Hazel Renewable Energy VCT2 plc

LEI: 213800GQ3JQE2M214C75

Half-Yearly Report for the six months ended 31 March 2018

Performance summary

	28 June 2018		31 Mar  2018	30 Sep 2017		31 Mar 2017
			Pence		Pence		Pence
Net asset value per Ordinary Share			113.4		114.9		115.5
Net asset value per 'A' Share			0.1		0.1		0.1
Cumulative dividends *			39.5		39.5		34.5
Total Return *			153.0		154.5		150.1
Share Price - Ordinary (HR2O)	112.0p		112.0p		106.5p		103.0p
Share Price - A Shares (HR2A)	5.05p		5.05p		5.05p		5.05p
* for a holding of one Ordinary Share and A Share

CHAIRMAN'S STATEMENT
I am pleased to present the Company's Half-Yearly Report for the six-month period ended 31 March 2018.

Investment portfolio
At the period end, the Company continued to hold a portfolio of 16 investments, which were valued at £30.1 million. There were no additions to, or full disposals from, the portfolio during the period, however two loan note investments were partially redeemed, at par, during the period.

The Board has reviewed the investment valuations at the half-year date. Adjustments have been made for cash that has been paid to the Company from the investee companies, as dividends during the period. The adjustments were equivalent to approximately a 2% reduction in fair value. Apart from this, no changes to the valuation of the underlying projects have been considered necessary at this time.

A large proportion of the underlying assets owned by the investee companies are solar assets. Irradiation levels over the six-month period have generally been lower than expected, contributing to net revenues from all the assets over the period coming in 11.5% lower than budget. However, as irradiation is naturally lower during the winter months and these months are only expected to produce a small proportion of the annual electricity generation and income, this shortfall is not considered significant and could be made up during the summer months. Indeed, irradiation levels since the period end have been ahead of expectation.

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

Net asset value and results
At 31 March 2018, the net asset value ("NAV") per Ordinary Share stood at 113.4p and the NAV per 'A' Share stood at 0.1p, producing a combined total of 113.5p. This represents a decrease of 1.5p since 30 September 2017.

The decrease in NAV is to be expected as the running costs of the VCT for this period, have exceeded income and gains from the portfolio. Further detail on the performance of the investee companies is given in the Investment Advisers Report. Total Return (total NAV plus cumulative dividends paid to date) stands at 153.0p for a holding of one Ordinary Share and one 'A' Share, compared to the cost for subscribers in the original share offer, net of income tax relief, of 70.0p. This represents an annualised tax-free return (IRR) of 6.9%, or 13.2% when taking into account the initial tax relief.

Share Buybacks
As part of the reorganisation in 2017, the Board reviewed the Company's share buyback policy. In the last Annual Report, the Board stated that it aims to buy-in shares that become available in the market, at a discount of approximately 2% to the latest published NAV. This policy is subject to market conditions, the Company having sufficient liquidity for dividends and other commitments and being able to comply with all relevant regulations, in particular those relating to VCT qualifying status.

During the period the Company purchased a total of 2,466,228 Ordinary Shares at an average price of 112.6p per share and a total of 2,466,228 'A' Shares at an average price of 0.1p.

Fundraising
In March, the Company identified an opportunity to undertake a small Top-up Offer for Subscription. This was launched on 14 March 2018 and reached full capacity a few days after launch. A total of £1.7m was raised by the Company, alongside the £2.5m raised by the sister company, Hazel Renewable Energy VCT1 plc ("Hazel1"). 1,370,434 Ordinary and 'A' Shares were issued during April 2018 in respect of this offer. These new funds help to finance the running of the Company, support the investee companies and potentially allow the Company to consider new opportunities that may arise.

Dividends
In recent years the Company has paid its annual dividend in September. This is not well synchronised with the cyclical pattern of income generated by the Company's underlying investments. Most income is produced in the July to September quarter, and is paid to the investee companies in November. The Board has therefore decided to pay future annual dividends in December, when most of the annual income flows have been received.

Accordingly, no dividend is being announced at this point. The Board expects to announce the annual dividend in November. The quantum of the dividend will depend on the levels of income generated over the summer months. The Company continues to target a dividend of at least 5.0p per annum.

