TLS Hydro Power 2015 7% Bond Issue

TLS Hydro Power
2015 7% Bond Issue
Offer Document
Promoted by
March 2015
i
Important Notice
This financial promotion has been issued and approved by Triodos Bank NV for the
purposes of section 21 of the Financial Services and Markets Act 2000. Triodos Bank
NV (incorporated under the laws of the Netherlands with limited liability, registered in
England and Wales with branch number BR3012) is authorised by the Dutch Central
Bank and subject to limited regulation in the UK by the Financial Conduct Authority
(FCA) and Prudential Regulation Authority (PRA). Details about the extent of our
regulation by the Financial Conduct Authority and Prudential Regulation Authority
are available from us on request. Registered office: Triodos Bank NV, Deanery Road,
Bristol, BS1 5AS. VAT registered number 793493383.
If you are in any doubt about the contents of this document or the action you should
take, you should immediately consult a person authorised for the purposes of the
Financial Services and Markets Act 2000 (as amended) who specialises in advising on
the acquisition of shares and other securities.
This document does not constitute a prospectus as defined by the Prospectus
Regulations 2005 ’the Regulations’, and has not been prepared in accordance with
the requirements of the Regulations.
To the best of the knowledge and belief of the Directors of TLS Hydro Power (who
have taken all reasonable care to ensure that such is the case), the information
contained in this document is in accordance with the facts and does not omit anything
likely to affect the import of such information. The Directors, whose names appear on
page 7, accept responsibility accordingly.
ii
TLS Hydro Power Limited
TLS Hydro Power Limited is a private limited company, registered in Scotland with
registered office at Balgonie Power Station, Markinch, Glenrothes, Fife, KY7 6HQ
(registered number SC200394)
Offer for subscription
An offer of up to 2,500,000 Bonds each with a nominal value of £1 in the Company
Promoted by
The distribution of this document in jurisdictions other than the United Kingdom
may be restricted by law and therefore persons into whose possession this document
comes should inform themselves about and observe any of those restrictions. Any
failure to comply with any of these restrictions may constitute a violation of the
securities laws of any such jurisdiction.
iii
Stormontfield – River Tay
iv
Contents
Letter from Dr A R Middleton, Founder and Chief Executive Officer....................... 2
1. Investment summary............................................................................................. 3
2. Directors, Secretary and Advisers........................................................................... 7
3. Business review..................................................................................................... 8
4. The market...........................................................................................................14
5. Directors and the management team....................................................................17
6. Financials..............................................................................................................19
7. Risk warnings.......................................................................................................21
Appendix 1: Definitions and terms..................................................................... 26
Appendix 2: General information....................................................................... 29
Appendix 3: Taxation......................................................................................... 32
1
Letter from Dr A R Middleton,
Founder and Chief Executive
Officer
Thank you for your interest in our TLS Hydro Power Bonds.
We are pleased to give you the opportunity to invest in
our 2015 Bond Issue which will help us to finance the
development of some new hydro power assets. We hope
you’ll read this document and conclude that an investment
in TLS Hydro Bonds can achieve a positive environmental
impact whilst offering the potential to earn an attractive
financial return.
I founded TLS Hydro Power in 1999 to help make a contribution to renewable energy
generation in the UK. Since then we have developed eight hydro power schemes and
we have a further scheme currently in construction – combined these schemes will
generate around 16 GWh of green energy, enough to power around 4,000 homes.1
TLS Hydro Power is part of the the TLS Energy group, which includes three main
group companies – TLS Hydro Power, Tradelink Solutions and LoC02 Energy. We have
developed the Group over the past 17 years to cover the entire supply chain from
the production of renewable energy through to supply of energy to customers. It is
through the combined activities of this Group that we aim to achieve our mission to
supply renewable energy at affordable prices to domestic customers and businesses.
Today, through the retail arm of the Group, LoCO2 Energy, we supply energy to
around 8,500 customers. This year we expect that around 80% of the energy we
purchase will come from renewable sources – this compares to a national average of
16.7% in the year to 31 March 2014.2
Through TLS Hydro Power we can maintain a degree of control over the source of
the energy we supply to our customers. Currently around 16% of the energy we
purchase comes from our own hydro power schemes. However, we are committed
to doing more and our aim is to supply one third of our retail business through our
own renewable energy production. To achieve this we need to develop, own and
operate more renewable energy generating assets and our 2015 Bond Issue will be
instrumental in this.
Bob Middleton
Founder and Chief Executive Officer TLS Energy group
1 Estimated based on most recent statistics from the Department of Energy and Climate Change showing that annual
UK average domestic household consumption is 4,170 kWh
2 DECC energy statistics 31 March 2014
2
1. Investment summary
Hydro power
Hydro power is the energy derived from running water and is one of the first sources
of energy to be harnessed by man. Hydro power has been used to generate electricity
in the UK for over 130 years, with the first UK hydro power station supplying
electricity to the public in Surrey in 1881.3
Large-scale hydro schemes are typically man-made installations, where water flows
from a reservoir down through a tunnel and away from a dam. Large-scale hydro
schemes enable energy to be stored using reservoirs, delivering electricity to the grid
when required. Hydro power is the only renewable technology that can be used to
store large quantities of energy in a clean, environmentally friendly way.
Hydro power schemes can also be developed from rivers using the natural flow of the
river and a weir to enhance the continuity of the flow. Most small-scale hydro schemes
take this form. The environmental and visual impact of such small-scale schemes is
very low and water is returned to the river after passing through the turbines. These
are the schemes that TLS Hydro Power develops.
Around 90% of the energy from running water can be converted into electricity – this
makes hydro power more efficient than any other form of power generation. It is also
one of the cleanest forms of renewable energy, with no direct CO2 emissions.4
3 British Hydro Power Association newsletter 2006
4 http://www.british-hydro.org/hydro_facts.html
Carrongrove Lady’s Leap Falls
3
Once developed, hydro power installations can have a life span of over 100 years –
there are many such installations in existence today.5
With the abundance of natural resources we have in Great Britain – particularly in
Scotland with its wet climate and mountainous terrain – there is significant scope for
the development of further small-scale hydro power schemes. In addition to the 1.7
GW6 of small-scale hydro power schemes already installed in the UK, which generate
enough electricity to power around 1.1 million homes;7 it is estimated that there is
potential for up to 2.5 GW of additional capacity in England, Scotland and Wales.8
TLS Hydro Power
TLS Hydro Power is a leading independent developer, operator and owner of smallscale hydro power projects in the UK. Established in 1999, we currently own and
operate a total of eight hydro power schemes which provide energy to LoCO2
Energy. We have a further scheme in construction which will increase our total
capacity to 4.2 MW.
