LNG

Costly investment programmes to facilitate Europe’s green energy transition are weakening the credit metrics of regulated gas and electricity networks. Moody’s Ratings hence changed the outlook of European TSOs to ‘negative’ from ‘stable’.

Transparent and established regulation still supports credit quality, but regulators struggle to facilitate infrastructure investment at an affordable cost. “If shareholders consider allowed returns or cost recovery mechanisms to be insufficient, then support will fall short of maintaining credit quality,” analysts commented.

Europe's power grids and gas network operators are hard pressed to handle the substantial growth in load-related Capex required, and planned investments, said Phil Cope, senior credit officer at Moody’s Ratings.“Pressing demands arise from the need to grid-connect more renewables and accommodate rising volumes of electricity demand other sectors, e.g. heating (heat pumps), transport (electric vehicles), and data centres, where demands for capacity will intensify to support the growth in AI,” he explained.

Capital spending has grown significantly in recent years: Five-year Capex guidance for many networks – especially electricity transmission – is at least double that of five years ago. The current regulatory framework allows many gas and power network operators to recover investment over 20 to 50 years. But analysts warn the surge in Capex dwarfs the rise to network companies’ operating cash flow and this, in turn, weakens cash-flow based credit metrics.

TenneT, the TSO handling the power grid in the Netherlands and part of Germany, has seen its five-year Capex guidance soar from €40 billion in 2023 to over €62 billion this year – with no end in sight. The Belgian/German network operator Elia, meanwhile, has seen the same Capex metric almost double from around €16 billion to €30 billion over the same period.

The French and Spanish utilities ENGIE and Iberdrola have either increased or stated their intention to rise their exposure to regulated electricity networks. Moody’s reckons this is because they aim to improve their risk profile by benefitting from the “growth in higher quality earnings” as these networks carry out their investment programs. Others, notably SSE of Scotland and the German regional utility EnBW have reduced their exposure by selling their minority stakes in their power transmission businesses in recent years.

Iberdrola, the Spanish utility company and former major liquefied natural player that sold most of its LNG portfolio to Pavilion Energy of Singapore in 2019, said it had agreed to sell 13 mostly gas-fired power plants in Mexico for $6 billion to the Mexican government.

The Mexican President Andrés Manuel López Obrador praised the deal with Iberdrola as a “new nationalization” of the electricity market in Mexico.

The Chairman of Iberdrola, Ignacio Galán, and Mexico’s President López Obrador, announced the deal after a meeting.

Iberdrola said the sales agreement was signed with an entity called Mexico Infrastructure Partners and involved 8,400 megawatts of capacity from 12 gas-fired plants and one 103 MW wind asset called La Venta III.

Iberdrola Chairman Galán said the Spanish utility was still committed to advancing the development of renewable energy in Mexico.

Strategy

“Iberdrola confirms its commitment to Mexico by reaffirming its leadership as the leading private generator of renewable energy with the backing of the Federal Government to continue operating its assets under market conditions and drive the energy transition in the country,” Galán explained.

“In addition, Iberdrola Mexico will continue to serve its existing customers and both parties will work together to try to resolve the various disputes that have arisen in the country in recent years,” the Iberdrola Chairman added.

Leftist President López Obrador had previously compared the attitudes of Iberdrola and several other companies to those of conquerors, a reference to the Spanish Conquistadors who had invaded South America and Mexico in the 16th Century.

Iberdrola had been a major LNG market participant until the 2019 transaction with Pavilion Energy when Iberdrola’s LNG assets were sold as part of the Spanish utility’s €3.5Bln ($3.8Bln) “non-strategic asset rotation” plan.

Mexico itself is a major importer of US pipeline natural gas as well as LNG and also has plans to be an LNG exporter.

New policy

The Mexican President said that the sales agreements for the 13 power plants allowed progress to be made on the implementation of Mexico's “new energy policy” for the future.

The transaction with Iberdrola gives the Mexico’s state-owned power company, Comisión Federal de Electricidad (CFE), or the Federal Electricity Commission, majority control over the electricity market.

“This means we're rescuing the Comisión Federal de Electricidad and this is a new nationalization of our electric industry,” stated López Obrador.

López Obrador added that the acquisition would take CFE's power generation holdings to almost 56 percent of Mexico's total, up from about 40 percent.

A statement said that the deal was expected to be completed within the next five months. 

Pavilion Energy, the Singapore LNG and natural gas market participant, has completed the transaction to acquire the portfolio of LNG and gas assets of Spanish utility Iberdrola as it also launches European trading operations.

Cheniere Energy has taken over care, custody and control from engineers Bechtel Inc of the first liquefaction Train completed at the Corpus Christi export plant in Texas and is expected to start regular commercial deliveries soon to Spanish and Indonesian contract customers.

“Train 1 at Corpus Christi has achieved substantial completion, becoming the first liquefaction train placed into operation at a greenfield liquefaction facility in the lower 48 states,” said Jack Fusco, President and Chief Executive of Cheniere.

“This momentous achievement was made possible by Cheniere’s professionals and our EPC partner, Bechtel, who worked diligently together to ensure a seamless transition from construction to operations,” added Fusco.

“I’d like to thank the Cheniere team and Bechtel for their world-class execution, which has enabled us to continue our impeccable record of bringing trains online safely, ahead of schedule, and within budget,” stated the CEO.

Brendan Bechtel, Chairman and Chief Executive the privately-held Bechtel, whose corporate headquarters are in San Francisco, said his company was proud to be contributing to Cheniere’s success on the US Gulf Coast.

“It was three years ago that we were able to support Cheniere’s entry into the LNG export market with Train 1 at the Sabine Pass Liquefaction project,” explained the Bechtel Chairman.

“With five trains now completed and operating well ahead of schedule, we are excited to continue working alongside Cheniere to deliver their next wave of trains with the reliability of outcome that Cheniere and Bechtel have become known for delivering,” he added.

“This program is a great example of how a one-team approach can bring world-class results, and I want to congratulate Jack and the Cheniere team for fostering this environment of collaboration and mutual success,” stated Bechtel.

Cheniere explained that under the Corpus Christi plant’s sale and purchase agreements (SPAs) with Spanish utility Endesa and Indonesian state energy company Pertamina, the date of first commercial deliveries is expected to occur in June 2019, upon which the term of each of these SPAs commences.

Additionally, volumes are expected to start being delivered in June 2019 under an SPA with a second Spanish utility Iberdrola.