Ladies and gentlemen, welcome to the Greencoat UK Wind Half Year Results Conference Call. My name is Glenn. I'll be the operator for today's call. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. I will now hand you over to your host, , to begin. Stephen, please go ahead.
Thank you. Good morning to everyone for joining. This is our 11th half year results presentation. We went through our 10th anniversary about three months ago. It's our 21st results presentation for you. To some extent, you might think we've got a bit of a coming of age. I guess we've got a slightly more challenging background. The presentation we give is quite different. In one sense, we will cover results, but we also want to cover some of the concerns that we think you guys have. We've had a lot of time with, especially analysts, over the last few months. I just go through a lot of things, and I think we should tackle some of those as well as the good results.
Starting from the first page, that just out of interest, is Beverley Bank extension. If you look here to the right of that photo, obviously you can't, but you can see Liverpool, but that's what that is. Carrying on that into the results, NAV is basically flat in the first half. We'll go through some of the drivers. There's quite a few ups and downs in that, but I want to go through that in a few minutes time. Cash generation still high, given elevated power prices, offsets low wind resource in the first half. At the high temporal and net dividend cover of 2.1 times as a consequence of that. Secondly, I guess the issues that we want to go through and tackle.
First of all, debt. We repaid our 2024 maturities a month ago. We cleared the RCF. We've got a balance sheet where you can see realistically what was sent, with a new term loan. We didn't talk about that. We think it was planned when we put debt in place. That was done about a month ago. Obviously, just want to clear, go through that and chat a bit about that. Onto power prices and assumptions. We are very clear, we've got very focused assumptions, and we'll just go through that. I think the most important thing about is, people worry a little bit about dividends and can we continue to increase power?
Yes, is the very clear answer, we'll sort of demonstrate that with sensitivity and very low power prices. Inflation, we've watched with a little bit of horror, people thinking that inflation being higher than expected should mean that interest rates go up, and therefore, our return is not as attractive. Actually, inflation is good for us, we'll go through that a little bit as well. Those are the three issues, if you like. The sort of the most important part, I guess, for the whole presentation is the portfolio IRR. Now we're at 9% discount rates are up. They're way north of where they were at IPO, actually pretty attractive versus risk-free rates.
10% net return to investors is nearly 6% above the risk-free rate, and it's in inflation length. We'll go through that in a bit more detail as we go through the presentation. You may have spotted London Array being transacted on or announced on Monday, complete next week. In total, with all the transactions and the investment, we're gonna go towards above two, well, not towards, but above 2 GW. In that process, generating about GBP 170 million of value to shareholders, we'll go through that. A little detail, that's largely for biological transactions, and there's some consequences of biological, gonna be good value to us.
We stand at this point, every year producing GBP 200 million of excess cash, against the GBP 200 million dividend, if you like. We've got a 2x dividend cover, you can sort of see that, and that gives us flexibility to either pay down debt as due course or to add some leverage and buy further assets or maybe disposals. We've just got a whole range of things there in the toolbox, I guess, in making sure that the transactions we've done have created really valuable, as a consequence. Moving on, very quickly, I guess you can sort of see the chart on the right, simple model of the power produced and the cash generation. I think two points I want to sort of draw out.
Look at that total dividends paid, GBP 8.36, but more importantly, I guess, GBP 18.6 of reinvestment. We're not sure the investment community has spotted the business is designed not just to have a dividend that increases with RPI, which we've done every year, and we continue to do every year. But also by design, not by chance, but by design, we are reinvesting to preserve now on a real basis, and you can sort of see that. It makes a difference, a different yield, I guess, maybe 5% versus the 5% of reinvestment. We just think that clarity on the GBP 8.36 is something we really want to point out, and therefore that takes it, takes us into the net 10% return to investors. That's really all we want to sort of draw from that slide.
You then carry on through that page, the fix is made up, on page 4. You can see that this isn't just a freak every year. The dividend cover is high, and the reinvestment is high. We've got almost as much reinvestment as actually dividends paid, and those together make up that 10% return, that we're paying to investors.
Boss. Thank you. Let's cover financial performance. That's cash flow and net asset value. On the first of those slides, slide six, we've only got two slides this time around, we can quickly get onto our key themes. This is the cash flow slide, as Steve mentioned, a very robust dividend cover of 2.1 times. You can see that at the top of the table. In the period, GBP 204 million of cash generation, covering GBP 96 million worth of dividends paid, 2.1 times dividend cover. Moving down the table, the acquisitions, that's GBP 55.9 million. That is primarily Delphos. Andy will talk about that in more detail later. That was GBP 51.5 million.
