Orsted A/S (DNNGY) CEO Mads Nipper on Q2 2022 Results - Earnings Call Transcript | Seeking Alpha

2022-09-10 22:58:03 By : Mr. oscar jia

Orsted A/S (OTCPK:DNNGY) Q2 2022 Earnings Conference Call August 11, 2022 9:00 AM ET

Mads Nipper - CEO & Group President

Daniel Lerup - Group CFO, SVP, Head, Commercial and EPC & Operation Finance

Casper Blom - Danske Bank

Alberto Gandolfi - Goldman Sachs Group

Robert Pulleyn - Morgan Stanley

Mark Freshney - Crédit Suisse

John Musk - RBC Capital Markets

Vincent Ayral - JPMorgan Chase & Co.

Deepa Venkateswaran - Sanford C. Bernstein & Co.

David Paz - Wolfe Research

Peter Bisztyga - Bank of America Merrill Lynch

Welcome to the Orsted Q2 2022 earnings call. [Operator Instructions]. Today's speakers are CEO, Mads Nipper; and CFO, Daniel Lerup. Speakers, please begin.

Thank you very much, and good afternoon, everyone. I hope you've enjoyed a nice time off. And for those of you who are still on vacation, thanks a lot for your time today. We've had a strong operational and financial first half of 2022 with our EBITDA, excluding new partnerships, amounting to DKK 11.4 billion, an increase of 48% on last year.

Earnings from ramp-up generation from offshore and onshore assets as well as higher wind speeds than last year have offset the negative impact from ineffective hedges related to the delayed commissioning of Hornsea 2. Our combined heat and power plants have benefited from the higher power prices and our gas business has been able to optimize the offtake flexibility that we have at our Northwestern European gas activities.

The market conditions continue to be very volatile and the strong performance of our business in the first half of the year have once again highlighted the strengths and benefits of our diversified portfolio. Furthermore, the strong performance has led us to increase our full year 2022 EBITDA guidance by DKK 1 billion to the range of DKK 20 million to DKK 22 billion. With the expected outperformance driven by higher earnings in Bioenergy and other as well as onshore. Daniel will elaborate further on our guidance towards the end of this presentation.

On that note, I will take you through the strategic highlights for the second quarter, which have been very eventful and extremely important for us and our ambition of a world that runs entirely on green energy. While on the very day where I went to spend some time with my family, it was announced that Orsted has been awarded a contract for difference for our 2.9 gigawatt Hornsea 3 project in the U.K. The award is another important win and a significant step towards our 2030 ambition of 30 gigawatt installed capacity in offshore, and the project is going to be the world's single biggest offshore wind farm. Hornsea 3 will provide power to more than 3.2 million households in the U.K. and is expected to be operational by 2027. I will go into details with the award on the next slide.

In the Netherlands, we partnered up with Total Energies to jointly submit bids for the 1.5 gigawatt Dutch offshore wind tenders, Holland Coast West. Together with Total Energies, we will leverage our strength as a world-class leaders in renewable energy and offshore wind to support the Netherlands in its acceleration of offshore wind build-out towards 2030 and beyond in a state-of-the-art ecologically friendly manner and as part of an integrated energy system. Our ecological innovation tender proposal would change how wind farms relate to ecology and with its measures unprecedented monitoring program and strong cooperation with companies, institutes, universities and NGOs.

Our proposal focuses on working with all parties, both international and local to build the knowledge needed to have wind farm strengthen nature by default. Our system integration proposal would leverage our growing green hydrogen experience to deliver 600 megawatt of electrolysis capacity. This will be the largest green hydrogen cluster in the world by 2027, powered solely by Holland Coast West to decarbonize industrial activities in Zealand, supplementing this with batteries, electric transport and direct electrification to optimize the integration of offshore wind power into the energy system. The winners of the tenders are expected to be announced by the Dotch government during second half of 2022.

In 2021, we entered the European onshore market by acquiring Brookfield Renewable Ireland's onshore wind platform from which Astris developing high potential projects that will contribute to the group's growth ambitions towards 17.5 gigawatt onshore renewable capacity by 2030. Building on our well-performing onshore platform and in line with our strategy to further expand our European footprint, we have entered the Spanish onshore renewables market with several strong solar and wind partnerships and signed an agreement to acquire the German and French onshore developer, Ostwind.

I will cover Ostwind acquisition in greater details in a few minutes. Our onshore entry into Spain is formed by 4 partnerships with Glide Energy, Rolwind, ARBA Energias Renovables and Ereda, who will support the project development. All partners have extensive experience in greenfield development and together form a complementary geographic footprint.

The short-term aim of the partnership is to develop onshore wind and solar PV project in Spain that allow us to participate in the upcoming Spanish grid auctions inspected in 2022 and put in rights a bit for the right to develop a multi-gigawatt pipeline, solar and wind energy. The long-term goal is to develop large-scale onshore wind-solar PV and storage projects that can be commercialized through either government auctions or the growing market for corporate power purchase agreements.

Spain is one of Europe's largest renewables markets and the Spanish government has set out to reach 70% renewable generation by 2030, followed by 100% renewable generation by 2050, making Spain an absolute front runner in the green energy transition. The onshore partnerships complement our efforts to explore floating offshore wind opportunities in Spain, together with Repsol as announced earlier this year.

The presence across technologies will enable us to provide a full suite of solutions to help our corporate and government partners decarbonize and complement the ambition of Orsted's offshore business in a key market. Together with all our partners, we sit on strong development expertise and local knowledge of the Spanish market. And hence, we can provide green energy solutions at scale to support the green transformation in the country while creating value for our stakeholders.

In our U.S. onshore business, we have commissioned the 268 megawatt wind part of the combined solar PV and wind project, Helena Energy Center. And in Europe, our 62-megawatt onshore wind farm Kennoxhead 1 was Scotland was successfully commissioned in June. Furthermore, we acquired Ford County Wind in Illinois, U.S. This 121 megawatt onshore wind farm strengthens our presence in the MISO region, where we acquired Lincoln Land last year.

I'm very excited to announce that our Danish flagship power-to-x project, green fuels for Denmark has been granted IPSA status by the European Commission. IPSA is short for important project of common European interest and characterizes the project that contributes to sustainable economic growth, job creation and the competitiveness of the EU economy. The IPSA status is important as the Danish government shortlisted green fuels for Denmark as 1 of only 2 Danish power-to-x projects eligible for public funding, provided that the European Commission identified it as being a common European interest. The Danish government has earmarked a total of DKK 850 million for funding for the 2 short-listed projects. IPSA is a key enabler for creating green and energy independent Europe as it will unlock substantial amounts of funding to mature power to X to become a cornerstone technology in the fight against climate change in the hard to abate sectors and as a clear homegrown European industrial strength.

We have set the ambition to become a global leader in renewable hydrogen and green fuels, and we are building a strong and diverse portfolio of power to x projects across industries and geographies. The European Commission's decision to award IPSA status to the flagship project green fuels for Denmark is a testimony to the strength and maturity of our Power to x pipeline, which is based on concrete, feasible and scalable projects in partnership with key off-takers. Greenfields for Denmark is being developed in partnership with leading offtakers in heavy road transport, shipping and aviation.