Outlook
Following the successful reorganisation of the Company, alongside Hazel VCT1, the Board and the Investment Adviser are now working together on the strategy for the future, that will seek to deliver maximum value for Shareholders.

In addition, going forward, we will be paying particular attention to keeping Shareholders informed of the VCT's progress. To date, Downing LLP, as administrator, has provided the online information for the VCTs. Gresham House is working on a new website for the VCT, to be contained within their website. This will include all the information you will need to keep abreast of developments in the VCTs. It is expected to be up and running during the course of the summer. Furthermore, we will be sending out, and posting online, updates between the Annual and Half-Yearly Reports, to keep you fully informed.

The task of ensuring that the Company complies with the latest VCT regulations is challenging and places significant restrictions on the Company, which must continue to meet the VCT rules at all times, so as to preserve the tax benefits for Shareholders.

Despite these restrictions, the Investment Adviser believes that returns from the portfolio can continue to be maintained, and potentially enhanced, by close monitoring of the assets, to ensure that performance is optimised and costs are tightly controlled.

As mentioned above, the Company expects to announce its annual dividend in November, and will notify Shareholders at that time.

Christian Yates
Chairman

INVESTMENT ADVISER'S REPORT
The Adviser reports below on the performance of the portfolio of assets owned by Hazel Renewable Energy VCT1 ("Company") in the half-year ending 31 March 2018. This report analyses performance by the various sites in which the Company has a stake.

Performance
The solar generation assets, that account for circa 93% of the Company's NAV, performed 3.6% worse than forecasted during the half-year.

The entire underperformance can be explained by low irradiation conditions and the effect of a grid level outage, covered by business interruption insurance, at Wychwood, one of the two smallest ground-mounted solar assets.

Macro Level Factors
Macro level factors are outside of the Company's control and these were unfavourable overall.

The UK has been going through a period of generally low solar irradiation conditions in the last two years, and the last six months have also been poor in this regard. There are pyranometers installed on all eight ground-mounted solar sites in the portfolio, and their readings indicate weighted average (by capacity) irradiation of 2.7% below forecast in the period.

The macro level variable that worked out in the Company's favour was inflation. The Feed-in-Tariffs ("FiTs") and Renewable Obligation Certificates ("ROCs") earned by the Company are adjusted in line with Retail Price Inflation ("RPI") every April. The exact RPI level used is that published by the Office of National Statistics in December, which this time coincided with the peak of recent RPI releases at 4.1%. The portfolio valuation models assume long term inflation of three percent. This will add circa £100,000 to forecast portfolio revenues if all else remains the same.

The third macro-level variable is power prices. These fluctuated significantly during the period, however on average they were lower by 5% compared to the six-month period ending 31 March 2017. This had little negative impact on the portfolio, as over 80% of the NAV is concentrated in projects remunerated under the FIT regime, where in excess of 90% of revenues are fixed.

Finally, the ROC recycle price (which has a minor effect on two of the eight ground-mounted solar projects) rebounded from zero to the ten percent.

Overall the net effect of the above factors was a shortfall in total portfolio revenues of £389,893, resulting in total revenue from the investee companies of £3,001,801 compared with a budget of £3,391,694. During the period there were no material differences between actual and budgeted costs. Solar irradiation in May has been above average and it is hoped that over the course of the summer, income will be made up by higher levels of irradiation.

Technical Performance of the Assets
Performance of the asset base was mixed. A straightforward way of measuring technical performance is to adjust the figures for performance versus the financial model, by measured irradiation versus forecast. If the resulting number is above 100%, the asset has performed better than irradiation conditions suggest and if the number is lower than 100%, the asset has performed worse than irradiation conditions suggest.

On a weighted (by generation) basis, and adjusted for irradiation, the ground-mounted solar assets performed slightly worse than forecast with a 0.9% shortfall.

The Wychwood site experienced a 2.5-month long outage due to an outage at the grid level, and therefore outside of the Company's control. These types of outages are covered by business interruption insurance. The claim for this was approved by the insurer.

The Lake Farm site had experienced an outage for the same reason last summer. The insurance claim for that was also approved and the proceeds were received in April.

