Project Update

RNS Number : 3939L

Infrastrata PLC

19 April 2018

 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). With the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

19 April 2018

INFRASTRATA PLC

("InfraStrata" or the "Company")

Project Update

The Board of InfraStrata (LON: INFA), the UK quoted company focused on development of strategic gas storage capacity, is pleased to provide an update on the Company's 100% owned gas storage project in Islandmagee, Northern Ireland (the "Project" or "Islandmagee") and also to set out the current status of the Project's development and work to date.

Highlights:

·    Strategic milestones established for the Company, its Board and senior management team with an overriding focus on expediting the prospective revenue generation of Islandmagee;

·    The Front End Engineering and Design ("FEED") is a key step in the Project's development and the Company has recently announced that it has secured the funding arrangements to enable the Company to commence and complete the FEED and will have sufficient general working capital until the end of 2018 upon completion of the placing announced on 4 April 2018 (the "Placing"), which is subject (inter alia) to the passing of resolutions  at the General Meeting on 25 April 2018 (the "GM"); 

·    Once the Placing completes, the Company will have achieved the milestone of raising sufficient funds for the FEED to match the European Union Connecting Europe grant, enabling up to €4,024,000 of grant funding to be accessed by the Company, of which €1,600,000 has been received in cash by the Company and is currently held in escrow pending release against verified FEED expenditure, with the balance to be paid in instalments after satisfactory completion of each FEED stage;

·    Finalisation of formal contract agreements with key FEED contractors is nearing completion and FEED commencement is expected to be announced shortly;

·    A Project Concept Evaluation Study ("PCE Study") was commissioned by the Company in early 2017 to evaluate and define the key technical requirements and design parameters for the FEED;

·    Interpretation of the PCE Study findings by the Board and advisers demonstrates advantages through project phasing and, specifically, completion of the Project in two cavern increments enabling potential earlier revenue generation;

·    Independent verification work undertaken by an international consultancy firm demonstrates a robust return on investment from the Project with a baseline internal rate of return ("IRR") of 12%, with potential for further improvement in certain scenarios, including access to additional grant funding and an extension to the operational life of the Project;

·    The Board is assessing opportunities for additional grant funding and believes, based on work undertaken, there is potential for a 40 year operational life compared to the 20 year life upon which the Project economics have been modelled to date; and

·    Detailed discussions continue with construction financing providers in respect of Project level finance. A number of providers have expressed a conditional interest in taking a substantial Project level equity stake in Islandmagee's construction financing, subject to completion of due diligence and terms being agreed.

Adrian Pocock Chief Executive Officer of InfraStrata plc, commented: "This announcement demonstrates the extensive work undertaken to date to move the Project forward.  We are grateful to all those parties that have helped us achieve the milestones to date, including advisers, private and public organisations and our shareholders.

The PCE Study report was intended to prepare the Company for the commencement of the full FEED and has highlighted a number of positive design developments to enhance the Project and to potentially expedite first revenue generation.

The Board is now finalising matters ready for commencement of the FEED, an extremely important step in the Project's development.  Concurrently, we are also advancing discussions with construction finance providers for potential project level financing.

After extensive work within the Company, we are now in a strong position to advance the business and generate shareholder value in a real sense.  Our business momentum is gathering pace and I look forward to updating shareholders further."

Strategic Milestones

The Company's Board recognises that shareholders are eager to see a clear definitive plan to drive the Company forward and realise value from the Islandmagee project.

As a result, and in line with reasonable expectations when seeking to bring a major infrastructure project through final development and into the commercialisation phase, the Company has established the key strategic milestones for the Company, its Board and the senior management team members. Similar milestones will be included in contracts with third party suppliers and consultants to ensure the Company remains on track with its key operational and strategic objectives.

