Hazel Renewable Energy VCT 2 plc : Annual Finan...

Hazel Renewable Energy VCT2 plc
Final results for the year ended 30 September 2016

 

FINANCIAL HIGHLIGHTS

			Audited		Audited
			Year End		Year End
			30 September 2016		30 September 2015
			Pence		Pence
Net asset value per Ordinary Share			117.3		117.3
Net asset value per 'A' Share			0.1		0.1
Cumulative Dividends paid			34.5		29.5
Total return per Ordinary Share and 'A' Share			151.9		146.9

CHAIRMAN'S STATEMENT
I present the Annual Report for Hazel Renewable Energy VCT2 plc for the year ended 30 September 2016. As Shareholders will be aware, there has been a heavy focus in recent months on considering the future of the Company and a general meeting took place on 19 January 2017 for Shareholders to vote on this. The results of this meeting are discussed below.

Although the above work has taken up a considerable amount of both the Board's and the Investment Manager's time, it is pleasing to report that the investment performance has continued to be satisfactory during the year, with a further small uplift in NAV per share being recorded.

Investment portfolio
There was limited investment activity during the year and, at the year end, the Company held a portfolio of 16 investments with a total value of £30.9 million.

As usual, the Board has reviewed the investment valuations and made some minor adjustments to the fair values, resulting in a net unrealised gain of £370,000.

Net asset value and results
At 30 September 2016, 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 5.0p (4.3%) 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 34.5p. Total Return (NAV plus cumulative dividends paid to date) now stands at 151.9p, 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 £1.2 million, comprising a surplus of £1.0 million on the revenue account and £0.2 million on the capital account.

Dividends
A dividend of 5.0p per Ordinary Share paid was paid on 16 September 2016. 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.

Share Buybacks
During the year, the Company acquired 98,300 'Ordinary' Shares and 105,600 'A' Shares for cancellation at an average price of 111.0p and 0.1p per share respectively.

In view of the ongoing review in respect of the future of the Company, the Company will not make any further purchases of shares for the time being.

Future strategy
At the General Meeting that took place on 19 January 2017, the Company's Shareholders voted against the Company continuing as a VCT. At a meeting of Shareholders of the sister company, Hazel Renewable Energy VCT1 plc ("Hazel 1"), Shareholders voted the opposite way and were in favour of continuing.

The Articles of Association now require that the Board puts formal proposals to Shareholders for a winding up, reorganisation or other reconstruction by 19 May 2017. The Board will work closely with the Board of Hazel 1 to see if a plan can be devised that provides all Shareholders with a satisfactory outcome, including Shareholders that may wish to continue with their investment. However, Shareholders should note that the ultimate result may be that both Companies wind up.

Board
Since March 2016, the Board has comprised two directors. In view of the work described above that the Directors will now undertake to identify proposals for the future of the Company, the directors have decide to appoint Matthew Evans as an additional non-executive director. The existing directors believe that Matthew will be a valuable addition to the Board and will be helpful in helping to shape proposals for the future of the Company.  Matthew will be well-known to some shareholders as a director of JL Strategies Limited, a founding partner of LGT Vestra and, more recently, a founding partner of CH1 Investment Partners.

Annual General Meeting
The Company's sixth AGM will be held at Ergon House, Horseferry Road, London SW1P 2AL at 11.35 a.m. on 13 March 2017.

One item of special business will be proposed in respect of share buybacks.

Outlook
Although the result of the EU referendum and plans for Brexit might have some significant effect on the macro economic environment in the medium and long term, the Board believes the impact on the Company will be reasonably small. The Company is effectively fully invested in a portfolio of projects with long term, Government backed agreements in place. This should ensure a relatively stable outlook in terms of expected performance of the assets. The Board will, of course, continue to monitor developments.

The Board remains pleased with the performance of the Company to date. The vote by Shareholders against continuing is a disappointment, however the Board understands that a significant proportion of Shareholders wish to realise their investment. Work is now underway to produce a plan that provides a satisfactory route for Shareholders as a whole. The Board expects to present formal proposals to Shareholders in May.

