Final Results

Alkane Energy PLC 22 March 2006 For immediate release 22 March 2006 Alkane Energy plc ('Alkane', 'the Group' or 'the Company') Unaudited preliminary results for the year ended 31 December 2005 Alkane is an international renewable energy company specialising in the design, build, operation and servicing of methane treatment plants and electricity generation facilities that use biogas, landfill gas, coal mine methane and sewage gas as fuel. Highlights • Turnover marginally lower at £19,585,000 (2004: £19,785,000) • Substantial reduction in operating losses before exceptional items to £244,000 (2004: loss of £753,000) • Loss before taxation, exceptional items and sale of fixed assets of £427,000 (2004: loss of £655,000) • Cash inflow from operating activities of £369,000 (2004: outflow of £261,000) • Net debt of £2,133,000 (2004: net funds of £2,617,000) • Three new CMM projects commenced electricity supply in 2005 • Electricity supply contracted at over £50/MWh • Strong macro-economic and political support for Group strategy • Loss per share 0.22p (2004: loss of 0.80p) Commenting on the preliminary results, Chief Executive, Dr Cameron Davies, said: 'Whilst we are disappointed that our move into profitability has been deferred, significant progress is expected to be made on a number of fronts in 2006. High energy prices prevail across all our markets, underpinning Alkane's business model, both as a power generator and equipment supplier. 'With Pro2's order book standing at record levels and the expected roll-out of at least two further mine gas sites in the UK by the year end, we are confident that 2006 is the year we finally achieve our move into profitability and we are taking concrete steps to ensure that this is achieved for the benefit of all shareholders'. Enquiries: Alkane Energy plc Tel: 020 7466 5000 (Today) Dr Cameron Davies Tel: 01623 827927 (Thereafter) Buchanan Communications Tel: 020 7466 5000 (Today) Eric Burns Tel: 01943 883990 (Thereafter) Ben Willey Chairman's Statement Introduction As reported in our trading update of 6 March 2006, a combination of factors encountered in the final quarter means that results for the year ended 31 December 2005 are lower than expectations. As a result, our target date of operating profitability has been pushed back from 2005 to 2006. Whilst this is disappointing, the Company continued to make good progress at an operational level with three new borehole-based mine gas generation projects brought on stream in the UK and a number of new contracts secured at Pro2 in Germany. The medium term future for Alkane remains positive, underpinned by high energy prices in the UK and growing markets for our generation and methane control equipment worldwide, particularly in the biogas and carbon credits sectors. Financial Overview Turnover was marginally down at £19,585,000 compared to £19,785,000 in 2004. The Group made an operating loss before exceptionals of £244,000 (2004: £753,000); after exceptional items and sales of fixed assets the profit was £353,000 (2004: loss of £382,000). Turnover in the UK, mainly from the Group's seven mine gas plants, was £2,131,000 (2004: £699,000) with an operating loss of £661,000 before exceptionals (2004: loss of £1,598,000). Pro2's sales in 2005 were below budget at £17,454,000 (2004: £19,086,000); although at the year end Pro2 had capitalised plant manufactured in the year with a value of £2.4m and had increased work in progress by £1.6m both in relation to sales contracts substantially but not legally completed in the year. Pro2's operating profits before exceptionals were £417,000 for 2005 (2004: £845,000) after warranty costs and provisions against trade debtors of £303,000. There are two operating exceptional items. The first relates to those sites where there have been operating difficulties during the year which were reviewed for their carrying value and an impairment charge of £524,000 has been made to reflect their future revenue earning capacity. The second operating exceptional item relates to the UK biogas business. The land acquisition difficulties encountered at the proposed biogas facility in Northern Ireland, reported in the interim results announcement last September, have led to the Company taking the decision to withdraw from this sector. Accordingly, £249,000 has been written off reflecting our investment in the Fivemiletown project and associated redundancy costs. There are two non-operating exceptional items which relate to the significant improvement