Ørsted A/S
Q2 2021 Earnings Call Transcript

Published: 12 Aug 2021

[Operator:]

Hello, and welcome to the Ørsted Q2 2021 Earnings Call. For the first part of this call, all participants will be in a listen-only mode. And afterwards, there will be a question-and-answer session. Today, I am pleased to present Mads Nipper, CEO; and Marianne Wiinholt, CFO. Speakers, please begin.

[Mads Nipper:]

Thank you very much, and good morning good afternoon everyone. And welcome to the Q2 2021 earnings call. Having now been part of Ørsted team for more than seven months, I'm pleased to say that, we've continued to execute on many important strategic milestones in the second quarter of 2021. And I'm constantly impressed by the sheer intensity with which our company manages to progress so many important areas in parallel. During the first half of 2021, we have been impacted by very low wind speeds across our portfolio, but we do maintain our full year EBITDA guidance of DKK 15 billion to DKK 16 billion, due to the strong performance from our CHP plants and high earnings from gas business, as well as additional earnings from finalized construction projects in offshore. Most recently, we won with a full bid for our 1,148 megawatt Ocean Win two project in the competitive solicitation in New Jersey, which grows our firm offshore wind capacity to 18.5 gigawatts and brings us closer to our new 30 gigawatts by 2030 offshore wind ambition that was launched at our Capital Markets Day. This win is another tangible example demonstrating that we can and will continue to be the undisputed leader within offshore wind, while creating value for shareholders. This quarter, we launched several key strategic partnerships in Japan, Korea, Norway and Scotland, further positioning ourselves to reach our 2030 aspiration to become the world's leading green energy major. These partnerships included our Japanese consortium established to JWD and Eurus. It included an MOU with Korean POSCO to support the development of 1.6 gigawatt offshore wind projects off the coast of Incheon City and to conduct feasibility studies on potential collaboration on renewable hydrogen in Korea. It also included our consortium established with Fred. Olsen Renewables and Hafslund Eco in Norway. And our newest partnership established with Falck Renewables and BlueFloat Energy for the ScotWind lease round where seabed bids were submitted in July. I'll also point to the fact that, the latter two of these partnerships confirm our commitment to floating foundations as a complementary technology to bottom fixed offshore wind. As an example of our view that bottom fixed and floating are complementary technologies, we also submitted bids for bottom fixed offshore wind project rights at the ScotWind leasing round as a stand-alone developer. We also finalized a number of agreements during the quarter as we completed our 50-50 joint venture with PGE in Poland for the Baltic a 2 and 3 projects. We closed the rookfield Renewable, Ireland acquisition and closed the 50% farm-downs for Borssele 1 & 2 to Norges Bank. And on the topic of farm-downs we have now launched the structured process regarding the farm-down of our Hornsea 2 project in the UK with the aim of closing a deal in 2022 after the asset has been commissioned. We continue to see very strong interest from potential partners for our assets and with recent partnership transactions in mind, we are optimistic about also executing a strong deal for Hornsea 2. We also progressed our market-leading renewable hydrogen and green fuels pipeline with the construction start of our first renewable hydrogen project H2RES. This project will have an electrolyzer capacity of two megawatts and will use our two Avedøre Anholt wind turbines to investigate how best to combine efficient electrolyzer facilities with fluctuating power supply from offshore wind. Moreover, we entered an agreement with Hofer to source renewable power for the next phases of the green fuels for Denmark project. Within our onshore business, we commissioned our first large-scale combined solar PV and storage facility Permian Energy Center, as well as our largest onshore wind project to date the 367 megawatt Western Trail Wind Farm both located in Texas. As a top five developer in the US and recent entrant in the EU, we continue to demonstrate our on-time and on-budget construction capabilities. Our adjustability to customer demands through hybrid projects and the benefits of having a portfolio approach to off take. On the topic of onshore, we recently announced that Declan Flanagan has decided to step down from his position in the company. 12 years after founding Lincoln Clean Energy and three years after Ørsted's acquisition, Declan felt it was the right time for a change. We have initiated the process for recruiting the next CEO of onshore and effective immediately, Neil O’Donovan; our Chief Operating Officer of Onshore has been appointed interim CEO of Onshore. At our recent Capital Markets Day, we set an ambitious growth target of reaching an installed onshore capacity for 17.5 gigawatts by 2030. And we have a very strong set of value-creating growth opportunities in our pipeline and remain fully committed of reaching that target. I am confident that the strong team and organization that we have built will continue the impressive work we've seen over the past three years. Let's now turn to Slide 4 and look at our New Jersey accomplishment in greater detail. We are thrilled to have been successful in the second competitive offshore wind solicitation in New Jersey. Here, the full amount of our 1,148 megawatt Ocean Wind two project was awarded a 20-year contract starting at US$84 per megawatt hour in 2029 and escalating 2% per annum, which equals a levelized 2017 price of $67 per megawatt hour. Subject to final investment decision, the project is expected to be commissioned in 2029. We see this project demonstrating our capabilities in creating value in a competitive environment, by leveraging our expertise to help our