REG - Rurelec PLC - Disposal of Argentinian Interests and Notice of GM

RurelecAnnouncement

16/05/2023 07:00

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RNS Number : 4911Z  Rurelec PLC  16 May 2023

 

16 May 2023

 

This announcement contains inside information for the purposes of Article 7 of
the UK version of Regulation (EU) No 596/2014 which is part of UK law by
virtue of the European Union (Withdrawal) Act 2018, as amended ("MAR"). Upon
the publication of this announcement via a Regulatory Information Service,
this inside information is now considered to be in the public domain.

 

Rurelec PLC

("Rurelec" or the "Company")

 

Proposed Disposal of Argentinian Interests resulting in Fundamental Change of
Business

Notice of General Meeting

 

Rurelec entered into a conditional agreement dated 15 May 2023 to sell its
Argentinian Interests (as defined below) to Verafont S.A., Basic Energy
Limited and Mr. Esteban Reynal (the "Purchasers") for a consideration of up to
USD 5m (c£4m). The sale is a fundamental disposal pursuant to Rule 15 of the
AIM Rules and accordingly is conditional on Shareholders' approval. Subject to
the receipt of this approval the Disposal is expected to complete during June
2023. Sterling Trust Limited (in administration) which holds 53.99% of the
issued share capital of the Company has irrevocably committed to support the
sale, and vote in favour of the Disposal at the General Meeting.

Following Completion the Company intends to pay a special dividend of 0.20p
per share to shareholders on the register on a record date after Completion
which will be announced in due course, in accordance with the Company's
strategy to return capital to Shareholders. The balance of the consideration
(approximately US$1.44m (c£1.14m) will be retained to be used as working
capital for the business for the next phase of the Group's development.

A general meeting (the "General Meeting") of the Company is expected to be
held at 5 St. John's Lane, London, England, EC1M 4BH at 10.00 am on 1 June
2023. The formal Notice of General Meeting will be included in a circular to
shareholders which will be posted today, and this will also be available from
the Company's website www.rurelec.com (http://www.rurelec.com) .

All capitalised terms used in this announcement are defined terms, and a list
of definitions is included at the end of this announcement.

Background to and reasons for the Resolutions

Rurelec's main assets are the 701 Turbines and the Argentinian Interests. The
latter comprises (amongst others) Rurelec's interest in EdS, in Argentina,
held through Patagonia Energy Ltd. which is 50% owned by the Company in a
joint venture with Basic Energy Limited and Esteban Reynal.  EdS owns a 138MW
combined cycle powerplant known as Central Termica Patagonia, located in the
coastal city of Comodoro Rivadavia. Over recent years cash generated by the
powerplant and paid to Rurelec has been the Company's main source of income.
While the plant is well maintained, in recent years it has been unable to
produce significant Argentine Peso surplus cash owing to an unfavourable
electricity market following payment delays and fixed tariffs which have
fallen behind inflation. The Company received income through Patagonia Energy
Ltd. in the year to 31 December 2022 of USD 0.76m. As a result, the Company's
working capital has deteriorated, and the Directors have been seeking to
dispose of assets. On 25 January 2023 the Company announced that it was in
discussions to sell its Argentinian Interests.

Rationale for the Disposal

Over recent years the Board explored a number of opportunities to dispose of
the Argentinian Interests and have concluded that there is a limited market
for these assets. The Disposal gives the Company necessary liquidity and,
subject to approval, will lead to Shareholders crystallising value through a
dividend. While the plant is well maintained, the Directors believe EdS will
face headwinds in the future which are likely to result in it having to
preserve its own liquidity at the expense of any distribution for the benefit
of Rurelec. In particular:

 

·    There is a need for major maintenance programs from 2023 and beyond
which will need funding.

·    Loans from CAMMESA which funded previous maintenance due for
repayments were requested to be extended for the year 2023 in September 2022.
This extension cannot be guaranteed.

·    Payments for electricity generated due from CAMMESA are likely to
continue to be delayed, in light of the difficult macro-economic situation in
Argentina.

