REG - Gresham House REVCT - Half Year Results
29/06/2022 14:15
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RNS Number : 6785Q Gresham House Renewable EnergyVCT1 29 June 2022
29 June 2022
Gresham House Renewable Energy VCT 1 PLC
LEI: 213800IVQHJXUQBAAC06
Half Year Results
These half-year results will be available on the Company's website at
https://greshamhouse.com/real-assets/new-energy-sustainable-infrastructure/gresham-house-renewable-energy-vct-1-plc/
(https://greshamhouse.com/real-assets/new-energy-sustainable-infrastructure/gresham-house-renewable-energy-vct-1-plc/)
.
In accordance with Listing Rule 9.6.1, copies of these documents will also be
submitted to the UK Listing Authority via the National Storage Mechanism and
will be available for viewing shortly at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .
For further information, please contact:
Gresham House Asset Management renewablevcts@greshamhouse.com (mailto:renewablevcts@greshamhouse.com)
Investor Relations Tel: 020 7382 0999
JTC (UK) Limited GreshamVCTs@jtcgroup.com (mailto:GreshamVCTs@jtcgroup.com)
Company Secretary
Tel: 020 3846 9774
Shareholder information
Performance summary
27 June 31 March 30 September 31 March
2022 2022 2021 2021
Pence Pence Pence Pence
Net asset value per Ordinary Share 90.8 90.1 92.5
Net asset value per 'A' Share 0.1 0.1 0.1
Cumulative dividends* 57.1 57.1 57.1
Total Return* 148.0 147.3 149.7
Share Price - Ordinary (GV1O) 88.0 88.0 91.0 97.0
Share Price - A Shares (GV1A) 5.05 5.05 5.05 5.05
* for a holding of one Ordinary Share and A Share
Dividends
Ordinary Shares 'A' Shares Total
Pence Pence Pence
2011 Final 30 March 2012 3.5 - 3.5
2012 Final 28 March 2013 5.0 - 5.0
2013 Special 28 February 2014 7.3 3.7 11.0
2013 Final 28 March 2014 5.0 - 5.0
2015 Interim 18 September 2015 5.0 - 5.0
2016 Interim 16 September 2016 5.0 - 5.0
2017 Interim 15 September 2017 5.0 - 5.0
2018 Interim 14 December 2018 5.5 0.5 6.0
2019 Interim 20 December 2019 5.3 0.5 5.8
2020 Interim 31 December 2020 5.3 0.5 5.8
51.9 5.2 57.1
Dividends are paid by the registrar on behalf of the VCT. Shareholders who
wish to have dividends paid directly into their bank account and did not
complete these details on their original application form can complete a
mandate form for this purpose. Forms can be obtained from Link Asset Services.
Chairman's statement
I am pleased to present the Half-Yearly Report of Gresham House Renewable
Energy VCT 1 plc ("VCT") for the period ended 31 March 2022.
The period under review has less solar irradiation than the second half of the
year over the spring and summer months. The total revenue from the renewable
assets was just 0.3% behind budget, at £3.5 million. This was despite higher
than expected irradiation (6.7%) as some of the assets are showing signs of
their age and under performing. Much time and effort has been spent over the
period on correcting the problems that have occurred. Inevitably there are
cost attached to such repairs and this has impacted the cash flow available to
the VCT, however I am pleased to report that the work carried out in the last
financial year on three major assets has resulted in very significantly
improved performance for those sites, and we anticipate that the further work
being undertaken will similarly improve performance shortly.
Turning to the matter of the sale of the solar assets, it had been hoped that
the sales process, commenced in the late summer of 2021, would have been
concluded by the end of 2021. However, certain issues were uncovered during
the due diligence process which were complex and/or requiring negotiation with
third parties, resulted in the process being more protracted than expected.
These issues have taken some time to resolve to the satisfaction of the
potential purchaser. A couple of key issues remain outstanding, but it is
hoped that these can be addressed soon so that a sale can be agreed and
closed. Given the age of the portfolio, it is not wholly unsurprising that
potential buyers raised additional concerns largely relating to warranties and
performance of the equipment.
Investment portfolio
At the period end, the VCT held a portfolio of 16 investments, which were
valued at £27.2 million.
The portfolio is analysed (by value) between the different types of assets as
follows:
Ground mounted solar 80.1%
Rooftop solar 8.5%
Small wind 4.3%
Non-renewable assets 7.1%
The Board has reviewed the investment valuations at the half-year and notes
that the valuation of the portfolio has not changed and remains at £27.2
million. Although the overall valuation of the 16 investments has not changed
since the valuation at year end, there have been some movements in value
between the different types of assets.
Whilst the valuation of the portfolio at the half-year has been positively
impacted by the increase in power prices in the six month period and by the
increases in inflation projections, with most of the revenue being linked to
RPI, this increases the overall profitability, and therefore valuation of the
assets, these have been offset by two key factors with the result that the
valuation of the portfolio has remained flat. Firstly, an increase in the
discount rate used by 50bp to 6.25% for the solar assets, as explained below,
and secondly a doubling of the allowance made for the financial and
administrative management fees of the underlying companies.
The Board felt it prudent to adopt a more conservative approach to the
discount rate taking into consideration a backdrop of high inflation and
rising interest rates. It should be noted that the revised rate is now more in
line with the sector and other similar portfolios. The sales process has
indicated that the allowances made for the financial and administrative
management fees for the underlying companies were insufficient given rising
costs and the complexity of managing a portfolio of this type and age. The
Board therefore decided to increase these costs.
As referred to above several problems have emerged during the sale process.
