Hazel Renewable Energy VCT 2 plc : Final Results

Hazel Renewable Energy VCT2 plc
Final results for the year ended 30 September 2015

FINANCIAL HIGHLIGHTS

			Audited		Audited
			Year End		Year End
			30 September 2015		30 September 2014
			Pence		Pence
Net asset value per Ordinary Share			117.3		115.0
Net asset value per 'A' Share			0.1		0.1
Cumulative Dividends paid			29.5		24.5
Total return per Ordinary Share and 'A' Share			146.9		139.6

CHAIRMAN'S STATEMENT
I am pleased to present the Company's Annual Report for the year ended 30 September 2015. The year has been one of steady progress within the portfolio. Investment activity has been mostly limited to a small number of partial redemptions and winding up of investee companies that are no longer being used. Since the year end the Company is expected to complete another refinancing which has the potential to further increase the yield from the existing portfolio.

Investment portfolio
At the year end, the Company held a portfolio of 16 investments with a total value of £30.7 million.

There were five full realisations during the year, primarily from investments that had ceased to undertake any activities and were being wound up. There were also partial loan stock redemptions from four investments. Total proceeds were £1.2 million and realised gains on the year were £121,000.

Within the existing portfolio progress has generally been good, with the Manager achieving administration cost savings on many of the solar projects, while producing reliable energy generation performances.  The wind turbine portfolio has not performed so well and has warranted a provision against its carrying value.

In reviewing the investment valuations at the year end, the Board has made a number of adjustment resulting in a net unrealised gain of £1.5 million.

Net asset value and results
At 30 September 2015, the Net Asset Value ("NAV") per Ordinary Share stood at 117.3p and the NAV per 'A' Share stood at 0.1p, producing a combined total of 117.4p. This represents an increase of 7.3p (6.3%) 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 29.5p. Total Return (NAV plus cumulative dividends paid to date) now stands at 146.9p, compared to the cost to investors in the initial fundraising of £1.00 or 70.0p net of income tax relief.

The profit on ordinary activities after taxation for the year was £1.8 million, comprising a loss of £125,000 on the revenue account and surplus of £1.9 million on the capital account.

Dividends
A dividend of 5.0p per Ordinary Share paid was paid on 18 September 2015. In line with the Company's policy, it is intended that the next annual dividend will be paid in September 2016 and will be announced in May 2016.

Future strategy
Given that the Company's original fundraising was launched slightly over five years ago, the articles specify that a resolution is put to Shareholders at the forthcoming AGM for the Company to continue as a VCT.

The Board has spent some time discussing future strategy with the Manager and considered a number of possible options in which the Company could move forward. Options such as winding up, divesting and reinvesting into new assets and changing the structure of the investment vehicle were considered.

The process highlighted the fact the Company holds a robust portfolio of renewable energy assets which cannot be rebuilt from scratch and which have a financing structure in place that will allow the payment of gently increasing dividends over a long timeframe.

With the incentives schemes for new renewable energy projects now dramatically reduced and such schemes also now effectively prohibited from being held as qualifying investments by VCTs, the Board believes that the existing portfolio offers Shareholders a reliable, tax-free income stream with the possibility of further capital growth and the prospect of steadily increasing dividends. Accordingly the Board plans to operate the existing portfolio in this manner over the next 5-10 years, although will review strategy at regular intervals.

The board recognises that a small number of Shareholders may wish to exit once the initial holding period passes and has introduced a share buyback policy of buying in any shares that become available in the market at approximately a 5% discount to the latest published NAV. In future, the Board intends to publish NAVs for each quarter end.

Fundraising plans
While the opportunity for further investment by VCTs into renewable energy projects benefitting from Government incentives has now passed, the Manager is seeing interesting dealflow in other cleantech opportunities, such as electrical storage solutions both in the UK and overseas.

The Manager believes that there is sufficient good quality dealflow to be able to build a new investment portfolio from scratch which can provide an attractive returns in a related but different area to the existing portfolio. Accordingly, proposals are being drawn up for a new fundraising in a new share class.

