Octopus VCT 3 plc : Correction Half-yearly report

Octopus VCT 3 plc

Correction - Half-Yearly Results

25 May 2017

Correction of RNS published at 18:18 on 23 May 2017

The following amendments have been made to the Chairman's Statement

Remove the following paragraph:

I am sorry to say that the targeted NAV of 90p at the five year point is not going to be achieved. The primary reason is that the VCTs are smaller than anticipated, and this has led to higher running costs as a percentage of assets than expected. The other main causes are the significant fall in projected power prices since the original investment was made and the insolvency of Oskamera, the key developer for five out of the seven sites, which led to some unbudgeted costs.

Update and include the following paragraph:

I am sorry to say that the targeted NAV of 90p at the five year point is not going to be achieved. The underlying solar assets have performed broadly in line with expectations, however shareholder returns have been lower than expected for two main reasons.

Firstly, there has been a significant fall in long term projected power prices since the original investment was made. As investors may remember, the solar company revenues are derived from two main sources:

• Government backed subsidies such as the FIT or ROCs
• Selling the wholesale electricity produced by the solar sites

It is these wholesale electricity revenues, which represent around 40% of the solar site revenues that have been impacted heavily by the reduction in long term energy forecasts.

Secondly, the VCTs are smaller than anticipated at the time of launch. This small size has led to higher than anticipated running costs of the VCT wrapper as a percentage of its assets. The VCTs are smaller than expected because the government reduced the subsidies available to renewable energy sites such as the ones held in OVCT 3 and OVCT 4 midway through the fundraising period. Despite the manager, Octopus Investments, reducing its annual management fee to encourage further investment, less money was raised than anticipated at the outset.

The remainder of the announcement remains unchanged.

Unaudited Half-Yearly Report for the Period Ended 28 February 2017

23 May 2017    

Octopus VCT 3 plc, managed by Octopus Investments Limited, today announces the Half-Yearly results for the period ended 28 February 2017.

These results were approved by the Board of Directors on 23 May 2017.

You may, in due course, view the Half-Yearly Report in full at www.octopusinvestments.com . All other statutory information will also be found there.

Financial Summary

Chairman's Statement

I am pleased to present the half-yearly report for Octopus VCT 3 plc for the period ended 28 February 2017.

Performance
The power generating companies which together comprise the portfolio have been revalued to reflect current market conditions and the reduction in their revenue generating lives since inception. To date they have performed in line with expectations, and have made total distributions of £1,651,000 (equivalent to 20 pence per share) to the Company.

Due to the nature of the Company's investments, which have a planned 25 year life, the NAV is designed to fall to zero over the life of the Company. This is because the Company intends to pay annual dividends and the value of the investee solar companies reduces as their remaining years of operation decline over time. Because of this factor and others explained below the underlying NAV has decreased from 80.1 pence per share at 31 August 2016 to 73.5 pence per share at 28 February 2017, while the Total Value per share, including dividends paid to date of 20p stands at 93.5p (down from 95.1p at 31 August 2016).

The majority of the reduction in NAV over the last 6 months is directly attributable to the distribution of a 5p dividend to shareholders in February 2017. The remainder of the drop in NAV can be mainly attributed to the impact of the higher than expected running costs of the VCT as a result of the small size of the funds with the final adjustment reflecting the latest valuation of the assets during the period.

I am sorry to say that the targeted NAV of 90p at the five year point is not going to be achieved. The underlying solar assets have performed broadly in line with expectations, however shareholder returns have been lower than expected for two main reasons.

Firstly, there has been a significant fall in long term projected power prices since the original investment was made. As investors may remember, the solar company revenues are derived from two main sources:

• Government backed subsidies such as the FIT or ROCs
• Selling the wholesale electricity produced by the solar sites

It is these wholesale electricity revenues, which represent around 40% of the solar site revenues that have been impacted heavily by the reduction in long term energy forecasts.

Secondly, the VCTs are smaller than anticipated at the time of launch. This small size has led to higher than anticipated running costs of the VCT wrapper as a percentage of its assets. The VCTs are smaller than expected because the government reduced the subsidies available to renewable energy sites such as the ones held in OVCT 3 and OVCT 4 midway through the fundraising period. Despite the manager, Octopus Investments, reducing its annual management fee to encourage further investment, less money was raised than anticipated at the outset.

If forecast power prices do not recover, the continued payment of an annual dividend of 5p over the complete life of the Company is under threat. Forecast energy prices are volatile and this conclusion may therefore change over time, but the current future forecast of energy prices leads to a projection showing that the Company could pay an annual dividend in the region of circa 4p until the end of the investment horizon.

Please see the table below for movements in NAV from 31 August 2016 to 28 February 2017, including dividends paid during the period.

Investment Policy & Portfolio
The Company is fully invested in seven companies, each containing an operational solar site. These sites have a range of capacities around 1MW and benefit from either the Feed in Tariff (FIT) or Renewable Obligations Certificates (ROCs), which form part of their revenue stream alongside the electricity they sell on the wholesale market.

The sites have been operating for over four years and have been performing satisfactorily as a portfolio since the start of operations. As mentioned in the Year End Financial Statements in August 2016, two sites in the portfolio have previously experienced a number of technical issues which have since been resolved. The work has now been completed and the sites are expected to generate revenue in line with their planned output.

