Eco (atlantic) Regulatory News (ECO)

13 Mar 2008 07:01

EcoSecurities Group plc13 March 2008 EcoSecurities Group plc Preliminary results for the year ended 31 December 2007 Dublin, Ireland - EcoSecurities Group plc ("EcoSecurities" or the "Group"), aleading company in the business of sourcing, developing and trading carboncredits, today announces its preliminary results for the year ended 31 December2007 and trading statement to 29 February 2008. Highlights • 2007 marked EcoSecurities' 10th anniversary and witnessed policydevelopments of significance to the Group's business. Publication of the SternReport, IPCC's 4th Assessment Report and the Bali Roadmap developed at theConference of Parties to UNFCCC all pave the way to a larger and longer-lastingcarbon trading environment. • In order to capture the opportunities related to the expansion of thismarket, EcoSecurities raised in total €100 million of additional capital in June2007 (€44.0 million) and July 2007 (€56.0 million). A partnership agreement wasalso signed as part of a strategic investment by Credit Suisse. • EcoSecurities' revenue increased by 135% to €7.2 million and the lossbefore financing costs increased by 70% to •(35.8) million. The loss for thefinancial 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 thebuyer 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 thiscontract will be available for sale to the Group's other customers. • At the 2007 year end the Group had contracts for CERs from 437 CDMprojects, of which 400 projects were included in the Group's portfolio and theremainder are in an internal due diligence process prior to entry into theportfolio. The contracted projects are capable of generating 166 million CERs to2012 (2006: 156 million) and the volume from projects in due diligence will notbe 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 fromindividual contracts, portfolio projects are capable of generating 130 millionCERs to the Group to 2012 and projects in due diligence have the potential togenerate a further 20 million CERs. • Changes in the CDM process during the year resulted in delays inproject registration and carbon credit generation, leading the Group to conducta portfolio write-down in November 2007. • Post-2012 contracted volume continued to grow and by 31 December 2007totalled 103 million carbon credits. The post-2012 CDM portfolio volume relatesto potential production of CERs from the Group's projects after 2012 and isincremental to the CDM portfolio. • EcoSecurities initiated activities related to the voluntary carbonmarket and created a VER portfolio of 10.7 million. The first VER sales of170,000 tonnes were achieved in 2007 to both US and European corporate buyers. • At 31 December 2007, 437 projects were contracted, of which 400 werein the CER portfolio, 239 PDDs were completed, 223 projects had been submittedto validation, 115 had completed the validation process and 95 were registeredwith the CDM Executive Board. • Of the 400 projects in the portfolio, 342 were financed, 292 wereunder construction and 148 were operational. • 13 million CERs were sold forward during 2007, bringing the total to42 million CERs at 31 December 2007. This represents expected total forward CERrevenue of €558 million and a Net Trading Margin of €280 million through to2013. • The strategic relationship with Credit Suisse continued to gainmomentum with the completion of EcoSecurities Carbon I, a ground-breakingstructured CER transaction which placed over 5 million CERs. Group revenues fromthis transaction are expected to commence in 2009. • Secondary trading in CERs has presented new opportunities for theGroup with additional value generated from projects outside its portfolio. • Management was strengthened with the appointment of Adrian Fernando asChief Operating Officer, Paul Ezekiel as an additional Non-Executive Directorand Martin Enderlin, former CDM Executive Board member, as Director ofGovernment and Regulatory Affairs. • EcoSecurities maintained a cash balance of €88 million at 31 December2007. 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 remainedstable at 150 million CERs at 29 February 2008, including volume of 28 millionCERs that were in due diligence. • At 29 February 2008, the number of projects registered had increasedto 101. • The Group continues to focus on originating VER projects and at 29February 2008 had acquired a further 2.2 million VERs. • New management appointments comprised James Thompson as ChiefFinancial Officer and Alec Dreyer as an additional Non-Executive Director.Former CFO, Jack MacDonald is now Director of Corporate Development, focusing onidentifying and executing strategic opportunities, with particular emphasis onacquisitions and project investments. • EcoSecurities and Credit Suisse inaugurated their joint €1 billioncarbon purchase facility in February 2008, with the signing of emissionreduction purchase agreements with a Chinese renewable energy project developerfor several wind farm projects. • The Group's cash balance as at 29 February was approximately €78million. The Group's contracted carbon credit projects at 31 December 2007 can be brokendown as follows: Carbon credit type: Gross volume Net entitlement to Group (million) (million) CERs to 2012 (principal) 131 123CERs to 2012 (agency) 9 4CERs to 2012 (project development) 4 3Subtotal CER portfolio to 2012 144 130 CERs to 2012 (in due diligence) 22 20Subtotal contracted CERs to 2012 166 150 CERs post-2012 (options and ERPAs) 103 103VERs 11 11Total volume contracted 280 264 The Group's contracted projects and CERs on a net basis can be analysed asfollows: 31 December 2007 31 December 2006Project cycle landmark No. of projects Million CERs No. of Projects Million CERs(cumulative values)Contracted 437 150 353 127Due diligence 37 20 0 0Portfolio 400 130 353 127 Operational stage:Financed 342 104 283 105Construction started 292 88 162 61Operation started 148 39 84 31 CDM stage:PDD