Hazel Renewable Energy VCT 2 plc : Final Results
HAZEL RENEWABLE ENERGY VCT2 PLC
FINAL RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2013
FINANCIAL HIGHLIGHTS
| Unaudited | Audited | Audited | |
| Year End | Year End | ||
| 31 December 2013 | 30 September 2013 | 30 September 2012 | |
| Pence | Pence | Pence | |
| Net asset value per Ordinary Share | 123.1 | 98.8 | 94.6 |
| Net asset value per 'A' Share | 0.1 | 0.1 | 0.1 |
| Dividends paid | 8.5 | 8.5 | 3.5 |
| Total return per Ordinary Share and 'A' Share | 131.7 | 107.4 | 98.2 |
CHAIRMAN'S STATEMENT
I am pleased to present the Company's third annual report. Following major investing activity in the first two years, the Company is now effectively fully invested. This has allowed the Board to seek out ways of enhancing value for Shareholders within the existing portfolio.
During the year, the Investment Manager identified an opportunity to enhance value significantly through the acquisition of additional stakes in a number of existing ground-mounted solar investments. Combined with these acquisitions was a refinancing of the Company's portfolio of investments, structured in a way that the increased risk involved in taking on additional debt is more than offset by the additional projected cashflows from the investments. This transaction completed in December and has resulted in a significant uplift in net asset value (NAV) and an immediate cash inflow into the Company to allow the declaration of a special dividend.
Venture capital investments
At the year end, the Company held a portfolio of 23 investments with a total value of £22.5 million. There was one main addition during the year, being a further investment in Ayshford Solar (Holding) Limited of £2.3 million. There were also a number of loan stock redemptions, which produced total proceeds of £2.8 million and partly financed the new investment in Ayshford Solar.
At the year end, the Board undertook a review of all investment valuations. This has resulted in uplifts in respect of several of the solar investments.
The ground mounted solar investments performed steadily throughout the year and have now established reliable track records. This has supported a total increase in value of £2.5 million at the year end for the investee companies holding this type of asset (AEE Renewables UK 26 Limited, AEE Renewables UK 3 Limited, Beechgrove Solar Limited, New Era Energy Limited, South Marston Solar Limited and Vicarage Solar Limited, Ayshford Solar (Holdings) Limited and Owl Lodge (Holding) Limited)).
In addition, the valuations of a number of the Company's rooftop solar investments have also been uplifted. With much of the risk now eliminated from these investments and steady performance now being achieved, Hewas Solar Limited and St. Columb Solar Limited were increased in value by £641,000.
As part of the review of investments, the Board identified two investments that have been performing poorly and have considered it prudent to fully provide against both of them. The first is Quiet Revolution Limited where a provision has been made of £618,000. This was prompted by a further fundraising requirement which the Company was not prepared to support. The Company retains a shareholding following the fundraising but the future of Quiet Revolution Limited remains uncertain. The second provision is £100,000 against loans made available to Lime Technology Limited where interest is now overdue, and there is doubt over the recoverability of the principal.
Over the year, the net unrealised gains on investments was £2.4 million.
Net asset value and results
At 30 September 2013, the NAV per Ordinary Share stood at 98.8p and the NAV per 'A' Share stood at 0.1p, producing a combined total of 98.9p. This represents an increase of 9.2p (9.7%) over the year (after adjusting for dividends paid during the year of 5.0p per share).
The profit on ordinary activities after taxation for the year was £2,077,000, comprising a loss of £158,000 on the revenue account and profit of £2,235,000 on the capital account.
December 2013 refinancing transaction
The refinancing transaction was described in the Circular sent to Shareholders in November and consisted of the acquisition of additional shares in the six ground-mounted solar investments such that the Company now effectively holds 50% stakes in these businesses (with the other 50% being held by Hazel Renewable Energy VCT1 plc). The transaction also involved the introduction of intermediate holding companies (Lunar 1 Limited and Lunar 2 Limited), which drew down borrowings of £66m at an attractive rate partly to fund the acquisitions.
The transaction has allowed the ground-mounted solar project companies to repay £2.1 million of existing loan notes to the VCT.
The primary benefit of the transaction is access to significantly enhanced future cash flows, which the Board feels more than offsets the limited additional risk of financial leverage.
Following the transaction, the valuations of the Lunar companies and the other companies involved in the transaction have been reviewed and the Board has concluded that the transaction has resulted in an estimated uplift of £5.6 million across these investments, equivalent to 24.6p per Ordinary Share.
