Oersted A/S

SWB:D2G

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to this call for Orsted Q1 2018 Results Call. I will now hand over the words to CEO, Henrik Poulsen. Please go ahead.

[Henrik Poulsen, CEO, President & Member of Executive Board]

Thank you and good morning, everyone. Welcome to this Q1 presentation. I am here with our Group CFO, Marianne Wiinholt.Let's dive straight into it and turn to Page 3 in the presentation. 2018 is off to a very satisfactory start. Our strong operational and financial performance continued in this first quarter and we reached a number of important business development milestones.We reached an EBITDA of DKK 5.5 billion, which is up 68% on the first quarter last year. The results were mainly driven by higher generation from our offshore wind farms in operation and also high income from partnerships. In Bioenergy & Thermal Power we improved the spreads and the higher heat generation as well as the bioconversion of Skaerbaek Power Station which was inaugurated late last year, all contributed to the positive development, along with the positive arbitration outcome regarding the renegotiation of gas purchase contract in distribution and customer solutions.On the back of this arbitration outcome and the strong operational start to the year, we have increased our EBITDA guidance for 2018 by DKK 0.5 billion compared to the guidance in the Annual Report for 2017.EBITDA, excluding new partnership agreements, is now expected to amount to between DKK 12.5 billion and DKK 13.5 billion. Following the buyer conversion of the Skaerbaek Power Station and the continued ramp up of our offshore wind capacity, the green share of our heat and power generation increased substantially from 56% in Q1 '17% to 68% in Q1 '18. In April, we participated in the second transitional auction in Germany and we expect to receive the results within the next few days or next few weeks.We also submitted a bid in the auction in Connecticut competing for roughly 200 megawatts. We expect to receive the results from this auction in second quarter -- later in the second quarter this year. In late March, we submitted a bid for capacity in the first Taiwanese grid allocation. We expect to get the result of the 3.5 gigawatt grid allocation by the end of April, in other words within the next few days.In Taiwan, we have also just taken a final investment decision on Phase 2 of the Formosa 1 project, where we expect to start constructing the 120 megawatt offshore wind farm next year, this will further build on our local capability in Taiwan.As we have previously communicated, we've seen leading edge erosion to varying degrees on the blades of the 3.6 megawatt Siemens wind turbines. We are currently planning the individual repair and upgrade campaigns together with Siemens Gamesa and specific agreements have been made for the Danish Anholt asset and for the U.K., London Array wind farm. These agreements build on earlier grid guiding principles on a portfolio basis. Further agreements, which we expect to follow similar principles are expected in the months to come. Siemens Gamesa has commenced work at Anholt and during the campaign Siemens Gamesa will dismantle the blades, apply a protective shell and also install an aerodynamic improvement kit to increase the yield. Because of the increased production and partly as a result of warranty claims, the repairs will expectedly have little to no impact on our financials.Lastly, we took another step in developing our storage business by entering into an agreement to buy the project rights for a 20 megawatt storage project near Liverpool in the U.K. We will build and operate the battery and expected to be in operation by the end of this year. The storage solution will be used to provide services to the U.K.'s National Grid to help manage grid stability during changes between peak power demand and low power demand.Furthermore, the 2 megawatt battery solution at the Burbo Bank offshore wind farm is also progressing according to plan. We expect it to be operational within the next few weeks. It will be the first time an offshore wind farm is integrated with a battery system to deliver frequency response to the grid.On Slide 4 and 5, I will provide an update on the market development and offshore wind opportunities across the U.S., Taiwan and Europe. In February, we obtained approval from the Taiwanese Environmental Protection Administration for the EIAs for our four Greater Changhua projects with a total capacity of 2.4 gigawatt. With these approvals, we have secured exclusivity over the development of these sites. In late March, we submitted a bid for capacity in the Taiwanese grid allocation. The government, as I mentioned, will allocate a total of 5.5 gigawatt grid capacity for the period until 2025. The result of the 3.5 gigawatt grid allocation is expected within the next week and the outcome of the ensuing 2.0 gigawatt price-based auction could be announced as early as June.In the US offshore wind continues to build momentum along the East coast. As you know, we submitted a bid at the first large-scale offshore wind auction in Massachusetts in December last year. The selection of the preferred bidder or bidders in the Massachusetts auction originally scheduled for April 23, has been delayed by a month and we now expect an announcement on May 23.The U.S. government has also proposed a competitive price auction for 2 additional commercial wind lease areas in federally owned waters south of Massachusetts asking potential bidders to express their interest or reaffirm their interest within the next month.In the state of New York, the expectation is that a competitive offshore wind auction will take place towards the end of this year or beginning of next year. In addition, the U.S. government has