Interim Results

12 September 2012

Alkane Energy plc

Unaudited interim results for the half year to 30 June 2012

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 2012.

Operational Highlights

§ Transformational Greenpark acquisition completed in the period, adding six operational sites and several development opportunities to the Group

§ Enlarged Group now has 70MW of installed power generation across 19 operating sites with an enlarged development pipeline of sites and licences

§ Alkane now the largest coal mine methane operator in UK

§ Planned major refurbishment programme nearing completion

§ Newly acquired and developed sites delivering in line with expectations

§ Commissioning of new site at Gedling adding 3.1MW to capacity

§ Commenced work on second biogas contract with total biogas capital contracts signed in excess of £4m during 2012

§ Power response capacity increased to 31MW (2011: 8MW)

§ 58% increase in weekly output figure from 2.4GWh prior to acquisition to 3.8GWh at the start of September

Financial Highlights

§ Revenue increased 6% to £5.3m (2011: £5.0m)

§ Group profit before tax pre exceptionals increased 7.5% to £0.96m (2011:£0.89m)

§ Operating margins pre exceptionals improved to 22.1% (2011: 20.2%)

§ Average power prices of £56/MWh (H1 2011: £49/MWh) achieved in the period, benefitting from contracts placed during 2011

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

"The highlight of the period was the transformational acquisition of Greenpark which provides us with a significant increase in operating capacity and in our project pipeline.

We have also made good progress in the existing business with output now running at record levels and our upgraded sites well positioned for the start of the peak winter demand period. The full benefits of the Greenpark acquisition which will be seen in the second half of this year."

For more information please contact:

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

Notes to Editors:

Alkane Energy is one of the UK's fastest growing independent power generators. The Company operates mid-sized "gas to power" electricity plants providing both predictable and fast response capacity to the grid. Following the acquisition of Greenpark Energy Limited ("Greenpark"), Alkane now has a total of 70MW of installed generating capacity and an electrical grid capacity of 89MW.

Alkane's main operations are based 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 we can move to power response. Power response sites are connected to mains gas and produce electricity at times of high electrical demand or in order to balance the electricity grid. Alkane now operates 25MW of power response on conventional gas post the Greenpark acquisition.

The Group operates from 19 mid-size (up to 10MW) power plants across the UK, 12 CMM, 4 conventional gas and 3 using both fuel sources, and sells this power through the electricity network, using standard modular reciprocating engines to generate the electricity. The engine units and other plant are designed to be flexible and transportable and this allows additional capacity to be brought onto growing sites and underutilised plant to be moved to new sites to maximise efficiency.

The biogas market also provides a potential new business stream where we are making progress. Running on gas generated from the processing of organic waste will require exactly the same power assets and core gas and electricity skills as CMM.

Coal bed methane ("CBM") is a longer term opportunity where Alkane has 500km2 under licence and contingent resource estimates of circa 350 billion cubic feet. In February 2012 the Company signed a partnership agreement with Aberdeen Drilling Management Limited who are assessing the exploitation potential of two of our licences with CBM potential.

Summary

Alkane is pleased to announce its unaudited interim results for the first half of 2012, which has been a transformational period for the Group as a result of the acquisition of Greenpark Energy Limited ("Greenpark"). The integration plan is on track and the enlarged Group is performing well with the benefits of site improvements already being demonstrated in the second half.

Following the Greenpark acquisition, Alkane is now the largest CMM operator in the UK, with installed generation capacity of 70MW and an electrical grid capacity of 89MW. As a consequence of the acquisition and site improvements we have seen the weekly output figure expand from 2.4GWh prior to the acquisition to 3.8GWh in the first week in September. This represents a 58% increase.

Finance

The half year results include the consolidation of Greenpark from completion on 26 April 2012. There are a number of exceptional items relating to the acquisition and also to an impairment of biogas costs identified in the published figures but which have been excluded from the adjusted figures below to provide a clearer comparison.