TLS Hydro Power is a private limited company registered in Scotland and is part of
the larger renewable energy group – the TLS Energy group. The Group companies
are intrinsically linked and combined cover the entire energy supply chain, from
production of renewable energy through to supply to the end user, supporting each
other with expertise, resources and services. Through our retail arm – LoCO2 Energy
– we supply energy to around 8,500 customers.
We are seeking to raise £2.5 million through a Bond Issue which will enable us
to acquire and develop new hydro power schemes in Great Britain and grow our
renewable energy generation.
Historically our schemes have been funded through a combination of bank debt and
accumulated profits of the Company. This method of financing is limiting our ability to
achieve our strategic objectives due to the time it can take to secure external debt.
Raising finance through this Bond Issue will help us to address this and enable us to
take advantage of opportunities as they arise in this increasingly competitive market.
In the future our aim is to part re-finance each new project using bank debt once it
becomes operational. This will allow us to continue to invest in additional renewable
energy projects.
Recently we have agreed terms for the development of a 1.1 MW hydro power
scheme in Scotland. We plan to begin construction of the scheme later this year.
It is intended that this will be the first project we finance using the money raised
through the Bond Issue.
5http://www.british-hydro.org/hydro_facts.html
6 DECC Energy Trends – June 2014
7 Estimated based on most recent statistics from the Department of Energy and Climate Change showing that annual
UK average domestic household consumption is 4,170 kWh
8 Delivering UK Energy Investment – DECC, July 2014
4
The Offer
Issuer: TLS Hydro Power Limited
Amount: £2.5 million
Term: Five years, repayment on 31 March 2020.
Interest: 7% gross per year, fixed and payable (net of UK basic rate tax) annually in
arrears on 31 March in each calendar year.
Additional interest: both existing LoCO2 Energy customers and investors who
become LoCO2 Energy customers by 31 March 2016 and who are still customers on
31 March 2020 will receive additional interest of 0.25% per year (i.e. gross interest
equivalent to 7.25% per year), payable at maturity. The additional interest will also
apply to employees of the TLS Energy group who remain employees until the Bonds
are repaid.
Minimum investment: £1,000; a lower minimum investment of £500 applies for
LoCO2 Energy customers and employees of the TLS Energy group.
Aggregate minimum subscription: the aggregate minimum subscription for the
Offer is £1 million.
Security: Unsecured and not guaranteed.
Covenants: a gearing covenant (which puts a limit on the Company’s total
borrowings) and a debt service reserve (which limits the cash which can be distributed
from the Company as dividends) are contained within the Bond Instrument.
Reporting: Bondholders will receive a TLS Hydro Power annual report which will
contain details of the projects financed by the Bond Issue monies and compliance
with the covenants.
Transferability: Bonds are transferable and may be sold on a matched bargain basis
facilitated by Ethex9 if there are willing buyers.
Timetable: The Offer opens on 16 March 2015 and closes on 29 May 2015 (unless
the £2.5 million target has been reached beforehand or the Offer is extended by the
Directors at their sole discretion).
9 Ethex is a not for profit ethical investment intermediary.
5
Key risk factors
The Directors consider the key risk factors to be as follows:
• Investing in TLS Hydro Power Bonds is not the same as investing money
in a bank account as your capital is at risk and you may not get back the
full amount that you invested. The Bonds are not covered by the Financial
Services Compensation Scheme.
• The Bonds have a fixed repayment date and investors will have no ability to
require the Company to repay their capital before the repayment date (save in the
event of default by the Company). Although the Bonds are transferable and can
be sold on a matched bargain basis facilitated by Ethex, there is no certainty that
there will be a buyer for the Bonds, nor what price they will pay. Investors should
therefore only invest if they are prepared to wait until the scheduled repayment
date on 31 March 2020 to receive their capital.
• The Company’s ability to repay the Bonds on 31 March 2020 or at all is dependent
on the continued success of its business model and planned means of refinancing.
• The Bonds are an unsecured investment and will rank behind the existing bank
loans (and any other secured debt of the Company) for security purposes. In the
event of a financial failure of the Company, the Bonds would have the status of
an unsecured creditor and may not be capable of being repaid in full or at all
should the proceeds from a sale of the assets of the Company fail to cover all
unsecured liabilities.
Investors should read all of the risk factors set out in Section 7 before participating in
the Bond Issue.
Further information
The Financial Conduct Authority recently introduced new regulations regarding
the promotion of shares, bonds and debentures that are not listed on a
recognised stock exchange, or part of a fund. Before you can apply for the Bonds,
we need to ask you to declare what kind of investor you are and check that you
understand the nature of investment you are considering and the risks involved.
For further details, please visit www.loCO2energy.co.uk or contact Triodos at
[email protected] or on 0117 980 9593.
6
2. Directors, Secretary
and Advisers
Directors
Receiving agent to the Offer
Mrs S Lund
Dr A R Middleton
Mrs P A Middleton
Capita Registrars Limited
34 Beckenham Road
Beckenham
Kent BR3 4TU
Secretary
Accountants
Mrs P A Middleton
Lee Accounting Services Limited
Trading as Lee & Co
Chartered Accountants
& Statutory Auditors
26 High Street
Rickmansworth
Hertfordshire WD3 1ER
Registered office
Balgonie Power Station
Markinch
Glenrothes
Fife KY7 6HQ
Registered number
Solicitors to the Offer
SC200394 (Scotland)
Michelmores LLP
Woodwater House
Pynes Hill
Exeter EX2 5WR
Promoter and adviser
to the Company
Triodos Bank NV
Deanery Road
Bristol BS1 5AS
7
3. Business review
TLS Hydro Power has over 15 years’ experience of developing, constructing and
operating hydro power schemes. We have developed eight sites across the UK and
our ninth is currently in construction – combined these schemes will generate around
16GWh of green power each year. We are flexible in our approach to funding and
ownership structure and although we have maintained ownership of the majority
of the sites we operate, the landowners retain a stake in some of them. We have an
experienced engineering and maintenance team dedicated to the development and
operation of our sites.
We are specialists, not only in the development and construction of new hydro power
schemes, but also in the renovation of older sites which are no longer operational.
Three of our sites were old hydro power schemes which had fallen into disrepair and
were redeveloped by the Company. Our latest project in construction, Carrongrove,
makes use of the weir and waterways of a now abandoned paper mill. The
redevelopment of existing sites is part of the Company’s strategy in line with our aim
to minimise environmental impact as we grow our generating capacity.
The TLS Energy group
The TLS Energy group is owned by founders Bob and Pat Middleton who are also
Directors of TLS Hydro Power. Below is a timeline which summarises the history of
the Group.
