Interim Results
Alkane Energy PLC
20 August 2003
20 August 2003
Alkane Energy plc ('Alkane' or 'the company')
Unaudited Interim Results to 30 June 2003
Alkane Energy plc is the UK's leading commercial producer of Coal Mine Methane
(CMM) from abandoned coal mines.
Highlights
Strategy
• Expansion of international business
• Suspension of UK CMM developments, to conserve cash
• Realigning of UK cost base to reflect current economic conditions
• Move to trading on the Alternative Investment Market
Proposed Acquisition
• Acquisition of Pro2 in Germany for €4.0 million (£2.8 million)
• New revenue streams through supply of equipment for methane capture
• New markets in servicing, monitoring and contracting
• Options on further CMM sites in Germany which has favourable
legislation giving £46/MWh for generated electricity
Financial
• Gas sales volume similar to same period last year
• Turnover decreased 30% to £387,000 (2002: £552,000), reflecting
ongoing depressed wholesale electricity price
• Exceptional item of £19,321,000, principally due to write down of
assets
• Loss before taxation of £20,152,000 (2002: £113,000)
• Cash reserves £12,493,000 (2002: £17,280,000)
UK Operations
• All sites operating to expectations
• Further CMM developments remain on hold until economic climate
improves
• Assets write down to reflect suspension of UK CMM development
UK Government Support
• DTI funded study commissioned to examine possible support mechanisms
for CMM industry
Commenting on the results, Executive Chairman, Dr. Cameron Davies said:
'The proposed acquisition of a majority interest in Pro2 and the prudent
approach the company is taking with its existing UK assets reflects the
continued development of our strategy as outlined in our 2002 preliminary
results. We believe that our European plans will ultimately create shareholder
value at a faster pace than if we operated solely in the UK. I look forward to
the exciting next phase in our development as we work towards our goal of
strategic refocus.'
Enquiries:
Alkane Energy plc
Dr Cameron Davies, Chairman Tel: 01623 827 927
David Cross, Chief Executive
Buchanan Communications
Judith Parry/Sophie Morton Tel: 020 7466 5000 (today)
/01943 883990 (thereafter)
Ben Willey Tel: 020 7466 5000
Chairman's Statement
The six months to 30 June 2003 have been a period of refocus for the company as
we look to mainland Europe to develop a profitable business and create
shareholder value utilising our core expertise in Coal Mine Methane (CMM). Our
proposed acquisition of a majority interest in Pro2 Anlagentechnik GmbH (Pro2)
in Germany, which has also been announced today, will provide new revenue
streams for the company, as we take advantage of the more favourable renewable
energy legislation, which is expected to bring the group to an earlier
break-even date.
While the negotiations with Pro2 have been ongoing, progress has been made in
the UK, with the announcement by the DTI that it is to fund an assessment of
options and mechanisms of support for the CMM industry. A contractor is being
appointed to carry out this study, which should be completed by the end of 2003.
During the period, we are pleased to report that our UK operational sites have
performed at levels similar to the second half of the last financial year. No
new problems have emerged at the sites, and many valuable lessons have been
learnt from the early projects, which will be reflected in future developments.
On the 27th March 2003, we announced the suspension of development activity on
CMM sites in the UK and a reduction in headcount from 24 to 12 and other cost
savings, with estimated cash savings of £900,000 per year. As developments in
the UK have been put on hold, there is no longer a reasonable prospect that the
value of the majority of the assets will be recovered out of short to medium
term cash flows. Consequently it has been necessary to write down the carrying
value, which is described in more detail in the Financial Overview.
In light of these developments and as part of the proposals put to shareholders
today in the acquisition circular, we propose to move the trading of the
company's shares to the Alternative Investment Market (AIM). This will give the
company added flexibility and save on costs associated with a quote on the
Official List.
On 4th July we announced that Adrian Beecroft, one of our non-executive
directors, had decided to resign. We would like to thank Adrian for his
contribution since Apax Partners became a shareholder in 1995.
