Preliminary Results
EcoSecurities Group plc
13 March 2008
EcoSecurities Group plc
Preliminary results for the year ended 31 December 2007
Dublin, Ireland - EcoSecurities Group plc ("EcoSecurities" or the "Group"), a
leading company in the business of sourcing, developing and trading carbon
credits, today announces its preliminary results for the year ended 31 December
2007 and trading statement to 29 February 2008.
Highlights
• 2007 marked EcoSecurities' 10th anniversary and witnessed policy
developments of significance to the Group's business. Publication of the Stern
Report, IPCC's 4th Assessment Report and the Bali Roadmap developed at the
Conference of Parties to UNFCCC all pave the way to a larger and longer-lasting
carbon trading environment.
• In order to capture the opportunities related to the expansion of this
market, EcoSecurities raised in total €100 million of additional capital in June
2007 (€44.0 million) and July 2007 (€56.0 million). A partnership agreement was
also signed as part of a strategic investment by Credit Suisse.
• EcoSecurities' revenue increased by 135% to €7.2 million and the loss
before financing costs increased by 70% to €(35.8) million. The loss for the
financial year increased by 125% to €(45.0) million.
• The loss for the financial year was increased by a net provision of
€9.2 million relating to the cash settlement of a 2005 sales contract where the
buyer has given notice that they are unable, as a result of their jurisdiction,
to receive CERs. The CERs which would have been used for settlement of this
contract will be available for sale to the Group's other customers.
• At the 2007 year end the Group had contracts for CERs from 437 CDM
projects, of which 400 projects were included in the Group's portfolio and the
remainder are in an internal due diligence process prior to entry into the
portfolio. The contracted projects are capable of generating 166 million CERs to
2012 (2006: 156 million) and the volume from projects in due diligence will not
be included in the portfolio numbers unless projects satisfy EcoSecurities'
prudent assessment of project viability under CDM rules.
• On a net basis, adjusting for EcoSecurities' share of CERs from
individual contracts, portfolio projects are capable of generating 130 million
CERs to the Group to 2012 and projects in due diligence have the potential to
generate a further 20 million CERs.
• Changes in the CDM process during the year resulted in delays in
project registration and carbon credit generation, leading the Group to conduct
a portfolio write-down in November 2007.
• Post-2012 contracted volume continued to grow and by 31 December 2007
totalled 103 million carbon credits. The post-2012 CDM portfolio volume relates
to potential production of CERs from the Group's projects after 2012 and is
incremental to the CDM portfolio.
• EcoSecurities initiated activities related to the voluntary carbon
market and created a VER portfolio of 10.7 million. The first VER sales of
170,000 tonnes were achieved in 2007 to both US and European corporate buyers.
• At 31 December 2007, 437 projects were contracted, of which 400 were
in the CER portfolio, 239 PDDs were completed, 223 projects had been submitted
to validation, 115 had completed the validation process and 95 were registered
with the CDM Executive Board.
• Of the 400 projects in the portfolio, 342 were financed, 292 were
under construction and 148 were operational.
• 13 million CERs were sold forward during 2007, bringing the total to
42 million CERs at 31 December 2007. This represents expected total forward CER
revenue of €558 million and a Net Trading Margin of €280 million through to
2013.
• The strategic relationship with Credit Suisse continued to gain
momentum with the completion of EcoSecurities Carbon I, a ground-breaking
structured CER transaction which placed over 5 million CERs. Group revenues from
this transaction are expected to commence in 2009.
• Secondary trading in CERs has presented new opportunities for the
Group with additional value generated from projects outside its portfolio.
• Management was strengthened with the appointment of Adrian Fernando as
Chief Operating Officer, Paul Ezekiel as an additional Non-Executive Director
and Martin Enderlin, former CDM Executive Board member, as Director of
Government and Regulatory Affairs.
• EcoSecurities maintained a cash balance of €88 million at 31 December
2007.
Current trading and outlook
• Contracts for CERs amounted to 171 million CERs at 29 February 2008,
on a gross basis.
• On a net basis, the volume of contracted CER projects to 2012 remained
stable at 150 million CERs at 29 February 2008, including volume of 28 million
CERs that were in due diligence.
• At 29 February 2008, the number of projects registered had increased
to 101.
• The Group continues to focus on originating VER projects and at 29
February 2008 had acquired a further 2.2 million VERs.
• New management appointments comprised James Thompson as Chief
Financial Officer and Alec Dreyer as an additional Non-Executive Director.
Former CFO, Jack MacDonald is now Director of Corporate Development, focusing on
identifying and executing strategic opportunities, with particular emphasis on
acquisitions and project investments.
• EcoSecurities and Credit Suisse inaugurated their joint €1 billion
carbon purchase facility in February 2008, with the signing of emission
reduction purchase agreements with a Chinese renewable energy project developer
for several wind farm projects.
• The Group's cash balance as at 29 February was approximately €78
million.
The Group's contracted carbon credit projects at 31 December 2007 can be broken
down as follows:
Carbon credit type: Gross volume Net entitlement to Group
(million) (million)
CERs to 2012 (principal) 131 123
CERs to 2012 (agency) 9 4
CERs to 2012 (project development) 4 3
Subtotal CER portfolio to 2012 144 130
CERs to 2012 (in due diligence) 22 20
Subtotal contracted CERs to 2012 166 150
CERs post-2012 (options and ERPAs) 103 103
VERs 11 11
Total volume contracted 280 264
The Group's contracted projects and CERs on a net basis can be analysed as
follows:
31 December 2007 31 December 2006
Project cycle landmark No. of projects Million CERs No. of Projects Million CERs
(cumulative values)
Contracted 437 150 353 127
Due diligence 37 20 0 0
Portfolio 400 130 353 127
Operational stage:
Financed 342 104 283 105
Construction started 292 88 162 61
Operation started 148 39 84 31
CDM stage:
PDD complete 239 73 132 39
Submitted to Validation 223 66 125 38
HNA obtained 181 55 67 10
Validated 115 24 65 10
Submitted to Registration 110 23 62 10
Registered 95 13 53 10
Mark Nicholls, Chairman of EcoSecurities, commented: "EcoSecurities continued to
develop its CDM carbon credit portfolio during the year and, despite challenging
market conditions, continued to expand while maintaining its position as a
market leader. The Group maintained its strategic focus on the development of
its core activities of originating, implementing and commercialising CERs. In
addition it exploited other favourable expansion opportunities, particularly in
VERs and the secondary trading of CERs, and agreed a landmark strategic
partnership with Credit Suisse."
