Rio Grande LNG: Outsized deal – outsized complications

In a further sign of the momentum behind the US LNG market, NextDecade has closed a $12.3 billion debt financing for the Rio Grande LNG Phase 1 project. The deal will support the construction of three liquefaction mega-trains and is the first US LNG financing to include a private placement at the time of the final investment decision (FID).

To be located in Brownsville, Texas, Rio Grande LNG will have a nameplate liquefaction capacity of 27 million tonnes per annum (MTPA) once all five liquefaction trains have been developed. Phase 1 includes the construction of the first three trains and will have a capacity of 17.6 MTPA. NextDecade has issued a notice to proceed to Bechtel, the project’s EPC contractor.

NextDecade will invest $283 million in Phase 1 and has secured $5.9 billion of financial commitments from GIP, GIC, Mubadala Investment Company, and TotalEnergies. GIP, GIC, and Mubadala are financial investors. Under the joint venture agreement, NextDecade’s stake in the project entitles it to up to 20.8% of project cashflows, while the financial investors will receive 62.5% and TotalEnergies will receive 16.7%.

Debt raised to finance the project includes $11.6 billion of senior secured non-recourse bank credit facilities, which include $11.1 billion of construction term loans and a $500 million working capital facility. NextDecade also closed a $700 million senior secured non-recourse private placement. Gearing for the transaction is in the region of 70% and a secondary syndication for the bank debt is currently in progress.

The bank debt is structured via two different credit agreements, namely the CD Credit Agreement and the TCF Credit Agreement. The CD Credit Agreement includes a $10.3 billion term loan available to the borrower in three tranches to cover EPC, operating, and maintenance costs, fees and expenses associated with the CD Credit Agreement, and to fund a six-month debt service reserve account (DSRA). In addition, the CD Credit Agreement includes the $500 million working capital facility, which functions as a revolver and letter of credit facility to fund certain working capital needs.

The TCF Credit Agreement is a two-tranche $800 million construction loan with a similar purpose to the loan made through the CD Credit Agreement. The primary difference between the two credit agreements is that in the case of the TCF Credit Agreement, TotalEnergies will provide contingent credit support to the lenders. This credit support involves TotalEnergies agreeing to pay past due amounts owed by the project under the TCF Credit Agreement. A source close to the deal notes that TotalEnergies has taken advantage of the strength of its balance sheet to provide this form of credit support in several other project financings.

Including NextDecade’s equity contribution, a total of $18.4 billion of debt and equity has been raised to finance the project. According to a NextDecade SEC 8-K filing, this makes the deal the largest greenfield energy project financing in US history. Lenders on the bank financing currently include MUFG, Mizuho, and JP Morgan. MUFG and RBC are placement agents for the private placement. The bank financing is structured as a seven-year mini-perm and is priced at SOFR-plus-2.25%, while the notes offered under the private placement were issued at par and priced at 6.67%. The notes have a ten-year maturity and a bullet repayment schedule. 

MUFG is financial adviser to NextDecade for the debt financing and Macquarie Capital is financial adviser to NextDecade for the equity financing. Latham & Watkins is lead outside counse to NextDecade on the project financing. King & Spalding advised NextDecade on the EPC Agreement with Bechtel, LNG marketing, and all real estate matters. Other legal advisers on the transaction include Kirkland & Ellis (GIP), Jones Day (TotalEnergies), Sidley Austin (GIC), White & Case (Mubadala), and Norton Rose Fulbright (lenders).

The project has long-term LNG sale and purchase agreements (SPAs) for 16.2 MTPA of LNG with TotalEnergies, Shell NA LNG, ENN LNG, Engie, ExxonMobil LNG Asia Pacific, Guangdong Energy Group, China Gas Hongda Energy Trading, Galp Trading S.A., and Itochu Corporation. Many of the SPAs run for twenty-year terms. COD on the first train is expected in 2027.

The final EPC cost for Phase 1 is roughly $12 billion. Additional costs covered by the project financing include: owner’s costs and contingencies of approximately $2.3 billion; dredging for the Brazos Island Harbor Channel Improvement Project; conservation of more than 4,000 acres of wetland and wildlife habitat area and installation of utilities of approximately $600 million; and interest during construction and other financing costs of approximately $3.1 billion.

