Liquefied Natural Gas — Moving towards FID in 2018

Liquefied Natural Gas — Moving towards FID in 2018

Liquefied Natural Gas’s (LNGL) Magnolia development is up to 30 months ahead of other US-based greenfield liquefaction plants in regulatory approvals, putting it in prime position for buyers/traders looking to take advantage of the expected rebalancing of the LNG market in 2022-23. With low capex/opex/gas prices, the project has the potential to be very lucrative for partners selling to Europe/Asia. As a result, we now expect LNGL to sign tolling agreements and move towards FID in 2018, with first production in 2023. We have updated our valuation, which falls from A$1.25/share (US$3.79/ADR) to A$1.00/share (US$3.23/ADR). On a longer-term basis, this valuation should grow as the project is de-risked by tolling agreements and moves towards first LNG.

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Written by

Liquefied Natural Gas Ltd

Moving towards FID in 2018

Outlook for 2018

Oil & gas

13 February 2018

Price

A$0.53

Market cap

A$272m

US$:AU$1.28

Net cash (A$m) as at 31 December 2017

33.0m

Shares in issue

513.7m

Free float

91%

Code

LNG AU;
LNGLY US

Primary exchange

ASX

Secondary exchange

OTC

Share price performance

%

1m

3m

12m

Abs

(3.6)

20.5

(32.1)

Rel (local)

0.5

24.2

(33.9)

52-week high/low

A$0.96

A$0.37

Business description

Liquefied Natural Gas Ltd is an ASX-listed company devoted to the development of LNG export terminals in the US, Canada and other potential locations. It has traded ADRs.

Next events

Tolling /offtake agreements to be signed

2018

Final investment decision

2018

Financial close

2019

Analyst

Sanjeev Bahl

+44 (0)20 3077 5700

Liquefied Natural Gas Ltd is a research client of Edison Investment Research Limited

Liquefied Natural Gas’s (LNGL) Magnolia development is up to 30 months ahead of other US-based greenfield liquefaction plants in regulatory approvals, putting it in prime position for buyers/traders looking to take advantage of the expected rebalancing of the LNG market in 2022-23. With low capex/opex/gas prices, the project has the potential to be very lucrative for partners selling to Europe/Asia. As a result, we now expect LNGL to sign tolling agreements and move towards FID in 2018, with first production in 2023. We have updated our valuation, which falls from A$1.25/share (US$3.79/ADR) to A$1.00/share (US$3.23/ADR). On a longer-term basis, this valuation should grow as the project is de-risked by tolling agreements and moves towards first LNG.

Year end

Revenue (A$m)

Reported PBT
(A$m)

Cash from
operations (A$m)

Net (debt)/
cash (A$m)

Capex
(A$m)

06/16

7.3

(115.1)

(117.1)

67.2

(0.1)

06/17

0.6

(29.2)

(25.5)

40.3

(0.4)

06/18e

0.0

(27.1)

(20.2)

20.1

0.0

06/19e

0.0

(43.6)

(33.6)

(433.8)

(311.8)

Note: We include all project debt on LNGL’s balance sheet and assume FID in late 2018.

2018 is a key year for the company

The last few years have been challenging for LNG traders with a supply glut and low oil prices depressing profits. However, increases in oil (and LNG) prices in the near term, and increasing confidence that the market will rebalance in 2022-23, should give added impetus to buyers. Magnolia is well ahead of its greenfield peers in regulatory approvals and in our view should therefore be in a good position to sign up long-term partner agreements in 2018.

Magnolia project awaiting tolling agreements

Magnolia has existing LSTK contractual agreements for plant construction with performance guarantees and at attractively low costs due to its proprietary OSMR technology. The project has the required equity funding (from Stonepeak Infrastructure Partners) and therefore needs to sign tolling agreements and secure debt financing (70% of total, c US$3bn) before construction can proceed.

Valuation: A$1.00/share has space to grow

We retain our risked DCF approach which implies a valuation of A$1.00/share (US$3.23/ADR). This has fallen from A$1.25/share, mainly due to refined assumption inputs (including taxes and interest rates), timeline and exchange rates. While this valuation suggests substantial upside at this point, we note there is significant uncertainty on timelines and project delivery. However, we firmly believe the project is in a near unique position to deliver low cost LNG from US shale gas and we would expect our valuation to increase markedly as and when tolling agreements can be signed, FID taken and first LNG approaches.

Investment summary

Company description: Mid-scale LNG development

LNGL is developing LNG export terminals in the US and Canada. Its main asset is the 8mtpa (or greater) Magnolia LNG project on Lake Charles, while Bear Head LNG is an 8-12mtpa development in Nova Scotia. LNGL’s proprietary OSMR (optimised single mixed refrigerant) technology is a patented, mid-scale liquefaction technology, promising lower capital and operating costs. The company is currently working hard to get the Magnolia LNG project to financial close and FID by the end of CY18, with start-up in CY23.

Financials: Magnolia should be funded

LNGL has an agreement with KBR (leading a joint venture with SK E&C) for a lump sum turnkey contract for the 8mtpa Magnolia project for US$4.354bn. We expect this to be 70% debt funded, with the remaining 30% or so coming from its equity partner, Stonepeak Infrastructure Partners. Funding of the Bear Head project is less certain, although we expect similar debt structuring capacity. The ability of LNGL (and partners) to attract suitably priced debt funding is key to the value the projects will generate for shareholders. The move by BNP Paribas (former debt co-ordinator) to exit all oil and gas investments in 2017 was a set-back, but not a major one in our view. The company will likely need to raise equity in the next 12 months to fund project development costs and marketing costs.

