Member Info for tichtich

To be clear, the NAV is calculated as (Gross Asset Value) - (current debt), where the GAV is calculated by a DCF model. So debt repayments and interest are NOT included in the DCF model. The debt is simply valued as the amount currently owed. This is more conservative than modelling debt repayments and interest as cash flows in the DCF, because the interest rate on the debt is lower than the discount rate.

I should clarify something I wrote earlier. Bunsen wrote:

"NAV already includes turbine ageing, opex, capex, and discount-rate stress-testing."

And I responded:

"Yes, the NAV takes all those things into account."

To be clear, the NAV does NOT model capex. It just values the existing assets. Based on those assets alone, the IRR on investment at NAV should be 10% (if everything turns out as modelled). If some of the returns can be reinvested in new assets at a higher IRR, then that would be accretive to NAV.

If we assume, for the sake of argument, that there was no reinvestment, then profits would decline as assets reach the end of their lives, and eventually cease. But in the meantime the surpluses (over dividend cover) should be enough to pay off the debts and pay out additional dividends to make up for the falling off of dividends later.

Of course, this all assumes that the cash flow assumptions in the NAV model are borne out in practice. Mr Market seems to think they are overoptimistic. You will have to judge for yourself. As far as comparison with other renewable funds is concerned, I think you'll find that they all use similar assumptions (with differences between wind, solar, etc).

@bunsenburner123

"NAV already includes turbine ageing, opex, capex, and discount-rate stress-testing. An 11% discount rate is extremely conservative — higher than almost any peer — which already builds in the ‘depreciation’ you’re talking about."

Yes, the NAV takes all those things into account. That's part of the reason I prefer to look at the NAV rather than the dividend cash cover.

"UKW’s cash flow is backed by 20+ years of contracted or semi-contracted revenues..."

Only the subsidies and CFDs are long-term contracted, and those only account for half of future revenues by NPV. The other half are short-term contracts, only one or two (maybe three) years. UKW has made a point of retaining exposure to market prices so that it can benefit from higher market prices if they occur. That paid off big time in 2021/22, when electricity prices shot up.

"...and buybacks below NAV materially improve long-term dividend safety."

I mentioned that, though how material it turns out to be depends on how much they buy back and what the discount to share price is in the future. Last quarter, buybacks added 0.5p (or 0.35%) to NAV. If they can add 0.5p per quarter over a period of years, that could add up to being material!

@PaulCurtis

From the last half-yearly report:

"For the 30 June 2025 NAV, the portfolio average discount rate remained unchanged, at 9 per cent. The levered

portfolio IRR remains at 11 per cent. This continues to be materially higher than at IPO over a decade ago, having

been revised upwards significantly in the past 3 years to reflect rising interest rates.

"Given that the Company’s ongoing charges ratio is less than 1 per cent, the net return to investors (assuming

investment at NAV) is 10 per cent.

"This 10 per cent net return at NAV is also inflation linked, as described above. We believe that a 10 per cent

inflation linked return should be very attractive versus other investment opportunities. The Company’s 12 year

track record demonstrates relatively low volatility and the historical and the projected dividend cover is robust."

Note that, by definition, the levered IRR if shares are purchased at NAV equals the levered discount rate.

I'm confused by the final paragraph I've quoted above. Do they mean that the nominal return is 10% PLUS inflation? If so, this is much better than I described in my last comment. But I find this hard to believe.

"1. My point was comparing like with like. UKW dividend cover is flattered by no amortising debt. Clearly a Renewable that gets rid of its fixed debt ahead of another renewable with similar dividend cover is clearly preferable"

That's correct. I used to have shares in a renewable fund (I think it was BSIF) that had mostly amortising debt, and it published two figures for dividend cover: one that included amortisation payments as a cash expense and one that didn't. The latter cover was, of course, higher, and was provided for purposes of comparison with similar funds that had no amortising debt, such as UKW, which had no amortising debt at that time. Now that UKW has about 1/4 of its debt amortising, that complicates the comparison.