The Group's preliminary results for the year ended 31 December 2007 accompany
this press release.
Analyst meeting
The Group is holding a meeting for analysts today at 09:00 GMT. The presentation
will also be available via a dial in facility on +44 (0) 1452 565 289 quoting
Conference ID: 37684791. The presentation slides will be available on the
EcoSecurities website 15 minutes prior to the commencement of the meeting. A
replay facility will be available shortly after the presentation on +44 (0) 1452
55 00 00, Access Number: 37684791#, for a period of seven days.
For further information, please contact:
EcoSecurities Group plc +353 1613 9814
Bruce Usher, CEO
Pedro Moura Costa, President
James Thompson, CFO
Adrian Fernando, COO
Citigate Dewe Rogerson +44 20 7638 9571
Kevin Smith
Ged Brumby
Notes to Editors
CDM = Clean Development Mechanism, the provision of the Kyoto Protocol that
governs project level carbon credit transactions between developed and
developing countries
CER = Certified Emission Reduction, carbon credits created by Clean Development
Mechanism projects. One CER corresponds to 1 tonne of CO2e emission reductions
DOE = Designated Operational Entities, independent validation and verification
companies.
Gross = In respect of contracted and portfolio acquisitions of emission
reductions includes the total project volumes without adjustment for
EcoSecurities share of emission reductions from individual contracts.
IPCC = Intergovernmental Panel on Climate Change
ITL = International Transactions Log, an essential component of the trading
infrastructure as it forms the central hub of the settlement system which will
deliver traded allowances from sellers to buyers
Net = In respect of contracted and portfolio acquisitions of emission reductions
adjusts for EcoSecurities share of emission reductions from individual
contracts.
Net Trading Margin = Represents the net spread on principal arrangements, net
agency fees (after commission to third parties) and project development margins,
and excludes other direct cost inputs and fixed cost allocations
PDD = Project Design Document
UNFCCC = UN Framework Convention on Climate Change
VER = Verified Emission Reduction, carbon credits created through voluntary
emission reduction projects. One VER corresponds to 1 tonne of CO2e emission
reductions
EcoSecurities is one of the world's leading companies in the business of
originating, developing and trading carbon credits. EcoSecurities structures and
guides greenhouse gas emission reduction projects through the Kyoto Protocol,
working with both project developers and buyers of carbon credits.
EcoSecurities works with companies in developing and industrialising countries
to create carbon credits from projects that reduce emissions of greenhouse
gases. EcoSecurities has experience with projects in the areas of renewable
energy, agriculture and urban waste management, industrial efficiency, and
forestry. With a network of offices and representatives in more than 25
countries on five continents, EcoSecurities has amassed one of the industry's
largest and most diversified portfolios of carbon projects.
EcoSecurities also works with companies in the developed world to assist them in
meeting their greenhouse gas emission compliance targets. Utilising its highly
diversified carbon credit portfolio, EcoSecurities is able to structure carbon
credit transactions to fit compliance buyers' needs, and has executed
transactions with both private and public sector buyers in Europe, North America
and Japan.
Working at the forefront of carbon market development, EcoSecurities has been
involved in the development of many of the global carbon market's most important
milestones, including developing the world's first CDM project to be registered
under the Kyoto Protocol. EcoSecurities' consultancy division has been at the
forefront of significant policy and scientific developments in this field.
EcoSecurities has been recognised as the world's leading greenhouse gas advisory
firm over the last seven years by reader surveys conducted by Environmental
Finance Magazine.
EcoSecurities Group plc is listed on the London Stock Exchange AIM (ticker ECO).
Additional information is available at www.EcoSecurities.com.
Chairman's statement
2007 marked EcoSecurities' 10th anniversary and 10 years since the launch of the
Kyoto Protocol of the UN Framework Convention on Climate Change ('UNFCCC').
Coinciding with these landmarks, a series of climate policy developments
occurred during 2007 that are of significance to the operations of EcoSecurities
Group.
There were both positive and negative developments affecting the Kyoto
Protocol's Clean Development Mechanism ('CDM'), the main regulatory policy
process affecting the Group. During the year, changes in the CDM process led to
delays in project registration and carbon credit generation. Such delays led the
Group to conduct a thorough assessment of its projects, leading to a portfolio
write-down in November as described below.
On a more positive note, the resolutions of the Conference/Meeting of the
Parties of the UNFCCC that took place in December 2007 in Bali established a
roadmap for the development of a framework for carbon trading beyond 2012. The
Bali roadmap includes a proposal to reduce emissions by 2020 to levels 20 to 40%
below 1990 levels, significantly more advanced than the current 5.2% reductions
adopted for the first commitment period of the Kyoto Protocol (2008 to 2012).
Climate change and the need to mitigate greenhouse gas emissions have
significantly risen in public prominence. The publication of the Stern Report
and the 4th Assessment Report of the Intergovernmental Panel on Climate Change
('IPCC') have both helped to raise public concern about this issue, culminating
with the Nobel Prize award to the IPCC.