At 31 December 2013, the unaudited NAV per Ordinary Share stood at 123.1p and per 'A' Share at 0.1p. Total Return for a combined holding of one Ordinary Share and one 'A' Share was 131.7p.
Dividends
As a result of the transaction described above, the VCT has had a significant level of cash returned from the investee companies after the year end. The Board intends to distribute the majority of these funds to Shareholders and is proposing special dividends as follows:
Special interim in respect of the year ended 30 September 2014:
Ordinary Shares 7.3p
'A' Shares 3.7p
Total 11.0p
These dividends will be paid on 28 February 2014 to Shareholders on the register at 14 February 2014.
Additionally the Board is also proposing final dividends in respect of the year end 30 September 2013 as follows:
Final in respect of the year ended 30 Sept 2013:
Ordinary Shares 5.0p
'A' Shares nil
The final dividends will be subject to Shareholder approval at the AGM on 25 March 2014 and will be paid on 28 March 2014 to Shareholders on the register at 7 March 2014.
The 'A' Share structure facilitates the payment of an incentive fee to members of the management team, by virtue of the fact that one third of the 'A' Shares were issued to members of the Management Team outside the offers for subscription. The apportionment of dividends between the Ordinary and 'A' Shares is determined by rules set out in the Company's Articles and the original fundraising prospectus. The above special dividends result in dividends of £420,000 being paid on the Management 'A' Shares.
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 third AGM will be held at 59 Gloucester Place, London W1U 8JH at 11.05 a.m. on 25 March 2014.
One item of special business will be proposed at the AGM, a resolution seeking approval for the Company to be able to buy its own shares as described above.
Outlook
The refinancing transaction in December has been a significant development for the Company. The Board recognises the substantial amount of work undertaken by the Management Team and congratulates them on this achievement which, for an acceptable level of financial risk, unlocks funds that can be returned to Shareholders now and also provides the prospect of enhanced dividends for Shareholders in the future.
Looking forward, much of the Manager's work will be on continued close monitoring of the investments to ensure that the underlying projects keep producing the expected returns. In the case of the small numbers of investments which have faced some difficulties, work will continue to seek satisfactory resolutions. Although not without some risk, overall we expect the portfolio to continue to generate very satisfactory returns for Shareholders.
Peter Wisher
Chairman
INVESTMENT MANAGER'S REPORT
Introduction
We are pleased to be able to report that the year ended 30 September 2013 was very positive and active for Hazel Capital LLP as Investment Manager for Hazel Renewable Energy VCT2 plc. We are delighted to say that we have been able to develop the portfolio to a position where the Company now effectively owns and operates a set of operational assets which have reliable output and exceed our targeted yield.
Overall Portfolio and Operational Review
At the year end, the portfolio comprised 23 companies of which 19 companies were operational and held stakes in 15 underlying projects.
Operationally, the eleven solar projects (4 rooftop and 7 ground-mounted) are performing in line or above expectations. In contrast, and as reported in our report last year, our 4 wind project SPVs have mostly underperformed. We are determined to continue to drive better profitability from all investments, which we believe is possible by having more granular and timely information, making a myriad of small changes to the physical set up of certain projects and by improving response times.
Overall, the portfolio is yielding above the expectations we set for ourselves at the Company's launch and we have increased the value of many of the investments at the year end. This is despite a more volatile regulatory environment which, as expressed below, has dramatically impacted the fortunes of some of our counterparties.
While much of the news from the portfolio has been positive, the significant tariff reductions for new projects in the last 3 years has had heavy impact on the industry and has hit developers in all areas of the market.
One of the 4 solar installers we have worked with went into liquidation in May 2013. This has affected the management of Gloucester Wind Ltd in terms of transitioning paperwork and ongoing operations and maintenance ("O&M"). A replacement O&M contractor has now been brought in and we fully expect this investment to generate its targeted rate of return.
The small wind market has been hit particularly hard hit with demand for and installations of small wind turbines falling to 82% year on year in 2013. As a result of this, the developer of the bulk of our small wind installations, Windcrop Ltd, went into administration in July 2013. This impacts the investments in HRE Willow Ltd, Small Wind Generation Ltd, Tumblewind Limited and Minsmere Power Ltd, which have been underperforming.
Every crisis presents an opportunity and a proactive approach from the underlying manufacturers of the turbines has allowed us to source competitive O&M quotes and to run inspections of all sites to identify reasons for their underperformance and then attempt to resolve them. We are still hopeful that we can lift the returns of the Windcrop fleet closer to expected levels.