Financial Overview
During the period, gas sales from our existing portfolio of sites continued,
with gas volumes showing a decrease of just under 2%. Turnover was £387,000, a
decrease of 30% compared to £552,000 in the first half of 2002 due to the effect
of depressed wholesale electricity prices. As outlined previously operating
costs have risen due to ongoing site maintenance. This combination led to a
gross loss for the period of £35,000 (2002: £203,000 gross profit).
Administration costs in the half-year were £1,081,000 (2002: £696,000) including
£456,000 of costs which would have been capitalised, but following the
suspension of UK developments have been treated as administration costs.
Excluding this figure from administration costs gives a like for like reduction
of £71,000 in the half year.
The operating loss for the period was therefore £1,080,000 (2002: £488,000).
Since announcing the suspension of UK CMM development activity on 27th March
2003, we have examined the valuation of our fixed asset portfolio. As
development of our UK portfolio is now suspended and there is no certainty as to
when it may recommence, it was necessary to write down the carrying value of
these assets. This has resulted in an exceptional item of £19,321,000, of which
£16,926,000 comprises the write down of the assets portfolio, £2,000,000 has
been provided for the costs of restoration of the fully and partially developed
site portfolio, while the remaining £395,000 accounts for items such as the
redundancy programme undertaken during the period.
For the six months ending 30 June 2003, the company reported a loss on ordinary
activities before interest of £20,401,000 (2002: £488,000) and a loss before tax
of £20,152,000 (2002: £113,000). Loss per share stood at 22.48p (2002: 0.13p).
After the write down of our fixed assets, net assets of the company were
£10,857,000, while the cash balance at the half-year was £12,493,000.
The implementation of our revised strategy has led to a 55% decrease in our cash
outflow, with the company's cash consumption for the six months reducing to
£1,632,000 from £3,650,000 in the first half of 2002.
Operational Review
At the time of the preliminary results in March 2003, we announced a strategy
that capitalises on our expertise in CMM. The strategy focuses on the
international development of CMM, landfill methane opportunities in the UK and
sales of gas extraction equipment.
The announcement in March 2003 of our first international project, Joarin in
Germany, was the initial step in executing this plan. As previously announced,
Germany has favourable environmental legislation, which guarantees electricity
generated from CMM a price of £46/MWh. Our partners in this project are A-TEC
Anlagentechnik GmbH (A-TEC) and Pro2 who are providing the licence and equipment
respectively. The project in the Nordrhein-Westfalen region of Germany has a
contract life of 10 years and is supported by legislative benefits, which
mitigate a proportion of the costs. The project is on target to become
operational in the second quarter of 2004.
Our involvement in this project, coupled with the continuing poor economic
conditions in the UK for CMM production, has demonstrated that further
investment in Europe is an important element in the development of the company
and the creation of shareholder value. Pro2 is a partner to our first
investment in mainland Europe and we have for some months been discussing
further ways of exploiting these market opportunities. This has led to the
proposal to acquire 51% of the equity in Pro2.
Proposed acquisition of Pro2
As we announced in the circular accompanying this statement, Alkane will invest
€4.0m (£2.8m) in Pro2: €2.04 million to acquire a majority stake and €1.96
million by way of a loan. All our investment will be made directly into Pro2,
with no payments to the existing shareholders. Pro2 focuses on the design and
manufacture of equipment to extract and utilise methane, including biogas,
sewage gas, landfill gas and CMM. In addition to the sale of such equipment,
further higher margin revenue streams come from service and maintenance, and
contracting.
The Company will, as part of the investment, enter into an option agreement with
A-TEC to potentially develop A-TEC's remaining seven licences for CMM projects
in the Nordrhein-Westfalen region of Germany. The A-TEC Option Agreement
provides the Company with the option, but not the obligation, to develop each of
these projects on substantially the same terms as those applicable to the Joarin
project. Only the options over the first four licences are legally binding on
A-TEC. The development of these projects will enable us to both extract gas and
generate electricity, providing substantial revenues from Germany's green
legislative framework.
