Energy Transfer (ET -1.62%) has spent years trying to get a project to convert its Lake Charles facility from importing natural gas to exporting liquified natural gas (LNG) off the ground. It has faced several obstacles in that development, including losing its joint venture partner Shell and having to press pause on the project due to lower prices during the pandemic. These delays have made it so that the company might not finish the project before its export approval from the Department of Energy (DOE) expires.
The company had asked the DOE for an extension, which it recently denied. That puts the project at risk of never coming to fruition, which would be a blow to Energy Transfer's long-term growth prospects. It could impact its ability to deliver on its plan of growing its 9.9%-yielding distribution in the coming years. Here's what the company's management team had to say about this disappointing development on the first-quarter conference call.
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Key Data Points
A surprising denial
Energy Transfer's CFO Tom Long gave a brief update on Lake Charles LNG during his prepared remarks on the call. He stated:
In May 2022, we received an extension from FERC (Federal Energy Regulatory Commission) of the deadline for completion of the construction of Lake Charles LNG facility to December of 2028. And in June 2022, we applied to the Department of Energy. As many are now aware, on April 25th, the Department of Energy denied our request for this extension. We strongly disagree with this decision and we plan to file an appeal with the DOE within 30 days of the DOE decision.
FERC initially approved Energy Transfer's proposed conversion of Lake Charles from an import and regasification terminal into an LNG export facility in 2015. The DOE authorized it to export up to 16.45 million cubic feet of LNG annually. However, those approvals stipulated that the company finish the project within a reasonable timeframe. That hasn't happened due to significant competition and volatility in the energy markets.
As a result, the company filed for extensions. FERC granted one, while the DOE did not. The company hopes to get that decision reversed. If that doesn't happen, it likely signals the end of the line for this project.
Lots of hard work over the years
Later during the call, an analyst asked Energy Transfer's management team for an update on the project. Long responded by giving a broader overview of what happened. He noted that the company has already spent over $200 million across several years trying to get this project online. "Then the pandemic hit, that slowed us down significantly," stated the CFO. It then dove back into the project following Russia's invasion of Ukraine, which caused a 180-degree turn in market conditions. The company beefed up its team and traveled throughout Asia and Europe to gauge interest from LNG buyers. It signed several LNG sales contracts, including bringing Shell back as a buyer.
This progress led the company to file extensions with FERC and the DOE last year. FERC immediately granted the request, while the DOE implied it would. Long commented:
For months, we've been given every indication that the DOE would approve our extension. And then low and behold, here recently, they've come out and said that because of a new policy, they are not going to extend our request. And they've cited the lack of progress.
Long noted that the DOE hadn't asked the company for a progress report over the past year. However, it made significant progress. The CFO stated: "We are in negotiations...as we speak with over 20 million tons of additional customers on top of what we've already signed up. We have significant equity players that we're in negotiations with." It also has significant infrastructure already built, including four storage tanks and a dock, which puts it ahead of some competing projects that don't have any existing infrastructure.
Given all this, the company is seeking to get this decision reversed quickly. It also doesn't want to lose its momentum with potential customers and equity partners, which might also opt for a competing project.
Hoping for a reversal
Energy Transfer had hoped to finally approve the construction of Lake Charles LNG this year. The project would have provided a big boost to the company. Long stated on a previous call, "Upon completion of the LNG project, we expect to realize significant incremental cash flows from transportation of natural gas on our Trunkline pipeline system and other Energy Transfer pipelines upstream from Lake Charles." In addition, it would earn income from its equity interest in Lake Charles LNG.
Given those potential future cash flows, the company hopes its appeal will lead to an extension so it can pursue this project. It's a process investors should keep an eye on since it could move the needle for the company over the long term by giving it more fuel to grow its big-time distribution.