customers, achieving their ambitious renewable targets, deliver on strong local content and ultimately execute a very attractive project. With the award, our Ocean Wind lease area will be utilized to its maximum capacity of 2.3 gigawatts. Moreover, with our 4.1 gigawatt of awarded capacity, we have the largest US offshore wind development pipeline, which unlocks significant synergies in procurement, construction and operation. In addition to the awarded capacity, Ørsted and our partners still have proprietary rights to around 4 gigawatts of remaining seabed leases on the US East Coast, which can be utilized for upcoming solicitations. Turning to Slide 5, where I'll give an update on our offshore and onshore construction projects and renewable pipeline. Starting with our offshore and onshore projects under construction, the construction work for all products continues according to schedule. At Hornsea 2, as of today, 128 out of the 165 foundations and 59 of the 165 turbines are installed at sea. When commissioned in the first half of 2022, Hornsea two will become the world's largest offshore wind farm, exceeding our own Hornsea 1. At our Greater Changhua 1 and 2a project, we have started offshore construction work with installation of the export cable and pin piles for the foundations and continue to progress the associated onshore construction. We expect to commission the project on time in the second half of 2022, but the continued dynamic COVID-19 restrictions in Taiwan, could potentially impact the construction time line. In the first quarter of the year, we discovered an array cable protection issue at several of our offshore wind farms across the UK and Continental Europe. We are progressing the technical investigation process and our assessments are unchanged, since our last update and still point to a total financial impact of around DKK 3 billion across 2021 to 2023, with approximately one-third expected to be capitalized. We continue to see good progress on our onshore construction program and we do expect to commission Mussel Shoals in Q3 of this year, as the project is in the final stages of testing and commissioning. By year-end, we expect to commission Haystack and our other assets under construction, Kennoxhead 1, Old 300 and Helena Energy Center and they are on track to be commissioned in the first half of 2022. During Q2, we added a 302 megawatt onshore wind project, Lincoln Land in MISO to our construction program. We entered into an agreement to acquire the project in May and we expect to both commission the project and close the transaction by the end of the year. While we continue to have a development focused culture in our onshore business, we also have proven to buy well and we see this project bringing diversification benefits at solid value to our portfolio. This brings our installed and under construction renewable capacity for the group to 16.5 gigawatt. As for our water projects, we are also seeing strong progress. Starting in the US with the increased resources at the Bureau of Ocean Energy Management or BOEM and various indications of momentum on both the federal and state levels, we do remain confident that three of our largest US projects Ocean Wind 1, Revolution Wind, and Sunrise wind are on track to be commissioned before the end of 2025. Both Ocean Wind 1 and Revolution Wind have their notices of intent and Sunrise Winds notice of intent is expected during the third quarter of this year. As previously communicated South Fork is still expected to be commissioned by the end of 2023. Following its draft environmental impact statement issued in January 2021. And Skipjack Wind 1 is still on track to be commissioned by its previously updated expectation of 2026, which reflects our updated interconnection landfall plan and our proposed Maryland II project bid. Our awarded projects in Germany, Taiwan and Poland also continue on track. This puts us at 25 gigawatts of firm renewable capacity from projects commissioned under construction or awarded across offshore and onshore. And with this, I'm happy to say that with our 25 gigawatt of firm capacity, 22 gigawatts of substantiated pipeline and more than 35 gigawatts of opportunity pipeline in offshore, we are well on our way to reach the 50 gigawatt by 2030 ambition. Let's now move to slide 6 and an update on upcoming offshore wind auctions and market developments. We continue to see numerous auction and tender based opportunities opening and being awarded in the coming six to 18 months. And with our recent awards in Poland and New Jersey, the next results are expected for Maryland and Japan in Q4 of this year. In Maryland, we submitted a bid for 760 megawatt through our Skipjack 2 project in response to the Public Service Commission's call for up to 1.2 gigawatts of offshore wind. Our proposal includes numerous synergies with our already awarded 120-megawatt Skipjack Wind 1 project, pledges to environmental justice initiatives and commitments to significant manufacturing operations that will enable Maryland to establish itself as a significant player in the offshore wind supply chain. In Japan, we submitted three bids with our joint venture partners one with TEPCO in Joshi and two with JWD and euros in Nocera and Yuri Hanzhong. The auction comprises a total capacity of 1.5 gigawatt split between four zones, 415 megawatts for Nocera, 730 megawatts between Rihand North and South, and 370 megawatt for Joshi. This auction is an important first step for Japan to achieve its target of 10 gigawatts of offshore wind by 2030 and 45 gigawatts by 2040. And looking at the rest of the auction time line, we expect most auctions and tenders to kick off in 2021 with results expected during 2022. As we work towards our vision of Ørsted being a catalyst of change towards a world that runs entirely on green energy, I am proud to be part of a team with the talent, ambition and the will to constantly push the agenda and this quarter was no exception. And with this, I will now hand over the word to Marianne.

