Rurelec PLC

("Rurelec" or "the Company")

Interim results for the six months ended 30 June 2022

Strategy update and intended

Board appointment

Rurelec PLC (AIM: RUR), the owner, operator and developer of power generation capacity internationally, today announces its unaudited interim results for the six months ended 30 June 2022.

Financial Highlights:

·      Operating loss:                                                 £0.49 million (2021 £0.44 million)

·      Post tax profit / (loss):                                     £0.70 million (2021: (£0.88) million)

·      Profit / (loss) per share:                                 0.12 pence (2021: (0.16) pence)

·      Net asset value per share:                            2.2 pence (2021: 2.5 pence)

·      Net cash balance:                                           £0.88 million (2021: £0.28 million) 

Operational and Post Half-Year Highlights:

·      Major improvement in post-Tax profitability, from a loss of £0.88 million last period to £0.70 million profit this period, this was largely due to exchange rate movements on US Dollar-denominated loan receivables and the carrying value of the 701 turbines. In the prior period there had been adverse half-year end exchange rate losses of £0.43 million as compared to gains of £1.19 million in the current period.

·      Cash increased from £0.28 million last period to £0.88 million at the end of the period under review, which is the result of debt repayment from PEL, the Joint Venture company which owns Energia del Sur, S.A. ("EdS"), totalling £0.67 million and receipt of disposal proceeds from the sale of the Arica 6B turbine totalling £0.72 million. Current cash balance £0.75 million.

·      Whilst the Board is encouraged to note the improvement in the cash position at 30 June 2022 compared to the same date last year, there remains significant uncertainty around the timing and quantum of future debt repayments from PEL. This uncertainty is reflective of continued trading difficulties in Argentina amidst softening electricity spot tariffs and tight exchange controls.

·      The Board continues to explore options for the Chilean project following the successful sale of the Frame 6B turbine sale for US $1.0 million/£0.72 million which was agreed on 9 September 2021. 

·      Discussions remain ongoing with regard to the disposal of two Siemens Westinghouse 701 128 MW gas turbine generators ("701s").

Strategy update and proposed board appointment

The strategy of the Group continues to be focussed on stabilising the financial position, keeping costs under tight control, whilst buyers for certain assets are found. 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 2021, 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.

While the asset disposal program is being pursued, the board is considering the next phase of the Company's development and also strategic partnering options for existing assets. The Company has therefore appointed Orana Corporate LLP ("Orana"), a London-based corporate advisory and business services practice to assist with the next phase. The fees for this arrangement are an annual corporate adviser fee of £60,000 per annum; an interim management fee of £5,000 per month until the date that Daniel Maling becomes a director of the Company (although at this stage there is no guarantee that he will become a director of the Company); a success fee calculated as a commission (up to a maximum of 7.5%) linked to asset sales and associated new business opportunities and, subject to shareholder approval; the issue of 35,000,000 warrants over Ordinary Shares at a price of 0.75p per Ordinary Share. Following shareholder approval, it is intended that the warrants will vest in two separate tranches with 20,000,000 vesting on an asset sale; and the balance vesting on satisfactory completion of a fundraising.  A circular to convene a general meeting of shareholders for the associated approval, which will also contain full details of the warrant terms, will be dispatched in due course.

Orana's primary objectives are to introduce new investors to the Company, and a review of Rurelec's assets with a view to unlocking their inherent value potential for the Company's shareholders. They will seek to find opportunities to commercialise existing assets, if they are not sold, and identify new business prospects or strategic partnerships. This could see Rurelec take advantage of the global energy sector's transition away from the most polluting fossil fuels.

In addition, as part of the terms of the arrangement it is proposed that Mr Daniel Maling, a partner of Orana, be appointed a director of the Company subject to regulatory due diligence and Nominated Adviser approval. Mr Maling is a London-based senior corporate financier with an energy sector focus with over 25 years' experience, who has advised and managed several quoted companies in the United Kingdom, Canada, and Australia. Under the terms of his proposed service contract ("Service Contract") he will be paid a salary of £30k per annum for a minimum of 10 days per month; he is on three months' notice and is subject to customary restrictive covenants and standard employment terms and conditions. It is also intended that, subject to shareholder approval, Daniel will be issued with 20,000,000 warrants to subscribe for ordinary shares in the Company. Such options would be capable of being exercised at any time after their date of vesting, whilst Daniel remains an employee of the Company, at an exercise price of 0.75p.

At the same time, it is proposed Daniel Maling enter into a consultancy agreement with the Company pursuant to which he will receive a fee of £2,500 per month for supplementary work over and above his Service Contract.   

