Final Results

Alkane Energy PLC 24 March 2004 Immediate Release 24 March 2004 Alkane Energy plc ('Alkane' or 'the company' or 'the group') Unaudited Preliminary Results to 31 December 2003 Alkane Energy plc is an international green energy company, which designs, manufactures and operates specialist methane capture and utilisation technology for the safe, efficient and environmentally beneficial use of this gas. Financial Highlights •Turnover increased to £7,270,000 (2002: £995,000) •Gross profit increased to £2,349,000 (2002: £105,000) •Exceptional item of £19,670,000, principally due to write down of assets •Loss before taxation of £20,703,000 (2002: £567,000) •Cash reserves of £8,757,000 (2002: £14,125,000) Operational Highlights •Acquisition of Pro2 Anlagentechnik GmbH ('Pro2') completed •Excellent initial contribution from Pro2 •First order for sale of a transportable containerised mine gas extraction system, contract value US$1.2 million •EU state aid clearance for exemption from the Climate Change Levy for electricity generated from Coal Mine Methane (CMM) Commenting on the results, Executive Chairman, Dr. Cameron Davies said: 'I am very pleased by the progress Alkane has made during 2003 towards achieving the goals set out in the company's revised strategy announced in our preliminary results for 2002. The acquisition of Pro2 and thus entry into the European green energy market is proving to be a prudent decision and we now anticipate an earlier move into profit.' For further information: Alkane Energy plc Dr. Cameron Davies, Executive Chairman Tel: 020 7466 5000 (today) David Cross, Chief Executive Tel: 01623 827927 (thereafter) Buchanan Communications Sophie Morton Tel: 020 7466 5000 (today) Tel: 01943 883990 (thereafter) Ben Willey Tel: 020 7466 5000 Chairman's Statement Alkane's third year as a public company has been an eventful period, which has seen the company go a long way to fulfilling its revised strategy of diversification away from the UK business and the development of other methane markets and technologies, as set out in the company's preliminary results announcement for 2002. As part of this diversification on 19 September 2003 Alkane completed the acquisition of a majority interest in Pro2, a methane utilisation technology company based near Dusseldorf, Germany. Alkane is delighted by the contribution Pro2 made to the company's activities in the three months it has been part of the group. During the year the company achieved another of the goals outlined in the strategy review by signing its first contract for the sale in 2004 of a transportable containerised mine gas extraction system, with an order value of US$1.2 million. Positive developments have also occurred as Alkane, through the Association of Coal Mine Methane Operators (ACMMO), has worked to gain environmental and political recognition for CMM capture. In October 2003, the company received the long awaited EU state aid clearance for exemption from the Climate Change Levy for electricity generated from CMM. This became effective on 1 November 2003 and is expected to make a small but useful contribution in 2004. Alkane also carried out a number of cost cutting measures. As a consequence of suspending UK CMM developments the decision was taken to write down the carrying value of the UK assets and reduce the head count from 24 to 10, as announced in our interim results. The company's UK expenditure base has therefore been reduced by £750,000. In September trading of the company's shares was transferred from the Official List to the Alternative Investment Market (AIM) which provides a more flexible and appropriate regulatory environment for a company of Alkane's size. Alkane's entry into the European green energy market through Pro2 has proved to be a prudent decision and the company now anticipates an earlier move into profit. I am confident that the combination of Alkane's expertise and experience coupled with the complementary skills and market position of Pro2 will help the group develop in other specialist green energy markets both in the UK and internationally. Whilst 2003 was challenging, it was also a year of progress. I thank all our shareholders and our team for their continued support of our revised strategy, and I welcome Pro2 into the Alkane group. Financial Overview Sales for the year were £7,270,000 (2002: £995,000) of which £6,615,000 was attributable to Pro2 since it joined the Alkane group on 19 September 2003, and £655,000 was attributable to the original Alkane business. The operating loss before exceptional items was £1,415,000 (2002: £1,253,000). Losses narrowed to £335,000 (2002: £765,000) in the second half. Pro2 contributed an operating profit of £597,000 in the period from 19 September, a very encouraging initial contribution. Both sales and profits from Pro2 in this period reflect the nature of the business which is significantly weighted to the