complete 239 73 132 39Submitted to Validation 223 66 125 38HNA obtained 181 55 67 10Validated 115 24 65 10Submitted to Registration 110 23 62 10Registered 95 13 53 10 Mark Nicholls, Chairman of EcoSecurities, commented: "EcoSecurities continued todevelop its CDM carbon credit portfolio during the year and, despite challengingmarket conditions, continued to expand while maintaining its position as amarket leader. The Group maintained its strategic focus on the development ofits core activities of originating, implementing and commercialising CERs. Inaddition it exploited other favourable expansion opportunities, particularly inVERs and the secondary trading of CERs, and agreed a landmark strategicpartnership with Credit Suisse." The Group's preliminary results for the year ended 31 December 2007 accompanythis press release. Analyst meeting The Group is holding a meeting for analysts today at 09:00 GMT. The presentationwill also be available via a dial in facility on +44 (0) 1452 565 289 quotingConference ID: 37684791. The presentation slides will be available on theEcoSecurities website 15 minutes prior to the commencement of the meeting. Areplay facility will be available shortly after the presentation on +44 (0) 145255 00 00, Access Number: 37684791#, for a period of seven days. For further information, please contact: EcoSecurities Group plc +353 1613 9814 Bruce Usher, CEOPedro Moura Costa, PresidentJames Thompson, CFOAdrian Fernando, COO Citigate Dewe Rogerson +44 20 7638 9571 Kevin SmithGed Brumby Notes to Editors CDM = Clean Development Mechanism, the provision of the Kyoto Protocol thatgoverns project level carbon credit transactions between developed anddeveloping countries CER = Certified Emission Reduction, carbon credits created by Clean DevelopmentMechanism projects. One CER corresponds to 1 tonne of CO2e emission reductions DOE = Designated Operational Entities, independent validation and verificationcompanies. Gross = In respect of contracted and portfolio acquisitions of emissionreductions includes the total project volumes without adjustment forEcoSecurities share of emission reductions from individual contracts. IPCC = Intergovernmental Panel on Climate Change ITL = International Transactions Log, an essential component of the tradinginfrastructure as it forms the central hub of the settlement system which willdeliver traded allowances from sellers to buyers Net = In respect of contracted and portfolio acquisitions of emission reductionsadjusts for EcoSecurities share of emission reductions from individualcontracts. Net Trading Margin = Represents the net spread on principal arrangements, netagency 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 voluntaryemission reduction projects. One VER corresponds to 1 tonne of CO2e emissionreductions EcoSecurities is one of the world's leading companies in the business oforiginating, developing and trading carbon credits. EcoSecurities structures andguides 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 countriesto create carbon credits from projects that reduce emissions of greenhousegases. EcoSecurities has experience with projects in the areas of renewableenergy, agriculture and urban waste management, industrial efficiency, andforestry. With a network of offices and representatives in more than 25countries on five continents, EcoSecurities has amassed one of the industry'slargest and most diversified portfolios of carbon projects. EcoSecurities also works with companies in the developed world to assist them inmeeting their greenhouse gas emission compliance targets. Utilising its highlydiversified carbon credit portfolio, EcoSecurities is able to structure carboncredit transactions to fit compliance buyers' needs, and has executedtransactions with both private and public sector buyers in Europe, North Americaand Japan. Working at the forefront of carbon market development, EcoSecurities has beeninvolved in the development of many of the global carbon market's most importantmilestones, including developing the world's first CDM project to be registeredunder the Kyoto Protocol. EcoSecurities' consultancy division has been at theforefront of significant policy and scientific developments in this field.EcoSecurities has been recognised as the world's leading greenhouse gas advisoryfirm over the last seven years by reader surveys conducted by EnvironmentalFinance 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 theKyoto Protocol of the UN Framework Convention on Climate Change ('UNFCCC').Coinciding with these landmarks, a series of climate policy developmentsoccurred during 2007 that are of significance to the operations of EcoSecuritiesGroup. There were both positive and negative developments affecting the KyotoProtocol's Clean Development Mechanism ('CDM'), the main regulatory policyprocess affecting the Group. During the year, changes in the CDM process led todelays in project registration and carbon credit generation. Such delays led theGroup to conduct a thorough assessment of its projects, leading to a portfoliowrite-down in November as described below. On a more positive note, the resolutions of the Conference/Meeting of theParties of the UNFCCC that took place in December 2007 in Bali established aroadmap for the development of a framework for carbon trading beyond 2012. TheBali 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% reductionsadopted for the first commitment period of the Kyoto Protocol (2008 to 2012). Climate change and the need to mitigate greenhouse gas emissions havesignificantly risen in public prominence. The publication of the Stern Reportand the 4th Assessment Report of the Intergovernmental Panel on Climate Change('IPCC') have both helped to raise public concern about this issue, culminatingwith the Nobel Prize award to the IPCC. Australia announced its intention to adopt the Kyoto Protocol's emissionreduction targets, a welcome development which will result in an