And when fully developed, it aims to reach a total electrolysis capacity of 1,300 megawatts able to produce 275,000 tons of renewable fuels per year. And in addition to Greenfields for Denmark, 3 other asset projects have been shortlisted in the IPSA process and the EU Commission is expected to finalize its IPSA notification process by the end of this year. As you're probably all aware, by now back in May, Gazprom Export demanded us to pay for gas supplies in rubles, which we refused as Orsted is under no obligation to do so under the contract.

As a consequence, Gazprom Export halted the supply of gas to Orsted on June 1. We were prepared for that scenario, and therefore, we did not have any financial exposure related to the Gazprom Export contract as per June 1, 2022. We are in ongoing dialogue with the authorities, and we trusted the authorities who had the overall overview of supply situation in Denmark are prepared for the situation.

And let me end this overview by highlighting our achievement to be named as one of the 100 most influential companies for the second year running by Time. Time commenced us for expanding offshore wind energy in the United States. And moving from the innovators category to the leaders category this year, that is an acknowledgment of our ambitious efforts within renewable build-out and the many projects now planned along the East Coast.

Turning to Slide 4 and our record-breaking win in the U.K. On July 7th, the U.K. Department for Business, Energy and Industrial Strategy or BEIS, awarded us a contract for difference for our 2,852 megawatt Hornsea 3 offshore wind farm at an inflation index strike price of GBP 37.35 per megawatt hour in 2012 prices. The contract comes with a level of merchant flexibility as the CFD provides the flexibility to be able to reduce the contracted capacity by around 25%.

Meaning that we can potentially decide to keep around 700 megawatt outside the CFD framework. The CFD runs for up to 15 years, starting after commissioning of the wind farm, which is planned for 2027. And we expect to take final investment decision within the next 1.5 years and potentially as soon as year-end. This award is another testimony of offshore wind being a homegrown source of clean energy at large scale that will help the U.K. achieve its climate targets and increase energy independence, while creating local jobs and industrial development.

Now more than ever, there is a need for the further development of renewable energy, not only to address the increasing threats of climate change, but also to increase the stability and resilience of energy supply. And we look forward to working with government and industry colleagues to accelerate the deployment of offshore wind, not only in the U.K. but globally as well. Towards the end of this decade, we expect to further invest around GBP 14 billion in the U.K. and the 2.9 gigawatt Hornsea 3 project will play a key role in the ongoing development of a larger and sustainably competitive U.K. supply chain to support the next phase of the U.K.'s offshore wind success story.

We've already secured capacity with key suppliers for around 2/3 of Hornsea 3's CapEx and have announced a multimillion pound agreement for Hornsea 3 to be the first and leading customer at SeAH Winds monopile factory in Teesside. With the Hornsea 3 win, the awarded Hornsea zone exceeds 3 or 5 gigawatts. We can unlock significant synergies by taking a global portfolio view on procurement and by utilizing Hornsea 3's size and location adjacent to our existing U.K. East Coast wind farms with close to 4 gigawatts in operation.

Hornsea 3 will contribute significantly to Orsted's ambitions of globally installing 30 gigawatt offshore wind by 2030, and the project itself effectively satisfied our annual build-out ambition of around 3 gigawatts. In addition to the already awarded Hornsea zone, we are developing our Hornsea 4 project, which could have a capacity of approximately 2.6 gigawatt. Hornsea 4 is currently going through the planning process with the decision expected in early 2023.

Moving to Slide 5 and our acquisition of the German and French onshore renewable platform, Ostwind. I am very excited to welcome the Ostwind team to the Orsted family as the company has an impressive and proven track record of developing high-quality projects as well as a strong cultural alignment. The talented team has a significant local community presence, and we will get a strong, fully integrated platform from which we can create value. Ostwind develops, constructs and operates onshore wind farm and solar PV projects. The company has been active in onshore wind development for over 20 years with a track record of more than 1 gigawatt of energized projects across the 2 countries.

Today, Ostwind has an attractive portfolio of 152 megawatts in operation and under construction, approximately 526 megawatts in advanced development and approximately a further 1 gigawatt in its development pipeline. In addition to the 1.5 gigawatt development pipeline, Orsted has identified an additional targeted pipeline growth of approximately 900 megawatts towards the beginning of the 2030s. Our successful experience with the Lincoln Clean Energy acquisition and subsequent portfolio execution gives us a comfort that we can execute on the additional capacity beyond the name pipeline.

For reference, the 2022 pipeline of Lincoln Clean Energy at the acquisition was 2.5 gigawatts compared to our actual U.S. operational portfolio of almost 4 gigawatts. And not only did the onshore team significantly outperform in terms of capacity, we have also seen business cases with higher value creation than the original expectations. Ostwind's existing management team will continue to run the business, which will be integrated into Orsted's onshore business unit over time. We expect meaningful synergies between our onshore and offshore businesses in Germany, both regarding offtake solutions for our customers and combined renewable power capacity for future renewable hydrogen production.

And I look forward to welcoming the Ostwind team to Orsted. Orsted's Onshore renewables platform now covers 4 of the largest growth markets in Europe at scale. These key onshore markets have an expected build-out of around 300 gigawatt renewable capacity between 2021 and 2030, corresponding to around 10% yearly growth rates in all markets. And the European portfolio will supplement our primary growth market in the U.S., where around 400 gigawatt of onshore renewable capacity is forecasted in the same period.

Now turning to Slide 6, where I'll give an update on our construction projects and pipeline starting out with projects under construction. The construction of Hornsea 2 and Greater Changhuan 1 & 2a are both still underway. At Hornsea 2, we have seen good progress in the final construction phase with commissioning work picking up after progressing slower than expected in the beginning of the quarter. All turbines are fully commissioned and commercially operational by now. Remaining reliability runs and associated paperwork are planned to be concluded shortly, and formal part commissioning is expected in August.

At Greater Changhua 1 & 2a we've successfully installed 95 jacket foundations and 48 wind turbines. We continue to make good progress in all areas of construction. We achieved first power in April and will continue the installation in the coming months. As we previously highlighted, the schedule was sensitive to impacts from COVID-19, and we have seen that COVID-19 restrictions and a spike of positive COVID cases have been a challenge in building up resources to allow the planned rate of production and installation work.

And consequently, we now expect to commission the last turbines in 2023. The 130-megawatt South Fork offshore wind farm in the U.S. has entered the construction phase and together with our partner, Eversource, we are now progressing the onshore construction works, including the substation where the project will connect. The offshore part of South Fork is expected to be built in 2023. And our 2 German wind farms, Borkum Riffgrund 3 and Gode Wind 3 are both progressing according to plan.