Commenting on the results, Andy Coveney, Rurelec's Executive Director, said:

"The Board continues to pursue measures to unlock the inherit value of the Company through selling or developing assets and managing cash receipts from the power generation plant in Argentina. We are conscious that the economic situation in Argentina remains challenging and we continue to monitor the impact on our operating asset there.

That said, with the prospect of future asset sales, and a healthy cash balance, we remain cautiously optimistic about stabilising our financial position and developing a platform for future growth in the period ahead.

I welcome the engagement of Dan Maling and his team at Orana whom we believe will provide a new impetus and direction as we look forward to the next phase of the Rurelec story."

For further information please contact:

Executive Directors' Statement

Review of Operations

Argentina

Energia del Sur, S.A. ("EdS") generated a steady and consistent output which continued throughout the first 6 months of 2022.

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 as a result of these controls and the loss suffered on funds remitted from EdS to PEL had been in the order of 53 per cent. of the underlying face value.  A similar situation persisted in the first 6 months of 2022. 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. The power output generated by EdS has been remunerated as Spot Price under Resolution SE 440 ("Resolution 440") which dictates the price EdS can charge for the electricity it generates. Resolution 440 introduced the following main changes:

•        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, instead became linked to the Argentine peso.

•        Steam turbine and gas turbine capacity and offtake revenue both became remunerated under the Resolution 440 tariff.

4. In April 2022, the Secretariat of Energy published a new resolution which governs the Spot price tariff, Resolution SE 238/2022 ("Resolution 238") with retroactive effect to February 2022.  This Resolution introduced the following changes to Resolution 440:

•        Remuneration prices were increased by 30% for the period Feb to May 2022. A further 10% price increase was implemented from June 2022.

•        Cancellation of the clause of reduction of income due to availability based on the utilization factor. The application of this clause was suspended for EdS since February 2021, representing an increase in our collection of AR$86 million, or £0.65 million at average official Argentine rates, during 2021.

Despite the price increases introduced in Resolution 238, the income generated under this new tariff is still significantly lower than the income generated by EdS under Resolution 220 which expired in September 2020.

Until there is a change of government with policies more favourable to generators, EdS's revenue and cash generation will continue to be suppressed.  This in turn will influence the timing and amounts of any cash payments from EdS to PEL and ultimately to Rurelec.

5. The Argentinian economy remained weak throughout the period and the board understand from local Argentinian management that tariffs are not likely to increase under the current government other for than general inflationary increases.

In the 6 months to 30 June 2022 EdS accumulated sufficient cash to make one payment of unsecured loan repayments to PEL of US $1 million/£0.79 million, of which Rurelec received (i) US$0.76 million/£0.67 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; and (ii) US $0.01 million of management fees. 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, up to the date of this interim statement, Rurelec has received no further payments by way of partial repayment of the Loan Notes.

The balance outstanding on the Loan Notes at 30 June 2022 was US $13.35 million (2021: US $14.94 million).  Future loan repayments will be in the ratio 72:28 (Rurelec:Basic) between Rurelec and Basic Energy Limited, the ultimate shareholders of PEL.

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 and the costs of renewing the annual rental agreement on the land.

Asset disposals

No further asset disposals were achieved in the period.

Head office

Tight controls continued to be maintained on overheads in the UK and administration costs for the period were flat at £409k (2021: £416k).

Debt repayments and Cash flow

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

The period-end cash balance was £879k (2021: £275k).

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. Given the deterioration in the cash generation from Argentina, the Group is now critically dependent on asset sales. However, there can be no guarantee as to the timing of any such asset sales and receipts, 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 or that EdS will remain economically viable. The Directors consider that the prospect of better tariffs being granted for EdS's power is largely dependent on political change in Argentina which may not occur until late 2023, if at all.   

Given the cash balances held by the Group, potential cash remittances from our Argentine operation and potential asset disposals, the directors believe there is currently sufficient headroom in existing working capital resources to avoid the need to seek further sources of working capital and accordingly continue to adopt the going concern basis of accounting. However, the potential remittances and receipts are not guaranteed and if neither source of funds generates sufficient cash in the future there would exist a material uncertainty over the ability of the Company to finance its ongoing activities, the Directors continue to keep this under review.

Board of Directors

There were no changes to the Board of Directors during the period covered by these condensed financial statements.

Andy Coveney

Executive Director

RURELEC PLC

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

for the half year ended 30 June 2022

(expressed in thousands of pounds)

RURELEC PLC

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (unaudited)

at 30 June 2022

(expressed in thousands of pounds)

RURELEC PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)

for the half year ended 30 June 2022

(expressed in thousands of pounds)