REG-Hazel Renewable Energy VCT 2 plc : Final Results <Origin Href="QuoteRef">HR2O.L</Origin>
29/01/2016 13:10
Hazel Renewable Energy VCT2 plc
Final results for the year ended 30 September 2015
FINANCIAL HIGHLIGHTS
Audited Audited
Year End Year End
30 September 2015 30 September 2014
Pence Pence
Net asset value per Ordinary Share 117.3 115.0
Net asset value per 'A' Share 0.1 0.1
Cumulative Dividends paid 29.5 24.5
Total return per Ordinary Share and 'A' Share 146.9 139.6
CHAIRMAN'S STATEMENT
I am pleased to present the Company's Annual Report for the year ended 30
September 2015. The year has been one of steady progress within the portfolio.
Investment activity has been mostly limited to a small number of partial
redemptions and winding up of investee companies that are no longer being
used. Since the year end the Company is expected to complete another
refinancing which has the potential to further increase the yield from the
existing portfolio.
Investment portfolio
At the year end, the Company held a portfolio of 16 investments with a total
value of £30.7 million.
There were five full realisations during the year, primarily from investments
that had ceased to undertake any activities and were being wound up. There
were also partial loan stock redemptions from four investments. Total proceeds
were £1.2 million and realised gains on the year were £121,000.
Within the existing portfolio progress has generally been good, with the
Manager achieving administration cost savings on many of the solar projects,
while producing reliable energy generation performances. The wind turbine
portfolio has not performed so well and has warranted a provision against its
carrying value.
In reviewing the investment valuations at the year end, the Board has made a
number of adjustment resulting in a net unrealised gain of £1.5 million.
Net asset value and results
At 30 September 2015, the Net Asset Value ("NAV") per Ordinary Share stood at
117.3p and the NAV per 'A' Share stood at 0.1p, producing a combined total of
117.4p. This represents an increase of 7.3p (6.3%) over the year (after
adjusting for dividends paid during the year of 5.0p per Ordinary share).
Total dividends paid to date for a combined holding of one Ordinary Share and
one 'A' Share stand at 29.5p. Total Return (NAV plus cumulative dividends paid
to date) now stands at 146.9p, 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 £1.8
million, comprising a loss of £125,000 on the revenue account and surplus of
£1.9 million on the capital account.
Dividends
A dividend of 5.0p per Ordinary Share paid was paid on 18 September 2015. In
line with the Company's policy, it is intended that the next annual dividend
will be paid in September 2016 and will be announced in May 2016.
Future strategy
Given that the Company's original fundraising was launched slightly over five
years ago, the articles specify that a resolution is put to Shareholders at
the forthcoming AGM for the Company to continue as a VCT.
The Board has spent some time discussing future strategy with the Manager and
considered a number of possible options in which the Company could move
forward. Options such as winding up, divesting and reinvesting into new assets
and changing the structure of the investment vehicle were considered.
The process highlighted the fact the Company holds a robust portfolio of
renewable energy assets which cannot be rebuilt from scratch and which have a
financing structure in place that will allow the payment of gently increasing
dividends over a long timeframe.
With the incentives schemes for new renewable energy projects now
dramatically reduced and such schemes also now effectively prohibited from
being held as qualifying investments by VCTs, the Board believes that the
existing portfolio offers Shareholders a reliable, tax-free income stream with
the possibility of further capital growth and the prospect of steadily
increasing dividends. Accordingly the Board plans to operate the existing
portfolio in this manner over the next 5-10 years, although will review
strategy at regular intervals.
The board recognises that a small number of Shareholders may wish to exit
once the initial holding period passes and has introduced a share buyback
policy of buying in any shares that become available in the market at
approximately a 5% discount to the latest published NAV. In future, the Board
intends to publish NAVs for each quarter end.
Fundraising plans
While the opportunity for further investment by VCTs into renewable energy
projects benefitting from Government incentives has now passed, the Manager is
seeing interesting dealflow in other cleantech opportunities, such as
electrical storage solutions both in the UK and overseas.
The Manager believes that there is sufficient good quality dealflow to be
able to build a new investment portfolio from scratch which can provide an
attractive returns in a related but different area to the existing portfolio.
Accordingly, proposals are being drawn up for a new fundraising in a new share
class.