requested investors to submit expressions of interest for commercial offshore wind energy development opportunities in 4 so-called coal areas facing Long Island. Lease auctions could expectedly take place late next year.Building on the momentum in the U.S., we have decided to open an office in Atlantic City, New Jersey during the month of May. The expectation is that New Jersey will have its first solicitation late this year or early next year.In an address yesterday, marking his first 100 days in office, New Jersey Governor, Murphy emphasized that the state's offshore wind ambitions and by the way also mentioned us this decision to set up office in Atlantic City. As I mentioned in the beginning of the call, we submitted a bid in the 200 megawatt auction in Connecticut and expect to receive the results later during the second quarter.Rhode Island has established a target of 1 gigawatt renewable energy to be installed by the end of 2020 and currently has a mandate to procure up to 400 megawatt of renewable energy by the end of this summer.Moving on to Europe; in the U.K., the government is seeking 10 gigawatts of new capacity to what 2030 where offshore wind is competing with other less established technologies for a total pot of money of GBP 557 million allocated for future CfD auction. The third CfD auction is expected to take place during the spring of next year. As we have previously communicated, the consenting phase is still ongoing at our Hornsea 3 project and we expect to have key consenting in place during the autumn of 2019, which would make the project eligible to participate in an expected fourth CfD auction at a later point in time.Following the second sensational auction in Germany, we expect the German authorities to host the first centralized tender for an expected 700 megawatt to 800 megawatt offshore wind farm in 2021. A climate protection strategy and action program is currently being discussed by the German government coalition partners. We remain hopeful that Germany will make a strong commitment to the Paris Climate Agreement an expedient phase-out of coal capacity and the restructuring of carbon pricing.As you know, the Dutch government has published a firm roadmap for 11.5 gigawatt of offshore wind to be constructed by 2030, compared to the previous target of 4.5 gigawatt by 2023. This is supplemented by a commitment to complete phase-out of coal by 2030 and the introduction of a carbon price floor from 2020. The next tender in the Netherlands will be Holland Coast South 3 and 4, which is expected to take place in Q4 this year.In Denmark, the government has just recently stated very significant focus on offshore wind in order to reach its 50% renewables target by 2030. The new energy agreement covering the period post 2020 is on the development and is expected to be finalized this year. The agreement could subject to political negotiations opened up for an additional number of large-scale offshore wind farms to be constructed between 2024 and 2030. The Belgian government has just announced plans to double the area of its North Sea waters made available to offshore wind parks after 2020, as part of its exit strategy from nuclear power. Belgium has currently a 0.9 gigawatt of offshore wind capacity and wants to increase that capacity to 4 gigawatts by 2030. Tendering could come as early as next year assuming draft plans pass into legislation end of 2018 or early 2019.Turning to Slide 6 for an update on the key construction projects in progress around the company, well, I'm glad to see that construction and preparations are generally progressing according to plan. At Walney Extension, the installation of all 87 turbines have been completed. The project has been performing ahead of the original schedule recently. We now expect Walney Extension to be fully commissioned in third quarter this year compared to the previously communicated second half of this year.At Borkum Riffgrund 2, the installation of foundations have started and we have installed 15 out of 56 foundations by now and we expect the installation of turbines to commence within the next couple of months.At Hornsea 1, we continue to see good progress and we have installed 23 out of the 174 foundations, while the installation of the offshore export cable is ongoing.At Borssele 1&2 procurement, procurement is currently our main focus. The turbine supply agreement was signed last year and the remaining key contracts will be finalized during this year.For Hornsea 2, which will be, as you know, the world's biggest offshore wind farm when operational in 2022, we have selected Siemens Gamesa as the exclusive supplier of wind turbines. We expect to deploy their 8 megawatt wind turbines. Furthermore, we have commenced construction of the onshore substation at Hornsea 2.In Bioenergy and Thermal Power, we are well underway with the bio-conversion of the Asnaes Power Station, which is progressing according to plan with expected commissioning by the end of 2019. The construction of our first commercial Renaissance plant in Northwich in the U.K. has been completed. As you know, the Renaissance plant in Northwich is a first of its kind and there are number of mechanical issues that are being addressed, while we gradually ramp up the plant. We are making progress, but testing and fine-tuning up the machinery is still ongoing. We still expect the plant to be commissioned before the end of Q2 2018.At the end of March, we had 301,000 smart meters up and running at Radius' power distribution customers. Thus we are well on track to install approximately 1 million smart meters by the end of 2020.All in all, we are quite pleased about our operational and financial performance in Q1 and the continued strong strategic progress.On that note, I will hand over the word to Marianne.