Valuation: Current A$1.00/share (US$3.23/ADR) should grow

Although we refer to other techniques, our primary methodology continues to be using risked DCF analysis. The predictable and consistent cash flows from the project (once up and running) should enable high debt funding levels and healthy dividend distributions, allowing comparisons with utility-type peers in time. The current share valuation is contingent on various factors, not least LNGL’s ability to reach financial close for its projects and, around four years later, start and operate them successfully. Unfortunately it has taken a number of years longer than originally anticipated to progress the project, as regulatory timetables coincided with a depressed LNG pricing and supply/demand environment. This picture looks to be brightening of late.

We currently value LNGL at A$1.00/share (US$3.23/ADR), applying a 60% risk to Magnolia and 15% to Bear Head. Even assuming just Magnolia, this could rise significantly once the project starts based on P/E, EV/EBITDA and dividend yield.

Sensitivities: Predictable cash flows once started

The overriding consideration for investment in LNGL is its ability to get the projects to sanction – despite a marked change in oil prices and dawning realisation by industry players that LNG supply/demand will shift in four to five years, the shares have not picked up materially. Investors are waiting for binding tolling agreements to be signed which we think will happen in 2018.

The structuring of the financing is also key as investors could see large swings in valuation depending on the amount of debt it can attract, while the prices negotiated for the tolling fees (or SPAs) will also have an impact. The larger the debt facility (and lower the costs), the higher the equity returns for the partners. Our modelling indicates an unlevered project IRR in 2018 of 11% (and levered equity cash flow IRR of 17%, assuming 70% debt).

Modular, mid-scale LNG pioneer

Liquefied Natural Gas Ltd (LNGL) is focused on efficient, mid-scale LNG developments, which are expected to have significantly lower capex/opex costs than existing technologies. The company is currently developing two LNG liquefaction plants in North America, the 8mtpa capacity (or greater) Magnolia LNG plant (Louisiana) and 8-12mtpa Bear Head project (Nova Scotia). The company has shares listed on the ASX and ADRs in New York. A full US listing is currently on hold.

OSMR: Mid-size LNG with lower capex/opex

LNGL’s OSMR liquefaction technology is patented in all major markets and promises to deliver lower capex and opex costs than comparative technologies. Although commercially new as a full application, it is a novel combination of a number of existing solutions reducing risks.

OSMR is the integration of three proven technologies/processes: single mixed refrigerant process (the oldest LNG liquefaction technology), combined heat and power (which is used extensively in the power industry) and ammonia refrigeration (which is one of the most used refrigeration technologies in industrial applications). Furthermore, a number of studies have been executed by third parties, including by CH-IV (2008), Foster Wheeler (developer of multiple LNG systems globally), Arrow-WorleyParsons (2009 and 2010), and HQC and Consultants (2010). A report was also issued by SK E&C in June 2009, and updated in 2013. This concluded that OSMR should be highly reliable and provide good utilisation.

Furthermore, the involvement of KBR (in a JV with SK E&C) as the contractor should be a considerable comfort. It is putting its own balance sheet behind the project and has guaranteed minimum production. The JV will be responsible for the execution of the turnkey projects at Magnolia and be responsible for the timing and budget (and open to liquidated damages).

LNGL’s technology is believed to be very competitive with other techniques, producing a much lower NPV10 breakeven than other projects. The very low risk to gas supply and low prices for delivered LNG mean that Magnolia should be very attractive to offtake partners.

According to the company, capex for conventional technologies (which we interpret as single, double and propane-precooled mixed refrigerant systems) are around US$1,000/tpa, while the OSMR for trains 1 and 2 is significantly lower (US$549-628/tpa). Plant efficiency should compare well with other technologies, with lower fuel usage leading to a material improvement over a single mix refrigerant process. The smaller train sizes (vs those typically used by Shell/BG for example) allow a modular development and enable a company such as LNGL to be a credible developer.

Patent protection and licensing

LNGL’s patents could lead to valuable future licensing fees. These pale in significance compared to the returns from project equity ownership but could provide useful, cost free, revenues. The management continues to market the project (and technology) globally and is very open to licensing the technology to the right partners.

US shale boom secures the gas supply

Magnolia and Bear Head are well placed to take advantage of the shale gas boom in the US and Canada, where fracking has utterly changed the gas supply picture. Massive existing infrastructure, increasing technological progress and available capital has seen a huge surge of gas production, substantially reducing and stabilising prices.

In this environment, the US has the potential to provide gas to LNG export schemes without risking major price increases. We anticipate that Magnolia could be fed by the Haynesville and Eagle Ford shale gas plays via Kinder Morgan’s Louisiana pipeline (with which LNGL has executed a binding capacity precedent agreement), with areas further afield also possible.

Bear Head will likely be supplied via the company’s Bear Paw pipeline, which offers a path for gas to flow to the site. It would connect Bear Head to Goldboro (where the Maritimes and Northeast pipeline terminates, meeting the Sable Island pipeline). The 62.5km pipeline is fully permitted.

LNG supply, demand and pricing

We do not forecast LNG supply/demand, but note that many independent sources point to a rebalancing of supply/demand by 2022-23, after which time new supply will be needed. Given LNGL’s low-cost approach, it should be well placed to have economic returns from development.

The recent increase in Brent pricing has seen LNG increase in concert. The forward gas curve has continued to lower and flatten, implying increased arbitrage opportunities for shale gas-based LNG.

Exhibit 1: LNG (Japanese) prices have closely tracked Brent prices and have picked up markedly recently

Exhibit 2: Henry Hub forward curves have lowered and flattened over time

Source: Edison Investment Research, Bloomberg

Source: Edison Investment Research, Bloomberg

Exhibit 1: LNG (Japanese) prices have closely tracked Brent prices and have picked up markedly recently

Source: Edison Investment Research, Bloomberg

Exhibit 2: Henry Hub forward curves have lowered and flattened over time

Source: Edison Investment Research, Bloomberg

For a tolling partner, Magnolia(n) LNG would cost approximately $7/mcf, (made up of source gas (US$2.9/mcf in 2023-24 forward prices), tolling fee of c US$2.5/mcf and transport costs of US$1-2/mcf). Given the current LNG prices of c $10/mcf, this would make trading very attractive, giving us comfort that LNGL will be able to negotiate long-term contracts in 2018.