The current managers of Pro2 retain the remaining equity in the company, and
have each been given a service agreement with a minimum three year term, and a
five year bonus plan based on the achievement of major annual targets in Pro2's
five year plan. Through this we aim to ensure that all members of the Pro2
management team remain motivated and incentivised by this deal.
The acquisition of Pro2 therefore fits extremely well with Alkane's core
expertise, and also fulfils part of the outlined strategy to enter the German
CMM market, as well as gaining entry into the landfill methane market. The
latter is recognised in the UK Renewables Obligation framework, which would
revitalise our plans for the UK business. The capture of methane from eligible
sources and its use to generate electricity thereby achieves income from the
sale of Renewable Obligation Certificates of approximately £48/MWh (Source:
Platts ROC Marker Projections, medium build scenario 2004) at current prices in
addition to the current wholesale price of electricity of about £20/MWh under
NETA.
Move to trading on the Alternative Investment Market
Due to the operating conditions in the UK, and the current capitalisation of the
company, we have decided to move to AIM. This will give the company added
flexibility and save costs associated with Official List regulations. Delisting
from the Official List and commencement of dealing on AIM is expected to occur
on the 19th September 2003, subject to the approval of the Pro2 transaction by
shareholders.
Green Energy Parks
During the period all of our operational sites in the UK produced gas. As
previously reported, the first sites developed in the UK have enabled us to
learn many lessons, with many operational difficulties being overcome. We have
subsequently developed a new design and operation methodology for implementation
at any future sites once the economic conditions for CMM change.
Our plants at Wheldale and Shirebrook performed at levels similar to the second
half of the last financial year while Barnsley continues to perform at a low
output level in line with expectations.
We reported in March 2003 that Coalite Products Limited, the customer at
Markham, had been put into administration. As the air ingress problems at this
site continued it was decided to suspend production in May pending resolution of
the administration order.
During the period these operations continued to be cash generative.
11th Onshore Licensing Round
After the recent round of licence applications, we are pleased to announce that
a further 2 blocks have been added to our UK portfolio. These sites in
Nottinghamshire add a further 173 sq. km to our existing acreage, at a cost of
£4,326 pa.. This now covers 5,790 sq. km of licence area, by far the largest of
any company in this sector in the UK.
As part of our strategy, which continues to include the UK, we will regularly
review this in the light of the cost of holding the licences and the potential
of each area to contribute in due course to the growth of the group.
Government Support
On the 19th June 2003, we were pleased to report the announcement by the UK
Government that it would be funding the assessment of options and support
mechanisms for the CMM industry. A contractor is being appointed to study and
assess the industry. The report is expected to be completed by the end of 2003,
and the DTI has indicated that in due course it will be published. We continue
to be confident of the prospects of gaining additional benefits from the UK
Government, as we believe that the UK Government will want to capture CMM
emissions as this will help to meet its Kyoto responsibilities. In reducing
carbon emissions CMM capture is 9 times more effective than wind power per unit
of electricity generated.
We are still awaiting EU State Aid clearance for the exemption of CMM powered
electricity from the Climate Change Levy, which was included in the UK's Finance
Act 2002.
During the last six months a number of ministers and MPs have continued to show
great interest in the future potential of this industry, culminating in July
2003 with a letter of support from the Welsh Assembly Government advocating the
inclusion of CMM in the Renewables Obligation.
Prospects
Recently wholesale electricity prices, which were around £17/MWh in March 2003,
have shown a marked increase, with the forward price for 2006 rising to around
£24/MWh. This is excellent news for Alkane as our results have been affected by
the depressed wholesale market price. However, we are mindful of the volatile
nature of the market, and although encouraged by the suggested trend in power
pricing, remain convinced that a fully economic UK CMM business will only be
developed if CMM is included in the UK's Renewables Obligation.
On completion of the proposed acquisition of Pro2, we anticipate that the
break-even point for Alkane will be brought forward by a number of years. We
believe that the synergies of the combined businesses provide expertise, new
markets and new revenue streams for the group, coupled with sufficient capital
to undertake this strategy.
