Rurelec pitches for power supply crown

Peter Earl, the former maverick City financier who now heads Latin America-focused power generation group Rurelec, is watching events in Spain with particular interest just now. Endesa, that country’s largest electric utility, is in the process of being acquired by Barcelona-based Gas Natural after a prolonged takeover battle and, as a consequence, is expected to divest some of its assets in Chile, Argentina and Bolivia.

Endesa is currently a partner with AIM-quoted Rurelec in several parts of South America and the acquisitive British company would dearly like to get its hands on some of the Spanish giant’s operations in that part of the world. ‘We could buy some of Endesa’s power plants,’ suggests Earl, ‘and that would make us the number one power generator in Latin America.’

Rurelec was floated on AIM in 2004 at 40p by Arbuthnot and has been expanding fast.
The company raised £3.5 million last summer towards buying Argentina’s Patagonia Energy and another £20 million before Christmas to help fund the purchase of a controlling stake in Bolivian electric utility Empresa Electrica Guaracachi.

Significantly, Guaracachi is at present driving a £24 million scheme to build two 60 megawatt turbines to supply electricity generated by Bolivia’s abundant natural gas to neighbouring Argentina, where electricity demand has been rising at nearly six per cent a year. If this project goes ahead, Cemsa, one of Endesa’s local subsidiaries, has agreed to be the key supplier.

Meanwhile, Guaracachi recently took delivery of a third turbine, which arrived in Bolivia’s capital city Santa Cruz on the day of recently-elected President Morales’ inauguration. A populist radical, Morales is seen as a thorn in the flesh of George W Bush, but Earl decided to meet him and establish cordial relations without delay.

If Earl’s plans come to fruition, Rurelec could soon have a generating capacity of more than 400 megawatts and Earl aims to nearly double that to 770 megawatts next year.
House broker Hichens Harrison sees profits surging from £165,000 to £3.1 million in the year to next June and Rurelec, which paid a maiden 0.5p dividend last year, plans what Earl calls ‘a full dividend’ next time round.

Strategy
Earl says he wants to make Rurelec a major regional player in Latin America, a goal which Endesa spin-offs could bring within reach. This involves taking the company with its expertise into those countries which have put free-market reforms into practice.

At present, that rules out Brazil, the largest country in the continent. But Rurelec maintains a watching brief.

Rurelec has its origins in Independent Power Corporation (IPC), a private company set up by Earl some years ago to take advantage of electricity privatisation around the world. After its first coup, turning round a power plant in Kazakhstan and selling it to Samsung of Korea ‘for nine times what we paid for it’, Earl and his business partner at the time, former Tory sports minister Colin Moynihan, hit on the idea of involving US power companies in electricity privatisations in South America, in particular providing qualified people to run their power plants.

One of these was Xcel of Colorado, which Earl bought out in 2001 after it had become the fifth largest utility in the USA, with a controlling stake in NRG, even bigger at number three. IPC, which has three Rurelec directors on its board, often provides management for the utilities in which Rurelec takes an interest and has, for example, been running Guaracachi for three years.

Over the past decade, IPC has ‘owned, operated and developed 4,000 megawatts’ of power generation capacity, doubling Bolivian output in the process, says Earl. IPC ‘once had seven per cent of the Argentine market’.

Earl says he originally meant to float IPC, but event-ually decided it would be ‘hard to get the market to understand it’. Thus was born the idea of floating Rurelec as a company with a clear geographic focus.

IPC now provides ‘administrative support’ to Rurelec and, from time to time, ‘engineering assistance for specific Rurelec projects’. The directors maintain ‘there is no conflict or overlap’ between the two companies.

They point out that ‘IPC will only have the right to develop or invest in isolated power projects in Latin America if Rurelec has declined the opportunity’. Earl is adamant that he will not muddy the stock market waters by seeking a rival quote for IPC.

‘In the 1990s, privatisation was the motor for IPC,’ recalls Earl. Now, ‘technology is the driver’.

Rurelec intends to trade in what chairman Jimmy West calls ‘portfolios of power generation equipment’. He adds ‘the management’s knowledge of the second-hand equipment market can help source good value motors and turbines.’