The way I look at it is that the published figures are for cash cover, so they don't take depreciation into account. In other words, they don't take into account the need to replace ageing assets. Taking depreciation into account would give a more realistic (and significantly lower) cover, as it would better represent the long-term sustainability of the dividend. (Including debt amortisation as a cash expense partly offsets the need to take depreciation into account, but only partly.)

That said, I think the NAV (per share) is a better measure of the long-term sustainability of the dividend, because it's based on a long-term discounted cash flow analysis. The expected return on NAV is 11% (because the DCF calculation uses an 11% discount rate) minus 1% for the management fee, making 10%. That's a nominal return. The equivalent real return is 7.5%, because the DCF calculation assumes a 2.5% inflation rate (last time I looked). The current dividend yield on NAV is about 7.4%. If that dividend grows with inflation over the very long term, it represents a 7.4% real return. So the return predicted by the DCF calculation is only slightly more than the return needed to keep raising the dividend in line with inflation long term, meaning that there's very little margin of safety (in case the cash flows are poorer than assumed in the DCF calculation). However, this assumes no further accretive investments. Accretive investments (including share buybacks below NAV) increase the margin of safety.

"In the recent disposals, the NAV was that established a couple of days before the sale. So we have no idea whether a good price was achieved or not."

Well, it was good relative to the share price! And it shows that _someone_ believes the NAV enough to put their money (or at least their shareholders' money) where their mouth is.

"Looking forward, wind resource isn't actually expected to decrease for the UK and global warming trends should actually boost wind in UK."

I remember a UKW presentation from about a year ago in which the speaker (from UKW) said that expert opinion was divided as to whether global warming would increase or decrease UK wind speeds.

"Basically unrealised, paper valuations jumped up in 2022 then fell back in 2023 and 2024. The key here is unrealised gains and losses, they're purely paper metrics."

If you're talking about NAV, remember that NAV is based on a discounted cash flow (DCF) calculation. The NAV fell initially because of the use of a higher discount rate (a response to the increase in interest rates), but then continued to fall because of lower expectations for future electricity prices and wind speeds.

The first effect could be considered a "paper" effect. It doesn't indicate lower future dividends, just that the dividends are less attractive relative to the new higher interest rates that can be earned on bonds and cash.

The second effect is a real (not paper) loss. The margin of safety for future dividends has been reduced. (Perhaps it has even gone negative; I haven't checked the figures recently.)

But I think the main concern (and the main reason for the price discount) is suspicion that the current estimates of future electricity prices (and perhaps wind speeds) are still overoptimistic (plus the threat to the index linking of subsidies). One thing to remember is that the relevant electricity prices are not general prices, but specifically the prices that can be earned by wind farms. Those two price levels might diverge in the future, if/when the pricing mechanism is revised.

I'm not necessarily bearish at the current share price level. I just want to give some balance to your very bullish assessment.

"I can see the new Schroders management selling their shares in Greencoat."

Selling their own shares would be tantamount to a declaration that they don't believe their own UKW NAV estimate.

"Buy backs because they don't want to invest spare cash in windfarms, and in fact selling interests. That tells me that if they think the returns are poor, then we should sell.”

Why pay full price for wind farms when you can buy them at a discount by buying back shares? If UKW is a bad investment, then full price wind farms would be even worse.

Genghis, maybe the strategy was to lower the share price and buy back shares on the cheap!

P.S. I'm slightly tempted to add some shares at this low price (and big discount to NAV), in the hope that they will actually succeed in selling the assets at the current low valuations. But I can't help recalling the fate of DGI9. 😉

Just read the new NAV update. Ugh! On top of everything else, they effectively admit that they are selling off assets at fire sale prices. In my opinion this shows the foolishness of shareholders who voted to wind up the fund.