Revenue is £5.3m (2011: £5.0m) representing a 6% increase predominantly due to the higher selling prices achieved for the period. Operating profit pre exceptionals has grown to £1.2m (2011: £1.0m) resulting in an improved operating margin of 22%, up from 20% in the first half of 2011. This improved margin is due to higher average selling prices. EBITDA was £2.1m (2011: £1.9m) representing a 40% margin (2011: 39%). Profit before tax pre exceptionals has risen 7.5% to £958k (2011: £891k) after allowing for higher interest costs following the financing of the acquisition. Earnings per share pre exceptionals is 1.06pps (2011: 1.15pps) after a reduction in the amount of the deferred tax asset recognised, from £200k in the first half of 2011 to £100k in the first half of 2012.

Average power prices achieved in the period were £56/MWh (2012: £49/MWh) as we benefitted from contracts placed during 2011. We expect to see a full year average price for 2012 of approximately £52/MWh with 90% of our expected 2012 output already contracted. The ongoing economic conditions have depressed pricing in the energy market and we have as at the time of this statement contracted 33% of expected 2013 output at an average price of £51/MWh.

The exceptional items in the published figures are the expenses relating to the acquisition of Greenpark (£500k), and the credit of negative goodwill on the acquisition (£539k); and an impairment of £313k in respect of capitalised development costs relating to the biogas business, principally for the unsuccessful joint tender bid for the NE Wales Council Anaerobic Digestion contract. Finally there have been cash receipts totalling £328k in respect of deferred loans from the 2009 disposal of Pro2, which are shown as a reversal of impairment within discontinued operations.

The published figures with all of these one off items included show profit before tax from continuing and discontinued operations of £1,012k (2011: £739k) and earnings per share of 1.11pps (2011: 0.99pps).

The Greenpark acquisition was completed with the maximum consideration of £5.7m funded by a £3m additional bank facility with Lloyds TSB Bank and a £2m Shareholder Convertible Loan Note.

Group cashflow generated an operating inflow of £1.8m (2011: £2.1m) with capital expenditure increasing to £3.5m (2011: £1.9m) to build the new facilities at Gedling and Pontycymmer and to complete the site improvements at Calverton and Bilsthorpe. In addition the cash outflow in acquiring Greenpark and the associated costs was £4.8m.

Net assets are £22.5m (2011: £19.9m) with a strong asset base in engine capacity, site infrastructure, 89MW of grid capacity and capitalised gas extraction costs (planning and drilling costs). Overall the Group net debt at 30 June 2012 was £10.3m (2011: £3.4m) with gearing being 46% (2011: 17%). We have met all the bank covenant tests and since the period end we have commenced the scheduled repayment of the acquisition facility.

Operations

Existing CMM Assets

Alkane has the UK's leading portfolio of CMM licences, enabling the Company to extract gas from abandoned coal mines.

Output was 65GWh in the first half (H1 2011: 70GWh) with the Greenpark acquisition having added 6GWh to output in the nine weeks from completion to the period end. The decline in output from existing Alkane sites reflects the previously reported accelerated maintenance work that was carried out during the period at all but two of the Group's existing assets in order to lay the foundations for the successful integration of Greenpark. The value of this work can already be seen at Bilsthorpe and Calverton where both sites have been brought back on stream with improved gas flows.

New Sites

We have carried out a review of the entire operations and the development pipeline of the Group in order to prioritise the allocation of funds so as to optimise returns. The enlarged Group has a greater number of potential development sites and additional exploration licences which will extend the development pipeline irrespective of the scale and timing of the next licensing round.

Alkane has commenced operations at a 3.1MW two engine site at Gedling, Nottinghamshire, which was fully commissioned in June 2012, and a further 0.7MW site at Pontycymmer, South Wales, is expected to open in the second half of the year.

Greenpark Acquisition

The Greenpark acquisition has added nine sites of which one is a CMM site, three are power response, two are combined CMM and power response, and the remaining three sites were non-operational at the time of the acquisition. The total installed engine capacity of Greenpark was 29MW and these sites have been delivering in line with expectations.

The integration of Greenpark is proceeding to plan. Work continues integrating these sites and we are pleased with progress to date. We are installing new pump capacity at Cadeby which is increasing engine utilisation. We are progressing well with plans to complete similar upgrades at Houghton Main and potentially Askern.

We are now seeing the benefit across the enlarged Group with record production months and this will be reflected in the full year results.