Peter Wisher
Chairman

INVESTMENT MANAGER'S REPORT

Introduction
The year ended 30 September 2016 has been another good year for Hazel Renewable Energy VCT2 plc (the Company).

The portfolio was fully invested at the beginning of the financial year, and we had set ourselves the objectives of 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.

We continuously seek to improve the operational performance of the asset base by examining the performance of each installation in detail, closely taking into account factors specific to the installation, as well as our knowledge of the type of technical installation that is in place. We also review the operations maintenance ("O&M") process from the point of view of its impact on performance. For the year in question, we have focused both on the ground-mounted solar assets that form the majority of the asset base, as well as the small wind turbine and roof-mounted solar system portfolios.

In terms of financial performance, our primary focus was on successfully concluding the refinancing transaction ("Project Surya") that pooled together the Ayshford Court and Priory Farm ground-mounted solar assets that are remunerated under the Renewable Obligation Certificate ("ROC") mechanism as well as the circa 1,200 roof-mounted solar installations that are located on properties owned by housing associations in England, Wales and Scotland and are remunerated under the Feed-in-Tariff ("FiT") mechanism.

This transaction was finalised at the beginning of March. The terms were very attractive, the interest rate was at 1.54% plus inflation, which is one of the lowest refinancing interest rates we have come across in the market.

The purpose of the refinancing was to deploy the proceeds into investments that could yield substantially higher than the refinancing rate as well as secure a cash buffer that could be used to fund repurchases of the Company's shares.

We were able to deploy close to 20 percent of the net proceeds into purchasing the interests of the minority shareholders in the special purpose vehicle ("SPV") that owns the very well-performing Ayshford Court asset. In May we also concluded a £1 million investment into Chargepoint Services Limited, a company that develops electric vehicle charging infrastructure.

Further investments have been on hold pending the outcome of the continuation vote which took place on 19 January 2017.

The refinancing transaction has aided us with our task of improving operational performance. Such transactions involve a thorough review of historic operational performance by technical advisers. We have used their feedback to address minor technical issues as well as to improve on O&M procedures and incorporate these in new contracts.

Separately, we were able to continue our successful effort to reduce costs across the portfolio. The most notable savings have come from the reduction of O&M costs for the 6 FiT-remunerated ground-mounted solar assets but we have also continued to reduce non-core costs such as bookkeeping and identify new areas with cost reduction potential such as utility and monitoring costs.

Overall portfolio and Operational review
At the end of the year, the portfolio consisted of 16 underlying renewable energy generation projects which are all entirely owned by the VCTs as well as the small investment made in the year, in a company developing electric vehicle charging infrastructure.

The eight ground-mounted solar assets that account for close to eighty percent of the portfolio performed well in operational terms however solar irradiation was lower than expected by between 1.7% and 5% at seven of the eight installations. There were no significant technical issues experienced at any of these installations.

The refinancing transaction that included the Ayshford Court and Priory Farm assets was taken as an opportunity to bolster the O&M contracts that were in place. Better reporting, fault response and revenue compensation (in the event of poor performance by the Contractor) were introduced. Issues relating to the way the Priory Farm installation reconnects to the electricity grid in the case of significant and sustained grid outages that had surfaced in the previous year were also successfully resolved.

We are continuing to reap the benefits of the sophisticated monitoring systems installed at the beginning of summer 2014 at these installations. We have worked with the monitoring system providers to improve the quality and reporting of the data. We have also added an experienced renewable energy engineer to our team who has been tasked with supervising O&M contractors more closely and proactively identifying areas where operational performance could be further enhanced.

Six of the eight ground-mounted assets are now only a month away from the expiry of the O&M contracts put in place 5 years ago. We have run a "beauty - parade" of contractors and now have an offer from the existing contractor who can continue to perform the services at less than half the price we have been paying. This will result in significant cost savings of circa £140,000 per year.

