US LNG assets change hands [NGW Magazine]
Stakes in a US liquefaction terminal and in an LNG-focused company are in the process of changing hands. Dominion Energy is selling a 25% operating interest in the Cove Point LNG terminal in Maryland to Berkshire Hathaway as part of a broader transaction involving the handover of most of its natural gas transmission and storage assets.
And separately, Blackstone Group is selling its stake of around 41% in Cheniere Energy Partners to Brookfield Asset Management’s infrastructure unit, as well as to its own Blackstone Infrastructure Partners unit.
These transactions – not to mention Brookfield’s acquisition of a 25% interest in Cove Point LNG in late 2019 – are noteworthy for the involvement of deep-pocketed companies that do not specialise in natural gas or liquefaction. Blackstone and Brookfield are both alternative asset management firms, while Berkshire Hathaway is a giant holding company.
In addition, the transactions illustrate that while proposed US LNG terminals are struggling to move forward and secure financing against a backdrop of global oversupply and low prices, investing in existing facilities is still an appealing option. Indeed, these buyers – or other players – may pursue the acquisition of further LNG assets.
Cheniere partnership stake
The transaction involving Blackstone’s stake in Cheniere Energy Partners was confirmed in an August 22 filing with the US Securities and Exchange Commission (SEC). The deal involved a $34.25 per unit sale price, which puts its overall value at around $7bn, a source familiar with the transaction told NGW. The stake will be split between Blackstone and Brookfield on a roughly 50:50 basis, with each thus owning almost 21% in Cheniere Energy Partners upon the deal’s completion this month.
Cheniere Energy Partners is a limited partnership formed by LNG producer Cheniere Energy to build, own and operate the Sabine Pass LNG export terminal – the first to start up in the US over the past few years – in Louisiana. Blackstone agreed to invest around $1.5bn in the partnership in 2012 through its Blackstone Energy Partners private equity fund.
The transfer of half of this interest to Blackstone Infrastructure comes as Cheniere finishes building the sixth and final liquefaction train at Sabine Pass and prepares to move to a purely operational phase at the plant. According to the source, Blackstone Infrastructure does not have a time horizon for selling a given asset and can own it over the long term – unlike Blackstone Energy, which typically has a shorter holding period.
Illustrating the potential attractiveness to investors, Cheniere has previously estimated that by the time Train 6 at Sabine Pass enters service – now scheduled for 2022 – the fixed fees paid by offtakers will amount to $3.3bn/yr.
In an August 24 note, financial services firm Morningstar commented that the transaction represented a success for Blackstone, given the size of the deal compared with its original investment in Cheniere. However, it did not rule out that Brookfield may buy out Blackstone Infrastructure’s stake in the future, or even acquire Cheniere Energy Partners outright.
“With virtually all future development activity expected to take place at the Cheniere Energy level, Cheniere Energy Partners has more or less served its purpose as a capital-raising vehicle, and we do not expect it to exist over the long run,” Morningstar said.
Morningstar energy strategist Stephen Ellis, who authored the note, clarified this for NGW. “When I say Cheniere Energy Partners will cease to exist, that means the current public equity ownership will eventually transfer to private hands, either entirely owned by Brookfield, another party, or as a private subsidiary of Cheniere Energy itself.”
Asked who else may be interested in stepping in at a future date, Ellis suggested Berkshire Hathaway. “As it stands now though, given its new ownership, I'd give Brookfield a slight edge,” he said.
Morningstar described Brookfield as “an experienced and long-term oriented infrastructure investor, which could be useful for further capital-raising efforts from the Cheniere entities”.
Dominion steps back
The Dominion transaction, meanwhile, comes as the gas and utility company adjusts its business to better pursue its goal of net zero greenhouse gas (GHG) emissions by 2050.
When Dominion sold a 25% stake in Cove Point LNG to Brookfield last year for just over $2bn, it cited its intention to “establish a permanent capital structure for Cove Point”. The Berkshire Hathaway transaction, by contrast, comes as part of a broader shift away from fossil fuels and towards “state-regulated, sustainability-focused utilities”.
The operated interest in Cove Point is one of a package which also includes stakes in small-scale LNG ventures and is valued at $9.7bn in total, including $5.7bn worth of debt.
“Berkshire Hathaway’s purchase of gas transmission and storage assets includes one of the transmission lines Cove Point connects into, as well as other LNG assets, such as Dominion’s stake in the JAX LNG facility in Jacksonville, Florida, and the Trussville LNG facility in Alabama,” Dominion told NGW. But it denied there were plans to sell its remaining 50% non-operated interest in Cove Point. “Natural gas is the energy source allowing us to more quickly expand our solar and wind portfolios and will remain an integral part of our energy mix for years to come,” it said. However, at this point “it makes sense for the day-to-day operations to be overseen by Berkshire Hathaway.”
Another Morningstar equity analyst, Charles Fishman, agreed that it did indeed make sense for Berkshire Hathaway to assume operatorship of Cove Point. This is because the broader handover of gas assets includes personnel, presumably including those with experience of operating the terminal.
However, Morningstar said previously that it believes cash flow from Cove Point to be more important to dividend security than any other asset Dominion owns, and this could factor into the company’s desire to retain a 50% interest in the facility. Morningstar describes Cove Point as a wide-moat asset – or one that has a long-term competitive advantage. “In the case of Cove Point it’s really because of the quality of the take-or-pay contract with the two counterparties,” Fishman told NGW. The counterparties in question are a joint venture between Japanese firms Sumitomo and Tokyo Gas, and a subsidiary of India’s Gail.
“The 20-year agreement with each of these creditworthy counterparties has a fixed fee that covers all operating and capital costs, including profit,” Morningstar said in a report on Dominion. “Natural gas is supplied by the counterparties. Thus, Dominion takes no commodity or volume risk.”
On top of the only risk for Dominion and its partners in Cove Point being operational, Fishman said he considers it unlikely that any other major LNG export terminal would be licensed on the US East Coast soon. This gives the facility a further competitive edge that may have boosted the facility’s attractiveness for the companies buying into it.
Berkshire Hathaway declined to comment, while Brookfield did not respond to NGW’s query. However, Fishman said Cove Point was certainly the kind of infrastructure project investment that would appeal to both firms. Indeed, given Brookfield’s upcoming acquisition of the Cheniere Partners stake, it appears that the current challenges faced by the LNG market have not deterred it from pursuing similar investments after buying into Cove Point last year.