Turning to our onshore renewable projects under construction, where we are currently constructing around gigawatt 1 gigawatt. In Europe, our 2 onshore wind construction projects, Lisheen 3 and Ballykeel are progressing as planned. And as mentioned, we commissioned the wind part of Helena Energy Center. Back in April, we took FID on the 201-megawatt sunflower wind project in Kansas, U.S. and began the construction phase. The project is progressing according to plan, and we still expect commissioning during Q4 of 2023.

For the solar projects in the U.S., we are currently constructing Old 300 and our first combined onshore wind and solar PV project, Helena Energy Center. We are working with our suppliers to ensure compliance with the UkuForced Labor Prevention Act requirements and confirm deliveries to target commissioning in first half of 2023 and 2023, respectively. For our awarded portfolio, we are progressing our U.S. development projects. In June, our Ocean Wind 1 offshore wind farm reached a major milestone as BOM released the draft environmental impact statement for the project 1 week ahead of schedule. The statement confirms there is not an alternative with materially less environmental impact than the project we have designed. Next step for the project is to obtain the final environmental impact statement, which is expected in 2023.

And by the end of this process, a record of decision is issued. Commissioning of the wind farm is still expected before the end of 2025. For our Ocean Wind 1 project, we have contracted GE Haliade-X turbine. We are aware of the ongoing dispute between GE and Siemens Gamesa, and we understood that there are workable solutions for well-advanced projects such as Ocean wind 1 to continue without impact. We are confident that both companies are committed to helping the United States achieve its offshore wind energy ambitions and unlock the climate and economic benefits the industry holds for the country and the world.

At our Sunrise Wind and Revolution Wind projects, we continue to develop the 2 projects together with our JV partner Eversource. We expect the projects to be fully permitted in 2023 and to be commissioned by 2025. The strong development and execution efforts means that we continue to be well on track to reach our strategic ambition of around 50 gigawatts renewable capacity installed by 2030.

Let's move on to Slide 7 and an update on our offshore wind outlook. With the CFD Round 4 award, U.K. allocated the largest ever offshore wind capacity in a single auction. We continue to see a significant number of auctions and tenders globally to take place in our core markets during 2022 and 2023. And we are awaiting the outcome of the New Jersey offshore wind transmission auction as well as the Holland Coast West tender during second half of 2022. And in addition to the planned auctions and tenders in the near future, we continue to see increased political support for the build-out of renewables.

In March, the European Commission presented an initial communication on how to reduce imports of Russian gas and how to address the high energy prices in Europe. In May, the commission presented a more concrete plan, which encompassed several supportive measures, including proposal to increase EU's renewable energy target for 2030 to 45%. This will oblige member state to designate areas to the development of renewable energy in line with the 2030 renewable energy target, give all the renewable energy project status of overriding principle as well as target of 75% of hydrogen used in industry to be green by 2030.

The world and Europe need to roll out renewable energy at a much faster pace than now to secure energy independence and to fight climate change and working closer together among the North Sea countries is a great way to better materialize the immense offshore potential of this region. Back in May, I personally had the privilege to attend the North Sea Summit in Aspen, where heads of governments from Denmark, Germany, Belgium and the Netherlands took an enormous step towards reaching the EU's climate neutrality goal by cosigning a joint declaration that will make the North Sea a green powerhouse for Europe. Together, the 4 countries want to harvest at least 150 gigawatts of offshore wind in 2050, enabling the declaration to provide 230 million European households with green electricity.

Finally, we are encouraged that the U.S. Senate passed the inflation Reduction Act or IRA, and that the U.S. House is scheduled to vote for tomorrow, Friday. The IRA will be a historic investment in clean energy in the U.S. It will allocate hundreds of billions of dollars to help facilitate a clean energy transition. And not only does it extend to improve existing tax credits for solar PV onshore wind and offshore wind, but it introduces new ones for critical clean energy technology such as energy storage and green hydrogen. Moreover, it aligns tax credits with incentives for creating well-paying jobs and expanding the domestic supply chain of clean energy technology.

Orsted is positioned well to benefit from the legislation and to build on its existing commitment to labor and local supply chain. We are assessing the impact of the recently passed IRA, and early indicators project a meaningful double-digit basis point IRR uplift on the cases. The next step in the process is the subsequent guidance provided by the Department of Treasury and Department of Labor, and we will be very close to that process. As we mentioned at previous earnings calls, supportive clean energy legislation was a key lever to counter the inflationary pressure we have seen and the IRA will be essential to ensure the continuous momentum of the offshore wind industry in the U.S.

And with that, let me hand over to our CFO, Daniel.

Thank you, Mads. And good afternoon, everyone. Let me start with Slide 8 and the EBITDA for the second quarter of 2022. For the group, we realized a total EBITDA of DKK 3.6 billion, an increase of 27% on last year's EBITDA, excluding new partnerships. The earnings in our offshore business amounted to DKK 1.9 billion, which was slightly below last year when excluding the new partnership effects from 2021.

During Q2 2022, we had wind speeds above last year, which had a positive impact of around DKK 800 million, although wind speeds were slightly below normal wind for the quarter. The increased generation from ramp-up at Hornsea 2 was partly offset by lower generation capacity at Borssele 1 and 2, following the 50% farm down in May 2021. For the quarter, offshore power generation is up with 32%. Due to the challenging market conditions with high prices and significant volatility during the second quarter, we realized negative effects from higher balancing costs and price in effective hedges.

In addition, we saw increased costs following expanding our operating portfolio, owing to higher OpEx and to new costs. We had a negative impact of DKK 400 million from overhedging primarily related to Hornsea 2 as commissioning work was progressing slower than expected throughout the quarter, but has picked up significantly in July combined with wind speeds below norm, resulting in lower than the expected and hedged production.

On the topic of Hornsea 2, I would like to highlight that the negative DKK 2 billion impact from overhedging will be balanced out over the lifetime by the benefit from the inflation indexation of the CFD through the CFD period. Within our existing partnerships, we reported earnings of DKK 600 million, which mainly came from the construction work for our partners at the Greater Changhua 1 project during Q2 2022. Finally, within offshore, our project development costs increased by DKK 0.2 billion, driven by the continued expansion of our footprint.

Earnings in our onshore business increased sixfold and amounted to DKK 1.1 billion, driven by the significant increase in generation from newly commissioned assets as well as a benefit from higher power prices in U.S. and Europe. In the U.S., we have benefited from the higher power prices during the ramp-up phase on our assets under construction, where PPAs did not start until commissioning.

Furthermore, some of our more recent PPAs have upside share structures that allow for capture of additional revenue in periods of high pricing. In Bioenergy and others, earnings increased by 29% driven by significantly higher earnings from our CHP plants due to high power prices. The increase was partly offset by a negative effect from price and effective hedges during the quarter. Last year, we replaced the form of business performance principle with IFRS 9 as it has become easier to apply IFRS hedging accounting for our energy hedges. However, as we hedge on a 5-year horizon and within markets with low liquidity, we use proxy hedges such as location, commodity and time spreads in addition to hedges that currently matches our exposures. This is something that we have done for many years and is very normal.

