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Hazel Renewable Energy VCT2 plc: Final Results
Hazel Renewable Energy VCT2 plcLegal Entity Identifier: 213800GQ3JQE2M214C75Final results for the year ended 30 September 2018
FINANCIAL HIGHLIGHTS
| 30 September 2018 | 30 September 2017 | ||||
| Pence | Pence | ||||
| Net asset value per Ordinary Share | 119.1 | 114.9 | |||
| Net asset value per ‘A’ Share | 0.1 | 0.1 | |||
| Cumulative Dividends paid | 39.5 | 39.5 | |||
| Total return per Ordinary Share and ‘A’ Share | 158.7 | 154.5 |
CHAIRMAN’S STATEMENT
I am pleased to present the Annual Report of Hazel Renewable Energy VCT2 plc, which covers the year ended 30 September 2018.
As most Shareholders will be aware, with effect from November 2017 the Investment Advisory Agreement transferred to Gresham House Asset Management Limited. At the same time, Giles Clark, who was heavily involved in the reorganisation process in a consultative capacity, joined the Board as a Non-executive Director. Giles trained as an accountant and since 2006 has acted as an investor, developer and operator of large scale solar projects in Europe and the UK (see further details on page 2 of the Annual Report).
I was encouraged by the recent announcement that Gresham House has agreed to acquire the fund and investment management business of Livingbridge VC LLP that includes the two Baronsmead Venture Capital Trusts (VCTs). Founded in 1995, the Baronsmead brand is well known and respected within the VCT community for delivering consistent performance and strong governance.
Whilst the investment emphasis of the Hazel Capital Renewable Energy VCTs remains on renewable infrastructure, I expect there to be benefits to shareholders resulting from the deal. The addition of eight specialist investment and research professionals covering both public and private market opportunities will provide broader coverage and increased deal flow. Additional resource in the middle office at Gresham House should also lead to improved efficiency in performance analysis and reporting.
Over the last two years there have also been some significant changes to the VCTs regulations and, partly as a result of this, the Company decided to raise additional funds by way of two small top-up offers for subscription.
I am pleased to report that the underlying investment portfolio has been stable and has produced satisfactory results for the year. Although solar irradiation was strong during the summer months, some technical issues offset some of the performance gains that might otherwise have arisen from this year’s sunny weather. However, the long-term outlook for the portfolio as a whole looks positive, with returns from the installed base of assets expected to continue to generate steady cash flows, resulting in an overall unrealised valuation uplift of £753,000.
Board compositionThe Board comprises three non-executive directors with a broad range of experience and we continue to work closely with the Board of the sister company, Hazel Renewable Energy VCT1 plc (“Hazel1”).
The Board considers that the Company, together with Hazel1 and the Investment Adviser, is adequately resourced to continue to provide good returns for Shareholders over the foreseeable future.
Investment portfolioAt the year end, the Company held a portfolio of 16 investments, which were valued at £30.6 million. There were no additions to the portfolio during the year, however two loan note investments were partially redeemed, and one loan note investment was fully redeemed, all at par.
The portfolio is analysed (by value) between the different types of assets as follows:
| Ground-mounted Solar | 81.6% |
| Rooftop Solar | 11.1% |
| Small Wind | 5.7% |
| Vehicle Charging | 1.6% |
The Board has reviewed the investment valuations at the year end and made a number of adjustments. Net unrealised gains on the portfolio totalled £753,000. This has been driven by favourable movements in some of the key inputs into the financial models of the underlying assets.
Further detail on the investment portfolio is provided in the Investment Advisor’s Report.
Net asset value and resultsAt 30 September 2018, the Net Asset Value (“NAV”) per Ordinary Share stood at 119.1p and the NAV per ‘A’ Share stood at 0.1p, producing a combined total of 119.2p per “pair” of Shares. This represents an increase of 4.24p (3.7%) over the year.
Total dividends paid to date (including those paid in December 2018) for a combined holding of one Ordinary Share and one ‘A’ Share stand at 45.5p. Total Return (NAV plus cumulative dividends) stands at 158.7p, compared to the cost to investors in the initial fundraising of £1.00 or 70.0p net of income tax relief.
The profit on ordinary activities after taxation for the year was £804,000, comprising a revenue profit of £112,000 and a capital gain of £692,000 as shown in the Income Statement.
DividendsIn recent years the Company has paid its annual dividend in September. In the Half Year Report, I announced that the Company plans to pay dividends in future in December as this better synchronises with the income generated by the assets held by the portfolio companies.
On 14 November 2018, the Board declared dividends in respect of the year ended 30 September 2018 of 5.4958p per Ordinary Share and 0.5042p per A Share. These dividends were paid on 14 December 2018 to Shareholders on the register at 23 November 2018.
Fundraising activitiesChanges to the VCT regulations over the last two years have created some challenges for your Company. You will recall that from April 2014 new investments in contract backed renewable energy projects are no longer eligible as qualifying VCT investments. Furthermore, with effect from 1 October 2019 for this Company, the required level of qualifying investments the VCT must hold will increase from 70% to 80%. The Board reviewed how this might best be achieved in the longer term and considered that a further fundraise, in order to invest in new qualifying investments, would be the most appropriate course of action.
In March 2018, the Company undertook a small top-up offer for subscription. This offer sold out very quickly raising £1.7 million for the Company and £2.5 million for Hazel1. In view of the level of demand a further top-up was launched in September. This offer also sold out in short time raising, £4.0 million alongside £3.2 million for Hazel1. For your Company, a total of 4,647,144 Ordinary and 5,684,428 ‘A’ Shares were issued in respect of the offers.