[Marianne Wiinholt, CFO, Executive VP & Member of Executive Board]

Thank you Henrik and good morning from me also.If we start on Slide 7, I will dive into the financials of Q1 2018. As Henrik said, we realized an EBITDA of DKK 5.5 billion, an increase of DKK 2.2 billion compared to Q2 2017. This increase was primarily driven by higher earnings from operating wind farms and partnership agreements.In Bioenergy and Thermal Power, EBITDA doubled to DKK 0.4 billion, which was driven by improved spreads, higher heat generation due to colder weather and the bio-conversion of Skaerbaek power plant in Q4 2017.Distribution and customer solutions was flat on a very strong Q1 2017, due to a positive arbitration outcome regarding the renegotiation of the gas purchase contract in 2018. Net profit totaled DKK 3 billion, an increase of DKK 1.8 billion, driven by the higher EBITDA. The free cash flow from continuing operations for Q1 2018 came in at a negative of DKK 1.6 billion, which was in line with the free cash flow of the first quarter last year.The higher EBITDA and the receipt of the deferred proceeds from the farm-down of 50% of Walney Extension, up DKK 0.8 billion, was offset by tax payments of DKK 3.1 billion.We decided to pay the payments we would normally do in November -- in March; and in Q1 2017, we did not have any tax payment at all. We also paid residual taxes relating to 2017, which totaled DKK 0.6 billion. We also had an increase in funds tied up in working capital of DKK 0.6 billion compared to Q1 '17.If you then turn to Slide 8 and our net debt and financial ratios. Our net debt ended at DKK 4.3 billion, mainly driven by the early on account tax payment, I just described, as well as the distribution of DKK 3.8 billion of dividends to our shareholders. Our key credit metric, FFO to adjusted net debt stood at 46% at Q1 '18. Once again, above our target level of around 30%. We are pleased to see that yesterday S&P reaffirmed their BBB plus rating with the stable outlook.Return on capital employed came in at 27%, an increase of 10 percentage point, and was significantly impacted by the farm-down things on Walney Extension and Borkum Riffgrund 2 at the end of '17.On Slide 9, I will describe our framework for interest rate and inflation risk management, with focus on assets and liability management principles. The overall framework for our risk management consist of 4 risk categories of assets and debt allocation, which assets are divided into, based on the nature of the inflation and interest rate exposure. Simple risk metrics are used to match assets with the appropriate debt within each category.There are 3 main objectives of the interest rate and inflation risk management. First of all, the long-term real value of equity and hence the shareholder value is protected by offsetting the interest and inflation risk exposure embedded in [ us just ] income streams by allocating debt with similar, but opposite risk exposure.Secondly, the cost of funding is minimized by allowing flexibility to take advantage of attractive market opportunities. For example, obtain long-term funding at the current very attractive funding rates. And lastly, the cost of hedging is minimized by using the natural portfolio synergies between the assets, allowing and matching of up to 100% of asset value with the appropriate debt.The latter is particularly utilized to prioritize the assignment of fixed rate debt for up to 100% of estimated asset value of our continental EU offshore wind farms, which is offshore wind farms in Denmark, Germany and in the Netherlands and also potentially new wind farms in U.S. and Taiwan, where the subsidies and the PPAs are fixed in nominal terms.Conceptually, these fixed nominal income streams are matched with our [indiscernible] fixed nominal debt obligation and we thereby eliminate the inflation risk embedded in the fixed nominal income streams.This approach lead the inflation index revenue, primarily from U.K. offshore wind farms to service the shareholder returns, thereby protecting the real value of equity against the fluctuations in inflation rates.Let's then move to the quarterly results of the business units, starting wind power on Slide 10. Power generation increased by 43%, relative to Q1 '17, primarily due to the ramp up of generation from Burbo Bank Extension, Race Bank and Walney Extension. But higher wind speeds and higher availability also contributed positively.EBITDA amounted to DKK 4 billion, an increase of DKK 1.8 billion. The earnings from the operating wind farms increased 51% on the back of higher power generation. The earnings from partnership agreements were up by DKK 0.8 billion, due to a high level of activity related to the construction of Walney Extension and Borkum Riffgrund 2 for partners. The free cash flow total a negative DKK 0.2 billion. The higher EBITDA and the receipt of the deferred proceeds of DKK 0.8 billion in Q1 from the farm down of 50% of Walney Extension, but partly offset by the previously mentioned early on account tax payment and payment of residual taxes regarding 2017. Return on capital employed for wind powers stood at 30%.If you then go to the results for Bioenergy and Thermal Power, on Slide 11, here we saw that EBITDA more than doubled and amounted to DKK 0.4 billion. The increase of DKK 0.2 billion was due to the improved spreads, higher heat generation and the bio-conversion of Skaerbaek power plant. The free cash flow amounted to DKK 0.4 billion and here the increase was primarily due to the higher EBITDA.If you then turn Page 12, covering the results in distribution and customer solutions. Here we saw that EBITDA in Q1 was flat on a strong Q1 2017, which was due to a positive arbitration outcome, regarding the gas purchase contract we described before. But in addition, we had higher earnings from our 2 markets for physical power and gas in Q1 2018.In 2017, Q1, we had extraordinary high earnings from the trading of our financial energy exposures. The free cash flow amounted to a negative of DKK 0.2 billion. The decrease of DKK 1.7 billion was due to more funds tied up in receivables, driven by higher sales, including higher sale of ROCE -- receivables from ROCs and higher prices as well as receivable from the one-off arbitration, I just mentioned.And then finally, we turn to the financial guidance and policies on Slide 13. As Henrik mentioned, we have raised our EBITDA guidance, excluding the partnership agreements by DKK 0.5 billion to DKK 12.5 billion to DKK 13.5 billion, due to the strong operational starts to the year and positive arbitration outcome. As a further result of the positive arbitration outcome, we have also changed the directional guidance for distribution and custom solutions relative to 2017 from significantly lower to lower.We maintain the remaining guidance and targets as we have previously stated. We believe that we will carry out the divestment of Hornsea 1 in the second half of 2018 or in 2019.On that note, we will now open up for Q&A. Operator, please.

[Operator]

[Operator Instructions] Our first question comes from the line of Kristian Johansen from Danske Bank.

[Kristian Tornøe Johansen, Senior Analyst]

So my question is around this arbitration case. And then whether you can quantify the exact impact and also how many other similar arbitration cases do you have ongoing. In other words, I mean is there a possibility for -- of further one-offs to be booked in the coming quarters?

[Marianne Wiinholt, CFO, Executive VP & Member of Executive Board]

Unfortunately we cannot say -- we mentioned the amount. We are bound by confidentiality. This is the last arbitration, so you could not expect further arbitration gains from any of those business going forward in the next quarters.