Australia announced its intention to adopt the Kyoto Protocol's emission
reduction targets, a welcome development which will result in an increase in the
international carbon market size. Internal policy developments in the US have
also been encouraging and the introduction of mandatory emission targets at a
federal level would, if enacted, significantly increase the size of the global
emission reductions market and could extend timeframes well beyond the current
2012 cut-off point of the first commitment period of the Kyoto Protocol.
EcoSecurities positioned itself to participate in the market segments that are
developing worldwide as a result of these policy changes. To capture these
opportunities, EcoSecurities raised €100 million for the Group in mid-2007. The
stronger balance sheet and the partnership agreement signed with Credit Suisse
as part of its investment are both important elements of the Group's strategy to
continue to participate in the international carbon market in the long run.
The Group achieved several significant milestones and continued to expand while
maintaining its position as a market leader. The Group maintained its primary
focus on the development of its core activities of originating, implementing and
commercialising Certified Emission Reductions ('CERs'). In parallel with the
evolution of the policies related to the compliance market, there has been a
significant rise in demand for emission reduction credits among non-regulated
sectors over the last 18 months, placing increased emphasis on the development
of voluntary Verified Emission Reduction credits ('VERs') from projects
worldwide, including in the US. The Group successfully expanded into the VER
markets and also initiated secondary CER trading activities, both key components
of the expansion plan announced last summer.
As previously announced, the Board took the view that delays in the CDM
registration and issuance process, seen in the latter part of 2007, were not
just a short term anomaly. Accordingly, in line with Group's policy of
continually assessing the project portfolio to take account of operational,
regulatory and market risk, the Board decided it was prudent to make a
comprehensive portfolio write down in November 2007. While this was
disappointing, the Group's portfolio now reflects the current realities of the
CDM registration process. In addition, the Group has subsequently tightened
further the due diligence procedures that are undertaken prior to a project
entering its portfolio.
At 29 February 2008 the Group had contracts for CERs from 479 CDM projects, of
which 411 projects have passed due diligence and have been included in the
Group's portfolio. The contracted projects are capable of generating 171 million
CERs to 2012. In addition, the Group has 108 million CERs under contract for
issuance beyond 2012 and 13 million VERs. In total, the gross contracted volume
by the Group amounts to 279 million CERs. On a net basis, the CER portfolio
projects, excluding projects under due diligence, are capable of generating 122
million CERs to EcoSecurities to 2012.
The Group continued to develop its partnership with Credit Suisse, which enables
EcoSecurities to differentiate its origination and commercialisation offerings
in what is becoming an increasingly competitive environment. In February 2008,
EcoSecurities and Credit Suisse inaugurated their joint €1 billion carbon
purchase facility.
EcoSecurities' geographic reach was extended with new offices and
representatives established in Japan, Peru, Switzerland, Italy and Bahrain and
the Group now has a presence in 27 countries. This network facilitates sourcing
and servicing projects throughout the world and by the year end the Group had
projects in 34 countries.
The Group significantly advanced projects through the Clean Development
Mechanism with 42 additional projects registered with the CDM Executive Board
during the year, bringing the overall total to 95 projects registered by year
end. In order to accelerate the process of project registration and issuance,
the Group increased implementation capacity by adding additional resources, as
well as conducting continuous prioritisation of strategic projects in its
portfolio.
During the year the Group continued to expand its commercialisation activities,
offering new and innovative products to the market. A highlight was
EcoSecurities Carbon I a ground-breaking structured CER transaction established
in partnership with Credit Suisse, which placed over 5 million CERs in 2007, the
revenues of which will commence in 2009. Furthermore, secondary trading in CERs
has presented new opportunities for the Group with additional value generated
from projects outside of its portfolio. EcoSecurities is using its global
network of offices and employees to source secondary CERs from both
EcoSecurities' clients and competitors' projects, thereby providing a service to
CDM project developers and generating incremental revenue for the Group.
EcoSecurities' VER activities continued to progress well, with the Group having
rapidly expanded its offering and raised its profile within this emerging area
of the carbon market. Strategic agreements to develop VER projects were signed
in key markets such as the US, Turkey and China. The successful development of
this product has helped EcoSecurities to mitigate some of the financial impact
resulting from delays in the CDM project cycle.
Since the year end one of the Group's forward CER delivery customers has given
notice that it is unable, as a result of its Mauritian jurisdiction, to receive
CERs in accordance with the terms of the contract signed in 2005. As a result
the Group is required to deliver a cash settlement equivalent to the market
value of the CERs in March 2008. As explained further in the financial review,
the Group has accounted for a net financial cost of €9.2 million as a result.
CERs which would have been used for settlement of this contract will be
available for sale to the Group's other customers.
Given the continued growth and expansion of the Company and the Board's earlier
commitment to strengthen its senior management team, EcoSecurities has made
several new board level appointments over the last six months. These include
James Thompson as Chief Financial Officer, Adrian Fernando as Chief Operating
Officer and Alec Dreyer and Paul Ezekiel as additional Non-Executive Directors.
In addition, the Group has recruited Martin Enderlin, former CDM Executive Board
member, as Director of Government and Regulatory Affairs. Former CFO, Jack
MacDonald, is now Director of Corporate Development, focusing on identifying and
executing strategic opportunities, with particular emphasis on acquisitions and
project investments.
The global emissions trading markets in which the Group operates are primarily
influenced by the formulation and implementation of policy and regulation.
Several key policy developments occurred during the last year, most notably the
UNFCCC's Bali conference and the publication of the EU ETS phase III proposals.
In both cases EcoSecurities has been and will continue to be engaged in a
constructive dialogue with regulators and policy makers. On a less positive note
there continue to be significant delays in the linking of the UNFCCC's
International Transaction Log to the European Union's Community Independent
Transaction Log. The evolution of an effective central settlement system for
CERs is important and the Group will continue to be prudent with respect to its
cash position until the EU has confirmed the connection timetable.
