REG-Hazel Renewable Energy VCT 2 plc : Half-yearly report <Origin Href="QuoteRef">HR2O.L</Origin>
28/06/2017 18:00
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Hazel Renewable Energy VCT2 plc
Half-Yearly Report for the six months ended 31 March 2017
Performance summary
31 Mar 2017 30 Sep 2016 31 Mar 2016
Pence Pence Pence
Net asset value per Ordinary Share 115.5 117.3 116.6
Net asset value per 'A' Share 0.1 0.1 0.1
Cumulative dividends per Ordinary Share 34.5 34.5 29.5
Total return per Ordinary Share and 'A' Share 150.1 151.9 146.2
CHAIRMAN'S STATEMENT
I present the Company's half-yearly report for the six months ended 31 March
2017.
As Shareholders will be aware, a General Meeting took place in January for
Shareholders to vote on whether the Company should continue as a Venture
Capital Trust for a further five years. Shareholders voted against the
resolution and, as a result, the Board is now working on proposals for the
voluntary liquidation, reconstruction or other reorganisation of the Company.
Investments
At the period end, the Company held a portfolio of 17 investments with a value
of £30.9 million which were spread across the ground mounted solar, roof
mounted solar and small wind sectors. There have been no additions to or
disposals from the portfolio during the period.
The portfolio companies have continued to perform in line with expectations
over the period under review, in some cases benefitting from improved rates on
Operations and Maintenance contracts that the Investment Advisor has been able
to negotiate. The Board has reviewed the valuations at the period end and
agreed that no adjustments to the investment valuations were required.
Further detail on the investments is provided in the Investment Advisor's
report.
Net asset value and results
At 31 March 2017, the net asset value ("NAV") per Ordinary Share stood at
115.5p and the NAV per 'A' Share stood at 0.1p, producing a combined total of
115.6p. This represents a small fall of 1.8p since the 30 September 2016 year
end as the VCT's running costs have exceeded income from the assets over the
winter period when solar irradiation is at its lowest.
Total Return (total NAV plus cumulative dividends paid to date) stands 150.1p
for a holding of one Ordinary Share and one 'A' Share, compared to the cost
for subscribers in the original share offer, net of income tax relief, of
70.0p. The Directors consider this to be an excellent result for Shareholders
to date.
The loss on ordinary activities after taxation for the period as shown in the
Income Statement was £428,000, equivalent to 1.8p per Ordinary Share. This
loss arises as the investee companies have not paid any dividends to the VCT
during the period as a result of the seasonality of the income for most of the
assets. VCT running costs for this period have therefore exceeded income.
Dividends
In line with the Company's policy a dividend of 5.0p per Ordinary Share will
be paid on 15 September 2017 to Shareholders on the register at 18 August
2017.
Directorate
As I mentioned in my statement in the Annual Report, Matthew Evans joined the
Board as a non-executive director on 31 January 2017. Matthew is proving to be
a very useful addition to the Board, which now comprises three non-executive
directors. The Directors believe this is an appropriate size for the Company.
Future Strategy
As mentioned above, shareholders have voted against the Company continuing as
a Venture Capital Trust for a further five years. As your Company has a close
relationship with Hazel Renewable Energy VCT1 plc ("Hazel 1"), with which it
has co-invested on all its investments, the Board has been working with the
Hazel 1 Board, seeking to develop proposals that will best meet the
requirements of all shareholders.
To this end, the Companies have appointed a consultant to run this process and
have engaged with several parties, including Hazel Capital, the Investment
Advisor, with the objective of preparing formal proposals. The final proposals
are expected to provide some Shareholders with an option to exit from their
investment while maintaining viable vehicles for those Shareholders that wish
to continue holding their investment.
We anticipate that these proposals will be ready to present to Shareholders in
the late summer.
Share buybacks
In view of the ongoing review of future strategy, the Board has suspended
share buybacks for the time being. These may be re-introduced when the plans
for the future of the Company have become clearer.
No shares were purchased in the period.
Outlook
There are a number of differing views amongst the shareholder base of the
Company, and Hazel 1, as to what investors wish to see from the companies and
their investments in the future. The Board has been presented with a
significant challenge to structure a plan that can meet the requirements of
all Shareholders, but is working towards proposals which it believes can be
flexible enough to satisfy most Shareholders.