[Operator]

Our next question comes from the line of Sam Arie from UBS.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

Congratulations again on excellent set of results. And I'm smiling, as I said, because I think I say that you every time now and looking forward is obvious, the calendar is packed with catalyst that could be very positive. But look my question is, and I apologize for asking this, but just to keep us all on it, can you spend a minute to talk about the downside? So all the companies in the sector have issues -- problems in the [ in-tray ] that keep management up at night. What are the biggest negatives that you're dealing with at the minute? What are you worried about and where if anywhere should we being cautious at this point?

[Henrik Poulsen, CEO, President & Member of Executive Board]

Thank you, Sam, It's obvious. It's a broad question. I would say, I sleep quite well at night also at the moment. There is no doubt that we obviously all as probably, many of you waiting for the outcome of the auctions that are currently in progress. Obviously, we are looking forward to getting the outcome in Germany, which should arrive hopefully within days or at least within the next few weeks. In Taiwan, we would probably get an outcome from the grid allocation, whether hearings take place tomorrow and on Saturday. We would expect to get an announcement shortly after that, so probably no later than next week and then not least also of course outcomes in Massachusetts and Connecticut. So, it's not something that keep me up at night, but we are obviously very excited about getting to the outcomes of these quite competitive options. In terms of things that constitutes the downside, being or doing what we do, I always way say that building these very large assets far from shore which we should always keep an eye on our construction. We have almost come to take it for granted that we deliver all of these offshore wind farms on time and in budget, and we have a strong track record in that area, but I would certainly never take anything for granted. These are very complex projects. But they're -- as I mentioned earlier, they are in really good progress. Other than that, I mean clearly the competitive intensity in offshore wind has incentivized over the past couple of years. These auctions and tenders that we participate in, there is obviously keen interest to win these projects. And there is no doubt that we also have a need to continue to [ sharpen or sort ] and continue to drive down the cost of electricity by constantly innovating on our side and that is also the key focus to make sure we can sustain a good value creation in a competitive environment. So, I think I'll leave it at that far, but please feel free to ask more specific questions, if you have any particular concerns.

[Operator]

Our next question comes from the line of Casper Blom from ABG Sundal Collier.

[Casper Blom, Lead Analyst]

Also congrats from my side on the strong numbers here. Again, I was hoping that maybe you could shed a little more light over the Taiwanese process. As you mentioned Henrik, we should expect news here within the next week. But what exactly -- what how can I say step in the process, is it that we're getting now? When we get sort of exact news on a PPA and when would you expect to be able to take a final investment decision in Taiwan, please?

[Henrik Poulsen, CEO, President & Member of Executive Board]

Yes. So, as I said, the hearings will take place tomorrow and Saturday where all projects that are bidding or applying for grid allocation will get a chance to present themselves to the evaluation panel. We then expect them to come forward with a grid allocation probably within the next week. We expect that grid allocation to essentially allocate the 3.5 gigawatts and part of that will go to an early allocation that should be built within the next couple of years and then we will see the remaining 3 gigawatt being allocated. Most likely as we understand the framework to the top 4 applicants where the #1 will get 1.2 gigawatt of grid allocation; the second will get [ 900 ] megawatt and then 600 megawatt and 300 megawatt for numbers, #2, #3 and #4 in that ranking. If you get a good allocated, you then essentially move into a PPA process with [ Tai ] power. And once that has been settled during second half of this year, we would expect you continue with your permitting processes seeking both offshore and onshore permits to eventually commence construction and once we have visibility on that, we should be in a position to FID a potential project during 2019. So that's the overall process on the grid allocation and then as you know, there will be a price-based auction, we currently expect there to be a deadline for the price-based auction for an additional 2 gigawatt. The deadline expectedly be in June and we would expect to get an outcome from that auction fairly quickly that should be a relatively straightforward allocation mechanism. So, we would expect an outcome also during the month of June.

[Casper Blom, Lead Analyst]

Great. If I just may follow-up, because on the PPA discussion with Tai Power and there has been a lot of numbers mentioned the last year or so, and I think the last one I heard was around EUR 160 per megawatt hour is that still sort of the level that you're thinking?

[Henrik Poulsen, CEO, President & Member of Executive Board]

That is the most recent feed-in tariff that has been made public by Tai Power and the Taiwanese government, there is a 20-year tariff, slightly above EUR 160 that could be an alternative tariff structure where you go for higher tariff during the first 10 years and a lower tariff during the last 10 years. And again, it's all going to be subject to the final PPA negotiation with Tai Power, but that is the current tariff level.

[Operator]

Our next question comes from the line of John Musk from Royal Bank of Canada.

[John Musk, Analyst]

We've obviously had a few upgrades to guidance over the past few quarters and I'm just looking at the quantum of the upgrade you given today, I just want to get some sense of -- is this enough, or do you think you're being conservative here because the result in distribution customer solutions and the increased guidance there, plus the strong Q1 we've seen in Wind Power would suggest that potentially -- you have left a little bit in the bag here which you would be willing to comment on that?

[Henrik Poulsen, CEO, President & Member of Executive Board]

Thank you, John. I'm obviously -- I don't want to start modifying the guidance here. We genuinely do believe that DKK 12.5 billion to DKK 13.5 billion is the right guidance for the full year to the point you've made, we've had a very strong operational first quarter with very strong availability and wind speeds driving our load factor to 55 which is a record load factor, and then we had that arbitration outcome and the twin combination drive that DKK 0.5 billion, so to speak, so we do feel that this is a sort of the prudent guidance to provide.

[Operator]

Our next question comes from the line of Gurpreet Gujral from Macquarie.

