Hazel Renewable Energy VCT 2 plc : Half-yearly report

Hazel Renewable Energy VCT2 plc
Half-Yearly Report for the six months ended 31 March 2017

Performance summary

31 Mar 2017 30 Sep 2016 31 Mar 2016
  Pence   Pence   Pence
Net asset value per Ordinary Share115.5 117.3 116.6
Net asset value per 'A' Share0.1 0.1 0.1
Cumulative dividends per Ordinary Share34.5 34.5 29.5
Total return per Ordinary Share and 'A' Share150.1 151.9 146.2

I present the Company's half-yearly report for the six months ended 31 March 2017.

As Shareholders will be aware, a General Meeting took place in January for Shareholders to vote on whether the Company should continue as a Venture Capital Trust for a further five years. Shareholders voted against the resolution and, as a result, the Board is now working on proposals for the voluntary liquidation, reconstruction or other reorganisation of the Company.

At the period end, the Company held a portfolio of 17 investments with a value of £30.9 million which were spread across the ground mounted solar, roof mounted solar and small wind sectors. There have been no additions to or disposals from the portfolio during the period.

The portfolio companies have continued to perform in line with expectations over the period under review, in some cases benefitting from improved rates on Operations and Maintenance contracts that the Investment Advisor has been able to negotiate. The Board has reviewed the valuations at the period end and agreed that no adjustments to the investment valuations were required.

Further detail on the investments is provided in the Investment Advisor's report. 

Net asset value and results
At 31 March 2017, the net asset value ("NAV") per Ordinary Share stood at 115.5p and the NAV per 'A' Share stood at 0.1p, producing a combined total of 115.6p. This represents a small fall of 1.8p since the 30 September 2016 year end as the VCT's running costs have exceeded income from the assets over the winter period when solar irradiation is at its lowest.

Total Return (total NAV plus cumulative dividends paid to date) stands 150.1p 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 Directors consider this to be an excellent result for Shareholders to date.

The loss on ordinary activities after taxation for the period as shown in the Income Statement was £428,000, equivalent to 1.8p per Ordinary Share. This loss arises as the investee companies have not paid any dividends to the VCT during the period as a result of the seasonality of the income for most of the assets. VCT running costs for this period have therefore exceeded income.

In line with the Company's policy a dividend of 5.0p per Ordinary Share will be paid on 15 September 2017 to Shareholders on the register at 18 August 2017.

As I mentioned in my statement in the Annual Report, Matthew Evans joined the Board as a non-executive director on 31 January 2017. Matthew is proving to be a very useful addition to the Board, which now comprises three non-executive directors. The Directors believe this is an appropriate size for the Company.

Future Strategy
As mentioned above, shareholders have voted against the Company continuing as a Venture Capital Trust for a further five years. As your Company has a close relationship with Hazel Renewable Energy VCT1 plc ("Hazel 1"), with which it has co-invested on all its investments, the Board has been working with the Hazel 1 Board, seeking to develop proposals that will best meet the requirements of all shareholders.

To this end, the Companies have appointed a consultant to run this process and have engaged with several parties, including Hazel Capital, the Investment Advisor, with the objective of preparing formal proposals. The final proposals are expected to provide some Shareholders with an option to exit from their investment while maintaining viable vehicles for those Shareholders that wish to continue holding their investment.

We anticipate that these proposals will be ready to present to Shareholders in the late summer.

Share buybacks
In view of the ongoing review of future strategy, the Board has suspended share buybacks for the time being. These may be re-introduced when the plans for the future of the Company have become clearer.

No shares were purchased in the period.

There are a number of differing views amongst the shareholder base of the Company, and Hazel 1, as to what investors wish to see from the companies and their investments in the future. The Board has been presented with a significant challenge to structure a plan that can meet the requirements of all Shareholders, but is working towards proposals which it believes can be flexible enough to satisfy most Shareholders.

This process is made a little easier by the fact that the Company continues to hold a robust portfolio of renewable energy assets which is producing satisfactory returns and is expected to continue to do so well into the future.

I look forward to presenting proposals to Shareholders in the coming months.

Peter Wisher


We are pleased with the overall performance of the portfolio in the half year ending 31 March 2017.

The portfolio consists of assets of a high build quality that are standing the test of time well. Most of them have been inspected at different points in time and have passed with flying colours, especially the solar assets. The strong O&M contracts we have as well as the right monitoring and risk management strategy we are implementing suggest that performance will remain strong in the future.