Project summaries

LNGL continues to progress its marketing efforts, as can be seen in Exhibit 3.

Exhibit 3: Key information on projects

 

Magnolia

Bear Head

Current equity interest

100%

100%

Location

Lake Charles, US

Nova Scotia

Size of land

115 acres

327 acres

Capacity

8mtpa (four trains of 2mtpa), possible extension

8-12mtpa (five trains)

Capex

Fixed price turnkey contract with KBR for US$4.354bn gross for 8mtpa (excludes other costs of 15.5% and debt interest repayments at an assumed rate of 6.5%). Valid until June 2018

As per Magnolia

FID/sanction

Late 2018

Mid-2022

Equity partner (funding provided)

Stonepeak will contribute the required equity funding of US$1.5bn on a redeemable preferred basis on a 12-year tenor

No partner secured yet. Assumed to be a partner seeking similar returns as Stonepeak

First gas

We assume 2023, with trains starting up every three months

We assume 2027 (FID after Magnolia first gas); five trains starting sequentially as at Magnolia

Gas source

US gas network

US/Canadian gas network

EPC partners

KBR, SK E&C (agreement extended to mid-2018)

Assumed KBR, SK E&C

Tolling partners

Magnolia LNG and Meridian LNG signed a binding agreement for firm capacity rights for up to 2mtpa in July 2015and this has been extended a number of times and now is valid until March 2018.

Other discussions are ongoing. “Substantially all the offtake negotiations are for initial 20-year terms under liquefaction tolling agreements (LTA) or sales and purchase agreements (SPA).” According to the latest quarterly release

Source: LNGL

Magnolia could deliver first LNG in 2023

The Magnolia project is a four-train, 8mtpa LNG plant planned to be built on a 115 acre plot in the Port of Lake Charles, Louisiana (adjacent to the existing LNG channel). The plant will use LNGL’s proprietary OSMR process liquefaction technology. A binding 20-year pipeline capacity precedent agreement was signed in 2014 with Kinder Morgan Louisiana Pipeline (KMLP). The site itself has a lease for 30 years (potentially extendable to 70 years) and the project is construction ready.

A binding lump sum turnkey (LSTK) with KBR (& SK E&C) has been executed, fixing capex at $4.354bn for the first four fully operational trains (excluding other costs of 13.5-15.5%) – this is currently valid until mid-2018, although we would not be surprised if it was extended again.

LNGL is partnering with Stonepeak Infrastructure Partners on Magnolia. Stonepeak will provide the equity required (US$1.5bn) to develop the project, while debt funding will need to be sourced. An agreement with BNP Paribas fell through after the bank declared in 2017 that it would no longer fund any oil/gas developments. The management is confident that it will be able to secure funding through other sources.

Project timing

The project development timing has continued to slip. We now model financial close – originally scheduled for mid-2015 – in late-2018. The next steps are:

Binding offtake agreements – this is the critical milestone and management is working hard to get contracts signed.

Binding term sheet for debt – we expect full funding to be secured six months after binding tolling agreements are executed.

Bear Head is a valuable option for now

LNGL bought the Bear Head site from Anadarko in August 2014 for US$11m. Under Anadarko, the site was originally developed as an LNG import terminal but was mothballed in 2007. All permitting and approvals had been granted and civil works had reached an advanced stage – for example, roads, utilities and foundations for two 180,000m3 LNG tanks are complete.

The site is large (327 acres vs 115 at Magnolia) and the company has ample space for 8mtpa (two phases). Indeed, it has filed applications with the Canadian authorities for up to 12mtpa of capacity. We assume that first gas is in mid-2027, which is later than management guidance of 2024-2025, as we assume FID after Magnolia first gas.

Exhibit 4: Bear Head site

Source: LNGL

We expect the development of Bear Head to cost a similar amount to Magnolia. While much of the civil works are complete, the harsher climate may require greater protection against the cold winters. To balance this, the yield of LNG could well be greater, increasing efficiency and reducing overall costs.

Bear Head will likely be supplied via the company’s Bear Paw pipeline, which offers a path for gas to flow to the site. It would connect Bear Head to Goldboro (where the Maritimes and Northeast pipeline terminates, meeting the Sable Island pipeline). The 62.5km pipeline is fully permitted. We note that Bear Head LNG continues “to market capacity to all three potential gas paths: US, offshore Nova Scotia; and Western and Central Canada.”

The source of equity funding for Bear Head is unclear at the moment. We assume a similar structure of funding as Magnolia, although there is currently no equity partner. Magnolia cash flows are not likely to come through until 2023, which would mean that using these to fund development at Bear Head would necessarily require an FID after this date.

Threats and sensitivities

Commodity risk: Should binding tolling agreements be signed, the company should have no direct exposure to commodity risk, while operating costs movements should be largely mitigated by tolling fees. However, if SPAs are used at Magnolia, the company would be more exposed to movements of Henry Hub (HH). As we note elsewhere in the note, the futures curves of HH has lowered and flattened over the years since fracking was introduced.

Financing risks: LNGL needs to secure the funding for the development of the projects. For the 8mtpa Magnolia project, this is US$4.4bn (gross excluding other costs, $5bn including other costs, but excluding capitalised interest). Of this, we assume $1.5bn is funded by Stonepeak, with the rest funded through debt. Without this funding, the Magnolia project’s (and hence LNGL’s) value could be uneconomic or severely compromised. We assume that the project is 70% debt funded at an interest rate of 6.5%. If debt cannot be found at this level then the NPV of LNGL’s stake could fall materially.

Technological risk: the OSMR process has received the technological approval of KBR and SK E&C and has the tacit confidence of a range of companies. The contractors will provide performance liquidated damages for capacity should the technology not deliver the modelled efficiencies and KBR has guaranteed 92% efficiency (implying 8% fuel used in process). The tolling term sheets also require that Magnolia provides minimum production – if this is not achieved, the plant could suffer financial penalties.

