Cheniere Energy - Q2 2023

Transcript

Operator (participant)

Good day, Welcome to the Cheniere Energy Second Quarter 2023 Earnings Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Bhatia. Please go ahead, sir.

Randy Bhatia (VP of Investor Relations)

Thanks, operator. Good morning, everyone, and welcome to Cheniere's second quarter 2023 earnings conference call. The slide presentation and access to the webcast for today's call are available at cheniere.com. Joining me this morning are Jack Fusco, Cheniere's President and CEO, Anatol Feygin, Executive Vice President and Chief Commercial Officer, Zach Davis, Executive Vice President and CFO, and other members of Cheniere's senior management. 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 to the slide presentation. As part of our discussion of Cheniere's results, today's call may also include selected financial information and results for Cheniere Energy Partners, L.P., 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 three. Jack will begin with operating and financial highlights. Anatol will then provide an update on the LNG market, and Zach will review our financial results and 2023 guidance. After prepared remarks, we will open the call to Q&A. I now turn the call over to Jack Fusco, Cheniere's President and CEO.

Jack Fusco (President and CEO)

Thank you, Randy. Good morning, everyone, and thanks for joining us today as we review our second quarter results and improved full-year 2023 outlook. Following a record-breaking year for the LNG industry, activity levels, particularly in the U.S., remain elevated, with significant commercial momentum and multiple projects having reached FID this year, as energy consumers worldwide look to secure cost-competitive, reliable natural gas supply in pursuit of achieving evolving energy, economic, and environmental policies and goals. Such activity confirms liquefied natural gas as a preferred clean energy solution, underscoring its critical long-term role in the global energy mix. Recently, the short-term global gas benchmarks have been volatile as markets try to adjust to a multitude of factors like weather, storage, and economic growth that drive all commodity businesses.

With over 150 million tons under construction globally and expected to come online over this decade, we expect pockets of volatility in the future as the market adjusts and absorbs this new supply. Cheniere is built to thrive in this volatility as a highly contracted nature of our cash flow profile ensures visibility in our returns while maintaining some exposure to the upside when markets dislocate, like they did last year. At Cheniere, our focus is centered on the long-term fundamentals for natural gas worldwide. Today, those fundamentals remain as strong as ever. With the global LNG market expected to nearly double by 2040, hundreds of millions of tons of new LNG capacity will need to be developed to meet this demand. Our platform is ideally set up to enable us to accretively capture our fair share.

Please turn to slide five, where I will review key operational financial highlights from the second quarter 2023 and introduce our upwardly revised full-year financial guidance. The second quarter was once again highlighted by excellent performance across the Cheniere platform. First and foremost, our relentless focus on operational excellence continues to set us apart, and the successful completion of our planned maintenance at both Sabine Pass and Corpus Christi during the quarter further reinforces our execution capabilities and our stellar operating reputation that our long-term customers expect and appreciate. Also, during the quarter, our commercial momentum on the SPL Expansion Project accelerated with three new long-term SPAs in support of that project. On project execution, Bechtel continues to progress Corpus Christi Stage 3 well ahead of schedule, increasing my optimism for that project being completed ahead of the guaranteed dates.

We generated Consolidated Adjusted EBITDA of approximately $1.9 billion in the second quarter, Distributable Cash Flow of approximately $1.4 billion, and net income of approximately $1.4 billion. These outstanding financial results are the product of our safe, stable, and reliable operations at our facilities. Those operations resulted in the export of 149 cargoes in the second quarter, down from the record levels we've set in recent quarters due to the planned maintenance that was performed. I'll review the major turnaround at Sabine Pass in more detail in a minute. Looking ahead to the balance of 2023, our forecast has improved slightly.

Today, we are raising our full-year guidance ranges by $100 million to $8.3 billion-$8.8 billion of Consolidated Adjusted EBITDA and $5.8 billion-$6.3 billion of DCF. The increase is mainly driven by the release of the remaining few cargoes that have been reserved for origination this year, as well as some optimization and sub-chartering activity. Zach will provide more color on the guidance, but we have excellent visibility into the balance of the year, and we're confident in our ability to finish the year within these new ranges. During the second quarter, Zach and his team continued to progress in our co-comprehensive capital allocation plan. We paid down another $200+ million of long-term debt.

We bought back over 2 million shares for $337 million. We paid a quarterly dividend of $0.395. In addition, we opportunistically refinanced our next debt maturity, enabling further financial flexibility, doing so in a cost-efficient manner. On Stage 3, we continued to equity fund that project, investing approximately $200 million during the quarter and over $2 billion to date. As I mentioned on the last earnings call, certain construction activities on Stage 3 are taking place ahead of plan. I remain optimistic in schedule outperformance and potentially having more LNG volumes in 2025, and possibly the entire seven-train project complete by the end of 2026. Stage 3 is over 38% complete. The construction activities continue to ramp up as we now have nearly 1,000 personnel on site.

In fact, during the second quarter, the first structural steel was erected, an important milestone for Stage 3 as construction activities advance and the project begins to take shape. Anatol and his team were also extremely busy in the second quarter as we signed three new long-term SPAs, which are expected to support the SPL Expansion Project. The SPAs are with Korea Southern Power and repeat customers, Equinor and ENN, represent a mix of FOB and DES terms. The SPAs aggregate to just under 4 million tons per annum, each with a certain amount of volume tied to an FID of the first train of the SPL Expansion Project. While it is early, the diversity of this growing creditworthy contract portfolio speaks to not only the strength and the long-term fundamentals of the LNG market, but also the value the LNG market places on Cheniere specifically.

Turn now to slide six. You might recall last year, we sanctioned Corpus Christi Stage 3 with a diverse portfolio of FOB, DES, and IPM contracts signed with customers from Asia to Europe to North America, featuring utility end users and portfolio players alike. Our customer portfolio is a result of continuous commercial innovation and a customer-focused strategy that prioritizes collaboration and tailored energy solutions for our customers. We expect the contract portfolio on the SPL expansion project to reflect similar diversity in our early progress with KOSPO, Equinor, and ENN. All investment-grade counterparties certainly support that. We are extremely excited about the commercial momentum we have gained on the SPL expansion project in such a short time, and I'm optimistic there's more long-term business to do in support of the project this year.

