Hazel Renewable Energy VCT 2 plc : Half-yearly ...

Hazel Renewable Energy VCT2 plc
Half-Yearly Report for the six months ended 31 March 2015

Performance summary

31 Mar 2015		30 Sep 2014		31 Mar 2014
	Pence		Pence		Pence
Net asset value per Ordinary Share	115.1		115.0		105.2
Net asset value per 'A' Share	0.1		0.1		0.1
Cumulative dividends per Ordinary Share	24.5		24.5		24.5
Total return per Ordinary Share and 'A' Share	139.7		139.6		129.8

CHAIRMAN'S STATEMENT
I am pleased to present the Company's half-yearly report for the six months ended 31 March 2015.

Investments
At the period end, the Company held a portfolio of 21 investments with a value of £30.0 million and which were spread across the ground mounted solar, roof mounted solar and small wind sectors.

The investment portfolio has continued to perform satisfactorily. All investment valuations have been held at the previous carrying value at the period end, with the exception of Lunar 2 Limited, which has been increased in value by £300,000 in recognition of the cash that has accumulated in the company and its subsidiaries over the period as a result of the receipt of Feed in Tariffs ("FiTs").

Further details on the investments is provided in the Investment Manager's report below.

Net asset value and results
At 31 March 2015, the net asset value ("NAV") per Ordinary Share stood at 115.0p and the NAV per 'A' Share stood at 0.1p, producing a combined total of 115.1p. This reflects no change since 30 September 2014.

Total Return (total NAV plus cumulative dividends paid to date) stands at 139.6p for a holding of one Ordinary Share and one 'A' Share, compared to the cost for subscribers in the original share offer, net of income tax relief, of 70.0p.

The return on ordinary activities after taxation for the period as shown in the Income Statement was £5,000.

Dividends
As I mentioned in my statement in the last Annual Report, the Board has decided to adjust the Company's financial calendar to better align the payment of the annual dividend with the seasonal cycle of the receipts of FiTs and other incentives by the investee companies.

The first dividend on this revised schedule will be 5.0p per share which will be paid on 18 September 2015 to Shareholders on the register at 28 August 2015. It is intended that the annual dividend in future will always be paid in September.

Future Strategy
The Company will be five years old later this year and the Board has decided that it is an appropriate time to review the long term strategy for the Company.

Having successfully built a solid portfolio comprising ground mounted solar, roof mounted solar and some wind small wind projects, the Manager and the Board are evaluating options in order to determine which are likely to produce the best overall outcome for Shareholders. The Board notes that almost all of the projects owned by the investee companies earn incentives which are no longer available within a VCT wrapper which produces tax-free income for Shareholders.

Although this work is not yet complete, there appear to be strong arguments in favour of the Company continuing as a VCT after the initial five year period rather than considering a wind up. The Manager believes there may be further opportunities for refinancing of the existing portfolio as well as other areas in the renewable and sustainable sectors that may be attractive in due course.

I will be in position to give more detailed proposals for the future strategy of the Company when the next Annual Report is published.

Share buybacks
As set out in the original prospectus, the Company operates a policy of buying in any of its own shares that become available in the market at a 10% discount to NAV, subject to certain regulatory and any liquidity restrictions. The Board intends to review this policy at regular intervals, in particular to ensure that demand for buybacks and liquidity remain appropriately aligned.

No shares were purchased in the period.

Outlook
With the Company fully invested and the portfolio continuing to mature, we expect relatively little portfolio activity over the remainder of the financial year. The Manager's main focus will continue to be on optimising the performance of the existing investments.

I look forward updating Shareholders on developments in my statement within the Annual Report for the year ending 30 September 2015.

Peter Wisher
Chairman

INVESTMENT MANAGER'S REPORT
The half year ending 31 March 2015 has been notable for an intensified focus in three areas: operational improvements, cost savings in finance and structure-related areas and future investment strategy and dividends.

The VCTs are now fully-invested and this has been the first half year since the inception of the VCTs where we have not made new investments or implemented any refinancing. This has given us the long awaited opportunity to delve deeper into these areas that have had to take a back seat to putting money to work and related activities.

Specifically, since the year end in September 2014, we have done the following:

Operations
- Looked at ways in which we could boost the performance of our large ground-mounted solar assets, particularly those that earn high feed-in-tariffs. We identified a small modification in one of our parks that carried a negligible cost but had the potential of increasing the amount of electricity generated;
-Negotiated and put in place a good, attractively priced O&M contract for the small part of our rooftop solar portfolio that has had operational issues. Anesco, the appointed contractor, is the most experienced in the UK, in our view;
- Developed our working relationship with Britwind (Ecotricity Group), the O&M contractor appointed for the small wind fleet, and engaged with independent contractors for the purpose of improving monitoring and addressing performance issues. Our efforts are bearing fruit, with more of the fleet reaching a steady-state performance; and
- Broadened our O&M relationships with a view to cutting O&M costs by as much as 50% as current contracts expire over the coming 2 years.