The Company also holds a small portion of short term non-qualifying loans from which it earns interest. Within the period under review repayments were received in from Adala Solar (£88,750), Akycha Power (£26,250), Daubree Energy (£40,500), Debes Energy (£25,000), Delambre Energy (£12,500) and Lacaille Energy (£12,500), together with accrued interest.

Cash and Liquid Resources
Cash is held on deposit with HSBC. As the Company is fully invested the amount of cash held by the Company at the period end is modest. Cash is paid from the solar companies up to the Company as and when needed to fund expenditure or pay dividends and the Company therefore currently holds no other deposit accounts or money market funds.

Principal Risks and Uncertainties
Now that the Company owns a portfolio of fully operational assets the number of risks faced is reduced as the core construction phases have been completed. The key risks on the ongoing operations are

• Power Prices- Revenues are derived from two sources; first, the Government backed subsidies such as the FIT or ROCs and secondly; from selling the wholesale electricity produced by the solar sites. The wholesale electricity revenues, which represent over 40% of the total revenues are variable and will be subject to market forces. The Investment Team uses industry recognised forecasts to predict the electricity prices for the life of the sites. It also mitigates price fluctuations in the short term via forward selling the electricity by Power Purchase Agreements (PPAs) to reduce income volatility. However, it should be noted that long term power price forests can rise and fall, and therefore can have an impact on the value or NAV of the underlying solar sites.
• Site Technical Issues- all sites are potentially vulnerable to unforeseen technical issues and, to the extent possible, all equipment is warranted to industry standard levels. In addition, each site has insurance in place so that, in the event of a fault occurring that causes the plant temporarily to cease operating and generating revenues, the insurance coverage can be invoked to claim for such losses.
• Weather- all forecasts are based on an assumed level of sunlight each year, but this does vary significantly year-on-year, with a concomitant effect on revenues. However, a prudent approach is taken in the revenue forecasting to reduce the likelihood of this occurring.
• Site Market Value - there are a number of drivers of the value of a solar site. Underlying assumptions are continually revised for macroeconomic changes (e.g. inflation), industry specific drivers (e.g. electricity price forecasts, business rates, embedded benefits) and track record of specific site performance.

VCT Qualifying Status
PricewaterhouseCoopers LLP provides the Board and Octopus, the Company's Investment Manager, with advice on the ongoing compliance with HMRC rules and regulations concerning VCTs. The Company's portfolio already exceeds the HMRC threshold which requires that 70% of the VCT's investments must comprise 'qualifying holdings' by the end of its third accounting period. As at 28 February 2017, qualifying investments represented 89.9% of the Company's portfolio. Octopus expects the required investment hurdle to be maintained.

Outlook
As it stands today and as highlighted in the annual report for the year ended 31 August 2016, the downward pressure on energy prices means that maintenance of the 5p per annum dividend and achieving the total return of 110p per share at the five year point is most unlikely. As a reminder, the 110p total return comprises of the sum of four annual dividends of 5p each and targeted NAV of the solar assets of 90p at the five year point (i.e. 5p x 4 + 90p = 110p).

The Board is mindful that investors will pass or have passed through their five year VCT qualifying period in 2017. Whilst the fund was established as a VCT with a 25 year limited life, the Board is aware that some investors may wish to realise their investment earlier, once outside their minimum five year VCT holding period.

Due to the sub-optimal size of the portfolio, the Company's ability to satisfy any such requests risks having a significant detrimental effect on the value for remaining shareholders. As such, the Board is currently considering options to provide an equitable liquidity solution for all, once all shareholders have passed through their five year VCT qualifying holding period. This may include an earlier, orderly wind up of the VCT through the sale of its assets and the return of capital to shareholders. More information will be provided to shareholders in due course.

Gregor Michie
Chairman
23 May 2017

Director's Responsibilities Statement

We confirm that to the best of our knowledge:

• the half-yearly financial statements have been prepared in accordance with Financial Reporting Standard 104 'Interim Financial Reporting' issued by the Financial Reporting Council;
  
  
• the half-yearly report includes a fair review of the information required by the Financial Conduct Authority Disclosure and Transparency Rules, being:
  
  
  • an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements;
    
    
  • a description of the principal risks and uncertainties for the remaining six months of the year; and
    
    
  • a description of related party transactions that have taken place in the first six months of the current financial year, that may have materially affected the financial position or performance of the Company during that period and any changes in the related party transactions described in the last annual report that could do so.

On behalf of the Board

Gregor Michie
Chairman
23 May 2017

Condensed Income Statement

• The 'Total' column of this statement is the profit and loss account of the Company; the revenue return and capital return columns have been prepared under guidance published by the Association of Investment Companies.
• All revenue and capital items in the above statement derive from continuing operations.
• The Company has only one class of business and derives its income from investments made in shares and securities.
• The company has no other comprehensive income for the period.
• The accompanying notes are an integral part of the half-yearly report.

The statements were approved by the Directors and authorised for issue on 23 May 2017 and are signed on their behalf by:

Gregor Michie
Chairman
Company Number: 07744056

Condensed Statement of Changes in Equity

Condensed Cash Flow Statement