·    Renewable sources of electricity, hydro, wind and solar, are being
continuously improved in the Patagonia area. These sources will have a
priority dispatch over EdS which may reduce annual generation by EdS.

In addition, the persistent macro-economic and political situation in
Argentina makes it particularly difficult for EdS to remit dividends to
Rurelec; these factors include:

 

·    There is a significant gap between the central bank exchange rate and
CCL exchange rate.

·    A reduction in industrial activity, due to the macro-economic
situation may lead to reduced demand for power.

·    Political uncertainty makes predicting a future government's approach
to tariff increases difficult or impossible.

Credit is likely to become more expensive due to high interest rates or not
available at all. Accordingly, the Directors have concluded that the
Argentinian Interests are unlikely to contribute to Rurelec shareholder value
in the short or medium term and are therefore best owned by an entity
resident, or with other interests, in Argentina.

 

The Disposal will not be subject to withholding tax in Argentina.

 

At the Company level, cash generation from Argentina is significantly below
historic levels, and insufficient to sustain the Company in the absence of
other funding which cannot be guaranteed to be available. The Disposal
therefore ensures that the liquidity of the business is sustained.

 

The Argentinian Interests have a book value of USD 4.76m in the accounts as at
30 June 2022, being the latest published balance sheet. In the year to 31
December 2021 PEL made an operating profit of USD 0.90m.

 

Disposal Agreement

Rurelec intends to sell the Argentinian Interests to the Purchasers for up to
USD 5m (c£4m) payable in cash, subject to Shareholders' approval. The
Purchasers include Basic Energy Limited and Esteban Reynal who together
currently own the shares in PEL not held by Rurelec.

 

The Purchasers will pay Rurelec USD 3m (c£2.4m) upon Completion, which is
expected to occur shortly after the General Meeting if approval of
shareholders is given. Of this USD 3m, USD 600,000 (c£475,000) has been paid
by the Purchasers into an escrow account as a deposit, which is expected to be
released to Rurelec at Completion.  In the event that the Resolution
regarding the Disposal is not passed, or Completion does not occur due to
reasons other than a material default of the Purchasers, the deposit will be
returned to the Purchasers.

 

In addition, further contingent payments of, in aggregate, up to USD 2m
(c£1.6m) may be made as follows:

 

·    USD 1m will be paid: if within 12 months following Completion, an
increase of the Remuneration payable by CAMMESA to EdS is both (i) approved by
the Secretary of Energy of Argentina; and (ii) received by EdS in cash or by
EdS receiving a set-off against a current liability of EdS (including by way
of cancellation of debts and/or interest payable by EdS to CAMMESA). For the
purposes of this clause "current" liability means an amount that became or
would become due and payable by EdS during said 12 month period provided that
the rate of such increase is 50% (or more), more than the inflation rate in
respect of the 12-month period immediately preceding the month in which such
increase is approved. If these conditions are satisfied, then a further USD 1m
will be payable to Rurelec on the date falling 12 calendar months following
the date of payment to EdS of such increase of Remuneration. However, this
payment will be reduced to USD 500,000 if the rate of the Remuneration
increase is less than 50% but greater than 25% of the inflation rate in
respect of the 12-month period immediately preceding the month in which such
increase is approved.

 

·    USD 1m will be paid: if within 36 months following Completion,
CAMMESA reimburses in cash to EdS all major and minor maintenance costs for
EdS's turbines estimated for the period 2023 to 2025., If this condition is
satisfied, then the Purchasers will pay a further USD 1m to Rurelec on the
date falling 36 calendar months following Completion. This will be reduced to
USD 500,000 if 75% or more of such costs (but less than 100%) are reimbursed
in the same timeframe.

 

The sale and purchase agreement contains warranties which are typical for a
transaction of this nature.  The Company's liability for warranty claims are
subject to customary limitations including an overall cap of USD 300,000 (save
for claims under certain fundamental warranties or in the case of fraud,
wilful negligence or intentional misrepresentation where the Company's
aggregate liability will not exceed the consideration actually received).

 

The Purchasers' obligations and liabilities under the conditional share
purchase agreement are several only.