[Marianne Wiinholt:]

Thank you Mads, and good afternoon from me too. Let's start on slide 7, where I will go through the EBITDA for Q2 2021. We realized a group EBITDA of DKK8.2 billion, an increase of DKK5.2 billion. The increase primarily related to the 4.5% farm down gain from the Borssele 1 and 2 divestment to Norges Bank. In addition, Q2, 2021 included a positive effect of DKK150 million from ceasing to report according to the business performance principle. And finally Q2 2020 included earnings from our distribution B2C and City Light businesses, which we have divested. When we adjust for these effects earnings in Q2 2021 was in line with last year. Earnings from offshore sites were negatively impacted by wind speeds significantly below the norm. In Q2 2021, the wind speed came in at 7.8 meter per second, compared to the normal wind of 8.6 meter per second. This difference in the wind speeds, compared to a normal wind quarter, translates into a negative EBITDA impact of around DKK900 million. As expected, Q2 2021 was also negatively impacted by higher transmission tariffs, following the divestment of the offshore transmission assets at Walney Extension and Horns Rev 1 and lower earnings from Horns Rev 2, due to the subsidy period ending in October 2020. These negative effects were partly offset by the full ramp-up of Borssele 1 & 2 and from the last 400-megawatt of Hornsea 1 receiving, CfDs from April 2021. In Q2, 2021, the underlying earnings from partnerships primarily concerned adjustments to finalize construction projects, while Q2 2020, related to the construction of Virginia coastal wind and lower CapEx at Hornsea 1. Our onshore business was positively impacted by the ramp-up of generation from the wind farms Willow Creek and Plum Creek, as well as the solar PV farm Permian Energy Center. However, the ramp-up was more than offset by lower wind speeds, costs relating to the Brookfield Renewable Ireland transaction, a subsequent credit loss relating to the winter storm period in February 2021 and a gain, from the divestment of Oak Solar in Q2 2020. In Bioenergy and Other, the underlying earnings significantly increased, driven by very strong performance at our CHP plants, where earnings increased due to higher power prices and sale of ancillary services driven by the colder weather. Within our gas and markets and infrastructure, the significant increase in gas prices, led to a net positive effect from revaluation of gas at storage and storage hedges, if we then turn to slide 8, where I will take a quick look at wind speeds, across Europe, in 2021. In the first half of 2021, we have, as I said, experienced, wind speed significantly below the norm. And the financial impact from these low wind speeds in the offshore portfolio up until end of July is negative DKK1.4 billion with the majority of the negative impact realized in Q2 and July. On the slide, the deviations of the wind resource across Europe, compared to the historic norm are shown. The light green and dark blue color indicate wind speeds below the norm. And similarly, the yellow and red colors indicate wind speeds above. From these wind maps, it is evident, that while the wind speeds in most of Europe have been worrying -- varying above and below the norm. The areas where the majority of our offshore assets are situated, namely, in the North Sea and the Irish Sea, here we have seen wind speeds significantly below the norm, especially during the second quarter. And the low wind speeds continued into July. While fluctuations in wind speed from month-to-month are completely normal. We regard this prolonged period during 2021 with these low wind speeds, as quite unusual, but don't see any structural changes to our long-term wind speed projections. In Q1 2020, we had wind speed significantly above the norm. And realized an $800 million outperformance compared to a normal wind period. And the reality is that, wind speeds will, vary from quarter-to-quarter but over time revert to the mean and be quite stable. We then continue to slide 9 and our financial performance and net interest-bearing debt. Net profit for the period totaled DKK5.5 billion, a significant increase on last year mainly due to the Borssele 1 and 2, farm down gain. In addition, our net financial income and expenses amounted to a negative, DKK0.4 billion, compared to a negative of DKK 1 billion in Q2 2020. The lower net expenses were mainly related to lower interest expenses due to the lower net debt, while Q2 last year was adversely impacted by the early termination of the project finance at our US Block Island projects resulting in a loss on an interest rate swap of DKK 0.4 billion. Finally, our tax on profit for the period was positively impacted by an updated assessment of our uncertain tax position and the increase of the UK tax rate from 19% to 25% from 2023. This was partly offset by the initial recognition of deferred taxes related to the tax equity at Permian Energy Center, Muscle Shoals and our US offshore portfolio. Free cash flow totaled DKK 1.6 billion in the quarter. Cash flow from operating activities included the tax equity contribution from our partner at Premium Energy Center. The divestments related to the 50% farm down of Borssele 1 and 2 and the 25% farm down of Ocean Wind 1 as well as the final settlement with the IP related to the Ørsted C1 transmission divestments. Our gross investments totaled DKK 12.1 billion, driven by continued investments into offshore and onshore wind and solar PV farms as well as the acquisition of Brookfield Renewables Ireland. Our net debt at the end of second quarter amounted to DKK 12.1 billion. And the lower net debt during the quarter primarily reflected the positive free cash flow as I just described. Let's then turn to Slide 10, which shows our financial and non-financial ratios. Our key credit metric FFO to adjusted net debt stood at 63% for the 12-month period, ending in June 2021, which is well ahead of our credit metric target. The metric was positively impacted by the farm-down gain of the Borssele 1 and 2 farm down – wind farm, sorry. Our return on capital employed came in at 12.5%, with the increase compared to last year being attributable to a higher EBIT over the 12-months period. We are well on track to achieve an average return on capital employed of 11% to 12% between 2020 and 2027, as guided at our recent CMD. Our greenhouse gas emission intensity decreased, due to additional offshore and onshore capacity. This was partly offset by higher power generation from our coal-fueled units, where we have a regulatory obligation to make all of our energy capacities available to the market. We remain on track to meet our scope 1 and 2 target of less than 10 grams CO2 equivalents per kilowatt hour in 2025. Turning to safety, where we have seen a reduction of 10% in the number of injuries. And as a result, the total recordable injury rate has decreased from 3.7% in the first half of 2020 to 3.1 in this first half. Let's then go to Slide 11, where I will go through our implementation of the EU taxonomy. As part of the European Green Deal to become the first climate neutral continent by 2050, the EU Commission has established the EU Taxonomy as an important enabler to scale up sustainable investments. The Taxonomy is a catalog of environmentally sustainable economic activities, each with criteria to determine if they sustainably contribute towards a sustainable economy. At Orsted, we want to be a catalyst for change and we have committed to taking a leading role in the global green energy transformation. We therefore welcome the new reporting framework and during the year, we have assessed whether our activities can be identified in the taxonomy and thereby be classified as taxonomy eligible. Subject to fulfilling certain criteria on sustainability, contributing to at least one environmental objective, not doing significant harm on other environmental objectives and complying with minimum social safeguards, the activities will be classified as taxonomy aligned. Although the upcoming EU requirements for reporting on taxonomy eligible activities, does not come into force until January 2022, we have decided to disclose approximate levels for our taxonomy eligible share of revenue EBITDA and gross investments today. We plan to complete the criteria screening before year-end and also then report on taxonomy aligned shares in our annual reports, one year ahead of the requirements. It should be noted that the numbers we disclose, as part of this quarter's results, are approximate rather than exact numbers as some uncertainty related to the final interpretation of the taxonomy still exists. In the first half of 2021, the taxonomy eligible share of our revenue was above 65%. The non-eligible part of our revenue, primarily concerned our long-term legacy activities, related to sourcing and sale of gas, fossil-based power and heat generation at our Danish CHPs and sale of power to end customers. The corresponding share of EBITDA was above 95% and the share of gross investments was above 99%. And then finally, let's turn to slide 12 and the outlook for 2021. We reiterate our full year guidance for 2021 EBITDA of DKK 15 billion to DKK 16 billion, but we currently expect an outcome in the low end of this range, mainly due to the very low wind speeds in June and July. The guidance assumes normal wind speeds in the last five months of the year. As I mentioned earlier, the adverse effects from the low wind speeds on the entire offshore portfolio up until end of July, is a negative DKK 1.4 billion compared to a normal wind year. This negative impact as well as the warranty provision of DKK 0.8 billion relating to the cable protection system issue, are partly offset by the strong performance from our CHP plants and the high earnings in our gas business as well as additional earnings from our finalized construction projects in offshore. As in previous years, our EBITDA guidance does not include earnings from new partnerships during the year, which means that the farm-down gain from Borssele 1 and 2 is excluded from our full year guidance. And so is the gain from the Changhua 1 farm down, which we expect to close later this year. Looking at the directional guidance for our business units. We changed the offshore guidance to significantly lower from lower due to the very low wind speeds and the warranty provision related to the cable protection system issue. Moreover, we changed the directional guidance for Bioenergy and other to higher from previously lower, following the high earnings from CHP plants and gas markets and infrastructure in the first half of 2021. We are increasing our gross investment expectations to DKK 39 billion to DKK 41 billion from the previous level of DKK 32 billion to DKK 34 billion. The increase reflects the Brookfield Renewable Ireland acquisition and the associated CapEx spend for the remainder of 2021 as well as the expected acquisition of the fully constructed Lincoln Land project. And with that, we now open up for questions. Operator, please.

