Cheniere Energy, Inc. Q4 FY2022 Earnings Call

Good day. And welcome to the Cheniere Energy Q4 and Fiscal Year 2022 Earnings call and Webcast. This call is being recorded. At this time, I'd like to turn the conference over to Mr. Randy Bhatia. Please go ahead.

Thank you. Operator. Good morning, everyone. And welcome to Cheniere's Fourth Quarter and Full Year 2022 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 the Cheniere management team. Before we begin, I'd 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 LP, or CQP. We do not intend to cover CQP's results separately from those of Cheniere Energy, Inc. The call agenda is shown on Slide 3. Jack will begin with operating and financial highlights, Anatol will 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 for Q&A. I'll now turn the call over to Jack Fusco, Cheniere's President and CEO.

Thank you, Randy. And good morning, everyone. Thanks for joining us this morning as we review an incredibly rewarding and transformational 2022 and provide our outlook for what we expect to be another busy and successful year for Cheniere in 2023. To say 2022 was an incredible year for Cheniere would be an understatement. Disruption and volatility dominated energy markets worldwide as geopolitical tensions and the weaponization of energy supply turbocharged already volatile markets suffering from years of underinvestment in infrastructure. The criticality of reliable natural gas supply in a functioning energy system and the vital role natural gas plays throughout a developed economy was on full display as the world watched some of the wealthiest nations scramble to ensure reliable energy supply for their populations and economies. While it appears that a severe energy crisis in Europe over the winter has been narrowly avoided, the situation there reinforces the vital need for a reliable, affordable, secure, and diverse energy mix. At Cheniere, we were proud to play an important role in helping balance global energy markets when it was needed most. With the early completion and advanced startup of Train 6 at Sabine Pass, we produced approximately 44 million tons of LNG during 2022, 72% of which was directed to Europe, further illustrating the value of destination flexibility that Cheniere pioneered. Over the summer, we reached FID on Corpus Christi Stage 3, which will bring an additional 10 million tons of much-needed LNG to the global market and our long-term customers starting in 2025. In 2022, the focus of the global natural gas industry for both suppliers and consumers crystallized around the trilemma of energy security, affordability, and long-term environmental performance. On each of these critical points, Cheniere offers a market-leading solution, instilling my confidence in our growth potential, which I'll elaborate on in a few minutes. Please turn to Slide 5, where I will review key operational and financial highlights from the fourth quarter and full year 2022, and introduce our 2023 financial guidance. We generated consolidated adjusted EBITDA of approximately $3.1 billion in the fourth quarter, bringing our annual total to approximately $11.6 billion, above the high end of our guidance range. We generated approximately $2.3 billion of distributable cash flow in the fourth quarter, bringing the full year 2022 DCF total to approximately $8.7 billion, also above the high end of our guidance range. Looking back at the original guidance provided in November of 2021, we beat the midpoint of each of those guidance ranges by over $5 billion, illustrating the extraordinary nature of the global gas markets and the value of our ability to be a reliable operator and supplier during the year. For the fourth quarter, we generated over $3.9 billion of net income, and our annual total is a positive $1.4 billion. Our net income continues to be impacted by noncash unrealized derivatives, which worked in our favor in the fourth quarter as global gas markets moderated. During the fourth quarter, Zach and his team made excellent progress on our capital allocation plan, deploying billions of dollars into capital return via debt repayment, share repurchases, increased dividends, and into disciplined, accretive growth at Corpus Christi Stage 3. Operationally, the fourth quarter and full year 2022 were exceptional. We exported a record 166 cargoes from our facilities, bringing our annual total to a record of 638 cargoes. I'd like to recognize Cheniere’s approximately 1,550 professionals who worked tirelessly in 2022, demonstrating Cheniere’s execution and operations leadership in the global marketplace while achieving record safety metrics throughout the year. Now, shifting our focus to 2023, I'm pleased to introduce our 2023 financial guidance of $8 billion to $8.5 billion in consolidated adjusted EBITDA, $5.5 billion to $5.6 