The new funds will be maintained and managed separately from the existing
investments but will allow the fixed running costs of the VCT to be spread
over a greater asset base, reducing the burden on all shareholders.
Corporate broker appointment
In order to ensure an orderly market in the Company's shares, the Company has
engaged Panmure Gordon UK Limited to act as the Corporate Broker to the
Company. Any Shareholders wishing to sell their shares should contact Panmure
Gordon whose details are noted on the Shareholder Information page.
Annual General Meeting
The Company's fifth AGM will be held at 2 nd Floor, 227 Shepherds Bush Road,
London W6 7AS at 2.05 p.m. on 7 March 2016.
Two items of special business will be proposed at the AGM; a resolution
seeking approval for the Company to be able to buy its own shares as described
above and one to amend the Articles of Association as described below.
In view of the future strategy and planned fundraising, the Board has decided
to seek Shareholder approval by resolution 9 at the forthcoming AGM to amend
the Articles of Association to remove the requirement for a regular
continuation vote to be put to Shareholders in future. The Board believes this
gives more flexibility in implementing future plans and will avoid potential
issues in fundraising where no guarantee can be given that Shareholders will
be able to hold their shares for the minimum holding period.
Notice of the meeting is at the end of this document.
Outlook
The Board is very satisfied with the performance of the Company to date and
believes it is well placed to continue to deliver solid results to
Shareholders for years to come. The second major refinancing which is expected
to complete shortly should improve the prospects for an increasing yield from
the current portfolio.
The proposals for the new fundraising in a new share class will have a
relatively small impact on existing Shareholdings other than in reducing
running costs, although there could be possible benefits in co-investing with
the new share pool if suitable and attractive opportunities arise and surplus
funds are available. The new fundraising will also, of course, provide an
opportunity for existing Shareholders to make a new VCT investment with a team
that has delivered excellent results since first entering this market some
five years ago.
I look forward to reporting on developments in my statement with the half
year report to 31 March 2016.
Peter Wisher
Chairman
INVESTMENT MANAGER'S REPORT
Introduction
The year ended 30 September 2015 has been another good year for Hazel
Renewable Energy VCT2 plc (the Company). As the portfolio was fully invested
at the beginning of this financial year, the focus has been on further
improving the operational and financial performance of the asset base as well
as exploring and initiating new avenues for augmenting the return of the
portfolio. The improvement in operational performance is a process that was
initiated in the previous financial year, starting with the small-wind
portfolio. This was extended this year to cover other areas of the portfolio
such as the roof-mounted solar assets.
In terms of financial performance, we have sought to extend the benefits
gained from the previous financial year's refinancing and concurrent
acquisition of the entire share capital of the six ground-mounted solar assets
commissioned in 2011 and 2012. We have done this by pooling together an
additional group of the portfolio's solar assets in order to refinance them
with low cost debt and to use the proceeds to invest in projects offering a
substantially higher return. This transaction commenced at the beginning of
September and is expected to complete shortly.
Separately, across the board, there was also a successful effort to reduce
non-core costs across the portfolio such as audit and bookkeeping costs.
Overall Portfolio and Operational Review
At the end of the year, as at the end of the previous year, the portfolio
consisted for the most part of 16 underlying projects held through 13
portfolio companies which are all either entirely or majority-owned by the
VCTs. The dormant companies that featured in last year's report were all
closed down.
Ten of the twelve solar projects (eight ground-mounted and four rooftop ones)
which account for close to 80% of capital invested, continued to perform in
line or above expectations. However, Priory Farm, the comparatively small,
3.2MW ground-mounted solar project acquired in July 2014 (owned by Tumblewind
Limited) showed poorer performance as a result of a combination of
grid-related issues (a series of long outages over the summer) and an
inadequate agreement between the project company and the local grid operator.
These issues were subsequently addressed by way of a revised agreement with
the local grid operator, technical modifications and adjustments to the O&M
contract and we expect to see this project perform reliably going forward.
Another historically poor performer, measured against the initial
expectations, is the solar rooftop portfolio owned by Gloucester Wind Ltd (a
c£1m investment), which had suffered as a result of the original developer
going into administration in April 2013. However we are very pleased with
the progress in restoring the operating performance of this portfolio which
has largely been catalysed by the appointment of Anesco as O&M contractor.