These new funds provide the opportunity for the Company to consider making a small number of new VCT qualifying investments and provide the Company with some additional flexibility that will help it to maintain the new 80% qualification threshold.
It is envisaged that the new investments, which must meet all of the VCT regulations including the type of business, size, age and the risk to capital test, will be different from the assets in which the VCT is currently invested. As stated in the top up offer document, the Investment Advisor will be looking for companies within the clean technology space, which offer the prospect of maximising returns for Shareholders, through them having a good management team, an excellent business plan and significant growth potential. The VCT may also invest in companies quoted on AIM.
Share BuybacksThe Board is aware that from time to time some Shareholders may wish to realise part or all of their investment and has therefore taken steps to try to ensure that there is a liquid market in the Company’s shares.
During the period, the Company purchased a total of 2,466,228 Ordinary Shares at an average price of 112.6p per Share, and a total of 2,466,978 ‘A’ Shares at an average price of 0.1p. These Shares are held in treasury.
The Company has a policy of buying Shares that become available in the market at a price approximately equivalent to a 2% discount to NAV. This policy is subject to liquidity and regulatory constraints. The Board reviews the buyback policy from time to time and may make changes if it considers that to be in the best interests of Shareholders as a whole.
Shareholders considering selling their Shares should contract the broker for the Company, whose details are shown on the Shareholder Information page of the Annual Report.
Change of nameNow that Hazel Capital LLP has been fully integrated into the Gresham House business, the Board believes that the logical next step is to change the name of the Company to Gresham House Renewable Energy VCT2 plc (and that of the sister Company to Gresham House Renewable Energy VCT1 plc).
A resolution to approve the change of name will be put to both sets of Shareholders at their respective forthcoming AGMs.
Annual General MeetingThe Company’s eighth AGM will be held at Gresham House’s offices at Octagon Point, 5 Cheapside, London EC2V 6LP 11:10 a.m. on 6 March 2019.
Four items of special business will be proposed as follows:-one resolution seeking authority to undertake share buybacks; -two resolutions seeking authority to allow the Directors to allot shares and disapply pre-emption rights in respect of those shares (including shares held in treasury); and-one resolution seeking authority to change the name of the Company, to Gresham House Renewable Energy VCT2 plc.
OutlookNow that the changes to the Investment Advisory arrangements are behind us, over the coming year we will be seeking to leverage the additional resources that Gresham House brings to the Company, to ensure that the performance of the assets and Shareholder returns are optimised, while also ensuring that the Company comfortably maintains its VCT status and the accompanying tax benefits. Working closely with the Investment Adviser, the Board will also be seeking to invest the proceeds of the top up offers in attractive VCT qualifying assets.
I look forward to meeting those investors that are able to attend the forthcoming AGM in March. Meanwhile, I would encourage you to take a look at the Gresham house website (newenergy.greshamhouse.com) where you can find all of the information regarding the Company and where, from time to time, the Investment Adviser will be publishing updates on the performance of the VCT.
Christian YatesChairman
INVESTMENT ADVISER’S REPORTPortfolio HighlightsThe Investment Adviser is pleased to report that the portfolio of assets owned by Hazel Renewable Energy VCT2 plc performed in line with expectations in the year ending 30 September 2018. There were no full acquisitions or disposals to report in the period, however some loan note investments were partially repaid.
The Companies remain principally invested in a diversified portfolio of well-constructed renewable energy projects that access long-term UK government-backed Feed-in-Tariff (FiT) and Renewable Obligation Certificate (ROC) support mechanisms which provide revenues which are predominantly linked to the Retail Price Index (RPI).
The total generation capacity of assets owned by the Companies is 34.9MWp (see table below).
During the period from 1 April 2018 to 30 September 2018, the Company’s Net Asset Value per share increased to 119.2p (30 September 2017: 115.0p) with the overall Net Asset Value at £30.7 million (30 September 2017: £28.2 million).
Portfolio revenues were 0.18% ahead of forecast for the year (8.3% below forecast in the year ending 30 September 2017). Revenues for all major segments of the portfolio came within 0.75% of the respective targets.
The performance in generation terms was 0.08% behind forecast in the period (6.2% below forecast in the year ending 30 September 2017).
The payment of an annual dividend of 6.0p (5.4965p per Ordinary Share and 0.5035p per A Share) was announced on 14 November, and this was paid on 14 December 2018.
£5.7m of additional funds were raised in 2018 via two Top-Up offers launched in February and September 2018. £1.7m and £4.0m were raised for the Company respectively. This is covered in more detail in the Chairman’s Statement.
The funds raised allow the Company to make new qualifying investments. The criteria used to evaluate new investments will be consistent with the original mandate of maximising capital gains and income for shareholders and will complement the majority of the portfolio’s core holdings of asset-backed renewable generation investments. Areas of current focus include cleantech hardware and software development, and companies providing services to the cleantech sector.
In addition to the above, the Boards may make a limited proportion of total funds raised available for share buybacks in accordance with the Company’s Share buyback policy.
Portfolio Composition
| Portfolio Composition by Asset Type and Impact on NAV | |||
| Asset Type | MWp | Portfolio Value | % of Portfolio Value |
| Ground-mounted Solar (FIT) | 20,291 | £21,686,087 | 70.9% |
| Ground-mounted Solar (ROC) | 8,699 | £3,275,385 | 10.7% |
| Rooftop Solar | 4,425 | £3,388,544 | 11.1% |
| Wind Assets | 1,465 | £1,738,343 | 5.7% |
| Charge Point Services | - | £500,000 | 1.6% |
| Other | - | ||
| TOTAL | 34,880 | £30,588,359 | 100.0% |
The 34.9MWp renewable energy projects in the portfolio generated 33,678,102 kilowatt-hours of electricity over the year, sufficient to meet the annual electricity consumption of c.9,730 homes.
