GV2O Gresham House Renewable Energy Vct 2 Plc

I am pleased to present the Half-Yearly Report of Gresham House Renewable Energy VCT2 plc for the period ended 31 March 2024.

Following the outcome of the continuation vote in July 2021, and therefore the decision to pursue a Managed Wind Down, the Board together with the Investment Adviser has continued to work towards realising the remaining Company's portfolio of assets in a manner that achieves a balance between maximising net value received from the sale of assets and making a timely return of capital.

Following the sale of two ground-mounted solar sites and approximately 1,600 commercial and residential solar installations to Downing Renewables & Infrastructure Trust plc in April 2023, as reported in the Annual Report for the year end 30 September 2023, the Board has continued to seek an acquiror for the remaining assets in the portfolio, namely the Apollo solar portfolio and a small portfolio of micro wind assets. The Board appointed Jones Lang LaSalle (JLL) to assist with this phase of the Managed Wind Down process. The Apollo assets continue to be managed by the Investment Adviser with the focus on delivering the best possible yield whilst minimising costs ahead of a sale process. The Investment Adviser has also been diligently supporting the Boards of the VCTs and JLL in progressing the ongoing sale process.

A number of non-binding offers were received for the Apollo assets. JLL, the Boards of both VCTs and the Investment Adviser continue to engage with the bidders to clarify certain aspects of the offers. It is a very challenging market in which to sell such assets given the higher interest rate environment, which means investors return expectations are higher, compounded by falling power prices. The age and relatively small size of the portfolio have proved an issue for some investors. The extant financing has also proved unattractive for others. Limited investor liquidity and the sheer range of investment opportunities also mean that prospective buyers with capital to deploy are being highly selective and/or opportunistic in pricing assets for sale. However, the Board remains determined to seek the best outcome for Shareholders as soon as possible and is particularly mindful of the proportionately higher costs associated with running a relatively small fund.

The technical performance of the Apollo portfolio has improved following maintenance and repowering works carried out in previous years and is satisfactory. However given the age of the portfolio, further technical maintenance has been necessary during the half-year which has impacted generation. Total revenue was also affected by poor irradiation, particularly in December 2023 and February 2024, resulting in a shortfall of 7.0% to budget in the six month period ended 31 March 2024. The value of the Company's assets has also been negatively impacted by the latest independent power price forecasts used in this half-year valuation which project both lower short term and long-term power prices than assumed in the last year end valuation. Moreover the reduction in inflation assumptions used in this half-year valuation in line with the forecast long-term Bank of England (BoE) rates has also negatively impacted the value of the assets. The discount rate used to value the future cash flows of the Apollo assets has been left unchanged.

At 31 March 2024, the Company's NAV per 'pair' of shares (one Ordinary share and one 'A' Share) was 45.7p compared to 55.4p at 30 September 2023. This reduction is due to the payment of dividends totalling 7.5p per Ordinary Share largely from the proceeds from the sale of the Surya assets in April 2023, and also the consequence of a reduction in value of the remaining portfolio.

Investment portfolio

At 31 March 2024, the VCT held a portfolio of eleven investments, which were valued at £16.1mn (30 September 2023: £18.0mn). Against this the VCT owes £4.3mn of loans (30 September 2023: £3.7mn) due to the investment portfolio companies which, including the net current assets of £0.2mn (30 September: £0.2mn), equals net assets of £12.0mn (30 September 2023: £14.5mn) per the VCT's balance sheet. There have been no follow-on acquisitions and no disposals in the six month period under review.

The Board's valuation of £16.1mn is based on the continued use of a discounted cash flow model for consistency with all the previous annual valuation exercises.  The key assumptions in this valuation model are updated by the Investment Adviser to reflect the current challenging market conditions and asset performance. These assumptions are reviewed and approved by the Board.  This valuation approach is consistent with the VCT's peer group of comparable companies.  However, the Board notes that this internal valuation approach may lead to valuations which differ from offers made by prospective buyers using different assumption sets, notably future power prices, inflation, discount rates, interest rates, as well as the relative strength of the competitive environment. There is no guarantee therefore that the internal valuation will be realised in any current or future sales process.

