Final Results

Alkane Energy PLC 13 March 2003 13 March 2003 Alkane Energy plc ('Alkane' or 'the Company') Unaudited Preliminary Results to 31 December 2002 Alkane Energy plc is the UK's leading commercial producer of Coal Mine Methane (CMM) from abandoned coal mines. Highlights Strong Cash Position: • CMM sales volume increased by 35% • Turnover decreased slightly to £995,000 (2001: £1,017,000) • Loss before taxation of £567,000 (2001: profit of £407,000) • Strong cash reserves available to fund future capital investments £14.1m (2001: £20.9m) Revised Strategy: • International CMM projects • UK landfill methane projects • Sale of modular containerised systems • UK CMM site development on hold pending improvement in economic conditions International Projects: • First international project signed for 2.7MW generation facility in Germany • Guaranteed electricity price of €67.40/MWh (£46.00) compared to the UK which is currently £17/MWh • Guaranteed customer for the electricity generated • Similar projects sought in Germany and other EU countries UK Operations: • Four CMM sites operational • Emissions reduction equating to 510,000 tonnes of CO2 (2001: 380,000 tonnes) achieved UK Government Support: • Full exemption from Climate Change Levy granted • Environmental benefits of the CMM industry recognised in Energy White Paper • Trade body continues to lobby for inclusion in the Renewables Obligation Commenting on the results, Executive Chairman, Dr Cameron Davies, said: 'The UK energy industry has had an extremely difficult year in 2002, and we have shared that experience. We remain convinced that our expertise and technology can be used to generate a good return for our shareholders. We have therefore resolved to seek profitable opportunities outside the UK and in complementary areas where the operating regime is more favourable. I look on this as an exciting development in the growth of the Company.' Enquiries: Alkane Energy plc Dr Cameron Davies, Chairman Tel: 01623 827 927 David Cross, Chief Executive Binns & Co PR Ltd Judith Parry/Sophie Morton Tel: 020 7786 9600 (today)/0113 242 1171 (thereafter) Dr Ben Willey Tel: 020 7786 9600 ALKANE ENERGY plc PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2002 Our second year as a public company has been a particularly difficult one. The UK energy industry has experienced a severe fall in wholesale electricity prices which has eroded the margins achieved in Coal Mine Methane ('CMM') generation and made the development of many sites commercially unviable. Whilst we look to the UK Government to take action to support its commitment to a low carbon emission energy policy and the CMM industry, this has not yet been forthcoming in a meaningful way. We have therefore adapted our business strategy, primarily focusing our site development programme outside the UK, along with developments in complementary areas. Financial Review For the year 2002, the company made a loss on ordinary activities before taxation of £567,000 compared to a profit of £407,000 in 2001. Sales volume of CMM for the year increased by 35%, however, turnover for the year decreased slightly to £995,000 (2001: £1,017,000). This was a result of the average price per therm achieved over the year falling by some 28% in comparison to 2001. Interest earned in the year decreased to £686,000 (2001: £1,224,000) reflecting a reduction in the average cash balance and lower interest rates. Operating costs have increased to £890,000 (2001: £534,000). The main cause of this increase was the additional two sites operating for most of the year. Furthermore there were costs for remedial works at Shirebrook. Administration expenses have remained unchanged. Cash outflow in the year of £6.8m (2001: £5.0m) mainly relates to capital expenditure incurred in the development of new sites including Wheldale and Barnsley which opened early in 2002. Capital investment was also made in the construction of four modular containerised extraction systems which are fully transportable and are now available for use both in the UK and overseas. Cash reserves as at 31 December 2002 were £14.1m (2001: £20.9m). In line with the policy outlined at the time of the Company's flotation in December 2000, the directors are not proposing the payment of a dividend. Strategy At the time of the interim results for the period ended 30 June 2002 I announced that the price our customers were able to attain for electricity generated from CMM was insufficient to make future projects financially viable without UK Government support. Inclusion in the Renewables Obligation, which would be at no cost to the Government, would provide a substantial