Rurelec Regulatory News (RUR)

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.

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.

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DEFINITIONS

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