TotalEnergies and the financial investors all have options to invest in Train 4 and Train 5 of the project, as well as options to invest in a planned carbon capture and sequestration project at Rio Grande. The right of TotalEnergies to invest in Train 4 and Train 5 is dependent on the use of its LNG purchase rights for 1.5 MTPA in each of Train 4 and Train 5. TotalEnergies has the right but not the obligation to purchase LNG from Train 4 and Train 5 for a 20-year period.

Locational advantages

As might be expected, a project on the scale of Rio Grande has been in the works for some time. NextDecade was founded in 2010 and has long worked to develop the LNG facility in Brownsville. The project’s south Texas location is an important part of its business case. Positioned near the border with Mexico, Brownsville receives comparatively low levels of rainfall and the navigability of shipping channels is less affected by fog than some areas of the Gulf Coast.

Similarly, south Texas has a lower risk of experiencing hurricanes and/or tropical storms than many Gulf Coast locations. The shipping channels in the area are also under-utilised. All these geographic factors lower construction and operating risk, increasing the viability of the project in the eyes of investors and lenders.

The location of the project also gives it access to feed gas from the Permian Basin and Eagle Ford shale plays. High levels of crude oil production have led to large volumes of associated natural gas in west Texas and New Mexico. This natural gas is in abundant supply, but has relatively few offtakers due to a lack of pipeline infrastructure to transport the gas to other regions. Natural gas from the region is, therefore, cheaper than in areas such as Louisiana. Rio Grande will be supplied with gas via the 4.5 Bcf/d Rio Bravo Pipeline Project. Enbridge entered into an agreement to acquire the Rio Bravo Pipeline Company from NextDecade for up to $25 million in February 2020.

A complicated path to financial close

In May 2017, NextDecade announced that it had appointed Societe Generale and Macquarie Capital as financial advisers for the project’s debt and equity financing. Societe Generale resigned its advisory mandate a few years later, as the bank’s investment policy precluded lending to new LNG projects and only allowed it to service existing clients. MUFG subsequently pitched for and secured the debt advisory role.

The project was commercialised very quickly at the end of 2022, with most of the SPAs signed in the 18 months preceding the fourth quarter of 2022. Although a few SPAs were agreed before the outbreak of the war, the majority of these agreements were signed following Russia’s invasion of Ukraine, which caused global gas supplies to become severely constrained. Describing this shift, a source notes: “There was a trickle and then there was a wave.”

The rapid commercialisation of the project at the end of last year led to a need to close the project financing as soon as possible. This was partly due to the fact that EPC prices can only be held for a limited period, particularly in the current inflationary environment. The EPC price rose a number of times before financial close, meaning that closing the financing in a short timeframe was crucial to prevent the price from increasing to the point of being an existential threat to the project.

The financing encountered some obstacles in its launch to the bank market. I Squared Capital was initially intended to be part of the consortium of equity investors and intermediate agreements had been signed to this effect. When the deal went out to market, the details of I Squared’s investment in the project were still being finalised. However, within a month of the deal launching to banks, I Squared exited the project. I Squared had had exclusivity on the project equity and had been due to provide a substantial portion.

The sudden loss of a major equity investor initially made closing the financing challenging, particularly given the present demand for bank capital from other major US LNG players such as Venture Global, Cheniere, and Sempra. In light of the sheer volume of debt that needed to be raised, the decision was taken to get credit ratings in order to make use of the bond market. The ratings were investment-grade even without significant sponsor completion guarantees.

Once GIP joined as an equity investor, the deal was relaunched to the bank market in March 2023 and using the bond market proved not to be necessary to secure the amount of debt required. But a small bond was still printed to reward institutional investors for doing the due diligence on the bond financing and preparing to invest in the project. Issuing the bond was also an exercise in relationship building, as many of the institutional investors are prominent players that may need to be approached if and when the bank debt is refinanced.