billion in distributable cash flow, and $4 to $4.25 in per-unit distributions of CQP. I am pleased to provide 2023 guidance figures that are significantly higher than our more normalized 9 Train run rate. I believe that the stabilization of both prices and volatility in the international gas markets will support stronger and faster demand growth, ultimately supporting my long-term confidence in the structural shift to natural gas worldwide. Turning to Slide 6, I will cover my key priorities for 2023. First and foremost, we have an established track record earned over multiple years of delivering on our promises, and I expect that to be maintained in 2023. We have set ambitious but achievable guidance ranges for the year, and our focus will be on strengthening that track record by delivering on our financial guidance. In 2023, with less CMI volume and without the variable of new capacity entering service, we have a higher degree of visibility on our metrics than we did a year ago to meet our forecasted production estimates and continue to progress on our 2020 vision capital allocation plan. Second, we expect to lead with organic growth and have over 30 million tons currently under development or under construction. Our $40 billion in infrastructure investments is one of the biggest competitive advantages we have, enabling economically advantaged capacity expansions such as Corpus Christi Stage 3. Construction activities at Stage 3 are progressing. It is too early to say we are ahead of schedule, but Bechtel has begun to execute on some aspects of early construction ahead of plan. Beyond Stage 3, we are progressing through the pre-filing process on midscale Trains 8 and 9 at Corpus Christi and expect to submit the full filing to FERC before the end of the first quarter. At Sabine Pass, we have just initiated the permitting process for a significant capacity expansion by submitting pre-filing documentation to FERC. I will discuss this project in more detail on the next slide, but we are extremely excited about developing the Sabine Pass expansion, which could add approximately 20 million tons of additional capacity at the site. Moving this project through engineering, construction, and permitting will be a major priority in 2023. Anatol, Ramzi, and the team are actively commercializing this new potential investment. Third, we'll further advance our climate and sustainability initiatives, which we'd like to describe as actionable, not aspirational. Despite the industry-wide focus on energy security in 2022, improving environmental performance remains a long-term goal, and establishing and maintaining environmental competitiveness is critical for continued natural gas adoption and the long-term resiliency of LNG. The programs we have discussed on recent calls—including our QMRV program, our cargo emission tags, and joining the UN's Oil and Gas Methane Partnership—are all efforts on which I expect continuous focus, improvement, and refinement to further reinforce Cheniere's leadership position on these crucial efforts. Now turning to Slide 7, I'll share some details about our next major capacity expansion at Sabine Pass. We've just commenced the permitting process on this large-scale project and expect to submit the full filing before the end of the year. The Sabine Pass expansion project is designed for approximately 20 million tons of LNG. The project is expected to consist of up to three large-scale liquefaction trains utilizing the same Liquefaction process technology deployed on the six operating trains at SPL. Each train is expected to have a nominal production capacity of approximately 6.5 million tons. The project is also expected to include a Boil-Off Gas Re-Liquefaction Unit, which would add almost a million tons of production, and two full containment LNG storage tanks. We have been hard at work on early-stage development of this project and have Bechtel already engaged on front-end engineering and design work. We will develop the Sabine Pass expansion project utilizing the same rigorous and financially disciplined approach to project development and capital investment you've come to expect from Cheniere. The SPL expansion project is consistent with the significant growth plans we laid out in our capital allocation presentation in September, showing a potential 90 million ton platform across Sabine Pass and Corpus Christi. Our infrastructure platform is an enormous competitive advantage, and this project is expected to capitalize on that to deliver Brownfield economics. We look forward to updating you on this large-scale growth project at Sabine Pass, as well as developments at Corpus as we move through this process. Thank you again for your continued support of Cheniere. I'll now turn the call over to Anatol, who will provide an update on the LNG market.