Cost escalation risk: cost escalation risk is well mitigated if tolling agreements can be signed quickly. LNGL has a turnkey contract with KBR that is valid until 30 June 2018. Although we are optimistic that the contract will be renewed, there is no guarantee that the cost will be the same and there is therefore a risk of escalation.

Protection risk: LNGL has patent protection for OSMR in 16 countries including the US and Canada (countries where its projects are currently located), and the majority (if not all) of consumer countries (including Japan).

Partner risk: the success of the LNGL projects is reliant on many parties, whether for providing equity finance, arranging debt finance or signing binding tolling agreements, constructing the plants (KBR and SK E&C) and transporting the gas (Kinder Morgan). Partners involved so far (Stonepeak, Meridian and KBR) have been happy to renew contracts and agreements as required.

Tax risks: Magnolia is subject to federal and state taxes, which we assume to be 25% over the life of the project (including tax holidays and breaks), with a 2% land tax (2% of asset value, with a five-year tax break extendable for a second five-year period). For Bear Head, we apply the 31% corporate tax rate (including state tax).

LNG pricing risks: our base case assumption is that all LNG is sold to FTA-approved countries but it does have non-FTA approval, enabling to sell worldwide (widening its reach and hopefully revenues).

Management

We think the board is strong, particularly the experience of Greg Vesey (CEO), Paul Cavicchi (chairman) and Phil Moeller (non-executive director).

LNGL key personnel

Paul Cavicchi (chairman) has over 25 years’ experience across a range of gas and power projects, including development and construction of LNG infrastructure. Paul’s most recent executive position was as executive VP of GDF SUEZ Energy North America where he supervised and directed all business development efforts for the company in North America. Previous roles include president and CEO of SUEZ Renewable Energy.

Greg Vesey (CEO) joined as MD and CEO in April 2016, based in Houston. Greg has held senior executive roles in the international energy sector through a distinguished career of 35 years with Chevron and Texaco. Most recently, he was president of Chevron Natural Gas and VP, gas supply and trading, from 2011 to 2015. In this role he was responsible for Chevron’s global LNG, natural gas and natural gas liquid marketing and trading activity and was based in Houston. Other roles include president of Chevron Global Power and at Chevron Technology Ventures. Greg holds a bachelor of business degree from Northwestern State University of Louisiana.

Mike Mott (CFO) joined the company in September 2014. Before joining LNG, Mike held a number of senior finance, strategy and operations roles at BG. He held progressively senior accounting and risk management roles at Dynegy from 1995 and was previously at PwC.

Joseph B’Oris (CDO) began his career at Getty Oil (later acquired by Texaco). While at Texaco, Joe was responsible for all commercial activities on the Sabine pipeline (owner/operator of Henry Hub). He served in leadership roles in various LNG projects across the world for Nexen Energy/CNOOC, Shell, Marathon, and Jordan Cove LNG, where he was responsible for commercial and business development activities.

John Baguley (CTO) joined LNGL in May 2014 as the Magnolia LNG COO based in Houston, moving to CTO in November 2015. John brings over 30 years’ experience in the successful delivery of front-end engineering design and EPC services for major LNG plants and projects worldwide, including serving as a project director, project manager and engineering manager for some of the world’s most challenging facility locations (primarily at KBR for 33 years).

Non-executive director: Phil Moeller is a former commissioner of the Federal Energy Regulatory Commission (FERC). He was the second-longest serving member in the history of FERC and the only person in the federal government in a senate-confirmed position who was nominated by both President George W. Bush and President Barack Obama. He focused on policies that encouraged the construction of additional electric transmission and interstate natural gas infrastructure and policies promoting well-functioning wholesale markets.

Financials

Project financing cost

The key to how much of the project’s value current investors will be able to retain is the level of debt that can be raised for development. With 30% already covered by the Stonepeak agreement (see below), we assume debt will cover the rest. However, if this is too optimistic new funding sources may have to be found, diluting current shareholders’ interests.

For simplicity, we model that all debt is provided by a bank facility and that this is paid off as quickly as possible with project free cash flows. This will almost certainly not be the case – Cheniere has raised c 80% of its debt through bonds, with the remaining 20% as a bank facility. As a result, our modelling (with dividends paid only after all bank debt is paid off on a project basis) will likely lead to a later (and higher) dividend stream than will probably take place.

The Stonepeak agreement (originally made in 2013) was renewed and extended in July 2017 and provides that Stonepeak will contribute equity funding of up to US$1.5bn for the project (which should cover all required equity funding). In return, it will receive a redeemable preferred interest in Magnolia with a fixed coupon with pay-in-kind provisions during construction. The tenor is 12 years and it is redeemable at Magnolia’s discretion after three years of operations. There are no conversion features into Magnolia or LNGL shares.

We assume that the rest (70%) of the project financing will be achieved through debt and at an effective interest rate of 6.5%. This is higher than peers are trading on (on a yield-to-maturity basis), including Cheniere. As a result, as long as LNGL delivers the projects as promised, we think 6.5% is a fair/conservative assumption for the moment.

Exhibit 5: Bond yield to maturity vs pipeline/utility peers

Exhibit 6: Cheniere bonds, yield to maturity

Source: Bloomberg, Edison Investment Research. Note: Grey dots are bond B rating while green dots are A rated in industrials, utilities sectors

Source: Bloomberg, Edison Investment Research

Exhibit 5: Bond yield to maturity vs pipeline/utility peers

Source: Bloomberg, Edison Investment Research. Note: Grey dots are bond B rating while green dots are A rated in industrials, utilities sectors

Exhibit 6: Cheniere bonds, yield to maturity

Source: Bloomberg, Edison Investment Research

Company financials

At December 2017, LNG had cash resources of A$33m, annualised administration expenses of c A$16m and spends around A$5m every six months on project development (expensing for the moment). At this level of spend the company will require further capital in 2019 assuming no offtake is forward sold; our base case assumes any capital raise is executed at the current share price which would be dilutive for shareholders.