The Lake Farm, South Marston, Priory Farm and Parsonage sites performed better than expected given the irradiation conditions.

The Kingston site suffered an outage due to the HV cables at the site short circuiting due to poor original installation. This was repaired within eight days and prompted a testing process of HV cables at all ground-mounted sites to prevent a repeat of this situation.

The Beechgrove site suffered from a problem that repeats whenever very damp conditions are present - some of the DC connectors on the modules are affected by moisture. This is very difficult to address in a cost effective (without leading to an outage of long duration) manner.

Following on from the technical risk management strategy put into action last year, the Adviser prepared a comprehensive technical study of the asset base and reported to the Board in March.

An important area of focus was the decision criteria for preventative maintenance capital expenditure for all the key components of the sites. The ground-mounted sites are of high build quality and inverter failure rates are very low, however these are expected to increase as they are between four and seven years into the ten-year expected life of the inverters. There are reserves in place under the debt facility agreements to replace inverters and replacements, however the Company seeks to not use up these reserves faster than necessary and to minimise downtime.

Steady progress was made on reducing the number of non-performing solar rooftop installations during the six-month period. Repairs were carried out on all properties where housing association tenants allowed the contractor access. These repairs are expected to increase revenues from this group of installations by 2.5%.

The small wind fleet which accounts for circa seven percent of the Net Asset Value continued to perform poorly, with the 95 Huaying HY-5 turbines offline. The shortfall between actual revenues and revenues forecast at the time of the original investments in the 2001 to 2013 period was £192,739. The Adviser commissioned an inspection programme to identify those assets that could be safely put back into service at a reasonable cost and decided to set the bar at six years in terms of the payback period of the additional investment required. With all but 12 of the 95 turbines inspected, 60 will be repaired over the summer and autumn months, with circa £160,000 earmarked for this. The contribution to revenues, once all the repairs are completed, is expected to be circa £40,000 per year.

Costs
The Adviser has been working over the past two years to reduce the cost base as much as possible with the main area of focus being operations and maintenance. In February, Baywa, which was appointed last year, was given a five-year contract, thus locking in the rate negotiated last year (which was around 60% lower than the rate that applied to the first five years of the projects).

The Adviser also replaced Anesco with Silverstone Green Energy as the Operations and Maintenance Contractor for the small Wychwood and Parsonage sites. Silverstone emerged from the tender as the best option.

Recent Developments
Since the period end, a Top-Up offer was successfully completed at full capacity. This has provided the Company with some funds that are available for new investment, for which we continue to evaluate potential VCT-qualifying investment opportunities.  Meanwhile we will monitor the assets vigorously with the purpose of further maximising yield.

Gresham House Asset Management Limited

UNAUDITED BALANCE SHEET
as at 31 March 2018

	31 Mar 2018		31 Mar 2017		30 Sep 2017
	£'000		£'000		£'000
Fixed assets
Investments	30,096		30,941		31,390
Current assets
Debtors	415		484		447
Cash at bank and in hand	1,600		7		88
	1,991		491		535
Creditors: amounts falling due within one year	(294)		(45)		(68)
Net current assets	1,697		446		467
Total assets less net current assets	31,793		31,387		31,857
Creditors: amounts falling due after more than one year	(5,185)		(3,045)		(3,660)
Net assets	26,632		28,342		28,197
Capital and reserves
Called up share capital	62		62		62
Share premium	3,985		3,985		3,985
Funds held in respect of shares not yet allotted	1,598		-		-
Treasury Shares	(2,792)		-		-
Special reserve	9,840		11,065		9,840
Revaluation reserve	14,865		14,466		15,504
Capital reserve - realised	(1,241)		(1,187)		(1,200)
Revenue reserve	315		(49)		6
Equity shareholders' funds	26,632		28,342		28,197
Net asset value per Ordinary Share	113.4p		115.5p		114.9p
Net asset value per 'A' Share	0.1p		0.1p		0.1p
	113.5p		115.6p		115.0p