However, it is unlikely this project will reach original expectations although
it is now much closer to them. We are also pleased to say that there has
been no valuation impact on the portfolio as the original transaction was
well-priced, resulting in a margin of safety.
Across our ground-mounted solar farms, the sophisticated monitoring systems
installed at the beginning of summer 2014 continue to be invaluable,
delivering more timely and granular information on the performance of each
asset. This has enabled us to better monitor the performance of our O&M
contractors and identify areas to reduce risk and increase returns through the
modification of O&M contracts.
In terms of electricity prices, over the last two years there has been a long
downward drift in power prices in the wholesale market. The vast majority of
our projects' revenues are shielded from this as they are Feed-in-tariff based
or, in the case of the Ayshford Court solar project, are under a fixed price
power purchase agreement. However, the export tariffs that account for
around 10% of the overall portfolio's revenues has fallen. Given the
severity of the disruption in the worldwide energy price environment, it is
difficult to foresee when a recovery in the power prices will occur, however,
we take comfort from the fact that this portfolio is largely shielded from
this effect.
There are, however, methods we can apply to improve revenues per kWh of
electricity generated. We are searching for opportunities to make direct sales
to power consumers (aka direct Power Purchase Agreements - PPAs), and will
intensify these efforts in 2016. Another opportunity we are continuously
evaluating is the installation of energy storage solutions on our sites in
order to shift and smooth our electricity output to improve the electricity
price that could be achieved. The steadily declining cost of batteries is
likely to yield opportunities in the near future.
As explained last year, from a cost perspective, our O&M contract costs are
falling sharply as our contracts come up for renewal. We have seen this with
Priory Farm this year, where we have achieved a 30% reduction. The bigger
positive impact will come when several more O&M contracts come up for renewal
next year, or possibly earlier, the savings from this will contribute to an
increase in returns.
For 'Project Lunar' (the debt structure secured on the now wholly-owned six
FIT solar projects) we continued to meet our obligations to the lender
including payment milestones, ongoing funding of reserves, observing all
covenants and other requirements. One key, near term aspect of this
transaction has been the need to fund various reserves required by the lender,
and until fully funded, which will take till the end of 2018, this funding of
reserves (the largest being the Debt Service Reserve Account) will reduce our
cash flow from these projects. Once funded, however, this effect goes away
revealing the strong underlying cash generation of this group of projects; at
which time we expect dividends to investors to increase markedly. Of course
at the end of the debt repayment in 20 years' time, the largest remaining
value creator in this structure kicks in with dividends of over £8m in 2034,
and over £11m in both 2035 and 2036 (assuming 2% RPI on average between now
and then) as the debt will have been repaid and the reserves unwound. This
totals over £30m in dividends in three years compared with just c£18m of
equity invested in these assets.
Our small wind turbine projects held within HRE Willow Ltd, Small Wind
Generation Ltd, Tumblewind Ltd and Minsmere Power Ltd stabilised but continued
to lag in terms of performance. As explained in last year's report, the fact
that the developers went bankrupt meant that the companies did not benefit
from the contractual provisions that provided compensation in the event of
underperformance. Britwind, a division of Ecotricity, that were appointed as
O&M Contractor in the previous financial year are steadily progressing with
the repairs and adjustments that are necessary to the physical structures.
Unlike the previous financial year, we now have access to a full year's high
quality data on the performance of each individual wind turbine via an online
portal and therefore are in a better position to make a judgment on where
performance is likely to go. We have concluded that certain assets within this
segment of the portfolio are unlikely to ever reach expected performance due
to poor wind conditions at the specific sites and in some cases poor quality
physical installations. We have therefore taken a prudent approach and
impaired the value of these assets in this year's valuation exercise. We will
continue to strive to rectify issues that can be rectified and see the
potential for an upward adjustment in the future.
Portfolio Valuation
The NAV of the portfolio has increased from 115.1p to 117.4p (or from 139.6p
to 146.9p if dividends already paid are taken into account). This year's
increase has come about primarily as result of market prices for renewable
power generation assets rising and strong performance from the ground-mounted
solar assets that we own. These have been more than sufficient to offset not
only the effect of lower power prices but also the impact of the impairment of
the small wind portfolio which we deemed prudent. Our portfolio of assets
that were initially bought targeting average hurdle rates of 9% to 11% are now
valued by discounting cash flows at 7.25% reflecting the number of market
participants who are keen to own these fixed-income type assets in an
environment where interest rates remain at historical lows. The discount rate
of 7.25% followed a valuation exercise that we carried out and that was
reviewed by BDO, the Company's auditors, and is 0.25% less than last year.