The value of the SPVs containing the ground-mounted solar installations has increased since the last audited NAV from 30 September 2015. This is due to the fact that a lower discount rate (6.5% for the FiT-remunerated assets and 6.75% for the ROC-remunerated assets) was used in the valuation to reflect the increase in the market value of these assets.

Of the four rooftop solar portfolios that we own, the two portfolios that are distributed across housing association rooftops in England, Wales and Scotland and that account for circa 70% of the solar rooftop asset base have performed better than expectations despite the poor irradiation experienced.

These FiT-remunerated installations were also included in the refinancing transaction, and as is the case with the ground-mounted assets, we took advantage of the fact that the Lender conducted intensive due diligence to improve O&M arrangements. We replaced the Strategic Group which had commissioned the assets with Anesco, who has emerged as the most stable and capable provider of O&M services for roof-mounted installations. Strategic Group were reducing staffing and were not able to commit to the requirements we had for the actual services to be performed. Our new long-term contract with Anesco has performance guarantees in place as well as tightened reporting requirements.

The solar rooftop portfolio owned by Gloucester Wind Ltd (a £1.8 million investment), had suffered as a result of the original developer going into administration in April 2013.  We are continuing to see minor improvements in this portfolio, however, as communicated last year, it is unlikely this project will reach original expectations from the time of the original investment.  We are also pleased to say that there has been no valuation impact on the portfolio as the original transaction was well-priced.

On an overall basis the value of the solar rooftop portfolio has shown a small increase compared to last year. This is due to the fact that a slightly lower discount rate was used to reflect the lower hurdle rates that apply to these assets with a high degree of revenue predictability.

The financial performance of the solar assets has been slightly weaker than expected this year due to the lower irradiation as well as the fact that power prices remained lower than modelled at the time of the original investment. The exposure to power prices of the FiT-remunerated portion of the portfolio is low, however Priory Farm, one of the two ground-mounted solar assets remunerated under the ROC regime has suffered from the very low prices that prevailed in the earlier part of the year as well as the fall in the recycle value component of the ROC value. The other asset, Ayshford Court Limited is still under a fixed price Power Purchase Agreement and has therefore not suffered an impact.

Electricity prices had been in a long downward drift in power prices in the wholesale market over the 2.5 year period that ended last summer. Since then there has been a meaningful bounce due to the depreciation in sterling as well as the upward movement in oil and gas prices. It remains difficult to foresee whether this bounce in power prices will be sustained.  It is important to bear in mind, however, that on an overall basis this portfolio has very low exposure to power prices.

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. We have also successfully completed the first interest payment process for Project Surya.

Our small wind turbine projects held within HRE Willow Ltd, Small Wind Generation Ltd, Tumblewind Ltd and Minsmere Power Ltd have shown some improvement since last year. We have been working with our O&M contractor Britwind, a division of Ecotricity, to implement a targeted maintenance capex programme to resolve a few categories of issues that affected circa 15 percent of the turbines in the portfolio. Each installation was evaluated separately to decide whether the new incremental investment in the form of maintenance capex would yield a positive return in terms of increased yield. We have also tested the solution proposed by Britwind on a sample of installations before giving the go-ahead for a wider roll-out.

Despite these efforts, we stick to our conclusion that certain assets within this segment of the portfolio are not likely to ever reach expected performance due to poor wind conditions at the specific sites and in some cases poor quality physical installations. We continue to reflect the same degree of impairment in the value of these assets in this year's valuation exercise as that of last year. We will continue to strive to rectify issues that can be rectified and continue to see the potential for an upward adjustment in the future.

Portfolio valuation
The NAV of the portfolio has remained static at 117.4p while the total return has increased from 146.9p to 151.9p if dividends already paid are taken into account. This year's increase has come about as a result of market prices for renewable power generation assets rising which we have reflected in the lower discount ranges that we have used, inter alia, as described below.

This is the first year where we have used different discount rates for different sets of assets. We believe this is justified due to the diversity of the asset base. The FiT remunerated ground-mounted solar projects have the most stable cashflows as the fixed feed-in-tariff accounts for over ninety percent of the unit revenues. These assets have also been operating for close to five years and this is a decent history of predictable cashflow generation. We have therefore used the lowest discount rate of 6.5% for the FiT based assets.

