Interim Results

RNS Number : 2485R

Alkane Energy PLC

10 September 2014

 



10 September 2014

Alkane Energy plc

Unaudited interim results for the half year to 30 June 2014

Alkane Energy plc ("Alkane" "the Group" or "the Company") (AIM: ALK) the independent gas to power producer, today announces its unaudited interim results for the six months ended 30 June 2014.

Operational Highlights

·      Transformational period with installed capacity increased by 69%

·      On track to reach 100MW power response capacity by H1 2015

·      Completion of sealing works at Maltby

·      Successful acquisition of Wheldale STOR facilities and completion of Egdon shale transaction

·      Acquisition of three power response sites (49MW) from Carron Energy post period end

Financial Highlights

·      Revenue of £7.1m and adjusted EBITDA of £2.5m, owing to anticipated reduction in DBO business

·      Group PBT of £7.3m (H1 2014: £1.0m) owing to exceptional items

·      Adjusted PBT of £529k (H1 2013: £1,421K) reflecting reduced DBO activity

·      Adjusted EPS of 0.43p per share (H1 2013: 1.43p per share)

·      On track to meet full year expectations

Commenting on the interim results, Chief Executive Officer, Neil O'Brien, said:

"This has been a transformational period for Alkane. We have invested for the future and completed important transactions positioning the business for further long term growth. We have also enhanced our power response capacity by more than 150%, providing Alkane with a broader and more balanced generating portfolio and giving scale to a business with exceptional growth opportunities.

Our shale business transaction with Egdon Resources means that we continue to be well positioned to benefit from potential upside from the development of shale gas in the UK while remaining focused on our core business.

With the deterioration in UK generating capacity, Alkane has the expertise and assets in place to capitalise on the opportunities arising from this situation.  We are confident that 2014 will be another year of progress for the Group."

For more information please contact:

Alkane Energy plc Neil O'Brien, Chief Executive Officer Steve Goalby, Finance Director	01623 827927
Liberum Capital Limited Clayton Bush Tim Graham	020 3100 2000
VSA Capital Limited Andrew Raca	020 3005 5004
Hudson Sandler Nick Lyon Alex Brennan	020 7796 4133

Background information

Alkane is one of the UK's fastest growing independent power generators. The Company operates mid-sized "gas to power" electricity plants providing both base load and fast response capacity to the grid. Following the recently announced acquisition of three power response sites from Carron Energy Limited and Dragon Generation Limited, Alkane has a total installed generating capacity of 140MW and an electricity grid capacity of 160MW.

Alkane's base load operations, where power is generated 24/7, are centred on a portfolio of coal mine methane ("CMM") sites. Alkane has the UK's leading portfolio of CMM licences, enabling the Company to extract gas from abandoned coal mines.

As CMM declines at any one site, Alkane retains valuable generating capacity and a grid connection which can be redeployed to power response. Power response sites are connected to mains gas and produce electricity at times of high electrical demand through peak running, or in order to balance the electricity grid through participation in the National Grid's short term operating reserve programme ("STOR"). Participants in STOR are paid premium rates when called upon by the Grid to meet temporary supply shortages. Alkane now operates 93MW of power response, one of the UK's largest power response businesses, with contracted revenues extending out to 2025.

The Group operates from 27 mid-size (up to 25MW) power plants across the UK, 15 CMM only, 8 mains gas only, 3 using both fuel sources and 1 using kerosene only. Alkane uses standard modular reciprocating engines to generate the electricity and sells this power through the electricity network. The engine units and other plant are designed to be flexible and transportable allowing additional capacity to be brought onto growing sites and underutilised plant to be moved to new sites to maximise efficiency.

Alkane transferred in June 2014 its shale gas interests to Egdon Resources plc.  Alkane received 40m Egdon shares making us the largest shareholder in Egdon, a significant player within the UK shale industry.

Alkane has a range of core skills encompassing the entire project development cycle including planning and permitting, sourcing plant and managing the build and commissioning stage. This has enabled Alkane to establish a design, build and operate ("DBO") business for third party clients in the biogas and oil & gas industries.

The Group has circa 800km² of acreage under various onshore Petroleum Exploration and Development Licences ("PEDLs").  

More information is available on our website www.alkane.co.uk

Summary 

The Board of Alkane Energy announces its interim results for the six months ended 30 June 2014.  It has been a transformational period for the Group with three significant corporate transactions completed this year together with on-going work on our organic project pipeline and running the existing fleet of engines. 

The transfer of our shale gas interests to Egdon Resources plc ("Egdon") completed in June was an important strategic agreement for Alkane. It will enable us to benefit from the potential upside not only from the development of shale gas in the UK but also from Egdon's conventional oil and gas exploration and production whilst we remain firmly focused on growing our core gas to power business.

Power response, which we only started in 2009, is growing strongly to form a substantial and complementary business alongside base load coal mine methane ("CMM").  With the acquisition of Wheldale from SSE plc in February and the three newest sites acquired in July from Carron Energy Limited and Dragon Generation Limited ("Carron Energy") we have reached 93MW of power response capacity, close to our stated objective of having 100MW in place by spring of next year. 

Our base load CMM operations have seen the completion of the planned work programme at the Maltby Colliery site, and whilst this disrupted production during Q2 this year we returned to full production at the end of June. 

The Group results include a one-off exceptional profit of £10.0m, net of costs, from the transfer to Egdon of the shale rights in 10 of our 21 licences.  We have also reviewed the carrying values of the gas assets held on all of our licences and concluded that it is appropriate to make an impairment charge of £3.2m.  The total of one-off items is an exceptional profit of £6.7m.