Tradelink Solutions
is established by
Bob Middleton
providing training
and consultancy
services to the
energy industry
1995
TLS Hydro Power
acquires its second
hydro power scheme,
Stormontfield
LoCO2 Energy
is incorporated
to sell energy
to domestic
customers and
small companies
TLS Hydro Power's
largest hydro power
scheme, Slatach,
begins generating.
This takes
total capacity
to 4.1 MW
2003
2009
2013
1999
2005
2011
2014
TLS Hydro Power
is incorporated
and acquires its
first hydro power
scheme, Balgonie
Cleghorn hydro
power scheme is
developed. This was
a re-development
of a site which has
been in use as a
hydro-generating
station since 1880
LoCO2 Energy
is awarded
with an ethical
award by the
Ethical Company
Organisation
TLS Hydro Power,
Tradelink Solutions
and LoCO2 Energy
are consolidated
into TLS
Energy group
Construction
begins on
Carrongrove, the
Group's ninth
hydro power scheme
LoCO2 Energy
reaches 8,500
domestic customers
8
TLS Energy group incorporates three main group companies – TLS Hydro Power,
Tradelink Solutions and LoCO2 Energy. The below diagram illustrates how these
companies fit together:
Trad
Powe elink S
r by
olu
pr
ti
and ovidin ons s
bo
g
O up
ok
ke fge por
ep
ing m a ts
se d
r
contributes to the UK’s
development of renewable
energy sources
supports and advises
organisations involved in
renewable energy
Elec
tricity
wer
generated by hydro po
proje
y
b
cts owned or operated
TLS
gy
Hydr
Ener
o Power
is sold to LoCO2
h
hroug
gy t
ents
ner
2 E agreem
e
CO
Lo chas
tors
rts pur enera
g
po er
up pow ergy
n
ss
of le e
nt ab
ew
ro
yd ion
S H trat
L
T nis
i
m es
vic
Tra
de
the link
arr So
an lut
wi gem ion
th
re e
n
supplies renewable
energy at an affordable
price to business and
domestic users
Tradelink Solutions
Tradelink Solutions is an energy solutions company that advises clients across a
breadth of UK renewable energy and power generation sites.
Tradelink Solutions was the first company to be established in the Group in 1995.
Through Tradelink Solutions we provide commercial services to the renewable energy
industry. Our services include brokerage for generators, trading of Renewable Obligation
Certificates and Levy Exemption Certificates, Feed-in Tariff services and power purchase
agreements. We also provide training courses to the industry on the electricity market.
In 2014 Tradelink Solutions generated income of £29 million and profit before tax of
around £117,000.
LoCO2 Energy
LoCO2 Energy is the retail arm of the Group. It was established in 2009 to supply
renewable energy to householders and businesses. Today LoCO2 Energy has around
8,500 retail energy customers. TLS Hydro Power provides around 16% of the energy
purchased for our customers.
9
Slatach – Francis turbine
Currently around 80% of the energy purchased for our customers comes from renewable
sources – this compares to a UK average of 16.7% in the year to 31 March 2014.10
Hydro power accounts for the highest proportion of our renewable fuel mix. We also
purchase from wind, anaerobic digestion, biomass, solar and landfill gas generators.
LoCO2 Energy has grown significantly in recent years and in 2014 generated income
of £7.7 million and profits before tax of around £200,000.
LoCO2 Energy offers customers 100%
green energy products (‘planet tariff’)
and products that mix both green and
‘brown’ energy and therefore are sold
at a lower price point (‘pocket tariffs’).
TLS Hydro Power
TLS Hydro Power has developed eight hydro power schemes – six in Scotland and
two in England. We have a further scheme in Scotland currently in construction
which is expected to become operational this summer.
In 2014 the Company generated income of £1.13 million and profit before tax of
around £604,000.
10DECC energy statistics 31 March 2014
10
Schemes developed by TLS Hydro Power
Roshven
Size: 500kW
Homes served: 360
Slatach
Size: 1000kW
Homes served: 719
Glen Forslan
Size: 500kW
Homes served: 480
Brunery
Size: 500kW
Homes served: 720
Stormontfield
Size: 100kW
Homes served: 120
Carrongrove
Size: 500kW
Homes served: 336
Balgonie
Size: 650kW
Homes served: 576
Cleghorn
Size: 280kW
Homes served: 192
Nenthead
Size: 300kW
Homes served: 144
Greenholme Mill
Size: 330kW
Homes served: 312
We work closely with the land owners on the development of each of our schemes
and jointly develop an ownership structure on each site which suits both the
landowner and the Company.
We invest significant amounts in maintenance each year to ensure our schemes
continue to deliver expected levels of energy generation and that the expected
lifespan of the schemes is achieved.
11
New projects
Carrongrove
Capacity: 500kW
Location: Stirlingshire, Scotland
Total project cost: £1.2 million
Estimated production: 1,370 MWh per year
Carrongrove Mill is located in Stoneywood, in the Falkirk Council area. Water has
been abstracted from the River Carron at this site for over 140 years for use in the
manufacture of paper and for electricity generation. The paper mill closed in 2005.
Through this scheme TLS Hydro Power will be using the existing weir and intake to
once again generate electricity from the River Carron.
This site was identified by Falkirk Council as having potential for hydro power
generation as well as for the opportunity such a development affords to install a new
fish ladder for migratory fish on the current upstream limit. This will open up a further
6.5 km of main river and tributaries as a potential spawning ground for salmon, trout
and other migratory species.
TLS Hydro Power has successfully gained both local planning and Environment Agency
approval for the project and has secured the required grid connection. Construction of
the scheme started in November 2014 and is forecast to be completed by July 2015.
The project is being funded through a combination of the Company’s cash reserves
and bank debt provided by Triodos Bank.
Carrongrove
12
Slatach access track
Future development
Capacity: 1,100 kW
Location: Perth and Kinross, Scotland
Total project cost: £2.5-3 million
Estimated production: 2,600 MWh per year
TLS Hydro Power has recently agreed terms to develop a project in the Perth and
Kinross area of Scotland. The site is on a National Forest Estate. As with other Forestry
Commission sites, the local community will be invited to invest with a maximum 20%
stake in the site being offered.
Subject to completing the consultation process, TLS Hydro Power aims to begin
construction in Autumn 2015 with the project due to become operational in Autumn
2016. We intend that this will be the first project funded using the Bond Issue proceeds.
Strategy
Our overall objective is to continue to contribute to and support the UK’s renewable
energy industry by growing our portfolio of renewable energy generating assets. Our
specific long-term aim is to build our renewable energy production to provide one
third of LoCO2 Energy’s retail supply.