We look forward to continuing to build on the contract portfolio that features a breadth, depth, and scale that sets us apart from the competition. Turn now to slide seven. I'll provide some details around the major maintenance turnaround we completed on Sabine Pass Trains 1 and 2 during the quarter. This was the largest maintenance turnaround we have completed yet at Cheniere, and first and foremost, I'm proud to say the event was completed successfully on schedule, and most importantly, with zero recordable or lost time injuries. The turnaround was successful, not only in terms of the important maintenance work executed on Trains 1 and 2, but also as it provides a foundation and some significant lessons learned as we conduct planning for future large-scale maintenance turnarounds. During the month of June, Trains 1 and 2 at SPL were offline for about 25 days.

In approximately a 25-day span, we had an incremental approximate 1,400 personnel on-site at Sabine Pass. Those personnel completed approximately 10,000 total tasks across 2,000 work orders, with all of that work requiring over 2,250 permits to be issued. To have an effort like that completed in under four weeks speaks to the enormous amount of planning and preparation ahead of time, as well as an excellent execution and coordination throughout the event. I'd like to recognize all those involved, especially our Cheniere personnel and our longtime equipment partners at Baker Hughes, for delivering outstanding results and further reinforcing Cheniere's reputation for successful execution and demonstrating our safety-first culture from start to finish.

The success of this major turnaround provides enormous benefits to Cheniere as well as our customers, as we will use our experiences to inform maintenance planning in the future, as well as with the goal of remaining a world-class operator in the eyes of the LNG industry, employees, and stakeholders alike. Stable and reliable operations have never been more critical, as energy security concerns have become a significant priority around the world, and our dependable operations continue to grow as a distinct competitive advantage. Last month, at the LNG 2023 Industry Conference in Vancouver, energy security and reliable LNG operations were primary themes in the hallways and in the presentations on the main stage. I was proud to hear many of our long-term customers acknowledge and thank Cheniere specifically for being such a reliable and responsible LNG supplier.

The value of that track record is clearly being demonstrated, evidenced by not only the financial results and guidance we reported this morning, but also by the 4 million tons per annum of contracts we signed this quarter. We will continue to press this and our many other competitive advantages as we commercialize additional capacity on the Sabine Pass expansion project. On that note, I'll hand it over to Anatol to further address the LNG market and our commercial strategy. Thank you all again for your continued support of Cheniere.

Anatol Feygin (EVP and Chief Commercial Officer)

Thanks, Jack. Good morning, everyone. Throughout the second quarter, international gas benchmarks continued to moderate, briefly returning to single-digit territory as global inventory levels reached historic highs amid mild weather and tepid macroeconomic activity in most of the key demand centers. Although the extreme prices and volatility of 2022 appear to be in the rearview mirror, prices remain above historical norms, the market continues to react to news of any potential disruption. June TTF contract settled at $7.75 in MMBtu, the lowest monthly settlement since April of 2021, ticked higher more recently, settling July at $11.30 due to extended maintenance in Norway.

Similarly, JKM delivery prices dropped from about $14 in MMBtu for April to settle around $9.60 an M for July, and back up around $11.90 in MMBtu for August, thanks to cooling demand load, LNG outages, and summer maintenance. In the U.S., mild weather and production growth kept Henry Hub prices below $3 an M during the quarter, incentivizing coal to gas switching, which, along with lower renewables generation and coal retirement, has significantly increased power sector demand, helping balance the market. Strong summer cooling demand, along with the return of LNG facilities for maintenance, has provided modest support to prices, with the August contract settling just below $2.50 an M.

While concerns about near-term market tightness have moderated amid softened near-term fundamentals and continued uncertainty around the pace of China's recovery, we still view the market to be structurally tight and delicately balanced over the next few years, as very limited new supply is set to enter the market globally, leaving further potential for upside risks going forward. With that in mind, let's now turn to slide nine to address regional dynamics in more detail, starting with Europe. During the second quarter, Europe's LNG imports continued to grow year-on-year, despite ongoing efforts to reduce gas consumption. LNG flows to Europe grew 9% year-on-year, or 2.7 million tons for the second quarter, on the back of strong U.S. flows in April and May.

June imports were relatively flat, driving TTF prices near pre-crisis levels before ticking up again on news of an extended outage at Hammerfest LNG and other gas processing facilities. Reduced gas consumption, coupled with elevated storage levels at the top of the five-year range, continued to weigh on the European market, with data from the IEA suggesting that total European gas demand fell by more than 30 BCM in the first half of 2023. Total electricity generation has declined considerably, falling 9% in the first half of 2023 relative to historic averages, largely as a result of the Russia-Ukraine war and slower economic growth throughout the region. This decline, coupled with notable gains in renewable power generation, resulted in lower demand for thermal generation, further contributing to the decline in total gas consumption.

We started to see a deceleration of these trends in the second quarter as gas burn economics improved. Once overall energy demand levels are gradually restored in Europe, we expect natural gas to regain its share in the supply stack and maintain its critical role in Europe's power mix. The coal, lignite, and nuclear baseload capacity retirements currently underway in Germany and other European countries should increase demand for gas capacity to maintain grid reliability and flexibility in the power supply stack amid increasing renewable capacity. Let's now turn to slide 10 to discuss Asia.

While LNG demand across Asia has remained largely subdued year to date, increased imports in China, South and Southeast Asia during the quarter were offset by further demand decline in Japan, with only 14 million tons of LNG imported by the country in the second quarter, representing an 18% decline year-on-year. In fact, May registered the lowest import levels in Japan in 15 years, as consumers were incentivized to conserve energy amid electricity rate hikes. Additionally, nuclear availability impacted gas demand in the power sector. We expect this trend to continue as two additional nuclear reactors in Japan are scheduled to restart in the third quarter.