Seven Star

We have also started the preparation to drill at Nooks Farm, Staffordshire, on a conventional gas reserve acquired within Seven Star Natural Gas in 2011. The estimated contingent resources at this site were 1.5bcf which we are targeting for the development of a 2MW facility.

Following a site survey, an agreement has been reached with Shell UK Limited, a previous licence holder, under which we will carry out restoration work on two previously abandoned wells, including re-drilling and plugging. The value of the work to be carried out has been agreed with Shell at up to £5.8m. Work is underway and is expected to continue into 2013.

Power Response

Power response is the provision of standby capacity for the national grid short term operating reserve ("STOR") and peak load generation. As CMM declines at any one site Alkane retains valuable generating capacity and a grid connection which we move to power response when appropriate. Power response sites are connected to mains gas and produce electricity at times of high electrical demand or in order to balance the electricity grid. Alkane now allocates 31MW of generating capacity to power response post the Greenpark acquisition. Revenue from power response was £592k in the period (2011: £211k), an increase of 181%.

Biogas

The biogas market also provides a potential new business stream. Running on gas generated from the processing of organic waste requires exactly the same power assets and core gas and electricity skills as CMM.

During the period we commenced work on our second design, build, operate ("DBO") contract to supply power plant to an anaerobic digestion biogas site.

We continue to bid for biogas DBO contracts which provide us with profitable supply margins. Together with a joint venture partner we had been appointed preferred bidder for a council based contract in North East Wales but, as previously reported, it was not possible to agree contractual terms with the funder that were satisfactory to the joint venture and we therefore withdrew from the project.

Alkane has signed biogas contracts to the value of £4.0 million so far this year, covering a range of projects in the food processing, agricultural and council waste. This builds on the successful commissioning of our first biogas site at Glenfarg in Scotland.

Coal Bed Methane

CBM is a longer term opportunity where Alkane has 605km2 under licence and contingent resource estimates of circa 385 billion cubic feet. In February 2012 the Company signed a partnership agreement with Aberdeen Drilling Management Limited under which they are exploring two of our licences with CBM potential.

Outlook

The first half performance reflects our continuing focus on improving operational efficiency. The acquisition of Greenpark extends our development pipeline of new operations over the short to medium term and now with 15 operating CMM sites we are by far the largest CMM operator in the UK.

Our strategy remains to develop the business both within the CMM sector and related areas of power response, biogas and onshore gas markets.

With the UK power market expecting 25% of industry capacity to be retired in the next decade, Alkane is strongly placed to take advantage of this trend with its increasing capacity to produce reliable energy for the national grid.

We look forward to reporting a further six months of progress at our preliminary results for the year ending 31 December 2012.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the 6 months ended 30 June 2012

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 30 June 2012

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months ended 30 June 2012

(1) During the six months ended 30 June 2012 £245,000, being the premium on issue of shares as consideration for the acquisition of Greenpark Energy Limited (see note 10), has been credited against merger relief reserve. During the six months ended 30 June 2011, £98,000 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 £232,000 (30 June 2011: nil, 31 December 2011: nil), share-based payments of £253,000 (30 June 2011: £184,000; 31 December 2011: £210,000) and a distributable reserve of £8,419,000 (30 June and 31 December 2011: £8,419,000) created following cancellation of the share premium account.

CONSOLIDATED STATEMENT OF CASH FLOWS

for the six months ended 30 June 2012

NOTES TO THE ACCOUNTS

1. CORPORATE INFORMATION

The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2012 were authorised for issue in accordance with a resolution of the directors on 11 September 2012.

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 2011 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 2011, which have been prepared in accordance with IFRSs as adopted by the European Union.

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 2011, with the addition of one new policy as follows:

Compound Financial Instruments

Compound financial instruments issued by the Group comprise convertible loan notes that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value.

The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or expiry.

Borrowings are classified as current liabilities unless the Group has unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

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. During the period the Group completed the acquisition of Greenpark Energy Limited and management carried out a fair value assessment and a calculation of the liability component of convertible loan notes which were issued to partly fund the acquisition. These assessments and calculations are based on estimates and judgments of:

·; the present value of future revenue in respect of non-current assets;

·; the expected costs and the present value of such costs in respect of site restoration; and

·; the present value of the total sum payable over the full term of the convertible loan notes.

