Oersted A/S

SWB:D2G

Earnings Call Analysis

Strong Growth Amid Challenges in Offshore Wind Projects

Ørsted reported a robust Q2 with a 59% increase in EBITDA to DKK 5.3 billion, driven by higher earnings from offshore wind farms and favorable wind speeds. Revenue guidance for 2024 remains DKK 23-26 billion, while gross investment guidance has been lowered to DKK 44-48 billion due to project delays. Key projects like Revolution Wind faced delays due to onshore substation issues, pushing commissioning to 2026. Despite this, Ørsted remains on track to achieve its long-term goal of 35-38 gigawatts of renewable capacity by 2030, supported by new projects and partnerships in battery storage and renewable energy. The company maintains a fossil-free energy generation target by 2025.

Introduction to Ørsted's Performance and Business Initiatives

In the second quarter of 2024, Ørsted showed resilience and strategic progress despite industry challenges. The company’s CEO, Mads Nipper, emphasized their ongoing commitment to financial targets and a fully funded business plan. EBITDA, excluding new partnerships and cancellation fees, rose to DKK 5.3 billion — a significant increase of 59% compared to the previous year. This growth was driven primarily by ramp-ups in new wind farms and favorable wind conditions. Ørsted commissioned around 2 gigawatts of renewable capacity, further aligning with its goal of achieving 35-38 gigawatts by 2030.

Strategic Decisions and Expansions

Ørsted is not only focusing on expanding wind energy but also exploring battery storage solutions. The company’s recent investment decision on a 300-megawatt battery storage system connected to the Hornsea 3 offshore wind farm is a testament to this emphasis. Additionally, they announced a partnership with 'Clean Energy' to develop four standalone battery energy storage systems in the U.S. Midwest with a potential capacity of 1 gigawatt.

Project Highlights and Approvals

Significant projects like Sunrise Wind and Revolution Wind have made considerable progress. Sunrise Wind, in particular, received final federal approval and began construction of a 924-megawatt project. However, there are challenges as well, notably with Revolution Wind, which faced delays due to soil contamination issues.

Financial Overview

CFO Trond Westlie reported that Ørsted achieved an EBITDA of DKK 5.3 billion, an increase of DKK 2 billion from the same period last year, driven by offshore site earnings. Underlying tax rates remained steady at 22%, while the reported net profit was negatively impacted by impairments, amounting to a negative DKK 1.7 billion. Adjusted for these impairments and cancellation fees, net profit totaled DKK 800 million, up by DKK 1.3 billion from the previous year.

Operational and Risk Management

Ørsted’s half-year performance saw investments in renewable energy capacity that support long-term growth ambitions. Tactical decisions were made to de-prioritize the green fuels market due to unfavorable conditions, focusing instead on core business areas. Although construction progress is robust overall, issues such as electrical infrastructure problems at Hornsea 1 and 2 were flagged and managed effectively.

Cash Flow and Debt Management

At the end of Q2, Ørsted's net debt was DKK 49.4 billion, a slight decrease of DKK 0.5 billion. The company's gross investments amounted to DKK 8.3 billion, with several divestments totaling DKK 3 billion. The cash outflow related to Ocean Wind 1 cancellation fees was DKK 4.1 billion for 2024.

Safety and Environmental Milestones

Ørsted plans to phase out coal-based generation by the end of 2024, moving towards a fossil-free energy generation model by 2025. The safety protocols have also shown positive results with fewer recordable injuries, which is an encouraging step.

Future Outlook and Guidance

Ørsted reiterates its full-year guidance of DKK 23-26 billion for 2024, expecting higher earnings from offshore businesses and lower earnings from bioenergy and other sectors. Gross investment guidance has been adjusted to DKK 44-48 billion due to timing effects moving some costs into 2025. Ørsted remains committed to disciplined capital allocation and risk mitigation to support their growth strategy.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the Ørsted Q2 2024 earnings call. [Operator Instructions]

Today's speakers are Group President and CEO, Mads Nipper and CFO, Trond Westlie. Speakers, please begin.

[Mads Nipper, executive]

Hello, everyone, and thank you very much for joining our earnings call. During the second quarter, we continued to execute on our business plan and our Q2 earnings are supporting our guidance for the year. We continue to undertake the necessary prioritizations within our business and have seen progress on several risk mitigating initiatives.

Furthermore, we see that our operations performed well. Despite continued industry challenges and an unsatisfactory project-specific issue at our legacy U.S. offshore project Revolution Wind, our long-term financial targets remain unchanged, and we have a fully funded business plan.

Looking at our financials for the second quarter. Our underlying business continues to perform well, and our operational portfolio continues to deliver strong earnings. EBITDA, excluding new partnerships and cancellation fees, totaled DKK 5.3 billion in Q2, an increase of 59% versus Q2 of 2023.

The main driver for this increase was higher earnings from our offshore sites driven by ramp-up from new wind farms and higher wind speeds. Earnings from offshore sites amounted to DKK 4.4 billion, an increase of 40% compared to the same period last year.

For the first half of the year, EBITDA, excluding new partnerships and cancellation fees, increased by DKK 2.5 billion to DKK 12.8 billion. Over the past quarter, we have commissioned around 2 gigawatts of renewable capacity.

The commissioning of Greater Changhua 1 & 2a, South Fork, Eleven Mile and Helena Energy Center will be providing clean energy across 3 different continents. This is a significant contribution to our long-term targets for renewable capacity, where we aim to reach around 35 to 38 gigawatts by 2030.

In addition to our installed capacity of 17.6 gigawatts, we are currently constructing 7.6 gigawatts of renewable capacity across our offshore and onshore projects. In the second quarter, we took the final investment decision of a 300-megawatt battery storage system co-located with the onshore converter station for our Hornsea 3 offshore wind farm.

We expect that the increase of renewable energy in the future will lead to increased intermittency and fluctuation of intraday power prices, which will support the value creation of the business case. Battery energy storage systems are often part of solar PV projects, but we see integrated solutions being increasingly interesting.

