TIDMHR1O
Hazel Renewable Energy VCT1 plc
Legal Entity Identifier: 213800IVQHJXUQBAAC06
Final results for the year ended 30 September 2017
FINANCIAL HIGHLIGHTS
Audited Audited
Year End Year End
30 September 30 September
2017 2016
Pence Pence
Net asset value per Ordinary Share 116.0 118.1
Net asset value per 'A' Share 0.1 0.1
Cumulative Dividends paid 39.5 34.5
Total return per Ordinary Share and 'A'
Share 155.6 152.7
CHAIRMAN'S STATEMENT
I present the Annual Report for Hazel Renewable Energy VCT1 plc for the
year ended 30 September 2017, my first as Chairman of the Company.
As Shareholders will be aware, it has been a busy year for your Company.
In recent months, the Board has agreed a reorganisation of the Company,
with Gresham House Asset Management Limited formally taking over as
Investment Adviser. The new arrangements bring a number of benefits
which the Board believes will deliver enhanced value to Shareholders. We
are looking forward to working with the new team as the Company enters
the next stage of its life.
Investment portfolio
There were no changes to the investment portfolio during the year. At
the year end, the Company held a portfolio of 16 investments with a
total value of GBP31.4 million.
As usual, the Board has reviewed the investment valuations at the year
end and made adjustments to the fair values. Despite lower than expected
irradiation during the year which impacted the solar investments, other
factors have offset this resulting in a net unrealised gain of
GBP992,000.
Net asset value and results
At 30 September 2017, the Net Asset Value ("NAV") per Ordinary Share
stood at 116.0p and the NAV per 'A' Share stood at 0.1p, producing a
combined total of 116.1p. This represents an increase of 2.9p (2.5%)
over the year (after adjusting for dividends paid during the year of
5.0p per Ordinary share). Total dividends paid to date for a combined
holding of one Ordinary Share and one 'A' Share stand at 39.5p. Total
Return (NAV plus cumulative dividends paid to date) now stands at 155.6p,
compared to the cost to investors in the initial fundraising of GBP1.00
or 70.0p net of income tax relief.
The profit on ordinary activities after taxation for the year was
GBP703,000, comprising a revenue loss of GBP196,000 and a capital gain
of GBP899,000 as shown in the Income Statement.
Dividends
A dividend of 5.0p per Ordinary Share paid was paid on 15 September
2017. The Company normally pays its annual dividend in September each
year, however the plans for the future of the Company as discussed below
may impact this.
The Company's general dividend policy is to distribute surplus funds
generated by the underlying investments, subject to maintaining an
appropriate cash reserve within the Company to meet anticipated future
requirements.
Share Buybacks
The Company has introduced a policy of buying in shares that become
available in the market at a 2% discount to NAV. Shareholders who wish
to sell their shares will need to do so via a stockbroker. The Company
has engaged Panmure Gordon (UK) Limited ("Panmure") as its Corporate
Broker. Panmure can provide guidance on the timing and likely price of
buybacks. Contact details for Panmure can be found on the inside cover
of the Annual Report.
No 'Ordinary' Shares or 'A' Shares were purchased during the year.
Board composition
In July, Michael Cunningham retired as a non-executive Director and
Chairman of the Company. Michael had been Chairman's since launch 2010
and made a substantial contribution to the development of the Company.
He also worked to resolve the challenges faced by the Company over the
last two years. I will miss working with him and wish him well for the
future with his other ventures. Following Michael's resignation, I
agreed to take over as Chairman.
The Directors are reviewing the composition of the Board and may make a
new appointment in due course.
Investment Adviser
As mentioned above, Gresham House Asset Management Limited ("GHAM") has
now been appointed as Investment Adviser to the Company, and our sister
Company, Hazel Renewable Energy VCT2 plc. GHAM is part of AIM-quoted
specialist asset manager, Gresham House plc.
GHAM acquired the business of Hazel capital LLP on 31 October 2017 so
the Company now benefits from continuity of the key investment
executives plus the enhanced resources of a larger group. As part of the
new arrangements, the Board also secured a reduced advisory fee. The
Board looks forward to working with GHAM and believes that the new
structure can deliver enhanced returns to Shareholders in due course.
