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Edited Transcript of DENERG.CO earnings conference call or presentation 8-Aug-19 12:00pm GMT

Q2 2019 Orsted A/S Earnings Call

Hoersholm Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Orsted A/S earnings conference call or presentation Thursday, August 8, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Henrik Poulsen

Ørsted A/S - President & CEO

* Marianne Wiinholt

Ørsted A/S - CFO

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Conference Call Participants

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* Alberto Gandolfi

Goldman Sachs Group Inc., Research Division - Head of European Utilities Research

* Deepa Venkateswaran

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Iain Stewart Turner

Exane BNP Paribas, Research Division - Analyst of Utilities

* James Brand

Deutsche Bank AG, Research Division - Research Analyst

* Jenny Ping

Citigroup Inc, Research Division - Director and Analyst

* Kristian Tornøe Johansen

Danske Bank Markets Equity Research - Senior Analyst

* Marcus Bellander

Nordea Markets, Research Division - Senior Analyst

* Mark Freshney

Crédit Suisse AG, Research Division - Research Analyst

* Peter Andrew Bisztyga

BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director

* Samuel James Hugo Arie

UBS Investment Bank, Research Division - MD and Research Analyst

* Timothy Ho

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Welcome to this Ørsted Q2 2019 Earnings Call. (Operator Instructions) Today's speakers are the CEO, Henrik Poulsen; and the CFO, Marianne Wiinholt.

Speakers, please begin.

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Henrik Poulsen, Ørsted A/S - President & CEO [2]

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Thank you, and good afternoon, everyone, and welcome to this first half earnings call. Our company continued its strong performance in the second quarter, with results in line with expectations. And quite notably, also the award of 2 major U.S. offshore wind projects. Our EBITDA for the second quarter of the year amounted to DKK 3.6 billion, which is an increase of DKK 0.5 billion compared to last year. The increase in EBITDA was mainly driven by our offshore wind farms in operation, where we saw a year-on-year increase of 29%, driven by ramp-up in generation from Borkum Riffgrund 2 in Germany and Walney Extension and Hornsea 1 in the U.K.

We are quite satisfied with our financial performance, which puts us well on track to deliver on our full year guidance. Relative to our expectations at the beginning of the year, we have, as always, seen some underlying ups and downs. On the negative side, we are, despite the very significant growth, not fully satisfied with our production in the first half year where the number of outages and curtailments across the offshore wind portfolio has been higher than normal. We estimate that these issues in total have resulted in an uncompensated production shortfall of roughly 350 gigawatt hours on a year-to-date basis, equivalent to roughly DKK 400 million in operating profits.

We would, under normal circumstances, expect the uncompensated production loss to be less than half of that. We expect these issues to persist into the third quarter of this year. On the positive side, we've seen higher earnings from partnerships than originally expected, which Marianne will come back to. And we have also seen stronger-than-expected earnings from trading related to hedging of our energy exposures and also strong margins in our gas portfolio. With the continued ramp-up in our offshore and onshore wind capacity, our green share of heat and power generation increased to 85% in the second quarter, up from 80% in second quarter last year.

As you know by now, in June, we were selected as the preferred bidder for New Jersey's first offshore wind farm with our 1,100 megawatt project, Ocean Wind. And in July, we were selected as one of the 2 preferred bidders in the New York solicitation with the 880-megawatt Sunrise Wind project, which we own in a joint venture with Eversource. We, obviously, are very pleased with this award, which I will discuss in more detail in a few moments.

During the quarter, we also received the outcome of offshore wind tenders in France and the Netherlands. These tenders were awarded to an EDF Energy, Enbridge joint venture and Vattenfall, respectively.

At the end of July, we commissioned the Lockett onshore wind farm in Texas well ahead of schedule. The 184-megawatt onshore wind farm in the ERCOT region has performed as expected since the commissioning, and we are quite pleased with the onshore team's strong EPC performance on Lockett.

In May, we completed the largest green bond offering to date when we successfully secured a funding of GBP 900 million. The proceeds from the green bonds are earmarked for offshore wind activities in the U.K. and will also provide a natural hedge towards our significant pound sterling exposure.

In June, we signed a guaranteed 5-year syndicated green revolving loan facility of NTD 25 billion for our offshore wind projects in Taiwan. We're also very pleased with the commitment from 15 banks on this transaction, including the domestic Taiwanese banks. We are proud of this being the first-ever green loan facility in Taiwan, and we will now start preparations for a potential green bond issuance in the local Taiwanese market towards the end of this year.

In May, the Copenhagen Maritime and Commercial Court ruled in favor of Ørsted in the case concerning the use of the Ørsted name with a clear vote of 5 to 0. We are satisfied that this judgment upholds our claim that we have the right to use the Ørsted name. In June, the plaintiffs decided to appeal the case, and it is currently being assessed whether the appeal will be heard at the high court or whether it will go directly to the Supreme Court.

In June, we decided to consolidate the business unit Customer Solutions and Bioenergy into a new business unit named Markets & Bioenergy. The decision was taken as a natural consequence of the 2 existing business units being reduced in size. The downsizing is driven by the planned divestment of our Danish power distribution, residential customer and city light businesses and also divestments of our oil and gas infrastructure assets as well as activities that have been either discontinued or transferred to other parts of Ørsted. The financial consolidation of the 2 business units into one will be reflected in our interim financial report for the first 9 months of 2019.

Morten Buchgreitz, who was previously EVP of Customer Solutions, has been appointed EVP of Markets & Bioenergy. Within Markets & Bioenergy, we continue to prepare our power distribution, residential customer and city light businesses for separation and subsequent divestment. We still believe signing of combined transaction or separate transactions can be achieved before the end of the year. At this point, we cannot provide further details on the process, but we will of course be actively pursuing the divestments during second half of this year.

Turning to Slide 4, where I will focus on the outcome of the solicitations in New Jersey and New York. As mentioned in June, the New York -- sorry, the New Jersey Board of Public Utilities selected Ørsted as the preferred bidder for New Jersey's first offshore wind farm. We are very excited with the award and look forward to delivering the first offshore wind farm in the U.S. above the 1 gigawatt mark as well as contributing to meet Governor Murphy's ambitious renewable energy goals. We will now negotiate the final terms of the 20-year offshore wind renewable energy certificates. The project will receive $98.1 per megawatt hour from 2024, with a 2% annual escalator, corresponding to a levelized 2017 price of $86.4 per megawatt hour.

Subject to a final investment decision, the 1,100-megawatt wind farm is expected to be completed by 2024. We will work with the nonutility affiliates of PSEG, who will provide energy management services and potential lease of land for use in the project development and execution phase. Furthermore, PSEG has an option to become an equity investor of up to 50%. We are proceeding with plans to establish an operation and maintenance base in Atlantic City that will provide permanent high-skilled jobs during the lifespan of the project.

In July, the New York State Energy Research and Development Authority, NYSERDA, selected the project, Sunrise Wind as one of the preferred bidders in the offshore wind procurement of 1.7 gigawatt. The other award went to Equinor's project, Empire Wind. We will now negotiate a 25-year offshore wind renewable energy certificate for the 880-megawatt project which will contribute significantly to achieving Governor Cuomo's ambitious goal for New York's transition to renewable energy.

Sunrise Wind is a 50-50 joint venture with Eversource. And the project is exploring transmission partnerships with the New York Power Authority and the leading New York utility, Con Edison. We will apply a cluster approach to our Northeast projects comprising South Fork, Sunrise Wind and Revolution Wind. The cluster will have a total capacity of 1.7 gigawatts to be built between 2022 and 2024.

