Hazel Renewable Energy VCT 2 plc : Final Results

Hazel Renewable Energy VCT2 plc

Final results for the year ended 30 September 2012

FINANCIAL HIGHLIGHTS

	30 September 2012		30 September 2011
	Pence		Pence
Net asset value per Ordinary Share	94.6		93.4
Net asset value per 'A' Share	0.1		0.1
Dividends paid	3.5		-
Total return per Ordinary Share and 'A' Share	98.2		93.5

CHAIRMAN'S STATEMENT

Introduction

I am pleased to present the Company's second Annual Report. Good progress has been made in both investing the Company's funds and also by most of the underlying investments.

Top-up share offer

The Company successfully completed a top-up offer during the year along with its sister company, Hazel Renewable Energy VCT1 plc. The fundraising was fully subscribed and raised gross proceeds of approximately £2.0 million for each VCT. Shares were issued under this offer at a price of £1.05 for one Ordinary Share and one 'A' Share.

Venture capital investments

The significant number of changes to the FiT regime imposed by the Government since the Company's launch have produced challenges in investing the Company's funds, however, it is now close to completing the build of its initial investment portfolio.

During the year, 14 new investments were made at a total cost of £9.6 million, along with 6 follow-on investments with a total cost of £2.0 million. Of the new investments, the majority were in solar PV projects, although a number of small wind projects were also backed.

In general, the investee companies have progressed well. A small number have encountered initial technical issues, particularly the wind projects. The Manager has worked closely with these investee companies and potential solutions are now being implemented. Several investee companies still have funds which have not yet been employed in suitable projects. The Manager is working with these companies in assessing opportunities to employ the remaining capital.

Since the year end, three investee companies, which had commenced work in rolling out solar projects under the Renewable Obligation Certificate "ROC" regime, have accepted offers to dispose of their stakes in the projects at attractive prices. These companies have now returned some of their funds to the Company by redeeming loan stock but they continue to hold a proportion of their original capital and will seek new projects.

The Board has reviewed the valuations of the investments at the year end and made modest increases to the valuations of investments which have already established a reliable track record of electricity generation.

AEE Renewables 26 Limited has been uplifted by £344,000, St Columb Solar Limited by £251,000, Hewas Solar Limited by £108,000, and New Energy Era Limited by £92,000. All other investments continue to be valued at levels equal to original cost.

Further details of the investment management activities during the year are included in the Investment Manager's Report.

Net asset value and results

At 30 September 2012, the NAV per Ordinary Share stood at 94.6p and the NAV per 'A' Share stood at 0.1p, producing a combined total of 94.7p. This represents an increase of 4.7p (5.0%) over the year (after adjusting for dividends paid during the year of 3.5p per share).

The profit on ordinary activities after taxation for the period was £883,000, comprising of a loss of £62,000 on the revenue account and profit of £945,000 on the capital account.

Dividends

The Board is proposing a final dividend for the year of 5.0p per Ordinary Share. The dividend will be subject to Shareholder approval at the AGM on 11 March 2013 and will be paid on 28 March 2013 to Shareholders on the register at 1 March 2013.

Share buybacks

The Company operates a share buyback policy whereby, subject to liquidity, the rules of the London Stock Exchange, the UK Listing Authority and applicable VCT legislation, it will make market purchases of its own shares that become available in the market at a price equivalent to a 10% discount to the most recently published NAV.

A special resolution to continue this policy is proposed for the forthcoming AGM.

No shares were bought back during the year.

Annual General Meeting

The Company's second AGM will be held at 59 Gloucester Place, London W1U 8JH at 12:05 p.m. on 11 March 2013.

Three items of special business will be proposed at the AGM; one resolution seeking approval for the Company to be able to buy its own shares as described above and two resolutions in connection with the authority for the Directors to allot shares. Notice of the meeting is at the end of this document.

Outlook

The Board is pleased with the progress made by the Manager in investing the Company's funds and in building a robust portfolio of renewable energy assets. There is still work to be done by some of the investee companies in utilising all of their capital and, in addition, the Company now has further funds to invest following the recent redemption of loan stock by three investee companies. Although the regulatory changes to the FiT and ROC regimes have potentially reduced yields from the renewable energy sector, the Manager is continuing to see attractive opportunities in which these funds can be employed.