This process is made a little easier by the fact that the Company continues to
hold a robust portfolio of renewable energy assets which is producing
satisfactory returns and is expected to continue to do so well into the
future.
I look forward to presenting proposals to Shareholders in the coming months.
Peter Wisher
Chairman
INVESTMENT MANAGER'S REPORT
We are pleased with the overall performance of the portfolio in the half year
ending 31 March 2017.
The portfolio consists of assets of a high build quality that are standing the
test of time well. Most of them have been inspected at different points in
time and have passed with flying colours, especially the solar assets. The
strong O&M contracts we have as well as the right monitoring and risk
management strategy we are implementing suggest that performance will remain
strong in the future.
The major assets of the portfolio have performed well during this period.
Where we have had issues these have been primarily limited to segments of the
portfolio that make a very small contribution to total NAV. We have also
been able to achieve significant cost savings primarily through the
renegotiation of Operations and Maintenance ("O&M") contracts for these
assets.
There are three sets of key factors we look at to determine the overall
performance of the portfolio; macro factors (such as inflation, power prices,
ROC recycle values and climactic conditions), technical performance and
operating costs.
As investment managers, we have control over the latter two factors but macro
factors are outside our control.
Macro factors were marginally unfavourable overall in the latest period.
Inflation was higher with UK RPI increasing from 2% to 3.1%, although the
benefits of this will not be felt until next year. In terms of weather
conditions for our solar and wind assets, solar irradiation was in line with
expectations while average wind speeds were not at all favourable.
In more detail, the ground mounted solar installations, accounting for over
75% of the NAV, performed substantially better than the roof-mounted solar
installations which are primarily located in northern parts of the UK and are
hence more susceptible to shadowing effects in the dark months of the year.
Power prices fluctuated significantly during the period but ended the half
year at levels similar to where they started. A spike in power prices during
the period had little positive impact on the portfolio, as over 80% of the NAV
is concentrated on projects remunerated under the Feed-in-Tariff (FIT) regime,
where over 90% of revenues are fixed. Finally, the ROC recycle price (which
affects two of our solar projects) remained at zero due to surge in renewable
energy generation capacity that has been deployed. This is despite the
commitment enshrined in the ROC regime that they should reach 10% of the ROC
buyout price.
The portfolios benefit from inflation as the electricity tariffs earned by
renewable energy generation installations are revised upwards every April with
inflation (with reference to RPI the October before). All else being equal a
1% increase in inflation increases cash available for distribution by c.3%.
Tariffs were adjusted upwards in April by 2.51% which means that there was no
benefit accruing to the portfolio in the last half year but we look forward to
this contributing in future periods.
In terms of technical performance, the ground mounted solar installations
performed in line with the expectations set at the time of acquisition of the
projects. For one of the sites there was an outage in October at the point
of connection to the electricity grid which is outside the site boundary and
under the exclusive control of the local electricity network operator. This
meant that although the site was capable of generating power, it could not
export this power to the grid. All the sites are insured with business
interruption insurance for this type of event, although, in this case, the
duration was less than the minimum excess set under the policy. The impact on
the portfolio was to reduce revenues portfolio by 1.5%, all else being
equal. This is the sort of rare event over which a manager has little
control.
In the period, we undertook a new risk assessment study based on our
experience to date with the purpose of identifying areas where a small
incremental investment could drastically reduce the likelihood of low
probability but high impact outages within a project's boundary. We took
into account the age of the equipment as well as the fact that some brands of
equipment are getting more difficult to source. Three areas we identified as
having a high pay-off. These are longer lead time items such as meters and
switchgear. A modest incremental investment has resulted in sufficient spares
to avoid such an event across the four larger FiT-remunerated sites that
generate around 75% of overall portfolio revenues (but a smaller percentage of
cashflow today due to debt obligations).
Rooftop installations, which represent circa 18% of the NAV mostly performed
well. The only ongoing challenge relates to detailed monitoring as it is not
cost effective to put equipment on the c. 1,500 small installations that the
portfolio owns. As a result, some of the installations can be affected by
communication problems which prevent metering data being reported for revenue
collection purposes. This is a widespread occurrence across similar solar
portfolios and its effect is only limited to timing of revenue receipts.