To achieve this we will continue to invest in UK hydro power schemes as these benefit
from low environmental impact, long project lifetimes and reliable energy output. We
aim to invest in both the restoration of existing sites, as we have done successfully in
the past, as well as in new sites where the environmental impact is low.
We may also aim to diversify our portfolio of renewable energy assets by considering
investment in wind or solar PV projects, should suitable opportunities arise.
13
4. The market
The UK has a binding EU target to deliver 20% of energy demand from renewable
sources by 2020.11 This, combined with support schemes put in place by the UK
Government to implement climate change policy and to meet this target, has driven
investment in renewable energy capacity in recent years.
UK renewable electricity
By 31 December 2013 UK renewable electricity installed capacity reached 19.7
GW. Small-scale hydro power accounted for around 7% of this with 1.7 GW of
installed capacity.12
In the year to 31 March 2014 renewables contributed 16.7% to UK electricity supplied.
Coal 34%
Other 2.1%
Renewables 16.7%
Natural Gas 25.6%
Nuclear 21.6%
Source: DECC energy statistics 31 March 2014
112009 EU Renewable Energy Directive
12 DECC Energy Trends – June 2014
14
Hydro power
Hydro power has been a generator of renewable electricity in the UK since the 1880’s,
and accounts for approximately 1.5% of total UK electricity generation today. Most
suitable sites for large-scale hydro in the UK have already been developed. However,
there remain significant opportunities for investment in small-scale sites, such as those
developed by TLS Hydro Power.
There are opportunities for investment in re-generating old sites, as well as investing
in new sites. The UK Government is providing support for those who wish to tap into
this potential through the Feed-in Tariff scheme.
Over 300 hydro installations with total capacity of 45 MW have already been
accredited under the Feed-in Tariff scheme since 2010.13
Studies in Scotland and England and Wales indicate that there is a remaining potential
of around 1,000 – 2,500 MW to be exploited in small-scale hydro power.13
Hydro power: key facts
Installed capacity at end of 2013
1,700 MW
Estimated investment from 2014-2020
(Electricity Market Reform delivery plan)
£0.4 – 0.5 billion
Pipeline data
100 MW awaiting construction
2020 estimated deployment range
1,800 MW
Source: Delivering UK Energy investment – July 2014. Department for Energy and Climate Change
Government policy and the UK
renewable energy outlook
There are currently two support mechanisms for new renewable energy projects. The
Renewables Obligation scheme is currently the main support mechanism for larger
scale renewable technology. The Feed-in Tariff scheme supports only smaller projects
of up to 5 MW, such as those developed by TLS Hydro Power.
13 Delivering UK Energy Investment – DECC, July 2014
15
Prospecting near Roshven
Following an extensive consultation process, during 2014 the UK Government started
implementing changes in the way that the renewable energy sector will operate –
known as Electricity Market Reform (EMR). The EMR will be fully implemented from
31 March 2017 and under these changes the Renewables Obligation scheme will be
replaced with a Contract for Difference for projects over 5 MW. However projects
under 5 MW – such as those developed by TLS Hydro Power – will continue to be
eligible for the Feed-in Tariff, receiving a fixed price per unit of generation for the first
20 years of operation.
Our projects and prospects
All of our existing sites benefit from either payments under the Renewable Obligation or
the Feed-in Tariff scheme for the first 20 years of operation. Although the Renewable
Obligation is closing to new generation from 31 March 2017, the UK Government has
confirmed that all existing accreditations under the Renewable Obligation scheme will
be ‘grandfathered’ (or honoured) for the lifetime of their support. This provides certainty
over our Renewable Obligation Certificate income to 2027 and our Feed-in Tariff
income into the 2030’s.
Our projects which become operational beyond 2017 will remain eligible for the Feedin Tariff scheme, which is now the main support mechanism for renewable projects
below 5 MW in capacity.
16
5. Directors and the
management team
TLS Hydro Power has three directors; Bob Middleton, Pat Middleton and Suzanne Lund.
Dr Anthony Robert Middleton
Chief Executive Officer and Founder of the
TLS Energy group and Managing Director of
TLS Hydro Power
Bob has over 35 years’ senior level experience of the
energy industry. Before founding Tradelink Solutions
and more recently TLS Hydro Power and LoCO2
Energy, he held a number of managerial positions
within BP and Eastern Electricity where his achievements included the successful
management of a range of major electricity and gas projects both in the UK and
overseas. With expertise in most aspects of the commercial energy industry, including
asset management, electricity and gas marketing, energy trading, arbitrage and
risk management, Bob has been instrumental in developing and implementing the
Group’s successful strategy to date. He takes an active lead in the development and
negotiation of new hydro power schemes.
Pat Middleton
Non-executive Director and Company Secretary of
the TLS Energy group
With a degree in pure maths with economics, Pat has
held senior marketing and communications positions
within two universities, a private higher education
college and a membership body. She currently serves
as Honorary Secretary for the Friends of a national
children’s charity and is a trustee of a local Citizens Advice Bureau. She has been a
non-executive director of the TLS Energy group since it was established in 1997 and a
Director of TLS Hydro Power since the Company was established in 1999.
Suzanne Lund
Finance Director of the TLS Energy group and
TLS Hydro Power
Suzanne joined the TLS Energy group in 2007 and
is responsible for its financial management. After
obtaining a first-class maths degree and completing
a two-year graduate trainee placement at Unilever in
South Africa, Suzanne moved to the UK in 1994 and
qualified as a CIMA accountant in 1997. She has previously worked for Virgin Retail
Europe, Coca Cola and Schweppes Beverages and Beco (UK). Suzanne has an active
role on the Board of both the Company and the Group.
17
The TLS Energy group senior
management team
Diane Dowdell
Commercial Director of Tradelink Solutions
Diane joined the TLS Energy group in 2003 where her
strong industry reputation and expert knowledge of
gas and electricity risk management activities have been
vital assets. Thanks to her steady guidance, TLS Energy
group remains able to provide clients with a first-class
service and is one of the few companies able to offer
staff real hands-on experience of both traditional and modern energy trading. Diane
has 30 years of experience in the energy industry working for British Coal, Eastern
Natural Gas, Eastern Electricity and Entergy Power Group.
Ian Almond
Chief Engineer for TLS Hydro Power
Ian completed a degree in environmental engineering
at the University of Nottingham in 2005. He started his
professional career as an Environmental Consultant on
projects in the UK and India, and subsequently worked
for Fugro GEOS in Western Australia. Following a position
as an environmental consultant with Atkins Global in
London, Ian started a permanent role with TLS Hydro Power in January 2014. Since
joining TLS Hydro Power Ian has contributed to the development and construction
phases of hydro power projects and the identification of potential new schemes.
