Hazel Renewable Energy VCT 2 plc : Final Results

Hazel Renewable Energy VCT2 plc
Final results for the period ended 30 September 2011

FINANCIAL HIGHLIGHTS

	30 September 2011
	Pence
Net asset value per Ordinary Share	93.4
Net asset value per 'A' Share	0.1
Total return per Ordinary Share and 'A' Share	93.5

CHAIRMAN'S STATEMENT
Introduction
I am pleased to present the Company's first Annual Report and Accounts. The Company has been a very active investor in its initial period and has made good progress in building the investment portfolio.

Share offer
The Company launched joint offers for subscription ("Offers") with Hazel Renewable Energy VCT1 plc in October 2010. The fundraising was fully subscribed raising gross proceeds of £41.5 million between the two Companies. Hazel Renewable Energy VCT2 issued a total of 20.8 million Ordinary Shares and 31.2 million 'A' Shares, giving net proceeds, after issue costs, of £19.6 million.  

Shareholders who subscribed under the Offers received one Ordinary Share and one 'A' Share for every £1 subscribed. The 'A' Shares are designed as a tax-efficient mechanism to facilitate the payment of a performance incentive to the management team should any such incentive become payable in the future.  The management team hold one third of the 'A' Shares in issue. The 'A' Shares are expected to have a net asset value of 0.1p per share for the initial years of the Company.  This is only expected to change if and when the performance hurdles are met and a performance incentive becomes due.

Venture capital investments
Since the Company's launch, the Government has announced several significant changes to the Feed-in-Tariff ("FiT") regime, particularly in relation to solar power. It has also been announced that businesses receiving FiTs will not be qualifying under the VCT rules for investments made after 6 April 2012. These changes have created some significant additional challenges for Hazel Capital ("the Manager"), but, I am pleased to report that the Manager has had a strong dealflow and was able to complete a number of ground-mounted solar investments before the key deadline in August. Several on-shore wind and roof-top solar investments have also been completed.

At the period end, the Company held seven VCT qualifying investments with a total cost of £5.2 million. The Company also had £1.2 million invested in those companies in non-qualifying instruments.

Under the VCT regulations, the Company has until 30 September 2013 to get at least 70% of its funds invested in VCT qualifying business, however, the Company intends to employ the majority of its funds in a much shorter period, before the rule changes in April 2012. At 30 September 2011, the proportion of funds held in qualifying investments stood at 27%.  

It is, of course, early days for all of the Company's investments, but to date none have experienced any significant deviation from plan and are therefore all carried at valuations equal to original cost at the period end.

Net asset value and results
As with most VCTs, the initial period tends to see the Company's running costs exceeding the level of investment income that can be generated while the majority of funds are initially held as cash deposits. As a result, the Company has experienced a small fall in net asset value per share ("NAV") over this period. The Board expects this lost ground to be recovered as the proportion of funds invested increases and the investments start to produce the anticipated yields.

At 30 September 2011, the NAV per Ordinary Share stood at 93.4p and the NAV per 'A' Share stood at 0.1p, producing a combined total of 93.5p, a decrease of approximately 1.1% over the initial NAV of 94.5p (net of issue costs).

The loss on ordinary activities after taxation for the period was £194,000, comprising of a loss of £145,000 on the revenue account and loss of £49,000 on the capital account.

Dividends
The Board is proposing a final dividend for the initial period of 3.5p per Ordinary Share. The dividend will be subject to Shareholder approval at the AGM on 27 March 2012 and will be paid on 30 March 2012 to Shareholders on the register at 2 March 2012.

Share buybacks
The Company operates a share buyback policy whereby, subject to liquidity, the rules of both the London Stock Exchange and the UK Listing Authority and applicable VCT legislation, it is intended that the Company 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 Annual General Meeting ("AGM").

Annual General Meeting
The Company's first AGM will be held at 59 Gloucester Place, London W1U 8JH at 11:10 a.m. on 27 March 2012.

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 authority for the Directors to allot shares. Notice of the meeting is at the end of this document.

Outlook
Despite the impact of the FiT Review, further changes to the FiT regulations and changes to the VCT regulations, the Company has made a good start in employing its funds in a series of attractive renewable energy opportunities.