We assume FID is taken on Magnolia at the end of CY18, and this should catalyse a payment from Stonepeak adding short-term capital for LNGL. After sanction/FID, the project should be largely funded by Stonepeak and debt, with little equity required from LNGL. It will need to pay for G&A in this period however until first production and cash flows.

Exhibit 7: Unlevered and levered cash flows for Magnolia

Source: Edison Investment Research

Valuation

Our DCF approach is one used across our oils coverage and, given the steady predictable expected EBITDA across the LNG projects, should be applicable for the valuation of LNGL. We then apply a risking to account for various factors before the projects’ start-up (such as uncertainty over possible delays and uncertainty over reaching FID/sanction).

Major assumptions

We assume a tolling fee of US$2.75/mcf (or equivalent margin achieved in an SPA) inflating at 0.5% per year from start-up in 2023, 96% utilisation. Opex is assumed to be $0.25/mmbtu, with produces a lowered EBITDA margin of $2.25/mmbtu (vs $2.5/mmbtu previously).

A corporate tax rate of 25% and land tax rate of 2% at Magnolia. The tax rate falls from our previously assumed rate of 38% as a result of a better tax understanding of the project with the effect of tax holidays and other tax breaks, and as a result of the implementation of the recent Republican tax plan. At Bear Head, we revise the tax rate to 31% (including state and federal taxes).

Debt funding of 70% of the project with an interest rate of 6.5%. The debt is modelled as bank debt, although we expect the project to raise the majority of the capital through bonds (as Cheniere has done). We have lowered our assumption on debt interest costs given the current yields on Cheniere debt/other instruments and note that our assumptions may end up too high.

Equity funding of US$1.5bn. For Magnolia, Stonepeak Infrastructure Fund is the equity partner, and this amount should cover the entire equity funding requirement.

The modelling implies that LNGL will need some capital in 2019/20, so we would expect this to happen in 2018. We hope (some) binding tolling agreements will have been announced by this point and that additional shares can be issued at a premium to its current price, though this is not assured (or assumed). To be conservative, we assume US$20m is raised at the current price, diluting NAV and producing a lower valuation than would otherwise be the case.

We discount the levered equity cash flows due to LNGL at 10%.

We assume commissioning of the trains occurs every three months after the end of construction, leading to a ramp up of utilisation over the first year or so of operations.

Exhibit 8: NAV summary

Asset

Country

Equity
interest (%)

CoS
(%)

Net risked value

US$m

A$/share

US$/ADR

Net (debt)/cash (June 2017)

36

0.08

0.26

G&A

(69)

(0.16)

(0.50)

Project development costs June 2017 to July 2018e

(8)

(0.02)

(0.02)

Additional cash from assumed equity issuance

20

0.04

0.14

Magnolia Trains 1-4

US

100%

60%

365

0.82

2.63

Bear Head Trains 1-4

Canada

100%

15%

105

0.23

0.76

NAV

 

 

448

1.00

3.23

Source: Edison Investment Research. Note: We assume all financing for Magnolia is provided by debt and Stonepeak and that LNGL only has to provide for corporate costs. At Bear Head, we assume LNGL provides equity capital and is thus able to retain more of the project. We have assumed the capital raised above is at current share prices (c A$0.6/share)

Our modelling assumptions produce an unlevered IRR for Magnolia (gross) of 11% in July 2018 (17% levered), so the value for shareholders depends to a great extent on the inputs we use. Increase in debt facility/lowering of debt rates/increasing tolling fees achieved/decreases in final capex bills and other factors all have a very material effect on this valuation. We also caution that our risking is very subjective and we would urge investors to be comfortable with their own view on project progress.

Historical pricing multiples for peers

With stock markets at historical highs and multiples continuing to expand, we urge investors to look beyond current multiples to ensure that long-term investment retains a margin of safety for returns. LNGL’s peers/comparators have traded on a wide range of multiples in the last 25 years, depending on interest rates and overall investment sentiment. As a result, investors should be aware that current multiples are not consistent over time and are well above historical norms/averages.

Exhibit 9: Long-term multiples for peers – New York Industrial Average Index

Exhibit 10: Utilities index multiples have continue to push higher and are at historical highs

Source: Bloomberg, Edison Investment Research

Source: Bloomberg, Edison Investment Research

Exhibit 11: Price to earnings multiples for comparable companies

Exhibit 12: EV/EBITDA multiples for comparable companies

Source: Bloomberg, Edison Investment Research

Source: Bloomberg, Edison Investment Research

Exhibit 13: Price to cash flow multiples for comparable companies

Exhibit 14: Dividend yields for comparable companies

Source: Bloomberg, Edison Investment Research

Source: Bloomberg, Edison Investment Research. Note: The black line is a generic 10-year US government bond yield.

Exhibit 9: Long-term multiples for peers – New York Industrial Average Index

Source: Bloomberg, Edison Investment Research

Exhibit 11: Price to earnings multiples for comparable companies

Source: Bloomberg, Edison Investment Research

Exhibit 13: Price to cash flow multiples for comparable companies

Source: Bloomberg, Edison Investment Research

Exhibit 10: Utilities index multiples have continue to push higher and are at historical highs

Source: Bloomberg, Edison Investment Research

Exhibit 12: EV/EBITDA multiples for comparable companies

Source: Bloomberg, Edison Investment Research

Exhibit 14: Dividend yields for comparable companies

Source: Bloomberg, Edison Investment Research. Note: The black line is a generic 10-year US government bond yield.

Exhibit 15: Scenarios (applied only to Magnolia)

Exhibit 16: Effect on project ownership and net value for Magnolia (unrisked), US$m

Exhibit 17: Effect on net value

Discount rate applied to levered cash flows. Default is 10%.