second half of the year. Pro2's business continued to grow with year on year sales increasing by 22%. Sales in the UK were £655,000 (2002: £995,000), the reduction largely relating to the effect of the decline in wholesale electricity prices. An exceptional charge of £19,670,000 has been made. As reported in the interim results announcement, this arises from the suspension of UK CMM development, which required a write down of the carrying value of the fixed asset portfolio of £16,926,000. £2,000,000 has been provided for the costs of restoration of the fully and partially developed site portfolio. The remaining £744,000 relates to the costs of the redundancy programme and other restructuring costs. A tax charge of £117,000 (2002: nil) was incurred despite recording a group loss as the UK losses cannot be offset against profits in Pro2. The cash position remains strong at £8,757,000 (2002: £14,125,000). The consolidation of Pro2 brings into our balance sheet a bank loan of £368,000 and asset finance debt of £2,525,000. Asset finance will increase as both the UK business and Pro2 continue to develop the contracting side of the group's business. Operational Reviews Since the incorporation of Pro2 into the group, both the UK and European businesses have begun to develop in line with our revised strategy. Pro2 Pro2 designs and manufactures gas utilisation/power generation equipment for sale to a range of specialist green energy markets, as well as providing after sales support services. Pro2 employs 69 people and operates principally across Europe with its main market in Germany. The company operates in markets which are regulated by stringent environmental legislation aimed at reducing greenhouse gas emissions and thus driving the methane capture and utilisation industry forward. The EU market for electricity generated from landfill gas, sewage gas and biogas is growing rapidly with capacity forecast to increase from 1,500MW in 2001 to 4,000MW in 2010 (source: Frost & Sullivan 2003). These sources of methane together with CMM are mitigated by Pro2's climate change reduction technology, which can be divided into four main product areas; methane capture, utilisation as a fuel, disposal and treatment. From these activities, Pro2 derives three income streams: •Plant sales In 2003, plant sales incorporating the design, construction, planning and installation of various methane capture, utilisation, disposal and treatment plants, accounted for approximately 70% of Pro2's turnover. Typically these plant sales have the potential for a follow on service contract in the region of 5-10% p.a. of the original sales value. •Service, maintenance and monitoring The after-sales customer service package represented 12% of Pro2's turnover in 2003 and covers: - individual maintenance and servicing agreements from monthly maintenance contracts through to complete operational management of installed plant on behalf of customers - online plant control which allows Pro2 to operate remote diagnosis and maintenance of every plant, 24 hours a day • Contracting The contracting side of the Pro2 business contributed around 18% to its turnover in 2003. This enables Pro2 to participate in the profits from individual projects. Pro2 currently has 26 contracting projects operating under this scheme with a total generation capacity of 14.5MW. The intention is to improve Pro2's sales mix by increasing the proportion of sales derived from the higher margin contracting and service aspects of the business. CMM projects in Germany Alkane's first German CMM project at Joarin, which was announced last March, is progressing well and is estimated to become operational in the third quarter of 2004. The generation facility will be of 2.7MW capacity and will be the first project where Alkane will generate and sell the electricity. Pro2 will supply the extraction and generation equipment to Alkane, and A-TEC Anlagentechnik GmbH (A-TEC) has supplied the licences and will be paid a fee from the project's profits. The total cost of the project to Alkane is expected to be approximately €1.9 million (£1.3m). Under the German Renewable Energy law the electricity generated at the site will have a guaranteed premium price of approximately £47/ MWh and the local network operator has an obligation to connect the plant to its grid and to purchase the electricity. Alongside the investment in Pro2, Alkane has entered 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. Two of these projects are in the planning and investigation phase and if found to be viable, are expected to be brought into operation in 2005. CMM projects in the UK The four operational CMM sites produced gas in 2003 and are overall cash generative and profitable. Alkane has a portfolio of sites in various stages of development which can be reactivated if and when the economics, driven by legislation, change in the company's favour. As previously