Throughout 2008, the Group will focus on progressing its contracted emission
reduction projects through the CDM project cycle. By continuing to innovate and
add to its commercialisation offering the Group will optimise the potential of
its portfolio. EcoSecurities plans to accelerate its activities in secondary
trading of CERs and VER markets, developing projects to high quality emission
reduction standards, in order to meet the changing needs of large corporate
buyers.
With a strong balance sheet and enhanced implementation resources, EcoSecurities
remains well positioned not only to realise the value of the assets it has
within its existing portfolio, but also to continue growing its business. The
capital increase mid-year enabled the Group to strengthen its balance sheet,
putting the Group in a strong cash position for the year ahead. The Board is
confident in the Group's prospects for the current year and beyond, providing
emission reduction credits to a continuously expanding market environment.
Executive Directors' review
2007, EcoSecurities' 10th anniversary year, was one of consolidation of earlier
successes to provide the Group with the ability to continue growing in a dynamic
market environment and building its carbon credit portfolio to enable market
leadership over the long term. Alongside its core focus on origination,
implementation and commercialisation of CERs, the Group was quick to recognise
and exploit further growth opportunities which included the acquisition of
post-2012 emission reductions, trading opportunities in the secondary market and
the emerging VER markets in the US and globally. The Group also strengthened its
balance sheet, holding significant cash reserves following the institutional
placing and the strategic investment made by Credit Suisse. The Group's market
share remained significant, with 95 of the 896 projects registered by the CDM
Executive Board at the year end having been implemented by EcoSecurities.
Origination
While origination activity during 2007 continued to progress, the Group's net
portfolio to 2012 increased only slightly from 127 million CERs in December 2006
to 130 million CERs at 31 December 2007. In the second half of 2007 the Group
enhanced its project selection and due diligence process to assess
systematically the operational, financial and CDM viability of projects before
they are added to the portfolio. At the 2007 year end a further 20 million CERs
on a net basis were in the Group's due diligence process and, although under
contract, will not be included in the portfolio numbers until conclusion of such
assessments. This process prevents the entry of projects with low likelihood of
success into the portfolio, increasing its inherent quality and reducing
volatility in portfolio volume.
At year end the Group had contracts for CERs from 437 CDM projects, of which 400
projects have passed due diligence and were included in the Group's portfolio.
The contracted projects are capable of generating 166 million CERs to 2012 on a
gross basis (2006: 156 million). The average acquisition price to the Group at
year end was €6.45 per CER.
Based on the increasing recognition of the need for greenhouse gas mitigation,
as well as repeated signals that carbon trading will remain part of the global
effort against climate change, the Group made a strategic decision to contract
for the purchase of CERs beyond 2012. During 2007 the Group made a concerted
effort to enter into options for the purchase of post-2012 CERs and by the year
end had rights to over 103 million post-2012 CERs.
EcoSecurities continued to form strategic partnerships with organisations such
as the Dubai Multi Commodities Centre (a strategic initiative of the Dubai
government to establish a commodity market place there) and Stantec (a large
North American engineering company) to maximise project origination activities
in these regions and to expand its reach and effectiveness. Furthermore, the
partnership with Credit Suisse also provided the Group with a competitive
advantage in the market place and during February 2008 EcoSecurities announced
that it had inaugurated its joint €1 billion carbon purchase facility, with the
signing of emission reduction purchase agreements with a Chinese renewable
energy project developer for several wind farm projects.
At the beginning of 2007, the Group commenced its voluntary emission reduction
project activities, both in the US and internationally and by year end it has
already originated 10.7 million VERs. The Group was also successful in selling
VERs to European and American buyers, as described in the Commercialisation
section.
The Group's contracted carbon credit projects at 31 December 2007 can be broken
down as follows:
Carbon credit type: Gross volume Net entitlement to
Group
(million) (million)
CERs to 2012 (principal) 131 123
CERs to 2012 (agency) 9 4
CERs to 2012 (project development) 4 3
Subtotal CER portfolio to 2012 144 130
CERs to 2012 (due diligence) 22 20
Subtotal contracted CERs to 2012 166 150
CERs post-2012 (options and ERPAs) 103 103
VERs 11 11
Total volume contracted 280 264
Implementation
There continued to be significant delays throughout the CDM project development
cycle which had an overall impact on EcoSecurities' ability to progress projects
quickly through to registration and issuance. These delays are particularly
acute in relation to the CDM Executive Board, Designated Operational Entities ('
DOEs') and, in some countries, host nation approval. Despite these challenges,
EcoSecurities increased the number of registered projects from 53 to 95 at year
end, with these projects capable of producing 13 million CERs by 2012 on a net
entitlement basis to the Group. Of the 437 projects at contract and term sheet
stage at year end, 239 projects had completed project design documents ('PDD'),
181 had received host nation approval and 115 had been validated. A total of 342
projects in the Group's portfolio were financed and 148 were operating at year
end, with the ability to produce 39 million CERs to 2012 for EcoSecurities.
The Group's contracted projects and CERs on a net basis can be analysed as
follows:
31 December 2007 31 December 2006
Project cycle landmark No. of projects Million CERs No. of projects Million CERs
(cumulative values)
Contracted 437 150 353 127
Due diligence 37 20 0 0
Portfolio 400 130 353 127
Operational stage:
Financed 342 104 283 105
Construction started 292 88 162 61
Operation started 148 39 84 31
CDM stage:
PDD complete 239 73 132 39
Submitted to Validation 223 66 125 38
HNA obtained 181 55 67 10
Validated 115 24 65 10
Submitted to Registration 110 23 62 10
Registered 95 13 53 10
By the year end, the Group had seen its implementation portfolio increase to 11%
of the global market (calculated as a percentage of the registered projects out
of the total number of projects in the UNEP-Risoe CDM Pipeline). In order to
accelerate the process of project registration and issuance, the Group added
further implementation capacity during the year. It increased its headcount of
CDM specialists to 84 and deployed staff close to the projects in its regional
offices to enhance project monitoring capacity. In combination with increasing
the size of the team, the Group instigated a series of process improvements as
well as a further prioritisation of project work to optimise the way in which
the most valuable and strategic projects progress through the CDM project cycle.