Similarly, we expect to see nuclear pressures on LNG spot buying in Korea, too, where LNG imports were flat in Q2 with the startup of the 1.4 GW Shin Hanul Unit 1 nuclear plant last year and the expected start-up of the similarly sized Shin Hanul 2 in the third quarter of this year. In India, imports during the quarter trended slightly higher compared to last year, increasing by about 4% year-on-year. Despite the further decline in JKM, prices remained too elevated during the quarter to elicit a meaningful response from price-sensitive South Asian buyers. Southeast Asian demand showed significant growth during the quarter as imports increased 31% year-on-year. Thailand, the main driver of the region's demand, grew imports 43%, or 1 million tons in Q2, amid a heat wave that sent temperatures soaring.

Southeast Asia is expected to be an important growth market in the future as it expands its import infrastructure. The region added a new market in the second quarter, as the Philippines imported its first cargo in April. Just last month, Vietnam started commissioning its first regas terminal to service a new 1.5 GW gas-fired power plant. In China, LNG imports picked up in the second quarter, increasing 20% year-on-year. A warm and dry summer triggered a rebound in spot buying activity as a persistent heat wave and low hydropower generation output increased demand for natural gas. China's hydropower dropped 28% year-on-year in the first half of 2023, helping boost electricity demand from other sources, including gas. In fact, during the quarter, overall gas demand grew 10% year-on-year, despite some macroeconomic headwinds in China.

Let's now turn to slide 11 for some thoughts on the market for long-term contracting. Despite some of the near-term market dynamics discussed earlier, pointing to potentially soften demand for LNG in the front of the curve, which as Jack noted, we're largely insulated from. Over the last 12 to 18 months, we have witnessed record levels of long-term contracting, particularly for U.S. volumes, as the long-term trade outlook continues to call for further growth in LNG supply. In aggregate, the level of long-term Henry Hub linked contracts signed in 2022 alone far exceeded the total signed over the six preceding years combined, and the market looks to be on track to potentially repeat this level of contracting activity this year.

As we previously discussed, we expect demand from China and other fast-growing Asian economies to underpin the next LNG supply wave, representing over 70% of the LNG demand growth through 2040. Asian demand, coupled with Europe's desire to replace Russian supply, has driven recent commercial activity. Although Asian customers and portfolio players have been the largest and most active buyers of long-term volumes globally over the past 18 months, European counterparties have certainly stepped up, signing contracts representing over 20 MTPA, of which 18 MTPA is tied to U.S. projects for about 25% of the total U.S. volumes signed since 2022. At Cheniere, we have signed over 15 million tons of long-term contracts in just the last 18 months, 30% of which are expected to underpin our future growth at both Corpus and Sabine Pass.

While midscale Trains 8 and 9 are fully commercialized, the origination team is hard at work constructing the portfolio for the SPL Expansion Project. As Jack mentioned, our success to date has been a direct result of our resolute commitment to operational excellence and financial discipline across everything that we do. Our contract portfolio today is comprised of a diverse mix of contract structures with varying terms and tenors, all of which were signed with high-quality, creditworthy, and geographically diverse counterparties who value the flexibility and reliability of our products. In fact, several of our recently signed contracts were signed with repeat customers, ENN and Equinor most recently, but also EOG, NG, and PetroChina last year, signaling the mutual commitment to quality we share with our long-term customers. As we continue to commercialize our growth projects, this commitment will remain steadfast.

With that, I will turn the call over to Zach to review our financial results and guidance.

Zach Davis (EVP and CFO)

Thanks, Anatol. Good morning, everyone. I'm pleased to be here today to review our second quarter 2023 results and key financial accomplishments, all of which are products of our team's dedication to operational excellence, seamless execution, and financial discipline as we continue to serve our customers across the world while creating long-term value for our stakeholders. Turning to slide 13. For the second quarter, we generated net income of approximately $1.4 billion, Consolidated Adjusted EBITDA of approximately $1.9 billion, and Distributable Cash Flow of approximately $1.4 billion. Relative to recent quarters, our second quarter results reflect a higher proportion of our LNG being sold under long-term contracts, less volumes being sold into short-term markets, continued moderation of international gas prices, as well as the operating cost and production impact from the major turnaround at SPL during the quarter.

Once again, these impacts were partially offset by the proactive locking in of a large portion of our open cargoes for the quarter, late last year and earlier this year, at margins above what is in the market today. During the second quarter, we recognized in income 561 TBtu of physical LNG, including 547 TBtu from our projects and 14 TBtu sourced from third parties. Approximately 85% of these LNG volumes recognized in income were sold under long-term SPA or IPM agreements, with initial terms greater than 10 years.

As we've noted in prior earnings calls, our reported net income is impacted by the unrealized non-cash derivative impacts to our revenue and cost of sales line items, which are primarily related to the mismatch of accounting methodology for the purchase of natural gas and the corresponding sale of LNG under our long-term IPM agreements. The further decline and sustained moderation in volatility of international gas price curves throughout the second quarter served to benefit the mark-to-market valuation of these agreements, increasing our net income line item for the third quarter in a row. With today's results, we have earned cumulative net income of approximately $8.4 billion for the trailing 12 months and have now reported positive net income on a quarterly and cumulative trailing four-quarter basis, three quarters in a row.

Throughout the quarter, we continued to deploy capital pursuant to our comprehensive capital allocation plan, increasing shareholder returns, strengthening our balance sheet, and pursuing accretive growth. In June, we refinanced and replaced our existing secured credit facilities at CQP and SBL with a new $1 billion senior unsecured facility at CQP and a $1 billion senior secured facility at SBL. These transactions extended the original maturities, migrated some capacity from the project to the parent, desecured some of our borrowing capacity, and further enhanced our liquidity with more flexible terms. These new facilities, combined with the CEI and CCH credit facilities and our cash on hand, provide ample consolidated available liquidity, affording us even greater optionality as we continue to execute on our long-term capital allocation plan, while effectively operating and constructing the second-largest LNG platform in the world.

