Interim Results

Alkane Energy PLC 20 August 2003 20 August 2003 Alkane Energy plc ('Alkane' or 'the company') Unaudited Interim Results to 30 June 2003 Alkane Energy plc is the UK's leading commercial producer of Coal Mine Methane (CMM) from abandoned coal mines. Highlights Strategy â€¢ Expansion of international business â€¢ Suspension of UK CMM developments, to conserve cash â€¢ Realigning of UK cost base to reflect current economic conditions â€¢ Move to trading on the Alternative Investment Market Proposed Acquisition â€¢ Acquisition of Pro2 in Germany for â‚¬4.0 million (Â£2.8 million) â€¢ New revenue streams through supply of equipment for methane capture â€¢ New markets in servicing, monitoring and contracting â€¢ Options on further CMM sites in Germany which has favourable legislation giving Â£46/MWh for generated electricity Financial â€¢ Gas sales volume similar to same period last year â€¢ Turnover decreased 30% to Â£387,000 (2002: Â£552,000), reflecting ongoing depressed wholesale electricity price â€¢ Exceptional item of Â£19,321,000, principally due to write down of assets â€¢ Loss before taxation of Â£20,152,000 (2002: Â£113,000) â€¢ Cash reserves Â£12,493,000 (2002: Â£17,280,000) UK Operations â€¢ All sites operating to expectations â€¢ Further CMM developments remain on hold until economic climate improves â€¢ Assets write down to reflect suspension of UK CMM development UK Government Support â€¢ DTI funded study commissioned to examine possible support mechanisms for CMM industry Commenting on the results, Executive Chairman, Dr. Cameron Davies said: 'The proposed acquisition of a majority interest in Pro2 and the prudent approach the company is taking with its existing UK assets reflects the continued development of our strategy as outlined in our 2002 preliminary results. We believe that our European plans will ultimately create shareholder value at a faster pace than if we operated solely in the UK. I look forward to the exciting next phase in our development as we work towards our goal of strategic refocus.' Enquiries: Alkane Energy plc Dr Cameron Davies, Chairman Tel: 01623 827 927 David Cross, Chief Executive Buchanan Communications Judith Parry/Sophie Morton Tel: 020 7466 5000 (today) /01943 883990 (thereafter) Ben Willey Tel: 020 7466 5000 Chairman's Statement The six months to 30 June 2003 have been a period of refocus for the company as we look to mainland Europe to develop a profitable business and create shareholder value utilising our core expertise in Coal Mine Methane (CMM). Our proposed acquisition of a majority interest in Pro2 Anlagentechnik GmbH (Pro2) in Germany, which has also been announced today, will provide new revenue streams for the company, as we take advantage of the more favourable renewable energy legislation, which is expected to bring the group to an earlier break-even date. While the negotiations with Pro2 have been ongoing, progress has been made in the UK, with the announcement by the DTI that it is to fund an assessment of options and mechanisms of support for the CMM industry. A contractor is being appointed to carry out this study, which should be completed by the end of 2003. During the period, we are pleased to report that our UK operational sites have performed at levels similar to the second half of the last financial year. No new problems have emerged at the sites, and many valuable lessons have been learnt from the early projects, which will be reflected in future developments. On the 27th March 2003, we announced the suspension of development activity on CMM sites in the UK and a reduction in headcount from 24 to 12 and other cost savings, with estimated cash savings of Â£900,000 per year. As developments in the UK have been put on hold, there is no longer a reasonable prospect that the value of the majority of the assets will be recovered out of short to medium term cash flows. Consequently it has been necessary to write down the carrying value, which is described in more detail in the Financial Overview. In light of these developments and as part of the proposals put to shareholders today in the acquisition circular, we propose to move the trading of the company's shares to the Alternative Investment Market (AIM). This will give the company added flexibility and save on costs associated with a quote on the