TIDMGV2O
RNS Number : 6792Q
Gresham House Renewable EnergyVCT2
29 June 2022
29 June 2022
Gresham House Renewable Energy VCT 2 PLC
LEI: 213800GQ3JQE2M214C75
Half Year Results
These half-year results will be available on the Company's
website at
https://greshamhouse.com/real-assets/new-energy-sustainable-infrastructure/gresham-house-renewable-energy-vct-2-plc/
.
In accordance with Listing Rule 9.6.1, copies of these documents
will also be submitted to the UK Listing Authority via the National
Storage Mechanism and will be available for viewing shortly at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
For further information, please contact:
Gresham House Asset Management renewablevcts@greshamhouse.com
Investor Relations Tel: 020 7382 0999
JTC (UK) Limited GreshamVCTs@jtcgroup.com
Company Secretary Tel: 020 3846 9774
Shareholder information
Performance summary
27 June 31 March 30 September 31 March
2022 2022 2021 2021
Pence Pence Pence Pence
Net asset value per Ordinary Share 90.0 89.2 91.6
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Net asset value per 'A' Share 0.1 0.1 0.1
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Cumulative dividends* 57.1 57.1 57.1
------- -------- ------------ --------
Total Return* 147.2 146.4 148.8
------- -------- ------------ --------
Share Price - Ordinary (GV2O) 87.0 87.0 90.0 96.0
------- -------- ------------ --------
Share Price - A Shares (GV2A) 5.05 5.05 5.05 5.05
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* for a holding of one Ordinary Share and A Share
Dividends
Ordinary
shares 'A' Shares Total
Pence Pence Pence
2011 Final 30 March 2012 3.5 - 3.5
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2012 Final 28 March 2013 5.0 - 5.0
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2013 Special 28 February 2014 7.3 3.7 11.0
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2013 Final 28 March 2014 5.0 - 5.0
------------------ -------- ---------- ------
2015 Interim 18 September 2015 5.0 - 5.0
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2016 Interim 16 September 2016 5.0 - 5.0
------------------ -------- ---------- ------
2017 Interim 15 September 2017 5.0 - 5.0
------------------ -------- ---------- ------
2018 Interim 14 December 2018 5.5 0.5 6.0
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2019 Interim 20 December 2019 5.3 0.5 5.8
------------------ -------- ---------- ------
2020 Interim 31 December 2020 5.3 0.5 5.8
------------------ -------- ---------- ------
51.9 5.2 57.1
-------------------------------- -------- ---------- ------
Dividends are paid by the registrar on behalf of the VCT.
Shareholders who wish to have dividends paid directly into their
bank account and did not complete these details on their original
application form can complete a mandate form for this purpose.
Forms can be obtained from Link Asset Services.
Chairman's statement
I am pleased to present the Half-Yearly Report of Gresham House
Renewable Energy VCT 2 plc ("VCT") for the period ended 31 March
2022.
The period under review has less solar irradiation than the
second half of the year over the spring and summer months. The
total revenue from the renewable assets was just 0.3% behind
budget, at GBP3.5 million. This was despite higher than expected
irradiation (6.7%), as some of the assets are showing signs of
their age and are under performing. Much time and effort has been
spent over the period on correcting the problems that have
occurred. Inevitably there are costs attached to such repairs and
this has impacted the cash flow available to the VCT, however I am
pleased to report that the work carried out in the last financial
year on three major assets has resulted in very significantly
improved performance for those sites and we anticipate that the
further work being undertaken will similarly improve performance
shortly.
Turning to the matter of the sale of the solar assets, it had
been hoped that the sales process, commenced in the late summer of
2021, would have been concluded by the end of 2021. However,
certain issues were uncovered during the due diligence process
which were complex and/or requiring negotiation with third parties,
and resulted in the process being more protracted than expected.
These issues have taken some time to resolve to the satisfaction of
the potential purchaser. A couple of key issues remain outstanding,
but it is hoped that these can be addressed soon so that a sale can
be agreed and closed. Given the age of the portfolio, it is not
wholly unsurprising that potential buyers raised additional
concerns largely relating to warranties and performance of the
equipment.
Investment portfolio
At the period end, the VCT held a portfolio of 16 investments,
which were valued at GBP27.4 million.
The portfolio is analysed (by value) between the different types
of assets as follows:
Ground mounted solar 80.2%
Rooftop solar 8.4%
-----
Small wind 4.3%
-----
Non-renewable assets 7.1%
-----
The Board has reviewed the investment valuations at the
half-year and notes that the valuation of the portfolio has
remained at GBP27.4 million. Although the overall valuation of the
16 investments has not changed since the valuation at year end,
there have been movements in value between the different types of
assets.
Whilst the valuation of the portfolio at the half-year has been
positively impacted by the increase in power prices in the six
month period and by increases in inflation projections, with most
of the revenue being linked to RPI, which increases the overall
profitability, and therefore valuation of the assets, these have
been offset by two key factors with the result that the valuation
of the portfolio has remained flat. Firstly, an increase in the
discount rate used by 50bp to 6.25% for the solar assets, as
explained below, and secondly a doubling of the allowance made for
the financial and administrative management fees of the underlying
companies.
The Board felt it prudent to adopt a more conservative approach
to the discount rate taking into consideration a backdrop of high
inflation and rising interest rates. It should be noted that the
revised rate is now more in line with the sector and other similar
portfolios. The sales process has indicated that the allowances
made for the financial and administrative management fees for the
underlying companies were insufficient given rising costs and the
complexity of managing a portfolio of this type and age. The Board
therefore decided to increase these costs.