Last week, we announced our first partnership agreement into stand-alone storage as we teamed up with mission "clean energy". The partnership will advance 4 stand-alone battery energy storage systems across the U.S. Midwest with a potential capacity of 1 gigawatt. We see this partnership as a way to complement our existing development efforts while broadening and diversifying the portfolio of technologies that we can offer to utilities and other customers.

For Sunrise Wind, we signed our OREC PPA with NYSERDA. And in addition, we received a construction and operations plan approval. With this final federal approval, we have officially begun the construction of the 924-megawatt project on the U.S. East Coast, which will generate enough renewable power to nearly 600,000 New York's homes.

With these milestones in place, we completed the acquisition of Eversource's 50% share of Sunrise Wind in July and now have full ownership of the project. Additionally, we have concluded the divestment of our onshore platform in France and share in 4 U.S. onshore projects, in line with what we announced earlier this year.

From a strategic portfolio point of view, we have taken the decision to seize execution of the liquid effuse project flagship 1 and de-prioritize our immediate efforts within the liquidity fuel markets. The industrialization as well as commercial development of the offtake market of liquid e-fuels has progressed significantly slower than expected.

As a result, we have not been able to make long-term offtake contracts at sustainable prices. Combined with higher project costs, this development as well as our strategic focus on prioritizing growth options with the highest potential for value creation have led us to take the prudent decision to discontinue the project and re-prioritize our efforts in Power-to-X.

We remain fully committed to our efforts within green hydrogen, which is closer to our strategic core and where we currently see a higher potential for value creation. The decision to seize the execution of flagship 1 has led to a provision for cancellation fees of DKK 0.3 billion and impairment of DKK 1.5 billion.

We finalized the negotiation of several contracts related to Ocean Wind 1 and settled a claim with the state of New Jersey at better-than-assumed terms. These settlements of cancellation fees lead to a positive EBITDA impact of DKK 1.6 billion.

At the same time, valuation indications for our Ocean Wind 1 or Ocean Wind seabed have led to an impairment of DKK 0.6 billion in the quarter. The net impact of these effects amount to a net positive EBIT impact of DKK 1.0 billion for the quarter.

We maintain our full year EBITDA guidance of DKK 23 billion to DKK 26 billion, excluding earnings from new partnerships and impact from cancellation fees. We have increased our expected earnings within offshore compared to beginning of the year, while lowering our expected earnings in Bioenergy and other. At the same time, we have lowered our gross investment guidance by DKK 4 billion to DKK 44 billion to DKK 48 billion, driven by timing effects pushing CapEx spend into 2025.

Let's turn to Slide 4, where I'll give a status on our construction projects. Despite our continued focus on project execution and our dedicated work to derisk our construction portfolio, we have seen an unsatisfactory project-specific issue leading to a delay on the construction schedule of our legacy U.S. offshore project, Revolution Wind.

At Revolution Wind, we have seen encouraging progress on several of the risk mitigations we have been addressing, including monopile fabrication as well as securing availability and flexibility of installation vessels. The offshore construction activities are on track with 44 out of the projects, 67 monopiles installed as of this week. However, one of the risks we had identified as part of the risk review has materialized during the quarter as the construction of the onshore substation, which is part of the onshore scope handled by our partner, Eversource, will be delayed.

The cause of the delay is mitigating actions needed to address higher-than-anticipated level of soil contamination. While we were aware of contamination at this site, given its past users enable disposal facility, the comprehensive analysis from Eversource as part of the early construction work have shown that the level of contamination and its impact to the project schedule are more substantial than anticipated.

As a result, an update to the site design was required, which has resulted in a delay to the onshore construction activities. Based on this development, we now expect the commissioning of Revolution Wind to be delayed to 2026. We will be working closely with Eversource to explore all mitigations to improve the schedule and minimize the financial impact.

As a result of the delay and increased costs relating to extending the construction period, we are booking an impairment of DKK 2.1 billion, for which the majority is related to the delayed revenue profile. As we have previously indicated, the project did not satisfy our life cycle spread to WACC requirement at the point of the FID.

But despite these developments, we do see a positive value of the projects on an absolute IRR level as well as an attractive forward-looking return, and we remain committed to constructing Revolution Wind as part of our wider Northeast portfolio of projects.

Turning to the remainder of the portfolio, which have progressed over the past quarter. For our German program, we continue to progress towards commission of Gode Wind 3 where we have completed the construction of the project reached first power of 21 out of 23 turbines and are now undertaking the final testing to commission the wind farm within the next 1 to 2 months.

As part of the installation of Gode Wind 3, we have successfully developed and used a first-of-its-kind noiseless monopile installation technique, which enables a further reduction of the potential impact from construction activities on the marine environment as well as constructing in a more cost-effective way once adopted at scale.

For Borkum Riffgrund 3, we have progressed well with the monopile installation and more than 1/3 of the turbines are installed. While the majority of the monopiles have been installed already, the fabrication of the final ones remain on a tight schedule. Our key focus is to progress the timely ramp up of the remaining monopiles and potential mitigations.

The project continues to progress on a compressed schedule and we expect to commission the project in 2025. We are progressing the construction of Greater Changhua 2b and 4 and expect to start the installation of foundations of turbines in the first half of 2025.

In terms of vessel capacity, we are encouraged with regards to the vessel availability and continue to monitor the situation closely to ensure timely delivery. On Sunrise Wind, our Sunrise Wind project has entered the construction phase with the onshore construction phase progressing according to schedule.

This includes good progress on the onshore converter station, where the civil phase has been completed and majority of concrete foundations and key buildings are well progressed. The offshore installation work is expected to commence in 2025, but we do see an increased risk of project commissioning slipping into the -- from the end of '26 and into the first half of '27.

This risk relates to equipment installation and commissioning of the first-ever U.S. offshore HVDC system and the export cable. This potential delay in commissioning does not have a material impact on the business case as we can absorb the changes within the construction scope, and our team is working on mitigation strategies to address the risk.

The other key item on a critical path towards COD is the supply of monopiles. And I'm pleased to say that the production of monopile for Sunrise has already started and progressing according to the updated schedule. The supply chain situation for foundations remains tight in the medium term due to the many new facilities, and we are following the progress slowly -- or closely working with our suppliers to mitigate delay risks.