We are pleased to report that we have maintained our core business EBITDA margins at 44%.  As expected, revenue has fallen when compared with the same period last year at £7.1m (H1 2013: £11.1m)  This is principally due to a reduction of £3.6m in our design, build and operate business ("DBO") - the prior year comparative results included revenue of £2.9m from the one off contract for refurbishment work at Three Nooks Farm, Staffordshire.  In addition, as reported on 7 July 2014, electricity output in the period was 10% lower at 85GWh (H1 2013: 94GWh) as a result of the closure of the Maltby Colliery taking longer than planned.  EBITDA for the period was in line with expectations at £2.5m (H1 2013: £3.3m). 

Group profit before tax has increased to £7.3m (H1 2013: £1.0m) resulting in an earnings per share of 5.85 pence (H1 2013: 1.05 pence).  Excluding the profit on the transfer of shale interests and other exceptional items, adjusted profit before tax is £529k (H1 2013: £1,421k), with the principal reason for the decrease a reduction in profit from the DBO business.   H1 2013 included £1.0m profit from the one off Three Nooks contract.  Adjusted earnings per share is 0.43 pence (H1 2013: 1.43 pence).  

We remain on track to meet market full year expectations.

Corporate Activity

Wheldale Acquisition

In February, we acquired the Wheldale 7.5MW STOR facility from SSE plc for a consideration of £1.5m.  This transaction was funded by an increase in our bank facility and the operation has been successfully integrated into our power response operations.

Egdon Shale Transaction

In June, we completed the transfer of the shale rights in 10 of our licence areas to Egdon Resources plc.  The shale transaction has seen Alkane receive 40m Egdon shares making us the largest shareholder in Egdon, a significant player within the UK shale industry. We will continue to work in partnership with them in progressing both shale and CMM opportunities as well as looking at jointly bidding in the 14th Onshore Licensing Round which was announced by DECC on 28 July 2014.

Carron Energy Transaction

In July, post the half year, we acquired three power plants with a combined 49MW of installed capacity from Carron Energy for a consideration of £11.75m.  These operations will be integrated into our power response activities.  Two plants, with a combined capacity of 24MW, will adopt our normal "gas to power" running regime of winter evening peak load operation and participating in National Grid's Short Term Operating Reserve ("STOR") to cover the summer period and winter mornings.  The final site with a capacity of 25MW has a long term high value STOR contract with 11 years remaining, and is therefore committed to STOR throughout the year.

Production

Our base load generation is fuelled by CMM from 18 sites.  These sites are run 24/7 as this maximises cash flow and paybacks on the CMM development capital costs.  Where we have excess grid and engine capacity or where we can acquire assets effectively we run power response engines on bought-in mains gas.  The use of bought-in gas increases our costs per MWh, over the operating costs of CMM, but is still profitable where we achieve peak prices such as winter evenings and within STOR.

All our sites are remotely managed 24/7 by the central control based at Markham in Derbyshire.  We deploy a team of field technicians from Markham to provide operation and maintenance services to the fleet of engines.  This keeps our cost base low and response time as high as possible. 

Overall our installed capacity has reached 140MW (H1 2013: 81MW).  In the first half of the year our sites have delivered 85GWh (H1 2013: 94GWh).  This was a satisfactory performance given that production was disrupted at Maltby as the mine closure operation took place.

Number of operational sites	2009	2010	2011	2012	2013	H1 2014	2014 to date*
Base load CMM	8	10	11	16	18	18	18
Power response	1	2	2	7	7	8	11
Gas supply	2	2	2	1	1	1	1
Total	9	12	13	20	23	24	27
(note - total does not sum as some sites operate in more than one category)
Installed capacity	2009	2010	2011	2012	2013	H1 2014	2014 to date*
	MW	MW	MW	MW	MW	MW	MW
CMM	17	23	27	37	45	45	45
Power response	7	8	8	31	36	43	93
Gas supply (equivalent MW)	6	6	6	2	2	2	2
Total	30	37	41	70	83	90	140

*Includes the acquisition of three power response sites from Carron Energy in July 2014

CMM

The shaft sealing operations at Maltby, which was not within our control, was initially planned for 5 weeks but in the event took 13 weeks.  CMM base load output across the rest of the sites has been in line with management expectations and we are pleased to report that Maltby returned to full CMM production in June. We have seen a number of record production figures for total Group CMM production since this date.  In particular, current output from Maltby is ahead of expectations and we expect production in the second half to compensate for the delayed shaft sealing operations.

We continue to work on the drilling of new sites with one further drill expected in Yorkshire by the end of 2014.  Overall we are working as many as 10 potential sites at any one time to bring them through the permitting, planning, drill and build phases.

Power Response

Output from power response has increased in the period compared to H1 2013.  Our increased presence in the STOR market has resulted in higher output, despite lower overall demand from National Grid in the early months of 2014.  In H1 2014 Alkane supplied between 2.5%-3% of STOR hours called by National Grid and this share should rise as the Carron Energy sites are included in our H2 figures.  We expect demand for STOR to increase as we move into a period of tighter generating margins and more intermittent plant is added to the system. 