As referred to above, several problems have emerged during the
sale process. One in particular is worthy of mention, although the
Board do not expect it to be a problem in the longer-term. The
solar farm at South Marston sells its power to Honda, but Honda is
leaving the site and selling it to a third party. The negotiations
are proving complex and there is thus some uncertainty as to the
contractual arrangements for the sale of power going forward,
although it seems unlikely that the purchaser of the Honda site
would not want to have access to an existing and proven supply of
renewable energy on its doorstep.
Venture Capital investments
The VCT also holds two investments that are not in renewable
energy. A follow-on investment of GBP67,500 was made into bio-bean
Limited ("bio-bean") in December 2021 to fund the growth and
development of the business. The valuation of bio-bean has been
held at cost at 31 March 2022, while the valuation of the VCT's
investment into Rezatec has increased by GBP0.2 million or 24.7%
since the investment was made driven by non-cash interest income
accumulating on the preference shares in Rezatec.
Further detail on the investment portfolio is provided in the
Investment Adviser's Report.
Net asset value and results
At 31 March 2022, the Net Asset Value ("NAV") per Ordinary Share
stood at 90.0p and the NAV per 'A' Share stood at 0.1p, producing a
combined total of 90.1p per "pair" of Shares. The movement in the
NAV per share during the half-year is detailed in the table
below:
Pence per
'pair' of
shares
NAV as at 1 October
2021 89.3
----------
Plus NAV increase 0.8
----------
NAV as at 31 March
2022 90.1
----------
Total dividends paid to date for a combined holding of one
Ordinary Share and one 'A' Share stand at 57.1p (September 2021:
57.1p). The NAV Total Return (NAV plus cumulative dividends) has
increased by 0.5% in the six months and now stands at 147.2p
excluding the initial 30% VCT tax relief, compared to the cost to
investors in the initial fundraising of GBP1.00 or 70.0p net of
income tax relief.
The profit on ordinary activities after taxation for the
half-year was GBP0.2 million (March 2021: GBP2.1 million loss),
comprising a revenue profit of GBP307,000 (March 2021: GBP240,000)
and a capital loss of GBP115,000 (March 2021: capital loss of
GBP2.3 million) as shown in the Income Statement.
2022 Annual General Meeting ("AGM")
The VCT's eleventh AGM was held on 23 March 2022 at 11.30 a.m.
and all resolutions were passed by way of a poll.
Outlook
As we look ahead the portfolio is in much better shape than it
was this time last year thanks to all the effort that has gone into
repairs and renewals. We very much hope that a sale of the solar
assets will be satisfactorily concluded in the near term. However,
if despite all the efforts made by the Board and the Investment
Adviser, with the sale process led by EY, this proves not to be
possible then, so as to comply with shareholders' wishes to wind up
the company, the VCT will have to continue until the time is right
to re-market the assets. We would expect this re-marketing to take
place once the full financial year results are known and the
aforementioned issues have been resolved.
Christian Yates
Chairman
29 June 2022
Investment Adviser's report
Portfolio highlights
Gresham House Renewable Energy VCT 2 plc remains principally
invested in the renewable energy projects that the VCT and VCT 1
have co-owned for a period of eight to eleven years, depending on
the asset, with the value of these projects representing well over
90% of the value of the portfolio. The total generation capacity of
assets co-owned by the VCT is 34.4MWp. The VCT also has two venture
capital investments.
During the half-year the sale process of the solar energy
projects that are owned jointly with Gresham House Renewable Energy
VCT 1 plc ("VCT 1"), was progressed. The two VCTs appointed EY to
prepare and run the sales process. A number of parties carried out
initial due diligence on the portfolio, and submitted non-binding
offers subject to further due diligence. One potential buyer was
granted exclusivity to perform detailed due diligence and
engagement with that party is ongoing.
The Investment Adviser has, in the meantime, continued to manage
the assets as if holding them for the long-term, whilst also
supporting the Board of the VCT and its advisers in advancing the
sale process.
The Investment Adviser has undertaken a valuation exercise and
provided the Directors with several valuation scenarios based on
different assumptions. The Directors have the responsibility of
valuing these assets. Although there is a sales process in
progress, it should be noted that the valuation is based on a
long-term hold basis.
The vast majority of the assets held by the VCT produce solar
power. The solar portfolio is relatively old compared to other
solar farms across the UK. They are older than well over 90% of
total solar capacity in the UK, but this means that the VCT's solar
farms have secured higher incentives than most other solar
installations in the UK.
The total revenue from renewable energy generation was
GBP3,521,029 and of this, GBP3,058,789 was from government
incentives and inflation-linked contracts. The total revenue from
the renewable assets was 0.3% behind budget.
The downside of the VCT's older assets is the additional
maintenance required to keep them operating effectively. Projects
to repair or replace certain components across the three worst
performing older sites were completed during the last financial
year. Performance since completion of the works has been
encouraging, with consistently increased output and reliability at
Kingston Farm and Lake Farm with new, 10-year warranties on some of
the key equipment (replacement inverters) and UK based technical
staff available for ongoing repairs or maintenance. The repairs at
Beechgrove Farm highlighted other issues which have since been
repaired under warranty during this half-year. These further
repairs are expected to deliver increased output during the second
half of this financial year.
In terms of available resources, the half-year benefited from
strong solar irradiation which came in at 6.7% ahead of budget.
This should have resulted in better generation performance but
there were technical issues at two of the ground mounted sites
(Beechgrove and Ayshford Court, as described below) and poorer than
expected performance of the roof mounted portfolio. These legacy
issues have been addressed through a successful warranty claim and
repair works.
