REG-Hazel Renewable Energy VCT 2 plc : Final Results <Origin Href="QuoteRef">HR2O.L</Origin>
10/01/2018 07:05
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Hazel Renewable Energy VCT2 plc
Legal Entity Identifier: 213800GQ3JQE2M214C75
Final results for the year ended 30 September 2017
FINANCIAL HIGHLIGHTS
Audited Audited
Year End Year End
30 September 2017 30 September 2016
Pence Pence
Net asset value per Ordinary Share 114.9 117.3
Net asset value per 'A' Share 0.1 0.1
Cumulative Dividends paid 39.5 34.5
Total return per Ordinary Share and 'A' Share 154.5 151.9
CHAIRMAN'S STATEMENT
I present the Annual Report for Hazel Renewable Energy VCT2 plc for the year
ended 30 September 2017, my first as Chairman of the Company.
As Shareholders will be aware, it has been a busy year for your Company. In
recent months, the Board has agreed a reorganisation of the Company, with
Gresham House Asset Management Limited formally taking over as Investment
Adviser. The new arrangements bring a number of benefits which the Board
believes will deliver enhanced value to Shareholders. We are looking forward
to working with the new team as the Company enters the next stage of its life.
Investment portfolio
There were no changes to the investment portfolio during the year. At the year
end, the Company held a portfolio of 16 investments with a total value of
£31.4 million.
As usual, the Board has reviewed the investment valuations at the year end and
made adjustments to the fair values. Despite lower than expected irradiation
during the year which impacted the solar investments, other factors have
offset this resulting in a net unrealised gain of £992,000.
Net asset value and results
At 30 September 2017, the Net Asset Value ("NAV") per Ordinary Share stood at
114.9p and the NAV per 'A' Share stood at 0.1p, producing a combined total of
115.0p. This represents an increase of 2.6p (2.2%) 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 39.5p. Total Return (NAV plus cumulative dividends paid to
date) now stands at 154.5p, 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 £652,000,
comprising a revenue loss of £243,000 and a capital gain of £895,000 as
shown in the Income Statement.
Dividends
A dividend of 5.0p per Ordinary Share paid was paid on 15 September 2017. The
Company normally pays its annual dividend in September each year, however the
plans for the future of the Company as discussed below may impact this.
The Company's general dividend policy is to distribute surplus funds generated
by the underlying investments, subject to maintaining an appropriate cash
reserve within the Company to meet anticipated future requirements.
Share Buybacks
The Company has introduced a policy of buying in shares that become available
in the market at a 2% discount to NAV. Shareholders who wish to sell their
shares will need to do so via a stockbroker. The Company has engaged Panmure
Gordon (UK) Limited ("Panmure") as its Corporate Broker. Panmure can provide
guidance on the timing and likely price of buybacks. Contact details for
Panmure can be found on the inside cover of the Annual Report.
No 'Ordinary' Shares or 'A' Shares were purchased during the year.
Board composition
In July, Peter Wisher resigned as a non-executive Director and Chairman of the
Company due to ill health. I am sad to report that Peter has since passed
away. Peter was Chairman since the Company's launch in 2010 and presided
over a period that delivered solid returns to Shareholders. Peter's presence
as a colleague and friend is greatly missed and our thoughts are with his
family and friends. Following Peter's resignation, I agreed to take over as
Chairman. Subsequently Giles Clark has joined the Board as a non-executive
director. Giles has significant experience in the solar energy sector and
acted as a consultant for the Company in the recent review. Giles brings
additional skills to the Board and, we believe, will be a significant asset.
Investment Adviser
As mentioned above, Gresham House Asset Management Limited ("GHAM") has now
been appointed as Investment Adviser to the Company, and our sister Company,
Hazel Renewable Energy VCT1 plc. GHAM is part of AIM-quoted specialist asset
manager, Gresham House plc.
GHAM acquired the business of Hazel capital LLP on 31 October 2017 so the
Company now benefits from continuity of the key investment executives plus the
enhanced resources of a larger group. As part of the new arrangements, the
Board also secured a reduced advisory fee. The Board looks forward to working
with GHAM and believes that the new structure can deliver enhanced returns to
Shareholders in due course.
