Magnolia LNG, Stonepeak Finalise Equity Funding Agreement (USA)

Liquefied Natural Gas confirmed that wholly owned subsidiaries of the company and Stonepeak Partners have signed a legally binding Equity Commitment Agreement, including the agreed final form of the Magnolia LLC Agreement, to provide 100% of the construction equity for the company’s Magnolia LNG Project in Louisiana, United States. The total Stonepeak equity contribution is estimated to be US$660 million.

Stonepeak and the company signed an equity funding and strategic alliance term sheet on 26 July 2013, the key terms of which are incorporated in the Equity Commitment Agreement. Based on the Project’s current financial model, Stonepeak’s US$660 million equity investment will provide it with an approximate 50% equity interest in the project, with the company retaining around a 50% equity interest.

The Stonepeak equity transaction comprises two documents, namely:

1. Equity Commitment Agreement, which governs the relationship, cooperation, rights and obligations between Stonepeak and the company in relation to the Project through to a Final Investment Decision (FID); and
2. Magnolia LLC Agreement, which sets out the respective rights and obligations of Stonepeak and the company from FID, including the construction and funding of the project, the management and governance of the project, the allocation and distribution of the Project’s future profits, and other related matters. The Magnolia LLC Agreement serves the same purpose as a Joint Operating/Venture Agreement or Shareholder Agreement would in Australia.

This marks a major milestone for the Company in the development of the project with equity funding plans for the Project’s construction and operations now in place. The key terms of the Equity Commitment Agreement include:

• Stonepeak will commit to provide 100% of the Project equity at FID, which is estimated to be US$660 million. Stonepeak will receive an approximate 50% interest in the MLNG Project (based on a pre‐determined internal rate of return) in exchange for the Project equity funding;
• The company will receive a one‐off success fee on the Project reaching FID, calculated at 3% of the total project capital cost (the fee is currently estimated to be US$66 million);
• Stonepeak has approved the payment by Magnolia LNG to the company of an OSMR® technology license fee of US$25 million for trains 1 and 2, with 50% payable at FID and 50% payable at Commercial Operations Date. A further payment of US$25 million will be payable for trains 3 and 4 under the same terms;
• Stonepeak will assist the company in securing long term Project debt financing, which is estimated at US$1.540 billion. In this regard, Stonepeak will work with the Company in ensuring all material Project agreements and other documents are in a bankable form. Stonepeak and the company have selected three parties to present final proposals for the role of Project Financial Advisor; and
• Stonepeak will be entitled to appoint one manager to the Board of Magnolia LNG, LLC (the Project ownership company), with no voting rights prior to FID and the commencement of Stonepeak’s Project equity financing contribution.

Stonepeak Managing Director and co founder, Trent Vichie, said that “We are delighted to enter into this partnership with the Company for the Magnolia LNG Project. We look forward to working with the Company’s Projet management team to bring the Project to FID and ultimately commercial operations.”

The Company’s Managing Director, Maurice Brand, commented: “The Stonepeak Equity Commitment Agreement is a significant milestone in the development of the Magnolia LNG Project, and has considerably de‐risked our path to LNG production. The Project is set to be within the first 5 LNG export projects in the US to commence LNG supply.”

“Obtaining equity funding in a short period of time from a well‐regarded infrastructure fund is a solid endorsement of the Project, the OSMR® LNG Liquefaction Process, and the Company’s ability to develop and operate a major US LNG export facility.”

The Project is based on the development of 2 x 2mtpa LNG trains in Stage 1. First production is anticipated in the first half 2018. The Project can be increased by an additional 2 x 2mtpa LNG trains at a marginal cost for a total nominal capacity of 8mtpa.

Key milestones, “Conditions Precedent”, that Magnolia LNG will need to satisfy prior to Stonepeak commencing the Project equity financing, which are all usual for the nature of the Project, include:

• Executed Tolling Agreements for a total of 3.4mtpa of Firm Capacity with parties such as Gunvor. Magnolia LNG has already provided Gunvor with the first comprehensive preliminary draft tolling agreement for its consideration;
• Executed lump sum turnkey Engineering, Procurement and Construction“wrap” contract, which includes a fixed EPC cost and completion and production and plant efficiency performance guarantees. This EPC contract minimises cost and schedule overrun risks, as these risks are borne by the appointed EPC Contractor. Magnolia LNG expects to appoint its preferred EPC Contractor in the fourth quarter 2013;
• Executed Project Debt Financing Facility of US$1.540 billion, being 70% of the total capital cost estimate of US$2.260 billion for trains 1 and 2. Stonepeak and the Company will shortly select a Project Financial Advisor to assist Magnolia LNG ensure Project bankability and to secure the Project debt financing;
• Executed minimum 30 years Lease Agreement with the Lake Charles Harbour and Terminal District. Magnolia LNG has already signed a 4 year Site Option Agreement with the Port and agreed the definitive Lease Agreement; and
• The Federal Energy Regulatory Commission issuing to Magnolia LNG a Notice to Proceed with construction of the project. This is on schedule for early 2015 and is expected to be the last Condition Precedent to be satisfied to achieve FID.

As previously announced, the company has signed a non‐binding Tolling Agreement Term Sheet with Brightshore Overseas Ltd (an affiliate of Gunvor) and a non‐binding Heads of Agreement with Gas Natural SDG SA (GNF), for the 4mtpa planned output of Stage 1.

Brand added, “The Company is now focused on signing the definitive Tolling Agreements for the 3.4 mtpa Stage 1 firm capacity of the Project with Gunvor and GNF, selecting its preferred EPC Contractor, and progressing the required FERC approvals. We will continue to update shareholders on our progress on a monthly basis and when material agreements have been executed.”

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LNG World News Staff, October 24, 2013; Image: LNG Ltd