‘Wind droughts’ may have contributed to power generation at Greencoat UK Wind (UKW ) falling 18% below budget in the first half of the year, but the £3.9bn renewables fund’s recent interims show it is still a formidable force in income generation.

Net cash of £204m in the six months to 30 June plunged from £328.8m a year ago when UKW cashed in on record energy prices after Russia’s invasion of Ukraine. Nevertheless, that was more than double what was required for the 6%-yielder’s RPI-linked dividends, even if it was a sharp drop from the prodigious 3.8 times dividend cover achieved in the first half of 2022.

As a result, UKW declared 4.36p per share in first-half dividends and is on track to lift payouts by 13.4% to 8.76p this year. The investment company has increased distributions for each of its 10 years since launchng.

Resilient assets

Like rival Renewables Infrastructure Group (TRIG ), which reported its interims last week, UKW has proved resilient in the face of macroeconomic pressures.

Rising interest rates forced the closed-end fund to lift the levered discount rate measuring its long-term cashflows by 1% to 11%. That knocked 11.4p off net asset value (NAV) per share but raised the rate of return investors can expect in the future.

Softening power price forecasts shaved a further 6.8p off NAV per share, with UKW assuming a £78.90-per-megawatt-hour (MWh) price compared with about £120/MWh in December.

‘A conservative 20% discount is applied to power price assumptions in all years to reflect that wind generation typically earns a lower price than the base load power price,’ portfolio managers Stephen Lilley and Laurence Fumagalli explained.

The hits to NAV were mostly offset by positives, such as increasing the value of construction projects by £132m, or 5.7p per share. It also saw an 8.1p boost from higher inflation assumptions, where UKW forecasts average retail price inflation of 10% this year, 5% next year, 3.5% in 2025-2030 and 2.5% from 2031.

Overall, this meant a modest reduction of 0.8% in NAV per share, down 1.3p to 165.8p at 30 June. Including dividends, this gave an underlying total return of 1.7%.

‘Extreme downside’ protection

Management stated that even in an ‘extreme downside’ scenario where power prices reached £10/MWh, the dividend increases in line with RPI would still be covered for the next five years thanks to the proportion of revenue that is fixed through renewables obligations contracts and contracts for difference.

The vulnerability of the portfolio to rising interest rates is accompanied by a more helpful contribution from inflation, with the managers stating a ‘substantial proportion of the portfolio revenue’ was index-linked and there was ‘implicit inflation linkage in power prices’.

‘Over the long term, 1% higher inflation means 1% higher internal rate of return,’ they said.

Despite the below-budget production in the half year, the portfolio of 46 operating wind farms generated 2,088 gigawatt hours of energy, enough to power 1.8 million homes.

Another 335 (MWh) of energy will be added to the portfolio via three new investments that are due to complete in the third quarter. In a deal signed three years ago, £320m was invested into the South Kyle wind farm,  and another £444m was ploughed into London Array offshore wind farm after a debt refinancing.

At 30 June, UKW had £499m of cash and nothing drawn on a £600m credit facility, although cash is set to fall to around £300m after the investments.

Investment opportunity

Lilley and Fumagilli said there was ‘no shortage of investment opportunities, further fuelled by the challenging fundraising environment affecting all buyers in both public and private markets’.

‘The group is very well capitalised and the business model is self-funding,’ they added.

At 144.5p yesterday, UKW shares closed on a discount of around 13% to NAV, a level Liberum analyst Joseph Pepper described as ‘excessive’ for a fund offering a ‘meaningful return above gilts’ that previously traded at a premium to its asset value.

Including dividends, the shares have fallen 2.5% this year, better than the 8.1% decline in its peer group, according to Numis Securities. Over 10 years, shareholders have received a total return of 132.6%, the second best of any London-listed infrastructure fund, behind 3i Infrastructure (3IN ).