At the same time, the Group continued to grow and improve its capacity to
monitor operations of its projects, an essential component to enable carbon
credit creation, verification and issuance to the requirements of the CDM.
The Group's implementation division continued to add to its list of achievements
in 2007. It helped to register the first gas flaring project in the Gulf
Cooperation Council region, registered the first ever project in Thailand and
finalised the CDM implementation work for the Group's first N2O abatement
project in China.
Commercialisation
Commercialisation made good progress in 2007. The Group sold forward a further
13 million CERs during the year. At the year end a net total of 42 million CERs
were sold forward through 2013 (2006: 29 million), of which 2.8 million are for
2008. This represents expected forward CER revenues of €558 million and a Net
Trading Margin of €282 million by 2013. The weighted average price on the
forward contracts is €13.10, an increase over the year (2006: €11.30).
The Group continued to expand its commercialisation product offering helped by
its strategic partnership with Credit Suisse. December saw the placing of over 5
million CERs via EcoSecurities Carbon I, a special purpose vehicle developed
jointly with Credit Suisse. This innovative structure allowed sales of CERs to a
number of new credit-worthy clients and achieved a premium price without
EcoSecurities incurring any guaranteed delivery obligation. Revenue for the
Group from EcoSecurities Carbon I will commence in 2009.
Secondary trading had a productive initial year, with increased revenue and net
profit. Pricing, trading and risk systems are in place and are being parallel
tested to ensure accuracy and flexibility. The Group's global network of offices
and relationships positions us to capitalise upon market trends and trading
opportunities.
EcoSecurities VER activities continued to gain momentum with the Group achieving
sales of 170,000 tonnes to clients such as Netjets Europe and Yahoo.
The Group's CER net committed delivery schedule net is 0.4 million in 2008, 7.9
million in 2009, 8.1 million in 2010, 5.1 million in 2011, 4.4 million in 2012
and 2.9 million in 2013. Considering its current CER inventory, planned
verifications during 2008 and CER production profile of the portfolio, the Group
is comfortable with its ability to meet its delivery commitments.
Consultancy
During 2007 Consultancy focused on integrating the operations of Trexler Climate
+ Energy Services. The acquisition, which took place in February 2007, greatly
enhanced EcoSecurities' presence in the United States.
Consultancy significantly grew its external client base during the year. It
continued to work with international organisations focusing on climate change
policy and capacity building such as the World Food Programme, International
Finance Corporation and the Global Mechanism. In addition, the Group continued
to expand its corporate carbon footprinting work, as well as providing ongoing
support for the development of strategies by the American utilities to support
the integration of emissions trading under California's AB32 and the Low Carbon
Fuel Standard. The Group's Ecosystem Services team continued to contribute
extensively to the policy processes related to including avoided deforestation
into an international carbon trading scheme.
Policy and operational matters
Policy making and regulation continued to have a significant impact on the
Group's business in 2007. Throughout the course of the year, the Group engaged
in a constructive dialogue with national governments, Designated National
Authorities, policy makers, industry associations and NGOs to enhance the
efficiency and effectiveness of the CDM process in mitigating against climate
change. The Group was encouraged to see that some of the CDM process
improvements that had been recommended by industry bodies and EcoSecurities had
been incorporated in the official documentation produced by the Conference/
Meeting of Parties of the UN Framework Convention on Climate Change in Bali last
December.
During 2007, the Group devoted substantial efforts to develop and implement its
corporate social responsibility policy and procedures. A clear framework was
developed to assist in ensuring that our projects make a positive difference to
the environment and at the same time protecting the interests of our investors.
Despite experiencing some market challenges in 2007, the Group continued to
build on earlier achievements, with more market 'firsts' which included being
the first company to successfully register CDM projects in Thailand and the Gulf
Cooperation Council region. In recognition of its role in the market,
EcoSecurities was awarded Best CDM/JI Project Developer - Kyoto Project Credits
2007 and Best Advisory - Kyoto Project Credits 2007 by Environmental Finance
Magazine, the 7th year in a row in which the Group received awards by readers of
this publication. The Group was also ranked number 22 in CNBC European Business
Magazine's 'Top 100 Low Carbon pioneers'. It is also pleasing to see the work of
the IPCC, which included contributions from three of EcoSecurities' senior
staff, Pedro Moura Costa, Agus Sari and Mark Trexler, recognised through the
Nobel Prize.
During the year, new representative offices and subsidiaries were opened in
Tokyo, Lima, Bern, Rome and Manama. This brought the total number of offices and
representatives to 30 at year end (2006: 25). Staffing levels increased to 300
by year end, representing an increase of 44%, primarily to provide additional
resource in implementation to progress the project portfolio through the CDM
approval cycle. In order to support the growth of the Company, significant
improvements were made in IT infrastructure.
The cost base of the Group expanded in line with management's expectations as
the Group achieved its staff recruitment targets. The Group remains in a strong
cash position following the capital increase mid-year.
Outlook
With the start of the 1st commitment period of the Kyoto Protocol in 2008,
EcoSecurities' focus during 2008 and beyond will be on the delivery of CERs to
compliance buyers. This will involve the further strengthening of people and
processes as well as deploying additional staff closer to project operations in
local offices. The Group has built capacity in monitoring and verification and
anticipates increased focus on these activities to ensure carbon credit
production and issuance. As significant components of the CDM project cycle are
dependent on the work of DOEs, EcoSecurities established framework agreements
with the major DOEs to ensure that these allocate capacity to conduct the
validations and verifications needed for the Group's projects. The volumes
planned and scheduled to be verified until the end of the year give the Board
confidence that EcoSecurities will meet its delivery obligations.
