Trading Emissions PLC Regulatory News (TRE)

Trading Emissions PLC

Results for the year ended 30 June 2012

Trading Emissions PLC ("TEP" or "the Company"), a closed end investment company that specialises in renewable energy projects and emissions instruments such as carbon credits, today announces its financial results for the twelve months ended 30 June 2012.

Financial Highlights

·; Valuation: Group Net Asset Value ("NAV") of 62.98p per share as at 30 June 2012 (2011: 121.08p per share as at 30 June 2011).

·; An independent valuation carried out by an international accountancy firm gave a composite fair value of the Group's net assets (carbon, private equity and cash) of GBP 170.3 million (68.17p per share). The Board has used this valuation in determining each investment's fair value apart from one case where the Board concluded that fair value should be reduced by GBP 4.9 million.

·; Loss per share of 53.35p for the year ended 30 June 2012 (9.49p loss per share for year ended 30 June 2011).

·; Private equity portfolio: GBP 114.2 million or 45.72p per share as at 30 June 2012 (37.23p per share as a 30 June 2011).

·; CER portfolio: Net liability of GBP 17.0 million or negative 6.81p per share at 30 June 2012 (portfolio was in an asset position at 30 June 2011 with a positive value per share of 48.84p).

·; Cash: The Company held net cash of GBP 61.0 million or 24.42p per share at 30 June 2012 (GBP 43.9 million or 17.56p per share as at 30 June 2011). This includes total restricted cash of GBP 16.3 million at 30 June 2012 (2011: GBP 27.3 million)

Operational Highlights

·; On 2 December 2011, the Company was reregistered under the Isle of Man Companies Act 2006. New Articles of Association were adopted which, inter alia, enable the Company to return cash to Shareholders by a series of one or more B share schemes pursuant to which Shareholders will be able to choose whether to receive returns of cash as income or capital.

·; Also on 2 December 2011 Neil Eckert, Malcolm Gillies, Bertrand Rassool and Nigel Wood resigned as Directors and Martin Adams, Christopher Agar, Norman Crighton and Francis Hackett were appointed as Directors. Francis Hackett resigned on 21 June 2012 and Martin Adams was appointed Chairman.

·; The Company aims to return capital to Shareholders through controlled realisation processes.

·; A programme of renegotiation of fixed price ERPAs commenced in 2012. At 30 June 2012, eight ERPAs had been renegotiated. Subsequent to the year end, the Company renegotiated a further four ERPAs.

·; A number of non-binding offers were received during the year to acquire TEP's CER portfolio. Neither the Board nor the Investment Adviser believed these offers represented the best outcome for shareholders. The Board believes future terms of sale will be significantly improved following renegotiation of the ERPAs.

·; Sales processes and/or strategic reviews are underway for all of the Company's private equity investments.

Post balance sheet events

·; On 2 October 2012, a subsidiary of TEP issued a notice of withdrawal to the general partner of Chapel Street Environmental LP, in accordance with the terms of the limited partnership agreement.

·; A resolution to amend the Investing Policy of the Company will be tabled at the Annual General Meeting to be held on 19 December 2012

Investment Adviser

·; The Board is conducting a process to select an investment adviser, or advisers, to assist in the management and disposal of all remaining assets from 2013 onwards. In accordance with the terms of the existing agreement, EEA has been offered the opportunity to continue to provide investment advisory services to TEP post-2012 subject to agreement on terms and conditions.

For further information:

Key abbreviations and terminology relating to the carbon portfolio

Carbon: Key terms and acronyms

Carbon Prices and Currency Rates

Carbon: CER Prices

The following are the CER futures prices as quoted on ICE which have been used to value the ERPAs at 30 June 2012 and 31 October 2012:

Key foreign exchange rates:

The following are the key foreign exchange rates used in currency conversions at 30 June 2012 and 31 October 2012:

Chairman's Statement

Dear Shareholder

As your new Chairman, I am pleased to report to you on progress at Trading Emissions PLC ("TEP" or the "Company") during the last year.

Board of Directors

The Board of Directors ("the "Board") comprises five non-executive Directors ("Directors"), of whom three were elected at the last Annual General Meeting ("AGM") held on 2 December 2011. Francis Hackett also joined the Board at the same AGM in 2011 and served as Chairman until he resigned on 21 June 2012.

Since the new Directors joined the Board, the main focus has been on:

- Assessing, with the support of EEA Fund Management Limited ("EEA" or the "Investment Adviser"), the carbon portfolio and cash requirements, the related hedges and developing and implementing risk and liability mitigation strategies.

- Obtaining an in-depth understanding of each private equity investment, its intrinsic value, operational issues, the local investment and business environment, potential realisation strategies and, as appropriate, implementing a disposal and/ or strategic review process.

- Assessing where significant value has been created or lost with respect to all investments, including those substantially written off.

- Reviewing the appropriateness of the past, existing and future potential investment advisory, management and administration arrangements.

- Reducing the Company's operating cost base and implementing enhanced controls and budgeting with a view to reducing expenses.

- Implementing clear responsibilities and reporting requirements for each Director.

Financial highlights

The Net Asset Value ("NAV") of TEP decreased to GBP 157.3 million (62.98p per share) at 30 June 2012 from GBP 169.9 million (68.01p per share) at 31 December 2011, and from GBP 302.5 million (121.08p per share) at 30 June 2011, largely as a result in the fall in carbon prices during the intervening period. Under International Financial Reporting Standards ("IFRS"), the Company's carbon portfolio and those private equity investments which are not subsidiaries, and are classified as financial assets, are measured at fair value. Where the Board has decided to dispose of a subsidiary, then, in accordance with IFRS 5, "Non-current assets classified as held for sale and discontinued operations", the subsidiary's carrying value is the lower of its net carrying value (including any impairment losses recognised) and its fair value less costs to sell. Hence, IFRS does not allow for the simple presentation of the Group's private equity investment fair values, specifically in those instances where the fair value exceeds the subsidiary's net carrying value or the Company's operating costs within the financial statements.

In order to provide an indication of the fair value of all investments, including consolidated subsidiaries, the Board commissioned an update of the independent valuation as at 30 June 2012 by the same international accountancy firm that conducted the exercise at the interim reporting date. As a result of that exercise, the Board has been advised that the composite fair value at 30 June 2012 of (a) the private equity investments; (b) the carbon portfolio net of hedges; and (c) cash was GBP 170.3 million or 68.17p per share (compared with a valuation of GBP 184.0 million or 73.63p per share as at 31 December 2011). These valuations have been used by the Board in determining each investment's fair value, apart from in one case where the Board concluded that the fair value should be reduced by GBP 4.9 million. The Board has also been advised that under accounting standards it is not always appropriate to write up those investments where the carrying value in the financial statements is lower than valuations in the independent valuation report. These are the principal reasons for the difference between the total net asset value of GBP 157.3 million shown in the financial statements and GBP 170.3 million in the independent valuation report.

There was considerable trading activity in the Company's shares during the year and a number of significant new investors joined the register. The average discount to NAV at which TEP's shares traded during the financial year ended 30 June 2012 was 60.1%.