There have been no other significant changes in the bases upon which estimates have been determined compared to those applied at 31 December 2011, and no other change in estimate 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 2011. Actual results may differ from these estimates.

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 2012.

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 development and operation of biogas projects. 

Seasonality of operations

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

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

4. TAXATION

There is no tax charge for the current period (six months ended 30 June 2011: nil, year ended 31 December 2011: nil). A deferred tax asset of £100,000 has been recognised in the period in accordance with a prudent estimate of the extent to which future taxable profits will be available to be utilised against unused tax losses and other temporary differences (six months ended 30 June 2011: £200,000, year ended 31 December 2011: £200,000).

5. DISCONTINUED OPERATIONS

On 2 March 2009 the Group sold its 38 per cent equity interest in Pro2 Anlagentechnik GmbH. An impairment charge was made in respect of deferred payments due to the Company, of which €1,055,000 (£854,000) was in respect of shareholder loans made to Deutsche KWK GmbH, the holding company of Pro2 Anlagentechnik GmbH. Repayments of €100,000 (£81,000) have subsequently been received and credited to the Statement of Comprehensive Income as impairment reversals, leaving an outstanding balance of €955,000 (£773,000) at 31 December 2011.

During the period the Company agreed a revised repayment schedule of the outstanding loans. A revised principal amount of €755,000 (£611,000) was agreed in return for repayment of €610,000 (£494,000) during 2012. The remaining €145,000 (£117,000) will remain on the original repayment schedule and is due to be repaid on 31 December 2013. Repayments of €300,000 (£247,000) were received in the six months to 30 June 2012 (six months to June 2011: €25,000 (£21,000), year to 31 December 2011: €75,000 (£64,000)). In the period from 30 June 2012 up to the completion of these interim statements a further €100,000 (£81,000) has been received. An impairment reversal of €400,000 (£328,000) has therefore been made in the period. There remains a fundamental uncertainty in respect of the recovery of the outstanding balance of €355,000 (£287,000) and consequently there has been no further reversal of the impairment charge.

6. EARNINGS PER 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:

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. PROPERTY, PLANT AND EQUIPMENT

Acquisitions and disposals

During the six months ended 30 June 2012, the Group acquired assets with a cost of £7,800,000 (six months ended 30 June 2011: £1,781,000; year ended 31 December 2011 £3,543,000). This includes £5,600,000 (after fair value adjustments) acquired as part of the acquisition of Greenpark Energy Limited. There were no disposals during the period (30 June and 31 December 2011: nil).

8. GAS ASSETS

Acquisitions and disposals

During the six months ended 30 June 2012, the Group acquired assets with a cost of £3,000,000 (six months ended 30 June 2011: £1,916,000; year ended 31 December 2011: £3,903,000). This includes £1,500,000 (after fair value adjustments) acquired as part of the acquisition of Greenpark Energy Limited. There were no disposals during the period (30 June and 31 December 2011: nil).

9. CAPITAL COMMITMENTS

At 30 June 2012, the Group had the following capital commitments contracted for but not provided in the financial statements:

Acquisition of property, plant and equipment £319,000 (30 June 2011: £277,000; 31 December 2011 £325,000);

Acquisition of gas assets £104,000 (30 June 2011: £564,000; 31 December 2011: £378,000).

10. Acquisition of Greenpark Energy Limited

On 26 April 2012 the Group completed the purchase of the entire issued share capital of Greenpark Energy Limited, a company with seven coal mine methane (CMM) extraction licences and six operational sites generating from both CMM and natural gas.

The total consideration for the shares is as follows:

(1) Financed by way of the issue of £2,000,000 convertible loan notes (see note 12) and an increase in borrowing facilities. The Group has extended its borrowing facilities with Lloyds TSB Bank. A term loan of £3,000,000, secured by way of legal charges over the Group's assets, has been provided to finance the acquisition, to be repaid in quarterly payments over two years. At the same time the existing revolving credit facility was reduced from £7,500,000 to £6,500,000.

(2) The cash consideration includes £500,000 paid into escrow. £250,000 will be released to the seller on 30 September 2012 provided that certain property issues are satisfied by that date. £250,000 is held in escrow in order to allow for any claims under the warranties included in the Share Purchase Agreement; the warranty period runs until 30 September 2012. The effect of discounting the deferred consideration has not been reflected within the cost of the investment as the Directors do not consider it to be material given the payment date.