in UK energy prices over the past year. In 2003, the Company wrote off a significant proportion of its partially developed UK gas properties, and made a provision of £2.0m for the full costs of restoring the sites over the next two years. We are now moving ahead with the development of projects and, as a result, a conservative write back of £967,000 has been made against the projects opened in 2005. The restoration provision has been reduced by £378,000 by applying a discount factor to recognise the longer period, up to 2015, over which the provision will be utilised. Loss before taxation, exceptional items and sale of fixed assets was £427,000 compared with a loss of £655,000 in 2004. The loss per share was reduced to 0.22p, from 0.80p in 2004. The Pro2 business is strongly biased towards the end of the year. Group funds of €3,000,000 (£2,057,000) were applied in December 2005 to support the working capital requirements arising from this seasonality and to support the production of plant for use in the contracting business. This working capital flow is expected to reverse in the first half of 2006 as Pro2's working capital demand returns to normal following the trading peak at the end of 2005. As previously reported, this demand on Group funds has meant investment in new UK mine gas developments have been delayed and management have reduced their budgets for 2006. The Group's underlying operations have been cash generative both in the UK and at Pro2. However, overall, there has been a net cash outflow of £4,347,000 and we finished the year with net debt of £2,133,000, compared with net cash of £2,617,000 as at 31 December 2004. The majority of this outflow has stemmed from the acquisition of tangible fixed assets. In the UK, there has been a cash outflow of £2,407,000, mainly in relation to the new mine gas plants developed during the year. At Pro2, cash outflow to acquire tangible fixed assets was £2,668,000, the majority of which relates to the costs of certain plant manufactured in the year and which has been capitalised. Operating Review Mine Gas Plants We started the year with four mine gas extraction sites, of which three were operational. Whilst some of the sites encountered operational issues, the overall level of output was in line with expectations of a portfolio of this nature. Three new mine gas power generation plants were completed and commenced production during the year, drawing methane from boreholes. The gas quality from boreholes is considerably higher than from mine shafts. Electricity prices at these sites are contracted for 12 to 20 months at above £50/MWh, including income from climate change levy exemption certificates. The overall portfolio of UK sites is performing satisfactorily in the current year. The borehole based sites are a more reliable source of high quality mine gas and we intend to adopt this approach in future developments. Two more borehole-based plants are expected to come on stream in the second half of 2006 and planning permissions and land leases are being negotiated to allow an increase in the project build rate. The generating plant portfolio is being expanded to benefit from capturing the full value chain from mine to grid and so that any fall in gas production at one site can be offset at other sites. Alkane's licence areas are being thoroughly reviewed to determine the availability of mine gas reserves that are economic and have short payback periods at forecast electricity prices. Research into planning permissions, land ownership and grid connection availability has commenced at sites within our licences. These future borehole based power generation plants have the potential to significantly add to our UK electricity generation portfolio. German CMM Rising mine water at the Joarin mine has reduced the flow of good quality mine gas and a decision has been taken to move one of the 1.35MW containerised generators to the UK for use on a new mine gas site. The plant is now generating at around 1.35MW with an electricity price of €65/MWh (approximately £45). Alkane has options over seven other mine gas sites in Germany, however, wells drilled at two of them to date (at no cost to Alkane) were disappointing. The development programme is being reviewed in the light of higher electricity prices and tax losses available in the UK. Pro2 As announced on 6 March 2006, Pro2 finished the financial year below budget. Also, as previously reported, sales and profits from Pro2 are historically weighted to the second half of the