Carbon portfolio

At 30 June 2012, the fair value of the carbon portfolio, gross of hedges and swaps, was a net liability of GBP 17.1 million (negative 6.84p per share) compared with a net liability of GBP 27.9 million (negative 11.17p per share) at 31 December 2011. The net value of hedges and swaps at 30 June 2012 was GBP 0.1 million, giving a net carbon portfolio liability value of GBP 17.0 million (negative 6.81p per share). The net value of hedges and swaps at 31 December 2011 was GBP 9.9 million, giving a net carbon portfolio liability value of GBP 18.0 million (negative 7.20p per share).

The spot price of CERs rose from around EUR 6 after the Company was launched in 2005 to a high in excess of EUR 22 in 2008. TEP has entered into 44 individual long term ERPAs for the supply of CERs from Chinese project owners and two World Bank-sponsored UCF projects. The Company is also counterparty to a fixed price ERPA in Israel which projected to generate a small number of CERs. The Company receives CERs from Asia Biogas, which are transferred at a nominal fee.

At the beginning of the financial year, the Company was required to purchase fixed price Pre-2012 CERs at a weighted average price of EUR 7.54 per CER.

In relation to Post-2012 CERs under the original ERPAs with Chinese counterparties, TEP continued in eight cases to have obligations to acquire CERs at fixed prices, but in most others had the option but not the obligation to acquire the CERs. In the case of six of the eight contracts, fixed prices were agreed for CERs issued Post-2012 until 2018. The two other contracts fall under the World Bank UCF where the Company will receive CERs at fixed prices until 2014. On 24 October 2012, the spot price of CERs quoted on ICE fell to an all-time low of EUR 0.84 per CER, compared with an average price of EUR 12.03 for the 2011 financial year and an average price of EUR 5.81 for the 2012 financial year. The principal reasons for the collapse in carbon prices are the oversupply of CERs and ERUs, muted demand caused by economic slowdown in Europe and restrictions and uncertainty in relation to the future demand within carbon markets including the EU ETS Post-2012.

At the beginning of 2012, the Board instructed EEA to commence a process of renegotiation of all ERPAs with Chinese counterparties with a view to:

·; replacing the fixed price payable by TEP for CERs with a percentage of the prevailing spot price, whereby TEP expects to receive a margin on each CER bought and subsequently sold; and

·; replacing the options to acquire Post-2012 CERs with a firm commitment by TEP to register and sell those CERs on the basis set out above.

The rationale behind the ERPA renegotiations is to reduce TEP's liabilities in relation to fixed price obligations and to create an asset in relation to Post-2012 CERs by committing TEP to register and sell CERs at spot prices. The status of the 44 ERPA renegotiations is summarised in the Investment Adviser's Report.

To date, it has not been possible to amend the terms of the UCF projects sponsored by the World Bank, although the Board is hopeful that the UCF projects may be renegotiated at some point in the future. Under the UCF, TEP has the obligation to acquire an estimated 1.8 million CERs annually until March 2014, at a fixed price of EUR 6.12 per CER. Settlement of the purchases under the UCF projects is guaranteed by a letter of credit issued on behalf of TEP, which is collateralised with blocked deposits of EUR 20.2 million (GBP 16.3 million).

Given the steady decline in spot prices and continuing negative market prospects, TEP aims to hedge as much of its exposure to projected CER deliveries as it prudently can afford to post as cash collateral. As the hedges in place at the end of the financial year covered 4.3 million CERs, the projected risk adjusted unhedged exposure as at 30 June 2012 was 2.6 million Pre-2012 CERs for delivery by 31 March 2013.

At 31 October 2012, the Investment Adviser estimates that the net liability payable by TEP to acquire contracted CERs when assuming that (i) spot prices fall to zero; (ii) deliveries are in line with the risk adjusted projections as at 31 October 2012; and (iii) the impact of hedges has been taken into consideration, is GBP 33.6 million. This compares with a net liability of GBP 60.4 million as 30 June 2012, GBP 86.0 million as 31 December 2011 and GBP 144.3 million at 30 June 2011.

A number of non-binding offers were received during the year to acquire TEP's carbon portfolio, which EEA and the Board did not believe represented the best outcome for shareholders. The offers were by and large received prior to a material number of ERPAs being renegotiated and therefore involved TEP paying large sums of money to transfer the CER obligations and extinguish the associated future liabilities. In the light of the ERPAs already renegotiated and under renegotiation, the Board is of the view that the future terms of a sale could be significantly improved.

Private equity investments

After TEP raised an aggregate of GBP 310.0 million in 2005 and 2006, GBP 212.4 million was invested in private equity assets and CDM loans around the world in the renewable energy sector. To date, TEP has received proceeds of GBP 25.8 million from those investments. Details are provided in Table 7 of the Investment Adviser's Report. The private equity portfolio had a book value at 30 June 2012 of GBP 114.2 million (45.72p per share), compared with GBP 124.9 million (49.99p per share) at 31 December 2011. The fair value of the private equity portfolio according to the independent report was GBP 126.3 million (50.56p per share) and GBP 121.4 million (48.60p per share) following the Directors' adjustment.

With the exceptions of Asia Biogas, Element Markets and TEP Solar (owned by TEP subsidiary Surya), a significant number of TEP's private equity investments and CDM loans essentially involved green-field start-up projects. TEP wholly owns, controls or has the right to assume control of most of its private equity investments. The Company relies on EEA to manage relationships with other equity owners in investee companies and to report to the Board on the management and performance of investee companies. Under the Company's existing investment policy no new private equity investments will be made, although the Board retains the discretion to provide follow on funding where required. In line with the Company's investment policy, the Board is not undertaking a fire sale of investments. The portfolio is being managed with a view to maximising aggregate realisation proceeds over the short to medium term.

During 2012, the Company continued with the disposal, refinancing, redemption, termination or liquidation processes in relation to each of its private equity investments and CDM loans. The recent state of the financial and carbon markets and low level of corporate activity in the renewable energy sector have added to the challenges of what is already a difficult and diverse portfolio of assets located in a variety of jurisdictions. In many cases, the operating histories of certain investee companies have reduced further the level of corporate interest that might ordinarily be expected.

The Bionasa biodiesel facility in Brazil is the largest single asset held by TEP. During 2012 the arbitration process to resolve the ownership dispute with the Brazilian partner was suspended and a local financial adviser was mandated to raise capital to finance TEP's exit. A sale of the entire company is also possible under the right circumstances. The deterioration in the Brazilian financial markets is providing challenges to both the capital raising process and availability of working capital to finance Bionasa's operations.

TEP Solar completed the acquisition of three projects during the financial year ended 30 June 2012 at an aggregate cost of GBP 47.7 million and successfully refinanced, via limited recourse project financing, two of the three projects acquired (Ravano and Olivia). TEP Solar is proceeding with the refinancing of the third project (Librandello). The Company believes that following completion of the limited recourse refinancing of Librandello, the entire TEP Solar portfolio will represent an attractive fully-financed operating portfolio investment opportunity.

The TEP Solar acquisitions were part-funded through a short term loan from the Investment Adviser's parent, EEA Group Limited of EUR 12.0 million in 2011. The loan was repayable on demand. In order to avoid foreclosure which would have significantly prejudiced TEP's investment, TEP Solar repaid EUR 10.0 million in 2012, with the outstanding balance of EUR 2.0 million and all outstanding interest being repayable by 31 December 2012 at the latest.