During the quarter, we repaid a little over $200 million of long-term indebtedness through our open market repurchase program, substantially all of which was used to repurchase a portion of the senior secured notes due in 2024 at SBL. In June, we further addressed these notes opportunistically with our inaugural investment-grade offering at the parent level, $1.4 billion of 5.95% senior unsecured notes at CQP. The net proceeds from this offering were used to further refinance and redeem approximately $1.4 billion of the SBL 2024 notes, not only extending our maturity, but also desecuring and further desubordinating our balance sheet, all three of which are key tenets to the balance sheet strategy set forth in our capital allocation plan.

As discussed on previous calls, we plan to address the remaining balance of the SBL 2024 notes with cash on hand later this year and into next, after which point we will have addressed all maturities through early 2025. In the meantime, you can expect we will continue to opportunistically de-lever utilizing our open market repurchase program. On the ratings front, just last week, Fitch upgraded CCH to triple B from BBB-, bringing our project-level ratings in line at Fitch. In April, Moody's announced that CEI and CCH were under review, which, if upgraded, would further solidify our corporate structure as investment-grade. As noted on the last call, now that we have achieved investment-grade ratings across our corporate structure, going forward, we are targeting a 1-to-1 ratio of de-leveraging and share buybacks on an aggregate basis.

During the quarter, we repurchased approximately 2.3 million shares of common stock for approximately $337 million. As we have previously noted, there will likely be a catch-up trade over the next year or two in order to achieve that one-to-one ratio, where our opportunistic repurchase plan will outpace debt repayment over that time. We are confident that we will deploy the remaining $2.8 billion of our share repurchase authorization to complete our $4 billion plan ahead of schedule, as our goal to repurchase approximately 10% of the company remains intact. We also declared our eighth quarterly dividend of $0.395 per common share for the second quarter last week.

Later this year, we expect to be able to step up the dividend in line with our previous guidance of growing our dividend by approximately 10% annually into the mid-2020s through construction of Stage 3. For the final pillar of our comprehensive capital allocation plan, disciplined growth, we funded approximately $200 million of CapEx at our Stage 3 project during the quarter with cash on hand, as this remained the most efficient form of funding during the quarter. We will have over $3 billion available on our CCH Term Loan that we plan to utilize in the coming years. As Jack mentioned, the Bechtel engineer teams have made meaningful progress year-to-date. We are optimistic on the timing of those volumes and our ability to bring another over 10 million tons to market ahead of schedule.

Turn now to slide 14, where I will discuss our 2023 guidance and update you on our open capacity for the remainder of the year. Today, we are raising our full year 2023 guidance ranges by $100 million to $8.3 billion-$8.8 billion in Consolidated Adjusted EBITDA and $5.8 billion-$6.3 billion in Distributable Cash Flow. With respect to our EBITDA sensitivity for the remainder of the year, we have an immaterial amount of unsold LNG remaining, so we have excellent visibility of delivering results comfortably in these ranges for the year.

On the Q1 call in May, we shared with you that we had only 35 TBtu of volume unsold for the remainder of the year, which we have further sold down during the second quarter, while also releasing the remaining cargoes originally reserved for origination. Combined with the incremental margin from optimization activities, this gives us further clarity around our expected financial results for the year and supports the increase to our ranges today. As always, our results could be impacted by the timing of certain year-end cargoes heading into 2024, as well as incremental margin from further optimization upstream and downstream of our facilities. Our Distributable Cash Flow for 2023 could also be affected by any changes in the tax code under the IRA.

However, the guidance provided today is based on the current IRA tax law guidance, in which we would not qualify for the minimum corporate tax of 15% this year.

... However, as noted previously, both of these dynamics would mainly affect timing and not materially impact our cumulative cash flow generation through the mid-2020s, as we think about our overall capital allocation plan and our 2020 Vision goals. Similar to this past year, we look forward to providing additional insight on our 2024 production profile and open capacity on our next call in November, with official 2024 financial guidance to come out with our Q4 and full year 2023 results in February. As we have consistently forecasted, including in our 2020 Vision, 2024 may end up being our most contracted year ever on a percentage basis, ahead of Stage 3, coming online in 2025 and 2026, which is expected to grow our operating LNG portfolio to over 55 million tons per annum.

Despite some near-term challenges in the market, like cost inflation, higher borrowing costs, and competition, the global market is clearly calling for new LNG supplies, given the many advantages of natural gas as a primary energy source. At Cheniere, we are well-positioned and committed to providing energy solutions for our customers, developing and building projects that deliver appropriate risk-adjusted returns for our investors and stakeholders, and operating and maintaining our facilities with a safety-first culture in order to be the LNG provider of choice for decades to come. 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 (participant)

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you please limit yourself to one question and one follow-up. After that, you are welcome to rejoin the queue if you have further questions. Again, please press star one to ask a question. Our first question comes from Jeremy Tonet with J.P. Morgan. Your line is open. Please go ahead.

Jeremy Tonet (Research Analyst and Managing Director)

Hi, good morning.

Jack Fusco (President and CEO)

Good morning, Jeremy.

Jeremy Tonet (Research Analyst and Managing Director)

Just want to start off with the balance sheet, if I could. I, I think there was $4.5 billion of cash on the balance sheet, so a mountain of cash there. Just wondering how you think about deploying that. Clearly, there'd be some debt paydown and some funding for expansions, but as far as return to capital, just wondering if you might be able to provide a bit more color there, just $4.5 billion being a sizable number.

Zach Davis (EVP and CFO)

Thanks, Jeremy Tonet. This is Zach Davis. So, so as you think about the $4.5 billion of unrestricted cash, that had an increment that-- in that was a $1.4 billion related to the bond proceeds from the CQP bond we did in late June. That, that was a refinancing that was executed in early July. You have to take at least $1.4 billion out of that. Then when you think about how much is actually sitting at CEI versus CQP, it's in the mid-twos. Clearly there's ample liquidity when you, when you consider that our, our guidance is $6 billion of DCF or so, and we've made around $4 billion of that to date.

