Orsted A/S (DNNGY) CEO Henrik Poulsen on Q1 2020 Results - Earnings Call Transcript

Orsted A/S (OTCPK:DNNGY) Q1 2020 Earnings Conference Call April 29, 2020 8:00 AM ET

Company Participants

Henrik Poulsen – Chief Executive Officer

Marianne Wiinholt – Chief Financial Officer

Conference Call Participants

Casper Blom – ABG Sundal Collier

Mark Freshney – Credit Suisse

John Musk – RBC

Rob Pulleyn – Morgan Stanley

Klaus Kehl – Nykredit

Peter Bisztyga Bank – America Securities

Marcus Bellander – Nordea

Sam Arie – UBS

Deepa Venkateswaran – Bernstein

Alberto Gandolfi – Goldman Sachs

Kristian Johansen – Danske Bank

James Brand – Deutsche Bank

Henrik Poulsen

Thank you so much and good afternoon everyone and welcome to this earnings call. I hope you're all safe and in good spirits despite these unusual and challenging times. Despite the COVID-19 crisis and its profound impact on societies around the world, we have had a very good start to the year with strong financial results and solid operational performance across the entire business.

I'll give you an update on the effects of COVID-19 shortly, but let me start by summarizing the first quarter highlights. EBITDA for the quarter amounted to DKK 6.8 billion which is an increase of 33% compared to last year. The increase in EBITDA was mainly driven by our offshore and onshore wind farms in operation where we see a year-on-year increase of 25% driven by ramp up in generation from mostly Hornsea 1, but also Lockett and Sage Draw. And that was further impacted by high wind speeds in Europe throughout the quarter.

The strong financial performance in first quarter keeps us well on track to reach our full year EBITDA guidance of DKK 16 billion to DKK 17 billion. And at this point in time we have no indication that the COVID-19 situation will significantly impact our full year earnings and thus we reiterate our 2020 EBITDA guidance.

These first quarter results demonstrate the robustness of our business model and the strength and execution capacity of our organization not least the frontline employees who have kept all our operational activities moving forward under challenging circumstances. The continued build-out within our offshore and onshore businesses brings our green share of heat and power generation to a record high 90% for the first quarter compared to 80% in the first quarter last year. The increase once again underpins our commitment to a world that runs entirely on green energy and it brings us one step closer to our 2025 target of a completely carbon neutral generation.

On the back of our Memorandum of Understanding with TEPCO we have now entered into an agreement to establish a joint venture company for offshore wind in Japan with the intention of working towards a joint bid in the first Japanese auction expected towards the end of this year. The JV is a significant milestone for our market entry in Japan and we're looking forward to supporting Japan's ambitions for renewable power generation.

In the Netherlands we have started the installation of turbines and achieved first power at the 752 megawatt Borssele 1 and Borssele 2 offshore wind farm yesterday. The COVID-19 crisis has made the construction of the wind farm more challenging than anticipated but the project team is working hard to progress the turbine installation on time without compromising health and safety standards and the project is well underway. Earlier this week we signed a 15 year inflation index fixed price agreement with Nestlé UK starting in May 2020. Nestlé will buy the output of 31 megawatt from our Race Bank offshore wind farm corresponding to 125 gigawatt hours of green power per year. This will cover 50 % of Nestlé’s UK power consumption. The PPA is our largest long-term fixed price PPA in the UK.

In March we commissioned our 338 megawatt Texan onshore wind farm Sage Draw on time and on budget. The 120 wind turbine project will have the capacity to meet the annual electricity needs of 120,000 households. We continue to explore industrial scale production of green hydrogen. In the UK we have secured £7.5 million in funding for Phase 2 of the renewable hydrogen project Gigastack.

The project enables us and our partners to conduct a front-end engineering design study on a 100 megawatt electrolyser using renewable energy from the Hornsea 2 offshore wind farm. In Denmark we are working on the H2RES project together with our partners and we have received funding for the construction of a 2 megawatt electrolysis plant including hydrogen storage. The electrolysis plant will generate renewable hydrogen for buses, lorries and possibly taxis. In addition to the funded projects in Denmark and the UK we are involved in other early states renewable hydrogen projects in Germany and the Netherlands.

We remain excited about the significant potential we see in renewable hydrogen to decarbonise industrial processes and replace fossil fuels with hydrogen based e-fuels for heavy transportation and aviation.

At the end of March, the Copenhagen Maritime and Commercial Court decided to close the action for damages in our favour in the Elsam case. The action for damages related to a claim the abuse of a dominant position on the market for wholesale power between 2003 and 2006. We're very pleased with the court's decision and see that’s a natural outcome in continuation of the proceeding acquittal from the competition authorities claim on this matter. However, we were informed earlier this week that the claimants have decided to appeal the case to the Supreme Court.

Turning to Slide 4 on an update on COVID-19, on March 25, we provided the market with an update on our operational and financial situation and gave an overview of the risks related to COVID-19 which could potentially impact our business. Obviously, the situation is constantly developing and we remain vigilant about the unfolding crisis, but let me just take you through the development since our last market update.

I'll start by highlighting that our asset base despite COVID-19 is still fully operational at normal availability rates, with the 25% increase in EBITDA from offshore and onshore wind farms also underlines. While the necessary extensive measures to protect the health of our employees will continue to challenge our operations we remain optimistic about being able to maintain normal availability rates across our operating assets. As our power generation is almost fully hedged the first couple of years, the price volatility seen in the market has had a very limited impact on our financial results for Q1 and it's not expected to have any significant impact for the remainder of the year.

With cash, cash equivalents and committed credit facilities of approximately DKK 30 billion at the end of Q1, we have sufficient financial resources to continue our day-to-day operations and investment program through 2020 and 2021 without further funding. We will not rule out that we will take up further funding over the next couple of years, but we are not under any pressure to do so and we can await the right timing.