As an outline, the milestones cover the following areas:

-      Commencement of FEED as soon as possible and completion by Q4 2018, in line with grant timetabling requirements (see below);

-      Successful conversion of existing grant allocations received by the Company into cash and the application for, and securing of, all available additional grant allocations over and above those announced to date within Q3 2018;

-      Provide a meaningful update on agreements to be negotiated with gas storage/traders and construction finance providers at a project level during Q3 2018;

-      Provide updates of refined Project economics based on optimised project phasing, design maturation and commercial agreements during second-half of  2018.

-      Issue of tender documentation for the project construction phase in Q4 2018, in line with completion of FEED;

-      Selection of contractor(s) for project construction Q1 2019; and

-      Achieving Final Investment Decision point, confirming the decision to proceed to Project construction, including all required project construction finance agreements, in Q2 2019.

Financing

FEED funding

As previously announced the Company was awarded a grant from the EU Connecting Europe Facility, providing up to €4,024,000 in grant funding towards the cost of the FEED phase and in-situ downhole testing programme, subject to the Company receiving match funding.

As confirmed in the Company's Strategic Fundraise announcement on 4 April 2018 and with the completion of the Placing (which is subject, inter alia, to the passing of the resolutions at the Company's General Meeting on 25 April 2018), the Company will have raised the funding to enable the Company to commence and complete the FEED.

Of the €4,024,000 grant awarded, €1,600,000 has been received in cash by the Company and placed into a holding account pending commencement of the FEED wherefrom, subject to normal grant allocation procedures, the monies will be released to the Company against confirmed FEED expenditure.

Under the terms of this grant certain activity milestones are expected to be met including completion of the FEED engineering report by 28 September 2018 and completion of the FEED by 20 December 2018.  Upon satisfactory completion of milestones required by the grant, the balance of grant monies would be expected to be released to the Company soon thereafter.

Construction Finance

The Company has actively engaged with a number of potential finance providers to secure project level finance for the construction phase of the Project's development.

The overall Project construction CAPEX was previously estimated to be circa £308 million and of this around £100 million, or one third, would ideally be sourced from project level equity finance.  The work undertaken during the PCE Study has identified a number of Project enhancements in terms of phased project implementation that will be incorporated into the construction finance model. To be clear, this equity finance would be at the project level and not at the InfraStrata plc level.

Following extensive work undertaken by the Board, a number of parties have expressed a conditional interest in providing this project level equity finance subject to completion of due diligence and terms being agreed. 

The remaining debt proportion of the Project's construction finance is expected to benefit from the UK Government Guarantee Scheme (https://www.gov.uk/government/publications/uk-guarantees-scheme-key-documents).  Government support under this scheme takes the form of an unconditional and irrevocable financial guarantee of scheduled principal and interest in favour of a lender to an eligible UK infrastructure Project. The Company has opened dialogues with a number of potential providers of debt finance for the Project construction.  These discussions are expected to gather momentum as the FEED engineering progresses and further definition is produced on the budget and scope of the next phase of the Project.

Project Concept Evaluation Study ("PCE Study")

The Company has received the completed PCE Study report for the Project in mid-2017.  This study was commissioned in preparation for the FEED to evaluate the concept of value enhancement on the current design basis and to define the key technical requirements and design parameters for the FEED.

The report highlights the importance and commercial benefits of phasing the Project. The report also clarifies a number of technical areas and shows a potential improved level of profitability, when compared with earlier assumptions.

On the basis of the PCE Study report and the findings gained from discussions with key prospective stakeholders, the Board intends to follow the recommendations in the PCE Study for the Project to be completed in incremental sections.  The Board intends to work towards developing two caverns at a time (eight caverns in total, as originally planned) to seek to achieve the following:

·     securing commercial tenants for the caverns in advance of incurring costs (see below);

·     reducing the time to first revenue from the Project;

·     take advantage of the proposed project to allow reverse flow of the Scotland Northern Ireland Pipeline in the event that it is completed before maximum storage capacity of the Project is completed and available; and

·     align the pace of the debt facilities with the forecast revenue streams.

The Board intends to issue further announcements relating to the technical elements of the Project as the FEED process progresses.