Governance and reporting
The Directors and senior management team manage the Company on a day to day
basis. Board meetings are held every six months for TLS Hydro Power, as well as for
the TLS Energy group and other group companies.
TLS Hydro Power produces consolidated audited statutory accounts. For each year of
the Bond term the Company will produce an audited consolidated annual report, a
copy of which will be provided to Bondholders. The report will include an update on
the projects financed by the Bond monies and will report on the covenants.
18
6. Financials
Financial forecasts
A summary of the Company’s recent trading performance and financial forecasts is
shown below.
Income and expenditure
Year ended 31 March
2014
Audited
£’000
2015
Forecast
£’000
2016
Projected
£’000
2017
Projected
£’000
2018
Projected
£’000
2019
Projected
£’000
2020
Projected
£’000
Income
1,128
1,021
1,267
1,713
1,887
2,298
2,380
Costs
(380)
(258)
(482)
(422)
(490)
(585)
(616)
EBITDA
748
763
785
1,291
1,397
1,713
1,764
Depreciation
(89)
(130)
(256)
(338)
(385)
(446)
(447)
EBIT
659
633
529
953
1,012
1,267
1,317
Bank interest
(104)
(132)
(126)
(126)
(212)
(235)
(336)
Bond interest
–
–
(155)
(177)
(177)
(177)
(162)
49
41
40
42
45
46
47
EBT
604
542
289
692
668
901
866
Tax
(104)
(104)
(14)
(112)
(101)
(116)
(125)
EAT
500
438
275
580
567
785
741
Minority interest
(13)
(16)
(14)
(14)
(15)
(15)
(16)
Retained profit for the year
487
422
261
566
552
770
725
Share of joint venture profit
Note: Forward-looking statements are merely unaudited forecasts and
projections based on a number of assumptions and should not be relied
upon as indicators of future performance. There is no guarantee these
forecasts or projections will be achieved.
Income is derived from the sale of the electricity generated by the Company’s
hydro power schemes and UK Government pricing mechanisms linked to the
generation of renewable electricity.
Costs include direct costs incurred by each hydro power site such as rent and rates,
insurance and repairs and maintenance, as well as an operational management fee
and an administrative fee payable per site to Group companies. Costs in 2015 and
2016 include estimated one off costs associated with the Bond Issue of £132,000.
19
The key assumptions underlying these forecasts and projections are as follows:
• The Carrongrove scheme currently being constructed begins generating electricity
consistently from October 2015.
• The Company acquires and constructs two new schemes in the forecast
period. Both are 1 MW schemes which are 100% owned by the Company.
One becomes operational in October 2016 and one in October 2017.
• The Company raises £2.5 million through this Bond Issue. This is used to
fund the first new scheme later this year. Once operational in October 2016
the Company will raise bank debt to re-finance this project. This enables the
Company to recycle much of the capital raised through the Bond Issue and
invest this in the second project.
• The Bond is repaid in March 2020, 50% from retained cash and 50% through
additional bank debt secured against the unencumbered hydro power assets.
Balance sheet
Year ended 31 March
2014
Audited
£’000
2015
Forecast
£’000
2016
Projected
£’000
2017
Projected
£’000
2018
Projected
£’000
2019
Projected
£’000
2020
Projected
£’000
4,758
5,677
7,441
8,185
10,011
9,944
9,545
Cash
304
592
1,532
1,087
1,202
3,279
2,752
Other current assets
490
549
660
804
857
1,010
1,068
794
1,141
2,192
1,891
2,059
4,290
3,819
Current liabilities
429
683
452
469
561
691
807
Net current assets
365
458
1,740
1,422
1,497
3,599
3,012
2,102
2,355
2,637
2,495
3,840
5,101
5,886
-
-
2,500
2,500
2,500
2,500
-
188
450
453
456
460
464
468
2,290
2,805
5,590
5,450
6,800
8,065
6,354
2,833
3,330
3,591
4,157
4,709
5,478
6,204
46%
43%
60%
55%
58%
59%
51%
Fixed assets
Current assets
Bank loans
Bond
Other long term liabilities
Net assets
Gearing
Gearing is calculated as total debt (bank loans and Bond) as a proportion of total debt
plus net assets.
Fixed assets are primarily represented by plant and machinery and land and buildings in
respect of the hydro power schemes owned by the Company. Certain fixed assets were
revalued by the Company in 2008 and are included in the balance sheet at the revalued
amount. Loans comprise primarily bank debt secured against specific hydro power sites.
20
7. Risk warnings
In addition to the other relevant information set out in this document the
following specific risk factors should be considered carefully in evaluating whether
to make an investment in the Bonds. If you are in any doubt about the contents
of this document or the action you should take, you are strongly recommended to
consult your financial or other professional adviser.
The Directors believe that the principal risk factors relevant to investing in Bonds
issued by the Company are as set out below. The following risk factors should be
considered but it should be noted that these are not exhaustive and not in any
particular order of priority.
The Bond and the Company
1. Past performance is not necessarily a guide to
future performance
Events in the past, or experience derived from these, or indeed present facts, beliefs
or circumstances, or assumptions derived from any of these, do not predetermine the
future. Hopes, aims, targets, plans or intentions contained in this document are no
more than that and should not be construed as forecasts.
2. Redemption of Bonds
An investment in TLS Hydro Power will be in the form of Bonds, which are
contractually due for repayment at the end of their term on 31 March 2020. It is not
certain that TLS Hydro Power will have sufficient funds or access to financial resources
available in order to repay the Bonds on their due date.
The Directors are confident of their ability to plan and manage the business and
financial resources of the Company such that they will have a range of options
available to them to repay the Bonds on their due date.
3. Unsecured debt
The Bonds will be an unsecured debt of the Company and are not guaranteed. In the
event of the Company entering into a formal insolvency process, Bondholders will rank
equally with other unsecured creditors of the Company and behind secured creditors
and may not recover their full investment.
The Directors consider that TLS Hydro Power is a financially sound business with a
proven sustainable business model based on ownership of renewable energy assets
and long-term contracted and government backed income streams. As a result, they
consider the risk of an event occurring which would lead to an insolvency of the
Company to be remote.
21
Cleghorn
4. Liquidity
Although the Bonds are transferable, they will not be listed on a recognised stock
exchange. An investment in an unquoted security of this nature, being an illiquid
investment, is speculative, and involves a degree of risk. It may not be possible to sell
or realise the Bonds or to obtain reliable information about the risks to which they are
exposed before the end of their term.
Bonds can potentially be sold on a matched bargain basis facilitated by Ethex, an
ethical investment intermediary, if there are willing buyers.
5. Availability of bank debt
Any bank which lends to the Company in the future may choose to withdraw from
lending due to changes in their own banking policy or an inability to agree on future
lending terms. Were this to happen, it may not be possible to replace the bank loans
on such favourable terms, or at all, in which case the development and profitability of
the Company might be adversely affected.