Two interested parties have so far provided expressions of interest to acquire the EWG Slupsk wind farm project, conditional on all relevant permits and licenses being issued to construct and operate the facility.

As the process for the sale of Asia Biogas did not result in any offers on acceptable terms, TEP is undertaking a strategic review with the senior management team.

The Company is reviewing with the senior management of Element Markets the strategy and potential sale of that business.

Following receipt of a distribution of USD 1.9 million from Chapel Street in April 2012, the Company has served a withdrawal notice requiring repayment of the remaining fair market value of the Company's investment.

In respect of the disposals during the year of the investments in Electricidad Andina, Environmental Credit Corporation, Escalona and Jantus, GBP 2.0 million has been received, with further payouts amounting to, in aggregate, the equivalent of up to GBP 9.3 million at current exchange rates being contingent on certain events and hurdles which may or may not materialise. No value has been assigned to these amounts in the financial statements.

The disposal, termination or liquidation of a number of other smaller investments is expected to conclude by the end of 2012 including Carbon Capital Markets, EcoTraders and Sun Biofuels which could return, in aggregate, up to GBP 1.3 million at current exchange rates.

Future management and administration of the portfolio

From launch in 2005 to 30 June 2012, TEP has paid, in aggregate, investment advisory fees to EEA of GBP 42.7 million and performance fees of GBP 34.3 million. The existing investment advisory agreement with EEA terminates on 31 December 2012.

The Board is conducting a process to select an investment adviser, or advisers, to assist in the management and disposal of all remaining assets from 2013 onwards. TEP has received proposals from several interested parties to manage either the carbon portfolio or the private equity portfolio or both. In accordance with the terms of the existing agreement, EEA has been offered the opportunity to continue to provide investment advisory services to TEP Post-2012 subject to agreement on terms and conditions.

The Board will retain absolute discretion to approve the sales of all investments. It is envisaged that Norman Crighton and I will remain closely involved in all material negotiations in respect of realisations. Where appropriate to ensure that TEP's strategy is properly considered, we will also remain directors of certain of TEP's investee companies.

The Board is also undertaking a review of the provision of administration services to TEP and its subsidiaries which, at present, are provided by a combination of IOMA Fund and Investment Management ("IOMAFIM") and Chamberlain Fund Services ("CFS") with assistance from EEA.

Distributions

At 30 June 2012, the Company held cash (excluding cash margin held at a broker of GBP 2.1 million) equivalent to GBP 61.0 million (24.42p per share), including restricted cash of GBP 16.3 million (6.53p per share) in support of the World Bank-sponsored UCF. As a result, EEA projects that the Company will have enough cash on hand to pay any notional liabilities in the event that CER prices fall to zero, even assuming no material disposals of investee companies.

The Company intends to distribute substantially all cash not required to meet liabilities and operating costs. In the short term, the ability to conclude the ERPA renegotiations and dispose of the carbon portfolio will determine how much cash is available to effect the next distributions to Shareholders. As and when the carbon portfolio and private equity investments are sold, further distributions will be effected.

In 2011, the Company put in place a 'B share' dividend option mechanism in order to ensure future distributions could be made in a cost effective, flexible and timely manner. The Board intends to consult with the Company's major Shareholders with a view to distributing cash in the most appropriate manner. As TEP has registered under the Isle of Man Companies Act 2006, capital can be returned to Shareholders subject to meeting the solvency requirements required under the 2006 Act.

Investing policy

In a Circular issued by the Company on 25 August 2010, the Board committed that prior to 31 December 2012, Shareholders will be invited to vote on the future of the Company, with the exact form of the resolutions on which Shareholders will vote to be determined at that time.

At the AGM to be held on 19 December 2012, Shareholders will be requested to vote on a resolution to change the Company's Investing Policy to the following:

The investment objective of the Company is to carry out an orderly realisation of the portfolio of carbon and private equity assets, distribution of the net proceeds to Shareholders and then undertake a voluntary winding-up of the Company. No new private equity investments will be made except where the Board considers it necessary to provide follow-on capital to protect an existing investment.

In implementing the proposed new Investing Policy, Shareholders should be aware of the following significant risk factors:

·; The Company invests in unquoted companies, entities and projects in emerging markets, which carry a higher than average degree of investment risk.

·; The Company's exposure to climate related instruments is subject to volatility in carbon prices, which is beyond the Company's control.

·; Valuations are subject to uncertainty and there is no assurance that the realisation proceeds from the sales of investments will reflect the Company's carrying values or independent fair valuations.

·; There is no guarantee that the realisation strategies will provide the targeted returns sought by the Company and, as such, there can be no guarantee that the Company will achieve its proposed investment objective.

·; As the Board is comprised of non-executive directors, the implementation of the investment objective will, to a significant degree, be reliant on the performance and capabilities of its investment adviser(s).

·; The illiquidity in the Company's underlying investments will affect the level and timing of distributions to Shareholders.

The Board unanimously recommends approval of the resolution to amend the Investing Policy.

In the event that the resolution for the continuation of the Company with an amended Investing Policy is not passed by Shareholders, the Board will bring forward further proposals for the reconstruction and/or liquidation of TEP.

2012 AGM

At the AGM to be held on 19 December 2012, two resolutions will be presented to Shareholders for consideration under special business. The first of these resolutions is to amend the Investing Policy, as outlined above. The second resolution is in respect of a Directors' Incentive Plan, details of which will be explained in a separate letter from Chris Agar, the chairman of the Board's Nomination and Remuneration Committee, with the notice of AGM.

The Board is most appreciative of the support received from Shareholders during the past year. We are hopeful that it will not be too long before regular distributions can commence.

Martin Adams

Chairman

07 November 2012

Investment Adviser's Report

Overview

The Investment Adviser's Report (the "Report") updates investors on the Company's activities for the period from 1 July 2011 to 31 October 2012. The report reviews events relating to 1 July 2011 to 30 June 2012 (being the "financial year") and then events after the financial year end to 31 October 2012.

The Report is presented in two parts, reflecting the format of the Company's asset segmentation which follows in the accounts. First, the risk adjusted carbon credit portfolio is presented, including an update of the CDM status of major projects in the portfolio and transactions that were undertaken to create this CER portfolio; followed by an update on the Company's portfolio of energy and climate related private equity investments.

In accordance with the Company's investment policy, during the financial year no new investments have been made except for follow-on investments in the solar sector which were completed when the current investment policy was put in place. On the instructions of the Board, the Investment Adviser has endeavoured to provide the Board with appropriate realisation opportunities for its portfolio of investments, as well as providing appropriate investment advice to manage these investments. The Investment Adviser has regularly engaged with the Board on these exit strategies.

Part 1: CER portfolio

The Company's rights to CERs have been acquired principally through ERPAs whereby the Company enters into a contract with a seller for the purchase of primary CERs, with payment due on or after delivery to the Company. ERPAs representing the majority of the existing risk-adjusted carbon portfolio with Chinese counterparties have been or are currently being renegotiated.