STATEMENT OF CHANGES IN EQUITY
for the six months ended 31 March 2018

	Called up Share capital	Share Premium account	Shares not yet allotted	Treasury Shares	Special reserve	Revaluation reserve	Capital Reserve -realised	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
As 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)	-	-
As at 30 September 2017	62	3,985	-	-	9,840	15,504	(1,200)	6	28,197
Total comprehensive income	-	-	-	-	-	(639)	(41)	309	(371)
Fundraising proceeds	-	-	1,598	-	-	-		-	1,598
Transactions with owners
Repurchase of shares	-	-	-	(2,792)	-	-	-		(2,792)
As at 31 March 2018	62	3,985	1,598	(2,792)	9,840	14,865	(1,241)	315	26,632

UNAUDITED INCOME STATEMENT
for the six months ended 31 March 2018

	Six months ended 31 Mar 2018				Six months ended 31 Mar 2017			Year ended 30 Sep 2017
	Revenue	Capital	Total		Revenue	Capital	Total		Total
	£'000	£'000	£'000		£'000	£'000	£'000		£'000
Income	701	-	701		6	-	6		492
(Losses)/gains on investments
Unrealised	-	(639)	(639)		-	-	-		992
Realised	-	5	5		-	-	-		46
	701	(634)	67		6	-	6		1,530
Investment advisory fees	(139)	(46)	(185)		(215)	(72)	(287)		(570)
Other expenses	(253)	-	(253)		(89)	(58)	(147)		(308)
Return/(loss) on ordinary activities before taxation	309	(680)	(371)		(298)	(130)	(428)		652
Tax on total comprehensive income and ordinary activities	-	-	-		-	-	-		-
Return/(loss) for the period and total comprehensive income	309	(680)	(371)		(298)	(130)	(428)		652
Return per Ordinary Share	1.3p	(2.8p)	(1.5p)		(1.2p)	(0.6p)	(1.8p)		2.6p
Return per 'A' Share	-	-	-		-	-	-		-

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

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 STATEMENT OF CASH FLOWS
for the six months ended 31 March 2018

		31 Mar 2018		31 Mar 2017		30 Sep 2017
		£'000		£'000		£'000
(Loss)/return on ordinary activities before taxation		(371)		(428)		652
Losses/(gains) on investments		634		-		(1,038)
Decrease/(increase) in other debtors		32		(63)		(26)
Decrease in other creditors		(26)		(115)		(92)
Net cash inflow/(outflow) from operating activities		269		(606)		(504)
Cash flows from investing activities
Purchase of investments		-		-		-
Sale of investments		660		-		589
Net cash inflow from investing activities		660		-		589
Net cash inflow/(outflow) before financing		929		(606)		85
Cash flows from financing activities
Equity dividends paid		-		-		(1,225)
Fundraising proceeds		1,598		-		-
Long term loans		1,526		609		1,224
Purchase of own shares		(2,541)		-		-
Net cash inflow/(outflow) from financing activities		583		609		(1)
Increase in cash		1,512		4		84
Cash and cash equivalents at start of period		88		3		4
Cash and cash equivalents at end of period		1,600		7		88

SUMMARY OF INVESTMENT PORTFOLIO
as at 31 March 2018

Qualifying and partially qualifying investments	Operating sites	Sector	Cost	Valuation	Unrealised gain/(loss) in period	% of portfolio by value
			£'000	£'000	£'000
Lunar 2 Limited*	South Marston, Beechgrove	Ground Solar	2,976	15,360	38	51.2%
Ayshford Solar (Holding) Limited*	Ayshford	Ground Solar	1,348	2,231	(343)	7.4%
Lunar 1 Limited*	Kingston Farm, Lake Farm	Ground Solar	125	2,121	-	7.0%
New Energy Era Limited	Wychwood Solar Farm	Ground Solar	884	1,390	-	4.6%
Hewas Solar Limited	Hewas	Roof Solar	1,000	1,355	-	4.5%
Vicarage Solar Limited	Parsonage Farm	Ground Solar	871	1,215	-	4.0%
Tumblewind Limited*	Priory Farm	Small Wind/Solar	1,326	1,138	69	3.8%
Gloucester Wind Limited	Gloucester	Roof Solar	1,000	915	(38)	3.0%
Minsmere Power Limited	Minsmere	Small Wind/Solar	975	729	-	2.4%
HRE Willow Limited	HRE Willow	Small Wind	875	726	-	2.4%
St Columb Solar Limited	St Columb	Roof Solar	650	671	(2)	2.2%
Chargepoint Services Limited		Vehicle charging	500	500	-	1.7%
Small Wind Generation Limited	Small Wind Generation	Small Wind	975	483	-	1.6%
Penhale Solar Limited	Penhale	Roof Solar	825	362	(363)	1.2%
Sunhazel UK Limited		Roof Solar	1	-	-
			14,331	29,196	(639)	97.0%
Non-qualifying investments
AEE Renewables UK 3 Limited	Lake Farm	Ground Solar	900	900	-	3.0%
			900	900	-	3.0%
Total investments			15,231	30,096		100.0%