Pricing

Average base load power prices achieved in the period were £55/MWh (H1 2013: £53/MWh).  Base load prices for the current year have been falling and we now expect to see a full year average base load price for 2014 of approximately £51/MWh, with 89% of our expected 2014 output already contracted at this average price.  We have 64% of expected base load output in 2015 contracted at an average price of £52/MWh.  Whilst these appear, on the surface, relatively stable prices there are significant pressures in the market.  Last year's mild winter, increasing LNG deliveries to European markets and stronger sterling have a depressing impact on prices.  However the situation in the Middle East, Ukraine and the loss of generating capacity in the UK market all increase pressure on prices. 

As the Group increases the scale of the power response business then the wholesale base load selling price only tells part of the story.  Our STOR running profitability has benefited from "spark spread" margin improvement reflecting lower gas prices.  At our 25MW Leven site, acquired from Carron Energy in July 2014, we have an inflation-proofed contract giving circa £1.2m availability payment per annum up to 2025.  In addition we are seeing payments from National Grid for winter peak running increasing by 17% and we aim to be attracting capacity payments in future years.  As a consequence of this shift in income streams, Alkane is less exposed to the pure wholesale energy price than was the case in previous years.

Design Build and Operate ("DBO")

As expected, we have seen a drop in the level of DBO activity as the one-off contract at Three Nooks Farm in Staffordshire ended last year.  We continue to work with onshore oil and gas and biogas operators to secure contracts for the installation of our standard "gas to power" plant, but expect lower revenue from this source in the second half of the year compared to the first six months.  

We retain our focus on building in areas which will offer us long term generation and ownership, and are reviewing a number of opportunities.  We aim to be selective in which projects we take on, ensuring that they remain within our skill set and do not overstretch our resources.

Finance

Revenue in the period was £7.1m (H1 2013: £11.1m).  Revenue in our core generation business was £6.0m (H1 2013: £6.4m), but there was an expected decrease in revenue from the DBO business to £1.1m (H1 2013: £4.7m).  Revenue last year included £2.9m of revenue from the one off contract for refurbishment work at Three Nooks Farm, Staffordshire.

Gross profit was £2.2m (H1 2013: £3.6m), with the gross margin held at 32%.  Operating profit was £7.6m, compared to £1.3m in H1 2013.  There are two exceptional items which have driven this increase in operating profit.  Firstly the net profit on the transfer of our shale gas interests to Egdon was £10.0m, with our shareholding being valued at £10.5m, against which we have charged associated costs of £0.5m.  Secondly we have reviewed the carrying values of the gas assets we hold on all of our licences and concluded that it is appropriate to make an impairment charge of £3.2m.  A further £0.1m of exceptional administrative expenses relates to the costs of corporate transactions, mainly the acquisition of three power responses companies that was completed in July.  Operating profit before these exceptional items was £0.9m compared to £1.7m in the first half of 2013, reflecting the reduction in DBO activity and lower output following the planned Maltby closure.

Our cost base remains tightly controlled. Administrative expenses before exceptional items were £1.5m (H1 2013: £1.9m). 

EBITDA was £9.3m (H1 2013: £3.0m) and profit before tax was £7.3m (H1 2013: £1.0m).  After adjustment for the exceptional items referred to above, EBITDA was £2.5m (H1 2013: £3.5m) representing a 36% margin (H1 2013: 31%) and profit before tax was £0.5m (H1 2013: £1.4m).

Earnings per share was 5.85 pence (H1 2013: 1.05 pence), and after adjustment for the exceptional items it was 0.43 pence (H1 2013: 1.43 pence).

Group cash flow generated an operating inflow of £1.3m (H1 2013: £2.6m) with capital expenditure of £3.0m compared to £8.5m in H1 2013 when the majority of the expenditure was in respect of the Maltby CMM assets purchase.

Net assets at 30 June 2014 stood at £40.7m (H1 2013: £31.2m) with a strong asset base in engine capacity, site infrastructure, grid capacity, and capitalised gas extraction costs (planning and drilling costs) and our significant investment in Egdon. Overall the Group net debt at 30 June 2014 was £12.4m (H1 2013: £8.6m) with gearing at 31% (H1 2013: 27%).  We have met all the bank covenant tests and in the period we have repaid a total of £3.4m in loan and lease repayments.

A dividend of 0.2 pence per share was paid in May 2014 (H1 2013: 0.1 pence per share).

Subsequent to the period end, on 21 July 2014 the Group acquired three power response companies from Carron Energy for a total consideration of £12.06m.  The acquisition was partly funded by a term loan of £5.5m provided by Lloyds Bank plc, repayable in monthly instalments over five years commencing in August 2014. The balance was financed by a proportion of the funds raised by a share placing. A total of £8.0m was raised by the issue of 22,222,222 new Ordinary Shares at a placing price of 36 pence per share. The balance of the funds raised in the placing will provide additional working capital to support the continued investment by the Group in its core gas to power activities.

Licence Portfolio

As previously reported, the Board had been reviewing shale opportunities within the existing acreage and announced in May that we had selected Egdon Resources plc ("Egdon") as our partner for the analysis and appraisal of shale potential within our acreage.  The deal with Egdon gave us access to an experienced long term UK onshore operator who is funded to appraise and progress developments for the coming years.  There is no Alkane cash being put into this transaction and we have received 40m shares in Egdon, the third largest listed company within the UK shale industry, which will provide us with upside potential if shale gas is proven to be commercially viable over the coming years.  The Alkane team can therefore remain concentrated on the delivery of CMM and power response sites.

DECC announced on 28 July 2014 the commencement of the 14^th Onshore Licensing Round.  Alkane will be evaluating a number of potential CMM and small scale stranded conventional gas opportunities.  Where these overlap with shale areas we will consider joint bids with Egdon. 