The major assets of the portfolio have performed well during this period.  Where we have had issues these have been primarily limited to segments of the portfolio that make a very small contribution to total NAV.  We have also been able to achieve significant cost savings primarily through the renegotiation of Operations and Maintenance ("O&M") contracts for these assets.

There are three sets of key factors we look at to determine the overall performance of the portfolio; macro factors (such as inflation, power prices, ROC recycle values and climactic conditions), technical performance and operating costs.

As investment managers, we have control over the latter two factors but macro factors are outside our control.

Macro factors were marginally unfavourable overall in the latest period. Inflation was higher with UK RPI increasing from 2% to 3.1%, although the benefits of this will not be felt until next year. In terms of weather conditions for our solar and wind assets, solar irradiation was in line with expectations while average wind speeds were not at all favourable.

In more detail, the ground mounted solar installations, accounting for over 75% of the NAV, performed substantially better than the roof-mounted solar installations which are primarily located in northern parts of the UK and are hence more susceptible to shadowing effects in the dark months of the year.  Power prices fluctuated significantly during the period but ended the half year at levels similar to where they started.  A spike in power prices during the period had little positive impact on the portfolio, as over 80% of the NAV is concentrated on projects remunerated under the Feed-in-Tariff (FIT) regime, where over 90% of revenues are fixed. Finally, the ROC recycle price (which affects two of our solar projects) remained at zero due to surge in renewable energy generation capacity that has been deployed.  This is despite the commitment enshrined in the ROC regime that they should reach 10% of the ROC buyout price.

The portfolios benefit from inflation as the electricity tariffs earned by renewable energy generation installations are revised upwards every April with inflation (with reference to RPI the October before).  All else being equal a 1% increase in inflation increases cash available for distribution by c.3%. Tariffs were adjusted upwards in April by 2.51% which means that there was no benefit accruing to the portfolio in the last half year but we look forward to this contributing in future periods.

In terms of technical performance, the ground mounted solar installations performed in line with the expectations set at the time of acquisition of the projects.  For one of the sites there was an outage in October at the point of connection to the electricity grid which is outside the site boundary and under the exclusive control of the local electricity network operator. This meant that although the site was capable of generating power, it could not export this power to the grid.  All the sites are insured with business interruption insurance for this type of event, although, in this case, the duration was less than the minimum excess set under the policy. The impact on the portfolio was to reduce revenues portfolio by 1.5%, all else being equal.  This is the sort of rare event over which a manager has little control.

In the period, we undertook a new risk assessment study based on our experience to date with the purpose of identifying areas where a small incremental investment could drastically reduce the likelihood of low probability but high impact outages within a project's boundary.  We took into account the age of the equipment as well as the fact that some brands of equipment are getting more difficult to source. Three areas we identified as having a high pay-off. These are longer lead time items such as meters and switchgear. A modest incremental investment has resulted in sufficient spares to avoid such an event across the four larger FiT-remunerated sites that generate around 75% of overall portfolio revenues (but a smaller percentage of cashflow today due to debt obligations). 

Rooftop installations, which represent circa 18% of the NAV mostly performed well.  The only ongoing challenge relates to detailed monitoring as it is not cost effective to put equipment on the c. 1,500 small installations that the portfolio owns. As a result, some of the installations can be affected by communication problems which prevent metering data being reported for revenue collection purposes. This is a widespread occurrence across similar solar portfolios and its effect is only limited to timing of revenue receipts.

The small wind turbine portfolio which accounts for 7% of the total NAV suffered a run of sub-par performance exacerbated by poor wind conditions. One third of the fleet consists of Huaying HY-5 turbines which have performed poorly from the start. We had initiated a maintenance capital expenditure programme to improve performance. However, this has now been put on hold due to mechanical failure on two Huaying turbines meaning that most of these turbines have been put on mechanical break as we perform a safety review.

As to costs, we have renegotiated the O&M contracts for the four largest FiT-remunerated ground-mounted solar assets, and now pay around half of what we were paying last year, as well as improving contractual provisions. A further 10% reduction will come through if we extend the contracts beyond the one-year term, which can be done once there is clarity on the final outcome of the continuation vote process.

We are working on achieving further cost savings through lower bills for services such as electricity (incoming), mobile and broadband communications and security and monitoring.

There is also scope to renegotiate some terms of the debt facility that was put in place in December 2013.   We will report on this at a future date but, for example, as the prices of inverters and modules is now much lower than in 2013, the reserves are now sufficient to replace most inverters and a significant sub-set of the entire module stock across the six sites in question.