Portfolio Summary
The solar projects within the portfolio (ground and roof-mounted installations) which comprise 33.4MWp, accounted for 97.6% of the generation output performance. These assets delivered performance just shy of expectations (0.08% less) during the year (6.3% below in the year ending 30 September 2017). They accounted for 92.7% of the Investment Portfolio Value.
While overall output performance was broadly in line with our expectations, generation versus forecast levels varied significantly over the 12-month period. A gloomier than usual winter saw average performance across the ground and roof-mounted solar assets, followed by underperformance in the very wet spring months of March and April. A very bright summer brought robust output from May through July. Generation levels were in line with forecast levels in August and September.
The eight ground-mounted solar installations, which have a total generation capacity of 29.0MW, accounted for 87.0% of the electricity generated and this was just above (by 0.33%) forecasts (6.3% below in the year ending 30 September 2017). This segment accounts for 81.6% of the Investment Portfolio Value.
The roof-mounted solar asset portfolio which has capacity of 4.42MW, accounted for 11.1% of the Investment Portfolio Value and 10.6% of the total electricity generated. This was 3.4% below expectations (10.5% below in the year ending 30 September 2017).
The small wind turbines, which have total generation capacity of 1.47MW, accounted for 5.7% of the Investment Portfolio Value and 2.4% of the total electricity generated. This segment met expectations that were previously downgraded to account for the Huaying HY-5 turbines that were put on hold in spring 2017 due to mechanical problems.
In revenue terms, the electricity generated by the entire asset base earned £11.1 million in the year which was 0.18% ahead of forecasts. £10.8m of this amount was generated by the solar ground-mounted and rooftop assets and the remainder by the small wind turbine portfolio.
| Portfolio Revenues by Asset Type (£ Sterling) | |||
| Asset Type | Forecast Revenue | Actual Revenue | Revenue Performance |
| Ground-mounted Solar (FIT) | 8,465,104 | 8,439,491 | 99.70% |
| Ground-mounted Solar (ROC) | 1,183,971 | 1,238,383 | 104.60% |
| Rooftop Solar | 1,159,056 | 1,150,676 | 99.28% |
| Wind Assets | 275,565 | 275,565 | 100.00% |
| TOTAL | 11,083,696 | 11,104,115 | 100.18% |
The portfolio benefited from higher than forecast inflation, power prices (including the recycling component of the Renewable Obligation Certificates (ROCs)) and irradiation, however surrendered much of the combined benefit to lost production from the heat effect and other technical factors.
A kilowatt-hour (kWh) generated by a ground-mounted solar asset earned 33.0p on average, whereas a kWh generated by a wind turbine earned an average of 34.0p.
By asset type, 86.7% of revenues (being 78.5% FiT, 6.7% ROC, 1.5% Export Fixed) were RPI-linked while 9.0% came from the sale of power (Export Variable), of which 3.2% in absolute terms is under fixed-price contracts running until 2019.
The FiT-remunerated ground-mounted solar assets that earn FiTs as well as income from the sale of power in the wholesale market, accounted for 75.9% of the portfolio level income, whereas the ROC-remunerated ground-mounted solar assets, that earn ROCs and variable export revenues, accounted for 11.2%, and the roof-mounted solar assets that earn FiTs and fixed export tariffs accounted for 10.4%.
Overall Portfolio and Operational ReviewThe analysis of performance is based on three pillars. The first covers macro factors including inflation, power prices, variable components of subsidies and climactic conditions. The second category covers technical performance, and the third category covers costs.
MacroSolar irradiation was 7.3% ahead of forecasts on a capacity-weighted basis, a welcome development after two years of poor sunshine. Project by project, measurements varied between 97.7% and 134.8% of forecast levels for the eight ground-mounted solar projects in the portfolio. Each 1% change, in absolute terms, in irradiation for this portfolio results in a £108,000 movement in revenues.
The portfolio’s revenues were helped by inflation as both FiT and ROC payments are index-linked to the RPI. FiTs and ROCs increased in price by 4.1% on 1 April 2018. The RPI has drifted down from these levels over 2018, however it remains above the 3% level used in long-term forecasts. For every 1% increase, in absolute terms, in inflation, portfolio revenues rise by £96,000.
Technical PerformanceThe ground-mounted solar asset base achieved its target level of generation. The strong solar irradiation in the summer months was offset by the temporary but negative effect on panel performance of the high ambient temperatures on the surfaces of the solar panels. This effect is expected in solar power generation.
However, other technical factors such as the age of some of the components used in the projects, also prevented the ground-mounted solar asset base from benefitting from the strong solar irradiation.
| Portfolio Technical Performance by Asset Type | |||
| Asset Type | Forecast Output | Actual Output | Technical Performance |
| Ground-mounted Solar (FIT) | 20,657,691 | 20,116,689 | 97.38% |
| Ground-mounted Solar (ROC) | 8,538,000 | 9,175,955 | 107.47% |
| Rooftop Solar | 3,699,550 | 3,575,458 | 96.65% |
| Wind Assets | 810,000 | 810,000 | 100.00% |
| TOTAL | 33,705,241 | 33,678,102 | 99.92% |
During the year a comprehensive technical review has been undertaken. This included a study to determine whether accelerating the replacement of inverters, (which would typically be replaced after 10 years), would achieve an attractive payback profile. The outcome led to a recommendation to proceed and any inverter replacement will be funded by the equipment replacement reserves (£2.4 million) already held as funded cash deposits within the debt facility for the six FiT-remunerated ground-mounted projects.