Cost reduction through financial and structural improvements
- Conducted a thorough review of bookkeeping, tax, accounting and audit costs across the portfolio and have identified alternative solutions that can reduce costs by  as much as 30%; and
- Initiated a review of the structure of the Company and its portfolio with a view to identifying top level savings from mergers and consolidations

Investment Strategy and Dividends
- We have put in place better systems and procedures to forecast cash yields across our portfolio. This has given us much greater visibility on dividends in the short and longer term. The results that have come out of our analysis have been encouraging and highlight the value that has been created by leveraging good quality assets at good terms and acquiring new assets at attractive valuations (largely due to conservative modelling resulting in better-than-expected returns). Also, as part of this process the Board of Directors has recommended making the payment of the annual dividend at the end of the year it corresponds to, rather than in the middle, which occurred for historical reasons only; and
- Continued our efforts to identify a pipeline of new high-yielding opportunities (in solar but also energy efficiency and electricity storage) with a similar risk profile to the current portfolio. As the Company is fully invested and the net cash yield after costs is paid out as dividends, funds for new investments can only come from refinancing other assets, or additional fundraising. We therefore examined the refinancing potential for SPVs that are not leveraged today in the context of the unprecedentedly low interest rate environment that we are experiencing. The low rates as well as funders' increasing comfort with renewable generation assets has brought down risk premiums and this may give us a unique opportunity to refinance them - however we will continue to be very mindful of the need to avoid excess leverage even with the greater stability of our asset base.

We are very pleased with the progress made in the quarter. Not only have we been able to boost operational performance at the margin and lay the grounds for further improvements, but we have also identified the potential to extract significant savings from ancillary areas such as the structure of the Company and financial costs such as audit, accounting, tax and bookkeeping. We are confident that all the necessary steps have been taken to drag up laggards in the portfolio such as the small portion of the solar rooftop portfolio that has underperformed, and our small wind portfolio. We are also happy with the cashflow forecasting tools that we now have.

Finally, after conducting another review of the valuation of the portfolio we have concluded that, for most investments, an adjustment either way is not justified at this time. We have anecdotal evidence that hurdle rates for renewable generation assets have drifted down since the last valuation at 30 September 2014, in line with interest rates that hit all-time lows.  However these rates have experienced a sharp bounce in the last two weeks. This suggests that a "mark-to-market" exercise for our portfolio in what is likely to be a volatile interest rate environment should be done cautiously; we will continue to make adjustments if we have strong evidence of a sustained move in hurdle rates. We have however agreed with the Board that the investment in Lunar 2 should be uplifted slightly by £300,000 in view of the cash which has accumulated in the company and its subsidiaries over the period.

We look forward to the next half year and building on the progress we achieved in the six months ending at the end of March.

Ben Guest
Chief Investment Officer
Hazel Capital LLP

UNAUDITED SUMMARISED BALANCE SHEET
as at 31 March 2015

	31 Mar 2015		31 Mar 2014		30 Sep 2014
	£'000		£'000		£'000
Fixed assets
Investments	29,958		25,791		29,802
Current assets
Debtors (including accrued income)	394		112		144
Cash at bank and in hand	46		1,331		163
	440		1,443		307
Creditors: amounts falling due within one year	(654)		(2,030)		(682)
Net current liabilities	(214)		(587)		(375)
Total Assets less net current liabilities	29,744		25,204		29,427
Creditors: amounts falling due after more than one year	(1,412)		-		(1,100)
Net assets	28,332		25,204		28,327
Capital and reserves
Called up share capital	62		57		62
Share premium	3,985		2,001		3,985
Unallotted share capital	-		1,180		-
Special reserve	13,632		13,653		13,632
Revaluation reserve	12,427		9,519		12,127
Capital reserve - realised	(865)		(715)		(794)
Revenue reserve	(909)		(491)		(685)
Equity shareholders' funds	28,332		25,204		28,327
Net asset value per Ordinary Share	115.0p		105.2p		115.0p
Net asset value per 'A' Share	0.1p		0.1p		0.1p
	115.1p		105.3p		115.1p

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the six months ended 31 March 2015

