Executive Directors' Statement

Review of Operations

Argentina

Following the 2019 US$6 million major overhaul and repair of its steam turbine and the refurbishment of one gas turbine, EdS resumed a steady and consistent output which continued throughout the first 6 months of 2021.

Despite the plant performing well, the economic situation in Argentina remained in crisis:

1. High inflation and a decline in the value of the Argentinian peso against the US Dollar led to the Argentinian Central Bank tightening exchange controls in September 2019.  The exchange controls on US Dollars have a direct effect on the cash remittances by EdS to PEL, the latter not being resident in Argentina.  The cost of transferring money out of Argentina has increased dramatically since February 2020.  In 2020 the loss suffered on transferring US Dollars out of Argentina was approximately 43 per cent of the underlying face value and a similar situation persisted in the first 6 months of 2021. The duration and severity of these controls remains uncertain.

2. Delays have been experienced by EdS along with other generators in Argentina in receiving payments of revenue from CAMMESA (the wholesale electricity market regulator and administrator).

3. In March 2020, the Argentinian Government announced a policy change whereby energy spot prices will no longer be linked to US Dollars but to Argentinian Pesos retroactively to February 2020 and will be updated monthly from March 2020. This increased the foreign exchange risk of operating in Argentina.

4. The Resolution 220 Power Purchase Agreement ("PPA"), which governed the tariff by which the output of the Steam Turbine was remunerated, expired in September 2020, after which, amidst severe economic weakness in Argentina and a political stance of a new Government which is generally unfavourable to the power producing companies, the output was remunerated under Resolution SE 31/2021 ("Resolution 31") which governed spot prices.  That spot tariff was significantly lower than the previous Resolution 220 tariff.

5. The Argentinian economy remained weak, and the Argentinian Government continues to struggle with COVID-19 related problems. The Directors also understand that the effects of COVID-19 were a material factor in delays to the finalisation of the Resolution 31 tariff.

Since the expiry of the Resolution 220 PPA, the management of EdS, together with support from external advisers and the Rurelec Board, were engaged in extensive negotiations to establish a new tariff for EdS's power generation. These negotiations were held with CAMMESA, and the Secretariat of Energy who have ultimate responsibility for the policies and tariffs that control the generation and regulation of electricity supply in Argentina. During these negotiations, EdS management had access to the very highest levels of national and regional Government and also within CAMMESA. EdS's management believes it was granted this access because it is a strategically important supplier of power in the region around Comodoro Rivadavia in southern Patagonia. However, in the meantime, until a new tariff was operational, capacity and offtake revenue generated from the Steam Turbine was remunerated at Resolution 31/2021 spot prices.  This had significant adverse implications for EdS's revenue and cash generation, and adversely affected cash payments due from EdS to PEL and ultimately to Rurelec.

Between the expiry of the Res 220 PPA in September 2020 and 30 June 2021, the only cash the Company received from EdS via PEL was US $224k/£174k on 23 October 2020. In the 6 months to 30 June 2020 EdS generated sufficient cash to make unsecured loan repayments to PEL of US $1.82 million/£1.40 million, of which Rurelec received US$1.44 million/£1.12 million, in partial repayment of the Amended and Restated Loan Notes (the "Loan Notes") that were created as part of a new agreement with the joint venture partner in November 2019. This agreement set out how cash receipts in PEL will be allocated between the joint venture partners and represented a major step forward in our mutual working relationship. After the end of the period under review, on 14 July 2021, Rurelec received a further payment of US$0.48 million/£0.35 million from PEL by way of partial repayment of the Loan Notes.

On 2 June 2021, the Rurelec Board announced that the Argentinian Secretary of Energy had issued a new tariff under Resolution SE 440/2021 ("Resolution 440") which replaced Resolution 31 which had governed spot prices. This impacts the price at which EdS can charge for the electricity it generates. Resolution 440 introduces the following changes to the existing Resolution 31 tariff:

•      Spot generation tariffs increased by 29 per cent. on average. This increase was retroactively applied from February 2021.

•       Spot prices were no longer linked to the US Dollar, but instead are linked to the Argentine peso.

•       Steam turbine and gas turbines capacity and offtake revenue were both to be remunerated under the Resolution 440 tariff. Previously just gas turbine offtake was remunerated under Resolution 31.

Despite the increases in Resolution 440, the income generated under this new tariff is significantly lower than under Resolution 220. Accordingly, the Directors anticipate that EdS's revenue has been significantly adversely impacted by this change.

In response to the decline in tariffs, the Directors of Rurelec understand that EdS's management has formulated contingency plans to reduce costs including options to shut down parts of the EdS operation (e.g. the Steam turbine) if necessary.  Whilst this is intended to restore EdS to viability it is uncertain whether EdS will generate sufficient cash to remit to Rurelec via PEL. 

