Houston — Japan's Toshiba will pay about $800 million to China's ENN to take over its US LNG business that includes long-term obligations to buy liquefied gas from an export terminal in Texas, as the electronics maker focuses on its core businesses and distances itself from volatile energy markets.
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The complicated transaction announced Thursday follows extensive negotiations that Toshiba has held over the last several months with multiple companies about offloading the US assets.
Amid the US shale revolution that unlocked vast reserves of cheap natural gas, Toshiba signed a binding 20-year agreement in 2013 with Freeport LNG for 2.2 million mt/year of LNG from the Quintana Island facility upon completion of the third liquefaction train there. Since then, the Texas facility has faced construction delays and its first train has yet to start commercial operations. Uncertainties about future LNG prices and a lack of synergies with its other businesses forced Toshiba's hands.
"In reaching its decision, Toshiba weighed ... the full alternatives of withdrawal from the business by the transfer or by canceling the liquefaction agreement and the LNG related agreement, or continuing the business by its own," the company said in a statement.
Under the deal, Toshiba will transfer all outstanding shares of an entity that holds its US LNG assets to ENN. The Chinese company will pay Toshiba $15 million (1.7 billion yen) for the shares, while Toshiba will pay $821 million (93 billion yen) to ENN, largely to assume the LNG offtake contract obligations with Freeport LNG.
"The amount of this one-off payment was proposed by the buyer in the bid process," Toshiba said, adding that ENN's offer was determined to the best one from multiple candidates that evaluated the present value of Toshiba's US LNG business.
Since November 2013, spot LNG prices in Asia have plunged 40%, with Platts JKM, the benchmark price for spot LNG in Northeast Asia, assessed at $10.425/MMBtu on Wednesday.
One potential hiccup in the deal, which is targeted to close by March 31, 2019, involves the multiple utilities whom Toshiba planned to sell the LNG it was scheduled to buy from Freeport LNG. Toshiba said that if the utilities that have already agreed to buy LNG from Toshiba do not approve the ENN deal, the Chinese company will buy that supply from Toshiba under the same conditions that had been agreed with the utilities, thereby releasing Toshiba from any impact from the offtake obligations.
Another matter involves how Freeport LNG responds.
Toshiba said that if it is required to make a payment to Freeport LNG due to a default under the original offtake agreement, ENN will compensate Toshiba for the full amount. ENN is required to provide Toshiba with a $500 million (56.6 billion yen) bank guarantee letter.
In an email responding to questions, Freeport LNG spokeswoman Heather Browne offered congratulations to Toshiba for the successful conclusion if its sale process. However, she did not address the terms of the agreement.
"We welcome ENN to our existing suite of world class offtakers, and look forward to working with them as we move forward with commencement of commercial operations in the coming year," Browne said.
Earlier in 2018, Freeport LNG pushed back the expected commercial start date for the export terminal's first train to September 1, 2019, a roughly nine-month delay from a previous target of the fourth quarter of this year. It cited a combination of flooding following Hurricane Harvey in August 2017, as well as contractor execution delays.
The lead contractor, McDermott International, which picked up the job when it acquired CB&I, has also faced challenges on other US LNG export projects with which it has been involved.
One of the multiple companies that had expressed interest to Toshiba in acquiring its offtake commitment at Freeport LNG was Tellurian, developer of the proposed Driftwood LNG export terminal in Louisiana. Because of the delays at Freeport LNG, Tellurian passed. It was "not comfortable" that Train 3 was "going to be available for any period of time that" Tellurian would need it, a person familiar with Tellurian's discussions with Toshiba told S&P Global Platts.
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