(MENAFN Editorial) Hazel Renewable Energy VCT1 plc
Legal Entity Identifier: 213800IVQHJXUQBAAC06
Final results for the year ended 30 September 2017
FINANCIAL HIGHLIGHTS
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 £31.4 million.
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 £1.00 or 70.0p net of income tax relief.
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.
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.
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.
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.
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.
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.
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
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.
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.
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 £80,000 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 £175,000 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 £10,000 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.
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 £10million in total with the Company's share being £5.0million - 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 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.
Gresham House Asset Management Limited
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 30 September 2017:
* 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
All venture capital investments are incorporated in England and Wales.
Directors' responsibilitiesIn preparing these financial statements the Directors are required to:
- select suitable accounting policies and then apply them consistently;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
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
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2017
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 financial statements are presented in Sterling (£).
Presentation of income statement 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.
- 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.
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.
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:
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.
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 Issue costs
Issue costs in relation to the shares issued for each share class have been deducted from the share premium account.
3. Income
4. Basic and diluted earnings per share
5. Basic and diluted net asset value per 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:
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.
- Investment price risk; and
- Interest rate 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 £31,390,000 (2016: £30,941,000). 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.
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;
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 £71,000 (2016: £157,000) 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 £4,426,000 (2016: £3,262,000), 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.
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.
- The fees payable to Downing LLP have increased from £35,000 to £40,000 per annum, with effect from 1 October 2017;
- The annual fees payable to the Chairman have increased from £20,000 to £25,000;
- The annual fees payable to the other Non-executive Directors have increased from £15,000 to £20,000.
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 6th Floor, St. Magnus House, 3 Lower Thames Street, London EC3R 6HD and will be available for download from www.downing.co.uk.MENAFN1001201800703653ID1096331842