Chairman's statement

I am pleased to present the Group's interim report for the half year ended 30 June 2014, the first set of results since my appointment in March 2014.  Whilst it has been another encouraging period for the Operations division, during which the Group acquired the Hillbarton composting facility business and assets, the Engineering, Procurement and Construction contracts ("EPC") division was loss making in the period and continues to face a number of challenges.  

Half year revenue for the period was £5,598,000 (2013: £12,906,000) and the Group operating loss for the period was £1,176,000 (2013: £777,000).  Overall, the Group recorded a gross profit for the period of £1,089,000 (2013: £1,940,000). 

The Group cash balance as at 30 June 2014 was £288,000 (2013: £1,739,000) having drawn down £389,000 (2013: £Nil) from a short-term bank facility. 

Group Plant Operations Division

The Group's operations division performed satisfactorily in the first half of 2014 with gross margins increasing by 7% to 28.7% (2013: 21.7%). 

During the period, the Group was pleased to strengthen the operations business with the acquisition of the Hillbarton business and assets.  The Hillbarton site is a combined In Vessel ("IVC") and Open Air Windrow ("OAW") composting facility based in the South West of England.  It has a combined capacity of 34,000 tonnes per annum and is permitted up to a capacity of 50,000 tonnes per annum, allowing the potential for future expansion.  The operation also benefits from established compost brands and it supplies bagged compost products to the local retail market.  The assets were acquired for £1, with an element of contingent consideration based on future profitability.  We are pleased to report that integration has proceeded smoothly and the site is already contributing a modest profit. 

Perth AD Facility (TEG Biogas (Perth) Limited)

The performance of the Perth AD facility continues to be excellent with power output ahead of design capacity, consistently producing in excess of 0.7MW of electricity. 

The implementation in Scotland of the landfill ban on organic waste commenced in January 2014 and the Group has already observed a significant increase in demand for waste capacity.  Furthermore, the plant generates approximately 0.2 MW of heat, and it is intended that this will be utilised on site in the Binn Eco Park development from 2015.  The Group retains a 50% shareholding in TEG Biogas (Perth) Limited, though the current accounting treatment prevents the Group from reporting gross revenue and returns in the Group's primary accounts.

Dagenham AD and IVC Facility (TEG Biogas (London) Limited)

Following a successful construction and commissioning period, we were pleased to announce on 6 March 2014 that the Dagenham facility had passed its performance tests and was handed over to the client, TEG Biogas (London) Limited both to programme and on budget.  TEG commenced its first Operating and Maintenance contract ("O&M"), a 15-year agreement generating £1.3m per annum in revenues.  This O&M contract represents a new operating segment for the Group and is being reported as such.  The Group retains 24.5% ownership of the facility though again, the accounting treatment currently prevents the Group from reporting gross revenue and returns from this shareholding in the Group's primary accounts.

The AD plant has been ramped up to full power output and it is expected that the Combined Heat and Power plant ("CHP") will be upgraded to 2MW from the current 1.56MW due to the exceptional performance of the facility.  However, the Group O&M contract has presented some challenges in relation to the cost of waste haulage and product placement.  Whilst teething issues are typical for a new facility, the O&M contract is not expected to move into profit until 2015.    

Group EPC Contracts Division

The EPC division's revenue was significantly reduced compared to the same period in 2013, reflecting a drop off in revenues following the end of the Dagenham contract construction period and the delays in completing financial close of the Gaydon project.  The Group retains a minimum overhead in the EPC division but given the fixed level of overhead required for future build projects and to resolve the Manchester contract, the EPC contracts division was loss making in the period.

As announced on 4 July 2014, the Group experienced difficulties in reaching financial close on the Gaydon project.  Whilst an offer of funding was in place and the project was close to completion, the delays in finalising funding offers in 2013 resulted in certain site related issues that funders required clarity on and unfortunately it has not been possible to resolve these to date.  The Group has therefore decided not to pursue this project further and expects to continue to operate the site as a composting facility until the end of its existing lease in 2019.

Greater Manchester Waste PFI Contract

The Company continues to work hard and is making progress in relation to the Manchester contracts.  Work is continuing to resolve the outstanding issues, with certain projects close to completion and further projects expected to be completed during the coming winter.  The Group continues to press for the release of retentions. Whilst PI insurers have responded in relation to project costs, the Company continues to bear the cost of the EPC division required to manage the conclusion of this contract.