When you think about liquidity, we'd like to keep around $1 billion on the balance sheet at all times, give or take. We probably have at around another $1 billion to spend on the Corpus Stage 3 project this year, and then the dividend that we're set to increase in Q3, the guidance that we had last year. You take all that into account, there's still probably $2 billion there. I'll just reiterate what we keep on saying, is that we are intent to catch up on the 1-to-1 cumulative ratio between debt paydown and share buybacks over time, and we are on track to do so. There will be, over time, billions of dollars allocated to our buyback program.

We're just going to stick to our opportunistic approach, abide by Rule 10b5-1 rules, and we'll follow through and eventually get to that $20 per share of run rate cash flow.

Jeremy Tonet (Research Analyst and Managing Director)

Got it. That makes sense. $2 billion of cash, nice to have discretionary on the balance sheet there. Maybe pivoting a little bit and just, you know, to the guidance raised again there. Wondering if you might be able to provide a bit more color as far as the optimization opportunities, be it upstream, downstream, or at the facilities, what they are, how big they are, how sticky they are? Does any of this impact, I guess, you know, run rate EBITDA as you think about it?

Zach Davis (EVP and CFO)

I, I guess the, the good thing on, on, on that is, no, it doesn't affect run rate EBITDA because we, we really don't guide to it until it's firm. As, as we think about run rate EBITDA over time, that's just based on the fixed fees, the open capacity at 225, and a basic lifting margin. That's it. These are the, the types of examples that are the incremental optionality that comes with, like, the Cheniere platform from our brownfield growth to the opportunities upstream with lifting margin and being such a big customer to most of the pipes upstream of the plant, and the biggest consumer of, of natural gas in the United States, to being a relatively big charterer with, with our DES and IPM deals.

Basically, what happened in the quarter was we firmed up some more of the sub-chartering, let's say, of some of our links on our shipping portfolio. Once that's firm, I see it in the guidance, and that helped move the numbers upward. Add to that, that we released those four origination cargoes, and it's on the team, sold another four million tons without needing much in terms of bridging, and we were pretty much obligated to increase guidance by $100 million this quarter.

Jeremy Tonet (Research Analyst and Managing Director)

Got it. That's helpful. That's great to see Anatol pulling up EBITDA there. Thank you very much for the color. I'll leave it there.

Operator (participant)

We'll go next to Jean Salisbury with Bernstein. Your line is open. Please go ahead.

Jean Salisbury (Senior Analyst of Natural Gas and MLPs)

Hi, good morning. Can you speak to what sort of cost inflation you're expecting for Corpus Christi 8 and 9, assuming that you do it, as you progress there?

Jack Fusco (President and CEO)

Yeah. Hi. Hi, Jean Ann. I'm not expecting much. We've been very effective with Bechtel on buying materials, when we see low points. I think our overall inflationary environment is, has been around 10%, so far, from us being working closely and collaboratively with Bechtel on the procurement. I would expect that to be the same for 8 and 9 also.

Jean Salisbury (Senior Analyst of Natural Gas and MLPs)

Great. Thank you. As a follow-up, Cove Point transacted recently at a, at a much lower multiple than in 2019. Can you just kind of, is this a sign that the LNG space is becoming more challenged? How did you view that transaction multiple?

Jack Fusco (President and CEO)

Can I start on that, Zach?

Zach Davis (EVP and CFO)

Yeah, of course.

Jack Fusco (President and CEO)

Before you, before you start?

Zach Davis (EVP and CFO)

You're the boss.

Jack Fusco (President and CEO)

He's smiling in the stand. It's, it's hard to make that comparison, right, from a single train confined... I mean, I, I've spent a lot of time down in that, that part of the woods. As you all know, I have a house in Annapolis, and, and, there is no growth potential. To compare Cove Point to Cheniere is, is not, not, even close to being correct. You want to get through the go through multiple.

Zach Davis (EVP and CFO)

Sure. I think there's more dynamics to this than just looking at the multiple. I think they sold to an existing operator, an existing owner, and it's probably the easiest way for Dominion to get out of the business. If you account for no growth to customers, bowling versus our FOB, DES, IPM, CMI model, where you get all the steady cash flows, but also, like this quarter, incremental cash flow from all the optionality that comes with the platform, I think it only reaffirms that we're going to get a premium valuation to anything that Cove Point has or something like that. That's how we think about it. Clearly, even at the share price today, we're barely getting valued at that type of multiple.

What we're pretty keen on is every turn on that multiple is probably over $25 to the share price. We'll take it, and, yeah, I just wouldn't say it's apples to apples.

Jean Salisbury (Senior Analyst of Natural Gas and MLPs)

Great. Thanks for that, Zach. That's all for me.

Operator (participant)

We'll go next to Julien Dumoulin-Smith with Bank of America. Your line is open. Please go ahead.

Cameron Lochridge (Equity Research Analyst)

Hi there, team. This is actually Cameron Lochridge on for Julian. Thank you guys for taking my questions, and congrats on a great quarter. I wanted to start just on the expansion efforts, right, with Sabine, specifically asking kind of how you guys are thinking about open capacity for those trains. Would you give any consideration maybe to carrying in a little more open capacity than you have with some of your other projects? Then on a related note, just any update on the regulatory front, just given some of the recent decisions and, and, and whatnot by the DOE and elsewhere.

Jack Fusco (President and CEO)

Hi, Cameron. This is Jack. I'll start off, and the answer on the first one was exposure to the commodity markets. I'd say no. We're going to do this the way we've done trains in the past. We're going to use our financial discipline. We're going to commercialize 85%-90% of the output of the train that we feel comfortable that we can reliably serve and make sure it meets all of our financial criteria that Zach and the team have laid out many times in the past. As you know, I've spent time in the power business, and that was almost 100% merchant, day in and day out, and I felt like a farmer.