Capex – base case is the upper end of the current guidance (US$4.354bn with a further 15.5% of “other costs”, or a total of $5bn). Low end of guidance would correspond to $3.8bn + other costs leading to US$4.4bn. We do not include capitalised interest in this number.

Interest rate on debt – assumed as 6.5% as base case where debt provides 70% of funding requirement.

Debt available to finance project (assume any amount below 70% is provided by LNGL). If more than 75% debt is provided, Stonepeak reduces its contribution. Note: this likely underestimates the effect as we do not include dilutive effect of raising shares at lower than our valuation.

Tolling fee (or average rate achieved through SPAs if used). Default is US$2.75/mcf, and we assume opex of $0.5/mcf against this, giving EBITDA margins of $2.25/mcf

Source: Edison Investment Research

Exhibit 18: Peer group valuation

Company

Market cap

EV

EV/EBITDA (current EV) (x)

P/E (x)

P/CF (current share price) (x)

Dividend yield (%)

$m

$m

2017

2018e

2019e

2017

2018e

2019e

2017

2018e

2019e

2017

2018e

2019e

Cheniere Energy Inc

13,164

34,223

18.7

15.9

11.9

Neg.

68.2

40.9

10.5

10.4

8.1

0.0

0.1

0.0

NextDecade Corp

868

868

Tellurian Inc

2,635

2,633

National Grid PLC

38,665

64,833

9.1

8.9

8.4

13.8

13.5

12.8

7.6

7.4

7.2

5.5

5.7

5.9

United Utilities Group PLC

7,189

17,145

12.1

11.3

10.8

17.0

14.9

13.6

7.8

6.9

6.7

5.2

5.3

5.5

Severn Trent PLC

6,628

13,930

11.1

10.6

10.1

16.8

15.6

14.4

7.7

7.3

7.0

4.3

4.6

5.0

Pennon Group PLC

4,325

8,043

11.4

10.5

9.9

15.6

13.8

12.5

8.0

7.6

6.8

5.2

5.6

6.0

Snam SpA

17,153

30,697

12.4

12.0

11.9

14.7

14.1

13.9

8.4

8.3

8.5

5.5

5.5

5.7

Federal Grid Co Unified Energy System PJSC

4,022

6,591

2.6

2.6

3.2

3.3

3.3

4.1

1.6

1.5

2.0

7.8

7.3

7.3

Red Electrica Corp SA

11,871

18,988

10.1

9.9

9.6

14.4

13.7

13.2

8.5

8.3

8.0

5.1

5.5

5.8

Fluxys Belgium SA

2,281

2,159

6.3

6.4

6.6

32.0

31.7

36.3

9.1

9.3

9.7

4.8

4.8

4.7

REN - Redes Energeticas Nacionais

2,094

5,160

8.6

8.3

8.2

13.0

14.2

13.9

4.7

5.2

5.1

6.5

6.3

6.3

Enagas SA

6,856

12,083

9.1

9.4

9.6

11.9

13.2

13.2

6.8

7.1

7.3

6.2

6.5

6.8

Terna Rete Elettrica Nazionale SpA

12,179

22,369

11.5

11.2

10.9

14.6

14.3

13.9

8.6

8.2

8.1

4.4

4.6

4.8

Centrica PLC

10,829

16,907

5.4

5.3

5.3

10.9

10.0

10.5

5.2

5.1

5.2

8.7

8.2

7.9

Consolidated Edison Inc

24,350

39,402

9.8

9.7

9.3

19.2

18.4

17.5

8.6

8.3

7.6

3.5

3.6

3.7

RWE AG

13,087

16,720

2.4

2.6

2.6

8.8

11.9

11.1

3.2

3.0

2.9

2.9

3.2

4.1

PG&E Corp

22,604

40,856

6.6

6.5

6.8

11.9

11.5

11.1

4.4

4.2

4.2

4.4

5.1

5.4

CenterPoint Energy Inc

11,978

19,276

9.4

8.8

8.5

21.0

19.0

18.1

7.5

6.7

6.5

3.9

4.0

4.2

NiSource Inc

8,066

15,940

10.4

9.6

8.8

20.1

18.8

17.5

7.7

7.5

7.6

2.9

3.1

3.3

UGI Corp

7,998

11,968

7.8

7.5

7.3

18.2

17.4

17.5

9.1

8.6

8.2

2.2

2.3

2.4

Atmos Energy Corp

9,032

12,432

10.9

9.9

8.8

21.3

19.8

18.4

11.6

10.8

10.1

2.4

2.5

2.7

Kinder Morgan Inc/DE

43,838

80,491

10.8

10.4

9.9

24.2

21.9

19.3

10.4

10.3

4.0

5.1

6.3

Spectra Energy Partners LP

13,772

20,494

9.7

9.2

8.7

12.6

13.2

13.8

9.4

11.0

11.3

6.6

7.1

7.5

Boardwalk Pipeline Partners LP

3,382

6,935

8.2

8.2

8.2

9.9

10.3

10.8

5.0

5.0

4.8

3.0

3.2

6.1

Energy Transfer Equity LP

20,008

63,327

9.5

8.2

7.5

15.8

10.2

9.3

5.1

4.6

4.4

6.3

6.9

7.7

ONEOK Inc

24,409

33,601

17.1

15.1

13.7

34.5

25.8

24.2

18.1

15.4

14.6

4.8

5.3

5.8

CEZ AS

13,451

20,097

7.8

7.8

7.6

15.5

19.8

20.9

5.6

5.9

5.8

6.2

5.0

4.5

RWE AG

13,089

16,720

2.4

2.6

2.6

8.8

11.9

11.1

3.2

3.0

2.9

2.9

3.2

4.1

SSE PLC

18,207

27,490

8.0

7.8

7.6

11.1

10.5

10.2

6.6

6.3

6.2

7.3

7.6

7.6

Verbund AG

9,874

8,135

7.7

8.6

7.5

25.4

29.6

22.4

11.7

12.4

11.0

1.6

1.5

1.9

