Hazel Renewable Energy VCT 2 plc : Final Results

Hazel Renewable Energy VCT2 plc
Legal Entity Identifier: 213800GQ3JQE2M214C75
Final results for the year ended 30 September 2017

FINANCIAL HIGHLIGHTS

	Audited		Audited
	Year End		Year End
	30 September 2017		30 September 2016
	Pence		Pence
Net asset value per Ordinary Share	114.9		117.3
Net asset value per `A` Share	0.1		0.1
Cumulative Dividends paid	39.5		34.5
Total return per Ordinary Share and `A` Share	154.5		151.9

CHAIRMAN`S STATEMENT
I present the Annual Report for Hazel Renewable Energy VCT2 plc for the year ended 30 September 2017, my first as Chairman of the Company.

As Shareholders will be aware, it has been a busy year for your Company. In recent months, the Board has agreed a reorganisation of the Company, with Gresham House Asset Management Limited formally taking over as Investment Adviser. The new arrangements bring a number of benefits which the Board believes will deliver enhanced value to Shareholders. We are looking forward to working with the new team as the Company enters the next stage of its life.

Investment portfolio
There were no changes to the investment portfolio during the year. At the year end, the Company held a portfolio of 16 investments with a total value of £31.4 million.

As usual, the Board has reviewed the investment valuations at the year end and made adjustments to the fair values. Despite lower than expected irradiation during the year which impacted the solar investments, other factors have offset this resulting in a net unrealised gain of £992,000.

Net asset value and results
At 30 September 2017, the Net Asset Value ("NAV") per Ordinary Share stood at 114.9p and the NAV per `A` Share stood at 0.1p, producing a combined total of 115.0p. This represents an increase of 2.6p (2.2%) over the year, after adjusting for dividends paid during the year of 5.0p per Ordinary share. Total dividends paid to date for a combined holding of one Ordinary Share and one `A` Share stand at 39.5p. Total Return (NAV plus cumulative dividends paid to date) now stands at 154.5p, 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 £652,000, comprising a revenue loss of £243,000 and a capital gain of £895,000 as shown in the Income Statement.

Dividends
A dividend of 5.0p per Ordinary Share paid was paid on 15 September 2017. The Company normally pays its annual dividend in September each year, however the plans for the future of the Company as discussed below may impact this.

The Company`s general dividend policy is to distribute surplus funds generated by the underlying investments, subject to maintaining an appropriate cash reserve within the Company to meet anticipated future requirements.

Share Buybacks
The Company has introduced a policy of buying in shares that become available in the market at a 2% discount to NAV. Shareholders who wish to sell their shares will need to do so via a stockbroker. The Company has engaged Panmure Gordon (UK) Limited ("Panmure") as its Corporate Broker. Panmure can provide guidance on the timing and likely price of buybacks. Contact details for Panmure can be found on the inside cover of the Annual Report.

No `Ordinary` Shares or `A` Shares were purchased during the year.

Board composition

In July, Peter Wisher resigned as a non-executive Director and Chairman of the Company due to ill health. I am sad to report that Peter has since passed away. Peter was Chairman since the Company`s launch in 2010 and presided over a period that delivered solid returns to Shareholders. Peter`s presence as a colleague and friend is greatly missed and our thoughts are with his family and friends. Following Peter`s resignation, I agreed to take over as Chairman. Subsequently Giles Clark has joined the Board as a non-executive director. Giles has significant experience in the solar energy sector and acted as a consultant for the Company in the recent review. Giles brings additional skills to the Board and, we believe, will be a significant asset.

Investment Adviser
As mentioned above, Gresham House Asset Management Limited ("GHAM") has now been appointed as Investment Adviser to the Company, and our sister Company, Hazel Renewable Energy VCT1 plc. GHAM is part of AIM-quoted specialist asset manager, Gresham House plc.

GHAM acquired the business of Hazel capital LLP on 31 October 2017 so the Company now benefits from continuity of the key investment executives plus the enhanced resources of a larger group. As part of the new arrangements, the Board also secured a reduced advisory fee. The Board looks forward to working with GHAM and believes that the new structure can deliver enhanced returns to Shareholders in due course.