In the U.K., we continue to progress the 2.9 gigawatt Hornsea 3 project according to plan, following the FID in December of last year. As a part of the FID, we have also submitted a portion of the project's capacity into the recent CfD allocation round in the U.K. and are awaiting an outcome from the U.K. government in early September.

In onshore, the construction of our European portfolio is progressing well, with construction work ongoing in Germany and Ireland. In the U.S., we are currently constructing Mockingbird of 471 megawatts as well as the last part of Old 300. The construction of the 2 solar PV projects shows good progress with commission expected in Q3 this year. And we have an attractive backlog of onshore development projects which we expect to bring to FID towards the end of '24 and early '25 to support the continued growth in our onshore business.

And with that, let me hand over the financials to you, Trond.

[Trond Westlie, executive]

Thank you, Mads, and good afternoon, everyone. For the second quarter results, let me start with Slide 5 and the EBITDA for the quarter. For the presentation, all numbers are quoted in Danish kroner.

For the group, we realized a total of EBITDA of DKK 5.3 billion, excluding new partnership and cancellation fee. This was DKK 2 billion higher than the same quarter last year with offshore sites being the key driver for the increase.

Let me walk you through the main earnings developments for the quarter. For our offshore side, earnings increased by DKK 1.3 billion. This was driven by ramp-up generation, higher prices on our green certificates, improved earnings from our power trading activities as well as strong wind speeds.

At our quarter 1 update, we flagged an issue with electrical infrastructure for the transmission cables at Hornsea 1 and 2. As expected, this has resulted in lower availability during second quarter. The remedial work has been performed and the issue is repaired in line with our expectations during quarter 2.

Earnings from our existing partnerships were limited and lower compared to same quarter last year, where there was a benefit from adjustments of provisions towards partners. For onshore, earnings increased around DKK 200 million due to ramp-up generation as well as higher wind speeds.

Within Bioenergy and other, earnings from our Copenhagen plants increased by around DKK 300 million as a result of higher heat generation and compensation received from [indiscernible] for keeping 3 of our Danish power stations operational until August.

Within our gas business, earnings improved compared to last year. Last year, we saw a temporary negative effect from revaluation of our gas -- at our gas storage, which was not repeated to the same extent this year.

As we have announced, we have finalized negotiations with the state of New Jersey and several contracts at a better-than-assumed terms, leading to a reduction in our provision and an equivalent positive EBITDA impact of DKK 1.6 billion relating to the Ocean Wind contracts or other provisions.

In addition, as a consequence of our decision to seize the execution of the flagship 1 project, we have incurred a cancellation fee of DKK 300 million. And as such, we have a total net provision reversal of DKK 1.3 billion in the quarter, including changes in our estimates for cancellation fees, the quarterly EBITDA is totaling DKK 6.6 billion of profit.

Let's turn to Slide 6. Adjusted for cancellation fee and impairments, our net profit totaled DKK 800 million, which is DKK 1.3 billion higher than last year, primarily driven by higher underlying earnings. While the reported tax rate for the quarter is impacted by impairments not being tax deductible, the underlying tax rate for our business activities was 22% and thus in line with previous quarters.

Our reported net profit was a negative DKK 1.7 billion and adversely impacted by the impairments. As Mads mentioned on Revolution Wind, the projects delayed onshore installation schedule has resulted in an impairment. As you are aware, we have had to recognize impairments of our U.S. offshore projects in the past.

That means that the projects do not carry any headroom in the impairment analysis of our legacy U.S. projects. Because of this, any changes to the business case, such as delayed project schedules, increased on cost construction and interest rate movements are likely to lead to adjustments in impairments as long as changes are not included in the remaining contingencies in each project.

Adjusted for impairments and cancellation fees, our return on capital employed came in at 13.1%, which is in line with the number for second quarter 2023. The reported return on capital employed landed at a negative 12.4% and was primarily attributable to the lower EBIT as a result of the impairments and cancellation fees the last 12 months.

Going then to Slide 7 and our net interest-bearing debt and credit metric. At the end of the second quarter, our net debt amounted to DKK 49.4 billion, a slight decrease of DKK 0.5 billion during the quarter. Our cash flow from operating activities was supported by our operating income and release of collateral, partly offset by cancellation fee payments related to Ocean Wind 1.

So far in '24, we have had a cash outflow of DKK 4.1 billion relating to cancellation fees from Ocean Wind 1, of which DKK 1.7 billion was in second quarter. For the quarter, our gross investments totaled DKK 8.3 billion, driven by our investments into the construction of our renewable project portfolio.

Divestment proceeds totaled DKK 3 billion in the quarter, coming from the sale of our French onshore portfolio as well as the partial divestments of 4 operational U.S. onshore assets. On a related note, we continue to see good progress within our divestment program as we have several transactions in process.

This includes the Changhua 4 transaction, which we continue to expect to sign and close during this calendar year. Our key metric FFO to adjusted net debt stood at 23% at the end of the second quarter. Compared to last year, the increase is driven by higher funds from operations in the 12 months rolling period, which more than offset the increase in our adjusted net debt position, including the provision payments for Ocean Wind.

As we highlighted in our first quarter results, the ratio is expected to be lower for the full year of '24 before starting to recover towards the targeted level, about 30% by the end of 2026 due to the payments -- the likely payments of the Ocean Wind provision.

Going then to Slide 8 and our nonfinancial metrics. For the first quarter of 2024, our taxonomy aligned metrics were in line sorry, the second quarter of 2024, is it, of course, our taxonomy aligned metrics were in line with our expectations. Renewable share of energy came in at 97% compared to 92% for the same period last year.

The development was driven by a ramp-up generation of -- in offshore, higher wind speed as well as lower coal-based generation. Our plan to phase out coal-based generation during '24 remains on track. By the end of August, the order from 2022 to keep 3 of our Danish coal and oil field power station units operational, expires.