Veolia Environnement SA

14,763

23,830

6.0

5.7

5.5

21.0

17.7

15.9

5.4

5.0

4.7

3.8

4.2

4.5

A2A SpA

6,160

10,049

6.8

7.0

7.0

13.7

14.1

14.0

5.9

5.9

5.9

3.7

4.4

4.6

Endesa SA

24,396

30,014

7.2

7.1

7.0

14.6

14.0

13.6

7.4

7.2

6.9

7.1

7.2

7.4

Gas Natural SDG SA

24,725

42,424

7.8

7.3

6.9

16.5

15.1

13.6

6.1

5.7

5.6

5.0

5.1

5.3

Hera SpA

5,577

8,959

7.4

7.4

7.4

18.5

18.3

18.2

6.3

6.3

6.1

3.1

3.2

3.3

Iberdrola SA

51,793

87,491

9.1

7.9

7.5

15.7

14.4

13.4

6.9

6.4

6.0

4.8

5.0

5.3

Acciona SA

5,330

11,588

7.5

7.4

7.1

17.0

16.8

14.9

6.3

5.0

4.6

3.8

4.0

4.2

Source: Bloomberg. Note: Prices are as at 23 January.

Exhibit 19: Financial summary

Accounts: IFRS, Yr end: June, AUD: Millions

 

2013

2014

2015

2016

2017

2018e

2019e

Total revenues

 

 

0.5

0.3

7.9

7.3

0.6

0.0

0.0

Cost of sales

 

 

0.0

0.0

0.0

0.0

0.0

0.0

(2.5)

Gross profit

 

 

0.5

0.3

7.9

7.3

0.6

0.0

(2.5)

SG&A (expenses)

 

 

(2.7)

(3.5)

(8.1)

(19.4)

(13.6)

(16.2)

(16.6)

R&D costs

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other income/(expense)

 

 

(11.3)

(20.1)

(71.9)

(89.3)

(14.0)

(6.0)

(14.6)

Exceptionals and adjustments

0.1

(0.5)

(14.8)

(14.3)

(2.5)

(7.0)

(10.0)

Depreciation and amortisation

 

 

(0.1)

(0.1)

(0.1)

(0.0)

(0.0)

(0.0)

(0.0)

Reported EBIT

 

 

(13.6)

(23.8)

(86.9)

(115.7)

(29.6)

(29.2)

(43.7)

Finance income/(expense)

 

 

0.2

(0.8)

0.6

0.6

0.4

0.1

0.1

Other income/(expense)

 

 

0.0

0.0

0.0

0.0

0.0

2.0

0.0

Exceptionals and adjustments

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Reported PBT

 

 

(13.4)

(24.7)

(86.3)

(115.1)

(29.2)

(27.1)

(43.6)

Income tax expense (includes exceptionals)

 

 

0.0

0.0

(0.1)

0.0

(0.1)

(0.0)

0.0

Reported net income

 

 

(13.4)

(24.7)

(86.3)

(115.1)

(29.3)

(27.2)

(43.6)

Basic average number of shares, m

 

 

267.7

333.9

464.4

503.2

513.0

513.7

513.7

Basic EPS

 

 

(0.0)

0.0

(0.2)

(0.2)

(0.1)

(0.1)

(0.1)

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

(13.6)

(23.3)

(72.0)

(101.4)

(27.0)

(22.2)

(33.7)

Adjusted EBIT

 

 

(13.7)

(23.3)

(72.1)

(101.4)

(27.0)

(22.2)

(33.7)

Adjusted PBT

 

 

(13.5)

(24.1)

(71.5)

(100.8)

(26.7)

(20.1)

(33.6)

Adjusted EPS

 

 

(0.1)

(0.1)

(0.2)

(0.2)

(0.1)

(0.0)

(0.1)

Adjusted diluted EPS

 

 

(0.1)

(0.1)

(0.2)

(0.2)

(0.1)

(0.0)

(0.1)

 

 

 

 

 

 

 

 

 

 

Balance sheet

 

 

Property, plant and equipment

 

 

0.1

0.3

12.1

12.0

12.0

12.0

308.2

Goodwill

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Intangible assets

 

 

0.0

0.0

0.0

0.0

0.0

0.0

15.6

Other non-current assets

 

 

0.5

0.0

0.0

0.0

0.0

0.0

0.0

Total non-current assets

 

 

0.6

0.3

12.1

12.0

12.0

12.0

323.8

Cash and equivalents

 

 

1.6

47.8

47.0

67.2

40.3

20.1

0.0

Inventories

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Trade and other receivables

 

 

0.0

0.3

2.5

0.7

0.1

0.1

0.1

Other current assets

 

 

1.0

3.3

135.2

4.6

4.6

4.6

4.6

Total current assets

 

 

2.6

51.4

184.6

72.6

45.0

24.8

4.7

Non-current loans and borrowings

 

 

0.0

0.0

0.0

0.0

0.0

0.0

433.8

Other non-current liabilities

 

 

0.3

0.2

0.2

0.1

0.0

0.0

0.0

Total non-current liabilities

 

 

0.3

0.2

0.2

0.1

0.0

0.0

433.8

Trade and other payables

 

 

1.1

3.4

13.9

2.6

2.2

2.2

2.2

Current loans and borrowings

 

 

0.0

0.5

0.0

0.0

0.0

0.0

0.0

Other current liabilities

 

 

0.3

0.0

1.0

0.9

0.4

0.4

0.4

Total current liabilities

 

 

1.4

3.9

14.9

3.5

2.5

2.5

2.5

Equity attributable to company

 

 

1.7

47.7

181.7

81.1

54.6

34.4

(107.7)

Non-controlling interest

 

 

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

 

 

 

 

 

 

 

 

 

 

Cash flow statement

 

 

Profit for the year

 

 

(13.4)

(24.7)

(86.3)