[Operator:]

This concludes our presentation, and we are now happy to answer your questions. This call will have to end no later than 3

[Deepa Venkateswaran:]

Thank you. My question is on the Lincoln Land project given that this is -- when you acquired it it's already constructed by someone else that seems to be a bit different from the previous acquisitions that you've done. Maybe you can elaborate on the rationale other than just the diversification on MISO and maybe talk on the value creation? And secondly should we expect more of such deals where you will acquire existing projects, or is this should we look at this as a one-off?

[Mads Nipper:]

Thanks a lot Deepa. I can add some have some comments to that and Marianne if you are free to supplement. But I think honestly I think the two main reasons are that this is really an important diversification into MISO as mentioned but also that it is a value-creating project. We will generally maintain our focus on greenfield development. That's what we do best. But when we do come across opportunities like this one that we believe we can buy well and therefore also create value from. Then this is something that we will opportunistically choose to do which was the case of this time. And then I'll also mention that this actually did come -- we have not mentioned that, but this did come with another early-stage development opportunity as well which is something that adds additional value to this acquisition as well.

[Deepa Venkateswaran:]

Thank you. Did Marianne want to add anything?

[Marianne Wiinholt:]

No, I think it was covering.

[Deepa Venkateswaran:]

Okay. Thank you.

[Operator:]

And the next question comes from the line of Alberto Gandolfi from Goldman Sachs. Please go ahead.