[Gurpreet Singh Gujral, Alternative Energy Analyst]

Just a question for me on the CapEx plans that you have in the known offshore wind business within renewables, so I just wanted to get a guide on what you expect to invest in other projects in the battery space or solar PV space this year and potentially next year?

[Henrik Poulsen, CEO, President & Member of Executive Board]

Yes, we are -- as we have mentioned earlier and most explicitly back in February looking into ways into other renewable technologies. We, at that point also communicated that if you take, sort of the 5, 6, 7-year view on the future, we would expect 85% to 90% of our total CapEx to be allocated to offshore wind and between nothing and 10% of all of our CapEx spend to go into these new renewable technologies and we obviously maintaining a strict capital allocation discipline in looking at these new opportunities, which means that they all are going to be filtered against very strict value creation criteria. We are looking, as we mentioned earlier into storage, we have as we also referred to make the first investment decision into standalone utility scale storage solution in the U.K. These are relatively small projects in CapEx terms we're talking a few million euro, so they are not significant compared to what we will be putting into offshore wind. We also continue to look at opportunities to potentially engage in onshore wind and solar PV, there we have not yet found the right opportunities and again, if we have to move into those areas, we will only do so if we find the exact right investment opportunities. All in all, we stand by the CapEx allocation guidance that we provided back in February, we would expect between 0 and 10% of our total CapEx for the next 5, 6, 7 years to go into these new technologies.

[Operator]

Our next question comes from the line of Kristian Godiksen from SEB.

[Kristian Godiksen, Analyst]

Just one follow-up on Taiwan, follow-up on the PPA, which is subject to negotiations, is there a risk that the feed-in tariff could come out lower at the levels sounds very lucrative and special obviously if the Thai government [ sees ] a level in hindsight what has been settle for in Europe?

[Henrik Poulsen, CEO, President & Member of Executive Board]

It's not something that I can -- that I can start guessing about. Kristian as you'd imagine, I mean the current tariff level is between EUR 160 million and EUR 170 million for 20 years. We clearly expect that feed-in tariff regime for 20 years to remain in place. What the exact final feed-in tariff will be again we're going to have to wait and see what the outcome will be of the process with Tai Power. But we obviously remain convinced that this is going to be solid projects, if we were to get awarded some great or win in the project-based auction.

[Operator]

Our next question comes from the line of Mark Freshney from Credit Suisse.

[Mark Freshney, Research Analyst]

Can you talk about the potential for further cost savings for the projects under construction? If I recall at the end of last year, I think there was an acknowledgment that you would complete some of the wind farms a little bit cheap up than you would had expected. Can I ask, given the [ Owney ] seems to be a little bit earlier in the time frame, it's normal if projects completed earlier for them to cost less, is there any scope for you to further outperform in the cost on the construction contracts?

[Henrik Poulsen, CEO, President & Member of Executive Board]

Thank you Mark, I mean, we obviously hard at work every day to see if we can deliver these projects, better than the original FID budget and as you refer to, we have previously announced that what we referred to as the IPO portfolio of construction projects specifically 6 projects in the U.K and Germany and that we now expect to [ leave ] them at around 20 megawatt capacity rather than 22 megawatt to 24 megawatt that we announced at the time of the IPO. And we obviously continue to look for opportunities. When we deliver our project like Walney ahead of schedule, it would typically entail certain savings compared to the original FID case and also -- it would also mean that we reached the CfD milestone earlier than expected, which would mean that we start generating subsidized income earlier than we had originally expected. So, we constantly chase these opportunities, rather not start sort of predicting what the forward-looking potential is, but I can reassure you that we are constantly chasing these opportunities and I would say we have a track record of generally delivering these projects on budget or slightly better.

[Operator]

Our next question comes from the line of Jørgen Bruaset from Nordea Markets.

[Jørgen V. Bruaset, Senior Analyst]

So Henrik, you mentioned that you're looking at solar PV and onshore wind as potential investment cases. I was just wondering when you look at these opportunities, are you only looking at projects to develop organically or would you be willing to do sort of [ couple ] like acquisitions to acquire portfolios or setups where you see that you can add something to the table?

[Henrik Poulsen, CEO, President & Member of Executive Board]

Thank you Jorgen. We are looking at both organic and acquisitive growth opportunities. Again, we have moved into storage and so far, that has been purely organic by buying individual projects or building projects related to our own existing asset base. When you look at solar PV and onshore wind, moving into those areas, I would expect this to acquire a platform including a development portfolio if we were to step into those areas. And again, we have been looking for development portfolio where we can bring some value creation through our existing skill base and through our balance sheet. And we do believe there might be such opportunities out in the market. But so far, we have not been able to get to something that we found to be sufficiently interesting. So, I hope that answers the question, Jorgen.

[Operator]

Our next question comes from the line of Deepa Venkateswaran from Bernstein.

[Deepa Venkateswaran, Senior Analyst]

I had a question on Taiwan as well. So obviously, it's almost a once in a lifetime opportunity to get allocated both in the beauty contest and the competitive auction. Do you foresee, I mean, if you are successful in both round? Do you foresee any issue, because the project is too huge to be able to develop your entire 2.4 gigawatt if you're successful or would you say that actually we can only build up to 1.2 for whatever logistical reasons or risk reasons or otherwise? So I just wanted to understand do you see any limits obviously subject to your site size in Taiwan?