The little extra on top of that is just further investment into our current year extension investment, via the loan, the construction loan that we're financing. You can also see a little bit further down the table, the GBP 290 million net amount drawn under the facilities. That's the GBP 640 million of new term loans, minus the GBP 350 million of debt repayments that we undertook about a month ago. More detail on that later. It would have been higher than 2.1x dividend cover, but for the wind resource. Generation was down 18%, had we had 250 wind resource in the half, and that 2.1x dividend cover would have been nearer to three times. That's cash flow. If we move on to the balance sheet, we're a net asset value.
We've got a new look bridge, where we've combined cash generation dividends and assumption changes into a single bridge. We hope it's more useful for readers. You can see the GBP 204 million of cash gen and GBP 96 million dividend there. Eight point eight pence of cash gen, paying a 4.1 pence dividend. Clearly, the difference there, the 4.7 pence, is increasing the NAV. This is this reinvestment theme again. I'm not sure people have been focusing on the fact that if nothing else changes, this company grows organically every half, every year into the indefinite future. If you move on to the assumptions, I'd like to take a couple of those as a couplet. Inflation, changed to our short-term inflation assumptions, and the only assumption we've changed on this later is our 2023 RPI assumption.
Changing the 2023 inflation assumption only, has added 8.1 pence to the NAV, which is a nice offset to the 11.4 pence decrease in the NAV, coming from the 1% increase in discount rates. Stephen's going to talk to you later in more detail about both of those, but they really should be seen as a couplet. Inflation is good for this business. Perfect offset for increasing interest rates and increasing discount rates. The other main assumption there, that's changed, is the power price assumption. Power prices are down over the half. That's had a 6.8 pence deleterious effect in that, over GBP 150 million. This is where it's funny how the world works.
The Electricity Generator Levy, which was all very painful, and we were talking to you about it late last year, is our friend. On the 31st of December, so in the year-end now, we were expecting, forecasting, if you like, to pay GBP 30 million of Electricity Generator Levy over the next three years. It turns out that we're now forecasting we'll only pay GBP 50 million of Electricity Generator Levy over the next two years. Sort of 30 this year, 20 next year. That's a GBP 150 million difference in the forecast CGL payments. That's a GBP 150 million damper, protects us from power price movements. What I'm saying is, perhaps that power price movement would have been a GBP 300 million hit to now, but for the benefit of EGL.
Remember, we paid 45% of everything we earn above GBP 75 in the megawatt hour to the government. You know, what used to be a GBP 10 per megawatt hour hit, this is now only a GBP 5. Quite interesting. The last thing I'd like to talk about on this page is the committed investment line, GBP 132.5 million, or 5.7 pence increase in the NAV. To be clear, that does not include London Array. London Array was only signed over the weekend, hence we announced it on Monday this week. Didn't exist with us. It was dead to us as of the 30th of June. At the 30th of June, we did have a couple of certain and imminent upcoming investments that had been signed many years ago, in fact.
One was South Kyle, the other is Kype Muir Extension. Taken together, the mark-to-market value of those commitments is GBP 132.5 million, above the expected investment cost. You can read more about that in note 13 to the accounts, I think, the contingencies. They've always been there, at least since 2020. They've been lurking there in the contingencies and commitment note, but they've always been recorded at nil value. Now, as certain imminence, they are recorded at a mark-to-market value of GBP 132.5 million. Great NAV accretion from upcoming investments. We move on to the sort of key themes section. Sorry if that was a bit brief on the results, but we think it's important to get on to the key themes. I'll take 2 of them, and then hand over to Steve.
The first one I'd like to talk to you about is debt. Reiterating something we've both said already, GBP 640 million was drawn down at the end of June. GBP 150 million went straight out, the next day, went out to repay our near-term maturities. These were loans, with CBA and NAV maturing November and December this year. They're repaid. We can stop worrying about those if they were. We also repaid GBP 200 million of the RCFs, that was zero drawn, at about the 30th of June. We have GBP 500 million sitting on our balance sheet, ready of course, you now know, to invest into London Array on Monday next week. The other thing we'd like to draw out on this page is the sort of weighted average cost of the debt. It's 4%.
