Interim Results

Alkane Energy PLC 12 September 2002 12 September 2002 Alkane Energy plc ('Alkane' or 'the company') Unaudited Interim Results to 30 June 2002 Alkane Energy plc is the UK's leading commercial producer of Coal Mine Methane (CMM) from abandoned coal mines. Highlights • Turnover remained unchanged at £552,000 (First Half 2001: £552,000) • Loss before taxation of £113,000 (First Half 2001: profit of £330,000) • Cash reserves of £17.3m (First Half 2001: £24m) • Four CMM producing sites operational (2001: three sites) • Focus on fewer sites with better economics due to low electricity prices • Target of six new sites by end of 2003 • Recent Government actions supportive of the CMM industry Commenting on the results, Executive Chairman, Dr Cameron Davies, said: 'The company continues to have a bright future. Recent action by the UK Government shows that CMM is being accepted as a form of alternative energy and a way of eliminating a highly toxic greenhouse gas. In response to the fall in electricity prices resulting from the New Electricity Trading Arrangements, we have re-evaluated our plans to be more selective in our site development programme. I believe that this prompt action positions the company better to achieve rapid growth in the future.' Enquiries: Alkane Energy plc Tel: 01623 827927 Dr Cameron Davies Executive Chairman David Cross Chief Executive Binns & Co PR Ltd Tel: 020 7786 9600 (Today) Judith Parry/Sophie Morton Thereafter: 0113 242 1171 Chairman's Statement The six months to 30 June 2002 have been a period of mixed fortunes for the company, however recent government initiatives augur well for our long-term success. Full exemption from the Climate Change Levy, which was announced in the Budget in April 2002, has been incorporated in the Finance Act 2002 and EU state aid clearance is expected early in 2003. This will enable Alkane's customers to obtain a premium price for the electricity generated from Coal Mine Methane (CMM), a proportion of which will be passed back to Alkane, potentially increasing turnover at the relevant sites by around 15%. However, this positive development has been eclipsed by the impact of the New Electricity Trading Arrangements (NETA), which has driven down the wholesale price of electricity to a level well below that which had been widely anticipated. This has made many of the proposed generation sites uneconomic at the present time. We believe it is prudent to regard this as a medium-term situation and have revised our development plans accordingly. Whilst this has resulted in a slowing of the site-opening programme, we believe that it is in the long-term interests of the company to implement this revision to our strategy now. In this way our financial resources will be allocated in the most efficient manner, to the attractive sites that are still to be opened within the existing Alkane portfolio. The Government has also indicated that methane from abandoned mines is to be treated as a priority for inclusion in the 'Projects' section of the Emissions Trading Scheme (ETS). Inclusion in the ETS would enable the company to sell the carbon emissions reductions achieved at its sites into the emerging market for carbon emissions. This could represent a significant additional income stream for the company in future years. Financial Highlights As anticipated, the company made a loss on ordinary activities before taxation of £113,000 in the period, compared to a profit of £330,000 in the corresponding period in 2001. The previous year's profit was largely derived from interest earned on the high cash balance, part of which has since been utilised. In addition, bank deposit rates have fallen. Turnover was unchanged at £552,000. This figure has been impacted by the operational situation which is detailed below resulting in no sales for the period from our Steetley site and a significant reduction in sales from our Markham site. Operating costs rose as the company increased the number of operational sites and additional expenditure was incurred on engineering solutions to the problems we have encountered at some of these sites. This led to a fall in the gross profit achieved in the period. Financial Outlook The delay in the number of new site openings announced in our preliminary results statement for the year ended 31 December 2001 has resulted in the company having a cash balance of £17.3 million, which is higher than anticipated. Consequently, the loan facility that the directors were in the process of establishing at that time is not expected to be required until 2004. We previously indicated that we did not expect to see the financial benefits from our roll out programme until 2003. Following the changes to our strategy as set out in this Statement, we now expect these to start to come through during 2004. Green Energy Parks During the period, we began delivering gas to customers from two new sites in Yorkshire. Wheldale, which is our largest project, is operating efficiently. We began delivering gas to Scottish & Southern Energy in February 2002, and the customer's gas take has progressively increased. The plant was developed using the existing mine shafts which were sealed but not filled on closure of the mine. At the Barnsley site, which began delivery of gas to Rexam Glass in February 2002, a restricted connection to the void space in the mine has reduced the flow of gas. We are therefore investigating the feasibility of drilling another borehole in a different location and other means to increase output. Production