TIDMLEAF
RNS Number : 6807I
Leaf Clean Energy Company
23 March 2018
23 March 2018
Leaf Clean Energy Company
Results for the six months ended 31 December 2017
The board of Leaf Clean Energy Company ("Leaf") announces the
Leaf Group's results for the six months ended 31 December 2017.
For further information, please contact:
Mark Lerdal +1 (415) 264 5096
Leaf Clean Energy Company
Nicholas Wells +44 (0) 20 7397 8920
Cenkos Securities plc
Chairman's statement
Dear Shareholder:
Leaf Clean Energy Company's (the "Company" or "Leaf") current
net asset value ("NAV") on 31 December 2017 was $89.6 million, $1.4
million higher than on 30 June 2017. This change resulted from the
comprehensive income for the period, which consisted primarily of
an $8.0 million write down of the net deferred tax liability and a
$0.6 million gain on revaluation in the carrying value of the
portfolio companies, offset in part by a $3.5 million increase in
the provision for contingent costs associated with concluding the
Invenergy lawsuit and returning cash to the shareholders, $3.0
million of transaction-related costs and $0.8 million of
administration expenses. At the end of the period, $2.0 million of
Leaf's NAV was held in cash and $102.0 million in investments. NAV
per share for the Leaf Group was 75.85 cents or 56.17 pence at the
period-end exchange rate of $1.35/GBP. As reported on September 20,
2017, Leaf borrowed $2,000,000 from three lenders to increase its
liquidity and to ensure that Leaf had adequate resources to pursue
the litigation against Invenergy. The loan is described in more
detail in note 16 of the financial statements.
As is evident from our financial statements, the primary source
of returns to shareholders will be derived from Leaf's investment
in Invenergy Wind LLC, ("Invenergy"). As previously reported, Leaf
brought an action against Invenergy in the Delaware Court of
Chancery (the "Court") for breach of contract. In June of 2016, the
Court ruled that Invenergy had breached the Third Amended and
Restated Limited Liability Company Agreement governing the
membership interests in Invenergy (the "Operating Agreement"). The
Court's ruling did not determine the amount of damages to which
Leaf is entitled. Leaf believes the damages, pursuant to a formula
contained in the Operating Agreement, were $126.1 million on
December 15, 2015, the date of the breach. Leaf believes such
damages should be reduced by the $3.9 million previously reported
tax distribution from Invenergy. Leaf also believes that, if it
prevails in the litigation, it will be entitled to interest on the
judgment at the Delaware statutory rate of interest of 6%,
compounded quarterly, from the date of the breach. Invenergy
disputes that Leaf is entitled to the damages Leaf is seeking and
believes that Leaf is entitled, at most, to nominal damages.
Invenergy has asserted that any obligation it owes to Leaf was
excused because of the put/call process described in my previous
statements. Invenergy called Leaf's interest in Invenergy on
December 28, 2015. On the same day Leaf put its interest to
Invenergy. Each party appointed a third-party appraiser to value
Leaf's stake in Invenergy. The results were $73.1 million (from the
appraiser appointed by Leaf) and $36.4 million (from the appraiser
appointed by Invenergy). A third appraiser was retained jointly by
Leaf and Invenergy to value Leaf's interest in Invenergy. The third
appraisal was $42.5 million. Pursuant to the Operating Agreement,
when that appraisal was complete, the average of the three
appraisals, $50.7 million, should determine the price for Leaf's
interest in Invenergy for the purposes of the put/call process. In
a ruling on October 7, 2016, the Court determined that the put/call
process did not excuse the above described litigation because the
breach occurred prior to the exercise of either the put or the
call. In another ruling, on October 10, 2016, the Court allowed
Invenergy to amend its pleadings to assert a counterclaim against
Leaf for allegedly causing Leaf's appraiser to provide a biased and
inaccurate appraisal.
A trial was held on October 25-27, 2017 in the Court, which
examined both Leaf's claim and Invenergy's counterclaim. As is
standard procedure in Delaware, post-trial the parties argued the
merits of the case in the Court. That argument was held on January
19, 2018. A decision is expected within 90 days of the argument.
Because of the inherent risks associated with litigation, and
collection if Leaf prevails, together with income taxes and
transaction expenses associated with any judgement, the board of
directors has maintained the value of the investment in Invenergy
at its 30 June 2017 value of $99.1 million, and this is the value
reflected in the Company's December 31, 2017 NAV of $89.6
million.
Our net deferred tax liability (on potential gains on the
Invenergy investment) has moved from $11.3 million to $3.3 million
and has increased net asset value by the $8.0 million difference.
The change reflects the impact of the recently announced US Tax
Cuts and Jobs Act and also assumptions concerning non-US source
gains. There are uncertainties in the calculation of the net
deferred tax liability however we believe we have erred on the side
of prudence in calculating this amount.
Description of projects
Invenergy Renewables LLC ("Invenergy"). The actual business
affairs of Invenergy on an annual basis are largely irrelevant to
our valuation of our ownership interest. As noted above, our
interest is primarily based upon the breach of contract claim we
made against Invenergy. Nevertheless, Invenergy develops, owns, and
operates clean power generation facilities and storage solutions in
the Americas, Europe and Asia. During 2017, Invenergy commissioned
a number of projects with aggregate capacity exceeding 200
megawatts. Additionally, Invenergy continued to selectively dispose
of certain assets having consummated the sale of two wind projects
representing 198 megawatts of generation capacity.
Vital Renewable Energy Company ("VREC"), the owner of a
sugar-cane-based facility in Brazil which produces ethanol and
refined sugar concluded a strong 2017/2018 crushing season with
production levels having increased by 30% over the prior crushing
season. VREC is currently executing on its growth plans by focusing
on its industrial expansion program.
Lehigh Technologies, Inc. ("Lehigh"), the specialty materials
company was acquired by Michelin North America on October 13, 2017.
All of the approximately $400 thousand of Leaf's proceeds from that
transaction have been placed in escrow securing the indemnity
provided to Michelin North America. Provided that there are no
outstanding indemnification claims, any amount remaining in this
escrow in October 13, 2019 will be returned to Leaf.
Energía Escalona ("Escalona"), the hydroelectric project
development company based in Mexico City, has completed project
development activities and is currently seeking to arrange debt and
project equity financing. Leaf continues to explore its strategic
options for this asset.