The small wind turbine portfolio which accounts for 7% of the total NAV
suffered a run of sub-par performance exacerbated by poor wind conditions. One
third of the fleet consists of Huaying HY-5 turbines which have performed
poorly from the start. We had initiated a maintenance capital expenditure
programme to improve performance. However, this has now been put on hold due
to mechanical failure on two Huaying turbines meaning that most of these
turbines have been put on mechanical break as we perform a safety review.
As to costs, we have renegotiated the O&M contracts for the four largest
FiT-remunerated ground-mounted solar assets, and now pay around half of what
we were paying last year, as well as improving contractual provisions. A
further 10% reduction will come through if we extend the contracts beyond the
one-year term, which can be done once there is clarity on the final outcome of
the continuation vote process.
We are working on achieving further cost savings through lower bills for
services such as electricity (incoming), mobile and broadband communications
and security and monitoring.
There is also scope to renegotiate some terms of the debt facility that was
put in place in December 2013. We will report on this at a future date
but, for example, as the prices of inverters and modules is now much lower
than in 2013, the reserves are now sufficient to replace most inverters and a
significant sub-set of the entire module stock across the six sites in
question.
There is the potential for a negative development on the cost side, beyond the
manager's control: there are proposals that, if finally implemented, could
increase the business rates that the FiT-remunerated sites are paying, by
increasing the rateable value, significantly. A decision on these proposals is
due in the near future.
Year over year, energy production has been at the same level as it was during
the half year to March 2016, when climactic conditions were also slightly
unfavourable. Production in this period accounts for around a third of annual
output, and even a single good month in the summer season would be sufficient
to redress the effect over the full year.
Looking into the future, the increase in inflation will impact the portfolio
positively, as will more favourable weather conditions than those which have
been experienced over the last 18 months.
Investment Strategy, Valuation and Dividends There is a substantial amount of
cash in the portfolio as only 30% of the refinancing transaction proceeds from
last year were reinvested. However the Board has halted new investment pending
the outcome of the process that began with the continuation vote in January
2017. Share buy backs, inter alia, would be a good use of this cash.
The portfolio is capable of generating a very attractive dividend profile
which will increase over time as inflation filters through, operating costs
are released further, cash in reserves are released and leverage is paid off.
The government has closed all avenues that enable investors to enjoy the
regular and predictable income streams for renewable generation assets in a
tax free manner. In our view, this means that the portfolio has scarcity value
as well, in our view.
We are working with the Board to reach a solution that will allow investors
who have voted in favour of continuation to continue enjoying increasing tax
free dividends, and those investors who want to sell to exit at an attractive
price.
We look forward to the next half year and building on the progress we achieved
in the six months ended March 2017.
As a final comment, Hazel Capital has announced that it has agreed terms for
its acquisition by Gresham House plc. This is a very positive development
which will strengthen the Hazel Capital team and improve its ability to
perform its services. The transaction is expected to complete in the third
quarter of 2017.