 

The Company has received irrevocable undertakings to vote in favour of the
Resolution to approve the Disposal from Sterling Trust which holds 53.99% of
the Company's issued share capital.

 

AIM Rule 15: Fundamental Disposal

The Disposal is a fundamental disposal pursuant to Rule 15 of the AIM Rules,
and accordingly it is conditional on the consent of its shareholders in a
general meeting.

It should be noted that, if approved, the Disposal will be deemed to be a
disposal that divests Rurelec of all, or substantially all of its trading
businesses, activities or assets (pursuant to Rule 15 of the AIM Rules).
Accordingly, on Completion Rurelec would be regarded as an AIM Rule 15 cash
shell. Within six months of becoming an AIM Rule 15 cash shell, Rurelec must
make an acquisition or acquisitions which constitutes a reverse takeover under
Rule 14 of the AIM Rules ("Relevant Acquisition") or the Exchange will suspend
trading in the Company's Ordinary Shares pursuant to AIM Rule 40; and if such
a Relevant Acquisition is not completed within a further six months, the
admission of the Company's ordinary shares to trading on AIM will likely be
cancelled.

Use of funds

Upon Completion the Company expects that the initial net proceeds will amount
to approximately USD 2.85m (c£2.3m) net of fees, expenses and commissions in
relation to the Disposal. The Directors consider that it is prudent to retain
a proportion of these funds for working capital for the Company while they
seek to maximise the value of the Company's other investments, in particular
the Turbines. In line with the Directors' corporate strategy to return capital
to shareholders having realised an asset, the Company will, subject to
Completion, pay a special dividend of 0.20p per share to shareholders (a total
sum of approximately £1.12m) as soon as practicable after completion of the
Disposal. Details of the timing of the special dividend, including the record
and payment dates, will be announced after Completion.

 

Ongoing Business

Following Completion, it will be the strategy of the Company to maximise the
value of the Company's other investments, whilst exploring potential
investment opportunities, with a view to enhancing shareholder value.

 

Recommendation

Rurelec's liquidity position is now acute. The Company does not have
shareholder authority to issue any new shares. Accordingly, Shareholders
should be aware that Rurelec does not have the flexibility to access the
equity capital markets for funding.

In the event that the Disposal, which is subject to Shareholders' approval,
does not complete, the Company is unlikely to be able to raise working capital
on reasonable terms, or at all. In such circumstances it is likely to lead to
a significant and permanent impairment of shareholder value.

The Directors consider that the Disposal is in the best interests of the
Company and its Shareholders as a whole. Accordingly, the Directors will
unanimously recommend that shareholders vote in favour of the Resolution to be
proposed at the General Meeting.

 

For further information please contact:

 

 Rurelec PLC             W H Ireland (Nomad & Broker)
 Andy Coveney, Director  Katy Mitchell

 Tel: 020 7549 2839/40   Tel: 020 7220 1666

 

 

 

 

DEFINITIONS

 

The following definitions apply throughout this announcement unless the
context otherwise requires:

 

 "AIM"                                    the AIM market operated by the London Stock Exchange;

 "AIM Rules"                              the AIM Rules for Companies published by the London Stock Exchange from time
                                          to time;

 "Argentinian Interests"                  (i)         2,789,297 ordinary shares of US$1.00 par value each in

                                        PEL, comprising 50% of all of the issued shares of PEL;

                                          (ii)         600 A Class shares of ARG$ 1.00 (Peso Argentino) each in
                                          Electrica, comprising 0.1% of the entire issued share capital of Electrica;
                                          and

                                          (iii)        The Shareholder Debt;

 "Basic Energy Limited" or "Basic"        Basic Energy Limited, a company incorporated in the Bahamas with company
                                          number 14026 whose principal office of business is at Interenergy, 1 East
                                          Putnam Avenue, Greenwich, CT 06830 USA;

 "CAMMESA"                                Argentine Wholesale Electricity Market Clearing

                                          Company (Spanish: Compañía Administradora del Mercado Eléctrico Mayorista
                                          S.A.);