We have valued the assets grouped together under Project Surya at a discount rate 25 basis points lower than this to reflect the mix of rooftop solar assets with no power price exposure and the ROC-remunerated ground-mounted solar projects where up to 30% of unit revenues are impacted by power prices.

At the other end of the scale are the small solar rooftop portfolios where the lease counterparts are individual homeowners and schools as well as the small wind turbine portfolios. We have used discount rates of 7% and 7.25% respectively for these assets.

A significant difference from last year is the degree to which this valuation is composed of cash. In addition to the circa £6 million we have in the various reserves required under the Lunar and Surya facilities we have circa £5.5 million of cash that remains from the refinancing. Under ordinary circumstances this would have been largely reinvested however all new investment decisions have been put on hold pending the outcome of the review by the Board following the continuation vote.

Factors that will continue to affect the value of these assets in the future are maturity (longer operating histories suggest higher predictability), the number of participants in the market who have appetite to own these assets, inflation expectations, power prices and interest rates. The first two factors represent a favourable tailwind for the portfolio, the assets are gaining longer operating histories and there is a greater diversity of potential owners out there who are comfortable owning these assets.

Inflation has also been rising and since revenues are inflation-linked, a further increase could translate into higher valuations in the future. This has been covered in the circular that was send out at the end of 2016.

The last two factors remain very difficult to forecast. Power prices have bounced since the Brexit vote but they are still significantly under the levels we saw as recent as 1.5 years ago. The future direction will be determined by commodity prices as well as the supply/demand balance of the UK electricity system.

Renewable generation assets such as those under the Company's ownership tend to trade at a certain premium in relation to "risk free" interest rates. This premium has narrowed over the years and has led to us using lower discount rates for valuation purposes. It is difficult to predict how this may change but it is unlikely that the premium will increase given the increased comfort of investors in owning these assets. However, the risk free rate is also a factor and the return of "risk free" rates to historically normal levels could adversely affect the valuation of the portfolio.

Outlook
Our focus for 2017 will be on continuing to improve the performance of the operational and financial performance of the assets and thus the overall yield of the portfolio.

We will also continue to seek opportunities for further value enhancement through energy storage projects attached to the ground-mounted solar projects so long as there is no impact on the accreditation status.

The Company has recently gone through a continuation vote. Regardless of the outcome of the vote, there will be some investors who will want to sell their shares. We will strive to achieve the best possible value for these investors.

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 2016:

	Cost	Valuation	Valuation movement in year	% of  portfolio
	£'000	£'000	£'000
Qualifying and part-qualifying investments
Lunar 2 Limited*	2,976	13,479	1,276	43.6%
Ayshford Solar (Holding) Limited*	2,480	3,496	(75)	11.3%
Lunar 1 Limited*	125	2,186	110	7.1%
New Energy Era Limited	884	1,489	119	4.8%
Hewas Solar Limited	1,000	1,361	(387)	4.4%
Vicarage Solar Limited	871	1,303	122	4.2%
Tumblewind Limited*	1,438	1,246	82	4.0%
Gloucester Wind Limited	1,000	1,153	112	3.7%
Minsmere Power Limited	975	1,050	130	3.4%
HRE Willow Limited	875	770	(10)	2.5%
Penhale Solar Limited	825	735	(340)	2.4%
St. Columb Solar Limited	650	690	(670)	2.2%
Small Wind Generation Limited	975	583	(99)	1.9%
Chargepoint Services Limited	500	500	-	1.6%
Sunhazel UK Limited	1	-	-	0.0%
	15,575	30,041	370	97.1%
Non-qualifying investments
AEE Renewables UK 3 Limited	900	900	-	2.9%
	900	900	-	2.9%
	16,475	30,941	370	100%
Cash at bank and in hand		4		0.0%
Total investments		30,945		100%