Over the next year, the Manager's work will become more focussed on the existing portfolio. Opportunities to refinance existing projects will be explored. This may allow yields to be enhanced and further funds to be released for reinvestment.

Peter Wisher

Chairman

INVESTMENT MANAGER'S REPORT

Introduction

The team at Hazel Capital is pleased to be able to report that it has continued to deploy capital resulting in total investments in excess of £20 million at the date of this report, leaving your Company almost fully invested. This being said, as the underlying project companies generate significant cashflow which, combined with the outright sale of a small number of projects at a profit, there is the need for continual redeployment of funds into new opportunities. Hazel Capital continues to find new opportunities despite the end of Feed-in-Tariff driven businesses as a qualifying trade for VCT purposes for incremental investments.

As many of your Company's investments mature, with many now having over a year's operating history, it is gratifying to see that the majority are performing to plan or above expectations. This is particularly true for our solar investments, which make up 78.5% of total funds deployed. Our small wind investments which represent less than 15% of funds, while also being cash-generative, have not enjoyed the same result, partly due to light winds (annual variations in wind resource can be significant) and partly due to operational issues relating to grid voltages being higher than they ought to be. The developer is in contact with the utility company to address this issue. The developer has also identified a solution independent of the utility company which is showing promising results.

Hazel Capital's role, with the portfolio being almost fully invested, now moves from deploying funds into opportunities with good risk-adjusted return characteristics to a manager of project companies with the goal of maximising returns. This we are doing through various efforts, including increasing energy produced, lowering costs and refinancing of equity with debt. The latter is a major project for the next 12 months during which time we will refinance as much of the portfolio as possible, providing debt markets are supportive of long term financing at attractive rates.

Most importantly, the Company is on track to generate cashflow in excess of that required to pay its next annual dividend targeted internally by Hazel Capital at the time that funds were raised.

We are also grateful for the support from new and existing Shareholders who invested in the top-up fundraising which closed at the start of April 2012 which increased funds under management by 10% or £2.1 million.

Regulatory changes

As was the case last year, the regulatory environment has continued to prove challenging. This year the changes came from the Department for Energy and Climate Change ("DECC") and also HM Revenue and Customs ("HMRC"), and further uncertainty was introduced by the judicial review of the tariff cut. These changes directly impacted the revenue line for renewable energy generation in both Feed-in-Tariffs ("FiTs") and are also expected for renewable obligation certificates ("ROC"). These changes have significantly impacted the revenue levels available for large solar installation and distributed wind and solar assets alike. Despite its best efforts, the changes introduced by the DECC have not had a negative impact on any assets in the portfolio.

Furthermore, in addition to the revenue impact introduced by the DECC, separate changes introduced by HMRC also narrowed the pool of qualifying investments from which the VCT could invest. Notwithstanding these changes, the VCT has managed to navigate a path and successfully deploy capital in attractive assets. Given the VCT is rapidly approaching full investment, the regulatory landscape is expected to become less important, however, in the event that capital is released through refinancing and/or return of profits, the VCT will need to operate within this ever changing environment.

Portfolio overview

The core of the VCT portfolio is built around capital invested in six larger ground mounted solar projects. These projects were commissioned in Q4:2011 and now have a full year of operating history. Whilst the poor summer has had an impact on output, the solar projects have, as a group, performed in line with expectations and not experienced any significant operational issues.

In addition, the VCT has acquired a portfolio of roof-mounted solar assets during the course of the year, and, whilst FiT support has been falling, this has been mostly compensated for by reducing installation costs. These cost reductions come from falling equipment costs and more competition from project developers/installers which has led to them accepting lower margins. So, whilst available returns have certainly dropped incrementally, they still meet our hurdle rates. Going forward, it is difficult to predict how much further costs will drop and whether this will continue to keep pace with the FiT tariff digression mechanism which is designed to steadily reduce the prevailing tariff.

The tariff applicable to small wind assets has also suffered reductions, however, given the comparatively low level of wind capacity added under the FiT regime (as compared with solar), this has not suffered the same level of attention from the DECC. The VCT will shortly conclude funding a fleet of small wind turbines, which is expected to reach c.350 turbines located across the UK. Early performance of the fleet has been disappointing. This is currently the subject of further detailed technical analysis but it is not believed that this will be a long-term performance issue. A proposed technical solution is in the process of being rolled out which is expected to address the issue.