 "CCL"                                    (Spanish: Contado con Liquidación) is a financial transaction that consists
                                          of buying negotiable securities in Argentina quoted in Argentine currency,
                                          transferring it abroad and then selling the same negotiable securities in the
                                          US with a dollar quote. Through this transaction, domestic currency is
                                          converted into US dollars in a foreign account;

 "Company" or "Rurelec"                   Rurelec PLC, a company incorporated under the laws of England and Wales with
                                          company number 04812855;

 "Completion"                             completion of the Disposal;

 "Disposal"                               the proposed sale of the Argentinian Interests to the Purchasers in accordance
                                          with the conditional share purchase agreement dated 15 May 2023;

 "Directors" or "Board"                   the directors of the Company

 "EdS"                                    Energia Del Sur S.A., a company incorporated in Argentina with company number
                                          7527, Book 115 Vol. A, IGJ Registration No. 1.593.639 and CUIT No.
                                          30-67732078-4 whose registered office is at Arroyo 880, Piso 2, Office 3,
                                          Ciudad Autonoma de Buenos Aires, C1007AAB, Argentina;

 "Electrica"                              Electrica del Sur S.A., a company incorporated in Argentina with company
                                          number 9106, Book 119 Vol. A, IGJ Registration No. 1.624.187 and CUIT No.
                                          30-68898894-6 whose registered office is at Arroyo 880, Piso 2, Office 3,
                                          Ciudad Autonoma de Buenos Aires, C1007AAB, Argentina;

 "FCA"                                    the UK Financial Conduct Authority;

 "FSMA"                                   the Financial Services and Markets Act 2000 (as amended);

 "Group"                                  the Company, its subsidiaries and its subsidiary undertakings;

 "London Stock Exchange"                  London Stock Exchange Group plc;

 "Ordinary Shares"                        ordinary shares of £0.01 each in the capital of the Company;

 "Patagonia Energy Ltd." or "PEL"         Patagonia Energy Ltd., a company incorporated under the laws of the British
                                          Virgin Islands with company number 620522 whose registered office is at
                                          Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands.
                                          Rurelec owns 50% of PEL;

 "Purchasers"                             Verafont, Basic and Mr. Esteban Reynal;

 "Regulatory Information Service"         a service approved by the FCA for the distribution to the public of regulatory
                                          announcements and included within the list maintained on the FCA's website;

 "Remuneration"                           the unit values of the remuneration concepts (prices and costs) related to the
                                          availability and energy applicable to "Central Patagonia" and received by EdS,
                                          which are proposed to be effective after the date of Completion and as
                                          approved by the Secretary of Energy of Argentina, except for any payments made
                                          to EdS for maintenance purposes.

 "Resolution"                             the resolution to be proposed at the General Meeting as set out in the notice
                                          of General Meeting;

 "Shareholders"                           holders of Ordinary Shares;

 "Shareholder Debt"                       US$ 25,278,637, being the sum of all amounts owed by PEL to the Company at
                                          Completion under (i) a fourth amended and restated promissory note between PEL
                                          and the Company dated 19 November 2019 (under which US$13,355,181 is owed),
                                          and (ii) an umbrella agreement between (among others) the Company, Basic, PEL,
                                          Electrica and EdS dated 19 November 2019, as amended on 20 May 2020 (under
                                          which US$11,923,456 is owed);

 "Turbines"                               two Siemens Westinghouse TG50D5/W701DS 127.8 MW gas turbine generator
                                          packages, including ancillary equipment;

 "UK"                                     the United Kingdom of Great Britain and Northern Ireland;

 "US dollar", "US$"or "USD"               references to the lawful currency of the United States of America;

 "Verafont"                               Verafont S.A., incorporated under to law 16,060, domiciled in the Republic of
                                          Uruguay, constituted according to the statute dated 21 October 2015, approved
                                          by the Internal Audit of the Nation on 18 November 2015, registered in in the
                                          Registry of Legal Entities with No. 115066 on 4 December 2015 and registered
                                          in the Tax Authority under No. 21770541001;

 "£", "pounds sterling", "pence" or "p"   references to the lawful currency of the United Kingdom.

 

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