Amendment to the Articles of Association
The VCT's investments are mostly in companies which were set up to
develop and operate renewable energy assets. In some cases, these
companies have not yet generated enough profits to fully offset the
set-up costs and, as a result, do not yet have distributable reserves
even though they are now generating surplus cash. Funds from these
investee companies have, in some cases, been paid up the VCT by way of
loans. In due course, it is expected that these loans will be cancelled
by the declaration of dividends from the investee company once
distributable reserves are available.
Article 106.1 restricts the Company from borrowing from non-group
companies a sum in excess of 15% of the net assets of the Company. As
currently drafted, loans from investee companies are included in this
calculation. The Directors believe that it was not intended that such
loans be included within this restriction and propose to extend the
definition of "Group" in the articles to include investee companies.
Resolution 6 will be proposed as a special resolution at the forthcoming
AGM seeking to make this amendment to the articles. The Board recommends
voting in favour of this resolution to allow the Company to continue to
have flexibility in transferring surplus cash from the investee
companies to the Company as required.
Annual General Meeting
The Company's seventh AGM will be held at St. Magnus House, 3 Lower
Thames Street, EC3R 6HD at 11:00 a.m. on 21 March 2018.
Two items of special business will be proposed in respect of authority
to undertake share buybacks and to amend the Articles of Association as
described above.
Outlook
The recent Budget by Her Majesty's Government announced a number of
further changes to the VCT regulations. As the Company is effectively
fully invested, the Board does not believe the new regulations will have
an impact on returns from the existing portfolio. The new regulations do
however place further restrictions on the types of new investments that
VCTs are able to make in future and will have an influence on any plans
that the Company might develop in respect of new investment activity.
The Board has also considered the potential impact of the UK leaving the
European Union. With almost all of the Company's funds employed in
renewable energy assets in the UK, the Board do not consider that any
impact of this will be significant for the Company.
In terms of the existing portfolio, over the next year, the investment
advisory team will continue close monitoring of and, where possible,
seek to further achieve running costs savings and improved efficiency
from the current assets.
I look forward to updating Shareholders in my statement with the Half
yearly report to 31 March 2018 which is expected to be published in July
2018.
Stephen Hay
Chairman
INVESTMENT ADVISER'S REPORT
Introduction
We would like to thank the shareholders for supporting the
reorganisation of the company and appointing Gresham House Asset
Management Limited as Investment Adviser. We look forward to sustaining
and enhancing the impressive investment returns that have been achieved
since inception in 2009. We are pleased to report that the portfolio of
assets owned by Hazel Renewable Energy VCT1 plc ("the Company") extended
its multi-year period of solid performance in the year ending 30
September 2017. This was achieved in spite of a significant headwind in
the form of adverse weather conditions faced by all owners of solar
generation assets in the UK.
The portfolio was fully invested at the beginning of the year. Although
there were surplus proceeds from the refinancing carried out in March
2016, the need to allow for all potential outcomes of the reorganisation
of the Company meant that these funds were maintained in cash.
The focus in the year was to generate as much yield as possible from the
portfolio, and to reduce risk to revenues over multiple years by
building in resilience through a new spare parts strategy and
negotiating better insurance terms.
Overall, the Company owns a well-diversified portfolio of assets of high
build quality. The ground-mounted sites and the solar installations
located on the roofs of residential properties owned by housing
associations across the UK have performed well over the years and
account for circa ninety percent of the cashflows and therefore the
value. The small wind turbine portfolio and to a lesser extent the small
portfolio solar installations located on the roofs of privately-owned
houses and schools have performed less well over the years, although the
latter has done better than expected in the past year.
Overall Portfolio and Operational Review
We have set out below the framework we use to analyse the performance of
the portfolio of assets in this report. We base our analysis on three
key factors: The first are macro level factors and include inflation,
wholesale power prices, variable components of subsidies for renewable
energy generation and climactic conditions. The Investment Adviser has
no control over this set of factors. The second category covers the
technical performance of an asset in terms of energy generation for a
given level of macro risk factors. The third category covers costs. The
Investment Adviser has much more control over the second and third
categories.