Market and our Strategy

The Ofgem capacity appraisal published in June predicted that without action the risk of power cuts could be as high as one chance in four by the winter of 2015/16.  Since this report, following shutdowns at a number of power stations, National Grid have announced emergency measures to reduce the risk of power cuts in the coming winter.  In addition, DECC, Ofgem and the National Grid are introducing capacity initiatives in order to increase longer term security of supply. These capacity initiatives include winter Demand Side Balancing Reserve which starts in November 2014 as an interim measure before the introduction of the capacity mechanism.  The Company has bid into the 2014/2015 round and is expecting results in mid-September.  The full capacity mechanism is being introduced in respect of plant being available from 2018/2019 onwards.   The process for the first year is underway and Alkane has submitted for pre-qualification its portfolio of existing and new-build power response and base load CMM, with results due in early October.  We will take part in the auction for 2018/2019 in December with results expected on 24 December 2014.  These initiatives provide the Group with an opportunity for a significant additional income stream in future years.

The tighter UK generating market presents a number of opportunities for Alkane.  Our core CMM business could benefit from higher prices and capacity payments.  The power response assets are well positioned to supply additional running hours.  Their speed of response (on-line in less than 15 minutes of call) means that we can support intermittent renewable capacity such as wind farms.  In addition our cost effective running regimes make our engines ideal to support the network during winter evening peak periods.  

We have achieved scale in both sides of the production business - base load CMM and power response and we continue to exploit growth opportunities. 

Outlook

The first half of 2014 has been transformational for the Group.  We have invested for the future, and including the acquisition of three sites from Carron Energy in July 2014, our power response capacity has grown by 158% from 36MW to 93MW, delivering a broader balanced generating portfolio and giving scale to a business where there are opportunities for growth in the tighter UK generating market.  We have also taken the strategic decision to transfer our shale gas interests to Egdon, and we will benefit from the potential upside from the development of shale gas without any financial commitment from the Company.  We are confident that 2014 will be another year of progress for the Group.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the 6 months ended 30 June 2014

		For the six	For the six	For the year
		months ended	months ended	ended
		30 June	30 June	31 December
		2014	2013	2013
		Unaudited	Unaudited	Audited
	Notes	£'000	£'000	£'000
Revenue		7,064	11,076	20,571
Cost of sales		(4,818)	(7,478)	(13,664)
Gross profit		2,246	3,598	6,907
Impairment of gas assets	14	(3,180)	-	-
Administrative expenses		(1,465)	(1,854)	(3,342)
Exceptional administrative expenses	14	(82)	(404)	(703)
Total administrative expenses		(1,547)	(2,258)	(4,045)
Return on Group operations		(2,481)	1,340	2,862
Profit on transfer of licences	12	9,990	-	-
Other operating income		127	3	471
Profit on activities before finance costs		7,636	1,343	3,333
Finance income		3	8	18
Finance costs		(382)	(334)	(696)
Net finance costs		(379)	(326)	(678)
Profit before tax		7,257	1,017	2,655
Taxation	4	-	100	100
Profit for the period attributable to equity holders of the parent		7,257	1,117	2,755
Other comprehensive income (items that may be reclassified to profit or loss)
Available for sale financial assets	12	500	-	-
Total comprehensive income for the period attributable to equity
holders of the parent		7,757	1,117	2,755
Earnings per share
Basic, for profit for the period attributable to equity holders of the parent	6	5.85p	1.05p	2.40p
Diluted, for profit for the period attributable to equity holders of the parent	6	5.14p	1.00p	2.25p

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 30 June 2014

		30 June	30 June	31 December
		2014	2013	2013
		Unaudited	Unaudited	Audited
	Notes	£'000	£'000	£'000
NON-CURRENT ASSETS
Property, plant and equipment	8	23,291	23,302	23,316
Gas assets	9	21,215	20,597	23,335
Intangible assets		1,618	1,209	1,633
Derivative financial instrument		22	-	22
Deferred tax asset		900	900	900
Available for sale financial asset	12	11,000	-	-
		58,046	46,008	49,206
CURRENT ASSETS
Inventories		439	469	464
Trade and other receivables		5,740	3,338	4,156
Cash and cash equivalents		519	3,053	838
		6,698	6,860	5,458
TOTAL ASSETS		64,744	52,868	54,664
CURRENT LIABILITIES
Trade and other payables		(5,253)	(3,625)	(4,616)
Finance lease obligations		(586)	(524)	(343)
Long-term borrowings due within one year		(1,500)	(1,500)	(1,500)
Provisions		(180)	(368)	(146)
		(7,519)	(6,017)	(6,605)
NON-CURRENT LIABILITIES
Finance lease obligations		(1,567)	(210)	(69)
Long-term borrowings		(9,281)	(9,396)	(9,161)
7.5% Convertible loan stock		(2,210)	(2,081)	(2,199)
Deferred payments		(900)	(900)	(900)
Provisions		(2,585)	(3,018)	(2,737)
		(16,543)	(15,605)	(15,066)
TOTAL LIABILITIES		(24,062)	(21,622)	(21,671)
NET ASSETS		40,682	31,246	32,993
EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
Share capital	15	621	618	618
Share premium		7,016	6,905	6,906
Hedging reserve		22	-	22
Other reserves		9,297	9,256	9,230
Retained earnings		23,726	14,467	16,217
TOTAL EQUITY		40,682	31,246	32,993