Certainty of delivery commitments to European Union (EU) buyers is conditional
on there being a connection of the International Transactions Log (ITL) registry
to the EU's Community ITL registry. While in some cases it is anticipated that
transactions may be settled via national registries outside the EU, the Group
will be particularly prudent in conserving its cash balances until there is
confirmation of the timetable for the connection of these registries. Currently,
EcoSecurities does not assume that this will occur before the limit date of
April 2009 set by the EU.
In addition to its efforts related to the CDM, EcoSecurities plans to continue
building its presence in the voluntary markets in the US and internationally.
Additional resources are being devoted to create and sell VERs, with a focus on
meeting the needs of large corporate buyers in Europe and the US.
Origination will focus on acquisition of CERs and VERs worldwide and there will
be an increased effort on securing rights to carbon credits beyond 2012. The
Board believes that the Group's strong international presence gives it
significant competitive advantage in the sourcing of high quality CER and VER
projects and intends to continue to expand its operations in the promising US
market. In summary, and in line with the Bali Roadmap and likely policy changes
in the US, the Group is positioning itself for a wider market and regulatory
environment that will become clearer from the end of 2009. The Group will
continue to engage in various policy dialogues with stakeholders to help design
or improve regulatory schemes related to greenhouse gas mitigation in various
jurisdictions.
EcoSecurities and its senior management team are positive about the prospects
and opportunities related to the future of the carbon market and are confident
as to the capacity of the Group to maintain its market leadership in 2008 and
beyond.
Financial review
Income statement
Group revenue rose by 135% to €7.2 million. This was largely on the back of
emission reduction sales increasing by nearly 200% with volumes increasing to
454,000 tCO2e. The launch of EcoSecurities Carbon I towards the end of the year
marked a step forward in the commercialisation process and revenue from this
transaction is anticipated to commence in 2009. Consulting revenues at €1.2
million rose by 12%.
The gross profit margin was low and not representative of the average prices of
the deliveries on forward sales and CERs from the portfolio due to high level of
secondary sales and the price of CERs allocated to cost of sales.
Administrative expenses increased by 61% in line with expectations principally
as a result of the planned expansion of the implementation team. The primary
business expense continues to relate to staff and associated costs. Staff
increased from 209 to 300 during the year, of which 84 were in implementation.
Administrative expenses also included costs of €0.1 million in relation to the
2007 capital increase and costs in relation to EcoSecurities Carbon I of €0.8
million.
Within financing income and costs, the Group has recognised a net charge of €9.2
million. This charge relates to a fixed price sale contract signed in 2005
where the buyer is now unable, as a result of its Mauritian jurisdiction, to
receive CERs in settlement of the Group's delivery obligations. In these
circumstances, the sale contract provides for the settlement to be in cash and
to be calculated as the difference between the deemed market price of CERs in
March 2008 and the contracted sale price (if lower). Since the sale price under
this agreement is lower than the year end market price, a financial liability
has been reflected. CERs intended to have been used in settlement of this
contract will be otherwise available for sale to the Group's other customers.
Other finance income amounted to €6.1 million of which €3.4 million was interest
received on the Group's cash deposits and the remaining €2.7 million represents
the gain on the mark to market of derivative contracts. Other finance costs of
€4.3 million comprise an exchange loss of €2.5 million arising principally on
the British Pound denominated deposits held as a currency hedge against the
Group's British Pound based future operating costs, a charge of €1.5 million
relating to the value of the option to purchase CERs granted to Credit Suisse in
2005 and interest payable on the Credit Suisse loan that has since been repaid.
The Group incurred a tax charge of €1.7 million as a result of taxes payable by
subsidiaries. At the year end accumulated tax losses of €62.4 million were
available to offset future profits.
The retained loss for the year amounted to €45.0 million, an increase of €25.0
million from the prior year driven principally by the Group's increase in
headcount and the provisions described above.
Balance sheet
Intangible assets increased by €0.6 million to €4.0 million at the year end.
This balance primarily relates to project related expenditure and advances and
includes €0.8 million of identifiable internal costs of CDM project
implementation capitalised during the year in accordance with the Group's
policy.
Investments in project related plant and equipment in the year amounted to €2.0
million spread over 37 investment in 3 countries. At the year end the Group had
additional commitments amounting to €13.2 million for future capital expenditure
in relation to emission reduction projects. €1.0 million was spent on expanding
the Group's administrative infrastructure including fixtures, fittings and
computer equipment
Inventories comprised 837,000 issued CERs and 942,000 issued VERs.
Restricted cash balances amounting to €19.4 million principally relate to cash
provided as collateral for delivery commitments, €14.5 million of which is due
to be released by June 2008.
Capital increase
In June and July the Company increased its capital by placing 19.4 million
shares with investors, including 9.2 million shares subscribed by Credit Suisse.
The placing raised a total of €96.5 million for the Company net of expenses of
€3.5 million.
Cash flow
The operating cash outflows amounted to €51.1 million as the Group increased its
implementation capability and working capital in particular inventory and trade
receivables. Project related expenditure and advances amounted to €2.3 million.
Net financing inflows amounted to €75.5 million comprising the mid year capital
increases of €100 million, repayment of borrowings of €(7.8) million, movements
of €13.1 million to restricted cash and costs associated the placing which
amounted to €3.5 million.
The net increase in cash and cash equivalents over the year amounted to €16.4
million and in addition interest bearing loans and borrowings reduced by €7.8
million. The year end balance of cash and cash equivalents was €88.1 million and
there were no interest bearing loans or borrowings outstanding.
Hedging policies
The Group has a treasury and commercial hedging policy that covers interest
rate, foreign exchange and commodity price exposures. Normally, and where
appropriate, the Group may hedge a proportion of its net production of emission
reductions to protect cash flows against commodity price and exchange rate
fluctuations. The Group also maintains cash balances in major operating
currencies relative to operational cash requirements in those currencies and
incurred a loss of €2.5 million in the year principally as a result of the
Group's holding of British Pounds. The Group uses other hedging arrangements in
relation to specific currency exposures when prudent.