And following this, we will initiate the phase out towards the end of the year. Closing our coal-based generation means that from 2025, our entire energy generation will essentially be fossil free, which is a huge milestone.

On safety, we are encouraged to see a reduction in the number of recordable injuries for both our own and our contractors, employees. Throughout the second quarter, we have started to carry out safety days across Ørsted location globally, and we will ensure a continued focus on improving safety leadership at all levels of the organization.

And then finally, on my part, let's turn to Slide 9 and the outlook for '24. With the financial development for the first half of the year, we reiterate our full year guidance of DKK 23 billion to DKK 26 billion for 2024.

Compared to our expectation for earnings mix at the beginning of the year, we now expect higher earnings from our offshore businesses driven by the high wind speeds and the higher earnings from our power trading activities has delivered in the first 6 months of this year. At the same time, our earnings expectation for the Bioenergy and other business has been lowered.

Our level of gross investments for '24 is now expected in the range of DKK 44 billion to DKK 48 billion, which is a reduction compared to our expectations last quarter. This is due to timing effects across our project portfolio with costs moving into 2025.

And with that, I will pass some -- the word back to Mads for some final comments.

[Mads Nipper, executive]

Thanks a lot, Trond. And yes, turning to Slide 10 and a very quick summary of the first half of 2024. We have progressed with the execution of our updated business plan that we presented on February 1 or 3rd. I'm pleased that our operations are performing well, and in particularly that the earnings from our offshore wind farms and thus, our core business have increased.

In the first half of the year, we have commissioned around 2 gigawatts of renewable energy capacity which is supporting our long-term growth ambition. At the same time, we have taken a strategic decision to de-prioritize our efforts within the green fuels market due to the development of market conditions and, therefore, sees the execution of the greenfield project flagship 1.

And while we generally see solid construction progress it is unsatisfactory to have seen the project-specific issue that led to the delay of Revolution Wind. As we highlighted at our Capital Markets update in February, our construction portfolio contained risk and challenges that our entire team are working diligently to manage and further derisk.

While it is unsatisfactory to incur these impairments, none of the events are changing where we plan to be by 2030, nor does it change our comfort in our path towards our credit metric improvement towards '26 as we continue to have a fully financed business plan.

On the basis of a strong operational quarter, we remain focused on executing -- execution and risk mitigation. And we will continue being disciplined in our capital allocation and maintain a strong focus on value creation in support of our renewable portfolio growth as well as our business plan.

And with that, we will now open for questions. Operator, please.

[Operator]

[Operator Instructions] And the first question comes from Kristian Tornøe from SEB.

[Kristian Tornøe Johansen, analyst]

Yes. So my question goes to your long-term gross investment target of DKK 270 billion. So originally, you said 5% of this goes to Bioenergy and power stations. So I mean that's DKK 14 billion. With the change to the flagship 1 product and your comments on investments in e-fuels. How should I think about the investment needs for this segment going forward?

[Mads Nipper, executive]

Yes. Kristian, well, we will obviously stay flexible to this. We are constructing the carbon capture and storage facility as you know, in Denmark, which is also a part of that. And then we are still, as we have mentioned, committing to our green hydrogen portfolio while we are de-prioritizing our green fuels. So there is no reason to change that, but we will uphold the flexibility to where that CapEx goes.

[Kristian Tornøe Johansen, analyst]

Okay. Understood. And then just my second question. So I understand the sell bid window in the CfD auction has closed. So can you confirm whether you have also placed a bid for Hornsea 4?

[Mads Nipper, executive]

That is an ongoing solicitation and our sort of our way of commenting on that. We refrain from commenting whether we have submitted a bid.

[Operator]

And the next question comes from Harry Wyburd from BNB Paribas Exane.

[Harry Wyburd, analyst]

On Revolution, can you remind us what annualized EBITDA you're expecting from Revolution? And can you comment on what change you might make to your 2026 guidance -- EBITDA guidance, I think DKK 30 billion to DKK 34 billion because I presume this would have an impact -- a quite significant impact on that.

And then on the impairments, clearly rates have fallen, you've quite a lot since the reporting date. Can you give us an idea of what adjustment, if any, you would make to the impairments to reflect lower rates if you based it on mark-to-market as of today?

[Trond Westlie, executive]

Well, in relation to guiding on separate project on the EBITDA impact on the later years, we are, of course, not going to do that. So having said that, we do not see any reason for changing as Mads said, on our targets for '26 and '30. There's no reason for changing sort of our views on that as of now. We're, of course, going to update you on the long-term targets. The guidance we're giving today is on our short-term targets for '24.

Going then to the impairment level relative to what could have happened during -- since June 30 until now, well, as a result of the accounting rules, of course, we have to abide by the things that we have updated information until yesterday to actually get into that view. So it's updated as we can give you right now.

[Operator]

And the next question comes from Alberto Gandolfi from Goldman Sachs.

[Alberto Gandolfi, analyst]

I have one question, and if possible, I'll ask a second one. The first question is that the DKK 4 billion impairment was to a degree of surprise today. So can you tell us, please, how much of that is noncash? And have you carried out maybe probability-weighted worst-case scenario? What if using the Murphy's law, everything that can go wrong, does go wrong. What else is left to impair reasonably speaking, it's in a bear case? Or do you believe that as of today, on a reasonable basis, the probability of something else going wrong is very low?

I'm trying to gauge here what else is left to have a proper clean slate besides execution risk on future projects. So I'm really trying to gauge how much is cash and what is the risk going forward and other announcements like the ones we saw today.

And maybe if you allow me the second one, please don't reply if you only stick to 1 question. You talked about Changhua 4. Can you please tell us what other assets are in an advanced stage of negotiations besides Changhua 4. Advance I mean something that you could sell between tonight and maybe the end of the first quarter of next year.

[Trond Westlie, executive]

On the impairment element relative to what's the amount of cash. This is, of course, as a result of the accounting rules, this is sort of a discounted element of the future cash flow relative to how we actually view the impairment. So it's not a direct impact with what comes out of a cash effect and what comes out of delayed cash flow as a result of the scheduling.