Amendment to the Articles of Association
The VCT's investments are mostly in companies which were set up to develop and
operate renewable energy assets. In some cases, these companies have not yet
generated enough profits to fully offset the set-up costs and, as a result, do
not yet have distributable reserves even though they are now generating
surplus cash. Funds from these investee companies have, in some cases, been
paid up the VCT by way of loans. In due course, it is expected that these
loans will be cancelled by the declaration of dividends from the investee
company once distributable reserves are available.
Article 106.1 restricts the Company from borrowing from non-group companies a
sum in excess of 15% of the net assets of the Company. As currently drafted,
loans from investee companies are included in this calculation. The
Directors believe that it was not intended that such loans be included within
this restriction and propose to extend the definition of "Group" in the
articles to include investee companies. Resolution 6 will be proposed as a
special resolution at the forthcoming AGM seeking to make this amendment to
the articles. The Board recommends voting in favour of this resolution to
allow the Company to continue to have flexibility in transferring surplus cash
from the investee companies to the Company as required.
Annual General Meeting
The Company's seventh AGM will be held at St. Magnus House, 3 Lower Thames
Street, EC3R 6HD at 11:00 a.m. on 21 March 2018.
Two items of special business will be proposed in respect of authority to
undertake share buybacks and to amend the Articles of Association as described
above.
Outlook
The recent Budget by Her Majesty's Government announced a number of further
changes to the VCT regulations. As the Company is effectively fully invested,
the Board does not believe the new regulations will have an impact on returns
from the existing portfolio. The new regulations do however place further
restrictions on the types of new investments that VCTs are able to make in
future and will have an influence on any plans that the Company might develop
in respect of new investment activity.
The Board has also considered the potential impact of the UK leaving the
European Union. With almost all of the Company's funds employed in renewable
energy assets in the UK, the Board do not consider that any impact of this
will be significant for the Company.
In terms of the existing portfolio, over the next year, the investment
advisory team will continue close monitoring of and, where possible, seek to
further achieve running costs savings and improved efficiency from the current
assets.
I look forward to updating Shareholders in my statement with the Half yearly
report to 31 March 2018 which is expected to be published in July 2018.
Christian Yates
Chairman
INVESTMENT ADVISER'S REPORT
Introduction
We would like to thank the shareholders for supporting the reorganisation of
the company and appointing Gresham House Asset Management Limited as
Investment Adviser. We look forward to sustaining and enhancing the impressive
investment returns that have been achieved since inception in 2009. We are
pleased to report that the portfolio of assets owned by Hazel Renewable Energy
VCT2 plc ("the Company") extended its multi-year period of solid performance
in the year ending 30 September 2017. This was achieved in spite of a
significant headwind in the form of adverse weather conditions faced by all
owners of solar generation assets in the UK.
The portfolio was fully invested at the beginning of the year. Although there
were surplus proceeds from the refinancing carried out in March 2016, the need
to allow for all potential outcomes of the reorganisation of the Company meant
that these funds were maintained in cash.
The focus in the year was to generate as much yield as possible from the
portfolio, and to reduce risk to revenues over multiple years by building in
resilience through a new spare parts strategy and negotiating better insurance
terms.
Overall, the Company owns a well-diversified portfolio of assets of high build
quality. The ground-mounted sites and the solar installations located on the
roofs of residential properties owned by housing associations across the UK
have performed well over the years and account for circa ninety percent of the
cashflows and therefore the value. The small wind turbine portfolio and to a
lesser extent the small portfolio solar installations located on the roofs of
privately-owned houses and schools have performed less well over the years,
although the latter has done better than expected in the past year.
Overall Portfolio and Operational Review
We have set out below the framework we use to analyse the performance of the
portfolio of assets in this report. We base our analysis on three key factors:
The first are macro level factors and include inflation, wholesale power
prices, variable components of subsidies for renewable energy generation and
climactic conditions. The Investment Adviser has no control over this set of
factors. The second category covers the technical performance of an asset in
terms of energy generation for a given level of macro risk factors. The third
category covers costs. The Investment Adviser has much more control over the
second and third categories.
Starting with macro factors, inflation, a parameter that the portfolio is very
sensitive to (as a result of inflation-linked power subsidies) steadily
increased through the year. RPI (Retail Price Inflation) increased from 2.0%
to 3.9% over the year. The substantially higher level is yet to be reflected
in the tariffs as adjustments become effective in April, however this increase
is a very positive development for the portfolio since each 1% increase in
valuation, adds circa £100,000 to portfolio revenues.
