Acquisition and Trading Update

RNS Number : 6509W

Alkane Energy PLC

02 February 2012

 



2 February 2012

Alkane Energy plc

("Alkane", "the Group" or "the Company")

Acquisition of Greenpark Energy Limited

Trading Update

Notice of Results

Highlights

Alkane Energy plc, the profitable alternative energy company, has conditionally agreed to acquire the entire issued share capital of Greenpark Energy Limited ("Greenpark") for a total consideration of up to £5.725 million (the "Acquisition").

Acquisition of Greenpark

·     Acquisition of Greenpark for total consideration of up to £5.725 million

·     Strategic acquisition of a coal mine methane ("CMM") and power response power generation business

·     The Acquisition is expected to be earnings enhancing

·     The Greenpark Acquisition brings:

o  total power generation of 46GWh for the year ended 31 December 2011;

o  8MW of CMM capacity from 3 sites;

o  21MW of power response capacity from 5 sites;

o  9 sites in total close to Alkane's operating geographical area with a total of 45MW of existing grid connection capacity and further additional grid potential;

o  16 modular reciprocating engines and associated plant and equipment with an estimated book value of approximately £9 million;

o  access to 7 CMM gas exploitation licences expected to extend the Group's CMM roll-out programme; and

o  Greenpark management estimates of unaudited revenue and EBITDA related to the CMM and power response business being acquired of c. £3.4 million and c. £1.9 million, respectively, for the year ended 31 December 2011.

·     Acquisition conditional on satisfaction of certain conditions precedent expected to occur during March 2012, with a longstop date of 30 April 2012

·     The Acquisition has been financed by conditional funding arrangements to:

o  extend and add additional banking facilities, increasing  total facilities to £9.5 million, to be provided by Lloyds TSB Bank PLC (currently drawn prior to the Acquisition at approximately £5.0 million);

o  the issue of a £2.0 million convertible loan; and

o  the issue of £250,000 in Alkane ordinary shares.

Trading Update

The Company will publish its results for the year ended 31 December 2011 on 7 March 2012 and today provides an update on trading.

·     Outline numbers for the Company for 2011 are:

o  revenue of c.£9.5 million (2010: £6.6m);

o  full year electricity output of circa 140GWh (2010: 120GWh); and

o  average electricity sales price for 2011 is expected to be approximately £51/MWh (2010: £44/MWh).

·     60% of 2012 output, excluding capacity from the Acquisition, now contracted at an average price of £56/MWh

·     Current price weakness in power market

Neil O'Brien, Chief Executive Officer, commented on the acquisition:

"This acquisition is a significant step change in the scale of Alkane and adds significantly to our operating capacity and project pipeline. In addition, the acquisition will allow us to triple our capacity in power response for the National Grid."

For more information please contact:

Alkane Energy plc Neil O'Brien, Chief Executive Officer Steve Goalby, Finance Director	01623 827927
Altium Capital Limited Adrian Reed Andy Clarke	0845 505 4343
VSA Capital Limited Andrew Raca	020 3005 5004
Hudson Sandler Nick Lyon Alex Brennan	020 7796 4133
www.alkane.co.uk

Alkane Energy plc

("Alkane", "the Group" or "the Company")

Acquisition of Greenpark Energy Limited

Trading Update

Notice of Results

Introduction

Alkane Energy plc, the profitable alternative energy company, has conditionally agreed to acquire the entire issued share capital of Greenpark Energy Limited ("Greenpark") for a total consideration of up to £5.725 million (the "Acquisition").

After Alkane, Greenpark is one of the largest independent UK operators of coal mine methane ("CMM") and currently operates approximately 8MW of CMM and 21MW of power response power generation with 9 sites in close proximity to those currently operated by Alkane. The Greenpark sites to be acquired also have a further 16MW of existing grid capacity with the potential to add further capacity for the development of the Company's power response business. As part of the Acquisition, Alkane will acquire 16 modular reciprocating engines and associated plant and equipment with an estimated book value of approximately £9 million. Alkane will also acquire or obtain access to additional undeveloped CMM licence areas which are expected to extend the duration of the Company's CMM new site development programme.