That's a lot higher than for the GBP 640 million of new term loans we've placed, because clearly interest rates are higher at the moment. The point is, it's not 6% or 7%, it's 4%. We didn't refinance our entire GBP 2 billion debt stack a month ago. You know, this has been put in place over many years, since 2015. It very deliberately had a set of mixed maturities. It's not all maturing next year, it's not all maturing in 5 years' time. It's maturing gradually over 2024, 2025, 2026, 2027, 2028, 2030, 2031, 2036. That's very deliberate. We will refinance these term loans when they mature, or presumably slightly before that. We'll be looking at rates at whatever the rates are at the time.
It's like if you have GBP 100 million, you don't invest it all in the stock market, probably on one day, you trickle it in over time. You know, we're very deliberately refinancing these loans on a mixed maturity basis. You'll see again in the table that obviously the RCF is sitting there at zero drawn. One imagines that some of that will be drawn to invest into South Kyle on the 31st of August. If all of this debt was floating, obviously it's not, the vast majority of it is fixed. If all of it was floating, and if interest rates went up by a further 1%, by definition, 1% of GBP 2 billion, that would cost us an extra GBP 20 million per annum in interest. Just to note, that's 0.x on the dividend cover.
It's not all floating, it's mostly fixed. If it was all floating and interest rates went up by another 1%, so what? GBP 20 million extra debt servicing costs, 0.1x on the dividend cover, it is irrelevant. We're in a very strong state of play debt-wise. We think it's a correct strategy for this business. To note again, the GBP 500 million of cash sitting on the balance sheet as at the 30th of June. The last slide from me for a little bit, turning over to power prices. The only movement here since December has been at the short end of the curve. We're takers here, well, not our assumptions, it's the forward curve. We've merely updated the forward curve for 2023 through 2026.
We apply our conservative 20% discount to that curve. Just to note, our actual captured price in the first half of this year was 4% below base load. We're not applying a 4% discount to the forward curve, we're applying a 20% discount to the forward curve. Substantially more conservative than the actual discount we're suffering. We think we're in a very good place on power pricing. We also think people have perhaps missed the point that these are free PPA discounts. You know, a typical PPA might say something like, a power purchase agreement might say something like, "We will pay you 90% of the index price." Others might say, "We'll pay the index price minus GBP 3 a megawatt hour." Some of them are obviously fixed prices.
If you take a representative power purchase agreement, e.g., 90% of the index price, the dotted line on this chart represents that. Some of our peers only show you post-PPA discount price. Up until now, we've always shown you the pre-PPA discount price. We've shown you both. We've also taken the trouble to print an entire table in our half year results. You don't have to get your ruler out and try and read across from the graph, the Y-axis anymore. We've also printed a incredibly busy table, giving you every detail, every single PPA we've got across all 46 operating assets. It's full transparency. You can make your own power price assumptions, but I would strongly suggest the forward curve is as good a guide as any.
It represents millions of GBP of daily transaction volume. Apply the 20% conservative discount to that. The other thing we've included in the results, indeed here, just underneath the graph, is a sort of forecast dividend cover table. We can inflate our dividend at RPI indefinitely. We've just shown you a 5-year run here. You can see the base case dividend cover of above 2x. You can also see the inflating RPI dividend. We're GBP 0.0876 next year. If December RPI for 2023 were to be 7%, next year's dividend will be GBP 0.0937 per share. If it is, we're forecasting 2.3x dividend cover.
To show you what would happen if power prices were GBP 50, if they were GBP 40, if they were GBP 30, if they were GBP 20, if they were GBP 10. Bear in mind, by the way, the value of carbon alone in the power price is about GBP 0.40 per MWh. If, weirdly, the power prices were GBP 10 per MWh, our dividend is still covered, including having inflated it every year with RPI. It's quite interesting, you know, a lot of people say all those crazy green cases with their largely unhedged strategy, are massively exposed to power prices. We might be more exposed to power prices than some funds, certainly a fund that are fixed all those power prices. Sensitivity is all relative, depends on the starting point.
If your starting point is 2.3x dividend cover, then you can afford to be quite sensitive to power prices. With protected, for instance, all the way down to GBP 10 a megawatt hour. If your starting point is 1.2x dividend cover, you might well be less sensitive power to power prices, but I'd like to see some of our peers run a sensitivity at GBP 10 to a megawatt hour and tell you what their dividend cover is. That's power prices. I'll now hand over to Steve, and he'll talk to you about inflation.