Having said that, the part of the impairment number, the majority of that number is the delay. So the biggest number in that sort of impairment number is -- the reason for that is the delay in schedule. So that's what I can give you on that.

On the -- before I send it over to Mads, on the proceeds side, on the Changhua 4, we still believe that we're going to sign and close that during the year. It's dependent on government approval that needs to be given by our -- to our investors in Taiwan. It's highly likely -- we believe now, of course, that it's highly likely that, that will be given, and we're getting comfort on that, but it still hasn't been given by the public authority that needs to give it.

On the practical side in our negotiations, we have come significantly far along on the negotiations, and it's literally almost clear to signing as soon as we get the clearance. On the other parts, we have several other projects going on that we expect to actually close and sign before Christmas. And that is our ambition. But of course, we're not going to give you any views on the size of the amounts or the effects or the actual timing of that.

[Mads Nipper, executive]

Yes. Thanks, Trond. And Alberto, let me give a few perspectives on your sort of, I think, very right question which is what's worst case or bear case. Well, let me start by saying that in this -- in especially the offshore business, no project is without challenges and risk as we have said many times. But let me just give you a little bit more details about what we have actually seen of encouraging progress despite the unsatisfactory impairment driven by the onshore substation. But the offshore construction mitigating actions are actually up until now working well.

We have been able to get firmer ground under the progress of the monopile manufacturing, which is one of the big bottlenecks we have seen, the coating facilities be operational, and therefore, have greater visibility of that. We've successfully secured extension and flexibility of vessels. And we have also, obviously, as you would expect us to, have scrutinized other onshore substation construction, including for Sunrise, where Eversource is also the lead, and we have found no similar issues.

We see the progress with monopile installation and turbine installation and an ongoing project going to the plan. And even though it is still tight, there is no reason with the current knowledge to believe that what we have now is not realistic. And it would be speculation to say what else could go wrong because what we present to you now is a plan that we believe in.

[Alberto Gandolfi, analyst]

Mads, if you allow me, forgive me, you said that sentence in offshore, not project is without risk. Can you please tell us what contingency normally do you in a project? There usually are contingencies, right, when you build a building, a shopping mall, offshore wind. Just trying to understand after what percentage of cost overrun or delayed revenues you actually need to impair. Do you put a 5%, 10%, 15%, 20% contingency in there?

[Mads Nipper, executive]

No worries at all. I'm not going to give you a percentage, Alberto. But what I can say is that what we do for every single project is that we -- based on the risk register and a probability weighted risk, we allocate those contingencies and typically also have an unallocated contingency. That would vary by risk profile of the project. Some of them are significantly derisked, some of them are in other markets and with a greater risk profile, and we will vary our contingency to that level. So I cannot and also will not give you a specific percentage.

[Operator]

And the next question comes from Jenny Ping from Citi.

[Jenny Ping, analyst]

Just going back to the P2X businesses and [indiscernible] flagship 1, the hydrogen and the [indiscernible]. Can you just remind us what is the total invested capital of these projects? Basically all the projects outside of your core onshore, offshore and the bioenergy part of the business.

And then secondly, just on the headroom relating to the impairment, obviously, rates have come down, and we are going to start to see some write-backs. Can you just help us to understand the extent of that headroom to get to a level where you no longer need to mark-to-market based on rates. What are we looking at? Is it $2 billion, $3 billion? Just some sense of how much of potential write-backs we are due to see?

[Trond Westlie, executive]

Well, when it comes to the P2X and the remaining part that we have on the balance sheet, it is minor, almost neglectable. So flagship 1 was really our big commitment, and that is where we have used the money for the last couple of years. So there are a few other projects going on, but the amount there is tiny. On the sensitivity part, of course, in our notes, in Note 4 on the impairment side in our reports, you'll actually find a sensitivity schedule as well as recoverable amount relative to where we are.

So -- and that means that, I mean, if you take the sensitivity of the 50 basis points is, of course, going to affect us with DKK 1.86 billion. So the small elements of the interest rate will, of course, go up and down. But as I said, when you have entered or have 0% to the impairment level, all these changes will impact impairments going forward.

[Operator]

From Casper Blom from Danske Bank.

[Casper Blom, analyst]

A couple of questions from my side as well. First of all, a question relating to the impairment on the seabed related to the Ocean Wind project. I suppose these impairments come now because you sort of say, tested the price in the market. But there are no impairments on other seabeds in your portfolio. Is that because you had sort of for some reason, included a particularly high seabed value for Ocean Wind. And how should we get comfortable that there will not be impairments on other seabeds around the world? That's the first question, please.

[Trond Westlie, executive]

When it comes to the seabed in Ocean Wind, this is a specific accounting method to actually -- we look at what the possible market value is relative to less cost as a result of that we are unwinding Ocean Wind, meaning that other leaseholds is actually looked at in a continuing business mind -- valuation mindset. And as a result of that, we actually not foresee as of now any reasons to look at the valuation on those. They are considering in an ongoing business and as a result of that evaluated accordingly. And that's the reason why we -- and as you say, in this winning mindset on Ocean Wind, we, of course, have to look at how the market value looked at this lease, and that's how we -- what we have been doing this quarter.

[Casper Blom, analyst]

Okay. And then my second question goes to the recent Taiwanese offshore wind auction where you participated with Greater Changhua 3 and was unfortunate not to get any allocation. As I understand it, due to a site overlap with another project. How does that place the Greater Changhua 3 project going forward? I mean if someone else has built there, can you use that for anything?

[Mads Nipper, executive]

Casper, the short answer is no, we can't. This is one of the frame regulations in the Taiwanese market is that it is allowed to have site overlaps, which we see in multiple cases. And then the one who ranks highest will then be -- will be the ones who get that award. And we are obviously in light of that and the fact that we will not be able to use Changhua 3. We are now reviewing our development pipeline in Taiwan and plan to develop new sites for future auctions. So we still believe in Taiwan as an attractive market.

[Operator]

And the next question comes from Deepa Venkateswaran from Bernstein.