The Acquisition will provide Alkane with a substantial increase in the scale of the Group delivering immediate operational assets and cashflow in a way which avoids the development lag of between 9-18 months between Alkane identifying, developing and funding the construction of new sites prior to them generating revenue which is inherent in the Group's organically developed sites. The Acquisition is expected to be earnings enhancing, assuming full conversion of the Convertible Loan (as defined below).

The initial consideration will comprise of £4.75 million in cash and £250,000 in Alkane ordinary shares of 0.5 pence each in the capital of the Company ("Consideration Shares") with further cash payments of up to £725,000 made subject to the release of an escrow retention and further contingent and deferred contractual arrangements detailed under the Acquisition agreement (the "Acquisition Agreement").

The Acquisition has been financed by conditional arrangements to add additional banking facilities, which combined with the Group's existing facilities, total £9.5 million (a £2.0 million net increase in facilities) to be provided by Alkane's current lending bank, Lloyds TSB Bank PLC ("Lloyds TSB"); the issue of a £2.0 million convertible loan (the "Convertible Loan"), underwritten by Henderson Global Investors ("Henderson"); and the issue of the Consideration Shares.

The Acquisition is conditional, inter alia, upon the restructuring of certain aspects of the Greenpark business prior to completion, and the approval of the Department of Energy and Climate Change ("DECC"). The majority of these conditions are out of the control of the Company, but are expected to occur in March 2012, and, under the Acquisition Agreement can occur no later than 30 April 2012. Further details of the Acquisition and funding arrangements are set out below in this announcement.

Trading Update and Notice of Results

The Company will publish its results for the year ended 31 December 2011 on 7 March 2012 and today provides an update on trading.

Trading for the year ended 31 December 2011 has seen further positive momentum, with output increasing by approximately 17% compared to the equivalent prior year. For the period, the Group expects to deliver an estimated full year electricity output of circa 140 GWh (2010: 120 GWh) driven by one additional new site commissioned during 2011 and the full year effect of new 2010 sites. At the year end the Company had 13 operating sites (2010: 12). The average electricity sales price for 2011 is expected to be around £51/MWh (2010: £44/MWh). The Group delivered and installed its first biogas generation plant during the year. The Board expects that the revenue for the year ended 31 December 2011 will be c. £9.5 million.

As enlarged by the Seven Star Natural Gas Ltd ("Seven Star") and Greenpark acquisitions, Alkane will have access to a significant additional number of existing, new and potential CMM, onshore gas and power response sites and an increased portfolio of gas extraction licences and business related planning permissions. Accordingly, the Group going forward will be able to adapt its roll-out programmes to optimise shareholder value creation with the most appropriate allocation of project development capital.

During the third quarter of 2011, electricity pricing was relatively strong and the Group took the decision to forward place electricity contracts for much of the 2012 output from the Group's existing sites. Accordingly, approximately 60% of the Group's expected 2012 output, excluding new capacity from the proposed Acquisition, is now contracted at an average price of £56/MWh. Since the placement of these contracts, electricity pricing has weakened with 12 month forward electricity contracts currently being quoted around £48/MWh. It is intended that either on or before the completion of the Acquisition that the CMM output of Greenpark will be placed for between 9-18 months at the prevailing market price and as a result, average pricing for 2012 will be at a lower level than currently contracted.

Overall, whilst there is currently a degree of short-term weakness in the electricity pricing market, the Board believes that the Company has a sound platform to further develop the quality and scale of the Group's electrical generation portfolio into a valuable and strategic asset.

Background to, and reasons for, the Acquisition

Alkane is a specialist developer and operator of gas to power generation plants. Currently methane is either extracted under licence from abandoned coal mines, with the Group having 25MW of CMM output, or engines are connected to mains gas to produce electricity at times of high electrical demand or in order to balance the electrical grid, an activity described as 'power response', of which the Group currently operates 8MW of capacity. In addition the Company is developing additional activities in the biogas and onshore gas markets where it can utilise the Group's core skills in designing, building and operating gas to power plants. All electrical output is generated using standard modular reciprocating engines.