In terms of the wider economy, the effects on the portfolio are
summarised below:
Power prices were significantly reduced through the pandemic and
price fixes were therefore sought in 2020 and early 2021, as soon
as Power Purchase Agreement ("PPA") providers began offering above
the budgeted levels at the time. Fixing the prices under PPAs
provided security of revenues. However, the fixed prices meant that
the portfolio has not been able to benefit from the increases in
wholesale power prices during the autumn and the further increases
that have been experienced after the Russian invasion of Ukraine.
These PPAs have started to expire and all will have expired by the
end of 2022. Assuming power price projections remain high, the
assets should have the opportunity to earn significantly higher
revenue from the sale of electricity (either on the wholesale
market or on new PPAs with higher prices) on expiry of the current
PPAs.
Whilst all works had to be suspended on residential roof mounted
solar installations last year as engineers were not permitted to
enter properties during lockdown, much of these have now been
carried out. Nevertheless, there continue to be some residents who
are shielding or are reticent to allow people into their homes and
so there are some repairs still outstanding.
With much of the portfolio's revenue being inflation linked,
higher inflation increases the profitability of the assets and
therefore their value, even though most of the cost base and the
debt facilities are also inflation-linked.
The VCT also holds newer investments in growth businesses;
bio-bean Limited, the world's largest recycler of waste coffee
grounds, which produces sustainable, clean fuels as well as
advanced biochemicals for use in the food industry; and Rezatec
Limited ("Rezatec"), a climate technology company and software
developer. Rezatec applies Artificial Intelligence based algorithms
to a range of earth observation data sources (satellite imagery,
soil data, weather data, topographic data etc.) to generate an
information services platform to help monitor land-based assets in
the forestry, agriculture and infrastructure sectors. Both
businesses continued to grow revenues in the period, though fell
short of their business plan objectives due to a number of factors
that will be covered later in the report.
Portfolio composition
Portfolio composition by asset type
31 March 2022 30 September 2021
% of % of
Value Portfolio Value Portfolio
Asset type kWp ('000) value ('000) value
------- ----------- ----------- ----------- -----------
Ground mounted solar (FIT)* 20,325 GBP19,455 71.0% GBP 19,341 70.6%
------- ----------- ----------- ----------- -----------
Ground mounted solar (ROC)** 8,699 GBP2,503 9.2% GBP 2,472 9.0%
------- ----------- ----------- ----------- -----------
Total ground mounted
solar 29,024 GBP 21,958 80.2% GBP 21,813 79.6%
------- ----------- ----------- ----------- -----------
Rooftop solar (FIT) 4,304 GBP 2,311 8.4% GBP 2,602 9.5%
------- ----------- ----------- ----------- -----------
Total solar 33,328 GBP 24,269 88.6% GBP 24,415 89.1%
------- ----------- ----------- ----------- -----------
Wind assets (FIT) 1,030 GBP 1,177 4.3% GBP 1,171 4.3%
------- ----------- ----------- ----------- -----------
Total renewable generating
assets 34,358 GBP 25,446 92.9% GBP 25,586 93.4%
------- ----------- ----------- ----------- -----------
Venture Capital investments N.A. GBP 1,942 7.1% GBP 1,814 6.6%
------- ----------- ----------- ----------- -----------
TOTAL 34,358 GBP 27,388 100.0% GBP 27,400 100.0%
------- ----------- ----------- ----------- -----------
* Feed in Tariff (FIT)
** Renewables Obligation Certificate (ROC)
The 34.4MWp of renewable energy projects in the portfolio of the
VCT and VCT 1 generated 9,810,747 kilowatt-hours of electricity
over the six months, sufficient to meet the annual electricity
consumption of circa 2,840 homes. The Investment Adviser estimates
that the carbon dioxide savings achieved by generating this output
from solar and wind versus gas-fired power, are equivalent to what
circa 5,700 mature trees would remove from the atmosphere. During
the half-year, residential rooftops of 5kWp capacity were written
off as the costs of rectification could not be justified by the
projected revenues even once repaired.
Portfolio summary
Approximately 93% of the portfolio value, and over 99% of the
income for the portfolio, is derived from the renewable energy
generation assets.
Renewable energy revenue by asset type
The performance against budget is shown below:
Portfolio revenues by asset type (GBP Sterling)
Budgeted Actual Revenue
Asset type revenue revenue performance
Ground mounted solar
(FIT) GBP2,582,878 GBP2,648,266 102.5%
-------------- -------------- -------------
Ground mounted solar
(ROC) GBP375,938 GBP380,968 101.3%
-------------- -------------- -------------
Roof mounted solar GBP343,256 GBP306,042 89.2%
-------------- -------------- -------------
Wind assets GBP231,071 GBP185,753 80.4%
-------------- -------------- -------------
TOTAL GBP3,533,143 GBP3,521,029 99.7%
-------------- -------------- -------------
The revenue is affected by:
Renewable energy resources (solar irradiation or wind, as
relevant);
The performance of the assets in converting the resources into
revenue (i.e. how the assets are performing, any technical issues,
etc); and
The revenue per unit of energy generated.
These themes will be expanded on below.
Renewable energy resources
The portfolio is heavily weighted to solar (96% by capacity of
the renewable assets, and 89% of total portfolio by value).
During the year the assets benefited from better solar resources
than budgeted, with solar irradiation being 6.7% ahead for the half
year.
Technical performance
The table below shows the technical performance for each of the
groups of assets.
