Ørsted A/S (ORSTED) Earnings Call Transcript & Summary

Hello, and welcome to the Ørsted COVID-19 update. [Operator Instructions] The meeting will end no later than 15:45 CET. Today, I'm pleased to present CEO, Henrik Poulsen; and CFO, Marianne Wiinholt. Please begin your meeting.

Thank you, and good afternoon, everyone, and thank you for joining this call at short notice. I'm sure you have all read the announcement that we released this morning. I will spend just a few minutes on a few introductory remarks, and then we'll move to Q&A. The world is indeed in uncharted and unpredictable territory. The COVID-19 pandemic is having a severe impact on our lives, livelihoods and societies at large. And it is against this backdrop of uncertainty that we today wanted to provide you with an update on our operational and financial situation and give you an overview of the risk related to COVID-19, which could potentially impact our business. The health and well-being of our employees and their families remains our top priority. Before anything else, we want to make sure that our employees stay safe and healthy and that we support the efforts to contain the spread of the virus. Under these challenging circumstances, I must say I have been very impressed with our employees' ability to adapt quickly to the new situation and overcome the many certain obstacles related to travel restrictions, working from home and other preventive measures. The dedication and professionalism of the whole Ørsted team makes me both optimistic and grateful and gives me comfort about Ørsted coming through this crisis in the best way possible. Now turning to the business. Let me start by saying that our business model remains very resilient, and our operations remain stable. This allows us to maintain our financial guidance for 2020. In particular, I will highlight that our asset base is fully operational at normal availability rates. This goes for our offshore and onshore wind farms, our heat and power plants in Denmark, our supply businesses and our trading operations. Our construction projects are all progressing according to plans. There is a risk that key suppliers get delayed and that our own personnel are constrained by the travel restrictions put in place in many countries, but so far, we have been able to find solutions to the challenges. Due to our extensive hedging program, we also remain largely shielded in the short- to medium-term from the current extreme market volatility, and we see limited risk of being materially impacted by decreasing gas and power prices as well as the volatile currency rates. I also want to make clear that our liquidity reserve is sized to support our significant investments in renewable energy projects for quite some time, even in stressed scenarios. Before the crisis, we took advantage of the very strong funding markets and prefunded future cash needs so we today can support our operations and investment program through 2020 and 2021 without further funding. Although Ørsted remains stable and risks relatively contained, we do remain vigilant about the unfolding global crisis. And we have identified a number of risks, which we systematically monitor. I'm sure all of you have read our announcement, so let me just highlight a few of the key factors that could potentially impact our business. As mentioned, travel restrictions and quarantined employees may impact our ability to keep our site operations and our internationally staffed service operations vessels fully manned. This may over time, impact the availability of our wind farms, but we see no COVID-19-related impact on availability so far. Travel restrictions and quarantines may likewise impact our supplier's ability to deliver critical components to projects currently under construction. We are in close contact with all key suppliers and monitor the situation on a daily basis. Our construction projects continue to progress according to plan and with embedded contingencies that, to a certain extent, can mitigate potential delays. The negative economic impact of the global crisis also increases credit risk on key suppliers, counterparts and customers. However, the majority of our income is rooted in very strong investment-grade, state-owned or state guarantees -- guaranteed entities, and to a latter extent, utilities and corporates. This will support our resilience during the macroeconomic downturn, which we must expect. We also get questions regarding increased risk of negative power prices in the light of lower power demand and how we're exposed in such scenarios. Power demand has certainly decreased in the markets most affected by the virus. But so far, power demand in our core markets in Germany, the U.K. and Denmark, is much less affected, and we cannot detect any change pattern in the occurrence of negative prices. In a scenario with more subdued power demand for longer, we could potentially see an increase in the number of hours with negative prices. But as we have partly compensated, we assessed the overall impact to be limited. Turning to our development pipeline. We remain dependent on public authorities to progress the permitting and consenting of awarded projects and development sites and to progress the maturation of regulatory frameworks, including upcoming tenders and auctions. Such processes could potentially be delayed due to travel restrictions, people working from home and government stakeholders being occupied by crisis management. To mention a specific example, we have seen executive orders signed by several U.S. governors regarding mandates to require nonessential employees staying home due to the COVID-19 situation. We could see impacts to time lines from delays to our geophysical and geotechnical survey campaigns that are planned to start this spring, and we're currently working with local and state-elected officials on the best path forward. We activated our Corporate Crisis Management Organisation after the outbreak of the virus. This organization is headed by the Executive Committee and chaired by me. We will maintain the Corporate Crisis Management Organisation in place for the time being to steer the company through this unfolding and unpredictable crisis. Let me end these introductory remarks by saying that although the immediate and direct impact of the crisis on Ørsted for now is limited, we cannot afford to be complacent about the situation we're in. We will stay on our toes, and we will manage our risks. And I am convinced that we can keep the company stable and in good shape through the crisis while also keeping the Ørsted team healthy and safe. On that note, I will now open up for questions. Operator, please.