Since the market update in March, we have seen some new developments on the risks we highlighted. These risks are primarily related to our construction and development projects. Our construction projects all remain on track, but on a couple of the projects we do see an increased risk of component and service delivery delays from suppliers impacted by COVID-19.

In Singapore, two shipyards manufacturing the substations for Hornsea 2 and Greater Changhua 1 & 2a have been temporarily closed due to the COVID-19 outbreak. At this point in time, we don't expect these shutdowns to have a critical impact on the 900 megawatt Greater Changhua 1 & 2a timeline, whereas the Hornsea 2 construction timeline is somewhat more at risk although it is still too early to conclude.

Our onshore solar and storage project Permian Energy Center is partially supplied with solar panels and inverters from Malaysia and India respectively. The delivery of these components could potentially be delayed due to factory shutdowns caused by the COVID-19 virus. Currently scope of the delay is not considered to be critical and we still expect to complete the Permian Energy Center in 2021. We collaborate closely with all our partners to mitigate these situations as best possible and without compromising health and safety standards. Based on our current outlook, it is our assessment that the COVID-19 related impact on the construction projects will be limited, both in terms of timing and economics.

Turning to our development pipeline, where we currently have the most notable impact from COVID-19. As we have previously communicated, our offshore development projects in the U.S. are moving forward, although at a slower pace than originally expected due to a combination of the Bureau of Ocean Energy Management's prolonged analysis of the cumulative impacts from the build out of U.S. offshore wind, and now also COVID-19 effects.

The two earliest projects in our pipeline, the 120 megawatt Skipjack project in Maryland, and the 130 megawatt South Fork project in New York are most exposed to the risk of delays. For Skipjack, it is no longer realistic to receive the Notice of Intent from BOEM in due time to meet the commissioning date in late 2022. The notice of intent is the first important milestone towards receiving the final permit, the so called Construction and Operations Plan Approval. Therefore, we now expect to commission the wind farm approximately one year later. Likewise, although we have received the notice of intent for the South Fork project, which is also planned for 2022 commissioning date, we have not received a confirmed permit schedule from the federal government outlining when the Construction and Operations Plan Approval will be received. This combined with impacts from the COVID-19 related shutdowns in New York will also very likely delay South Fork to beyond 2022. Although delays are never helpful for value creation, we expect the overall impact on the economics for both of these projects to be contained.

For our largest awarded U.S. development projects Revolution Wind, Ocean Wind and Sunrise Wind, we are expected commissioning in 2023 and 2024. We also see increased risk of delays. We have submitted our COP applications for Ocean Wind and Revolution Wind and are awaiting BOEM to issue their notices of intent for these two projects outlining the timeline to get to a COP approval.

For Sunrise Wind in New York, we're currently unable to progress our offshore site surveys due to COVID-19 restrictions which adversely impacts our COP application process. So for these three projects, we need more visibility on the path to COP approval, before concluding on whether the current commissioning timing in 2023-2024 remains realistic. We expect to have more clarity on this matter after summer. Finally, we have as a precautionary measure taken a DKK 100 million provision for bad debt to cover the COVID-19 related default risk among our customers in our B2B business.

Turning to Slide 5 where I will give an update on the offshore construction projects currently in progress. At our Dutch Borssele 1 & 2 wind farm as I mentioned, we installed the first turbine earlier this month and we have now installed seven out of the 94 turbines. As mentioned, we generated first power yesterday and expect the wind farm to be completed on time by the end of Q4 this year. At the Virginia EPC demo project, the foundations and turbines are on the way to Halifax, Canada from where they will be loaded out to the construction site. And at both Hornsea 2 and Greater Changhua 1 & 2a we continue the onshore construction work on schedule.

In April, we signed a 15 year contract with Ta San Shang Marine chartering the shipping company to build the world's first ever Taiwan flag service operation vessel for the operation and maintenance of our Greater Changhua offshore wind farms.

Turning to Slide 6, on an update on construction projects outside offshore. In onshore, we continue to see good progress on our three construction projects and the onsite construction teams are working well with effective social distancing measures in place. Despite the challenges I alluded to before, we still expect to complete Plum Creek and Willow Creek during 2020 and Permian Energy Center in 2021. At Plum Creek, we have installed 46 of the 82 turbines. At our Renescience facility in the U.K., the plant is now ready to be put back into operation following a number of upgrades to the facility. We expect the plant to be commissioned later this year. The plant is currently de-manned due to the COVID-19 situation, but we will resume the ramp up production as soon as the situation allows for it.

Moving to Slide 7 on an update on market development and upcoming auctions. Usually, I go through three regional market development slides, but as there have been limited new developments in recent months, I will cover the most significant highlights together with the updates to the timeline for auctions and tenders in 2020 and 2021. The market development slides can be found in the appendix to this presentation. We are still looking into a very significant number of auction options and tenders in 2020 and 2021. As most countries and states stick to the original timeline, despite the COVID-19 situation.

In Europe, the bid deadline for the tender of Holland Cost North 1 is due tomorrow and we intend to join the tender. The COVID-19 crisis has caused a decrease in power demand and commodity prices and it will have a deep impact on the global economy. However, we do believe the world will recover from the crisis over the next couple of years. And on this basis, we will continue to take a long term view on the investment opportunities we see in the market across regions and across technologies.

We believe financially robust companies that maintain a long-term view on the market are likely to find additional opportunities in the wake of the current crisis. When assessing these opportunities, we're looking to build a global portfolio of high quality assets, which is diversified along several risk dimensions. Risks considered include among others, sovereign risk, currency, consenting and permitting, construction, supply chain maturity, interconnection and transmission access, merchant price exposure and stakeholder complexity.