Since the year end, the Company has completed a number of new investments, such that at today's date, the Company now has approximately 43% of its funds invested in VCT qualifying investments (or investments intended to become qualifying) and a further 21% in non-qualifying renewable energy investments. The job of building the investment portfolio is expected to be completed shortly.  

Looking ahead, once each project is fully operational and producing a steady income stream, the Manager will start to explore the possibility of refinancing projects to enhance yields.

Peter Wisher
Chairman

INVESTMENT MANAGER'S REPORT
Introduction
We, at Hazel Capital, are delighted with the success of our VCT fundraising and confidence shown in our company to deploy funds into the exciting area of government-backed feed-in-tariff projects.

As a team, including experienced fund managers from an institutional background, with the added benefit that three out of four of the core team have a training in engineering, it has been possible to maintain a focus on risk management, efficient pipeline development and deployment, diversification by technology and counterparty, as well as attractive target returns for Shareholders.

FiT review and VCT regulation changes
The above has not been achieved in a particularly favourable environment. The government, represented by the Department for Energy and Climate Change (DECC), have, despite stating an intention to maintain a stable regulatory regime, felt it necessary to 'move the goalposts' on several occasions by cutting tariffs drastically for solar projects with only weeks of warning; first large-scale and more recently small-scale projects.  Despite this shifting landscape, it is encouraging that DECC have remained true to their promise of not making retrospective changes to tariffs on operational projects.

It is our mission to deploy 70% of your capital into qualifying projects by April 2012, at which time changes to rules for VCTs (particularly that new investments into FiT-based project companies will no longer be qualifying) and further changes in Feed-in Tariffs themselves may occur for other technologies in addition to solar, which have already been affected. Given that we manage approximately £40 million across Hazel Renewable Energy VCT1 plc and Hazel Renewable Energy VCT2 plc, and that we aim to commit up to £2 million per investable project, we will achieve our goal by targeting 15 investments.

Investment activity
We began the period focussing on larger, ground-mounted solar projects where we saw the ability to deploy significant amounts of capital in a project area where technology risk is very low (solar panels are guaranteed by their manufacturers for 25 years as standard), planning consent was not problematic (projects cannot be seen from even a fairly short distance, make very little noise and are generally liked by local communities) and where returns met our hurdle rates. We had hoped to deploy in excess of ten projects, but sadly as early as 23 March 2011, a review of ground-mounted solar tariffs was implemented, culminating in a c.70% cut in tariffs for such projects from 1 August 2011 for projects commissioned after this date. In any event, we are pleased to announce that we have nonetheless invested in five ground-mounted solar projects so far.  We are also hopeful that we will invest in at least one or two more projects in coming months. These projects would still meet target returns, although they will be lower than our earlier investments, given that they would be already operational projects carrying no development or construction risk.

Our second key area of focus was also affected by government 'about-turns', this time roof-mounted solar. More recently, on 31 October 2011 the government announced a fast-track review of small-scale solar projects with the intention of cutting tariffs by c.40-50% depending on the installation size and type of installations commissioned after 12 December 2011. This has been done as a reaction to the huge take-up by consumers of this technology (some 50,000 installations at last count) which was in turn driven by falling equipment prices driving financial returns up sharply. This has also affected our investment plans, given that we intended to commit to at least three project companies in this area, but in any event may only make two investments into a few hundred roofs.  We may yet find some acquisition opportunities of portfolios of already installed roofs, but we are discounting the likelihood of this happening at this time.

As a result of less than expected funds being invested into solar projects, which may now account for eight or nine of our 15 target investments, we have turned to small-wind projects; an exciting technology with huge potential in the UK. The UK has a great wind resource but clearly large wind is not the solution as a dense population results in NIMBY-ism.  Small wind, on the other hand is much less objectionable, with turbines being much quieter and typically no more than 15 metres tall.

