Alkane Energy plc (“Alkane”, “the Group” or “the Company”) (AIM: ALK) the profitable alternative energy company, today announces its unaudited interim results for the six months to 30 June 2011.

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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The strong momentum we have created over recent years has continued into the start of 2011 with output rising 34% to 70GWh (2010: 52GWh). This is a further important step in the delivery of our stated strategy to exploit the coal mine methane (“CMM”) reserves in our licence portfolio by increasing the number of sites we operate.  CMM revenues have increased 40% on the same period last year to £4.0m (2010: £2.8m).

We continue to look to broaden our product offering by leveraging our core gas to power skills. The Board is determined to seek out sensible business expansion as a way to enhance shareholder value whilst retaining CMM as our priority investment area. Each investment in new business areas is designed to give us an improved quality of earnings with more predictable and longer term cash flows. The acquisition of Seven Star Natural Gas Ltd (“Seven Star”) in May 2011 has provided two conventional onshore gas licences where we intend to deploy the same operating model and equipment that we have on CMM sites through the construction of mid-sized gas to power plants.  

 

In addition Alkane has already started moving into biogas and power response which together contributed 20% of turnover in the first half.

 

Revenue increased by 63% to £5.0m (2010: £3.1m), driven by higher CMM output and rising selling prices compared with the same period last year. In addition, we are reporting the first revenue from our biogas business, which has delivered its first power plant with income in the period of £0.7m.

 

Profit before tax, after adjusting for the one-off advisory and professional fees incurred in completing the acquisition of Seven Star, increased by 36% to £0.89m (2010: £0.65m), reflecting the benefit of higher prices and additional output. The published profit before tax is £0.72m (2010: £0.65m).

 

The pricing environment has been positive with an average electricity selling price for the period of £49/MWh (2010: £43/MWh) an increase of 14% on the same period last year. 

 

Gross profit was £2.2m in the period, up 22% (2010: £1.8m). Gross margin was 44%, down from 59% in the same period last year, however no margin has been taken to date on the sale of the biogas power plant and if this element is excluded gross margin was 52%. The decline in the 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 51% to £1,075k (2010: £710k) as we continued to invest in new sites and major overhauls.

 

We continue to manage our cost base prudently. While administrative expenses rose by 8% to £1.2m (2010: £1.1m), these now represent 24% of revenue compared to 37% last year. The average interest rate paid was reduced to 5.9% (2010: 7.3%).

 

EBITDA was up 34% to £1.95m (2010: £1.45m) in the period which represents an EBITDA margin of 39% (2010: 47%). Excluding the biogas business, EBITDA margins were flat at 48% (2010: 49%).

 

Our balance sheet remains strong with net assets rising to £19.9m (2010: £16.6m), with modest gearing of 17% (2010: 14%) and net debt of £3.4m (2010: £2.4m). The Board is comfortable with the current level of debt and will look to take advantage of debt funding as facilities are made available and there is clear visibility of future cash flows.

 

Cash flow from operations has increased to £2.1m (2010: £1.5m). In addition, we raised £1.0m of new equity on the acquisition of Seven Star in May. Cash outflows include the on-going roll out programme of new CMM sites with capital expenditure running at £1.9m (2010: £2.2m) and payments of £0.3m for the acquisition of Seven Star and associated due diligence fees.

 

The following table shows our continued progress:

 

 

We traded from 12 sites throughout the period. CMM accounts for the majority of our output, and has seen a 32% increase in electricity generation to 68GWh (2010: 51GWh), as we benefit from the full year impact of sites opened last year. We have now commissioned our first new site in 2011, Calverton, which started to export to the grid in July. A second site, at Gedling, has been drilled and we are on track to open a site at Pontycymmer early in 2012. We remain on track to deliver around 4MW of new CMM capacity by the year end.

 

Pricing (base load 12 month ahead contracts) has firmed over the last 15 months having started from a low point of below £40/MWh to touch £60/MWh during the spring of this year. Over that period the market tightened due to colder than normal winter conditions, political disruption in the Middle East and additional LNG demand from Japan post the earthquake and tsunami. We operate a prudent forward contracting policy, and currently have 96% of 2011 expected output contracted at £51/MWh. Looking forward into 2012 we have an average contract price of £57/MWh for 54% of our expected output.