The new funds will be maintained and managed separately from the existing investments but will allow the fixed running costs of the VCT to be spread over a greater asset base, reducing the burden on all shareholders.

Corporate broker appointment
In order to ensure an orderly market in the Company's shares, the Company has engaged Panmure Gordon UK Limited to act as the Corporate Broker to the Company. Any Shareholders wishing to sell their shares should contact Panmure Gordon whose details are noted on the Shareholder Information page.

Annual General Meeting
The Company's fifth AGM will be held at 2^nd Floor, 227 Shepherds Bush Road, London W6 7AS at 2.05 p.m. on 7 March 2016.

Two items of special business will be proposed at the AGM; a resolution seeking approval for the Company to be able to buy its own shares as described above and one to amend the Articles of Association as described below.

In view of the future strategy and planned fundraising, the Board has decided to seek Shareholder approval by resolution 9 at the forthcoming AGM to amend the Articles of Association to remove the requirement for a regular continuation vote to be put to Shareholders in future. The Board believes this gives more flexibility in implementing future plans and will avoid potential issues in fundraising where no guarantee can be given that Shareholders will be able to hold their shares for the minimum holding period.

Notice of the meeting is at the end of this document.

Outlook
The Board is very satisfied with the performance of the Company to date and believes it is well placed to continue to deliver solid results to Shareholders for years to come. The second major refinancing which is expected to complete shortly should improve the prospects for an increasing yield from the current portfolio.

The proposals for the new fundraising in a new share class will have a relatively small impact on existing Shareholdings other than in reducing running costs, although there could be possible benefits in co-investing with the new share pool if suitable and attractive opportunities arise and surplus funds are available. The new fundraising will also, of course, provide an opportunity for existing Shareholders to make a new VCT investment with a team that has delivered excellent results since first entering this market some five years ago.

I look forward to reporting on developments in my statement with the half year report to 31 March 2016.

Peter Wisher
Chairman

INVESTMENT MANAGER'S REPORT
Introduction
The year ended 30 September 2015 has been another good year for Hazel Renewable Energy VCT2 plc (the Company). As the portfolio was fully invested at the beginning of this financial year, the focus has been on further improving the operational and financial performance of the asset base as well as exploring and initiating new avenues for augmenting the return of the portfolio. The improvement in operational performance is a process that was initiated in the previous financial year, starting with the small-wind portfolio. This was extended this year to cover other areas of the portfolio such as the roof-mounted solar assets. 

In terms of financial performance, we have sought to extend the benefits gained from the previous financial year's refinancing and concurrent acquisition of the entire share capital of the six ground-mounted solar assets commissioned in 2011 and 2012.  We have done this by pooling together an additional group of the portfolio's solar assets in order to refinance them with low cost debt and to use the proceeds to invest in projects offering a substantially higher return. This transaction commenced at the beginning of September and is expected to complete shortly.

Separately, across the board, there was also a successful effort to reduce non-core costs across the portfolio such as audit and bookkeeping costs.

Overall Portfolio and Operational Review
At the end of the year, as at the end of the previous year, the portfolio consisted for the most part of 16 underlying projects held through 13 portfolio companies which are all either entirely or majority-owned by the VCTs.  The dormant companies that featured in last year's report were all closed down.

Ten of the twelve solar projects (eight ground-mounted and four rooftop ones) which account for close to 80% of capital invested, continued to perform in line or above expectations.  However, Priory Farm, the comparatively small, 3.2MW ground-mounted solar project acquired in July 2014 (owned by Tumblewind Limited) showed poorer performance as a result of a combination of grid-related issues (a series of long outages over the summer) and an inadequate agreement between the project company and the local grid operator. These issues were subsequently addressed by way of a revised agreement with the local grid operator, technical modifications and adjustments to the O&M contract and we expect to see this project perform reliably going forward.

