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CHAIRMAN’S REPORT WITH AUDITED PRELIMINARY FINANCIAL STATEMENTS
Dublin, Ireland – 5 April 2006
I have pleasure in presenting the audited preliminary financial statements of AgCert International Plc (“the Company”) for the period from incorporation 8 December 2004 to 31 December 2005. AgCert’s first year as a public company, was one filled with accomplishments, challenges and opportunities. The carbon world has developed rapidly during the period, as has the Company.
AgCert’s business is the production and sale of reductions in greenhouse gas emissions (referred to as "Offsets") from agricultural sources on an industrial scale. Its methods involve the capture and combustion of biogas containing greenhouse gases, primarily methane, emitted from animal waste management systems ("AWMSs"). To achieve this, AgCert has developed proprietary data systems and processes which have been designed to be fully scalable and adaptable to the AWMSs of large confined animal feeding operations including those for swine, dairy and poultry.
Market development
The European Union Emission Trading Scheme (“EU ETS”) was launched in January 2005 and created the main market for AgCert’s business. The Kyoto Protocol came into force in February of 2005 establishing a global system to reduce greenhouse gases. Companies producing more than their target greenhouse gas emissions under the terms of the Kyoto protocol will need to buy Offsets or Credits to cover the excess or face heavy fines. Trading of European Union Allowances (“EUAs”) the benchmark for carbon value began with prices in the €7 to €9 per tonne range and with daily volume of 50,000 to 750,000 tonnes. By mid March 2006 prices had escalated to more than €26 per tonne and daily trading volumes reached as high as 2.5 million tonnes. After much anticipation the World’s first Certified Emission Reductions (“CERs”) were issued in relation to hydroelectricity projects in Honduras in October 2005.
Operational performance
Against this market background AgCert has developed rapidly, expanding its initial operations in Brazil and Mexico, establishing operations in new geographies, namely Chile and Argentina, and extending its activities to new agricultural sectors, such as dairy and poultry.
From an initial base at 8 December 2004 of 20 employees and 8 completed biodigesters, AgCert now has over 220 employees and more than 400 completed biodigesters.
AgCert is a pioneer in the Carbon market and has achieved rapid growth. In this new industry the CDM process creates necessary checks and balances, but remains commercially challenging as regulators and market participants seek to gain experience. By growing rapidly, the Company has secured a significant market presence in Brazil and Mexico, but at the cost of an organizational restructuring during Autumn 2005 and higher than expected construction expenditures as some sites, mostly in Brazil, were below our current minimum size and others needed remedial work to meet the Company’s construction standards. This has resulted in a delay in execution of the Company’s business plan however we believe that this is primarily a matter of timing and, taking account of the positive market environment for trading in carbon credits, we remain positive about the long-term outlook for the business,
Substantial progress has been made both in operations and regulatory approvals, particularly in the final quarter of 2005. Below is a summary of the Company's operational performance with reference to its key performance measures:
Performance Measure
|
10 September 2005
|
31 December 2005
|
24 March 2006 |
Arrangements for sites (Brazil, Mexico, Chile, Argentina) |
>1,000 |
>1,300 |
>1,700 |
Sites in progress |
352 |
517 |
622 |
Build time |
16 to 20 weeks |
12 to 15 weeks |
12 to 15 weeks |
Completions |
59 |
265 |
411 |
Capital cost per CER |
€1.20 |
€1.22 |
€1.28* |
CER annual production rate for completed sites |
0.4 million |
1.2 million |
2.1 million |
Prompt start qualifying farms |
471, of which 372 farms meet company criteria
|
471, of which 372 farms meet company criteria |
471, of which 372 farms meet company criteria
|
Total credit reserve (from farms started) |
23 million tonnes CO2e |
25 million tonnes CO2e |
32 million tonnes CO2e
|
PDDs submitted |
18 |
30 |
38 |
PDDs registered |
0 |
3 |
14 |
Letters of approval |
7 (Mexico) |
15 (Mexico) 9 (Brazil)**
|
18 (Mexico) 9 (Brazil)*** |
EUA prices / tonne |
€ 23.83 |
€21.60 |
€26.40 |
* Represents current and projected cost/CER. In early 2006, AgCert completed a number of smaller sites of < 3000 annual CERs that were committed to in 2005. Construction on smaller sites is more costly on a per CER basis. In addition, there were non-recurring costs relating to remedial action on some sites to bring them up to the Company’s construction standards. These factors resulted in the cost/CER reaching a high of €1.60/CER in January and February of 2006. All remedial work will be completed in the first half of 2006. The Company has not initiated, or committed to, construction on high cost smaller sites in 2006 and anticipates a cost/CER that is in line with the target of < €1.20/CER.