Ben Guest
Managing Partner
Hazel Capital LLP
UNAUDITED SUMMARISED BALANCE SHEET
as at 31 March 2017
31 Mar 2017 31 Mar 2016 30 Sep 2016
£'000 £'000 £'000
Fixed assets
Investments 30,941 30,071 30,941
Current assets
Debtors (including accrued income) 484 452 420
Cash at bank and in hand 7 21 4
491 473 424
Creditors: amounts falling due within one year (45) (96) (161)
Net current assets/(liabilities) 446 377 263
Total assets less net current assets/(liabilities) 31,387 30,448 31,204
Creditors: amounts falling due after more than one year (3,045) (1,730) (2,434)
Net assets 28,342 28,718 28,770
Capital and reserves
Called up share capital 62 62 62
Share premium 3,985 3,985 3,985
Special reserve 11,065 12,402 11,065
Revaluation reserve 14,466 14,096 14,466
Capital reserve - realised (1,187) (913) (1,057)
Revenue reserve (49) (914) 249
Equity shareholders' funds 28,342 28,718 28,770
Net asset value per Ordinary Share 115.5p 116.6p 117.3p
Net asset value per 'A' Share 0.1p 0.1p 0.1p
115.6p 116.7p 117.4p
STATEMENT OF CHANGES IN EQUITY
for the six months ended 31 March 2017
Called up share capital Share premium account Special reserve Revaluation reserve Capital reserve - realised Revenue reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Six months ended 31 March 2016
At 30 September 2015 62 3,985 12,402 14,090 (841) (810) 28,888
Gains on investments - - - 6 - - 6
Expenses capitalised - - - - (72) - (72)
Retained revenue - - - - - (104) (104)
At 31 March 2016 62 3,985 12,402 14,096 (913) (914) 28,718
Year ended 30 September 2016
At 30 September 2015 62 3,985 12,402 14,090 (841) (810) 28,888
Gains on investments - - - 370 6 - 376
Expenses capitalised - - - - (216) - (216)
Retained revenue - - - - - 1,059 1,059
Transfer between reserves - - - 6 (6) - -
Repurchase and cancellation of own shares - - (111) - - - (111)
Dividend paid - - (1,226) - - - (1,226)
At 30 September 2016 62 3,985 11,065 14,466 (1,057) 249 28,770
Six months ended 31 March 2017
At 30 September 2016 62 3,985 11,065 14,466 (1,057) 249 28,770
Gains on investments - - - - - - -
Expenses capitalised - - - - (130) - (130)
Retained revenue - - - - - (298) (298)
At 31 March 2017 62 3,985 11,065 14,466 (1,187) (49) 28,342
UNAUDITED INCOME STATEMENT
for the six months ended 31 March 2017
Six months ended 31 Mar 2017 Six months ended 31 Mar 2016 Year ended 30 Sep 2016
Revenue Capital Total Revenue Capital Total Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Income 6 - 6 267 - 267 1,784
Gains on investments - - - - 6 6 376
- - - 267 6 273 2,160
Investment management fees (215) (72) (287) (216) (72) (288) (576)
Other expenses (89) (58) (147) (155) - (155) (365)
(Loss)/return on ordinary activities before taxation (298) (130) (428) (104) (66) (170) 1,219
Tax on total comprehensive income and ordinary activities - - - - - - -
(Loss)/return attributable to equity shareholders (298) (130) (428) (104) (66) (170) 1,219
Return per Ordinary Share (1.2p) (0.6p) (1.8p) (0.4p) (0.3p) (0.7p) 4.9p
Return per 'A' Share - - - - - - -
The total column within the Income Statement represents the Statement of Total
Comprehensive Income of the Company prepared in accordance with Financial
Reporting Standards ("FRS102"). 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").
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 CASH FLOW STATEMENT
for the six months ended 31 March 2017
31 Mar 2017 31 Mar 2016 30 Sep 2016
£'000 £'000 £'000
Net cash outflow from operating activities (606) (328) 786
Cash flows from investing activities
Purchase of investments - (558) (1,057)
Sale of investments - 1,148 1,148
Net cash inflow from investing activities - 590 91
Net cash inflow/(outflow) before financing activities (606) 262 877
Cash flows from financing activities
Equity dividends paid - - (1,226)
Long term loans 609 (257) 448
Purchase of own shares - - (111)
Net cash (outflow)/inflow from financing activities 609 (257) (889)
Increase/(decrease) in cash 3 5 (12)
Notes to the cash flow statement:
1 Cash (outflow)/inflow from operating activities
(Loss)/return on ordinary activities before taxation (429) (170) 1,219
Gains on investments - (6) (376)
Increase in other debtors (62) (90) (58)
(Decrease)/increase in other creditors (115) (62) 1
Net cash outflow from operating activities (606) (328) 786
2 Analysis of net funds
Beginning of period 4 16 16
Net cash inflow/(outflow) 3 5 (12)
End of period 7 21 4
SUMMARY OF INVESTMENT PORTFOLIO
as at 31 March 2017
Cost Valuation Unrealised gain in period % of portfolio by value
£'000 £'000 £'000
Qualifying and partially qualifying investments
Lunar 2 Limited* 2,976 13,479 - 43.6%
Ayshford Solar (Holding) Limited* 2,480 3,496 - 11.3%
Lunar 1 Limited* 125 2,186 - 7.1%
New Energy Era Limited 884 1,489 - 4.8%
Hewas Solar Limited 1,000 1,361 - 4.4%
Vicarage Solar Limited 871 1,303 - 4.2%
Tumblewind Limited* 1,438 1,246 - 4.0%
Gloucester Wind Limited 1,000 1,153 - 3.7%
Minsmere Power Limited 975 1,050 - 3.4%
HRE Willow Limited 875 770 - 2.5%
Penhale Solar Limited 825 735 - 2.4%
St. Columb Solar Limited 650 690 - 2.2%
Small Wind Generation Limited 975 583 - 1.9%
Chargepoint Services Limited 500 500 - 1.6%
Sunhazel UK Limited 1 - - 0.0%
15,575 30,041 - 97.1%
Non qualifying investments
AEE Renewables UK 3 Limited 900 900 - 2.9%
900 900 - 2.9%
16,475 30,941 - 100.0%
Cash at bank and in hand 7 0.0%
Total investments 30,948 100.0%
* Part-qualifying investment
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
1. General information
Hazel Renewable Energy VCT2 plc ("the Company") is a venture capital trust
established under the legislation introduced in the Finance Act 1995 and is
domiciled in the United Kingdom and incorporated in England and Wales.