Thanks Jack, and good morning, everyone. Please turn to slide 9. An accelerated post-pandemic recovery followed by the curtailment of Russian gas flows into Europe led to a sharp increase in LNG demand in 2022. With limited new liquefaction capacity and several production outages, the LNG market remained extremely tight throughout the year, with prices reaching all-time highs and remaining elevated. Despite the supply-side challenges, global LNG trade grew by approximately 5% from 2021, equating to an additional approximately 19 million tons. Overall, US exports increased 9% year-on-year, up 6.3 million tons to 76.5 Mtpa in 2022, despite the Freeport outage in the second half of the year. US LNG represented nearly 40% of the growth in global LNG supply, and the early completion of our Train 6 meaningfully contributed to that growth. As Zach noted, our increase in production enabled Cheniere to help address Europe's call for reliable, flexible natural gas supply. Following the loss of Russia as a significant supplier, Europe became a substantial demand center for LNG, attracting approximately 70% of all US LNG in 2022, as prices reached record levels and redirected destination flexible US LNG volumes to address the deficit. The TTF monthly settlement prices averaged around $40 per MMBtu in 2022, over 180% higher than the $14 average in 2021. In the fourth quarter, the TTF monthly settlement prices averaged $42 per MMBtu, a 46% increase year-on-year, but significantly lower than the peak of nearly $100 in MMBtu in late August. Similarly, the 2022 JKM average settlement price increased by over 125% year-on-year to an average of $34 per MMBtu, with the fourth quarter average price increasing 38% year-on-year to an average of $38, but well below the summer peak of nearly $70. In the US, Henry Hub prices averaged nearly $7.22 but have moderated considerably since the peak in September and are now trading well below $3 per MMBtu. This rapid correction, driven by North American production growth, demonstrates the relative attractiveness of Cheniere’s Henry Hub denominated long-term FOB and DS contracts and underlines producers' desire to diversify from solely domestic indices. Despite the retreat of global gas prices to pre-war levels beginning in the fourth quarter and into 2023 on the back of a mild winter and demand reduction efforts in Europe, the overall market remains volatile. We expect volatility to remain elevated as Europe sorts out its near and long-term gas supply strategies and the impact of a post-COVID China on the market becomes more apparent. Let's now turn to slide 10 to address regional dynamics in more detail. Much of the flexible LNG in the market was directed to Europe and offset approximately 84% of the 74 Bcm, or 55 million ton reduction in Russian gas supply. Europe's LNG imports totaled over 120 million, of which 110 million tons went to the EU plus UK, marking a 69% increase year-on-year. US LNG to the block plus the UK totaled 48 million tons, a 165% increase year-on-year. Clearly, destination flexible US LNG was able to meet Europe's call for natural gas supply in 2022. Throughout the year, the EU implemented several extraordinary measures to mitigate the potential impact of a complete cutoff of Russian gas amid low nuclear and hydropower output. These measures, along with mild weather and demand price response, enabled Europe to replenish its inventories and avoid a potentially crippling energy crisis in the near term. Some coordinated initiatives included a regulatory push to immediately increase LNG import infrastructure, diversify supply sources, and reduce natural gas demand. To date, five new regasification terminals have commenced service in Europe since September, a key enabler of Europe's ability to grow LNG imports to record levels in the fourth quarter. Demand reduction efforts were also made across Europe, with residential, commercial, and industrial customers able to reduce aggregate demand by an estimated 12% during the year, as power generation increased coal usage. This trend is likely to reverse in 2023, given elevated gas storage levels and a mild weather outlook. Currently, it appears the European gas system will make it through this winter without the enforced supply restrictions many had feared. Amid historically high LNG prices, the global inflationary environment, lower economic activity, and reduced market liquidity led to some price-sensitive Asian buyers withdrawing from the spot LNG market. Imports into Asia declined by 20 million tons, or 7%, year-on-year, with nearly 16 million tons of the drop attributable to China. This marked the first substantial annual decline in LNG imports since China began importing in 2006. China's economy faced extended COVID restrictions, a property sector crisis, and severe drought, all of which led to a drop in total gas demand of 4 Bcm in 2022, primarily driven by the industrial and power generation sectors. Similar to parts of Europe, low hydro output and high gas prices spurred increased coal generation in the second half of 2022. However, with JKM and TTF prices moderating, we expect to see price-sensitive Asian LNG demand resume as indications of higher industrial activity in China emerge following the lifting of COVID restrictions. This development could have a potentially material impact on next winter's global balance. Moving to Slide 11, Europe’s shift away from Russia created an immediate supply gap of approximately 70 Bcm in 2022, which is likely to rise to approximately 110 Bcm in 2023, assuming Russian pipeline supplies are fully curtailed. This supply gap of 100 Mtpa is equivalent to around a quarter of the current global LNG market and highlights the critical role of LNG in ensuring energy security, underscoring the importance of long-term contracted and reliable LNG supply in the global energy mix. While short-term dynamics dominated headlines last year, the long-term fundamentals are central to our strategic planning and positioning, demonstrating the need for further investment in LNG capacity. Over the coming decades, both the supply and demand sides support new liquefaction infrastructure. In addition to high project development hurdles, capital intensity, and long construction timelines for new LNG facilities, legacy plant utilization rates worldwide have continued to decline due to outages, feedstock limitations, fleet inefficiencies, and competing domestic demand in some markets. Since 2010, the volume produced by these legacy projects has declined by 23%, or over 25 million tons, further contributing to the need for more capacity. While these facilities produced about a quarter of all total volume last year, their contribution is expected to decline over time as feedstock resources deplete, their ability to export diminishes, and their performance potentially degrades. Meanwhile, investment in downstream LNG infrastructure continues to grow, both in Europe and other parts of the world. Over 370 million tons of regas capacity is under development, equivalent to about 80% of global LNG trade today. Furthermore, nine new markets are expected to enter the LNG trade in the next two years, including Vietnam, the Philippines, and Ghana. Investing in new LNG supply is critically needed, not only to address the current market imbalance and meet expected long-term demand growth but also to offset declining production from certain legacy facilities. To this end, Cheniere is doing its part, with over 10 million tons under construction and another 20 million tons in the permitting process. We aim to leverage our many advantages to economically contribute to the overall reliability, security, affordability, and scale of the global LNG market. With commercial support for capacity beyond Corpus Christi Stage 3 in hand, the team is well-positioned to leverage that success as we develop and commercialize the SPL expansion project. With that, I will turn the call over to Zach to review our financial results and guidance.