Amendment to the Articles of Association
The VCT`s investments are mostly in companies which were set up to develop and operate renewable energy assets. In some cases, these companies have not yet generated enough profits to fully offset the set-up costs and, as a result, do not yet have distributable reserves even though they are now generating surplus cash. Funds from these investee companies have, in some cases, been paid up the VCT by way of loans. In due course, it is expected that these loans will be cancelled by the declaration of dividends from the investee company once distributable reserves are available.

Article 106.1 restricts the Company from borrowing from non-group companies a sum in excess of 15% of the net assets of the Company. As currently drafted, loans from investee companies are included in this calculation. The Directors believe that it was not intended that such loans be included within this restriction and propose to extend the definition of "Group" in the articles to include investee companies. Resolution 6 will be proposed as a special resolution at the forthcoming AGM seeking to make this amendment to the articles. The Board recommends voting in favour of this resolution to allow the Company to continue to have flexibility in transferring surplus cash from the investee companies to the Company as required.

Annual General Meeting
The Company`s seventh AGM will be held at St. Magnus House, 3 Lower Thames Street, EC3R 6HD at 11:00 a.m. on 21 March 2018.

Two items of special business will be proposed in respect of authority to undertake share buybacks and to amend the Articles of Association as described above.

Outlook
The recent Budget by Her Majesty`s Government announced a number of further changes to the VCT regulations. As the Company is effectively fully invested, the Board does not believe the new regulations will have an impact on returns from the existing portfolio. The new regulations do however place further restrictions on the types of new investments that VCTs are able to make in future and will have an influence on any plans that the Company might develop in respect of new investment activity.

The Board has also considered the potential impact of the UK leaving the European Union. With almost all of the Company`s funds employed in renewable energy assets in the UK, the Board do not consider that any impact of this will be significant for the Company.

In terms of the existing portfolio, over the next year, the investment advisory team will continue close monitoring of and, where possible, seek to further achieve running costs savings and improved efficiency from the current assets.

I look forward to updating Shareholders in my statement with the Half yearly report to 31 March 2018 which is expected to be published in July 2018.

Christian Yates
Chairman

INVESTMENT ADVISER`S REPORT

Introduction
We would like to thank the shareholders for supporting the reorganisation of the company and appointing Gresham House Asset Management Limited as Investment Adviser. We look forward to sustaining and enhancing the impressive investment returns that have been achieved since inception in 2009. We are pleased to report that the portfolio of assets owned by Hazel Renewable Energy VCT2 plc ("the Company") extended its multi-year period of solid performance in the year ending 30 September 2017. This was achieved in spite of a significant headwind in the form of adverse weather conditions faced by all owners of solar generation assets in the UK.

The portfolio was fully invested at the beginning of the year. Although there were surplus proceeds from the refinancing carried out in March 2016, the need to allow for all potential outcomes of the reorganisation of the Company meant that these funds were maintained in cash.

The focus in the year was to generate as much yield as possible from the portfolio, and to reduce risk to revenues over multiple years by building in resilience through a new spare parts strategy and negotiating better insurance terms.

Overall, the Company owns a well-diversified portfolio of assets of high build quality. The ground-mounted sites and the solar installations located on the roofs of residential properties owned by housing associations across the UK have performed well over the years and account for circa ninety percent of the cashflows and therefore the value. The small wind turbine portfolio and to a lesser extent the small portfolio solar installations located on the roofs of privately-owned houses and schools have performed less well over the years, although the latter has done better than expected in the past year.

Overall Portfolio and Operational Review
We have set out below the framework we use to analyse the performance of the portfolio of assets in this report. We base our analysis on three key factors: The first are macro level factors and include inflation, wholesale power prices, variable components of subsidies for renewable energy generation and climactic conditions. The Investment Adviser has no control over this set of factors. The second category covers the technical performance of an asset in terms of energy generation for a given level of macro risk factors. The third category covers costs. The Investment Adviser has much more control over the second and third categories.