Another historically poor performer, measured against the initial expectations, is the solar rooftop portfolio owned by Gloucester Wind Ltd (a c£1m investment), which had suffered as a result of the original developer going into administration in April 2013.  However we are very pleased with the progress in restoring the operating performance of this portfolio which has largely been catalysed by the appointment of Anesco as O&M contractor.  However, it is unlikely this project will reach original expectations although it is now much closer to them.  We are also pleased to say that there has been no valuation impact on the portfolio as the original transaction was well-priced, resulting in a margin of safety.

Across our ground-mounted solar farms, the sophisticated monitoring systems installed at the beginning of summer 2014 continue to be invaluable, delivering more timely and granular information on the performance of each asset.  This has enabled us to better monitor the performance of our O&M contractors and identify areas to reduce risk and increase returns through the modification of O&M contracts.

In terms of electricity prices, over the last two years there has been a long downward drift in power prices in the wholesale market.  The vast majority of our projects' revenues are shielded from this as they are Feed-in-tariff based or, in the case of the Ayshford Court solar project, are under a fixed price power purchase agreement.  However, the export tariffs that account for around 10% of the overall portfolio's revenues has fallen.  Given the severity of the disruption in the worldwide energy price environment, it is difficult to foresee when a recovery in the power prices will occur, however, we take comfort from the fact that this portfolio is largely shielded from this effect.

There are, however, methods we can apply to improve revenues per kWh of electricity generated. We are searching for opportunities to make direct sales to power consumers (aka direct Power Purchase Agreements - PPAs), and will intensify these efforts in 2016. Another opportunity we are continuously evaluating is the installation of energy storage solutions on our sites in order to shift and smooth our electricity output to improve the electricity price that could be achieved.  The steadily declining cost of batteries is likely to yield opportunities in the near future.

As explained last year, from a cost perspective, our O&M contract costs are falling sharply as our contracts  come up for renewal. We have seen this with Priory Farm this year, where we have achieved a 30% reduction. The bigger positive impact will come when several more O&M contracts come up for renewal next year, or possibly earlier, the savings from this will contribute to an increase in returns.
For 'Project Lunar' (the debt structure secured on the now wholly-owned six FIT solar projects) we continued to meet our obligations to the lender including payment milestones, ongoing funding of reserves, observing all covenants and other requirements.  One key, near term aspect of this transaction has been the need to fund various reserves required by the lender, and until fully funded, which will take till the end of 2018, this funding of reserves (the largest being the Debt Service Reserve Account) will reduce our cash flow from these projects.  Once funded, however, this effect goes away revealing the strong underlying cash generation of this group of projects; at which time we expect dividends to investors to increase markedly.  Of course at the end of the debt repayment in 20 years' time, the largest remaining value creator in this structure kicks in with dividends of over £8m in 2034, and over £11m in both 2035 and 2036 (assuming 2% RPI on average between now and then) as the debt will have been repaid and the reserves unwound. This totals over £30m in dividends in three years compared with just c£18m of equity invested in these assets.

Our small wind turbine projects held within HRE Willow Ltd, Small Wind Generation Ltd, Tumblewind Ltd and Minsmere Power Ltd stabilised but continued to lag in terms of performance.  As explained in last year's report, the fact that the developers went bankrupt meant that the companies did not benefit from the contractual provisions that provided compensation in the event of underperformance. Britwind, a division of Ecotricity, that were appointed as O&M Contractor in the previous financial year are steadily progressing with the repairs and adjustments that are necessary to the physical structures. Unlike the previous financial year, we now have access to a full year's high quality data on the performance of each individual wind turbine via an online portal and therefore are in a better position to make a judgment on where performance is likely to go. We have concluded that certain assets within this segment of the portfolio are unlikely to ever reach expected performance due to poor wind conditions at the specific sites and in some cases poor quality physical installations. We have therefore taken a prudent approach and impaired the value of these assets in this year's valuation exercise. We will continue to strive to rectify issues that can be rectified and see the potential for an upward adjustment in the future.