We have also held one investment in the form of a non-qualifying loan (of £600,000) to Quiet Revolution Ltd, another small wind developer and manufacturer; an investment made to generate a pipeline of small wind projects The Company has faced difficulties and required further funding during the year which we chose not to support. As a result, our loan was converted into equity, which we have valued at nil at the year end.
Finally, we have made a full provision of £100,000 against our investment in Lime Technology Limited, the sustainable building product developer, where progress has been disappointing.
Despite these provisions, the net overall increase in the valuation of the portfolio over the year was £2.4 million, generally reflecting the maturing state of the underlying projects.
Since the year end we have been able to carry out a significant financial refinancing of the 6 larger solar parks and acquisition of those shares that the Company did not already own. This is described in more detail below.
FIT Refinancing Transaction
Since the year end, we have been able to carry out a significant refinancing involving the six investments which hold stakes in the ground-mounted solar parks and the acquisition of additional shares in those companies.
The six FIT-earning companies (AEE Renewables UK 26 Limited, AEE Renewables UK 3 Limited, Beechgrove Solar Limited, New Era Energy Limited, South Marston Solar Limited and Vicarage Solar Limited) were offered debt funding with attractive terms. This offer was not attractive to the other shareholders in these companies who preferred to an exit for tax reasons and so there was an opportunity for the Company and Hazel Renewable Energy VCT1 plc to acquire the other shareholders' stakes by taking up the debt offer themselves. The transaction was undertaken by the introduction of intermediate holding companies, Lunar 1 Ltd and Lunar 2 Ltd (together the "Lunar Companies"). The Lunar Companies issued a bond to lenders totalling £66 million, which was largely used to acquire the shares of the other investors.
Following this transaction:
* The Company, along with Hazel Renewable Energy VCT1 plc, now effectively wholly owns the six companies involved in the transaction (which total 20.4MW) having previously owned between 15% and 39.2% of the larger sites (of 4 to 5MW sites) and 90% of the two smallest sites (of 0.6 to 0.7MW each).
* There is presently £66m of borrowings in the Lunar Companies which own these six projects.
* The value of these companies arrived at by discounting the future cashflows at a WACC (weighted average cost of capital) of 8%, results in an increase in valuation of the Company's investments of £5.6m.
* The main contributors to the increase in valuation include the cost synergies derived from bringing these investments together, continued operational improvements of the assets and the benefits derived from the favourable bond terms agreed to complete the purchase of what are now the wholly owned subsidiaries of the VCT's investment in Lunar.
We are delighted to announce that this transaction has resulted in a further uplift in NAV between the 30 September 2013 year end and the 31 December 2013 of 24.2p, taking the NAV of a combined holding of one Ordinary Share and one A Share to 123.2p and the Total Return of a combined holding to 131.7p.
Further Transactions
While the Investment Manager has no immediate opportunities to add value by further refinancing of other project companies or any other corporate transaction, we will continue to assess incremental opportunities as they present themselves.
Outlook
The refinancing transaction has allowed us to unlock significant value from an already strong solar portfolio. We expect to see continued steady performance from the majority of projects, along with improvements from some of the underperforming assets, and believe that these will provide income to the Company to allow an attractive level of dividends to be paid to Shareholders well into the future.
Ben Guest
Chief Investment Officer
Hazel Capital LLP
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 30 September 2013:
| Cost | Valuation | Valuation movement in period | % of portfolio | |
| £'000 | £'000 | £'000 | ||
| Qualifying and part-qualifying investments | ||||
| AEE Renewables UK 3 Limited* | 3,125 | 3,150 | 25 | 13.7% |
| Ayshford Solar (Holding) Limited | 2,716 | 2,999 | 283 | 13.0% |
| AEE Renewables UK 26 Limited* | 1,145 | 1,928 | 439 | 8.4% |
| Hewas Solar Limited* | 1,125 | 1,624 | 391 | 7.1% |
| South Marston Solar Limited* | 952 | 1,515 | 563 | 6.6% |
| Beechgrove Solar Limited | 906 | 1,369 | 463 | 5.9% |
| New Energy Era Limited | 884 | 1,342 | 366 | 5.8% |
| St. Columb Solar Limited* | 735 | 1,236 | 250 | 5.4% |
| Vicarage Solar Limited | 871 | 1,041 | 170 | 4.5% |
| Gloucester Wind Limited | 1,000 | 1,000 | - | 4.3% |
| Minsmere Power Limited | 975 | 975 | - | 4.2% |
| Small Wind Generation Limited | 975 | 975 | - | 4.2% |
| Penhale Solar Limited | 900 | 900 | - | 3.9% |
| HRE Willow Limited | 875 | 875 | - | 3.8% |
| Tumblewind Limited | 850 | 850 | - | 3.7% |
| Owl Lodge Solar (Holding) Limited | 80 | 260 | 180 | 1.1% |
| Causilgey Solar (Holding) Limited | 248 | 226 | (22) | 1.0% |
| Higher Tregarne Solar (Holding) Limited | 243 | 224 | (19) | 1.0% |
| Yonder Netherton Solar (Holding) Limited | 5 | 5 | - | 0.0% |
| Sunhazel UK Limited | 1 | 1 | - | 0.0% |
| 18,611 | 22,495 | 3,089 | 97.6% | |
| Non-qualifying investments | ||||
| ZW Parsonage Limited | 15 | 15 | - | 0.1% |
| Quiet Revolution Limited | 618 | - | (618) | 0.0% |
| Lime Technology Limited | 100 | - | (100) | 0.0% |
| 733 | 15 | (718) | 0.1% | |
| 19,344 | 22,510 | 2,371 | 97.7% | |
| Cash at bank and in hand | 537 | 2.3% | ||
| Total investments | 23,047 | 100.0% |
* Part-qualifying investment
All venture capital investments are incorporated in England and Wales.
