PAPA One Ltd – Summer 2022 Shareholder Update

PAPA One Ltd – Summer 2022 Shareholder Update

Management of the Company:

Luis Novella and Adam Smith continue to manage the Company as your directors and to pursue our key objective of permitting the Campeche solar PV project in Mexico with a view to its sale at late or ready to build stage.

Mexican Power Market Update:

In the June 2022 Mexican mid-term elections, President Andres Manuel Lopez Obrador and the ruling Morena party lost their supermajority. As a result, there were insufficient votes to amend the Mexican constitution and the regulations concerning the country’s electric sector. In very simple terms, this means that the energy market in Mexico will not be renationalised.

Although this event is significant and potentially marks a key turning point in this current political cycle, in the short term it is likely that the President and those responsible for energy policy will continue to politicise the country’s regulators and power market system, potentially to the detriment of free-market forces. These are political risks that we cannot influence.

As a general comment, we feel that we can be reasonably confident that the overall framework for the power sector and its key fundamentals will remain unchanged and when new policies do come forward, they will align with our proposition as an independent developer.

Campeche Project Update:

Our relationship with our Spanish partner continues to strengthen and to work efficiently. The project team has successfully driven the project development forward and completed the next significant milestone in the permitting process. This marks a key stage in the project’s progress up to the ready-to-build (RTB) stage. The majority of the permits and licenses have either been obtained or are imminent, with the exception of the interconnection permit. 

We are currently focusing our energies on the ongoing negotiations with CFE, with the support and assistance of a major electricity distributor in Mexico, in respect of the interconnection applications and protocols. From a practical and operational perspective, CFE is still being slow to progress interconnection permitting, citing delays caused by the Covid pandemic. However, over recent weeks we have seen some easing within CFE and some third-party projects have been granted interconnection permits. This provides the first positive signal that CFE is beginning to resume business as usual although the majority of projects (including ours) are caught in the backlog.

CAMPECHE” PROJECT STATUS REPORT (134 MW SOLAR GENERATOR)

ACTIVITYSTATUSFEEDBACK
LandObtainedThe lease of the land on which the Project is to be implemented was ratified before a notary public on February 22, 2021. Full registration of lease on the land has been finalised and completed.
ConaguaObtainedBy means of letter number BOO.904.04.-014 dated August 3, 2021, it was reported that there are no currents or bodies of water of national property in the project area.
INAH004 ObtainedOn July 13, 2021, the prospecting application was entered into the offices of the INAH Campeche centre, to which file number 09/21 was assigned. The Department of Legal Procedures and Services responded on 13th October 2021 to the aforementioned request.
005 PendingEngagement with the Head of the Department has continued with the view to complete the required further steps in the process. We anticipate updates on this within the next 6 weeks.
CENACE In processThe preparation of the M&E engineering work, including the Indicative Study has been concluded. However, we still await assurances from CENACE to proceed further in the process due to the backlogs in the system, the official line from CENACE and the government is still connected to the COVID-19 Pandemic. 
Environmental& Social Impact StudiesPendingThe environmental consultants working on the Campeche site have completed the required site surveys and associated work. They submitted the official Environmental Impact Study to the official body SEMARNAT on 23rd June 2022
The project has been published in the required regional newspaper 5th July 2022.
License Budget Municipal (change of land use and construction)ObtainedFollowing 14th December 2021 submissions to Municipality of Escárcega, successful negotiations were completed. Both construction and change of land use permits have been obtained They will be in force for a period of 3 years.
EVISPendingOn August 23, 2021, the Social Impact Assessment of the project was successfully submitted to the Ministry of Energy. 
DGAC ObtainedBy means of letter number 4.1.2.3.2524/SIAC/2021 dated November 12, 2021, the project and its construction plans were authorised, reserving the authority the right to carry out inspections to verify compliance with the technical characteristics and the corresponding legislation.
SCT PendingThe engineering work was carried out and the access file was entered into the Ministry of Communications and Transport on December 3, 2021.
CENAGAS PendingThe request for confirmation that the pipelines and infrastructure of CENAGAS are not affected by the development was made and entered on 14th July 2021, 
CFE In processThe study and entry of the request for consent in relation to the CFE Transmission facilities was carried out on 15th December 2021. We continue to engage at a high level with CFE and the government with the assistance of a large distributor with the aim to get assurances from them on completing the interconnection requirements and gaining certainty on connection dates.

Project Strategy:

In our last report, we outlined two possible options linked to the outcome of the political process referred to above. We now consider that our approach of continuing to execute the development process over the past 6 months to cover both scenarios has proven to be correct and has enabled us to mitigate the current risks while engaging with key stakeholders in the Government, CFE and institutional operators and counterparties in the power market.

As previously mentioned, we still anticipate challenges, particularly with delays in the grid interconnection process. However, we also believe that the high-level engagement that we have undertaken positions the Company well within the market. This will also help us to better navigate the interconnection permitting process, which is currently the main roadblock in the sector.

By persisting with the development process under the difficult recent conditions, we have delivered further key milestones (most significantly, the Environmental Impact Study) which have increased the marketability of the Campeche project. This has given the project greater visibility in the wider power market and has attracted interest from operators and potential institutional investors. 

These well-informed and established participants in the Mexican electricity market continue to see great potential over the medium to long term and have been reassured by the Government’s failure to interfere with the power market.

The Company and our Spanish partners have received approaches in the last 3 months from large power companies and asset managers. Although this is early stage engagement and discussions are ongoing, it is promising evidence of demand for our project.

Based on our current assessment of the discussions with CFE, we will not have clarity on the timing of the filing of the final interconnection permit application, and when it would be granted, before September 2022. 

Resources:

The Company continues to meet its contractual obligations by contributing our share of the cost and general operating expenses to permit the Campeche project SPV to ready-to-build status. 

At this stage, provided there are no further unforeseen events and/or escalating costs, we anticipate that sufficient funds should be available to complete the permitting of the project. We review our financial position regularly and anticipate further discussions on the funding requirements of the project SPV with our Spanish partner in the coming weeks. We will inform you if any specific concerns arise and will provide reasonable notice if further funding is needed for the Company.

Governance:

The articles of association are publicly available on the Companies House website. We are often joined by our investment lead, accountants and company lawyer in order to make sure we have the most accurate information and also to ensure compliance with statutory requirements and that we follow best practices.

To Conclude:

We will continue to engage cautiously with specialist investors but will hold back on formal marketing efforts until we have more information on the interconnection application from CFE. As is standard for the sale of power projects, we will seek heads of terms that will provide a framework for the sale and/or finance of the project with a view to receiving a cash payment that can ultimately be distributed from the Company’s reserves. 

At that point, we expect to engage with PAPA One shareholders in relation to such distributions and the lead times that may be required. Until the Company has realised its stake in the Campeche project SPV, we are unlikely to be in a position to discuss any such distribution.

The Campeche project and the Company are in good standing and the strategy that we have been pursuing remains viable with a project sale achievable should the interconnection permit be granted.

We wish you and your families wonderful times over the summer holiday season. We are, as ever, thankful for having you as our shareholders and partners.

Warm regards,

Luis Novella Chairman
PAPA One Ltd https://papa-one.com/

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