Delayed regulatory approvals from the Federal Energy Regulatory Commission (FERC) also had an impact on the financing timeline. Legal challenges to the FERC’s initial approval of the project contributed to a stalled permitting process that left the project in regulatory limbo for around two years. Despite the fact that work on the project financing was ongoing, the deal was unable to move towards financial close without a regulatory green light. This placed additional pressure on the turnaround time needed for the financing, which needed to close before the expiry of agreements such as EPC, offtake, and pipeline contracts. The FERC finally granted approval for the project in April.

The participation of TotalEnergies also helped to push the financing over the line, satisfying some of the last requirements for the project to reach the FID stage. In June, the company announced that it would take its 16.7% stake in the first phase of Rio Grande and that it had signed a 20-year SPA to purchase 5.4 MTPA of LNG from the project. Before TotalEnergies was confirmed as an offtaker, it was thought that five or six additional offtakers would be needed, but TotalEnergies agreed to purchase roughly all of the project’s remaining production capacity. Finally, TotalEnergies also acquired a 17.5% stake in NextDecade for $219 million.

The Proximo perspective

Raising such an enormous quantum of debt for Rio Grande in a relatively short space of time is a feat in itself. The deal dwarfs even transactions like the $7 billion Port Arthur LNG financing, which closed earlier this year. NextDecade and its advisers also had to close the deal while wrangling with regulatory issues, EPC and offtake contracts that were time-limited, I Squared walking away from the project, and a crowded US LNG market. The transaction’s status as the largest greenfield energy project financing in US history sets a benchmark that will be difficult to surpass.

There are some similarities between Rio Grande and Port Arthur. Like Port Arthur, the project makes use of the traditional stick-built model rather than the modular approach taken by companies like Venture Global. Both projects are also being built by Bechtel – the gold standard of LNG EPC contractors. While Rio Grande and Port Arthur were always likely to be commercially viable in the long-run, Russia’s war on Ukraine has created a cascade of demand from European and Asian offtakers for long-term SPAs with US LNG facilities. Rio Grande thus joins the swiftly swelling ranks of a new generation of highly profitable LNG projects in the US.

Rio Grande has quite a number of Asia-based offtakers alongside its European buyers. While many European countries are suffering from gas supply constraints resulting from directly boycotting Russian gas, this has impacted the availability of gas worldwide as European offtakers have looked to purchase gas elsewhere. This has led to strong demand from Asia for US LNG.

The presence of companies such as Engie, Galp, Itochu, and China Gas amongst the offtakers continues the trend of international utilities purchasing US LNG primarily for domestic use in the wake of supply shortages. Other offtakers like Shell and TotalEnergies will bolster their global gas trading volumes by buying LNG from Rio Grande.

Perhaps the most intriguing aspect of the Rio Grande financing is its use of the private placement at FID. The decision to issue the note despite this being unnecessary in terms of raising sufficient debt for the project may well be a wise strategy. Having an established relationship with institutional investors will ensure a smoother path to a capital markets refinancing. This may allow the sponsors to recycle the banks’ capital through an early refinancing, freeing up bank capacity for Train 4 and Train 5 and for the carbon capture project. As US LNG becomes further embedded in global energy supplies, this is a structure that may well be replicated in future deals.

Rio Grande LNG Phase 1

• Financial close: July 2023
• Description: A project financing for the Rio Grande LNG project in Brownsville, Texas that is the largest greenfield energy project financing in US history and the first to use a private placement at FID.
• Sponsors: NextDecade, GIP, GIC, Mubadala Investment Company, and TotalEnergies
• Debt: $12.3 billion
• Tenor: 7 years (bank debt); 10 years (private placement)
• Pricing: SOFR-plus-2.25% (bank debt); 6.67% (private placement)
• Lenders: MUFG, Mizuho, JP Morgan
• Placement agents: MUFG and RBC
• Financial advisers: MUFG (debt) and Macquarie Capital (equity)
• Sponsors’ legal advisers: Latham & Watkins and King & Spalding (NextDecade), Kirkland & Ellis (GIP), Jones Day (TotalEnergies), Sidley Austin (GIC), White & Case (Mubadala)
• Lenders’ legal advisers: Norton Rose Fulbright
• EPC contractor: Bechtel