Starting with macro factors, inflation, a parameter that the portfolio is very sensitive to (as a result of inflation-linked power subsidies) steadily increased through the year. RPI (Retail Price Inflation) increased from 2.0% to 3.9% over the year. The substantially higher level is yet to be reflected in the tariffs as adjustments become effective in April, however this increase is a very positive development for the portfolio since each 1% increase in valuation, adds circa £100,000 to portfolio revenues.

Climactic conditions however were unfavourable. The amount of solar irradiation falling on the solar panels showed a marked decline from prior years. For the six ground-mounted solar power plants remunerated by Feed-in-Tariffs (FiTs) that account for around 70% of the value of the portfolio, irradiation fell 5.5% short of forecasts. Each 1% movement in irradiation for this portfolio results in a £80,000 movement in revenues. For the two ground-mounted sites remunerated by Renewable Obligation Certificates (ROCs), irradiation came in line with forecasts due to one of the parks being located on the East Anglia coast which typically experiences different weather patterns than Central and Western England where the other parks are located.

Unlike the case with the ground-mounted sites where pyranometers are installed to measure irradiation, we do not have the ability to measure irradiation at the roof-mounted solar installations as installing pyranometers is not cost effective.

It is extremely difficult to forecast irradiation on a year-by-year basis. Conditions have been poor in the last two years and we hope that a reversion-to-mean effect manifests itself in the next year.

Power prices drifted down moderately throughout the year, however the portfolio`s very low exposure to power prices (less than 5% of revenues are currently from variable tariffs) means that this has a very modest impact.

Moving on to the second category, the technical performance of the assets. We are pleased to report that the ground-mounted asset base that accounts for 79% of the portfolio value, performed in line with expectations despite the fact that we raised these expectations during the year. Performance would however have come in better had there not been an outage of three weeks duration at the point at which one of the ground-mounted sites connects to the electricity grid. We expect to be partially compensated for this outage through contractual terms in our Operations and Maintenance Agreement.

Outages that occur in the summer where energy generation is highest can result in a significant revenue loss and we looked at ways in which we can minimise the probability and magnitude of such losses. We renegotiated our insurance policies for the ground-mounted assets taking advantage of more competition and substantially better terms available in the insurance market, and are pleased to report that the excess (deductible) is now ten days as opposed to twenty-five days for allowable claims. We have also reviewed our spare parts strategy for both the ground-mounted and rooftop-mounted solar installations to improve the lead times of potential repairs and have ordered an additional stock of spare parts that have long delivery times but negligible obsolescence risk.

The reduced risk profile has helped us in our decision to reduce the discount rate for the ground-mounted solar sites remunerated by FiTs by 25 basis points.

The roof-mounted solar asset portfolio that accounts for circa 12% of the overall valuation performed slightly ahead of expectations. Generation was 1% better than forecast.

An area of the portfolio that experienced a significant underperformance is the small wind portfolio. This portfolio accounts for around 10% of the overall value of the portfolio. We were hopeful that the small uplift we experienced in performance in the prior year would continue, however the opposite has happened.

Around a third of the portfolio consists of Chinese-made Huaying HY-5 wind turbines, some of which experienced significant technical and safety issues during the high wind conditions that prevailed in February. Britwind, the O&M Contractor, communicated that they would be unable to maintain these assets in the future due to the poor technical quality of the turbines and lack of support from the manufacturer, which invalidated our insurance coverage. This combined with the safety/public liability implications forced us to put the turbines on mechanical break.

One major disadvantage of this type of distributed asset is the difficulty of finding qualified and experienced Operations and Maintenance Contractors that can perform a decent quality service at a cost level that makes sense. We were nevertheless able to identify an engineer willing to perform these services and have tasked his firm with visiting and examining the installations and putting back in operation those turbines that are safe and unlikely to necessitate major repairs.

This has resulted in our decision to recommend a further impairment to the value of this element of the portfolio - it is now valued at circa half the original investment amount.

The third factor that determines performance is costs. Most of our work to reduce controllable costs was done in the prior year where we renegotiated our O&M and insurance contracts and achieved cost reductions of more than 50%. We also achieved savings in bookkeeping and accounting costs.