[Henrik Poulsen, CEO, President & Member of Executive Board]

Thanks, Deepa. I mean, the big price obviously in the grid allocation is the top rank, which would give you 1.2 gigawatt of grid allocation, which -- in our case would cover half of the Greater Changhua portfolio. You would still be looking for additional allocation, obviously in the price-based auction which is just adding on top of whatever you get in the grid allocation. So where that leaves us, obviously it's hard to predict. Again, we are anxiously awaiting the outcome. But we were certainly have an ambition that over time, we do develop the entire Greater Changhua portfolio to 2.4 gigawatt. Again, whether you can get that done within the current allocation of 5.5, that's probably a bit of a stretch frankly. But over time, I would be surprised if the Taiwanese government would want to expand offshore wind also beyond the currently announced 5.5 gigawatt. So over time clearly we will have an ambition to develop the entire area.

[Operator]

Our next question comes from the line of Marcus Bellander from Carnegie.

[Marcus Bellander, Research Analyst]

You mentioned that wind speeds were more or less normal in the quarter, but I think you also state somewhere in the report that wind speeds were higher in the U.K. and lower in Germany and Denmark. Just curious about how big a difference does that make from sort of a mix perspective? And I'm thinking both on your average power price, but also on your load factor.

[Marianne Wiinholt, CFO, Executive VP & Member of Executive Board]

It is definitely positive that we see very strong winds in the U.K. And therefore, we see that the revenue is benefiting from that, and also the load factor, because it is in the U.K. that we have the wind farms with the high wind speeds, and thereby the best load factors. So, yes, that have impacted the strong Q1.

[Marcus Bellander, Research Analyst]

And is it possible to quantify that effect in Q1?

[Marianne Wiinholt, CFO, Executive VP & Member of Executive Board]

No, not really.

[Henrik Poulsen, CEO, President & Member of Executive Board]

There is a positive mix queue, no doubt. I mean, if you want high wind speeds, we want them in the U.K.

[Marianne Wiinholt, CFO, Executive VP & Member of Executive Board]

Yes.

[Operator]

Our next question comes from the Pinaki Das from Bank of America Merrill Lynch.

[Pinaki Das, Vice President and Analyst]

I have got a couple of questions. One for you Henrik, just on Europe, you have a slide, Slide #5, where you stated the different countries and the targets. I just wanted to get some insights into your thought process here, because 3 of those countries, Germany, Netherlands and Denmark, maybe not Denmark, but Germany and Netherlands could be sort of zero subsidy and also you mentioned Belgium could also be zero subsidy. How has your process evolved in terms of how you look at this zero subsidy projects, and or they still attractive, carbon prices have gone up, what's your thought process behind Europe in general, where you see the zero subsidy regimes? And the second question is for Marianne. Just on your segmental information, which is in your report Slide #26. I just wanted to understand, I mean, you have almost DKK 4 billion of EBITDA in the wind power division. The cash flow from operating activities [ DKK 75 million ]. Just wanted to understand what that difference is, is it the tax elements that you mentioned on working capital or quite a big difference or over DKK 3 billion? So, I just wanted to understand that.

[Henrik Poulsen, CEO, President & Member of Executive Board]

On the zero subsidy projects in Continental Europe, we still clearly consider the project that we won in Germany last year to be an attractive project. If anything, I would say, our confidence in the project has only gone up, since we won it last year. And I do certainly believe as you look further into the 2020s sort of beyond 2025, that there is a potential, which is commercially attractive for us. We constantly monitor all of the underlying assumptions that we put into the [ EBIT ] case last year. And compared to those assumptions, we've clearly seen a positive development, not least in the power price, but also in the outlook on CO2 pricing. We have used fairly conservative long-term estimates of CO2 prices in Europe in our cases. And right now, what we're seeing in the market is that the market is actually well ahead of what we assumed back then and that is one of the key drivers of the long-term power price level. So, I would say, generally speaking, we remain quite positive on the value creation opportunity in the one zero subsidy project that we have taken so far.

[Pinaki Das, Vice President and Analyst]

Maybe just a follow-up on that. Would it be still similar in terms of financing these projects with the market risk?

[Henrik Poulsen, CEO, President & Member of Executive Board]

On a project like the one in Germany, we would clearly be in the market to look for corporate PPAs to put a price flow into the project over time. We do see the European corporate PPA market is beginning to sort of develop and gain some momentum. And in Germany, you actually need a zero subsidy project should be entitled to go out and sell in market, the green certificates coming from the zero subsidized wind farm. And therefore, you could say the supply of green certificates in the German corporate PPA market is very limited at the moment, given that there are very few [ series of ] the projects out there. So over the coming year or two, we will certainly be looking to start selling some of that production volume into 10 and 10 plus years corporate PPA contracts, which we believe will help build a fairly robust revenue structure into the project.

[Marianne Wiinholt, CFO, Executive VP & Member of Executive Board]

Yes. And then to your question on the operating cash flow in wind power, yes, you're right. We have an EBITDA of DKK 4 billion and we end up with an operating cash flow only close to DKK 700 million. The main difference is the tax significant part of this DKK 3.1 billion tax payment that relates to wind power. So that's why you have the big difference.

[Operator]

Our next question comes from the line of Elchin Mammadov from Bloomberg Intelligence.

[Elchin Mammadov]

Your power business was unprofitable last year, but this time this year, it's at least near the zero. I was just wondering, given the improved margins in the power prices in Europe, isn't a good time to be looking at possibly selling this non-core asset or you still want to hang out?

