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Toshiba says China's ENN to cancel deal to take over its US LNG business

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Japanese company has offtake commitments at Freeport LNG

Texas facility preparing to start up later this year

Houston — Toshiba said Thursday that a unit of China's ENN has decided to cancel an agreement to acquire the Japanese electronics maker's US LNG business, which includes offtake obligations at the Freeport LNG export terminal in the US, which is preparing to start up later this year.

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In a statement posted on its website, Toshiba said ENN Ecological Holdings told it Wednesday night that the board of directors of ENN had made the decision. ENN cited the fact that the transfer of assets had not been completed by the end of March as contemplated when the transaction was announced, and that the required conditions could not be met within a short time frame.

The abrupt developments are at the very least a distraction for the LNG export project located south of Houston, although Freeport LNG is moving forward as planned and trying to commercialize a fourth train.

"It doesn't give us pause. It is not affecting us. They are continuing to stand behind their obligations," spokeswoman Heather Browne said of Toshiba in a telephone interview.

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. 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 decision in November 2018 to dump its US LNG business, which includes the offtake obligations at Freeport LNG.

The complicated transaction called for Toshiba to pay about $800 million to ENN. Toshiba said it wanted to focus on its core businesses and distance itself from volatile energy markets.

ENN, meanwhile, has been beefing up its LNG commitments. The company had a significant presence at the LNG2019 conference in Shanghai last week, where it announced a nonbinding deal with Australia's Woodside Energy for 1 million mt/year of LNG offtake over 10 years, starting in 2025.

"The initial thought was that when this deal was announced toward the end of 2018, it would reaffirm China's interest in making further -- and more substantial -- direct investments in US LNG," Madeline Jowdy, S&P Global Platts Analytics senior director, global gas and LNG, said of the Toshiba-ENN transaction.

She said that was a positive sign considering the US-China trade dispute that erupted months earlier and resulted in tariffs being imposed by Beijing on imports of US LNG.

"This recent development casts doubts on those plans, although it remains unclear if this is just a straightforward business decision between ENN and Toshiba and not politically motivated," Jowdy said.

The deal followed extensive negotiations that Toshiba held over several months with multiple companies about offloading the US assets. Tellurian, developer of the proposed Driftwood LNG export project in Louisiana, was among the early interested parties, but later decided against pursuing a deal, in part because of the startup delays at the Freeport LNG terminal.

CLARIFICATION SOUGHT

In its statement, Toshiba said ENN plans to submit its decision to terminate the transaction to ENN shareholders for approval at a meeting scheduled April 29. Toshiba said it was seeking further clarification from ENN and that it was trying to determine how the decision will affect its financial performance, if it must keep the US business for a period longer than it expected.

"Toshiba has not yet received official documentary notice from ENN regarding the termination, a condition for making the termination effective," the company said. "Toshiba will now take all measures necessary to get a full and correct understanding of the situation, including communicating with ENN as needed, in order to recognize and make decisions on issues related to the LNG business."

One potential hiccup in the deal involved the multiple utilities to which Toshiba planned to sell the LNG it was scheduled to buy from Freeport LNG. Toshiba had said that if the utilities that have already agreed to buy LNG from Toshiba did not approve the ENN deal, the Chinese company would 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.

"Toshiba's LNG team has continued to work very diligently to develop a US LNG business," Freeport LNG's Browne said. "We recognize that. From our standpoint, we're happy to continue with them as a customer."

-- Harry Weber, Harry.Weber@spglobal.com

-- Edited by Joe Fisher, newsdesk@spglobal.com