increase in theinternational carbon market size. Internal policy developments in the US havealso been encouraging and the introduction of mandatory emission targets at afederal level would, if enacted, significantly increase the size of the globalemission reductions market and could extend timeframes well beyond the current2012 cut-off point of the first commitment period of the Kyoto Protocol. EcoSecurities positioned itself to participate in the market segments that aredeveloping worldwide as a result of these policy changes. To capture theseopportunities, EcoSecurities raised €100 million for the Group in mid-2007. Thestronger balance sheet and the partnership agreement signed with Credit Suisseas part of its investment are both important elements of the Group's strategy tocontinue to participate in the international carbon market in the long run. The Group achieved several significant milestones and continued to expand whilemaintaining its position as a market leader. The Group maintained its primaryfocus on the development of its core activities of originating, implementing andcommercialising Certified Emission Reductions ('CERs'). In parallel with theevolution of the policies related to the compliance market, there has been asignificant rise in demand for emission reduction credits among non-regulatedsectors over the last 18 months, placing increased emphasis on the developmentof voluntary Verified Emission Reduction credits ('VERs') from projectsworldwide, including in the US. The Group successfully expanded into the VERmarkets and also initiated secondary CER trading activities, both key componentsof the expansion plan announced last summer. As previously announced, the Board took the view that delays in the CDMregistration and issuance process, seen in the latter part of 2007, were notjust a short term anomaly. Accordingly, in line with Group's policy ofcontinually assessing the project portfolio to take account of operational,regulatory and market risk, the Board decided it was prudent to make acomprehensive portfolio write down in November 2007. While this wasdisappointing, the Group's portfolio now reflects the current realities of theCDM registration process. In addition, the Group has subsequently tightenedfurther the due diligence procedures that are undertaken prior to a projectentering its portfolio. At 29 February 2008 the Group had contracts for CERs from 479 CDM projects, ofwhich 411 projects have passed due diligence and have been included in theGroup's portfolio. The contracted projects are capable of generating 171 millionCERs to 2012. In addition, the Group has 108 million CERs under contract forissuance beyond 2012 and 13 million VERs. In total, the gross contracted volumeby the Group amounts to 279 million CERs. On a net basis, the CER portfolioprojects, excluding projects under due diligence, are capable of generating 122million CERs to EcoSecurities to 2012. The Group continued to develop its partnership with Credit Suisse, which enablesEcoSecurities to differentiate its origination and commercialisation offeringsin what is becoming an increasingly competitive environment. In February 2008,EcoSecurities and Credit Suisse inaugurated their joint €1 billion carbonpurchase facility. EcoSecurities' geographic reach was extended with new offices andrepresentatives established in Japan, Peru, Switzerland, Italy and Bahrain andthe Group now has a presence in 27 countries. This network facilitates sourcingand servicing projects throughout the world and by the year end the Group hadprojects in 34 countries. The Group significantly advanced projects through the Clean DevelopmentMechanism with 42 additional projects registered with the CDM Executive Boardduring the year, bringing the overall total to 95 projects registered by yearend. In order to accelerate the process of project registration and issuance,the Group increased implementation capacity by adding additional resources, aswell as conducting continuous prioritisation of strategic projects in itsportfolio. During the year the Group continued to expand its commercialisation activities,offering new and innovative products to the market. A highlight wasEcoSecurities Carbon I a ground-breaking structured CER transaction establishedin partnership with Credit Suisse, which placed over 5 million CERs in 2007, therevenues of which will commence in 2009. Furthermore, secondary trading in CERshas presented new opportunities for the Group with additional value generatedfrom projects outside of its portfolio. EcoSecurities is using its globalnetwork of offices and employees to source secondary CERs from bothEcoSecurities' clients and competitors' projects, thereby providing a service toCDM project developers and generating incremental revenue for the Group. EcoSecurities' VER activities continued to progress well, with the Group havingrapidly expanded its offering and raised its profile within this emerging areaof the carbon market. Strategic agreements to develop VER projects were signedin key markets such as the US, Turkey and China. The successful development ofthis product has helped EcoSecurities to mitigate some of the financial impactresulting from delays in the CDM project cycle. Since the year end one of the Group's forward CER delivery customers has givennotice that it is unable, as a result of its Mauritian jurisdiction, to receiveCERs in accordance with the terms of the contract signed in 2005. As a resultthe Group is required to deliver a cash settlement equivalent to the marketvalue 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 beavailable for sale to the Group's other customers. Given the continued growth and expansion of the Company and the Board's earliercommitment to strengthen its senior management team, EcoSecurities has madeseveral new board level appointments over the last six months. These includeJames Thompson as Chief Financial Officer, Adrian Fernando as Chief OperatingOfficer