at Steetley, the smallest plant, has become uneconomic due to a combination of reliability problems with the customer's generating engines, the fall in the electricity price and the high cost of gas extraction at this site. The company and the customer have therefore mutually agreed to terminate this contract, and production has been suspended. At Shirebrook, sales for the period were at a similar level to the previous year. However, water leaking into the gas extraction pipe installed at the time of closure of the colliery and changing conditions in the mine have reduced the gas flow. Engineering solutions are being sought but it is unlikely that it will be possible to restore full production again. Markham continues to encounter operational difficulties caused by air leaks. The customer's burners have been modified to use lower methane concentrations but sales will continue below original expectations until the air leaks are sealed. We do not anticipate this to happen before 2004, when remedial work by third parties at Arkwright is expected to be completed. Site Development Programme Since flotation, a significant amount of pre-development work has been completed on proposed sites. At current electricity prices many of these sites do not show a sufficient return on investment to justify development. Consequently, we do not plan to commission construction of those sites until economic viability has been restored through either Government support or a rise in electricity prices. In addition, we are continuing to optimise our containerised equipment system with the aim of achieving significant reductions in project development costs. Earlier in the year we had anticipated that six new sites would be opened by the end of 2002, but we now expect these to be brought onstream during 2003. There have been two other sources of delay. Firstly, the site development programme is dependent on a number of factors outside the direct control of the company such as planning permission, land acquisition and the cost of the connection to the electricity distribution network. Secondly, some boreholes have encountered water or have had poor connections to the underground void. In the light of this we have modified our strategy so as to target modern tunnels in the mine which provide good connections to the gas reservoir, as at Warsop and Whitwell. At the Prince of Wales Colliery in Pontefract, Yorkshire, we have had our first opportunity to connect directly into an underground roadway and integrate an Alkane gas extraction system into a mine closure plan. The mine ceased coal production on 30 August 2002 and our team is currently installing a gas pipeline from deep in the mine workings to the surface. We anticipate that our plant will commence extraction operations during 2003. At Warsop in Nottinghamshire, which is also under development, we have completed the borehole and have a good connection to the gas reserve. However, first production has been rescheduled to 2003 due to delays in obtaining the necessary permits and the electricity export connection. Similar issues have delayed the start of drilling at Bevercotes in Nottinghamshire and consequently opening is now scheduled for 2003. We have a broad range of sites currently under evaluation, including Pontycymmer, our first in South Wales, where a borehole drilled into the mine workings has found gas with a high methane content. Prospects Given the low electricity prices under NETA, we are pleased that the Government has begun to give the industry the support it requires for its further development. Through our membership of the Association of Coal Mine Methane Operators, the company continues to lobby the Government for the level of benefits afforded to other forms of green energy technology. Alkane, with its substantial licensed area to exploit, has a large number of potential projects under consideration but will be more selective in its site development programme. The knowledge and experience gained in recent years has enabled us to identify the more attractive sites in our portfolio and exploitation of these will lead to a better use of our financial resources. The company and the CMM industry continue to have a bright future, and we are not deterred by the initial difficulties we have encountered in exploiting this new energy source. We believe that our prompt action in modifying our strategy to address these challenges leaves us well placed to take advantage of our unique position as leaders of the CMM industry. Dr Cameron Davies Executive Chairman 12 September 2002 GROUP PROFIT AND LOSS ACCOUNT for the six months ended 30 June 2002 six months six months year ended ended ended 30 June 2002 30 June 2001 31December (Unaudited) (Unaudited) 2001 £'000 £'000 £'000 TURNOVER 552 552 1,017 Cost of sales (349) (246) (534) ------- ------- ------- GROSS PROFIT 203 306 483 Administrative expenses (696) (675) (1,323) Other operating income 5 6 23 ------- ------- ------- OPERATING LOSS (488) (363) (817) Bank interest receivable 375 693 1,224 ------- ------- ------- (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (113) 330 407 Taxation - - - ------- ------- ------- (LOSS)/PROFIT ATTRIBUTABLE TO SHAREHOLDERS (113) 330 407 ACCUMULATED LOSSES BROUGHT FORWARD (1,818) (2,225) (2,225) ------- ------- ------- ACCUMULATED LOSSES CARRIED FORWARD (1,931) (1,895) (1,818) ------- ------- ------- (Loss)/Earnings per ordinary share - basic (0.13p) 0.37p 0.45p (Loss)/Earnings per ordinary share - fully diluted (0.13p) 0.36p 0.44p