Continued operations
We expect a decision from the Court in April. Even if Leaf
prevails at the Court of Chancery, Invenergy can appeal to the
Delaware Supreme Court. Such an appeal would delay paying any
award. As reported previously, we will own our share of VREC for
some time. We have valued VREC and Escalona at our expectation of
return. Leaf possesses the financial resources and the support of
its major shareholders to pursue the litigation to its
conclusion.
Mark Lerdal
Chairman
23 March 2018
Management report
Overview
During the six months ended 31 December 2017, Leaf's management
continued its work implementing Leaf's orderly realisation strategy
(see Strategy below). These activities consisted of working with
Leaf's legal counsel in pursuing the breach of contract claim filed
by Leaf against its investee, Invenergy, while also monitoring
Leaf's remaining investments with a view towards future realisation
events for these holdings.
Following the recent sale of Lehigh Technologies, Inc. to
Michelin (see below), Leaf's portfolio consists of three remaining
investments: Invenergy, VREC, and Escalona. Leaf is a minority
holder in Invenergy and VREC and a majority holder in Escalona.
Strategy
The Leaf Group's investment strategy is to carry out an orderly
realisation of its portfolio of private equity assets, distribute
the net proceeds to holders of its ordinary redeemable shares, and
undertake a voluntary winding-up of the company.
Leaf will not invest in any new portfolio companies but may make
additional investments in existing portfolio companies where
required to preserve or enhance the realisation value of these
investments.
Financial highlights
Below is a summary of financial highlights across the Leaf
portfolio during the six-month period ended 31 December 2017:
Invenergy-related highlights
Please refer to Note 20 of the financial statements for more
background and information regarding the Invenergy lawsuit and
put/call process.
Background from prior periods:
-- On 18 July 2016 Leaf filed a motion for entry of an order and
final judgment, asking the Court to order Invenergy to pay damages
of $126.1 million, based on the calculation of the Target Multiple
per the terms of the Operating Agreement, less the $3.9 million
previously reported tax distribution from Invenergy, plus interest
on the net $122.2 million in damages at the Delaware statutory rate
of interest of 6%, compounded quarterly, from the date of the
breach.
-- On 12 August 2016, Invenergy filed an answering brief to
Leaf's motion, disputing that Leaf is entitled to the damages Leaf
is seeking and arguing that Leaf is entitled, at most, to nominal
damages. Invenergy also asserted that any obligation it owes to
Leaf is excused because of the put/call process described in the
interim statements. On this same date, Invenergy also filed a
motion to amend its original answer to the lawsuit to add five
additional affirmative defences and two counterclaims.
-- On 6 October 2016, the Court heard oral arguments by the
parties on the Leaf and Invenergy motions.
-- In two orders on 7 and 10 October 2016 which can be
downloaded and viewed in their entirety at the following URL:
http://www.leafcleanenergy.com/media-relations/download-centre/,
the Court denied Leaf's and Invenergy's motions, apart from
allowing one of Invenergy's counterclaims.
o The Court allowed Invenergy to assert a counterclaim against
Leaf alleging that Leaf acted in bad faith by causing its appraiser
in the put/call to provide a biased and inaccurate appraisal. Leaf
believes this counterclaim to be without merit.
o The Court made additional rulings, including: 1) finding that
Leaf's claims are not excused as a result of Leaf exercising the
put, 2) that an exchange of mutual releases required in the
put/call will not moot the lawsuit, and 3) that Leaf's right to a
remedy for Invenergy's breach is not barred because Leaf did not
seek injunctive relief to block the closing of the TerraForm
Transaction.
-- On 7 April 2017, the third appraisal in the put-call process
was completed by an appraiser mutually selected by Leaf and
Invenergy. This appraiser valued Leaf's 2.3% stake in Invenergy at
$42.5 million.
Developments during the period:
-- A trial was held by the Court on 25-27 October 2017 to
determine the damages that will be awarded to Leaf due to
Invenergy's breach and to rule on Invenergy's counterclaim. The
Court held post-trial argument on 19 January 2018. A decision is
expected within 90 days of that date. Both parties will have the
right to appeal the ruling to the Delaware Supreme Court.
Other highlights
-- Lehigh was sold to Michelin North America, Inc. ("Michelin")
by way of a merger that was completed on 13 October 2017. Under the
terms of the deal the Leaf Group is entitled to approximately
$400,000 being its pro rata portion of the total proceeds. The
proceeds have been placed in a two-year general indemnity escrow by
Michelin to meet any liabilities that might arise pursuant to the
terms of the transaction. In the 30 June 2017 financial statements,
the Company's holding in Lehigh was valued at $310,000.
Financial performance
The Leaf Group's total net asset value (NAV) on 31 December 2017
was $89.6 million, $1.4 million higher than on 30 June 2017. This
change resulted from the $1.4 million comprehensive income for the
period, which in turn consisted primarily of an $8.0 million write
down of the net deferred tax liability, a $0.6 million gain on
revaluation in the carrying value of the portfolio companies, and
$0.2 million of foreign exchange gains, partially offset by a $3.5
million increase in the provision for contingent costs associated
with concluding the Invenergy lawsuit and returning cash to the
shareholders, $3.0 million of transaction-related costs, and $0.8
million of administration expenses. At the end of the period, $2.0
million of Leaf's NAV was held in cash and $102.0 million in
investments.
NAV per share for the Leaf Group was 75.85 cents or 56.17 pence
at $1.3503 to the GBP1. This was an increase of 1.5 per cent for
the six-month period from 30 June 2017. The increase was entirely
due to the comprehensive income for the period. Due to the
significant increase in the value of the GBP relative to the US
dollar over the period, NAV per share in pence decreased by 2.3%,
as the 3.9 per cent increase in the GBP/$ exchange rate over the
six-month period turned the US dollar income into a GBP loss as a
result of the translation of Leaf's mostly US dollar denominated
NAV into GBP.
Leaf's administrative expenses for the six-month period ended 31
December 2017 were $205 thousand lower than the comparable prior
period, having adhered to the previously announced $1.63 million
budget for the current fiscal year. Leaf is currently on track to
meet this budget for the full year. Note that, due to uncertain
timing and amounts the budget did not include transaction-related
costs or payments under the Company's incentive plans. Leaf has not
accrued anything for future transaction costs. Leaf has made a $5.1
million provision for contingent costs associated with concluding
the Invenergy lawsuit and returning cash to the shareholders.