We intend that this approach will provide a route to advanced revenue streams
from Germany and to developing an economic business in the UK. In the meantime
we will continue to work through our trade association ACMMO with the UK
Government to develop a strategy for the inclusion of CMM in the UK's Renewables
Obligation.
GROUP PROFIT AND LOSS ACCOUNT
for the six months ended 30 June 2003
Six months Six months Year ended
ended ended 31 December
30 June 2003 30 June 2002 2002
(Unaudited) (Unaudited)
£ '000 £ '000 £ '000
TURNOVER 387 552 995
Cost of sales (422) (349) (890)
GROSS (LOSS)/PROFIT (35) 203 105
Administrative expenses (1,081) (696) (1,365)
Other operating income 36 5 7
OPERATING LOSS (1,080) (488) (1,253)
EXCEPTIONAL ITEM (NOTE 3) (19,321) - -
LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST (20,401) (488) (1,253)
Bank interest receivable 249 375 686
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (20,152) (113) (567)
Taxation - - -
LOSS ATTRIBUTABLE TO SHAREHOLDERS (20,152) (113) (567)
ACCUMULATED LOSSES BROUGHT FORWARD (2,385) (1,818) (1,818)
ACCUMULATED LOSSES CARRIES FORWARD (22,537) (1,931) (2,385)
Loss per ordinary share - basic and diluted (22.48p) (0.13p) (0.63p)
STATEMENT OF RECOGNISED GAINS AND LOSSES
There are no recognised gains or losses for the six months other than the loss
of £20,152,000 (six months ended 30 June 2002: loss of £113,000; year ended 31
December 2002: loss of £567,000).
GROUP BALANCE SHEET
at 30 June 2003
as at as at as at
30 June 2003 30 June 2002 31 December
(Unaudited) (Unaudited) 2002
£'000 £'000 £'000
FIXED ASSETS
Intangible assets - 28 -
Tangible fixed assets - gas properties 515 14,769 17,179
Tangible fixed assets - other 72 259 250
587 15,056 17,429
CURRENT ASSETS
Stocks 14 17 15
Debtors 518 638 605
Cash at bank and in hand 12,493 17,280 14,125
13,025 17,935 14,745
CREDITORS: amounts falling due within one year (755) (1,419) (888)
NET CURRENT ASSETS 12,270 16,516 13,857
TOTAL ASSETS LESS CURRENT LIABILITIES 12,857 31,572 31,286
CREDITORS: amounts falling due after one year - - (277)
PROVISIONS FOR LIABILITIES AND CHARGES (2,000) (109) -
NET ASSETS 10,857 31,463 31,009
CAPITAL AND RESERVES
Called up share capital 448 448 448
Share premium account 32,946 32,946 32,946
Profit and loss account (22,537) (1,931) (2,385)
TOTAL EQUITY SHAREHOLDERS FUNDS 10,857 31,463 31,009
GROUP STATEMENT OF CASHFLOWS
for the six months ended 30 June 2003
Six months Six months Year ended
ended ended 31 December
30 June 2003 30 June 2002 2002
(Unaudited) (Unaudited)
£ '000 £ '000 £ '000
NET CASH OUTFLOW FROM OPERATING ACTIVITIES (792) (442) (1,143)
RETURNS ON INVESTMENT AND SERVICING OF
FINANCE
Interest received 229 404 713
CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT
Payment to acquire intangible assets - (12) -
Payments to acquire tangible fixed assets - gas (748) (3,560) (6,515)
properties
Payments to acquire tangible fixed assets - other (14) (40) (52)
Receipt of grant - - 192
(762) (3,612) (6,375)
EXCEPTIONAL ITEM
Head office reorganisation costs (307) - -
NET CASH OUTFLOW BEFORE FINANCING (1,632) (3,650) (6,805)
FINANCING: issue of ordinary share capital - - -
DECREASE IN CASH (1,632) (3,650) (6,805)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
Six months Six months Year ended
ended ended 31 December
30 June 2003 30 June 2002 2002
(Unaudited) (Unaudited)
£ '000 £ '000 £ '000
CHANGE IN NET FUNDS ARISING FROM
CASH FLOWS (1,632) (3,650) (6,805)