Hazel Renewable Energy VCT1, of which Hazel Capital LLP is the Investment Manager, holds the same investments as above.
Investment movements for the year ended 30 September 2013
ADDITIONS
| Cost | |
| £'000 | |
| Qualifying investments | |
| Ayshford Solar (Holding) Limited | 2,265 |
| Non-qualifying investments | |
| Quiet Revolution Solar Limited | 18 |
| 2,283 |
DISPOSALS
| Cost | Valuation at 30/09/12 | Proceeds | Profit vs cost | Realised gain | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Qualifying investments | |||||
| Owl Lodge Solar (Holding) Limited | 464 | 464 | 464 | - | - |
| St. Columb Solar Limited* | 200 | 200 | 200 | - | - |
| South Marston Solar Limited* | 158 | 158 | 158 | - | - |
| Higher Tregarne Solar (Holding) Limited | 125 | 125 | 125 | - | - |
| Causilgey Solar (Holding) Limited | 101 | 101 | 101 | - | - |
| Penhale Solar Limited | 100 | 100 | 100 | - | - |
| Beechgrove Solar Limited | 94 | 94 | 94 | - | - |
| Tumblewind Limited | 62 | 62 | 62 | - | - |
| 1,304 | 1,304 | 1,304 | - | - | |
| Non-qualifying investments | |||||
| AEE Renewables UK 26 Limited | 650 | 650 | 650 | - | - |
| AEE Renewables UK 3 Limited | 375 | 375 | 375 | - | - |
| Hewas Solar Limited | 237 | 237 | 237 | - | - |
| ZW Parsonage Limited | 235 | 235 | 235 | - | - |
| 1,497 | 1,497 | 1,497 | - | - | |
| 2,801 | 2,801 | 2,801 | - | - |
* Part-qualifying investment
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 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). 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.
INCOME STATEMENT
for the year ended 30 September 2013
| Year ended 30 Sept 2013 | Year ended 30 Sept 2012 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
| Income | 386 | - | 386 | 481 | - | 481 | |
| Net gain on investments | - | 2,371 | 2,371 | - | 1,051 | 1,051 | |
| 386 | 2,371 | 2,757 | 481 | 1,051 | 1,532 | ||
| Investment management fees | (314) | (104) | (418) | (302) | (101) | (403) | |
| Other expenses | (230) | (32) | (262) | (241) | (5) | (246) | |
| (Loss)/profit on ordinary activities before tax | (158) | 2,235 | 2,077 | (62) | 945 | 883 | |
| Tax on ordinary activities | - | - | - | - | - | - | - |
| (Loss)/profit attributable to equity shareholders | (158) | 2,235 | 2,077 | (62) | 945 | 883 | |
| Basic and diluted (loss)/profit per share: | |||||||
| Ordinary Share | (0.7p) | 9.8p | 9.1p | (0.2p) | 4.3p | 4.1p | |
| '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 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 2013 | Year ended 30 September 2012 | ||||
| £'000 | £'000 | ||||
| Opening Shareholders' funds | 21,607 | 19,445 | |||
| Proceeds from share issue | - | 2,123 | |||
| Share issue costs | - | (117) | |||
| Profit for the year | 2,077 | 883 | |||
| Dividend paid | (1,139) | (727) | |||
| Closing Shareholders' funds | 22,545 | 21,607 | |||
BALANCE SHEET
as at 30 September 2013
| 2013 | 2012 | |||
| £'000 | £'000 | £'000 | £'000 | |
Fixed assets | ||||
| Investments | 22,510 | 20,657 | ||
| Current assets | ||||
| Debtors | 175 | 450 | ||
| Cash at bank and in hand | 537 | 630 | ||
| 712 | 1,080 | |||
| Creditors: amounts falling due within one year | (677) | (130) | ||
| Net current assets | 35 | 950 | ||
| Net assets | 22,545 | 21,607 | ||
| Capital and reserves | ||||
| Called up Ordinary Share capital | 23 | 23 | ||
| Called up 'A' Share capital | 34 | 34 | ||
| Share premium account | 2,001 | 2,001 | ||
| Special reserve | 17,721 | 18,860 | ||
| Revaluation reserve | 3,166 | 795 | ||
| Capital reserve - realised | (35) | 101 | ||
| Revenue reserve | (365) | (207) | ||
| Total equity shareholders' funds | 22,545 | 21,607 | ||
| Basic and diluted net asset value per share | ||||
| Ordinary Share | 98.8p | 94.6p | ||
| 'A' Share | 0.1p | 0.1p |
CASH FLOW STATEMENT
for the year ended 30 September 2013
| Year ended 30 September 2013 | Year ended 30 September 2012 | |||
| £'000 | £'000 | |||
| Net cash inflow/(outflow) from operating activities | 528 | (509) | ||
| Capital expenditure | ||||