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

Yes. So for your onshore business, you have 2 projects scheduled for completion in Q4 this year. In the event that these projects are delayed into 2021, will that mean you will lose your tax credits?

We currently see continued good progress on the 2 projects, Willow Creek and Plum Creek. So for now, we have no expectation that they will not be completed before the end of this year. If they step into 2021, we'll have to wait and see what the situation is. There are ongoing discussions in the U.S. as to whether there should be an extension of the period on the safe harbor regulation that basically would allow projects to still maintain their existing tax credit even if there are some small delays potentially up to a year. So it's a situation that we currently consider low likelihood question. And even if it were to occur, there is, I think, a reasonable hope that there may be some changes to the framework that would allow everyone in the U.S. to be slightly delayed in light of this situation.

Okay. That's quite clear. Then my second question is regarding your farm-down of the Changhua 1 & 2a project. To what extent has the current crisis impacted your negotiations with potential partners?

They have not been impacted. That process continues, and it is still well on track. The project is also still well on track in terms of construction and fabrication progress.

Our next question comes from Deepa Venkateswaran from Bernstein.

I had one bigger picture question and one more smaller. So bigger picture, just wondering what your views are, Henrik, on how you see governments respond to the green -- do you see green stimulus? Or do you actually see governments take a pause because there are more pressing problems? And it's quite likely also that emissions will be much lower, so how do you see this change, your vision of this green world? And the second question, just in terms of the under construction projects. So you already mentioned Taiwan and the onshore wind. Would you be able to just talk about other critical projects? I'm guessing Borssele 1 & 2 and then Hornsea 2. Just what stage they are? And then how much of a delay can you kind of still accommodate in their schedules so that everything is still on track?