Climactic conditions however were unfavourable. The amount of solar
irradiation falling on the solar panels showed a marked decline from prior
years. For the six ground-mounted solar power plants remunerated by
Feed-in-Tariffs (FiTs) that account for around 70% of the value of the
portfolio, irradiation fell 5.5% short of forecasts. Each 1% movement in
irradiation for this portfolio results in a £80,000 movement in revenues. For
the two ground-mounted sites remunerated by Renewable Obligation Certificates
(ROCs), irradiation came in line with forecasts due to one of the parks being
located on the East Anglia coast which typically experiences different weather
patterns than Central and Western England where the other parks are located.
Unlike the case with the ground-mounted sites where pyranometers are installed
to measure irradiation, we do not have the ability to measure irradiation at
the roof-mounted solar installations as installing pyranometers is not cost
effective.
It is extremely difficult to forecast irradiation on a year-by-year basis.
Conditions have been poor in the last two years and we hope that a
reversion-to-mean effect manifests itself in the next year.
Power prices drifted down moderately throughout the year, however the
portfolio's very low exposure to power prices (less than 5% of revenues are
currently from variable tariffs) means that this has a very modest impact.
Moving on to the second category, the technical performance of the assets. We
are pleased to report that the ground-mounted asset base that accounts for 79%
of the portfolio value, performed in line with expectations despite the fact
that we raised these expectations during the year. Performance would however
have come in better had there not been an outage of three weeks duration at
the point at which one of the ground-mounted sites connects to the electricity
grid. We expect to be partially compensated for this outage through
contractual terms in our Operations and Maintenance Agreement.
Outages that occur in the summer where energy generation is highest can result
in a significant revenue loss and we looked at ways in which we can minimise
the probability and magnitude of such losses. We renegotiated our insurance
policies for the ground-mounted assets taking advantage of more competition
and substantially better terms available in the insurance market, and are
pleased to report that the excess (deductible) is now ten days as opposed to
twenty-five days for allowable claims. We have also reviewed our spare parts
strategy for both the ground-mounted and rooftop-mounted solar installations
to improve the lead times of potential repairs and have ordered an additional
stock of spare parts that have long delivery times but negligible obsolescence
risk.
The reduced risk profile has helped us in our decision to reduce the discount
rate for the ground-mounted solar sites remunerated by FiTs by 25 basis
points.
The roof-mounted solar asset portfolio that accounts for circa 12% of the
overall valuation performed slightly ahead of expectations. Generation was 1%
better than forecast.
An area of the portfolio that experienced a significant underperformance is
the small wind portfolio. This portfolio accounts for around 10% of the
overall value of the portfolio. We were hopeful that the small uplift we
experienced in performance in the prior year would continue, however the
opposite has happened.
Around a third of the portfolio consists of Chinese-made Huaying HY-5 wind
turbines, some of which experienced significant technical and safety issues
during the high wind conditions that prevailed in February. Britwind, the O&M
Contractor, communicated that they would be unable to maintain these assets in
the future due to the poor technical quality of the turbines and lack of
support from the manufacturer, which invalidated our insurance coverage. This
combined with the safety/public liability implications forced us to put the
turbines on mechanical break.
One major disadvantage of this type of distributed asset is the difficulty of
finding qualified and experienced Operations and Maintenance Contractors that
can perform a decent quality service at a cost level that makes sense. We were
nevertheless able to identify an engineer willing to perform these services
and have tasked his firm with visiting and examining the installations and
putting back in operation those turbines that are safe and unlikely to
necessitate major repairs.
This has resulted in our decision to recommend a further impairment to the
value of this element of the portfolio - it is now valued at circa half the
original investment amount.
The third factor that determines performance is costs. Most of our work to
reduce controllable costs was done in the prior year where we renegotiated our
O&M and insurance contracts and achieved cost reductions of more than 50%. We
also achieved savings in bookkeeping and accounting costs.
This year however, we suffered the impact of a significant increase in
business rates. The Government decided to increase business rates by close to
three times for ground-mounted solar farms that were built in the 2010 to 2012
period and therefore earned very high FiTs. The impact on the portfolio is an
increase of £175,000 per year in the cost base once the taper period of three
years to moderate the impact is over.