This year however, we suffered the impact of a significant increase in business rates. The Government decided to increase business rates by close to three times for ground-mounted solar farms that were built in the 2010 to 2012 period and therefore earned very high FiTs. The impact on the portfolio is an increase of £175,000 per year in the cost base once the taper period of three years to moderate the impact is over.

There is the potential of further reductions in O&M costs as prices in the UK become more aligned with those in Continental Europe, however the long-term nature of our O&M contracts (a requirement under the debt facility agreements) mean that we will not enjoy the benefits of such a realignment for several years to come.

We are now working on achieving cost reductions in ancillary areas such as electricity imports, communications, security and monitoring, however we do not expect these savings to amount to more than £10,000 per annum across the portfolios.

Portfolio Valuation
As at 30 September 2017, the combined NAV and Total Return stood at 115.0p and 154.5p respectively, an increase of 2.6p after adjusting for dividends paid during the year of 5.0p. This year`s increase, as was the case last year, has come from the increase in market prices for renewable generation assets which we have reflected in the lower (by 25 basis points) range we used to value the ground-mounted, FiT remunerated solar sites that account for circa 70% of the value of the portfolio.

In addition, our valuation assumptions incorporate a small increase in the generation forecast. It would be extremely unlucky for the current poor irradiation conditions to persist in the very long term and we have reduced the weighting of the current year in our forecasts.

There have been no changes to discount rates used for other assets in the portfolio or to inflation assumptions. Inflation has continued to increase during the year and RPI has come in as high as 3.9% (as opposed to our forecast for long term inflation of 3%) however we must take into account that this increase could prove to be very transient.

Similar to last year, a significant portion of the valuation (circa £10million in total with the Company`s share being £5.0million - circa 18% of the valuation) is comprised of cash balances held by investee companies. Two thirds of this cash is held in reserves (for equipment replacement and debt service in the case of a significant breach of debt terms) that are mandatory under the debt facility agreements.

In the longer term the potential to capture residual value through the extension of leases beyond their 25-year term and upgrading the equipment using new technology with much better yields may arise. We witnessed this in another transaction relating to an asset outside the Company`s portfolio. It is a given that subsidies will not be available and it is impossible to predict power prices so far out in the future but upgrade costs are also likely to be very low.

Other Developments
The Hazel Capital Team that has delivered market-leading performance in shareholder value is now proud to be part of Gresham House plc, a fast-growing publicly-quoted alternative asset manager. We believe these combined resources will be of great benefit to shareholders as they will have the same core investment team continuing to manage the portfolio as well as access to the wider Gresham House team`s experience in alternative asset management and investor communication. On the latter point, Gresham House are working closely with trusted advisers, clients and industry experts to develop a best-in-class client portal, which will provide enhanced communication and high-quality reporting to investors. The objective is to provide all shareholders with secured access to the client portal during the first quarter of 2018.

Outlook
We will continue to target improvements in yield and reductions in risk across the portfolio, and evaluate incremental maintenance capex decisions that have the potential to generate high returns.

Should the opportunity occur to deploy the surplus cash proceeds held by investee companies as a result of the March 2016 refinancing, we will seek further investment opportunities such as the acquisition of small scale solar sites or adding energy storage to existing projects in a way that does not compromise the accreditation status.

Gresham House Asset Management Limited

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments were held at 30 September 2017:

	Cost	Valuation	Valuation movement in year	% of portfolio
	£`000	£`000	£`000
Qualifying and part-qualifying investments
Lunar 2 Limited*	2,976	15,322	1,843	48.7%
Ayshford Solar (Holding) Limited*	1,928	3,154	164	10.0%
Lunar 1 Limited*	125	2,121	(65)	6.7%
New Energy Era Limited	884	1,390	(99)	4.4%
Hewas Solar Limited	1,000	1,355	(6)	4.3%
Vicarage Solar Limited	871	1,215	(88)	3.9%
Tumblewind Limited*	1,401	1,144	(65)	3.6%
Gloucester Wind Limited	1,000	953	(200)	3.0%
Minsmere Power Limited	975	729	(321)	2.3%
HRE Willow Limited	875	726	(44)	2.3%
Penhale Solar Limited	825	725	(10)	2.3%
St Columb Solar Limited	650	673	(17)	2.1%
Chargepoint Services Limited	500	500	-	1.6%
Small Wind Generation Limited	975	483	(100)	1.5%
Sunhazel UK Limited	1	-	-	0.0%
	14,986	30,490	992	96.6%
Non-qualifying investments
AEE Renewables UK 3 Limited	900	900	-	3.0%
	900	900	-	3.0%
	15,886	31,390	992	99.6%
Cash at bank and in hand		88		0.3%
Total investments		31,478		100.0%

