Rame Energy CEO Interview: Independent Power Producer

Rame Energy (LON:RAME) headquartered in Plymouth is a new entrant to the AIM market and is focused on energy and marine services in the UK and a pipeline of renewable energy projects in Chile.  It is the entry that Rame Energy have carved out to bring renewable energy to the industrial and domestic sector in Chile which makes this quite an interesting investment proposition for me.   The Chilean government recently passed legislation to open up the country's domestic market for renewables and in particular, solar power, which is where the Beco Solar subsidiary would be well placed to capitalise.

Following a number of recent announcements Mr Tim Adams, the Chief Executive Officer of Rame Energy, has taken time out to discuss various business aspects.

Q1.  Briefly, could you please set the scene with the background, business model and mission?

Rame Energy is an Independent Power Producer (IPP). We provide on-grid and off-grid power solutions to industry by generating renewable energy; primarily wind and solar.

Founded in 2002 as the Seawind Group, Rame has a proven track record in power project design and execution. For over a decade we've delivered a range of projects, establishing a strong reputation for meeting deadlines and budgets - often in harsh environments and remote locations.

In 2006, we were introduced to the Chilean energy market by our client Barrick Gold for whom we conducted a number of feasibility studies across Latin America. Barrick engaged us to design, construct and operate the world's highest altitude utility scale wind turbine – no mean feat in the middle of the Argentinean Andes. We then went on to develop, at the time, Chile's largest wind farm project for mining – the 20MW Punta Colorada project.

Having amassed a significant body of experience and expertise, we took the strategic decision to own and operate our own power generation projects and this led to our AIM listing back in April 2014.

Our mission is to create value for stakeholders by developing a portfolio of high yielding, renewable energy projects. These assets will generate clean, commercially priced electricity both on-grid and off-grid for the benefit of our industrial customers.

Our business is focussed on returns rather than scale and the economic model for private power sales to industry is robust; high performing power projects with guaranteed, visible, near term returns allow capital to be recycled into future projects with a decreasing cost of capital.

We are targeting a mixed portfolio of 300MW within three years and earlier this year, achieved mechanical completion at our first projects as an independent power producer, the 15MW wind projects at Raki and Huajache in Chile.

Q2.  Rame Energy recently acquired the Beco Solar energy business, can you please explain the rational for this decision and your aspirations for the fully owned subsidiary going forward?

Rame acquired Beco in June 2014 having already collaborated on a number of solar opportunities. We recognized that Beco's solar experience could add significant value to the Rame offer; both by adding to our internal power generation portfolio and expanding our solar activities in the UK, Chile and world markets.

Less than a year after acquisition, we have successfully transferred our solar capabilities into Chile. February saw the completion of phase 1 of our first fully owned solar power plant – one of the first in Santiago to benefit from new legislation to incentivize rooftop generation.

This legislation is widely predicted to open up the Chile's rooftop generation market, and, through Beco, we are ideally placed to capitalize on these opportunities to provide an additional revenue stream.

Subject to financing, we are also developing our first multi megawatt on-grid ground mounted solar power plant. Located in Northern Chile, the plant is expected to yield approximately double the output of a UK solar plant and we intend to fast track development phase 1 – 2.5MW of a potential 20MW – to achieve power out by the end of 2015.

Q3.  What are the key significant projects for Rame Energy and the time scales investors should be looking out for?

Right now, the market is understandably focused on our first two major projects as an independent power producer; the 15MW wind farms at Raki and Huajache in which Rame has 20% equity. Whilst the landslide at the end of 2014 delayed the execution of these projects, they are now back on track and we anticipate power out shortly.

We are also progressing the co-financing framework agreement with Santander to develop up to 133 MW in Chile, 54MW of which is scheduled for construction to commence in Q4 2015. The terms of the agreement allow us to monetize the true market value of our development activities prior to construction, further enhance our earning visibility and provide us with a clearly defined and de-risked route to full ownership at completion.

On the solar side, we've made significant progress on our first multi-megawatt on-grid solar project. Initially a 2.5MW with an additional potential 17.5MW, the project will be fast tracked for power out in Q4 2015 subject to financing for which we have an indicative term sheet to provide non-recourse debt. Once again, because our focus is to identify high yielding energy investment opportunities, this first project is located just south of the lower Atacama desert in an excellent solar climate, where power prices are high and grid connection is adjacent to the site. These sorts of opportunities will continue to be the focus of Rame's on-grid development activities where we focus on exceptional sustainable returns and not simply large scale.  The higher cash yields we can achieve support a range of financing options for Rame which lessen the need to rely on raising equity from traditional sources and we expect to be able to grow our portfolio quickly as a result.  We're currently in negotiations with an existing client for a 15 year PPA and the project naturally plays an important part in establishing a mixed portfolio of 300MW of generating assets in the next three years.