The reduction in the net deferred tax liability resulted from a
combination of: 1) the reduction of lower US corporate tax rates
brought about by the 2017 Tax Cuts and Jobs Act, which was enacted
in December 2017 and 2) certain changes in the methodology for
calculating the potential liability made to reflect an assumed
non-US portion of the expected gain on the ultimate redemption of
Leaf's Invenergy stake, and other factors. The increase in the
incentive plans provision resulted primarily from the revaluation
of the investments and the decrease in the net deferred taxes, in
addition to other factors.
Portfolio update
Key updates regarding Leaf's portfolio companies during the
interim report period included the following:
Invenergy Renewables LLC (Invenergy)
Invenergy, North America's largest independently owned clean
power generation company, commenced commercial operations at its
Corriegarth, Roncevaux and Campo Palomas wind energy projects.
Invenergy completed project financings for several wind energy
projects including Santa Rita and Bishop Hill II. The company has
also executed power purchase agreements (PPAs) for several of its
projects with corporate customers as well as power companies.
Invenergy executed several transactions during 2017 including
the sale of its Corriegarth wind project for total consideration of
about $240 million as well as the acquisition of La Jacinta Solar
Farm in Uruguay from Fotowatio Renewable Ventures. In October 2017,
Invenergy entered into an agreement to sell its Forward Wind Energy
project (129 MW) located in Wisconsin to Wisconsin Public Service
Corporation, Wisconsin Power and Light Company and Madison Gas and
Electric Company for a purchase price of approximately $174
million. The transaction is expected to close in the spring of
2018.
Lehigh Technologies, Inc. (Lehigh)
In October 2017, Michelin North America, a wholly owned
subsidiary of the Michelin Group, acquired 100% of the shares of
Lehigh Technologies. Michelin is the second largest tire
manufacturer in the world with annual sales in excess of $20
billion.
Vital Renewable Energy Company (VREC)
VREC, a renewable energy company focused on the development of
sugar-cane-based ethanol and sugar concluded its 2017/2018 crushing
season with production levels that were significantly higher than
the previous crushing season and financial performance that were
above expectations. The company's financial performance was
bolstered by commodity prices, particularly for ethanol, which
remained strong throughout the crushing season. VREC has also
achieved good progress in its post-merger integration efforts as
well as in realizing cost synergies due to the business combination
that was consummated in the spring of 2017 with an established
agricultural firm in the state of Goias.
VREC is focused in progressing its industrial growth initiatives
during the 2018/2019 crushing season.
Energía Escalona (Escalona)
Escalona, the hydroelectric project development company based in
Mexico City, has completed project development activities for the
Escalona project. Escalona successfully secured the Estudio Técnico
Justificativo para Cambio de Uso de Suelo" ("ETJ") permit. Escalona
is currently in the market to raise project equity and debt
financing for the project. Leaf continues to review its strategic
options for this asset.
In the coming months, the Leaf Board and management will
continue to focus on achieving expedient realisations of the assets
to enable additional future distributions to the shareholders. The
Leaf Board and management have maintained and will continue to
maintain an appropriate cash balance to ensure that Leaf can
continue to execute its strategy.
23 March 2018
Condensed consolidated statement of comprehensive income
for the six months ended 31 December 2017
Note (Unaudited) (Unaudited)
6 months ended 6 months ended
31 December 2017 31 December
2016
$'000 $'000
Net gain/(loss) on investments at fair
value through profit or loss 12.1 620 (13,456)
Net foreign exchange gain/(loss) 23 (254)
Other income 2 -
Gross portfolio return/(loss) 645 (13,710)
Transaction-related costs 7 (3,009) (619)
Administration expenses 6 (771) (976)
Interest on shareholders loan and amortisation
of loan facility fee 16 (89) -
Provision for doubtful intercompany
receivable (11) (382)
Contingent costs provision reversal/(expense) 8 (3,450) 1,280
------------------------------------------------ ----- ------------------ ----------------
Loss before taxation (6,685) (14,407)
------------------------------------------------ ----- ------------------ ----------------
Taxation 19 8,039 (164)
------------------------------------------------ ----- ------------------ ----------------
Total gain/(loss) and total comprehensive
income/(loss) for the period 1,354 (14,571)
================================================ ===== ================== ================
Earnings/(loss) for the period attributable
to equity holders 1,354 (14,571)
Basic and diluted earnings/(loss) per
share (cents) 10 1.15 (12.33)
================================================ ===== ================== ================
The accompanying notes form an integral part of these interim
condensed consolidated financial statements.
Condensed consolidated statement of financial position as at 31
December 2017
(Unaudited) (Audited)
Note 31 December 2017 30 June 2017
$'000 $'000
Assets
Investments at fair value
through profit or loss 12.1 102,000 101,410
Deferred tax assets 19 3,955 8,181
Long term portion of capitalised 42 -
loan fee
Total non-current assets 105,997 109,591
---------------------------------- ----- ----------------- -------------
Cash and cash equivalents 1,981 2,286
Trade and other receivables 14 127 65
Total current assets 2,108 2,351
---------------------------------- ----- ----------------- -------------
Total assets 108,105 111,942
================================== ===== ================= =============
Equity
Share capital 18 27 27
Share premium 18 297,046 297,046
Retained losses (207,445) (208,799)
---------------------------------- ----- ----------------- -------------
Total equity 89,628 88,274
---------------------------------- ----- ----------------- -------------
Liabilities
Deferred tax liabilities 19 7,257 19,522
Shareholders loan 16 2,000 -
Provision for future contingent
costs 8 5,100 1,650
Accrued interest on shareholders 68 -
loan
---------------------------------- ----- ----------------- -------------
Total non-current liabilities 14,425 21,172
---------------------------------- ----- ----------------- -------------
Trade and other payables 15 4,052 2,496
Total current liabilities 4,052 2,496
---------------------------------- ----- ----------------- -------------
Total liabilities 18,477 23,668
---------------------------------- ----- ----------------- -------------
Total equity and liabilities 108,105 111,942
================================== ===== ================= =============
Net asset value per share
(cents) 75.85 74.71
================================== ===== ================= =============
The accompanying notes form an integral part of these interim
condensed consolidated financial statements.