* 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 2016

ADDITIONS

	Cost
	£'000
Qualifying and part-qualifying investments
Ayshford Solar (Holding) Limited	557
Chargepoint Services Limited	500
	1,057

DISPOSALS

	Cost	Valuation at 30 September 2015	Proceeds	Profit/ (Loss) vs cost	Realised gain /(loss)
	£'000	£'000	£'000	£'000	£'000
Qualifying and part-qualifying investments
Tumblewind Limited	1,010	1,010	1,010	-	-
Ayshford Solar (Holding) Limited	65	59	65	-	6
St. Columb Solar Limited	58	58	58	-	-
	1,133	1,127	1,133	-	6
Non-qualifying investments
ZW Parsonage Limited	15	15	15	-	-
	15	15	15	-	-
	1,148	1,142	1,148	-	6

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 2016

			Year ended 30 September 2016				Year ended 30 September 2015
			Revenue	Capital	Total		Revenue	Capital	Total
			£'000	£'000	£'000		£'000	£'000	£'000
Income			1,784	-	1,784		580	-	580
Gain on investments			-	376	376		-	2,057	2,057
			1,784	376	2,160		580	2,057	2,637
Investment management fees			(432)	(144)	(576)		(424)	(141)	(565)
Other expenses			(293)	(72)	(365)		(281)	-	(281)
Profit/(loss) on ordinary activities before tax			1,059	160	1,219		(125)	1,916	1,791
Tax on total comprehensive income and ordinary activities			-	-	-		-	-	-
Profit/(loss) for the year and total comprehensive income			1,059	160	1,219		(125)	1,916	1,791
Basic and diluted earnings per share:
Ordinary Share			4.3p	0.6p	4.9p		(0.5p)	7.8p	7.3p
'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 2016

			2016		2015
		£'000	£'000	£'000	£'000
Fixed assets
Investments			30,941		30,656
Current assets
Debtors		420		362
Cash at bank and in hand		4		16
		424		378
Creditors: amounts falling due within one year		(161)		(160)
Net current assets			263		218
Total Assets less net current assets			31,204		30,874
Creditors: amounts falling due after more than one year		(2,434)		(1,986)
Net assets			28,770		28,888
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			11,065		12,402
Revaluation reserve			14,466		14,090
Capital reserve - realised			(1,057)		(841)
Revenue reserve			249		(810)
Total Shareholders' funds			28,770		28,888
Basic and diluted net asset value per share
Ordinary Share			117.3p		117.3p
'A' Share			0.1p		0.1p

STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2016

	Called up share capital	Share Premium Account	Special Reserve	Revaluation reserve	Capital reserve  realised	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Year ended 30 September 2015
At 30 September 2014	62	3,985	13,632	12,127	(794)	(685)	28,327
Total comprehensive income	-	-	-	1,936	(20)	(125)	1,791
Transactions with owners
Dividend paid	-	-	(1,230)	-	-	-	(1,230)
Transfer between reserves	-	-	-	27	(27)	-	-
At 30 September 2015	62	3,985	12,402	14,090	(841)	(810)	28,888
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
Dividends 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

CASH FLOW STATEMENT
for the year ended 30 September 2016

		Year ended 30 September 2016		Year ended 30 September 2015
			£'000		£'000
Net cash inflow/(outflow) from operating activities			786		(482)
Cash flows from investing activities
Purchase of investments			(1,057)		-
Proceeds from disposal of investments			1,148		1,203
Net cash inflow from investing activities			91		1,203
Net cash inflow before financing activities			877		721
Cash flows from financing activities
Equity dividends paid			(1,226)		(1,230)
Long term loans			448		362
Purchase of own shares			(111)		-
Net cash inflow/(outflow) from financing activities			(889)		(868)
Net decrease in cash			(12)		(147)
Cash and cash equivalents at start of year			16		163
Cash and cash equivalents at end of year			4		16
Cash and cash equivalents comprise
Cash at bank and in hand			4		16
Total cash and cash equivalents			4		16

NOTES TO THE ACCOUNTS
for the year ended 30 September 2016

1. General Information
Hazel Renewable 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 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.