Starting with macro factors, inflation, a parameter that the portfolio
is very sensitive to (as a result of inflation-linked power subsidies)
steadily increased through the year. RPI (Retail Price Inflation)
increased from 2.0% to 3.9% over the year. The substantially higher
level is yet to be reflected in the tariffs as adjustments become
effective in April, however this increase is a very positive development
for the portfolio since each 1% increase in valuation, adds circa
GBP100,000 to portfolio revenues.
Climactic conditions however were unfavourable. The amount of solar
irradiation falling on the solar panels showed a marked decline from
prior years. For the six ground-mounted solar power plants remunerated
by Feed-in-Tariffs (FiTs) that account for around 70% of the value of
the portfolio, irradiation fell 5.5% short of forecasts. Each 1%
movement in irradiation for this portfolio results in a GBP80,000
movement in revenues. For the two ground-mounted sites remunerated by
Renewable Obligation Certificates (ROCs), irradiation came in line with
forecasts due to one of the parks being located on the East Anglia coast
which typically experiences different weather patterns than Central and
Western England where the other parks are located.
Unlike the case with the ground-mounted sites where pyranometers are
installed to measure irradiation, we do not have the ability to measure
irradiation at the roof-mounted solar installations as installing
pyranometers is not cost effective.
It is extremely difficult to forecast irradiation on a year-by-year
basis. Conditions have been poor in the last two years and we hope that
a reversion-to-mean effect manifests itself in the next year.
Power prices drifted down moderately throughout the year, however the
portfolio's very low exposure to power prices (less than 5% of revenues
are currently from variable tariffs) means that this has a very modest
impact.
Moving on to the second category, the technical performance of the
assets. We are pleased to report that the ground-mounted asset base that
accounts for 77% of the portfolio value, performed in line with
expectations despite the fact that we raised these expectations during
the year. Performance would however have come in better had there not
been an outage of three weeks duration at the point at which one of the
ground-mounted sites connects to the electricity grid. We expect to be
partially compensated for this outage through contractual terms in our
Operations and Maintenance Agreement.
Outages that occur in the summer where energy generation is highest can
result in a significant revenue loss and we looked at ways in which we
can minimise the probability and magnitude of such losses. We
renegotiated our insurance policies for the ground-mounted assets taking
advantage of more competition and substantially better terms available
in the insurance market, and are pleased to report that the excess
(deductible) is now ten days as opposed to twenty-five days for
allowable claims. We have also reviewed our spare parts strategy for
both the ground-mounted and rooftop-mounted solar installations to
improve the lead times of potential repairs and have ordered an
additional stock of spare parts that have long delivery times but
negligible obsolescence risk.
The reduced risk profile has helped us in our decision to reduce the
discount rate for the ground-mounted solar sites remunerated by FiTs by
25 basis points.
The roof-mounted solar asset portfolio that accounts for circa 12% of
the overall valuation performed slightly ahead of expectations.
Generation was 1% better than forecast.
An area of the portfolio that experienced a significant underperformance
is the small wind portfolio. This portfolio accounts for around 10% of
the overall value of the portfolio. We were hopeful that the small
uplift we experienced in performance in the prior year would continue,
however the opposite has happened.
Around a third of the portfolio consists of Chinese-made Huaying HY-5
wind turbines, some of which experienced significant technical and
safety issues during the high wind conditions that prevailed in
February. Britwind, the O&M Contractor, communicated that they would be
unable to maintain these assets in the future due to the poor technical
quality of the turbines and lack of support from the manufacturer, which
invalidated our insurance coverage. This combined with the safety/public
liability implications forced us to put the turbines on mechanical
break.
One major disadvantage of this type of distributed asset is the
difficulty of finding qualified and experienced Operations and
Maintenance Contractors that can perform a decent quality service at a
cost level that makes sense. We were nevertheless able to identify an
engineer willing to perform these services and have tasked his firm with
visiting and examining the installations and putting back in operation
those turbines that are safe and unlikely to necessitate major repairs.
