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Octopus VCT 3 plc (OVC3)

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Tuesday 15 December, 2015

Octopus VCT 3 plc

Octopus VCT 3 plc : Final Results

Octopus VCT 3 plc : Final Results

 

15 December 2015

Octopus VCT 3 plc, managed by Octopus Investments Limited, today announces its final results for the year ended 31 August 2015.

Financial Summary

  As at
31 August 2015
As at
31 August 2014
     
Net assets (£'000s) 7,067    7,481
Return on ordinary activities after tax (£'000s) 15 76
Net asset value (NAV) per share 85.7p 90.5p
Cumulative dividends paid since launch 10.0p 5.0p
NAV plus cumulative dividends paid 95.7p 95.5p
Dividends paid in year 5.0p 5.0p
Proposed final dividend for the year 5.0p 5.0p
     

Subject to shareholder approval at the Annual General Meeting the final dividend of 5.0p per share will be paid on 12 February 2016 to shareholders on the register on 15 January 2016.

  

Chairman's Statement

Introduction

I am pleased to present the Annual Report of Octopus VCT 3 plc (the Company) for the year ended 31 August 2015.

Performance

During the period the Total NAV Return (current NAV plus cumulative dividends paid to date) of the Company has risen slightly from 95.5 pence per share at 31 August 2014 to 95.7 pence per share at 31 August 2015.

As a reminder, the NAV (Net Asset Value) excluding dividends is designed to fall to zero over the life of the Company as the annual dividend is paid out, and consequently the value of the solar companies reduces as they approach the end of their 25 year operating lives. Therefore, as expected, the underlying NAV has decreased from 90.5 pence per share at 31 August 2014 to 85.7 pence per share at 31 August 2015, while the Total Return, including dividends paid to date of 10p, stands at 95.7p.

The Board's main focus is to maintain the targeted 5p dividend each year despite the impact of falling power prices in response to the reduction in the market price of oil and gas. The valuations of your Company's investments, as a function of the forecast revenue flows, are based on estimates of power prices over the remaining life of the assets provided by a leading energy consultancy, recognised as experts in this field. Using their 'Central' case, the predicted long term cash flows fall marginally short of the level required for a continued payment of an annual dividend of 5p over the complete life of the Company. However, a relatively modest increase in future years in the market price of electricity would improve the outlook sufficiently for the 5p target to be met.

Over the preceding period two sites in the portfolio have experienced a number of technical issues resulting in some under-performance, leading to a loss in revenues and an unbudgeted liability. These issues were compounded by the insolvency of the main contractor responsible for the construction and ongoing Operations and Maintenance (O&M) of the sites, as a result of which one of the companies had to take on an additional liability to cover the cost of rectifying a technical issue. However, as there has been some over-performance from other sites in the portfolio during the period, the loss of output has been comfortably offset against a surplus generated by other sites. Overall, our investments continue to perform well and in line with expectations.

It should be noted that the smaller than anticipated amount of funds raised for the Company in 2011/2012 and the resulting reduction in economies of scale leaves less margin for protection of the dividend than would otherwise have been the case. Costs borne by your Company are monitored closely by your Board.

Dividend Policy and Dividend

The current cash balance held by the Company is sufficient to cover the next dividend of 5p, allowing for a prudent reserve for operating purposes. Therefore, in line with the dividend policy stated in the Prospectus, your Board has proposed a final dividend of 5.0p per share in respect of the year ended 31 August 2015. This dividend, if approved by shareholders at the AGM, will be paid on 12 February 2016 to shareholders on the register on 15 January 2016.

Investment Portfolio

The Company is fully invested into seven companies, each containing an operational solar site. These sites have a range of capacities between 1-2MWp and benefit from either the Feed In Tariff (FIT) or Renewables Obligation Certificates (ROCs), which form part of their revenue stream alongside the electricity they sell on the wholesale market. The sites have all been operating for between two and three years now, and apart from the recent above mentioned issues have been performing well.

There are no plans to make any further investments as the Company intends to hold the assets for their full operating lives of twenty five years. However, the Company does also hold a small portion of funds for making short term non-qualifying loans from which it earns interest.