The portfolio is analysed (by value) between the different types of assets as follows:

The Board has reviewed the investment valuations at the half-year end and notes that the valuation of the renewables portfolio has decreased by £1.5mn or 8.5%, largely due to the fall in electricity prices and inflation assumptions.

The portfolio still benefits from having locked in PPAs at higher power prices which have generated strong returns over the first six months of this year. 

There has been an ongoing issue in relation to the grid connection of the South Marston solar park. This arose from the decision of the offtaker of the electricity (Honda) to close its factory at the site that the solar park supplies and to sell the site to Panattoni.  Panattoni, a provider of logistic facilities, has now completed the acquisition of Honda's site and has confirmed that it wants to use the power from South Marston to supply its tenants once the new logistics facilities have been constructed. The Investment Adviser has been negotiating with both Honda and Panattoni over a number of months to ensure that existing agreements with Honda will be novated to Panattoni as well as securing improvements to those agreements where needed to give South Marston better legal protection. The Board is pleased to announce that all of the amendments and improvements to the existing agreements which it sought have now been agreed with all parties and will be signed shortly following consent from the VCT's lenders, whose consent is required under the Loan Facility Agreement.

In order to maintain VCT status, the Company needs to ensure that it maintains certain percentages of qualifying investments within its portfolio. The Board anticipates that the Company will fall below these percentages as the asset realisation process continues. Therefore, to avoid a possible breach of VCT status, the Board has been advised that the Company may in due course need to start the process of a members' voluntary liquidation which would involve delisting the Company's shares. The Board continues to monitor those ratios to ensure that the Company is compliant at all times with all requirements.

Venture Capital investments

The VCT holds two non-renewables investments. As previously reported, these companies entered administration in Q2 2023 with no recovery of any value expected.

Further detail on the investment portfolio is provided in the Investment Adviser's Report.

Net asset value and results

At 31 March 2024, the Net Asset Value (NAV) per Ordinary Share stood at 45.6p and the NAV per 'A'Share stood at 0.1p, producing a combined total of 45.7p per 'pair' of shares. The movement in the NAV per share during the half-year is detailed in the table below:

The NAV Total Return (NAV plus cumulative dividends) has decreased by 1.7% in the six months and now stands at 128.8p excluding the initial 30% VCT tax relief, compared to the cost to investors in the initial fundraising of £1.00 or 70.0p net of income tax relief.

The loss on ordinary activities after taxation for the half-year was £0.6mn (31 March 2023: £0.4mn), comprising a revenue profit of £1.1mn (31 March 2023: £0.7mn) and a capital loss of £1.7mn (31 March 2023: capital loss of £1.1mn) as shown in the Income Statement.

Dividends

In the half-year period, the Board was pleased to declare a 7.5p per Ordinary Share interim dividend. The 7.5p interim dividend related to income generation from the portfolio, but part of which was also the distribution of the remaining proceeds arising from the sale of the Surya assets in April 2023. This dividend was paid on 21 December 2023 to Shareholders on the register on 1 December 2023. No amounts were payable to 'A'Shares during the six months period.

Following the 7.5p interim dividend payment above, cumulative dividends paid since inception for a combined holding of one Ordinary Share and one 'A'Share increased to 83.1p (30 September 2023: 75.6p).

2024 Annual General Meeting (AGM)

The VCT's thirteenth AGM was held on 19 March 2024 at 12.00 p.m. All resolutions were passed by way of a poll.

Acquisition of Gresham House plc, statement regarding Investment Adviser

Further to the announcement on 17 July 2023 of the acquisition of Gresham House plc by Searchlight Capital Partners L.P., the acquisition has now completed, and Gresham House plc delisted from the London Stock Exchange on 20 December 2023, to become a privately owned company. The acquisition is expected to have minimal impact on the Company and business is continuing as usual. For further information please visit the website link: https://greshamhouse.com/about/.