(115.1)

(29.3)

(27.2)

(43.6)

Taxation expenses

 

 

0.0

0.0

0.0

0.0

0.0

(0.0)

0.0

Net finance expenses

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Depreciation and amortisation

 

 

0.1

0.1

0.1

0.2

0.2

0.0

0.0

Share based payments

 

 

(0.1)

0.0

14.8

14.3

2.5

7.0

10.0

Other adjustments

 

 

5.3

0.8

(7.4)

(6.8)

1.5

0.0

0.0

Movements in working capital

 

 

0.4

2.0

8.9

(9.8)

(0.4)

0.0

0.0

Interest paid / received

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Income taxes paid

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Cash from operations (CFO)

 

 

(7.7)

(21.8)

(70.0)

(117.1)

(25.5)

(20.2)

(33.6)

Capex

 

 

(0.0)

(0.2)

(11.6)

(0.1)

(0.4)

0.0

(311.8)

Acquisitions & disposals net

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other investing activities

 

 

2.4

(1.8)

(131.7)

130.6

0.0

0.0

0.0

Cash used in investing activities (CFIA)

 

 

2.4

(2.0)

(143.3)

130.5

(0.4)

0.0

(311.8)

Net proceeds from issue of shares

 

 

0.0

70.2

205.0

0.2

0.7

0.0

0.0

Movements in debt

 

 

0.0

0.0

0.0

0.0

0.0

0.0

433.8

Other financing activities

 

 

(0.0)

(0.0)

(0.0)

(0.0)

(0.0)

(0.0)

(108.5)

Cash from financing activities (CFF)

 

 

(0.0)

70.2

205.0

0.2

0.7

(0.0)

325.3

Increase/(decrease) in cash and equivalents

 

 

(5.3)

46.4

(8.3)

13.5

(25.3)

(20.2)

(20.1)

Currency translation differences and other

 

 

0.0

(0.3)

7.5

6.7

(1.6)

0.0

0.0

Cash and equivalents at end of period

 

 

1.6

47.8

47.0

67.2

40.3

20.1

0.0

Net (debt) cash

 

 

1.6

47.3

47.0

67.2

40.3

20.1

(433.8)

Movement in net (debt) cash over period

 

 

(5.3)

45.7

(0.3)

20.2

(26.9)

(20.2)

(453.9)

Source: Company accounts, Edison Investment Research

Contact details

Revenue by geography

1001 McKinney
Suite 600
Houston
Texas
77002
www.lnglimited.com.au

N/A

Contact details

1001 McKinney
Suite 600
Houston
Texas
77002
www.lnglimited.com.au

Revenue by geography

N/A

Management team

Chairman: Paul Cavicchi

CEO: Greg Vesey

Paul has over 25 years’ experience across a range of gas and power projects, including development and construction of LNG infrastructure. Paul’s most recent executive position was as executive VP of GDF SUEZ Energy North America. Previous roles include president and CEO of SUEZ Renewable Energy.

Greg has held senior executive roles in the international energy sector through a distinguished career of 35 years with Chevron and Texaco. Most recently, he was president of Chevron Natural Gas & VP, gas supply and trading from 2011 to 2015.

CDO: Joe B’Oris

Mike Mott: CFO

Joe began his career at Getty Oil (later acquired by Texaco). While at Texaco, Joe was responsible for all commercial activities on the Sabine Pipeline (owner/ operator of Henry Hub). He served in leadership roles in various LNG projects across the world for Nexen Energy/CNOOC, Shell, Marathon, and Jordan Cove LNG, where he was responsible for commercial and business development activities

Mike Mott joined the company in September 2014. Before joining LNG, he held a number of senior finance, strategy and operations roles at BG. Mike held progressively senior accounting and risk management roles for Dynegy from 1995 and was previously at PWC.

Management team

Chairman: Paul Cavicchi

Paul has over 25 years’ experience across a range of gas and power projects, including development and construction of LNG infrastructure. Paul’s most recent executive position was as executive VP of GDF SUEZ Energy North America. Previous roles include president and CEO of SUEZ Renewable Energy.

CEO: Greg Vesey

Greg has held senior executive roles in the international energy sector through a distinguished career of 35 years with Chevron and Texaco. Most recently, he was president of Chevron Natural Gas & VP, gas supply and trading from 2011 to 2015.

CDO: Joe B’Oris

Joe began his career at Getty Oil (later acquired by Texaco). While at Texaco, Joe was responsible for all commercial activities on the Sabine Pipeline (owner/ operator of Henry Hub). He served in leadership roles in various LNG projects across the world for Nexen Energy/CNOOC, Shell, Marathon, and Jordan Cove LNG, where he was responsible for commercial and business development activities

Mike Mott: CFO

Mike Mott joined the company in September 2014. Before joining LNG, he held a number of senior finance, strategy and operations roles at BG. Mike held progressively senior accounting and risk management roles for Dynegy from 1995 and was previously at PWC.

Principal shareholders

(%)

Baupost

12.1

Valinor

8.2

Vanguard

2.6

Andrew Bruce

1.7

Bassam Chahla

1.6

Paul Bridgwood

0.6

Norges

0.6

Companies named in this report

Cheniere, KBR, SK E&C, Meridien, BNP Paribas , Next Decade

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Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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United Kingdom

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10017, New York

US

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NSW 2000, Australia

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DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Liquefied Natural Gas Ltd Ltd and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Powerhouse Energy Group — Making money from waste

PowerHouse Energy’s innovative, distributed waste-to-hydrogen technology satisfies the joint needs of powering fuel cell electric vehicles, finding an alternative means of waste disposal to landfill or incineration and providing a predictable form of clean energy to complement intermittent supplies such as wind and solar. The hydrogen and electricity are produced close to point-of-use, saving transportation costs and reducing transmission losses and the associated carbon footprint. The company has a pilot system near Ellesmere Port, Merseyside, and intends to commence commercial production in FY18.

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