The interim condensed consolidated financial statements were
approved by the board of directors on 23 March 2018 and signed on
their behalf by:
Mark Lerdal Stephen Coe
Executive Chairman Non-Executive Director
Condensed consolidated statement of changes in equity for the
six months ended 31 December 2017
Share Share Retained Total
Capital Premium losses equity
$'000 $'000 $'000 $'000
----------------------------------------- ------------------------ --------- ----------- --------
Balance at 30 June 2017 (audited) 27 297,046 (208,799) 88,274
Total comprehensive income for the
period - - 1,354 1,354
Balance at 31 December 2017 (unaudited) 27 297,046 (207,445) 89,628
========================================= ======================== ========= =========== ========
Share Share Retained Total
Capital Premium losses equity
$'000 $'000 $'000 $'000
------------------------------------------- --------- --------- ----------- -----------
Balance at 30 June 2016 (audited) 27 297,046 (190,746) 106,327
Total comprehensive loss for the period - - (14,571) (14,571)
Balance at 31 December 2016 (unaudited) 27 297,046 (205,317) 91,756
=========================================== ========= ========= =========== ===========
The accompanying notes form an integral part of these interim
condensed consolidated financial statements.
Condensed consolidated statement of cash flows for the six
months ended 31 December 2017
(Unaudited) (Unaudited)
6 months ended 6 months ended
31 December 31 December 2016
2017
$'000 $'000
Cash flows from operating activities
Refund from account closure 2 -
Transaction-related expenditures (1,409) (763)
Operating expenditures (818) (1,021)
Fees for shareholders loan (125) -
Advances to investee companies (8) -
Net cash used in operating activities (2,358) (1,784)
---------------------------------------------- --------------- ------------------
Cash flows from investing activities
Additional proceeds from sale of investments 30 48
Post-sale expenditures in relation
to prior realisation - (5)
Net cash generated from investing activities 30 43
---------------------------------------------- --------------- ------------------
Cash flows from financing activities
Proceeds from shareholders loan 2,000 -
Net cash generated from financing activities 2,000 -
---------------------------------------------- --------------- ------------------
Net decrease in cash and cash equivalents (328) (1,741)
Cash and cash equivalents at start
of the period 2,286 5,977
Effect of exchange rate fluctuations
on cash and cash equivalents 23 (254)
---------------------------------------------- --------------- ------------------
Cash and cash equivalents at end of
the period 1,981 3,982
---------------------------------------------- --------------- ------------------
The accompanying notes form an integral part of these interim
condensed consolidated financial statements.
Condensed consolidated statement of cash flows for the six
months ended 31 December 2017
(Unaudited) (Unaudited)
6 months ended 6 months ended
31 December 31 December
2017 2016
Reconciliation of total loss and total comprehensive $'000 $'000
loss for the period to net cash used in
operating activities
Total gain/(loss) and total comprehensive
income/(loss) for the period 1,354 (14,571)
Adjustments for:
(Decrease)/Increase in net deferred tax
liability (8,039) 163
Net unrealised (gain)/loss on investments
at fair value through profit or loss (590) 13,500
Increase/(decrease) in provision for future
contingent costs 3,450 (1,280)
Net foreign exchange (gain)/loss (23) 254
Loan facility expenses 21 -
Provision for doubtful intercompany receivables 11 382
Net realised gain on investments at fair
value through profit or loss (30) (44)
Other income (6)
Depreciation expense - 4
Taxation - 1
------------------------------------------------------ --------------- ---------------
Operating loss before changes in working
capital (3,852) (1,591)
Movement in trade and other receivables (62) 49
Movement in trade and other payables 1,556 (242)
Net cash used in operating activities (2,358) (1,784)
------------------------------------------------------ --------------- ---------------
Notes to the interim condensed consolidated financial statements
for the six months ended 31 December 2017
1 Leaf
Leaf Clean Energy Company (the "Company" or "Leaf") was
incorporated and registered in the Cayman Islands on 14 May 2007.
Leaf was established to invest in clean energy projects,
predominantly in North America. Clean energy includes activities
such as the production of alternative fuels, renewable power
generation and the use of technologies to reduce the environmental
impact of traditional energy. The investments of Leaf will be
realised in an orderly and expedient manner, that is, with a view
to achieving a balance between: (i) returning cash to Shareholders
at such times and from time to time and in such manner as the Board
may (in its absolute discretion) determine; and (ii) maximising the
realisation value of Leaf's investments. In light of the
realisation strategy, there will be no specific investment
restrictions applicable to Leaf's portfolio going forward.
The shares of Leaf were admitted to trading on the AIM market of
the London Stock Exchange ("AIM") on 28 June 2007 when dealings
also commenced.
During the period, Leaf's executive chairman, agents, and
management team (the latter being employees of Leaf) performed all
significant functions.
The interim condensed consolidated financial statements as at
and for the six months ended 31 December 2017 are for the Leaf
Group. Refer to note 17.
The consolidated financial statements of the Leaf Group as at
and for the six-month period ended 31 December 2017 are available
upon request from Leaf's registered office at PO Box 309, Ugland
House, George Town, Grand Cayman KY1-1104, Cayman Islands or at
www.leafcleanenergy.com.
2 Statement of compliance
These interim condensed consolidated financial statements have
been prepared in accordance with IAS 34 Interim Financial
Reporting. They do not include all of the information required for
full annual financial statements and should be read in conjunction
with the consolidated financial statements of Leaf as at and for
the year ended 30 June 2017.
These interim condensed consolidated financial statements were
approved by the board of directors on 23 March 2018.
3 Significant accounting policies
Save as for explained above, the accounting policies applied by
Leaf in these interim condensed consolidated financial statements
are the same as those applied by Leaf in its consolidated financial
statements as at and for the year ended 30 June 2017.
4 Use of estimates and judgements
The preparation of interim condensed consolidated financial
statements requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and
the reported amounts of assets and liabilities, income and expense.
Actual results may differ from these estimates.
The significant judgements made by management in applying Leaf's
accounting policies and the key sources of estimation uncertainty
were the same as those applied to the consolidated financial
statements as at and for the year ended 30 June 2017.
The most significant area requiring estimation and judgement by
the directors is the valuation of unquoted investments, (see note
12).
5 Financial risk management
The Leaf Group's financial risk management objectives and
policies are consistent with those disclosed in the consolidated
financial statements as at and for the year ended 30 June 2017.
