·         Transformational period for Alkane

·         Acquisition of Seven Star Natural Gas Limited in May 2011

·         Entering build phase of two new coal mine methane (‘CMM’) projects expected to add 4MW of capacity by end H1 2012

·         Successful sale of first biogas energy plant

·         Generating output up by 17% to record 140GWh

·         Average selling price up 16% to £51/MWh (2010 £44/MWh)

·         Installed capacity of 27MW for CMM and 8MW for power response as at 31 December 2011

 

·         Revenue increased 44% to £9.5m (2010: £6.6m)

·         Adjusted EBITDA up 39% to £4.6m (2010: £3.3m)

·         Adjusted profit before tax up 45% to £2.0m (2010: £1.4m)

·         Operating cash of £4.4m (2010: £3.5m)

·         Net assets increased 17% to £20.9m

 

·         Acquisition of Greenpark Energy for consideration up to £5.725m will, when complete, increase capacity and secure long-term project pipeline

·         First coal bed methane partnership agreement signed with Aberdeen Drilling Management

 

“I am delighted to report on what has been a transformational period for the Group. By executing our stated strategy of remaining focused on our core coal mine methane business whilst leveraging our skills into new, related business streams, Alkane has become the leader in the UK CMM market and one of the largest independent power response providers.

Our strong organic performance, combined with our recent acquisitions, has given Alkane a scale where it is ideally positioned to exploit growth opportunities in the UK power industry where 25% of capacity will be decommissioned in the next decade.”

 

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2011 and the start of 2012 has been a transformational period for Alkane. The acquisitions of Seven Star Natural Gas Limited (“Seven Star”) in May 2011 and Greenpark Energy Limited (“Greenpark”), expected to be completed by the end of April 2012, will fundamentally enhance the Group’s prospects. The acquisitions will bring operating scale, bringing proforma installed engine capacity up to 70MW. They will provide growth opportunities, particularly in increases in the project pipeline and an increase of electrical grid capacity to 92MW. The benefits of these acquisitions will be seen in the results for 2012 and beyond. 

 

Since the period end we also signed a partnership agreement with Aberdeen Drilling Management Limited (“ADM”) to explore two of Alkane’s licences with coal bed methane (“CBM”) potential in the North West of England and in the East Midlands.  

 

From our existing assets the Company generated 140GWh of electricity in 2011 (2010: 120GWh), an increase of 17% as we saw the benefit of new capacity coming on line. The investment programme has continued into 2012 with new sites in Pontycwmmer, South Wales, and Gedling, Nottinghamshire, which are well into the build phase.

 

In 2011 Alkane opened a new coal mine methane (“CMM”) site at Calverton in July and gained, through the acquisition of Seven Star, onshore gas licences in Staffordshire and Derbyshire. In addition, we have successfully sold our first biogas energy plant to a project in Glenfarg, Scotland.

 

 

For the twelve months ended 31 December 2011, revenue has grown by 44% to £9.5m (2010: £6.6m). This increase is built on three main features. First the rise in output to 140GWh, up 17% on 2010. This has been achieved from operations across 13 sites (2010: 12 sites) which have boosted output, and we have benefited from the full year impact of sites commissioned in 2010. Secondly, we secured increased average electricity prices of £51/MWh for the period (2010: £44/MWh). Finally, the revenue line has the benefit of our first biogas energy plant sale to a project in Scotland which has resulted in revenue of £1.1m.

 

Gross profit was £4.2m in the year, up 21% (2010: £3.5m). Gross margin was 44%, down from 53% last year, which reflects a lower level of margin achieved on plant sales. Excluding the impact of the biogas power plant sale gross margin was 50%. The small underlying decline in the core gross margin was due to several factors. Cost of sales, excluding depreciation, have increased, partly reflecting the increase in sales volume, but also reflecting higher pumping costs as we increase vacuum at our sites in order to maximise the volume of CMM recovered. Also, included in cost of sales is the gas purchased for the power response business, which rose due to increased production. Depreciation increased by 28% to £2.3m (2010: £1.8m) as we continued to invest in new sites and major overhauls.