The Dutch project up for tender is low-risk on essentially all other dimensions than merchant price exposure. As we seek to build a global project portfolio with a balanced profile across all risk dimensions, we currently see a role for a project with the characteristics offered by the Dutch project. It goes without saying that I cannot go into detail about our bid but I believe that we've made a strong proposition to the benefit of the Dutch society and environment. Should we win the tender? We will leverage our market base set of hedging strategies, as well as the corporate PPA market to balance out the merchant exposure.

Looking towards the U.S., where Maryland has announced the target of approximately 1.6 gigawatts offshore wind capacity by 2030 of which 1.2 gigawatt remains available. Auctions are planned for first half 2020, 2021 and 2022 respectively, with at least 400 megawatts in each auction. In Virginia, Governor Ralph Northam has signed the Clean Economy Act for development of at least 5.2 gigawatts of offshore wind by 2034. Roughly half of the capacity will be developed and owned by Dominion Energy, whereas no plan has been published for the remainder of the capacity.

In New York NYSERDA has been authorized to start procurement of up to 2.5 gigawatt offshore wind capacity. In the beginning of this week, the agency decided not to accelerate the opening of the auction and made COVID-19 concerns. However, we still anticipate the auction to proceed over the course of second half this year.

As mentioned in the beginning of the call, we have established a JV for offshore wind in Japan with TEPCO. Due to a prolonged site designation process and a pending announcement of the final auction design, we now expect the qualification of prospective areas to take place during second quarter this year ahead of unexpected auction towards the end of the year.

Finally turning to Belgium, where the government recently set a target to allocate 2.2 gigawatt of offshore wind by 2022 and 4 gigawatt by 2030. Auctions are expected to take place in 2021 and 2022, but the auction framework is still to be announced. With this, I will now handle over the word to Marianne.

Marianne Wiinholt

Thank you Henrik and good afternoon from me too. And let's start on Slide 8, where I will go through the EBITDA for Q1 2020. In Q1, we realized EBITDA DKK 6.8 billion, an increase of DKK 1.7 billion on Q1 2019 corresponding to a 33% increase.

In offshore, the EBITDA for the quarter totaled DKK 5.6 billion, an increase of DKK 1.3 billion. The earnings from operating wind farms increased 25% compared to last year, driven by the ramp up of generation from Hornsea 1, as well as very high wind speeds in the quarter. Wind speeds amounted to a portfolio average of 12.1 meters per second, which is above a normal wind year of 10.4 meters per second. Availability and that's 93%, which was below Q1 2019. The lower availability in Q1, 2020 was driven by Hornsea 1, due to cable replacement campaigns and Borkum Riffgrund 2 due to largely compensated transmission outage.

Earnings from partnerships totaled DKK 1.1 billion compared to DKK 0.9 billion in Q1, 2019. The construction agreements in Q1, 2020 primarily related to the updated assumptions regarding the divestment of the transmission assets for Hornsea 1. These changed assumptions also forms the basis for the DKK 1 billion increase in our full year EBITDA guidance in early March. Others including project development costs amounted to a negative DKK 0.4 billion. The lower levels relative to Q1, 2019 was mainly due to higher expense product development activities in the U.S. and Taiwan in Q1, 2019.

In onshore, EBITDA totaled DKK 187 million, an increase of DKK 36 million of Q1 2019. The earnings increase of 24% was primarily due to ramp up of generation from Sage Draw and Lockett. The wind speeds for the portfolio was 7.5 meters per second below the normal wind speeds in Texas and below the wind speeds in Q1 2019. Availability across the portfolio came in at 95%.

EBITDA in Markets & Bioenergy was DKK 933 million, an increase of DKK 249 million. The earnings from our gas activities increased by DKK 128 million and this was mainly due to a less negative effect from revaluation of our gas storage, as gas prices had a steeper decline during Q1 last year than it has this year, as well as the positive effects from storage hedges. This was partly offset by lower earnings due to the shutdown from late 2019 until 2022 of the two gas fields, as well as the provision for bad debt which Henrik mentioned of DKK 100 million in our B2B business to cover the extraordinary default risk among our customers due to COVID-19. EBITDA from distribution, B2C and city light increased by DKK 0.1 billion, mainly due to lower costs. As in Q4 2019, earnings from trading related to hedging of our power exposures and power portfolio optimization activity in relation to offshore and onshore are presented in these business units.

In Q1, 2020, EBITDA of DKK 195 million, and a negative DKK 10 million were transferred to from Markets & Bioenergy to offshore and onshore respectively while DKK 390 million was transferred to offshore in Q1 2019.

If we then turn to Slide 9, and our financial performance and net interest bearing debt. Net profit total DKK 3.3 billion a DKK 0.7 billion increase compared to Q1 2019. The higher EBITDA was partly offset by higher depreciation driven by more wind farms in operation and higher financial expenses. Free cash flow from continuing operations was negative DKK 5.7 billion in Q1, 2020. Cash flow from operating activities came in at negative DKK 0.4 billion mainly driven by the EBITDA being more than offsets by funds tied up in working progress on construction agreements and changes in the value of derivatives. Furthermore, DKK 1.3 billion was paid on account tax in Denmark in Q1, 2020.

Our gross investment for the quarter totaled DKK 5.3 billion, primarily related to our offshore projects Borssele 1 & 2 and in Hornsea 2 and Greater Changhua 1 & 2a, as well as our onshore project Sage Draw, Plum Creek and Permian Energy Center.

Our net debt at the end of the quarter amounted to DKK 27.1 billion. The DKK 9.9 billion increase in the quarter primarily reflected the negative free cash flow as just described, as well as the distribution of DKK 4.4 billion in dividends to our shareholders. We had a positive impact from exchange rate adjustments of DKK 0.4 billion.