I was always worried about the weather, and, we have no desire to invest billions of dollars and continue to invest billions of dollars in American infrastructure and, and pray that, commodity markets will come back our way. That's the first part. The second question was on the regulatory, structure or the, or, or recent regulatory developments. I mean, I, I, for one, am, am, am guardedly optimistic. I think, under Chairman Phillips, FERC is trying to act a little more in a bipartisan way. They've approved some major, you know, natural gas projects and specifically some, some, LNG projects to go, to move forward, and that's been very positive, all the way around, that things are actually, being reviewed and, and approved, at, in FERC.

Similarly, I'd say at the DOE, Secretary Granholm was very clear when she discussed the critical role of U.S. LNG to support our allies and testimony that she recently gave to the House of Representatives.

Those to me are really positive developments on the, on the regulatory front for, for our expansion opportunities.

Cameron Lochridge (Equity Research Analyst)

Got it. Thank you for that, Jack. Then, maybe one for Anatol real quick. You mentioned European appetite for long-term contracts in your prepared remarks, just how, how strong that's been of late. Any, any insight you can share on what's, you know, perhaps what's driving that and for how long you, you maybe see that persisting?

Anatol Feygin (EVP and Chief Commercial Officer)

Yeah, thanks, Cameron. I do think that European sort of direct end users will continue to be part of the long-term sort of support equation for U.S. projects. My comments were kind of in the context of Europe not being as big a piece of the equation in 22 as I would have expected, and that has changed slightly, but it's still only a quarter. The vast majority of that volume moving forward will still be addressed by intermediaries who are still half of that volume. It has improved. I expect that to continue to be a healthy market for, for long-term commitments, but it'll still be very much intermediated by portfolio players as well.

Cameron Lochridge (Equity Research Analyst)

Got it. Thank you for that. Again, congrats, guys. That's all for me.

Operator (participant)

Our next question comes from Brian Reynolds with UBS. Your line is open. Please go ahead.

Brian Reynolds (Research Analyst)

Hi, good morning, everyone. We continue to see some exciting announcements around bringing more natural gas from Texas into the LNG Louisiana corridor. Kind of just curious, just given the size and scope of the Sabine Pass Expansion, if there are any updated thoughts around providing equity support to bring natural gas into Texas, and, you know, what that permitting timeline could look, look like, just given, you know, it's crossing state borders and, and likely need for greenfield capacity. Thanks.

Anatol Feygin (EVP and Chief Commercial Officer)

Yeah, sure, Brian. We, as we've said in the past, we view the gas supply component of our projects as an absolutely critical step, and we would not pursue a project that did not have a robust gas supply solution. That said, we view the Permian as a great source, not just for Corpus and, and this expansion, but also for the expansion of Sabine, and we'll continue to work with our infrastructure partners to find the best options for, for supplying the Sabine expansion. Whether that includes equity or not, you know, TBD, obviously we're not opposed to that, as you saw with our project into, into the Corpus expansion. All of those options are on the table.

Brian Reynolds (Research Analyst)

Great. Appreciate all the color. As my follow-up, Zach, kind of want to talk about potential funding needs for the Sabine Pass expansion. Just given, you know, the attractive leverage in debt levels at CQP with the debt reduction over the past few years and the ability to flex that variable distribution, you know, when the time comes to spend capital on expansion. Just kind of curious around if you could provide some more color around, you know, funding expectations between debt and perhaps internal equity for the project. Thanks.

Zach Davis (EVP and CFO)

Sure. It, it, it will be a, a debt and internal equity funding for, for, for that project over time. We'll start thinking about that now. We're, we're thinking about the next few years as we're in development, what, what the leverage metrics should be going into FID. Honestly, the lower those leverage metrics are going into FID, more capacity we'd have to lever up to, to help funding during construction of the project. Anything that we pay down going forward in, in, inside the CQP box is honestly like a pre-investment for that expansion. As we look at our metrics on a consolidated basis, we're right under four times. CQP is a little over four times, it, it, it'll make sense for some of the debt pay down going forward to be inside that CQP box.

With that, it'll give us even more funding flexibility when it comes to FID in, in, in a couple of years, where we'll live within cash flows, maintain a base distribution, and most importantly, maintain those investment-grade credit metrics, so that eventually that, let's say, high $3 DPU run rate can get to something like $5 or better.

Brian Reynolds (Research Analyst)

Great, really helpful. Appreciate all the color and, enjoy the rest of your morning. Thanks.

Operator (participant)

Our next question comes from Sam Burwell with Jefferies. Your line is open. Please go ahead.

Sam Burwell (VP)

Hey, good morning, guys. I know that you've addressed it already, so I don't want to belabor it too much, but just the buyback seemed a little bit smaller, especially relative to the free cash flow that you put up in the quarter. Just curious if you could maybe elaborate or give a little bit more color on the 10b5-1 restrictions that are in place, just seeing as you repurchased a lot more stock in 4Q 2022 and 1Q 2023 relative to what you did in this past quarter, despite the shares being under pressure in May and June.

Zach Davis (EVP and CFO)

Sure. I, I'm gonna go back to the fact that we're thinking about this in the 2020 Vision through 2026, and we have a three-year plan for $4 billion. On a cumulative basis, we will get there on a 1-to-1 debt paydown to, to share buyback. To focus quarter by quarter is, is honestly not how we're looking at it. Again, if you just look at the time you're referencing, where the stock was probably like $20-$25 lower than where it is today, it clearly, if there had been pressure for a continued period of time, we probably would have been able to buy more. Abiding by Rule 10b5-1, where we're not ones that are allowed to affect the share price.

We're not allowed to buy at the opening or at the end of the day, there's a myriad of other rules that we have to be careful of, that, yeah, when there's only three days of extreme pressure, at a certain price level, we can't be a majority of it. I wouldn't keep score quarter-to-quarter, but if you want to, this is the 1st quarter that share buybacks was higher than debt paydown. If you think about the $4 billion program for three years, we've gone through 30% of it in about 25% of the time. We're on pace to do that ahead of schedule. That's the plan.