	31 Mar 2015		31 Mar 2014		30 Sep 2014
	£'000		£'000		£'000
Opening Shareholders' funds	28,327		22,545		22,545
Unallotted share capital	-		1,180		-
Proceeds from share issue	-		-		2,067
Share issue costs	-		-		(98)
Dividends	-		(4,068)		(4,069)
Total recognised gains for the period	5		5,547		7,882
Closing Shareholders' funds	28,332		25,204		28,327

UNAUDITED INCOME STATEMENT
for the six months ended 31 March 2015

	Six months ended 31 Mar 2015				Six months ended 31 Mar 2014			Year ended 30 Sep 2014
	Revenue	Capital	Total		Revenue	Capital	Total		Total
	£'000	£'000	£'000		£'000	£'000	£'000		£'000
Income	126	-	126		205	-	205		370
Gains on investments
- unrealised	-	300	300		-	5,735	5,735		8,343
	126	300	426		205	5,735	5,940		8,713
Investment management fees	(212)	(71)	(283)		(190)	(63)	(253)		(517)
Other expenses	(138)	-	(138)		(141)	1	(140)		(314)
Return on ordinary activities before taxation	(224)	229	5		(126)	5,673	5,547		7,882
Taxation	-	-	-		-	-	-		-
Return attributable to equity shareholders	(224)	229	5		(126)	5,673	5,547		7,882
Return per Ordinary Share	(0.9p)	0.9p	0.0p		(0.6p)	24.9p	24.3p		33.3p
Return per 'A' Share	-	-	-		-	-	-		-

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

UNAUDITED CASH FLOW STATEMENT
for the six months ended 31 March 2015

		31 Mar 2015			31 Mar 2014			30 Sep 2014
Note		£'000			£'000			£'000
Cash (outflow)/inflow from operating activities and returns on investments	1	(613)			1,228			(424)
Capital expenditure
Purchase of investments		-			-			(1,684)
Sale of investments		145			2,454			2,735
Net cash inflow from capital expenditure		145			2,454			1,051
Equity dividends paid		-			(4,068)			(4,069)
Net cash outflow before financing		(468)			(386)			(3,442)
Financing
Unallotted share capital		-			1,180			-
Proceeds from Ordinary Share issue		-			-			2,062
Proceeds from 'A' Share issue		-			-			4
Long term loans		351			-			1,100
Share issue costs		-			-			(98)
Net cash inflow from financing		351			1,180			3,068
(Decrease)/increase in cash	2	(117)			794			(374)
Notes to the cash flow statement:
1  Cash (outflow)/inflow from operating activities and returns on investments
Return on ordinary activities before taxation			5			5,547		7,882
Gains on investments			(300)			(5,735)		(8,343)
(Increase)/Decrease in other debtors			(250)			63		32
(Decrease)/Increase in other creditors			(68)			1,353		5
Net cash (outflow)/inflow from operating activities			(613)			1,228		(424)
2  Analysis of net funds
Beginning of period			163			537		537
Net cash (outflow)/inflow			(117)			794		(374)
End of period			46			1,331		163

SUMMARY OF INVESTMENT PORTFOLIO
as at 31 March 2015

	Cost	Valuation	Unrealised gain in period	% of portfolio by value
	£'000	£'000	£'000
Lunar 2 Limited	2,976	10,247	300	34.2%
Ayshford Solar (Holding) Limited	2,102	2,921	-	9.7%
Tumblewind Limited	2,534	2,856	-	9.5%
Lunar 1 Limited	124	2,043	-	6.8%
Hewas Solar Limited	1,000	1,672	-	5.6%
St Columb Solar Limited	722	1,388	-	4.6%
New Energy Era Limited	884	1,304	-	4.4%
Vicarage Solar Limited	871	1,204	-	4.0%
Minsmere Power Limited	975	1,009	-	3.4%
Gloucester Wind Limited	1,000	1,000	-	3.3%
Small Wind Generation Limited	975	975	-	3.2%
AEE Renewables UK 3 Limited	900	900	-	3.0%
Penhale Solar Limited	900	900	-	3.0%
HRE Willow Limited	875	875	-	2.9%
Owl Lodge Solar (Holding) Limited	80	249	-	0.8%
Higher Tregarne Solar (Holding) Limited	243	216	-	0.7%
Causilgey Solar (Holding) Limited	248	184	-	0.6%
ZW Parsonage Limited	15	15	-	0.1%
Yonder Netherton Solar (Holding) Limited	5	-	-	0.0%
Sunhazel UK Limited	1	-	-	0.0%
Lime Technology Limited	100	-	-	0.0%
	17,530	29,958	300	99.8%
Cash at bank and in hand		46		0.2%
Total investments		30,004		100.0%

SUMMARY OF INVESTMENT MOVEMENTS
as at 31 March 2015

Additions
There were no additions during the six months to 31 March 2015.