Thanks, Anatol, and good morning, everyone. I'm pleased to be here today to review our fourth quarter and full year 2022 results, focusing on key financial accomplishments and 2023 financial guidance. As Zach and Anatol have noted, 2022 was quite a year for our company, our stakeholders, and our industry as a whole. The financial results reported today reflect the Cheniere team's unwavering commitment to operational excellence, execution, and financial discipline, which is especially important during this period of prolonged volatility in global energy markets. Turning to slide 13, for the fourth quarter and full year, we generated adjusted EBITDA of approximately $3.1 billion and $11.6 billion, respectively, and distributable cash flow of approximately $2.3 billion and $8.7 billion, or approximately $35 of annual cash flow per share. Full-year results exceeded the high end of our latest guidance ranges provided in September, with results ending up close to $5.5 billion higher than our original 2022 guidance. We have transformed our capital allocation objectives, becoming an investment-grade company, with Stage 3 construction fully underway and a sharpened focus on more robust shareholder returns via our upsized $4 billion buyback program and competitively growing dividends. In the fourth quarter and full year, we recognized income from 591 and 2,317 TBtu of physical LNG, respectively, which included 581 and 2,288 TBtu from our projects and 10 and 29 TBtu sourced from third parties, respectively. Approximately 80% of these LNG volumes recognized in income in both periods were sold under long-term SPA or IPM agreements with terms exceeding 10 years. Our fourth quarter and full year results were once again supported by increased margins realized on our LNG deliverables, driven primarily by elevated market pricing throughout the year and higher volumes produced at both of our sites, thanks to the early completion and ramp-up of SPL Train 6 and the maintenance optimization announced in May. Our total margins also benefited from portfolio optimization activities in addition to proceeds from the early termination of the Chevron TUA. Additionally, I would like to highlight that we generated net income of $3.9 billion and $1.4 billion for the fourth quarter and full year, respectively. As noted in prior earnings calls, our net income line was impacted by the unrealized noncash derivative impact, primarily relating to the mismatch of accounting methodology for the purchase of natural gas and the corresponding sale of LNG under our long-term IPM agreements. While this resulted in unfavorable changes throughout most of 2022 due to rising international gas prices, the moderating of international gas price curves during the fourth quarter provided a significant benefit, allowing us to reach a cumulative positive net income for the preceding 12 months for the first time in several years. Before discussing our financial guidance and priorities for 2023, I want to recap some key financial accomplishments for 2022, emphasizing how effectively we allocated capital back into the business and to our shareholders. First and foremost, I'm pleased to highlight that our commitment to achieving and maintaining a sustainable balance sheet was recognized by the rating agencies through 13 distinct upgrades to our credit ratings across our corporate structure over the last year, including the achievement of two investment-grade ratings at our parent entities. In November, S&P upgraded Cheniere and CQP by two notches to BBB, with a stable outlook, marking Cheniere's first and CQP’s second investment-grade rating. Shortly thereafter, Fitch initiated its coverage of Cheniere with a BBB- rating and a stable outlook. Achieving investment grade has long been a goal of ours, as we believe it positions Cheniere favorably for the future and validates the long-term value of our platform. During the quarter, we prepaid approximately $2.2 billion in consolidated long-term indebtedness, bringing our total debt paydown to just over $6.6 billion through the fourth quarter since launching our initial capital allocation plan in 2021, which included over $5 billion of debt reduction in 2022 alone. Since our third-quarter call in November, we also issued $500 million of senior secured amortizing notes due 2037 in the public and private debt capital markets, with proceeds used, along with cash on hand, to redeem the remaining SPL 2023 notes. In December, we repurchased over $750 million of the outstanding 2024 notes at CCH following a tender offer and redeemed the remaining nearly $500 million