Portfolio Valuation
The NAV of the portfolio has increased from 115.1p to 117.4p (or from 139.6p to 146.9p if dividends already paid are taken into account).  This year's increase has come about primarily as result of market prices for renewable power generation assets rising and strong performance from the ground-mounted solar assets that we own. These have been more than sufficient to offset not only the effect of lower power prices but also the impact of the impairment of the small wind portfolio which we deemed prudent.  Our portfolio of assets that were initially bought targeting average hurdle rates of 9% to 11% are now valued by discounting cash flows at 7.25% reflecting the number of market participants who are keen to own these fixed-income type assets in an environment where interest rates remain at historical lows. The discount rate of 7.25% followed a valuation exercise that we carried out and that was reviewed by BDO, the Company's auditors, and is 0.25% less than last year.

We will not offer a prediction on where interest rates will go but one factor pointing to the potential for higher valuations is the maturity of the asset base.  As assets acquire longer operating histories, the predictability of revenues increases, and a lower discount rate can be justified. The ground-mounted solar assets in the portfolio that were among the first to be built in the UK also benefit from the fact that their exposure to market power prices is less than 10% of revenues and hence should command a higher discount rate than the average in the market. With the advent of cheaper battery technology and other levers, there is also the opportunity to earn additional revenue streams from the projects or increase value in other ways.

Outlook
The fund was fully invested at the end of the financial year. However, should, as we expect, the refinancing transaction mentioned above close successfully, we will aim to deploy the proceeds into investments with a similar risk/reward profile to the current portfolio at hurdle rates significantly in excess of the cost of debt and thus hopefully add value to the portfolio.

Our focus for 2016 will be on continuing to improve the operational and financial performance of the assets and thus the overall yield of the portfolio, as well as the anticipated successful conclusion and deployment of the proceeds from the refinancing transaction.

Also, as we reach the five year mark in the life of the Company, we anticipate a wish by some investors to sell their shares.  The Company has plans to fund purchases with cash in hand in order to implement its policy to repurchase shares at approximately a 5% discount to the latest stated NAV, subject to certain restrictions including liquidity and regulatory (for more information please see the announcement posted at the London Stock Exchange in December 2015).

As always, we are very happy to hear from our investors if they have any questions or comments.

Ben Guest
Chief Investment Officer
Hazel Capital LLP

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments were held at 30 September 2015:

	Cost	Valuation	Valuation movement in year	% of portfolio
	£'000	£'000	£'000
Qualifying and part-qualifying investments
Lunar 2 Limited*	2,976	12,202	2,255	39.8%
Ayshford Solar (Holding) Limited	1,987	3,073	267	10.0%
Tumblewind Limited*	2,449	2,175	(596)	7.1%
Lunar 1 Limited*	124	2,076	33	6.8%
Hewas Solar Limited	1,000	1,748	76	5.7%
St. Columb Solar Limited	708	1,419	45	4.6%
New Energy Era Limited	884	1,369	65	4.5%
Vicarage Solar Limited	871	1,181	(22)	3.8%
Penhale Solar Limited	825	1,075	249	3.5%
Gloucester Wind Limited	1,000	1,041	41	3.4%
Minsmere Power Limited	975	920	(89)	3.0%
HRE Willow Limited	875	780	(95)	2.5%
Small Wind Generation Limited	975	682	(292)	2.2%
Sunhazel UK Limited	1	-	-	0.0%
	15,650	29,741	1,937	96.9%
Non-qualifying investments
AEE Renewables UK 3 Limited	900	900	-	2.9%
ZW Parsonage Limited	15	15	-	0.1%
	915	915	-	3.0%
	16,565	30,656	1,937	99.9%
Cash at bank and in hand		16		0.1%
Total investments		30,672		100.0%

* Part-qualifying investment

All venture capital investments are incorporated in England and Wales.

Hazel Renewable Energy VCT1 plc, of which Hazel Capital LLP is the Investment Manager, holds the same investments as above.