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months ended 30 June 2014

	Attributable to equity holders of the parent
	Issued capital	Share premium(1)	Hedging reserve	Other reserves(2)	Retained earnings	Total  equity
	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2014	618	6,906	22	9,230	16,217	32,993
Profit for the period	-	-	-	-	7,257	7,257
Other comprehensive income for the period	-	-	-	-	500	500
Total comprehensive income for the period	-	-	-	-	7,757	7,757
Dividend (note 7)	-	-	-	-	(248)	(248)
Share-based payment	-	-	-	78	-	78
Equity component of convertible loan notes	-	11	-	(11)	-	-
Issue of share capital	3	99	-	-	-	102
At 30 June 2014 (Unaudited)	621	7,016	22	9,297	23,726	40,682
At 1 January 2013	507	1,248	-	9,196	13,451	24,402
Profit and total comprehensive income for the period	-	-	-	-	1,117	1,117
Dividend (note 7)	-	-	-	-	(101)	(101)
Share-based payment	-	-	-	60	-	60
Issue of share capital	111	5,657	-	-	-	5,768
At 30 June 2013 (Unaudited)	618	6,905	-	9,256	14,467	31,246
At 1 January 2013	507	1,248	-	9,196	13,451	24,402
Profit and total comprehensive income for the year	-	-	-	-	2,755	2,755
Dividend	-	-	-	-	(101)	(101)
Fair value of derivative instrument	-	-	22	-	-	22
Share-based payment	-	-	-	146	-	146 -
Share options lapsed and exercised	-	-	-	(112)	112	- -
Issue of share capital	111	5,658	-	-	-	5,769
At 31 December 2013 (Audited)	618	6,906	22	9,230	16,217	32,993

 

^{(1) During the six months ended 30 June 2013 £274,000 was written off against the share premium account in respect of costs relating to the issue of shares.}

 ^{(2) Other reserves comprise the equity component of convertible loan notes of £221,000 (30 June and 31 December 2013: £232,000), a share-based payments reserve of £413,000 (30 June 2013: £361,000; 31 December 2013: £335,000), a merger relief reserve of £244,000 (30 June and 31 December 2013: £244,000), and a distributable reserve of £8,419,000 (30 June and 31 December 2013: £8,419,000) created following cancellation of the share premium account.}

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

for the six months ended 30 June 2014

		For the six	For the six	For the year
		months ended	months ended	ended
		30 June	30 June	31 December
		2014	2013	2013
		Unaudited	Unaudited	Audited
	Notes	£'000	£'000	£'000
Operating activities
Profit before tax from continuing operations		7,257	1,017	2,655
Adjustments to reconcile operating profit to net cash flows:
Transfer of licences	12	(10,500)	-	-
Depreciation of property, plant and equipment		1,320	1,366	2,797
Gas asset depletion		292	340	670
Gas asset impairment	14	3,180	-	-
Gas asset write off		213	-	-
Intangible asset amortisation		15	-	15
Intangible asset impairment		-	233	233
Share-based payments expense		78	60	146
Finance income		(3)	(8)	(18)
Finance expense		382	334	696
Movements in provisions		(118)	40	(463)
(Increase)/decrease in trade and other receivables		(1,583)	1,391	573
Decrease in inventories		25	3	8
Increase/(decrease) in trade and other payables		755	(2,150)	(1,754)
Net cash flows from operating activities		1,313	2,626	5,558
Cash flows from investing activities
Interest received		3	8	18
Purchase of property, plant and equipment		(1,341)	(4,863)	(6,180)
Purchase of gas assets		(1,639)	(3,604)	(6,193)
Purchase of intangible assets		-	-	(439)
Net cash flows used in investing activities		(2,977)	(8,459)	(12,794)
Cash flows from financing activities
Issue of share capital		13	5,768	5,769
Proceeds from sale and finance leaseback		2,000	-	-
Sale and finance leaseback rentals		(259)	(388)	(710)
Proceeds from long-term borrowing		3,220	3,001	3,516
Repayment of long-term borrowings		(3,100)	(750)	(1,500)
Dividend paid to equity holders of the parent		(248)	(101)	(101)
Interest paid		(281)	(213)	(469)
Net cash flows from financing activities		1,345	7,317	6,505
Net (decrease)/increase in cash and cash equivalents		(319)	1,484	(731)
Cash and cash equivalents at beginning of period		838	1,569	1,569
Cash and cash equivalents at close of period	17	519	3,053	838

NOTES TO THE ACCOUNTS

1.      CORPORATE INFORMATION

The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2014 were authorised for issue in accordance with a resolution of the directors on 9 September 2014.

Alkane Energy plc is a public limited company incorporated and domiciled in England whose shares are publicly traded.  The Company's registered number is 2966946.

The principal activities of the Group are described in Note 3.

2.      BASIS OF PREPARATION AND ACCOUNTING POLICIES

Basis of preparation

The interim condensed financial statements are unaudited and do not constitute statutory financial statements within the meaning of section 435 of the Companies Act 2006.

The comparative figures for the year ended 31 December 2013 were derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. Those accounts received an unqualified audit report which did not contain statements under section 498(2) or (3) (accounting records or returns inadequate, accounts not agreeing with records and returns or failure to obtain necessary information and explanations) of the Companies Act 2006.

The interim condensed financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union and the AIM rules of the London Stock Exchange. This report should be read in conjunction with the Group's Annual Report and Accounts 2013, which have been prepared in accordance with IFRSs as adopted by the European Union.