There is the potential for a negative development on the cost side, beyond the manager's control: there are proposals that, if finally implemented, could increase the business rates that the FiT-remunerated sites are paying, by increasing the rateable value, significantly. A decision on these proposals is due in the near future.

Year over year, energy production has been at the same level as it was during the half year to March 2016, when climactic conditions were also slightly unfavourable. Production in this period accounts for around a third of annual output, and even a single good month in the summer season would be sufficient to redress the effect over the full year.

Looking into the future, the increase in inflation will impact the portfolio positively, as will more favourable weather conditions than those which have been experienced over the last 18 months.
Investment Strategy, Valuation and Dividends There is a substantial amount of cash in the portfolio as only 30% of the refinancing transaction proceeds from last year were reinvested. However the Board has halted new investment pending the outcome of the process that began with the continuation vote in January 2017.  Share buy backs, inter alia, would be a good use of this cash.

The portfolio is capable of generating a very attractive dividend profile which will increase over time as inflation filters through, operating costs are released further, cash in reserves are released and leverage is paid off.

The government has closed all avenues that enable investors to enjoy the regular and predictable income streams for renewable generation assets in a tax free manner. In our view, this means that the portfolio has scarcity value as well, in our view.

We are working with the Board to reach a solution that will allow investors who have voted in favour of continuation to continue enjoying increasing tax free dividends, and those investors who want to sell to exit at an attractive price.

We look forward to the next half year and building on the progress we achieved in the six months ended March 2017.

As a final comment, Hazel Capital has announced that it has agreed terms for its acquisition by Gresham House plc.  This is a very positive development which will strengthen the Hazel Capital team and improve its ability to perform its services.  The transaction is expected to complete in the third quarter of 2017.

Ben Guest
Managing Partner
Hazel Capital LLP

as at 31 March 2017

  31 Mar
  31 Mar
  30 Sep
  £'000   £'000   £'000
Fixed assets      
Investments30,941 30,071 30,941
Current assets      
Debtors (including accrued income)484 452 420
Cash at bank and in hand7 21 4
 491 473 424
Creditors: amounts falling due within one year(45) (96) (161)
Net current assets/(liabilities) 446 377 263
Total assets less net current assets/(liabilities) 31,387 30,448 31,204
Creditors: amounts falling due after more than one year  


Net assets 28,342   28,718 28,770
Capital and reserves      
Called up share capital62 62 62
Share premium3,985 3,985 3,985
Special reserve11,065 12,402 11,065
Revaluation reserve14,466 14,096 14,466
Capital reserve - realised(1,187) (913) (1,057)
Revenue reserve(49) (914) 249
Equity shareholders' funds 28,342   28,718 28,770
Net asset value per Ordinary Share 115.5p   116.6p   117.3p
Net asset value per 'A' Share 0.1p   0.1p   0.1p
  115.6p   116.7p   117.4p

for the six months ended 31 March 2017

  Called up


- realised

  £'000 £'000 £'000 £'000 £'000 £'000 £'000
Six months ended 31 March 2016  
At 30 September 2015623,98512,40214,090(841)(810)28,888
Gains on investments---6--6
Expenses capitalised----(72)-(72)
Retained revenue-----(104)(104)
At 31 March 2016623,98512,40214,096(913)(914)28,718
Year ended 30 September 2016  
At 30 September 2015623,98512,40214,090(841)(810)28,888
Gains on investments---3706-376
Expenses capitalised----(216)-(216)
Retained revenue-----1,0591,059
Transfer between reserves  







Repurchase and cancellation of own shares--(111)---  (111)
Dividend paid--(1,226)---(1,226)
At 30 September 2016623,98511,06514,466(1,057)24928,770
Six months ended 31 March 2017  
At 30 September 2016623,98511,06514,466(1,057)24928,770
Gains on investments-------
Expenses capitalised----(130)-(130)
Retained revenue-----(298)(298)
At 31 March 2017623,98511,06514,466(1,187)(49)28,342

for the six months ended 31 March 2017


Six months ended
31 Mar 2017

Six months ended
31 Mar 2016
30 Sep
  Revenue Capital Total   Revenue Capital Total   Total
  £'000 £'000 £'000   £'000 £'000 £'000   £'000
Income6-6 267-267 1,784
Gains on investments--- -66 376
 --- 2676273 2,160
Investment management fees(215)(72)(287) (216)(72)(288) (576)
Other expenses(89)(58)(147) (155)-(155) (365)
(Loss)/return on ordinary
activities before taxation
(298)(130)(428) (104)(66)(170) 1,219
Tax on total comprehensive income and ordinary activities--- --- -
(Loss)/return attributable to
equity shareholders
(298)(130)(428) (104)(66)(170) 1,219
Return per Ordinary Share (1.2p) (0.6p) (1.8p)   (0.4p) (0.3p) (0.7p)   4.9p
Return per 'A' Share --- --- -

The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS102"). 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").