[Alberto Gandolfi:]

Hi, good afternoon and thank you for taking my question. I wanted to go maybe back to the topic of equipment. And when we look at your slide five, there are about -- you're in the final straight, particularly in offshore on Hornsea two and Greater Changhua, but there's about 8.5 gigawatt of awarded projects where you have not begun construction yet. You've already set your topline on those projects. And what I was wondering is can you give us please more color on fixed costs procurement strategies, specifically how much of the equipment is procured on a fixed cost? Do you still need to hire staff to develop those facilities? Have you already fully secured any third-party vessels or ships or EPC that you might need? And perhaps you can talk about as well if you've been able also elaborating -- extending sorry at this point to cables not just to the turbine. So, I'm just trying to figure out how we should think about cost inflation on those awarded projects. Thank you so much.

[Mads Nipper:]

Thanks a lot Alberto. I can try and -- it's obviously a quite complex issue. But I'll say just as a fly into this generally the impact of the cost inflation sort of midterm -- short and midterm is more moderate. And it's obvious that many of these projects are being constructed quite a few years into the future. And therefore, if the current inflation rates either sustain or even worse continue up then of course there is an impact of this. As we elaborated on our Capital Markets Day, we are doing a number of things on these projects to ensure that we create predictability and certainty as to what our cost levels are going to be. That will never secure the full cost. So there will always be an exposure. But in this case, I mean, yes, we did secure vessels for some of these upcoming projects. We are -- we have worked with cable manufacturers for a while. And have settled prices on some of that also for HVDC cables and we are locking in also some of the raw heavier raw material categories such as steel. And I believe we said that up to 70% of the near-term US construction projects or nearer-term US construction projects we actually have that transparency already. And then of course what we try to do is as early as possible to lock the agreements with our suppliers to ensure that we create the transparency. There is of course, if you look at projects that are going to be constructed all the way through 2029 as the latest one there will of course be an exposure. But we do believe that we are generally in a good place and compared to some of the many industrial companies but also some of our partners in the supply chain we are less exposed with a moderate impact short to midterm, but of course, it's something we are following incredibly closely. I guess, this is -- Marianne unless you want to add something, I think, this is as close as we can get because it very much is a project-by-project approach.

[Operator:]

And the next question comes from the line of Rob Pulleyn from Morgan Stanley. Please go ahead.

[Rob Pulleyn:]

Hi. Thanks. Good afternoon. I think the cost inflation might be done. So may I just ask on the CapEx guide? Previously it was 32 to 34. The new ones 39 to 41. Brookfield I believe is about 4.2. There's the Lincoln acquisition. I was just wondering whether you could confirm, is there any other movements in your CapEx guidance that we should be aware of? In particular is there any, sort of, inflation to existing CapEx expectations in 2021 captured in that uplift? And that's the one question.

[Marianne Wiinholt:]

Yes. Happy to answer. No the increase only reflects the two things that you mentioned there the Brookfield, the acquisition price including the CapEx spent for the remainder of the year. So that's approximately five. And then the last two is the Lincoln Land. So it's purely that. No cost inflation in that number.

[Rob Pulleyn:]

Marvelous. That’s great to hear. I will turn it over. Thank you.

[Operator:]

And the next question comes from the line of Kristian Johansen from Danske Bank. Please go ahead.

[Kristian Johansen:]

Yes. Thank you. So my question is regarding your earnings in bioenergy and other. So just wondering around the dynamics if power prices stay at these levels and the same with gas prices should we expect a continued elevated earnings level for this business?

[Marianne Wiinholt:]

There's two different answers to the different areas. Yes for Bioenergy, we benefit from these prices. And if we continue to see these prices we will see elevated earnings. On the gas business that is actually as I've said many times before it is a margin business. And these positive fluctuations we see from revaluation of storage and hedging of these storages. That is in a way timing effects that will net out over time. We have positive earnings in the business, but it's not the same volatility as you will see in the CLPs.

[Mads Nipper:]

And then Kristian, if I can just briefly add. Also bear in mind that the Q2 overperformance of Bioenergy was obviously both driven by the price level -- by the power price level, but also driven by the unusually cold spring in Denmark with April. And also the first half of May, we did produce and sell a significantly higher share of value-creating heat from those plants as well which contributed to the very strong performance in Q2.

[Kristian Johansen:]

Understood. Thank you.

[Operator:]

And the next question comes from the line of Sam Arie from UBS. Please go ahead.

[Sam Arie:]

Thank you very much and thanks for the presentation today. I think you explained very clearly on the quarterly results and the wind speed impact. So I don't have any questions on that. And I'd just like to ask one sort of bigger picture question. Now coming back again for your very interesting page 5. And on the right-hand side of this you show us your substantiated pipeline which you also had in the CMD slides? And I just wanted to ask can you -- I mean my assumption is all of this is going to get built. The question about auctions and so on is just what's the timing, which assets get built when. But I think if you look at the bigger picture in the world and the IPCC report this week and so on it's hard to imagine that 22 gigawatt there isn't going to get built. So can you talk to us just a little bit about -- or if there's anything in there which is kind of competitive i.e. maybe there's a gigawatt in there which you could lose to somebody else somehow, or is that all 22 gigawatts of rights that only you can develop? And can you tell us a little bit about what it costs to add a gigawatt to that substantiated pipeline, or another way of looking at it how much should we expect that substantiated pipeline to grow going forward – keep it, but I'd love your comments on those. Thank you.