Thank you, Deepa. It's at this point in time, it's, of course, difficult for me to predict exactly how this is going to impact the political support for the green transformation. There are a couple of things you could point to. One is it's obvious that we have a near-term crisis here, which we need to deal with as a global society. And it's obviously quite natural that all forces are mobilized behind sort of fighting the coronavirus. Now with that said, the climate challenge is not going to go away. And even if there will be a temporary reduction in emissions due to the economic downturn, emissions will climb back as the global society comes back to a more normalized situation, which will again accentuate the need for more long-term systematic reductions of global CO2 emissions. So we are facing a pressing and severe challenge in terms of climate change, and it's obviously not going to go away. So I don't have concerns about whether there will be focus on climate change once we have managed our way through this COVID-19 situation. It's also quite clear that there will, obviously, and are being very extensive stimulus packages released all around the world. And we see more and more political demand for these packages being spent on something that points towards the future, something that will help future-proof society for coming generations. And we see more and more political calls for some of these stimulus programs to be invested into, among other things, green energy. And I have only, a few hours ago, been invited by the EU Commission to join a session on this topic. So it also goes to show that people are aware that if we have to spend a lot of money to revitalize global economies post-COVID-19, we might as well spend them wisely. I'm quite convinced that politicians will agree that spending on green energy is a smart thing to do. In terms of the more specific project status, on Borssele 1 & 2, we are in good progress. We continue to install foundations and array cables at the moment. And we have good visibility on the turbine production as well. So at the moment, we have roughly 2/3 of all foundations in place at Borssele. So we are making good progress and are still optimistic that we could get this project completed before the end of this year. At Hornsea 2, same situation. Fabrication of the critical components is underway and well in progress. And there, obviously, we are not yet in extensive offshore installation, but we are basically seeing the fabrication being well on track. Same can be said about Changhua 1 & 2a. We have currently a lot of focus on this -- on the big steel structures. We have -- as you know, we have jacket foundation suppliers, both in Taiwan and in South Korea, and we also have pin pile manufacturing going on in both countries. And we have, throughout recent weeks and the past few months in both Taiwan and South Korea, been able to sustain production all along. We have had to develop a few workarounds to overcome some of the travel restrictions we face, but it has been impressive to see how people have come up with new ways of working together even when they can't travel. This, for instance, includes us moving towards video-based quality assurance inspection where we have some of our specialists from Europe dialing in to video conferences and doing quality assurance work on the steel structures directly out of Copenhagen. And we're quite comfortable with these solutions that they are quite manageable. So overall, fabrication well on track, and that goes essentially for all components for Changhua 1 & 2a as well. In the U.S., Sage Draw is drawing towards completion, and we're hoping that we will complete the Sage Draw onshore wind farm within a matter of weeks. It should be essentially within 1 to 2 weeks, so that's pretty much done. We continue to see good progress on both Plum Creek and Willow Creek, Plum Creek being more advanced. And there, we are receiving and installing turbines at the moment. And then last but not least, we have the large Permian solar farm, where we have more than 100 people on-site at the moment, obviously, working under all of the guidelines and regulations to keep them safe. But basically, getting everything ready for the site to soon start receiving solar panels coming in from the Far East, mostly from Vietnam. And we also have good visibility on the supply chain. So we remain all around. So far, we are cautiously optimistic that we will be able to continue to progress all of these different construction projects. Obviously, there are risks, as we have highlighted in today's announcement. And as time goes by, the risk picture may change. If it changes materially, we will obviously keep you informed.

[Operator Instructions] Next we have is from Matthew Phillips from Fidelity International.

Just a quick question on issuance. You said that all your CapEx and construction programs are covered for both this year and next with the liquidity you have on hand. Does that mean you don't plan to issue in the next few years? Or do you think if markets would have come down, could we see Ørsted coming to market at some point in the next sort of 12 to 18 months?

Yes. We have liquidity for the next 2 years with the CapEx program as we have laid out but also taking into account the Radius and B2C and outdoor lighting proceeds that we expect to get later this year. We cannot rule out that we will go to the market over the next 2 years, but we will see. And we will probably do that, but we will see when the time is right for that.

Our next question comes from Sam Arie from UBS.

I have sort of similar question but relating to farm-down. I'm just wondering if you could comment on how you see the appetite for farm-downs in the current environment. Are your current negotiations proceeding exactly as expected? Have there been any delays or anything that makes you think that farm-downs might be more difficult to get completed in the new environment?

Thanks, Sam. We haven't seen any changes in terms of the dynamics around farm-downs. As you're all aware, we are in an active process on farming down Changhua 1, and that process is very much on track. And I think everyone in that process are quite comfortable with the progress we're seeing at the project. So no changes as far as we can tell.

Our next question comes from Marcus Bellander from Nordea.

Just a quick one. I'm wondering if there's any -- if this market volatility is benefiting your trading unit in any way. Should we expect a strong trading result in Q1?

No, Marcus. We could probably benefit from it, but we have chosen to reduce the risk in our market trading because we think with the current volatility, that's the prudent thing to do. So we are doing very well in the area, but we are not taking on additional risk. Twice the contrary, we are reducing risk.

Our next question comes from Kristian Johansen again from Danske Bank.

Just a follow-up on your hedging. So as I understand that your -- I mean, in terms of your merchant exposure, that is pretty much fully hedged for this year. Can you just help me to what level you are hedged for 2021 and '22?

Yes. So we are more or less fully hedged, both for 2020 and 2021. And then we are also, to quite a large extent, hedged into 2022. So in that respect, we are in a very good position.