The below table summarises the valuation methodologies and key
assumptions in deriving the aggregate fair value of the investments
as at 31 December 2017 of $102.0 million (30 June 2017: $101.4
million):
Significant inputs
Name of Investment Valuation methodology / assumptions
--------------------------------------- ---------------------- ------------------------------
Invenergy Renewables LLC ("Invenergy") Income approach Forecast cash flows
(formerly known as Invenergy (damages awarded in
Wind LLC) lawsuit) discount rate
Name changed on 24 May 2017
Vital Renewable Energy Company, Market multiples Choice of comparable
LLC ("VREC") companies, publicly
available data about
operating results
Energia Escalona s.r.l. ("Escalona") Income approach Forecast cash flows
discount rate
--------------------------------------- ---------------------- ------------------------------
The below table summarises the valuation methodologies and key
assumptions in deriving the aggregate fair value of the investments
as at 30 June 2017.
Significant inputs
Name of Investment Valuation methodology / assumptions
--------------------------------------- ---------------------- ----------------------------
Invenergy Renewables LLC ("Invenergy") Income approach Forecast cash flows
(formerly known as Invenergy (damages awarded in
Wind LLC) lawsuit)
Name changed on 24 May 2017 discount rate
Vital Renewable Energy Company, Market multiples Choice of comparable
LLC ("VREC") companies, publicly
available data about
operating results
Energia Escalona s.r.l. ("Escalona") Income approach Forecast cash flows
discount rate
Lehigh Technologies Inc. ("Lehigh") Income approach Forecast cash flows
discount rate
--------------------------------------- ---------------------- ----------------------------
6 Administration expenses
(Unaudited) (Unaudited)
6 months ended 6 months ended
31 December 2017 31 December 2016
$'000 $'000
Salaries and related costs 255 387
Directors' remuneration (note 9) 173 173
Legal and professional fees (1) 106 105
Administration fees 75 75
Other expenses 73 98
Audit fees 31 32
Directors' and officers' insurance expense 26 27
Rental fees 19 48
Travel and subsistence expenses 13 31
Total 771 976
============================================ ================== ==================
(1) Administration expenses do not include transaction related
legal or professional services costs, which are reported as
transaction related expenses on the condensed consolidated
statement of comprehensive income.
7 Transaction-related costs
Leaf does not budget transaction-related costs, due to the
unpredictability of their timing and amounts. The amounts disclosed
for the six-month periods ended 31 December 2017 and 31 December
2016 consist primarily of legal costs and professional services
incurred during the period in connection with the complaint filed
on 21 December 2015 by Leaf against Invenergy Wind LLC.
8 Contingent costs provision
The Leaf Board has adopted incentive compensation arrangements
for the Company and its advisors under which Company payees will
receive incentive payments only when cash is returned to the
shareholders and certain advisors will receive incentive payments
upon the redemption of Leaf's Invenergy stake following the
conclusion of the Invenergy lawsuit. The arrangements for the
Company payees include a sliding scale of incentives based on cash
returned to the shareholders. As at 31 December 2017, the Leaf
Group updated its prior estimate of these contingent costs to be
$5.10 million (30 June 2017: $1.65 million), using an estimate of
total cash that will be returned to the shareholders that is based
on the 31 December 2017 net asset value, including the $99.1
million valuation for Invenergy, less the estimated cash
requirements of the Company in completing the realisation of the
investments. Revisions to the estimate of total cash that will be
returned to shareholders and other factors result in adjustments to
the provision for future incentive payments, which are recognised
in profit or loss during the period of the adjustment.
9 Directors' remuneration
Details of the directors' basic annual remuneration areas in
effect during the period was as follows:
31 December 2017 Basic annual remuneration
$'000
Mark Lerdal (executive chairman) 250
Stephen Coe 70
Peter O'Keefe 25
345
================================== ==========================
Directors' fees and expenses payable during the six months ended
31 December 2017 were:
31 December 2017 Directors' Reimbursements Total
fees
$'000 $'000 $'000
Mark Lerdal (executive chairman) 125 10 135
Stephen Coe 35 - 35
Peter O'Keefe 13 - 13
173 10 183
================================== =========== =============== ======
31 December 2016 Directors' Reimbursements Total
fees
$'000 $'000 $'000
Mark Lerdal (executive chairman) 125 15 140
Stephen Coe 35 - 35
Peter O'Keefe 13 - 13
173 15 188
================================== =========== =============== ======
Each director is also entitled to receive reimbursement of any
expenses in relation to their appointment. Total reimbursement to
the directors for the six-months ended 31 December 2017 amounted to
$9,952 (2016: $14,473) of which $nil was outstanding at 31 December
2017 (2016: $nil).
10 Basic earnings/loss per share
Basic and Diluted
Basic and diluted earnings/(loss) per share is calculated by
dividing the earnings/(loss) attributable to equity holders of Leaf
by the weighted average number of ordinary shares in issue during
the period:
(Unaudited) (Unaudited)
6 months ended 6 months ended
31 December 2017 31 December 2016
Earnings/(loss) attributable to equity holders ($'000) 1,354 (14,571)
Weighted average number of ordinary shares in issue (thousands) 118,163 118,163
----------------------------------------------------------------- ------------------ ------------------
Basic and fully diluted earnings/(loss) per share (cents) 1.15 (12.33)
================================================================= ================== ==================
There is no difference between the basic and diluted loss per
share for the period.
11 Investments
Investments in underlying investee companies (held through
various wholly owned intermediary subsidiaries) comprise membership
units, ordinary stock, and preferred stock, preferential return of
capital and capped rights to share in profits. The directors, with
advice from Leaf's employee management team, have reviewed the
carrying value of each investment and calculated the aggregate
value of the Leaf Group's portfolio. Investments are measured at
the directors' estimate of fair value at the reporting date, in
accordance with IAS 39 'Financial Instruments: Recognition and
measurement.
12 Critical accounting estimates and assumptions
These disclosures supplement the commentary on the use of
estimates and judgments (see note 4).
Key sources of estimation uncertainty
Determining fair values
The determination of fair values for financial assets for which
there is no observable market prices requires the use of valuation
techniques as described in accounting policy 3.1 from the 30 June
2017 financial statements. For financial instruments that trade
infrequently and have little price transparency, fair value is less
objective, and requires varying degrees of judgement depending on
liquidity, concentration, uncertainty of market factors, pricing
assumptions and other risks affecting the specific instrument. See
also "Valuation of financial instruments" below.
