Further to the announcement made on 10 October 2018, Urals Energy, the independent exploration and production company with operations in Russia, provides the following update on the actions that were previously carried out by Mr S Kononov, without the knowledge or approval of the Board. Mr Kononov is the president of JSC Petrosakh, the Company’s 98.56% owned subsidiary (“JSC Petrosakh”). JSC Petrosakh owns, inter alia, the Company’s oil and gas interests at Petrosakh and its shares in the Kholmsk commercial seaport (the “Kholmsk Port”).
On 10 October 2018, the Company announced that the Board of Urals Energy (the “Board”) had become aware of an unauthorised loan of the Group’s funds of approximately US$1.5 million to a third party. The principal terms of this loan (the “Loan”), which was authorised by Mr Kononov, are as follows:
· Lender: JSC Petrosakh.
· Borrower: An individual, Mr Y L Freidis, an employee of JSC Petrosakh.
· Purpose: To acquire a 19.9% voting interest in the Kholmsk Port from the relevant Russian State organization, which acquired the voting interest at the time of the bankruptcy of the previous holder.
· Amount: Approximately 87 million Russian Roubles, equivalent to approximately US$1.3 million at current exchange rates.
· Interest: 7.5% per annum, rolled up to maturity.
· Repayment date: 22 December 2022.
· Security: None.
The Board considers that this Loan is wholly inappropriate and unacceptable. The Board is investigating whether the documentation relating to the Loan, and the granting of the Loan, is valid.
On 10 October 2018, the Company also announced that the Board believed that Mr Kononov had made an unapproved disposal of part of the Group’s shareholding in the Kholmsk Port to a third party, on deferred payment terms. Following further investigation, it has become clear to the Board that the shares in the Kholmsk Port sold under this transaction were not part of the Group’s original shareholding in the Kholmsk Port (as announced on 6 August 2018), but instead represented additional shares in the Kholmsk Port, equivalent to approximately 11.9% of the voting rights of the Kholmsk Port (the “Additional Shares”), which were acquired by JSC Petrosakh and then subsequently sold to a third party (being the JSC Lipetsk Distillery Company) on deferred settlement terms.
The terms of the deferred payment agreement for the sale of the Additional Shares are as follows:
· Seller: JSC Petrosakh.
· Buyer: JSC Lipetsk Distillery Company (“LDC”).
· Shares sold: equivalent to approximately 11.9% of the voting rights of the Kholmsk Port.
· Sale value: approximately 22 million Russian Roubles, equivalent to approximately US$0.3 million at current exchange rates.
· Payment details: payment in respect of approximately 40% has been received by the Group, while the balance is callable on demand with seven days’ notice.
Following further investigation, the Board believes that the Additional Shares were acquired by JSC Petrosakh during the period from July to September 2018, on the instruction of Mr Kononov, at a range of prices, broadly equivalent to the average prices at which the Additional Share were sold to LDC. As this unapproved acquisition of the Additional Shares took place in addition to the original 23% voting interest held by the Group, the Board understands that Mr Kononov decided to sell the Additional Shares to LDC.
Accordingly, the effective voting interest in the Kholmsk Port held by the Group remains as 23%, with the Group being owed approximately 13.2 million Russian Roubles (approximately US$0.2 million at current exchange rates) by LDC as the outstanding balance net of repayments that have already been received by the Group.
The Board believes that the making of the Loan, and the amounts outstanding from the purchase and subsequent disposal of the Additional Shares (on the deferred payment terms) has led to a combined current working capital deficit of approximately US$1.6 million. In addition, the Group has made working capital advances to the Kholmsk Port totalling approximately 100 million Russian Roubles (approximately US$ 1.5 million at current exchange rates).
Under Russian Federal law, the Group, as a majority owned foreign company, would require preliminary approval of the Anti-Monopoly Commission before obtaining control of a Russian port. Mr Kononov has represented to the Board that Mr Freidis is an independent person and that neither Mr Kononov nor Mr Freidis have an economic or control interest in LDC. Nevertheless, the Board believes that the amount that remains owed by LDC should be paid to the Group as soon practical, as the Board views the above transactions involving the Additional Shares as being unacceptable arrangements. The Board is also investigating whether the documentation relating to the transactions involving the Additional Shares is valid.
Meetings between the Company’s legal advisers and Mr Kononov to discuss these matters took place on 12 October 2018 and there will be further meetings in the coming days.
The Board’s position, which has been represented to Mr Kononov, is that:
· The Group should be repaid the funds associated with the Loan in full and the Loan should be novated to Mr Kononov or a third party, as soon as practicable.
· The outstanding deferred payments from LDC should be demanded immediately, and if not paid by LDC, then Mr Kononov should make these payments himself to the Group and seek repayment from LDC.
· Any working capital loans from the Group to the Kholmsk Port that are greater than JSC Petrosakh’s interest in the Kholmsk Port should be repaid.
· An agreement should be reached between the Group and the Kholmsk Port to secure JSC Petrosakh as a direct supplier of fuel oil to the Kholmsk Port, as originally intended.
The Board believes that the completion of the above measures will restore the Group’s significantly constrained current working capital position, as described in the Company’s announcement of 10 October 2018. However, the Board is also seeking additional alternative interim working capital solutions, although at present, discussions regarding such solutions are at an early stage of development. Potential solutions to the Group’s working capital needs could involve short-term loan finance being provided to the Group. The Board is also seeking to expedite the process for the planned tanker shipment from Arcticneft, as described in the Company’s announcement of 10 October 2018.
Subject to the successful completion of the above measures, the restoration of the Group’s working capital position, and no other relevant adverse factors arising, the Board would re-consider the payment of a dividend for the year to 31 December 2017.
However, the Board cautions that there can be no guarantee of success in respect of the remedial actions described above. The Board remains of the opinion that if none of the potential solutions to the Group’s current working capital deficit can be put in place by the end of this month, then the Board will have to take steps to protect the interests of the Group’s creditors. Further announcements will be made in due course.
In addition, the Group has significantly augmented its control framework to seek to avoid future breaches of the Group’s systems, procedures and controls. Under Russian Law, the President or General Director of a joint stock company, which is the legal incorporation status of JSC Petrosakh, has authority to approve any action, including contracts, loans and asset sales within a limit of 25% of the capital employed of that company, and in this case the employed capital of JSC Petrosakh is approximately US$30 million. However, it has been the rule and practice of the Group that these powers will only be used with the approval of the Board, and prior to the advent of the events described above, Mr Kononov has followed this practice.
All senior employees have been made aware of the need for the Group’s rules and practices to be adhered to and the consequences of non-compliance. On the basis that the Board has had confidence in Mr Kononov over the last few years, and that he has recognised that the transactions described above must be reversed, the Board has decided to allow Mr Kononov to continue in his position for the time being, provided that he adheres to the Group’s rules and practices and its control and supervision framework.
Further announcements will be made as appropriate.