* Partially qualifying investment

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

1.General information
Hazel Renewable Energy VCT2 plc ("the Company") is a Venture Capital Trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales.

2.Accounting policies - Basis of accounting
The unaudited half-yearly results cover the six months to 31 March 2018 and have been prepared in accordance with the accounting policies set out in the annual accounts for the year ended 30 September 2017 which were prepared under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and in accordance with the Statement of Recommended Practice ("SORP") "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies ("AIC") revised November 2014.

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

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

5.Net asset value per share at the period end has been calculated on 22,038,632 Ordinary Shares and 34,332,155 '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 23,872,598 Ordinary Shares and 36,166,663 'A' Shares, being the weighted average number of shares in issue during the period, excluding Treasury Shares.

7.Dividends

	Period ended 31 Mar 2018			Year ended 30 Sep 2017
	Revenue	Capital	Total		Total
	£'000	£'000	£'000		£'000
Dividends paid
2017 Interim - Ordinary Shares - 5.0p	-	-	-		1,225
	-	-	-		1,225

8.Reserves

	Period ended 31 Mar 2018		Year ended 30 Sept 2017
	£'000		£'000
Share premium reserve	3,985		3,985
Special reserve	9,840		9,840
Revaluation reserve	14,865		15,504
Funds held in respect of shares not yet allotted	1,598		-
Treasury Shares	(2,792)		-
Capital reserve-realised	(1,241)		(1,200)
Revenue reserve	315		6
	26,570		28,135

The Revenue reserve, Capital reserve - realised and Special reserve are distributable reserves. Distributable reserves are reduced by unrealised holding losses of £1,161,000, which are included in the Revaluation reserve. Distributable reserves at 31 March 2018 were £7,754,000.

9.Risks and uncertainties
Under the Disclosure and Transparency Directive, the Board is required in the Company's half-year results to report on principal risks and uncertainties facing the Company over the remainder of the financial year.

The Board has concluded that the key risks facing the Company over the remainder of the financial period are as follows:
(i) investment risk associated with investing in small and immature businesses;
(ii) market risk in respect of the various assets held by the investee companies; and
(iii) failure to maintain approval as a VCT.

In order to make VCT qualifying investments, the Company has to invest in small businesses which are often immature. The Investment 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 Manager also seeks to diversify the portfolio to some extent by holding investments which operate in various sectors. The Board is satisfied with this approach.

The Company's compliance with the VCT regulations is continually monitored by the Administration Manager, who reports regularly to the Board on the current position. The Company has reappointed Philip Hare & Associates LLP, 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.

10.Going concern
The Directors have reviewed the Company's financial resources at the period end and conclude that the Company is well placed to manage its business risks.

The Board confirms that it is satisfied that the Company has adequate resources to continue in business for the foreseeable future. For this reason, the Board believes that the Company continues to be a going concern and that it is appropriate to apply the going concern basis in preparing the financial statements.

11.The unaudited financial statements set out herein do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 and have not been delivered to the Registrar of Companies.

12.The Directors confirm that, to the best of their knowledge, the half-yearly financial statements have been prepared in accordance with the "Statement: Half-Yearly Financial Reports" issued by the UK Accounting Standards Board and the Half-Yearly Report includes a fair review of the information required by:

a)DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

13.Copies of the Half-Yearly Report will be sent to Shareholders shortly. Further copies can be obtained from the Company's registered office or can be downloaded from www.downing.co.uk.

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