increase in the value of each unit of energy produced. This form of government support already exists for CMM elsewhere in the EU but has not yet been forthcoming in the UK. Whilst the Government's proposals in its recent Energy White Paper gave some encouragement, the Board has decided that until there is a major shift of UK Government policy towards the industry, the future strategy of the company should be focused on other opportunities. Such options include emerging opportunities outside the UK, landfill methane and exploitation of the company's modular containerised systems. As a further consequence of the current business outlook in the UK, we continue to examine our cost base, with a view to reducing our cash outflow. This is likely to result in our team being significantly reduced in size. EU Developments I was delighted to be able to announce, on 10 March 2003, that we have entered into a contract with A-TEC Anlagentechnik GmbH and Pro2 Anlagentechnik GmbH for the development of a 2.7MW generation facility in Gelsenkirchen in the Nordrhein-Westfalen region of Germany. This will be both Alkane's first project outside the UK and where the company generates and sells electricity. The project, which is expected to take 12 months to implement, will benefit from the very significant assistance afforded to CMM projects by the German Government. The German Renewable Energy Law (Erneuerbare Energien Gesetz) means that CMM sourced electricity will have a guaranteed price of €67.40/MWh (£46.00) during the period of the contract and that the local network operator is obliged to purchase it. This contrasts with £17/MWh currently available in the UK under the New Electricity Trading Arrangements. We are looking to build upon this first step outside the UK with further projects in Germany if they can be secured on favourable terms. We are also considering projects in other EU countries where we believe that the Government may include CMM in its Renewables Obligation. Landfill Methane Another area under review is UK landfill methane, which qualifies for the Renewables Obligation. The environmental benefits of landfill methane capture are similar to those of CMM. Virtually all the 500 MW of installed landfill methane capacity has been developed under one or other of the Government's Green Energy Schemes, particularly the Non Fossil Fuel Obligation (NFFO) and now the Renewables Obligation. UK landfill methane projects are able to obtain additional income from the sale of Renewable Obligation Certificates ('ROCs'). Currently there is a shortfall of Renewable Energy compared to the Government's targets and ROCs have been selling for £45/MWh which is in addition to the wholesale electricity price. Sale of Containerised Extractors We have received enquiries for the sale of our transportable containerised extractors for use at working coal mines. Although discussions are at an early stage, we are pleased with the initial studies in this new business activity, and believe this could be another area for exploitation on an international scale. 11th UK Onshore Licensing Round The DTI has announced the 11th UK onshore licensing round will close for applications on 7 May 2003. Most of the acreage with CMM potential has already been licensed and our application in this round is likely to be limited. Whilst the focus of our activities in the immediate future will be outside the UK, we believe that a better environment for the extraction and sale of CMM will eventually come about in the UK. UK Government Support We were delighted when it was announced in the Government's Budget Statement in April 2002 that CMM would receive full exemption from the Climate Change Levy. This has been incorporated in the Finance Act 2002 and EU state aid clearance is awaited. This was the first tangible evidence of support from the Government for this industry. The much anticipated Energy White Paper, published in February 2003, contained further positive indications of the Government's intention to provide support for the industry. This was the first time that CMM has been referred to in a DTI energy document and Alkane is encouraged that the Government has now publicly recognised that CMM represents 'a material environmental problem' and 'is a legacy to be managed'. The Government also says that it recognises that existing levels of support are inadequate and says that it will work to negotiate the entry of CMM electricity generation projects into the EU Emissions Trading Scheme (ETS) on a 'project' basis. It will also work on a framework for pilot CMM projects within the UK's own ETS. Whilst Alkane welcomes both of these initiatives, the