Offshore wind developers in the US continue to be hit hard by inflation and supply chain disruption, putting the nation's target of 30 GW by 2030 at risk. |
The stock price of the world's largest offshore wind developer hit a six-year low after it laid bare 28.4 billion Danish kroner of impairments related to its US East Coast portfolio and canceled the development of two gigawatt-scale wind farms off New Jersey.
The sizable write-down announced by Denmark's Ørsted A/S on its US offshore wind assets Nov. 1, equivalent to approximately $4 billion, came in higher than analysts expected as the industry struggles to regain footing lost due to inflation, rising interest rates and supply chain disruptions.
The charges prompted S&P Global Ratings on Nov. 2 to place Ørsted on CreditWatch with negative implications, following similar action in early September by Moody's, which changed its outlook for the company to negative from stable.
CEO Mads Nipper said the developer's US portfolio had long been "by far the biggest uncertainty" in its business but that some of that has now been resolved with the cancellation of the 1,100-MW Ocean Wind 1 and 1,148-MW Ocean Wind 2 projects.
Ocean Wind 1, the most advanced project in Ørsted's US offshore portfolio, accounted for 70% of the total impairments.
"That project is now stopping. At the same time, we have taken a final investment decision on Revolution Wind, we have paused all spend on Skipjack, and we are also taking a cautionary approach toward a rebid on [Sunrise Wind]," Nipper told analysts on Ørsted's third-quarter earnings call.
Ørsted also expects to book an approximately 8 billion kroner to 11 billion kroner impairment in the fourth quarter on cancellation fees related to Ocean Wind 1 that are "subject to dialogue with individual suppliers."
"We see these implications as particularly painful but we are in a situation where we see that what can, and could, very unpredictably impact our situation is significantly de-risked going forward, and that should also limit the variability of the future impairments that could potentially deteriorate massively," Nipper said.
'Better visibility'
Analysts agreed with the CEO's assessment that the cancellation of the Ocean Wind projects at least provides clarity to investors.
RBC Capital Markets analysts said the move will hit the company's share price in the short term but "may actually provide better visibility on Ørsted going forward."
"We do not believe that the market ever expected these projects to be built, with none of these projects reflected within the current share price," the analysts said in a Nov. 1 note.
Ørsted's stock is down 59.3% this year, having twice suffered sharp drops of about 25% after disclosing impairments on its US wind assets. The stock closed Nov. 1 at 252.50 kroner per share — far below the 1,351.50-kroner-per-share peak achieved in January 2021.
"We accept that incremental negatives may trigger further share price weakness in the immediate market response," Morgan Stanley analysts said in a Nov. 1 note. "However, we also believe the company's increased clarity on its US portfolio will ultimately be taken well, even though the impairment is larger than guided/expected and project cancellations will trigger EPS downgrades."
Ørsted said the impairments put pressure on its capital structure and that the company will undergo cost-saving initiatives and working capital improvements to protect its credit rating.
But Nipper said the company has "no active plans" to raise equity — language that analysts said opens the door for a potential capital increase at a later stage — or cut its dividend.
Barclays noted the third-quarter impairments came in much higher than "consensus expectations" of 17 billion kroner and that "the risks associated with the [US offshore wind] development pipeline should not be taken for granted."
Vessel shortages
Problems in the supply chain were by far the biggest driver behind the cancellation of Ocean Wind 1, according to Nipper.
A delay in securing construction vessels ultimately sealed the wind farm's fate and explain why Ørsted added more than 12 billion kroner to its impairment bill in just two months, the CEO said.
With no more buffer in its schedule and a lack of backup vessels, the project was facing a "multiyear delay" and the prospect of Ørsted having to recontract key items at "expectedly higher prices."
For the 704-MW Revolution Wind project, which is to supply power to utilities in Rhode Island and Connecticut, Ørsted feels "much more comfortable about the total vessel availability," Nipper said, reassuring investors the issues will also not impact Sunrise Wind.
"We have secured the backup vessel for the full scope of the [Sunrise Wind] project, so we are not in a situation where any further delays ... can delay the entire project," the CEO said.
Sunrise Wind faces headwinds after the New York Public Service Commission rejected a request from Ørsted and development partner Eversource Energy to increase its contracted offtake price. The companies now intend to rebid the project into the New York State Energy Research and Development Authority's recently announced accelerated solicitation for offshore wind.
New York's third offshore wind auction recently awarded 4 GW of projects at an estimated average price of $145/MWh. For comparison, the adjusted price that Ørsted and Eversource had applied for was less than $140/MWh in total.
"So even should we bid in with a level we were applying for ... then we would still be meaningfully lower than the average of the winning price, which we believe gives us good reason to believe that we have a very competitive project compared to the winners," Nipper said.
Hornsea 3
Ørsted's efforts to stack up the business cases of its projects go beyond just the US, with the development of its 2,852-MW Hornsea 3 offshore wind farm in the UK also uncertain.
The company continues to face inflationary pressure and supply chain disruption on the project, whose future was called into question when Sweden's Vattenfall AB opted to shelve its Norfolk Boreas wind farm, which has a fixed-price contract at the same price as Hornsea 3.
Ørsted still plans to take a final investment decision on Hornsea 3 in 2023, but is working on multiple fronts to make the economics work. That includes looking at contracts, suppliers, revenues, merchant flexibility and layout optimization, Nipper said.
"We continue to work with these levers along with ... dialogue with the state about any tax benefits that can further help it," Nipper said.
As of Nov. 1, US$1 was equivalent to 7.08 Danish kroner.
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