Critical judgements in applying the Leaf Group's accounting
policies
Critical judgements made in applying the Leaf Group's accounting
policies include:
Valuation of financial instruments
The Leaf Group's accounting policy on fair value measurements is
discussed in accounting policy 3.1 from the 30 June 2017
consolidated financial statements. The Leaf Group measures fair
value using the following hierarchy that reflects the significance
of inputs used in making the measurements:
-- Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.
-- Level 2: Valuation techniques based on observable inputs,
either directly (i.e., as prices) or indirectly (i.e., derived from
prices). This category includes instruments valued using: quoted
market prices in active markets for similar instruments: quoted
market prices for identical or similar instruments in markets that
are considered less than active; or other valuation techniques
where all significant inputs are directly or indirectly observable
from market data.
-- Level 3: Valuation techniques using significant unobservable
inputs. This category includes all instruments where the valuation
technique includes inputs not based on observable data and the
unobservable inputs have a significant effect on the instrument's
valuation. This category includes instruments that are valued based
on quoted prices for similar instruments where significant
unobservable adjustments or assumptions are required to reflect
differences between the instruments.
Fair values of financial assets and financial liabilities that
are traded in active markets are based on quoted market prices or
dealer price quotations. For all other financial instruments the
Leaf Group determines fair values using valuation techniques.
Leaf, through its wholly-owned subsidiaries, holds full or
partial ownership interests in a number of unquoted clean energy
companies. These investments are classified as level 3 in the fair
value hierarchy.
12.1 Investments at fair value through profit or loss
The following table shows a reconciliation of the opening
balances to the closing balances for fair value measurements in
Level 3 of the fair value hierarchy.
(Unaudited) (Audited)
Year ended Year ended
31 December 2017 30 June 2017
------------------------------------------------- ------------------ --------------
Balance brought forward 101,410 115,700
Additional investments in subsidiaries - 250
Movement in fair value of investments 590 (14,540)
Balance carried forward 102,000 101,410
------------------------------------------------- ------------------ --------------
Total gain/(losses) for the year included in
profit or loss relating to investments held at
the end of the reporting period. 590 (14,540)
================================================= ================== ==============
Investments are stated at fair value through profit or loss on
initial recognition. All investee companies are unquoted. Leaf has
an established control framework with respect to the measurement of
fair values. The directors, with advice from the management team,
has overall responsibility for all significant fair value
measurements, including Level 3 fair values. The management team
regularly reviews significant unobservable inputs and valuation
adjustments.
12.2 (a) Significant unobservable inputs used in measuring fair
value
The table below sets out information about significant
unobservable inputs used at 31 December 2017 in measuring financial
instruments categorised as Level 3 in the fair value hierarchy.
Sensitivity to
Fair value at 31 changes in
December 2017 Valuation significant
Description $'000 technique Unobservable input Range unobservable inputs
----------------- ----------------- ----------------- ------------------- ------------------ --------------------
Unlisted private $102,000 Market Operational $57/mm tons - The estimated fair
equity multiples, multiples $68/mm tons value would
investments income approach increase (decrease)
if the operational
multiples were
higher/lower.
Discount rates 7.2%-15% The estimated fair
value would
increase/(decrease)
if the discount
rate were
lower/higher
Forecast cash n/a n/a
flows
Forecast cash $50.7mm - The estimated fair
flows (lawsuit $144.0mm value would
outcomes) increase/(decrease)
if the lawsuit
outcome cash flow
were higher/lower
The table below sets out information about significant
unobservable inputs used at 30 June 2017 in measuring financial
instruments categorised as Level 3 in the fair value hierarchy.
Sensitivity to
changes in
Fair value at 30 Valuation significant
Description June 2017 $'000 technique Unobservable input Range unobservable inputs
----------------- ----------------- ----------------- ------------------- ------------------ --------------------
Unlisted private $101,410 Market Operational $57/mm tons - The estimated fair
equity multiples, multiples $63/mm tons value would
investments income approach increase (decrease)
if the operational
multiples were
higher/lower.
Discount rates 7.2%-15% The estimated fair
value would
increase/(decrease)
if the discount
rate were
lower/higher
Forecast cash n/a n/a
flows
Forecast cash $50.7mm - The estimated fair
flows (lawsuit $144.0mm value would
outcomes) increase/(decrease)
if the lawsuit
outcome cash flow
were higher/lower
Significant unobservable inputs are developed as follows.
Operational multiples: Represent amounts that market
participants would use when pricing the investments. Operational
multiples are selected from comparable public companies based on
geographic location, industry, size, target markets and other
factors that management considers to be reasonable. The traded
multiples for the comparable companies are determined by dividing
the enterprise value of the company by its operational metric and
further adjusted if appropriate for considerations such as the lack
of marketability and other differences between the comparable peer
group and specific company.
Discount rate: Represents the rate used to discount projected
levered or unlevered forecasted cash flows and terminal value for a
project or company to their present values as part of the
calculation of enterprise value for the project or company, or for
the expected cash flows to Leaf from a forecasted transaction.
Forecast cash flows: Cash flows are forecast by Leaf by
considering possible operational scenarios and transaction terms,
the amount to be paid or received under each scenario and the
probability of each scenario. In the case of Invenergy, they also
consider alternative possible outcomes for the damages that might
be awarded in Leaf's lawsuit against Invenergy.
12.2 (b) Effects of unobservable input on fair value
measurement
Although Leaf believes that its estimates of fair value are
appropriate, the use of different methodologies or assumptions
could lead to different measurements of fair value. For fair value
measurements in Level 3, changing one or more of the assumptions
used to reasonably possible alternative assumptions would have the
following effects on Leaf's net asset value (NAV) at 31 December
2017 ($ millions): (Favourable: 27.6, Unfavourable: (56.0)).