and Alec Dreyer and Paul Ezekiel as additional Non-Executive Directors.In addition, the Group has recruited Martin Enderlin, former CDM Executive Boardmember, as Director of Government and Regulatory Affairs. Former CFO, JackMacDonald, is now Director of Corporate Development, focusing on identifying andexecuting strategic opportunities, with particular emphasis on acquisitions andproject investments. The global emissions trading markets in which the Group operates are primarilyinfluenced by the formulation and implementation of policy and regulation.Several key policy developments occurred during the last year, most notably theUNFCCC'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 aconstructive dialogue with regulators and policy makers. On a less positive notethere continue to be significant delays in the linking of the UNFCCC'sInternational Transaction Log to the European Union's Community IndependentTransaction Log. The evolution of an effective central settlement system forCERs is important and the Group will continue to be prudent with respect to itscash position until the EU has confirmed the connection timetable. Throughout 2008, the Group will focus on progressing its contracted emissionreduction projects through the CDM project cycle. By continuing to innovate andadd to its commercialisation offering the Group will optimise the potential ofits portfolio. EcoSecurities plans to accelerate its activities in secondarytrading of CERs and VER markets, developing projects to high quality emissionreduction standards, in order to meet the changing needs of large corporatebuyers. With a strong balance sheet and enhanced implementation resources, EcoSecuritiesremains well positioned not only to realise the value of the assets it haswithin its existing portfolio, but also to continue growing its business. Thecapital 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 isconfident in the Group's prospects for the current year and beyond, providingemission reduction credits to a continuously expanding market environment. Executive Directors' review 2007, EcoSecurities' 10th anniversary year, was one of consolidation of earliersuccesses to provide the Group with the ability to continue growing in a dynamicmarket environment and building its carbon credit portfolio to enable marketleadership over the long term. Alongside its core focus on origination,implementation and commercialisation of CERs, the Group was quick to recogniseand exploit further growth opportunities which included the acquisition ofpost-2012 emission reductions, trading opportunities in the secondary market andthe emerging VER markets in the US and globally. The Group also strengthened itsbalance sheet, holding significant cash reserves following the institutionalplacing and the strategic investment made by Credit Suisse. The Group's marketshare remained significant, with 95 of the 896 projects registered by the CDMExecutive Board at the year end having been implemented by EcoSecurities. Origination While origination activity during 2007 continued to progress, the Group's netportfolio to 2012 increased only slightly from 127 million CERs in December 2006to 130 million CERs at 31 December 2007. In the second half of 2007 the Groupenhanced its project selection and due diligence process to assesssystematically the operational, financial and CDM viability of projects beforethey are added to the portfolio. At the 2007 year end a further 20 million CERson a net basis were in the Group's due diligence process and, although undercontract, will not be included in the portfolio numbers until conclusion of suchassessments. This process prevents the entry of projects with low likelihood ofsuccess into the portfolio, increasing its inherent quality and reducingvolatility 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 agross basis (2006: 156 million). The average acquisition price to the Group atyear 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 globaleffort against climate change, the Group made a strategic decision to contractfor the purchase of CERs beyond 2012. During 2007 the Group made a concertedeffort to enter into options for the purchase of post-2012 CERs and by the yearend had rights to over 103 million post-2012 CERs. EcoSecurities continued to form strategic partnerships with organisations suchas the Dubai Multi Commodities Centre (a strategic initiative of the Dubaigovernment to establish a commodity market place there) and Stantec (a largeNorth American engineering company) to maximise project origination activitiesin these regions and to expand its reach and effectiveness. Furthermore, thepartnership with Credit Suisse also provided the Group with a competitiveadvantage in the market place and during February 2008 EcoSecurities announcedthat it had inaugurated its joint €1 billion carbon purchase facility, with thesigning of emission reduction purchase agreements with a Chinese renewableenergy project developer for several wind farm projects. At the beginning of 2007, the Group commenced its voluntary emission reductionproject activities, both in the US and internationally and by year end it hasalready originated 10.7 million VERs. The Group was also successful in sellingVERs to European and American buyers, as described in the Commercialisationsection. The Group's contracted carbon credit projects at 31 December 2007 can be brokendown as follows: Carbon credit type: Gross volume Net entitlement to Group (million) (million) CERs to 2012 (principal) 131 123CERs to 2012 (agency) 9 4CERs to 2012 (project development) 4 3Subtotal CER portfolio to 2012 144 130 CERs to 2012 (due diligence) 22 20Subtotal contracted CERs to 2012 166 150 CERs post-2012 (options and ERPAs) 103 103VERs 11 11Total volume contracted 280 264 Implementation There continued to be significant delays throughout the CDM project developmentcycle which had an overall impact on EcoSecurities' ability to progress