2. Accounting policies - Basis of accounting
The unaudited half-yearly results cover the six months to 31 March 2017 and
have been prepared in accordance with the accounting policies set out in the
annual accounts for the year ended 30 September 2016 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") revised
November 2014.
3. All revenue and capital items in the Income Statement derive from
continuing operations.
4. The Company 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
24,504,860 Ordinary Shares and 36,799,133 'A' Shares, being the number of
shares in issue at the period end.
6. Return per share for the period has been calculated on 24,504,860 Ordinary
Shares and 36,799,133 'A' Shares, being the weighted average number of shares
in issue during the period.
7. Dividends
Period ended 31 Mar 2017 Year ended 30 Sep 2016
Revenue Capital Total Total
£'000 £'000 £'000 £'000
Paid in period
2016 Interim Ordinary - 5.0p - - - 1,226
- - - 1,226
Forthcoming dividends
2017 Interim Ordinary - 5.0p - 1,226 1,226 -
- 1,226 1,226 -
8. Reserves
Period ended 31 Mar 2017 Year ended 30 Sept 2016
£'000 £'000
Share premium reserve 3,985 3,985
Special reserve 11,065 11,065
Revaluation reserve 14,466 14,466
Capital reserve-realised (1,187) (1,057)
Revenue reserve (49) 249
28,280 28,708
The Revenue reserve, Capital reserve - realised and Special reserve are
distributable reserves. The distributable reserve is reduced by unrealised
holding losses of £598,703 which are included in the Revaluation reserve.
Distributable reserves at 31 March 2017 were £9,231,835.
9. Risks and uncertainties
Under the Disclosure and Transparency Directive, the Board is required in the
Company's half-year results to report on principal risks and uncertainties
facing the Company over the remainder of the financial year.
The Board has concluded that the key risks facing the Company 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; and
(iii) failure to maintain approval as a VCT.
In order to make VCT qualifying investments, the Company has to invest in
small businesses which are often immature. The Investment Manager follows a
rigorous process in vetting and careful structuring of new investments and,
after an investment is made, close monitoring of the business is conducted.
The Manager 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 Company's compliance with the VCT regulations is continually monitored by
the Administration Manager, who reports regularly to the Board on the current
position. The Company has appointed Philip Hare & Associates LLP, who will
work closely with the Investment Manager 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.
10. Going concern
The Directors have reviewed the Company's financial resources at the period
end and conclude that the Company is well placed to manage its business risks.
The Board confirms that it is satisfied that the Company has adequate
resources to continue in business for the foreseeable future. For this reason,
the Board believes that the Company continues to be a going concern and that
it is appropriate to apply the going concern basis in preparing the financial
statements.
11. 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.
12.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 financial 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.
13. Copies of the Half-Yearly Report will be sent to Shareholders shortly.
Further copies can be obtained from the Company's registered office or can be
downloaded from www.downing.co.uk.
This announcement is distributed by Nasdaq Corporate Solutions on behalf of
Nasdaq 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.
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