Portfolio technical performance by asset type (kWh)
Actual output
(in the
same
Budgeted Actual Technical period last
Asset type output output performance year)
Ground mounted
solar (FIT) 5,743,540 5,917,840 103.0% 4,345,581
---------- ----------- ------------ -------------
Ground mounted
solar (ROC) 2,455,190 2,441,622 99.5% 2,296,349
---------- ----------- ------------ -------------
Roof mounted solar 998,414 934,415 93.6% 920,595
---------- ----------- ------------ -------------
Wind assets 642,972 516,870 80.4% 535,070
---------- ----------- ------------ -------------
TOTAL 9,840,116 9,810,747 99.7% 8,097,595
---------- ----------- ------------ -------------
The ground mounted solar (FIT) assets performed ahead of budgets
and significantly ahead of the same period last year.
The results of the successful repowering works at Kingston Farm
and Lake Farm (each with 4.98MW capacity, FIT assets) were evident
with Kingston Farm performing better than budget, even when
adjusting for better irradiation. The figures for Lake Farm were
slightly lower than budget when adjusted for irradiation but
nevertheless a significant improvement compared to the previous
year.
Beechgrove's (3.98MW, FIT) repowering works were completed just
before the end of the last financial year, however performance was
held back by another issue, cracking connectors at the back of its
solar panels which in turn were causing isolation faults on the
system. Following a root cause analysis this degradation of the
connectors was found to be caused by the high salt content in the
air due to the site's proximity to the sea. A warranty claim was
initiated against Jinko Solar, the manufacturer, and replacement
works involving the blanket replacement of all original connectors
with ones made from an improved polymer, which can withstand the
marine environment, are now taking place. The early signs are that
these will result in a significant improvement from the second half
of this financial year and going forward for the long-term.
Overall, the replacement works are expected to have a payback of
under five years and were largely paid for from cash held in
reserves for performing such works.
Ayshford Court (5.45MW, ROC) also exhibited lower than expected
performance. This was caused by a small number of failing solar
modules taking down entire strings across several modules. The
string-based configuration of many solar plants means that a small
number of module failures can take large parts of the plant
offline. The solution to this is close monitoring and a
rearrangement and redistribution of the solar modules such that the
faulty modules are grouped together. These works were carried out
in March and April 2022. A warranty claim is also in progress
against the manufacturer.
South Marston (4.97MW FIT) has historically sold all its power
to a Honda production plant adjacent to the site at Swindon. Honda
has closed down this facility and its exit is leading to changes of
contractual arrangements for the sale of power and potentially for
the technical set-up of the grid connection. The Investment Adviser
is working with Honda and the new site owner to ensure continuity
of supply of power by the solar farm.
Generation of the rooftop solar portfolio was 6.4% lower than
budget and slightly up on the same period last year. Irradiation
cannot be measured at roof mounted solar installations as it is not
cost effective to install pyranometers, but one can assume that the
irradiation at these sites was in line with the irradiation at the
ground mounted assets. The Investment Adviser continues to work
with the O&M contractors and landlords to get access to the
rooftop installations that are underperforming, to effect repairs
as soon as possible.
The small wind portfolio performed 19.6% lower than budget,
continuing the poor performance experienced in recent years. Small
wind accounts for only 3% of the portfolio in terms of capacity. In
the last financial year, the fleet of Huaying HY5 wind turbines,
which was plagued with technical issues and had been a net cash
drain, was disposed of. The VCT continues to own the fleet of R9000
wind turbines, which have generally performed better and have the
support of an experienced O&M contractor with easy access to
spare parts.
Revenue per kilowatt hour of renewable energy generated
The UK Government has used several mechanisms to encourage
investment into renewable energy generation, including the Feed in
Tariff ("FIT") and Renewables Obligation Certificate ("ROC")
support mechanisms.
The VCT's renewable assets benefit from these schemes which
provide revenues predominantly linked to the Retail Price Index
("RPI"). As both the costs and perceived risks of building new
renewable energy generating capacity have fallen, so have the value
of the incentives offered for new installations. For example, an
asset that generates electricity from solar power that was
commissioned and accredited for the FIT before the end of July 2011
received just under 40 pence for every kilowatt hour (kWh) of
electricity it produced (with the added extra of a floor price
support to ensure it may also sell this power at a reasonable
price). The incentives for new capacity have fallen consistently
since the assets owned by the VCT were commissioned, and new solar
installations built today receive no such incentives and must rely
on selling power for their income. In the six months to the end of
March 2022, the average spot price (day ahead) of power was 13
pence per kWh so a new asset selling power at the spot price would
earn 13 pence, whereas an older solar asset, like some of those
owned by the VCT, could earn at a minimum 3.95 pence per kWh for
exporting the power (given the FIT export price floor) plus 39.75
pence per kWh FIT generation revenue.
Of the total revenues generated of GBP3,521,029 in the
half-year, 85% was earned from government backed incentives for
generating renewable electricity. Included within export revenue
above, a further 4% is inflation linked, either through the FIT
export floor price for selling electricity or contracts for the
sale of electricity, taking the government backed or RPI linked
revenues to 89% of the total.
Such a high proportion of income that is fixed by the
government, is RPI linked and is not exposed to wholesale power
prices, is a significant driver of value in this portfolio. This
enabled the portfolio to be largely insulated from the very
significant reduction in the wholesale price of electricity
experienced during the pandemic. Whilst predictable, government
backed revenues reduce the risk, given the low power prices through
the first few months of the pandemic, when prices increased the
assets entered into fixed price contracts of various lengths to
sell power. This further reduced the risk of variability in
revenues from wholesale power price fluctuations. This was
beneficial when coming out of the pandemic but it has also meant
that the assets have not benefited from the increase in wholesale
power prices resulting from the war in Ukraine from February 2022.
The PPA contracts will expire during 2022 and so new contracts, at
higher prices, are expected to be available at the relevant
time.