The Company has also received, and projects that it will continue to receive, CERs related to a number of its equity investments, particularly from Asia Biogas. This is described in more detail in Part 2 of this Report.

The Company also provided debt finance to companies developing or operating CDM projects. These loans were repayable in CERs directly from the relevant projects and secured with project or company assets or guarantees. The Company does not expect to receive any further significant quantities of CERs from these arrangements.

The portfolio quantities set out below include CERs received or to be delivered as a result of these three types of CER delivery transactions described above.

The Report includes statements that are forward-looking and tables that include projections or statements that use terms such as "projects", "expects", "will" or "should". In each case, these statements and tables reflect the current expectations of the Company and/or the Investment Adviser based on risk-adjusted calculations, but actual deliveries of CERs and/or other emission reduction credits may differ materially from those predicted by the projections or other forward-looking statements in this Report.

In the Report, we differentiate between commercialisation activities (secondary trading activities which result in the net sale of CERs and have the effect of reducing the size of the unsold portfolio, effectively hedging the Company's forward position) and trading activities (activities which do not alter the Company's overall CER position but generate cash or favourably adjust the composition of the portfolio).

A summary of notable operational and financial detail relating to the CER portfolio from the beginning of the financial year to 31 October 2012 is as follows:

- The price of CERs has fallen significantly since the beginning of the financial year. For example the December 2012 CER future price has fallen from EUR 11.09 on 1 July 2011 to EUR 4.18 on 30 June 2012. Since the end of the financial year prices have fallen further to a low of EUR 0.84 on 24 October 2012.

- This fall in the value of CERs has had a significant adverse impact on the Company's CER portfolio, the fair value of which has fallen by GBP 70.1 million in the financial year.

- Excluding HFC projects, the Investment Adviser renegotiated 14% of fixed price risk adjusted projected volumes from ERPAs during the financial year. As at 31 October 2012, the Investment Adviser has renegotiated 41% of fixed price risk adjusted projected volumes from ERPAs. The Investment Adviser continues to engage and make progress with project owners on renegotiating the remaining fixed price ERPAs in the CER Portfolio.

- The Investment Adviser has put in place hedges worth EUR 14.2 million (GBP 11.4 million) at 31 October 2012. The hedges are worth EUR 19.5 million (GBP 15.7 million) should CER prices fall to zero.

- The Company and the Investment Adviser continue to monitor the Company's cash position to ensure it has sufficient funds to cover fixed price liabilities, even in the event that CER prices fall to zero.

CER portfolio overview

The Company's CER portfolio was designed to provide a long exposure to the price of CERs. This was achieved principally by acquiring CERs directly from CDM projects on a fixed price basis under ERPAs. Prior to the beginning of the financial year, the average purchase price paid by the Company for CERs was consistently below the secondary market price, meaning that the CER portfolio was in a net profit position. During the financial year, CER prices have declined significantly in value. Most of this decline occurred in the first six months of the financial year. Subsequent to the financial year, CER prices have again fallen significantly with a December 2012 CER valued at EUR 4.18 at 30 June 2012 and reaching a low of EUR 0.84 on 24 October 2012.

Under these market conditions, the long position in CERs has become a significant net liability position for the Company. The Investment Adviser is mitigating the realisation of these liabilities through the renegotiation of ERPAs as well as hedging activities in the secondary market.The graph below shows the historical trend of December 2012 futures from March 2008 to October 2012.

http://www.rns-pdf.londonstockexchange.com/rns/6098Q_1-2012-11-8.pdf 

Source: Data from Bloomberg

Risk adjustment model

Since the launch of the Company, the Investment Adviser has developed and refined a model for estimating how many CERs will be delivered from each of the individual projects in the Company's CER portfolio over the life of the relevant contracts. This model takes into account the individual specifications and capacity to generate CERs for each project, and adjusts this by taking into account risk adjustment factors. These factors are:

1. The performance of every project by sector within the UNFCCC universe. Data on performance from each of the projects in the UNFCCC process is collated, filtered and sorted by industrial sector and project type. An industry specific "risk adjustment factor" is then applied to the model.

2. The macroeconomic environment. Many of the projects, such as hydro electricity generation and natural gas, are sensitive to GDP growth and economic activity and adjustments are made to reflect the latest estimates of these variables.

3. The performance history of the individual projects. Previous issuances are assessed and if these are materially different from industry specific risk adjustment factors, then the Investment Adviser may amend the risk adjustment factors accordingly.

4. The Investment Adviser may also adjust for project specific matters following discussions with project owners. This may involve an analysis of actual performance of the project as to the impact on CER issuance in future.

Each ERPA has two distinct phases; firstly, CERs projected to be generated prior to the end of 2012 and issued before the end of March 2013 ("Pre-2012 CERs"); and, secondly, CERs that are either generated after 2012, or delivered after March 2013 if generated prior to the end of 2012 ("Post-2012 CERs").

As at the beginning of the financial year, the Investment Adviser's model projected a total of 20.0 million Pre-2012 CERS to be delivered to the Company for which an average price of EUR 7.54 would be paid. During the financial year, revisions to the model projected that 3.3 million fewer CERs would be delivered due to changes in the factors mentioned above, in particular a slowdown in expected economic activity.

The details of the Company's entire ERPA portfolio, excluding inventory are set out in Table 1 below:

The risk adjusted quantities have been valued using ICE CER prices as at 30 June 2012 . Estimated cash flows in the Company's ERPAs are then discounted to determine the net present value of the rights to CERs under each ERPA.

As at 30 June 2012, the Investment Adviser projects that the Company will receive 10.3 million Pre-2012 CERs for which it will have to pay an average price of EUR 6.00 per CER. This can be split between fixed price quantities of 7.3 million CERs at a weighted average price of EUR 7.21 per CER and those purchased under renegotiated ERPAs of 3.0 million CERs at a weighted average price of EUR 3.53 per CER based on the 30 June 2012 spot price.

The Investment Adviser also projects that 5.3 million Post-2012 CERs will be delivered from 2013 onwards. This is made up of 3.3 million fixed price CERs at a weighted average price of EUR 7.29 and 2.0 million spot price CERs at a weighted average price of EUR 4.21 per CER. This increase of 0.7 million CERs is primarily due to the renegotiation of ERPAs, explained in more detail below.

In the financial year, 6.4 million CERs were delivered to the Company at an average price of EUR 6.82. The majority of CERs purchased by the Company in the financial year were then sold in the secondary market at an average price of EUR 6.39 per CER, realising an aggregate cash loss for the year of EUR 4.9 million.

Details of the Company's CER ERPA portfolio as at 31 October 2012 are set out below in Table 2.

As at 31 October 2012, the Investment Adviser projects that the Company will receive 10.9 million Pre-2012 CERs for which it will have to pay an average price of EUR 4.04 per CER. This can be split between fixed price quantities of 6.1 million CERs at a weighted average price of EUR 6.86 per CER and those purchased under renegotiated ERPAs of 4.8 million CERs at a weighted average price of EUR 1.13 per CER based on the 31 October 2012 spot price.

The Investment Adviser also projects that 8.3 million Post-2012 CERs will be delivered from 2013 onwards. This is made up of 2.4 million fixed price CERs at a weighted average price of EUR 6.95 per CER and 5.9 million spot price CERs at a weighted average price of EUR 1.53 per CER. There has been an increase of 3.0 million CERs in the four month period ending 31 October 2012 due to the renegotiation of four additional ERPA contracts after the financial year end.

Renegotiated ERPAs

The price of CERs is now substantially lower than when the original ERPAs were negotiated and agreed. In the original ERPAs, the Company was obliged to purchase Pre-2012 CERs at a fixed price and in some instances had an option or a right of first refusal to buy Post-2012 CERs at a fixed price. In certain cases, the Company was also obliged to purchase Post-2012 CERs out to dates between 2015 and 2017. If the price of CERs had remained stable after the ERPAs had been negotiated then the Company would have realised profits on each ERPA. However, as the price of CERs began to fall to below the fixed price the Company was expected to pay, the Board instructed the Investment Adviser to enter into ERPA renegotiations with project owners. The new structure that the Company has sought to agree to replace the fixed price paid per CER with one where the Company pays a percentage of spot CER price on the date of delivery to the Company. In effect, the Company should earn a positive margin, provided the CER price remains at a level sufficient to cover expenses. This revised floating price structure is becoming increasingly common in the Chinese CER market. At the same time, the Company, where possible, also offered to purchase Post-2012 CERs on the same floating price terms.

As at the date of this Report, 12 out of 44 ERPAs have been renegotiated, whereby an element of the projected volumes has been transferred from a fixed price to a floating price basis. A summary of the impact of these renegotiated ERPAs is set out at Table 3 below:

Table 3: Renegotiated ERPAs/ maximum liability of fixed price contracts

* CER commitments to 31 December 2012 refers to the monitoring period in which CERs are generated. This is the assumption used in the ERPA valuation at 30 June 2012.

** The CERs to be delivered has been calculated by taking the total expected volume Post-2012, divided by the number of years left in phase III of the EU ETS (8 years)

*** Represent the total projected risk adjusted volumes the Company was committed to purchase under the original fixed price ERPAs.

Cash flows from purchases and sales of carbon

In the financial year, the Company sold approximately 7.2 million CERs with net proceeds of approximately GBP 39.3 million. The Company's average CER purchase price was EUR 6.82 for CERs received in the financial year (refer to table 1), although not all CERs issued were paid for at year end. Of those contracts which were paid for, the average purchase price was EUR 6.72. A summary of the purchases and sales cash inflows and outflows in GBP from the CER portfolio has been included in table 4 below, with 2011 comparative movements.

Table 4: Cash flow from purchases and sales of carbon (GBP)

Inventory

As at 31 October 2012, the Company had inventory of approximately 2.5 million CERs, which were valued at EUR 3.2 million (GBP 2.6 million). As at 30 June 2012, the Company held inventory of approximately 2.0 million CERs and 0.04 million European Union Allowances ("EUAs"), which were valued at EUR 8.7 million (GBP 7.0 million).

Hedging and swaps

A significant amount of CER sales activity carried out by the Company is completed through physical delivery against exchange traded fund positions through a prime broker. This is a key activity with regards to managing the CER portfolio, as it serves as a hedging mechanism. This is especially significant in the light of falling CER prices. The hedges were valued at EUR 0.9 million (GBP 0.7 million) at 30 June 2012.

At 31 October 2012, the Company has forward sold approximately 3.7 million CERs for delivery in December 2012 providing aggregate proceeds (due on delivery) of approximately EUR 16.1 million and delivery of 1.0 million CERs for March 2013 delivery providing aggregate proceeds (due on delivery) of approximately EUR 3.4 million. The value of these hedges as at 31 October 2012 was EUR 14.2 million, with the increase in value from EUR 0.9 million at 30 June 2012 due primarily to falling CER prices.

The swaps were valued at a liability of EUR 0.8 million (liability of GBP 0.6 million) at 30 June 2012.

Cash position for CER payments

The Investment Adviser and the Board closely monitor cash held by the Company in connection with servicing the CER portfolio. The Investment Adviser and the Board believe the Company should be prudent in managing this exposure and successful ERPA renegotiations should reduce this exposure in future. The following reconciliation shows the available cash projection on the basis of fixed price exposures as at 31 October 2012:

The exposure to these 4.5 million CERs was valued at GBP 33.6 million as at 31 October 2012. The Company held cash at 31 October 2012 of GBP 63.6 million.

CDM project portfolio under ERPAs (China)

The Investment Adviser has focused on the renegotiation of fixed price volume ERPAs in China. The Investment Adviser is continuing discussions with all other sellers where fixed price volumes remain in place. While these renegotiations are ongoing, the Company has not paid for CERs under fixed price ERPAs.

A summary of the impact of the renegotiation process on fixed price volumes is set out in table 3. The CDM project portfolio under ERPA for China, by project type, is set out in table 6 below.

The Company has agreements with the World Bank UCF for two HFC-23 destruction projects. Delivery has generally taken place quarterly. However, there have been delays in issuance as the CDM Executive Board required clarification as to whether replacement or retro-fitted parts were impacting the historical waste generation rate. This issue appears to be reaching a resolution and issuances are expected to commence again in November 2012.

The European Union is not allowing the use of CERs generated from HFC-23 projects in Phase 3 of the EU ETS. This will apply to CERs received from such projects after March 2013. The Company's valuation methodology reflects the change, with CERs expected to be received from HFC-23 projects after March 2013 being valued at the same price as a high quality voluntary credit or AAU.

The Company has an obligation to purchase a projected 3.6 million CERs from the HFC projects with the final delivery projected to occur in early 2014. The Investment Adviser and the Board are examining all options to reduce the Company's exposure to Post-2012 CERs from these HFC projects. These projects represent 20% of fixed price volumes as at 31 October 2012.

The Company's outstanding bank guarantee in favour of the World Bank, secured by pledged deposits, currently stand at EUR 20.2 million (GBP 16.3 million).

Post-2012 CERs

The strategic priority of the Investment Adviser has been the reduction of the liability resulting from the Company's fixed price ERPAs in China by converting these into floating price contracts. Depending on progress, the Investment Adviser has also been discussing concurrently or consecutively to the renegotiations the extension of the Company's ERPAs to cover Post-2012 purchases. To date, renegotiated ERPAs have resulted in the Company becoming obliged to purchase 4.6 million Post-2012 CERs. Future renegotiated ERPAs will be likely to oblige the Company to purchase additional Post-2012 CERs.

CDM project portfolio under ERPA (rest of the world)

In terms of ERPAs producing CERs on a fixed price basis, the Company projects that it will receive 40,000 CERs in 2012 from the Hadera Paper fuel switch project in Israel, after which the ERPA will terminate. Two other ERPAs, Amman East and Durban eThekwini landfill were terminated by the Company during the financial year.

As a result of its investment in Asia Biogas , the Company estimates that it will receive a total of 1.1 million CERs from Asia Biogas' projects located in South East Asia. The Company does not have to pay any additional price outside of validation and verification costs for these CERs. The Company is currently in the process of restructuring its ERPAs in South East Asia in order to incentivise Asia Biogas and its group companies' continuing participation in the CDM process.

CDM project portfolio from carbon loans

·; Alto Tietê Biogás - Brazil

In October 2010, the Company provided a cash and CER facility to the Alto Tietê Biogás ("ATB") landfill gas capture and flaring project located in Itaquaquecetuba, State of São Paulo, Brazil. The cash facility was for up to EUR 1.0 million and the CER facility was for 40,000 CERs. It was intended that the facility would be repaid in CERs generated from the project's first and second issuances. However, although the project registered with the UNFCCC and began operation in September 2008, both of these issuances were rejected by the UNFCCC in April 2012. As such, the Board reassessed the recoverability of the outstanding loan balance and recognised an impairment as disclosed in note 14. The Board is in consultation with local lawyers regarding the recovery of the loan.

·; Dairy farm finance facility - Mexico

In April 2009, the Company entered into a carbon loan facility with Environmental Credit Corp ("ECC") to finance the construction of biodigesters at a number of dairy farms in Mexico. A total of USD 875,000 has been drawn down. In July 2011, the loan was settled by ECC by assigning its project lagoon covers to the Company and hence the Company became the beneficiary of the CERs expected to be generated by the project's bundle of biodigesters.

The project bundle was registered in October 2011 and is now operational. It is estimated to yield a gross quantity of approximately 200,000 CERs by 2016. Whilst the Company is pursuing the sale of the projects and rights to the CERs, the Board re-assessed the recoverable amount of the lagoon covers, including the expected costs to be incurred in running the project, and recognised an impairment, as disclosed in Note 8.

·; Escalona - Mexico

In 2007 the Company provided a USD 500,000 loan for working capital purposes to a 9.3MW run-of-river hydro project in Mexico under development with a local project development business called Energia Escalona. The loan was due to be repaid in CERs generated by the project before 2012.

The project has suffered delays to its development programme and is not operational. The Company has terminated the loan and related agreements and received USD 300,000 on 3 October 2012.

Part 2: Private equity portfolio

The Company has made a series of equity investments in renewable energy projects. Following the Company's announcement in August 2010, the Investment Adviser ceased origination of new equity investment opportunities on the Company's behalf, other than in relation to TEP Solar where funds had already been committed.

This section of the Report sets out activities in relation to the private equity portfolio during the financial year and progress for each of these investments. The private equity portfolio is currently subject to an individual asset realisation strategy over the short to medium term.

The Company has disposed of the following investments during the financial year:

·; The Company sold its 1.54% interest in Jantus for EUR 1.9 million in December 2011. The proceeds of this sale were received on 21 December 2011. The original investment value was EUR 2.7 million. 

·; Through its participation in the Santa Rita Limited Partnership ("SRLP"), the Company owned 97.3% of Electricidad Andina S.A., a company incorporated in Peru. Electricidad Andina was sold in April 2012 for initial proceeds of USD 0.1 million. Further amounts of USD 0.4 million and USD 9.5 million are receivable by SRLP upon the project executing a power purchase agreement and upon reaching a financial close, respectively. An additional amount capped at USD 5 million may also become receivable by TEP in the event that certain performance targets are met. The Company's original investment value in Santa Rita was USD 10.5 million.

·; The Company disposed of its 77% interest in ECC for an up-front cash consideration of USD 15,000 and a 12-month note of USD 130,000. As at the date of this publication, USD 43,000 has been received. TEP may also be entitled to additional contingent payments. The original investment value was USD 16.9 million.

The financial history of TEP's private equity investments and CDM loans is summarised in Table 7 below. Please note that certain of these investments have been settled while some remain active.

 Table 7: TEP private equity investments and CDM loans

Notes:

1) Invested amounts include both equity and loans, but do not include all operating costs such as accountancy, 

consultancy and legal fees, that have been paid directly by TEP since inception to 30 June 2012.

2) Monies returned include the proceeds of sale of CERs under the terms of CDM loan agreements.

3) Review of exit strategy.

Bionasa

Company overview

Bionasa Combustivel Natural S.A. ("Bionasa") is a special purpose Brazilian biodiesel company established in 2007 for the development of a 200,000 tonnes per annum greenfield multi-feedstock biodiesel production plant in Poranguatu in the State of Goias. The Bionasa plant became fully operational and licensed in May 2011 and has since regularly participated in the quarterly state-run biodiesel auction programme.

The purpose of the investment is to take advantage of early entrance into the Brazilian market for biodiesel which is driven in part by the establishment of mandatory targets for the production of biodiesel blended in petroleum-derived diesel. Brazil's nascent biodiesel industry is small compared to its vast ethanol market, but it benefits from a mandated 5% blend in all commercial diesel. The current 5% blend requirement is projected to increase incrementally to meet the Brazilian authorities' expressed goal of 20% biodiesel admixture by 2020. Bionasa is well positioned to take advantage of growth and consolidation opportunities in Brazil.

The location of the Bionasa plant allows it to both source oilseed feedstock and tallow (animal fats) from the ranching industry.

The Bionasa plant was able to achieve social seal certification in 2012, which permits greater participation in the biodiesel auctions and premium pricing.

The Bionasa project was developed and implemented by Bionasa's original shareholders, Jaragua and Canabrava. The Company provided the bulk of the development capital through a convertible preferred equity investment. The Company became entitled to convert its 25% minority interest into 99.4% of Bionasa's ordinary share capital on 31 July 2010 as a result of Bionasa's non-payment of dividends. The Company filed for conversion, which is the subject of an ongoing dispute resolution process before the arbitral chamber of the Sao Paulo Stock Exchange (BOVESPA).

Exit/realisation strategy

On 25 January 2012, the Company,Jaragua and Canabrava agreed to suspend the arbitration process and pursue a joint capital raise intended to enable the Company to realise its investment in Bionasa. Under the agreement, the parties will work jointly to raise capital at the Bionasa level for the purpose of buying back the Company's investment at a minimum price acceptable to the Board. The capital raise may take the form of debt, equity or a hybrid structure. All assets of Bionasa are available to support the capital raising exercise. A sale of the entire company is also possible under the right circumstances. To that end, the parties have retained a financial adviser to lead the capital raise. This process is on-going.

In the event the capital raise efforts break down, the Company will return to the arbitration process to effect itsconversion rights.

Surya - TEP Solar

Company overview

Surya PLC ("Surya") is a wholly-owned subsidiary of the Company. Surya owns the entire issued share capital of TEP (Solar Holdings) Limited ("TEP Solar" or ''TS''), an Irish incorporated company that invests in companies operating in the renewable energy industry.

Surya, through TS, has invested primarily in companies that own and operate solar PV projects located in Italy. The Company believes that incentivised Feed-in Tariffs ("FiT") provided for in government legislation in Italy have made the sector an attractive investment opportunity. The Company's strategy, executed through Surya, has been to build critical mass in solar PV assets to leverage economies of scale.

As at the date of this Report, TS directly owns five special purpose vehicles ("SPVs" or "Project Companies") that in turn own and operate eight PV plants in southern and central Italy with a total installed capacity of approximately 24.6 MW.

TS has refinanced three of the SPVs, representing 13.4 MW of its portfolio via limited recourse bank project finance facilities. An additional SPV, representing 2 MW of TS' portfolio has been refinanced via a sale and leaseback structure. The refinancings would have represented approximately 80% of project capital costs incurred, and are repayable over the life of the project. The portfolio also holds VAT facilities for these SPVs on a shorter term basis. It is important to note that these facilities are ringfenced within the TS structure, and are with limited recourse to the Company.

One SPV, Librandello, owns and operates a single site PV plant in Sicily with a capacity of 9.2 MW. Librandello and TS, through the Investment Adviser, are currently negotiating preliminary terms for project finance facilities with two Italian banks in order to potentially refinance the project costs currently funded by TS. It is expected that a mandate for the financing will be granted to one of the two banks in Q4 2012.

Investment update - financial year

As at 30 June 2012, the Company had invested approximately EUR 36 million in Surya via equity, and a further EUR 21.1 million via debt instruments.

An additional loan of EUR 12 million had been provided by EEA Group Limited (parent company of the Investment Adviser) by way of a secured, repayable on-demand facility. In May 2012, Surya repaid EUR 10 million of this loan to EEA Group Limited. Surya must repay the remaining EUR 2 million and all accrued interest by 31 December 2012.

During the financial year, the Company has invested an additional EUR 3.4 million in Surya via debt instruments, as part of the total amount committed by the Company for follow-on investments in private equity assets. The Company (directly or through TS) has also received proceeds from its investments of EUR 4.6 million, comprised of the EUR 3.4 million and EUR 1.2 million development fees paid by the SPV's RGP Puglia 1 S.r.l ("RGP") and Florasolar S.r.l ("Florasolar") to the Company.

TS acquired three SPVs during the financial year (Librandello, RGP and Florasolar in Italy with a total installed capacity of approximately 14.2 MW) and it signed a project finance facility with Centrobanca of approximately EUR 19.3 million to finance the project costs of the RGP and Florasolar projects.

The five SPVs are all fully operational and generating cash flows from the sale of electricity and tariff eligibility. Overall production and sales of electricity to the Italian grid operator are in excess of expectations.

During the financial year, TS terminated the agreement for the acquisition of a 4.8MW capacity project located in Sicily (Albanese), recovering the sum of EUR 3.6 million initially paid by way of deposit. TS paid the seller an amount of EUR 300,000 as a settlement paper.

Valuation/realisation strategy

The Company believes that following the completion of the re-financing of Librandello, TS' assets will represent an attractive fully-financed operating investment portfolio.

Element Markets

Company overview

Founded in 2005 with an initial focus on air emissions ("ERC"), greenhouse gas ("GHG") credit and Renewable Energy Certificate ("REC") marketing, Element Markets developed an insight into US environmental compliance markets that can be directly applied to the US biogas market. Today, Element Markets is a leading producer and marketer of biogas and environmental commodities in the US.

Element Markets has contracted rights to over 6,600,000 MMBtu/year and has off-take agreements for approximately 2,400,000 MMBtu/year. Element Markets owns the Huckabay Ridge Renewable Natural Gas Facility in Stephenville, Texas, one of the largest anaerobic digestion projects in the US. The facility is currently not operating and Element Markets management is considering various options to refurbish the plant. Element Markets is also currently developing and constructing several landfill gas-based biogas projects. In addition to its proprietary development efforts, Element Markets also provides biogas marketing services to third-party projects.

On 19 July 2012, Element Markets announced the release of RINPLUS, an online proprietary Renewable Identification Number Assurance Program. Several of the major refiners and bio-fuels producers in the US have agreed to transact through this new platform.

Element Markets is an active participant in the regional USA ERC markets and has a substantial presence in both the GHG and REC markets. Element Markets intends to enter the carbon cap and trade program in California (AB32) as this market opens in 2013.

Exit/realisation strategy

Element Markets retained an investment bank in September 2011 to run a process to either sell Element Markets, or raise capital for Element Markets to develop and grow its biogas business. The investment bank commenced the marketing efforts in earnest in January 2012. Discussions are ongoing with interested parties and with senior management regarding the sale and strategy of the business.

EWG Slupsk

Company overview

The project consists of a proposed 98 wind turbines across 8 wind farm clusters located in Northern Poland with an installed capacity of at least 245MW (assuming 2.5MW WTGs). The Company, through TEP (Renewables Holding) Limited, bought a 60% share in the project development company EWG Slupsk Sp. Z.o.o. ("EWGS") with the aim of taking the project to a fully permitted and ready for construction stage before managing a profitable exit.

The Polish Government is currently drafting a new law on renewable energy and released the proposed text in October 2012 which confirmed its continued support to the renewable energy sector. The Government has indicated that it will extend the incentive scheme regime which provides for a support mechanism and an obligation to offtake electricity generated from renewable energy sources at a set price. Energy from renewable sources will also continue to benefit from priority of dispatch. The legislation is expected to be finalised and to enter into force in January 2013.

EWGS has a signed grid connection agreement with PSE Operator, the Polish transmission grid operator. Obtaining the grid connection agreement was a major milestone for the project.

Permits and licenses for construction are progressing. Land rights have been acquired under leases. Environmental decisions have been obtained. In total, 50 building permits need to be obtained, of which 33 have already been received, nine are pending and the remainder are expected to be applied for before the end of November 2012. Although no requests have been refused to date, the approval process is time consuming and the Investment Adviser is working closely with EWG (the other shareholder in EWGS) with the aim of having all permits issued by the end of 2012. The number of permits required has almost doubled as EWGS is applying for turbine units individually rather than by cluster.

EWGS has entered into a management agreement with EWG, the other shareholder in EWGS. EWG is responsible for land selection and acquisition, the execution of design works related to the wind farms, the transformer stations, the electrical interconnections and for applying for building permits.

Exit/realisation strategy

Discussions are taking place with several parties regarding to the sale of the project. The Company hopes to agree on a disposal of the EWG project by the end of 2012.

Asia Biogas ("ABS")

The equity and loan investments were made in instalments in local currencies and USD for a number of years. During the financial year, loans of USD 250,000 made by TEP to ABS in 2010 were repaid.

Company overview

As at 30 June 2012, 81% of ABS was owned by the Company. ABS was formed in September 2010 to consolidate the interests of the Company and Silk Roads Limited (a holding company for the Asia Biogas founders) in a number of jointly owned companies in South East Asia. When ABS was formed, TEP invested USD 5 million by way of a convertible loan note, which fell due on 17 September 2012. The Company has converted USD 250,000 of principal plus all accrued interest at that date to obtain a 95.1% shareholding in ABS. The remaining principal is repayable on or before 31 March 2013.

ABS and its subsidiaries (the "ABS Group") is one of Southeast Asia's largest biogas systems design, engineering, construction and operating groups with operations in Thailand, the Philippines, Indonesia and Malaysia.

Following the establishment of ABS, a corporate restructuring was undertaken and a new management team was recruited. The ABS Group has been cash flow positive on a month-to-month basis since March 2012. As at 30 June 2012, the ABS group held cash balances of approximately USD 4.5 million.

Operating projects review

ABS operates two starch facilities in Thailand and owns a minority interest in a third. The largest project is Korat Waste to Energy which is in its ninth year of operation and is the principal generator of cash flow for the ABS Group as well as CERs which are sold at a nominal value to TEP. ABS Group also operates 31 Waste to Energy projects hosted on pig farms in the Philippines and four in Thailand which generally have performed poorly and are currently being restructured, closed or sold.

Development projects

Five new biomass/biogas development projects located in Philippines, Thailand and Indonesia were identified by management as potentially being capable of providing attractive returns in the short term through generation of fee income and a carried equity interest. The required investment to start up the projects woul be sourced from third party debt and equity investors.

Exit/realisation strategy

Joint financial advisers were appointed by TEP to manage the sale of ABS during 2012. Unfortunately the bids received were unattractive and the process has ended. ABS' senior management is reviewing with TEP a strategy to stabilise the operations of the group and bring the new projects to fruition with a view to generating positive cash flow to repay the loan from the Company and then sell the business.

Chapel Street

Chapel Street is advised by CK Environmental Capital Management LLC ("CKECM"). This section of the Report is prepared by the Investment Adviser from information provided by CKECM and the Company. The Investment Adviser has not independently verified this information.

Company overview

Chapel Street reports that it has invested in three natural gas digestion projects in the USA, two in Arizona and one in South Dakota. Chapel Street has advised that these projects are operational and are flaring off natural gas, for which they receive US carbon credits. Chapel Street is investigating the possibility of connecting to the grid for the Arizona facilities to sell the natural gas as clean power.

The Company received USD 1.9 million on 27 April 2012 as a capital distribution from Chapel Street.

Exit/realisation strategy

TEP Trading 2 Limited has issued a notice to the general partner of Chapel Street specifying that it wishes to withdraw its capital with effect from 1 January 2013 in accordance with the terms of the Chapel Street limited partnership agreement.

Company overview

Carbon Capital Markets, ("CCM") provides investment management services to the Carbon Assets Fund ("CAF"). It also oversees the Zybranka project in the Ukraine. CCM is additionally managing out various OTC and on exchange positions.

Exit/realisation strategy

In the financial year, CCM recovered GBP 1.2m in input tax arrears from HMRC and redeemed the Company's remaining outstanding preference shares, returning an additional GBP 0.8 million to the Company. CCM has received various approaches concerning an acquisition of the business, but TEP expects realisation by way of sale or wind down before the end of 2012 at or around CCM's current net asset value.

EcoTraders ("ET")

Company overview

ET has developed a portfolio of 17 potential CDM projects in Israel. Eleven projects in the portfolio have been registered so far, six of which are already generating CERs. Five of these six projects are already issuing CERs. The remaining project is at the validation stage. The technologies covered comprise landfill gas, fuel switch, magnesium production, energy efficiency and renewable energy, mainly solar and wind. ET's revenues primarily comprise success fees determined as a certain percentage of the revenues from the sale of the CERs or as a percentage of the issued CERs. Due to substantial delays in the UNFCCC validation, registration, verification and issuance processes, cash flows from success fees have been delayed and ET has grown more slowly than expected. As at 31 December 2011, ET made a profit of EUR 100,000. ET has started to expand into new business areas, mainly consultancy services, such as carbon foot printing, and emissions inventories.

Exit/realisation strategy

The Company is currently pursuing an exit through a management buyout of ET.

Electricidad Andina

Company overview

Through its participation in the Santa Rita Limited Partnership ("SRLP"), the Company owned 97.3% of Electricidad Andina S.A., a company incorporated in Peru.

Exit/realisation

Electricidad Andina was sold in April 2012. SRLP received USD 100,000 upon the signing of the sale and purchase agreement. Further contingent consideration has been agreed as follows; USD 400,000 upon the project receiving a power purchase agreement and USD 9.5 million on the project's financial close.

The Investment Adviser estimates that it may take approximately nine months from the date of this Report for the project to execute a power purchase agreement and that financial close may occur up to two years thereafter.

An additional amount capped at USD 5 million may also become receivable in the event that certain performance targets are met.

The loss on disposal is disclosed in note 18 of the financial statements.

Environmental Credit Corp. ("ECC")

Company overview

ECC is a leading carbon offset developer in the USA, which owns or is a project partner to 49 offset projects primarily in the USA and has registered and issued more than 2.3 million carbon offset credits. The ECC investment was essentially an option on the development of a greenhouse gas cap-and-trade scheme in the USA. The Company sought to benefit from an early-mover advantage by utilizing the ECC platform to (i) build out a market infrastructure capable of originating, developing, and commercialising carbon offset credits in the U.S. under a then current and nascent voluntary market and an anticipated and much larger U.S. compliance market, and (ii) acquire and construct a robust portfolio of carbon offset credits to be later monetised in the anticipated USA compliance market while benefiting from lower competition and other early-mover advantages.

The development of a USA compliance market appeared to be gaining significant momentum following the election of President Obama in 2008. The American Clean Energy and Security Act of 2009 ("ACES"), which would have established a variant of an emissions trading plan similar to the EU ETS, was approved by the American House of Representatives in June 2009. However ACES failed to gain Senate approval. With the failure of ACES, a robust national compliance market never materialised and, along with recessionary pressures, the value of carbon offset credits continued to be depressed.

Exit/realisation

After conducting a sales process that commenced in September 2011, the Company agreed to accept a management buyout offer from ECC's senior management team. The buyout was completed on 31 May 2012, with consideration taking the form of a nominal upfront cash payment to the Company, a 12 month note, and an on-going contingent payment obligation due to the Company in the event of a future sale of ECC above a certain threshold. The contingent consideration is up to 80% of the excess over a payment of USD 300,000 in the event of a change of control of ECC outside the ordinary course of business or the transfer of the majority of ECC's assets. If this happens up to and including 31 May 2013, 80% of the excess will be due to TEP, following 31 May 2013 up to/including 31 May 2014, 50% of the excess will be due to TEP and following 31 May 2014 up to/including the 31 May 2015, 20% of the excess will be due to TEP.

The loss on disposal is disclosed in note 18 of the financial statements.

Sun Biofuels ("SBF")

Company overview

SBF was planned as an African jatropha-based biofuel production business with large-scale land lease holdings in Tanzania and Mozambique. Following the Company's first investment in SBF in 2006, further capital injections in the form of equity, long term debt and working capital over a number of years provided TEP with a 99% shareholding in return for its aggregate investment of USD 36.7 million.

No material value was recovered from the fixed assets held in Africa that had last been valued by SBF at USD 9.6 million. After SBF was unable to raise third party financing to fund its continued development, the Company appointed an administrator of SBF in July 2011 and a creditors liquidation is currently in process.

Exit/realisation

The Company expects to receive approximately GBP 300,000 once the liquidation process has been completed.

EEA Fund Management Limited

Investment Adviser

07 November 2012

The notes below form an integral part of these financial statements.

Consolidated Statement of Financial Position

The financial statements were approved and authorised for issue by the Board on 07 November 2012 and signed on its behalf by:

Peter Vanderpump Philip Scales

Director Director

Consolidated Statement of Changes in Equity

Attributable to equity holders of the Company

The notes below form an integral part of these financial statements.

Consolidated Cash Flow Statement