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ContourGlobal plc Acquisition of CHP Portfolio in Mexico from Alpek

ContourGlobal plc (LON:GLO) today announced it has reached agreement with Alpek S.A.B. de C.V, to acquire Alpek’s portfolio of two natural gas-fired combined heat and power  plants, together with development rights and permits for a third plant, for $724 million in cash. An additional payment at closing estimated at $77 million represents the Value Added Tax (VAT) assessed for the transaction and is expected to be refunded in full within 12 months of closing. The two CHP plants will provide electricity and steam under long-term contracts to subsidiaries of Alfa S.A.B. de C.V, a leading Mexican industrial conglomerate, and other commercial and industrial customers.

The CHP plants are located on sites adjacent to, and interconnected with, Alpek’s industrial facilities and have a gross installed capacity of 518MW. Additionally, ContourGlobal will be acquiring the development rights and permits for a third adjacent plant with a planned capacity of 414MW.

Joseph C. Brandt, President and CEO of ContourGlobal commented:

“We are delighted to expand our cogeneration Solutions business into Mexico with the acquisition of Alpek’s combined heat and power plants. We have developed our Solutions business over the past decade with blue chip clients like Alpek and look forward to powering their growth over the long-term.

“This accretive transaction fits squarely into our strategic and financial approach to acquisitions. It was highlighted during our IPO and reflects our commitment to pursue high quality growth through operationally led strategic acquisitions and to double adjusted EBITDA without issuing new equity within five years of our listing. We are closer to achieving this objective with this acquisition, which we expect to add approximately $110 million to our adjusted EBITDA in the first full year of operations.”

Strategic Rationale

· Highly efficient cogeneration facilities. The Assets are highly efficient cogeneration facilities similar to those ContourGlobal operates in its Solutions Division for industrial customers including Coca-Cola Hellenic, AmBev and Ingredion. These plants provide multiple products of value for industrial partners, including electricity, heat, steam, chilled water and in several facilities, the capture of CO2[1]. The business is expected to achieve substantial growth beyond the existing portfolio of assets and clients.

· Benefit from favourable regulatory regime. The Assets enjoy the benefits associated with the Legado regulatory framework which provides benefits to customers when they acquire power and other energy products including from high-efficiency cogeneration natural-gas fired power plants. Recognizing its superior efficiencies to conventional gas and liquid fired generation, this technology is designated as clean energy under the Mexican regulation.

· Attractive growing power market. Mexico is Latin America’s second largest power market. It continues to achieve high rates of growth in low carbon resources and is a market in which ContourGlobal has been active for several years, as the Company is developing a 300MW wind farm in Baja California. Mexico has committed to increasing its share of clean energy in its power mix to 35% by 2024, up from 21% in 2016. Cogeneration such as CHP is specifically included as a clean energy technology for the purposes of reaching this target.

· Long-term contracts with leading Mexican companies. The Acquisition is consistent with ContourGlobal’s strategy of developing and operating power assets supported by long-term contracts, here, from multi-year offtake agreements with leading Mexican industrial and commercial companies including Alpek subsidiaries and other affiliates within the Alfa Group. At closing, the operational Assets are expected to have around 90% of their power plus all steam revenues under long-term contract. Approximately 30% of revenues in the next 10 years are expected to be generated from contracts with affiliates of Alpek.

· Additional development opportunity. The Acquisition includes the attractive opportunity to construct a third plant with a planned capacity of 414MW. The project includes certain permits already granted and would be located adjacent to the plant being commissioned in Altamira, which would provide cost efficiencies including shared supply infrastructure.

Attractive Financial Investment

· Significant EBITDA contribution. The Assets will deliver contracted USD earnings with high quality, blue-chip clients with an expected EBITDA contribution of $110 million in their first full year of operations. These CHP plants benefit from USD denominated contracts for electricity and steam.

· Earnings accretive. Significantly earnings accretive, enhancing the Group’s ability to invest in the business and concurrently support a growing dividend to shareholders.

· Attractive amortizing project financing. Amortizing USD project financing to be fully underwritten and led by The Bank of Nova Scotia (“Scotiabank”) of up to $590 million to be entered into at closing; Group net debt to Adjusted EBITDA is expected to be in the range of 4-4.5x within 12 months of closing.

· Credit accretive. Credit accretive acquisition with high quality, long-term contracted USD revenues and contractual right to pass through fuel commodity costs, consistent with operating strategy.

High Quality Low Carbon Combined Heat & Power Assets

· The portfolio being acquired consists of 932MW of potential capacity, located on Alpek’s petrochemical sites in the Mexican states of Veracruz and Tamaulipas, of which 518MW will be operational by closing. The total portfolio comprises: 104MW of existing operational capacity; 414MW currently undergoing commissioning and scheduled to enter commercial operations within the first half of 2019; and development rights and permits for an additional adjacent 414MW plant.

· One plant, located in Cosoleacaque, Veracruz state, CELCSA, has a capacity of 104MW and entered into commercial operations in December 2014. It provides power and steam to the Alfa Group’s adjacent petrochemical plants under 20-year contracts signed in 2014, with excess power output supplied to large industrial and commercial clients in Mexico, including with other Alpek affiliates, through medium and long-term power purchase agreements (“PPAs”).

· The second plant, CGA1, located in Altamira, Tamaulipas state has a projected capacity of 414MW, and was constructed under a turnkey EPC contract with a subsidiary of the Spanish industrial conglomerate, Grupo ACS. Construction commenced in 2016 and commissioning is currently underway with the expected entry into commercial operations in the first half of 2019. ContourGlobal’s obligation to complete the Acquisition is conditional upon CGA1 successfully completing its commissioning tests and entering into commercial operations. The facility is adjacent to a petrochemical plant owned by Alpek and will provide steam production and power output under a 20-year contract. Similar to CELCSA, it sells the excess power output to a diversified portfolio of commercial and industrial clients, including to other Alpek affiliates, through medium and long-term PPAs.

Financing the Acquisition

· The estimated total consideration payable at completion of $724 million plus refundable VAT is expected to be financed through a combination of an amortizing USD project financing of up to $590 million, together with existing cash resources of the Company.

· The CHPs are a USD business with predominately USD-linked PPAs. Mexican peso-denominated contracts are entered into for the purpose of mitigating exposure to local fixed and variable costs.

Conditions to Complete the Acquisition

The Acquisition, including break-fee arrangements, is classified under the Listing Rules as a Class 1 transaction and therefore is conditional, amongst other things, on the approval of ContourGlobal’s shareholders. The Company and Alpek have obtained an irrevocable undertaking from ContourGlobal L.P., which as at 31 December 2018 owned approximately 71% of the ordinary share capital of the Company, to vote in favour of the inter-conditional shareholder resolutions to be proposed in connection with the Proposed Acquisition.