Less than 1 year ago, we created the leading U.S. offshore wind platform by merging the asset portfolios and competencies of Deepwater Wind and Ørsted U.S. Our recent significant project wins in New Jersey and New York are proof of the strength and quality of the combined organization. With the recent allocation of almost 2 gigawatt, we have secured an offshore wind buildout portfolio on the U.S. east coast of approximately 2.9 gigawatts to be completed between '22 and '24. This significant pipeline will enable us to optimize EPC and operations across the portfolio as well as inside the clusters.

In addition to the awarded capacity, we have around 5 gigawatt of lease rights on the U.S. East Coast, which can be developed for the many upcoming auctions. The awards have significantly reinforced our leadership position in U.S. offshore wind. And we are well on track to reach our ambition of 15 gigawatt offshore wind capacity by 2025 as we continue to innovate and pioneer the global offshore wind industry.

Turning to Slide 5 where I'll give an update on the key offshore construction projects in progress. At Hornsea 1, the construction progress is well on track. We have installed all foundations and array cables as well as 131 out of the 174 turbines. With the current progress, we expect the wind farm to be fully operational in fourth quarter this year.

At our Borselle 1 and 2 wind farm, the construction of the O&M building in Vlissingen is progressing according to plan. We still expect the Dutch wind farm to be completed in late 2020 or early 2021. The Virginia EPC demo project is also well in progress. The onshore construction has commenced, while the offshore construction work is scheduled to begin in second quarter next year. We now expect to complete the 2 turbine pilot project by the end of 2020.

At the Hornsea 2 project, we have signed all key supplier and installation contracts and we continue the onshore construction work on the substation and export cable. The project is scheduled for completion in the first half of 2022. At our Greater Changhua 1 and 2a project in Taiwan, we continue our efforts to sign the remaining supply and installation contracts. We have started the onshore construction work and remain on schedule to complete our first large-scale offshore wind farm in Asia by 2022.

At the same time, we've seen good progress at the 120-megawatt Formosa 1 Phase 2 joint venture project. The onshore construction work is progressing according to plan. And in May, the offshore installation work commenced. By the end of the July -- by the end of July, the first turbine was installed, and we expect the wind farm to be fully commissioned towards the end of this year.

Now turning to Slide 6 and an update on the construction projects outside offshore. In our onshore business, we continue to see good progress on our construction projects. In July, we commissioned the Lockett onshore wind farm in Texas well ahead of schedule. And in the subsequent period, we have seen very good performance from the wind farm.

In June, the construction work at Sage Draw commenced with road and foundation installation well underway. We expect the 338-megawatt wind farm in the Texas ERCOT region to be commissioned by first quarter next year. In June, we acquired the 103-megawatt construction-ready onshore project, Willow Creek. The project is located in South Dakota. And together with our concrete development project in Nebraska, the acquisition further expands our operations into the southwest power pool market. Construction of the wind farm commenced in the beginning of July, and we expect the wind farm to be commissioned by the end of 2020.

In Bioenergy, the bio conversion of the Asnæs Power Station is progressing according to plan. The first shipment of wood chips has arrived, and the project team is currently preparing to fire up the boilers with wood chips for the first time. We still expect final commissioning towards the end of 2019.

At our last remaining coal-fired CHP Asnæs Power Station, we have not been able to find a joint solution with the heat customers for a bio conversion project. Consequently, we informed the heat customers that we will close down operations by the end of 2022. We applied to shut down the plant to the relevant authorities, and the Danish Energy Agency has issued a draft ruling, granting us permission to close down the power station by the end of 2022. The draft ruling has been in consultation with the parties and we are currently awaiting the final ruling from the authorities.

The reconfiguration of our Renescience plant in the U.K. has been completed, and we are now in the process of ramping up the waste throughput as well as production. We now expect to commission the plant at the end of this year. We continued the installation of smart meters within our power distribution network. At the end of June, 976,000 smart meters had been installed and taken into use. We expect to install the last smart meters during third quarter this year. And including the subsequent testing and period of commissioning, the project remains well on track to be finalized on schedule in 2020.

Let's turn to Slides 7, 8 and 9 and take a look at the latest market development and offshore wind opportunities across the regions. Starting in Massachusetts, where the state's second offshore wind solicitation has been launched. Bidders will have to submit their bids by 23rd of August this year, with expected selection of projects for negotiation in November this year. Bidders can submit proposals ranging between 200 and 800 megawatt. As part of the updated framework in Massachusetts, the price cap for the second solicitation has been removed. Recently, Massachusetts passed a new bill with an ambition of 3.2 gigawatt offshore wind by 2030, 5 years ahead of the previous target.

With the total award of 1.7 gigawatt to Sunrise Wind and Empire Wind, New York has taken a significant step towards their 2035 target of 9 gigawatt offshore wind. We expect that the next auction will take place in second half of 2020. Furthermore, we expect the federal agency, BOEM, to release 2 New York offshore lease areas of at least 800 megawatt each in early 2020, with a lease auction likely to take place later in 2020.

In New Jersey, the recent 1.1 gigawatt award was the first step towards the state's 2030 target of 3.5 gigawatt of offshore wind. New Jersey is expected to have subsequent auctions of 1.2 gigawatt of offshore wind in both 2020 and 2022.

Moving to Connecticut, where the state approved the legislation for the procurement of an additional 2 gigawatt of offshore wind. The next procurement is expected to be for 400 to 800 megawatt of offshore wind with a bid deadline on September 30 this year and an expected outcome announced in November.

In Rhode Island, the 400-megawatt PPA for our Revolution Wind project has been approved by regulators. And we continue the development of the full Revolution Wind project. National Grid has made a conditional selection of the preferred bidders in the 2018 0 carbon RFP. Selected bidders have been notified and additional details will be updated upon successful contract negotiations. We can conclude that National Grid did not select any offshore wind projects for this procurement.

Finally, Maryland has confirmed the state's target of approximately 1.6 gigawatt of offshore wind capacity by 2030, an increase of 1.2 gigawatt compared to the previous build. Maryland is expected to have auctions of at least 400 megawatts of offshore wind in both 2020, 2021 and 2022.

We continue to see a strong development within offshore wind on the U.S. east coast, with several ongoing and upcoming solicitations, expected lease area auctions as well as increased commitments to the long-term build-out of offshore wind.

Turning to Slide 8 and the recent market developments in Europe. In the U.K., the third CfD bid window is now closed and an outcome is expected to be announced during September this year. As we did not participate in the auction, we're looking forward to the subsequent auctions which will be held every second year.

In Germany, the German Federal Ministry for Economic Affairs has recently suggested to increase the current 15 gigawatt target for 2030 to 20 gigawatt. We expect Germany to launch the first centralized tender in 2021 with the aim of having 800 megawatt constructed annually from 2026 onwards.

Moving to the Netherlands, where the fourth offshore wind tender was concluded in the beginning of July. Even though we were not successful in the tender, we're still committed to contribute to the green transition through green hydrogen projects in the Netherlands and elsewhere as we see offshore wind based hydrogen as a cornerstone in the continued decarbonization of our core markets. The Dutch government has had an ambitious target of 11.5 gigawatt of offshore wind by 2030, and we expect the next tender of up to 760 megawatt to take place early next year. In France, the third offshore wind tender was concluded in June. We were not successful in the tender, but we are pleased that the French government increased their offshore wind target from 5 gigawatt to 10 gigawatt by 2028 in connection with the outcome of the third auction.

Finally, turning to Slide 9 and the market development in Asia Pacific. In Taiwan, auctions for an additional 4.5 gigawatts to be built post-2025 is being planned. The framework around these auctions are not yet in place, but we expect that the auction design for the third round development will be announced during fourth quarter this year.