NET FUNDS AT START OF PERIOD 14,125 20,930 20,930
NET FUNDS AT END OF PERIOD 12,493 17,280 14,125
NOTES TO THE ACCOUNTS
at 30 June 2003
1. BASIS OF PREPARATION
These unaudited interim financial statements, which are for the six months ended
30 June 2003, 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 2002 statutory accounts.
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. EXCEPTIONAL ITEM - FUNDAMENTAL RESTRUCTURING
Six months Six months Year ended
ended ended 31 December
30 June 2003 30 June 2002 2002
(Unaudited) (Unaudited)
£ '000 £ '000 £ '000
a. Impairment of tangible fixed assets - (17,046) - -
gas properties
b. Deferred grant income written back 278 - -
c. Provision for the restoration of sites (2,000) - -
d. Impairment of tangible fixed assets - (158) - -
other
e. Other head office reorganisation costs (395) - -
(19,321) - -
During the period a fundamental restructuring of the business has been
implemented following the decision taken by the Group to suspend the development
of new coal mine methane projects in the UK and to pursue a new strategy. The
net costs incurred as a result of this fundamental reorganisation are:
a. UK development sites have been written down to nil. Operating sites
have been written down to reflect their value in use. This has been determined
using a discounted cash flow model applying a discount rate of 10% which
reflects the expected return on capital of such projects;
b. Deferred grant income received in relation to a development site has
been released in line with the write off;
c. Provision has been made for the restoration of all sites as required
under the terms of planning permissions or under lease conditions;
d. Other tangible assets which are no longer used have been written off;
and
e. Other head office costs including redundancy payments and professional
fees relating to the restructuring have been written off.
4. MOVEMENT IN TANGIBLE FIXED ASSETS
The following table shows in summary the movement in tangible fixed assets.
Gas Properties Other
£'000 £'000
Cost at 1 January 2003 17,692 363
Additions in the period 453 3
Written off in the period (17,096) (236)
Cost at 30 June 2003 1,049 130
Depreciation at 1 January 2003 513 113
Provided during the period 71 23
Written off in the period (50) (78)
Depreciation at 30 June 2003 534 58
Net book value at 30 June 2003 515 72
Net book value at 31 December 2002 17,179 250
5. LOSS PER SHARE
The basic and diluted loss per ordinary share is based on a loss of £20,152,000
(six months ended 30 June 2002: loss of £113,000; year ended 31 December 2002:
loss of £567,000) on a weighted average of 89,659,399 ordinary shares (six
months ended 30 June 2002: 89,659,399; year ended 31 December 2002: 89,659,399).
6. RECONCILIATION OF OPERATING LOSS TO NET CASH FLOW FROM OPERATING ACTIVITIES
Six months Six months Year ended
ended ended 31 December
30 June 2003 30 June 2002 2002
(Unaudited) (Unaudited)
£ '000 £ '000 £ '000
Operating loss (1,080) (488) (1,253)
Depreciation 95 95 208
Amortisation - 15 31
Decrease in stock 1 2 4
Decrease/(increase) in debtors 107 (15) 19
Increase/(decrease) in creditors 85 (51) (152)
Net cash outflow from operating activities (792) (442) (1,143)
7. ANALYSIS OF NET FUNDS
as at as at as at
30 June 2003 30 June 2002 31 December
(Unaudited) (Unaudited) 2002
£'000 £'000 £'000
Cash at bank and in hand 12,493 17,280 14,125
8. GENERAL NOTE
The profit and loss account for the year ended 31 December 2002 and the balance
sheet at that date are derived from the Group's full accounts which have been
filed with the Registrar of Companies and on which the Group's auditors gave an
unqualified report. The auditors have carried out a review of the financial
information for the six months ended 30 June 2003.
Copies of this interim report have been sent to registered shareholders and
further copies are available from the Company's registered office.
This information is provided by RNS
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