Thank you, sir. Asymmetry is interesting as well. Onto inflation. Picking up from the previous slide, I guess the update is, we're seeing December's RPI at 7%. That, before we go into the effects of that RPI, just to try and sort of nail the wide questions effectively. The inflation feeds into UK revenues, explicitly in the RPIs for RPI and CPI, but also implicitly in the power prices. You also seeing inflation higher just because of power prices, so the correlation to those is pretty strong. In terms of the mechanics, so the rock prices are replaced by the average of the years', inflation numbers. Last year not the December numbers.
When we get into the beginning of this year, we increased the dividend by 13.4%. That was December's RPI. This year, if December's RPI is 7%, the dividend will get to GBP 9.37, which is obviously on the previous slide. December's RPI, rock prices are slightly different. You get the average of that. That increased over the year of 13.4, and you're looking at 7. The average of those is going to be roughly 10. You would imagine the rock prices coming into next year would go by 10. You can see that on the chart on the right-hand side there. You've got to. It's all about timing and where inflation is going up, or if it's going up, it's down.
The cover, I guess, of last year was 13.4% dividend increase, but ROC going up by 11.6%. It reverses this year with inflation down. What the dividend will go up by 7%, but ROCs will go up by 10%. I'm not sure you can work out the logic of that. The assumption for the ROC increasing would be 13.47%. Actually, that'd be 10%. You can see that, you know, that's some indication in inflation. Along there, obviously, it's clear. We watched with some frustration as we say forward, but that's probably too strong a word.
Frustration, I guess, at some of the response to higher inflation numbers than expected in announced in the by the government and our share price going down. Slightly bizarre in one sense, because actually, it probably should be turned precisely the opposite. As I said earlier on, if we have inflation, the worry, I guess, was that, I mean, the interest rates go up, but interest rates go up because of inflation. If inflation is good for the return, and if interest rates are bad, and they roughly balance themselves out, actually, it didn't improve the press higher or down, and you can see the balance of the scales on the right-hand side of the bottom there. Hope that's clear.
Coming on to, I feel like, possibly the most important time in the whole presentation is the return. We have, a year ago, started to increase discount rates. We haven't reduced much, actually, might be about 1%. Now, above by quite a distance from where we even started that. We started about a year ago. That's not necessarily aggressive statement at the top there, but we do think the sector is not getting the point. Asset pricing has changed. Whatever you think you see in the market, it has to, because the risk-free rate has changed, it has to change, and therefore, discount rates have to move up significantly. We've already done it, so we feel as if we're in a good place, but it has to happen across the sector.
We have now got a levered return over 11%, so that means taking a cost down to just over 10%. That is inflation linked as well. That we can compare to the beginning to the UK yields of 10 years, 4.2% and 5.8% above that. Remember, over the last 10 years, that hasn't been particularly, you know, the business has been very low volatility. We have high historic handles that we're getting over the next few years, as you saw on previous slides of 2.3.4%. We think that that is a great product. I guess trying to get the same point yet again.
Yes, that 10% return is not 1 billion deals, but it is a 10% return, and there is GBP 836 million of dividends being paid over the last 10 years. 836, sorry, 836, 806 in reinvestment. That 806 of reinvestment can't be ignored. If the model is properly understood, that 10% return is a good product. If people bought, obviously, below now, where the share price currently is, that's even higher than the analysis. Lawrence, do you want to continue on the transactions before I forget?
Yes. Quick overview. All 4 of the transactions, I'm going to give you a little bit more detail on in the coming slides, are bilateral. There are 4 out of 22 bilateral transactions that we've executed out of our total 49 assets. It's that bilateral nature, our ability to access these NAV-accretive valuations that have driven, or will be, we expect GBP 170 million of total value across these 4 transactions. Now, 132 of that, or GBP 132.5 million, you know, comes from South Kyle and Kype Muir Extension, because those 2, being our 4th commitment as at the 30th of June, appear as a value on our balance sheet. There's another GBP 40 million there coming from London Array and Delphos.
As I said, all four of these are bilateral, which is what drives that. We'll come to a bit more detail shortly. The other point, last point I want to make on this slide is the self-funding point. As Steve mentioned, you know, we're generating GBP 200 million a year of free cash flow over and above our GBP 200 million dividend. That's what 2 times dividend cover means. That's GBP 200 million that we can do whatever we want with. We're not going to set fire to it. We're not going to bury it in a hole. We're either going to repay debt, which would increase NAV, or we're going to make further investments, which we NAV accretive.