Generation of the rooftop solar portfolio was 3.4% lower than forecast. Work is ongoing to address known metering issues at certain installations at which access is difficult. Resolution of these issues is expected to lead to a recovery of 50% of the revenue shortfall.
The small wind portfolio performed in line with the reduced expectations following the poor performance from the start of these projects. Small wind accounts for 5.7% of the portfolio. Following initial inspections to determine the scale of the issue with the Huaying HY-5 turbines (92 of the 290 turbines in total), a programme of repair was initiated in the spring of this year and is progressing well. It was decided that only the installations where the incremental sum invested would generate a payback period of less than or equal to six years, would be repaired. This amounted to 67 of the 92. At the time of writing, 39% of the turbines had been repaired with the work expected to be completed in the spring.
Operating costsThe third factor that determines performance is costs. The vast majority of the cost base is fixed and/or contracted and includes rent, business rates, and regular operations and maintenance (O&M) costs as the major categories.
During the year, the O&M contracts for the small Wychwood and Parsonage ground-mounted solar projects (1.4MW of capacity) were awarded to Silverstone Green Energy, a contractor that has been delivering a good service for two larger ground-mounted solar assets. This generated a 25% saving on those contracts, worth £4,460 per annum going forward.
There is the potential for further reductions in O&M costs as prices in the UK become more aligned with those in Continental Europe, however the long-term nature of the O&M contracts (a requirement under the debt facility agreements) mean that we would not expect to receive the benefits of such a realignment until current contracts expire or can be renegotiated, the earliest of which is in seven years.
The main cost item that shows variability from year-to-year is repair and maintenance costs. These are closely monitored and compared with a budget that is set every year. Repair and maintenance spend involving solar panels and inverters, the key components of a solar project, is covered by the maintenance reserves totalling £2.6m that are in place for all the ground-mounted solar assets and for most of the roof-mounted solar assets. In addition, there are some one-off costs that were not covered by reserves such as meter replacements and pigeon-proofing for the roof-mounted solar assets, and cable replacement for the ground-mounted assets. This cost was £70,000 above the £190,000 budget set for the year due to what are expected to be one-off repairs to the roof-mounted solar installations.
Portfolio ValuationThe NAV of the Company has increased from 115.0p to 119.2p in the period from 1 October 2017 to 30 September 2018. The Total Return for the period has increased from 154.5p to 158.7p.
This year’s increase in NAV principally resulted from a change in the discount rate used to value the FiT-remunerated ground-mounted solar assets from 7.0% on an unleveredbasis to 6.5% on a levered basis. The NAV impact of this change was £0.8m or 3.4p per share. By comparison the discount rate used to value the ROC-remunerated ground-mounted solar assets and FiT-remunerated roof-mounted solar assets within the portfolio on a levered basis is 6.75%.
The 25bp difference in the levered discount rates for the two FiT and ROC groups is accounted for by the lower level, in the medium to long term, of exposure to wholesale power prices of the former (12%) compared to the latter (16%), and the fact that the latter includes roof-mounted solar assets which carry more inherent risks than ground-mounted solar assets.
| 30 Sep 2018 (000) | Share of Portfolio Value | 30 Sep 2017 (000) | Share of Portfolio Value | |
| FiT-remunerated ground-mounted solar projects | £21,686 | 70.9% | £20,948 | 66.7% |
| ROC-remunerated ground-mounted solar projects | £3,275 | 10.7% | £4,298 | 13.7% |
| Rooftop solar projects | £3,389 | 11.1% | £3,704 | 11.8% |
| Small wind turbines | £1,738 | 5.7% | £1,939 | 6.2% |
| ChargePoint Services | £500 | 1.6% | £500 | 1.6% |
| TOTAL PORTFOLIO | £30,588 | 100% | £31,390 | 100% |
| Other net assets/(liabilities) | £92 | £(3,193) | ||
| TOTAL NAV | £30,680 | £28,197 | ||
| NAV per share (Ordinary and A combined) | 119.2p | 115.0p |
The low risk profile of the FiT-remunerated ground-mounted solar assets justifies this reduction of 50 basis points. Discount rates used in the market have moved down for these types of assets with a high proportion (88% for this portfolio) of fixed tariff revenues. Furthermore, the £2.1m in maintenance reserves, which at current market prices is sufficient to replace as much as 30% of the panels and inverters, and the £4.4m of cash, albeit restricted under the debt facilities, imply lower risk to future cashflows.
The Investment Adviser believes that the discount rates used for all the assets are consistent with what other owners of solar assets use while valuing their own portfolios, and its experience gained from selling similar assets in other areas of its business. The discount rate that purchasers of ground-mounted solar assets use varies according to the level of exposure to wholesale power prices and has been observed to be as low as 5 to 5.5% on a levered basis for FiT-remunerated ground mounted solar projects that were built in 2011.
Inflation as measured by the RPI remains above 3% and RPI has gone up as high as 4.1% in December 2017 (as opposed to our forecast for long-term inflation of 3%). However, this increase could prove to be very transient, given the currently heightened level of macroeconomic uncertainty.
Key assumptions for the revenues and operating costs of the projects remain the same as they were last year.