Market Update

The fundamental drivers remain in place for continued market growth, presenting - opportunities for further development of the Group.  Statutory obligations to divert waste from landfill increase annually and Landfill Tax ("LFT") has reached a total of £80.00 per tonne.  This will increase annually in the future by RPI.  As stated above, the Scottish Assembly has commenced the progressive introduction of a complete ban on the landfill of organic waste in both the public and private sectors and the Northern Ireland Assembly has recently announced it will introduce similar measures. 

The wider regulatory environment continues to benefit the Group, as its technology lends itself to the additional level of containment required by the regulators, which is now being enforced generally.  In addition, at some point in the future, regulators are expected to further enforce policies to reduce the level of low-grade green waste disposal, potentially increasing the volume of green waste diverted into the composting sector.

Consolidation of the composting and AD sectors is expected to continue and the Board believes there will be continued opportunities to grow the operational business through project finance and, potentially, with value enhancing acquisitions, such as the successful Simpro and Hillbarton projects. 

Board Structure

As announced on 22 May 2014, the restructuring of the Board was completed with the appointment of Steve Morrison and Fergus Healy following my appointment on 31 March 2014.

Strategic Activities

The Group continues to investigate further investments at both the operating company and project level and is advancing AD projects at four of its facilities, including a project at the recently acquired Hillbarton facility.  Furthermore, the Group is appraising further potential acquisitions that it believes could enhance its operations business.  The Board is seeking alternative financial structures for these projects that would offer greater value and it has received offers of project funding that are currently under review.

It is recognised that the Group has been significantly restricted as it does not benefit from a solid capital position and is dependent on higher risk and unpredictable EPC projects, together with a successful outcome to the Greater Manchester contract.  The Group is close to completing an operational group review aimed at resolving these issues and will update the markets further in the near future.

Future Prospects

The Board believes the Operations division of the Group offers sustainable and predictable revenues and therefore represents the future value of the Group.  Its performance over recent years has been encouraging and it has developed into one of the strongest performers in the sector.  Whilst 2014 still holds some challenges for this division with some increased competition in some regions, and there are the normal teething problems with the new Dagenham O&M contract, the outlook for the operations division remains strong.  The Board believes it should therefore focus future efforts and resources on growth of this division through the development of AD plants on Group sites, possible refinancing of associated interests and through value enhancing acquisitions.  This strategy will reduce the reliance on the unpredictable and lumpy cashflows associated with contracts in the EPC division.

The Board recognises that the Group remains significantly undercapitalised and that to secure the future of the Group it is necessary to secure further funding, both for projects and working capital.  Should this funding be secured it is likely to be through both project finance (debt) and a proportion of equity.  The current economic environment is difficult and the company has reported an operating loss for the period.  Whilst the company has made progress in relation to the Manchester contracts, the directors consider that the outlook presents significant challenges in terms of resolving the outstanding issues and securing the retentions in the near future.  Whilst the directors have instituted measures to preserve cash and secure additional finance, such finance will be required during the remainder of this year, and these circumstances create material uncertainties over the future trading results and cash flows. The company has commenced discussions with its largest shareholders about additional funding requirements but have not yet secured a commitment from them.

The Board recognises the Group remains at risk unless that is achieved but on the basis that such funding can be secured, the Board is confident that the Group has a positive future as a larger and more profitable operating company.

L McKenna

Chairman

30 September 2014

Consolidated statement of comprehensive income

For the six months ended 30 June 2014

Consolidated statement of financial position

As at 30 June 2014

Consolidated statement of changes in equity

For the six months ended 30 June 2014

Consolidated statement of cash flows

For the six months ended 30 June 2014

Notes to the interim report

1.     Nature of operations and general information

The principal activities of The TEG Group Plc and its subsidiaries ('the Group') are the design and production of Silo-cage composting plants and Anaerobic Digestion (AD) plants for sale to third party clients, and the design, build and operation of TEG owned waste recycling facilities.

The TEG Group Plc is the Group's ultimate parent company.  It is incorporated and domiciled in Great Britain.  The address of TEG Group Plc's registered office, which is also its principal place of business, is Westmarch House, 42 Eaton Avenue, Buckshaw Village, Chorley, PR7 7NA.  The TEG Group Plc's shares are listed on the Alternative Investment Market of the London Stock Exchange.

The TEG Group Plc's consolidated financial statements are presented in Pounds Sterling (£), which is also the functional currency of the parent company. 

These consolidated condensed interim financial statements have been approved for issue by the Board of Directors on 30 September 2014.