outstanding with cash on hand. We also continued utilizing our open market repurchase program, repurchasing over $400 million in principal of outstanding CCH notes with maturities ranging from 2025 to 2039 in the fourth quarter alone. Today, we have almost $10 billion of consolidated available liquidity, including our bank facilities, investment-grade balance sheets throughout the Cheniere structure, and our nearest maturity is not until next year. I'm proud of what our team has accomplished at such an accelerated pace, reflecting our focus on managing our debt across the corporate structure, strategically and opportunistically, for the long term. Having solidified our balance sheet and reached our initial investment-grade goals, we've recalibrated our debt pay down to share repurchase ratio from four to one to one to one, as outlined in our revised capital allocation from last September. In the fourth quarter, we repurchased approximately 4.4 million shares for over $700 million, bringing our total shares repurchased during 2022 to 9.3 million for approximately $1.4 billion. Given our one-to-one cumulative goal over time, expect to see increased share buyback momentum with growing relative buyback allocations for 2023. We also paid $1.0385 per common share in dividends last year, inclusive of a 20% increase for the third quarter, and declared and paid our sixth quarterly dividend of $0.0395 for the fourth quarter this past month. We intend to continue growing our dividend annually by roughly 10% through the mid-2020s as we construct Stage 3. Turning to slide 14, in 2023, our guidance is $8 billion to $8.5 billion in consolidated adjusted EBITDA and $5.5 billion to $6 billion in distributable cash flow, or over $20 of cash flow per share. These ranges reflect current international gas price curves, along with our significantly smaller open position relative to 2022 due to the initiation of several long-term contracts this year and planned maintenance at Sabine Pass. 2022 was an unprecedented year, with EBITDA and DCF nearing double and triple our respective 9 Train run rate guidance levels. 2023 is shaping up to be another incredible year, with guidance ranges multiple billions of dollars above the run rate levels for both, thanks to proactive management of our open capacity. While this does reflect a higher contribution from long-term contracts in 2023, our focus remains on achieving our 2020 vision of generating over $20 billion of cash and over $20 of DCF per share, which we expect to accomplish notwithstanding the moderation in near-term prices. With respect to open capacity, we have less than 70 TBtu of unsold LNG remaining, 20 TBtu of which are reserved for long-term origination. We currently forecast that a $1 change in market margin could influence EBITDA by approximately $50 million for the remainder of 2023. The marketing team has done an excellent job proactively selling our open capacity since November, moving from 150 TBtu to this guidance range of over $8 billion today and keeping us on track with our 2020 vision. Moreover, our results could be impacted by the timing of certain year-end cargoes heading into 2024. Our distributable cash flow for 2023 may also be affected by anticipated changes in the tax code under the IRA. However, the guidance provided today is based on current IRA tax law guidance, where we would not qualify for the minimum corporate tax of 15% this year. Both of these factors would primarily affect timing but not materially impact our cumulative cash flow generation through the mid-2020s as we deploy capital allocation. Reflecting on 2022, the year was filled with uncertainty across global energy markets, yet the Cheniere team remained focused on what we could control: the reliable, safe, and seamless operations at Sabine Pass and Corpus Christi, enabling us to achieve extraordinary results. We have accelerated our follow-through on capital allocation by deploying over $8 billion towards our above plans, including growth objectives with Stage 3. Our conviction in the critical long-term role of natural gas worldwide to address the trilemma of energy security, affordability, and long-term environmental performance has only strengthened amidst last year's market volatility. We are positioning Cheniere for the future in all we do, including our accretive growth projects, investment-grade balance sheet, and long-term commitment to generating meaningful and sustainable shareholder returns. That concludes our prepared remarks. Thank you for your time and interest in Cheniere. Operator, we are ready to open the line for questions.

Our first question comes from the line of Brian Reynolds with UBS.

Good morning, everyone, and congrats on now qualifying for S&P 500 eligibility. Maybe to start off just on the macro, we see a much different headline TTF and JKM price versus our time together on the last conference call. That said, we are starting to see some green shoots on demand recovery in both Europe and Asia. I was curious if you could broadly discuss what you are seeing in terms of near-term demand coming back, supporting the spot market. As a follow-up, perhaps on a longer-term basis with a more normalized headline price, are you seeing a pickup in contracting activity from counterparties? Thanks.

Thanks, Brian. I'll turn it over to Anatol. He can talk about the demand growth across the globe.

Hey, Brian. Good morning. We've had very good engagement throughout 2022, as you can imagine. As we discussed in the prepared remarks and throughout the last few years, the value of long-term contracts—the stability, reliability, and acquiring these volumes at a quarter or a third of that headline price—has never been clearer than it was throughout 2022. While we obviously saw short-term demand destruction, most countries remain committed to gas and continue to invest substantially in infrastructure, including China, India, and other Southeast Asian markets, as well as Europe. We're very encouraged by a mix of committed interest in our product, so we feel optimistic about this opportunity.

Great, thanks. As a follow-up on capital allocation, the recent investment-grade upgrades by two agencies, along with growth CapEx and dividends, seem to lead to a return of cash story via buybacks. Are there any moving pieces we should consider regarding the use of excess cash flow and balance sheet capacity?

Hey, Brian, it's Zack, and I think you got it right. The over $700 million of buybacks in Q4 was the most we've ever done strategically as we were focusing early last year on our investment grade. We overloaded the debt pay down to secure that rating once and for all with Fitch and S&P. The guidance is one-to-one, but we did pay down a bit more debt in the last quarter or so, so it’s now time to catch up this year and beyond to achieve our one-to-one cumulative goal. Given that we paid down over $5 billion last year, there is around $2 billion in buybacks relative to debt pay down needed over the next year or two. We'll be keenly focused on that while buying back at lower price levels than expected, helping us solidify our 2020 vision.

We'll take our next question from the line of Jeremy Tonet with JPMorgan.

Good morning. I want to start off here on Sabine Pass. At the risk of putting the cart ahead of the horse, I wonder if we could get any more color about how this commercialization process could look down the road. Specifically, if you're looking for gas sourcing, would this likely come from the Permian? Regarding financing, would CQP be issuing equity? What timeline for contract commercialization will we be thinking? Any bits of information you could provide would be super helpful.

Thanks, Jeremy. We are excited about the Sabine Pass expansion. As mentioned in our prepared remarks, this site is currently being utilized as a lay-down area, making it primed and ready to go, one of the advantages of a brownfield site. The infrastructure is there, and there's significant demand from our customer base worldwide. We had 13 foundational customers back in 2016, and now we have over 33 who take at least a cargo a month with contracts longer than 20 years. That diversity in our customer base has grown significantly as our contract structures evolved between FOB and others. I’ll turn it back to Zach to discuss specifics.

Sure, and then I'll hand it off to Anatol for insights on contracting. We're just starting the permitting process and engineering work with Bechtel. It will be some time before we spend even more than $100 million as we develop this over the coming year or so. Given that it's brownfield, it should be cost-effective. Still, it's 20 million tons, so expect us to approach it likely in stages to maximize efficiency, managing bank debt, capital raises, and equity over time. Our base plus variable distribution at CQP allows us to undertake this significant expansion, maintaining the base distribution while keeping within our cash flows. We will stick to our leverage targets and ensure an accretive structure.

Yes, just to address your question about gas supply integration, it has been a key success factor for us and part of our structural advantages. We take that seriously, and we will have robust solutions for that. You can expect a healthy, credible mix of producers and buyers alike, including European and Asian ones excited about this growth opportunity.

Understood. That's very helpful. Thank you. Just touching on your action points regarding the Boil-Off Gas Re-Liquefaction Unit and other enhancements. What type of economics will these CapEx projects have? Will they compete with the facilities themselves, and could tax incentives like 45-Q help?

On Boil-Off Gas, we're redirecting it back into the trains for processing. This consumes capacity but we’ve calculated the Re-Liquefaction Unit would significantly enhance production throughout the facility. This adds value we currently lack at either site. Regarding heat recovery units, having the ability to capture hot flue gas from gas turbines to produce power increases overall efficiency. We will utilize waste heat and make our approach more competitive while improving our environmental profile.

We will take our next question from the line of Marc Solecitto with Barclays.

With the formal upgrade to investment grade, could you discuss some benefits that come with it, either commercially or operationally, in terms of working capital management or collateral requirements related to hedges or forward sales?

Achieving investment grade is more than just symbolic. We have lower pricing on our working capital facilities and revolvers. Both corporate revolvers are now unsecured, providing greater flexibility. Additionally, CMI can utilize our parent guarantee to reduce collateral requirements for hedging, with our liquidity about $10 billion now with term loans, revolvers, and cash on hand. It’s a significant achievement and steps forward in our strategy.

Following up on a potential expansion at SPL, how should we think about the key potential cadence there? Could you potentially do that one train at a time? For the 20 million tons of expanded capacity, could there be additional debottlenecking on existing capacity with investments in ancillary infrastructure?

Our operating team continually impresses me with their abilities in debottlenecking and optimization efforts. So, yes, we intend to commercialize these trains as we've done in the past, potentially building them in stages. It is definitely our aim to maximize productivity and efficiency.

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

Good morning. Just one more follow-up on the commercialization of the Sabine Pass expansion. Anatol, could you explain how much of a disadvantage it is not to have FERC approval in hand when trying to commercialize, compared to other approved but untested operators? Perhaps it does not matter due to Cheniere's reputation.

Your observation is fair, and we've considered this. Last year, when commercializing Corpus Stage 3, we ended up securing contracts beyond just Stage 3 and hold a strong position with nearly 3 million tons available to convert to SPA. Our reputation and track record in execution give us an advantage in this process.

Thanks! Could you discuss the pros and cons you weighed regarding the decision to return to full-size trains versus mid-scale for your next project?

Now we have all tools at our disposal. Analyzing the economics, full-scale ConocoPhillips trains at Sabine Pass are the most efficient solutions versus smaller mid-scale units. Given the power mix, which primarily comes from coal in Texas, it is not environmentally advantageous. That led us to the decision favoring larger trains at Sabine Pass.

We'll take our next question from the line of Spiro Dounis with Citi.

Thanks. Operator. Good morning, team. First, regarding EPC costs, with inflation and labor shortages impacting upcoming projects, how are you balancing competitive liquefaction fees while meeting target returns?

We maintain a strong relationship with Bechtel built over the last decade. Together, we use limited notices to proceed and pay at-risk early to lock in materials and supplies, effectively managing inflation and meeting targeted returns. I anticipate we can continue doing this. I haven’t observed labor shortages impacting us yet, as Bechtel is ahead of schedule on Corpus Stage 3, and I expect them to maintain delivery ahead of guaranteed dates.