We could even borrow more, you know, for every GBP 200 million of excess cash flow, we could borrow GBP 100 million and invest GBP 300 million in NAV-accretive investments. We could go further, maybe sell some assets at NAV in order to reinvest, but better than NAV. Of course, we can always crowd in co-investment partners, as we have done over many years. I think our first co-investment partners was Swiss Life back in 2014, when we bought some assets from AES. UKW took a 52% stake. I think it was for GBP 85 million, and Swiss Life came in alongside us for GBP 80 million. GBP 165 million in those days was a large chunk of change. We've brought co-investment partners in over many years, and we can continue to do so.
The reason that's important, turning the page, is it allows us to access larger transactions, such as London Array. Here is the GBP 717 million that moves from Schroders Greencoat Funds to the set, will be on Monday next week. GBP 444 of that in total comes from UKW. The rest comes from co-investment partners. It allows you to access these larger transactions. We were very excited to announce this on Monday. It's obviously a flagship deal. It's got a page on its own. Don't worry, we haven't got a page for each of the other three transactions. I'll counter through those. All four deals were bilateral, as I mentioned. You've got two questions to ask there: Why were they bilateral? Why us?
London Array in many ways resembles Walney, an asset we invested in 2 or 3 years ago. We own 25%, all together with investment partners of London Array, we own 25% of Walney. Are the same Siemens 3.6 megawatt turbines. They were both bilateral transactions, they were both critically bilateral for the same reason. They were classic transactions, where they were co-owned by 2 utilities, as well as other investment partners. Walney, with SSE selling its passive financial stake to us, leaving Ofgem as the operating utility. London Array is reversed. It's Ofgem, as the passive financial investor, selling its stake to us, leaving RWE as the operating utility. This is very different from when a utility wholly owns a project and then maybe disposes of a 50% or 49% stake to financial investors.
It's a lot more awkward for these guys when there's two utilities there. Not least, access to information, if they're the passive financial utility, not the operating utility, but also the whole complex series of confidentiality provisions, pre-emption rights, tag rights, put options, all sorts of things. It's a lot easier for these to keep it below the radar and only announce it when it happens. You saw it two, three years ago, when we bought 25% of Walney from SSE bilaterally, and you've seen it again on London Array. Why us? We're a very good partner to both SSE, and in this case, also, in fact, I think Schroders Greencoat is also the largest global partner.
Turning the page, a bit more quickly to the other three, page 16, Delcambre, South Kyle and Cantmire Extension. Delcambre, that was a bit like Maerdy back in the day and Clyde back in the day. We bid on this asset in an auction process. We were kicked out because our price wasn't high enough. True of Maerdy, true of Clyde, true of Delcambre. Whoever the seller then appointed as the preferred bidder for that failed to execute. What did the seller do? They turned to the most dependable counterparty they could find. Obviously, we were good partners with SSE and Clyde. Delcambre is the 6th asset we've depended, very dependably acquired from BayWa r.e. We managed to pick that up bilaterally at a lower price than the one we first bid into the auction.
It's about 20%, NAV accretive for us, for instance, about GBP 10 million. South Kyle and Kype Muir Extension are quite interesting. They were bilateral because they were both transacted in 2020, when the market was really feeling its way on substitute assets, and then we had to price them.
... particularly a utility like that, and doesn't want to sort of necessarily tell everyone that it's selling an asset. Not everyone has the sophistication to work out how to price and structure for the sale of a subsidiary asset, particularly a large one for GBP 320 million. They both ended up as bilateral transactions. Clearly, because they were priced in 2020, everyone thought the power price was GBP 50 a megawatt hour. Now that the power price for the first half of this year was GBP 100 a megawatt hour, they're clearly a lot more valuable. That was a bet we placed back in 2020, and it was a bet well worth placing, and it's paid off enormously.
As you can see, the combined value, the market value of the commitments on those two, South Kyle and Cantarell Extensions, GBP 32.5 million. Short version, UK Power's leading market position allowed us to access these assets, and it's a very, very good use of shareholder funds. As we said, GBP 117 million worth of navigation costs for either recent or near-term investments.
Nearly at the end. No worries. This is what the business looks like with the now 2 GW, I guess. Shortly, as you'll see, 2.2 million homes, and you can see the Article nine investments. That has been the case there, as you may well be aware, the two projects are South Glasgow and South Wales Cantarell Extension, Tinworth Shore.