In the longer term, the potential to create additional value through the extension of land leases beyond their current 25-year term and through upgrading the equipment using improved technology with much better yields may arise.
OutlookThe Investment Adviser will continue to target improvements in yield and reductions in risk across the portfolio, and to evaluate incremental maintenance capital expenditure and replacement decision where these can be justified in economic terms.
The Investment Adviser is conscious that the most valuable FiT assets in the portfolio are now over seven years old and will be monitoring them more closely to identify and replace or repair aging equipment before it can impact generation.
An emerging trend in the solar industry in the UK is the extension of leases beyond the 25 -year term that is customary across the solar asset base. The end of the lease term is still at least 18 years away, however many landowners are receptive to locking in rent for the longer term. Capital expenditure on upgrading the projects when the current leases expire is expected to generate yields in excess of six percent.
A key focus will be the deployment of funds raised in the Top-Up. As stated in the Top-Up prospectus, asset-backed renewable energy generation investments are no longer qualifying under current VCT rules.
The Investment Adviser is currently screening potential opportunities in order to identify investments in line with the Company’s mandate. Consideration is being given to companies in the clean technology space that have already secured funding from Venture Capital firms, companies listed on the UK’s AIM market and companies that are active in key areas of growth such as recycling and waste management, generation asset optimisation and information services.
The investment process will be enhanced by the acquisition by Gresham House Plc of the fund and investment management business of Livingbridge VC LLP which includes the two Baronsmead VCTs. The addition of eight specialist investment and research professionals covering both public and private market opportunities will provide broader coverage and increased deal flow when investing the top-up funds.
Gresham House Asset Management Limited
REVIEW OF INVESTMENTS Portfolio of investmentsThe following investments were held at 30 September 2018:
| Cost | Valuation | Valuation movementin year | % of portfolio | |||
| £’000 | £’000 | £’000 | ||||
| Qualifying and part-qualifying investments | Operating sites | Sector | ||||
| Lunar 2 Limited* | South Marston, Beechgrove | Ground-mounted solar | 2,976 | 15,937 | 615 | 47.4% |
| Lunar 1 Limited* | Kingston Farm, Lake Farm | Ground-mounted solar | 125 | 2,605 | 483 | 7.7% |
| Ayshford Solar (Holding) Limited* | Ayshford Farm | Ground-mounted solar | 1,348 | 2,168 | (406) | 6.4% |
| New Energy Era Limited | Wychwood Solar Farm | Ground-mounted solar | 884 | 1,713 | 323 | 5.1% |
| Vicarage Solar Limited | Parsonage Farm | Ground-mounted solar | 871 | 1,431 | 216 | 4.3% |
| Hewas Solar Limited | Hewas Solar | Roof Solar | 1,000 | 1,217 | (137) | 3.6% |
| Tumblewind Limited* | Priory Farm | Small Wind/Solar | 1,326 | 1,107 | 39 | 3.3% |
| Gloucester Wind Limited | Gloucester Wind | Roof Solar | 1,000 | 1,047 | 95 | 3.1% |
| HRE Willow Limited | HRE Willow | Small Wind | 875 | 874 | 148 | 2.6% |
| St Columb Solar Limited | St Columb Solar | Roof Solar | 650 | 594 | (79) | 1.8% |
| Minsmere Power Limited | Minsmere | Small Wind/Solar | 975 | 531 | (199) | 1.6% |
| Penhale Solar Limited | Penhale Solar | Roof Solar | 825 | 530 | (195) | 1.6% |
| Chargepoint Services Limited | Vehicle Charging | 500 | 500 | - | 1.5% | |
| Small Wind Generation Limited | Small Wind Generation | Small Wind | 975 | 334 | (150) | 1.0% |
| Sunhazel UK Limited | Roof Solar | 1 | - | - | 0.0% | |
| 14,331 | 30,588 | 753 | 91.0% | |||
| Cash at bank and in hand | 3,038 | 9.0% | ||||
| Total investments | 33,626 | 100.0% |
* Part-qualifying investment
All venture capital investments are incorporated in England and Wales.
Hazel Renewable Energy VCT1 plc, of which Gresham House Asset Management Limited (“GHAM”) is the Investment Adviser, holds the same investments as above.
REVIEW OF INVESTMENTS Investment movements for the year ended 30 September 2018
DISPOSALS
| Cost | Valuation at 30 September 2017 | Redemption of loan notes/sale proceeds | Profit vs cost | Realised Gain | |
| £’000 | £’000 | £’000 | £’000 | £’000 | |
| VCT Qualifying investments | |||||
| Ayshford Solar (Holdings) Limited | 580 | 580 | 580 | - | - |
| 580 | 580 | 580 | - | - | |
| Non-qualifying investments | |||||
| AEE Renewables UK 3 Limited (Note 1) | 900 | 900 | 900 | - | - |
| Tumblewind Limited | 75 | 75 | 75 | - | - |
| 975 | 975 | 975 | - | - | |
| Liquidation proceeds | |||||
| Hemp Technology Limited (Note 2) | - | - | 33 | 33 | 33 |
| Total | 1,555 | 1,555 | 1,588 | 33 | 33 |
The basis of valuation for the largest investments is set out on pages 15 to 18 of the Annual Report.
Note 1: The loan note redemption proceeds of £900,000 were not received in cash by the Company and were instead used to repay a long-term loan balance between the Company and Lunar 2 Limited.
Note 2: The proceeds received were in connection with the liquidation of Hemp Technology Limited, a subsidiary of Lime Technology Limited, a company in which the VCT previously held a loan note investment. The amounts received were secured under a debenture between the VCT and the company. No further amounts are receivable.