My second question relates to spot volumes. Since the last update, you've secured considerable volume. Have those activity levels continued? In placing the remaining 50 TBtu for spot, do you see value in waiting longer, or could we potentially see that closed before the next earnings call?

Great question, Spiro. Corey Grindal, our new Chief Operating Officer, has been working diligently on this. We must wait on some volumes due to our operational track record and the reputation we maintain. We plan to retain some cargoes for potential weather events and planned maintenance. We have sold most of our firm cargoes and will continue to place them as opportunities arise. As we think about the guidance, people are focused on how much we’ve proactively sold going into this call. The CMI team did an incredible job selling over $20 last year and continues to manage over $10 this year. With our EBITDA guidance of $8 billion to $8.5 billion and only 50 TBtu open, priced below $10, it's a minimal impact overall. This illustrates how locked in our projections are, and I expect Corey and the team to successfully reduce that number in upcoming calls.

We'll take our next question from the line of Sean Morgan with Evercore.

Hey, thanks guys for taking the question. The market seems somewhat surprised by the Sabine Pass's scale. I think it's a positive surprise as we proceed, leading investors to reassess CQP growth. Historically, CQP has been in tune with investor preferences. It appears you're maintaining most of this variable distribution component alongside the base distribution. How do you balance future CapEx for Sabine Pass with your distribution mandate?

Sure. I mentioned earlier how the base plus variable distribution policy was established for this purpose. It allows us flexibility to provide a stable base distribution while deciding how much variable to distribute. Currently, we project a variable component could generate a $4 to $4.25 DPU for ‘23. We don’t expect significant expenditures during development.

Thanks. That's really helpful. Also on the expansion, I'm excited that this growth catalyst seems to be back on the table, as Stage 3 has settled into models. Regarding the existing CMI marketing contract between SPL and CMI, will it be extended for the 20 million Sabine Pass expansion as well? What are we looking at for incremental volumes to CMI on a run rate basis?

Yes, the agreement between CMI and both projects will remain consistent, including the expansions at Sabine and Corpus, allowing us to leverage up to $3 for taking those volumes worldwide. As for volumes, we aim for 90% contracted when completed, leading to around two to three million tons of open capacity available for CMI to manage over time.

We'll take our last question from the line of John Mackay with Goldman Sachs.

Thanks for the time. Regarding boil-off and the CCS planned for this expansion, are both options considered for Corpus and at what stage?

Plans for additional facilities and technologies, such as CCS and the Boil-Off Gas Re-Liquefaction Unit, are currently not in the Corpus plans. These would require a filing with FERC for approval. We aim to first perfect technology at Sabine, then potentially roll it out at Corpus as well.

Understood. Also, securing gas for Sabine will require longer pipeline access. How are your customers approaching that? Are they looking at your ability to secure feed gas before committing?

Today, we buy 7.5 Bcf from 70 different producers throughout North America and Canada. We deliver it to our facilities, processing and shipping it off. This is a blip in the grand scheme, as you know; we're the largest purchaser of physical gas in the US and the largest holder of gas transport pipeline, ensuring delivery while tapping into all basins for comprehensive solutions.

Our last question will come from the line of Craig Shere with Tuohy Brothers.

Hi, thanks for your time. Considering the one-to-one ratio for capital allocation, when you're FID-ing projects at around three times EBITDA, should we consider this given the stabilizing balance sheet could allow changes to the one-to-one ratio?

I want to clarify that three times EBITDA is a target. However, achieving that indicates a working balance sheet as we grow. Construction will span four to five years, leading to debt before seeing EBITDA returns. We'll remain cautious about maintaining visibility on our financials, and the one-to-one ratio will continue as we go for future projects.

I would expect that while the technology remains the same, larger scales may yield earlier execution than anticipated. The ENC team has been impressive with previous projects, and based on past experience, I am optimistic we can deliver first LNG ahead of guaranteed timelines. Thank you, everyone. We appreciate all your support and hope to see you all soon.

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