Amendment to Investment Advisory Agreement

The Investment Advisory Agreement (IAA), between the Company and its Investment Adviser, Gresham House Asset Management Limited (Gresham House), provides that the annual running costs of the Company (including the Investment Adviser fee) for the financial year are subject to a cap of 3.0% of net assets. Investment Advisory fees payable to Gresham House are subject to a claw back for costs incurred in excess of this cap. Following the part sale of assets in April 2023 and subsequent dividend paid as a result of the 13 July 2021 shareholder vote to wind-down the Company, the Company's net assets have reduced to a level not anticipated when the IAA agreement was agreed and signed. Due to this significant reduction in the NAV as a result of the Managed Wind Down process, the annual running costs (being, all costs and expenses of a regular and anticipated nature) for the financial year ending 30 September 2024 are now expected to exceed the 3% cap, currently forecasted to be around 4%. As many costs incurred in running a listed company are largely fixed and with the Board noting that the annual running costs cap is not intended to penalise the Investment Adviser for a reduction in NAV in a wind down situation, it has been agreed between the Board and Gresham House that the cap of net assets should be revised to the lesser of 5% of net assets and £625,000. The basis of calculation of investment advisory fees, calculated as 1.15% of net assets, are unaffected.

Outlook

As noted in previous reports, the Board has not been able to realise the sale of the Company's Apollo assets as quickly as Shareholders may have expected, due to extremely challenging market conditions and issues on certain assets (notably South Marston) which needed resolving.  The Board continues to ensure that every effort is being made to maximise Shareholder returns. Following a change in corporate finance adviser, the Board is focused on realising value for Shareholders through the sale process and this will remain its priority until achieved.

In the meantime, as evidenced by the most recent dividend payment on 21 December 2023, the remaining portfolio is generating strong cash flows for the Company. Despite this, costs throughout the remaining portfolio continue to rise and, with only the Investment Advisers fees linked to the NAV, the Company's costs largely remain at the level pre-sale of assets.

The strategy remains to find a motivated and willing purchaser who  offers appropriate value for the assets which the Company is seeking to sell.

Once again, I would like to thank Shareholders for their patience and continued interest and support.

Christian Yates

Chairman
24 June 2024

Portfolio highlights

Gresham House Renewable Energy VCT2 plc remains principally invested in the renewable energy projects that the VCT and Gresham House Renewable Energy VCT1 plc (VCT1) have co-owned for between eleven and thirteen years, depending on the asset. Following the sale of 13MWp of capacity (the Surya assets) in April 2023, the total generation capacity of assets co-owned by the VCT as 31 March 2024 was 21.3MWp.

The Investment Adviser has repeated the internal valuation exercise on the same basis as previous valuations being a discounted cash flow model approach, for the purpose of determining the Net Asset Value and has provided the relevant information to the Board of the VCT, to determine the value of the assets. For the Apollo assets, the valuation presented in this half yearly report reflects the Directors' view of the fair value of the assets which incorporates potential costs (such as the EGL) a future acquirer may incur through holding the assets as well as their view on other key assumptions that determine future operational and financial performance.

During the half year, the total revenue from renewable energy generation was £3.6mn (31 March 2023: £5mn for the whole portfolio, £3.5mn for the retained assets i.e. following the sale of the Surya assets). 74% of this revenue is from Feed-in- Tariff revenues which are set by the UK Government. The total revenue from the renewable assets was 7% below forecast budget, primarily due to lower than forecast solar irradiation in the period.

Due to the age of the VCT's assets, additional maintenance is required to keep them operating effectively although much of this work has been completed and the portfolio now benefits from improved technical performance. Further unscheduled maintenance work will be required on some of the assets that have not been upgraded yet, to maintain good technical performance.

During the period, actual solar irradiation was 8.0% below forecast, with December 2023 and February 2024 in particular seeing much less solar irradiation (sun) than in previous years.

In terms of the macroeconomic environment, the effects on the portfolio are summarised below:

The VCT held two investments in what were expected to be growth businesses: bio-bean Limited and Rezatec Limited. As highlighted in the last annual report, both businesses regrettably went into administration and as such their holding value was written down to zero.