As well as improving productivity and boosting supplies, Rurelec applies ‘combined cycle’ technology to its natural gas power plants. This enables a significant portion of the waste thrown off in the process to be recycled back into the power generation procedure, which makes for both enhanced cost efficiency and cuts CO2 emissions at the same time.

Earl says this can be between 36 and 58 per cent effective and has the added commercial benefit of earning Rurelec carbon credits under the Kyoto regime. Within 18 months, he claims, 30 per cent of the company’s capacity will be eligible for carbon credits.

Gas is plentiful in Bolivia and other parts of Latin America. Earl insists Rurelec is not concerned by talk that coal and nuclear power are due a renaissance.

Management
Now 50, Peter Earl, Rurelec’s managing director and 9.4 per cent shareholder, first made a name for himself in the City 20 years ago by championing the cause of de-mergers through his company, Ifincorp Earl, which he recalls as ‘the first corporate finance boutique’. A former consultant with the Boston Group advising Middle Eastern and Latin American companies in privatisations and later seconded to the World Bank, he aroused opposition and derision over some of the putsches he attempted, but argues history has vindicated him.

In the mid-1990s, Earl, with or without his IPC hat, advised on £3.5 billion of cross-border power sector acquisitions and bids. These concerned 5,000 megawatts of installed capacity and more than two million electricity users.

Earl’s two fellow executive directors are Michael Eyre, a former engineer at the Central Electricity Generating Board (CEGB) who became head of engineering quality at National Power, and Elizabeth Shaw, finance director, who worked on corporate electrical deals with Earl at Fieldstone Private Capital Group, and has direct experience of the Bolivian power industry. Both are also on the board of IPC.

Rurelec’s non-executive chairman is Jimmy West, a former managing director of Globe Investment Trust and merchant bank Lazards. His various directorships now include Gartmore Fledgling Trust, one of Rurelec’s largest shareholders.

The company’s other non-executive director is Francis Mattos, 72, an industry veteran seconded from the CEGB in the 1980s to head overseas business for British Electricity International. There, his biggest project was the 1993 acquisition of the Pego power station in Portugal, then the largest privatised power project in Europe.

Prospects
The expansion planned for Guaracachi and the potential arising from expected Endesa sell-offs, as well as Rurelec’s other Latin American projects, could pay off handsomely for the company. Hichens Harrison sees profits rising from £3.1 million to £4.6 million in the year to June 2007 and points to the company’s declared progressive dividend policy.

Earl argues market opportunities are multiplying at present, partly because several US companies are withdrawing from the region, for internal reasons of their own. ‘That means there are more plants to go for,’ he maintains.

The Bolivia-Argentina gas-fired electricity export project serves commercial and political needs, by generating revenues for Bolivia from its gas without Bolivia losing control of its reserves. Observers suggest Morales’ conservative opponents would prefer an arrangement involving a major multinational and involving lower royalties, but, while he holds on to power, it should go ahead.

The Patagonia acquisition, for £4.5 million cash down with £1.5 million later if performance targets are met, has brought Rurelec half of the owner of Argentine power plant Energia Del Sur. This will help establish the company, which has also been asked to install new capacity in outlying areas of Argentina, in its regional role.

Valuation
Among the institutions that backed Rurelec’s 40p float in 2004 were Gartmore, Jupiter, Framlington, Foreign & Colonial and Artemis. HSBC is a significant holder.

Rurelec has appeal because of its significant growth potential, its niche role and its intention to pay worthwhile dividends. Analysts suggest the shares at 49p could offer a strong yield, not to be sniffed at in today’s low interest rate climate.

There are inevitable risks with operating in Latin America, notably politics and currency. But most countries there, whatever their regimes, are anxious to improve their infrastructures. They welcome foreign investors if they are not too over-bearing.
Despite the pace of Rurelec’s expansion, Earl argues the company remains ‘under-geared’, with debts of £30 million and cash of nearly £12 million. With healthy cashflow from supplying electricity, he does not envisage returning to the market again for cash, but will use debt and the company’s ‘massive balance sheet’ to finance growth.

A sometimes unorthodox figure, Earl has not been every fund manager’s cup of tea. But, if his plans come to fruition, he could be on to winner this time.