The Company attempts to mitigate against such risks by taking out long-term loan
facilities on sustainable terms. The Group has a 10 year relationship with its principal
lender, Triodos Bank, and is confident that its operational projects will offer an
attractive form of security to banks in the future.
22
6. Loss of key management
The Company is dependent, to a certain extent, upon the contribution of the
Directors and the senior management team. If any of them were no longer
involved with the Company in the future, this may have a material negative
impact upon the Company’s financial performance.
In the event of a loss of any member of the current Board of Directors or senior
management team, the Directors are confident that TLS Hydro Power would be
able to attract the right calibre of individual to join as a replacement.
7. Interest rates
An increase in interest rates could impact the profits generated by the Company
and its ability to service the debt, or restrict its ability to raise bank debt in future.
The Company’s current borrowing is in the form of long-term loans with a
combination of fixed and variable interest rates (see Appendix 2, paragraph 7).
8. Taxation
Information regarding taxation is based upon current UK taxation legislation and
HM Revenue & Customs practice. Tax law and practice are subject to change.
Any changes in the level and basis of taxation, in tax reliefs or in HM Revenue
& Customs practice may affect the value of an investment in the Bonds and
returns to Bondholders.
The renewable energy industry
1. Government policy towards renewable energy may
change unfavourably
Our business plan and strategy are based on current UK Government and European
renewable energy policy. Changes in respect of legislation concerning Renewable
Obligation Certificates (ROCs), the Feed-in Tariff (FIT), the EMR and UK planning law
in relation to renewable energy projects could have a negative impact on the revenues
and profits of some of our operating projects.
However, there is a global consensus on taking action on climate change and energy
security, which has positively influenced Government and European Union policy.
The UK Government has made certain commitments to ROCs and the FIT which are
underpinned by a European Directive to achieve 20% of energy from renewables
by 2020. ROCs and FIT are subject to regular review though all UK governments
have been consistent in avoiding changes which impact projects retrospectively by
adopting a grandfathering policy for operational projects.
The Electricity Market Reform was introduced and received Royal Asscent in 2014. This
moves away from the Renewables Obligation for large scale projects commissioned
after March 2017. However, payments for existing schemes made under the
Renewables Obligation are being grandfathered and will continue until 2027.
23
2. Reliance on variable resources such as rainfall
Climate variability and fluctuating long-term weather patterns could reduce the
profitability of the whole portfolio. There is no consensus on evidence in historical
records nor indication from climate modelling of declining trends in the average
rainfall conditions. To mitigate the impact of regional variations from year to year
we have invested, and seek to invest, in a variety of geographical locations which
would give some protection against these changes.
We conduct a thorough due diligence process prior to making an investment. This
includes the use of external specialists and resource assessments to determine, to
the extent possible, the appropriateness of any site. This work measures, among
other things, potential renewable energy generation and other factors associated
with any site.
3. Technology failure
Generation of electricity involves mechanical and electronic processes which may
fail under certain conditions and lead to loss of revenues and repair or replacement
costs. In order to mitigate against this we use tried-and-tested technologies backed by
warranty and service packages and undertake regular preventative maintenance.
4. Operating risk
There are risks associated with operating facilities where an accident or incident might
result in the facility being shut down for investigation and/or repair.
We have a diversified portfolio of assets. This diversification means that the
Company’s performance is less exposed to any one asset. We also take out insurance
against loss of revenue caused by major equipment failure.
5. Fluctuating market conditions
The wholesale prices of electricity and gas, which have an impact on sale prices for
the Company’s electricity and other potential revenue streams, fluctuate. This may
lead to volatility in some of our revenue streams.
However a significant proportion of the income generated is from long-term inflation
linked UK Government pricing mechanisms which do not fluctuate providing stable
income streams.
6. Foreign exchange risk
We may purchase capital equipment in currencies other than pounds sterling,
particularly the euro. Accordingly, foreign exchange risk arises during the construction
phase. We aim to manage this risk on an individual project-by-project basis through the
fixing of exchange rate exposure in contract negotiations and contractual agreements.
7. Environmental risks
Adverse environmental conditions at any of the properties used by the Company for
renewable generation may negatively affect the Company’s business and profitability.
24
Balgonie power station
We normally commission specialist environmental consultants to report on these
matters before entering into any contract committing the Company to material
financial expenditure. We employ proven technologies designed to prevail in adverse
environmental conditions. We also hold specialist insurance to mitigate our exposure
in the event of loss.
8. Development and construction partner risk
Development and construction of hydro power and other electricity generation
projects is invariably a challenging process involving significant input by and reliance
on development partners. In the event that one party does not perform its obligations
adequately or at all, the success of a project may be put in jeopardy. This can have a
significant effect on the Company’s financial results and lead to a loss of its investment.
We select our development and construction partners carefully and take into account
their experience and track record in similar projects and financial capabilities. We
also insist on collateral warranties and, where appropriate, guarantees against nonperformance under contracts. Through the development and construction phase, we
closely monitor our partners and contractors and their work.
25
Appendix 1:
Definitions and terms
Act: the Companies Act 2006
Bond instument: the bond instrument made by way of a deed poll dated
16 March 2015
Bonds: the bonds of £1 each to be issued by the Company, as constituted by the
Bond Instrument
Bondholder or Investor: an investor who subscribes for and holds Bonds
Bond Issue or Offer: £2,500,000 of Bonds issued by TLS Hydro Power under
the Offer
Capita Asset Services or Capita: a trading name of Capita Registrars Limited
Customers: Customers of LoCO2 Energy
Company or TLS Hydro Power: TLS Hydro Power Limited, a company registered in
Scotland (SC0200394) and its subsidiary companies which at the time of the Offer
are as follows: Irene Power Company Limited (company number 06008431); Slatach
Hydro Power Limited (company number SC349289)
CfD: Contract for Difference
Closing date: the earlier of the Maximum Subscription being reached or 12 noon
on Friday 29 May 2015 (or such later date that the Directors of TLS Hydro Power may
reasonably determine in their sole discretion)
Directors or the Board: the directors of the Company
Dutch Central Bank: De Nederlandsche Bank (DNB), the central bank and one of the
banking regulatory authorities of The Netherlands
EBIT: Earnings Before Interest and Tax
EBITDA: Earnings Before Interest, Tax, Depreciation and Amortisation
EMR: Electricity Market Reform
Ethex: a not-for-profit ethical investment intermediary which provides a matched
bargain market for the Bonds
FCA: the Financial Conduct Authority
FIT: Feed-in Tariff. A revenue support mechanism under which generators of
renewable energy receive payments funded by the Government
26
FSMA: the Financial Services and Markets Act 2000 (as amended)
Gearing covenant: a financial covenant applicable to the Bonds, details of
which are set out in the bond instrument
Group or TLS Energy group: TLS Energy Limited, a registered company
(04274965) and direct parent company of TLS Hydro Power, LoCO2 Energy and
Tradelink Solutions
GW: gigawatt, 1000 megawatts
GWh: the amount of electricity consumption (or generation) at a constant rate
of 1 gigawatt per hour.