Official List. On 4th July we announced that Adrian Beecroft, one of our non-executive directors, had decided to resign. We would like to thank Adrian for his contribution since Apax Partners became a shareholder in 1995. Financial Overview During the period, gas sales from our existing portfolio of sites continued, with gas volumes showing a decrease of just under 2%. Turnover was Â£387,000, a decrease of 30% compared to Â£552,000 in the first half of 2002 due to the effect of depressed wholesale electricity prices. As outlined previously operating costs have risen due to ongoing site maintenance. This combination led to a gross loss for the period of Â£35,000 (2002: Â£203,000 gross profit). Administration costs in the half-year were Â£1,081,000 (2002: Â£696,000) including Â£456,000 of costs which would have been capitalised, but following the suspension of UK developments have been treated as administration costs. Excluding this figure from administration costs gives a like for like reduction of Â£71,000 in the half year. The operating loss for the period was therefore Â£1,080,000 (2002: Â£488,000). Since announcing the suspension of UK CMM development activity on 27th March 2003, we have examined the valuation of our fixed asset portfolio. As development of our UK portfolio is now suspended and there is no certainty as to when it may recommence, it was necessary to write down the carrying value of these assets. This has resulted in an exceptional item of Â£19,321,000, of which Â£16,926,000 comprises the write down of the assets portfolio, Â£2,000,000 has been provided for the costs of restoration of the fully and partially developed site portfolio, while the remaining Â£395,000 accounts for items such as the redundancy programme undertaken during the period. For the six months ending 30 June 2003, the company reported a loss on ordinary activities before interest of Â£20,401,000 (2002: Â£488,000) and a loss before tax of Â£20,152,000 (2002: Â£113,000). Loss per share stood at 22.48p (2002: 0.13p). After the write down of our fixed assets, net assets of the company were Â£10,857,000, while the cash balance at the half-year was Â£12,493,000. The implementation of our revised strategy has led to a 55% decrease in our cash outflow, with the company's cash consumption for the six months reducing to Â£1,632,000 from Â£3,650,000 in the first half of 2002. Operational Review At the time of the preliminary results in March 2003, we announced a strategy that capitalises on our expertise in CMM. The strategy focuses on the international development of CMM, landfill methane opportunities in the UK and sales of gas extraction equipment. The announcement in March 2003 of our first international project, Joarin in Germany, was the initial step in executing this plan. As previously announced, Germany has favourable environmental legislation, which guarantees electricity generated from CMM a price of Â£46/MWh. Our partners in this project are A-TEC Anlagentechnik GmbH (A-TEC) and Pro2 who are providing the licence and equipment respectively. The project in the Nordrhein-Westfalen region of Germany has a contract life of 10 years and is supported by legislative benefits, which mitigate a proportion of the costs. The project is on target to become operational in the second quarter of 2004. Our involvement in this project, coupled with the continuing poor economic conditions in the UK for CMM production, has demonstrated that further investment in Europe is an important element in the development of the company and the creation of shareholder value. Pro2 is a partner to our first investment in mainland Europe and we have for some months been discussing further ways of exploiting these market opportunities. This has led to the proposal to acquire 51% of the equity in Pro2. Proposed acquisition of Pro2 As we announced in the circular accompanying this statement, Alkane will invest â‚¬4.0m (Â£2.8m) in Pro2: â‚¬2.04 million to acquire a majority stake and â‚¬1.96 million by way of a loan. All our investment will be made directly into Pro2, with no payments to the existing shareholders. Pro2 focuses on the design and manufacture of equipment to extract and utilise methane, including biogas, sewage gas, landfill gas and CMM. In addition to the sale of such equipment, further higher margin revenue