Project Commercialisation

A key objective for the Project is the successful commercialisation of the underlying asset.  The Board has carefully considered the strategic market positioning of the Project, to identify the major companies operating in the market and to ultimately plan towards ensuring the best design to ensure that the facility is beneficial for all stakeholder and interest groups.

In this regard the Company has been in dialogue with many finance providers, gas storage operators, potential investors and Government-backed organisations. Following more detailed dialogue, a number of potential partners are now in the process of carrying out due diligence on the Company and the Project. 

Each of these potential partners has a different commercial proposal and the Company is in the process of evaluating each and negotiating terms, with a view to maximising the potential benefits to shareholders. The Board intends to conduct a final appraisal of all the available funding solutions and commercial partners before finalising its decision on which option to proceed with.

The outcome of this extensive work suggests that the Project has three primary routes to commercialisation which are not necessarily mutually exclusive: 

1.    Letting caverns on a long-term arrangement to a gas trading company or companies;

2.    Letting caverns to the Government to ensure it has a strategic reserve supply of gas in storage to meet demand spikes in periods of high demand; or

3.    For the Project's operator to purchase and trade gas via the facility as principal.

Based on the above, the Company is in negotiations regarding the terms of potential leases for the facility.  The Company has also entered into discussions with the Government regarding the potential longer-term implications of the gas storage market and the important role that the Project could facilitate, an aspect that may yet gain traction as a Government priority.

The Company, at this stage, has evaluated and discounted the possibility of it purchasing and trading gas from the facility.  It was felt that this would be a distraction from the important task of securing Project finance and constructing the facility. However, a major advantage of an incremental approach is that the Project's operator can re-visit the decision regarding whether to trade gas once the facility is operational and generating revenue with its first tenant.

What has emerged from the Board's discussions to date is that a smaller initial facility with a rapid turnaround from injection to withdrawal is what the market requires.  The feedback from the Company's discussions with industry stakeholders suggests that this would also be desirable to the gas trading market.

Project Return on Investment

The Company has been working with an international consultancy firm to ensure an independent verification of the Project's prospective return on investment. 

The results of the independent review and modelling of the Project demonstrate that the baseline IRR for the Project fully constructed, as modelled, is 12%, which the Board believes to be in line with a reasonable estimate of an industry average IRR.  This is a strong baseline outcome for the Project.

Notably, the independent review and modelling of the Project demonstrates that there is potential for substantial upside in the Project's IRR in certain scenarios, which includes if the Project receives significant levels of additional grant funding and an extension to the operational life of the Islandmagee facility.

The Board will continue to work with grant agencies to identify further opportunities for significant grant funding for which the Board considers the Project may be eligible, reflecting the strategic significance of the asset.

Furthermore, the Project has previously been modelled and internal returns determined based on a 20-year operational life, but the Directors believe that on the basis of the extensive technical work undertaken, there is a solid argument for the facility having an actual life of 40 years.  If a 40-year life is used for the Project's financial modelling, then this is expected to lead to a substantially increased IRR.

Further information will be announced regarding Project Commercialisation as material developments occur.

For further information, please contact:

InfraStrata plc Adrian Pocock, Chief Executive	c/o Yellow Jersey [phone]
Allenby Capital Limited (AIM Nominated Adviser & Joint Broker) Jeremy Porter / Alex Brearley / Liz Kirchner	[phone]
SI Capital Limited (Joint Broker) Nick Emerson	[phone]
Yellow Jersey PR (Financial PR / IR) Tim Thompson / Sophia Macleod / Henry Wilkinson [e-mail]	[phone]

-ENDS-

The Front End Engineering & Design (FEED) and Insitu Downhole Testing programme for the Islandmagee gas storage Project is co-financed by the European Union's Connecting Europe Facility.

Disclaimer releasing the European Union from any liability in terms of the content of the dissemination materials:

"The sole responsibility of this publication lies with the author. The European Union is not responsible for any use that may be made of the information contained therein."

information is available on the Project company's website: http://www.islandmageestorage.com/.  

 

END

 

 

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