projectsquickly through to registration and issuance. These delays are particularlyacute 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 yearend, with these projects capable of producing 13 million CERs by 2012 on a netentitlement basis to the Group. Of the 437 projects at contract and term sheetstage 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 342projects in the Group's portfolio were financed and 148 were operating at yearend, 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 asfollows: 31 December 2007 31 December 2006Project cycle landmark No. of projects Million CERs No. of projects Million CERs(cumulative values)Contracted 437 150 353 127Due diligence 37 20 0 0Portfolio 400 130 353 127 Operational stage:Financed 342 104 283 105Construction started 292 88 162 61Operation started 148 39 84 31 CDM stage:PDD complete 239 73 132 39Submitted to Validation 223 66 125 38HNA obtained 181 55 67 10Validated 115 24 65 10Submitted to Registration 110 23 62 10Registered 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 outof the total number of projects in the UNEP-Risoe CDM Pipeline). In order toaccelerate the process of project registration and issuance, the Group addedfurther implementation capacity during the year. It increased its headcount ofCDM specialists to 84 and deployed staff close to the projects in its regionaloffices to enhance project monitoring capacity. In combination with increasingthe size of the team, the Group instigated a series of process improvements aswell as a further prioritisation of project work to optimise the way in whichthe most valuable and strategic projects progress through the CDM project cycle.At the same time, the Group continued to grow and improve its capacity tomonitor operations of its projects, an essential component to enable carboncredit creation, verification and issuance to the requirements of the CDM. The Group's implementation division continued to add to its list of achievementsin 2007. It helped to register the first gas flaring project in the GulfCooperation Council region, registered the first ever project in Thailand andfinalised the CDM implementation work for the Group's first N2O abatementproject in China. Commercialisation Commercialisation made good progress in 2007. The Group sold forward a further13 million CERs during the year. At the year end a net total of 42 million CERswere sold forward through 2013 (2006: 29 million), of which 2.8 million are for2008. This represents expected forward CER revenues of €558 million and a NetTrading Margin of €282 million by 2013. The weighted average price on theforward contracts is €13.10, an increase over the year (2006: €11.30). The Group continued to expand its commercialisation product offering helped byits strategic partnership with Credit Suisse. December saw the placing of over 5 million CERs via EcoSecurities Carbon I, a special purpose vehicle developedjointly with Credit Suisse. This innovative structure allowed sales of CERs to anumber of new credit-worthy clients and achieved a premium price withoutEcoSecurities incurring any guaranteed delivery obligation. Revenue for theGroup from EcoSecurities Carbon I will commence in 2009. Secondary trading had a productive initial year, with increased revenue and netprofit. Pricing, trading and risk systems are in place and are being paralleltested to ensure accuracy and flexibility. The Group's global network of officesand relationships positions us to capitalise upon market trends and tradingopportunities. EcoSecurities VER activities continued to gain momentum with the Group achievingsales 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, 7.9million in 2009, 8.1 million in 2010, 5.1 million in 2011, 4.4 million in 2012and 2.9 million in 2013. Considering its current CER inventory, plannedverifications during 2008 and CER production profile of the portfolio, the Groupis 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, greatlyenhanced EcoSecurities' presence in the United States. Consultancy significantly grew its external client base during the year. Itcontinued to work with international organisations focusing on climate changepolicy and capacity building such as the World Food Programme, InternationalFinance Corporation and the Global Mechanism. In addition, the Group continuedto expand its corporate carbon footprinting work, as well as providing ongoingsupport for the development of strategies by the American utilities to supportthe integration of emissions trading under California's AB32 and the Low CarbonFuel Standard. The Group's Ecosystem Services team continued to contributeextensively to the policy processes related to including avoided deforestationinto an international carbon trading scheme. Policy and operational matters Policy making and regulation continued to have a significant impact on theGroup's business in 2007. Throughout the course of the year, the Group engagedin a constructive dialogue with national governments, Designated NationalAuthorities, policy makers, industry associations and NGOs to enhance theefficiency and effectiveness of the CDM process in mitigating against climatechange. The Group was encouraged to see that some of the CDM processimprovements that had been recommended by industry bodies and EcoSecurities hadbeen incorporated in the official documentation produced by the Conference/Meeting of Parties of the UN Framework Convention on Climate Change in Bali lastDecember. During 2007, the Group devoted substantial efforts to develop and implement itscorporate social responsibility policy and procedures. A clear framework wasdeveloped to assist in ensuring that our projects make a positive difference tothe environment and at the same time protecting the interests of our investors. Despite experiencing some market challenges in 2007, the Group continued tobuild on earlier achievements, with more market 'firsts' which included beingthe first company to successfully