Again, what's most important is we're gonna get to that $20 per share run rate cash flow ahead of time and buy back 10% of the market cap over time. It, it, it'll play itself out, but we're not dollar cost averaging here with our free cash flow. It wasn't ever going to be in, in, in such a way as you referenced.

Sam Burwell (VP)

Okay. certainly all fair points. maybe just to follow up on Jack's comments about the confidence on CCL 3 volumes possibly coming on a little bit earlier than expected. I mean, what, what supports that confidence? I mean, understand that the project is 38% complete, and the construction is, is 5% complete. how do you see that progressing? Again, like, what's what drives the claim that volumes can come on early?

Jack Fusco (President and CEO)

You know, I, I get a weekly construction report, and I've, I was out at the site myself. There's over 1,000 people there. There's over 10,000 pile, pilings have been installed. Train 1, it's concrete, over 50% complete. The steels being erected on the cryo rack. You know, as I see the progress, that progress, it's way ahead of schedule. I know that we have some very critical components for Train One that are, that are, have been shipped. They just haven't been received. I think on the next call, you guys will get a much more fulfilling update on the schedule. That's what gives me my optimism.

Sam Burwell (VP)

All right. Understood. Thanks for the color, guys.

Operator (participant)

Our next question comes from Ben Nolan with Stifel. Your line is open. Please go ahead.

Ben Nolan (Managing Director in Research)

Yeah, thanks. I guess I'll, I'll put both of these into one. There has been some, some issue, issues with congestion and water levels and that sort of thing around the Panama Canal. I'm curious if that's impacting how you guys are, are, managing your, your book. And then also, there's a lot of speculation there is likely to be a, a pretty high increase in or upward movement in freight costs into the back half of the year. Just curious where your, where your freight book looks like at the moment.

Anatol Feygin (EVP and Chief Commercial Officer)

Yeah, thanks, Ben. You, you're absolutely right. The canal has had an issue with drought. You know, clearly it is something that we are very close to. The canal is a very good partner, it is it continues to be a good partner and will be for decades to come. Equally, obviously, Europe has been the market of choice, that does not affect us nearly as much as it would have. We also have the capacity to address that by going around instead of through the canal, which obviously takes longer, but equally obviously saves you the transit fees on the canal. All of that is included in our guidance and in our economics.

We, we do look forward to continuing to work with the canal and, and finding, finding good solutions there. In terms of, in terms of costs, you're, you're referring to sort of charter rates as they continue to be elevated in the back half of the year, driven primarily by the contango into Europe. Of course, as, as you know, we have our requirements fully covered, and our, our shipping position reflects that.

Ben Nolan (Managing Director in Research)

All right. I appreciate it. Thanks.

Operator (participant)

Our next question comes from Craig Shere with Tuohy Brothers. Your line is open. Please go ahead.

Craig Shere (Director of Research)

Morning. Thanks for fitting me in. Um, you know, po- post, uh, and I understand, uh, uh, Trains Eight and Nine, uh, for Corpus are, are, are significantly hedged on, on some costs. But, um, we're, we're hearing more and more about EPC price inflation, uh, you know, post, uh, Port Arthur, uh, and Rio Grande FIDs. Uh, and I wonder if you could opine on the, the broader market, uh, trends in terms of, um, we used to be looking at 6x EBITDA on projects. Uh, uh, now maybe somewhere in the seven times might be more reasonable, but, but some peers might be pressured even at eight times. In terms of, you know, pure FIDs, the pressure on the market and how you would think about economics, uh, and, and hurdle rates for SPL Stage Five, could you kind of give us your thoughts? Sure.

Zach Davis (EVP and CFO)

Yeah, yeah, we've heard about all, all of the other projects. Mind you, they're greenfield, as we think about it, if we could sign up the contracts like Anatol and the team have been doing, and can do it around, let's say, 7x CapEx or better, and then you fund it around 50% leverage. We're talking about sub 4x easy on, on, on the credit metrics, and you, you likely can still get to 10% or better on unlevered returns. We're, we're gonna do that all day. Not only are we gonna do that all day, we're still gonna wholly own these projects.

We, we, we just have a different dynamic economically, with an investment-grade balance sheet, cash flowing in the billions, and having already spent $40 billion, that like, structurally and financially, it's, it's just no, no comparison. Yeah, I guess kudos to some of these folks for getting their projects to the starting line. But again, we have a really nice hand to play here at both sites.

Craig Shere (Director of Research)

As we go into the next decade, do you see this basically as a systemic competitive advantage that, you know, the field is just gonna permanently be winnowed?

Zach Davis (EVP and CFO)

We have to focus on what we do here, and Jack reiterates that all the time to us as we execute on these projects. Again, if the economics don't align, we'll be patient, we'll be disciplined, and we'll just keep on buying back the stock and letting all the shareholders that already believe in Cheniere own more and more of Sabine and Corpus in the meantime. Then when they do align, and it's clearly accretive, we're gonna go for it. And that's it. If some other folks get projects done, so be it. Again, this industry is probably going to double in the next 20 years or so, and Cheniere is not gonna build all of it, because we're not doing this for market share.

Craig Shere (Director of Research)

Fair enough. Thank you.

Operator (participant)

Our next question comes from Robert Mosca with Mizuho Securities. Your line is open. Please go ahead.

Robert Mosca (VP in Equity Research)

Hi, good morning, everyone. just wondering if you could talk about some of the bottlenecking activity you've undertaken in your non-train portfolio, and when or whether you think you could start to push towards maybe the higher end of that 4.9-5.1 MTPA per train run rate.