This has resulted in our decision to recommend a further impairment to
the value of this element of the portfolio - it is now valued at circa
half the original investment amount.
The third factor that determines performance is costs. Most of our work
to reduce controllable costs was done in the prior year where we
renegotiated our O&M and insurance contracts and achieved cost
reductions of more than 50%. We also achieved savings in bookkeeping and
accounting costs.
This year however, we suffered the impact of a significant increase in
business rates. The Government decided to increase business rates by
close to three times for ground-mounted solar farms that were built in
the 2010 to 2012 period and therefore earned very high FiTs. The impact
on the portfolio is an increase of GBP175,000 per year in the cost base
once the taper period of three years to moderate the impact is over.
There is the potential of further reductions in O&M costs as prices in
the UK become more aligned with those in Continental Europe, however the
long-term nature of our O&M contracts (a requirement under the debt
facility agreements) mean that we will not enjoy the benefits of such a
realignment for several years to come.
We are now working on achieving cost reductions in ancillary areas such
as electricity imports, communications, security and monitoring, however
we do not expect these savings to amount to more than GBP10,000 per
annum across the portfolios.
Portfolio Valuation
As at 30 September 2017, the combined NAV and Total Return stood at
116.1p and 155.6p respectively, an increase of 2.9p after adjusting for
dividends paid during the year of 5.0p. This year's increase, as was the
case last year, has come from the increase in market prices for
renewable generation assets which we have reflected in the lower (by 25
basis points) range we used to value the ground-mounted, FiT remunerated
solar sites that account for circa 70% of the value of the portfolio.
In addition, our valuation assumptions incorporate a small increase in
the generation forecast. It would be extremely unlucky for the current
poor irradiation conditions to persist in the very long term and we have
reduced the weighting of the current year in our forecasts.
There have been no changes to discount rates used for other assets in
the portfolio or to inflation assumptions. Inflation has continued to
increase during the year and RPI has come in as high as 3.9% (as opposed
to our forecast for long term inflation of 3%) however we must take into
account that this increase could prove to be very transient.
Similar to last year, a significant portion of the valuation (circa
GBP10million in total with the Company's share being GBP5.0million -
circa 18% of the valuation) is comprised of cash balances held by
investee companies. Two thirds of this cash is held in reserves (for
equipment replacement and debt service in the case of a significant
breach of debt terms) that are mandatory under the debt facility
agreements.
In the longer term the potential to capture residual value through the
extension of leases beyond their 25-year term and upgrading the
equipment using new technology with much better yields may arise. We
witnessed this in another transaction relating to an asset outside the
Company's portfolio. It is a given that subsidies will not be available
and it is impossible to predict power prices so far out in the future
but upgrade costs are also likely to be very low.
Other Developments
The Hazel Capital Team that has delivered market-leading performance in
shareholder value is now proud to be part of Gresham House plc, a
fast-growing publicly-quoted alternative asset manager. We believe these
combined resources will be of great benefit to shareholders as they will
have the same core investment team continuing to manage the portfolio as
well as access to the wider Gresham House team's experience in
alternative asset management and investor communication. On the latter
point, Gresham House are working closely with trusted advisers, clients
and industry experts to develop a best-in-class client portal, which
will provide enhanced communication and high-quality reporting to
investors. The objective is to provide all shareholders with secured
access to the client portal during the first quarter of 2018.
Outlook
We will continue to target improvements in yield and reductions in risk
across the portfolio, and evaluate incremental maintenance capex
decisions that have the potential to generate high returns.
Should the opportunity occur to deploy the surplus cash proceeds held by
investee companies as a result of the March 2016 refinancing, we will
seek further investment opportunities such as the acquisition of small
scale solar sites or adding energy storage to existing projects in a way
that does not compromise the accreditation status.