Investment movements for the year ended 30 September 2015

DISPOSALS

	Cost	Valuation at 30 September 2014	Proceeds	Profit/ (Loss) vs cost	Realised gain
	£'000	£'000	£'000	£'000	£'000
Qualifying and part-qualifying investments
Higher Tregarne Solar (Holding) Limited	243	216	264	21	48
Owl Lodge Solar (Holding) Limited	80	249	274	194	25
Yonder Netherton Solar (Holding) Limited	5	-	-	(5)	-
Ayshford Solar (Holding) Limited	260	260	260	-	-
Tumblewind Limited	85	85	85	-	-
Causilgey Solar (Holding) Limited	248	183	181	(67)	(2)
St. Columb Solar Limited	15	15	15	-	-
Penhale Solar Limited	74	74	74	-	-
	1,010	1,082	1,153	143	71
Non-qualifying investments
Lime Technology Limited	100	-	50	(50)	50
	100	-	50	(50)	50
	1,110	1,082	1,203	93	121

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). 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 2015

			Year ended 30 September 2015				Year ended 30 September 2014
			Revenue	Capital	Total		Revenue	Capital	Total
			£'000	£'000	£'000		£'000	£'000	£'000
Income			580	-	580		370	-	370
Gain on investments			-	2,057	2,057		-	8,343	8,343
			580	2,057	2,637		370	8,343	8,713
Investment management fees			(424)	(141)	(565)		(388)	(129)	(517)
Other expenses			(281)	-	(281)		(302)	(12)	(314)
Profit/(loss) on ordinary activities before tax			(125)	1,916	1,791		(320)	8,202	7,882
Tax on ordinary activities			-	-	-	-	-	-	-
Profit/(loss) attributable to equity shareholders			(125)	1,916	1,791		(320)	8,202	7,882
Basic and diluted earnings per share:
Ordinary Share			(0.5p)	7.8p	7.3p		(1.4p)	34.7p	33.3p
'A' Share			-	-	-		-	-	-

All Revenue and Capital items in the above statement derive from continuing operations. The total column within the Income Statement represents the profit and loss account of the Company. No operations were acquired or discontinued during the year.

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

Other than revaluation movements arising on investments held at fair value through profit or loss, there were no differences between the profit or loss as stated above and historical cost.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

		Year ended 30 September 2015		Year ended 30 September 2014
			£'000		£'000
Opening Shareholders' funds			28,327		22,545
Proceeds from share issue			-		2,067
Share issue costs			-		(98)
Profit for the year			1,791		7,882
Dividend paid			(1,230)		(4,069)
Closing Shareholders' funds			28,888		28,327

BALANCE SHEET
as at 30 September 2015

			2015		2014
		£'000	£'000	£'000	£'000
Fixed assets
Investments			30,656		29,802
Current assets
Debtors		362		144
Cash at bank and in hand		16		163
		378		307
Creditors: amounts falling due within one year		(624)		(682)
Net current liabilities/assets			(246)		(375)
Total Assets less net current liabilities/assets			30,410		29,427
Creditors: amounts falling due after more than one year		(1,522)		(1,100)
Net assets			28,888		28,327
Capital and reserves
Called up Ordinary Share capital			25		25
Called up 'A' Share capital			37		37
Share premium account			3,985		3,985
Special reserve			12,402		13,632
Revaluation reserve			14,090		12,127
Capital reserve - realised			(841)		(794)
Revenue reserve			(810)		(685)
Total Shareholders' funds			28,888		28,327
Basic and diluted net asset value per share
Ordinary Share			117.3p		115.0p
'A' Share			0.1p		0.1p