[Deepa Venkateswaran, analyst]

I had a question around the impairment as well. I think the first part is compared to last year, when most of the delays, I mean it's caused by the supply chain and so on. Would you say that in comparison to that, the Revolution Wind is of a different quality in that sense and just reflecting on your market caps fallen by almost DKK 12 billion to DKK 13 billion when I think the true issue is really that maybe the NPV of this project is changed by DKK 2 billion. And I presume no one was really giving value to flagship 1 et cetera, in their valuation. So I just wanted to get your qualitative view on how you see this versus, say, last year this time when we were in a similar position?

And on Sunrise Wind, can I check now that you've bought out the other 50% from Eversource paying around $1 billion compared to your recoverable value of your 50% north of DKK 4 billion. Would you again have some chance to write back any prior impairments? I think you've impaired DKK 3 billion in that project historically. So again, when you combine the 2 stakes together, does that give an opportunity to write back anything in Q3?

[Mads Nipper, executive]

Yes. Deepa, yes, you're right. We do look at this -- the nature of this impairment as fundamentally different than last year. In a way, you can say that the root cause behind the impairment for Revolution Wind is really not supply chain related. As I said before, the supply chain and offshore construction related mitigating actions is progressing to plan. So therefore, we feel with how that has progressed, we see execution, we see the construction schedule progressing. And we also see that the quality of the mitigating actions for the supply chain-related parts, both in Revolution and in our other projects progressing well.

What we have here, say -- you could say that the onshore construction part, which is in the scope of our partner is, in many ways, a more standard operation. I mean this is infrastructure investment. What happened was that due to the soil conditions, we needed -- Eversource needed to do more piling, needed to redesign and therefore, I would really urge us not to make too many sort of reader crosses from what happened here to the offshore construction mitigating actions, even though, of course, it is something that has a significant adverse impact and therefore, is unsatisfactory. But it is very true that we see the nature and root cause of this impairment as dramatically different from what happened last year.

[Trond Westlie, executive]

And on the Sunrise win relating to the resource transaction and the impairments. This is not going to affect our view on the impairment as such. We are in the impairment territory. And that sort of transaction in itself does not change that. So we are just going to do our impairment evaluation when it comes to the end of the second quarter since we are in that territory, and then it's the normal course of a valuation that goes in there.

[Operator]

And the next question comes from Mark Freshney from UBS.

[Mark Freshney, analyst]

Trond, if I could come back to the DKK 70 billion to DKK 80 billion disposal plan through to 2026. I mean across the end, I know that one of your partners exited Race Bank, but the deal flow has been very low compared to your expectations in February when you announced the target. How would you say your expectation of being able to do that DKK 70 billion to DKK 80 billion has changed? Do you think it's -- you're more certain you can do it because you progressed or less certain because the climate for these types of deals is a lot tougher?

And secondly, a question for Mads, just on Chinese offshore wind equipment. I mean clearly, the turbine is almost half of the CapEx spend for many projects. A lot has been made by some of your competitors and counterparts about the suitability of these machines. But what is your view on the ability to bring these machines to Europe and to integrate them in some of your projects?

[Trond Westlie, executive]

Well, let's start on the sort of the farm-down processes. I do think that they are -- the way we actually see the market right now, as I said in the -- when we did the first quarter call, we saw sort of a slight positive development and also some slight positive development on the return requirements, specifically in the U.S., even though not large.

Having said that, in the second quarter until now, what we see is the same interest and flow or available money for these kind of investments. And what we also recognize is that Ørsted as a partner is a good partner for many of these investors in the environment we're talking. So all in all, I will notch it up a slight more positive touch than I said in the first quarter.

So when it comes to the volume and the ability to find investors and also price them reasonably seems to be there, and we have sort of a positive view. And as a result of that, we still maintain that. We have that self-funded plan for this period and we're moving along. Having said that, of course, when this plan was presented in February, all the farm-downs and sort of at least on the speed of the farm-downs that has been in process and are in process is, of course, picking up and these transactions, of course, take some time.

So when it actually comes to the project or the transactions that are going to be signed and closed during the year, they are, of course, sort of queuing up sort of late Q3 coming into Christmas time.

But our schedule is there. We still have several of them that we believe is actually going to be signed and closed. And also when we actually look at our workload and also the project that we have put in action, we also see that we're going to deliver on the '26 level. So all in all, we -- and I still don't think that we should adjust or say any other things.

[Mads Nipper, executive]

And I'll comment on the Chinese equipment, Mark, and just in the beginning, you said that turbine is half -- approximately half the CapEx. That is typically not the case. It is typically a smaller part given also the relatively larger share especially transport and installation has gotten, but it is a significant size.

So let me start by saying we have no current plans for Chinese turbines in our pipeline, and that has not changed. But that said, we do and we will continue to consider all technologies and suppliers on an ongoing basis, and we will select the equipment based on the quality, technical maturity, performance, commercial terms and so on. But we will also ensure that any regulatory risks will be taken into consideration before specifically taking, in this case, Chinese turbines.

[Operator]

And the next question comes from Helene Kvilhaug Brondbo from DNB Markets.

[Helene Brondbo, analyst]

Yes. I just wanted to follow up on the farm-down questions. And I just wanted to ask how you are planning to fund future capital requirements in the coming quarters, if you fall short of your farm-down expectations?

[Trond Westlie, executive]

As of now, I do not see any challenge in our liquidity position relative to timing of the farm-downs. So the farm-downs is, of course, a part of our self-funded plan relative to our net interest-bearing debt and our borrowing capabilities as a result of having the target of the 30% in 2026. But as of now, we don't see any liquidity challenge relative to the timing elements as we foresee it.

[Operator]

And the next question comes from Lars Heindorff from Nordea.

[Lars Heindorff, analyst]

A couple of questions on my part. So the first one is on Revolution Wind and the postponement. How is that impacting project economics? I hope you can maybe remind us a little bit about where we should think about the 150 to 300 basis point spreads in relation to revolution win? And also I mean, the offtake agreements that you have there, will that be postponed a year in the end? Or will you then have to go commercial if it's delayed and then the agreement runs out? And how you -- just to get sort of a sense for how this actually affected the project economics. That's the first one.