year and revenue is not recognised until the company receives a final sign off from the customer. During the latter part of 2005, certain large orders did not receive final sign off by the end of the financial year - thus leading to the shortfall in reported revenue and profits against expectations. As illustrated by the increase in stock, work in progress at Pro2 was £2.2 million at the year end compared to £0.6 million in 2004. These specific orders will be recognised in the first half of the current year. In addition, the results in the second half were adversely affected by one-off warranty claims and provisions against trade debtors. Pro2 is actively pursuing counter claims against the original manufacturer of equipment relating to the warranty claims and payment of the unpaid debtors. Orders for 2006 are already at record levels, driven by the renewable energy sector with new emphasis on the use of farmed biomass to produce biogas for renewable electricity generation at high premium prices up to €210/MWh. Pro2 has targeted this new sector in partnership with biogas equipment manufacturers and offers a one-stop-shop for biomass to renewable energy. In view of the premium price tariff paid for the electricity, farmers and agribusinesses are expanding the crops planted specifically for bio-energy production. Pro2's sales in this market grew rapidly in 2005 and this trend is expected to continue. Under German renewable energy legislation, the 20 year fixed contract price for renewable electricity falls by 1.5% on January 1 of every year. As a result, customers order large numbers of these plants in the last quarter of the year. To react to this demand for new biogas plants to generate electricity before the deadline, Pro2 expanded its production to two shifts in December. Pro2 sold its first containerised power generation plants in Hungary during the year and began to market its climate change reduction systems in the burgeoning carbon credits sector. In the second half it succeeded in selling its first flare systems to mine gas mitigation projects under the Joint Implementation programme of the Kyoto Protocol. Alkane Biogas Local opposition encountered in Northern Ireland by the partners in the proposed grant-supported centralised biogas plant at Fivemiletown has led to the cancellation of the project. As a result, the Company has decided to withdraw from the biogas sector in the UK, and has written off £249,000 reflecting our investment in the Fivemiletown project and redundancy costs. Pro2 Services Limited Pro2 Services, the engineering services company acquired in March 2005, has secured its first contracts for methane mitigation equipment and services. It is developing its engineering capability in order to take over currently outsourced servicing operations at Alkane's own gas extraction and power generation plants. Management We recognise the importance of having strong processes in place to match the anticipated future growth of the business. To this end, we have appointed an experienced interim manager who is responsible for a review of the business model and processes within Pro2, including financial reporting. As the Group develops, we are taking measures to bolster the management team and implement succession planning. Prospects We made considerable operational progress in 2005 despite the issues that deferred our anticipated move into profit until 2006. Global markets for climate change reduction technology and services continue to grow and high energy prices in the UK support the expansion of our mine gas portfolio. In addition, the global carbon credits market is accelerating rapidly and is expected to become an attractive market for Alkane in the future. We are actively pursuing opportunities to exploit our skills and technology in this area under the Clean Development Mechanism and Joint Implementation programmes. In closing, I would like to thank my colleagues in the UK and Germany for all their hard work and dedication in moving the Company towards a profitable future. John Lander Chairman GROUP PROFIT AND LOSS ACCOUNT for the year ended 31 December 2005 2005 2004 (unaudited) £ '000 £ '000 TURNOVER 19,585 19,785 Cost of sales (14,028) (14,910) -------- -------- GROSS PROFIT 5,557 4,875 Administrative expenses - operating (6,395) (6,041) Administrative expenses - exceptional (Note 2) (773) - -------- -------- (7,168) (6,041) Other operating income 594 413 -------- -------- OPERATING LOSS (1,017) (753) Profit on sale of fixed assets 25 371 