The favourable and unfavourable effects of using reasonably
possible alternative assumptions for the above unobservable inputs
for the valuation of Leaf's unlisted private equity investments
have been calculated by varying these inputs in the applicable
valuation models based on a reasonable lower and upper range as
determined by Leaf Management. The most significant unobservable
inputs are the discount rate, the forecasted cash flows for lawsuit
outcomes and operational multiples. The discount rate used in the
models at 31 December 2017 ranged between 7.2% and 15% (with
reasonably possible alternative assumptions ranging between 6.2%
and 20.0%). The forecasted cash flows for lawsuit outcomes used in
the model was $122.2mm, with reasonably possible outcomes of
$50.7mm and $144mm. The operational multiples used in the model at
31 December 2017 ranged between $57/mm tons and $68/mm tons, with
reasonably possible alternative assumptions of $41.5/mm tons to
$84/mm tons.
For fair value measurements in Level 3, changing one or more of
the assumptions used to reasonably possible alternative assumptions
would have the following effects on Leaf's net asset value (NAV) at
30 June 2017 ($ millions): (Favourable: 18.3, Unfavourable:
(58.6)).
The favourable and unfavourable effects of using reasonably
possible alternative assumptions for the above unobservable inputs
for the valuation of Leaf's unlisted private equity investments
have been calculated by varying these inputs in the applicable
valuation models based on a reasonable lower and upper range as
determined by Leaf Management. The most significant unobservable
inputs are the discount rate, the forecasted cash flows for lawsuit
outcomes and operational multiples. The discount rate used in the
models at 30 June 2017 ranged between 7.2% and 15% (with reasonably
possible alternative assumptions ranging between 6.2% and 20.0%).
The forecasted cash flows for lawsuit outcomes used in the model
was $122.2mm, with reasonably possible outcomes of $50.7mm and
$144mm. The operational multiple used in the model at 30 June 2017
was $74/mm tons, with reasonably possible alternative assumptions
of $14.5/mm tons to $75/mm tons.
13 Financial instruments not measured at fair value
The financial instruments not measured at fair value through
profit or loss are short-term financial assets and financial
liabilities whose carrying amounts approximate their fair value,
these are all categorised within level 2 of the fair value
hierarchy.
14 Trade and other receivables
(Unaudited) (Audited)
31 December 2017 30 June 2017
$'000 $'000
Current portion of capitalised loan fee 63 -
Prepayments 61 62
Other receivables 3 3
Total 127 65
----------------------------------------- ------------------ --------------
Amounts due from group companies are unsecured, interest free
and receivable on demand.
15 Trade and other payables
(Unaudited) (Audited)
31 December 2017 30 June 2017
$'000 $'000
Other creditors 4,020 2,373
Audit fees payable 32 65
Administration fees payable - 37
Taxes payable - 21
Total 4,052 2,496
----------------------------- ------------------ --------------
Note that Leaf has an arrangement with outside counsel to defer
75% of its hourly fees in relation to the Invenergy lawsuit pending
its resolution. As at 31 December 2017, $3.7 million of fees (30
June 2017: $1.7 million) have been deferred under this arrangement
and are included in the other creditors figure in the above
table.
16 Loan from shareholders
On 20 September 2017, Leaf entered into a $5 million loan
facility (the "Shareholder Loan Facility") with certain
shareholders to support its operating requirements over the next
two years. The two-year facility, provided by Crystal Amber Fund
Ltd, Brookdale International Partners, L.P. and Brookdale Global
Opportunity Fund, is unsecured and is subject to an interest rate
of 12% per annum, payable at maturity. On 20 September 2017, Leaf
borrowed $2 million from the Shareholder Loan Facility. $68
thousand of interest was accrued and $21 thousand of the $125
thousand loan facility fee was amortised in respect of the loan
during the period (2016: $nil and $nil, respectively).
17 The subsidiaries
The following subsidiaries of the Leaf Group are held at fair
value on the consolidated financial statements in accordance with
IFRS 10:
Country of Principal activity Effective interest held
incorporation
------------------------------------------ ---------------- -------------------- ------------------------
Escalona Coopertief U.A Netherlands Hydro Energy 87.5%
Escalona B.V Netherlands Hydro Energy 87.5%
Energentum Renewable Energy S.A. de C.V. Mexico Hydro Energy 87.5%
Energía Escalona s.r.l. Mexico Hydro Energy 51.2%
Leaf Invenergy Company Cayman Islands 100%
Leaf Invenergy US Investments, Inc. USA (Delaware) 100%
Leaf Biomass Investments, Inc. USA (Delaware) 100%
Leaf SkyFuels Company Cayman Islands 100%
Leaf Solar Company Cayman Islands 100%
Leaf VREC Company Cayman Islands 100%
18 Share capital
Ordinary shares of GBP0.0001 Number of shares Share capital Share premium
each
$'000 $'000
At 31 December 2017 118,162,853 27 297,046
At 30 June 2017 118,162,853 27 297,046
The authorised share capital of the Leaf Group is GBP25,000
divided into 250 million Ordinary Shares of 0.0001 each.
Under the terms of the placement on 22 June 2007, Leaf issued
200,000,000 shares of GBP0.0001 each par value at a price of GBP1
each. The difference between the issue price and the par value was
transferred to share premium account, net of share issue
expenses.
Leaf have repurchased 10,582,873 shares in 2015. Share capital
and premium received was translated to US Dollars at the exchange
rate prevailing at the date of receipt of the proceeds.
The holders of ordinary shares are entitled to receive dividends
as declared from time to time and are entitled to one vote per
share at meetings of Leaf. All shares rank equally with regards to
the Leaf Group's assets.
Capital management
At an extraordinary general meeting ("EGM") held on 1 July 2014,
Leaf's shareholders voted to accept the board's proposed resolution
to change the Leaf Group's investment strategy to an orderly
realisation and return of capital to the shareholders, which will
occur on an asset-by-asset basis in timeframes appropriate for each
asset. The details of the new strategy are disclosed in the EGM
circular for this meeting, which can be found on Leaf's
website.
The Leaf Group's capital comprises share capital, share premium
and reserves and is not subject to externally imposed capital
requirements.
19 Income tax
(Unaudited)
(Unaudited) Six months
Six months ended ended
31 December 31 December
2017 2016
$'000 $'000
--------------------------------------------- ------------------ ------------
Current tax expense
Current year - 1
- 1
--------------------------------------------- ------------------ ------------
Deferred tax expense
Temporary differences (8,039) 163
- 163
--------------------------------------------- ------------------ ------------
Tax (gain)/expense on continuing operations (8,039) 164
--------------------------------------------- ------------------ ------------
The Leaf Group believes that its accruals for tax liabilities
are adequate for all open tax years based on its assessment of many
factors, including interpretations of tax law and prior
experience.