** 8 were conditional *** 3 are conditional
AgCert secured its first CER in the last week. The United Nations appointed Executive Board of the Clean Development Mechanism (CDM) announced on 31 March and the 3 April respectively, that it has authorised the issuance of CERs from bundled projects in Mexico and from the Granja Becker animal waste management project in Brazil.
AgCert has secured advance sales contracts of approximately €94 million (excluding the AES pre-pay), and sees an abundance of potential future customers. As a consequence of the delayed execution of the business plan, the Company has been working with its customers to match its revised and updated regulatory and production schedule with the customers’ delivery requirements.
Capital expenditure of €41.3 million in the period reflected the construction of bio-digesters in Mexico and Brazil. Operating cash costs of €16.6 million reflect operational expenditures incurred in supporting the execution of the plan.
Capital Requirements
The IPO of AgCert shares in June 2005 raised gross proceeds of €91 million for the Company. Since that time, significant progress has been made against the plan for biodigester installations. AgCert intends to explore additional sources of supply in Latin America during 2006 and also is researching sources of supply in new territories, with a view to further expansion beyond its existing geographic footprint. To maintain the momentum now achieved, the Company is currently engaged in raising additional funds for capital and operating expenditures over the coming years. Since 31 December 2005, the company has:
- arranged a secured pre-payment of up to €60 million from The AES Corporation (“AES”) for the purchase of CERs to be delivered between 2008 and 2012. As part of this arrangement, AgCert International will grant warrants to the purchaser on each drawdown of funds representing in total a maximum of 5,266,656 ordinary shares, which are exercisable for a period of 5 years from date of grant (but not before 1 June 2007) at an exercise price of 115% of the market price at the date of grant.
- signed a term sheet for the placing with AES of new shares in the amount of 9.9% of the currently issued share capital at a price of €2.66 per share. This placement is subject to AES final Board approval and Agcert International Plc shareholder approval. As part of the term sheet, AgCert and AES agreed to pursue additional strategic initiatives.
- progressed negotiations with International Finance Corporation (“IFC”), and a group of international banks for a senior syndicated debt facility of up to €120 million.
Board developments
On 13 September 2005 AgCert announced that Bill Haskell, a director, would serve as interim CEO, replacing the former CEO. Under Bill’s leadership, substantial progress has been made and to maintain that momentum, the Board is delighted to announce that Bill has accepted the role of permanent CEO.
Outlook
Unlike many businesses, the Company’s production does not start at zero each year, but instead builds upon prior periods’ capacity. For 2006 and beyond, the Company intends to concentrate on identifying and securing sources of CER supply, constructing biodigesters on time and within budget and operating and maintaining facilities for the long term, all the while satisfying significant regulatory requirements.
AgCert operates under the scrutiny of the Clean Development process and embodies the ideals of the Clean Development Mechanism – bringing new investment capital and technology to developing countries and fostering sustainable economic development while improving the environment. The Company works according to the World Bank Group’s environment and social standards policies.
The signs of global climate change were abundantly evident in 2005, with unusual local temperatures, extreme storms and shrinking ice in glaciers and at the poles. The problem is clear, as is the opportunity. Against this background, the rapid growth of the Carbon market and the Company’s achievements to date, the Board takes a positive view of the future.
Merrick G. Andlinger
Chairman
5 April 2006
Click here to view the full Preliminary Financial Statements 5 April 06