Rurelec's power generation assets ensure survival through global financial credit crunch by Proactiveinvestors

Peter Earl, CEO of Rurelec has shown beyond a doubt that he is a survivor. Virtually all listed companies were hit by the collapse of Lehman Brothers, which turned out to be the catalyst of a massive implosion of the financial industry. The casualties of global credit crunch are still emerging, but beyond a shadow of a doubt, some of the hardest hit have been companies reliant on equity markets to fund their survival as they are not self financing; or companies who require debt for capital expenditure, be it a mine, a power plant or an office block. Rurelec falls into the latter category, and one could easily argue that the company could have failed if it were not for some impressive manoeuvring.

Rurelec, as the name suggests, was built around the concept of bringing electricity to rural areas. The focus of the company is South America, and in particular, Bolivia and Argentina. Before the credit crunch occurred, Rurelec was in fine shape. It had a 50.01% interest in Bolivia's largest power generator, Guaracachi (439 MW installed capacity), and had just completed the acquisition of the remaining interest in Energia del Sur in Argentina for US$25 million in June 2008. Guaracachi was profitable and paying a dividend, while continuing to invest in new generating capacity to meet increased demand in Bolivia and for export into Argentina and Brazil, and Energia del Sur was expected to follow suit once an upgrade in capacity was complete.

Peter Earl also believes passionately in Combined Cycle Technology, where waste heat from gas turbines is captured to generate steam to power additional turbines. Combined Cycle plants have two big benefits. First, they generate more power without consuming more natural gas. Second, they can qualify for Carbon Emission Reductions (CERs) under the Kyoto Protocol. For every tonne of carbon not emitted into the atmosphere, a CER is awarded. CER's currently change hands at around 12 euros. Rurelec recently completed the added 60MW of combined cycle capactiy at its Argentine plant, which will generate 148,000 CER's per annum at full capacity. At the current spot price, that's around Euro1.7 million in revenues. Not an insignificant amount of cash.

It Bolivia, 96MW of combined cycle capacity is currently being built in Santa Cruz, due for completion at the end of this year. This is not only the largest power unit to ever be built in Bolivia, but also the first to used combined cycle technology. It should come as no surprise that Guaracachi is seeking CER certification.

Despite all of the solid progress, Rurelec has been hit hard by the credit crunch. The combined cycle investments, the acquisition of the remaining stake in Energia del Sur combined with additional project developments at Guaracarchi required a considerable amount of finance.

Some of that finance was supplied by Standard Bank's London branch. What happened here is pretty typical of what happened to hundreds of small and midsized companies across the globe. Standard Bank initially agreed to supply a US$18 million secured bank loan for the expansion of the power plant in Argentina. The agreement included an option to convert the project development finance to a larger working capital financing facility once the upgrade was complete. This was before Lehman Brothers. Post Lehman Brothers, Standard Bank got cold feet, and rather than increase the debt, wanted it reduced.

Peter Earl doesn't have many kind words for Standard Bank these days, but to the surprise of many vultures waiting on the sidelines for a project finance default, Rurelec instead managed to raise £7.3 million from institutional shareholders. To put that figure into perspective, Rurelec raised 2.5 times the amount of money that the rest of the AIM raised in the first quarter of 2009.

Guaracharchi also found that project finance was thin on the ground for its project investments in Bolivia, but with an a strong balance, it managed to complete a 10 year AA+ bond issue which raised just over US$20 million. Peter Earl isn't finished with the bond market yet however, and is currently considering a bond issue for Energia del Sur.

Full year results for Rurelec arrived on investor’s laps last week. All things considered, the numbers underlined the robust assets on the company’s balance sheet. Full year revenues climbed 29% to £29.1 million and the pro-forma net asset value per share was 29 pence. The company did swing to a full year operating loss of £0.2 million however, partially due to higher gas prices in Argentina.

Looking ahead, stakeholders and observers still have plenty to watch out for. Additional combined cycle power plant capacity in Bolivia will be a major milestone, first revenues from CER’s, refinancing of the Argentine debt and the annual dividend payment from Guaracharchi will all be key milestones.

It is often assumed that utilities are less than exciting investments and are low growth. Rurelec couldn’t be further from this; adding power capacity at a healthy clip - and at the current valuation, isn’t getting much credit for it.

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