Gresham House Asset Management Limited
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 30 September 2017:
Valuation
movement % of
Cost Valuation in year portfolio
GBP'000 GBP'000 GBP'000
Qualifying and part-qualifying
investments
Lunar 2 Limited* 2,976 15,322 1,843 48.6%
Ayshford Solar (Holding)
Limited* 1,928 3,154 164 10.0%
Lunar 1 Limited* 125 2,121 (65) 6.7%
New Energy Era Limited 884 1,390 (99) 4.4%
Hewas Solar Limited 1,000 1,355 (6) 4.3%
Vicarage Solar Limited 871 1,215 (88) 3.9%
Tumblewind Limited* 1,401 1,144 (65) 3.6%
Gloucester Wind Limited 1,000 953 (200) 3.0%
Minsmere Power Limited 975 729 (321) 2.3%
HRE Willow Limited 875 726 (44) 2.3%
Penhale Solar Limited 825 725 (10) 2.3%
St Columb Solar Limited 650 673 (17) 2.1%
Chargepoint Services Limited 500 500 - 1.6%
Small Wind Generation Limited 975 483 (100) 1.5%
Sunhazel UK Limited 1 - - 0.0%
14,986 30,490 992 96.6%
Non-qualifying investments
AEE Renewables UK 3 Limited 900 900 - 3.0%
900 900 - 3.0%
15,886 31,390 992 99.6%
Cash at bank and in hand 129 0.4%
Total investments 31,519 100.0%
* Part-qualifying investment
All venture capital investments are incorporated in England and Wales.
Hazel Renewable Energy VCT2 plc, of which Gresham House Asset Management
Limited ("GHAM") is the Investment Adviser, holds the same investments
as above.
Investment movements for the year ended 30 September 2017
DISPOSALS
Valuation at 30 Profit Realised
Cost September 2016 Proceeds vs cost Gain
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Qualifying and
part-qualifying
investments
Ayshford Solar
(Holdings)
Limited 552 506 552 - 46
552 506 552 - 46
Non-qualifying
investments
Tumblewind Limited 37 37 37 - -
37 37 37 - -
589 543 589 - 46
All venture capital investments are incorporated in England and Wales.
Directors' responsibilities
The Directors are responsible for preparing the Strategic Report, 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), including Financial Reporting Standard
102, the financial reporting standard applicable in the UK and Republic
of Ireland (FRS 102). 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.
In addition, each of the Directors considers that the Annual Report,
taken as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company's
performance, business model and strategy.
INCOME STATEMENT
for the year ended 30 September 2017
Year ended 30 September Year ended 30 September
2017 2016
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income 492 - 492 1,784 - 1,784
Gain on investments - 1,038 1,038 - 376 376
492 1,038 1,530 1,784 376 2,160
Investment advisory fees (415) (139) (554) (432) (144) (576)
Other expenses (273) - (273) (272) (72) (344)
(Loss)/(profit) on ordinary activities before tax (196) 899 703 1,080 160 1,240
Tax on total comprehensive income and ordinary
activities - - - - - -
(Loss)/(profit) for the year and total comprehensive
income (196) 899 703 1,080 160 1,240
Basic and diluted earnings per share:
Ordinary Share (0.8p) 3.8p 3.0p 4.4p 0.7p 5.1p
'A' Share - - - - - -
All Revenue and Capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued
during the year. The total column within the Income Statement represents
the Statement of Total Comprehensive Income of the Company prepared in
accordance with Financial Reporting Standards ("FRS 102"). The
supplementary revenue and capital return columns are prepared in
accordance with the Statement of Recommended Practice issued in November
2014 by the Association of Investment Companies ("AIC SORP").
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 at historical cost.