streams come from service and maintenance, and contracting. The Company will, as part of the investment, enter 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. The A-TEC Option Agreement provides the Company with the option, but not the obligation, to develop each of these projects on substantially the same terms as those applicable to the Joarin project. Only the options over the first four licences are legally binding on A-TEC. The development of these projects will enable us to both extract gas and generate electricity, providing substantial revenues from Germany's green legislative framework. The current managers of Pro2 retain the remaining equity in the company, and have each been given a service agreement with a minimum three year term, and a five year bonus plan based on the achievement of major annual targets in Pro2's five year plan. Through this we aim to ensure that all members of the Pro2 management team remain motivated and incentivised by this deal. The acquisition of Pro2 therefore fits extremely well with Alkane's core expertise, and also fulfils part of the outlined strategy to enter the German CMM market, as well as gaining entry into the landfill methane market. The latter is recognised in the UK Renewables Obligation framework, which would revitalise our plans for the UK business. The capture of methane from eligible sources and its use to generate electricity thereby achieves income from the sale of Renewable Obligation Certificates of approximately Â£48/MWh (Source: Platts ROC Marker Projections, medium build scenario 2004) at current prices in addition to the current wholesale price of electricity of about Â£20/MWh under NETA. Move to trading on the Alternative Investment Market Due to the operating conditions in the UK, and the current capitalisation of the company, we have decided to move to AIM. This will give the company added flexibility and save costs associated with Official List regulations. Delisting from the Official List and commencement of dealing on AIM is expected to occur on the 19th September 2003, subject to the approval of the Pro2 transaction by shareholders. Green Energy Parks During the period all of our operational sites in the UK produced gas. As previously reported, the first sites developed in the UK have enabled us to learn many lessons, with many operational difficulties being overcome. We have subsequently developed a new design and operation methodology for implementation at any future sites once the economic conditions for CMM change. Our plants at Wheldale and Shirebrook performed at levels similar to the second half of the last financial year while Barnsley continues to perform at a low output level in line with expectations. We reported in March 2003 that Coalite Products Limited, the customer at Markham, had been put into administration. As the air ingress problems at this site continued it was decided to suspend production in May pending resolution of the administration order. During the period these operations continued to be cash generative. 11th Onshore Licensing Round After the recent round of licence applications, we are pleased to announce that a further 2 blocks have been added to our UK portfolio. These sites in Nottinghamshire add a further 173 sq. km to our existing acreage, at a cost of Â£4,326 pa.. This now covers 5,790 sq. km of licence area, by far the largest of any company in this sector in the UK. As part of our strategy, which continues to include the UK, we will regularly review this in the light of the cost of holding the licences and the potential of each area to contribute in due course to the growth of the group. Government Support On the 19th June 2003, we were pleased to report the announcement by the UK Government that it would be funding the assessment of options and support mechanisms for the CMM industry. A contractor is being appointed to study and assess the industry. The report is expected to be completed by the end of 2003, and the DTI has indicated that in due course it will be published. We continue to be confident of the prospects of gaining additional benefits from the UK Government, as we believe that the UK Government will want to capture CMM emissions as this will help to meet its Kyoto responsibilities. In reducing carbon emissions CMM capture is 9 times more effective