Let's move to Slide 10, which shows our financial and non-financial ratios. Our key credit metric FFO to adjusted net debt stood at 21% for the 12 month period ending in March. The low level is primarily because it includes the majority of our current tax regarding 2019. For the full year, we still expect the credit metric to be in line with our target of around 30%. Our return on capital employed came in at 11%. The decrease compared to the same period last year was because of the lower EBITDA over the 12 month period, which in Q1, 2019 was significantly impacted by the farm-down from Hornsea 1 in Q4, 2018. This return level is around our target of an average return on capital employed of approximately 10% for the group in the period 2019 to 2025.

Our greenhouse gas emissions continue to decline due to our continuous build out of offshore and onshore wind. And we remain well on track to meet our scope 1 and 2 targets in 2025. Our target is to be carbon neutral in 2025. By neutralizing these lost emissions with carbon offsets. As always, safety is high on our agenda, and we do our utmost to prevent accidents and injuries. Over the last 12 months, the total recordable injury rate also called TRIR amounted to 4.7 which was an increase compared to the same period last year. However, we are off to a better start this year as the recordable injuries in Q4, 2020 fell by 18% compared to last year. Our target is to reduce this rate to 4.2 or lower by 2020 and to 2.9 in 2025.

Slide 11, recaps our 2020 EBITDA and gross investment guidance as well as our long-term financial estimates and policies. As I already mentioned, we increased our EBITDA guidance from DKK 15 billion to DKK 16 billion, to DKK 16 billion to DKK 17 billion on March 4 due to the updated assumptions regarding the divestment of the transmission assets of Horesea 1. Our direction of EBITDA guidance for offshore is still lower compared to 2019, but we now expect earnings from existing partnerships in 2020 to amount to approximately DKK 1.2 billion. In the Annual Report for 2019, earnings from existing partnerships in 2020 were expected to be limited. The directional EBITDA guidance for onshore and markets and buyer entity is unchanged relative to the guidance in the Annual Report for 2019. Our growth investments guidance is unchanged relative to our guidance in the Annual Report and growth investments are expected to amount to DKK 30 billion to DKK 32 billion.

I will now hand back the word to Henrik.

Henrik Poulsen

Thank you, Marianne. On a final note, let me just again emphasize that Orsted is a strong company with a resilient business model and we are in a much less vulnerable position than many other sectors that regrettably or deeply impacted by this crisis. However, the impact of COVID-19 will have material ripple effects throughout all economies and sectors. And you can rest assured that we will not be complacent about its potential impact on Orsted.

We are obviously far from through the crisis and there a still a huge task ahead. As societies around the world seek to contain the spread of the virus, while also taking action to minimize the economic setback and start gradually easing the restrictions on our mobility, work life and our social life. The severe economic and social impact of COVID-19 will be felt for quite a while, but I remain absolutely convinced that the world will soon be on a path towards recovery, maybe with some lessons learned and reflections that will stay with us for the long-term.

It remains to be seen how COVID-19 will impact the speed of the global transition to green energy. Based on the segments, we have received to-date it seems likely that many governments will seek to tackle the COVID-19 crisis and the climate crisis. At the same time, through comprehensive, future oriented investments in sustainability. We will see a temporary decrease in global power consumption during the crisis and a subsequent recession. And we will likely also see some delays to auctions and permits but it will not materially change the long-term growth of renewable energy.

Climate change remains a profound and pressing challenge for the planet. And based on the dramatic price improvements in recent years, the build out of wind and solar power have become a cost effective way of decarbonizing societies, while driving local economic activity and job creation. As such, we are convinced that the public and political focus on sustainability and green investments will remain strong. On that note, we will open up for questions, operator, please.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Okay. Our first person is the line of Casper Blom at ABG Sundal Collier. Please go ahead. Casper, your line is now open.

Casper Blom

Thank you very much. And thanks for the opportunity.

Operator

Sorry, Casper, could you repeat that question? Your line just went? Okay. We seem to have lost the line of Casper. So we go over to the line of Mark Freshney of Credit Suisse. Please go ahead, Mark, Your line is now open.

Mark Freshney

Hello, if I could ask two questions, please. Firstly, if the U.S. pipeline gets pushed back by a year presumably there is also scope to potentially lose the subsidies, but going the other way use later variants of some of the turbines that you would have earmarked. So can you talk about how the economics may change or improve? And secondly, just with regards to the U.S. onshore market. I think it's becoming clear that OEMs are declaring force majeure, not everybody who wants North American turbines will get them this year. Can you talk about how that may impact PTC accreditation and project returns and whether from an industry perspective, you could get an extension or if there are any loopholes that would enable you to a credit under the Safe Harbor?

Henrik Poulsen

Thanks, Mark. On the U.S. pipeline, again, it's clearly it's way too early to conclude anything on the schedule for the large projects, the three large projects. We're still working towards delivering them on the current COD schedule but that does require that we start to soon receive some of these permits that alluded to earlier, if we don't obviously at some point it will cause a delay that may not be a full year delay those could be also shorter delays than that. So that the impact of any potential delays remains to be seen, we will obviously be hard at work to mitigate any negative effects from any potential delays.

We don't see any of the PPAs being at risk, we have good flexibility in these PPAs to work with the different states to still deliver on an extended timeline. So that is not a concern for now. When we look at mitigating the impact of any potential delays, we will of course also be looking at any potential upsides that we may have in terms of bringing even newer technology into the offshore wind farms. So, we'll of course make good use of any extended timelines in that regard.

When it comes to the onshore market, we have a good visibility on turbine deliveries for Plum Creek. In fact, we have the vast majority of turbines available at site already. So we are not concerned about our ability to deliver Plum Creek this year. We also continue to receive positive signals with regard to turbine deliveries for Willow Creek and those turbine deliveries are only a few weeks away now. So we’re also optimistic about our ability to deliver Willow Creek on schedule later this year. So, again we see very little risk here.