* Part-qualifying investment

All venture capital investments are incorporated in England and Wales.

Hazel Renewable Energy VCT1 plc, of which Gresham House Asset Management Limited ("GHAM") is the Investment Adviser, holds the same investments as above.

Investment movements for the year ended 30 September 2017

DISPOSALS

	Cost	Valuation at 30 September 2016	Proceeds	Profit vs cost	Realised Gain
	£`000	£`000	£`000	£`000	£`000
Qualifying and part-qualifying investments
Ayshford Solar (Holdings) Limited	552	506	552	-	46
	552	506	552	-	46
Non-qualifying investments
Tumblewind Limited	37	37	37	-	-
	37	37	37	-	-
	589	543	589	-	46

All venture capital investments are incorporated in England and Wales.

Directors` responsibilities
The Directors are responsible for preparing the Strategic Report, the Report of the Directors, the Directors` Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements the Directors are required to:

- select suitable accounting policies and then apply them consistently;
- make judgments and accounting estimates that are reasonable and prudent;
- state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company`s transactions, to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company`s performance, business model and strategy.

INCOME STATEMENT
for the year ended 30 September 2017

			Year ended 30 September 2017				Year ended 30 September 2016
			Revenue	Capital	Total		Revenue	Capital	Total
			£`000	£`000	£`000		£`000	£`000	£`000
Income			492	-	492		1,784	-	1,784
Gain on investments			-	1,038	1,038		-	376	376
			492	1,038	1,530		1,784	376	2,160
Investment advisory fees			(427)	(143)	(570)		(432)	(144)	(576)
Other expenses			(308)	-	(308)		(293)	(72)	(365)
(Loss)/profit on ordinary activities before tax			(243)	895	652		1,059	160	1,219
Tax on total comprehensive income and ordinary activities			-	-	-		-	-	-
(Loss)/profit for the year and total comprehensive income			(243)	895	652		1,059	160	1,219
Basic and diluted earnings per share:
Ordinary Share			(1.0p)	3.6p	2.6p		4.3p	0.6p	4.9p
`A` Share			-	-	-		-	-	-

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS 102"). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 by the Association of Investment Companies ("AIC SORP").

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

BALANCE SHEET
as at 30 September 2017

			2017		2016
		£`000	£`000	£`000	£`000
Investments			31,390		30,941
Current assets
Debtors		447		420
Cash at bank and in hand		88		4
		535		424
Creditors: amounts falling due within one year		(68)		(161)
Net current assets			467		263
Total Assets less net current assets			31,857		31,204
Creditors: amounts falling due after more than one year		(3,660)		(2,434)
Net assets			28,197		28,770
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			9,840		11,065
Revaluation reserve			15,504		14,466
Capital reserve - realised			(1,200)		(1,057)
Revenue reserve			6		249
Total Shareholders` funds			28,197		28,770
Basic and diluted net asset value per share
Ordinary Share			114.9p		117.3p
`A` Share			0.1p		0.1p

STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2017

	Called up share capital	Share Premium Account	Special Reserve	Revalua-tion reserve	Capital reserve realised	Revenue reserve	Total
	£`000	£`000	£`000	£`000	£`000	£`000	£`000
Year ended 30 September 2016
At 30 September 2015	62	3,985	12,402	14,090	(841)	(810)	28,888
Total comprehensive income	-	-	-	370	(210)	1,059	1,219
Transactions with owners
Dividend paid	-	-	(1,226)	-	-	-	(1,226)
Repurchase and cancellation of own shares	-	-	(111)	-	-	-	(111)
Transfer between reserves	-	-	-	6	(6)	-	-
At 30 September 2016	62	3,985	11,065	14,466	(1,057)	249	28,770
Year ended 30 September 2017
At 30 September 2016	62	3,985	11,065	14,466	(1,057)	249	28,770
Total comprehensive income	-	-	-	992	(97)	(243)	652
Transactions with owners
Dividends Paid	-	-	(1,225)	-	-	-	(1,225)
Transfer between reserves	-	-	-	46	(46)	-	-
At 30 September 2017	62	3,985	9,840	15,504	(1,200)	6	28,197