(Unaudited)
Balance as at 31 December
2017
---------------------------------
(Audited)
Net balance Recognised Deferred Deferred
2017 at in tax tax
profit or
loss during
$'000 01 July 2017 the period Net assets liabilities
------------------------------ ---------------------------------- ------------- -------- --------- ------------
Investments held at
fair value through
profit and loss (11,341) 8,039 (3,302) 3,955 (7,257)
Net tax assets (liabilities) (11,341) 8,039 (3,302) 3,955 (7,257)
------------------------------ ---------------------------------- ------------- -------- --------- ------------
Consistent with the revised US corporate tax rates from the 2017
Tax Cuts and Jobs Act, enacted in December 2017, the deferred tax
asset has been calculated using the 21% top US federal tax rate.
The deferred tax liability has an effective tax rate of 26% which
consists of the 21% top US federal tax rate plus an estimate of 5%
for the blended state tax rate, taking into the account the
deductibility of state taxes in the calculation of federal
taxes.
20 Investment in Invenergy
On 21 December 2015, as previously announced, Leaf filed a
lawsuit in Delaware Court of Chancery (the "DCC") against Invenergy
alleging, in part, that Invenergy breached the Third Amended and
Restated Limited Liability Company Agreement governing the
membership interests in Invenergy (the "Operating Agreement"). Leaf
alleged that Invenergy was required to either obtain Leaf's prior
consent to a sale of 832 megawatts of Invenergy's wind power
generation facilities to TerraForm Power for approximately $2
billion (the "TerraForm Transaction"), or, absent such consent,
make a payment to Leaf upon the closing date of the sale.
On 28 December 2015, Invenergy exercised its rights under the
Operating Agreement to redeem the LLC membership units owned by
Leaf, and Leaf exercised its right to put these units to
Invenergy.
On 7 January 2016, Leaf received a $3.9 million cash
distribution from Invenergy pursuant to the terms of Invenergy's
Operating Agreement.
On 15 April 2016, Leaf filed a motion for partial judgment on
the pleadings with respect to its claim that Invenergy breached the
Operating Agreement.
On 30 June 2016, the Court granted Leaf's motion, ruling that,
because Invenergy did not obtain Leaf's prior consent to the
closing of the TerraForm Transaction, Invenergy breached the
Operating Agreement.
The following key developments with respect to these proceedings
occurred during the one-year period ended 30 June 2017:
On 18 July 2016, Leaf filed a motion for entry of an order and
final judgment, asking the Court to order Invenergy to pay damages
of $126.1 million, based on the calculation of the Target multiple
per the terms of the Operating Agreement, less the $3.9 million
previously reported tax distribution from Invenergy, plus interest
on the net $122.2 in damages at the Delaware statutory rate of
interest of 6%, compounded quarterly, from the date of the
breach.
On 12 August 2016 Invenergy filed an answering brief to Leaf's
motion, disputing that Leaf is entitled to the damages Leaf is
seeking and arguing that Leaf is entitled, at most, to nominal
damages. Invenergy also asserted in its brief that any obligation
it owes to Leaf is excused because of the put/call process
described in the interim statements. On this same date, Invenergy
also filed a motion to amend its original answer to the lawsuit to
add five additional affirmative defenses and two counterclaims.
On 6 October 2016, the Court heard oral arguments by the parties
on the Leaf and Invenergy motions. In two orders on 7 and 10
October 2016 which can be downloaded and viewed in their entirety
at the following URL:
http://www.leafcleanenergy.com/media-relations/download-centre/,
the Court denied Leaf's and Invenergy's motions, apart from
allowing one of Invenergy's counterclaims.
-- The Court allowed Invenergy to assert a counterclaim against
Leaf alleging that Leaf acted in bad faith by causing its appraiser
in the put/call to provide a biased and inaccurate appraisal. Leaf
believes this counterclaim to be without merit.
-- The Court made additional rulings, including: 1) finding that
Leaf's claims are not excused as a result of Leaf exercising the
put, 2) that an exchange of mutual releases required in the
put/call will not moot the lawsuit, and 3) that Leaf's right to a
remedy for Invenergy's breach is not barred because Leaf did not
seek injunctive relief to block the closing of the TerraForm
Transaction.
A trial was held by the Court on 25-27 October 2017 to determine
the damages that will be awarded to Leaf due to Invenergy's breach
and to rule on Invenergy's counterclaim. The Court held post-trial
argument on 19 January 2018. A decision is expected within 90 days
of that date. Both parties will have the right to appeal the ruling
to the Delaware Supreme Court.
Because of the inherent risks associated with litigation and
collection if Leaf prevails, together with income taxes and
transaction expenses associated with the judgement, the board of
directors has maintained the value of the investment in Invenergy
at its 30 June 2017 value of $99.1 million, and this is the value
reflected in the Company's December 31, 2017 NAV of $89.6
million.
Put/call process summary:
Invenergy called Leaf's interest in Invenergy on 28 December
2015. On the same day, Leaf put its interest to Invenergy in order
to mitigate its damages from Invenergy's breach. Each party
appointed a third-party appraiser to value Leaf's stake in
Invenergy. The results were $73.1 million (from the appraiser
appointed by Leaf) and $36.4 million (from the appraiser appointed
by Invenergy). As noted above, Invenergy has asserted a
counterclaim alleging that Leaf acted in bad faith by allegedly
causing its appraiser to provide a biased and inaccurate appraisal.
A third appraiser was retained jointly by Leaf and Invenergy to
value Leaf's interest in Invenergy and appraised the value of
Leaf's stake in nvenergy to be $42.5 million. Pursuant to the
Operating Agreement, the average of the three appraisals ($50.7
million) should determine the price for Leaf's interest in
Invenergy for purposes of the put/call process. Leaf believes that
the put/call process outcome will determine the ultimate value of
Leaf's stake in Invenergy only if the Court decides Leaf is
entitled to less than the put/call outcome in damages for
Invenergy's breach of contract. If Leaf does not prevail in the
litigation, the ultimate recovery of the investment in Invenergy
will be substantially lower than the Leaf's current holding value
for its investment in Invenergy.
21 Subsequent Events
There were no subsequent events to report.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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