There is the potential of further reductions in O&M costs as prices in the UK
become more aligned with those in Continental Europe, however the long-term
nature of our O&M contracts (a requirement under the debt facility agreements)
mean that we will not enjoy the benefits of such a realignment for several
years to come.
We are now working on achieving cost reductions in ancillary areas such as
electricity imports, communications, security and monitoring, however we do
not expect these savings to amount to more than £10,000 per annum across the
portfolios.
Portfolio Valuation
As at 30 September 2017, the combined NAV and Total Return stood at 115.0p and
154.5p respectively, an increase of 2.6p after adjusting for dividends paid
during the year of 5.0p. This year's increase, as was the case last year, has
come from the increase in market prices for renewable generation assets which
we have reflected in the lower (by 25 basis points) range we used to value the
ground-mounted, FiT remunerated solar sites that account for circa 70% of the
value of the portfolio.
In addition, our valuation assumptions incorporate a small increase in the
generation forecast. It would be extremely unlucky for the current poor
irradiation conditions to persist in the very long term and we have reduced
the weighting of the current year in our forecasts.
There have been no changes to discount rates used for other assets in the
portfolio or to inflation assumptions. Inflation has continued to increase
during the year and RPI has come in as high as 3.9% (as opposed to our
forecast for long term inflation of 3%) however we must take into account that
this increase could prove to be very transient.
Similar to last year, a significant portion of the valuation (circa
£10million in total with the Company's share being £5.0million - circa 18%
of the valuation) is comprised of cash balances held by investee companies.
Two thirds of this cash is held in reserves (for equipment replacement and
debt service in the case of a significant breach of debt terms) that are
mandatory under the debt facility agreements.
In the longer term the potential to capture residual value through the
extension of leases beyond their 25-year term and upgrading the equipment
using new technology with much better yields may arise. We witnessed this in
another transaction relating to an asset outside the Company's portfolio. It
is a given that subsidies will not be available and it is impossible to
predict power prices so far out in the future but upgrade costs are also
likely to be very low.
Other Developments
The Hazel Capital Team that has delivered market-leading performance in
shareholder value is now proud to be part of Gresham House plc, a fast-growing
publicly-quoted alternative asset manager. We believe these combined resources
will be of great benefit to shareholders as they will have the same core
investment team continuing to manage the portfolio as well as access to the
wider Gresham House team's experience in alternative asset management and
investor communication. On the latter point, Gresham House are working closely
with trusted advisers, clients and industry experts to develop a best-in-class
client portal, which will provide enhanced communication and high-quality
reporting to investors. The objective is to provide all shareholders with
secured access to the client portal during the first quarter of 2018.
Outlook
We will continue to target improvements in yield and reductions in risk across
the portfolio, and evaluate incremental maintenance capex decisions that have
the potential to generate high returns.
Should the opportunity occur to deploy the surplus cash proceeds held by
investee companies as a result of the March 2016 refinancing, we will seek
further investment opportunities such as the acquisition of small scale solar
sites or adding energy storage to existing projects in a way that does not
compromise the accreditation status.
Gresham House Asset Management Limited
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 30 September 2017:
Cost Valuation Valuation movement in year % of portfolio
£'000 £'000 £'000
Qualifying and part-qualifying investments
Lunar 2 Limited* 2,976 15,322 1,843 48.7%
Ayshford Solar (Holding) Limited* 1,928 3,154 164 10.0%
Lunar 1 Limited* 125 2,121 (65) 6.7%
New Energy Era Limited 884 1,390 (99) 4.4%
Hewas Solar Limited 1,000 1,355 (6) 4.3%
Vicarage Solar Limited 871 1,215 (88) 3.9%
Tumblewind Limited* 1,401 1,144 (65) 3.6%
Gloucester Wind Limited 1,000 953 (200) 3.0%
Minsmere Power Limited 975 729 (321) 2.3%
HRE Willow Limited 875 726 (44) 2.3%
Penhale Solar Limited 825 725 (10) 2.3%
St Columb Solar Limited 650 673 (17) 2.1%
Chargepoint Services Limited 500 500 - 1.6%
Small Wind Generation Limited 975 483 (100) 1.5%
Sunhazel UK Limited 1 - - 0.0%
14,986 30,490 992 96.6%
Non-qualifying investments
AEE Renewables UK 3 Limited 900 900 - 3.0%
900 900 - 3.0%
15,886 31,390 992 99.6%
Cash at bank and in hand 88 0.3%
Total investments 31,478 100.0%
* Part-qualifying investment
All venture capital investments are incorporated in England and Wales.