One in particular is worthy of mention, although the Board do not expect it to
be a problem in the longer-term. The solar farm at South Marston sells its
power to Honda, but Honda is leaving the site and selling it to a third party.
The negotiations are proving complex and there is thus some uncertainty as to
the contractual arrangements for the sale of power going forward, although it
seems unlikely that the purchaser of the Honda site would not want to have
access to an existing and proven supply of renewable energy on its doorstep.
Venture Capital investments
The VCT also holds two investments that are not in renewable energy. A
follow-on investment of £67,500 was made into bio-bean Limited ("bio-bean")
in December 2021 to fund the growth and development of the business. The
valuation of bio-bean has been held at cost as at 31 March 2022, while the
valuation of the VCT's investment into Rezatec has increased by £0.2 million
or 24.7% since the investment was made, driven by non-cash interest income
accumulating on the preference shares in Rezatec.
Further detail on the investment portfolio is provided in the Investment
Adviser's Report.
Net asset value and results
At 31 March 2022, the Net Asset Value ("NAV") per Ordinary Share stood at
90.8p and the NAV per 'A' Share stood at 0.1p, producing a combined total of
90.9p per "pair" of Shares. The movement in the NAV per share during the
half-year is detailed in the table below:
Pence per
'pair' of
shares
NAV as at 1 October 2021 90.2
Plus NAV increase 0.7
NAV as at 31 March 2022 90.9
Total dividends paid to date for a combined holding of one Ordinary Share and
one 'A' Share stand at 57.1p (September 2021: 57.1p). The NAV Total Return
(NAV plus cumulative dividends) has increased by 0.5% in the six months and
now stands at 148.0p excluding the initial 30% VCT tax relief, 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 half-year was £0.2
million (March 2021: £2.1 million loss), comprising a revenue profit of
£297,000 (March 2021: £229,000) and a capital loss of £115,000 (March 2021:
capital loss of £2.3 million) as shown in the Income Statement.
2022 Annual General Meeting ("AGM")
The VCT's eleventh AGM was held on 23 March 2022 at 11.00 a.m. and all
resolutions were passed by way of a poll.
Outlook
As we look ahead the portfolio is in much better shape than it was this time
last year thanks to all the effort that has gone into repairs and renewals. We
very much hope that a sale of the solar assets will be satisfactorily
concluded in the near term. However, if despite all the efforts made by the
Board and the Investment Adviser, with the sale process led by EY, this proves
not to be possible then, so as to comply with shareholders wishes to wind up
the company, the VCT will have to continue until the time is right to
re-market the assets. We would expect this re-marketing to take place once the
full financial year results are known and the aforementioned issues have been
resolved.
Gill Nott
Chairman
29June 2022
Investment Adviser's report
Portfolio highlights
Gresham House Renewable Energy VCT 1 plc remains principally invested in the
renewable energy projects that the VCT and VCT 2 have co-owned for a period of
eight to eleven years, depending on the asset, with the value of these
projects representing well over 90% of the value of the portfolio. The total
generation capacity of assets co-owned by the VCT is 34.4MWp. The VCT also has
two venture capital investments.
During the half-year the sale process of the solar energy projects that are
owned jointly with Gresham House Renewable Energy VCT 2 plc ("VCT 2"), was
progressed. The two VCTs appointed EY to prepare and run the sales process. A
number of parties carried out initial due diligence on the portfolio, and
submitted non-binding offers subject to further due diligence. One potential
buyer was granted exclusivity to perform detailed due diligence and engagement
with that party is ongoing.
The Investment Adviser has, in the meantime, continued to manage the assets as
if holding them for the long-term, whilst also supporting the Board of the VCT
and its advisers in advancing the sale process.
The Investment Adviser has undertaken a valuation exercise and provided the
Directors with several valuation scenarios based on different assumptions. The
Directors have the responsibility of valuing these assets. Although there is a
sales process in progress, it should be noted that the valuation is based on a
long-term hold basis.
The vast majority of the assets held by the VCT produce solar power. The solar
portfolio is relatively old compared to other solar farms across the UK. They
are older than well over 90% of total solar capacity in the UK, but this means
that the VCT's solar farms have secured higher incentives than most other
solar installations in the UK.
The total revenue from renewable energy generation was £3,521,029 and of
this, £3,058,789 was from government incentives and inflation-linked
contracts. The total revenue from the renewable assets was 0.3% behind budget.
The downside of the VCT's older assets is the additional maintenance required
to keep them operating effectively. Projects to repair or replace certain
components across the three worst performing older sites were completed during
the last financial year. Performance since completion of the works has been
encouraging, with consistently increased output and reliability at Kingston
Farm and Lake Farm with new, 10-year warranties on some of the key equipment
(replacement inverters) and UK based technical staff available for ongoing
repairs or maintenance. The repairs at Beechgrove Farm highlighted other
issues which have since been repaired under warranty during this half-year.
These further repairs are expected to deliver increased output during the
second half of this financial year.
In terms of available resources, the half-year benefited from strong solar
irradiation which came in at 6.7% ahead of budget. This should have resulted
in better generation performance but there were technical issues at two of the
ground mounted sites (Beechgrove and Ayshford Court, as described below) and
poorer than expected performance of the roof mounted portfolio. These legacy
issues have been addressed through a successful warranty claim and repair
works.
In terms of the wider economy, the effects on the portfolio are summarised
below:
Power prices were significantly reduced through the pandemic
and price fixes were therefore sought in 2020 and early 2021, as soon as Power
Purchase Agreement ("PPA") providers began offering above the budgeted levels
at the time. Fixing the prices under PPAs provided security of revenues.
However, the fixed prices meant that the portfolio has not been able to
benefit from the increases in wholesale power prices during the autumn and the
further increases that have been experienced after the Russian invasion of
Ukraine. These PPAs have started to expire and all will have expired by the
end of 2022. Assuming power price projections remain high, the assets should
have the opportunity to earn significantly higher revenue from the sale of
electricity (either on the wholesale market or on new PPAs with higher prices)
on expiry of the current PPAs.
Whilst all works had to be suspended on residential roof
mounted solar installations last year as engineers were not permitted to enter
properties during lockdown, much of these have now been carried out.
Nevertheless, there continue to be some residents who are shielding or are
reticent to allow people into their homes and so there are some repairs still
outstanding.
With much of the portfolio's revenue being inflation linked,
higher inflation increases the profitability of the assets and therefore their
value, even though most of the cost base and the debt facilities are also
inflation-linked.
The VCT also holds newer investments in growth businesses; bio-bean Limited,
the world's largest recycler of waste coffee grounds, which produces
sustainable, clean fuels as well as advanced biochemicals for use in the food
industry; and Rezatec Limited ("Rezatec"), a climate technology company and
software developer. Rezatec applies Artificial Intelligence based algorithms
to a range of earth observation data sources (satellite imagery, soil data,
weather data, topographic data etc.) to generate an information services
platform to help monitor land-based assets in the forestry, agriculture and
infrastructure sectors. Both businesses continued to grow revenues in the
period, though fell short of their business plan objectives due to a number of
factors that will be covered later in the report.
Portfolio composition
Portfolio composition by asset type
31 March 2022 30 September 2021
Asset Type kWp Value % of Value % of
('000) Portfolio ('000) Portfolio
value value
Ground mounted solar (FIT)* 20,325 £19,455 71.6% £19,341 71.2%
Ground mounted solar (ROC)** 8,699 £2,295 8.5% £2,264 8.3%
Total ground mounted solar 29,024 £21,750 80.1% £21,605 79.5%
Rooftop solar (FIT) 4,304 £2,311 8.5% £2,602 9.5%
Total solar 33,328 £ 24,061 88.6% £24,207 89.0%
Wind assets (FIT) 1,030 £1,177 4.3% £1,172 4.3%
Total renewable generating assets 34,358 £25,238 92.9% £25,379 93.3%
Venture Capital investments N.A. £1,942 7.1% £1,814 6.7%
TOTAL 34,358 £27,180 100.0% £27,193 100.0%
* Feed in Tariff
(FIT)
** Renewables Obligation Certificate (ROC)
The 34.4MWp of renewable energy projects in the portfolio of the VCT and VCT 2
generated 9,810,747 kilowatt-hours of electricity over the six months,
sufficient to meet the annual electricity consumption of circa 2,840 homes.
The Investment Adviser estimates that the carbon dioxide savings achieved by
generating this output from solar and wind versus gas-fired power, are
equivalent to what circa 5,700 mature trees would remove from the atmosphere.
During the half-year, residential rooftops of 5kWp capacity were written off
as the costs of rectification could not be justified by the projected revenues
even once repaired.
Portfolio summary
Approximately 93% of the portfolio value, and over 99% of the income for the
portfolio, is derived from the renewable energy generation assets.
Renewable energy revenue by asset type
The performance against budget is shown below:
Portfolio revenues by asset type (£ Sterling)
Asset type Budgeted Actual Revenue
revenue revenue performance
Ground mounted solar (FIT) £2,582,878 £2,648,266 102.5%
Ground mounted solar (ROC) £375,938 £380,968 101.3%
Roof mounted solar £343,256 £306,042 89.2%
Wind assets £231,071 £185,753 80.4%
TOTAL £3,533,143 £3,521,029 99.7%
The revenue is affected by:
Renewable energy resources (solar irradiation or wind, as
relevant);
The performance of the assets in converting the resources into
revenue (i.e. how the assets are performing, any technical issues, etc); and
The revenue per unit of energy generated.
These themes will be expanded on below.
Renewable energy resources
The portfolio is heavily weighted to solar (96% by capacity of the renewable
assets, and 89% of total portfolio by value).
During the year the assets benefited from better solar resources than
budgeted, with solar irradiation being 6.7% ahead for the half year.
Technical performance
The table below shows the technical performance for each of the groups of
assets.
Portfolio technical performance by asset type (kWh)
Asset type Budgeted Actual Technical Actual output
output output performance (in the same
period last
year)
Ground mounted solar (FIT) 5,743,540 5,917,840 103.0% 4,345,581
Ground mounted solar (ROC) 2,455,190 2,441,622 99.5% 2,296,349
Roof mounted solar 998,414 934,415 93.6% 920,595
Wind assets 642,972 516,870 80.4% 535,070
TOTAL 9,840,116 9,810,747 99.7% 8,097,595
The ground mounted solar (FIT) assets performed ahead of budgets and
significantly ahead of the same period last year.
The results of the successful repowering works at Kingston Farm and Lake Farm
(each with 4.98MW capacity, FIT assets) were evident with Kingston Farm
performing better than budget, even when adjusting for better irradiation. The
figures for Lake Farm were slightly lower than budget when adjusted for
irradiation but nevertheless a significant improvement compared to the
previous year.
Beechgrove's (3.98MW, FIT) repowering works were completed just before the end
of the last financial year, however performance was held back by another
issue, cracking connectors at the back of its solar panels which in turn were
causing isolation faults on the system. Following a root cause analysis this
degradation of the connectors was found to be caused by the high salt content
in the air due to the site's proximity to the sea. A warranty claim was
initiated against Jinko Solar, the manufacturer, and replacement works
involving the blanket replacement of all original connectors with ones made
from an improved polymer, which can withstand the marine environment, are now
taking place. The early signs are that these will result in a significant
improvement from the second half of this financial year and going forward for
the long-term.
Overall, the replacement works are expected to have a payback of under five
years and were largely paid for from cash held in reserves for performing such
works.
Ayshford Court (5.45MW, ROC) also exhibited lower than expected performance.
This was caused by a small number of failing solar modules taking down entire
strings across several modules. The string-based configuration of many solar
plants means that a small number of module failures can take large parts of
the plant offline. The solution to this is close monitoring and a
rearrangement and redistribution of the solar modules such that the faulty
modules are grouped together. These works were carried out in March and April
2022. A warranty claim is also in progress against the manufacturer.
South Marston (4.97MW FIT) has historically sold all its power to a Honda
production plant adjacent to the site at Swindon. Honda has closed down this
facility and its exit is leading to changes of contractual arrangements for
the sale of power and potentially for the technical set-up of the grid
connection. The The Investment Adviser is working with Honda and the new site
owner to ensure continuity of supply of power by the solar farm.
Generation of the rooftop solar portfolio was 6.4% lower than budget and
slightly up on the same period last year. Irradiation cannot be measured at
roof mounted solar installations as it is not cost effective to install
pyranometers but one can assume that the irradiation at these sites was in
line with the irradiation at the ground mounted assets. The Investment Adviser
continues to work with the O&M contractors and landlords to get access to
the rooftop installations that are underperforming, to effect repairs as soon
as possible.
The small wind portfolio performed 19.6% lower than budget, continuing the
poor performance experienced in recent years. Small wind accounts for only 3%
of the portfolio in terms of capacity. In the last financial year, the fleet
of Huaying HY5 wind turbines, which was plagued with technical issues and had
been a net cash drain, was disposed of. The VCT continues to own the fleet of
R9000 wind turbines, which have generally performed better and have the
support of an experienced O&M contractor with easy access to spare parts.
Revenue per kilowatt hour of renewable energy generated
The UK Government has used several mechanisms to encourage investment into
renewable energy generation, including the Feed in Tariff ("FIT") and
Renewables Obligation Certificate ("ROC") support mechanisms.
The VCT's renewable assets benefit from these schemes which provide revenues
predominantly linked to the Retail Price Index ("RPI"). As both the costs and
perceived risks of building new renewable energy generating capacity have
fallen, so have the value of the incentives offered for new installations. For
example, an asset that generates electricity from solar power that was
commissioned and accredited for the FIT before the end of July 2011 received
just under 40 pence for every kilowatt hour (kWh) of electricity it produced
(with the added extra of a floor price support to ensure it may also sell this
power at a reasonable price). The incentives for new capacity have fallen
consistently since the assets owned by the VCT were commissioned, and new
solar installations built today receive no such incentives and must rely on
selling power for their income. In the six months to the end of March 2022 the
average spot price (day ahead) of power was 13 pence per kWh so a new asset
selling power at the spot price would earn 13 pence, whereas an older solar
asset, like some of those owned by the VCT, could earn at a minimum 3.95 pence
per kWh for exporting the power (given the FIT export price floor) plus 39.75
pence per kWh FIT generation revenue.
Of total revenues generated of £3,521,029 in the half-year, 85% was earned
from government backed incentives for generating renewable electricity.
Included within export revenue above, a further 4% is inflation linked, either
through the FIT export floor price for selling electricity or contracts for
the sale of electricity, taking the government backed or RPI linked revenues
to 89% of the total.
Such a high proportion of income that is fixed by the government, is RPI
linked and is not exposed to wholesale power prices, is a significant driver
of value in this portfolio. This enabled the portfolio to be largely insulated
from the very significant reduction in the wholesale price of electricity
experienced during the pandemic. Whilst predictable, government backed
revenues reduce the risk, given the low power prices through the first few
months of the pandemic, when prices increased the assets entered into fixed
price contracts of various lengths to sell power. This further reduced the
risk of variability in revenues from wholesale power price fluctuations. This
was beneficial when coming out of the pandemic but it has also meant that the
assets have not benefited from the increase in wholesale power prices
resulting from the war in Ukraine from February 2022. The PPA contracts will
expire during 2022 and so new contracts, at higher prices, are expected to be
available at the relevant time.
Operating costs
The vast majority of the cost base is fixed and/ or contracted and includes
rent, business rates, and regular O&M costs.
The main cost item that shows variability from year-to-year is repair and
maintenance costs. Repair and maintenance spend involving solar panels and
inverters, the key components of a solar project, is covered by cash held in
the maintenance reserves. At the year end these reserves totalled £1.1
million and are in place for all the ground mounted solar assets and for the
majority of the roof mounted solar assets. During the year £0.2 million was
spent on the works at Beechgrove.
The Investment Adviser has historically modelled its charges for managing the
SPVs as being the relevant charges to include for future periods. However,
feedback from the sales process has indicated that third parties would charge
more to account for the complexity of managing a portfolio of this type and
age and which includes leverage and a large number of distributed roof mounted
solar assets. The Investment Adviser has therefore updated the ongoing cost
assumptions used in the portfolio valuation to reflect a 100% increase.
Venture Capital investments
The VCT holds an investment of £0.70 million (including the £67,500
additional investment made in the half-year) in bio-bean, the world's largest
recycler of waste coffee grounds. bio-bean sources waste coffee grounds from
major retail coffee chains by offering the cheapest and most sustainable
avenue for disposing of them. bio-bean then converts these into coffee logs
for use in wood burning stoves as well as into pellets for combustion in
biomass-fed energy generators. It sells the logs online, through large
supermarkets and through home improvement chains. bio-bean also markets and
sells dried coffee grounds for use in a diverse set of applications including
cosmetics, bioplastics and the automotive industry. Demand for the coffee logs
(the main product) remains strong; it was adversely impacted by a warm spring
but high energy costs are likely to benefit it over the longer-term. The new,
higher margin dried coffee grounds is a developing market, with first revenues
achieved during the half-year and a pipeline of business development
opportunities that could lead to a significantly improved profit outlook.
The key challenge will be to realise the investment in this growth business in
line with the disposal of the other VCT assets. The market for secondary
stakes in private, venture capital funded companies is less liquid than the
market for renewable energy investments.
The VCT's other growth investment, Rezatec Limited ("Rezatec"), has also made
steady progress in the period, but not at the pace envisaged by the company's
management at the time of the investment in January 2020. Companies with
subscription-based business models such as Rezatec are valued on the basis of
Annual Recurring Revenue (ARR), and the growth in this metric (Compound Annual
Growth Rate (CAGR) of 86% over the last five years) has been slower than
forecast.
The investment by the VCT was structured in a way that provided an element of
protection against slower than expected growth and the dilution that can come
with additional funding rounds.
Portfolio valuation
Whilst the Investment Adviser is supporting the proposed sale of the VCT's
renewable assets and notes that a firm offer to purchase the assets will be
the best indication of value, consistent with prior years the Net Asset Value
("NAV") of the renewable portfolio is imputed from the valuation of future
projected cash flows generated by the renewable energy assets, as well as the
cash held by the companies in the portfolio and the cash held by the VCT. The
NAV of the overall portfolio also includes the value of the venture capital
investments into bio-bean and Rezatec.
The future cash flow projections for renewable assets are impacted by:
Renewable resources. Despite this year having higher solar
irradiation than budgeted, we have not changed the assumptions on irradiation.
Technical performance. As noted above, the repairs at Lake Farm
and Kingston Farm resolved their historic performance issues, but the repairs
at Beechgrove identified unrelated issues that needed to be resolved during
the half-year. Ayshford Court suffered technical issues that were repaired.
Despite expectations that these repairs will bring performance back up to
budget, we have not taken the benefits immediately as there is not a long
enough history of post repowering performance.
Prices. Power price forecasts that were initially adversely
impacted by COVID-19 have now risen well over pre-pandemic levels due to
rising commodity prices and acceleration of demand post the lockdowns ending
and the Russian Federation's invasion of Ukraine. The latest forecasts
provided by a leading market consultant, and current offers for PPAs from
purchasers for the power generated are used.
Costs. Up-to-date costs for the assets are included, reflecting
all commercial negotiations and also expectations for lower maintenance costs
after the older assets are repaired. The asset management costs going forward
have been doubled from those charged by the Investment Adviser, following
feedback from the sales process.
Corporation tax. The actual corporation tax paid will impact on
the cash available to shareholders.
Inflation. With most of the revenues being linked to RPI, any
increase in inflation projections increases the overall profitability, and
therefore valuation of the assets.
Once the free cash projected to be generated by the assets is calculated, the
value of these cash flows has to be estimated. The Investment Adviser notes
that these cash flows are supported by a very high proportion of government
backed and index linked revenues. In the current financial market, such cash
flows are dependable and therefore valuable. With greater certainty of output
at the three large ground mounted solar assets that comprise 40% of the
installed capacity there is greater visibility on the returns on these assets.
The discount rates used reflect the Investment Adviser's experience in the
market and evidence of third-party transactions, as well as based on feedback
from the VCT's advisers who are marketing the portfolio for sale.
The discount rates used to value the future cash flows have been increased by
0.5% for the solar asset portfolio since the end of the financial year and
remain unchanged at 6.75% for the small wind portfolio (2021: 5.5% to 6.75%).
The technical assumptions, including the performance ratio (the efficiency of
converting solar power into electricity), have been changed for the Kingston
Farm, Lake Farm, Beechgrove Farm and Ayshford Court assets. The successful
repairs of the first three are reflected in improved output, although the full
potential increase has not been included until actual performance demonstrates
this. A small number of module failures at Ayshford Court took down entire
strings with several modules. The lower than expected performance, although
repair work was carried out in March and April 2022, raised the need for a
reduction in the value of Ayshford Court.
There has been an increase in inflation projections to reflect the increased
inflation experienced during the half year and higher levels of market
inflation expectations.
The value of the new investments in bio-bean and Rezatec has been determined
using International Private Equity Valuation Guidelines and are held at a
valuation of £1.9 million, including the £67,500 additional investment in
bio-bean made during the half-year. The total invested is £1.7 million. The
increase in the value of the Rezatec stake is due to the rolling-up of non
cash interest payments.
Outlook
The Investment Adviser's continued focus is to ensure that the assets operate
at or above budget whilst it supports the ongoing sale process, especially in
relation to demonstrating the solid generation profile of the projects and
addressing the contractual status of the grid connection arrangement at South
Marston. The repairs of the underperforming assets that were completed in the
last financial year appear to have been successful, as have warranty claims
for the Beechgrove ground mounted solar asset and these have provided greater
visibility and reliability of revenues. The performance assumptions for these
assets as well as the Ayshford Court solar project have been mildly marked
down in the valuation model in order to reflect the fact that there is, at
this moment, not a long enough history of performance data post the repairs.
There is an observable impact of age on many of the assets that have not yet
been repowered in the portfolio. The Investment Adviser remains vigilant for
the purpose of spotting any signs of degradation early so that the impact on
availability can be managed and reduced. Further maintenance provisions have
been incorporated into the financial model to cover the risk of higher
maintenance expenditure on roof mounted assets.
The higher inflation outlook, whilst of concern from the point of view of the
wider UK and global economy, is positive for the owners of subsidised UK
renewable assets. Although most costs also rise in line with inflation, as
does the cost of servicing the two debt facilities, the net benefit of
increased inflation is strongly positive since it increases the inflation
linked revenues more than it increases the costs. All eight ground mounted
solar assets will have come out of their fixed price power purchase agreements
by the end of 2022, and assuming power prices remain high, should have the
opportunity to enjoy prices substantially higher than those locked in during
2020 and early 2021.
It is however very challenging to predict the future course of inflation and
power prices, with the range of forecasts for medium to long-term inflation
being very diverse. There are plausible future scenarios that could bring the
levels of inflation as well as power prices down substantially from current
levels.
The risk of government intervention to ease budgetary constraints and
pressures on consumers in the future cannot be ruled out entirely. Renewable
energy projects in the portfolio are not expected to be subject to a "windfall
tax" according to the UK Government's latest announcement but should power
prices stay elevated for very long, a windfall tax on smaller renewable
generation assets could come back on the agenda or potentially other energy
market reform measures.
Gresham House Asset Management Limited
29 June 2022
Unaudited Income Statement
For the six months ended 31 March 2022
Six months ended 31 March 2022 Six months ended 31 March 2021 Year ended
30
September
2021
Revenue Capital Total Revenue Capital Total Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Income 589 - 589 521 - 521 576
(Losses)/gains on investments
Unrealised - (80) (80) - (2,280) (2,280) (2,628)
Realised - - - - 16 16 -
589 (80) 509 521 (2,264) (1,743) (2,052)
Investment advisory fees (103) (35) (138) (115) (38) (153) (291)
Other expenses (189) - (189) (177) - (177) (351)
Profit/(loss) on ordinary activities 297 (115) 182 229 (2,302) (2,073) (642)
before taxation
Tax on total comprehensive income and ordinary activities - - - - - - -
Profit/(loss) attributable to equity shareholders 297 (115) 182 229 (2,302) (2,073) (2,694)
Earnings per Ordinary Share 1.2p (0.4p) 0.7p 0.9p (9.0p) (8.1p) (10.6p)
Earnings per 'A' Share - - - - - - -
The total column within the Income Statement represents the Statement of Total
Comprehensive Income of the VCT 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 April 2021) by the Association of
Investment Companies ("AIC SORP").
A Statement of Total Recognised Gains and Losses has not been prepared as all
gains and losses are recognised in the Income Statement as noted above.
Unaudited Balance Sheet
As at 31 March 2022
Notes 31 March 31 March 30 September
2022 2021 2021
£'000 £'000 £'000
Fixed assets
Investments - 28,038 -
Current assets
Investments 9 27,180 - 27,193
Costs incurred on sale of VCT's assets 387 - 181
Debtors 52 220 60
Cash at bank and in hand 1 54 31
27,620 275 27,465
Creditors: amounts falling due within one year (1,876) (1,348) (1,901)
Net current assets/(liabilities) 25,744 (1,073) 25,564
Creditors: amounts falling due after more than one year (2,532) (3,314) (2,534)
Net assets 23,212 23,651 23,030
Capital and reserves
Called up share capital 69 69 69
Share premium account 8 9,541 9,541 9,541
Treasury shares 8 (2,991) (2,991) (2,991)
Special reserve 8 4,171 4,171 4,171
Revaluation reserve 8 14,976 14,613 15,056
Capital redemption reserve 8 3 3 3
Capital reserve - realised 8 (2,274) (1,448) (2,239)
Revenue reserve 8 (283) (307) (580)
Equity shareholders' funds 23,212 23,651 23,030
Net asset value per Ordinary Share 90.8p 92.5p 90.1p
Net asset value per 'A' Share 0.1p 0.1p 0.1p
90.9p 92.6p 90.2p
Unaudited Statement of Changes in Equity
For the six months ended 31 March 2022
Called up Share Treasury Special Revaluation Capital Capital Revenue Total
share premium shares reserve reserve redemption reserve- reserve £'000
capital account £'000 £'000 £'000 reserve realised £'000
£'000 £'000 £'000 £'000
As at 30 September 2020 69 9,541 (2,991) 5,714 16,893 3 (1,426) (536) 27,267
Total comprehensive loss - - - - (2,644) - (6) (44) (2,694)
Transfer of net realised loss to - - - - 807 - (807) - -
Capital reserve - realised
Transaction with owners
Dividends paid - - - (1,543) - - - - (1,543)
As at 30 September 2021 69 9,541 (2,991) 4,171 15,056 3 (2,239) (580) 23,030
Total comprehensive (loss)/profit - - - - (80) - (35) 297 182
Transaction with owners
Dividends paid - - - - - - - - -
As at 31 March 2022 69 9,541 (2,991) 4,171 14,976 3 (2,274) (283) 23,212
Unaudited Statement of Cash Flows
For the six months ended 31 March 2022
31 March 31 March 30 September
2022 2021 2021
£'000 £'000 £'000
Cash flows from operating activities
Gain/(loss) on ordinary activities before taxation 182 (2,073) (2,694)