Summary consolidated income statement
For the year ended 31 December 2007
2007 2006
€'000 €'000
Revenue 7,222 3,073
Cost of sales (6,499) (1,374)
Gross profit 723 1,699
Administrative expenses (36,633) (22,721)
Loss before financing costs (35,910) (21,022)
Finance expense (note 3) (14,464) (856)
Finance income (note 3) 7,043 2,405
Loss before tax (43,331) (19,473)
Income tax expense (1,748) (573)
Loss for the financial year attributable (45,079) (20,046)
to equity holders of the Group
Basic loss per share (€ cent per share) (44.0) (21.7)
Diluted loss per share (€ cent per share) (44.0) (21.7)
Summary consolidated statement of recognised income and expense
For the year ended 31 December 2007
2007 2006
€'000 €'000
Loss for the financial year (45,079) (20,046)
Currency translation reserve movement (432) (22)
Total recognised income and expense for the (45,511) (20,068)
year
Summary consolidated balance sheet
At 31 December 2007
2007 2006
€'000 €'000
Assets
Non-current assets
Intangible assets 4,039 3,412
Property, plant and equipment 4,712 2,463
Deferred tax asset 229 -
Trade and other receivables 834 531
Total non-current assets 9,814 6,406
Current assets
Inventory 10,916 -
Derivative financial assets 2,641 -
Trade and other receivables 20,973 5,020
Cash and cash equivalents 88,076 60,452
Total current assets 122,606 65,472
Total assets 132,420 71,878
Shareholders' equity
Issued capital 282 232
Share premium 173,127 76,446
Share based payment reserve 902 664
Currency translation reserve (506) (74)
Other reserves (573) (573)
Retained earnings (70,019) (25,009)
Total shareholder's equity attributable 103,213 51,686
to shareholders of the Group
Liabilities
Non-current liabilities
Trade and other payables 3,040 3,040
Deferred tax liabilities 186 58
Total non-current liabilities 3,226 3,098
Current liabilities
Interest bearing loans and borrowings - 7,582
Trade and other payables 12,137 8,884
Derivative financial liabilities 1,505 -
Current tax payable 1,411 628
Provisions for liabilities 10,928 -
Total current liabilities 25,981 17,094
Total liabilities 29,207 20,192
Total equity and liabilities 132,420 71,878
Summary consolidated cash flow statement
For the year ended 31 December 2007
2007 2006
€'000 €'000
Cash flows from operating activities
Loss for the financial year (45,079) (20,046)
Income tax expense 1,748 573
Finance income (7,043) (2,405)
Finance expense 14,464 857
Depreciation of property, plant and 587 200
equipment
Impairment and amortisation of 1,460 52
intangible assets
Project costs transferred to inventory - 125
Write-down on inventory 429 -
Loss on disposal of property, plant and - 139
equipment
Share-based payment expense 307 385
Foreign exchange differences (994) (294)
Change in inventory (11,345) -
Change in trade and other receivables (8,773) (3,981)
Change in trade and other payables 3,610 9,626
Creation of provisions 816 -
Interest paid (334) (428)
Tax paid (974) -
Net cash out flow from operating (51,121) (15,197)
activities
Cash flows from investing activities
Interest received 3,262 2,170
Acquisition of businesses (170) -
Purchase of property, plant and (2,849) (2,673)
equipment
Investment in intangible assets (8,214) (3,487)
Net cash used in investing activities (7,971) (3,990)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital 100,045 85
Payment of share issue transaction (3,502) (2,222)
costs
Repayment of borrowings (7,866) (300)
Movement restricted cash deposits (13,136) (5,824)
Net cash generated / (used) from financing 75,541 (8,261)
activities
Net increase / (decrease) in cash and 16,449 (27,448)
cash equivalents
Cash and cash equivalents at start of 54,045 82,565
year
Effect of foreign exchange rate (1,865) (1,073)
fluctuations on cash and cash equivalents
Cash and cash equivalents at end of 68,629 54,045
year
Notes to the financial information
1. Basis of Preparation
This preliminary financial information has been derived from the Group's
consolidated financial statements for the year ended 31 December 2007 which have
been prepared in accordance with International Financial Reporting Standards
(IFRS) as adopted by the EU. The accounting policies applied in preparing the
Group's consolidated financial statements for the year ended 31 December 2007
are as published in the Annual Report for 2006. The audited financial
statements will be issued in due course and will include an unqualified opinion
from our auditors, KPMG Chartered Accountants.
2. Segment reporting
(a) Business segments
The Group has defined the following two business segments based on its operating
activities as follows:
(i) Emission reductions
This segment comprises emission reduction project activities where the Group
contracts with project developers in order to acquire or sell emission
reductions on their behalf, or development activities where the Group develops
its own interest in emission reduction projects as either lead project entity
or as part of a collaboration.
(ii) Consulting
This segment provides emission reduction advisory services to commercial and
governmental organisations.
2007 2006
Emission Consulting Total Emission Consulting Total
reductions reductions
€'000 €'000 €'000 €'000 €'000 €'000
Revenue 6,061 1,161 7,222 2,038 1,035 3,073
Segment result (36,019) (2,300) (38,319) (21,267) (1,305) (22,572)
Unallocated Group expenses (4,813) (1,523)
Loss before financing costs (35,910) (21,022)
Net finance income (7,421) 1,549
Income tax expense (1,748) (573)
Loss for the financial (45,079) (20,046)
year
Segment assets 61,447 1,133 62,580 14,555 1,271 15,826
Unallocated Group assets 69,840 56,052
Total 132,420 71,878
assets
Segment liabilities (25,545) (387) (25,932) (6,999) (1,011) (8,010)
Unallocated Group liabilities (3,275) (12,182)
Total liabilities (29,207) (20,192)
Capital expenditure 10,998 65 11,063 6,135 25 6,160
Depreciation, amortisation and 1,950 97 2,047 229 23 252
impairment losses
(b) Geographical segments
The Group's emission reduction business is conducted on a global scale, with
presence in most continents. The Group employs significant assets overseas which
are reported by continent. The Group's consulting business is undertaken through
offices in the UK, US, Brazil and Netherlands.