Hazel Renewable Energy VCT1 plc, of which Gresham House Asset Management
Limited ("GHAM") is the Investment Adviser, holds the same investments as
above.
Investment movements for the year ended 30 September 2017
DISPOSALS
Cost Valuation at 30 September 2016 Proceeds Profit vs cost Realised Gain
£'000 £'000 £'000 £'000 £'000
Qualifying and part-qualifying investments
Ayshford Solar (Holdings) Limited 552 506 552 - 46
552 506 552 - 46
Non-qualifying investments
Tumblewind Limited 37 37 37 - -
37 37 37 - -
589 543 589 - 46
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),
including Financial Reporting Standard 102, the financial reporting standard
applicable in the UK and Republic of Ireland (FRS 102). Under company law, the
Directors must not approve the financial statements unless they are satisfied
that they give a true and fair view of the state of affairs of the Company and
of the profit or loss of the Company for that period.
In preparing these financial statements the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and accounting estimates that are reasonable and prudent;
- state whether applicable UK accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements; and
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions, to disclose with
reasonable accuracy at any time the financial position of the Company and to
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
In addition, each of the Directors considers that the Annual Report, taken as
a whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's performance, business model
and strategy.
INCOME STATEMENT
for the year ended 30 September 2017
Year ended 30 September 2017 Year ended 30 September 2016
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Income 492 - 492 1,784 - 1,784
Gain on investments - 1,038 1,038 - 376 376
492 1,038 1,530 1,784 376 2,160
Investment advisory fees (427) (143) (570) (432) (144) (576)
Other expenses (308) - (308) (293) (72) (365)
(Loss)/profit on ordinary activities before tax (243) 895 652 1,059 160 1,219
Tax on total comprehensive income and ordinary activities - - - - - -
(Loss)/profit for the year and total comprehensive income (243) 895 652 1,059 160 1,219
Basic and diluted earnings per share:
Ordinary Share (1.0p) 3.6p 2.6p 4.3p 0.6p 4.9p
'A' Share - - - - - -
All Revenue and Capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued during the year. The
total column within the Income Statement represents the Statement of Total
Comprehensive Income of the Company prepared in accordance with Financial
Reporting Standards ("FRS 102"). The supplementary revenue and capital return
columns are prepared in accordance with the Statement of Recommended Practice
issued in November 2014 by the Association of Investment Companies ("AIC
SORP").
Other than revaluation movements arising on investments held at fair value
through the profit and loss, there were no differences between the return/loss
as stated above and at historical cost.
BALANCE SHEET
as at 30 September 2017
2017 2016
£'000 £'000 £ '000 £'000
Fixed assets
Investments 31,390 30,941
Current assets
Debtors 447 420
Cash at bank and in hand 88 4
535 424
Creditors : amounts falling due within one year (68) (161)
Net current assets 467 263
Total Assets less net current assets 31,857 31,204
Creditors: amounts falling due after more than one year (3,660) (2,434)
Net assets 28,197 28,770
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 9,840 11,065
Revaluation reserve 15,504 14,466
Capital reserve - realised (1,200) (1,057)
Revenue reserve 6 249
Total Shareholders' funds 28,197 28,770
Basic and diluted net asset value per share
Ordinary Share 114.9p 117.3p
'A' Share 0.1p 0.1p
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2017
Called up share capital Share Premium Account Special Reserve Revalua-tion reserve Capital reserve realised Revenue reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Year ended 30 September 2016
At 30 September 2015 62 3,985 12,402 14,090 (841) (810) 28,888
Total comprehensive income - - - 370 (210) 1,059 1,219
Transactions with owners
Dividend paid - - (1,226) - - - (1,226)
Repurchase and cancellation of own shares - - (111) - - - (111)
Transfer between reserves - - - 6 (6) - -
At 30 September 2016 62 3,985 11,065 14,466 (1,057) 249 28,770
Year ended 30 September 2017
At 30 September 2016 62 3,985 11,065 14,466 (1,057) 249 28,770
Total comprehensive income - - - 992 (97) (243) 652
Transactions with owners
Dividends Paid - - (1,225) - - - (1,225)