Losses on investments 80 2,280 2,628
Dividend Income (570) - (522)
Interest Income (18) - (54)
Decrease in other debtors 4 9 1
(Decrease)/increase in other creditors (180) 1,215 161
Net cash (outflow)/inflow from operating activities (502) 1,431 (480)
Cash flows from investing activities
Purchase of investments (67) (13) (13)
Sale of investments/ loan note redemptions - 122 137
Cost incurred as part of the sale of VCT's assets (51) - (19)
Interest received 22 - 223
Dividend income received 570 - 315
Net cash inflow from investing activities 474 109 643
Net cash (outflow)/inflow before financing activities (28) 1,540 163
Cash flows from financing activities
Equity dividends paid - (1,543) (1,543)
Long-term loans (2) - 1,354
Net cash outflow from financing activities (2) (1,543) (189)
Net decrease in cash (30) (3) (26)
Cash and cash equivalents at start of period 31 57 57
Cash and cash equivalents at end of period 1 54 31
Cash and cash equivalents comprise:
Cash at bank and in hand 1 54 31
Total cash and cash equivalents 1 54 31
Summary of Investment Portfolio and Movements
For the six months ended 31 March 2022
Investment portfolio as at 31 March 2022
Qualifying and partially qualifying investments Operating sites Sector Cost Valuation Unrealised % of
£'000 £'000 gain/(loss) portfolio
in period by value
£'000
Lunar 2 Limited* South Marston, Beechgrove Ground solar 1,330 14,264 155 52.5%
Lunar 1 Limited* Kingston Farm, Lake Farm Ground solar 125 2,281 63 8.4%
New Energy Era Limited Wychwood Solar Farm Ground solar 884 1,767 (17) 6.5%
Ayshford Solar (Holding) Limited* Ayshford Ground solar 827 1,373 11 5.1%
Rezatec Limited United Kingdom Clean energy 1,000 1,246 61 4.6%
Vicarage Solar Limited Parsonage Farm Ground solar 871 1,143 (86) 4.2%
Tumblewind Limited* Priory Farm Small wind/solar 979 922 19 3.4%
Gloucester Wind Limited Gloucester Roof solar 1,000 780 (77) 2.9%
HRE Willow Limited HRE Willow Small wind 875 710 9 2.6%
bio-bean Limited Cambridgeshire Clean energy 695 695 - 2.6%
Hewas Solar Limited Hewas Roof solar 1,000 683 (149) 2.5%
St Columb Solar Limited St Columb Roof solar 650 491 (42) 1.8%
Penhale Solar Limited Penhale Roof solar 825 358 (23) 1.3%
Minsmere Power Limited Minsmere Small wind/solar 975 323 (1) 1.2%
Small Wind Generation Limited Small Wind Generation Small wind 975 144 (3) 0.4%
Lunar 3 Limited* Ground solar 1 - - 0.0%
13,012 27,180 (80)
Cash at bank and in hand 1
Total investments 27,181 100.0%
* Partially qualifying investment
Investment disposals
There were no Investment disposals during the half-year to 31 March 2022.
Notes to the Unaudited Financial Statements
1. General information
Gresham House Renewable Energy VCT 1 plc ("VCT") 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 under
the Companies Act 2006.
At the General Meeting on 13 July 2021 a formal decision was made to wind the
VCT up. Similar to the financial statements prepared for the year ended 30
September 2021, the unaudited half-yearly financial statements to 31 March
2022 have been prepared on a non-going concern basis. The adjustments required
in respect of applying the non-going concern basis were to transfer the
investments held at fair value through profit or loss from non-current to
current assets.
2. Accounting policies - basis of accounting
The unaudited half-yearly results cover the six months to 31 March 2022 and
have been prepared in accordance with the accounting policies set out in the
annual accounts for the year ended 30 September 2021 which were prepared under
FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of
Ireland" and in accordance with the Statement of Recommended Practice ("SORP")
"Financial Statements of Investment Trust Companies and Venture Capital
Trusts" issued by the Association of Investment Companies ("AIC") in November
2014 and revised in October 2019 (updated in April 2021) ("SORP") as well
the Companies Act 2006.
3. All revenue and capital items in the Income Statement derive from
continuing operations.
4. The VCT has only one class of business and derives its income from
investments made in shares, securities and bank deposits.
5. Net asset value per share at the period end has been calculated on
25,515,242 Ordinary Shares and 38,512,032 'A' Shares, being the number of
shares in issue at the period end, excluding Treasury Shares.
6. Return per share for the period has been calculated on 25,515,242
Ordinary Shares and 38,512,032 'A' Shares, being the weighted average number
of shares in issue during the period, excluding Treasury Shares.
7. Dividends
No dividends were paid to shareholders during the six months to 31 March 2022.
8. Reserves
Period ended Year ended
31 March 30 September
2022 2021
£'000 £'000
Share premium account 9,541 9,541
Treasury shares (2,991) (2,991)
Special reserve 4,171 4,171
Revaluation reserve 14,976 15,056
Capital redemption reserve 3 3
Capital reserve - realised (2,274) (2,239)
Revenue reserve (283) (580)
23,143 22,961
The Special reserve is available to the VCT to enable the purchase of its own
shares in the market without affecting its ability to pay dividends. The
Special reserve, Capital reserve - realised and Revenue reserve are all
distributable reserves. At 31 March 2022, distributable reserves were
£1,614,000 (30 September 2021: £1,352,000).
9. Investments
The fair value of investments is determined using the detailed accounting
policies as referred to in note 2.