Portfolio composition

*Feed in Tariff (FiT)

** The investment values above are gross and include loans owed by the VCT  to the investment portfolio companies of £4.3mn at 31 March 2024 (30 September 2023: £3.7mn) as reflected in the net assets on the VCT's balance sheet.

The 21.3MWp of renewable energy projects held in the portfolio of the VCT and VCT1 as 31 March 2024 generated 5,572 MWh of electricity over the half year, sufficient to meet the annual electricity consumption of circa 2,064 homes¹. The Investment Adviser estimates that generating this output from renewable energy sources such as solar and wind, rather than coal or gas-fired power stations, saves 2,363 tonnes² of CO₂.

¹  Assuming an average annual electricity usage per household of 2.7MWh, as quoted by Ofgem October 2023. "Homes powered" calculated using Renewable UK methodology: MWh divided by average annual domestic electricity consumption.

² Based on estimated carbon dioxide emissions from electricity supplied by the Department for Energy Security & Net Zero assuming an "all non-renewable fuels" emissions statistic of 424tCO2/GWh of electricity supplied, DESNZ statistics July 2023, Digest of UK Energy Statistics, Table 5.14 ("Estimated carbon dioxide emissions from electricity supplied"). "Carbon avoided" calculated using Renewable UK methodology: Carbon reduction is calculated by multiplying the total amount of electricity generated by solar and wind per year by the number of tonnes of carbon which fossil fuels would have produced to generate the same amount of electricity.

Portfolio summary:

The performance against budget for the half year period is shown below:

The revenue is affected by:

The difference between budgeted and actual revenue is due to the difference between forecast generation and actual generation as power prices and tariff levels were known at the time of setting the budget.

The ground mounted solar assets which make up the bulk of the portfolio, performed 7% below budgeted output, a somewhat lower performance than the corresponding period in the prior financial year, although this is explained largely by the poor weather conditions.

Renewable energy resources
The portfolio is heavily weighted to solar (95.2% by capacity of the renewable assets, and 94.3% by value of the portfolio).

Technical performance
The table below shows the technical performance, (including in the case of solar, the impact of the lower irradiation), for each of the groups of assets.

*restated
** Technical performance is a measure of the percentage of actual output over budgeted output.

Three of the six ground-mounted solar projects have been repowered and other repairs have been carried out following successful warranty claims. This has led to improved performance across the portfolio. Two of the sites, Kingston Farm and Lake Farm are experiencing faults due to the early deterioration of solar panels which in turn leads to water ingress. The Investment Adviser has raised warranty claims against the two manufacturers, both of which are engaging with the process.

Two smaller sites, Wychwood and Parsonage, have some inverters that no longer function. These inverters are now obsolete. The Investment Adviser has received quotations to repower both these sites. The Investment Adviser is considering repowering all Wychwood inverters which would produce enough working spares to be used to replace failed inverters at Parsonage.  This approach is cost effective and should extend the economic life of Parsonage by a few years as well as boosting the technical performance of Wychwood.

South Marston (4.97MW) has historically sold all of its power output to the Honda plant in Swindon. The Honda plant was closed in 2021 and the site was sold to Panattoni , a commercial real estate/logistics developer, in February 2024.  Panattoni have been granted planning permission to redevelop the site, creating 10 buildings to be used as manufacturing sites and distribution warehouses. This transfer of ownership and redevelopment requires changes to the South Marston grid connection arrangements.  Panattoni is keen to make the solar power available to their future tenants and so is being supportive of these changes. The Investment Adviser has been liaising with Honda, Panattoni, and various advisers to ensure the viability of the solar park and continuity of export of power. The new contracts between South Marston Renewables Ltd, Honda and Panattoni are now in agreed form and awaiting lender consent.

The micro-wind portfolio performed 12.7% lower than budget (23.1% lower than budget in the corresponding period). The Investment Adviser attributes the lower performance to a combination of inverter failures and general wear and tear which leads to turbines being off for refurbishment, where applicable.  Micro-wind assets account for less than 5% of the portfolio in terms of capacity, so the Investment Advisor seeks to balance performance against considerable refurbishment costs, given the current sales process.