Directors’ responsibilitiesThe Directors are responsible for preparing the Strategic Report, the Report of the Directors, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements the Directors are required to:-select suitable accounting policies and then apply them consistently;-make judgments and accounting estimates that are reasonable and prudent;-state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and-prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions, to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
INCOME STATEMENTfor the year ended 30 September 2018
| Year ended 30 September 2018 | Year ended 30 September 2017 | ||||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||||
| Income | 771 | - | 771 | 492 | - | 492 | |||
| Gain on investments | - | 786 | 786 | - | 1,038 | 1,038 | |||
| 771 | 786 | 1,557 | 492 | 1,038 | 1,530 | ||||
| Investment advisory fees | (283) | (94) | (377) | (427) | (143) | (570) | |||
| Other expenses | (376) | - | (376) | (308) | - | (308) | |||
| Profit/(loss) on ordinary activities before tax | 112 | 692 | 804 | (243) | 895 | 652 | |||
| Tax on total comprehensive income and ordinary activities | - | - | - | - | - | - | |||
| Profit/(loss) for the year and total comprehensive income | 112 | 692 | 804 | (243) | 895 | 652 | |||
| Basic and diluted earnings per share: | |||||||||
| Ordinary Share | 0.5p | 2.9p | 3.4p | (1.0p) | 3.6p | 2.6p | |||
| ‘A’ Share | - | - | - | - | - | - | |||
All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards (“FRS 102”). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 (updated in February 2018) by the Association of Investment Companies (“AIC SORP”).
Other than revaluation movements arising on investments held at fair value through the profit and loss, there were no differences between the return/loss as stated above and at historical cost.
BALANCE SHEET
as at 30 September 2018
| 2018 | 2017 | ||||
| £’000 | £’000 | £’000 | £’000 | ||
| Investments | 30,588 | 31,390 | |||
| Current assets | |||||
| Debtors | 274 | 447 | |||
| Cash at bank and in hand | 3,038 | 88 | |||
| 3,312 | 535 | ||||
| Creditors: amounts falling due within one year | (113) | (68) | |||
| Net current assets | 3,199 | 467 | |||
| Creditors: amounts falling due after more than one year | (3,107) | (3,660) | |||
| Net assets | 30,680 | 28,197 | |||
| Capital and reserves | |||||
| Called up Ordinary Share capital | 28 | 25 | |||
| Called up ‘A’ Share capital | 40 | 37 | |||
| Share premium account | 7,531 | 3,985 | |||
| Treasury Shares | (2,792) | - | |||
| Funds held in respect of Shares not yet allotted | 1,035 | - | |||
| Special reserve | 9,724 | 9,840 | |||
| Revaluation reserve | 16,257 | 15,504 | |||
| Capital reserve - realised | (1,261) | (1,200) | |||
| Revenue reserve | 118 | 6 | |||
| Total Shareholders’ funds | 30,680 | 28,197 | |||
| Basic and diluted net asset value per share | |||||
| Ordinary Share | 119.1p | 114.9p | |||
| ‘A’ Share | 0.1p | 0.1p |
STATEMENT OF CHANGES IN EQUITYfor the year ended 30 September 2018
| Called up share capital | Share Premium Account | Treasury Shares | Funds held in respect of Shares not yet allotted | Special Reserve | Revaluationreserve | Capitalreserve realised | Revenue reserve | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| At 30 September 2016 | 62 | 3,985 | - | - | 11,065 | 14,466 | (1,057) | 249 | 28,770 |
| Total comprehensive income | - | - | - | - | - | 992 | (97) | (243) | 652 |
| Transactions with owners | |||||||||
| Dividend Paid | - | - | - | - | (1,225) | - | - | - | (1,225) |
| Transfer between Reserves | - | - | - | - | - | 46 | (46) | - | - |
| At 30 September 2017 | 62 | 3,985 | - | - | 9,840 | 15,504 | (1,200) | 6 | 28,197 |
| Total comprehensive income | - | - | - | - | - | 753 | (61) | 112 | 804 |
| Transactions with owners | |||||||||
| Repurchase of Shares | - | - | (2,792) | - | - | - | - | - | (2,792) |
| Issue of Shares | 6 | 3,546 | - | - | (116) | - | - | - | 3,436 |
| Unallotted Shares | - | - | - | 1,035 | - | - | - | - | 1,035 |
| At 30 September 2018 | 68 | 7,531 | (2,792) | 1,035 | 9,724 | 16,257 | (1,261) | 118 | 30,680 |
CASH FLOW STATEMENTfor the year ended 30 September 2018
| Year ended30 September 2018 | Year ended30 September 2017 | ||||
| £’000 | £’000 | ||||
| Cash flows from operating activities | |||||
| Profit for the financial year | 804 | 652 | |||
| Gains on investments | (786) | (1,038) | |||
| Decrease/(increase) in debtors | 174 | (26) | |||
| Decrease in creditors | (16) | (92) | |||
| Net cash (outflow)/inflow from operating activities | 176 | (504) | |||
| Cash flows from investing activities | |||||
| Proceeds from sale of investments/loan note redemptions | 688 | 589 | |||
| Net cash inflow from investing activities | 688 | 589 | |||
| Net cash inflow before financing activities | 864 | 85 | |||
| Cash flows from financing activities | |||||
| Equity dividends paid | - | (1,225) | |||
| Long term loans | 347 | 1,224 | |||
| Issue of Shares | 3,496 | - | |||
| Funds held in respect of Shares not yet allotted | 1,035 | - | |||
| Purchase of own Shares | (2,792) | - | |||
| Net cash inflow/(outflow) from financing activities | 2,086 | (1) | |||
| Net increase in cash | 2,950 | 4 | |||
| Cash and cash equivalents at start of year | 88 | 84 | |||
| Cash and cash equivalents at end of year | 3,038 | 88 | |||
| Cash and cash equivalents comprise | |||||
| Cash at bank and in hand | 3,038 | 88 | |||
| Total cash and cash equivalents | 3,038 | 88 | |||
NOTES TO THE ACCOUNTSfor the year ended 30 September 2018
General InformationHazel Renewable Energy VCT2 plc (“the Company”) is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales. Accounting policies
Basis of accountingThe Company has prepared its financial statements under FRS 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland and in accordance with the Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” issued by the Association of Investment Companies (“AIC”) in November 2014 and revised in February 2018 (“SORP”) as well as the Companies Act 2006.