Alkane's stated strategy has been to grow its installed base of gas to power electrical output whilst developing scale in its complementary businesses, such as power response. Achieving the Group's medium term capacity target and providing longevity of generating output requires Alkane to exploit both its existing gas exploration licences and obtain or acquire new licences from DECC or via corporate activity, respectively.

In May 2011 the Group acquired Seven Star, which provided Alkane with access to two existing licences that cover previously identified onshore gas sites. This has allowed the Company to commence the development of its first onshore gas to power facility and provides access to previously documented gas reserves of, in aggregate, approximately 3.50 bcf.

Greenpark is a natural addition to the Group providing as it does an operational and geographical fit of existing CMM sites and power generation, a sizable installed base of power response with the capacity for expansion via existing sites planning and grid connections, plus access to certain additional CMM licences previously granted to Greenpark by DECC where there are either already identified new or previously exploited CMM sites with development potential.

The Acquisition will provide Alkane with a substantial increase in the scale of the Group. It will deliver immediate operational assets and cashflow, avoiding the development lag of between 9-18 months between Alkane identifying, developing and funding the construction of new sites prior to them generating revenue which is inherent in the Group's organically developed sites. The Acquisition also extends the potential CMM development pipeline via the new CMM licences and accelerates the Group's power response development opportunities.

Information on Greenpark

Greenpark is a wholly owned subsidiary of GEL/GPEL Limited which is a privately owned developer of unconventional gas assets in the UK, Poland, Spain and the Ukraine. The current activities of GEL/GPEL Limited include CMM activities of Greenpark, coal bed methane ("CBM"), and shale gas licences in the UK and overseas.

On 28 December 2011, GEL/GPEL Limited announced the sale to Dart Energy Limited of its CBM and shale gas assets, comprising 22 onshore licences in the UK and options on GEL/GPEL Limited's overseas licences. The transaction was subject to certain conditions which are expected to be satisfied over the coming months, and include the reorganisation (the "Reorganisation") of the Greenpark business and assets to transfer out the non-CMM activities of Greenpark into another wholly owned subsidiary of GEL/GPEL Limited in order that the Acquisition can complete.

Following the Reorganisation, Greenpark will own or operate CMM or power response generation from 6 UK sites with leases over a further 3 sites at which CMM was previously operated. There is a total existing grid capacity at these sites of 45.4MW with potential additional grid capacity. During 2011, Greenpark produced approximately 46GWh of power, of which c. 40GWh was from CMM. As part of the Acquisition there are specific amendments and variations to the planning conditions of certain of the Greenpark sites which will be required, which Alkane will work with GEL/GPEL Limited to obtain.

Alkane will acquire 16 reciprocating engines with a total capacity of 29.4MW and associated plant and equipment with an estimated book value of approximately £9 million. The engines are fully modular and can be redeployed within the Group's current and future project portfolio which would otherwise have had to have been funded via capital investment from the Group's existing cashflow as part of its organic development programme.

Greenpark also either owns or has the right to exploit the current and potentially new CMM gas reserves under a number of licences previously granted by DECC (the "Licences"). As was the case with the previous Seven Star acquisition, the standard conditions which apply to the Licences mean that the Licences can be revoked if there is a change of control of the operator of the Licences and accordingly, the Acquisition is conditional, inter alia, upon approvals from DECC and confirmation that it does not intend to seek a further change of control following completion of the Acquisition.

Details of the Acquisition

The Acquisition Agreement was conditionally entered into on 1 February 2012 and completion will occur on satisfaction of a number of conditions precedent ("Completion"), summary details of which are set out below. The exact timetable of Completion is unknown and is subject to the satisfaction of the conditions precedent, the majority of which are out of the control of the Company, but is expected to occur during March 2012 and, under the Acquisition Agreement, can occur no later than 30 April 2012.