register CDM projects in Thailand and the GulfCooperation Council region. In recognition of its role in the market,EcoSecurities was awarded Best CDM/JI Project Developer - Kyoto Project Credits2007 and Best Advisory - Kyoto Project Credits 2007 by Environmental FinanceMagazine, the 7th year in a row in which the Group received awards by readers ofthis publication. The Group was also ranked number 22 in CNBC European BusinessMagazine's 'Top 100 Low Carbon pioneers'. It is also pleasing to see the work ofthe IPCC, which included contributions from three of EcoSecurities' seniorstaff, Pedro Moura Costa, Agus Sari and Mark Trexler, recognised through theNobel Prize. During the year, new representative offices and subsidiaries were opened inTokyo, Lima, Bern, Rome and Manama. This brought the total number of offices andrepresentatives to 30 at year end (2006: 25). Staffing levels increased to 300by year end, representing an increase of 44%, primarily to provide additionalresource in implementation to progress the project portfolio through the CDMapproval cycle. In order to support the growth of the Company, significantimprovements were made in IT infrastructure. The cost base of the Group expanded in line with management's expectations asthe Group achieved its staff recruitment targets. The Group remains in a strongcash 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 tocompliance buyers. This will involve the further strengthening of people andprocesses as well as deploying additional staff closer to project operations inlocal offices. The Group has built capacity in monitoring and verification andanticipates increased focus on these activities to ensure carbon creditproduction and issuance. As significant components of the CDM project cycle aredependent on the work of DOEs, EcoSecurities established framework agreementswith the major DOEs to ensure that these allocate capacity to conduct thevalidations and verifications needed for the Group's projects. The volumesplanned and scheduled to be verified until the end of the year give the Boardconfidence that EcoSecurities will meet its delivery obligations. Certainty of delivery commitments to European Union (EU) buyers is conditionalon there being a connection of the International Transactions Log (ITL) registryto the EU's Community ITL registry. While in some cases it is anticipated thattransactions may be settled via national registries outside the EU, the Groupwill be particularly prudent in conserving its cash balances until there isconfirmation of the timetable for the connection of these registries. Currently,EcoSecurities does not assume that this will occur before the limit date ofApril 2009 set by the EU. In addition to its efforts related to the CDM, EcoSecurities plans to continuebuilding its presence in the voluntary markets in the US and internationally.Additional resources are being devoted to create and sell VERs, with a focus onmeeting the needs of large corporate buyers in Europe and the US. Origination will focus on acquisition of CERs and VERs worldwide and there willbe an increased effort on securing rights to carbon credits beyond 2012. TheBoard believes that the Group's strong international presence gives itsignificant competitive advantage in the sourcing of high quality CER and VERprojects and intends to continue to expand its operations in the promising USmarket. In summary, and in line with the Bali Roadmap and likely policy changesin the US, the Group is positioning itself for a wider market and regulatoryenvironment that will become clearer from the end of 2009. The Group willcontinue to engage in various policy dialogues with stakeholders to help designor improve regulatory schemes related to greenhouse gas mitigation in variousjurisdictions. EcoSecurities and its senior management team are positive about the prospectsand opportunities related to the future of the carbon market and are confidentas to the capacity of the Group to maintain its market leadership in 2008 andbeyond. Financial review Income statement Group revenue rose by 135% to €7.2 million. This was largely on the back ofemission reduction sales increasing by nearly 200% with volumes increasing to454,000 tCO2e. The launch of EcoSecurities Carbon I towards the end of the yearmarked a step forward in the commercialisation process and revenue from thistransaction is anticipated to commence in 2009. Consulting revenues at €1.2million rose by 12%. The gross profit margin was low and not representative of the average prices ofthe deliveries on forward sales and CERs from the portfolio due to high level ofsecondary sales and the price of CERs allocated to cost of sales. Administrative expenses increased by 61% in line with expectations principallyas a result of the planned expansion of the implementation team. The primarybusiness expense continues to relate to staff and associated costs. Staffincreased 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 the2007 capital increase and costs in relation to EcoSecurities Carbon I of €0.8million. 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 2005where the buyer is now unable, as a result of its Mauritian jurisdiction, toreceive CERs in settlement of the Group's delivery obligations. In thesecircumstances, the sale contract provides for the settlement to be in cash andto be calculated as the difference between the deemed market price of CERs inMarch 2008 and the contracted sale price (if lower). Since the sale price underthis agreement is lower than the year end market price, a financial liabilityhas been reflected. CERs intended to have been used in settlement of thiscontract 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 interestreceived on the Group's cash deposits and the remaining €2.7 million representsthe 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 onthe British Pound denominated deposits held as a currency hedge against theGroup's British Pound based