Going concern

The Board is required to assess whether the Group has adequate resources to continue operations for the foreseeable future. After making enquiries, the directors have a reasonable expectation that the Company and the Group will continue in operational existence for the foreseeable future (being a period of at least 12 months from the date of this report). For this reason they continue to adopt the going concern basis for preparing the financial statements.

Accounting policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those presented in the Group's Annual Report and Accounts for the year ended 31 December 2013.

The preparation of interim financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses.

There have been no significant changes in the bases upon which estimates have been determined compared to those applied at 31 December 2013.  Whilst there has been no change in the bases of estimates, following a management review a gas impairment charge has been realised in the period, which has had a material effect on the current period.  All other significant estimates and judgments have been disclosed in the Group's Annual Report and Accounts for the year ended 31 December 2013.  Actual results may differ from these estimates.

In March 2013 Pro2 Anlagentechnik GmbH invested in Alkane Services Limited, a Group company, and from that date holds a non-controlling interest of 25% of the share capital.  The minority interest arising in the six months to 30 June 2014 was not material and has not been reflected in the interim financial statements.  Alkane Services Limited has been renamed Alkane Pro2 Services Limited.

These condensed consolidated interim financial statements have been prepared on the basis of IFRSs in issue that are effective at the Group's annual reporting date as at 31 December 2014.

3.      SEGMENT INFORMATION

Operating segments

The directors consider that there are two operating segments:

·     the extraction of gas for power generation and for direct sale;

·     the design, build and operation of projects for external customers.

The operating segment reporting format reflects the Group's management and reporting structure.         

Seasonality of operations

There is no significant seasonal nature to either of the Group's business segments.

	Six months	Six months	Year ended
	ended	ended	31 December
	30 June 2014	30 June 2013	2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Extraction and utilisation of gas
Total segment revenue	5,936	6,390	13,439
Depreciation/impairment	(4,802)	(1,699)	(3,469)
Profit on transfer of licences	9,990	-	-
Interest expense	(281)	(239)	(492)
Segment profit before tax	7,965	1,417	3,526
Design, build and operate projects for external customers
Total segment revenue	1,130	4,686	7,142
Impairment	-	(233)	(233)
Segment (loss)/profit before tax	(61)	361	599
Total
Total revenue	7,066	11,076	20,581
Total depreciation/impairment	(4,802)	(1,932)	(3,702)
Total profit on transfer of licences	9,990	-	-
Total interest expense	(281)	(239)	(492)
Profit before tax from operating segments	7,904	1,778	4,125
Corporate centre	(657)	(771)	(1,491)
Consolidation adjustment	10	10	21
Profit before tax	7,257	1,017	2,655

The following table reconciles total segment assets, total segment liabilities and segment additions to non-current assets.

	30 June	30 June	31 December
	2014	2013	2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Extraction and utilisation of gas	58,105	48,841	52,611
Design, build and operate projects for external customers	1,815	2,625	1,296
Total segment assets	59,920	51,466	53,907
Corporate centre	11,251	2,387	404
Intangible assets arising on consolidation	1,209	1,209	1,209
Consolidation adjustments	(7,636)	(2,194)	(856)
Total consolidated assets	64,744	52,868	54,664
Extraction and utilisation of gas	(23,517)	(26,283)	(26,507)
Design, build and operate projects for external customers	(1,823)	(2,655)	(917)
Total segment liabilities	(25,340)	(28,938)	(27,424)
Corporate centre	(13,280)	(8,816)	(7,291)
Consolidation adjustments	14,558	16,132	13,044
Total consolidated liabilities	(24,062)	(21,622)	(21,671)
Extraction and utilisation of gas	2,860	8,221	13,174
Design, build and operate projects for external customers	-	47	-
Total segment additions to non-current assets	2,860	8,268	13,174
Deferred tax asset	-	100	100
Corporate centre	11,000	1	22
Total consolidated additions to non-current assets	13,860	8,369	13,296

4.      TAXATION

There is no tax charge for the current period (six months ended 30 June 2013: nil, year ended 31 December 2013: nil). No deferred tax asset has been recognised in the period (six months ended 30 June 2013: £100,000, year ended 31 December 2013: £100,000).

5.      DISCONTINUED OPERATIONS

A loan to Deutsche KWK GmbH, an operation discontinued in 2009, is outstanding; after exchange rate differences of £8,000 the balance at 30 June 2014 is €145,000 (£116,000) (30 June 2013 €145,000 (£124,000); 31 December 2013 €145,000 (£121,000)). This balance is due to be repaid on 31 December 2014. The loan was fully impaired in 2009, and having reviewed the position at 30 June 2014 there remains a fundamental uncertainty in respect of the recovery of the outstanding balance of the loan and consequently there has been no reversal of the balance of the impairment charge.

6.      EARNINGS PER ORDINARY SHARE

Basic earnings per share amounts are calculated by dividing net profit for the period attributable to ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the period.

Diluted earnings per share amounts are calculated by dividing net profit for the period attributable to ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the period plus the weighted average number of Ordinary Shares that would be issued on the conversion of all the dilutive potential Ordinary Shares into Ordinary Shares.

