US$5.5m C&I Pipeline Secured

RNS Number : 0343M

Ncondezi Energy Limited

06 May 2020

 

News Release  

US$5.5m C&I Pipeline Secured

6 May 2020: Ncondezi Energy Limited ("Ncondezi" or the "Company") (AIM: NCCL) is pleased to announce that it has finalised a binding agreement with GridX Africa Development ("GridX") for a pipeline of solar and battery storage projects in the Commercial and Industrial ("C&I") sector.

Highlights :

· Ncondezi and GridX have signed a binding Relationship Agreement under which Ncondezi has the right (but not the obligation) to fund a pipeline of GridX C&I solar and battery storage projects in Mozambique (the "Projects")

· Ncondezi has a right of first refusal to fund 100% (up from 50%) of the Projects up to a total of US$5.5 million (the "ROFR")

· Projects include a diversified portfolio of 7 identified potential projects with a combined potential installed solar capacity of 2.8 MWp and 4.5 MWh of battery storage (the "Initial Projects")

· Initial Project investments into qualifying projects, subject to funding, represent an annuity revenue stream potential of over US$750,000 per annum

· Projects to be funded on a project by project basis and must meet strict minimum KPIs to be eligible for funding including:

o  Signed offtake agreement

o  Use of proven technology

o  All consents and permits to commence construction

o  Meeting minimum credit requirements

o  Generate an ungeared equity post tax IRR to Ncondezi of at least 10%

· GridX responsible for all costs incurred up to a Project meeting the KPIs and Ncondezi exercising its right to invest

· ROFR to be managed under newly formed subsidiary Ncondezi Green Power

· Initial Projects are at an early stage of development with first funding requirement not expected until Q4 2020 / Q1 2021

· The Relationship Agreement replaces the Term Sheet signed with GridX announced on 5 April 2019

Ncondezi Chief Executive Officer, Hanno Pengilly said: "We are pleased to have finalised the Relationship Agreement with GridX and believe it provides an optimal structure for Ncondezi to build out its C&I solar and battery storage strategy, bringing a focused portfolio of potential projects in Mozambique, which we will have full control over, in a jurisdiction we know well. 

This structure provides the opportunity for a phased and low risk entry point into the sector, with GridX responsible for the development and delivery of construction ready projects for investment consideration and, over time, a diversified portfolio approach spreading investment risk across multiple projects.

The Initial Project pipeline includes 7 potential projects covering a diverse range of sectors from hospitality and tourism to food and drink manufacturing and retail centres ensuring a wide range of potential offtakers and securing against any downturn in a single industry. These projects, along with our existing solar and energy storage facility currently under construction, represent a combined installation potential of 3.2 MWp of solar PV and 5.5 MWh of storage with potential revenues of over US$950,000 per annum. The Initial Projects are expected to be developed in a phased approach with no immediate funding requirements until the end of the year.

This is an optimisation of the original proposed structure with GridX announced on 5 April 2019 and requires no additional fee payments from Ncondezi. All projects will be housed under the Company's newly formed renewable energy subsidiary Ncondezi Green Power.

We believe the C&I solar and battery sector continues to represent a significant opportunity for the Company, and the Relationship Agreement allows us to develop our presence in the sector as we progress our flagship 300MW integrated coal to power project to Financial Close."

Relationship Agreement Summary

Ncondezi has signed a binding Relationship Agreement with GridX giving Ncondezi a right of first refusal to fund up to US$5.5 million of GridX developed Projects in Mozambique.

Under the agreement, GridX has identified 7 potential Projects under development with a combined potential installed PV capacity of 2.8 MWp and 4.5 MWh battery storage. Capital costs range from US$250,000 to US$ 2.1 million. Should these Initial Projects meet the minimum KPI's and Ncondezi exercise its right to fund, it would represent a potential annuity revenue stream of over US$750,000 per annum.

Each Project must meet a minimum set of KPIs before being presented to Ncondezi for funding. These minimum KPIs include:

· Project must be located in Mozambique;

· Project size between US$100,000 and US$10,000,000;

· Use of proven technology;

· Minimum post tax unlevered equity IRR of at least 10% to Ncondezi;

· Minimum credit requirements met;

· Bankable offtake denominated in US $;

· Completion of credit checks on potential clients with additional credit support in place where required

· Finalised Engineering Procurement and Construction and Operations & Maintenance contracts in place; and

· All consents and permits required to start construction in place

Ncondezi will have the right to fund 100% of each Project's equity requirement, and Projects will be accessed for funding on a project by project basis. Ncondezi will look to identify the optimal financing strategy for each Project, particularly with respect to securing funding at the Ncondezi Green Power subsidiary level, and will look at both debt and equity options with gearing of up to 50%. Discussions with potential investors and debt providers to date have been positive as investment mandates and appetites to fund energy access and renewable power projects continues to grow. 

The first Projects are anticipated to be presented for funding review during Q4 2020 / Q1 2021 .

Even if a Project does meet the minimum KPIs, Ncondezi has the right not to fund that Project. without any penalty. However, should Ncondezi elect not to fund any further Projects that meet the minimum KPIs, it will lose its ROFR over the remaining Projects. If a Project does not achieve the KPIs within the proposed time frame allocated, GridX has the ability to substitute that Project for alternative projects.

As part of the Relationship Agreement, GridX has agreed to forego payment of the final amount of the GridX Fee (US$130,000) payable under the previous arrangement, and this is no longer due for payment. Other than the capped development fee and profit sharing fee which may be due to GridX if Ncondezi elects to fund a Project, there are no further cash payments to be made to GridX.