2007 2006
Revenue Total Capital Revenue Total Capital
assets expenditure assets expenditure
€'000 €'000 €'000 €'000 €'000 €'000
Europe 6,104 117,891 9,646 823 68,012 4,090
North America 1,064 9,710 26 1,605 636 150
South America 45 1,002 69 477 724 475
Africa 9 55 10 92 24 -
Asia - 3,762 1,312 76 2,482 1,445
7,222 132,420 11,063 3,073 71,878 6,160
In presenting the information on the basis of geographical segments, segment
assets are based on the geographical location of the assets. Segment revenue is
based on the geographical location of customers.
3. Financial income and expense
During the year ended 31 December 2005, the Group entered into an agreement to
sell a specified number of CERs at a fixed price for delivery in 2008. While
the Group originally expected to settle this obligation through the delivery of
CERs, the Group has been informed that the buyer cannot now receive CERs in
settlement of the delivery obligation under the original contract because the
buyer is not able to set up an account to receive the CERs. A provision within
the original contract provides that, in such circumstances, the settlement is
required to be made in cash at the deemed market price of the CERs at a fixed
date prior to the settlement.
The buyer separately made available the rights to the CERs on the open market
and, in the year ended 31 December 2006, the Group acquired the rights to a
portion of these CERs at a cost of €1.3m. These rights were shown as intangible
assets in the balance sheet at 31 December 2006. The Group acquired the rights
to a further portion of these CERs in 2007 at an aggregate cost of €5.1m. As a
consequence of this, the rights to the CERs acquired by the Group are now
regarded an entitlement to receive a portion of the cash delivered under the
original contract.
As a result of the above, and because the fixed sales price under the agreement
is less than the estimated market price at the balance sheet date, the Group has
recorded:
- a provision of €10.1m in respect of the best estimate of its obligations under
the original contract as at 31 December 2007 measured based on forward prices;
and
- a receivable of €7.4m representing the estimated cash receivable in place of
the contractual rights to CERs acquired in 2006 and 2007.
The actual settlement of these contracts will be based on market prices at
future dates as specified in the contract and the Group's net exposure in this
regard remains subject to uncertainty. Settlement is due in April 2008.
The transactions above give rise to a net financial loss to the Group of €9.2m,
comprising finance income of €958k and finance expense of €10.1m, both of which
have been recognised in the income statement.
4. Loss per share
Basic loss per share is calculated by dividing the earnings attributable to
ordinary shareholders by the weighted average number of ordinary shares
outstanding during the year.
The weighted average number of ordinary shares is calculated as follows:
2007 2006
Number Number
('000) ('000)
Issued ordinary shares
At start of year 92,657 91,627
Effect of shares issued during the year 9,730 584
Weighted average number of shares for year 102,387 92,211
Basic and fully diluted loss per share is calculated as follows:
2007 2006
Loss for the year attributable to equity shareholders of the (45,079) (20,046)
Company (€'000)
Weighted average number of shares ('000) 102,387 92,211
Loss per share (€ cent) (44.0) (21.7)
5. Cash and cash equivalents
2007 2006
€'000 €'000
Cash at bank and in hand 33,875 4,410
Short term bank deposits 34,754 49,635
Cash and cash equivalents for the purposes of the cash flow
statements 68,629 54,045
Restricted cash 19,447 6,407
Cash and cash equivalents 88,076 60,452
Restricted cash deposits
At 31 December 2007, the Group had posted cash collateral of €19.4m (2006:
€6.4m), which is reflected in cash and cash equivalents as restricted cash at
year end. The Group has committed to sell CERs to third parties through the end
of the first Kyoto commitment period. Under certain contracts, the Group posts
cash or near-cash collateral or pledges agreements to purchase CERs to
purchasers' escrow accounts until the Group's delivery commitments are
fulfilled. €7.6m of this restricted cash will be released on the settlement of
the obligations described in note 3.
In addition, the Group also posts cash collateral in respect of letters of
credit, guarantees and bid-bonds issued under a standby letter of credit
facility. The terms of the facility require that collateral be posted in the
form of cash against all outstanding obligations. The Group has issued a number
of standby letters of credit under this facility to support investment and CER
related transactions.
Short term bank deposits
The Group's short term bank deposits are invested in money market deposits which
match the forecasted functional currency requirements of the business. Details
of these deposits are as follows:
Balance Weighted Weighted
invested average average term
interest rate
€'000
Currency
Euro 14,954 3.40% 16 days
Sterling 19,800 6.16% 25 days
34,754
6. Share Capital, Share Premium and Reserves
Share Share Currency Share based Other Retained Total
Capital Premium translation payment reserves earnings
reserve reserve
€'000 €'000 €'000 €'000 €'000 €'000 €'000
At 1 January 2007 232 76,446 (74) 664 (573) (25,009) 51,686
New shares issued in the year:
- pursuant to strategic 48 99,919 - - - - 99,967
investment
- in connection with acquisition - 188 - - - - 188
- on exercise of share options 2 76 - - - - 78
Transaction costs capitalised - (3,502) - - - - (3,502)
Total recognised gains and - - (432) - - (45,079) (45,511)
losses
Share-based payment - - - 307 - - 307
Transfer on exercise of share - - - (69) - 69 -
options
At 31 December 2007 282 173,127 (506) 902 (573) (70,019) 103,213
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