In addition, we anticipate that demand for off-grid renewable power to reduce diesel consumption will continue to grow. The oil market remains volatile and all the indications point to a sustained interest in renewables within the mining industry. Indeed in May, the CEO of mining giant Codelco will lead discussions with many of our clients on renewables and mines at a Santiago summit.

Q4.  RAME have just announced the sale of the Punta Chome project, could you please explain the rationale behind this decision and what financial gain has the company made from the sale.

As you would expect, we're constantly analysing our portfolio to ensure that projects deliver the strongest financial returns. In tandem, we aggressively seek out new projects.

In the case of Punta Chome (9MW), the business case was simple – we identified a better project to join the Santander portfolio. The new project is located in close proximity to an existing pipeline site and developing the two together to achieve a combined output of 54MW will offer significant efficiencies and, therefore a higher rate of return.

In light of this, the Board took the decision to sell Punta Chome and we were delighted to enter into an agreement with EREN for the sale, pre-construction permit finalisation, on-site construction enabling works and other project services to assist EREN with the complete implementation of the project. The package is worth up to US$2M between now and project completion – estimated for Q2 2016, and we retain an option to participate into up to 20% of the projects equity.

We see this as clear evidence of our ability to realise value from our pipeline in addition to growing our presence as an independent power producer.

Q5.  Why the focus on the Chile energy market? And, how do you find operating in Chile both with local stakeholders and the authorities?

Rame was an early mover in Chile and it's now widely acknowledged to be one of the world's most favourable markets for renewables currently ranking at number 11 in Ernst and Young's Renewable Energy Country Attractiveness Index. The reasons for this are complex but, in a nutshell, energy demand outstrips supply in a country where the climate is ideally suited to renewables and the government has set ambitious targets for their adoption.

We've been operating in Chile for nearly a decade. We established our Santiago office in 2006 and have been firmly embedded in local markets ever since. We are, therefore, experienced in dealing with both local stakeholders and the authorities and enjoy strong relationships across the board.

The authorities embrace renewables and set out very clear frameworks to follow for all the necessary operational activities and permissions. The biggest challenge – especially for new entrants - can be to secure a connection to the grid, but our experience stands us in good stead as we are familiar with the process and understand what the distribution companies are looking for.

Community relations is a very important aspect of our work and we dedicate significant resources to working in partnership with the communities in which we operate. Digital inclusion is a big issue in Chile and at Raki, we worked with community leaders to identify how we could use our construction capabilities to erect an internet mast to serve the local school and community. We believe that it is important to approach community relations on a case by case basis to ensure that the community's needs are at the forefront of our activities and, when we put something in place, we make sure it is sustainable. For example, the maintenance costs of the internet mast at Raki are included in long term contractual agreements.

Q6.  How does the wind energy project financing work? And what role does Santander play?

There are numerous financing structures available for wind project development, and in the past, we have adopted the sales before construction model – selling the developed project to a strategic investor prior to construction.

As we move towards becoming an independent power producer, there is no doubt that our partnership with Santander has been hugely valuable in expediting our progress. A framework agreement is in place for the next wind projects in Chile for up to 133MW and we are currently in the process of satisfying Santanders' due diligence requirements prior to moving to full contract and shareholder agreement.

Q7.  As a shareholder I must say I was very pleased with the funding arrangement recently announced for the Cerro Bayo project, especially as it did not involve RAME going to the stock market and selling shares to raise capital, can you briefly describe the funding achieved for the Cerro Bayo project, the forward work programme and company aspirations.

The Cerro Bayo project is one of our smaller off-grid projects to reduce dependency on expensive diesel generation for a remote mine. A 5 year power purchase agreement is in place with the mine owner Mandalay Resources. We have now secured a conditional funding facility of US$4.7 million with Anden Re and will retain a 25% equity stake.

Anden Re. are natural partners for Rame; they were set up by a highly experienced team of financial professionals including Rolf Dienst, Carsten Eckhart and August von Joest specifically to invest in renewables projects in Chile. There is a clear synergy and we are currently in discussions to explore a broader relationship for the financing of our off-grid portfolio.

Construction at Cerro Bayo has now commenced, starting with the drilling of rock anchors for the foundations, and we have secured three 600kW turbines for the project which are now undergoing a programme of optimisation to suit site and grid conditions. We anticipate that these will be ready for shipment to Chile in July 2015. Commissioning is scheduled for the Patagonian spring in Q2, 2016 to take advantage of optimum weather conditions.