than wind power per unit of electricity generated. We are still awaiting EU State Aid clearance for the exemption of CMM powered electricity from the Climate Change Levy, which was included in the UK's Finance Act 2002. During the last six months a number of ministers and MPs have continued to show great interest in the future potential of this industry, culminating in July 2003 with a letter of support from the Welsh Assembly Government advocating the inclusion of CMM in the Renewables Obligation. Prospects Recently wholesale electricity prices, which were around Â£17/MWh in March 2003, have shown a marked increase, with the forward price for 2006 rising to around Â£24/MWh. This is excellent news for Alkane as our results have been affected by the depressed wholesale market price. However, we are mindful of the volatile nature of the market, and although encouraged by the suggested trend in power pricing, remain convinced that a fully economic UK CMM business will only be developed if CMM is included in the UK's Renewables Obligation. On completion of the proposed acquisition of Pro2, we anticipate that the break-even point for Alkane will be brought forward by a number of years. We believe that the synergies of the combined businesses provide expertise, new markets and new revenue streams for the group, coupled with sufficient capital to undertake this strategy. We intend that this approach will provide a route to advanced revenue streams from Germany and to developing an economic business in the UK. In the meantime we will continue to work through our trade association ACMMO with the UK Government to develop a strategy for the inclusion of CMM in the UK's Renewables Obligation. GROUP PROFIT AND LOSS ACCOUNT for the six months ended 30 June 2003 Six months Six months Year ended ended ended 31 December 30 June 2003 30 June 2002 2002 (Unaudited) (Unaudited) Â£ '000 Â£ '000 Â£ '000 TURNOVER 387 552 995 Cost of sales (422) (349) (890) GROSS (LOSS)/PROFIT (35) 203 105 Administrative expenses (1,081) (696) (1,365) Other operating income 36 5 7 OPERATING LOSS (1,080) (488) (1,253) EXCEPTIONAL ITEM (NOTE 3) (19,321) - - LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST (20,401) (488) (1,253) Bank interest receivable 249 375 686 LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (20,152) (113) (567) Taxation - - - LOSS ATTRIBUTABLE TO SHAREHOLDERS (20,152) (113) (567) ACCUMULATED LOSSES BROUGHT FORWARD (2,385) (1,818) (1,818) ACCUMULATED LOSSES CARRIES FORWARD (22,537) (1,931) (2,385) Loss per ordinary share - basic and diluted (22.48p) (0.13p) (0.63p) STATEMENT OF RECOGNISED GAINS AND LOSSES There are no recognised gains or losses for the six months other than the loss of Â£20,152,000 (six months ended 30 June 2002: loss of Â£113,000; year ended 31 December 2002: loss of Â£567,000). GROUP BALANCE SHEET at 30 June 2003 as at as at as at 30 June 2003 30 June 2002 31 December (Unaudited) (Unaudited) 2002 Â£'000 Â£'000 Â£'000 FIXED ASSETS Intangible assets - 28 - Tangible fixed assets - gas properties 515 14,769 17,179 Tangible fixed assets - other 72 259 250 587 15,056 17,429 CURRENT ASSETS Stocks 14 17 15 Debtors 518 638 605 Cash at bank and in hand 12,493 17,280 14,125 13,025 17,935 14,745 CREDITORS: amounts falling due within one year (755) (1,419) (888) NET CURRENT ASSETS 12,270 16,516 13,857 TOTAL ASSETS LESS CURRENT LIABILITIES 12,857 31,572 31,286 CREDITORS: amounts falling due after one year - - (277) PROVISIONS FOR LIABILITIES AND CHARGES (2,000) (109) - NET ASSETS 10,857 31,463 31,009 CAPITAL AND RESERVES Called up share capital 448 448 448 Share premium account 32,946 32,946 32,946 Profit and loss account (22,537) (1,931) (2,385) TOTAL EQUITY SHAREHOLDERS FUNDS 10,857 31,463 31,009 GROUP STATEMENT OF CASHFLOWS for the six months ended 30 June 2003 Six months Six months Year ended ended ended 31 December 30 June 2003 30 June 2002 2002 (Unaudited) (Unaudited) Â£ '000 Â£ '000 Â£ '000 NET CASH OUTFLOW FROM OPERATING ACTIVITIES (792) (442) (1,143) RETURNS ON INVESTMENT AND SERVICING OF FINANCE Interest received 229 404 713 CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Payment to acquire intangible assets - (12) - Payments to acquire tangible fixed assets - gas (748) (3,560) (6,515) properties Payments to acquire tangible fixed assets - other (14) (40) (52) Receipt