[Mads Nipper:]

Thanks a lot Sam. Starting from the back. We can't say what it will cost because it really is an impossible question to answer because I mean we don't know what future seabed auctions will net out with what -- whether it's upfront payments or whether it is market development or whether it's simply commitments to do local development. So it really is -- it is borderline impossible to give sort of an average number for that. You are right that a large share of the 12 -- if we speak primarily about the 12 gigawatt of offshore firm or substantiated pipeline. A majority of that is actually proprietary seabed leases which will very, very likely materialize or it's unlikely that they won't materialize. But they are also part of that which is something we are developing together. For example, our Japanese bids would also be in there. And that would mean that we -- there is of course a risk that part of that will not materialize. But the majority of it will primarily a matter of time, but there is also some of it where there is a risk that it won't materialize. And therefore, that we will continue. We'll of course work hard to continue to take some from our so-called substantiated pipeline and move into the firm pipeline, so that that continues to go up to ensure that we safeguard our ability to deliver the 30 -- or the 30 gigawatts in offshore and the 50 gigawatts in total.

[Marianne Wiinholt:]

And we also strongly believe that most of the onshore pipeline will also be built because there we are not up against competition on any of it.

[Mads Nipper:]

So it's a number. It's a pipeline that we will -- or it's a pipeline that we feel very comfortable with. It is likely that a smaller part of that will not be built, but we also know that we are working to constantly increase that pipeline.

[Sam Arie:]

Okay, very good. And I – I’d love to follow-up, but actually I think you’ve said – thanks very much and so we continue that discussion….

[Mads Nipper:]

Happy to.

[Operator:]

And the next question comes from the line of John Musk from Royal Bank of Canada. Please go ahead.

[John Musk:]

Yes, good afternoon everyone. My question is on the taxonomy slide that you've provided this time. And I just want to get your sense of what you think investors will be looking for in the future? Is it – do you need to tick all three boxes around revenue EBITDA and CapEx. And obviously the revenue number is much lower and perhaps slightly surprised by that. Is there -- as a consequence of the answer to the first question is there a need for you to do anything about that? Is there any way you can influence that other than further disposals of those noncompliant businesses?

[Marianne Wiinholt:]

Yes. Good question John. Thanks for that. We will focus on all three. And all three of them we see as equally important and we think also that the market see all three as important. On the revenue side, we are at DKK 65 million which in a way might seem low when you compare to the EBITDA number. But it will be reduced. We have this reduction target for scope three emissions. We have a lot of gas that in a way will be taken out as the contracts expire. We have also seen that we are scaling down on the customer business. We made this divestment last year. So that will -- the revenue part will significantly increase over time. One of the issues we have is that we cannot always distinguish between what is green power when we sell something and what is black power. And if we can't distinguish in a way we cannot call it eligible and therefore it goes into -- to the black you can say. But as we mature, we will see this number going significantly up. And as we understand it being above 50% in a way is for now in a way something that many would be striving for, but our target is of course significantly higher than that.

[John Musk:]

And is there a target that you're willing to communicate on that strong number on the revenue side?

[Marianne Wiinholt:]

No. We've -- since in a way the taxonomy is not completely clear yet and there's still details missing. We haven't set a target.

[Mads Nipper:]

Although not the biggest part of the remaining 35% of the non eligible. Bear in mind, we have committed that our last coal-fired combined heat and power plant is decommissioned in 2023. So that is -- that share will go away relatively short term.

[John Musk:]

Okay. Thanks very much.

[Operator:]

And next question comes from the line of Dominic Nash from Barclays. Please go ahead.

[Dominic Nash:]

Good afternoon and thank you for – question. Can I ask a question on power prices? It's kind of similar to the inflation questions from earlier. When you look at the forward curves, you can see that they've shot up quite a lot in emerging markets. What's the potential sensitivity to you and your sort of hedging policy on your assets selling into this? And on the medium term, what we're seeing today with the significantly higher power prices, is that going to impact your view of what you put into your numbers when you bid for these PPA auctions in the shorter term, or are you currently just sitting on the sort of the long-term still the same power price as we were 12 months ago?

[Marianne Wiinholt:]

Yeah. You can say that with the position we are in where we have subsidies and we have PPAS and we have a very, very high hedging percentage. We don't have much merchant exposure. So that means, that basically we don't benefit from the current high-power prices, which of course is not good in this market, but which we have benefited from in many other situations because we are more than 90% hedged and from a very small exposure because most of it as I said is subsidies. Where we can benefit is that we have our hedging strategy and we are now able when we roll in quarter-by-quarter, we can hedge at higher levels in year three and year four for example than we could just half a year ago. This does not change our view on the long-term power prices. So therefore, when we bid into these auctions, we still use in a way the same fundamental models that we have for long-term power prices.

[Dominic Nash:]

Thank you.

[Operator:]

And the next question comes from the line of [Indiscernible] from Danske Bank. Please go ahead.