In Japan, the government recently designated 11 areas as potentially suitable for the development of offshore wind farms. And these areas will progress through the preparatory stages for designation of future promotion. 4 of these 11 areas will immediately undergo preparations for wind and geological surveys. One of those 4 areas is the Choshi zone, which is currently being developed by TEPCO and is the subject of a Memorandum of Understanding with Ørsted with the aim to jointly develop the project within this zone. The Ministry of Economy, Trade and Industry in Japan is pursuing a targeted timeline for a first auction round to take place in summer 2020. In South Korea, we continue to closely monitor the regulatory development of offshore wind.

This concludes the offshore market development review. Now let's turn to Slide 10 and the progress of our U.S. onshore business. The U.S. onshore business continues to expand its portfolio of operating and development projects. With the recent commissioning of the Lockett Wind farm, our operating portfolio of onshore wind farms reached 1 gigawatt. Furthermore, the recent acquisition of Willow Creek expands the geographic footprint of our asset base and increases our portfolio of projects towards 2022. The integration of the newly acquired solar and storage development activities of Coronal Energy into our U.S. onshore organization is progressing according to plan, and we remain very satisfied with the development of our onshore business and the value-creating growth opportunities it continues to offer. We will continue to expand our development portfolio and capabilities to create a leading North American platform within onshore wind, solar, energy and energy storage.

Now moving to Slide 11. Over the past decade, we have, at Ørsted, undertaken one of the most ambitious green transformations in the global energy industry guided by our vision of creating a world that runs entirely on green energy and our strong commitment to the Paris Agreement and the United Nations sustainable development goals.

By the end of first half 2019, we have reduced the carbon emission intensity from our own energy generation by 83% through the conversion of our CHP plants to sustainable biomass and the deployment of offshore and onshore wind. Our target, which we are fully on track to meet, is to reach a 98% reduction of the carbon emissions by 2025, making our energy generation essentially carbon-free.

In addition to our comprehensive transformation from black to green energy, we are taking a number of carbon reduction initiatives in our own operations including a new target to phase out fossil fuel cars from our company car fleet and fully convert to electric vehicles by 2025.

With our energy generation and other in-house operational activities well on track to become virtually carbon free, we now take the next major step in our decarbonization strategy. And today, we announced a new target that covers the indirect carbon emissions related to our business. By 2032, we want to reduce our so-called Scope 3 emissions by 50% compared to the 2018 baseline. These carbon emissions primarily relate to the sale of natural gas and fossil based power in our customer businesses. And from the goods and services, we source for construction of wind farms.

To meet the target, we will gradually reduce our natural gas sourcing portfolios, which today make up more than 80% of our total Scope 3 emissions. The gradual reduction in our gas sourcing and corresponding sales over the coming decade reflects our view that natural gas will continue to play an important role in the transition towards a society of fully powered by green energy. But over time, it must be replaced by renewable energy sources.

Furthermore, we will reinforce our ongoing engagement with our suppliers to reduce the emissions from the goods and services we source, in particular, related to the construction of our wind farms, which make up the largest emission source in our supply chain.

On that note, I will now pass on the word to Marianne.

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Marianne Wiinholt, Ørsted A/S - CFO [3]

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Thank you, Henrik, and good afternoon from me also. Let's start on Slide 12, where I will go through the group's financials for Q2 2019. In Q2, we realized an EBITDA of DKK 3.6 billion, a year-on-year increase of DKK 0.5 billion, in line with our expectations. In offshore, earnings from our operating wind farms increased by 29% due to the ramp-up of generation from Borkum Riffgrund 2, Walney Extension and Hornsea 1. Furthermore, wind speeds in Q2 2019 were above last year.

In Q2 '19, we had lower-than-expected generation from the underlying portfolio due to curtailments and outages. These operational issues, mainly related to a platform fire at Hornsea 1 in October 2018, converting station outages at Borkum Riffgrund 2 and array cable repair campaign at London Array as well as various array cable and export system outages at Race Bank, West of Duddon Sands and Burbo Bank. In addition, we had higher-than-expected curtailments at our German wind farms where we are partly compensated by the German grid operator tenant. These outages have resulted in an availability of 87% for the quarter.

In offshore, we had higher project development costs, which mainly related to activities in the U.S. and Taiwan. While earnings from partnership agreements was in line with Q2 2018.

Onshore contributed with DKK 167 million in the quarter, while Bioenergy was slightly below last year due to timing of the maintenance costs. In Customer Solutions, we saw higher earnings from trading related to hedging of our energy exposures and optimization of our LNG assets in Europe as well as strong underlying margins from our gas portfolio. This was partly offset by lower earnings related to our gas at storages. Finally, EBITDA in Q2 '19 was positively affected by DKK 149 million from the implementation of the new IFRS 16 accounting standard regarding leasing.

Net profit totaled DKK 1.1 billion, an increase of DKK 0.2 billion in the second quarter of '19. The increase was driven by higher EBITDA and partly offset by higher depreciation from more wind farms in operation. The effect from IFRS 16 was slightly negative on a net profit level.

Free cash flow from continuing operations came in at DKK 4.1 billion, a DKK 4 billion improvement year-on-year. In Q2 '19, we had a higher release of funds tied up in work in progress due to receipt of a milestone payment in connection with the construction of Hornsea 1 from our partner. Our gross investments for the quarter totaled DKK 3.4 billion, of which DKK 2.7 billion related to the build-out of our offshore and onshore wind farms.

If you then turn to Slide 13, and our net interest-bearing debt and financial ratios. Our net debt at the end of Q2 amounted to DKK 5 billion. The DKK 4.1 billion decrease primarily reflected contribution from free cash flow, as I just described as well as minor impacts from paid hybrid coupons and exchange rate adjustments.

Our credit metric, FFO to adjusted net debt, stood at 58%, well above our target level of around 30%. Return on capital employed came in at 29%, a 6 percentage point increase compared to the same period last year. Q2 '19 was significantly impacted by the farm down gains from Hornsea 1, whereas last year, it was impacted by the farm-down gains from Walney Extension and Borkum Riffgrund 2.

If we then move to the results from the business units, we start with offshore on Slide 14. Power generation increased by 0.4 terawatt hours compared to Q2 last year, primarily due to the ramp-up of generation from Borkum Riffgrund 2, Walney Extension and Hornsea 1, which in total amounted to 0.3 terawatt hours. As I described earlier, we had lower-than-expected generation from the underlying portfolio in Q2 '19 due to these curtailments and outages.

The wind speeds for the quarter was 8 meter per second, up 0.1 meter per second compared to last year. This was slightly below the normal wind speed for the quarter of 8.2 meters per second. We did, however, have a notable difference between locations with high wind speeds in Denmark and Germany, being offset by lower wind speeds in the U.K. For the first 6 months of '19. The wind speeds were in line with the normal year wind speed of 9.2 meter per second for the total portfolio.

EBITDA for the quarter amounted to DKK 3.3 billion, up DKK 0.2 billion on Q2 '18. Earnings from wind farms in operations increased by DKK 0.5 billion due to the higher generation. Earnings from partnerships in the quarter amounted to DKK 1.6 billion, which was in line with last year. The construction agreements in this quarter primarily concerned Hornsea 1 as well as positive effects from the ongoing divestments of the offshore transmission assets at Walney Extension and Race Bank. Whereas last year's earnings related to Walney Extension and Borkum Riffgrund 2.

In Q2 '19, we also had a positive effect from construction projects finalized in 2018 where the final completion of various outstanding issues ended up with a lower spend than what we had provided for. Finally, the project development costs for the quarter amounted to DKK 0.6 billion, mainly relating to the development activities in the U.S. and Taiwan. The total project development costs for '19 is expected to amount to roughly DKK 2.5 billion, of which approximately DKK 1.8 billion is expected to be expensed and the remaining DKK 0.7 billion will be capitalized.