Transfer between reserves - - - 46 (46) - -
At 30 September 2017 62 3,985 9,840 15,504 (1,200) 6 28,197
CASH FLOW STATEMENT
for the year ended 30 September 2017
Year ended 30 September 2017 Year ended 30 September 2016
£'000 £'000
Net cash inflow/(outflow) from operating activities (504) 786
Cash flows from investing activities
Purchase of investments - (1,057)
Proceeds from disposal of investments 589 1,148
Net cash inflow from investing activities 589 91
Net cash inflow before financing activities 85 877
Cash flows from financing activities
Equity dividends paid (1,225) (1,226)
Long term loans 1,224 448
Purchase of own shares - (111)
Net cash outflow from financing activities (1) (889)
Net increase/(decrease) in cash 4 (12)
Cash and cash equivalents at start of year 84 16
Cash and cash equivalents at end of year 88 4
Cash and cash equivalents comprise
Cash at bank and in hand 88 4
Total cash and cash equivalents 88 4
NOTES TO THE ACCOUNTS
for the year ended 30 September 2017
1. General Information
Hazel Renewable Energy VCT1 plc ("the Company") is a venture capital trust
established under the legislation introduced in the Finance Act 1995 and is
domiciled in the United Kingdom and incorporated in England and Wales.
2. Accounting policies
Basis of accounting
The Company has prepared its financial statements under FRS 102 'The Financial
Reporting Standard applicable in the UK and Republic of Ireland' and in
accordance with the Statement of Recommended Practice "Financial Statements of
Investment Trust Companies and Venture Capital Trusts" issued by the
Association of Investment Companies ("AIC") revised November 2014 ("SORP") as
well as the Companies Act 2006.
The Company implements new Financial Reporting Standards ("FRS") issued by the
Financial Reporting Council when they become effective.
The financial statements are presented in Sterling (£).
Presentation of income 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 FRS 102 Sections 11 and 12.
For unquoted investments, fair value is established by using the IPEV
guidelines. The valuation methodologies for unquoted entities used by the IPEV
to ascertain the fair value of an investment are as follows:
- Price of recent investment;
- Multiples;
- Net assets;
- Discounted cash flows or earnings (of underlying business);
- Discounted cash flows (from the investment); and
- Industry valuation benchmarks.
The methodology applied takes account of the nature, facts and circumstances
of the individual investment and uses reasonable data, market inputs,
assumptions and estimates in order to ascertain fair value.
Gains and losses arising from changes in fair value are included in the Income
Statement for the year as a capital item and transaction costs on acquisition
or disposal of the investment are expensed. Where an investee company has gone
into receivership or liquidation, or administration (where there is little
likelihood of recovery), the loss on the investment, although not physically
disposed of, is treated as being realised.
It is not the Company's policy to exercise controlling influence over investee
companies. Therefore, the results of these companies are not incorporated into
the Income Statement except to the extent of any income accrued. This is in
accordance with the SORP and FRS 102 sections 14 and 15 that does not require
portfolio investments, where the interest held is greater than 20%, 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 advisory fees to the revenue account and 25% to the capital account
to reflect the Board's estimated split of investment returns which will be
achieved by the Company over the long term.
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 as set out in Note
10 of the annual report) 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.
3. Income
Year ended 30 September 2017 Year ended 30 September 2016
£'000 £'000
Income from investments
Loan stock interest 185 198
Dividend Income 307 1,586
492 1,784
Other income
Bank interest - -
492 1,784
4. Basic and diluted earnings per share
Weighted average number of shares in issue Revenue (loss)/ return Capital return
Profit/(loss) per share is calculated on the following: £'000 per share £'000 per share
Year ended 30 September 2017 Ordinary Shares 24,504,858 (24) (1.0) 89 3.6
'A' Shares 36,799,133 (1) - 1 -
Year ended 30 September 2016 Ordinary Shares 24,576,029 1,057 4.3 160 0.6
'A' Shares 36,875,592 2 - - -
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.