Key Portfolio Operational Risks

A full summary of risks is provided. However it is important to keep in mind a number of key risks highlighted below surrounding to the ongoing operations of the underlying investments:

  • Power Prices - Revenues are derived from two sources; first, Government-backed subsidies such as FITs and ROCs, and secondly from sales of the electricity produced by the solar sites. The latter portion of revenues, which represents over 40% of the total, is variable and will be subject to market forces. The Investment Manager uses industry recognised forecasts to predict electricity prices for the life of the sites. It also mitigates price fluctuations in the short term via forward selling the electricity using Power Purchase Agreements (PPAs) to reduce income volatility, so as to achieve budgeted revenue. However, it should be noted that long-term electricity prices can rise and fall, and therefore have an impact on the Company's revenues and the NAV of the underlying solar sites.
  • Site Technical Issues - All sites are potentially vulnerable to unforeseen technical issues and, to the extent possible, all equipment is warranted to industry standard levels. In addition, each site has insurance in place so that in the event of a fault occurring that causes the plant to be unable to generate revenues temporarily the insurance can be invoked to claim for such losses.
  • Weather - All forecasts are based on an assumed level of sunlight each year, which is derived from historical averages, but this of course will vary from year to year. Less sunlight could potentially lead to a reduction in dividend payments, as a result of lower revenues but the prudent approach adopted in forecasting revenue mitigates the likelihood of this occurring.
  • Site Market Value - There are a number of drivers in the value of NAV of a solar site, including long term power prices and the discount rate used in the valuation of the solar asset (which is largely driven by the technology employed and track record). The risk of reduced power prices can be mitigated to a degree by forward selling the electricity produced via PPAs. However, the rate of return (and thus its value) for each site cannot be predicted for the medium to long term.
  • Business Rates - This is a new risk that has been identified relating to the regular Government review of business rates which are next due to be assessed and determined by October 2016. There is as yet no indication of what the new level will bebut given the proportion of site operation costs it represents, it could affect the level of future dividends, as well as the NAV.

VCT Qualifying Status

PricewaterhouseCoopers LLP provides the Board and Investment Manager with advice concerning ongoing compliance with HMRC rules and regulations concerning VCTs.  The Board has been advised that the Company is compliant with the conditions laid down by HMRC for maintaining provisional approval as a VCT. 

A key requirement is to maintain at least a 70% qualifying investment level. Encouragingly, as at 31 August 2015, 87.4% of the portfolio, as measured by HMRC rules, was invested in VCT qualifying investments. The Board continues to be confident that the 70% target will be maintained on an ongoing basis.

Annual General Meeting

The Directors look forward to meeting as many shareholders as possible at our Annual General Meeting on 27 January 2016, to be held at the offices of Octopus Investments Limited, 33 Holborn, London, EC1N 2HT. The AGM will start at 4.00 p.m.

Outlook

In the short term we expect UK power prices to remain depressed in the wake of the current global energy demand slump. It should be noted that this could reduce revenue generation and overall asset value, and hence the Company's ability to deliver a NAV plus cumulative dividends paid of 110p per share at the 5 year point.

As a reminder, the 110p comprises the sum of four annual dividends of 5p each and a targeted NAV of the solar assets of 90p at the 5 year point (i.e. 5p x 4 + 90p = 110p). As it stands today, and as highlighted in the half yearly report ended 28 February 2015, achieving a 90p NAV at the 5 year point remains challenging and would require energy prices to increase further than the current central forecast assumptions. Other key reasons that should be noted as to why the target is unlikely to be met include the drastic FIT reductions implemented by the Government in late 2011 (the Fund Manager reduced fees in an attempt to offset the reduction), as well as the impact of relatively higher running costs as a result of the lower than anticipated funds raised at the outset.

Finally, it should be highlighted that despite the recent well publicised announcements by the Government in respect of ending the various subsidy regimes for large scale solar PV in the UK, this may have a positive effect on the value of the existing portfolio of assets given that there is now a limited supply of 'green' energy to meet increasing demand. As the assets also benefit from an earlier, and hence higher, subsidy regime it is expected that they may attract a premium. Although not currently included in the valuations this potential increase may help offset some of the effects of falling power prices.