Operating costs
The vast majority of the cost base is fixed and/ or contracted
and includes rent, business rates, and regular O&M costs.
The main cost item that shows variability from year-to-year is
repair and maintenance costs. Repair and maintenance spend
involving solar panels and inverters, the key components of a solar
project, is covered by cash held in the maintenance reserves. At
the year end these reserves totalled GBP1.1 million and are in
place for all the ground mounted solar assets and for the majority
of the roof mounted solar assets. During the year GBP0.2 million
was spent on the works at Beechgrove.
The Investment Adviser has historically modelled its charges for
managing the SPVs as being the relevant charges to include for
future periods. However, feedback from the sales process has
indicated that third parties would charge more to account for the
complexity of managing a portfolio of this type and age and which
includes leverage and a large number of distributed roof mounted
solar assets. The Investment Adviser has therefore updated the
ongoing cost assumptions used in the portfolio valuation to reflect
a 100% increase.
Venture Capital investments
The VCT holds an investment of GBP695,000 (including the
GBP67,500 additional investment made in the half-year) in bio-bean
Limited ("bio-bean"), the world's largest recycler of waste coffee
grounds. bio-bean sources waste coffee grounds from major retail
coffee chains by offering the cheapest and most sustainable avenue
for disposing of them. bio-bean then converts these into coffee
logs for use in wood burning stoves as well as into pellets for
combustion in biomass-fed energy generators. It sells the logs
online, through large supermarkets and through home improvement
chains. bio-bean also markets and sells dried coffee grounds for
use in a diverse set of applications including cosmetics,
bioplastics and the automotive industry. Demand for the coffee logs
(the main product) remains strong; it was adversely impacted by a
warm spring but high energy costs are likely to benefit it over the
longer-term. The new, higher margin dried coffee grounds is a
developing market, with first revenues achieved during the
half-year and a pipeline of business development opportunities that
could lead to a significantly improved profit outlook.
The key challenge will be to realise the investment in this
growth business in line with the disposal of the other VCT assets.
The market for secondary stakes in private, venture capital funded
companies is less liquid than the market for renewable energy
investments.
The VCT's other growth investment, Rezatec Limited ("Rezatec"),
has also made steady progress in the period, but not at the pace
envisaged by the company's management at the time of the investment
in January 2020. Companies with subscription-based business models
such as Rezatec are valued on the basis of Annual Recurring Revenue
(ARR), and the growth in this metric (Compound Annual Growth Rate
(CAGR) of 86% over the last five years) has been slower than
forecast.
The investment by the VCT was structured in a way that provided
an element of protection against slower than expected growth and
the dilution that can come with additional funding rounds.
Portfolio valuation
Whilst the Investment Adviser is supporting the proposed sale of
the VCT's renewable assets and notes that a firm offer to purchase
the assets will be the best indication of value, consistent with
prior years the Net Asset Value ("NAV") of the renewable portfolio
is imputed from the valuation of future projected cash flows
generated by the renewable energy assets, as well as the cash held
by the companies in the portfolio and the cash held by the VCT. The
NAV of the overall portfolio also includes the value of the venture
capital investments into bio-bean and Rezatec.
The future cash flow projections for renewable assets are
impacted by:
Renewable resources. Despite this year having higher solar
irradiation than budgeted, we have not changed the assumptions on
irradiation.
Technical performance. As noted above, the repairs at Lake Farm
and Kingston Farm resolved their historic performance issues, but
the repairs at Beechgrove identified unrelated issues that needed
to be resolved during the half-year. Ayshford Court suffered
technical issues that were repaired. Despite expectations that
these repairs will bring performance back up to budget, we have not
taken the benefits immediately as there is not a long enough
history of post repowering performance.
Prices. Power price forecasts that were initially adversely
impacted by COVID-19 have now risen well over pre-pandemic levels
due to rising commodity prices and acceleration of demand post the
lockdowns ending and the Russian Federation's invasion of Ukraine.
The latest forecasts provided by a leading market consultant, and
current offers for PPAs from purchasers for the power generated are
used.
Costs. Up-to-date costs for the assets are included, reflecting
all commercial negotiations and also expectations for lower
maintenance costs after the older assets are repaired. The asset
management costs going forward have been doubled from those charged
by the Investment Adviser, following feedback from the sales
process.
Corporation tax. The actual corporation tax paid will impact on
the cash available to shareholders.
Inflation. With most of the revenues being linked to RPI, any
increase in inflation projections increases the overall
profitability, and therefore valuation of the assets.
Once the free cash projected to be generated by the assets is
calculated, the value of these cash flows has to be estimated. The
Investment Adviser notes that these cash flows are supported by a
very high proportion of government backed and index linked
revenues. In the current financial market, such cash flows are
dependable and therefore valuable. With greater certainty of output
at the three large ground mounted solar assets that comprise 40% of
the installed capacity there is greater visibility on the returns
on these assets. The discount rates used reflect the Investment
Adviser's experience in the market and evidence of third-party
transactions, as well as based on feedback from the VCT's advisers
who are marketing the portfolio for sale.
The discount rates used to value the future cash flows have been
increased by 0.5% for the solar asset portfolio since the end of
the financial year and remain unchanged at 6.75% for the small wind
portfolio (2021: 5.5% to 6.75%).
The technical assumptions, including the performance ratio (the
efficiency of converting solar power into electricity), have been
changed for the Kingston Farm, Lake Farm, Beechgrove Farm and
Ayshford Court assets. The successful repairs of the first three
are reflected in improved output, although the full potential
increase has not been included until actual performance
demonstrates this. A small number of module failures at Ayshford
Court took down entire strings with several modules. The lower than
expected performance, although repair work was carried out in March
and April 2022, raised the need for a reduction in the value of
Ayshford Court.
