Companies: ALK   

After a chequered history as a quoted company, the wind finally seems to be blowing in the right direction for green energy producer Alkane Energy.

European governments are looking favourably on the sector and encouraging renewable energy generation, which can assist in the reduction of carbon dioxide emissions insisted upon by the Kyoto Protocol. This suits a reawakened Alkane, which has modified its strategy to take advantage of these legislative trends.

The company joined the Full List in late 2000, raising £30 million at 90p a share for an initial valuation of £80 million. Alkane’s intention then was to set up plants at the top of abandoned UK coalmines to extract the methane buried beneath to generate electricity.

However, a sudden drop in wholesale electricity prices to around £15 per Mega Watt hour (MWh) over the succeeding two years, combined with Government reluctance to subsidise this process, forced Alkane to abandon this strategy in March 2003, incurring a one-off £19.7 million write-down as a result. At this nadir the shares stood at just 9.5p.

At the same time, the company re-focused its efforts on more environmentally concerned countries, principally Germany. The extraction of methane for use in electrical generation is encouraged by subsidies that allow producers to sell the resultant electricity at rates substantially above the prevailing market price. Equally importantly, these prices are agreed in fixed long-term contracts of 20 years or more with electricity companies, ensuring projects are commercially viable.

In August 2003, Alkane acquired a 51 per cent interest in Pro2, one of the leading engineers specialising in equipment for methane-based power plants. The German operator also provides other associated services to installers of its green energy generators.

The stake in Pro2, profitable on a trading level and making annual sales of £16 million, was acquired for just £2.6 million. Since then this subsidiary has continued to grow and makes up most of Alkane’s business. The entire group was profitable in the second half of 2004 and, with the Kyoto Protocol bringing carbon dioxide reduction to the fore, the group also stands to prosper as it can provide carbon emission credits through its activities.

Strategy

Chief executive Cameron Davies, who has been with the company since it floated, is focusing Alkane’s efforts firmly on Pro2’s activities. As well as making generators for use above abandoned coalmines, Pro2 also provides equipment for those obtaining methane from other sources.

For instance, decomposing rubbish in landfill sites gives off substantial amounts of methane. Silos of animal dung, normally located on livestock farms, also produce methane in large quantities, as of course do sewage plants. This methane is termed biogas and is becoming a key source of renewable energy.

Pro2 has contracts with an increasing number of large farms. These businesses are being encouraged to set up such plants, because the electricity generated can be sold at a subsidised rate to electricity companies. Farmers also take fees for accepting organic matter from supermarkets, such as food that has passed its sell-by date, to put into silos. Some farms even grow maize and other fast-growing crops to decompose in these silos, or ‘biodigesters’.

Pro2 aims to provide ‘turnkey’ solutions to its clients. This means, as well as supplying the equipment necessary to generate electricity from methane, it will install the system and service most of these plants. In addition, Pro2 can finance some of these operations, if the site-owner does not wish to, and so receive revenue for the electricity sold.

As well as serving its domestic market in Germany, Pro2 is selling its systems and services into other countries, both in Europe and further afield. In all, the group operates in 14 countries, and has installed 40 plants across the continent. It has recently made sales to Hungary, Russia and Martinique.

Overall, Pro2 has experienced consistent growth over the past five years and anticipates that 2005 will be another strong year of improvement, with an order book ‘running well ahead of 2004 in all sectors’.

Naturally, Alkane retains interests in the UK, and Pro2’s systems and services can be sold here. Just over a year ago the group bought a biogas concern for the knockdown price of £150,000. This business’ main interest is in a plant generating an anticipated 1.9MW of renewable energy in Northern Ireland.

The price of electricity has been rising over the past year to £27 per MWh, partially reflecting the increased costs of raw energy materials. This will make Alkane’s legacy plants above UK coalmines economically viable. One at Bevercotes, near Newark, is already operational. Another, at Markham, has its generator installed and has just been connected to the National Grid. Two further plants have ordered equipment from Pro2. When these are completed, Alkane will be capable of generating 8MW in total.

In addition, Pro2’s skills have enabled Alkane’s methane extraction systems to be adapted so they can take out methane from operational mines and, as a by-product, provide air conditioning. One has been sold to the Iranian national coal producer, bringing in substantial revenues of nearly £1 million. There is apparently strong interest for this system from such major coal producers as India, China and Russia.

Management

Cameron Davies, 61, is a geologist who worked for a number of oil and gas exploration and development companies, including Premier Oil, before setting up Alkane in 1994. He also has general management experience and was instrumental in lobbying the Government to exempt electricity generated from coalmine methane from the Climate Change Levy.

Technical director David Oldham used to be head of engineering at British Coal where he was responsible for creating power plants to use coalmine methane. He joined Alkane at its inception and designed most of the processes connected with its original business.

The company’s finance director is Stephen Goalby. For much of the 1990s he was financial controller of East Midlands Electricity, where he was instrumental in the company’s eventual sale. He was also involved in the renewable energy division of the company. After that he became general manager of Corby Power, operator of a large gas-fired power station, before joining Alkane in 1999.

Recently appointed chairman John Lander was managing director of the UK arm of fully-listed Tullow Oil until he joined Alkane.

Finally, Pro2 boasts three executive directors with over a decade of experience each in the renewable energy sector.

Prospects

Some of Alkane’s projects to generate electricity from coalmine methane have come on line in the first half of 2005. For instance, at the 2.7MW Joarin plant in Germany, where it effectively owns the licence to produce electricity, it has agreed a 20-year contract to sell the electricity produced at €65 per MWh for 20 years. Pro2 plans to put plants on three other German mines at which it has licences.

An additional benefit of Alkane’s activities is that using methane to produce electricity reduces the amount of greenhouse gas emitted into the atmosphere. This is because methane is considered 23 times more potent a greenhouse gas than carbon dioxide. Thus Alkane collects verifiable emissions credits that can be sold to large producers of carbon dioxide that exceed their quota.

At the group’s coalmine sites in Germany it will be able to sell these credits from 2008 when the EU legislation comes into force. These can currently be sold, at a discounted price of €16 a tonne, on the market. Alkane wants to convince the UK Government to reverse its current position and allow methane from abandoned coalmines to qualify for this credit as in Germany.

Service contracts to maintain plants for clients will become an increasingly important part of Alkane’s turnover in the coming years. These contracts should last for at least ten to 15 years after the plant is installed, and provide a steady stream of revenue to the company.

Davies sees much of the company’s growth coming organically, although he does not rule out further acquisitions. ‘We want to become a major player and not a minnow in the renewable energy sector,’ he says. An Austrian competitor of Pro2 has recently been taken over by US industrial giant GE, and Alkane might be an attractive target at some point too.

Valuation

After the successful integration of Pro2, Alkane’s turnover jumped 172 per cent last year to £19.8 million. This allowed the group to halve operating losses to £753,000. The company broke even in the second half, producing a £199,000 profit. Most of Pro2’s sales are recorded in the second half and this should be repeated this year. However, if growth continues as expected the company should make a maiden full-year profit this year.

House broker Brewin Dolphin predicts a 24 per cent rise in sales to £24.6 million, which should give a £700,000 pre-tax profit. If that can be repeated in 2006, then profits could climb to £3.1 million. That would equate to 2.2p earnings per share, giving a p/e of 16.8. But these figures could prove conservative, particularly if the UK Government changes its stance on the ‘green’ status of coalmine methane and income from emissions credits is received earlier than the 2008 date currently envisaged.