If there was a one year extension which is being discussed in the U.S. at the moment, it obviously add further cushion to our 100% PTC projects at the moment and such an extension could potentially also have other positive effects in other parts of our development portfolio.

Mark Freshney

Thank you.

Operator

Okay, we now go to the line of John Musk at RBC. Please go ahead. Your line is now open.

John Musk

Yes, apologies for some background noise. Two quick questions, firstly, can you update on the potential farm down in Taiwan? Is that being impacted by anything related to COVID in the near term? And then secondly, is there any further guidance you can give on the development of net debt to year-end in particular with some of the funds that are tied up and work in progress obviously the balance CapEx that needs to go out. Should we be expecting that net debt figure to rise into the year-end?

Henrik Poulsen

I'll start out on the Changhua 1 farm down. It continues to progress we have seen some reduction of pace due to COVID-19 preventing us from meeting and traveling, but despite this, we still continue to progress the transaction at decent speed. So, we don't expect any material delays to the transaction which also means that we would still expect to sign it before the end of this year. Closing would still most likely be first half of next year.

Marianne Wiinholt

Yes. And then on the net debt development, we will have to pay proceeds from divestment of Radius and then customers coming in the second half and then we have the very highest level of investment. So, of course it's very difficult to predict but more or less a flat level it's probably not a reasonable expectation.

John Musk

Okay. Thank you.

Operator

Okay. We now go to the line of Rob Pulleyn at Morgan Stanley. Please go ahead, Rob. Your line is now open.

Rob Pulleyn

Got it. Thank you, gentlemen. Two quick questions. The first one, just following up on the on the Taiwan question highlighting that you are progressing. Is there any room for an evolution and the valuation discussion there? Or is that fairly locked in obviously given the change in the shape of the world? And the second question, if I may, is other slippages in the U.S. particularly on the admin side around permits. Do you consider at this stage, this is a one-time slippage or could we see ongoing delays as government bureaucracy and bottlenecks take time to sort of resolve and debottleneck. Thank you.

Henrik Poulsen

Thank you. On the valuation, we don't see any room really for renegotiating the value of the Changhua 1 farm down. So, that is not part of the process. On the U.S., what we see at the moment is obviously, first and foremost, the impact from the cumulative impact assessment that was initiated in August last year and which has been extended and we now expect it to be published in June this year and following that we would expect permitting to progress across the different development projects in the U.S. So once we are on the other side of that we would expect the permitting to start picking up. So we consider this a one off situation and as I alluded to earlier, too early to tell whether it will impact the three large projects and if so, to what extent but we don't see it as an ongoing series of delays. That's not what we expect.

Rob Pulleyn

Thanks very much.

Operator

Okay. Our next is from the line of Thomas [indiscernible] from Union. Please go ahead, Thomas. Your line is now open.

Unidentified Analyst

Hello, everyone. Thank you for the presentation. A brief question regarding the three U.S. projects, Revolution Wind, Ocean Wind and Sunrise Wind, could you please remind me of the capacity of the various projects please?

Henrik Poulsen

Yes, I just have to think from the top of my head now. So Revolution Wind is a 704 megawatt project. And Ocean Wind is 1,100 and Sunrise Wind is 880. I got it right.

Unidentified Analyst

Thank you very much. Thanks.

Henrik Poulsen

You're welcome.

Operator

Okay. The next question is from the line of Klaus Kehl at Nykredit. Please go ahead. Klaus your line is now open.

Klaus Kehl

Yes. Two questions from my side. First of all, we're seeing a pretty lower power prices these days due to the Corona outbreak and you will in the Dutch auction in the coming days, which is without the subsidies. But let's just assume that prices they stay low for the next five years, then what are you allowed to walk away if the economy doesn't make any sense? Or how does such an auction actually work? That would be my first question.

Henrik Poulsen

Yes. Should I answer that first Klaus, then I'd say we have a very prudent view on what we would expect from future power prices. If you look towards 2023 and beyond the forward curve pre-Corona to the current forward curve is down by 2%, 3%, 4%. So, the market is pricing in close to a full recovery of power prices to pre-outbreak levels on the current forward curve, we still believe that this is a project that will allow us to generate meaningful value. And as I alluded to, we also do expect that we'll be able to offset part of the merchant exposure both through our hedging strategies and also in the corporate PPA market, potentially our PPA market also supported by future build out of green hydrogen.

So we see different strategies that make us quite comfortable about the value creation potential. As I said, we are balancing out a number of different risks when we compose our global asset portfolio. And of course, merchant price exposure is a very significant risk to be considered and it's a very visible risk. But we face a number of other risks whenever we engage around the world. And we are seeking to basically create a portfolio which is well diversified find across all of these risk dimensions. And at the moment, we have very little merchant risk in our portfolio. And also going-forward, we will still have limited merchant share in our portfolio, we have to bear in mind that we are still building the vast majority of our volumes based on long-term fixed price contracts at the moment. If we were to see a power price environment, which is below our expectation, it is not a reason for us walking away from the project, the framework wouldn't allow for that. So, once we take on the risk, we take it on.

Klaus Kehl

Okay, great. And then my second question would be, you have had a pretty solid start to the year and yet you only reiterate your guidance for the full year. So would it be fair to say that either perhaps guidance is a bit conservative or at least you're pretty certain that you will reach the target or is there some risk factors in the coming quarters that are missing?

Henrik Poulsen

Well, I think there are a couple of angles to answer, Klaus, one is that it's still early days, right? I mean, we only one quarter into the year. So we don't want to get out ahead of ourselves. Secondly, even if you have very strong wind quarters or wind month, it tends to even out a little bit over the quarter of the year. So on a full year basis, we don't see huge fluctuations in the total wind content. So whatever we are ahead after Q1, we could still lose some of that during the balance of year. And then third, and finally, it's quite clear that we are going through a very unpredictable situation with COVID-19 and even if we feel we are very robust and well on top of it, again, we don't want to get complacent about operating in this type of environment.