This increase compared to what we have earlier guided is mainly related to our U.S. activities, where we capitalized costs in the U.S. when we have an irrevocable PPA contract and an investable project. For our U.S. project, we have higher costs before we take the final investment decision compared to what we see in other markets we currently operate in, partly due to the late timing of FID relative to commissioning of the wind farm because of the regulatory process and partly due to higher site investigation costs. In addition, the later-than-expected FID on Greater Changhua 1 and 2 in Taiwan has to some extent, increased project development costs.

The free cash flow totaled DKK 5.9 billion in Q2, a significant increase on last year, mainly driven by a higher release of funds tied up in work in progress, from the received milestone payments in connection with construction of Hornsea 1 for our partners and lower gross investments.

If we then turn to the results for onshore on Slide 15. The onshore power generation amounted to 0.8 terawatt hours in Q2. The wind speeds averaged 7.7 meters per second, which was below a normal wind speed which is 8.4 for the quarter while we had a very high availability of 97% across the portfolio.

EBITDA came in at DKK 167 million for the quarter with earnings from operational wind farms and production credit contributing with DKK 220 million. This was partly offset by project development and other costs. The free cash flow amounted to a negative DKK 1.2 billion, primarily related to the construction of Sage Draw and Lockett as well as the acquisition of the Willow Creek project and the development activities of Coronal Energy.

Turning to Slide 16, covering the results in Bioenergy. EBITDA came in at a negative DKK 159 million. The lower EBITDA compared to last year was primarily related to timing of maintenance costs, while the underlying earnings were in line. The free cash flow increased by DKK 0.3 billion compared to last year. And this increase were driven by lower gross investments related to the bioconversion of the Asnæs Power Station, which is now close to being completed as well as higher trade and VAT payables due to higher generation in Q2 '19.

And to the last business unit on Slide 17, Customer Solutions. The EBITDA for Q2 '19 totaled DKK 0.3 billion, an increase of DKK 0.2 billion on last year. The higher earnings from trading related to hedging of our energy exposures as well as optimization of our LNG assets in Europe and strong underlying margins in our gas portfolio. The increase was partly offset by lower earnings related to our gas storage within markets.

The substantial decrease in gas prices during Q2 '19 led to a reduction in the accounting value of our gas inventories. And consequently, a temporary negative impact on EBITDA in this quarter. This negative impact will be offset if gas prices increase or when we sell the gas later in '19 or 2020 as we have hedged most of our gas margin.

The free cash flow for the quarter amounted to a negative of DKK 0.6 billion, primarily from higher receivables, partly relating to factoring of renewables energy certificates as well as lower payables due to the lower sourcing of gas volumes.

If we then turn to Slide 18, which shows our 2019 guidance and our long-term financial estimates and policies. Our 2019 EBITDA guidance for the group is unchanged relative to our guidance in our annual report for '18. And we still expect EBITDA, excluding new partnerships agreement to be between DKK 15.5 billion and DKK 16.5 billion. However, the unchanged outlook covers some underlying and offsetting changes across the business units.

Looking at offshore. We expect earnings from offshore wind farms in operation to increase as a result of the ramp-up of generation from Walney Extension, Borkum Riffgrund 2 and Hornsea 1. However, the increase will be lower than our original expectation due to the curtailments and operational issues talked about which we have experienced during the first half of 2019, and which we expect to persist into third quarter of 2019.

The earnings from our existing partnership agreements are now expected to be in line with 2018. Whereas we previously expected these earnings to decline. The earnings from partnership agreements amounted to DKK 3.7 billion in 2018. The improvement is mainly due to higher-than-expected earnings from the construction of Hornsea 1, due to the good progress we have seen including lower CapEx spend. We also had positive effects from construction projects finalized in 2018, where the final completion of these various outstanding issues ended with a lower spend than what we had provided for. And lastly, the positive effects from the ongoing divestments of the offshore transmission assets have also been included in the first half of '19.

For Customer Solutions, we now expect 2019 EBITDA to be in line with 2018, where we previously expected the EBITDA to be significantly lower. In Markets, we have seen significantly higher earnings from trading related to hedging of our energy exposures in the first half of '19 than what we had expected. In addition, we have had higher underlying earnings from our gas portfolio, mainly due to higher margins. Finally, we now expect a less negative accounting effect in our gas portfolio related to gas at storages, relative to what we expected at the beginning of the year. The accounting effect related to gas at storage is a timing effect and does not as such impact our earnings.

The directional guidance for Onshore and Bioenergy is unchanged relative to the guidance in our annual report for '18. Furthermore, our gross investments guidance of DKK 21 billion to DKK 23 billion is also unchanged.

And with that, we now open up for Q&A. Operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the question comes from the line of Kristian Johansen of Danske Bank.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [2]

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First question is on your guidance. And just if you can help me a bit with the math on these changes to the directional guidance. So you're saying lower earnings from operating offshore wind farms is balanced by earnings from partnership and customer solutions. If I look at what you've communicated when you made the Hornsea 1 farm down, you said that roughly DKK 2.6 billion, DKK 2.7 billion would be booked in 2019. And now you expect DKK 3.7 billion for this segment.

So to me, it sounds like you're upgrading by roughly DKK 1 billion. And then on top of that, the upgrade in Customer Solutions. But what you quantify in terms of lower-than-expected earnings for the operating wind farms is sort of in the magnitude of DKK 200 million to DKK 300 million. So can you just help me a bit on what I'm missing here?

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Henrik Poulsen, Ørsted A/S - President & CEO [3]

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I think it's a fact -- a question, Kristian. I'm not going to sort of argue, sort of with the individual items here that you referred to. I would just say that we still obviously have 0.5 year to go, and there is still a fair amount of uncertainty related to the next 6 months in terms of everything from production volume to prices. And we are in the process of finalizing the world's largest offshore wind farm, which obviously also confirms the uncertainty on the exact timing, et cetera.

So I'm just saying there are a number of moving parts across the business during balance of year, which led us to conclude that it would be correct for us to maintain our guidance at this point.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [4]

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Okay. But am I correct in assuming that the original guidance for partnerships were in line with what you guided for Hornsea 1, i.e., those DKK 2.6 billion to DKK 2.7 billion?

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Henrik Poulsen, Ørsted A/S - President & CEO [5]

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That's correct, yes.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [6]

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All right. Then my other question is regarding Ocean Wind and this option that PSEG has. I mean, you're probably not going to give us exact details. But obviously, what I would be quite interested to hear is that how we should think about this sort of compared to what we've seen in your farm down model. In other words, will you be able to have sort of full NPV retention if PSEG chooses to exercise this option?

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Henrik Poulsen, Ørsted A/S - President & CEO [7]

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I would not be able to go into any details on the topic, Kristian. There is an agreement with PSEG as to how they can buy into Ocean Wind up to 50% equity. And there is a good ongoing dialogue with PSEG at the moment. We're going to have to wait for that process to conclude before we can come out and give you any additional data points on a potential sell down.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [8]

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Can you say anything about the timeline? I mean, when do you expect this to sort of be completed?

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Henrik Poulsen, Ørsted A/S - President & CEO [9]

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I mean, it's -- the dialogue is well in progress. And it should be a matter of months. So certainly, sometime during the autumn.

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Kristian Tornøe Johansen, Danske Bank Markets Equity Research - Senior Analyst [10]

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All right. That's clear. Then my last question is on these outages and curtailment, which you described. Are there anything structural in this? I mean, should we sort of expect you to increase the budget for these kind of costs going forward? Or is it just backlog in the quarter?