 

EBITDA excluding exceptional administrative expenses was up strongly in the year, increasing by 39% to £4.6m (2010: £3.3m), representing an EBITDA margin of 48% (2010: 50%). 

 

We continue to manage our cost base prudently. Administrative expenses before exceptional items were held at £2.0m (2010: £2.0m), and these now represent 21% of revenue compared to 30% last year. The average interest rate paid was reduced to 5.5% (2010: 6.8%).

Profit before tax, after adjusting for the one-off advisory and professional fees incurred in respect of the acquisitions of Seven Star and Greenpark in the year, increased by 43% to £2.0m (2010: £1.4m), reflecting the benefit of higher prices and additional output. The published profit before tax is £1.7m (2010: £1.3m).

 

The adjusted earnings per share (excluding one-off costs) for continuing operations increased to 2.26p per share (2010: 2.01p per share), with the increased earnings being partially offset by a higher weighted average number of share post the acquisition of Seven Star. Published earnings per share for continuing operations is 1.92p per share (2010: 1.93p per share).

 

 

Net assets at 31 December 2011 have increased to £20.9m (2010: £17.9m) with strong asset backing as Alkane now has 41MW of generating capacity and the infrastructure for the 13 operating sites. Working capital requirements remain tightly controlled with the majority of income received within four weeks of month end and we have a policy to pay creditors on fair terms. Our capital expenditure programme amounted to £7.4m (2010: £5.8m) which incorporates the opening of Calverton, expenditure at Gedling and other projects that will open in 2012, and continuing investment in major engine services.

 

The Group generated £4.4m of operating cash in the year (2010: £3.5m). Power plant is expensive to build and commission but results in long-term strong cash flows.  The acquisition of Seven Star was funded through a £1.0m equity raise which increased the number of shares in issue by 5.6m.  

 

Adjusted net debt at the year end had reached £5.8m (2010: £3.9m) as we continue to invest in sites. Gearing is a comfortable 29% (2010: 23%) and the Group remains well within all of our bank covenants.

 

 

 

Alkane ended 2011 with 13 sites and 41MW installed capacity. Post the new organic site openings and the acquisition of Greenpark we will have a pro forma total of 19 sites with capacity rising to 70MW. This will make the Group the market leader in UK CMM and one of the largest independent power response providers.

 

Output in 2011 was up 17% at 140GWh which is the seventh year of growth in output for Alkane. Our largest site at Shirebrook is nearing the completion of a planned major overhaul which has held back first quarter output in 2012 but the site is expected to return to full production in the second quarter.

Market electricity prices for the next twelve months are currently around £49/MWh. However by using our forward contracting policy we have 77% of our expected 2012 output contracted at an average price of £56/MWh. This does not include Greenpark, which has not placed longer term contracts.  Following completion of the acquisition we will put longer term contracts in place for the Greenpark output, and at current market prices this would result in an average price in 2012 for the enlarged Group of circa £53/MWh.  Market prices are currently higher for 2013 and 2014 (£53/MWh and £55/MWh respectively).

CMM output was up 15% as a result of new site openings. As we have always explained, existing sites will see a decline in output as the methane resource decays over a period of time. Consequently we continue to invest in new sites and research potential new locations and licence opportunities. The acquisitions will considerably enhance our project pipeline with a number of attractive sites now being researched.

 

A new CMM site was opened in July 2011 at Calverton in Nottinghamshire. There was one drill which did not lead to a new site, but also a successful drill programme at Gedling which will be operational in 2012. The acquisition of Greenpark will provide immediate output from its existing sites.

 

 

Our power response business earns its revenue from a combination of supplying electricity at peak times, standby fees from the National Grid’s Short Term Operating Reserve (“STOR”) programme and winter premium payments. During 2011, Alkane had 8MW assigned to this activity and this figure will rise to 20MW following the acquisition of Greenpark. As these operations are fuelled by bought-in natural gas, they will be at a lower margin than CMM, but bring the benefit of more stable and predictable earnings.

 

 

Alkane has also sold its first power facility for a biogas plant, at Glenfarg in Scotland, generating revenue of £1.1m in 2011. The Company continues to evaluate a number of biogas investment and supply opportunities.

