TLS Hydro Power % Bond Issue

Transcription

1 TLS Hydro Power % Bond Issue Offer Document Promoted by March 2015 i

2 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 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 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

3 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

4 Stormontfield River Tay iv

5 Contents Letter from Dr A R Middleton, Founder and Chief Executive Officer Investment summary Directors, Secretary and Advisers Business review The market Directors and the management team Financials Risk warnings...21 Appendix 1: Definitions and terms Appendix 2: General information Appendix 3: Taxation

6 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 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

7 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 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 Carrongrove Lady s Leap Falls 3

8 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 GW 6 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 DECC Energy Trends June 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

9 The Offer Issuer: TLS Hydro Power Limited Amount: 2.5 million Term: Five years, repayment on 31 March 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 Ethex 9 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

10 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 or contact Triodos at investments@triodos.co.uk or on

11 2. Directors, Secretary and Advisers Directors Mrs S Lund Dr A R Middleton Mrs P A Middleton Secretary Mrs P A Middleton Registered office Balgonie Power Station Markinch Glenrothes Fife KY7 6HQ Registered number SC (Scotland) Promoter and adviser to the Company Triodos Bank NV Deanery Road Bristol BS1 5AS Receiving agent to the Offer Capita Registrars Limited 34 Beckenham Road Beckenham Kent BR3 4TU Accountants Lee Accounting Services Limited Trading as Lee & Co Chartered Accountants & Statutory Auditors 26 High Street Rickmansworth Hertfordshire WD3 1ER Solicitors to the Offer Michelmores LLP Woodwater House Pynes Hill Exeter EX2 5WR 7

12 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 2003 LoCO2 Energy is incorporated to sell energy to domestic customers and small companies 2009 TLS Hydro Power's largest hydro power scheme, Slatach, begins generating. This takes total capacity to 4.1 MW 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

13 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: and bookkeeping services Tradelink Solutions supports TLS Hydro Power by providing Ofgem administration supports and advises organisations involved in renewable energy Tradelink Solutions supports LoCO2 Energy through the arrangement of power purchase agreements with renewable energy generators contributes to the UK s development of renewable energy sources Electricity generated by hydro power projects owned or operated by TLS Hydro Power is sold to LoCO2 Energy 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 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

14 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 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, DECC energy statistics 31 March

15 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 Greenholme Mill Size: 330kW Homes served: 312 Nenthead Size: 300kW Homes served: 144 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

16 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 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 The project is being funded through a combination of the Company s cash reserves and bank debt provided by Triodos Bank. Carrongrove 12

17 Slatach access track Future development Capacity: 1,100 kw Location: Perth and Kinross, Scotland Total project cost: 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 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

18 4. The market The UK has a binding EU target to deliver 20% of energy demand from renewable sources by 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. Other 2.1% Coal 34% Renewables 16.7% Natural Gas 25.6% Nuclear 21.6% Source: DECC energy statistics 31 March EU Renewable Energy Directive 12 DECC Energy Trends June

19 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 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 Estimated investment from (Electricity Market Reform delivery plan) 1,700 MW billion Pipeline data 100 MW awaiting construction 2020 estimated deployment range 1,800 MW Source: Delivering UK Energy investment July 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

20 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

21 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 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 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

22 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 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 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

23 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 Forecast Projected Projected Projected Projected 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 ,291 1,397 1,713 1,764 Depreciation (89) (130) (256) (338) (385) (446) (447) EBIT ,012 1,267 1,317 Bank interest (104) (132) (126) (126) (212) (235) (336) Bond interest (155) (177) (177) (177) (162) Share of joint venture profit EBT Tax (104) (104) (14) (112) (101) (116) (125) EAT Minority interest (13) (16) (14) (14) (15) (15) (16) Retained profit for the year 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,

24 The key assumptions underlying these forecasts and projections are as follows: The Carrongrove scheme currently being constructed begins generating electricity consistently from October 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 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 Forecast Projected Projected Projected Projected Projected 000 Fixed assets 4,758 5,677 7,441 8,185 10,011 9,944 9,545 Current assets Cash ,532 1,087 1,202 3,279 2,752 Other current assets ,010 1, ,141 2,192 1,891 2,059 4,290 3,819 Current liabilities Net current assets ,740 1,422 1,497 3,599 3,012 Bank loans 2,102 2,355 2,637 2,495 3,840 5,101 5,886 Bond - - 2,500 2,500 2,500 2,500 - Other long term liabilities ,290 2,805 5,590 5,450 6,800 8,065 6,354 Net assets 2,833 3,330 3,591 4,157 4,709 5,478 6,204 Gearing 46% 43% 60% 55% 58% 59% 51% 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

25 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 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

26 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

27 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 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 This moves away from the Renewables Obligation for large scale projects commissioned after March However, payments for existing schemes made under the Renewables Obligation are being grandfathered and will continue until

28 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

29 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

30 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 (SC ) and its subsidiary companies which at the time of the Offer are as follows: Irene Power Company Limited (company number ); 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

31 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 ( ) 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: on Monday 16 March 2015 LoCO2 Energy: LoCO2 Energy Limited, a company registered in England and Wales ( ) 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

32 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 ( ) under common ownership to TLS Hydro Power within the TLS Energy group Tradelink Solutions: Tradelink Solutions Limited, a company registered in England and Wales ( ) 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 Slatach intake 28

33 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 SC on 29 September 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

34 5. The TLS Energy group A summary of the Group structure is as follows: TLS Energy Ltd Tradelink Solutions Limited LoCO2 Energy Limited TLS Renewable Consulting 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 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

35 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 investments@triodos.co.uk or on 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

36 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

37 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

38 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 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

39 35 Stormontfield