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Henrik Poulsen, Ørsted A/S - President & CEO [11]

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I would consider it more backlog in the quarter. We have seen availability in second quarter being down to 87%, which is quite unusual, which is also why we felt that we should come forward and provide you with more granularity on why the availability was that low in second quarter. I mean we will see quarters where we have very high availability quarters, where we have slightly lower availability. These different types of operational issues, they will come and go. And I would consider it sort of a natural statistical fluctuation.

But as we have pointed out today during first half, we have seen more than we have seen in previous years. And again, I think it's more a matter of having had a little bit of a bad streak during first half. I wouldn't extrapolate above and beyond that.

As I said earlier, we have been looking at an uncompensated production loss of 350 gigawatt hours. Normally, we would be looking at a normalized level, which is well below half of that. So when you look at the DKK 400 million that we point to as the EBITDA impact, that impact would normally probably be closer to DKK 100 million to DKK 200 million. So that sort of gives you the magnitude of what we will consider more of a normal impact and what was a little bit of a challenging first half this year.

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Operator [12]

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Our next question comes from the line of Alberto Gandolfi -- sorry, Alberto Gandolfi of Goldman Sachs.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [13]

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I have a few questions and thanks for taking them. The first one is, I think, at the moment, your run rate seems to be participating to about 6 gigawatts of auctions. Or probably in the next couple of years, up to 8 gigawatts of auctions. But the offshore market globally is obviously expanding. We're moving to, probably, if you take all those targets you are showing, we're moving to 15 and soon enough to 20 gigawatts.

So I was wondering what stops you from upgrading the tenders, the auctions you are going to attend to. Is it stretching to see in the organization? Is there any constraints? What are the bottlenecks? Or can you actually continue to expand your development team and be able to keep -- participate into more auctions?

So what I'm trying to say here is if we go to a 20 gigawatt a year of global offshore market, should you be able to perhaps being adding way more than 1 gigawatt a year? Because we move to a 2 gigawatt a year one day.

The second question is, if you have any thoughts in terms of what we might call an end game. The European Union has a 2050 strategy, which suggests by 2050 about 350 gigawatts of offshore just in Europe. And now the new President is talking about moving towards net 0 emissions. I was curious to see if you have done -- carried out any feasibility study. Can Europe become maybe a 400 gigawatt market in a net 0 emission scenario? And if that is the case, are we talking about the global offshore market of 1,000 gigawatts by 2050? Is this a type of top down -- I know it's 30 years away, but like 15 years ago, many people were underestimating handset sales of the iPhone or Amazon. So I'm just trying to figure this out.

And the last one is on permitting and bottlenecks more in general. One of your competitors has apparently been facing some delays. I was reading that in just on the East Coast, you need something like 23 permits. And even when you get awarded, you don't have all the permits. So I was trying to understand how the top-down policy will -- clashes against the bottom-up permitting, and if that could become a bit more of a recurring issue in such an expanded market.

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Henrik Poulsen, Ørsted A/S - President & CEO [14]

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Thanks, Alberto. When you look at the expansion of the global offshore wind market, it's been a trend in recent years that as the price of offshore wind has been going down quite rapidly, we have indeed seen the global market demand expanding. And it's been a little bit of a moving target and clearly, demand has been accelerating. We are currently looking at estimates of 150-plus gigawatt by 2030. And of course, there is a scenario where we could go beyond that number, no doubt. So it's hard to predict as it is indeed a market that is still very much evolving on a global scale.

Whether the EU net 0 emission ambition for 2050 would allow for a 350 or 400 gigawatt market obviously, very difficult for me to predict. It's not something that we've been doing any specific work on. But what we do see globally at the moment is that demand, if anything, is only accelerating for offshore wind as more and more governments recognize that it has become a very cost-effective technology, but also more and more governments begin to realize that it brings a number of significant additional benefits in the form of local investments, local job creation, et cetera, and over time, also a more independent national energy system. So I think the benefits of offshore wind are clearly being recognized at the moment.

Where it will take us? I'm probably not the right person to start guesstimating. But what we do see is an accelerating demand, no doubt. What are the constraints on our side? It's a good question. And obviously, one that we also spent quite a bit of time on. What we are doing at the moment is we are constantly debottlenecking our own business system to make sure that we can continue to expand the capacity that we can push through our system without losing quality. And market development is one area where we are clearly expanding. We are now developing markets in 3 regions around the world where we used to be only in a couple of countries. The entire EPC capability is being build up both in Asia and the U.S. at the moment. So we're going to be running essentially 3 regional EPC capabilities which is a massive expansion of our total capacity.

And at the same time, of course, at the end of the day, we need the capital also. So capital is also going to be a constraint given the massive amount of growth that is available to us when I look 10, 15 years into the future.

So our task is to make sure that we move forward, expand at the right pace, maintaining full control of the company. But of course, at the same time, reaching out for the massive growth available to us, staying disciplined in our capital spend. So I don't know if I answered the question, Alberto, but we are, on a continued basis, debottlenecking all parts of the business system to allow for more annual build-out than what we have seen historically.

The U.S. permitting, indeed, when you move into a new market like the U.S., where you have many, many stakeholders for whom offshore wind is a relatively new phenomenon, it is not unusual that there is quite a bit of education and learning to be done. Processes need to be established. Different agencies, different stakeholders need to collaborate to find joint solutions. And this includes federal agencies, it recruit -- it's stakeholders at state level, it's fishing communities, it's local coastal communities, et cetera. So it can be a complex stakeholder environment where everybody is sort of trying to get fully up to speed and that's where we are in the U.S. at the moment. So yes, there is, clearly, over the coming years, a job to be done to continue to align and streamline U.S. permitting processes, but I'm sure that we will get there. It is not unusual and it's pretty much the same. We've been through in other markets that we've been part of maturing over the years.

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Operator [15]

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Our next question comes from the line of Peter Bisztyga of Bank of America Merrill Lynch.

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Peter Andrew Bisztyga, BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director [16]

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Yes, a few questions, if I may. Firstly, just going back to this issue of your operational problems in Q2. You list a number of U.K. offshore wind projects where there are issues with the cables. And I was just wondering if there's some sort of type fault here or if it's just coincidence.

Then secondly, Siemens Gamesa sort of blew up recently, quoting the sort of competition was putting pressure on turbine prices. And I was wondering if you could just comment on the sort of trends that you're seeing in turbine costs as you're going through your various tenders.

And then finally, noticed the U.S. is planning a bill to extend ITCs for offshore wind for a few years. And I was just wondering maybe you could elaborate whether any of your New Jersey or rate item projects would benefit from this. Or is that just something that's going to help produce the price of future tenders?

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Henrik Poulsen, Ørsted A/S - President & CEO [17]

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On the cable issues in the U.K., we do not see a systemic issue. The different issues that we are fixing at the moment are all different in nature from one asset to the other. So it's not like it's one particular issue that cuts across. So we don't see any systemic effects here. And these are all issues. I should remind you, of course, that we can fix and they are being fixed at the moment. We would expect many of them to be completed during third quarter.

When it comes to SGRE, I did notice that they quoted pressure and price pressure when they released their accounts. There's no doubt that competitive intensity in renewable energy is everywhere. I mean, there's a tremendous amount of growth to be found globally in green energy. There are a number of players who want to be part of it. And when auctions are being used as the allocation mechanism, it will in itself drive quite a bit of competitive pressure on the developers who are bidding. And obviously, it's our task to pass that pressure onto the supply chain to make sure that they stay on their toes to innovate, to continue to take cost out, to make renewable energy as competitive as it can possibly be. And doing all of that while still retaining a value creation margin for ourselves.