benefits are likely to be in the longer term, as it is unlikely that CMM will be included in the EU ETS before 2008. A timetable for UK ETS pilot projects is under review. Even with these incentives, the Government acknowledges that it is unlikely to be sufficient to stimulate the industry in the short term and it is looking for further ways in which it can provide support. It is therefore the intention of Alkane through its trade body, the Association of Coal Mine Methane Operators (ACMMO), to continue to lobby strongly for inclusion in the Renewables Obligation or one of the Government's Green Energy Schemes. Environmental Methane is a significant greenhouse gas with a Global Warming Potential 23 times greater than that of Carbon Dioxide ('CO2'). In 2002, Alkane's four capture projects achieved an emissions reduction which equates to 510,000 tonnes of CO2 (2001: 380,000 tonnes). It is estimated that total CMM emissions from more than a thousand abandoned coal mines in the UK equate to 13.8m tonnes of CO2 per annum. Four hundred of these mines are included in Alkane's licensed acreage and many could be developed with the appropriate level of Government support. Review of Green Energy Parks During the first half of 2002, we began delivering gas to customers from two new sites in West Yorkshire. Wheldale, West Yorkshire Our Wheldale site, which began delivery of gas to our customer Scottish & Southern Energy in February 2002, has been operating efficiently, however output has been slightly below expectations. Output is currently at 80% of total capacity and is likely to continue at this level. The reason for this is that the plant is oversized relative to the desorption of gas from the mine. In future, through our modular containerised systems, we will be able to adjust the size of the plant once the volume and flow of gas has stabilised. Barnsley, West Yorkshire At Barnsley, our first containerised site, CMM is sold to Rexam Glass as a substitute for natural gas. A restricted connection to the void space in the mine has reduced the flow of gas. We have now located a site for a potential new borehole to rectify this but the project is on hold while our examination of cash conserving measures is completed. Steetley, Nottinghamshire This was one of our smaller pilot sites and because of operational difficulties and poor economics as previously reported, it ceased production in December 2002. Shirebrook, Derbyshire At our Shirebrook site, water and air 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. We have been able to complete repairs to the upper 60% of the pipe however the depth of the remainder makes complete remediation difficult. We are currently reviewing the available solutions. We expect this site to continue to produce gas at about 50% of its original output going forward. Markham, Derbyshire Work on rectifying the operational difficulties we have encountered at Markham has continued and since the year end the gas quality has improved. It is expected that remedial work by third parties will not commence before 2004 at Arkwright, the main source of air ingress. UK Site Development Programme As previously reported, we have taken a candid and realistic view of our current UK operations. We have learnt many lessons from our early prototype sites and in particular, the importance of capturing gas at a lower but steady rate. For this reason, we will design sites of a smaller size than originally anticipated. In future there will be very few large sites such as Wheldale. We have continued our site research programme and currently have a portfolio of sites at various stages of development for both electricity generation and direct gas clients. Several of these are ready for construction to commence once the economic climate changes. Prospects The UK energy industry has had an extremely difficult year in 2002, and we have shared that experience. We remain convinced that our expertise and technology can be used to generate a good return for our shareholders. We have therefore resolved to seek profitable opportunities outside the UK and in complementary areas where the operating regime is more favourable. I look on this as an exciting development in the growth of the company. The delay in our site development programme has enabled us to retain a strong cash position with reserves at the year end of £14.1m. This cash is available to fund future capital investment. We will continue to lobby the UK Government through our trade body with the aim of gaining entry to the Renewables Obligation which would enable the development and operation of many more of our environmentally beneficial Green Energy