The figures for 31 December 2013 are an abridged version of the Group's full financial statements and, together with other financial information contained in this interim report, which is unaudited, do not constitute statutory financial statements of the Group as defined in Section 434 of the Companies Act 2006.  Statutory financial statements for the year ended 31 December 2013 have been filed with the Registrar of Companies for England and Wales and have been reported on by the Group's auditors. The report of the auditors was unqualified and did not contain a statement under section 498 (2) or Section 498 (3) of the Companies Act 2006.

2.     Basis of preparation

The Group's interim condensed consolidated financial statements are for the six months ended 30 June 2014 and have been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards (IFRS).  They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2013.

These condensed consolidated interim financial statements (the interim financial statements) have been prepared in accordance with the accounting policies adopted in the last annual financial statements for the year 31 December 2013.

The Directors have prepared cash flow forecasts for a 12 month period following the date of approval.  As part of the preparation of these forecasts, the Directors have considered the overall financial market at this time, the challenges experienced in obtaining timely project funding and the impact such delays have on the cash flow position of the Group.  The Directors have estimated the likely conversion of potential future contracts, the likely timetable for release of the retentions and recovery of costs due in respect of the Manchester contracts, the working capital required and the likely funding available to execute contracts.  Given these considerations, the Directors have adopted a prudent funding policy with regards to forecasts over the period.

As described in the Chairman's statement, the current economic environment is difficult and the company has reported an operating loss for the period.  Whilst the company has made progress in relation to the Manchester contracts, the directors consider that the outlook presents significant challenges in terms of resolving the outstanding issues and securing the retentions in the near future.  Whilst the directors have instituted measures to preserve cash and secure additional finance, these circumstances create material uncertainties over the future trading results and cash flows. The company has commenced discussions with its largest shareholders about additional funding requirements but have not yet secured a commitment from them.

The accounting policies have been applied consistently throughout the Group for the purposes of preparation of these condensed consolidated interim financial statements.

3.     Business segments

For management purposes, the Group is organised into the following operating segments: Plant Operations, Operating and Maintenance Contracts and EPC Contracts.

All revenues from external customers and non-current assets are attributable to, and located in, Great Britain.

In identifying its operating segments, management follows the Group's service lines which represent the main products and services provided by the Group.  These operating segments are monitored and strategic decisions are made on the basis of segment operating results.

The Plant Operations segment relates to facilities which are owned and operated by the Group.  These sites process waste received from customers and manage the compost produced by the facilities. The Operating and Maintenance Contracts segment relates to the operation and maintenance of IVC and AD facilities that have been sold to third parties through the EPC Contracts segment.  The EPC Contracts segment includes IVC and AD sales to third parties including the design, production and installation of plants for sale to third party clients. The revenues and net result generated by each of the Group's operating segments are summarised as follows:

6 months to 30 June 2014

6 months to 30 June 2013

Year to 31 December 2013

4.     Share Capital

The deferred shares have no voting rights. The shares are not entitled to any dividend or other distribution or to participate in any way in the income or profits of the Group.

5.     Loss per share

Underlying losses per share has been disclosed to give a clear understanding of the Group's underlying trading performance.  It has been calculated using the underlying earnings figures above and the weighted average number of ordinary shares above.

Diluted losses per share is equal to the basic loss per share as the share options in issue at 30 June 2014 are anti-dilutive in respect of the diluted loss per share calculation and have therefore not been included.

6.     Business combination  

On 31 March 2014, the Group acquired the business and assets relating to a composting operation at Hillbarton, near Exeter. The acquisition was from Glendale Recycling Limited, a subsidiary of Parkwood Holdings Plc. The acquisition was on a cash-free, debt-free basis for a nominal initial consideration of £1 with a further potential contingent consideration of up to £400,000 dependent upon the profit performance of the operation over the next four years. The transaction has been accounted for through the application of IFRS 3 Business Combination (Revised 2008) and using the acquisition method of accounting.

The Hillbarton site is a combined In Vessel ("IVC") and Open Air Windrow ("OAW") composting facility with a combined capacity of 34,000 tonnes per annum. It has a permitted capacity of 50,000 tonnes per annum, allowing the potential for future expansion. The operation benefits from establish composting brands and supplies bagged compost products to the local retail market.

Fair values are provisional and will be reviewed during the hindsight period as further information is gathered relating to the fair values at the acquisition date.

The amounts provisionally realised for each class of the acquiree's assets and liabilities recognised at the acquisition date are as follows: