Offsetters Climate Solutions Inc. (TSXV: COO) CEO and founder James Tansey, in an interview with SmallCapPower.com, describes how his company has grown both organically and through acquisitions to just over $7 million in annual revenue. He also explained how Offsetters is building steady, predictable income streams with its locked-in contracts.
Video transcription
Voiceover: Offsetters Climate Solutions is a featured sponsored company and has paid SmallCapPower a fee for coverage. Be sure to see our full disclosure on our website.
Mark Thorburn: Offsetters Climate Solutions Inc. (TSXV: COO) is Canada’s leading provider of carbon management solutions, helping organizations and individuals understand, reduce, and offset their climate impact. The profitable company has more than six millions offsets developed and sold to date and has contracted sales agreements of over eight million dollars through 2014. SmallCapPower was pleased to have CEO James Tansey in the studio where we asked him to tell us more about COO.
James Tansey: Hi, my name’s James Tansey. I’m the CEO and founder of Offsetters Climate Solutions. We’re a Vancouver based company focused on carbon markets and carbon management in North America. Carbon markets in North America are underwritten by legislation. In Canada, that’s organized province by province and in the U.S., the biggest system is in California under the Western Climate Initiative.
Basically carbon offsets are created when regulators require that companies reduce their emissions by investing into forestry projects, into emissions reductions projects, and our role within the industry is to find and develop those projects and to sell them to large final emitters, oil companies, gas companies, cement companies that have to reduce their emissions within the legislation.
In our history, we’ve developed the two largest forest carbon projects in the world and we’ve been extremely active in the British Columbia and Alberta markets developing high quality offset projects. We help to fund those projects by providing both expertise and capital in some cases, and we get a commission on the sale of those projects to the large final emitters. We’ve been around since about 2007 as a company. We’ve grown both through organic growth and also through acquisitions to just over seven million in revenues, and we have teams in Vancouver and then also in Portland, Oregon.
Mark Thorburn: Can you explain in layman’s terms what a carbon offset is?
James Tansey: A carbon offset is a way for a company to meet its regulatory obligations, and so the regulator may say to a cement plant: you need to reduce your emissions by 10 or 15 percent. If that’s challenging for the cement plant to do then they can meet their obligations by buying emissions reductions somewhere else in the province or in the country. So they make an investment and they purchase emissions reductions through a forestry project, for instance. They pay, let’s say, $15 a ton to do that and it’s cheaper for them to buy that offset than it is for them to reduce the emissions in their plant and they still comply with what the regulator requires of them.
Mark Thorburn: How do you turn carbon offsets into a profitable business?
James Tansey: We have three major revenue streams within the business. The core revenue stream from offset project development involves us going out and finding projects, using our technical expertise to develop those projects, get the emissions reductions validated and verified and basically turn carbon into a commodity that we can sell to our clients. So that’s been a big part of our core business. We’ve generated over six million tons of carbon offsets since the company was founded, but there are two other related areas where we have really solid revenue streams. One is in advisory services where we help companies with the management and reporting of their emissions and that includes their reporting to the Carbon Disclosure Project, which is the largest global disclosure project for greenhouse gas emissions, and then we also help them in terms of internal management systems in setting targets and reducing their emissions. The third major area of revenue for us has been software. So we built carbon and greenhouse gas related software systems that we’ve licensed to companies and it helps to track their emissions. We built a system in Alberta that helped 10,000 farmers reduce their emissions from the management of farmland. We’ve developed a system that’s being marketed now to the provinces to help the provinces track their emissions, and it’s basically a web-based software as a service system. Our latest endeavor in the software space is something called Nature Bank. Nature Bank is a software system that allows forest land asset owners to track all of the different ecological and ecosystem services on the land. It’s basically a bank for ecological assets. It’s never really been done before, but that’s a $21 billion market and we think we have a software platform that’s unique, that we’ve tested and developed. And the interface to it will create opportunities for retail investors to basically make an investment in the protection or the purchase of forest projects anywhere in the world. It manages that process transparently and in some cases, if the investor wants to connect their investment to their Facebook page or to their social media platform, it’ll actually take them directly into the square of the rainforest that they’ve purchased.
Mark Thorburn: Are there any catalysts that could affect the Canadian carbon offset market in the near future?
James Tansey: The two big catalysts in the Canadian market that are pending are the LNG, the LiquefiedNatural Gas sector in B.C. It’s in the final stages of development. The business cases for investment will be finalized in 2015 and the regulator has said that any additional emissions from operating the LNG plants in the province will be subject to the offset legislation. So if they use natural gas, which they will do to drive the LNG plants, and their emissions are two or three million tons a year or more, they’ll have to offset all of the additional emissions. So the legislation for the LNG facility we expect will go to the legislature in British Columbia in the fall, and then there will be a clear regulatory framework for the next 10 or 20 years within the province. Alberta has also gone through a major review in terms of its emissions. It has a ceiling on carbon prices of $15 a ton and we expect to see that rise to $25 a ton, and with all the growth in oil sands in Alberta and the growth in the shale gas extraction in Alberta and B.C., we expect to see those markets grow to 60 to 100 million a year in British Columbia and $200 to $300 million a year in Alberta. So that’s the Canadian landscape. The California landscape is also looking very positive. We’re seeing trades occur at $10 a ton. There’s no additional legislation required for it. It’s an operating cap and trade system. And we’re going to see the price in that system rise to as high as $20 a ton by 2020, so we see that as a two to four billion dollar opportunity and we’re very active in the U.S. right now developing projects within that pipeline.
Mark Thorburn: What are the major challenges faced by your business?
James Tansey: Well, it’s always difficult being a business that’s subject to the political whims and to changes in government, but what we’ve seen over the last five or six years is legislation that really locks in those offset obligations. And we’re very confident now that those systems will remain in place and that legislation creates a real market for us. The challenges we have are just that the capital investment for these large-scale projects moves much slower than the pace of a business our size, so we have to be patient but we believe that by being patient and developing high-quality projects that we’ll see slow and steady growth over the next 10 years in the sale of those tons. So we’re in conversations now with the LNG developers about basically having an off-take agreement for those companies that would allow us to guarantee a price on any tons that we deliver to them. And since they’ll need tons every year they’ll be looking for 10 to 15 year projects. So from a revenue perspective what makes Offsetters Climate Solutions attractive is, as we lock in those contracts, it’s really an annuity business. We’ll have steady, predictable income streams and our barrier to entry is that we built up the expertise and the experience in Canada and North America and we have the most diversified offset portfolio than any of the companies in this space.
Mark Thorburn: What are you doing to create shareholder value in the next one to two years?
James Tansey: The major areas that we’re working on at the moment are in ensuring that we have sufficient capital on hand to be able to invest in early stage project development. We have a mechanism in place now with Gravitas that allows us to invest in the early stages of project development. The projects are typically cost expensive on the front end. All the costs are on the front end, so if we have access to capital pools that allow us to invest and that capital is secured against an off-take agreement or a contract, then we can dramatically expand the number of projects that we can do. So that mechanism gives our shareholders some confidence that we can continue to supply and grow. It also creates other opportunities for investors who may be more interested in providing debt than in getting involved directly in the company. And then we’re also very focused on innovating internally to develop new technology platforms. And Nature Bank has been the product of that effort. We’ve brought on an external investor into that project already that’s reinforced the company valuation at two million dollars for the Nature Bank subsidiary. And we’ll be developing that over the next 12 months, and then we’re constantly on the lookout for acquisition targets. And we’ve got three NDAs in place at the moment to look at potential acquisitions, which will also help with a step changing growth.
Mark Thorburn: Thanks for taking the time for today’s interview, James.
James Tansey: It’s a pleasure. Thanks very much.
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