| Purchase of investments | (2,283) | (11,625) | ||
| Proceeds from disposal of investments | 2,801 | 3,062 | ||
| Net cash inflow/(outflow) from capital expenditure | 518 | (8,563) | ||
| Dividends paid | (1,139) | (727) | ||
| Net cash outflow before financing | (93) | (9,799) | ||
| Financing | ||||
Proceeds from Ordinary Share issue | - | 2,123 | ||
Proceeds from 'A' Share issue | - | 1 | ||
Share issue costs | - | (117) | ||
| Net cash inflow from financing | - | 2,007 | ||
| Decrease in cash | (93) | (7,792) | ||
NOTES TO THE ACCOUNTS for the year ended 30 September 2013
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 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 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) 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 return per share
| Weighted average number of shares in issue | Revenue loss | Capital return | ||
| (Loss)/profit per share is calculated on the following: | £'000 | £'000 | ||
| Year ended 30 September 2013 | Ordinary Shares | 22,793,328 | (158) | 2,232 |
| 'A' Shares | 34,189,992 | - | 3 | |
| Year ended 30 September 2012 | Ordinary Shares | 21,776,774 | (62) | 945 |
| 'A' Shares | 32,665,086 | - | - | |
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 return 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 | 2013 | 2012 | ||||
| 2013 | 2012 | Net asset value | Net asset value | |||
| per share | £'000 | per share | £000 | |||
| Ordinary Shares | 22,793,330 | 22,793,330 | 98.8 | 22,511 | 94.6 | 21,573 |
| 'A' Shares | 34,189,992 | 34,189,992 | 0.1 | 34 | 0.1 | 34 |
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. 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:
Investment 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
Investment 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" assets 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.
Interest rate risk (continued)
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.
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.
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.
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 £153,000 (2012: £130,000) and has low short term loans from investee companies being £524,000 (2012: £nil) 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. Related party transactions
Hazel Capital LLP provides investment management services to the Company. During the year ended 30 September 2013 £418,000 (2012: £403,000) 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 2013, this amounted to £90,000 (2012: £86,000), 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 £nil (2012: £1,998) 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 18 December 2013, along with its sister company Hazel Renewable Energy VCT1 plc, the Company undertook a reorganisation of six of its investee companies (AEE Renewables UK 26 Limited, AEE Renewables UK 3 Limited, Beechgrove Solar Limited, New Era Energy Limited, South Marston Solar Limited and Vicarage Solar Limited), whereby additional stakes in each company were acquired from third parties and two holding companies, Lunar 1 Limited and Lunar 2 Limited were put in place. This allowed the drawdown of borrowings from a third party of £66 million which has the potential to substantially enhance cash flows attributable to the Company over the life of the underlying projects. The Board estimates that the transaction results in an uplift in value of these investments totalling £5.6 million, equivalent to 24.6p per Ordinary Share.
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 2013, but has been extracted from the statutory financial statements for the year ended 30 September 2013, which were approved by the Board of Directors on 31 January 2014 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 2012 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 2013 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.
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
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