The consideration payable, or which may become payable, by the Company pursuant to the Acquisition Agreement is as follows:

·     cash proceeds payable to the vendors of Greenpark (the "Vendors") of £4.75 million, payable on Completion;

·     as soon as practicable following Completion, the issue to the Vendors and admission to trading on AIM of the Consideration Shares. The number of Consideration Shares issued is to be based on the 30 day, volume weighted average share price of an Alkane ordinary share immediately prior to Completion, based on a value of £250,000; and

·     on Completion, £250,000 to be deposited in an escrow account managed by the Company and the Vendor's solicitors in relation to certain warranty and indemnity protections provided under the Acquisition Agreement. This will be released to the Vendors on 30 September 2012 on satisfactory confirmation that there will be no warranty or indemnity claim brought by the Group under the Acquisition Agreement.

Greenpark is being acquired on a cash free and debt free basis, based on an agreed balance sheet as at 30 November 2011, with agreed adjustments for the revenue, costs and interest charges relating to the CMM business and assets which are the subject of the Acquisition, after adjustment for certain CBM and other GEL/GPEL Limited costs currently within Greenpark, which are to be borne by the Vendors.

In addition to the above payments to be made on Completion, Alkane may be required to pay to the Vendors of Greenpark:

·     a further amount of up to £250,000 in cash, payable in relation to the resolution of certain planning issues to be resolved to the satisfaction of the Company, payable on 30 September 2012. This additional consideration is also subject to retention provisions under the warranty protections provided under the Acquisition Agreement; and

·     a final cash payment of £225,000, payable by the Company to the Vendors, payable on or before 30 September 2013. Any payment before 30 September 2013 to be at the sole discretion of the Company.

Completion of the Acquisition is conditional upon, inter alia, on the following:

·     DECC giving written indication that neither (i) the Reorganisation nor (ii) the change of control of Greenpark gives rise to circumstances in which it will exercise it power of revocation in response of any CMM Licence;

·     all debt facilities having been repaid and confirmation that security is released, in particular in relation to security over the engines; and

·     the Reorganisation completing.

Warranties typical for this type of transaction have been included and certain indemnities have been included including, inter alia, in relation to title to the CMM Licences.  There are limited time and financial limitations for the warranties and indemnities but the Company has secured warranty and indemnity insurance to take these to a market standard position.

If there is a breach by the Vendors/Greenpark of the Acquisition Agreement in the period prior to Completion, and the liability or cost of these matters are in excess of £250,000, then Alkane shall have the right to terminate the agreement or deduct the amount of the liability from the consideration.  If the second option is chosen, the Vendors have the right to accept this or terminate the agreement and pay a liquidated damages sum of £200,000.

Funding of the Acquisition

Bank facility

The Acquisition has been financed by conditional arrangements to extend and add additional banking facilities to be provided by Alkane's current lending bank, Lloyds TSB. When combined with the Group's existing facilities, the Group's aggregate debt facilities available will be £9.5 million. This will be made up of a variation in the current revolving credit facility ("RCF") to £6.5 million, committed until 31 December 2014, plus a two year term loan of £3.0 million, repayable quarterly. The interest charge for the term loan is 3.0% above LIBOR and as with the RCF, covenants are in place in respect of growth of net worth, EBITDA levels relative to outstanding debt, interest cover, minimum electricity pricing levels and the proportion of output under contract.

Convertible Loan

In addition to the debt funding to be provided by Lloyds TSB, Alkane has agreed terms for the issue of a £2.0 million convertible loan note (the "Convertible Loan") to be underwritten by Henderson, further terms of which are set out below.

The Acquisition of Greenpark was via a competitive auction process which required the Company to be able to demonstrate certainty of funding. The structure of the Acquisition means that the timing of Completion cannot be accurately determined. The combination of these factors meant that funding the additional cash costs of the Acquisition, not otherwise financed via debt facilities, by way of a rights issue or an equity placement, would have been difficult.

The Convertible Loan will be issued in units of £1 and may not be listed on any market but will be freely transferable to any fund which is, or is managed by, an entity which is authorised and regulated by the Financial Services Authority or to any other person with the written consent of the Company. Interest will be at a fixed rate of 7.5% per annum, which will be rolled up quarterly in arrears and included as principal to be repaid or converted. A facility fee of 3% will be charged and added to the principal of the Convertible Loan on Completion.