So I think it's just a natural part of the evolution of the industry that we see this type of pressure on the developers, but also on all other supply chain participants. But I'm sure that there will be value to be created, not only by us as developers, but also by the supply chain participants. The turbine manufacturers are all looking into a very, very significant long-term growth opportunity in offshore wind.

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Marianne Wiinholt, Ørsted A/S - CFO [18]

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And on your ITC question, I could say that, yes, we are benefiting from the ITC in our New York and New Jersey recent wins. But this extension of the ITC period, it's not something we are counting on yet. But of course, it would be very positive if that could also be a benefit to the future potential wins.

We are not giving the exact qualification here for each of our projects. That's not the level of detail we have been giving up until now, and we will not do that going forward.

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Peter Andrew Bisztyga, BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director [19]

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And sorry, just to clarify, if the ITC was extended would it be extended for the New Jersey and Rhode Island projects as well? Or just for future projects?

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Marianne Wiinholt, Ørsted A/S - CFO [20]

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No. That would just be future projects.

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Operator [21]

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

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Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [22]

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A few questions from me. Firstly, just on your guidance for the full year. Would you be able to give a range of what you're expecting for offshore wind site guidance for the full year, given you're still expecting some outages for the rest of the year? Second question is, you've been --

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Henrik Poulsen, Ørsted A/S - President & CEO [23]

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Look, there's something on your line, which makes it very difficult for us to hear you clearly.

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Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [24]

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Sorry, is this better?

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Henrik Poulsen, Ørsted A/S - President & CEO [25]

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Yes.

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Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [26]

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Sorry, for wasting everyone's time. So I'll go straight and just summarize that. So I just wanted to know if you're happy to share a guidance range for just your EBITDA from offshore sites, given that you're still expecting some outages in Q3, and overall, your guidance for the full year looks on the lighter side, I would say.

Secondly, looking at the recent auction wins in the U.S. where you've been probably more successful than what we expected. But in Europe, you've returned empty-handed. What sort of explains? Is it just the competitive dynamics? Or is there anything else at play?

And I think you mentioned also that you were still interested in doing something on green hydrogen in Netherlands. Would this be a separate merchant project? Or how are you sort of thinking about that? Or is that much more long term?

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Henrik Poulsen, Ørsted A/S - President & CEO [27]

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Thank you very much, Deepa. When it comes to guidance on the site EBITDA, we're not going to be providing that. We feel it simply becomes too granular for us to go down to guidance at that underlying level. So I'm sorry, but we're not going to be able to provide that.

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Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [28]

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Well, then maybe at least clarify the impact in the next 2 quarters or from any outages that are continuing.

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Henrik Poulsen, Ørsted A/S - President & CEO [29]

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Well, I mean we have, today, I said the 350 gigawatt hour and the DKK 400 million impact from first half. And we said that a number of these issues are going to persist into third quarter. So that's probably as close as we're going to get. At least, I think it gives you an indication as to what we could expect.

When it comes to the U.S. auction wins, again, obviously, incredibly encouraging for us not least, because it's our impression that these projects are not only been secured on the basis of price, but also with the evaluators clearly placing a lot of emphasis on our track record as a very experienced offshore wind developer and EPC company with a strong track record of delivering the projects that we commit. And at the same time, I think they also place value on the investments that we're going to make into the local areas. And of course, no doubt, I'm sure our prices have also been competitive. But it's not my impression that we have been winning on price alone. And in New Jersey, I think it was even made public that we did not even have the lowest price. So again, obviously, for us that is quite a good outcome.

In the EU, clearly, in France we were not successful in the Danco tender. We had a very productive and good collaboration with Total and Elicio. But at the end of the day, the winning consortium came in with a price which was materially below ours, which is what it is. It was won at EUR 44 as you know, and that was well below our bid price. So that's one of the tenders where you walk away. Of course, we would have liked to win. On the other hand, we have no regrets with regard to our bidding strategy in France.

The same can be said about the Netherlands. Clearly, we had hoped that the innovative proposal we put forward around green hydrogen that would be valued by the assessment panel and also the fact that we had given full certainty on the investment and financing by having our Board of Directors [FID-ing] the project upfront. But at the end of the day, those criteria did not give us enough points apparently to secure the award. Of course, we always, both in France and in the Netherlands and elsewhere where we do not win, we spend a fair amount of time trying to understand exactly why we did not win and also understanding why the awardee, what they did to win the project. So we'll try to extract as much learning as we can. But above and beyond that, I'm not overly concerned about it. There are many growth opportunities ahead of us in Europe. We'll have auction and tenders coming up in the U.K., Germany, France, Netherlands and Denmark just over the next 24 months. So we consider still Europe a core market and a significant long-term growth opportunity.

And as part of that, we are still a big believer in green hydrogen as a key piece to the puzzle of building a world that runs entirely on green energy. And therefore, we want to support a greener hydrogen. Some of the markets where we're seeing things moving forward, as you also alluded to, Deepa, is in the Netherlands and in Germany, which is also why we are active in those markets. And again, we will very much stay focused on green hydrogen to see if we can come up with future business models, where we combine a combined offshore wind and green hydrogen production.

And thereby, I'm also saying that we don't see green hydrogen on a merchant basis. We see green hydrogen in some kind of combination over time, at least, in a combination with our offshore wind assets. We may be running pilots here and there, where there will be some merchant exposure. But when you look at large scale deployment, we see it as an integral part of deploying offshore wind capacity.

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Operator [30]

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Our next question comes from the line of Timothy Ho of Morgan Stanley.

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Timothy Ho, Morgan Stanley, Research Division - Equity Analyst [31]

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Three questions for me. The first is, are the 2 recent U.S. wins comparable to the 7.5% to 8.5% through cycle IRR guidance for competitively secure processes that you gave at the CMD last year?

And a small follow-on to that. Given you are delivering assets at lower capital spend as exhibited through the gain this year, is there a potential positive upside risk that 7.5% to 8.5% guidance.

And finally, on farm downs, I know that you're only so far communicating about potentially doing one in Taiwan. But given the steep legdown in yields and the significant capacity growth opportunities that you have, could you see that view changing at all?

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Henrik Poulsen, Ørsted A/S - President & CEO [32]

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Thank you, Timothy. On the IRR guide -- IRR guidance, we are not going to be putting out a specific number for the U.S. projects. They are included in the portfolio of projects that we guided on at the Capital Markets Day, the 7.5% to 8.5% we had, the Revolution Wind project in that portfolio.

Sorry, Timothy, I'm just getting some additional comments on this side here. Yes. So okay. Sorry, I'm getting a little bit of side advice here from my CFO. So just to be very clear, the Revolution Wind project is in what we guided on at the Capital Markets Day. Obviously, at that point, we didn't know about Ocean Wind and Sunrise Wind and, therefore, they're not in that guidance mix or in that portfolio. And as I said earlier, we're not going to be providing any standalone guidance on those projects.

It simply becomes too granular for us to manage if we start providing any guidance at a project level. I hope for your understanding on that.

When it comes to lower CapEx, yes, it's true, we have had some upsides. As Marianne alluded to, Hornsea 1 is progressing quite well relative to our original CapEx estimate and we also managed to close down some of the projects completed last year, where we still had some provisions for what we call snagging. We managed to do that slightly below expected capital spend. I would not extrapolate that into sort of a broader upside to the 7.5% to the 8.5% IRR. We have many, many moving parts in our business cases across this portfolio of projects, across regions. So I would not take one parameter and start extrapolating on that, that would be incorrect, as I see it.

Timothy, could I have you just repeat the third and final question about capacity expansion? I'm not sure I...