Gregor Michie
Chairman
15 December 2015

Investment Manager's Review

Personal Service

At Octopus we have a dual focus, on managing your investments and keeping you informed throughout the investment process.  We are committed to providing our investors with regular and open communication. Our updates are designed to keep you informed about the progress of your investment.

Octopus Investments Limited was established in 2000 and has a strong commitment to both smaller companies and to VCTs.  We currently manage eight VCTs, including this VCT, and currently have over £5 billion of funds under management.  Octopus has over 400 employees.

Portfolio Review

The Company has invested in a portfolio of seven individual solar companies, each of which owns and operates a solar site in the 1-2MWp range. The first five sites have all been accredited for the FIT and have just passed their third full year of operation since commissioning. The remaining two sites were accredited under ROCs and are at their two and a half year point of operations.

Over the previous period two companies, Delambre and Huygens who own the ROC sites, experienced some technical issues with their sites as the result of some poorly installed cables during their original construction. As a result the Huygens site was only operating at around 60% of its total capacity over the recent summer months. The Delambre site was affected to a much lesser extent in revenues loss, but has had to incur an unbudgeted liability to cover the costs of rectifying the cables. To compound issues, the EPC who originally constructed the sites, and who was also responsible for their O&M, became insolvent during the period and mid repair works at the Huygens site. As a result the site remained only in partial operation for longer than was planned. However, temporary O&M services are now in place for the affected sites until a new longer term O&M provider can be secured. As a consequence of the insolvency, the Delambre site still requires additional works to be completed and therefore a provision has been set aside in the solar company accounts to carry out this work, which has consequently impacted the valuation of this company.

Other than the abovementioned issues the portfolio of seven sites has overall been performing well since the start of operations, and is slightly up against forecasts mainly due to good PPA terms.

Company Performance

Between the 31 August 2014 and the 31 August 2015, the NAV has decreased as would be expected. This is primarily due to the payment of the 5p dividend in January 2015. The table below shows the movements between the two periods:

Changes in NAV between August 2014 and August 2015
NAV at 31 August 201490.5
Cash distributions from solar companies 3.8
Revaluation of solar companies (0.8)
VCT running costs (2.8)
Dividends paid(5.0)
NAV at 31 August 201585.7

Company Outlook

The ongoing strategy is, as previously stated, to hold the assets for their full operational lives. The key risk is the impact of long term power prices which have dropped significantly in the last year or so. There is little that can be done in the immediate term, but our long term view is that they will rise again. However, aside from this we are proposing to investigate ways in which we can optimise or enhance the existing portfolio to create more value whether through technical improvements or potentially looking to extend the asset life beyond the current 25 years. This would have the effect of increasing both revenues, which go directly towards the dividend, as well as the value of the underlying company which will increase the NAV.

Finally, a point worth highlighting is that although the Government have effectively ended subsidies for new solar PV projects in the UK, this has the potential to increase the value of existing assets in the portfolio given there will now be a finite amount available in the market, and investors have become increasing interested in such asset classes due to their relatively predictable income and established technology. We will monitor the market closely and should there be sufficient justification for doing so we may look to decrease the discount rates used to value the sites according to market trends, which would in turn increase valuations. We monitor the renewables sector on a regular basis and the discount rates used to value the solar sites within the Company's portfolio are in line with market practice seen at present.  Any changes to discount rates used by market participants in the future may cause us to change the discount rates we use to determine fair value of the investments.

If you have any questions on any aspect of your investment, please call one of the team on 0800 316 2295.

Matt Setchell
Octopus Investments Limited
15 December 2015

Directors' Responsibilities Statement

The Directors are responsible for preparing the Strategic Report, Directors' Report, Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

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 laws).  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 and 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 judgements and accounting estimates that are reasonable and prudent; andstate whether applicable UK
  • Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements and the Directors' Remuneration report 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 confirm that:

  • so far as each Director is aware, there is no relevant audit information of which the Company's auditor is unaware; and
  • the Directors 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 the auditors are aware of that information.