HMRC: HM Revenue & Customs (formerly the Inland Revenue and Customs
and Excise)
Launch date: 10.00 on Monday 16 March 2015
LoCO2 Energy: LoCO2 Energy Limited, a company registered in England and
Wales (06895776) under common ownership to TLS Hydro Power within the
TLS Energy group
Maximum or Full Subscription: the aggregate maximum subscription under
the Bond Issue of £2,500,000
Minimum Subscription: the aggregate minimum subscription under the
Fundraising offer of £1,000,000
MW: megawatt, the unit for measuring energy output of a project
MWh: Megawatt-hour, the amount of electricity consumption (or generation) at a
constant rate of 1 Megawatt (MW) for a period of one hour.
Power: power is the rate at which energy is used or produced. 1 megawatt-hour
represents 1 hour of electricity consumption (or generation) at a constant rate of 1
megawatt (MW)
PPA: a power purchase agreement, the agreement between a supplier of
electricity and a generator of electricity regarding the price that will be paid
for the energy purchased
PRA: the Prudential Regulation Authority
Receiving agent: Capita Asset Services Limited in its capacity as receiving agent to
the Bond Issue
Renewable energy: energy generated from unlimited natural resources such as
wind, solar, hydro, wave and tidal
Renewables Obligation: all suppliers of electricity in the UK are obliged by law to
source a proportion of their electricity from renewable sources. The obligation is set by
DECC, increasing annually each year. Suppliers can meet their obligation by submitting
ROCs or paying a fixed amount per MWh to Ofgem. These payments are redistributed
back to those suppliers who have submitted ROCs
27
Renewable Obligation Certificate or ROC: generators of electricity under the
Renewables Obligation receive certificates for all renewable electricity they produce.
These certificates are usually sold to suppliers of electricity so the latter can meet the
requirements of the Renewables Obligation
TLS Renewable Consulting: TLS Renewable Consulting Limited, a company
registered in England and Wales (06895950) under common ownership to TLS Hydro
Power within the TLS Energy group
Tradelink Solutions: Tradelink Solutions Limited, a company registered in England
and Wales (03017466) under common ownership to TLS Hydro Power within the TLS
Energy group
Triodos Bank or the Bank: Triodos Bank NV (incorporated under the laws of The
Netherlands with limited liability, registered in England and Wales with branch number
BR3012). Authorised by the Dutch Central Bank and subject to limited regulation
in the UK by the Financial Conduct Authority and Prudential Regulation Authority.
Registered office: Triodos Bank NV, Deanery Road, Bristol, BS1 5AS. VAT registered
number 793493383.
Slatach intake
28
Appendix 2:
General information
1. Responsibility
The Directors (whose names appear on page 7) and the Company accept responsibility
for the information in this document. To the best of the knowledge of the Company
and the Directors (who have taken all reasonable care to ensure that such is the case),
the information contained in this document is in accordance with the facts and does
not omit anything likely to affect the import of such information.
2. Incorporation and activity
The Company was incorporated in Scotland under the Companies Act 1985 as a
private limited company with the name TLS Hydro Power Limited and registered
number SC200394 on 29 September 1999. The principal legislation that applies to
the Company is the Act.
The registered office of the Company is Balgonie Power Station, Markinch,
Glenrothes, Fife, KY7 6HQ.
3. Share capital of the Company and the subsidiaries
The issued share capital of the company is £2 and is held by TLS Energy Limited.
The ultimate parent company is TLS Energy Limited.
4. The Directors
The Directors are not directly remunerated by the Company, but are remunerated
through Tradelink Solutions Limited. The Directors have no direct interest in the
Company but through their ownership of the ultimate parent company TLS Energy
Limited, Bob Middleton and Pat Middleton are the ultimate controlling parties of
the Company.
29
5. The TLS Energy group
A summary of the Group structure is as follows:
TLS Energy Ltd
Tradelink
Solutions
Limited
LoCO2
Energy
Limited
Nenthead Mines
Hydro Power
Limited
TLS
Hydro Power
Limited
Wharfedale
Hydro Power
Limited
50% Joint venture
Irene Power
Company Limited
75% owned by
TLS Hydro Power
TLS Renewable
Consulting
Limited
Slatach Hydro
Power Limited
6. Material contracts
An engagement letter dated 28 November 2014 between TLS Energy Limited (previously
named Latent Energy Limited) (1) and Triodos Bank NV (2) in relation to the Fundraising.
Under this agreement, Triodos has been appointed as agent of the Company to use its
reasonable endeavours to procure subscribers for Bonds under the Offer.
The engagement letter provides for the Company to pay Triodos a success fee of 3.5%
of the aggregate gross proceeds of the Offer.
7. Banking facilities
The Company has the following loan facilities in place (all with Triodos Bank):
Carrongrove construction loan – A loan facility for £900,000 not currently drawn.
The loan facility is secured and bears an interest rate of 4.85% above the Royal Bank
of Scotland base rate. The loan is to be re-financed with an operating loan once the
Carrongrove scheme is operational.
30
Slatach operating loan 1 – A loan for £1.5m. The loan is to be repaid over 15 years
with monthly repayments. The loan is secured and bears interest at a fixed rate of
5.67%. This loan is fully drawn.
Slatach operating loan 2 – A loan for £598,200. The loan is to be repaid over 15
years with monthly repayments. The loan is secured and bears interest at a fixed
rate of 8.37%. This loan is fully drawn.
8. Related party contracts
Power purchase agreements
The Company has formal arms length power purchase agreements in place with
LoCO2 Energy Limited for each of the seven operational sites for which the Company
sells energy generated to LoCO2 Energy Limited. The agreements stipulate the prices
at which energy is to be sold for each site.
Administrative services
There are formal arms length contracts in place with Tradelink Solutions Limited for
the provision of administrative services in relation to the hydro power schemes. There
are currently five such contracts in place which stipulate an annual charge for the
services provided which is RPI linked. The services provided under these agreements
include general administration and financial services.
Management services
In 2014 the Company began to outsource some of the operation and maintenance
of its hydro power schemes to group company TLS Renewable Consulting Limited.
There are currently three formal arms length contracts in place with TLS Renewable
Consulting Limited for the provision of these services. The contracts stipulate an
annual charge for the services provided which is RPI linked.