The Company implements new Financial Reporting Standards (“FRS”) issued by the Financial Reporting Council when they become effective.
The financial statements are presented in Sterling (£).
Presentation of income statementIn order to better reflect the activities of a VCT and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.
InvestmentsAll investments are designated as “fair value through profit or loss” assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, in accordance with the Company’s documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines (“IPEV”) together with FRS 102 sections 11 and 12.
For unquoted investments, fair value is established by using the IPEV guidelines. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:
-Price of recent investment;-Multiples;-Net assets;-Discounted cash flows or earnings (of underlying business);-Discounted cash flows (from the investment); and-Industry valuation benchmarks.
The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.
Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment are expensed. Where an investee company has gone into receivership or liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised.
It is not the Company’s policy to exercise controlling influence over investee companies. Therefore, the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS 102 sections 14 and 15 that does not require portfolio investments to be accounted for using the equity method of accounting.
Income Dividend income from investments is recognised when the Shareholders’ rights to receive payment have been established, normally the ex-dividend date.
Interest income is accrued on a time apportionment basis, by reference to the principal sum outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection in the foreseeable future.
ExpensesAll expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:
-Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment; and-Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted a policy of charging 75% of the investment advisory fees to the revenue account and 25% to the capital account to reflect the Board’s estimated split of investment returns which will be achieved by the Company over the long term.
TaxationThe tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate, using the Company’s effective rate of tax for the accounting period.
Due to the Company’s status as a VCT and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company’s investments which arises.
Deferred taxation, which is not discounted, is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.
Other debtors, other creditors and loan notesOther debtors (including accrued income), other creditors and loan notes (other than those held as part of the investment portfolio as set out in Note 10 of the Annual Report) are included within the accounts at amortised cost.
Issue costsIssue costs in relation to the shares issued for each share class have been deducted from the special reserve.
Income
| Year ended 30 September 2018 | Year ended 30 September 2017 | ||
| £’000 | £’000 | ||
| Income from investments | |||
| Loan stock interest | 171 | 185 | |
| Dividend Income | 600 | 307 | |
| 771 | 492 | ||
| Other income | |||
| Bank interest | - | - | |
| 771 | 492 | ||
Basic and diluted net asset value per share
| Shares in issue | 2018 | 2017 | ||||
| 2018 | 2017 | Net asset value* | Net asset value | |||
| per share | £’000 | per share | £’000 | |||
| Ordinary Shares | 24,865,637 | 24,504,858 | 119.1 | 29,608 | 114.9 | 28,160 |
| ‘A’ Shares | 37,159,162 | 36,799,133 | 0.1 | 37 | 0.1 | 37 |
*Excluding funds held in respect of Shares not yet allotted.
The Directors allocate the assets and liabilities of the Company between the Ordinary Shares and ‘A’ Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights as described in Note 14 of the Annual Report.
As the Company has not issued any convertible shares or share options, there is no dilutive effect on net asset value per Ordinary Share or per ‘A’ Share. The net asset value per share disclosed therefore represents both the basic and diluted net asset value per Ordinary Share and per ‘A’ Share.
The Company’s investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company’s operations are:
-Market risks; -Credit risk; and -Liquidity risk.
The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company was expected to be exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below:
Market risks
As a VCT, the Company is exposed to investment risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Adviser and overseen by the Board. The Adviser monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Adviser to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various operating sites across several asset classes.
The key investment risks to which the Company is exposed are:-Investment price risk; and-Interest rate risk
Investment price risk
The Company’s investments which comprise of both equity and debt financial instruments in unquoted investments are all in renewable energy projects with predetermined expected returns. Consequently, the investment price risk arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the Company’s investment objectives which can be influenced by many macro factors such as changes in interest rates, electricity power prices and movements in inflation. It represents the potential loss that the Company might suffer through changes in the fair value of unquoted investments that it holds.
At 30 September 2018, the unquoted portfolio was valued at £30,588,000 (2017: £31,390,000). The key inputs to the valuation model are discount rates, inflation, irradiation, degradation, power prices and asset life. The Board has undertaken some sensitivity analysis into the effects of fluctuations in these inputs.