Due to the very high energy prices and volatility in 2022, we have seen a larger part of our trades being deemed ineffective under IFRS 9, which happens when the value of the proxy hedge is greater than the change in the underlying exposure. Consequently, we have recognized a negative market value from these ineffective hedges in EBITDA within our offshore and Bioenergy segments during Q2 2022. The impact we have booked in our accounts is purely a timing effect as the negative EBITDA impact in this quarter would otherwise have been recognized in later periods. Our overall value from proxy hedging is positive, which is what we normally see and with a fairly low volatility given our conservative VAR limits. Within our Gas Markets & Infrastructure business, we had lower earnings from our storage activities.

Let's continue to Slide 9, covering our net profit, ROCE and equity. Net profit for the period totaled DKK 0.3 billion, which was in line with last year when adjusting for the farm down gain relating to or to Borssele 1 and 2. Recall that Q2 and Q3 normally are weakest quarters of the year due to seasonality. Our return on capital employed came in at 15%, with the increase compared to last year being driven by a higher EBIT over the 12-month period. Our equity at the end of June 2022 was DKK 61.3 billion compared to DKK 96.9 billion 1 year ago.

The reduction was driven by unrealized losses on the hedge reserve for power hedges and to some extent, gas hedges due to the significantly increasing prices. At the end of June 2022, the post-tax hedging and currency translation reserve amounted to DKK 49.2 billion. This reserve will be matched by higher future revenue from the underlying assets when the contract fall into delivery. Approximately 60% of the reserve will materialize before December 31, 2023, thus gradually increasing our equity again.

Let's turn to Slide 10 and our cash flow, net debt and credit metric. Our net debt amounted to DKK 41.4 billion, an increase of DKK 11.4 billion during the quarter. Our cash flow from operating activities reflects the EBITDA being offset by a net cash outflow from work in progress and the temporary collateral posting of DKK 4.8 billion due to the increasing power and gas prices. At the end of June, we had a total of DKK 12.9 billion posted in collateral payments, which are affecting our net debt but will unwind over time. Our gross investments totaled DKK 6.4 billion, driven by our continued investments into offshore and onshore wind and solar PV funds.

In addition, we distributed dividends to our shareholders in April and saw a negative effect from exchange rate adjustments due to the increasing British pound. Our key credit metric, FFO to adjusted net debt stood at 18% for the 12-month period ending in June 2022, significantly below the level from last year, driven by the significant temporary collateral posting that I just described. We have taken several actions to improve our financial resources, including a EUR 1 billion parent company guarantee issuance in Q2 2022 to reduce initial margin and to some extent, variation margin payments. Adjusted for these collateral postings over the last 12-month period, the FFO to adjusted net debt credit metric would have been 46%. We remain fully committed to our target of an FFO to adjusted net debt level of 25% and expect to be around that level at the end of the year if no further collateral needs to be posted.

Turning to Slide 11 and our financial ratios. In Q2 2022, our taxonomy eligible share of revenue was 68%. Our share of OpEx was 80%. Our EBITDA was 91%, and the share of gross investments was at 98%. The noneligible part of our revenue primarily relates to our long-term gas legacy activities and noneligible power sales. Green share of energy came in at 92% by the end of Q2 compared to 89% same period last year. The development was primarily due to more wind and solar farms in operation as well as higher wind speeds, partly offset by lower biomass-based heat and power generation. Turning to safety. We have had an encouraging start to the year with an improvement in the total recordable injury rate to 2.8% in H1 2022 from 3.1% in H1 2021.

Let's turn to Slide 12, where I will describe the key expected full year earnings drivers within our portfolio. As Matt mentioned in his introduction, our strong financial performance has led us to increase our full year guidance by DKK 1 billion to the range of DKK 20 million to DKK 222 billion, excluding new partnerships. As you will have seen over the first 2 quarters of the year, we have seen significant earnings impacts from the high prices and volatility in the market across our portfolio with contrasting effects. In our offshore business, we have unfortunately incurred an approximate DKK 2.5 billion negative impact during H1 2022, relating mainly relating to the overhedging of Hornsea 2 as well as the negative price-driven impacts in Q2. These negative impacts within offshore will expectedly be more than offset by positive impacts from our onshore business, our combined heat and power plants and our gas business throughout 2022.

As I mentioned, our onshore earnings in the first half of the year have benefited from the high power prices in Ireland, U.K. and the U.S. Within Bioenergy and other, we expect higher earnings from our combined heat and power plants due to the higher power prices in Denmark. As we mainly hedge the power we co-generate with heat, we expect to continue to benefit from the higher power prices. In addition, we now expect higher full year earnings from our gas markets and infrastructure business. We've been able to optimize our Northwestern European gas activities and lock-in gains from the offtake flexibility in some of our sourcing contracts and gas storages in a very volatile market, leading to higher-than-expected earnings in 2022. We do not currently expect further impact from the Gazprom Export contract in the remainder of the year in addition to the net loss we realized in the first half.

Adding up these price and volatility impacts across the portfolio results in a net positive impact of around DKK 0.5 billion. The net positive effect reflects that we through our merchant exposure, benefit from the higher energy prices, which have balanced the adverse impacts from the overhedging. Throughout the first half of the year, we have seen excellent operational performance across our assets and wind speeds have been slightly above the norm. Had we not seen the overhedging impact caused by the delay of Hornsea 2 combined with very high power prices, we would have seen our EBITDA from our operational offshore and onshore assets increased with 28% compared to the first half of 2021.

In addition to these effects, we expect increased earnings from existing partnerships owing to the reversal of the cable protection system provision in Q1 2022 as well as higher earnings on construction work for partners. Within our offshore sites earnings, we do expect a negative impact from delayed ramp-up of Hornsea 2 and Greater Changhua 1 and 2. Lastly, we expect the acquisition of Ostwind and Ford County Wind to contribute with higher earnings in the last half of the year. Summing up all these effects leave us with DKK 1 billion outperformance compared to our initial full year EBITDA guidance. Considering the unprecedented market volatility, the continued and prolonged core challenges for our construction projects and the unexpected developments with our gas contract, this is a guidance upgrade, which reflects the continued strong operational performance and shows the robustness in our business model.

Finally, let's turn to Slide 13 and our outlook for 2022. As explained, we increased our full year 2022 EBITDA guidance to the range of DKK 20 million to DKK 222 billion based on the higher expected earnings in Bioenergy and other as well as onshore. We have changed the directional guidance for the Bioenergy and other business to significantly higher from previously lower. The directional guidance for the offshore and onshore businesses remains unchanged. We have increased our gross investment guidance by DKK 5 billion to the range of DKK 43 million to DKK 47 billion, which reflects the purchase price relating to the Ostwind transaction. We remain comfortable with our long-term financial targets, including EBITDA growth, return on capital employed and contracted share of profits.