[Unidentified Analyst:]

Thank you very much. It's a question on your adjusted net interest-bearing debt. You used to include asset retirement obligations the net value of those in your definition of adjusted debt. But I can see here in your table, in Note 13 that you no longer include those. So you get a lower figure for net interest-bearing debt on an adjusted basis. And thereby this also improves your FFO to adjusted net debt. So I was just wondering why you are no longer including these asset retirement obligations in your definition? Thanks.

[Marianne Wiinholt:]

Good question. We have three rating agencies giving us a rating. As you know there's only one of them that includes these retirement asset retirement obligations in their definition. And the one that is the strictest one does not. So therefore, in a way we try to make something in between these three rating agencies requirements. And we found out that the right thing was to exclude it in a way since two of them don't include it. And as I said, the strictest one don't. So that's the reason. We have been punishing ourselves a little bit too hard.

[Unidentified Analyst:]

Okay. But you're still hanging on to a 25% lower boundary target?

[Marianne Wiinholt:]

Yes, we are. We are. Yeah.

[Unidentified Analyst:]

Okay. Thanks.

[Operator:]

And the next question comes from the line of Louis Boujard from Oddo BHF. Please go ahead.

[Louis Boujard:]

Yes. Good afternoon. Thank you for taking my question. Just regarding the short-term guidance to have a bit more color on it. I was wondering if you could give a bit more details on what you mean by higher or significantly higher or lower significantly lower, if it is an absolute number or percentage. More specifically, when I look at the onshore for instance you are DKK 100 million below past year. And in the meantime, you expect higher, but I know that there is some commission in -- that are going to begin in the second half. But in the meantime, the consensus I think is already at DKK 1.65 billion on the figure, so does DKK 1.65 billion is significantly higher or only higher compared to the DKK 1.1 billion that you posted last year?

[Marianne Wiinholt:]

Yeah. Yes. I'll try to give some more color first on the guidance because I think it's quite relevant for you to understand in a way why we can stick to our guidance when we have this DKK 2.2 billion impact from the cable protection and the lower wind. So I'll start there and then I'll go a little bit more into detail with your -- the part of the question. Yes. So here we say that in a way when we started with the first guidance DKK 15 million to DKK 16 million, we were at the upper end of the range. So let's say we were at 16. Then you deduct the DKK 2.2 billion from these two negative effects I just referred to. And then, the question is what is it that can offset these very big negative impacts? And it is approximately DKK 500 million better result from construction gains, which the major part comes from the Hornsea 1 transmission asset divestment, where we got this final calculation from the authorities, which gave us a higher gain on that. So DKK 500 million from construction gains. Then we are DKK 600 million higher on our CHPs, compared to what we estimated when we started the year. We always use the forward curve when we calculate this, but in a way, the prices are significantly higher. And then the remaining positives to come up to the lower end of the range, is effect from revaluation of storage due to the high gas prices. It is the impact from the Brookfield and the Lincoln Land acquisition and then it is lower cost. So that brings us up to the lower end of the range. And then, you ask, in a way, what definition do we have on higher and lower and significantly higher and lower. And we haven't shared that. And we have some strict internal rules we use, but it's not something we -- it might be we shared one day, but for now, in a way, we have chosen not to share it. So, sorry for that. But I hope you could use my answer on the first part of your question.

[Louis Boujard:]

Yes. Thank you for the first part of the answer.

[Operator:]

[Operator Instructions] And the next question comes from the line of Sam Arie again from UBS. Please go ahead.

[Sam Arie:]

Hi. Sorry. I keep just coming back in, so just one follow-up on that previous discussion. And apologize for dragging this again away from Q2 and back to the topic of the future. But if you look at the substantiated pipeline on your -- at page five, I asked if you could sort of talk about how much it cost to grow and you said that's very difficult. Could you tell us how much it has cost to build the 22 gigawatts that you have there? I'm not sure if that's a number you've given before, but it would be very interesting to know. And the reason I ask you people often, a question I get a lot of the time on valuation is, how much do we think the business will be worth if you never won another project, the sort of ex-growth valuation. But I think that anybody looking at the shares through that lens ought to add the value of the pipeline assets, because even in theory if you didn't develop them they would have value and somebody else would. So just wondering if you can tell us kind of how much invested capital is in the substantiated pipeline, roughly speaking.

[Mads Nipper:]

I think, again, I don't think we can give a very specific number, but we -- but I think the -- when, for example, the seabed leases in the UK for Hornsea 3 and 4, but also the North American seabed was acquired, it was actually a very low price.

[Marianne Wiinholt:]

Next to zero.

[Mads Nipper:]

Next to zero. I mean, incredibly low. And today it represents north of eight gigawatts of substantiated pipeline. So you can say that what's tied up there is very little. And then for when we -- when we buy into a development project as now as for example in Japan, if somebody has been developing that we would pay an amount for that but also a relatively minor amount. So I think it's fair to say that the current -- again I'm speaking primarily for offshore here but the price tag on the current 12 gigawatt is actually small. It's a low price tag.

[Marianne Wiinholt:]

Yes. But if we should sell it today

[Mads Nipper:]

It's a totally different.

[Marianne Wiinholt:]

It's a totally different story. And we haven't paid a lot for the seabed. But of course, we are spending money on getting the EIAs on the whole permitting process which is something we expense. But we are talking of course, many billions of -- if you look altogether just on Hornsea 2, Hornsea 3, Hornsea 4 in a way it is a significant amount that we are spending that we are taking through the P&L.