future operating costs, a charge of €1.5 millionrelating to the value of the option to purchase CERs granted to Credit Suisse in2005 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 bysubsidiaries. At the year end accumulated tax losses of €62.4 million wereavailable to offset future profits. The retained loss for the year amounted to €45.0 million, an increase of €25.0million from the prior year driven principally by the Group's increase inheadcount 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 andincludes €0.8 million of identifiable internal costs of CDM projectimplementation capitalised during the year in accordance with the Group'spolicy. Investments in project related plant and equipment in the year amounted to €2.0million spread over 37 investment in 3 countries. At the year end the Group hadadditional commitments amounting to €13.2 million for future capital expenditurein relation to emission reduction projects. €1.0 million was spent on expandingthe Group's administrative infrastructure including fixtures, fittings andcomputer equipment Inventories comprised 837,000 issued CERs and 942,000 issued VERs. Restricted cash balances amounting to €19.4 million principally relate to cashprovided as collateral for delivery commitments, €14.5 million of which is dueto be released by June 2008. Capital increase In June and July the Company increased its capital by placing 19.4 millionshares 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 itsimplementation capability and working capital in particular inventory and tradereceivables. Project related expenditure and advances amounted to €2.3 million.Net financing inflows amounted to €75.5 million comprising the mid year capitalincreases of €100 million, repayment of borrowings of •(7.8) million, movementsof €13.1 million to restricted cash and costs associated the placing whichamounted to €3.5 million. The net increase in cash and cash equivalents over the year amounted to €16.4million and in addition interest bearing loans and borrowings reduced by €7.8million. The year end balance of cash and cash equivalents was €88.1 million andthere were no interest bearing loans or borrowings outstanding. Hedging policies The Group has a treasury and commercial hedging policy that covers interestrate, foreign exchange and commodity price exposures. Normally, and whereappropriate, the Group may hedge a proportion of its net production of emissionreductions to protect cash flows against commodity price and exchange ratefluctuations. The Group also maintains cash balances in major operatingcurrencies relative to operational cash requirements in those currencies andincurred a loss of €2.5 million in the year principally as a result of theGroup's holding of British Pounds. The Group uses other hedging arrangements inrelation to specific currency exposures when prudent. Summary consolidated income statementFor 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 expenseFor 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 sheetAt 31 December 2007 2007 2006 •'000 •'000AssetsNon-current assetsIntangible assets 4,039 3,412Property, plant and equipment 4,712 2,463Deferred tax asset 229 -Trade and other receivables 834 531Total non-current assets 9,814 6,406 Current assetsInventory 10,916 -Derivative financial assets 2,641 -Trade and other receivables 20,973 5,020Cash and cash equivalents 88,076 60,452Total current assets 122,606 65,472 Total assets 132,420 71,878 Shareholders' equityIssued capital 282 232Share premium 173,127 76,446Share based payment reserve 902 664Currency translation reserve (506) (74)Other reserves (573) (573)Retained earnings (70,019) (25,009)Total shareholder's equity attributable 103,213 51,686to shareholders of the Group LiabilitiesNon-current liabilitiesTrade and other payables 3,040 3,040Deferred tax liabilities 186 58Total non-current liabilities 3,226 3,098 Current liabilitiesInterest bearing loans and borrowings - 7,582Trade and other payables 12,137 8,884Derivative financial liabilities 1,505 -Current tax payable 1,411 628Provisions 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 statementFor the year ended 31 December 2007 2007 2006 •'000 •'000 Cash flows from operating activitiesLoss for the financial year (45,079) (20,046)Income tax expense 1,748 573Finance income (7,043) (2,405)Finance expense 14,464 857Depreciation of property, plant and 587 200equipmentImpairment and amortisation of 1,460 52intangible assetsProject costs transferred to inventory - 125Write-down on inventory 429 -Loss on disposal of property, plant and - 139equipmentShare-based payment expense 307 385Foreign 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 9,626Creation 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 activitiesInterest received 3,262 2,170Acquisition of businesses (170) -Purchase of property, plant and (2,849) (2,673)equipmentInvestment in intangible assets (8,214) (3,487)Net cash used in investing activities (7,971) (3,990) Cash flows from financing activitiesProceeds from the issue of ordinary share capital 100,045 85Payment of share issue transaction (3,502) (2,222)costsRepayment 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 82,565year Effect of foreign exchange rate (1,865) (1,073)fluctuations on cash and cash equivalents Cash and cash equivalents at end of 68,629 54,045year Notes to the financial information 1. Basis of Preparation This preliminary financial information has been derived from the Group'sconsolidated financial statements for the year ended 31 December 2007 which havebeen prepared in accordance with International Financial Reporting Standards(IFRS) as adopted by the EU. The accounting policies applied in preparing theGroup's consolidated financial statements for the year ended 31 December 2007are as published in the Annual Report for 2006. The audited financialstatements will be issued in due course and will include an unqualified opinionfrom our auditors, KPMG Chartered Accountants. 