Disposals

	Cost	Disposal proceeds	Total gain against cost	Realised gain in period
	£'000	£'000	£'000	£'000
Ayshford Solar (Holding) Limited	145	145	-	-
	145	145	-	-

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
1. Accounting policies - Basis of accounting
The unaudited half-yearly results cover the six months to 31 March 2015 and have been prepared in accordance with the accounting policies set out in the annual accounts for the year ended 30 September 2014 which were prepared under UK Generally Accepted Accounting Practice ("UK GAAP") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies revised January 2009 ("SORP").

2. All revenue and capital items in the Income Statement derive from continuing operations.

3. The Company has only one class of business and derives its income from investments made in shares, securities and bank deposits.

4. Net asset value per share at the period end has been calculated on 24,603,159 Ordinary Shares and 36,904,733 'A' Shares, being the number of shares in issue at the period end.

5. Return per share for the period has been calculated on 24,603,159 Ordinary Shares and 36,904,733 'A' Shares, being the weighted average number of shares in issue during the period.

6. Dividends

	Period ended 31 Mar 2015			Year ended 30 Sep 2014
	Revenue	Capital	Total		Total
	£'000	£'000	£'000		£'000
Paid in period
2013 Final Ordinary	-	-	-		1,139
2014 Special Ordinary	-	-	-		1,664
2014 Special 'A' Share	-	-	-		1,265
	-	-	-		4,068
Forthcoming dividends
2014 Final Ordinary - 5.0p	-	1,230	1,230		-
	-	1,230	1,230		-

7. Reserves

	Share premium account	Special reserve	Revaluation reserve	Capital reserve - realised	Revenue Reserve
	£'000	£'000	£'000	£'000	£'000
At 30 September 2014	3,985	13,632	12,127	(794)	(685)
Gains on investments	-	-	300	-	-
Expenses capitalised	-	-	-	(71)	-
Retained revenue	-	-	-	-	(224)
At 31 March 2015	3,985	13,632	12,427	(865)	(909)

The Revenue reserve, Capital reserve - realised and Special reserve are distributable reserves. The distributable reserve is reduced by unrealised holding losses of £196,000 which are included in the Revaluation reserve. Distributable reserves at 31 March 2015 were £11,662,000.

8. Risks and uncertainties
Under the Disclosure and Transparency Directive, the Board is required in the Company's half-year results to report on principal risks and uncertainties facing the Company over the remainder of the financial year.

The Board has concluded that the key risks facing the Company over the remainder of the financial period are as follows:

(i) investment risk associated with investing in small and immature businesses;
(ii) market risk in respect of the various assets held by the investee companies;
(iii) failure to maintain approval as a VCT; and

In order to make VCT qualifying investments, the Company has to invest in small businesses which are often immature. The Investment Manager follows a rigorous process in vetting and careful structuring of new investments and, after an investment is made, close monitoring of the business. The Manager also seeks to diversify the portfolio to some extent by holding investments which operate in various sectors. The Board is satisfied with this approach.

The Company's compliance with the VCT regulations is continually monitored by the Administration Manager, who reports regularly to the Board on the current position. The Company has appointed Robertson Hare LLP, who will work closely with the Investment Manager and provide regular reviews and advice in this area. The Board considers that this approach reduces the risk of a breach of the VCT regulations to a minimal level.

9. Going concern
The Directors have reviewed the Company's financial resources at the period end and conclude that the Company is well placed to manage its business risks.

The Board confirms that it is satisfied that the Company has adequate resources to continue in business for the foreseeable future. For this reason, the Board believes that the Company continues to be a going concern and that it is appropriate to apply the going concern basis in preparing the financial statements.

10. The unaudited financial statements set out herein do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 and have not been delivered to the Registrar of Companies.

11.The Directors confirm that, to the best of their knowledge, the half-yearly financial statements have been prepared in accordance with the "Statement: Half-Yearly Financial Reports" issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by:

a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

12. Copies of the Half-Yearly Report will be sent to Shareholders shortly. Further copies can be obtained from the Company's registered office or can be downloaded from www.downing.co.uk.

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This announcement is distributed by NASDAQ OMX Corporate Solutions on behalf of NASDAQ OMX Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Hazel Renewable Energy VCT 2 plc via Globenewswire

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