Future investment activity

We continue to look out for well-priced opportunities that might supplement the existing portfolio and have acquired small portfolios of roof mounted solar assets that fit with the Company's required return profile. Conversely, the VCT has been opportunistic and divested a limited number of assets where it was felt a good valuation was available.

Future investment activity is likely to be relatively limited due to capital constraints, however, the banking market now appears to be more receptive to financing FiT assets than was previously the case. Initial discussions will be followed up with a view to releasing capital invested in the larger solar parks.

Outlook

The day-to-day activity is now transitioning away from portfolio construction to asset management with a view to delivering expected investment returns and resulting in dividends to the Company's Shareholders. Appropriate levels of debt finance will be sought as part of this process with a view to releasing capital and enhancing equity returns.

Hazel Capital LLP

REVIEW OF INVESTMENTS

Portfolio of investments

The following investments were held at 30 September 2012:

	Cost	Valuation	Valuation movement in period	% of portfolio
	£'000	£'000	£'000
Qualifying and part-qualifying investments
AEE Renewables UK 3 Limited*	3,500	3,500	-	16.4%
AEE Renewables UK 26 Limited*	1,795	2,139	344	10.0%
Hewas Solar Limited*	1,362	1,470	108	6.9%
St Columb Solar Limited*	935	1,186	251	5.6%
South Marston Solar Limited*	1,110	1,110	-	5.2%
Beechgrove Solar Limited	1,000	1,000	-	4.7%
Gloucester Wind Limited	1,000	1,000	-	4.7%
Penhale Solar Limited	1,000	1,000	-	4.7%
New Energy Era Limited	884	976	92	4.6%
Minsmere Power Limited	975	975	-	4.6%
Small Wind Generation Limited	975	975	-	4.6%
Tumblewind Limited	912	912	-	4.3%
Vicarage Solar Limited	871	871	-	4.1%
HRE Willow Limited	875	875	-	4.1%
Owl Lodge Solar (Holding) Limited	544	544	-	2.6%
Ayshford Solar (Holding) Limited	451	451	-	2.1%
Higher Tregarne Solar (Holding) Limited	368	368	-	1.7%
Causilgey Solar (Holding) Limited	349	349	-	1.6%
ZW Parsonage Limited*	250	250	-	1.2%
Yonder Netherton Solar (Holding) Limited	5	5	-	0.0%
Sunhazel UK Limited	1	1	-	0.0%
	19,162	19,957	795	93.7%
Non-qualifying investments
Quiet Revolution Limited	600	600	-	2.8%
Lime Technology Limited	100	100	-	0.5%
	700	700	-	3.3%
	19,862	20,657	795	97.3%
Cash at bank and in hand		630		3.0%
Total investments		21,287		100.0%

* Part-qualifying investment

All venture capital investments are incorporated in England and Wales.

Hazel Renewable Energy VCT1 holds the same investments as above.

Investment movements for the year ended 30 September 2012

ADDITIONS

		Cost
		£'000
Qualifying investments
South Marston Solar Limited*		1,110
Beechgrove Solar Limited		1,000
Gloucester Wind Limted		1,000
Penhale Solar Limited		1,000
Minsmere Power Limited		975
Small Wind Generation Limited		975
Vicarage Solar Limited		968
Tumblewind Limited		912
St. Columb Solar Limited*		685
Owl Lodge Solar (Holding) Limited		544
Hewas Solar Limited*		462
Ayshford Solar (Holding) Limited		451
Higher Tregarne Solar (Holding) Limited		368
Causilgey Solar (Holding) Limited		349
ZW Parsonage Limited*		250
AEE Renewables UK 26 Limited*		145
HRE Willow Limited		125
Yonder Netherton Solar (Holding) Limited		5
Sunhazel UK Limited		1
Non-qualifying investments
Quiet Revolution Solar Limited		300
		11,625

DISPOSALS

	Cost	Proceeds	Profit vs cost	Realised gain
	£'000	£'000	£'000	£'000
Qualifying investments
ZW Parsonage Limited *	960	960	-	-
Vicarage Solar Limited	96	96	-	-
	1,056	1,056	-
Non-qualifying investments
South Marston Renewables Limited	1,000	1,256	256	256
AEE AG	750	750	-	-
	1,750	2,006	256	256
	2,806	3,062	256	256

* Part-qualifying investment

All venture capital investments are incorporated in England and Wales, with the exception of AEE AG, which was incorporated in Germany.