The adverse overall impact of the tariff changes may, however, improve following the conclusion of the "enhanced tariff" negotiations which continue to take place between EdS management and the Argentinian Secretariat of Energy, albeit there is no certainty when these negotiations will be concluded or what their impact will be. Until then, EdS's revenue and cash generation will continue to be affected, which in turn will influence the timing and amounts of any cash payments from EdS to PEL in repayment of the Loan Notes and ultimately to Rurelec. Accordingly, Rurelec will continue to have to be extremely cautious with working capital particularly in the absence of asset sales.

The balance outstanding on the Loan Notes at 30 June 2021 was US $14.95 million (2020: US $15.48 million), with the first US $5.0 million of repayment shared 80:20 between Rurelec and Basic Energy Limited, the ultimate shareholders of PEL, and 72:28 thereafter. 

Chile

In Chile, the necessary environmental consents and land leases were maintained in order to extend the project and the Board continues to review options in the light of the risks versus rewards of undertaking this project.

Asset disposals

Asset disposals to boost Rurelec's cash reserves are an important part of our strategy. On 9 September 2021 the Company agreed the disposal of its Frame 6B Gas Turbine that has been stored in Chile for US $1.0 million /£0.72million. The turbine was held at US $0.50 million/£0.37 million in Rurelec's Group 2020 accounts.

Head office

A tight rein continues to be maintained on overheads in the UK and administration costs for the period fell slightly to £416k (2020: £491k).

Debt repayments and Cash flow

As expected, Rurelec remained free of any secured debt and was consequently in the position of not having to pay any interest.

Due to the lack of receipts from PEL from 1 January 2021 to 30 June 2021, cash reserves fell compared to the previous year such that at the end of the period the balance was £275k (2020: £604k).

Liquidity remains a significant issue for the Group. The Group has been able to cope with variability in the timing and quantum of cash receipts from Argentina due to long term reductions in Group operating costs which throughout 2019, 2020 and 2021 are at lower levels than in previous years. The cash position is expected to recover further in line with expected remittances from EdS and PEL and, if and when sales of remaining assets are achieved by the Group. However, there can be no guarantee as to the timing of any such asset sales, nor regarding when any further cash will be received from Argentina owing to the multiple uncertainties outlined above. In particular there is no guarantee that the remuneration level of the tariff/PPA/spot prices will be further improved by the "enhanced tariff" negotiations that continue to take place with CAMMESA and the Argentinian Secretariat of Energy or that EdS will remain economical. The Directors consider that there is a reasonable prospect of a better tariff resulting from the negotiations in Argentina.   

Given the cash balances held by the Group, expected cash remittances from our Argentine operation and potential asset disposals, the directors continue to adopt the going concern basis of accounting.

Review of future strategy 

The strategy of the Group continues to be focussed on stabilising the financial position, keeping costs under tight control, whilst certain assets are sold. The underlying strategy is to preserve the value of the Group assets and to generate cash.  Given the Group is debt-free, this will in turn enable Rurelec to maximise returns to its shareholders though, as reported in the Audited Accounts for the year ended 31 December 2020, the ability of Rurelec to build up sufficient cash reserves to fund dividend payments remains very uncertain unless the returns from the Argentinian operations improve or further asset disposals are achieved.

Board of Directors

There was a change to the Board of Directors during the period covered by these condensed financial statements, Non-Executive Director Brian Rowbotham resigned on 13 April 2021.

Coronavirus Pandemic (COVID-19)

The COVID-19 pandemic spread globally in Quarter 1 2020. Widespread measures have been implemented globally by governments to control the virus and to support economies in the markets where the Group operates. However, it is uncertain whether those measures will be successful in the long-term eradication of the virus or in achieving recovery in those economies and over what timescale. The magnitude and duration of the disruption and decline in business in the markets in which the Group operates is currently uncertain.

The Argentinian Government imposed a tight lockdown on 19 March 2020.  Argentina's Government, viewing EdS's output as an essential service, issued instructions whereby the power plant should operate with the smallest number of people possible, covering operational shifts and preventive cleaning work with specific teams. All but essential staff have been working remotely and not been coming to the plant unless there is an equipment-related problem to address at the plant. A wide range of preventative measure were implemented to protect and safeguard staff.  Furthermore, the importance of EdS in the generation of electricity in the Chubut province means that its output remains strategically important and a high priority for CAMMESA.

Notwithstanding the above, it is still not considered possible to estimate the long-term financial impact of COVID-19 on the Argentinian economy at the present time, nor to anticipate the economic and fiscal measures that the Argentinian Government will impose in response. The pandemic is considered a non-adjusting balance sheet event. 

Andy Coveney

Executive Director

RURELEC PLC

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

for the half year ended 30 June 2021

(expressed in thousands of pounds)

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RURELEC PLC

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (unaudited)

at 30 June 2021

(expressed in thousands of pounds)

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RURELEC PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)

for the half year ended 30 June 2021

(expressed in thousands of pounds)

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