You can see that 2.2 million homes, I guess, is a, you know, a big number of homes. Now 2.5 million in terms of CO2 deployed versus 3rd generation. This is a sizable thing, I guess. We're also continuing that thought process that we started 10 years ago, with second capital doing more build-out, to build out to meet the sector. All the other stuff you're familiar with, Article 9, Community Funding, U.K. Government, good directors. That's pretty interesting. That's pretty good of having Jim Smith, nice to see him again. What a great director, very helpful in all the offshore experience he's got. A nice man to boot. Coming on to, I suppose, the summary to finish.
Now in the period ups and downs as we've been through, high cash generation, from largely from the power prices that are slightly lower. We're resourced and still we have to, we've dealt with the debt. We've shown hopefully that exposing the loan can continue for even the most extreme circumstances, power prices, et cetera, in places. Hopefully, now not to worry, having explained the return of 11% net to less than 10, hopefully this is a good 4.2. It's great, and hopefully we've demonstrated that we can buy transactions bilaterally, and create value by doing that.
Knowing full well that, you know, there'll be flexibility going forward, maybe with the excess of cash generation going forward to pay back the debt or to do some other things. We feel as though we're in good shape. We, in one sense, we're stable of the share price performance, because we don't think it reflects most of what is on the sheet. We're looking forward to seeing investors over the next few weeks, and giving them more detail. I mean, stop talking at this point. Can we have any questions? Perhaps maybe some closing comments. I presume we have explained everything clearly. Maybe we'll take some questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your phone keypad now. When preparing to ask your question, please ensure your phone is muted locally. We have our first question comes from Alexander Wheeler, from Royal Bank of Canada. Alexander, your line is now open.
Hi, Steve. Hi, Lawrence. Thanks for the presentation. Three questions from me, please. The first one is just on discount rates. I appreciate you've shown me the offset there with inflation. I'm just interested in what your thought process is here. I mean, you're already, you know, materially ahead on discount rates of the peer average, and, you know, you had quite a big premium versus the wider market. I'm just interested to understand how you think about that and the process that you were going through, and what you think the premium should be, I guess, in the sector to the risk-free. My second question is on the bilateral transactions, clearly beneficial, and you've done a lot of them.
How much opportunity do you think there is to continue to do these off-market transactions, compared to going through that more traditional bidding process? My last question is just on the space in the market and how you're thinking about, you know, offshore versus onshore in terms of portfolio mix going forward. Thank you.
Okay, I'll do the first one. Laurence will talk about the balance and then offshore, onshore. Actually, offshore, onshore, we're agnostic. We think there's opportunity from both places, more offshore, perhaps going forward, just with the scale and build-out. That's three there, so you only get two now. In terms of number one, discount rate. It's a really interesting question. A lot of folks have asked in some ways, other than peers, do we think our discount rates and return? Actually, it's more relevant to the returns to investors. Do we think the return is good enough in risk terms versus the risk-free rate? Yes, absolutely, we do. Do we think that others are not? Yes, absolutely, they're not.
I think that's the headline. Why have we moved it? I could get into that before, but I don't seem to be saying that. You know, it could be a comment and just talk about where it was previously. Probably logically, yes, but actually, you know, we need to get to the point where the return is something that people think is adequate for the risk, and therefore we have increased it. I think we have some of the benefit, and obviously, we have to disclose what the cap rates are, of having this, as you know, split discount rate methodologies. The benefit of that, I guess, is that we probably have a discount rate for merchant cash flows and discount rate on the fixed cash flows.
The one for the fixed cash flow, obviously, has to be as high as our cost of debt, effectively. It's hard to have cost, effectively, lower than the cost of debt, and that, probably, combined, is a lot higher than our cost of debt. The problem is, if you don't have that, if you don't have that methodology, you end up possibly risking our peers, thinking that the discount rate is above. Actually, if you break it down into risk, the benefits related to the rock testing are absolutely below. The benefit of having that split discount rate is really helpful because it gives you the discipline to actually price risk properly. I think we price risk properly.
We think the return is significantly higher, than the risk-free rate, and certainly good enough.
On to the second question, I assume a quick one up. Yeah. Look, we bought 22 transactions out of 49 bilaterally over a 10-year period. The sort of, you know, hit rate of bilateral versus auction process is probably relatively even over that time. I think it's possibly unusual that 4 out of the last 4 incoming investments are all bilateral. Remember that Durban, South Carolina, and Faulkner extension were actually signed back in 2020. I do think it's a good time to buy assets at the moment. If you're well-capitalized, as we are, I think it's a really good time to make investments. Hopefully, for instance, London Array and Dalquhandy demonstrate, one's a big flagship, headline-grabbing transaction. Dalquhandy is only GBP 50 million.