BALANCE SHEET
as at 30 September 2017
2017 2016
GBP'000 GBP'000 GBP'000 GBP'000
Fixed assets
Investments 31,390 30,941
Current assets
Debtors 443 416
Cash at bank and in hand 129 6
572 422
Creditors: amounts falling due within one year (71) (157)
Net current assets 501 265
Total assets less net current assets 31,891 31,206
Creditors: amounts falling due after more than one
year (4,426) (3,262)
Net assets 27,465 27,944
Capital and reserves
Called up Ordinary Share capital 24 24
Called up 'A' Share capital 36 36
Share premium account 3,910 3,910
Special reserve 9,062 10,244
Revaluation reserve 15,504 14,466
Capital redemption reserve 2 2
Capital reserve - realised (1,195) (1,056)
Revenue reserve 122 318
Total Shareholders' funds 27,465 27,944
Basic and diluted net asset value per share
Ordinary Share 116.0p 118.1p
'A' Share 0.1p 0.1p
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2017
Called
up Share Capital Capital
share Premium Special Revaluation redemption reserve Revenue
capital Account Reserve reserve reserve realised reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Year ended 30 September 2016
At 30
September
2015 62 3,910 12,430 14,090 - (840) (762) 28,890
Total
comprehensive
income - - - 370 - (210) 1,080 1,240
Transactions
with owners
Repurchase and
cancellation
of own shares (2) - (1,004) - 2 - - (1,004)
Dividend Paid - - (1,182) - - - - (1,182)
Transfer
between
Reserves - - - 6 - (6) - -
At 30
September
2016 60 3,910 10,244 14,466 2 (1,056) 318 27,944
Year ended 30 September 2017
At 30
September
2016 60 3,910 10,244 14,466 2 (1,056) 318 27,944
Total
comprehensive
income - - - 992 - (93) (196) 703
Transactions
with owners
Dividend Paid - - (1,182) - - - - (1,182)
Transfer
between
Reserves - - - 46 - (46) - -
At 30
September
2017 60 3,910 9,062 15,504 2 (1,195) 122 27,465
CASH FLOW STATEMENT
for the year ended 30 September 2017
Year ended Year ended
30 September 2017 30 September 2016
GBP'000 GBP'000
Net cash inflow/(outflow) from
operating activities (448) 784
Cash flows from investing
activities
Purchase of investments - (1,057)
Proceeds from disposal of
investments 589 1,148
Net cash inflow from investing
activities 589 91
Net cash inflow before financing
activities 141 875
Cash flows from financing
activities
Equity Dividends paid (1,182) (1,182)
Long term loans 1,164 1,261
Purchase of own shares - (1,004)
Net cash outflow from financing
activities (18) (925)
Net increase/(decrease) in cash 123 (50)
Cash and cash equivalents at
start of year 6 56
Cash and cash equivalents at end
of year 129 6
Cash and cash equivalents
comprise
Cash at bank and in hand 129 6
Total cash and cash equivalents 129 6
NOTES TO THE ACCOUNTS
for the year ended 30 September 2017
1. General Information
Hazel Renewable Energy VCT1 plc ("the Company") is a venture capital
trust established under the legislation introduced in the Finance Act
1995 and is domiciled in the United Kingdom and incorporated in England
and Wales.
2. Accounting policies
Basis of accounting
The Company has prepared its financial statements under FRS 102 'The
Financial Reporting Standard applicable in the UK and Republic of
Ireland' and in accordance with the Statement of Recommended Practice
"Financial Statements of Investment Trust Companies and Venture Capital
Trusts" issued by the Association of Investment Companies ("AIC")
revised November 2014 ("SORP") as well as the Companies Act 2006.
The Company implements new Financial Reporting Standards ("FRS") issued
by the Financial Reporting Council when they become effective.
The financial statements are presented in Sterling (GBP).
Presentation of income statement
In order to better reflect the activities of a VCT 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 FRS 102
Sections 11 and 12.
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 and FRS 102 sections
14 and 15 that does not require portfolio investments, where the
interest held is greater than 20%, 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 interest 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 advisory 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 VCT 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.
Other debtors, other creditors and loan notes
Other debtors (including accrued income), other creditors and loan notes
(other than those held as part of the investment portfolio as set out in
Note 10 of the annual report) 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.