Q8.  Following the landslide delay, when do you expect the Raki / Huajache wind project to be generating energy and how significant will this be for the company both in executing a project and financially?

Whilst hugely frustrating, the landslide at Raki / Huajache tested our metal and demonstrated our ability to overcome challenges to get the project quickly back on track. We have a strong reputation for delivering in isolated locations and harsh environments so although the landslide could not be predicted, we are experienced in coming up against these sorts of problems.

Our longstanding presence and relationships in Chile enabled us to work quick and effectively with the local authorities to minimize the impact and although the project was delayed, in the context of a complex project such as this, we don't consider it to be materially significant.

We achieved mechanical construction of Raki in early March and will obviously make a full announcement once final certification is achieved.

Q9.  The expansion of the agreement with Santander by a net 15MW to 133MW was recently announced. Can you elaborate on this partnership going forward, and how the agreement actually works as regards to the 133mw projects with them? How do RAME actually make money from these deals and over what time frame?

We are delighted to enjoy a strong relationship with Santander and there is no doubt that our partnership gets Rame into more projects and gives us the opportunity to refinance advantageously at project completion. The recent expansion of the portfolio demonstrates our ability to work together to respond to emerging opportunities in a dynamic market.

The framework agreement itself provides up to US$69M of equity financing for pipeline projects totaling up to 133MW. It's based on the Santander renewable energy bridge fund for Chile and under it, Santander buys an 80-90% equity stake in projects based on a fixed priced per MW. This gives Rame a market based development margin and cash earnings at financial close. We contribute construction equity proportionally and Santander structures senior debt with local lenders – typically leveraged at 65-75%.

Rame then supervises the construction and administers the special purpose vehicle (SPV). Prior to the commercial operation date, Rame has the option to buy back the Santander equity based on a fixed formula and this is the point at which Rame can recycle capital – a critical aspect of our strategy – by selling down to an institution.

Q10.  The share price and market capitalisation has struggled to hold the 18p IPO level, can you please outline the company objectives in terms of rewarding the Rame Energy investors?

Whilst the share price has not performed as we would have wished, the business has delivered on its objectives, increased its real value and managed to structure access to capital without diluting the shareholder base. We believe we will continue to progress solidly with our strategy and will soon demonstrate the substantial cash generation potential that underpins Rame's value proposition. With clear direction, measurable progress and solid net earnings combined with appropriate representation and advice, we are confident that the market capitalization will recover to reflect the performance and real potential of the business.

Q11.  Does Rame Energy believe the retail investor market currently 'gets' the Rame story and are there any plans to commission any broker/analyst report coverage going forward?

Rame has been listed on AIM for less than 12 months and it undoubtedly takes time to generate interest and establish market confidence. We recognize that, like many new AIM entrants, we have some issues around liquidity and we're approaching this from a number of directions internally.

That said, the signs are encouraging; our new website has attracted a lot of interest with traffic doubling, more and more people are registering for our news alerts, we're regularly discussed on the investor forums and coverage from Proactive Investors, Directors Talk and Stockopedia can only help to spread the word.

With our new website in place, we've started to cast the net wider and were recently covered by Bloomberg, The Times, The Daily Mail and The Telegraph which, naturally, triggers wider interest. In parallel, we are in discussions with one of the national papers about a project to increase Rame's profile across the board.

In addition, our new Chief Financial Officer, Kevin McNair, will be meeting with a number of brokers over the next few months to highlight the Rame offer more widely. Commissioning broker coverage is always an option but we are keen to attract independent broker coverage where possible.

Q12.  In summary, what can Rame Energy shareholders look forward to over the next 12 to 18 months?

Q1 2015 has seen the achievement of some key milestones for Rame; mechanical completion of Raki / Huajache, the completion of our first rooftop solar project in Chile, financial close of Cerro Bayo, the sale of Punta Chome, the expansion of the Santander portfolio and the announcement of our first multi megawatt on-grid mounted solar project in Chile.

On the back of this, the next 12-18 months will be an exciting period; we will shortly have completed our first 12 months post IPO and will be moving forwards on our first ground mounted solar projects as well as progressing with Santander.

Over the next 18 months, we are planning to achieve up to 130MW of wind and solar projects from our mature development pipeline and I look forward to keeping the market updated as we progress.

Thanks Tim for taking the time to discuss the various business aspects and for sharing your thoughts.

The interviewer holds shares in Rame Energy (LON:RAME)

The main article image is supplied with the courtesy and copyright of Rame Energy