In addition, GridX Africa AssetCo ("GridX SPV"), a special purpose vehicle setup specifically for the Company's first solar and battery storage project investment, will become a wholly owned subsidiary of Ncondezi Green Power through the purchase of all GridX's A class shares at par value totalling US$100. Following the acquisition, GridX will no longer have any management or acquisition rights in the GridX SPV, but will continue to provide management services  Furthermore, GridX has agreed that as soon as it becomes the owner of any plant and materials relating to the first solar and battery project currently under construction, it shall immediately transfer ownership of such plant and material to GridX SPV for no additional consideration.

As part of its ordinary course business as a developer, GridX is entitled to a capped development fee for each Project that Ncondezi funds, included as part of the Project capital cost. 

GridX is expected to provide Operations & Maintenance services for each of the Projects that achieves financial close in accordance with market-related commercial terms for projects of a similar nature, contracting directly with the power offtaker.

Certain incentives to encourage GridX to achieve the best returns for each Project, will be paid through a profit sharing mechanism where an equity IRR hurdle of above 10% is achieved by Ncondezi.

The Relationship Agreement will expire at the earlier of Ncondezi financing US$5.5m of Projects or 36 months.

Advantages to Ncondezi

The Company Directors believe the Relationship Agreement with GridX has the potential to deliver a number of benefits to Ncondezi namely:

Complementary to existing Ncondezi Project

Provides diversification from coal baseload power generation into captive solar & battery storage small scale renewable and energy storage projects.  From a cash flow perspective the smaller, easier to install solar and battery storage projects potentially provide near term cash flows before the Ncondezi Project target commissioning in 2024.  The smaller capital cost requirements also negate the need for a large strategic partner.

ROFR Structure

ROFR structure provides minimal distraction and additional resources to the Company, as GridX will take full responsibility for development work and costs to deliver construction ready projects for funding review.  The decision to fund only projects in Mozambique allows Ncondezi to focus on a geography and jurisdiction that it has expertise in again minimizing distractions from the main project.

Strong Market Fundamentals

Solar and battery storage projects have become economically competitive with traditional captive power solutions (diesel generators), and further reductions in the cost of solar and battery storage will ensure competitiveness continues into the future.  Added to this, the ancillary benefits (noise and emission reductions etc.) and increased pressure for sustainable energy sourcing further strengthen customer investment rational to invest in these solutions.

Potential low risk annuity businesses with significant growth potential

Ncondezi has an option to fund 100% of potential US$5.5m GridX project portfolio, with 7 potential Projects already identified. At the time of presentation to Ncondezi these are expected to be construction ready projects with attractive US$ denominated 10-15 year bankable offtake contracts significantly reducing risks.  In addition, over time, the diversified portfolio approach has a de-risking effect on portfolio level returns which is potentially attractive to external investors in the future.

Attractive project fundamentals and target returns

C&I projects are generally low capex and will usually be expected to generate cash flows within 12 months. The minimum 10% unlevered post tax equity IRR KPI sets a projected return floor for each project. These returns represent a premium return when compared to those in more developed power markets and it is expected that this can be improved further through higher delivered project IRRs and gearing.

First mover advantage

The African market is at an early stage of development with annuity income investors, utilities and oil companies seeking to enter the sector but slow to move. As Ncondezi builds a diversified portfolio of renewable C&I projects in one structure, the Company believes that this could ultimately represent an attractive investment opportunity to development funding institutions, annuity income renewable energy funds, utilities and energy companies and private equity funds.

  Enquiries

For further information please visit www.ncondezienergy.com or contact:

Ncondezi Energy	Hanno Pengilly	[phone]
Liberum Capital Limited NOMAD & Joint Broker	Andrew Godber, Edward Thomas, Kane Collings	[phone]
Novum Securities Limited Joint Broker	Colin Rowbury	[phone]
Pimlico Advisory Ltd Investor Relations	Elizabeth Johnson	[phone]

Note:

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation ("MAR"). Upon the publication of this announcement via Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain. If you have any queries on this, then please contact Hanno Pengilly, Chief Executive Officer of the Company (responsible for arranging release of this announcement) on [phone].

About Ncondezi Energy

Ncondezi is an African power development company with an advanced staged, integrated 300MW thermal coal power plant and mine project located in the Tete Province, Northern Mozambique.

The Company is focused on providing reliable, affordable and accessible baseload energy to Mozambique and secure against the effects of water drought and intermittency of new renewables. This project supports Mozambique's energy strategy of universal electricity access by 2030. According to the World Bank, only 30% of the Mozambican population had access to energy in 2017. The Ncondezi Project would provide 300MW of reliable and available power helping to close the infrastructure gap of the region and serving as a catalyst for economic development.

The power plant will be designed to be equipped with state-of-the-art emissions controls technologies that will reduce local air pollutants, minimizing the plant's impact on the environment and ensuring its compliance with the most stringent emission standards

In 2019, the Company entered into the Commercial and Industrial ("C&I") renewable and battery storage sector and in October 2019 announced its first investment in an off grid solar battery project. The Company has also secured the right to fund a US$5.5m C&I project development pipeline in Mozambique through a Relationship Agreement with GridX Africa Development announced in May 2020. The move into the C&I solar and battery storage sector offers a significant opportunity for the Company to complement the existing large-scale baseload power project and access near-term low-risk annuity income streams which have significant growth potential.

 

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