3. Income
Year ended Year ended
30 September 2017 30 September 2016
GBP'000 GBP'000
Income from investments
Loan stock interest 185 198
Dividend income 307 1,586
492 1,784
Other income
Bank interest - -
492 1,784
4. Basic and diluted earnings per share
Revenue
Weighted average number (loss)/ Capital
of shares in issue return return
Profit/(loss) per share is calculated on the per per
following: GBP'000 share GBP'000 share
Year ended 30
September
2017 Ordinary Shares 23,638,058 (195) (0.8) 898 3.8
'A' Shares 35,977,774 (1) - 1 -
Year ended 30
September
2016 Ordinary Shares 24,347,961 1,078 4.4 160 0.7
'A' Shares 36,635,087 2 - - -
As the Company has not issued any convertible securities or share
options, there is no dilutive effect on earnings per Ordinary Share or
'A' Share. The earnings per share disclosed therefore represents both
the basic and diluted return per Ordinary Share or 'A' Share.
5. Basic and diluted net asset value per share
Shares in issue 2017 2016
2017 2016 Net asset value Net asset value
per per
share GBP'000 share GBP'000
Ordinary Shares 23,638,058 23,638,058 116.0 27,429 118.1 27,908
'A' Shares 35,977,774 35,977,774 0.1 36 0.1 36
As the Company has not issued any convertible shares or share options,
there is no dilutive effect on 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 and per
'A' Share.
6. Principal risks
The Company's investment activities expose the Company to a number of
risks associated with financial instruments and the sectors in which the
Company invests. The principal financial risks arising from the
Company's operations are:
- Market risks;
- Credit risk; and
- Liquidity risk.
The Board regularly reviews these risks and the policies in place for
managing them. There have been no significant changes to the nature of
the risks that the Company was expected to be exposed to over the year
and there have also been no significant changes to the policies for
managing those risks during the year.
The risk management policies used by the Company in respect of the
principal financial risks and a review of the financial instruments held
at the year end are provided below:
Market risks
As a VCT, the Company is exposed to 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 Adviser and overseen by the Board. The
Adviser 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 Adviser 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; and
- Interest rate risk
Investment price risk
The Company's investments which comprise both equity and debt financial
instruments in unquoted investments are all in renewable energy projects
with predetermined expected returns. Consequently, the investment price
risk arises from uncertainty about the future prices and valuations of
financial instruments held in accordance with the Company's investment
objectives which can be influenced by many macro factors such as changes
in interest rates, electricity power prices and movements in inflation.
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 2017, the unquoted portfolio was valued at GBP31,390,000
(2016: GBP30,941,000). The key inputs to the valuation models are
electricity power prices, inflation and discount factors. The Board
considers that the most significant of these is discount factors and
inflation, and has undertaken some sensitivity analysis into the
movement of these.
The analysis below is provided to illustrate the sensitivity of the fair
value of investments to an individual input, while all other variables
remain constant. The Board considers these changes in inputs to be
within reasonable expected ranges. This is not intended to imply the
likelihood of change or that possible changes in value would be
restricted to this range. The possible effects are quantified below.
Change in fair
value of Change in NAV
Input Base case Change in input investments per share
GBP'000 pence
Discount
rate 6.5% - 7.25% +0.5% (1,870) (7.9)
-0.5% 1,985 8.4
Inflation 3.0 - 3.2% -0.5% (2,142) (9.1)
+0.5% 2,172 9.2
Power prices
The Board has considered the potential impact of changes in power prices
in the future and have concluded than the impact of any foreseeable
increases or decreases will not be significant to the valuation of the
portfolio as a substantial proportion of the total income generated by
the portfolio is derived from Feed in Tariffs and Renewable Obligation
Certificates.
Asset life
The Board has also considered the potential impact of changes to the
anticipated lives of assets in the portfolio. Close to ninety percent of
the Company's value is in assets refinanced by debt, and under the debt
facility agreements, substantial reserves are in place for renewing key
equipment as and when required. Furthermore, the underlying assets have
leases that are valid for the lifetime of the Company and cannot be
terminated early. Accordingly the Board does not consider that there
will be any significant impact to investment valuations as a result of
asset lives varying from those currently anticipated.
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. Where Investments in loan stock attract
interest, this is predominately charged at fixed rates. A summary of the
interest rate profile of the Company's investments is shown below.
There are three 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;
- "Floating rate" assets predominantly bear interest at rates linked to
The Bank of England base rate or LIBOR and comprise cash at bank; and
- No interest rate" assets do not attract interest and comprise equity
investments, certain loan note investments, loans and receivables and
other financial liabilities.