Exceptional items (Note 2) 1,345 - -------- -------- PROFIT/ (LOSS) ON ORDINARY ACTIVITIES BEFORE INTEREST 353 (382) Interest receivable and similar income 214 430 Interest payable and similar charges (397) (332) -------- -------- PROFIT/ (LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION 170 (284) Taxation (225) (267) -------- -------- LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (55) (551) Minority interests (140) (163) -------- -------- LOSS FOR THE FINANCIAL YEAR (195) (714) ======== ======== Loss per ordinary share - basic and diluted (0.22p) (0.80p) STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 2005 2004 (unaudited) £ '000 £ '000 Loss for the period (195) (714) Exchange rate differences (73) (2) -------- -------- TOTAL RECOGNISED GAINS AND LOSSES (268) (716) ======== ======== GROUP BALANCE SHEET at 31 December 2005 2005 2004 (unaudited) £'000 £'000 FIXED ASSETS Intangible assets 793 873 Tangible fixed assets - gas properties 4,997 2,674 Tangible fixed assets - other 5,706 4,293 --------- -------- 11,496 7,840 --------- -------- CURRENT ASSETS Stock 3,427 1,505 Debtors: amounts falling due within one year 6,268 6,349 Debtors: amounts falling due after more than one year 393 258 Investments 164 30 Cash at bank and in hand 2,090 5,716 --------- -------- 12,342 13,858 CREDITORS: amounts falling due within one year (8,785) (6,645) --------- -------- NET CURRENT ASSETS 3,557 7,213 --------- -------- TOTAL ASSETS LESS CURRENT LIABILITIES 15,053 15,053 CREDITORS: amounts falling due after more than one year (2,976) (2,665) PROVISIONS FOR LIABILITIES AND CHARGES (1,602) (1,998) MINORITY INTERESTS (1,217) (1,104) --------- -------- NET ASSETS 9,258 9,286 ========= ======== CAPITAL AND RESERVES Called up share capital 456 449 Share premium account 33,189 32,956 Profit and loss account (24,387) (24,119) --------- -------- TOTAL EQUITY SHAREHOLDERS' FUNDS 9,258 9,286 ========= ======== GROUP STATEMENT OF CASH FLOWS for the twelve months ended 31 December 2005 2005 2004 (unaudited) £ '000 £ '000 NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES 369 (261) RETURNS ON INVESTMENT AND SERVICING OF FINANCE Interest received 249 405 Interest paid (71) (121) Interest element of sale and finance leaseback rentals (88) - Interest element of finance lease payments (269) (93) -------- -------- (179) 191 TAXATION Overseas tax paid (248) (84) CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Payments to acquire intangible fixed assets (27) (8) Payments to acquire tangible fixed assets (5,126) (2,946) Receipts from the sale of tangible fixed assets 213 695 -------- -------- (4,940) (2,259) MANAGEMENT OF LIQUID RESOURCES Increase in current asset investment (135) - ACQUISITIONS AND DISPOSALS Purchase of subsidiary undertaking (80) (162) Net cash acquired with subsidiary undertaking 3 149 -------- -------- (77) (13) -------- -------- NET CASH OUTFLOW BEFORE FINANCING (5,210) (2,426) FINANCING Proceeds from sale and finance leaseback 1,644 - Increase in long term loans 30 - Sale and leaseback rental payments (418) Repayment of long term loans (50) (48) Capital element of finance lease rental payments (584) (573) Issue of ordinary share capital 241 8 -------- -------- DECREASE IN CASH (4,347) (3,039) ======== ======== NOTES TO THE ACCOUNTS 1. The preliminary unaudited financial statements for the year ended 31 December 2005 were approved by the board of directors on 21 March 2006. 2. EXCEPTIONAL ITEMS 2005 2004 (unaudited) £ '000 £ '000 Operating: Impairment of tangible fixed assets - gas properties (note a) (524) - Write-down of advances made (note b) (249) - --------- -------- (773) - ========= ======== Non-Operating: Reversal of impairment of tangible fixed assets - gas properties (note a) 967 - Reassessment of provision for the restoration of sites (note c) 378 - --------- -------- 1,345 - ========= ======== a. During 2003 a fundamental restructuring of the business was implemented following the decision taken by the Group to suspend the development of new mine gas projects in the UK and to pursue a new strategy. UK development sites were written down to nil. Operating sites were written down to reflect their value in use. This was determined using a discounted cash flow model applying a discount rate of 10% reflecting the expected return on capital of such projects. As a result of sustained increases in wholesale electricity prices the development of new mine gas projects in the UK recommenced in 2005. Accordingly a review has been taken of sites in