Directors' responsibilities statement

The Directors are responsible for preparing 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 Services Authority.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements the Directors are required to:

*    select suitable accounting policies and then apply them consistently;

*    make judgments and accounting estimates that are reasonable and prudent;

*    state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

*    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions, to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the areas of the Manager's and Administrator's websites maintained on behalf of the Company. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.

Statement as to disclosure of information to Auditor

The Directors in office at the date of the report have confirmed, as far as they are aware, that there is no relevant audit information of which the Auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor.

By order of the Board

Grant Whitehouse

Secretary of Hazel Renewable Energy VCT2 plc

INCOME STATEMENT

for the year ended 30 September 2012

			Year ended 30 Sept 2012				Period ended 30 Sept 2011
	Note		Revenue	Capital	Total		Revenue	Capital	Total
			£'000	£'000	£'000		£'000	£'000	£'000
Income	2		481	-	481		146	-	146
Net gain on investments	9		-	1,051	1,051		-	-	-
			481	1,051	1,532		146	-	146
Investment management fees	3		(302)	(101)	(403)		(110)	(36)	(146)
Other expenses	4		(241)	(5)	(246)		(181)	(13)	(194)
(Loss)/Profit on ordinary activities before tax			(62)	945	883		(145)	(49)	(194)
Tax on ordinary activities	6		-	-	-		-	-	-
(Loss)/Profit attributable to equity Shareholders			(62)	945	883		(145)	(49)	(194)
Basic and diluted (loss)/profit per share:
Ordinary Share	8		(0.2p)	4.3p	4.1p		(1.2p)	(0.4p)	(1.6p)
'A' Share	8		-	-	-		-	-	-

All Revenue and Capital items in the above statement derive from continuing operations. The total column within the Income Statement represents the profit and loss account of the Company. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement noted above.

Other than revaluation movements arising on investments held at fair value through profit or loss, there were no differences between the profit/loss as stated above and historical cost.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

		Year ended 30 September 2012		Period ended 30 September 2011
	Note		£'000		£'000
Opening Shareholders' funds			19,445		-
Proceeds from share issue	12		2,123		20,782
Share issue costs	12		(117)		(1,143)
Profit/(loss) for the year			883		(194)
Dividend paid	7		(727)		-
Closing Shareholders' funds			21,607		19,445

BALANCE SHEET

as at 30 September 2012

	Note		2012		2011
		£'000	£'000	£'000	£'000
Fixed assets
Investments	9		20,657		11,043
Current assets
Debtors	10	450		107
Cash at bank and in hand	16	630		8,422
		1,080		8,529
Creditors: amounts falling due within one year	11	(130)		(127)
Net current assets			950		8,402
Net assets			21,607		19,445
Capital and reserves
Called up Ordinary Share capital	12		23		21
Called up 'A' Share capital	12		34		31
Share premium account	13		2,001		19,587
Special reserve	13		18,860		-
Revaluation reserve	13		795		-
Capital reserve - realised	13		101		(49)
Revenue reserve	13		(207)		(145)
Total equity Shareholders' funds			21,607		19,445
Basic and diluted net asset value per share
Ordinary Share	14		94.6p		93.4p
'A' Share	14		0.1p		0.1p

CASH FLOW STATEMENT

for the year ended 30 September 2012

			Year ended 30 September 2012		Period ended 30 September 2011
				£'000		£'000
	Note
Net cash outflow from operating activities	15			(509)		(174)
Capital expenditure
Purchase of investments	9			(11,625)		(12,686)
Proceeds from disposal of investments	9			3,062		1,643
Net cash outflow from capital expenditure				(8,563)		(11,043)
Dividends paid	7			(727)
Net cash outflow before financing				(9,799)		(11,217)
Financing
Proceeds from Ordinary Share issue	12			2,123		20,751
Proceeds from 'A' Share issue	12			1		31
Proceeds from Preference Share issue	12			-		50
Redemption of Preference Shares	12			-		(50)
Share issue costs	12			(117)		(1,143)
Net cash inflow from financing				2,007		19,639
(Decrease)/Increase in cash	16			(7,792)		8,422

NOTES TO THE ACCOUNTS

for the year ended 30 September 2012

1. Accounting policies

Basis of accounting

The Company has prepared its financial statements under UK Generally Accepted Accounting Practice ("UK GAAP") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" revised January 2009 ("SORP").