And thank you very much, Daniel. And before we go to your questions, allow me maybe to a little bit unusual to add a couple of concluding remarks. Whilst we are not happy with the financial results of our core offshore business in the first 2 quarters of the year, we fundamentally see our offshore business as on a very positive track. The operational performance of our assets remained strong, and our energy production in offshore is up 30-plus percent versus last year's Q2. Related to these winds and first half have returned to normal, we finished installations and now have a fully producing Hornsea 2 world's biggest wind farm, ambitions for renewables build-out in our core offshore markets are higher than ever and growing.

Our Orsted competitiveness continues to be strong by ensuring awarded capacity of 4.5 gigawatts in 2021 and so far, almost 3 gigawatts this year with potential for more. And our recent Hornsea 3 -win and regulatory developments like the IRA in the U.S. make us confident that we despite some inflationary and supply chain headwinds can continue to create value in offshore. So all in all, on top of record results and strong traction in our onshore and bioenergy businesses, we remain optimistic and bullish about our offshore momentum. And with that, let us take your questions. Operator, please.

[Operator Instructions]. Our first question comes from the line of Casper Blom at Danske Bank.

Congrats with the guidance upgrade. My first question relates to the balancing costs or expenditures that you've been facing within the offshore business. And apologize if this is too simple minded, but as I understand it, you have to tell the regulator one day in advance how much production you expect to do? And then if there is a variation, you have to buy that electricity in the market. Given that, that is how the setup is, why don't you just tell the regulator that you expect to produce a little bit less than you actually do and then avoid these additional balancing costs?

Yes. Thank you for the question, Casper. So there is a skewness in this. So it's correct that we one day ahead nominate price and volumes, and then we in today have to adjust, depending on, for example, how the wind blows. And the dynamic is that if there is a lot of wind in the system, and we have produced more wind, then there will be, in general, a lot of production in the system, and therefore, prices will be low.

If we fall short of the expected production, that will be a situation where there will be probably low wind and where you will have to call on backup production which can be very expensive. Or we would have to go out in the market and buy it elsewhere at higher prices. So there is a skewness towards the negative in the way that that setup is running. And it's a very big and liquid market so it's something that we are used to dealing with. But of course, when you're seeing very high prices, the absolute balancing cost becomes higher. But in many cases, the relative balancing cost is not going up.

Okay. But just to make sure that I understand, when you make that nomination that day in advance, wouldn't you have then an incentive to be a little bit conservative given the skewness that you talk about?

I mean why say that you can produce 100 , if you could just say 95% and then avoid the penalty?

Because over time, the best economics will be us bidding in with what we expect.

I actually see Deepa's dialed in on 2 lines. So I'm going to try the second line she's dial on the previous one wasn't working. So Deepa, I'm trying on your second line now. Are you able to speak on this line?

Sorry, can you hear me now?

Yes, we can Deepa, we hear you.

I had a question on the proxy hedges and also just looking at how the market has reacted to your results today. So one, I just wanted to understand what you've recognized, is this an economic cash loss that we recognized early? Or is this a mark-to-market loss that gets reversed when you deliver? And is it, therefore, I mean, the market doesn't seem to be believing your upgrade given the reaction or maybe market is assuming that there's further cash losses? So could you just clarify that what exactly is this proxy hedge effect? And to what extent is it cash versus noncash?

Yes. I'll try to answer that Deepa. And of course, I can't comment on how the market is reading this. But the loss that we have taken into our P&L is a mark-to-market value. So it's not a cash or realized cash value in that sense. And it's a timing effect that will come back later on. This is a bit of a special case where you have an asymmetry in the way that IFRS 9 treats these proxy hedges. So we are -- in some cases, we will have to recognize the negative M to M loss even though we also have an M to M gain on other proxy hedges. So net, we are actually positive on our proxy hedges, which we usually are over the year. But due to the volatility that we have seen here, we say the negative part has a size that has begun significant enough for us to mention it here.

And maybe I don't be doing it. We're doing generous jobs, but it is very important that this project due to this asymmetry in the IFRS way of doing the hedge accounting. There is no net negative impact on this. It's actually a net positive of a few hundred million. So in that sense, we are not concerned about the real economic impact of those proxy hedging impacts driven by IFRS 9.

Next question comes from the line of Alberto Gandolfi of Goldman Sachs.

I hope you allow me an unprompted comment before the question. I mean just a quite surprised to see the IFRS 9 accounting is coming at the EBITDA level. Most of your competitors do it in the financial expenses or present an adjusted EBITDA for it because I think it's adding quite a lot of volatility. So it probably doesn't serve you enough justice. That's where I was going with it. But anyway, unsolicited feedback, and I apologize for that. But my question is the following.

Now I see that with the current very high level of commodities and power prices, your liquidity needs for margin calls is growing, you seem to be winning at a much higher success rate versus your business plan? Mad you said 4.5 gigawatts last year, you already won 3 gigawatt now, basically the only very big action you have so far, more auctions to come. You are trying to expand to get pipelines. So I guess my question is, when do you think you may actually need incremental funding for it? And I'm thinking here, I don't see anything wrong with issuing some equity if you keep punching above your weight and you're winning more projects. But can we understand a little bit how you're thinking about squaring all the circle of liquidity needs, better success rates and funding needs.

I can kick it off and then Dan can supplement and I'll bear truth. Thank you. And also thanks for the comment initially. I think the -- I mean, we cannot comment on the specifics of when an equity raise from the ABB comes in. But obviously, we are following it closely. But right now, it's -- we are actually progressing pretty much to plan. Yes, Ostwind acquisition came on top, but that's not enough to trigger. But obviously, I mean, as we will go along and if we continue the high win rates and see these opportunities, then that can trigger it. But it is simply impossible for us at this time to say more specifically when are we actually sort of going to pull that trigger. So it's not something where we unfortunately can share any more details at this stage.

Our next question is from the line of Kristian Johansen at SEB.

Yes. So I had a question on the implications of the IRA in the U.S. So firstly, just to clarify, Mads. I think you said that it implicated a meaningful double-digit uplift in IRR? So are you referring to your existing offshore projects? And I assume when you said double digit, there will be basis points. But also could you comment on the implications on your onshore business and whether this is signed into law, would speed up your build-out and also your U.S. P to X project, the clarity in the IRA, what does that mean for the FID on that project?

Yes, absolutely. Thank you, Kristian. Yes, you're correct. Sorry, if I forgot to say that it's basis points and just said double digit. Yes, that is for our existing awarded portfolio. We are saying that a meaningful double-digit uplift is what we're estimating. There will be some variance and it's still not sort of very, very sharp on how big shares we will qualify for given the local content and other criteria. But we believe we are extremely well positioned and better positioned than anybody else due to our already existing deep engagement to build a U.S. supply chain.

So this will give a noticeable lift to those cases. But of course, given the long-term nature of the RIA, this is also something we imagine can and will benefit future projects beyond that. It is also a benefit for onshore. And I don't know if you will say that it will speed us up further, but it surely gives us comfort that continuing to invest in the U.S. as our key growth market in onshore despite our European expansion is something that is very attractive.