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Timothy Ho, Morgan Stanley, Research Division - Equity Analyst [33]

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Yes, just regarding farm downs. So my understanding is that the only other fund on your planning explicitly is in Taiwan. And given lower yields, we know that there's huge amounts of capacity opportunity in the future that capital recycling could provide the additional capital for. Could you see that view changing?

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Henrik Poulsen, Ørsted A/S - President & CEO [34]

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Yes. No, it's an absolutely valid question, Timothy. And we do face, as we talked about, a tremendous amount of growth and we have many opportunities. Of course, we still have quite a bit of capacity on our balance sheet to fund the growth over the coming years, the DKK 200 billion estimate that we provided at the Capital Markets Day.

If we're going to be in need of additional capital if there's simply more value-creating growth for us to reach out for, obviously, we do have an opportunity to go back and farm down in either operating assets or some of the projects currently under construction. And if we do, if we believe there's a value creation opportunity in doing that, yes, it is clearly still something we're open to.

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Operator [35]

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

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [36]

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Two questions, the first regarding the outages. It seems many of them were related to cables or a transmission infrastructure. And I'm just wondering if there's any chance you'll receive compensation from cable manufacturers, or maybe on the contrary, that you will have to compensate the buyers of those assets because you built those transmission assets.

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Henrik Poulsen, Ørsted A/S - President & CEO [37]

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Thank you, Marcus. I mean, the outages, some of them are cable related, both array cable and also partly related to the export systems. Other outages have been related to substations, converter stations. Some have also had a turbine component in them, even if that's the smaller part of it. So it does cut across different types of components.

We generally always use our contractual rights to the full extent towards our suppliers to make sure that they pay for repair campaigns. And we, obviously, also, in these cases, going back to our suppliers to make sure that they pay what they're obliged to according to contracts. And broadly speaking, they are obliged to standing by the quality of the components that they have delivered to us.

When it comes to compensation of our partners in the projects, there is no compensation for these types of issues. They live with the operational risk that we have in that regard. It's a shared risk basis.

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [38]

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Okay. And my second question concerns the latest 5 or 6 auctions. It seems to me, at least, as if you have won the auctions where price was maybe not the most important factor. Does that concern you at all that you're essentially not competitive on price?

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Henrik Poulsen, Ørsted A/S - President & CEO [39]

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I don't think you can conclude from that, that we are not competitive on price. If we were not competitive on price, I don't think we would have won these auctions. I would actually turn it the other way around and rather than finding it to be a matter of concern, I find it very encouraging to see that we're able to win on non-price factors as well. But I don't think we can win on non-price factors while being downright uncompetitive on price. So I would certainly not jump to that conclusion. I think that would be quite a mistake.

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Operator [40]

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

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [41]

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I got two questions. The first one is on Brexit. I don't think we really had a discussion of that today. But I'm just wondering now that so-called "hard Brexit" starts to be rising in probability, whether you see any risk to, I suppose it's the Hornsea 2 construction plan that would be affected. I guess Hornsea 1 will be mostly done by the end of this year. But it would be great if you could talk that through. Because I suppose the risk there is on a project where you've got the subsidy logged, but the construction costs haven't gone in yet. So if you could talk about Hornsea 2 and Brexit, that'd be one.

And then my second question, and I apologize, it’s a bit of a theoretical one, but I really want to take advantage to get your views. But with rates and yields where they are at the minute, we get tons of questions now on cost of capital. And absolutely know you don't want to tell us what you think the cost of capital is and I'm not asking. But can you help on a couple of questions as follows. So the first part is, on Page 34 of your slides today, you give us average funding cost of the organization of I think 3.78%, maybe a bit higher if you include the hybrids. But on the page after, you show a marginal cost of debt, which can be much lower, maybe some bonds at 1.5%. We've seen other utilities do 1% not long ago.

So when you're bidding for a new project, can you tell us, do you tend to think about your average debt cost, which might be 3% or 4%, or your marginal debt costs, which might be 1% or 2%? And then I suppose the flip side to that is when we value the existing projects that you have, I think we all tend to sort of do a cash flow forecast and use a discount rate, but some people are marking that discount to rate market when the cost of capital -- when rates and bonds yields fall. But is that how you think about it for your existing assets? Do you tend to think of your cost of capital for those projects as fixed because you've locked in the funding already? Or do you tend to think that you should sort of mark-to-market that WAC as yields move around in the market?

I'm sorry, if there's two sides of the same coin and a bit of a theoretical question, but I think there's very great value if you can just share your thinking on those questions.

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Henrik Poulsen, Ørsted A/S - President & CEO [42]

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Thank you for the questions, Sam. I'll start out on the Brexit question. We have been spending a lot of time working through the different Brexit scenarios, including a no-deal Brexit and the supply chain implications it may have. It has mostly involved us actually going out to suppliers and talking to them about what their contingency plans are that would allow them to deliver all components for Hornsea 2 even in a no-deal Brexit. And that has given us a good level of comfort that we will be able to complete not only Hornsea 2 -- sorry, Hornsea 1, but also Hornsea 2 without any major disruptions from Brexit.

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Marianne Wiinholt, Ørsted A/S - CFO [43]

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Yes, Sam, and on your other question on the cost of capital, it's a very good and very valid question. As we have talked about before, both the WAC and the CapEx is the most sensitive information when it comes to the competitive auctions and tenders. So of course, we have a very clear methodology, which we use, but I will actually not share that with you because that is too sensitive for us. So unfortunately, I cannot share it with you, Sam.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [44]

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No discussion even in principle?

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Marianne Wiinholt, Ørsted A/S - CFO [45]

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No, not really. Because if I do that I'll actually give you the answer. So that's the problem.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [46]

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Okay. Well, at least I have further questions on paper. Perhaps, just a very quick follow-up on Hornsea 2 then if you don't mind. I think your answer was you don't expect any disruption, but should we expect that your build cost will increase significantly if we go to out of EU? Will you be factoring in a higher CapEx, in other words?

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Henrik Poulsen, Ørsted A/S - President & CEO [47]

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Beyond -- for Hornsea 2 or beyond Hornsea 2?

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [48]

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For Hornsea 2 in particular. I mean I suppose future projects, you would bid based on what you expect the cost to be post Brexit. But is one way, you've got revenue locked in that costs could now go up.

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Henrik Poulsen, Ørsted A/S - President & CEO [49]

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We do not expect any material impact on Hornsea 2. That is, by and large, fully locked in by now. And when it comes to future projects, we will have a fair amount of visibility, I would assume at least on the implications of Brexit, once we participate -- expectedly at least participate in the next CfD round in 2021. And there of course, we'll have to take account of any potential increases in our sourcing for the U.K. projects.

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Marianne Wiinholt, Ørsted A/S - CFO [50]

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And for Hornsea, also the currency part of it is also locked in due to the hedging policy we have. So we will not be hit there.

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Operator [51]

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Our next question comes from the line of Jenny Ping of Citi.

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Jenny Ping, Citigroup Inc, Research Division - Director and Analyst [52]

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I've got three. Firstly, can you give us an update for, especially, the Japan and the South Korea auctions coming up in terms of where you are relative to some of the competitors that's already formed JVs? And just that market with floating technology, where you are on floating? What your latest thoughts on that would be helpful.

Secondly, going back to the non-compensated curtailment issues, specifically looking at Germany. It looks like, basically, you get -- or the TSO have the 28 days allowance of not paying you every year. Can you firstly give us the run rate on how -- what the utilization, what the take-up of that 28 days have been from the TSO? And whether we should think about that being fully utilized going forward just because we have more and more renewables coming on to those system, and they can essentially ask you to switch off if there's too much wind and solar?