The financial statements are prepared under the historical cost convention except for certain financial instruments measured at fair value.

The Company implements new Financial Reporting Standards ("FRS") issued by the Financial Reporting Council when required.

Presentation of income statement

In order to better reflect the activities of a Venture Capital Trust and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments

All investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS26.

For unquoted investments, fair value is established by using the IPEV guidelines. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

*Price of recent investment;

*Multiples;

*Net assets;

*Discounted cash flows or earnings (of underlying business);

*Discounted cash flows (from the investment); and

*Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Gains and losses arising from changes in fair value are included in the Income Statement for the period as a capital item and transaction costs on acquisition or disposal of the investment are expensed.

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 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 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 Venture Capital Trust 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. Deferred taxation is not discounted.

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 9) are included within the accounts at amortised cost.

Issue costs

Issue costs in relation to the shares issued for each share class have been deducted from the share premium account.

2. Basic and diluted loss per share

	Weighted average number of shares in issue		Revenue loss	Capital return/(loss)
(Loss)/profit per share is calculated on the following:			£'000	£'000
Year ended 30 September 2012	Ordinary Shares	21,776,774	(62)	945
	'A' Shares	32,665,086	-	-
Period ended 30 September 2011	Ordinary Shares	12,394,059	(145)	(49)
	'A' Shares	16,405,026	-	-

As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per Ordinary Share or 'A' Share. The loss per share disclosed therefore represents both the basic and diluted return per Ordinary Share or 'A' Share.

3. Basic and diluted net asset value per share

	Shares in issue			2012		2011
	2012	2011	Net asset value			Net asset value
			per share	£'000		Per share	£'000
Ordinary Shares	22,793,330	20,771,172	94.6	21,573		93.4	19,414
'A' Shares	34,189,992	31,156,755	0.1	34		0.1	31

The Directors allocate the assets and liabilities of the Company between the Ordinary Shares and 'A' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights as described in note 12.

As the Company has not issued any convertible shares or share options, there is no dilutive 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 or per 'A' Share.

4. 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 market 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 market 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. Market risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key market risks to which the Company is exposed are:

*Market price risk

*Interest rate risk

Market price risk

Market price risk arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the Company's investment objectives. It represents the potential loss that the Company might suffer through changes in the fair value of unquoted investments that it holds.

Interest rate risk

The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers. Investments in loan stock attract interest predominately at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.

There are four categories in respect of interest which are attributable to the financial instruments held by the Company as follows:

*"Fixed rate" assets represent investments with predetermined yield targets and comprise certain loan note investments and Preference Shares;

*"Variable rate" asset represent investments with predetermined interest rates that vary at set dates in accordance with loan agreements;

*"Floating rate" assets predominantly bear interest at rates linked to Bank of England base rate or LIBOR and comprise cash at bank and liquidity fund investments and certain loan note investments; and

*"No interest rate" assets do not attract interest and comprise equity investments, certain loan note investments, loans and receivables (excluding cash at bank) and other financial liabilities.

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.

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 (£130,000) and has no borrowings 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.

5. Controlling party and related party transactions

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

Hazel Capital LLP also provides investment management services to the Company. Details of the agreement with Hazel Capital LLP are included within note 3. During the year ended 30 September 2012 £402,000 (2011: £146,000) was payable to Hazel Capital LLP in respect of these services. At the year end there was no balance owing to Hazel Capital LLP.

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 2012, this amounted to £85,657 (2011: £77,778), all of which is outstanding.

Hazel Renewable Energy VCT1 plc is a company of which Hazel Capital LLP is also the Investment Manager. At the year end the Company was owed £1,998 (2011: £7,774) by Hazel Renewable Energy VCT1 plc in relation to interest received on cash deposits during the fundraising. This amount is included in other debtors.

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 2012, but has been extracted from the statutory financial statements for the year ended 30 September 2012 which were approved by the Board of Directors on 15 January 2013 and will be delivered to the Registrar of Companies.  The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the period ended 30 September 2011 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 30 September 2012 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 10 Lower Grosvenor Place, London, SW1W 0EN and will be available for download from www.downing.co.uk. 

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The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and other applicable laws; and
(ii) they are solely responsible for the content, accuracy and originality of the
information contained therein.

Source: Hazel Renewable Energy VCT 2 plc via Thomson Reuters ONE

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