The following reflects the income and share data used in the basic and diluted earnings per share computations:

	Six months	Six months	Year ended
	ended 30 June	ended 30 June	31 December
	2014	2013	2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Profit attributable to equity holders of the parent	7,257	1,117	2,755
	No.	No.	No.
Basic weighted average number of Ordinary Shares	124,137,446	106,130,525	114,930,148
Dilutive effect of share options	6,124,309	4,112,645	4,992,606
Dilutive effect of convertible loan notes(1)	13,045,714	12,782,857	13,291,428
Diluted weighted average number of Ordinary Shares	143,307,469	123,026,027	133,214,182

⁽¹⁾ For the purposes of calculating the dilutive earnings per share, the profit for the period attributable to equity holders of the parent has been adjusted by the transaction costs and interest charges of £103,000 (six months ended 30 June 2013: £110,000; year ended 31 December 2013: £242,000) that would have been avoided if conversion was to have occurred. The revised profit for the period attributable to equity holders of the parent on this basis is £7,360,000 (six months ended 30 June 2013: £1,227,000; year ended 31 December 2013: £2,997,000).

A total of 22,222,222 Ordinary Shares were issued and admitted to trading on AIM on 21 July 2014 in respect of a share placing carried out in conjunction with the acquisition of three power response companies from Carron Energy Limited and Dragon Generation Limited (see note 16). There have been no other transactions involving Ordinary Shares or potential Ordinary Shares between the reporting date and the date of completion of these financial statements that would have changed significantly the number of Ordinary Shares or potential Ordinary Shares outstanding at the end of the period if those transactions had occurred before the end of the period.

7.      DIVIDEND

During the six months ended 30 June 2014 the Company paid a dividend of 0.2 pence per share totalling £248,000 (six months ended 30 June 2013 and year ended 31 December 2013: dividend of 0.1 pence per share totalling £101,000).

8.      PROPERTY, PLANT AND EQUIPMENT

Acquisitions and disposals

During the six months ended 30 June 2014, the Group acquired assets with a cost of £1,295,000 (six months ended 30 June 2013: £4,661,000; year ended 31 December 2013: £6,106,000). Included within additions for the period ended 30 June 2014 is £900,000 relating to the acquisition of Wheldale coal mine methane assets (see note 11). The figures in 2013 included £3,000,000 relating to the acquisition of Maltby coal mine methane assets (see note 13). There were no disposals during the period (30 June and 31 December 2013: nil).

9.      GAS ASSETS

Acquisitions and disposals

During the six months ended 30 June 2014, the Group acquired assets with a cost of £1,565,000 (six months ended 30 June 2013: £3,561,000; year ended 31 December 2013: £6,629,000). Included within additions for the period ended 30 June 2014 is £600,000 relating to the acquisition of Wheldale coal mine methane assets (see note 11). The figures in 2013 included £2,754,000 relating to the acquisition of Maltby coal mine methane assets (see note 13). There were no disposals during the period (30 June and 31 December 2013: nil).

An impairment test of gas assets relating to producing licence areas was carried out in the period.  This test took into account the expected future price of energy and the expected production life.  The test identified one producing licence with a carrying value that would not be recovered and an impairment charge of £787,000 was made.

In addition an impairment review of exploration and evaluation costs relating to non-producing licence areas was carried out in the period.  Following the review an impairment charge of £2,393,000 (30 June and 31 December 2013: nil) was made in respect of costs that would not lead to commercial operations.

10.    CAPITAL COMMITMENTS

At 30 June 2014, the Group had the following capital commitments contracted for but not provided in the financial statements:

·     Acquisition of property, plant and equipment £107,000 (30 June 2013: £794,000; 31 December 2013: £28,000);

·     Acquisition of gas assets £890,000 (30 June 2013: £248,000; 31 December 2013: £16,000);

·     Acquisition of Maltby coal mine methane assets £2,000,000 (30 June and 31 December 2013: £2,000,000).  See note 13.

11.    PURCHASE OF WHELDALE POWER RESPONSE FACILITIES

On 5 February 2014 the Group acquired the Wheldale power response facilities from SSE plc, for a total consideration of £1,500,000.  The initial consideration for the acquisition was £1,100,000 paid in cash on completion, with a £400,000 deferred cash payment to be paid on 31 October 2014.  The facilities comprise an installed engine capacity of 7.5MW and a grid connection of 10MW.  As part of the financial arrangements to fund the acquisition the Group increased its banking facilities with Lloyds Bank plc by £1,000,000.

12.    TRANSFER OF LICENCES

On 12 June 2014 the Group transferred its shale gas interests in certain UK petroleum and development licences to Egdon Resources plc in exchange for 40,000,000 new ordinary shares of 1 pence each in Egdon Resources plc, an AIM listed company whose registered office is at The Wheat House, 98 High Street, Odiham, Hampshire RG29 1LP.  At the date of the transfer Egdon Resources plc's share price was 26.25 pence, valuing gross consideration at £10,500,000.  A profit of £9,990,000 on the transfer has been recognised in the period.  Associated costs of sale attributable to the transfer of the shale gas interests are detailed below:

	Six months ended 30 June
	2014
	Unaudited
	£'000
Gross consideration	10,500
Non-capital costs relating to the transfer of licences	(297)
Capital costs relating to the transfer of licences	(213)
Profit on transfer of licences	9,990

The listed equity investment represents an 18% interest in Egdon Resources plc shares and is classified as an available for sale financial asset.  The Group's interest in Egdon Resources plc has not been treated as an associated undertaking as the Group does not have a significant influence over the company.  The shares are revalued at fair value at the end of each period.  The change in fair value in the period of £500,000 is shown in other comprehensive income.  The fair value disclosed is the market value at the statement of financial position date.  The movement in the fair value of available for sale financial assets is determined under Level 1 Inputs, being quoted prices in active markets that the Group has the ability to access as of the measurement date.