of grant - - 192 (762) (3,612) (6,375) EXCEPTIONAL ITEM Head office reorganisation costs (307) - - NET CASH OUTFLOW BEFORE FINANCING (1,632) (3,650) (6,805) FINANCING: issue of ordinary share capital - - - DECREASE IN CASH (1,632) (3,650) (6,805) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Six months Six months Year ended ended ended 31 December 30 June 2003 30 June 2002 2002 (Unaudited) (Unaudited) Â£ '000 Â£ '000 Â£ '000 CHANGE IN NET FUNDS ARISING FROM CASH FLOWS (1,632) (3,650) (6,805) NET FUNDS AT START OF PERIOD 14,125 20,930 20,930 NET FUNDS AT END OF PERIOD 12,493 17,280 14,125 NOTES TO THE ACCOUNTS at 30 June 2003 1. BASIS OF PREPARATION These unaudited interim financial statements, which are for the six months ended 30 June 2003, do not constitute Statutory Accounts within the meaning of Section 240 of the Companies Act 1985. They have been prepared using the accounting policies set out in the Group's 2002 statutory accounts. 2. TURNOVER Turnover is attributable to one continuing activity, the extraction and sale of gas from coal measures for power generation and burner tip use. All turnover is derived from within the United Kingdom. 3. EXCEPTIONAL ITEM - FUNDAMENTAL RESTRUCTURING Six months Six months Year ended ended ended 31 December 30 June 2003 30 June 2002 2002 (Unaudited) (Unaudited) Â£ '000 Â£ '000 Â£ '000 a. Impairment of tangible fixed assets - (17,046) - - gas properties b. Deferred grant income written back 278 - - c. Provision for the restoration of sites (2,000) - - d. Impairment of tangible fixed assets - (158) - - other e. Other head office reorganisation costs (395) - - (19,321) - - During the period 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; b. Deferred grant income received in relation to a development site has been released in line with the write off; c. Provision has been made for the restoration of all sites as required under the terms of planning permissions or under lease conditions; d. Other tangible assets which are no longer used have been written off; and e. Other head office costs including redundancy payments and professional fees relating to the restructuring have been written off. 4. MOVEMENT IN TANGIBLE FIXED ASSETS The following table shows in summary the movement in tangible fixed assets. Gas Properties Other Â£'000 Â£'000 Cost at 1 January 2003 17,692 363 Additions in the period 453 3 Written off in the period (17,096) (236) Cost at 30 June 2003 1,049 130 Depreciation at 1 January 2003 513 113 Provided during the period 71 23 Written off in the period (50) (78) Depreciation at 30 June 2003 534 58 Net book value at 30 June 2003 515 72 Net book value at 31 December 2002 17,179 250 5. LOSS PER SHARE The basic and diluted loss per ordinary share is based on a loss of Â£20,152,000 (six months ended 30 June 2002: loss of Â£113,000; year ended 31 December 2002: loss of Â£567,000) on a weighted average of 89,659,399 ordinary shares (six months ended 30 June 2002: 89,659,399; year ended 31 December 2002: 89,659,399). 6. RECONCILIATION OF OPERATING LOSS TO NET CASH FLOW FROM OPERATING ACTIVITIES Six months Six months Year ended ended ended 31 December 30 June 2003 30 June 2002 2002 (Unaudited) (Unaudited) Â£ '000 Â£ '000 Â£ '000 Operating loss (1,080) (488) (1,253) Depreciation 95 95 208 Amortisation - 15 31 Decrease in stock 1 2 4 Decrease/(increase) in debtors 107 (15) 19 Increase/(decrease) in creditors 85 (51) (152) Net cash outflow from operating activities (792) (442) (1,143) 7. ANALYSIS OF NET FUNDS as at as at as at 30 June 2003 30 June 2002 31 December (Unaudited) (Unaudited) 2002 Â£'000 Â£'000 Â£'000 Cash at bank and in hand 12,493 17,280 14,125 8. GENERAL NOTE The profit and loss account for the year ended 31 December 2002 and the balance sheet at that date are derived from the Group's full accounts which have been filed with the Registrar of Companies and on which the Group's auditors gave an unqualified report. The auditors have carried out a review of the financial information for the six months ended 30 June 2003. Copies of this interim report have been sent to registered shareholders and further copies are available from the Company's registered office. This information is provided by RNS The company news service from the London Stock Exchange

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