There has been an increase in inflation projections to reflect
the increased inflation experienced during the half-year and higher
levels of market inflation expectations.
The value of the investments in bio-bean and Rezatec has been
determined using International Private Equity Valuation Guidelines
and are held at a valuation of GBP1.9 million, including the
GBP67,500 additional investment in bio-bean made during the
half-year. The total invested is GBP1.7 million. The increase in
the value of the Rezatec stake is due to the rolling-up of non cash
interest payments.
Outlook
The Investment Adviser's continued focus is to ensure that the
assets operate at or above budget whilst it supports the ongoing
sale process, especially in relation to demonstrating the solid
generation profile of the projects and addressing the contractual
status of the grid connection arrangement at South Marston. The
repairs of the underperforming assets that were completed in the
last financial year appear to have been successful, as have
warranty claims for the Beechgrove ground mounted solar asset and
these have provided greater visibility and reliability of revenues.
The performance assumptions for these assets as well as the
Ayshford Court solar project have been mildly marked down in the
valuation model in order to reflect the fact that there is, at this
moment, not a long enough history of performance data post the
repairs.
There is an observable impact of age on many of the assets that
have not yet been repowered in the portfolio. The Investment
Adviser remains vigilant for the purpose of spotting any signs of
degradation early so that the impact on availability can be managed
and reduced. Further maintenance provisions have been incorporated
into the financial model to cover the risk of higher maintenance
expenditure on roof mounted assets.
The higher inflation outlook, whilst of concern from the point
of view of the wider UK and global economy, is positive for the
owners of subsidised UK renewable assets. Although most costs also
rise in line with inflation, as does the cost of servicing the two
debt facilities, the net benefit of increased inflation is strongly
positive since it increases the inflation linked revenues more than
it increases the costs. All eight ground mounted solar assets will
have come out of their fixed price power purchase agreements by the
end of 2022, and assuming power prices remain high, should have the
opportunity to enjoy prices substantially higher than those locked
in during 2020 and early 2021.
It is however very challenging to predict the future course of
inflation and power prices, with the range of forecasts for medium
to long-term inflation being very diverse. There are plausible
future scenarios that could bring the levels of inflation as well
as power prices down substantially from current levels.
The risk of government intervention to ease budgetary
constraints and pressures on consumers in the future cannot be
ruled out entirely. Renewable energy projects in the portfolio are
not expected to be subject to a "windfall tax" according to the UK
Government's latest announcement but should power prices stay
elevated for very long, a windfall tax on smaller renewable
generation assets could come back on the agenda or potentially
other energy market reform measures.
Gresham House Asset Management Limited
29 June 2022
Unaudited Income Statement
For the six months ended 31 March 2022
Year ended
Six months ended 31 Six months ended 31 30 September
March 2022 March 2021 2021
Revenue Capital Total Revenue Capital Total Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income 597 - 597 527 - 527 591
(Losses)/gains on investments
Unrealised - (80) (80) - (2,280) (2,280) (2,628)
Realised - - - - 16 16 -
597 (80) 517 527 (2,264) (1,737) (2,037)
Investment advisory fees (104) (35) (139) (116) (39) (155) (295)
Other expenses (186) - (186) (171) - (171) (347)
Profit/(loss) on ordinary
activities
before taxation 307 (115) 192 (287) (39) (326) (2,679)
Tax on total comprehensive - - - - - - -
income and ordinary activities
Profit/(loss) attributable
to equity shareholders 307 (115) 192 240 (2,303) (2,063) (2,679)
Earnings per Ordinary
Share 1.2p (0.4p) 0.7p 0.9p (8.8p) (7.9p) (10.2p)
Earnings per 'A' Share - - - - - - -
The total column within the Income Statement represents the
Statement of Total Comprehensive Income of the VCT prepared in
accordance with Financial Reporting Standards ("FRS 102"). The
supplementary revenue and capital return columns are prepared in
accordance with the Statement of Recommended Practice issued in
November 2014 (updated in April 2021) 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.