CASH FLOW STATEMENT
for the year ended 30 September 2017

		Year ended 30 September 2017		Year ended 30 September 2016
			£`000		£`000
Net cash inflow/(outflow) from operating activities			(504)		786
Cash flows from investing activities
Purchase of investments			-		(1,057)
Proceeds from disposal of investments			589		1,148
Net cash inflow from investing activities			589		91
Net cash inflow before financing activities			85		877
Cash flows from financing activities
Equity dividends paid			(1,225)		(1,226)
			1,224		448
			-		(111)
Net cash outflow from financing activities			(1)		(889)
Net increase/(decrease) in cash			4		(12)
Cash and cash equivalents at start of year			84		16
Cash and cash equivalents at end of year			88		4
Cash and cash equivalents comprise
Cash at bank and in hand			88		4
Total cash and cash equivalents			88		4

NOTES TO THE ACCOUNTS
for the year ended 30 September 2017

1. General Information
Hazel Renewable Energy VCT1 plc ("the Company") is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales.

2. Accounting policies
Basis of accounting
The Company has prepared its financial statements under FRS 102 `The Financial Reporting Standard applicable in the UK and Republic of Ireland` and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies ("AIC") revised November 2014 ("SORP") as well as the Companies Act 2006.

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

The financial statements are presented in Sterling (£).

Presentation of income statement
In order to better reflect the activities of a VCT and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the Company`s compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments
All investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company`s documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS 102 Sections 11 and 12.

For unquoted investments, fair value is established by using the IPEV guidelines. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

- Price of recent investment;
- Multiples;
- Net assets;
- Discounted cash flows or earnings (of underlying business);
- Discounted cash flows (from the investment); and
- Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment are expensed. Where an investee company has gone into receivership or liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised.

It is not the Company`s policy to exercise controlling influence over investee companies. Therefore, the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS 102 sections 14 and 15 that does not require portfolio investments, where the interest held is greater than 20%, to be accounted for using the equity method of accounting.

Income
Dividend income from investments is recognised when the Shareholders` rights to receive payment have been established, normally the ex-dividend date.

Interest income is accrued on a time apportionment basis, by reference to the principal sum outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection in the foreseeable future.

Expenses
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:

- Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment; and
- Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted a policy of charging 75% of the investment advisory fees to the revenue account and 25% to the capital account to reflect the Board`s estimated split of investment returns which will be achieved by the Company over the long term.

Taxation
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate, using the Company`s effective rate of tax for the accounting period.

Due to the Company`s status as a VCT and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company`s investments which arises.

Deferred taxation, which is not discounted, is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.

Other debtors, other creditors and loan notes
Other debtors (including accrued income), other creditors and loan notes (other than those held as part of the investment portfolio as set out in Note 10 of the annual report) are included within the accounts at amortised cost.

Issue costs
Issue costs in relation to the shares issued for each share class have been deducted from the share premium account.

3. Income

Year ended 30 September 2017		Year ended 30 September 2016
	£`000		£`000
Income from investments
Loan stock interest	185		198
Dividend Income	307		1,586
	492		1,784
Other income
Bank interest	-		-
	492		1,784

4. Basic and diluted earnings per share

	Weighted average number of shares in issue		Revenue (loss)/ return		Capital return
Profit/(loss) per share is calculated on the following:			£`000	per share	£`000	per share
Year ended 30 September 2017	Ordinary Shares	24,504,858	(24)	(1.0)	89	3.6
	`A` Shares	36,799,133	(1)	-	1	-
Year ended 30 September 2016	Ordinary Shares	24,576,029	1,057	4.3	160	0.6
	`A` Shares	36,875,592	2	-	-	-

As the Company has not issued any convertible securities or share options, there is no dilutive effect on earnings per Ordinary Share or `A` Share. The earnings per share disclosed therefore represents both the basic and diluted return per Ordinary Share or `A` Share.