And then the second one, still a follow-up on the disposals. The DKK 70 billion to DKK 80 billion until '26. If I understand it correctly, then Hornsea 3 and perhaps even Hornsea 4 is likely to be farm-down very early in the construction phase, which means probably a lower farm-down gain, but then less CapEx on the other hand. So the DKK 70 billion to DKK 80 billion, is that a P&L impact? Or is that total impacts which span both the P&L and cash flow and balance sheet? And how should we think about the sensor rate? Is that a number that will show up in terms of the gain that you will report on the P&L until '26?

[Trond Westlie, executive]

Well, on your first question on Revolution when it comes to the timing, when we actually ramp up these farms, some of the productions go into the grid as a result of having sort of the connectivity to the distribution. Here, since it is the onshore substation, we have nowhere actually even though the farm can be up and running at some point, we are nowhere to actually sell the electrons. And as a result of that, we are very dependent on that onshore substation coming in place. And as a result of that, we're actually going to see the total effect of that sort of schedule impact at 100% of the ramp-up. So that's part of why the NPV is so heavy loaded on the schedule impacts.

[Mads Nipper, executive]

Yes. And Lars, we will -- we can get back by IR on the specifics of the or the nature of the impact to the offtake agreement or the PPA. But obviously, with the extension, which we would need to confirm, then goes without saying that the values of those cash flows at the other end would be significantly less. And on the farm-downs, you mentioned on Hornsea 3 or Hornsea 4, you're right, that is likely to be where the -- by far, the majority of the contribution will be, the share of the CapEx.

[Lars Heindorff, analyst]

But it is just a follow-up because if it's in the early parts of the construction phase, then I assume that the gain that you're going to report on your P&L will be relatively modest compared to the size of the project than some of the previous gains that you have reported. So that just -- I mean, I can't see if those numbers are the magnitude that I think there will be how you can reach them to the DKK 70 billion to DKK 80 billion, unless you count differently than I do. Of course, I might be wrong.

[Trond Westlie, executive]

Yes. On the details of that, you're right in saying that it's a common national details going forward. But I have to refer that question to the IR relative to the specifics on the -- because I -- yes, I'm too fresh in this.

[Mads Nipper, executive]

But we can say, Lars, if the underlying question is the DKK 70 billion to DKK 80 billion, is that the total capital structure impact or is it the proceeds? It is the proceeds that we expect to get.

[Operator]

And the next question comes from Ahmed Farman from Jefferies.

[Ahmed Farman, analyst]

Just firstly, could you talk a little bit about the process on Sunrise Wind for onwards to get visibility on the potential risk that you have highlighted of the slippage. So what work you need to do and the associated time line for that? Then can we also have some of your thoughts on the Bioenergy business. Can you sort of talk a little bit about the outlook for this business in the second half and how should we think about this business sort of medium term, given there's been a fair amount of volatility in this?

[Mads Nipper, executive]

Yes, Ahmed, happy to comment on that. Well, on Sunrise Wind, we can already now share some of it, namely that the production schedule with 2 suppliers for the main risk, which is the foundation deliveries is they are in place already. We will, of course, follow those very closely and also ensure that potential backup vessel gets finally confirmed, but that is available. What we plan to do is to give you an update like we have done in the last few quarters, we will give you an update on our project progress, including Sunrise Wind in the coming quarters as well. So that is how we will give you visibility.

But as of now, given also what I mentioned that we have absolutely no similar concerns to the construction of the onshore substation as it is already well progressed and out of the civil works then this will be a standard reporting on risks as we go along in the coming quarters.

And on Bio, we are not going to give you sort of a specific financial outlook. But it is -- as you're well aware, it is very seasonal. So the winter season is where we have the backbone of these fixed contracts and very protected contracts in the sense that any fuel price variation is passed on to the customer. So it really only depends on how cold is the weather. And that is what gives the backbone of this sort of around between DKK 1 billion and DKK 1.5 billion annual earnings, and we have no reason to believe that, that part of this would change.

And the rest is the ancillary service where we also have no reasons to believe that we would be good. And really what determines the variations here will be how attractive are the spreads between the fuel prices and the power prices. And if they stay low, then that will be lower earnings on the condensing power, if they get more attractive, it will be higher. That's probably as close as I can get.

[Operator]

And the next question comes from Olly Jeffery from Deutsche Bank.

[Olly Jeffery, analyst]

Thank you very much. So just continuing on with questions around Revolution Wind, I'm afraid. Could you answer a little bit when you guys first became aware of the challenges around soil contamination and the need to change the design of the substation. And how much of that substation and the additional monopiles that you need that you have currently installed. I'm just wondering what is the risk during the process installing further monopiles is there a realistic chance that we could find further soil contamination issues and therefore, an additional impairment and potential delay? Or are you satisfied with the investigative work you've done so far that, that's unlikely to transpire?

And then also just on Sunrise Wind, if the product does flip into 2027, do you envision that being an impairment that would potentially come with that? And if so, to what type of quantity do you think that might be?

[Mads Nipper, executive]

Yes. Thanks a lot. No, I -- to your first question around the soil contamination and the further risk of that changing and incurring additional monopiles, we see that as very limited. Or not monopiles sorry piles. This is a standard piling, and we are already done. There's approximately 2,000 piles now completed. That was completed end of July. And therefore, we are in the concrete phase now. So the risk of any additional changes to this layout because now it is stable. We have a stable foundation. We are in the concrete foundation and will progress very fast, as fast as ever possible to complete then we see that as a very limited risk and certainly no further risk on the stability, which is also a root cause of the reason for the redesign here. So that is very limited.

And on Sunrise, there's potential delay into the first half '27. As Trond said in his script, this is something that has already been captured in the latest update. So we have assumed that this will happen. And therefore, if it slips into first half, then it is not something that, in its own right, will trigger an impairment.

[Operator]

The next question comes from Dominic Nash from Barclays.