The VCT has categorised its financial instruments using the fair value
hierarchy as follows:
Level 1 Reflects financial instruments quoted in an active market;
Level 2 Reflects financial instruments that have prices that are
observable either directly or indirectly; and
Level 3
Reflects financial instruments that use valuation techniques that are not
based on observable market data (unquoted equity investments and loan note
investments).
Level 1 Level 2 Level 3 31 March Level 1 Level 2 Level 3 30 September
2022 2021
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Unquoted loan notes - - 1,686 1,686 - - 1,686 1,686
Unquoted equity - - 25,494 25,494 - - 25,507 25,507
- - 27,180 27,180 - - 27,193 27,193
A reconciliation of fair value for Level 3 financial instruments held at the
period end is shown below:
Unquoted Unquoted Total
loan notes equity £'000
£'000 £'000
Balance at 30 September 2021 1,686 25,507 27,193
Movements in the income statement:
Unrealised loss in the income statement - (80) (80)
Purchased at cost - 67 67
Balance at 31 March 2022 1,686 25,494 27,180
10. Risks and uncertainties
Under the Disclosure and Transparency Directive, the Board is required in the
VCT's half-year results to report on principal risks and uncertainties facing
the VCT over the remainder of the financial year.
The Board has concluded that the key risks facing the VCT over the remainder
of the financial period are as follows:
(i) investment risk associated with investing in small and immature
businesses;
(ii) market risk in respect of the various assets held by the investee
companies;
(iii) failure to maintain approval as a VCT;
iv) risk surrounding the sale of the VCT's solar assets; and
v) economic risk due to several factors including the Russian
Federation's invasion of Ukraine
In order to make VCT qualifying investments, the VCT has to invest in small
businesses which are often immature. The Investment Adviser follows a rigorous
process in vetting and careful structuring of new investments and, after an
investment is made, close monitoring of the business. The Investment Adviser
also seeks to diversify the portfolio to some extent by holding investments
which operate in various sectors. The Board is satisfied with this approach.
The VCT's compliance with the VCT regulations is continually monitored by the
VCT Status Adviser, who reports regularly to the Board on the current
position. The VCT has reappointed Philip Hare & Associates LLP as VCT
Status Adviser, who will work closely with the Investment Adviser and provide
regular reviews and advice in this area. The Board considers that this
approach reduces the risk of a breach of the VCT regulations to a minimal
level.
There is a risk that the VCT's solar assets may not be realised at their
carrying value, and the sale commissions, such as liquidation costs and other
costs associated with the realisation of the VCT's assets, may reduce cash
available for distribution to shareholders. Furthermore, there is a risk that
the sale of the VCT's assets may prove materially more complex than
anticipated which may delay distribution of proceeds to shareholders. To
mitigate these risks, the VCT's Board has engaged several experts in this
field to ensure that a timely and appropriate sale price is achieved. In
addition, the Board reviews quarterly cash flow forecasts, prepared by the
Investment Adviser, and has considered the impact of additional costs likely
to be incurred during the managed wind-down of the VCT.
The Board has considered the Russian Federation's invasion of Ukraine and the
impact of the increasing inflation on the VCT. The higher inflation outlook,
whilst of concern from the point of view of the wider UK and global economy,
is positive for the owners of subsidised UK renewable assets. Although most
costs also rise in line with inflation, as does the cost of servicing the two
debt facilities, the net benefit of increased inflation is strongly positive
since it increases the inflation linked revenues more than it increases the
costs. It is however very challenging to predict the future course of
inflation, with the range of forecasts for medium to long-term inflation being
very diverse.
11. Going concern
In assessing the VCT as a going concern, the Directors have considered the
forecasts which reflect the proposed strategy for portfolio investments and
the results of the continuation votes at the AGM and General Meeting held on
22 March 2021 and 13 July 2021 respectively.
Although the continuation vote was passed by this VCT at the AGM, there were a
significant number of votes against this resolution and the shareholders of
VCT 2 voted against continuation. This required the VCTs to draw up proposals
for voluntary liquidation, reconstruction or other re-organisation for
consideration by the members at the General Meeting held on 13 July 2021. At
this meeting the proposed special resolution was approved by shareholders,
resulting in the VCT entering a managed wind-down and a new investment policy
replacing the existing investment policy. The Board agreed to realise the
VCT's investments in a manner that achieves balance between maximising the net
value received from those investments and making timely returns to
shareholders.
Given a formal decision has been made to wind the VCT up, the financial
statements have been prepared on a basis other than going concern. The Board
notes that the VCT has sufficient liquidity to pay its liabilities as and when
they fall due, during the managed wind-down, and that the VCT has adequate
resources to continue in business until the formal liquidation and wind-up
commences.
12. The unaudited financial statements set out herein do not constitute
statutory accounts within the meaning of Section 434 of the Companies Act 2006
and have not been delivered to the Registrar of Companies.
13. The Directors confirm that, to the best of their knowledge, the
half-yearly financial statements have been prepared in accordance with the
"Statement: Half-Yearly Financial Reports" issued by the UK Accounting
Standards Board and the Half-Yearly Report includes a fair review of the
information required by:
a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the financial year and their impact on the condensed set of financial
statements, and a description of the principal risks and uncertainties for the
remaining six months of the year; and
b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related
party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or performance of the entity during that period, and any changes in
the related party transactions described in the last annual report that could
do so.
14. Copies of the Half-Yearly Report will shortly be sent to shareholders
who have elected this communication preference. Further copies can be obtained
from the VCT's registered office or can be downloaded from
https://greshamhouse.com/real-assets/new-energy-sustainable-infrastructure/
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