The financial projections contained within this document reflect the above
contractual arrangements.
9. Bond Instrument
A copy of the Bond Instrument is available from Triodos on request. Please contact
[email protected] or on 0117 980 9593.
10. Other Information
The Offer is conditional upon the Minimum Subscription being raised. The Minimum
Subscription is £1,000,000. The subscription monies will be kept in a separate bank
account and, if the Minimum Subscription has not been achieved by 29 May 2015,
the Offer will be withdrawn and the subscription monies refunded without interest.
31
Appendix 3:
Taxation
If you are considering applying for Bonds, it is important that you understand
the taxation consequences of investing in the Bonds. You should read this
section and discuss the taxation consequences with your tax adviser, financial
adviser or other professional adviser before deciding whether to invest.
The summary set out below describes certain taxation matters of the United Kingdom
based on the Company’s understanding of current law and practice in the United
Kingdom as of the date of this Offer document, both of which are subject to change,
possibly with retrospective effect. The summary is intended as a general guide only
and is not intended to be, nor should it be construed to be, legal or tax advice.
The summary set out below applies only to persons who are the absolute beneficial
owners of Bonds who hold their Bonds as investments and (save where it is explicitly
stated otherwise) who are resident and (in the case of individuals) domiciled for tax
purposes in the United Kingdom. In particular, Bondholders holding their Bonds via a
depositary receipt system or clearance service should note that they may not always
be the beneficial owners thereof. Some aspects do not apply to certain classes of
person (such as dealers, certain professional investors and persons connected with the
Company) to whom special rules may apply. The United Kingdom tax treatment of
prospective Bondholders depends on their individual circumstances and may therefore
differ to that set out below or may be subject to change in the future.
If you may be subject to tax in a jurisdiction other than the United Kingdom or are
unsure as to your tax position, you should seek your own professional advice. This
summary only deals with the matters expressly set out below.
Interest on the Bonds
Withholding tax on the Bonds
Generally, payments of interest on the Bonds will be made with deduction of, or
withholding on account, of United Kingdom income tax at the basic rate of income
tax, (currently 20%).
Interest on the Bonds may be paid without withholding or deduction on account of
United Kingdom tax where:
(a) interest on the Bonds is paid by a company and, at the time the payment is made,
the Issuer reasonably believes that the person beneficially entitled to the interest
is: (i) a company resident in the United Kingdom; or (ii) a company not resident in
the United Kingdom which carries on a trade in the United Kingdom through a
permanent establishment and which brings into account the interest in computing
its United Kingdom taxable profits; or (iii) a partnership each member of which is a
32
company referred to in (i) or (ii) above or a combination of companies referred to in (i)
or (ii) above, provided that HMRC has not given a direction (in circumstances where it
has reasonable grounds to believe that it is likely that one of the above exemptions is
not available in respect of such payment of interest at the time the payment is made)
that the interest should be paid under deduction of tax, or
(b) the Issuer has received a direction permitting payment without withholding or
deduction from HMRC in respect of such relief as may be available pursuant to the
provisions of any applicable double taxation treaty. In other cases, an amount must
generally be withheld from payments of interest on the Bonds on account of United
Kingdom income tax at the basic rate (currently 20 per cent). If interest were paid
under deduction of United Kingdom income tax, Bondholders who are not resident in
the United Kingdom may be able to recover all or part of the tax deducted if there is
an appropriate provision in an applicable tax treaty.
Further United Kingdom income tax issues
Interest on the Bonds constitutes United Kingdom source income for tax purposes
and, as such, may be subject to income tax by direct assessment even where paid
without withholding, irrespective of the residence of the Bondholder.
However, interest with a United Kingdom source properly received without
deduction or withholding on account of United Kingdom tax will not be chargeable
to United Kingdom tax in the hands of a Bondholder (other than certain trustees)
who is not resident for tax purposes in the United Kingdom unless that Bondholder
carries on a trade, profession or vocation in the United Kingdom through a United
Kingdom branch or agency in connection with which the interest is received or to
which the Bonds are attributable (and where that Bondholder is a company, unless
that Bondholder carries on a trade in the United Kingdom through a permanent
establishment in connection with which the interest is received or to which the Bonds
are attributable). There are exemptions for interest received by certain categories
of agent (such as some brokers and investment managers). The provisions of an
applicable double taxation treaty may also be relevant for such Bondholders.
United Kingdom corporation tax payers
In general, Bondholders which are within the charge to United Kingdom corporation
tax (including non-resident Bondholders whose Bonds are used, held or acquired
for the purposes of trade carried on in the United Kingdom through a permanent
establishment) will be charged to tax as income on all returns, profits or gains on, and
fluctuations in value of, the Bonds (whether attributable to currency fluctuations or
otherwise) broadly in accordance with their statutory accounting treatment.
Other United Kingdom tax payers
Interest
Bondholders who are either individuals or trustees and are resident for tax purposes
in the United Kingdom or who carry on a trade, profession or vocation in the United
33
Kingdom through a branch or agency to which the Bonds are attributable will
generally be liable to United Kingdom tax on the amount of any interest received in
respect of the Bonds.
Transfer (including redemption)
For Bondholders who are individuals, the Bonds will constitute “qualifying corporate
bonds” within the meaning of section 117 of the Taxation of Chargeable Gains Act
1992. Accordingly, a disposal by such a Bondholder of a Bond will not give rise to a
chargeable gain or an allowable loss for the purposes of United Kingdom taxation of
chargeable gains.
Accrued income scheme
On a disposal of Bonds by a Bondholder who is an individual, any interest which has
accrued since the last interest payment date may be chargeable to tax as income
under the rules of the accrued income scheme as set out in Part 12 of the Income Tax
Act (ITA), if that Bondholder is resident in the United Kingdom or carries on a trade in
the United Kingdom through a branch or agency to which the Bonds are attributable.
Stamp duty and stamp duty reserve tax
No United Kingdom stamp duty or stamp duty reserve tax is payable on the issue or
transfer by delivery of the Bonds or on their redemption.
Inheritance tax
Generally, the value of the bonds will fall into the Bondholders estate for inheritance
tax purposes.
However, provided that the relevant Bonds are physically held outside the United
Kingdom at the time of death or when a gift is made, no inheritance tax is charged on
such death or gift if the Bondholder is neither domiciled, nor deemed to be domiciled,
in the United Kingdom. Where the Bonds are held in a clearing system, HMRC is
known to consider that the situs of the relevant assets is not necessarily determined by
the place where the Bonds are physically held. Prospective Bondholders to whom this
may be of significance are asked to consult their own professional advisers.
34
Stormontfield
35
36