So, when you add those factors up, we feel it's prudent to just in quotation marks just maintain our guidance.

Klaus Kehl

Okay. Got it. Thank you very much.

Operator

We now go to the line of Peter Bisztyga Bank of America Securities. Please go ahead. Peter, your line is now open.

Peter Bisztyga

Marianne there is two questions from me. Can you just remind us when you expect to make your final investment decision on your German zero subsidy projects and is your view of these projects, sort of based on exactly the same conversation that we've had on this call about your Dutch zero subsidy auction. So do you see the economics of those German projects is unchanged long-term. And then a question on your bad debt provision that you've taken for your B2B customers, it sort of seems quite low in absolute terms. I was just wondering what sort of bad debts do you normally see what are you experiencing at the moment? And what sort of assumptions have you used to make this provision?

Henrik Poulsen

Thanks Peter. With regard to the FID on the German development projects, we would expect to make those decisions during 2021. Our appetite for the German projects have not diminished, we continue to progress them and we continue to develop both the technical concepts and the commercial equation and the business case as you know, we have always been signing corporate PPA contracts against part of Borkum Riffgrund 3. So also, again, when we look at the total portfolio compensation across offshore, onshore wind and solar across regions, we see rule for this exposure in our total asset portfolio, so no change in our attitude and approach to the German projects.

Marianne Wiinholt

Yes. And then you had a question on the bad debt provision. We have accounts payable balance of approximately DKK 1 billion and now we have made a DKK 100 million on top of our normal provisions. And we have made a quite conservative use, because we have quite prudent credit policies when it comes to our B2B business. So, I would say I very much consider this to be a conservative provision.

Peter Bisztyga

Great. Thanks very much.

Operator

Okay. Our next question is from the line of Marcus Bellander at Nordea. Please go ahead, Marcus, Your line is now open.

Marcus Bellander

Thank you two questions if I may, first regarding the Dutch auction, I just read that Vattenfall has decided not to participate. And Vattenfall has been a pretty eager participant than the Dutch auctions so far. Is there anything materially different about this auction compared to the past ones? And then my second question is just a detail right in the report that the pretty weak earnings from heat and power generations in Bioenergy was offset by increased salesman's salary services and I'm just wondering if you could add some color to that why there is more ancillary services sold in this quarter and whether that's sustainable. Thank you.

Henrik Poulsen

Thanks Marcus. With regard to the Dutch tender there are no material changes to the format of this tender compared to previous tenders obviously I cannot comment on Vattenfall’s decision not to join the tender I'm sure they have their strategic and financial considerations behind that and obviously they have also taken two of the previous vendors in the Netherlands. When it comes to heat and power generation Marianne, you?

Marianne Wiinholt

Yes. We have seen an opening of the transmission lines to Germany which we have done over the last I think now it's one year and a half or something. We have seen an increased demand for ancillary services and for us, it looks quite sustainable. Of course, you can never rule out how things will develop going forward. But over the last few years, we have seen very strong demand for ancillary services and we have also been successful in winning these tenders that energinet.dk are running for these services.

Henrik Poulsen

The increased capacity on the Danish German interconnector means that we are able to deliver more ancillary services to help balance out the northern parts of the German grid. So we are also now essentially providing services to help balance out Germany.

Marcus Bellander

It's great, thank you. Thank you.

Operator

Okay. Our next question is from the line of Sam Arie at UBS. Please go ahead.

Sam Arie

Hi, good afternoon. Thank you for the presentation and congratulations again on a great set of results. I've got one niggly detail question and one bigger picture. The niggly detail one forgive me if I've missed something, but as I remember the Radius suppose you talk about the proceeds in the second half but I think that deal is not actually closed yet. So can I just check it that closed or not closed? And is there any risk that it wouldn't close? Or are we can we sort of be 100% confident that goes through as expected? That's my niggly question. I'm sure the answer is yes, it's fine. But please confirm.

Marianne Wiinholt

Yes, you're right. It's not closed. It’s signed but not closed. But the regulatory process is progressing well. So we expect it to close in the second half and we are very certain that we get the proceed.

Sam Arie

Okay. Very good. That's what I was hoping that. So thank you. And then if I may on a slightly bigger picture question when we last met I think you said that one of the main questions you'd been getting from the market at the time was about the risk of oil majors coming into the sector, with ambitions to grow renewable business. I think it's interesting recently, we've seen several of the oil companies repeating their renewable objective, despite the obvious and pressures, I guess, that they face at the moment. So my question is this really, do you see this as a threat or do you think that’s a different way that you might look at this over time? For example, would you be open to some kind of longer-term partnership or a joint venture with one of the oil companies and if that's on the radar, what could they offer you that you don't already have? That might be interesting to you? Thank you.

Henrik Poulsen

Thanks, Sam. Again, it's difficult to start speculating about how the oil majors will be impacted by the current crisis in terms of their commitment to a strategic pivot towards green energy, on one hand you could say they will be under even more pressure to accelerate the pivot. On the other hand, they will be basically struggling to generate the same type of cash, if any from their core business. So, they will also be busy, sort of just keeping their core business intact and in decent shape and for the time being, they’re also seeing, obviously, a pickup in their cost of capital. So, there are a number of things that obviously will weigh into how they're going to approach this. And clearly, I'm not going to pretend that I'm an expert on how they will behave in the years to come.

They are undoubtedly still going to move forward with green investments as far as they will be part of our industry. We welcome that we're going to need a lot of capital to transform the global energy system and in some cases they will be competitors as we have already seen last year and the year before. In other cases, we may collaborate you know that we have had a joint bid in the Dunkirk tender in France with Total. So we basically see them as we see most other competitors.