announced, the company is reviewing its licences and has so far relinquished 571 km2 of peripheral area. This will save underlying costs to the group of £60,000 per annum, partly offsetting increasing rental rates. Further to the announcement in the preliminary results for 2002, the economic situation for electricity generation in the UK remains unfavourable. The Government while continuing to issue statements of support for the industry has not yet introduced any viable financial support. Consequently the company's UK site development programme remains on hold. Alkane still awaits the findings of the Government's study assessing the options and support mechanisms for the UK CMM industry. ACMMO continues to lobby the Government to recognise the obvious safety and environmental benefits of including CMM in a green energy support system similar to that in place for landfill and sewage methane. Other UK activities In the medium term Alkane continues to look for opportunities to enter the UK landfill gas, sewage gas and biogas markets and is in early stage discussions with several potential partners. Through synergies with Pro2, Alkane has the expertise, experience and technology to successfully compete in these markets, coupled with the capital needed to fund projects. Methane from landfill sites, sewage digesters and biogas plants has the benefit of already being included in the Renewables Obligation that allows the trading of Renewable Obligation Certificates (ROCs), which currently sell at about £47/MWh. Emissions Trading The EU Emissions Trading Scheme (ETS) starts with the pilot phase from 2005-2008 and the full Kyoto Commitment phase from 2008-2012. This opens up the possibility of selling carbon emissions reduction certificates from CMM capture at abandoned coal mines. Methane is due to be included in the EU ETS in 2008. As an example, a 1MW CMM generation plant can typically mitigate methane emissions by the equivalent of 29,000 tonnes p.a. of carbon dioxide. Carbon dioxide emissions allowances are currently trading at around €12/tonne. The German Government has indicated a willingness to support the trading of carbon emissions reduction certificates from German CMM projects. Prospects Alkane was pleased to announce in its trading statement on 15 January 2004 that Pro2 has started 2004 with its strongest ever order book, which together with sales made to date is currently at 68% of its full year sales target. Given the significant impact that the Pro2 contribution will have on the group, the Directors are now confident that Alkane's breakeven point can be brought forward. Alkane intends to further exploit Pro2's technical expertise by pursuing new business activities across Europe within the expanding market for the reduction of greenhouse gas emissions. GROUP PROFIT AND LOSS ACCOUNT for the twelve months ended 31 December 2003 2003 2002 (unaudited) --------------------- -------- Continuing Acquisition of Total operations Pro2 £ '000 £ '000 £ '000 £ '000 TURNOVER 655 6,615 7,270 995 Cost of sales (583) (4,338) (4,921) (890) -------- -------- --------- -------- GROSS PROFIT 72 2,277 2,349 105 Administrative (2,165) (1,675) (3,840) (1,365) expenses Other operating income 81 (5) 76 7 -------- -------- --------- -------- OPERATING (LOSS)/ (2,012) 597 (1,415) (1,253) PROFIT EXCEPTIONAL ITEM (19,670) - (19,670) - -------- -------- --------- -------- LOSS ON ORDINARY (21,682) 597 (21,085) (1,253) ACTIVITIES BEFORE INTEREST Interest receivable and 429 - 429 686 similar income Interest payable and - (47) (47) - similar charges -------- -------- --------- -------- LOSS ON ORDINARY (21,253) 550 (20,703) (567) ACTIVITIES BEFORE TAXATION Taxation (117) - --------- -------- LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (20,820) (567) --------- -------- Minority Interests (207) - --------- -------- LOSS FOR THE FINANCIAL (21,027) (567) YEAR ACCUMULATED LOSSES BROUGHT FORWARD (2,385) (1,818) --------- -------- ACCUMULATED LOSSES CARRIED FORWARD (23,412) (2,385) ========= ======== Loss per ordinary share (23.45p) (0.63p) - basic and diluted STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 2003 2002 (unaudited) £ '000 £ '000 Loss for the financial year (21,027) (567) Exchange rate differences 9 - --------- ---------- Total recognised gains and losses relating to the (21,018) (567) year ========= ========== GROUP BALANCE SHEET as at 31 December 2003 2003 2002 (unaudited) £'000 £'000 FIXED ASSETS Intangible assets 729 - Tangible fixed assets - gas properties 487 17,179 Tangible fixed assets - other 3,514 250 Investments 157 - ---------- ---------- 4,887 17,429 ---------- ---------- CURRENT ASSETS Stocks 2,486 15 Debtors: amounts falling due within one year 4,589 605 Debtors: amounts falling due after more than one 517 - year Investments 29 - Cash at bank and in hand 8,757 14,125 ---------- ---------- 16,378 14,745 CREDITORS: amounts falling due within one