And then lastly, a question for Marianne on the accounting aspect. It looks like you've released a -- had a provision release from the farm down of 50% of your Walney Extension OFTO assets. Do you expect future provision releases to come through, especially given rates have fallen on -- for assets such as the Hornsea 1, Hornsea 2, which are obviously quite sizable? If you can comment on that, that would be helpful as well.

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Henrik Poulsen, Ørsted A/S - President & CEO [53]

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Thank you, Jenny. When it comes to Japan and South Korea, we see the Japanese government providing more and more visibility on sort of a regulatory framework for offshore wind build out. We still don't have the exact auction design. We don't have the exact timeline either. But our current expectation would be that there will be the first auction in Japan during the summer of next year. They have designated these 11 zones that are suitable for offshore wind development. And out of the 11, 4 have been selected to be the first movers. So we would expect those four areas, clearly, to be part of an initial auction presumably next year.

In those 4 areas, we are active -- actively focusing on the Choshi zone in collaboration with TEPCO, where we signed the MoU earlier this year, and we are now in a joint process with TEPCO in developing an offshore wind project in the Choshi zone. Hopefully, we should be able to then join a Japanese auction next year.

In South Korea, we do not yet have that same level of visibility. There is a lot of work going on between the government and some of the local players to basically establish a framework for offshore wind build-out, and we are closely monitoring the market and looking at any potential opportunities that may come up for us that. So we're staying close to it.

That is also the case for floating. We are closely observing all opportunities around the world for a floating offshore wind and staying close to both the market development and the technological development in floating, to make sure that if there is an opportunity where we should act, that we would be ready to do so. But for the time being, we are not actively pursuing any floating projects.

When it comes to the German non-compensated curtailment. What you alluded to relates to grid outages where the grid operator have an annual cap of 18 days per year that they can spend on unplanned grid disruptions. And then they have another 10 days for planned grid maintenance, adding up to the 28 days that you alluded to. Whether they will be spending the full amount of planned and unplanned time every year is very difficult to predict. My impression is that, in some years, they will be maxing out more or less, but in other years, they will not be using the full cap on both planned and unplanned grid outages.

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Marianne Wiinholt, Ørsted A/S - CFO [54]

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Yes. And then to your question on the OFTO release of provision. Yes, you're right. We released provisions related to both Race Bank and Walney Extension in this quarter. We -- the remaining OFTO we have is Hornsea 1 and Hornsea 2. And Hornsea 1, we expect to divest in 2021 and Hornsea 2 even later. So it is too early to say in a way how the interest rate environment and everything will be then. So therefore, in a way, we don't know, and we keep things unchanged for those assets.

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Operator [55]

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Our next question comes from the line of James Brand of Deutsche Bank.

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James Brand, Deutsche Bank AG, Research Division - Research Analyst [56]

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Most of my questions have been answered too. So I just had a couple of kind of relatively minor ones. But the first is just on some of the operational issues that you've had this year that have impacted production, whether we should be -- or whether you are or have spent a significant amount of CapEx sorting out those problems. And I guess some of that, as you answered it to an earlier question, might be able to be compensated by your suppliers. But whether you're spending a significant amount of CapEx or whether it was all just coming through as OpEx.

And the second one is, you mentioned the green bonds that you'd raised. I was wondering whether you could tell us the terms for the Taiwanese green bond. I was just curious what your funding cost was in local currency in Taiwan.

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Henrik Poulsen, Ørsted A/S - President & CEO [57]

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We have limited CapEx spend on these outages, traditionally, as they are mostly picked up by our suppliers. We will have some spend on the London array cable repair campaign. But broadly speaking, this is typically a spend that will be picked up by the suppliers of the malfunctioning components.

When it comes to OpEx, it's a relatively minor item, it's included in the DKK 400 million EBITDA impact that I alluded to earlier, but it's a relatively small part of that number. The vast majority of the DKK 400 million are lost revenues.

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Marianne Wiinholt, Ørsted A/S - CFO [58]

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Yes, and then to the question on the green bond in Taiwan. We expect to approach the market this autumn. So for now, in a way, we don't know where we will end on the interest rate for the Taiwanese bond. But we see a lot of interest, and we think that we will be able to make an attractive financing package there.

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Operator [59]

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

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [60]

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Firstly, on the DKK 200 billion CapEx plan or outlook through to 2025. On my numbers, they're still -- onshore is mostly you've got projects to take up the share there. But there seems to be an amount still of DKK 20 billion to DKK 30 billion uncommitted of scope for investments. And I think on your slide, Henrik, your CMD last November, you flagged the potential for the acquisition of a European onshore wind platform. How do you feel about that? And what are the other types of investment opportunities that you see? For example, would you consider investing more in North American onshore or maybe buying into projects in Europe and increasing the 2025 target?

My second question is just on the benefit, if you like, the extra billion Danish krones benefit to EBITDA from partnership profits. Is it fair to say now that there's an extra DKK 1 billion benefit to yourselves to lower CapEx through not spending as much on your own share of the projects, i.e., that impact should be doubled?

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Henrik Poulsen, Ørsted A/S - President & CEO [61]

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Thanks, Mark. On the DKK 200 billion towards 2025, you're right. I mean we don't have fully committed that entire spend by now. In terms of where it's going to be spent, the remaining part, I mean we obviously only going to spend the money if we can find profitable opportunities. But I do believe that we will be able to do so. Whether it's going to be an offshore or onshore and in what region, hard to predict. A lot of it is going to come down to the outcome of auctions over the next 1 to 2 years.

When it comes to onshore in Europe we do not have any active plans to make a European onshore acquisition. Again, I don't want to box ourselves in by ruling it out categorically and say it could never happen. I think that would be wrong, but I can say that we are not in the active process to -- processes to acquire a European onshore asset. We're extremely happy about the U.S. onshore business and its performance and the growth that we are able to find at the moment. And if anything, we could potentially continue to further expand that business, which currently is generating quite good value opportunities for us.

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Marianne Wiinholt, Ørsted A/S - CFO [62]

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Yes. And then on your DKK 1 billion additional partnership gains, there are 3 components to this approximately DKK 1 billion. It is the lower spend on Hornsea 1. It is this 1-year extension and this left over from the project we completed in '18. And then you have these OFTO divestments.

(inaudible) the first of them. Yes, that's right. From a cash flow perspective, you can double them. But not the OFTO part. Because for our own share, the OFTO is -- even if we get more cash flow upfront, we pay it through higher [term lease] or the opposite if we get lower cash flow to pay it through higher term lease . So that's a zero-game on the OFTO, but on the two others, you are right.

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Operator [63]

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Our last question comes from the line of Iain Turner of Exane BNP Paribas.

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Iain Stewart Turner, Exane BNP Paribas, Research Division - Analyst of Utilities [64]

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Last, but hopefully not least. Can I just ask you about when you expect to take FID on those 2 U.S. projects that you've won and what you need to do between now and then to achieve that, please?

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Henrik Poulsen, Ørsted A/S - President & CEO [65]

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Yes. I cannot give you the exact FID timing. What we need is, essentially, we need a construction and operations plan to be approved by BOEM and that's going to take a while. It's a relatively comprehensive permitting, consenting process that we're going to go through. And once we have that, and we have a mature supply chain concept, we're going to be putting the business cases in front of the board for a final investment decision. But at this point, I cannot give you an exact timing, but it's going to take us a while to get the FIDs done.

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Operator [66]

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There are no further questions. Please go ahead, speakers.

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Henrik Poulsen, Ørsted A/S - President & CEO [67]

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All right. Thank you, everyone, so much for joining, and thank you for all of the excellent questions. Much appreciated. Have a continued great day.