Sam Arie

Okay, that's really interesting. Thank you. I'm tempted to ask lots of follow up, but I'll leave it there thank you for ….

Henrik Poulsen

I'm always available Sam. So don't hesitate.

Sam Arie

Okay.

Operator

Okay. Our next question is over the line of Casper Blom at ABG Sundal Collier. Please go ahead. Your line is now open.

Casper Blom

Thanks a lot. I will I'll try again. Often I got disconnected previously. Sorry about that. Basically, it's just two follow up questions on previous questions asked. Follow up a little bit on Sam's question here on the oil majors. Have you seen any changes at all to sort of the competitive behavior over the last one two months? Or is it simply too early to talk about that opening comes through to all majors and more traditional competitors. And then secondly, in the U.S., as you wait for the regulator to finish up on Skipjack in south. Would have do you see any a risk or scenario where they end up with a decision that would be in any way costly for us or you, I mean, basically changing the layout or requirements on how to build off your wind in the U.S. Thank you.

Henrik Poulsen

Thanks, Casper on the oil majors. Again, we haven't really been able to detect any change to behaviors, again, you have to bear in mind that our ability to decode competitive behavior is very much linked to the tenders and the auctions. And there we have seen little activity since the outbreak of the COVID crisis. If anything, you could look at the Dutch tender with deadline tomorrow. A couple of the traditional players have publicly stated that they're not going to join, but I'm not sure I would read too much into it. I'm sure there will still be pretty intense competition in that Dutch tender.

When it comes to the regulatory process in the U.S, we have already been going through some modifications to the layout of the U.S. offshore wind farms, and most notably the spacing between the turbines where we have already accepted to use a wider spacing to accommodate other key stakeholders including fishermen and the Coast Guard. So for now, I would not expect us to see any additional changes of that nature.

Casper Blom

Okay. Just to follow up on that, Henrik when you change the layout like that is that does that make the project more expensive for you to build or is basically just a matter of taking up more space and thereby leaving less space for future projects.

Henrik Poulsen

It is mostly a matter of using more acreage taking away space from future projects you may have additional costs for site surveys and the cabling infrastructure. So on those two particular items you will see increased costs. On the other hand, you will have reduced wage effects due to the additional spacing. So, different factors will go in slightly different directions. Yeah.

Casper Blom

That's super helpful. Thanks a lot.

Operator

Okay. We now go to the line of Deepa Venkateswaran of Bernstein. Please go ahead. Your line is now open.

Deepa Venkateswaran

Thank you. I have a few questions. So firstly, starting on the availability, I noticed that it's 93% this quarter versus 96% last year. I was wondering in last year in Q2, you had lots of these outages. And I also saw that there's already some cable replacement for Hornsea 1, which is fairly new. So would you be able to comment about what happened in Q1 of this year? And then are you seeing any impact either because of COVID or would you like to comment about the whole cable replacement campaign.

Second question on offshore wind just want to understand whether there was any economic impact for the larger projects, if there's a one year delay either because of the tax credits or anything we need to account for? And would you be able to clarify whether any of your tax assumptions are linked to when the commissioning actually ends? And maybe the third question following up from sort of when you gave the COVID briefing a month back, you mentioned that you were in touch with some of the officials from the European Union, I was wondering if you can give an update of how you think the whole green recovery discussions are going. And any sort of insight or commentary on that would be very helpful. Thank you.

Henrik Poulsen

Thanks Deepa. On availability you're absolutely right. The biggest impact we saw in Q1 is from the replacement of joints. In the eastern section of the Hornsea 1, we detected one joint where we had an issue. And rather than waiting for potential additional failures, we decided to replace all of the joints in that section, we don't have any of those joints in the midsection, which is the one that has been on CFT since last year. We have now – we have finished that cable campaign but it did have an impact on availability in Q1.

Furthermore, we had very strong wind speeds in particular in February, which also impacted our availability we simply couldn't get out to do maintenance on the turbines. And there you'd have to just see it as a hedge. We get the benefit from the strong wind speed but on the other hand, it impacts the availability on the negative. And then we've had further outages at the converter station at Borkum Riffgrund 2 those are the main pockets in Q1.

Nothing that we overly concerned about these situations will come and go. And when you look at the total economic impact of outages in Q1, we would consider that sort of the normal level for first quarter.

On the economic impact in the U.S. from potential delays, it shouldn't impact our ITC. We are qualifying those tax credits upfront through investments into components for the wind farms and as such we have qualified the projects.

On the topic of green recovery, there is a lot of activity at the moment obviously governments have been busy spending whatever headroom they have to support heavily impacted business sectors to basically stay afloat during the crisis. But now most governments are beginning to spend more and more time on thinking about how to help rejuvenate the economies as we navigate through the crisis and hopefully get to the other side of it. And they're in many countries and also at EU level, we see a lot of focus on using green investments as part of stimulating economic growth and job creation. And it goes without saying that in particular, in Europe where we have a stronghold in renewable energy it will be a focus area for the European Union.

We saw that also through comments yesterday from Ursula von der Leyen and we saw also remarks from the German Government, which is about to take off the EU Presidency that they intend to put focus on. Among other things, they emphasized projects combining green hydrogen and offshore wind. And I can also say we have and when I say we, it's Martin Neubert and myself, we have been in meetings with the European Commission at senior level in recent weeks to just share our perspectives and our views on what can be done to tackle the climate crisis and COVID-19 at the same time.

Deepa Venkateswaran

Thank you.

Operator

Okay. Our next question is over to the line of Alberto Gandolfi at Goldman Sachs. Please go ahead. Your line is now open.

Alberto Gandolfi

Thank you all my questions have been answered, but I didn’t manage to cancel. I take the opportunity to wish you all the best and stay safe and thank you so much.

Henrik Poulsen

Same to you, Alberto. Thank you. Alberto. Thank you.