[Henrik Poulsen, CEO, President & Member of Executive Board]

Yes. We are very happy about the performance of the power -- Heat and Power business in Q1. Obviously, we've had fairly good weather conditions during Q1 this year. We have no active plans of going out trying to sell the asset. We are in the middle of converting it to biomass and we see significant value being added to the business right now. So, we are in no way active or in any hurry to go out and try to put this into the market, that we still have value to add to this business.

[Operator]

[Operator Instructions] Our next question comes from the line of Kristian Johansen from Danske Bank.

[Kristian Tornøe Johansen, Senior Analyst]

Just a follow-up regarding the load factor as well. So I obviously appreciate that effect will vary over quarters. But I'm just curious, in terms of the guidance you gave on the IPO of these 48% to 50% now that you have actually ramped up most of these IPO wind farms. It is still this range, which is valid, or have you discovered a bit of upside on the load factors of these wind farms?

[Henrik Poulsen, CEO, President & Member of Executive Board]

It's a good question. We would maintain the original guidance. Again, we've had a very strong quarter, it is the most windy quarter of the year, so 55 still you need to look at it in a full-year perspective and there we would maintain the 48 to 50, but at least we do believe that we have a strong support for the guidance we provided at the time of the IPO, but we would leave that, that guidance for now.

[Operator]

Our next question comes from the line of Sam Arie from UBS.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

Hi, again, so I, sort of, come back with another question and again thinking about the questions where the market is sometimes worried, and I think there's a point about cost reduction in offshore wind happening so far, so eventually everything in offshore wind get to the point where it doesn't need subsidies anymore. So, I mean, sort of 2 questions for you on that, longer-term question. First sort of timeframe do we need to think about for that outcome? And in that context, there was an industry report in the U.K., I think just a week or two ago, so just -- in the U.K. offshore wind will still need subsidies at some level, at least till 2030, as I mentioned if you, you would agree with that point of view and then secondly once we do get to a zero subsidy level for offshore wind cost, do you think the industry goes through a merchant model there? Or do you think there is some other kind of regulatory model that become standard such as a zero subsidy contract for difference?

[Henrik Poulsen, CEO, President & Member of Executive Board]

First of all, it's important to again mentioned that we will continue to see subsidized contracts for years to come, again depending on the individual market regime and the individual regulatory framework and one key driver obviously being whether it's a full scope project, including the transmission asset or not, where you include the transmission asset, I believe we're still some way away from reaching a zero subsidy level that will take a number of years before we reach that point in my view, and I would also say that we talk about zero subsidy in continental Europe, but the matter of fact is it's zero subsidy because the state finances the transmission asset in a separate bucket and we would claim that if they were to include that transmission asset in a full scope auction and expose it to competition, we would be able to build those wind farms at a lower total cost to the individual state. So again, there are some -- lot of nuances when we talk about zero subsidiary. Overall, there is no doubt the costs are coming down rapidly. We've seen the 60% cost reduction in just 4 years. Costs will continue to come down as we introduce new generations of turbines and continue to innovate the balance of plant and of course as cost come down over the next 5 to 10 years, we will gradually begin to approach zero subsidy models as we already begun to see last year and that's kind of, in my view, that's good news. It means that offshore wind is becoming very competitive vis-a-vis fossil fuels vis-a-vis other renewables that is going to drive very significant global demand for offshore wind and you need obviously to push the cost down and accept that, that over time may increase your merchant exposure in order for the technology to have a really strong future. So we can't have it both ways, we can't on one hand, sit and say that, that we worried about being subsidized and then the next month, we say we're worried about not being subsidized. It's a transition, it's a natural evolution of a new industry and a new technology. I think this industry is doing a remarkable job in transforming itself and I'm quite confident we can continue to create value also over the next 5 to 10 years, as we continue to gradually progress towards lower and lower subsidies or even to zero subsidies. Of course that will lead to a certain amount of merchant exposure, but I believe there are different ways, so beginning to also mitigate that risk. I mentioned earlier that for the German Cluster 1 project, we are working on corporate PPAs to go in and put a price flow structure into the project and that is one model, there could be other models you refer to certain regulatory models that you could envisage where -- where the state goes in and at least shares the downside risk with the bidders, which might actually be meaningful for the state to do in terms of getting to the best risk-return equation also from the point of you. So we not -- we are not as concerned about what that future will look like. We do believe that the industry has very strong outlook. As we move towards lower subsidies, you also have to bear in mind, we will see stronger and stronger global volume, stronger growth, stronger demand, we'll continue to see cost coming down and in that total equation between supply and demand on a global level and the continued cost out, I'm quite convinced we can continue to generate fairly good value for our shareholders.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

Thank you.

[Henrik Poulsen, CEO, President & Member of Executive Board]

A long answer to a pretty complex question, but I leave it at that.

[Operator]

Our next question comes from the line of Casper Blom from ABG.

[Casper Blom, Lead Analyst]

Just a subject that we also talked about a couple years ago in connection with the IPO, which would be the potential, I haven't say, reversed changes to old subsidy levels. We've seen the news in France recently that the government wanted to renegotiate a potential re-tender auctions that were actually done some years ago, as they've been seeing cost coming down. Do you see any kind of risk of that happening to some of your old projects that sort of governments coming back to change conditions? And what's your sort of whole thinking about that debate?