operation at 31 December 2005 and a further calculation made of their value in use over their expected useful life of up to 10 years, applying a discount rate of 10%. This has resulted in a £967,000 reversal of the previous impairment and a further impairment of £524,000 within fixed assets - gas properties. b. During the year the development of a potential biogas project in Fivemiletown in Northern Ireland was halted after a failure to secure land and planning permission, and the Group withdrew from the development of large-scale biogas projects. The costs written off during the year were £249,000 representing the amount adcanced by Alkane Biogas Limited, a subsidiary undertaking, to Biogas Ireland Limited, together with other costs associated with the withdrawal. c. As part of the fundamental reorganisation referred to in note a. a provision of £2,000,000 for the restoration of all sites as required under the terms of planning permissions or under lease conditions was established. It was anticipated that most of the provision would be utilised within the next two financial years, therefore the amount of the provision was not discounted. As stated in note a. the development of new mine gas projects in the UK recommenced in 2005. Accordingly the timing of the utilisation of the provision has been extended to be over the period up to 2015. It is now appropriate that discounting is applied. The provision has been reassessed taking account of utilisation to date and new sites added, and a discount rate of 10% has been applied. The amount of the provision on this basis is £1,588,000. 3. ACQUISITION OF PRO2 SERVICES LIMITED On 18 March 2005 Alkane Energy UK Limited, a wholly owned subsidiary, acquired 100% of the issued share capital of Farley (Energy) Services Limited (Farley) for a cash consideration of £90,000 and professional fees incurred of £10,000. £20,000 of the consideration was paid after the year-end and is included within creditors at 31 December 2005. Farley had net assets of £20,000 at the date of acquisition. No fair value adjustments have been made to the net assets acquired, therefore goodwill arising on the acquisition is £80,000, which after amortisation has a net book value of £74,000 at 31 December 2005. Farley has been renamed Pro2 Services Limited. 4. LOSS PER SHARE The basic and diluted loss per ordinary share is based on a loss of £195,000 (2004: loss of £714,000) on a weighted average of 90,424,387 ordinary shares (2004: 89,732,717). 5. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 2005 2004 (unaudited) £ '000 £ '000 Decrease in cash (4,347) (3,039) Proceeds from sale and finance leaseback (1,644) - Increase in long term loan (30) - Repayment of sale and finance leaseback rentals 418 - Repayment of long term loans 50 48 Capital element of finance lease rental payments 584 573 Purchase of liquid resources 135 - ---------- -------- CHANGE IN NET DEBT ARISING FROM CASH FLOWS (4,834) (2,418) Finance leases entered into - (1,046) Exchange rate differences 84 (7) ---------- -------- CHANGE IN NET DEBT (4,750) (3,471) NET FUNDS AT START OF YEAR 2,617 6,088 ---------- -------- NET (DEBT)/FUNDS AT END OF YEAR (2,133) 2,617 ========== ======== 6. RECONCILIATION OF OPERATING LOSS TO NET CASH FLOW FROM OPERATING ACTIVITIES 2005 2004 (unaudited) £ '000 £ '000 Operating loss (1,017) (753) Exceptional items - operating 773 - Depreciation 1,442 920 Amortisation 186 109 (Increase)/decrease in stock (1,965) 987 Increase in debtors (388) (1,627) Increase/(decrease) in creditors 1,370 105 Decrease in provisions (32) (2) -------- -------- NET CASH OUTFLOW FROM OPERATING ACTIVITIES 369 (261) ======== ======== 7. ANALYSIS OF NET DEBT As at Exchange As at 1st Cash rate 31 January flow differences December 2005 2005 (unaudited) £ '000 £ '000 £ '000 £ '000 Cash at bank and in hand 5,716 (3,621) (5) 2,090 Overdraft (3) (726) - (729) -------- --------- -------- -------- 5,713 (4,347) (5) 1,361 Liquid resources 29 135 - 164 Sale and finance leaseback - (1,226) - (1,226) Long term loans (322) 20 10 (292) Finance leases (2,803) 584 79 (2,140) -------- --------- -------- -------- 2,617 (4,834) 84 (2,133) ======== ========= ======== ======== 8. GENERAL NOTE 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 2004 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 and accounts for the year ended 31 December 2005 will be sent to shareholders during April 2006 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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