We will not offer a prediction on where interest rates will go but one factor
pointing to the potential for higher valuations is the maturity of the asset
base. As assets acquire longer operating histories, the predictability of
revenues increases, and a lower discount rate can be justified. The
ground-mounted solar assets in the portfolio that were among the first to be
built in the UK also benefit from the fact that their exposure to market power
prices is less than 10% of revenues and hence should command a higher discount
rate than the average in the market. With the advent of cheaper battery
technology and other levers, there is also the opportunity to earn additional
revenue streams from the projects or increase value in other ways.
Outlook
The fund was fully invested at the end of the financial year. However,
should, as we expect, the refinancing transaction mentioned above close
successfully, we will aim to deploy the proceeds into investments with a
similar risk/reward profile to the current portfolio at hurdle rates
significantly in excess of the cost of debt and thus hopefully add value to
the portfolio.
Our focus for 2016 will be on continuing to improve the operational and
financial performance of the assets and thus the overall yield of the
portfolio, as well as the anticipated successful conclusion and deployment of
the proceeds from the refinancing transaction.
Also, as we reach the five year mark in the life of the Company, we
anticipate a wish by some investors to sell their shares. The Company has
plans to fund purchases with cash in hand in order to implement its policy to
repurchase shares at approximately a 5% discount to the latest stated NAV,
subject to certain restrictions including liquidity and regulatory (for more
information please see the announcement posted at the London Stock Exchange in
December 2015).
As always, we are very happy to hear from our investors if they have any
questions or comments.
Ben Guest
Chief Investment Officer
Hazel Capital LLP
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 30 September 2015:
Cost Valuation Valuation movement in year % of portfolio
£'000 £'000 £'000
Qualifying and part-qualifying investments
Lunar 2 Limited* 2,976 12,202 2,255 39.8%
Ayshford Solar (Holding) Limited 1,987 3,073 267 10.0%
Tumblewind Limited* 2,449 2,175 (596) 7.1%
Lunar 1 Limited* 124 2,076 33 6.8%
Hewas Solar Limited 1,000 1,748 76 5.7%
St. Columb Solar Limited 708 1,419 45 4.6%
New Energy Era Limited 884 1,369 65 4.5%
Vicarage Solar Limited 871 1,181 (22) 3.8%
Penhale Solar Limited 825 1,075 249 3.5%
Gloucester Wind Limited 1,000 1,041 41 3.4%
Minsmere Power Limited 975 920 (89) 3.0%
HRE Willow Limited 875 780 (95) 2.5%
Small Wind Generation Limited 975 682 (292) 2.2%
Sunhazel UK Limited 1 - - 0.0%
15,650 29,741 1,937 96.9%
Non-qualifying investments
AEE Renewables UK 3 Limited 900 900 - 2.9%
ZW Parsonage Limited 15 15 - 0.1%
915 915 - 3.0%
16,565 30,656 1,937 99.9%
Cash at bank and in hand 16 0.1%
Total investments 30,672 100.0%
* Part-qualifying investment
All venture capital investments are incorporated in England and Wales.
Hazel Renewable Energy VCT1 plc, of which Hazel Capital LLP is the Investment
Manager, holds the same investments as above.
Investment movements for the year ended 30 September 2015
DISPOSALS
Cost Valuation at 30 September 2014 Proceeds Profit/ (Loss) vs cost Realised gain
£'000 £'000 £'000 £'000 £'000
Qualifying and part-qualifying investments
Higher Tregarne Solar (Holding) Limited 243 216 264 21 48
Owl Lodge Solar (Holding) Limited 80 249 274 194 25
Yonder Netherton Solar (Holding) Limited 5 - - (5) -
Ayshford Solar (Holding) Limited 260 260 260 - -
Tumblewind Limited 85 85 85 - -
Causilgey Solar (Holding) Limited 248 183 181 (67) (2)
St. Columb Solar Limited 15 15 15 - -
Penhale Solar Limited 74 74 74 - -
1,010 1,082 1,153 143 71
Non-qualifying investments
Lime Technology Limited 100 - 50 (50) 50
100 - 50 (50) 50
1,110 1,082 1,203 93 121
All venture capital investments are incorporated in England and Wales.
Directors' responsibilities
The 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).
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 STATEMENT
for the year ended 30 September 2015
Year ended 30 September 2015 Year ended 30 September 2014
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Income 580 - 580 370 - 370
Gain on investments - 2,057 2,057 - 8,343 8,343
580 2,057 2,637 370 8,343 8,713
Investment management fees (424) (141) (565) (388) (129) (517)
Other expenses (281) - (281) (302) (12) (314)
Profit/(loss) on ordinary activities before tax (125) 1,916 1,791 (320) 8,202 7,882
Tax on ordinary activities - - - - - - -
Profit/(loss) attributable to equity shareholders (125) 1,916 1,791 (320) 8,202 7,882
Basic and diluted earnings per share:
Ordinary Share (0.5p) 7.8p 7.3p (1.4p) 34.7p 33.3p
'A' Share - - - - - -
All Revenue and Capital items in the above statement derive from continuing
operations. The total column within the Income Statement represents the profit
and loss account of the Company. No operations were acquired or discontinued
during the year.
A Statement of Total Recognised Gains and Losses has not been prepared as all
gains and losses are recognised in the Income Statement noted above.
Other than revaluation movements arising on investments held at fair value
through profit or loss, there were no differences between the profit or loss
as stated above and historical cost.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
Year ended 30 September 2015 Year ended 30 September 2014
£'000 £'000
Opening Shareholders' funds 28,327 22,545
Proceeds from share issue - 2,067
Share issue costs - (98)
Profit for the year 1,791 7,882
Dividend paid (1,230) (4,069)
Closing Shareholders' funds 28,888 28,327
BALANCE SHEET
as at 30 September 2015
2015 2014
£'000 £'000 £ '000 £'000
Fixed assets
Investments 30,656 29,802
Current assets
Debtors 362 144
Cash at bank and in hand 16 163
378 307
Creditors : amounts falling due within one year (624) (682)
Net current liabilities/assets (246) (375)
Total Assets less net current liabilities/assets 30,410 29,427
Creditors: amounts falling due after more than one year (1,522) (1,100)
Net assets 28,888 28,327
Capital and reserves
Called up Ordinary Share capital 25 25
Called up 'A' Share capital 37 37
Share premium account 3,985 3,985
Special reserve 12,402 13,632
Revaluation reserve 14,090 12,127
Capital reserve - realised (841) (794)
Revenue reserve (810) (685)
Total Shareholders' funds 28,888 28,327
Basic and diluted net asset value per share
Ordinary Share 117.3p 115.0p
'A' Share 0.1p 0.1p
CASH FLOW STATEMENT
for the year ended 30 September 2015
Year ended 30 September 2015 Year ended 30 September 2014
£'000 £'000
Net cash outflow from operating activities and returns on investments (482) (424)
Capital expenditure
Purchase of investments - (1,684)
Proceeds from disposal of investments 1,203 2,735
Net cash inflow from capital expenditure 1,203 1,051
Dividends paid (1,230) (4,069)
Net cash outflow before financing (509) (3,442)
Financing
Proceeds from Ordinary Share issue - 2,062
Proceeds from 'A' Share issue - 4
Short term loans (60) -
Long term loans 422 1,100
Share issue costs - (98)
Net cash inflow from financing 362 3,068
Decrease in cash (147) (374)
NOTES TO THE ACCOUNTS
for the year ended 30 September 2015
1. Accounting policies
Basis of accounting
The Company has prepared its financial statements under UK Generally Accepted
Accounting Practice ("UK GAAP") and in accordance with the Statement of
Recommended Practice "Financial Statements of Investment Trust Companies and
Venture Capital Trusts" revised January 2009 ("SORP").
The financial statements are prepared under the historical cost convention
except for fixed asset investments which are measured at fair value.
The Company implements new Financial Reporting Standards ("FRS") issued by
the Financial Reporting Council when they become effective.
Presentation of income statement
In 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.