We had in fact anticipated much of the reductions in solar tariffs and so started, back in February, to build a pipeline in small scale wind projects, despite virtually all capital (Hazel's and our competitors alike) being focused on solar. We have focused on a few counterparties for the deployment of hundreds of small wind turbines, each expected to install up to 1,000 turbines.  This pipeline is secured with exclusivity agreements or rights of first refusal, which may make it more difficult for competitors to enter this market. This would account for between £15 million and £25 million of the £40 million capital, comfortably filling the remainder of the VCTs with at least 7 project company investments. The attraction of small wind is in its huge degree of diversification by location and also by technology (we will use at least three different turbines).  Also, lead times are short (installation of a turbine takes less than a day), reducing concerns around sudden changes in tariffs.

Outlook
In summary, we believe we are on track to satisfy our commitments to the Company's Shareholders in terms of investment timeframe, risk mitigation and return expectations. We look forward to another exciting year ahead.

Hazel Capital LLP

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments were held at 30 September 2011:

	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	-	18.0%
AEE Renewables UK 26 Limited*~	1,649	1,649	-	8.5%
ZW Parsonage Limited*~	960	960	-	4.9%
Hewas Solar Limited	900	900	-	4.6%
New Energy Era Limited	884	884	-	4.5%
HRE Willow Limited	750	750	-	3.9%
St Columb Solar Limited~	250	250	-	1.3%
	8,893	8,893	-	45.7%
Non-qualifying investments
South Marston Renewables Limited	1,000	1,000	-	5.1%
AEE AG	750	750	-	3.8%
Quiet Revolution Limited	300	300	-	1.6%
Lime Technology Limited	100	100	-	0.5%
	2,150	2,150	-	11.0%
	11,043	11,043	-	56.7%
Cash at bank and in hand		8,422		43.3%
Total investments		19,465		100.0%

All of the above were additions in the period.

* Part-qualifying investment
~ Currently non-qualifying but expected to become qualifying

Hazel Renewable Energy VCT1 plc and Hazel Cleantech Opportunities Fund 1 LP are also managed by Hazel Capital LLP. Hazel Renewable Energy VCT1 plc has made equal investments in all of the companies above. Hazel Cleantech Opportunities Fund 1 LP holds 23.7% of the equity in Quiet Revolution Limited and 21.3% of the equity in Lime Technology Limited.

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

Investment movements for the period ended 30 September 2011
DISPOSALS

			Profit	Realised
	Cost	Proceeds	vs cost	gain
	£'000	£'000	£'000	£'000
Non-qualifying investments
AEE Renewables UK 26 Limited	1,448	1,448	-	-
ZW Parsonage Limited	195	195	-	-
	1,643	1,643	-	-

The above disposals all relate to redemption of loan stock. The above were also additions in the period.

Directors' responsibilities statement
The Directors are responsible for preparing the Directors' Report, 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 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 period ended 30 September 2011

	Revenue	Capital	Total
	£'000	£'000	£'000
Income	146	-	146
Net gain on investments	-	-	-
	146	-	146
Investment management fees	(110)	(36)	(146)
Other expenses	(181)	(13)	(194)
Loss on ordinary activities before tax	(145)	(49)	(194)
Tax on ordinary activities	-	-	-
Loss attributable to equity Shareholders	(145)	(49)	(194)
Basic and diluted loss per share:
Ordinary Share	(1.2p)	(0.4p)	(1.6p)
'A' Share	-	-	-

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

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 the profit and loss, there were no differences between the return/(loss) as stated above and historical cost.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

	Period ended 30 September 2011
	£'000
Opening Shareholders' funds	-
Proceeds from share issue	20,782
Share issue costs	(1,143)
Total loss for the period	(194)
Closing Shareholders' funds	19,445

BALANCE SHEET
as at 30 September 2011

		2011
	£'000	£'000
Fixed assets
Investments		11,043
Current assets
Debtors	107
Cash at bank and in hand	8,422
	8,529
Creditors: amounts falling due within one year	(127)
Net current assets		8,402
Net assets		19,445
Capital and reserves
Called up Ordinary Share capital		21
Called up 'A' Share capital		31
Share premium account		19,587
Capital reserve - realised		(49)
Revenue reserve		(145)
Total equity Shareholders' funds		19,445
Basic and diluted net asset value per share
Ordinary Share		93.4p
'A' Share		0.1p

CASH FLOW STATEMENT
for the period ended 30 September 2011

	Period ended 30 September 2011
	£'000
Net cash outflow from operating activities	(174)
Capital expenditure
Purchase of investments	(12,686)
Proceeds from disposal of investments	1,643
Net cash outflow from capital expenditure	(11,043)
Net cash outflow before financing	(11,217)
Financing
Proceeds from Ordinary Share issue	20,751
Proceeds from 'A' Share issue	31
Proceeds from Preference Share issue	50
Redemption of Preference Shares	(50)
Share issue costs	(1,143)
Net cash inflow from financing	19,639
Increase in cash	8,422

NOTES TO THE ACCOUNTS
for the period ended 30 September 2011

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 and cover an eleven month period.