And our final question comes from Deepa Venkateswaran from Bernstein.

I had a question on the German subsidy-free project. And I was just wondering how you feel about it now given where power prices and carbon prices are. And do you still see appetite from corporates to embrace these kind of contracts? And do you also see any implication from the oil price meltdown on maybe future competition from the oil majors as you're competing in auctions?

Thanks, Deepa. It's quite evident that with the very low gas prices, CO2 prices, fossil fuel prices, in general, we see an impact on power prices all around Europe at the moment. We'll have to wait and see how power prices basically come back to what we would expect to be more normal long-term levels once we are on the other side of this COVID-19 crisis. So right now, I think it's quite unpredictable exactly where we are going to be on power prices in half a year or a year from now. And we don't have to make any decisions on the German 0 subsidy project anytime soon. We are still progressing the project. We're still talking to corporates about potential PPAs. But I think for now, everyone understands that you put things a little bit aside and focus on the crisis. And once things normalize, I would expect -- including the power prices will expectedly normalize. Again, we'll take a fresh look at the project. But for now, I can say we have certainly in no way given up on the project on the contrary.

Okay. And then the oil majors?

On the oil majors, again, I think it's a little unpredictable depending on what angle you take. The fact that they get much lower prices on their existing core business, will that drive them to accelerate the strategic shift towards renewable energy or will they, in fact, come under increasing financial pressure, basically leading to them having to cut back on their investment programs? I could probably take slightly different angles on what this will mean in terms of the oil majors' engagement in future auctions. So again, I would probably be careful of not trying to predict exactly what it's going to mean. I think we'll have to just work out through this crisis over the coming months and see where the world comes out on the other side. But -- and that certainly also goes for the oil majors. I could come from different angles and come to different conclusions.

Our next question comes from Sam Arie from UBS.

It seems like this is going to be a quick call, so I'm coming for the opportunity to ask another question. And you've obviously said in the past that you might have M&A opportunities going forward. And I'm just wondering, I'm sure you're very close to the market, but can you comment at all on how the M&A landscape looks? And I'm wondering if there are particular pipelines or developers that are more interested in now in finding a buyer than they might have been a few months ago. I'm not sure the crisis creates any opportunities for you in that sense. So interested in your comments.

Thanks, Sam. I'd say right now, we're very focused on maintaining full business continuity across our operating sites and our construction projects, and that's our primary focus, and then obviously, the safety and health of our staff. So we're not spending a massive amount of time on M&A at the moment, as you would imagine. Whether this situation -- whether we are on the other side of this crisis, we'll see more M&A opportunities, more developers that might be looking for a safe harbor and someone to team up with, we'll just have to wait and see. Again, I'd be careful of not trying to make too many predictions about what the world will look like on the other side of this crisis. I can only say we obviously have strategic flexibility and also the balance sheet to act if there are very good opportunities in the market at some point. But it's not a primary focus for us right now.

Our next question comes from Elchin Mammadov of Bloomberg Intelligence.

I just had a quick question. It's a variation on what's been asked before but slightly different. So again, assuming we enter into a deep recession, what do you think -- I mean, again, everyone is focusing on the oil majors, but what do you think the life of Macquaries and CIPs and other infrastructure investors are turning into developers going to do? Do you expect them to increase the activity? Or you don't expect major change?

Again, it's very difficult to predict. I think a lot of this will depend on how fast we come through this crisis and how fast we return to more normalized commodity pricing, interest rates, et cetera, and we get more visibility on what's ahead. So again, I'd be careful of not trying to put myself in the place of Macquarie or the major infrastructure funds. They still have an abundance of capital that they want to deploy. Whether they will have more or less appetite for our sector, again, I don't want to start predicting it right now. We'll have to wait and see.

Thank you. That was our final question. So I hand back -- I will hand back to Henrik Poulsen, the CEO, to finish today's call.

All right. Once again, thank you all very much for dialing in at short notice, and also thank you for the questions. Much appreciated. And most importantly, take care and stay safe and talk to you soon. Bye-bye.

Thank you. This now concludes today's call. We thank you for joining. You may now disconnect.