Parks. I would like to take this opportunity to thank our shareholders for their continued support and our team for their continued commitment and hard work during this difficult year. Dr. Cameron Davies Executive Chairman GROUP PROFIT AND LOSS ACCOUNT For the year ended 31 December 2002 2002 2001 (unaudited) £'000 £'000 TURNOVER 995 1,017 Cost of sales (890) (534) ----------- ----------- GROSS PROFIT 105 483 Administrative expenses (1,365) (1,323) Other operating income 7 23 ----------- ----------- OPERATING LOSS (1,253) (817) Bank interest receivable 686 1,224 ----------- ----------- (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE (567) 407 TAXATION Taxation - - ----------- ----------- (LOSS)/PROFIT FOR THE FINANCIAL YEAR (567) 407 ACCUMULATED LOSSES BROUGHT FORWARD (1,818) (2,225) ----------- ----------- ACCUMULATED LOSSES CARRIED FORWARD (2,385) (1,818) ----------- ----------- (Loss)/earnings per ordinary share - basic (0.63p) 0.45p (Loss)/earnings per ordinary share - fully (0.63p) 0.44p diluted STATEMENT OF RECOGNISED GAINS AND LOSSES There are no recognised gains or losses for the year other than the loss of £567,000 (2001: £407,000 profit) GROUP BALANCE SHEET At 31 December 2002 2002 2001 (unaudited) £'000 £'000 FIXED ASSETS Intangible assets - 31 Tangible fixed assets - gas properties 17,179 11,165 Tangible fixed assets - other 250 237 -------- -------- 17,429 11,433 -------- -------- CURRENT ASSETS Stock 15 19 Debtors 605 652 Cash at bank and in hand 14,125 20,930 -------- -------- 14,745 21,601 CREDITORS: amounts falling due within one year (888) (1,279) -------- -------- NET CURRENT ASSETS 13,857 20,322 -------- -------- TOTAL ASSETS LESS CURRENT LIABILITIES 31,286 31,755 CREDITORS: amounts falling due after more than (277) - one year PROVISIONS FOR LIABILITIES AND CHARGES - (179) -------- -------- NET ASSETS 31,009 31,576 -------- -------- CAPITAL AND RESERVES Called up share capital 448 448 Share premium account 32,946 32,946 Profit and loss account (2,385) (1,818) -------- -------- TOTAL EQUITY SHAREHOLDERS' FUNDS 31,009 31,576 -------- -------- GROUP STATEMENT OF CASH FLOWS For the year ended 31 December 2002 2002 2001 (unaudited) £'000 £'000 NET CASH OUTFLOW FROM OPERATING ACTIVITIES (1,143) (764) -------- -------- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received 713 1,226 Interest paid - (185) -------- -------- 713 1,041 TAXATION Corporation tax - - CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Payments to acquire tangible fixed assets - gas (6,515) (5,118) properties Payments to acquire tangible fixed assets - (52) (218) other Receipt of grant 192 - -------- -------- (6,375) (5,336) -------- -------- NET CASH OUTFLOW BEFORE FINANCING (6,805) (5,059) FINANCING Issue of ordinary share capital - 31 -------- -------- DECREASE IN CASH (6,805) (5,028) -------- -------- RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS 2002 2001 (unaudited) £'000 £'000 CHANGE IN NET FUNDS ARISING FROM CASH FLOWS (6,805) (5,028) NET FUNDS AT 1 JANUARY 20,930 25,958 -------- -------- NET FUNDS AT 31 DECEMBER 14,125 20,930 -------- -------- NOTES TO THE STATEMENT OF CASH FLOWS A. RECONCILIATION OF OPERATING LOSS TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES 2002 2001 (unaudited) £'000 £'000 Operating loss (1,253) (817) Depreciation 207 147 Amortisation 31 31 Decrease/(increase) in stock 4 (2) Decrease/(increase) in debtors 19 (119) (Decrease) in creditors (151) (4) ----------- ----------- Net cash outflow from operating activities (1,143) (764) ----------- ----------- B. ANALYSIS OF NET FUNDS At At 1 January 31 December 2002 Cash flow 2002 (unaudited) (unaudited) £'000 £'000 £'000 Cash at bank and in hand 20,930 (6,805) 14,125 ------ ------ ------ GENERAL NOTES 1. The preliminary unaudited financial statements for the year ended 31 December 2002 were approved by the board of directors on 12 March 2003. 2. a) The preliminary unaudited financial information set out above does not constitute full accounts within the meaning of Section 254 of the Companies Act 1985. b) Audited statutory accounts in respect of the year ended 31 December 2001 have been delivered to the Registrar of Companies and those accounts were subject to an unqualified report by the auditors. c) Copies of the audited annual report & accounts for the year ended 31 December 2002 will be sent to shareholders during April 2003 and will be available from the company's registered office, Edwinstowe House, High Street, Edwinstowe, Nottinghamshire NG21 9PR. This information is provided by RNS The company news service from the London Stock Exchange

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