Average Average period 2017 2016
interest rate until maturity GBP'000 GBP'000
Fixed rate 8.2% 1,810 days 2,231 2,255
Floating rate 0% 129 6
No interest rate 24,961 25,535
27,321 27,796
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 profit before tax for the year by GBP61. The Bank of England
base rate increased from 0.25% per annum to 0.5% per annum on 2 November
2017. Any potential change in the base rate, at the current level, would
have an immaterial impact on the net assets and total return of the
Company.
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 Adviser 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 with interest, dividends and other
receivables is covered within the investment advisory procedures. The
level of security is a key means of managing credit risk. Additionally,
the risk is mitigated by the security of the assets in the underlying
investee companies.
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 year that is
directly attributable to changes in credit risk. Any balances that are
past due are disclosed further under liquidity risk.
There have been no loans for which the terms have been renegotiated
during the year.
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 GBP71,000 (2016: GBP157,000) and has long term
loans from investee companies (see Note 13 of the annual report for an
analysis of the repayment terms), which are expected to be repaid by
future dividends from these companies, being GBP4,426,000 (2016:
GBP3,262,000), 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 Adviser in
line with guidance agreed with the Board and is reviewed by the Board at
regular intervals.
7. Controlling party and related party transactions
In the opinion of the Directors there is no immediate or ultimate
controlling party.
8. Events after the end of the reporting period
At the General Meeting of Hazel 2 Shareholders, at 10:45am on 7 November
2017, held at 6th Floor, St. Magnus House, 3 Lower Thames Street, London
EC3R 6HD, Hazel 2 Shareholders voted unanimously in favour of the
proposals for the reorganisation of Hazel 2, as detailed in the letter
to Shareholders dated 17 October 2017. Adoption of the Proposals by the
Company was conditional on Hazel 2 obtaining shareholder approval for
the Proposals, such that the two companies could continue to operate
closely together under a joint Investment Advisory Agreement.
The particulars of the proposals are set out below:
- Gresham House Asset Management Limited ("GHAM"), a wholly owned
subsidiary of Gresham House plc, was appointed as the Investment
Adviser;
- the investment advisory fee percentage is reduced from 2.0% to 1.4%
for the first year, followed by a further reduction to 1.15% thereafter;
- there will be an absolute cap on the fees charged to investee
companies by the Investment Adviser;
- performance incentive arrangements will remain unchanged;
- the annual running costs cap will be reduced from 3.5% of net assets
to 3.0% of net assets per annum;
- the buyback policy will be revised such that shares in the market will
be repurchased at a discount of 2% to the latest published NAV. The
previous policy set a discount of 5%.
- the notice period in respect of the agreement with the Investment
Adviser will be reduced from 12 months to 9 months and Shareholder
approval will no longer be required to initiate the notice period. The
revised notice period cannot be activated within two years of the
commencement date of the new Investment Advisory Agreement.
In addition to the above, the following changes, as also detailed in the
letter to shareholders dated 17 October 2017, were agreed by the Board:
- The fees payable to Downing LLP have increased from GBP35,000 to
GBP40,000 per annum, with effect from 1 October 2017;
- The annual fees payable to the Chairman have increased from GBP20,000
to GBP25,000;
- The annual fees payable to the other Non-executive Directors have
increased from GBP15,000 to GBP20,000.
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
2017, but has been extracted from the statutory financial statements for
the year ended 30 September 2017, which were approved by the Board of
Directors on 9 January 2017 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 2016 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 2017 will be printed and posted to shareholders
shortly. Copies will also be available to the public at the registered
office of the Company at 6(th) Floor, St. Magnus House, 3 Lower Thames
Street, London EC3R 6HD and will be available for download from
www.downing.co.uk.
This announcement is distributed by Nasdaq Corporate Solutions on behalf
of Nasdaq 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 1 plc via Globenewswire
http://www.hazelcapital.com
(END) Dow Jones Newswires
January 10, 2018 02:00 ET (07:00 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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