[Dominic Nash, analyst]

Two for me, please. First one is, again, talking about these impairments. And so an observation I have probably about 1/4 to 1/3 of all questions in every quarterly result seems to be about some form of impairment or write-back or another impairment or another write-back. Is there anything you can actually do to stop this volatility going forward. I know some from kitchen-sinking or [indiscernible] accounting system that basically means that we can get a period of stability so it doesn't undermine investor nervousness about it. That's sort of the first question.

And the second one is on offshore wind as a whole. Can you just give an update on where you're seeing the LCOE going for offshore wind? And if it remains stubbornly high, is there like another technology or other technologies that you would consider diversifying significantly into -- if you think that the offshore wind is not going to get down to the levels as probably needed by society.

[Trond Westlie, executive]

Well, when it comes to the impairment accounting rules, when you have entered sort of the impairment level, you basically have to do your best effort on sort of an NPV calculation on the whole history or the whole future of the project. And therefore, the changes to it and also the interest rate changes to it is going to impact up and down, and it's not really going to come out of that area. Unless it's going to be so good that you actually recover from everything from your starting point.

So that's why I mentioned it in the introduction that it's likely that we're going to see ups and downs as a result of this for the U.S. Pacific projects and we're going to continue that. Having said that, I think I also should reiterate what Mads said in his initial statements, and that is that these projects are IRR positive. They are from cradle to grave basically as we see. So fully loaded, not leveraged, we actually see positive risk terms coming out of this.

So we're not throwing money out of the window. And when we actually like on the revolution when we look at the forward-looking IRR, there is significant positive. So there's no question of doing anything else.

So financially, I'm sad that we're having these sort of impairment discussion. And the scheduling is the most important thing on this thing, but just coming out of that sort of loop with impairments is going to be challenging.

[Mads Nipper, executive]

And let me comment, Nash, on the offshore LCOE. So the development in the last sort of 6 to 12 months or 6 months have -- we have not seen deflation yet. We still see inflation. As we mentioned already also at the Q1 earnings call, we are seeing the inflation being at a totally different level than the previous 12, 18 months where it was very high. Now we see it at a much more modest level. But there is still inflation. And in that sense, we still see LCOEs ticking up.

And to your broader strategic question, will there essentially be other technologies that will be able to replace this. And certainly, the relative competitiveness of offshore in some geographies that have a choice that cannot be ruled out. But if you look at the entire Northern Europe, if you look at the Northeast U.S., clearly, there's a commitment to still see offshore wind playing an absolute key role.

And I think it is encouraging to see that even though this LCOE development is very well known, we do still see solicitations being brought online, most recently with the acceleration of New York 5 after the withdrawal of all New York 3 winners at that time. And that shows that the necessary commitment to keep building out despite the LCOE increase is still there. And obviously, scale, experience market building, higher robustness of the supply chain is exactly what it takes to start a downward curve again.

[Operator]

[Operator Instructions] And the next question comes from [indiscernible] from Pictet.

[Unknown Analyst]

Most of my questions have been answered, but I just wanted to get a clarification from you on liquidity situation. And I'm worried that you're saying that you sell assets. But your liquidity cushion has dropped by about DKK 14 billion year-to-date. And can you just remind me why that is because I can see that you're burning cash, but including disposals, it's less than half that amount. So was it that bank lines role to get reviewed? Or why was that?

And then kind of related to this question, in Q2, I think that you probably released a bit over DKK 1 billion from collateral release. And can you remind me how that works because now we're seeing probably TTF is higher and power prices going up a bit. Will that reverse in Q3 and become a drag on cash?

[Trond Westlie, executive]

Well, as I said, the liquidity reserve at the end of June is a bit more than DKK 75 billion. And as a result of that, when it actually comes to the timing of those kind of elements and also the timing of sort of the funding elements. As of now, we do not see the liquidity situation as a challenge. Of course, the release...

[Unknown Analyst]

What I'm trying to say was it's reduced by more than the cash burn. So did you elect to like cancel bank lines? Or why is it lower? I mean, I understand that you're saying a plan is funded.

[Trond Westlie, executive]

I'm not sure I understand sort of the detailed technicality of your question.

[Unknown Analyst]

Okay. So Basically, the question is, if the liquidity reduction is DKK 14 billion, which is from DKK 90.7 billion to DKK 76.7 billion, that's a DKK 14 billion reduction, but the cash burn is lower. So what changed in the reserve?

[Trond Westlie, executive]

I have to refer you to IR on that detailed question.

[Operator]

And the next question comes from David [indiscernible] from Volvo.

[Unknown Analyst]

I had a question just on Skipjack. Is there any update on talks on getting -- moving that project for -- or those projects forward, particularly in light of the recent capacity prices that we've seen in Mid-Atlantic and in Maryland. And then just realistically, is there a path to getting it done in this decade.

[Mads Nipper, executive]

Yes. We have submitted. We continue to develop that seabed. We -- as you know, we handed back the OREC and we continue to develop where we submitted a revised cup earlier this summer. So that is where we are on that. We have taken no further decisions on the future of Skipjack but ensuring that we have the full optionality in terms of where we create the greatest value is what we're focusing on, and that layering on and that lady step is submitting a revised cup.

[Operator]

And the next question comes from Mark Freshney from UBS.

[Mark Freshney, analyst]

Another question from me. Just on the Hornsea 4 cable. In the report, you alluded to starting work on the Hornsea 3 and Hornsea 4 offshore off tows. Can you talk about that and what the synergy is and what the amount of Hornsea 4 CapEx you would have done? And what benefit that might bring you in terms of competitiveness?

[Mads Nipper, executive]

Yes. So this is where there is a potential for the reuse of the Ocean Wind 1 export cable, which is why that is something we are already now planning and also progressing. I do not have the specific synergies that would be in Hornsea 3 up to construction. But this is where the most likely reuse of that cable would be, in which case it is something that would be obviously financially beneficial.

[Operator]

Ladies and gentlemen, this was the last question. I would now like to turn the conference back over to Mads Nipper for any closing remarks.

[Mads Nipper, executive]

Yes. And I just wanted to thank you very much for very good questions, and wish you all a nice and safe day. Thank you very much.