The Company implements new Financial Reporting Standards ("FRS") issued by the Accounting Standards Board 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 significant 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 has 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.

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.

A net deferred tax asset is regarded as recoverable and therefore recognised only to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

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 return	Capital loss
Loss per share is calculated on the following:			£'000	£'000
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

	2011	Pence per share	£'000
	Shares in issue
Ordinary Shares	20,771,170	93.4	19,414
'A' Shares	31,156,755	0.1	31
Net assets per Balance Sheet			19,445

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 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. Financial instruments
The Company's financial instruments comprise investments held at fair value through the profit and loss, being equity and loan stock investments in unquoted companies, loans and receivables being cash deposits and short term debtors and financial liabilities being creditors arising from its operations. The main purpose of these financial instruments is to generate cashflow and revenue and capital appreciation for the Company's operations. The Company has no gearing or other financial liabilities apart from short-term creditors and does not use any derivatives.

The fair value of investments is determined using the detailed accounting policy as shown in note 1.

Loans and receivables and other financial liabilities, as set out in the balance sheet, are stated at amortised cost which the Directors consider is equivalent to fair value.

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
* 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 period and there have also have been no significant changes to the policies for managing those risks during the period.

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 period 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 though 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.

At 30 September 2011, the unquoted portfolio was valued at £11,043,000.

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.

	Average	Average period	2011
	interest rate	until maturity	£'000
Fixed rate	6.5%	698 days	4,150
Variable rate	3.1%	854 days	1,050
Floating rate	0.5%		8,422
No interest rate			5,823
			19,445

The Company monitors the level of income received from fixed and floating 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.

It is estimated that an increase of 1% in interest rates would have increased total return before taxation for the period by £85,000. As the Bank of England base rate stood at 0.5% per annum throughout the period, it is not believed that a reduction from this level is likely.

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 Company's financial assets that are exposed to credit risk are summarised as follows:

	2011
	£'000
Investments in loan stocks	5,200
Cash and cash equivalents	8,422
Interest, dividends and other receivables	107
	13,729

The Manager manages credit risk in respect of loan stock with a similar approach as described under "Market 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.

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 period that are directly attributable to changes in credit risk.

Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. As the Company has a relatively low level of creditors (£135,000) 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.

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.

5. Controlling party and related party transactions
In the opinion of the Directors there is no immediate or ultimate controlling party.

Hazel Capital LLP, of which Christian Yates was a partner, acted as promoter for the Share Offer for subscription dated 20 October 2010 and agreed to underwrite the costs of the Offer in return for a fee of 5.5% of the monies raised, which amounted to £1,143,000. At the period end £30,454 was owed by Hazel Capital LLP for the refund of listing expenses. This amount is included in other debtors. No issue costs were due or outstanding at the year end.

Hazel Capital LLP also provides investment management services to the Company. During the period ended 30 September 2011, £146,000 was payable to Hazel Capital LLP in respect of these services. At the period 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 2011, this amounted to £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 £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.

6. Post Balance Sheet event
On 24 December 2011, the share premium account was cancelled following receipt of court approval. The amount standing to the share premium account on 31 August 2011 has therefore been transferred to a special reserve. The special reserve is a distributable reserve, which was created to enable the Company to purchase its own shares in the market and to pay dividends.

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 period ended 30 September 2011, but has been extracted from the statutory financial statements for the period ended 30 September 2011 which were approved by the Board of Directors on 30 January 2012 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.

A copy of the full annual report and financial statements for the period ended 30 September 2011 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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Source: Hazel Renewable Energy VCT 2 plc via Thomson Reuters ONE

HUG#1581182