 

 

We moved into power response facilities towards the end of 2009 with our surplus engine capacity being used as a peak load or short term operating reserve (“STOR”) stand by facilities for the national grid. Our Shirebrook site continued to run peak load (16.00 – 19.00 during the working week). Overall this power response generated circa 6% of the Group’s total revenue.

 

Our first Biogas plant has now been installed at Glenfarg, Perthshire at an anaerobic digestion (“AD”) site owned and operated by the TEG Group PLC (“TEG”), and we expect this plant to be commissioned during the second half of this year. This plant was delivered on time and on budget.

 

 

Alkane will remain close to its heritage in exploiting new business streams. Our skills encompass site selection, planning, permitting, building, owning and operating midsized “gas to power” sites. These skills, like our plant, are transferable and this has led us into power response and biogas. These new business streams are aimed at securing predictable and long term income flows.

 

We believe that our CMM licence portfolio has a number of attractive projects still to be developed and we have the proven skills and track record to exploit these opportunities.   Alkane is the sector leader in CMM in the UK and our on-going self financing roll out has made us one of the most active onshore gas companies. We continue to await the Department of Energy and Climate Change’s announcement of the 14^thLicensing Round and the Group will apply for a number of additional licences. However, the results of this round will now not occur until next year.

 

Alkane uses a series of criteria in appraising CMM sites which includes the size of the mine workings, gas content of the coals and flooding patterns. Flooding of the underground workings may occur at some point in the future which would deny the opportunity to use the gas resource. There is also drill risk and we have been unsuccessful in drilling at Clipstone this year which, although disappointing, is in-line with our average drilling success rate. CMM gas, as with any natural resource, is finite and we need to ensure we continue to refresh our reserve base.

 

The acquisition of Seven Star gave us our first conventional onshore gas licences. The acquisition provides two gas reserves in the Midlands. These sites are now being worked on as part of our project pipeline and considerable progress has already been made since acquiring the assets. A potential site has been identified for Calow in Chesterfield and negotiations have commenced with the land owner. A 12 month extension of the licence has been secured for the Nooks Farm, Staffordshire site so that we can review drilling and planning options. We also intend to make licence applications in the 14^th Licensing Round in respect of conventional onshore gas.

 

Alkane also has UK onshore gas licences covering over 600km², which have coal bed methane (“CBM”) and shale gas potential. The CBM gas in place is estimated at 385bcf (mid-case). As CBM remains to be proven commercially in the UK we continue to monitor progress in the wider industry and search for a partner who can bring CBM experience and financing through the exploration stage.

 

In biogas, we are delighted that the Alkane/TEG consortium has been selected as preferred bidder for the North East Wales area hub. This is expected to reach financial close before year end and we will then create a joint venture between Alkane and TEG to run the 15 year municipal waste contract with the intention of building a 20,000 tonne, 1.2MW, AD biogas plant near Rhyl in North Wales.  We continue to work with TEG on municipal contracts with the aim of being a joint venture equity investor or supply chain partner in future projects. There is a strong government commitment to support renewable energy and AD is one of the preferred solutions. Alkane is also in talks with other parties regarding AD projects outside the municipal sector.

 

 

Alkane has 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.  Our main CMM business continues to perform well and has made further progress both in terms of output and profitability. We remain fully committed to delivering on our CMM growth strategy. Selling prices have increased and we expect these to continue to strengthen and our CMM capacity to grow by a further 4MW by the year end.

 

Our core skills are enabling us to grow the business successfully in related areas where there are solid returns and the acquisition of Seven Star gives us new opportunities to exploit the onshore gas market.

 

Our first biogas project was installed on schedule and we foresee long term earnings from our power response facilities offering peak load or STOR stand by facilities for the national grid.

 

We look forward to delivering another successful year in line with market expectations.

 

 

 

 

 

 

 

 

 

 

Basis of preparation