And finally, I'm sure you read the same analysis, but at least some are claiming that with the up to $3 tax credit for green hydrogen, if qualifying for that full amount, the U.S. could actually be the cheapest place to produce green hydrogen, which we see as extremely encouraging, both for some of our existing plants like, for example, the letter of intent we have with Maersk on green methanol for their ships, but also for potential further power-to-x expansion. We still need to get more clarity on the details of that hydrogen dimension of the IRA, but we see it as something that makes the U.S. comparatively very, very attractive potential market for that expansion.

And maybe just to add a little bit on the onshore side. At face value, the IRA looks really good, and the direct impacts of that could actually materialize in higher IRR uplift compared to offshore. However, since you will have to also go out and secure corporate TPAs, there is, of course, an offsetting element in there where we could get in a situation where the customers would want some of that back. But it looks really good for the offshore part -- onshore part also go into 100% PTC.

If I just may follow up on your offshore portfolio. You have previously said that inflation has diluted the IRR a bit on the portfolio. Would it be fair to say that this uplift from the IRA fully compensate that dilution?

We can't comment on that, Kristian. And I think we generally not trying to make it a habit to comment on the sort of the specific projects or the near-term portfolios. But this is clearly something that helps.

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

Yes. Just a question on Hornsea 3, please? You said that you've secured of the sort of capacity for that. And I was just wondering whether you've secured equipment at fixed prices or whether your suppliers, be it on the turbines or anything else that have included sort of logistics and other cost pass-through clauses? So some insights on that would be useful.

Yes. We can say that as we said, Peter, we have secured the capacity and for some of them, it's we have agreed the prices. And for some of them, we have framework agreements that cover this, so we know what essentially know what at least very close to what it will cost. And then for some of them, there will still need to be negotiations outstanding. But within limits, so it's not something where we will just -- it can fundamentally change. So it's a mix of already fixed prices with something where we still need to finalize the negotiations for the fixed prices.

And maybe just to sort of clarify. So you're not expecting to accept any kind of cost pass-throughs on logistics or anything like that?

No, I think that's it will be too specific. But normally, I mean, for example, in some projects, we would cover the commodity risk of steel within some of our contracts. And that would -- that is probably something that we would also be or likely would be something that we would look at here. But that is also where we are encouraged to see, and I'm sure you know that as well as we do, but we are starting to see that after some of the extreme peaks we are -- for example, the heavy steel plates are starting -- have started in recent weeks to come down significantly lower than the peak. So we believe that this is a manageable exposure even though if there is a commodity risk that would still sit with us. And as we've said before, sometimes we also choose to lock those in at opportunities like we did with a significant part of the U.S. nearer-term EastCoast projects with the pre-buying of steel we did there.

Our next question comes from the line of Rob Pulleyn at Morgan Stanley.

If I may continue on the funding question, and apologies, it's a bit multifaceted. So first of all, we noticed this collateral posting you mentioned, and it would be interesting to know how much of that was an incremental move this year? And given where the credit metrics are, does this hasten the need for more debt given you've got less cash because of those collateral postings? And because of the credit metrics, does that mean there is a higher cost of debt associated with this? And all wrapped together with the previous question, does that accelerate the need for new equity capital to quite frankly, to accelerate the growth and lift the capacity targets? I'm just wondering how all of these different dynamics on the funding fit together as to what the picture looks like now versus what it may have looked like sort of 6, 12 months ago?

And we are in a situation where we have a good liquidity reserve. And for Q2, we did actually not see a net drag on the liquidity from the collateral posting because we also issued this PCG, where of the EUR 1 billion. However, on our credit metric, it is a drag due to the fact that we did see changes in the collateral but where it was on the variation margin where the PCG is only covering the initial margin and the variation part goes into the FFO of the metric. When it comes to funding need, this is not a driver for our future funding needs. But of course, if we continue to see that we deliver above expected on the auctions that we are in, that could, of course, be a trigger for that.

If I may just ask something I think many folks are wondering on the timing and notwithstanding the respect I have for Mads' answer earlier as to exactly when it is. Would you at least rule out an equity raise this year?

I don't think -- honestly, Rob, I mean we'd love to do it, but I don't think we will rule anything out. That is not to say that there are imminent plans at all, but it will be wrong of us to rule anything out at this stage.

And our next question comes from the line of Mark Freshney at Credit Suisse.

I was intrigued when you spoke about Hornsea 3. Clearly, you've won a CFD on part of it, but you mentioned the merchant component. So it would seem that you're still working on the business case there. Is it fair to say that 3.5 gigawatts is the maximum size? And can you talk about the process you'd go through in determining whether you take up that additional merchant capacity and whether you would need corporate PPAs ahead of FID? And how it might tie in to the rest of the project in terms of potentially synergies and lowering the CapEx per unit?

Thanks a lot, Mark. No, sorry, if I was not being clear on that part. The total capacity of the project is 2.9%, and that is what we have 2.852% to be specific. But that is what we've been awarded as CFD 4. What we do have is a merchant flexibility of up to 25%, meaning that if we choose to, when we get closer to the completion of the project, we can choose -- let's just play with a scenario where if prices are still sort of energy prices still very high. We have the flexibility to have up to 25%, so around 700 megawatts as part of the 2.9% to be merchant. That is an option we have at the time, given what the opportunities look like in terms of the power market in terms of PPA attractiveness and so on. But the starting point is that we will take in the full CFD for the full capacity. But we are mentioning this to you because, I mean, obviously, the energy markets are quite extreme.

And I would say all of us think that is probably relatively uncertain. So we actually think it's a great flexibility to have should we choose to do that. And we will -- as we progress through the project, as we take FID as we start construction and we follow the market, we would evaluate at start, obviously, looking at what kind of alternatives to a CFD contracted offtake would be more value creating and would be right to do. That's a process we will go through, but that will be something that starts closer to the COD in 2021.

So your business case is built around the CFD, I think, 38, 39 or 2012 prices. You have a free option to actually enhance the IRR by taking 700 megawatts merchant and your go to market looking at various options for that and so forth. And in terms of is there anything that you can give us on the IRRs or should we refer to our own private spreadsheets?

No. We can just say that this project, even though it was a price clearly competitive to join the winning bunch is something that is within our guided range. So we are comfortable with the project. And you're right, just to the first part of your conclusion is that our business case is built on the CFD, which we know we can get and if there's an opportunity through the merchant flexibility to improve that, that's an upside.

Our next question comes from the line of Vincent Ayral at JPMorgan.

Coming back on the comment that was made before, if the IFRS 9 here, we just are talking about noncash and not what we've seen with some other operators which have proxy aging costing them money. I'm thinking NG basically selling forward in France for Belgian Generation or Uniper in Germany for Northport. If it's really economic value zero think indeed, an adjusted number would clearly have helped the market today. I'll ask a question regarding Hornsea 2. So we have a delayed ramp up, but now you will be up and running. I understand that you may have some flexibility regarding the start of the CFD and you could potentially delay that. So it would be keen to understand if it is the case, how much potential upside could be there for the rest of the year? How long you could last? And is it included in the guidance, please?