There is a 12 month lock-in period from the date of issue of the consideration shares during which time the Company is precluded from disposal of the shares.  The Group does not intend to dispose of this investment in the foreseeable future.

13.    ACQUISITION OF MALTBY COAL MINE METHANE ASSETS

On 24 May 2013 the Group completed the purchase of coal mine methane assets located at Maltby Colliery for a consideration of £5,500,000. 

The purchase was partly funded by an extension of the Group's borrowing facilities with Lloyds Bank plc.  A term loan of £3,000,000, secured by way of legal charges over the Group's assets, was provided to finance the acquisition, to be repaid in quarterly payments over two years commencing in April 2014.  At the same time the existing revolving credit facility was increased from £6,500,000 to £7,000,000.  The balance of the consideration was financed by a proportion of the funds raised by a share placing.  A total of £6,000,000 was raised by the issue of 22,222,223 new ordinary shares at a placing price of 27 pence per share.

The assets acquired comprise plant and machinery of £3,000,000 and site infrastructure (including grid connection) of £2,754,000.  The Directors have carried out an assessment of the assets acquired and have concluded that no fair value adjustments are required.

A further payment of £2,000,000 will be made to acquire additional site infrastructure assets six months after the Maltby Colliery mine shafts are satisfactorily sealed as part of the planned closure of Maltby Colliery.  The closure is not within the control of the Company, but is expected to occur by October 2014.

14.    EXCEPTIONAL ITEMS

	Six months ended 30 June	Six months ended 30 June	Year ended 31 December
	2014	2013	2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Impairment of gas assets (see note 9)	(3,180)	-	-
Costs related to the acquisition of Wheldale power response assets (see note 11)	-	-	(7)
Non-capital costs relating to the acquisition of Maltby coal mine methane assets (see note 13)	(2)	(148)	(251)
Costs relating to the acquisition of three power response companies (see note 16)	(57)	-	-
Impairment of biogas development costs	-	(233)	(233)
Costs relating to the acquisition of Greenpark Energy Limited	-	(13)	(31)
Costs relating to the acquisition of licence	-	(10)	(25)
Costs relating to other corporate transactions	(23)	-	(108)
Costs of aborted corporate transactions	-	-	(48)
	(3,262)	(404)	(703)

15.    AUTHORISED AND ISSUED SHARE CAPITAL

	30 June	30 June	31 December
	2014	2013	2013
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Authorised
1,000,000,000 ordinary shares of 0.5p each	5,000	5,000	5,000

Allotted, called up and fully paid	thousands	£'000
Ordinary Shares of 0.5p each
At 1 January 2014	123,592	618
Issued on conversion of loan stock	645	3
At 30 June 2014 (Unaudited)	124,237	621
At 1 January 2013	101,113	507
Issued on exercise of share options	250	1
Issued as a result of a share placing	22,222	110
At 30 June 2013 (Unaudited)	123,585	618
At 1 January 2013	101,113	507
Issued on exercise of share options	257	1
Issued as a result of a share placing	22,222	110
At 31 December 2013 (Audited)	123,592	618

16.    SUBSEQUENT EVENT

On 21 July 2014 the Group acquired three power response companies from Carron Energy Limited and Dragon Generation Limited, for a total consideration of £12,060,000.

The acquisition was partly funded by a term loan of £5,500,000 provided by Lloyds Bank plc, repayable in monthly instalments over 5 years commencing in August 2014. The balance was financed by a proportion of the funds raised by a share placing. A total of £8,000,000 was raised by the issue of 22,222,222 new Ordinary Shares at a placing of 36 pence per share.

17.    ADDITIONAL CASH FLOW INFORMATION

Analysis of net debt

			1 January 2014	Cash flow	30 June 2014
			Audited		Unaudited
			£'000	£'000	£'000
Cash at bank and in hand			838	(319)	519
Sale and finance leaseback			(412)	(1,741)	(2,153)
Long-term loan			(10,661)	(120)	(10,781)
Net debt			(10,235)	(2,180)	(12,415)
Securities			257	1	258
Adjusted net debt(1)			(9,978)	(2,179)	(12,157)
			1 January 2013	Cash flow	30 June 2013
			Audited		Unaudited
			£'000	£'000	£'000
Cash at bank and in hand			1,569	1,484	3,053
Sale and finance leaseback			(1,122)	388	(734)
Long-term loan			(8,645)	(2,251)	(10,896)
Net debt			(8,198)	(379)	(8,577)
Securities			256	-	256
Adjusted net debt(1)			(7,942)	(379)	(8,321)
			1 January 2013	Cash flow	31 December 2013
			Audited		Audited
			£'000	£'000	£'000
Cash at bank and in hand			1,569	(731)	838
Sale and finance leaseback			(1,122)	710	(412)
Long-term loan			(8,645)	(2,016)	(10,661)
Net debt			(8,198)	(2,037)	(10,235)
Securities			256	1	257
Adjusted net debt(1)			(7,942)	(2,036)	(9,978)

⁽¹⁾This includes the effect of securities paid on finance lease transactions that are closely related to those items.

The convertible debt has been excluded from the above calculations as the current share price is above the conversion price and the directors expect it to be converted rather than repaid.

18.    GENERAL NOTE

Copies of this interim report will be sent to registered shareholders and further copies will be available from the Company's registered office.  It will also be available on the Company's website, www.alkane.co.uk.

 

END

 

 

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