5. Basic and diluted earnings per share

	Shares in issue		2017		2016
	2017	2016	Net asset value		Net asset value
			per share	£`000	per share	£000
Ordinary Shares	24,504,858	24,504,858	114.9	28,160	117.3	28,733
`A` Shares	36,799,133	36,799,133	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.

6. Principal risks
The Company`s investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company`s operations are:

- Market risks;
- Credit risk; and
- Liquidity risk.

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company was expected to be exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.

The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below:

Market risks
As a VCT, the Company is exposed to investment risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Adviser and overseen by the Board. The Adviser monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Adviser to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key investment risks to which the Company is exposed are:

- Investment price risk; and
- Interest rate risk

Investment price risk

The Company`s investments which comprise both equity and debt financial instruments in unquoted investments are all in renewable energy projects with predetermined expected returns. Consequently, the investment price risk arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the Company`s investment objectives which can be influenced by many macro factors such as changes in interest rates, electricity power prices and movements in inflation. It represents the potential loss that the Company might suffer through changes in the fair value of unquoted investments that it holds.

At 30 September 2017, the unquoted portfolio was valued at £31,390,000 (2016: £30,941,000). The key inputs to the valuation models are electricity power prices, inflation and discount factors. The Board considers that the most significant of these is discount factors and inflation, and has undertaken some sensitivity analysis into the movement of these.

The analysis below is provided to illustrate the sensitivity of the fair value of investments to an individual input, while all other variables remain constant. The Board considers these changes in inputs to be within reasonable expected ranges. This is not intended to imply the likelihood of change or that possible changes in value would be restricted to this range. The possible effects are quantified below.

Input	Base case	Change in input	Change in fair value of investments	Change in NAV per share
			£`000	pence
Discount rate	6.5% - 7.25%	+0.5%	(1,870)	(7.6)
		-0.5%	1,985	8.1
Inflation	3.0 - 3.2%	-0.5%	(2,142)	(8.7)
		+0.5%	2,172	8.9

Power prices

The Board has considered the potential impact of changes in power prices in the future and have concluded than the impact of any foreseeable increases or decreases will not be significant to the valuation of the portfolio as a substantial proportion of the total income generated by the portfolio is derived from Feed in Tariffs and Renewable Obligation Certificates.

Asset life

The Board has also considered the potential impact of changes to the anticipated lives of assets in the portfolio. Close to ninety percent of the Company`s value is in assets refinanced by debt, and under the debt facility agreements, substantial reserves are in place for renewing key equipment as and when required. Furthermore, the underlying assets have leases that are valid for the lifetime of the Company and cannot be terminated early. Accordingly the Board does not consider that there will be any significant impact to investment valuations as a result of asset lives varying from those currently anticipated.

Interest rate risk

The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers. Where Investments in loan stock attract interest, this is predominately charged at fixed rates. A summary of the interest rate profile of the Company`s investments is shown below.

There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:

- "Fixed rate" assets represent investments with predetermined yield targets and comprise certain loan note investments and preference shares;
- "Floating rate" assets predominantly bear interest at rates linked to The Bank of England base rate or LIBOR and comprise cash at bank; and
- No interest rate" assets do not attract interest and comprise equity investments, certain loan note investments, loans and receivables and other financial liabilities.

Fixed rate			1,810 days
Floating rate
No interest rate

The Company monitors the level of income received from fixed and floating rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.

It is estimated that an increase of 1% in interest rates would have increased profit before tax for the year by £61. The Bank of England base rate increased from 0.25% per annum to 0.5% per annum on 2 November 2017. Any potential change in the base rate, at the current level, would have an immaterial impact on the net assets and total return of the Company.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan stock in investee companies, cash deposits and debtors. Credit risk relating to loan stock investee companies is considered to be part of market risk.