Investments
All 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, with a view to selling after a
period of time, 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 FRS26.
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 UK GAAP and the SORP 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.
Expenses
All 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 management 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.
Taxation
The 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 notes
Other debtors (including accrued income), other creditors and loan notes
(other than those held as part of the investment portfolio) are included
within the accounts at amortised cost.
Issue costs
Issue costs in relation to the shares issued for each share class have been
deducted from the share premium account.
2. Income
Year ended 30 September 2015 Year ended 30 September 2014
£'000 £'000
Income from investments
Loan stock interest 244 179
Dividend Income 335 175
579 354
Other income
Bank interest 1 16
580 370
3. Basic and diluted earnings per share
Weighted average number of shares in issue Revenue loss Capital return
(Loss)/profit per share is calculated on the following: £'000 £'000
Year ended 30 September 2015 Ordinary Shares 24,603,156 (125) 1,913
'A' Shares 36,904,733 - 3
Year ended 30 September 2014 Ordinary Shares 23,614,754 (320) 8,190
'A' Shares 35,422,130 - 12
As the Company has not issued any convertible securities or share options,
there is no dilutive effect on earnings per Ordinary Share or 'A' Share. The
earnings per share disclosed therefore represents both the basic and diluted
return per Ordinary Share or 'A' Share.
4. Basic and diluted net asset value per share
Shares in issue 2015 2014
2015 2014 Net asset value Net asset value
per share £'000 per share £000
Ordinary Shares 24,603,158 24,603,158 117.3 28,851 115.0 28,290
'A' Shares 36,904,733 36,904,733 0.1 37 0.1 37
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.
5. Principal risks
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:
*Investment 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:
Investment 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 Manager
and overseen by the Board. The Manager 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 Manager to manage the investment risk in
respect of individual investments. Investment risk is also mitigated by
holding a diversified portfolio spread across various business sectors and
asset classes.
The key investment risks to which the Company is exposed are:
*Investment price risk
*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. It
represents the potential loss that the Company might suffer through changes in
the fair value of unquoted investments that it holds.
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.
Investments in loan stock attract interest predominately at fixed rates. A
summary of the interest rate profile of the Company's investments is shown
below.
There are four 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;
*"Variable rate" assets represent investments with predetermined interest
rates that vary at set dates in accordance with loan note agreements;
*"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 or
variable 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.
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 investee companies is considered to be part of market risk.
The Manager manages credit risk in respect of loan stock with a similar
approach as described under "Investment risks" above. Similarly the management
of credit risk associated interest, dividends and other receivables is covered
within the investment management 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 are directly
attributable to changes in credit risk.
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
£160,000 (2014: £158,000) and has low loans from investee companies being
£1,986,000 (2014: £1,624,000) 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 Manager in line
with guidance agreed with the Board and is reviewed by the Board at regular
intervals.
6. Related party transactions
In the opinion of the Directors there is no immediate or ultimate controlling
party.
Hazel Capital LLP is regarded as a related party as Bozkurt Aydinoglu is a
director of the VCT and a controlling partner in Hazel Capital LLP.
Hazel Capital LLP also provides investment management services to the
Company. During the year ended 30 September 2015, £565,000 (2014: £517,000)
was payable to Hazel Capital LLP in respect of these services. At the year end
there was no balance owing to Hazel Capital LLP (2014: nil).
In accordance with the prospectus and the Investment Management agreement,
Hazel Capital LLP receives trail commission of 0.4% of the net assets of the
Company at the year end, out of which it pays trail commission to financial
intermediaries. As at 30 September 2015, this amounted to £114,000 (2014:
£113,000), all of which is outstanding and included in accruals and deferred
income under Creditors.
ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The 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 2015, but has been
extracted from the statutory financial statements for the year ended 30
September 2015, which were approved by the Board of Directors on 28 January
2015 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 2014 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 2015 will be printed and posted to shareholders shortly. Copies
will also be available to the public at the registered office of the Company
at Ergon House, Horseferry Road, London SW1P 2AL and will be available for
download from www.downing.co.uk.
This announcement is distributed by NASDAQ OMX Corporate Solutions on behalf
of NASDAQ OMX Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for
the content, accuracy and originality of the information contained therein.
Source: Hazel Renewable Energy VCT 2 plc via Globenewswire
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