CASH FLOW STATEMENT
for the year ended 30 September 2015

		Year ended 30 September 2015		Year ended 30 September 2014
			£'000		£'000
Net cash outflow from operating activities and returns on investments			(482)		(424)
Capital expenditure
Purchase of investments			-		(1,684)
Proceeds from disposal of investments			1,203		2,735
Net cash inflow from capital expenditure			1,203		1,051
Dividends paid			(1,230)		(4,069)
Net cash outflow before financing			(509)		(3,442)
Financing
Proceeds from Ordinary Share issue			-		2,062
Proceeds from 'A' Share issue			-		4
Short term loans			(60)		-
Long term loans			422		1,100
Share issue costs			-		(98)
Net cash inflow from financing			362		3,068
Decrease in cash			(147)		(374)

NOTES TO THE ACCOUNTS
for the year ended 30 September 2015

1. Accounting policies
Basis of accounting
The Company has prepared its financial statements under UK Generally Accepted Accounting Practice ("UK GAAP") and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" revised January 2009 ("SORP").

The financial statements are prepared under the historical cost convention except for fixed asset investments which are measured at fair value.

The Company implements new Financial Reporting Standards ("FRS") issued by the Financial Reporting Council when they become effective.

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 FRS26.

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 UK GAAP and the SORP that does not require portfolio investments 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 management 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) 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.

2. Income

Year ended 30 September 2015		Year ended 30 September 2014
	£'000		£'000
Income from investments
Loan stock interest	244		179
Dividend Income	335		175
	579		354
Other income
Bank interest	1		16
	580		370

3. Basic and diluted earnings per share

	Weighted average number of shares in issue		Revenue loss	Capital return
(Loss)/profit per share is calculated on the following:			£'000	£'000
Year ended 30 September 2015	Ordinary Shares	24,603,156	(125)	1,913
	'A' Shares	36,904,733	-	3
Year ended 30 September 2014	Ordinary Shares	23,614,754	(320)	8,190
	'A' Shares	35,422,130	-	12

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.

4. Basic and diluted net asset value per share

	Shares in issue		2015		2014
	2015	2014	Net asset value		Net asset value
			per share	£'000	per share	£000
Ordinary Shares	24,603,158	24,603,158	117.3	28,851	115.0	28,290
'A' Shares	36,904,733	36,904,733	0.1	37	0.1	37

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.

5. 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:

*Investment 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:

Investment 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 Manager and overseen by the Board. The Manager 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 Manager 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
*Interest rate risk

Investment price risk

The Company's investments which comprise of 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. It represents the potential loss that the Company might suffer through changes in the fair value of unquoted investments that it holds.

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. Investments in loan stock attract interest predominately at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.

There are four 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;
*"Variable rate" assets represent investments with predetermined interest rates that vary at set dates in accordance with loan note agreements;
*"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.

The Company monitors the level of income received from fixed and floating or variable 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.

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 Manager manages credit risk in respect of loan stock with a similar approach as described under "Investment risks" above. Similarly the management of credit risk associated interest, dividends and other receivables is covered within the investment management 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 are directly attributable to changes in credit risk.

 

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 £160,000 (2014: £158,000) and has low loans from investee companies being £1,986,000 (2014: £1,624,000) 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 Manager in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.

6. Related party transactions
In the opinion of the Directors there is no immediate or ultimate controlling party.

Hazel Capital LLP is regarded as a related party as Bozkurt Aydinoglu is a director of the VCT and a controlling partner in Hazel Capital LLP.

Hazel Capital LLP also provides investment management services to the Company. During the year ended 30 September 2015, £565,000 (2014: £517,000) was payable to Hazel Capital LLP in respect of these services. At the year end there was no balance owing to Hazel Capital LLP (2014: nil).

In accordance with the prospectus and the Investment Management agreement, Hazel Capital LLP receives trail commission of 0.4% of the net assets of the Company at the year end, out of which it pays trail commission to financial intermediaries. As at 30 September 2015, this amounted to £114,000 (2014: £113,000), all of which is outstanding and included in accruals and deferred income under Creditors.

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 2015, but has been extracted from the statutory financial statements for the year ended 30 September 2015, which were approved by the Board of Directors on 28 January 2015 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 2014 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 2015 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at Ergon House, Horseferry Road, London SW1P 2AL and will be available for download from www.downing.co.uk.

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

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