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GROUP FIVE LIMITED - Kpone Gas- and Oil-fired combined cycle EPC power plant update and cautionary announcement

Release Date: 30/11/2018 17:33
Code(s): GRF     PDF:  
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Kpone Gas- and Oil-fired combined cycle EPC power plant update and cautionary announcement

Group Five Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1969/000032/06)
Share code: GRF ISIN: ZAE000027405
(‘Group Five’ or ‘the Company’ or ‘the Group’)

KPONE GAS- AND OIL-FIRED COMBINED CYCLE EPC POWER PLANT UPDATE AND
CAUTIONARY ANNOUNCEMENT

As outlined to the market on SENS on 6 November 2018, Group Five was informed by two
bank guarantee providers that the Kpone client had issued a written demand requesting an
amount of US$62,7 million be paid to the client in respect of guarantees issued on the Kpone
contract for delay damages. The market was updated again on SENS on 16 November 2018
that judgment had been handed down by the High Court of Johannesburg dismissing the
application made by the Group to interdict the demands made by the client.

The judge confirmed that contractual claims and disputes presented are complex, but as the
bond represents a stand-alone financial instrument separate to the contract, it had to be
independently assessed. His ruling therefore did not address the contract, the contractual
claims process or provide judgment on whether the contractual claims or parties have merit.
He added that “the underlying dispute is required to be resolved in the manner provided for
in the contract between them; and its determination may even come to a conclusion wholly
different from that which the owner has asserted to the banks”.

In a new development, Group Five was today issued with a notice in terms whereof the client
purported to terminate the contract. The Group denies the client’s entitlement to terminate the
contract and believes that the purported notice of termination is wrongful and constitutes a
repudiation of the contract. The Group has therefore in turn notified the client that it accepted
the client’s repudiation of the contract and accordingly issued a notice of termination to the
client, thereby effectively terminating the contract with immediate effect.

As outlined in the Group’s annual financial statements, stakeholders’ attention has in the past
been drawn to the contingent risk of claims on guarantees relating to the Group’s Kpone
contract of a performance bond of USD62,3 million, a retention bond of USD41,5 million and
an advance payment bond of USD2,6 million.

The Group has previously indicated that, notwithstanding any further potential delays to the
project or to the dispute resolution process, the gross maximum delay damages exposure
remains capped at US$62,5 million. Following the client’s demand earlier this month, the client
received payment for the maximum amount of the delay damages. The Group continues to
challenge the liability for delay damages, which liability is to be independently determined
through the dispute resolution mechanism set out in the contract.

The remaining value of on-demand bonds in issue, from financial institution to the client, post
the settlement of the US$ 62,7 million described above, amounts to US$43,8 million.

The Group has continued to engage with its financial partners and lenders who had, and
continue to, confirm their support in managing any potential liquidity event. This includes
lenders agreeing to abide by the creditors’ standstill agreement, established when the Group
entered into its Senior Bridging Facilities Agreement. The standstill agreement imposes
limitations on the standstill creditors to take enforcement action against the Group. Further
terms and conditions of this support, including the terms of repayment of any debt, are being
finalised with the lenders thus supporting the Group’s liquidity and therefore its going concern
status.

In terms of the contractual process, the Group will continue to progress its contractual rights
and entitlements for payment of all amounts due and owing under the contract, including the
recovery of delay damages (paid in terms of the guarantees) and claims against the client.
This includes a submission to the International Chamber of Commerce (ICC) in Paris for the
resolution of a dispute through expert proceedings, which is a considerably quicker process
for resolution of disputes than arbitration. Good progress has been made in this regard, with
the first disputes expected to be completed in early 2019.

The termination also enables the Group to proceed to dispute resolution, in accordance with
the contract, for payment of all amounts due and owing to the Group under the contract. The
Group’s Legal Counsel and Senior Legal Counsel, with experience in local and international
dispute resolution, remains of the considered view that the claims have merit and that the
Group has a reasonable prospect of recovering payment from the client.

In addition, as disclosed to the market on 16th November 2018 and as of today, being the
date of termination, the Group was unable to complete with the testing and commissioning of
the plant as the fuel provided by the client was contaminated and unfit for its purpose. Three
independent parties and laboratories have tested the fuel on the Group’s behalf and confirmed
that the fuel is contaminated and that it is their view that contamination took place at the client’s
source of supply. The provision of the fuel was the client’s responsibility.
As of today, and despite the Group’s requests for the client to resolve the contamination, the
client was unable to provide fuel that was within specification, uncontaminated and fit for
purpose to enable the Group to continue and complete the testing and commissioning of the
plant. The Group had previously notified the client of this material contamination issue,
including providing the Group’s rationale as to the client’s responsibility in this regard to which
the client has not attended to prior to this termination notice. This is one of the reasons why
the Group considers the client’s notice of termination as a repudiation of the contract.

Stakeholders will be kept appraised of developments.

Cautionary announcement

As the above may have a material impact on the price of Group Five’s securities, shareholders
are therefore advised to exercise caution when trading in the Company’s securities until a
further announcement is made.

30 November 2018

Sponsor
Nedbank Corporate and Investment Banking

Date: 30/11/2018 05:33:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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