Jack Fusco (President and CEO)

Yeah. Yeah. Hi, this is Jack. Yeah, I, I, I'll tell you, Robert, I've been more and more impressed with what my operating folks have been able to do. I, I am optimistic that they will continue to deliver on it. I think our guidance is right around 5. My expectation over time is that it, it's gonna be a little, a little higher than that. When we guide to the 5 million tons, that included and includes our major maintenance, and we just talked about, we had significant major maintenance in this quarter, and we're still able to hit the 5 million tons. We're not ready to guide above it just yet, but, but stay tuned.

Robert Mosca (VP in Equity Research)

Great. Appreciate it, Jack. For my follow-up question, I know in the past, it really hasn't been a part of the playbook to take on equity partners for projects, but any revised thoughts on your appetite if there is a high-quality partner that could also sign up for a chunk of offtake, since it seems like those opportunities may still be in the marketplace?

Jack Fusco (President and CEO)

Well, as you know, we have some great equity partners with Blackstone and Brookfield, and I've had a long relationship with them, and they've been very, very good partners for us at SPL. We just, as Zach mentioned, that, you know, his intent is to fund it with internal equity, internal capital down at CQP, as well as some debt for our expansion. We don't see a need to have to complicate our lives with more equity partners than we currently have today.

Robert Mosca (VP in Equity Research)

Great. Appreciate the time, everyone.

Operator (participant)

Our next question comes from Jason Gabelman with TD Cowen. Your line is open. Please go ahead.

Jason Gabelman (Managing Director in Energy Equity Research)

Hey, thanks for taking my questions. I wanted to ask, too, about the near-term outlook. There's a lot of concerns around European gas storage filling and potential pressure on MVP pricing, and I understand that will have a limited impact to your earnings on 2023, given the way you've locked in pricing. As you look to 2024, does the prospect of kind of more volatile gas dynamics impact the way you think about hedging your volume exposure next year? Either doing some earlier or potentially waiting until after you get through the fall volatility. Thanks.

Zach Davis (EVP and CFO)

Hey, this is Zach. I'm gonna start, and then Anatol can give a viewpoint on, on the market. Basically, I, I, I pretty much look at our EBITDA forecast daily, our cash flow forecast daily, and the volatility of the commodity curves definitely moves quite a bit, but the volatility in our EBITDA just doesn't, period. Like, next year, as I mentioned in the prepared remarks, might be our most de-risked and most contracted year we'll ever have. We'll have less than 100 TBtu open. We'll be, like, almost 98% or something like that, contracted with all of the contracts starting up, and that, that'll be the case until we have some of that acceleration of Stage 3 ramping up. There's not really a need to hedge or contract anything over what we already have.

This was always baked into the 2020 Vision, into the $20+ billion of available cash, yeah, we're, we're pretty locked in for the next year or two until that Stage 3 comes online.

Anatol Feygin (EVP and Chief Commercial Officer)

Yeah, just to follow up, you know, what's, what's critical for us and, and things that we look at, Europe this year will add order of magnitude, 60 million tons of import capacity. That obviously comes with storage capacity as well. Asia is, is on track to match that and, in the coming years, exceed that. Europe will add 100 million tons overall, probably through, through this build. Our customers will enjoy, and as Zach said, you know, this year and next year and, and really into the mid-thirties, we are overwhelmingly contracted, and they will enjoy very stable pricing, and will enjoy the ability to bring volumes into various markets as those markets send the right price signal.

You know, the way we look at it, the best case scenario is we continue to, to perform. Our operational excellence continues to deliver these volumes. Our customers enjoy those stable economics, and the world has the capacity to consume these additional volumes. Yeah, could you see more volatility? Sure. We doubt that you'll see a repeat of 2022 anytime soon, and the world will put tools in place to address that.

Jason Gabelman (Managing Director in Energy Equity Research)

Great, thanks. Just a quick follow-up on the other revenues bucket that you disclosed in your earnings. I think a lot of that has to do with chartering out vessels. Correct me if I'm wrong, given the outlook that fleet rates are going to continue to move higher, should we expect our other revenues bucket to continue to grow? Thanks.

Zach Davis (EVP and CFO)

forecast anything that's not firm. I look at Corey and the team, and we do expect them to take full advantage of the system and the assets that we have every day, looking forward. On top of that, though, we're pretty firm for the rest of this year. I mean, we have less than 10 TBtu even open, and some of the upside in the guidance today was thanks to not only subchartering year to date, but some that they locked in for the rest of the year. So there could be some, but it's getting smaller and smaller as we get further along in the year

Jason Gabelman (Managing Director in Energy Equity Research)

Great. Thanks for the time.

Operator (participant)

Our final question comes from Chris Tsung with Webber Research. Your line is open. Please go ahead.

Chris Tsung (Associate Analyst)

Hi. Good morning. Thanks for squeezing me in and taking my question. I wanted to just ask if you've noticed any impact from the DOE policy that have reduced the number of viable U.S. LNG projects, and would you anticipate that affecting the cadence of your filing process?

Jack Fusco (President and CEO)

No. All of our projects make our filings are already either fully commercialized or will be for or well on their way to being commercialized. There, there's no question of the of the need, and we should need, you know, significant extensions like we did during COVID.

Chris Tsung (Associate Analyst)

Okay. Just as a follow-up, we're seeing green shoots in the long-term pricing market, with prices inching up, you know, above, like, $2.50 or so. We also noticed next amended pricing across several of its SPAs ahead of their FID. Is that something you're seeing as well as you term out your merchant book and commercialize SPL Stage 5?

Jack Fusco (President and CEO)

Yeah, you're probably seeing that folks, you know, with, with the previous questions around inflation, you know, they can't seem to make their numbers without having some price escalation. That's probably what you're seeing around the market. You know, it's not easy to get a greenfield project off the ground, so.

Chris Tsung (Associate Analyst)

All right. Fair enough. That's it for me. I turn it over. Thank you, Jack.

Jack Fusco (President and CEO)

Thank you, Chris. Thanks, everybody. Thanks for your support of Cheniere, and we'll talk soon.

Operator (participant)

Thank you. Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time.