The entire wind portfolio is composed of R9000 turbines, which have generally performed satisfactorily and have the support of an experienced O&M contractor with access to spare parts and maintenance crews.

Revenue per MWh of renewable energy generated

The VCT's assets benefit from revenues linked to the Retail Price Index (RPI), with 74% of total revenues generated in the period earned from government backed incentives for generating renewable electricity.  This income is fixed by the government, is RPI linked and is a significant driver of value in the portfolio.

Total revenues per MWh generated by the solar assets were just over £670 for the year ended 30 September 2023 compared to £500 the year before. These are projected to fall by approximately 5% in the financial years ending 30 September 2024 and 30 September 2025, as a result of the lower power prices estimated in the industry forecasts. This modest reduction in revenues reflects the fact that the majority of revenues come from the subsidy, demonstrating the value of holding subsidised assets in the portfolio during periods of volatile electricity prices.

The significance of the government backed incentives to revenues is shown by the following chart.

Operating costs

The majority of the cost base is fixed and/or contracted under long-term contracts and includes rent, business rates, and regular O&M costs. Many of these costs have also risen in line with inflation.

The most material variable cost item is for repair and maintenance. Repair and maintenance expenditure for the remaining solar panels is largely covered by cash held in the maintenance reserve totalling £0.7mn at the end of the half year. 

Portfolio valuation

The Investment Adviser is supporting the sales adviser (JLL) in seeking to find a buyer for the VCT's remaining solar assets and notes that a binding offer between a willing buyer and willing seller to acquire the assets will be a good indication of value.  No binding nor firm offer has been received to date.

The NAV of the renewable portfolio is derived from the discounted future cash flows generated by the renewable energy assets, over their remaining lifetimes, as well as the cash held by the companies in the portfolio and the cash held by the VCT.

The future cash flow projections for renewable assets are impacted by:

§  Renewable energy resource. The assumptions for solar irradiation have not changed since the corresponding period and will be reviewed again at the time of the full year valuation.

§  Technical performance. The repairs at Lake Farm, Kingston Farm and Beechgrove Farm resolved their historic performance issues, and so the technical performance assumptions used in the last valuation have been maintained.

§  Power prices. Power price forecasts have been updated to reflect contracted positions in the near term followed by latest independent industry forecasts.

§  Asset Life. The assets are valued based on the duration of subsidies, the lease terms and the length of the planning permissions, without assuming extensions.

§  Costs. Current costs for the assets are included, reflecting all commercial negotiations, expectations for maintenance costs after the assets are repaired and the need to account for the costs of repairs to equipment such as switchgear and transformers.

§  Corporation tax. The actual corporation tax paid, (corporation tax rate increased to 25% effective from 1 April 2023), 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. This is offset, to some degree, by debt service for the debt facility also being indexed to inflation with an increase in inflation resulting in higher interest charges.

The discount rates used to value the future cash flows have been left unchanged for the solar assets and increased for the micro-wind assets, to reflect the Investment Adviser's experience in the market and evidence of third-party transactions.

Consistent with the year end valuation, the valuation of the portfolio at 31 March 2024 also takes into account the Electricity Generator Levy (EGL).  The EGL is likely to be payable by an acquiror of these assets. As previously reported, a portfolio value based purely on the cash flows generated by the assets would be somewhat higher for the reason that the Company itself would not be subject to the EGL (because the Company's generation output falls below the threshold for the EGL and the revenues are within the £10mn allowance). 

Outlook

The Investment Adviser's continued focus is to maximise generation and therefore revenues from the remaining assets, whilst supporting the Board's efforts to realise the maximum exit value for Shareholders.

The assets that were enhanced through inverter and transformer replacements demonstrate a sustained improvement in performance. The generation outlook is therefore improved. The Investment Adviser remains vigilant for signs of further degradation so that the impact on availability can be managed and reduced.

The effect of power prices locked in at high levels should translate into improved revenue and cash flow for the remaining assets over the next few years.

Gresham House Asset Management Limited

24 June 2024