Yes. Thank you. So we have already pushed 2 of the phases and we can choose next year to also push a phase. But remember, the -- so we are not getting any CFD income from Hornsea 2 this year. It is merchant. But as you know, we have fully hedged our offshore production, meaning that there are no upsides in this year or in the guidance from increasing prices.

And for next year, would you would not be fully hedged? It's fair to assume.

We are close to fully hedged for next year as well on the offshore part, but in onshore and Bioenergy.

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

Can you hear me okay?

Listen, thank you for the presentation and the explanation on the hedging bit, which I think we've all taken those off. I wanted to come back to a different question, the one that's sort of generally high power prices in Europe and in the U.K. and what policymakers can do to address it? And in that context, I want to ask you a question that I also posed to RWE this morning, which is -- I mean, if you take the U.K. as a focus, the question I suppose is what can the new pimento do about high energy costs, including power prices?

And assuming some kind of intervention is going to happen, what would industry support voluntarily in order to avoid something less palatable being forced on the industry involuntarily? And the particular idea I'm picking up into the industry discussions and so on, this is one about whether you could take existing constructed assets with merchant power price exposure and offer them a voluntary CFD maybe kept at the level of the new asset CFD, in which case, I suppose the idea is you would take the couple of gigawatts of assets you have in the U.K. on the Rob scheme and you would bid them in for a CFD, in the short run, you would get lower prices than on the merchant element of the ROC asset.

But in exchange, you get maybe another 10, 15 years of inflation index, fixed strike prices, which are kind of higher multiple, more transactable and carry more leverage and so on. And in that case, it seems to me like a solution where industry might which sign up voluntarily. So I just wondered the further question is, do you think that's a good kind of idea you think that could be part of the solution in the U.K. or other markets? Are you hearing anything from Dortmund that point concretely in that kind of direction? And if there were the FD options for your existing assets, is that something would consider bidding into?

To be very transparent, that particular idea is not something we've discussed a whole lot. We are obviously in very close dialogue around what are the risks and options to contribute to this. And given that we have such a large contracted share also in the U.K., then we actually see it in the way we are part of we are part of securing the stability of the prices, which is super difficult, not many are doing. I think and it's just an immediate reaction, rather than something which would not be thought through as a windfall tax, having something like this would certainly be an option, it would be something we would engage constructively in. But I think also that as long as any consideration is considering what is the real net upside that companies have, so that neither CFD volume nor the hedged volumes end up being taxed in a way. As long as that is the case, we would be open to discussing different solutions because, of course, it's a more challenging situation for the consumers.

If you permit me just to show a comment as my friend area made on earlier on an accounting subject. It seems to me in the U.K. in particular, there's a very short window in which some decisions are going to get made. And it feels to me there would be a huge benefit in having some kind of solutions to bring down bills and higher prices near term, which industry could be up to voluntarily. I think it would be a very strong message to the market. There were some kind of interventions that were agreed in the industry could say, "Yes, we back that, and we don't have to go along with that, but we do because it's good for us." And the existing asset CFD seems to be at least one of a few different candidates. So I hope we can keep an eye on that and keep discussing on future goals.

Absolutely. We will certainly pay attention to that and discuss that immediately with our U.K. colleagues.

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

Coming back, sorry, again to the balance sheet and in particular, to the question on collateral. Can you maybe update as to where the NKK 12.9 billion has moved since the half year. And whilst doing so, maybe just give us an indication of what is driving that? Should we just be looking at headline level or power prices? Or is it a bit more complicated around obviously hedges that you may have in other commodities?

Yes. So it's very much driven by the headline power and gas prices. And throughout the year or throughout the half year, the net collateral is roughly flat due to the fact that we've drawn it down the collateral with this EUR 1 billion PCT. So had we not made that one, we would have had an additional drag of DKK 7.5 billion.

And so the NKK12.9 billion is still a similar number that hasn't moved much since 30th of June.

Since 30th of June, so there's, of course, in July, been increasing in prices, which, of course, also is impacting the collateral, but I don't have that recent number.

And our next question is a follow-up from Casper Blom of Danske Bank.

A question regarding the Slide 12, which I found rather interesting. I just wanted to understand the sort of dynamic of looking a little bit ahead. Let's assume that in '23, we also see the same kind of pricing and volatility across your portfolio as you've seen this year. And then removing the over hedging at Hornsea 2, would it then be fair to assume that the onshore and the Danish power plants would give you an upside of, let's say NKK 2.5 billion compared to a, let's call it, a normalized situation. Would that be a fair assumption to have for next year?

Yes. I think I can kick it off. And again, invite Daniel to comment, Casper. But you're absolutely right that clearly, what has offset not all of the upside that we are seeing, hence, the NKK 1 billion upgrade in our full year guidance, not -- by far, the majority of that is the over hedging due to the delayed ramp of Hornsea 2. There are some other impacts and also even though there are higher balancing cost with higher power, then this is a totally different level. I mean, it's a much, much smaller number. And that is what will probably stay. But you're right, there would be a significant, significant share of that CHP and onshore upside, which would be a pure upside because we would only see a smaller part of the drag on our offshore unless we have other things like, for example, an unusually low wind year something else again, then it would be an offset, like you described.

Our next question comes from the line of Deepa Venkateswaran.

Second question. I just want to focus on the collateral posting and the FFO to net debt ratio. So some companies include the collateral margin also as receivables and net it off. And it seems like credit rating agencies are taking that into account. So I was just wondering whether the credit rating agencies are actually assuming that you'll never receive this collateral back? Or have you had any such discussion because it seems, again, observed that it would be something that unwinds over time and shouldn't really contribute to your fundamental debt position. So could you just clarify what the agency thoughts are on this, particularly if you don't have any counterparty risk on that collateral?

Yes. So I agree, it's we are in reason -- or we are in a continuous dialogue with the rating agencies to keep them, of course, updated on this. And since this is a timing effect, we feel fairly comfortable that it's not going to be something that will penalize us. And again, we also expect that that metric will come back to our targeted level, and we also have the Hornsea 2 divestment closing later in the year, which will also lead to a big capital inflow. But you're right, there are some funny effects from these margins where they hit different places in the P&L and balance sheet. And we are, of course, in dialogue with the rating agencies to make sure that they understand the effects of this.

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

Just along the lines of the last question in terms of the FFO net debt. I just wondered, your assumption is obviously there's no further collateral for the rest of the year. What if there is? What if things deteriorate from here? What levers do you have to pull? Can you issue more company guarantees? Clearly, the Hornsea capital inflow will help, but what are the options on the table, please?

Yes. So there's the PCG route. You can make bilateral agreements like RCS, you have more shorter-term debt. So I think we have -- and we have a fairly robust liquidity reserve already now. So I think we have a lot of possibilities to work with if we should see a bigger draw on the collateral.

And sorry, just one follow-up, given we're on the second round of questions. Just in terms of your Taiwan assets, obviously, the political risks, it seems to be going up between China and Taiwan. As we come up to the next round of auctions as well as making FIDs for the contracts you've already won, what I presume the risk premium attached to this is now higher. So how can you just talk us through how you look at future investments in the Taiwan project, please?