The analysis below is provided to illustrate the sensitivity of the fair value of investments to an individual input, while all other variables remain constant. The Board considers these changes in inputs to be within reasonable expected ranges. This is not intended to imply the likelihood of change or that possible changes in value would be restricted to this range. The possible effects are quantified below:
| Input | Base case | Change in input | Change in fair value of investments | Change in NAV per share |
| £’000 | pence | |||
| Discount rate | 6.25% – 7.25% | +0.5% | (1,060) | (4.0) |
| -0.5% | 1,129 | 4.2 | ||
| Inflation | 3.0% – 3.2% | +0.5% | 1,122 | 4.2 |
| -0.5% | (1,182) | (4.4) | ||
| Irradiation | 785 – 1,270kWh/m2 | +1.0% | 684 | 2.6 |
| -1.0% | (685) | (2.6) | ||
| Degradation | 0.3% – 0.4% | +0.1% | (671) | (2.5) |
| -0.1% | 680 | 2.5 | ||
| Power prices | £40 – £60/MWh | +10.0% | 1,390 | 5.2 |
| -10.0% | (1,390) | (5.2) |
Asset life
The Board has also considered the potential impact of changes to the anticipated lives of assets in the portfolio. Close to ninety percent of the Company’s value is in assets refinanced by debt, and under the debt facility agreements, substantial reserves are in place for renewing key equipment as and when required. Furthermore, the underlying assets have leases that are valid for the lifetime of the Company, which cannot be terminated early, and any extensions to the leases would require further planning permission. Accordingly, the Board does not consider it appropriate to disclose a sensitivity analysis in respect of asset life.
Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers. Where investments in loan stock attract interest, this is predominately charged at fixed rates. A summary of the interest rate profile of the Company’s investments is shown below.
There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:
-“Fixed rate” assets represent investments with predetermined yield targets and comprise certain loan note investments and preference shares; -“Floating rate” assets predominantly bear interest at rates linked to The Bank of England base rate or LIBOR and comprise cash at bank; and -“No interest rate” assets do not attract interest and comprise equity investments, certain loan note investments, loans and receivables and other financial liabilities.
The Company monitors the level of income received from fixed and floating rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.
It is estimated that an increase of 1% in interest rates would have increased profit before tax for the year by £3,000. The Bank of England base rate increased from 0.25% per annum to 0.5% per annum on 2 November 2017 and from 0.5% to 0.75% on 2 August 2018. Any potential change in the base rate, at the current level, would have an immaterial impact on the net assets and total return of the Company.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan stock in investee companies, cash deposits and debtors. Credit risk relating to loan stock in investee companies is considered to be part of market risk as the performance of the underlying SPVs impacts the carrying values.
The Adviser manages credit risk in respect of loan stock with a similar approach as described under “Market risks” above. Similarly, the management of credit risk associated with interest, dividends and other receivables is covered within the investment advisory procedures. The level of security is a key means of managing credit risk. Additionally, the risk is mitigated by the security of the assets in the underlying investee companies.
Cash is held by the Royal Bank of Scotland plc which is an A-rated financial institution and also ultimately part-owned by the UK Government. Consequently, the Directors consider that the credit risk associated with cash deposits is low.
There have been no changes in fair value during the year that is directly attributable to changes in credit risk. Any balances that are past due are disclosed further under liquidity risk.There have been no loan investments for which the terms have been renegotiated during the year.
Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. As the Company has a relatively low level of creditors being £113,000 (2017: £68,000) and has long term loans from investee companies (see Note 13 of the Annual Report for an analysis of the repayment terms), which have either been repaid at the date of this report or are expected to be repaid by future dividends from these companies, being £3,107,000 (2017: £3,660,000), the Board believes that the Company’s exposure to liquidity risk is low. The Company always holds sufficient levels of funds as cash in order to meet expenses and other cash outflows as they arise. For these reasons the Board believes that the Company’s exposure to liquidity risk is minimal. The Company’s liquidity risk is managed by the Investment Adviser in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.
Controlling party and related party transactions
In the opinion of the Directors there is no immediate or ultimate controlling party.
Events after the end of the reporting period
On 23 October 2018 the Company issued 752,759 Ordinary Shares at an average price of 123.6p and 752,759 ‘A’ Shares at an average price of 0.1p.
On 24 October 2018 the Company issued 1,067,378 Ordinary Shares at an average price of 123.7p and 2,104,662 ‘A’ Shares at an average price of 0.1p.
At the date of this report, the Company’s issued share capital comprised 26,685,774 Ordinary Shares and 40,016,583 ‘A’ Shares and the total number of voting rights in the Company were 26,725,790,583.
Following the period end the Company paid dividends in respect of the year ended 30 September 2018, of 5.4958p per Ordinary Share and 0.5042p per A Share. These dividends were paid on 14 December 2018 to Shareholders on the register at 23 November 2018.
Following the year end the Company made repayments in respect of the loan balances due to certain SPVs. Details of the amounts repaid are shown in Note 13 of the Annual Report. ANNOUNCEMENT BASED ON AUDITED ACCOUNTSThe financial information set out in this announcement does not constitute the Company’s statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 30 September 2018, but has been extracted from the statutory financial statements for the year ended 30 September 2018, which were approved by the Board of Directors on 31 January 2018 and will be delivered to the Registrar of Companies following the Company’s Annual General Meeting. The Independent Auditor’s Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s498(2) and (3) of the Companies Act 2006.
The statutory accounts for the year ended 30 September 2017 have been delivered to the Registrar of Companies and received an Independent Auditor’s Report which was unqualified and did not contain any emphasis of matter nor statements under s498(2) and (3) of the Companies Act 2006.
A copy of the full Annual Report and financial statements for the year ended 30 September 2018 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 6th Floor, St. Magnus House, 3 Lower Thames Street, London EC3R 6HD and will be available for download from https://newenergy.greshamhouse.com/investor-relations-vct2/.