The Adviser manages credit risk in respect of loan stock with a similar approach as described under "Market risks" above. Similarly, the management of credit risk associated with interest, dividends and other receivables is covered within the investment advisory procedures. The level of security is a key means of managing credit risk. Additionally, the risk is mitigated by the security of the assets in the underlying investee companies.

Cash is held by the Royal Bank of Scotland plc which is an A-rated financial institution and also ultimately part-owned by the UK Government. Consequently, the Directors consider that the credit risk associated with cash deposits is low.

There have been no changes in fair value during the year that is directly attributable to changes in credit risk. Any balances that are past due are disclosed further under liquidity risk.

There have been no loans for which the terms have been renegotiated during the year.

Liquidity risk

Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. As the Company has a relatively low level of creditors being £68,000 (2016: £161,000) and has long term loans from investee companies (see Note 13 of the annual report for an analysis of the repayment terms), which are expected to be repaid by future dividends from these companies, being £3,660,000 (2016: £2,434,000), the Board believes that the Company`s exposure to liquidity risk is low. The Company always holds sufficient levels of funds as cash in order to meet expenses and other cash outflows as they arise. For these reasons the Board believes that the Company`s exposure to liquidity risk is minimal.

The Company`s liquidity risk is managed by the Investment Adviser in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.
7. Controlling party and related party transactions
In the opinion of the Directors there is no immediate or ultimate controlling party.

8. Events after the end of the reporting period
At the General Meeting at 10:45am on 7 November 2017, held at 6th Floor, St. Magnus House, 3 Lower Thames Street, London EC3R 6HD, Shareholders voted unanimously in favour of the proposals for the reorganisation of the Company, as detailed in the Shareholder circular dated 16 October 2017.

The particulars of the proposals are set out below:
- Gresham House Asset Management Limited ("GHAM"), a wholly owned subsidiary of Gresham House plc, was appointed as the Investment Adviser;
- the investment advisory fee percentage is reduced from 2.0% to 1.4% for the first year, followed by a further reduction to 1.15% thereafter;
- there will be an absolute cap on the fees charged to investee companies by the Investment Adviser;
- performance incentive arrangements will remain unchanged;
- the annual running costs cap will be reduced from 3.5% of net assets to 3.0% of net assets per annum;
- the buyback policy will be revised such that shares in the market will be repurchased at a discount of 2% to the latest published NAV. The previous policy set a discount of 5%.
- the notice period in respect of the agreement with the Investment Adviser will be reduced from 12 months to 9 months and Shareholder approval will no longer be required to initiate the notice period. The revised notice period cannot be activated within two years of the commencement date of the new Investment Advisory Agreement.

In addition to the above, the following changes, as also detailed in the Shareholder circular published on 16 October 2017, were unanimously approved by Shareholders at the General Meeting on 7 November 2017:

- Giles Clark was appointed as a Non-executive Director with effect from 7 November 2017;
- The fees payable to Downing LLP have increased from £35,000 to £40,000 per annum, with effect from 1 October 2017;
- The annual fees payable to the Chairman have increased from £20,000 to £25,000;
- The annual fees payable to the other Non-executive Directors have increased from £15,000 to £20,000.

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company`s statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 30 September 2017, but has been extracted from the statutory financial statements for the year ended 30 September 2017, which were approved by the Board of Directors on 9 January 2017 and will be delivered to the Registrar of Companies following the Company`s Annual General Meeting. The Independent Auditor`s Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s498(2) and (3) of the Companies Act 2006.

The statutory accounts for the year ended 30 September 2016 have been delivered to the Registrar of Companies and received an Independent Auditor`s Report which was unqualified and did not contain any emphasis of matter nor statements under s498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 30 September 2017 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 6^th Floor, St. Magnus House, 3 Lower Thames Street, London EC3R 6HD and will be available for download from www.downing.co.uk.

---

This announcement is distributed by Nasdaq Corporate Solutions on behalf of Nasdaq Corporate Solutions clients.

The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Hazel Renewable Energy VCT 2 plc via GlobeNewswire
HUG#2160403