I can kick it off. I actually happened to personally be in Taiwan last week. So I think -- I mean, we are obviously intensifying our dialogues with geopolitical advisers following very closely the political landscape. And as later today, we've heard that the Vice President of the Taiwanese government is traveling for 10 days to Beijing. And we actually -- what we consistently hear is that the clear expectation is that even though this was a spike, we actually are of the opinion that structurally, this is not increasing the risk. We obviously have made a very fast track evaluation, both of the risk for our people, for our existing assets and so on due to the military drills from Beijing. But we are actually right now, we are actually not seeing that the risk is structurally and on an ongoing basis, substantially increasing. So it is not something that leads us to question whether we should support Taiwan's continued build-out of renewable energy nor fundamentally or at least to any sort of significant extent increase in the risk premium.

Our next question comes from the line of David Paz at Wolfe Research.

I just want to make sure you could hear me. So I had a question going back to the IRA. Can you maybe elaborate on that? I think you said double-digit basis point range. So it's clearly a very wide range. I mean does that apply to all the projects with contracts, so like the Northeast cluster, Ocean wins and Skipjack 1 and 2. And is the wide range of potential uplift due to just how far along some of those projects are, and therefore, some may just not get to that domestic content threshold?

Yes. I think -- thank you, David. That is why we say a meaningful double-digit uplift. You're right, there is a spread, but it's -- right now, with our current calculations, it's not sort of 10 or 12 basis points. But there is variation depending on how progressed it is, how our preliminary evaluation is? How much we would qualify for the existing projects? But obviously, with whatever we can do, we will do whatever we can to get that as high as possible. But I cannot share also because we will still need to qualify those numbers. We were in a hurry to try and calculate to at least give you an indication of the impact and this is as close as we can get it. But it is varying from project to project based on how much we think we can qualify for. And then also based on whether there are any conditions in the to pass back some all of that to the ratepayers, which is something which we would obviously negotiate with the states.

And just if I could follow-up related to that, can you maybe discuss how the transferability provision, just impacts how the existing contracts but any potential further transactions including farm downs and so forth in U.S.?

Yes. And the wording on the transferability is not at a level where it's completely clear yet exactly how we can use that. So we will be seeking more guidance from the treasury in order to understand that better. So it's probably not as good as the direct pay, but we think at least it can derisk the way that you utilize the ITCs, and there might be some further upside in there. And in the numbers we are mentioning here, so the first calculations we've done, we've not added any value to the transferability yet, even though we think that there is a value there also.

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

Could you give us any specific guidance on the year-end net debt, talking about what you think would be maybe temporary margin cost that you would expect to recover versus what is the actual underlying net debt?

No, I can't give you a number on the net debt. But as we also said earlier, we expect FFO to net debt to be around the 25% at year-end if we don't see any deterioration on the collateral side driven by higher power and gas prices.

The next question comes from the line of Rob Pulleyn, Morgan Stanley.

Given the time I have 2 quick ones. The first one, your partner, Eversource has disclosed its considering disposing of a stake in the JV. A frequent question we get is whether Orsted would be interested in acquiring that stake? And it'd be great to hear the company's public view on that topic. And secondly, just as an order of procedure, may ask what is included in the implied second half guidance for balancing costs and charges related to proxy hedges? If anything, just to make sure expectations are in the right place versus what you have guided.

Yes. Thanks a lot, Rob. I can say, I mean, in terms of Eversource share, they are part of the projects and the seabed we have. We are not ruling anything out, but I will also say that we are not -- I mean, I can't share any sort of any specifics about it. But we are in evaluation as to whether some of that would actually be meaningful for us to take over. But it is not something we can rule out that we would be interested in.

And could you maybe repeat the other question?

Yes, sure. I think Mads answered the first one. The second one is given the disconnect between expectations and quarterly reality, shall we say, for many quarters. Could we just be crystal clear within 2022 guidance that you've given, in the second half of the year, what is included for balancing costs and any future charges on proxy hedges, if anything? Presumably this volatile market continues in commodities, and therefore, there will be balancing costs and there could also be more charges to your proxy hedges. I'm just wondering what is included in that guidance that we're all on the same page?

Yes. So we have assumed a close to normal level for the remainder of the year. not really knowing exactly how this will impact our earnings going forward because it depends on the development in volatility and correlations. So it's something that we expect to be able to capture within our guided range.

And just to supplement. Again, repeating without being able to give you very exact numbers, even if the balancing costs stay at the current high levels and potentially even slightly escalated levels compared to where we are now, this is not something that puts our guidance at risk. Just being specific about that because balancing costs, it may sound quite dramatic, but it is still a relatively small part of that total deviation for the quarter. So even if it sustains, it's not something that makes us concerned about the validity of the updated guidance.

And we have one further question on the queue. That's from the line of Mark Freshney at Credit Suisse.

I just wanted to follow up with the local partners in North America because we've clearly seen the Eversource statements. And PSEG also made comments such as we are keeping returns under review, and I see that they paid to EUR 30 million this quarter. But my question is, surely, when you go to new areas such as the U.S. or Taiwan, your previous management were clear that you'll need local partners, particularly in some territories. And the #1 partner who you could wish for Dream for PSEG may want to sell, Eversource is taking their decision. How concerning is it for you that you can't get local content, if you like, on the capital side? And what kind of sale would you have on the partners in those projects? I mean do you have preemption and you can choose your own partner or are you at the mercy of financial funds who may not have the political relationships that you really need in those states?

We are not concerned, Mark, for 2 main reasons. There are more but 2 main reasons. One is that we are clearly not of the perception that PCG wants to sell. I mean PCG is engaging very deeply. We are working with them also on the big transmission bid we have in New Jersey so we do not have that fear. And at the same time, I will say that it's very important for us when we say that partners are necessary, in many cases, we always say what is it the local partner can bring us?

Is it political leverage? Is it local content? Is it market access? Is it access to projects? And therefore, now that, for example, also with Eversource's decision, Eversource has been a fantastic partner to get us into the market. But we also believe that we are now in a position with by far the largest pipeline and already being a huge political voice in both in Washington and the states where we're active. We already have that leverage now ourselves. So I mean, we'd have loved to continue to work with Eversource, but this is not something that is at all detrimental to our path forward.

And likewise, we are in Poland where we are the market entry is with our partner, PGE, but we already now know that we are not going to work with PGE for the second round. And this is fully natural because PGE helped us gain market access, gain access to the right stakeholders and so on. So it's not an unusual development that partners are not forever and ever. And that's why that combination with both PCG, we see them not underway anywhere and also the fact that partners sometimes are there for a period of time, and then we divorce happily. And that's fine.

And as there are no further questions from the participants at this time, I'll hand back to our speakers for the closing comments.

Yes. And I would just like to thank all of you. Great questions as always. And should you have any further questions. Us, [indiscernible] and the rest of the IR team are happy to answer them. So thank you very much. Stay safe, and have a great day.