 

In February 2012, the Company signed a partnership agreement with Aberdeen Drilling Management (“ADM”) to explore two of our licences with CBM potential in the North West of England and in the East Midlands. ADM will initially complete a geological research programme on the licences before finalising drilling commitments. ADM will farm-in to Alkane’s licences and gain up to a 50% share in Alkane’s interest in each licence following the completion of a CBM well in the respective licence area. 

 

 

 

 

Alkane’s core skills are the development, design and build of mid-sized gas to power plants. We use modular, remotely managed engines and plant to ensure our sites remain cost effective and flexible. Our main CMM business continues to perform well and has made further progress both in terms of output and profitability.

 

We have a clear strategy in place to exploit the opportunities in a power generation market where 25% of industry capacity will be retired in the next decade. As part of the Company’s growth strategy we are continuing to develop self-funded organic growth. However, we are aware of the need to increase the overall scale of the Group and reach critical mass from a financial and operating perspective. Accordingly, over the last year we have looked at a number of potential consolidation and expansion opportunities in CMM, stranded on-shore gas and biogas. We will continue to look for appropriate opportunities in these sectors, and others including CBM, where we have the in-house expertise to increase scale and add value for our shareholders.

 

We acquired Seven Star in May 2011 which has brought in two on-shore conventional gas licences with the potential to build our standard model power plants. We will also look at adding to our licence acreage in the 14th Onshore Licensing Round.

 

On 1 February 2012, Alkane announced the acquisition of Greenpark for a maximum consideration of £5.725m. When completed the acquisition will bring 29MW of installed engine capacity, which with associated plant and equipment has an estimated book value of approximately £9m, and access to seven CMM gas exploitation licences. It will boost our CMM output, the CMM project pipeline and our power response operations. We have consistently grown over recent years and on the current run rate the enlarged Group sites are generating an annualised output of 180GWh which is enough to power around 60,000 homes.

 

Post the acquisition of Greenpark we will operate from 14 CMM sites which will be by far the largest UK CMM portfolio. Once a site is established we would expect high EBITDA margins and payback periods of circa 3-4 years for a typical site. Like any resource the CMM gas will decline over time, and consequently we match generating capacity on site to run for around a decade. Therefore to maintain and grow output Alkane needs to have a development pipeline of future projects. 

 

As more renewable energy sources come on stream, the grid is finding that decentralised and variable generators such as wind power are raising new challenges to provide security of supply. As such National Grid and Department of Energy and Climate Change (”DECC”) see the need for an expansion in standby facilities with estimates that for every 8MW installed of intermittent wind power the grid will need 1MW of standby capacity. As CMM sites decline in output we have a ready-made power plant with planning, generators and grid capacity. We are therefore increasing our presence in power response which is aimed at running our fast response engines at peak winter pricing and acting as standby generators for National Grid. Immediately post the acquisition of Greenpark we expect to have 20MW across seven sites allocated to power response and we intend to increase this to 24MW by the end of 2012.

 

In terms of the broader renewable energy market we will remain focussed on our core gas to power skills and our operational heritage. 

 

 

 

 

 

The Board would like to take this opportunity to thank our staff and suppliers who are an essential part of the success of Alkane. 

 

It is pleasing to see how Alkane has built on the momentum of the last few years. Our core CMM business has made significant progress both in terms of profitability and output.

 

In addition, we have seen good progress in the related areas of power response and biogas with new opportunities following the acquisition of Seven Star in the onshore gas market.

 

Perhaps the most exciting development was the acquisition of Greenpark announced in February 2012 and due to complete before the end of April 2012. This will fundamentally enhance the Group’s prospects, boosting our installed engine capacity by 29MW, and now with 14 coal mine methane sites Alkane has the UK’s largest CMM portfolio.

 

Not only are National Grid and DECC forecasting the need for an expansion of electricity standby facilities, but also the UK power market will see 25% of industry capacity being retired in the next decade. We believe that Alkane is ideally placed to take advantage of these trends with its increasing scale, strong balance sheet, asset base and cash flow.

 

We look forward with confidence to another year of progress in 2012.