If we buy it for GBP 50, and it can be valued, even on very conservative assumptions, at GBP 60, then that's another creative, you know? Why should we not keep doing that? I think we'll be able to continue doing that. We don't mind competing in auctions. I mean, we've been kicked out of four auctions for offshore wind farms this year, because our price wasn't high enough. You know, history might suggest we might get invited back into one or two of them. Who knows? You know, we don't mind competing in auctions, if we've bought 22 bilaterally out of 49, we've obviously bought 27 through competitive processes. They're all good investments. I think, you know, no change. A good smattering between the two.
Okay, that's clear. Thank you.
Interesting. You're saying just in Dalquhandy was an auction, a semi-auction process that broke?
Yes. Same bilateral. Same with Clyde, same with Nadi, back in the day.
Thank you. Well, our next question comes from Iain Scouller, from Stifel. Iain, your line is now open.
Good morning. I've got three quick ones, if I may. Firstly, can you just talk a bit about SPV level debt and what the strategy is there and what the ratio is at the moment? I see you. There was a debt amortization of about GBP 26.6 million over the period. I mean, are we likely to see that sort of amount be increased going forward? The second one, you've got GBP 161 million of cash at the SPV level. Why wasn't that brought up to the group level for the 30th of June accounting period? The third one's just on power prices. I thought at the start of the year, you were assuming about GBP 120 for this year.
Looking at the chart on page 10, it now appears as though you're using GBP 80, for 2023, 2024. Have I got that right?
Yeah, you have it about right. In terms of the SPV level debt, that's Hornsea. That's the only project that we have project-level debt on. Earnings are likely to. You know, there may be projects in port, but there are no other projects in the portfolio other than that, to get project-level debt. That's the only point there. In terms of group level debt, do you want to pick that up, Lance?
Well, in terms of the SPV cash streaming, it will be on stream, one imagines, in August. It's just the quarterly cycle in. Quarter end occurs, it's June in this case. There's normally a round of SPV board meetings. Some of those are Greenco people, because we 100% own the SPV. Some of those are with joint venture partners. I think we're about half and half of the 46 operating assets, roughly half are JVs, half are 100% owned. It's a board meeting, typically at the end of July, so the next month after the quarter end, the dividends flow up typically in August. They'll be all upstairs ready to pay UKW's dividend to shareholders at the end of August. That's standard, just cash timing. In terms of power prices, yes.
You know, they've fallen a lot at the short end of the curve. You saw from our graph in our full year results, it was GBP 120, it's now GBP 80. In fact, you know, you don't need to get your ruler out anymore and read, is it roughly GBP 80? You can see precisely what it is in the power price table. I actually haven't got it in front of me, but it might be GBP 83 or something. Hang on, someone was just showing it to me. Actually, for the rest of this year, so it's GBP 78.93, to be precise.
It's fallen, and that's why the amount of money we're expecting to pay to the government under the Electricity Generator Levy has fallen from, as I said, GBP 200 million over 3 years to now GBP 50 million only over two years. It's a hit for the NAV. You can see it in the NAV bridge. It's not threatening in any way. As Steve vaguely alluded, it's a very asymmetric risk. You know, power prices can go as high as 500. Can they? Yes, they can. It happened last year, but they're not going to fall to GBP 10. If you start with a sort of GBP 80, falling to GBP 40 sort of base case assumption, the risk is wholly asymmetric. A lot more upside here, and we're very well placed and structured to cope with any reasonable answer, any answer.
Thank you.
Okay, that's great. Thanks very much. Thank you. As a reminder, ladies and gentlemen, if you would like to ask any further questions, please press star followed by one on your phone keypad now. We have our next question from Adam Kelly from JP Morgan. Adam, your line is now open.
Hi, good morning. Going back to what you said about portfolio returns, I just wonder if you could give a bit of color on how you're thinking about debt within your levered IRR. You say 11%, is that thinking that the current level of gearing is maintained? What are you thinking about in terms of costs for future debt, if you are assuming refinancing?
Thank you. Yeah, it's really simple. At the moment, we're 34% geared, and we have an all-in cost of debt at 4%. Obviously, there's a mix of maturities there, as we discussed, so you have to assume some kind of refinancing. I can tell you precisely what we're doing. We're assuming 35% average gearing over the long term, and we're assuming a 5%, so higher than current. 5% all-in cost of debt. You can do the math really, really simply. If you do 35% times 5%, plus 65% times 11% equals 9%. Right? There's a 200 basis point delta, roughly, between the unlevered and the levered return. 11% times, you know, reversing it.