(3) The deferred amount of £225,000 is due to be paid on 30 September 2013. The effect of discounting the deferred consideration has not been reflected within the cost of the investment as the Directors do not consider it to be material given the payment date.

(4) Part of the consideration was the issue of 1,162,237 new Ordinary Shares at a price of 21.51 pence per share.

Net assets with a book value of £11,911,000 were acquired at the date of acquisition. The Directors have carried out a fair value assessment of the identifiable assets, liabilities and contingent liabilities of Greenpark Energy Limited and concluded that the net fair value at the date of acquisition is £5,775,000. The following table shows the identifiable material assets and liabilities acquired, the fair value adjustments, the fair value and the resulting negative goodwill.

(1) The site restoration provision is recognised for the expected costs of the restoration of operating sites. The fair value adjustment represents a reassessment of the amount required to meet the expected costs. A discount factor is applied to the expected costs in order to arrive at the present value reflected in the provision.

As a result of the fair value assessment negative goodwill of £539,000 arises in respect of the transaction. Costs of £500,000 were incurred in advisory, professional and other fees in order to effect the acquisition, and the net amount of £39,000 has been credited to the Statement of Comprehensive Income under the heading of exceptional administrative expenses.

The revenue of the acquired company during the period from the date of acquisition to 30 June 2012 was £668,000, and the profit before tax was £286,000.

On 10 May 2012 the name of Greenpark Energy Limited was changed to Regent Park Energy Limited.

11. ACQUISITION OF SEVEN STAR NATURAL GAS LIMITED

On 26 May 2011 the Group completed the purchase of the entire issued share capital of Seven Star Natural Gas Limited ("Seven Star"), a company with two petroleum extraction and development licences covering previously identified onshore gas extraction prospects.

The total consideration for the shares is as follows:

(i) The agreement requires the Group to pay the vendors an additional amount of £900,000 split as follows:-

·; £250,000 within 15 business days of the satisfaction of certain conditions with respect to the site at Calow (PL213);

·; £250,000 within 15 business days of the satisfaction of certain conditions with respect to the site at Nooks Farm (PEDL141); and

·; £400,000 once Seven Star has produced in aggregate 1 bcf of natural gas from either or both of the Seven Star sites under the licences.

Net assets with a book value of £2,000 were acquired at the date of acquisition, together with the two licences which were not recognised in the accounts of Seven Star. The directors have carried out a fair value assessment of the identifiable assets, liabilities and contingent liabilities of Seven Star and concluded that the net fair value is £1,207,000, and this amount has been included in the statement of financial position as an intangible asset. No goodwill arises on the acquisition.

The acquisition was funded by the proceeds of a share placing. 5,605,370 new ordinary shares were issued at a placing price of 20p per share, raising £1,121,000. Expenses of £166,000 were incurred in respect of the placing. These costs have been written off against the share premium arising on the issue of the shares.

Costs of £173,000 were incurred in advisory, professional and other fees in order to effect the acquisition, and these costs have been expensed in the statement of comprehensive income.

12. Exceptional Administrative Expenses

13. CONVERTIBLE LOAN NOTES

On 26 April 2012 the Company issued £2,000,000 convertible loan notes, with the proceeds being utilised to partly fund the acquisition of Greenpark Energy Limited (see note 10). Interest is at a fixed rate of 7.5% per annum, which is rolled up quarterly in arrears and included as principal to be repaid or converted. The convertible loan is unsecured. The convertible loan notes are convertible at any time prior to repayment or automatic conversion at the holder's option, at a conversion price, fixed at 17.5 pence. If any element of the convertible loan is not converted, it is otherwise repayable on the date which is 3 years and 1 day after the issue date.

The liability component of the convertible loan notes is £1,768,000. This has been calculated by discounting the total sum payable over the full term of the loan notes by an effective interest rate of 12%. The equity component of £232,000 has been taken to other reserves.

14. AUTHORISED AND ISSUED SHARE CAPITAL

15. ADDITIONAL CASH FLOW INFORMATION

Analysis of net funds

\* This includes the effect of securities paid on finance lease transactions that are closely related to those items.

16. 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.