5. Basic and diluted earnings per share
Shares in issue 2017 2016
2017 2016 Net asset value Net asset value
per share £'000 per share £000
Ordinary Shares 24,504,858 24,504,858 114.9 28,160 117.3 28,733
'A' Shares 36,799,133 36,799,133 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.
6. 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:
- Market risks;
- Credit risk; and
- Liquidity risk.
The Board regularly reviews these risks and the policies in place for managing
them. There have been no significant changes to the nature of the risks that
the Company was expected to be exposed to over the year and there have also
been no significant changes to the policies for managing those risks during
the year.
The risk management policies used by the Company in respect of the principal
financial risks and a review of the financial instruments held at the year end
are provided below:
Market risks
As a VCT, the Company is exposed to investment risks in the form of potential
losses and gains that may arise on the investments it holds in accordance with
its investment policy. The management of these investment risks is a
fundamental part of investment activities undertaken by the Investment Adviser
and overseen by the Board. The Adviser monitors investments through regular
contact with management of investee companies, regular review of management
accounts and other financial information and attendance at investee company
board meetings. This enables the Adviser to manage the investment risk in
respect of individual investments. Investment risk is also mitigated by
holding a diversified portfolio spread across various business sectors and
asset classes.
The key investment risks to which the Company is exposed are:
- Investment price risk; and
- Interest rate risk
Investment price risk
The Company's investments which comprise both equity and debt financial
instruments in unquoted investments are all in renewable energy projects with
predetermined expected returns. Consequently, the investment price risk arises
from uncertainty about the future prices and valuations of financial
instruments held in accordance with the Company's investment objectives which
can be influenced by many macro factors such as changes in interest rates,
electricity power prices and movements in inflation. It represents the
potential loss that the Company might suffer through changes in the fair value
of unquoted investments that it holds.
At 30 September 2017, the unquoted portfolio was valued at £31,390,000 (2016:
£30,941,000). The key inputs to the valuation models are electricity power
prices, inflation and discount factors. The Board considers that the most
significant of these is discount factors and inflation, and has undertaken
some sensitivity analysis into the movement of these.
The analysis below is provided to illustrate the sensitivity of the fair value
of investments to an individual input, while all other variables remain
constant. The Board considers these changes in inputs to be within reasonable
expected ranges. This is not intended to imply the likelihood of change or
that possible changes in value would be restricted to this range. The possible
effects are quantified below.
Input Base case Change in input Change in fair value of investments Change in NAV per share
£'000 pence
Discount rate 6.5% - 7.25% +0.5% (1,870) (7.6)
-0.5% 1,985 8.1
Inflation 3.0 - 3.2% -0.5% (2,142) (8.7)
+0.5% 2,172 8.9
Power prices
The Board has considered the potential impact of changes in power prices in
the future and have concluded than the impact of any foreseeable increases or
decreases will not be significant to the valuation of the portfolio as a
substantial proportion of the total income generated by the portfolio is
derived from Feed in Tariffs and Renewable Obligation Certificates.
Asset life
The Board has also considered the potential impact of changes to the
anticipated lives of assets in the portfolio. Close to ninety percent of the
Company's value is in assets refinanced by debt, and under the debt facility
agreements, substantial reserves are in place for renewing key equipment as
and when required. Furthermore, the underlying assets have leases that are
valid for the lifetime of the Company and cannot be terminated early.
Accordingly the Board does not consider that there will be any significant
impact to investment valuations as a result of asset lives varying from those
currently anticipated.
Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial
assets through the effect of changes in prevailing interest rates. The Company
receives interest on its cash deposits at a rate agreed with its bankers.
Where Investments in loan stock attract interest, this is predominately
charged at fixed rates. A summary of the interest rate profile of the
Company's investments is shown below.
There are three categories in respect of interest which are attributable to
the financial instruments held by the Company as follows:
- "Fixed rate" assets represent investments with predetermined yield targets
and comprise certain loan note investments and preference shares;
- "Floating rate" assets predominantly bear interest at rates linked to The
Bank of England base rate or LIBOR and comprise cash at bank; and
- No interest rate" assets do not attract interest and comprise equity
investments, certain loan note investments, loans and receivables and other
financial liabilities.
Average Average period 2017 2016
interest rate until maturity £'000 £'000
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