[Mads Nipper:]

But also that like Marianne says, the value of it today if divested, which we have no plans to do that would be totally different because what has happened since then with not least the recent seabed auctions.

[Sam Arie:]

Yes. Thank you for that kind of forgetting, I was going to jump in then for a minute and tell you -- ask if you were talking down the shares for a minute but I think that you make the point very interestingly now. It's a little bit like the discussion we had on the RWE call earlier today, about their carbon hedges some of which they put on at very low values when the market didn't see the value but which they now have on the balance sheet and are obviously, worth massively more. But I think the value of that substantiated pipeline is a huge topic that we should keep discussing.

[Mads Nipper:]

It is an incredible value incredibly valuable asset. And I think the ability to bid in into the upcoming for example CFD four round in the UK with Hornsea 3 lease is one that will allow us -- which we firmly believe to both be very competitive and also have a very value-creating project. That obviously, is a privileged position.

[Sam Arie:]

Thank you. So I finger crossed for that event. And thanks again for your follow-up answers.

[Operator:]

And we have another follow up from Kristian Johansen from Danske Bank. Please go ahead.

[Kristian Johansen:]

Yes. Thank you. Just on your German zero subsidy date I think that's what you call Borkum Riffgrund 3 now. As I recall, it from when you got the allocation you needed to take an FID by 2021. Can you just remind me whether that's correct? And in that case what the status is of that project?

[Marianne Wiinholt:]

That is correct, Kristian. We expect to take FID in Q4 and we are well on track to do that.

[Mads Nipper:]

And we can also say that the process of securing PPAs for that project [indiscernible] is going very well.

[Kristian Johansen:]

So that was sort of my follow-up it was more in terms of whether you have secured a sufficient amount of PPAs for that project or whether you need to secure more before taking FID?

[Marianne Wiinholt:]

We can say that it's a highly attractive asset. So we are well covered.

[Kristian Johansen:]

Understood. Thank you.

[Operator:]

The next question comes from the line of Dominic Nash from Barclays.

[Dominic Nash:]

Yes Thank you for the follow-up question I've got here is the OFTOs in the UK as I understand a 20-year contract with yourselves. I think they're under consultation at the moment with optimist what happens in year 2021. And I also would be interested in hearing what you think the remuneration that you will need to provide to the optimist would be? And when do we expect to get the response from the consultation? Thank you.

[Marianne Wiinholt:]

Are you now talking about Hornsea 2 OFTO. I'm a little bit uncertain around the question. Sorry for the…

[Dominic Nash:]

No all of them all your wind farms are connected up to transmission assets, but I believe they're only on 20-year.

[Marianne Wiinholt:]

Yes, yes. But that's all settled and agreed upon. So we have fixed agreement and fixed transmission fees we pay. So in a way the only -- it's a completely regulated process. And the only thing that for us is the important thing is in a way what is the return requirement by the buyer, because the lower the return requirement the better for us. And then it is whether we get the allocation price approved. So whether we get some costs that we don't get covered. But that's the only uncertainty. The rest is from our point of view completely regulated and certain.

[Dominic Nash:]

Okay. Maybe I've missed it then, but I didn't know that we'd agreed a price yet for year 2021, I thought it's still up to the bat.

[Marianne Wiinholt:]

We actually know the tones as it's called for the whole period when we make the divestment, because that's built into the whole system.

[Dominic Nash:]

Okay. Thank you.

[Operator:]

And we have one more follow-up question from Deepa Venkateswaran from Bernstein. Please go ahead.

[Deepa Venkateswaran:]

Thank you. I wanted to ask a follow-up on the cost inflation particularly because on the turbine contracts there is an element of cost indexation where it's automatically passed on. So I just wanted to check with you. I mean, obviously, you've talked about the hedging on the US projects. But more broadly at what point do you lock your costs down? And for the German project for which you've not taken FID and haven't placed a firm order, I presume the indexation would work against you for now. So just wanted to talk in terms of the indexation that we see and how that pertains to how you manage your risk?

[Marianne Wiinholt:]

Yes, Deepa, you are right in a way we are sitting on the steel exposure. And we do it case-by-case. Sometimes in a way we have gone and hedged like we did for the US portfolio. But we have not done that for Germany. So yes, you're right, we have an exposure there. And then in a way our choice when we need to lock it in. And -- but that is already in a way. These high prices is built into the business case that we will take FID on in Q4.

[Deepa Venkateswaran:]

And presumably the improving power prices means that, any PPAs you can sign now can be at a better price. So hopefully that mitigates…

[Marianne Wiinholt:]

Yes. That's the dynamic also.

[Deepa Venkateswaran:]

Yes, might be improved.

[Marianne Wiinholt:]

Yes. You're right. Yes.

[Deepa Venkateswaran:]

Okay. Okay. Thank you.

[Operator:]

And as there are no further questions, I'll hand it back to the speakers for closing remarks.

[Mads Nipper:]

Yes. Thank you. And all we have left would be to say, thank you very much for great questions and insightful questions, and thanks for your trust and support, and have a great day.