Actually, my statement that "it's hard to know who to believe" was misleading, because there's no contradiction. If the research I mentioned is correct, electricity prices (in the period 2010-2023) were indeed higher due to wind generation (once green levies are taken into account). But this was far more than outweighed by the lowering of gas prices that resulted from lower gas demand. Most people arguing about this subject focus on electricity prices only, and ignore gas.

There have been a lot of people recently claiming that green energy has increased bills, and it's not only the anti-net-zero brigade. But this new research has apparently found the opposite:

https://www.theguardian.com/environment/2025/oct/28/wind-power-cut-uk-energy-costs-ucl-study

It's hard to know who to believe.

@jonathb

I wasn't really being serious about suing the government. If they make the early change to CPI, I expect it will be through legislation, and then I don't think it would be possible to sue. The courts can only apply the law, and the law is whatever parliament says it is. I assume that's already the case for the 2030 change from RPI to CPIH, which will affect holders of index-linked bonds and annuities, many of which were sold as linked to RPI throughout. I assume that the legislation relieved the treasury and the annuity companies of the obligation to make contractual RPI increases after 2030, substituting CPIH increase instead.

Unlike the USA, we don't have a written constitution that stands above the laws passed by parliament, so our supreme court can't strike down laws as unconstitutional. We have no checks and balances. You only need a majority of one in parliament to do anything. That's why our system has been called an "elected dictatorship". (God help us if Farage ever gets a majority.)

I guess it's also not a good sign that the government is willing to to welch on existing contracts. I wonder if they can be sued.

It's been known for a long time that RPI would be dropped in 2030. So this change (if it happens) just means an extra 4 years of CPI instead of RPI. I haven't checked recently, but my impression is that RPI has generally been about 1% above CPI. Also, it's only ROC subsidies (and not CFDs) that are currently linked to RPI. And my best guess (I haven't checked) is that about a quarter of future revenues (on an NPV basis) are from ROCs. So it's not the end of the world. But I can see this knocking a few more pence off the NAV/share.

Every quarter I hope that we've seen the last of the NAV falls, but then something else comes along to prolong the decline. ,😢

Good RNS update today, though it hasn't moved the share price. Not that I care, as long as they keep paying the dividends. In some ways I even prefer the price not to rise. If it went up significantly I might have to make a difficult decision about whether to sell. 😉

"This is what makes the shares look attractive on the basis that the profits are probably already there to make the annual distributions."

Surely those profits depend on the returns that LGEN earns on the invested funds. I believe the CSM is calculated on the basis of certain assumptions about future investment returns. So, if I'm not mistaken, the profits are only "already there" in a notional sense. The returns still need to be earned. (Though, given the coverage ratio of over 200%, I assume there's a large margin of safety.) I for one would like to know more about how the funds are invested. How much is in "risk-free" bonds, how much is in more risky investments, and what sort of investments? A couple of years ago I tried to find that information in the annual report, but as far I recall, I didn't find the sort of information I was looking for.

I would be grateful for any relevant information (or corrections if I've got anything wrong) from more knowledgeable investors.

I think the biggest risk is an adverse change to the electricity pricing system, which is almost certain if Reform takes over (God forbid!), but is also quite likely under another government. There's been a lot of discussion of a switch to "regional pricing", but the present government has decided against that for now.

Regarding debt, I think they are only lowering debt in proportion to the fall in gross asset value. The loan-to-value seems to be staying at about 40%.

Regarding dividend cover, this is basically a cash cover and doesn't take depreciation into account. So we need a cover substantially greater then 1 to allow for replacement of wind farms as they come to the end of their life. I think the 1.4x cover is enough for this, but the real surplus (after taking depreciation into account) is not as high as the 1.4x might make it seem.

I reduced my very large position in UKW a few months ago, and now I'm tempted to buy some shares back at a lower price. I'm not sure though, as my position is still rather large for comfort. I might wait to see if the price goes even lower!

Thanks for the link, Willja. Unfortunately that presentation was just a sales pitch, and didn't really say anything useful. It was mostly backwards looking, and didn't say anything about the future, apart from some discussion of the life expectancy of wind farms.