Unaudited Balance Sheet
As at 31 March 2022
31 March 31 March 30 September
2022 2021 2021
Notes GBP'000 GBP'000 GBP'000
Fixed assets
Investments 9 - 28,286 -
Current assets
Investments 9 27,388 - 27,400
Costs incurred on sale of VCT's assets 387 - 181
Debtors 178 273 176
Cash at bank and in hand 2 51 30
27,955 324 27,787
Creditors: amounts falling due within one year (1,438) (1,464) (1,461)
Net current assets 26,517 27,146 26,326
Creditors: amounts falling due after more than
one year (2,969) (3,174) (2,970)
Net assets 23,548 23,972 23,356
Capital and reserves
Called up share capital 71 71 71
Share premium account 8 9,734 9,734 9,734
Treasury shares 8 (3,403) (3,403) (3,403)
Special reserve 8 4,813 4,813 4,813
Revaluation reserve 8 14,974 14,611 15,054
Capital redemption reserve 8 1 1 1
Capital reserve - realised 8 (2,282) (1,456) (2,247)
Revenue reserve 8 (360) (399) (667)
Equity shareholders' funds 23,548 23,972 23,356
Net asset value per Ordinary Share 90.0p 91.6p 89.2p
Net asset value per 'A' Share 0.1p 0.1p 0.1p
90.1p 91.7p 89.3p
Unaudited Statement of Changes in Equity
For the six months ended 31 March 2022
Called Capital
up Share Capital reserve
share premium Treasury Special Revaluation redemption - Revenue
capital account shares reserve reserve reserve realised reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 30 September
2020 71 9,734 (3,403) 6,394 16,891 1 (1,433) (639) 27,616
Total comprehensive
loss - - - - (2,644) - (7) (28) (2,679)
Transfer of net
realised
loss to Capital
reserve-realised - - - - 807 - (807) - -
Transactions with
owners
Dividend paid - - - (1,581) - - - - (1,581)
As at 30 September
2021 71 9,734 (3,403) 4,813 15,054 1 (2,247) (667) 23,356
Total comprehensive
(loss)/profit - - - - (80) - (35) 307 192
Transactions with
owners
Dividend paid - - - - - - - - -
As at 31 March 2022 71 9,734 (3,403) 4,813 14,974 1 (2,282) (360) 23,548
Unaudited Statement of Cash Flows
For the six months ended 31 March 2022
31 March 31 March 30 September
2022 2021 2021
GBP'000 GBP'000 GBP'000
Cash flows from operating activities
Profit/(loss) on ordinary activities before
taxation 192 (2,063) (1,093)
Losses on investments 80 2,280 624
Dividend Income (570) - (522)
Interest Income (27) - (69)
Increase/(decrease) in other debtors 7 16 (2)
(Decrease)/increase in other creditors (178) 1,319 148
Net cash (outflow)/inflow from operating activities (496) 1,552 (496)
Cash flows from investing activities
Purchase of investments (68) (12) (13)
Sale of investments/loan note redemptions - 38 139
Costs incurred as part of sale of VCT's assets (51) - (19)
Interest received 17 - 184
Dividend income received 570 - 315
Net cash inflow from investing activities 468 26 606
Net cash (outflow)/inflow before financing
activities (28) 1,578 110
Cash flows from financing activities
Equity dividends paid - (1,581) (1,581)
Long-term loans - - 1,447
Net cash outflow from financing activities (28) (1,581) (134)
Net decrease in cash (28) (3) (24)
Cash and cash equivalents at start of period 30 54 54
Cash and cash equivalents at end of period 2 51 30
Cash and cash equivalents comprise:
Cash at bank in hand 2 51 30
Total cash and cash equivalents 2 51 30
Summary of Investment Portfolio and Movements
For the six months ended 31 March 2022
Investment portfolio as at 31 March 2022
Unrealised
gain/(loss) % of
Qualifying and partially Cost Valuation in period portfolio
qualifying investments Operating sites Sector GBP'000 GBP'000 GBP'000 by value
South Marston,
Lunar 2 Limited* Beechgrove Ground solar 1,330 14,264 155 52.1%
Kingston Farm,
Lunar 1 Limited* Lake Farm Ground solar 125 2,281 63 8.3%
Wychwood Solar
New Energy Era Limited Farm Ground solar 884 1,767 (17) 6.5%
Ayshford Solar (Holding)
Limited* Ayshford Ground solar 826 1,373 11 5.0%
Rezatec Limited United Kingdom Clean energy 1,000 1,246 61 4.6%
Vicarage Solar Limited Parsonage Farm Ground solar 871 1,143 (86) 4.2%
Tumblewind Limited* Priory Farm Small wind/solar 1,188 1,130 19 4.1%
Gloucester Wind Limited Gloucester Roof solar 1,000 780 (77) 2.9%
HRE Willow Limited HRE Willow Small wind 875 710 9 2.6%
bio-bean Limited Cambridgeshire Clean energy 695 695 - 2.5%
Hewas Solar Limited Hewas Roof solar 1,000 683 (149) 2.5%
St Columb Solar Limited St Columb Roof solar 650 491 (42) 1.8%
Penhale Solar Limited Penhale Roof solar 825 358 (23) 1.3%
Minsmere Power Limited Minsmere Small wind/solar 975 323 (1) 1.2%
Small Wind Generation
Limited Small Wind Generation Small wind 975 144 (3) 0.5%
Lunar 3 Limited* Ground solar 1 - - 0.0%
13,220 27,388 (80)
Cash 2
Total investments 27,390 100.0%
* Partially qualifying investment
Investment disposals
There were no Investment disposals during the half-year to 31
March 2022.
Notes to the Unaudited Financial Statements
1. General information
Gresham House Renewable Energy VCT 2 plc ("VCT") 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 under the Companies Act 2006.
At the General Meeting on 13 July 2021 a formal decision was
made to wind the VCT up. Similar to the financial statements
prepared for the year ended 30 September 2021, the unaudited
half-yearly financial statements to 31 March 2022 have been
prepared on a non-going concern basis. The adjustments required in
respect of applying the non-going concern basis were to transfer
the investments held at fair value through profit or loss from
non-current to current assets.
2. Accounting policies - basis of accounting
The unaudited half-yearly results cover the six months to 31
March 2022 and have been prepared in accordance with the accounting
policies set out in the annual accounts for the year ended 30
September 2021 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") in November 2014 and revised in October 2019
(updated in April 2021) ("SORP") as well the Companies Act
2006.
3. All revenue and capital items in the Income Statement derive from continuing operations.
4. The VCT 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 26,133,036 Ordinary Shares and 39,463,845 'A' Shares,
being the number of shares in issue at the period end, excluding
Treasury Shares.
6. Return per share for the period has been calculated on
26,133,036 Ordinary Shares and 39,463,845 'A' Shares, being the
weighted average number of shares in issue during the period,
excluding Treasury Shares.