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.

for the six months ended 31 March 2017

    31 Mar
  31 Mar
  30 Sep
  £'000   £'000   £'000
Net cash outflow from operating activities  (606) (328) 786

Cash flows from investing activities


Purchase of investments

  - (558) (1,057)

Sale of investments

  - 1,148 1,148
Net cash inflow from investing activities   - 590 91



Net cash inflow/(outflow) before financing








Cash flows from financing activities


Equity dividends paid

 - - (1,226)
Long term loans   609 (257) 448
Purchase of own shares   - - (111)
Net cash (outflow)/inflow from financing



Increase/(decrease) in cash  3 5 (12)
Notes to the cash flow statement:        
1  Cash (outflow)/inflow from operating activities      
(Loss)/return on ordinary activities before taxation(429) (170) 1,219
Gains on investments   - (6) (376)
Increase in other debtors   (62) (90) (58)
(Decrease)/increase in other creditors   (115) (62) 1
Net cash outflow from operating activities   (606) (328) 786
2  Analysis of net funds        
Beginning of period   4 16 16
Net cash inflow/(outflow)   3 5 (12)
End of period   7 21 4

as at 31 March 2017

  Cost Valuation Unrealised
gain in period
% of
by value
  £'000 £'000 £'000  
Qualifying and partially qualifying investments        
Lunar 2 Limited*2,97613,479-43.6%
Ayshford Solar (Holding) Limited*2,4803,496-11.3%
Lunar 1 Limited*1252,186-7.1%
New Energy Era Limited8841,489-4.8%
Hewas Solar Limited1,0001,361-4.4%
Vicarage Solar Limited8711,303-4.2%
Tumblewind Limited*1,4381,246-4.0%
Gloucester Wind Limited1,0001,153-3.7%
Minsmere Power Limited9751,050-3.4%
HRE Willow Limited875770-2.5%
Penhale Solar Limited825735-2.4%
St. Columb Solar Limited650690-2.2%
Small Wind Generation Limited975583-1.9%
Chargepoint Services Limited500500-1.6%
Sunhazel UK Limited1--0.0%
Non qualifying investments        
AEE Renewables UK 3 Limited900900-2.9%
Cash at bank and in hand 7 0.0%
Total investments  30,948 100.0%

* Part-qualifying investment

1. General information
Hazel Renewable Energy VCT2 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 unaudited half-yearly results cover the six months to 31 March 2017 and have been prepared in accordance with the accounting policies set out in the annual accounts for the year ended 30 September 2016 which were prepared under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and in accordance with the Statement of Recommended Practice ("SORP") "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies ("AIC") revised November 2014.

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

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

5. Net asset value per share at the period end has been calculated on 24,504,860 Ordinary Shares and 36,799,133 'A' Shares, being the number of shares in issue at the period end.

6. Return per share for the period has been calculated on 24,504,860 Ordinary Shares and 36,799,133 'A' Shares, being the weighted average number of shares in issue during the period.

7. Dividends

  Period ended
31 Mar 2017
Year ended
30 Sep 2016
  Revenue Capital Total   Total
  £'000 £'000 £'000   £'000
Paid in period        
2016 Interim Ordinary - 5.0p--- 1,226
 --- 1,226
Forthcoming dividends      
2017 Interim Ordinary - 5.0p-1,2261,226 -
 -1,2261,226 -

8. Reserves

  Period ended
31 Mar 2017
30 Sept 2016
  £'000   £'000
Share premium reserve3,985 3,985
Special reserve11,065 11,065
Revaluation reserve14,466 14,466
Capital reserve-realised(1,187) (1,057)
Revenue reserve(49) 249
 28,280 28,708

The Revenue reserve, Capital reserve - realised and Special reserve are distributable reserves. The distributable reserve is reduced by unrealised holding losses of £598,703 which are included in the Revaluation reserve. Distributable reserves at 31 March 2017 were £9,231,835.

9. 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; and
(iii) failure to maintain approval as a VCT.

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 is conducted. 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 Philip Hare & Associates 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.

10. 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.

11. 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.

12. 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.

13. 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.

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