To repeat very clearly, 35% gearing times 5% all-in cost of debt, plus 65% equity times 11% levered return, equals 9%, which is the unlevered return. We're assuming 35% gearing at a 5% all-in interest rate. Obviously, our gearing cap's 40, and we're currently at 34. We'd expect to hover in the 30-40 range, I guess, going forward. I think 35% gearing is, A, what we'd expect, and B, not at all scary.
Thanks. Just to clarify, would that mean that you would assume that you would be able to continue to gear at the same level, even beyond the subsidy life for the projects that do have subsidies?
Because obviously we'll either have bought more assets that are, say, CFD assets, or we will have fixed some of the floating cash flows. We're aiming to maintain very deliberately, this sort of rough 50/50 balance between fixed and floating rates. If it ever goes out of whack, i.e., becomes a bit too floaty, we'll fix it. We wrote about this actually in the full text of the half year report. The most likely way we'll fix it is by buying this infinite supply of CFD offshore wind farms. The likelihood is, we never actually have to sign a fixed price PPA, because we'll just buy some CFD assets.
If for some reason we get a bit floaty, and the ratio gets out of whack, we'll just sign some fixed price PPAs, as we actually have done with the likes of, say, BT and Tesco. You'll see on our Douglas West and, I think Glen Kyllachy assets, we did that really just to prove we could.
One of the benefits of having the stripped down price methodology as time goes by and as the circuits come off, the return goes up. Obviously, something that obviously you have the ability to cost, to fix if you want to. That logic is, you know, the methodology for certain places, it effectively self-corrects on value. For good reason. Obviously, pricing risk does its job.
... if we've understood risk properly and done that, it was fine at the time. Put yet another way, 35% gearing is a sort of 3 to 1 loan-to-value ratio. You'll always be able to borrow money if you're only looking to be 35% geared. You only need to contract if you want 80% gearing, or if you want to give 15-year debt. You're just borrowing over, say, a three year period, and you're only 35% geared. It's easy to borrow money. Thank you.
Thank you, Adam. With our next question comes from Markuz Jaffe from Peel Hunt. Marcus, your line is now open.
Thanks. Morning, chaps. Quick one from me is that, are you seeing cost price inflation of new projects coming through? Obviously, we've had news about a couple of pretty high-profile development projects, no longer being economically viable based on prices they've struck, with subsidies, et cetera, or CFDs. The second part of that is that then supportive of existing operational asset prices? Thanks.
It's not really our business, because we just buy operating assets, but we are aware, because we are a player in the wind industry generally. Tangentially, that, yes, people are talking about CapEx, inflation and yeah, there are some high-profile projects where, you know, the CapEx inflation is such, and the cost of capital, increase is such, put the two together, means you can no longer support the originally agreed tariff. Yes, we're aware of that. It's totally irrelevant to us. We just buy operating projects, so someone's already had to buy and build them. We then price the cash flows, as they are. Do I think all of that has any read-across into the value of operating assets? No, not really.
Operating assets are a series of future cash flows. The only thing that really matters is the discount rate that you use to price them. Just 'cause steel and concrete costs a lot more, doesn't really drive the value of a set of cash flows. The value of a set of cash flows is driven by the discount rate you use to value them. The OpEx is obviously very small, and they're very high margin businesses. You know, you ask about CapEx, but, you know, to the extent there's inflation in OpEx, it's not very, really a large part of the cash flow. Even if it is, the chances are your revenues are going up by more than your OpEx. Again, inflation's good. Inflation's our friend.
Okay, thanks.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask any further question, please press star followed by one on your telephone keypad now. We have no further questions on the line. I'll now hand back to Steve and Lily for final comments.
Thank you very much for joining. They were great questions. Obviously, we did the present reasonably well, so, and it, we've been itching to get out to talk to people for a month or two now. I think you know, this is a very stable business, but there are obviously some perceptions of things that are a problem that hopefully, you know, things like debt, inflation, power prices. You know, we're in good shape. Ultimately, you know, the message in a, in a higher interest rate environment about returns being high is obviously pretty crucial. That message, if we get out loud and clear, that will be the thing we're talking about over the next few weeks.
Then alongside that, you can make transactions now accretively, and potentially even sell above NAV. That's something that people are genuinely forced to. Thank you for being with us this morning, and hopefully you have a good rest of the day. Thanks. Bye.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.