITDA. So I just want to make sure I'm understanding that correctly. And if that's true, is that just a function of inflation or is something else going on there?

Yes, that's not exactly true. So when we think about stage -- growth beyond Stage 3, so Midscale Trains 8 and 9, that's going to be back to the same type of cost that we've had before, which is like that $600 to $700 a tonne. So that's going to add up to, I don't know, say, a little over $2 billion. So let's say, just over half of that $4 billion budget. And what we're saying there is that, look, we can do Stage 3, we can do Midscale 8 and 9 and still budget $1 billion a year and still have all this money to invest in the dividend as well as buybacks and debt paydown to get to those targets. So part of that is just budgeting. But 8 and 9 on Midscale, yes, that's going to be right around the same cost. So the rest is going to be development, getting us ready for future expansions beyond that and any other things that we can do on the debottlenecking side.

And we'll go next to Chris Tsung of Webber Research.

I wanted to ask about how pricing has trended on a term basis from the start of the year. Obviously, not all deals are up, that happens. But prices started to rise. Are they still being weighed down by some more [indiscernible].

Chris, you're really breaking up. Can you repeat the question?

Yes, sure. Can you hear me better now?

Yes.

I wanted to just ask about how pricing has generally trended throughout the year since the start and not apples-to-apples, but just wanted to get a sense if they're still being weighed down by some greenfield discounters.

Our long-term pricing versus a short-term pricing?

Right.

Because the short-term market is based off of press releases basically, and the weather is what's driving that amount of volatility right now. But on the longer term, I'd say, Chris, we've been very successful negotiating for a premium to, I think -- as we mentioned, most of our customers recognize that our operational excellence, our reliability comes at a cost. And they're building infrastructure, and they need to ensure that they have the cargoes for the LNG to go with that infrastructure, and they're willing to pay us a premium to what some of the other folks that aren't in the business are trying to offer.

Okay. And just as a follow-up for Midscale 8 and 9, it looks like in the letter, the construction date starts in 2024 and has a 2031 in-service date. I just wanted to get some color on the duration of construction for these 2 trains. It looks like it's around 7 years compared to what we're expecting for Stage 3 with 7 trains.

Did you say it looks like it's 7 years for construction of the 2 trains?

Yes. Sorry, is this better?

It's just an end date, Chris, on the permit. So the way the permits work is the government, FERC in this case, will give you an end date of when the trains have to be in operations. So you shouldn't read too much into that date.

I see. So it will be well within 2031?

That would be our plan, yes.

We'll go next to James Carreker of U.S. Capital Advisors.

Just maybe a dumb clarifying question. But when you talk about cash available through 2026, I guess is the start year on that '22, '21, just to clarify?

So yes, this is Zach. So it's starting now. We have some cash still on the balance sheet even after completing the $4 billion debt paydown original goal. So it's not really any cash generation from 2021 or earlier this year. It's what we have left on the balance sheet today and DCF going forward through '26.

Okay. Because I was just doing some back-of-the-envelope math with the '22 DCF and then kind of even just the 9 train DCF of $2.8 billion a year that gets you pretty close to the $20 billion. So I mean -- okay, that clarifies it a little bit. But I guess, is it fair to say this still assumes a fairly conservative outlook on marketing margins beyond '22?

Well, it would if we were only going to get around $20 billion of available cash. But as we directed you all to, it's over $20 billion. And once you take out Stage 3, you take out even $1 billion of growth a year, including Midscale 8 and 9, and you take out the dividend, there's over $10 billion. So yes, this is assuming that we can beat $20 billion. And if we don't beat $20 billion, that's because margins come down pretty dramatically.

And our last question comes from Jason Gabelman with Cowen.

I wanted to go back to the $4 billion of kind of other growth spend that you bucketed. You mentioned ESG and other development opportunities. Can you elaborate on what that is just broad strokes and the potential for that to generate additional earnings?

I'll go first. Basically, it's above and beyond. So first off, Midscale 8 and 9 is going to be over half of that. And then -- and that means we can equity fund the whole thing. And then on top of that is we're trying to literally double the portfolio from today over time. So there's going to be meaningful development work going on at Sabine and Corpus as we think about future expansions. And then on the ESG front, whether it is investigating carbon capture or other parts along the value chain that can make us more and more environmentally competitive over time, that stuff we're also investing in. So it's kind of a mix of a bunch of things. But when you account for just Midscale 8 and 9, that's a large portion of it and then we will spend significant development dollars to see if we can double this company.

Got it. I imagine you've been looking at carbon capture at least for the past little while with the IRA. Does it make it attractive? Does that make sense as something for you to invest in and capture that credit value?

Jason, this is Jack. And yes, that's something that when I was going around Washington before the IRA, we had signaled that $85 a tonne would be -- would go a long way to help us be more competitive on carbon capture. There's a lot of other things associated with that, though, that you have to get comfortable with. But as Zach mentioned, we're doing all the engineering work upfront and the geotechnical work that you would expect us to do.

And at this time, I would like to turn the call back to Jack Fusco for closing comments.

I just want to thank all of you for your support and your time tonight, and we hope to see you all soon. Thank you.

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