The Convertible Loan will be unsecured. The terms of the Convertible Loan state that it will automatically convert into ordinary shares of 0.5 pence each in the capital of the Company ("Ordinary Shares") (i) if at any time up to six months following the issue of the convertible loan notes the Company raises capital via an equity placing at 22 pence or above; or (ii) if later, on the date which is 3 years after the issue of the convertible loan notes. The convertible loan notes will be convertible at any time prior to repayment or automatic conversion at the holder's option, at a conversion price, fixed at 17.5 pence. The Company's obligations to convert the convertible loan notes is subject to (i) the Company having the appropriate shareholder authorities to permit conversion; and (ii) conversion not triggering a mandatory offer under Rule 9 of The City Code on Takeovers and Mergers. If any element of the Convertible Loan is not converted, it is otherwise repayable on the date which is 3 years and 1 day after the date of Completion.

Henderson have committed to work with the Company to offer other existing institutional shareholders of Alkane the chance to participate and invest in the Convertible Loan on the same terms as Henderson in the three month period following announcement of the Acquisition and before Completion.

Currently the Company does not have sufficient authority for full conversion of the Convertible Loan and accordingly the Company has committed to seek shareholder approval for the issue of sufficient Ordinary Shares on a non pre-emptive basis to allow for conversion of the Convertible Loan.  Shareholder approval will be sought at the next Company Annual General Meeting ("AGM") expected to be held in April 2012.

If the appropriate shareholder approvals are not received within 12 months of issue, the Convertible Loan is repayable within six months of written demand by any holder of the Convertible Loan unless such repayment could reasonably be expected to result in the Company breaching the financial covenants in its bank facilities with Lloyds TSB. In the event of such demand, an early repayment fee equal to 5% of the outstanding principal of the Convertible Loan will also be payable by the Company to the lender.

If for whatever reason the Convertible Loan cannot be repaid within the required period, as set out above, the Convertible Loan will remain in place but the interest rate shall increase to 15.0% per annum of the outstanding principal of the Convertible Loan. If the Convertible Loan remains unpaid for a further year, the interest rate shall increase by a further 5%.

The Convertible Loan will be repayable immediately if the Company enters into any formal winding up or insolvency process, stops or suspends payment of all or a material part of its indebtedness or seeks to reschedule all or a material part of its indebtedness.

The Convertible Loan will also be repayable immediately if any person or persons acting in concert acquire control of the Company. In such circumstances, the noteholders may demand repayment of their notes at a value equal to the value which they would have received had they converted their notes and accrued interest into Ordinary Shares and such Ordinary Shares had been sold.

Henderson is a substantial shareholder in the Company, holding approximately 24.3% of the voting rights (excluding treasury shares) of the Company. The issue of the Convertible Loan is therefore a related party transaction under AIM Rule 13. The directors of the Company having consulted with the Company's nominated adviser, Altium Capital Limited, consider that the terms of the Convertible Loan are fair and reasonable insofar as the Company's shareholders are concerned.

Financial Effects of the Acquisition

The Acquisition is expected to be earnings enhancing, assuming full conversion of the Convertible Loan.

For the year ended 31 December 2011, Greenpark management estimates of the unaudited results related to the CMM and power response business being acquired show revenue of approximately £3.4 million and EBITDA of approximately £1.9 million. The business is being acquired on a cash free and debt free basis with the financial benefits of the CMM business of Greenpark, post exchange and prior to Completion, being for the benefit of the Company. Unaudited, estimated net assets which are the subject of the Acquisition are approximately £13 million, but will be subject to a formal review as part of the Group's next audit.

Neil O'Brien, CEO, commented on the acquisition:

"This acquisition is a significant step change in the scale of Alkane and adds significantly to our operating capacity and project pipeline. In addition, the acquisition will allow us to triple our capacity in power response for the National Grid."

For more information please contact:

Alkane Energy plc Neil O'Brien, Chief Executive Officer Steve Goalby, Finance Director	01623 827927
Altium Capital Limited Adrian Reed Andy Clarke	0845 505 4343
VSA Capital Limited Andrew Raca	020 3005 5004
Hudson Sandler Nick Lyon Alex Brennan	020 7796 4133
www.alkane.co.uk

 

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