STATEMENT OF RECOGNISED GAINS AND LOSSES There are no recognised gains or losses for the six months other than the loss of £113,000 (six months ended 30 June 2001: profit of £330,000; year ended 31 December 2001: profit of £407,000). GROUP BALANCE SHEET at 30 June 2002 as at as at as at 30 June 2002 30 June 2001 31 December (Unaudited) (Unaudited) 2001 £'000 £'000 £'000 FIXED ASSETS Intangible assets 28 46 31 Tangible fixed assets - gas properties 14,769 8,009 11,165 Tangible fixed assets - other 259 227 237 ------- ------- ------- 15,056 8,282 11,433 ------- ------- ------- CURRENT ASSETS Stock 17 16 19 Debtors 638 600 652 Cash at bank and in hand 17,280 24,026 20,930 ------- ------- ------- 17,935 24,642 21,601 CREDITORS: amounts falling due within one year (1,419) (1,267) (1,279) ------- ------- ------- NET CURRENT ASSETS 16,516 23,375 20,322 ------- ------- ------- TOTAL ASSETS LESS CURRENT LIABILITIES 31,572 31,657 31,755 PROVISIONS FOR LIABILITIES AND CHARGES (109) (188) (179) ------- ------- ------- NET ASSETS 31,463 31,469 31,576 ------- ------- ------- CAPITAL AND RESERVES Called up share capital 448 448 448 Share premium account 32,946 32,916 32,946 Profit and loss account (1,931) (1,895) (1,818) ------- ------- ------- TOTAL EQUITY SHAREHOLDERS' FUNDS 31,463 31,469 31,576 ------- ------- ------- GROUP STATEMENT OF CASH FLOWS for the six months ended 30 June 2002 six months six months year ended ended ended 30 June 2002 30 June 2001 31 December (Unaudited) (Unaudited) 2001 £'000 £'000 £'000 NET CASH OUTFLOW FROM OPERATING ACTIVITIES (442) (305) (764) ----- ----- ----- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received 404 606 1,226 Interest paid - (185) (185) ----- ----- ----- 404 421 1,041 CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Payments to acquire intangible assets (12) - - Payments to acquire tangible fixed assets - gas properties (3,560) (1,988) (5,118) Payments to acquire tangible fixed assets - other (40) (88) (218) ----- ----- ----- (3,612) (2,076) (5,336) ----- ----- ----- NET CASH OUTFLOW BEFORE FINANCING (3,650) (1,960) (5,059) FINANCING: issue of ordinary share capital - 28 31 ----- ----- ----- DECREASE IN CASH (3,650) (1,932) (5,028) ----- ----- ----- RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS six months six months year ended ended ended 30 June 2002 30 June 2001 31 December (Unaudited) (Unaudited) 2001 £'000 £'000 £'000 CHANGE IN NET FUNDS ARISING FROM CASH FLOWS (3,650) (1,932) (5,028) NET FUNDS AT START OF PERIOD 20,930 25,958 25,958 ----- ----- ----- NET FUNDS AT END OF PERIOD 17,280 24,026 20,930 ----- ----- ----- NOTES TO THE ACCOUNTS at 30 June 2002 1. BASIS OF PREPARATION These unaudited interim financial statements, which are for the six months ended 30 June 2002, do not constitute Statutory Accounts within the meaning of Section 240 of the Companies Act 1985. They have been prepared using the accounting policies set out in the group's 2001 statutory accounts. The statutory accounts for the year ended 31 December 2001 received an unqualified auditor's report and have been delivered to the Registrar of Companies. 2. TURNOVER Turnover is attributable to one continuing activity, the extraction and sale of gas from coal measures for power generation and burner tip use. All turnover is derived from within the United Kingdom. 3. EARNINGS PER SHARE The loss per ordinary share is based on a loss of £113,000 (six months ended 30 June 2001 - profit of £330,000; year ended 31 December 2001 - profit of £407,000) on a weighted average of 89,659,399 ordinary shares (six months ended 30 June 2001 - 89,503,601; year ended 31 December 2001 - 89,571,612). The loss attributable to ordinary shareholders and the number of shares for the purpose of calculating the diluted loss per ordinary share for the six months ended 30 June 2002 are identical to those used for the basic earnings per share. This is because the exercise of share options held by directors and employees would have the effect of reducing the loss per ordinary share and is therefore not dilutive under the terms of FRS14 'Earnings per Share'. Diluted earnings per share for the six months ended 30 June 2001 are based on a dilution by 3,170,413 ordinary shares in respect of share options held by directors and employees (year ended 31 December 2001 - dilution by 3,149,334 ordinary shares). 4. RECONCILIATION OF OPERATING LOSS TO NET CASH FLOW FROM OPERATING ACTIVITIES six months six months year ended ended ended 30 June 2002 30 June 2001 31 December (Unaudited) (Unaudited) 2001 £'000 £'000 £'000 Operating loss (488) (363) (817) Depreciation 95 83 147 Amortisation 15 16 31 Decrease/(increase) in stock 2 1 (2) (Increase)/decrease in debtors (15) 22 (119) Decrease in creditors (51) (64) (4) ---- ---- ---- Net cash outflow from operating activities (442) (305) (764) ---- ---- ---- 5. ANALYSIS OF NET FUNDS as at as at as at 30 June 2002 30 June 2001 31 December (Unaudited) (Unaudited) 2001 £'000 £'000 £'000 Cash at bank and in hand 17,280 24,026 20,930 ----- ----- ----- 6. GENERAL NOTE The profit and loss account for the year ended 31 December 2001 and the balance sheet at that date are derived from the Company's full accounts which have been filed with the Registrar of Companies and on which the Companies auditors gave an unqualified report. Copies of the unaudited interim accounts will be sent to shareholders shortly. This information is provided by RNS The company news service from the London Stock Exchange

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