7. Dividends
No dividends were paid to shareholders during the six months to
31 March 2022.
8. Reserves
Period
ended Year ended
31 March 30 September
2022 2021
GBP'000 GBP'000
Share premium 9,734 9,734
--------- -------------
Treasury shares (3,403) (3,403)
--------- -------------
Capital redemption reserve 1 1
--------- -------------
Special reserve 4,813 4,813
--------- -------------
Revaluation reserve 14,974 15,054
--------- -------------
Capital reserve-realised (2,282) (2,247)
--------- -------------
Revenue reserve (360) (667)
--------- -------------
23,477 23,285
--------- -------------
The Special reserve is available to the VCT to enable the
purchase of its own shares in the market without affecting its
ability to pay dividends. The Special reserve, Capital reserve -
realised and Revenue reserve are all distributable reserves. At 31
March 2022, distributable reserves were GBP2,171,000 (30 September
2021: GBP1,899,000).
9. Investments
The fair value of investments is determined using the detailed
accounting policies as referred to in note 2.
The VCT has categorised its financial instruments using the fair
value hierarchy as follows:
Level 1 Reflects financial instruments quoted in an active market;
Level 2 Reflects financial instruments that have prices that are
observable either directly or indirectly; and
Level 3 Reflects financial instruments that use valuation
techniques that are not based on observable market data (unquoted
equity investments and loan note investments).
Level Level Level 31 March Level Level Level 30 September
1 2 3 2022 1 2 3 2021
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------- ------- ------- -------- ------- ------- ------- ------------
Unquoted loan notes - - 1,893 1,893 - - 1,893 1,893
------- ------- ------- -------- ------- ------- ------- ------------
Unquoted equity - - 25,495 25,495 - - 25,507 25,507
------- ------- ------- -------- ------- ------- ------- ------------
- - 27,388 27,388 - - 27,400 27,400
------- ------- ------- -------- ------- ------- ------- ------------
A reconciliation of fair value for Level 3 financial instruments
held at the period end is shown below:
Unquoted Unquoted
loan notes equity Total
GBP'000 GBP'000 GBP'000
Balance at 30 September 2021 1,893 25,507 27,400
----------- -------- --------
Movements in the income statement:
----------- -------- --------
Unrealised loss in the income statement - (80) (80)
----------- -------- --------
Purchased at cost - 68 68
----------- -------- --------
Balance at 31 March 2022 1,893 25,495 27,388
----------- -------- --------
10. Risks and uncertainties
Under the Disclosure and Transparency Directive, the Board is
required in the VCT's half-year results to report on principal
risks and uncertainties facing the VCT over the remainder of the
financial year.
The Board has concluded that the key risks facing the VCT 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;
(iii) failure to maintain approval as a VCT;
(iv) risk surrounding the sale of the VCT's solar assets;
and
(v) economic risk due to several factors including the Russian Federation's invasion of Ukraine
In order to make VCT qualifying investments, the VCT has to
invest in small businesses which are often immature. The Investment
Adviser 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 Investment
Adviser 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 VCT's compliance with the VCT regulations is continually
monitored by the VCT Status Adviser, who reports regularly to the
Board on the current position. The VCT has reappointed Philip Hare
& Associates LLP as VCT Status Adviser, who will work closely
with the Investment Adviser 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.
There is a risk that the VCT's solar assets may not be realised
at their carrying value, and the sale commissions, such as
liquidation costs and other costs associated with the realisation
of the VCT's assets, may reduce cash available for distribution to
shareholders. Furthermore there is a risk that the sale of the
VCT's assets may prove materially more complex than anticipated
which may delay distribution of proceeds to shareholders. To
mitigate these risks, the VCT's Board has engaged several experts
in this field to ensure that a timely and appropriate sale price is
achieved. In addition, the Board reviews quarterly cash flow
forecasts, prepared by the Investment Adviser, and has considered
the impact of additional costs likely to be incurred during the
managed wind-down of the VCT.
The Board has considered the Russian Federation's invasion of
Ukraine and the impact of the increasing inflation on the VCT. The
higher inflation outlook, whilst of concern from the point of view
of the wider UK and global economy, is positive for the owners of
subsidised UK renewable assets. Although most costs also rise in
line with inflation, as does the cost of servicing the two debt
facilities, the net benefit of increased inflation is strongly
positive since it increases the inflation linked revenues more than
it increases the costs. It is however very challenging to predict
the future course of inflation, with the range of forecasts for
medium to long-term inflation being very diverse.
11. Going concern
In assessing the VCT as a going concern, the Directors have
considered the forecasts which reflect the proposed strategy for
portfolio investments and the results of the continuation votes at
the AGM and General Meeting held on 22 March 2021 and 13 July 2021
respectively.
Although the continuation vote was passed by VCT 1 at the AGM,
there were a significant number of votes against this resolution
and the shareholders of this VCT voted against continuation. This
required the VCTs to draw up proposals for voluntary liquidation,
reconstruction or other re-organisation for consideration by the
members at the General Meeting held on 13 July 2021. At this
meeting the proposed special resolution was approved by
shareholders, resulting in the VCT entering a managed wind-down and
a new investment policy replacing the existing investment policy.
The Board agreed to realise the VCT's investments in a manner that
achieves balance between maximising the net value received from
those investments and making timely returns to shareholders.
Given a formal decision has been made to wind the VCT up, the
financial statements have been prepared on a basis other than going
concern. The Board notes that the VCT has sufficient liquidity to
pay its liabilities as and when they fall due, during the managed
wind-down, and that the VCT has adequate resources to continue in
business until the formal liquidation and wind-up commences.
12. 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.
13. 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
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.
14. Copies of the Half-Yearly Report will shortly be sent to
shareholders who have elected this communication preference.
Further copies can be obtained from the VCT's registered office or
can be downloaded from
https://greshamhouse.com/real-assets/new-energy-sustainable-infrastructure/
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END
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