year (6,088) (888) ---------- ---------- NET CURRENT ASSETS 10,290 13,857 ---------- ---------- TOTAL ASSETS LESS CURRENT LIABILITIES 15,177 31,286 CREDITORS: amounts falling due after one year (2,105) (277) PROVISIONS FOR LIABILITIES AND CHARGES (2,000) - MINORITY INTERESTS (1,079) - ---------- ---------- NET ASSETS 9,993 31,009 ========== ========== CAPITAL AND RESERVES Called up share capital 448 448 Share premium account 32,948 32,946 Profit and loss account (23,403) (2,385) ---------- ---------- TOTAL EQUITY SHAREHOLDERS FUNDS 9,993 31,009 ========== ========== GROUP STATEMENT OF CASHFLOWS for the twelve months ended 31 December 2003 2003 2002 (unaudited) £ '000 £ '000 NET CASH OUTFLOW FROM OPERATING ACTIVITIES (3,736) (1,143) RETURNS ON INVESTMENT AND SERVICING OF FINANCE Interest received 434 713 Interest paid (13) - Interest element of finance lease rental payments (33) - -------- -------- 388 713 TAXATION Corporation tax (116) - CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Payment to acquire intangible assets (108) - Payments to acquire tangible fixed assets - gas (866) (6,515) properties Payments to acquire tangible fixed assets - other (756) (52) Receipts from the sale of tangible fixed assets - 48 - other Payments to acquire investments 4 - Receipt of grant - 192 -------- -------- (1,678) (6,375) ACQUISITIONS AND DISPOSALS Purchase of subsidiary undertaking (1,644) - Net debt acquired with subsidiary undertaking (728) - -------- -------- (2,372) - EXCEPTIONAL ITEM Head office reorganisation costs (744) - -------- -------- NET CASH OUTFLOW BEFORE FINANCING (8,258) (6,805) FINANCING Repayment of overdraft (222) - Repayment of long term loans (24) Increase in capital element of finance lease rental 421 - contracts Issue of ordinary share capital 2 - -------- -------- DECREASE IN CASH (8,081) (6,805) ======== ======== RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS 2003 2002 (unaudited) £ '000 £ '000 Decrease in cash (8,081) (6,805) Repayment of overdraft 222 - Repayment of long term loans 24 Increase in capital element of finance lease (421) - contracts --------- --------- CHANGE IN NET funds ARISING FROM CASH FLOWS (8256) (6,805) Exchange differences (5) - --------- --------- MOVEMENT IN NET FUNDS (8,261) (6,805) NET funds AT 1 JANUARY 14,125 20,930 --------- --------- NET funds AT 31 DECEMBER 5,864 14,125 ========= ========= NOTES TO THE STATEMENT OF CASH FLOWS A RECONCILIATION OF OPERATING LOSS TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES 2003 2002 (unaudited) £ '000 £ '000 Operating loss (1,415) (1,253) Depreciation 382 208 Amortisation 18 31 Decrease/(increase) in stock 2,861 4 Decrease/(increase in debtors (2,850) 19 (Decrease)/increase in creditors (2,732) (152) --------- --------- NET CASH OUTFLOW FROM OPERATING ACTIVITIES (3,736) (1,143) ========= ========= B ANALYSIS OF NET FUNDS At 1st Foreign January Cash flow exchange At 31 December 2003 difference 2003 (unaudited) (unaudited) (unaudited) £ '000 £ '000 £ '000 £ '000 Cash at bank and in 14,125 (5,388) 20 8,757 hand Overdraft - 2 (2) - -------- --------- -------- --------- 14,125 (5,386) 18 8,757 Long term loans - (365) (3) (368) Finance leases - (2,505) (20) (2,525) -------- --------- -------- --------- 14,125 (8,256) (5) 5,864 ======== ========= ======== ========= GENERAL NOTES 1 The preliminary unaudited financial statements for the year ended 31 December 2003 were approved by the board of directors on 23 March 2004. 2 EXCEPTIONAL ITEM - FUNDAMENTAL RESTRUCTURING 2003 2002 (Unaudited) £'000 £'000 a. Impairment of tangible fixed assets - gas (17,045) - properties b. Deferred grant income written back 278 - c. Provision for the restoration of sites (2,000) - d. Impairment of tangible fixed assets - other (159) - e. Other head office reorganisation costs (744) - --------- ---------- (19,670) - ========= ========== During the year 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; Deferred grant income received in relation to a development site has been released in line with the write off; Provision has been made for the restoration of all sites as required under the terms of planning permissions or under lease conditions; Other tangible assets which are no longer used have been written off; and Other head office costs including redundancy payments and professional fees relating to the restructuring have been written off. 3. GOODWILL The goodwill arising on the acquisition of Pro2 Anlagentechnik GmbH on 19 September 2003 was £729,000, which after amortisation has a net book value of £711,000 at 31 December 2003. This figure is included in the Balance Sheet within intangible fixed assets. 4 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 2002 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 2003 will be sent to shareholders during April 2004 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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