2. Segment reporting (a) Business segments The Group has defined the following two business segments based on its operatingactivities as follows: (i) Emission reductions This segment comprises emission reduction project activities where the Groupcontracts with project developers in order to acquire or sell emissionreductions on their behalf, or development activities where the Group developsits own interest in emission reduction projects as either lead project entityor as part of a collaboration. (ii) Consulting This segment provides emission reduction advisory services to commercial andgovernmental 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 3,073Segment 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) 1,549Income 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 15,826Unallocated Group assets 69,840 56,052Total 132,420 71,878assets 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 6,160Depreciation, amortisation and 1,950 97 2,047 229 23 252impairment losses (b) Geographical segments The Group's emission reduction business is conducted on a global scale, withpresence in most continents. The Group employs significant assets overseas whichare reported by continent. The Group's consulting business is undertaken throughoffices in the UK, US, Brazil and Netherlands. 2007 2006 Revenue Total Capital Revenue Total Capital assets expenditure assets expenditure •'000 •'000 •'000 •'000 •'000 •'000Europe 6,104 117,891 9,646 823 68,012 4,090North America 1,064 9,710 26 1,605 636 150South America 45 1,002 69 477 724 475Africa 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, segmentassets are based on the geographical location of the assets. Segment revenue isbased on the geographical location of customers. 3. Financial income and expense During the year ended 31 December 2005, the Group entered into an agreement tosell a specified number of CERs at a fixed price for delivery in 2008. Whilethe Group originally expected to settle this obligation through the delivery ofCERs, the Group has been informed that the buyer cannot now receive CERs insettlement of the delivery obligation under the original contract because thebuyer is not able to set up an account to receive the CERs. A provision withinthe original contract provides that, in such circumstances, the settlement isrequired to be made in cash at the deemed market price of the CERs at a fixeddate prior to the settlement. The buyer separately made available the rights to the CERs on the open marketand, in the year ended 31 December 2006, the Group acquired the rights to aportion of these CERs at a cost of €1.3m. These rights were shown as intangibleassets in the balance sheet at 31 December 2006. The Group acquired the rightsto a further portion of these CERs in 2007 at an aggregate cost of €5.1m. As aconsequence of this, the rights to the CERs acquired by the Group are nowregarded an entitlement to receive a portion of the cash delivered under theoriginal contract. As a result of the above, and because the fixed sales price under the agreementis less than the estimated market price at the balance sheet date, the Group hasrecorded: - a provision of €10.1m in respect of the best estimate of its obligations underthe 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 ofthe contractual rights to CERs acquired in 2006 and 2007. The actual settlement of these contracts will be based on market prices atfuture dates as specified in the contract and the Group's net exposure in thisregard 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 whichhave been recognised in the income statement. 4. Loss per share Basic loss per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year. The weighted average number of ordinary shares is calculated as follows: 2007 2006 Number Number ('000) ('000)Issued ordinary sharesAt start of year 92,657 91,627Effect of shares issued during the year 9,730 584Weighted 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 4,410Short term bank deposits 34,754 49,635Cash and cash equivalents for the purposes of the cash flowstatements 68,629 54,045Restricted cash 19,447 6,407Cash 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 atyear end. The Group has committed to sell CERs to third parties through the endof the first Kyoto commitment period. Under certain contracts, the Group postscash or near-cash collateral or pledges agreements to purchase CERs topurchasers' escrow accounts until the Group's delivery commitments arefulfilled. €7.6m of this restricted cash will be released on the settlement ofthe obligations described in note 3. In addition, the Group also posts cash collateral in respect of letters ofcredit, guarantees and bid-bonds issued under a standby letter of creditfacility. The terms of the facility require that collateral be posted in theform of cash against all outstanding obligations. The Group has issued a numberof standby letters of credit under this facility to support investment and CERrelated transactions. Short term bank deposits The Group's short term bank deposits are invested in money market deposits whichmatch the forecasted functional currency requirements of the business. Detailsof these deposits are as follows: Balance Weighted Weighted invested average average term interest rate •'000Currency Euro 14,954 3.40% 16 daysSterling 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) 51,686New shares issued in the year:- pursuant to strategic 48 99,919 - - - - 99,967investment- in connection with acquisition - 188 - - - - 188- on exercise of share options 2 76 - - - - 78Transaction costs capitalised - (3,502) - - - - (3,502)Total recognised gains and - - (432) - - (45,079) (45,511)lossesShare-based payment - - - 307 - - 307Transfer on exercise of share - - - (69) - 69 -optionsAt 31 December 2007 282 173,127 (506) 902 (573) (70,019) 103,213 This information is provided by RNS The company news service from the London Stock Exchange