Operator

Okay. In that case, our next question is from the line of Kristian Johansen at Danske Bank. Please go ahead. Your line is now open.

Kristian Johansen

Thank you. So firstly in offshore, do you still expect project development costs to be lower this year compared to last year?

Marianne Wiinholt

Yes. There is no change to that.

Kristian Johansen

Great. Then just getting back to guidance and especially your indication of lower earnings for offshore this year compared to last year. So you're guiding quite specifically for a client of DKK 2.6 billion from construction contracts. But you've had a DKK 1 billion gain in Q1 in U.S. sites. So, I'm just struggling to understand why you shouldn't increase earnings by at least DKK 1.5 billion in the remaining three quarters in the sites considering you have full impact upon Q1, you have another 400 megawatt kicking of the CFD contract and now also have proposed contributing with the earnings.

Henrik Poulsen

Kristian, I think we're going to have to do a little bit of math. So while I start answering, I think Marianne would just try to see if we can piece this together.

Marianne Wiinholt

But remember that we have had a very, very positive impact from the very strong wind Q1. So and as we say, it's early in the year and we can not necessarily expect to have even a normal wind for the rest of the year. Of course that might be, but the impact from the strong wind is in the magnitude of DKK 800 million. So just to say that's a huge amount. So that's probably what you need to take into account.

Kristian Johansen

Sure. Again, I am going to ask in more simple way. So this guidance of lower earnings does that reflect a below normal wind conditions in the remainder of the year?

Henrik Poulsen

It does, it does Kristian

Marianne Wiinholt

Yes. Yes.

Henrik Poulsen

So it does reflect our overall approach of saying that what we gain or lose in Q1 to a certain extent, we expect that to be balanced out during the remainder of the year. We have always taken that approach to Q1 regardless of the direction of our performance.

Kristian Johansen

Okay. Well, quite simple them. And thank you then and my second question is just on your power distribution business, you mentioned earlier that you expect the deal to close in the second half of the year. Can you just remind us what you've included in your guidance in terms of how many months of contribution from power distribution?

Marianne Wiinholt

We have included six months, so up until end of June.

Kristian Johansen

Okay, for both. I mean, I guess it will be in the numbers until the deal is closed. Right?

Marianne Wiinholt

Yes. Absolutely.

Henrik Poulsen

It will.

Marianne Wiinholt

It will. But what we expected is to close we still say summer. So…

Henrik Poulsen

Late, late summer.

Marianne Wiinholt

Late summer.

Kristian Johansen

Fair enough. And there's no delay in that process due to COVID-19.

Henrik Poulsen

Not, not really not really. It's very minimum. I'm not sure we can tell the difference really. It is progressing as we had expected.

Kristian Johansen

All right. Good to hear. That’s all from me. Thank you.

Henrik Poulsen

Thanks, Kristian.

Operator

Okay. Our next question is from the line of James Brand of Deutsche Bank. Please go ahead. Your lines now open.

James Brand

Hello, most of my questions have been answered. So I'll just ask one question if that's okay. Just obviously delay is coming through for some of the projects potentially incurs extra costs for you but then equally, a lot of people are speculating that we might see deflation this year and a lot of raw material prices have come down oil prices have dropped. Normally, in a tougher economic backdrop construction tends to come under pressure and you can kind of encount savings. So I was just wondering whether maybe it's too early to say, but I was just wondering whether there was scope for you, you thought there was scope to maybe capture some more savings for your projects.

And I was also just wondering, in terms of timing, whether you could just remind us, when you lock in prices for steel and the overall cost of construction during the process, I presume that a lot of those costs are locked in pretty soon after the final investment decision. So maybe there isn't as much scope for your projects under construction benefit and maybe we're thinking more about projects that are further back in the development pipeline. Thanks.

Henrik Poulsen

Yes. On the delay and whether that may offer us to sort of an opportunity to benefit from deflationary pressures. Again, it's clearly it felt I couldn't rule it out, I mean, if we get delayed, we'll obviously always have to go back and take a fresh look at our supply chain plan. But again, it is of course too early. First of all, we haven't concluded on any delays on the three large projects in the U.S. and we still don't have any visibility on any deflationary pressure in the supply chain. So, I think we're going to need at least another half year to develop a view on that.

Marianne Wiinholt

And of course, we have locked in for the construction project. A lot of the CapEx but for the steel in particular, it's typically something we keep floating. So there could be a potential in a way upside from the steel.

James Brand

Thank you.

Operator

Okay. The final question in today's queue is open line of Mark Freshney at Credit Suisse. Please go ahead your line is now open.

Mark Freshney

Hi. If I could ask a question on getting into projects at a later stage, we saw a very hot market for tenders last year and I'm sure that there'll be one or two bidders out there regretting bidding low prices and being left with development projects that they struggle with. We've seen you enter into late stage projects before for example, with Race Bank, is that something that you would consider doing again, i.e., taking over a half developed project, if you like?

Henrik Poulsen

As I said earlier, Mark, I mean, in times like these you might see companies or projects that come under pressure. And there may be opportunities for companies with a strong balance sheet to which I would consider or set. Would we pick up projects? It's not something we have to do we have a strong pipeline. We have a great deal of visibility on our own, build our targets. So we are not under any pressure to do so. On the other hand, we have the capacity, if there is a value creation opportunity. So if it's a project under pressure, it's all going to come down to us seeing a clear value creation opportunity. If we do, I certainly wouldn't rule it out.

Mark Freshney

Thank you.

Operator

That was the last final question. I just pass it back to you for any closing comments.

Henrik Poulsen

Yes, I just wanted to say thank you all very much for joining today. Any additional questions don't hesitate, just reach out to IR. And most importantly, all of you stay safe and talk to you soon.

Operator

This now concludes today’s call. Thank you all very much for attending and you can now disconnect.