This is the first year in which the Financial Statements have been prepared under FRS 102, however it has not been necessary to restate comparatives as the treatment previously applied aligns with the requirements of FRS 102. As a result, there are no reconciling differences between the previous financial reporting framework and the current financial reporting framework and the comparative figures represent the position under both current and previous financial reporting frameworks.

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 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.

3. Income

Year ended 30 September  2016		Year ended 30 September  2015
	£'000		£'000
Income from investments
Loan stock interest	198		244
Dividend Income	1,586		335
	1,784		579
Other income
Bank interest	-		1
	1,784		580

4. Basic and diluted earnings per share

	Weighted average number of shares in issue		Revenue return/ (loss)		Capital return
Profit/(loss) per share is calculated on the following:			£'000	Per share	£'000	Per share
Year ended 30 September 2016	Ordinary Shares	24,576,029	1,057	4.3	160	0.6
	'A' Shares	36,875,592	2	-	-	-
Year ended 30 September 2015	Ordinary Shares	24,603,156	(125)	(0.5)	1,913	7.8
	'A' Shares	36,904,733	-	-	3	-

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 net asset value per share

	Shares in issue		2016		2015
	2016	2015	Net asset value		Net asset value
			per share	£'000	per share	£000
Ordinary Shares	24,504,858	24,603,158	117.3	28,733	117.3	28,851
'A' Shares	36,799,133	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.

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:

*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:

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 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 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 2016, the unquoted portfolio was valued at £30,941,000 (2015: £30,656,000). 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 has undertaken some sensitivity analysis into the movement of these.

The analysis below is provided to illustrate the sensitivity of the fair value of investment 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.

0.5% movement in discount rates

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%	(1,871,000)	(7.6)
		-0.5%	2,197,000	9.0

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 is directly attributable to changes in credit risk. Any balances that are past due are disclosed further under liquidity 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 £161,000 (2015: 160,000) and has low loans from investee companies being £2,434,000 (2015: £1,986,000) 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.

7. Related party transactions
In the opinion of the Directors there is no immediate or ultimate controlling party.

During the year, Hazel Capital LLP was regarded as a related party as Bozkurt Aydinoglu was a director of the VCT and a controlling partner in Hazel Capital LLP. Bozkurt ceased to be a director from 7 March 2016 and Hazel Capital LLP ceased to be a related party as at that date.

Hazel Capital LLP provides investment management services to the Company. During the year ended 30 September 2016, £576,000 (2015: £565,000) was payable to Hazel Capital LLP in respect of these services. At the year end there was no balance owing to Hazel Capital LLP (2015: 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 2016, this amounted to £115,000 (2015: £114,000), all of which is outstanding and included in accruals and deferred income under Creditors.

8. Events after the end of the reporting period
On 19 January 2017, the Company held a General Meeting seeking Shareholder approval for the Company to continue as a VCT for a further five years. The resolution was not passed by Shareholders and so now the board is required to put proposals to Shareholders for a voluntary liquidation, reconstruction or other reorganisation of the Company. The same resolution for the sister company, Hazel Renewable Energy VCT1 plc ("Hazel1"), was passed by Shareholders. As a result, the board is exploring options for the future of the two Companies with the Hazel 1 Board and expects to draw up formal proposals in the coming months.

The boards of both companies will review options for the future and expect to come to a conclusion in the coming months. Should this review result in a decision to voluntary liquidate the Company, it is likely that this would take place over a period of two to three years. The Directors therefore believe that it remains appropriate to prepare the accounts on a going concern basis. The financial effect of this event cannot be determined at this time, although if a voluntary liquidation were to take place, there might ultimately be a reduction in net asset value as a result of realising investments at lower than the current carrying values and costs associated in selling the Company's investments.

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 2016, but has been extracted from the statutory financial statements for the year ended 30 September 2016, which were approved by the Board of Directors on 31 January 2017 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 2015 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 2016 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.

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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.
Source: Hazel Renewable Energy VCT 2 plc via Globenewswire