The Directors are responsible for preparing the annual report in accordance with applicable law and regulations. Having taken advice from the Audit Committee, the Directors consider the annual report and the financial statements, taken as a whole, provide the information necessary to assess the Company's performance, business model and strategy and is fair, balanced and understandable.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website.  Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

To the best of our knowledge:

  • the financial statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws), give a true and fair view of the assets, liabilities, financial position and profit or loss of the company; and
  • the annual report, including the strategic report, includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Gregor Michie
Chairman
15 December 2015

Income Statement

     

Year ended 31 August 2015
 

Year ended 31 August 2014
    

Revenue
 

Capital
Total  

Revenue
 

Capital
Total
  Notes£'000£'000£'000 £'000 £'000 £'000
            
Gain on disposal of fixed asset investments   --- - 3 3
Loss on valuation of fixed asset investments 8 -(62)(62) - (14) (14)
            
Other income 2309-309 317 - 317
            
Management fees  (37)(12)(49) (14) (41) (55)
 

Other expenses
3(164)-(164) (156) - (156)
            
Profit/(loss) on ordinary activities before tax 108(74)34 147 (52) 95
            
Taxation on return on ordinary activities   

(19)
-(19) (19) - (19)
            
Profit/(loss) on ordinary activities after tax 89(74)15 128 (52) 76
Earnings per share - basic and diluted 1.1p(0.9)p0.2p 1.6p (0.6)p 1.0p
  • The 'Total' column of this statement is the profit or loss account of the Company; the supplementary revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies
  • All revenue and capital items in the above statement derive from continuing operations
  • The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds

The Company has no recognised gains or losses other than the results for the period as set out above.

Reconciliation of Movements in Shareholders' Funds

 
 Year ended 31 August 2015 Year ended 31 August 2014
 £'000 £'000
Shareholders' funds at start of period7,481 7,818
Profit/(loss) on ordinary activities after tax 15  76
Purchase of own shares (16) -
Dividends paid (413) (413)
Shareholders' funds at end of period7,067 7,481

Balance Sheet

 
   As at 31 August 2015 As at 31 August 2014
  Notes£'000£'000 £'000 £'000
Fixed asset investments* 8 6,944   7,181
         
Current assets:        
Debtors 9106  93  
Cash at bank  93  291  
   199  384  
Creditors: amounts falling due within one year 10(76)  (84)  
Net current assets   123   300
Net assets  7,067   7,481
         
Called up equity share capital 11 82   83
Share Premium 12 99   99
Special Distributable Reserve 12 7,104   7,444
Capital Redemption Reserve 12 2   1
Capital Reserve - Unrealised 12 (76)   (14)
Capital Reserve - Realised 12 (144)   (132)
Revenue Reserve 12 -   -
Total shareholders' funds  7,067   7,481
Net asset value per share7 85.7   90.5p

*Held at fair value through profit or loss

The statements were approved by the Directors and authorised for issue on 15 December 2015 and are signed on their behalf by:

Gregor Michie
Chairman
Company No: 07744056

 

Cash Flow Statement

   
  Year ended 31 August 2015 Year ended 31 August 2014
  £'000 £'000
      
Net cash inflow from operating activities 77   353
      
Taxation (21) (13)
      
Financial investment:      
Purchase of fixed asset investments 8- (225)
Receipt of loan note principal 8175 53
       
Dividends paid   (413) (413)
      
Financing:    
Issue of shares  - -
Cost of issue of shares  - -
Purchase of own shares    (16) -
Decrease in cash resources at bank (198) (245)

Reconciliation of Return before Taxation to Cash Flow from Operating Activities

  Year ended 31 August 2015 Year ended 31 August 2014
  £'000 £'000
Profit on ordinary activities before tax 34 95
(Increase)/decrease in debtors (13) 219
(Decrease)/increase in creditors (6) 28
Loss on valuation of fixed asset investments 62 14
Gain on disposal of fixed asset investments - (3)
Outflow from operating activities77 353

Reconciliation of Net Cash Flow to Movement in Net Funds

  Year ended 31 August 2015 Year ended 31 August 2014
  £'000 £'000
Decrease in cash resources at bank (198) (245)
Opening net liquid resources 291 536
Net funds at 31 August 201593 291

Net Funds at 31 August comprised:

  As at 31 August 2015 As at 31 August 2014
  £'000 £'000
Cash at bank 93 291
Net Funds at 31 August 201593 291



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: Octopus VCT 3 plc via Globenewswire

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