[Henrik Poulsen, CEO, President & Member of Executive Board]

We see no risk to our contract portfolio. When you look at the French situation, it is a particular situation as I see. These are contracts that were awarded 5 years ago or more than 5 years ago and that means they were at around the EUR 200 per megawatt hour level and during that exact timeframe, we've seen this 60-plus percent cost reduction for the technology, so you could say it's really a result of the French projects, not really moving forward during for a fairly long period of time, while the industry has seen cost coming down significantly, and that combination, when you look at it from the point of view of the French states, obviously means that now they're trying to rejuvenate the projects and actually move them into action. I don't think it's completely unreasonable that they kind of look at that EUR 200 level and ask themselves whether that is still the right subsidy level. You have to bear in mind that these are projects that have never reached an FID, so I think it's a pretty particular situation and I don't think there's any cross-read to any of our projects. These are projects that are all FIDs and in construction or have been constructed. I'm quite confident that the Danish, German and U.K. governments would never go back on a contract that have been allocated and acted upon through an FID or through construction.

[Operator]

Our next question comes from the line of Kristian Godiksen from SEB.

[Kristian Godiksen, Analyst]

I'm just wondering what you have -- what would have changed to make you participate in the upcoming tenders in the [ Hollandse ], which I guess should also be subsidy-free and what you didn't see value in participating in the one just finalized?

[Henrik Poulsen, CEO, President & Member of Executive Board]

Thanks, Kristian. I mean we would obviously take these Dutch tenders, they are not that different in terms of their fundamental characteristics, so the site characteristics. So we would, of course take a fresh look at all of the key assumptions going into a bit case. So that would be, whether we have changed our view on the OpEx and CapEx input parameters of the long-term power price parameters. It's here for us so, we would always update our view on these assumptions, to see if we believe there is a robust value creation case or not.

[Kristian Godiksen, Analyst]

Speaker A-Kristian GodiksenAnd what about -- two things, what about required rate of return and then also on some of these -- do you see that in your investment case decision that you had maybe too conservative assumptions, now that you see that a number of your competitors did see value in participating in the tender?

[Henrik Poulsen, CEO, President & Member of Executive Board]

We haven't really changed our view on the evaluation we did on the most recent Dutch tender. We stand by the conclusion that we reached. In terms of our return requirements, we do demand a certain spread on top of our cost of capital to make sure that we do create value and that we maintain the spend capital allocation, and we're not going to change that.

[Operator]

Our next question comes from the line of Deepa Venkateswaran from Bernstein.

[Deepa Venkateswaran, Senior Analyst]

I had a follow-up question on the U.S. market. So you did talk about developments in New York, for instance, now you don't really have a site there. So I was wondering what your game plan is for the States where you don't have leases? Can you use the sites in other states to participate, or do you anticipate essentially being able to win some leases later?

[Henrik Poulsen, CEO, President & Member of Executive Board]

It could be both. Frankly, we could see ourselves participating in State of New York from sites in neighboring states and/or we would of course also be interested if there was an opportunity to buy sites in the area along Long Island, which would probably be the opportunity that might come up. So it could be a combination of the two.

[Deepa Venkateswaran, Senior Analyst]

Okay. So you can use your New Jersey site, for instance than the New York maybe?

[Henrik Poulsen, CEO, President & Member of Executive Board]

That is our expectation that we could use our New Jersey and/or Massachusetts sites.

[Operator]

[Operator Instructions]Our next question comes from the line of Marcus Bellander from Carnegie.

[Marcus Bellander, Research Analyst]

I just wanted to follow-up on the question regarding whether your guidance is conservative or not and it does look a little conservative to me as well. And I'm just trying to understand if there is anything in there -- any one-offs that we might be missing. For example, the repair of the wings on Anholt and London Array, will that in any way affect 2018 earnings negatively?

[Marianne Wiinholt, CFO, Executive VP & Member of Executive Board]

I can definitely say no to the last question, Marcus that will not have a significant impact. But what you need to take into account is that we also have quite a strong construction gain in the first quarter, due to the good progress on Walney Extension, so you will not see a similar construction gain in the remaining quarters. So it is a bit front-end loaded on that account. And then of course, you have the wind speed and the cold weather impacting and the renegotiation lump-sum.

[Operator]

Our next question comes from the line of Kristian Godiksen from SEB.

[Kristian Godiksen, Analyst]

Last question for me. So just did not found any attractive investments within the solar and onshore wind, but could you -- do you have the capacity to invest within all 3 areas at the same time? And then -- and secondly, could you confirm that you are actively looking at potential acquisition targets within offshore wind in the U.S.?

[Henrik Poulsen, CEO, President & Member of Executive Board]

I could see us potentially having the capacity, that doesn't mean we would necessarily do that. But we could have the capacity within that 0% to 10% CapEx allocation that I referred to earlier for the next years through 2023. That could potentially be room, of course, that would depend on the size of the investments that we're looking at. I'm not going to comment on anything specifically in terms of where we are looking for acquisitions.

[Kristian Godiksen, Analyst]

But on the 0% to 10%, I guess that would be on top of a potential acquisition of a company, which both have some of the development competencies, but also the whole part -- the whole platform?

[Henrik Poulsen, CEO, President & Member of Executive Board]

0% to 10% would both include the acquisition money as well as any subsequent development CapEx.

[Operator]

There are no further questions at this time. So, please go ahead, speakers.

[Henrik Poulsen, CEO, President & Member of Executive Board]

All right, if no further questions, thank you all very much for joining this call and have a continued good day. Thank you.