Scatec ASA

OSE:SCATC

Earnings Call Transcript 2023-Q2

[Terje Pilskog, Chief Executive Officer]

Welcome, everybody, to the Presentation of our Second Quarter Results. It’s good to see you all. And it’s a privilege for me to present another strong quarter for Scatec. We have had strong progress on our construction activities with visible earnings impact. We have closed the sale of Upington. We have started selling energy in the merchant market for our largest plant in Ukraine. We have divested our project in Mozambique, and they reached financial close of Grootfontein in South Africa, a 273-megawatt project.

We also implemented our cost reduction program that we announced in the first quarter, and we raised NOK1 billion in funding for release, gaining a strong financial partner to support the further growth of the venture. And this is a major milestone for Release, really showing the value that has been created by the team so far.

On the organization side, I would like to welcome Mohamed Amer as new EVP for Green Hydrogen in Egypt. He has been instrumental in building the position that we have in Egypt and also building the position that we have within Green Hydrogen. Mikkel Torud has decided to move on to other exciting ventures outside Scatec, and I would like to take this opportunity also to thank Mikkel on behalf of Scatec for his long and significant contribution to the company.

We continue to have a strong focus on HSSE during this busy construction phase. We have delivered 8.4 million working hours over the last 12-months without any serious injuries. On ESG reporting, we have published our first Transparency Act statement, while we are preparing towards the requirements of the EU’s Corporate Sustainability Reporting Directive, which will be applicable as of 2024. Hans Hegge will, as usual, present the financials after me presenting the overall update, and we look forward to engage with you all on Q&A after we have finished the presentation.

So now let me turn to the highlights of the second quarter. Our group EBITDA reached NOK1.4 billion in the quarter, representing strong improvements across our segments, both relative to same quarter last year, and this is almost a doubling from the first quarter. Specifically, we had good construction progress and increased the gross margin related to the EPC contracts to 12%. This follows excellent performance by our EPC teams through the quarter. This is confirming the robust planning and attractive economics of our projects currently under construction. We have reached NOK4.6 billion in revenues in the quarter. This is up from NOK1.7 billion in the first quarter.

We also continue to deliver on our strategy as we communicated during our CMU last year. We have closed the sale of Upington, contributing NOK315 million to EBITDA, and we have streamlined our pipeline and focused our organization. We are progressing towards our growth objective of investing NOK10 billion of own equity by the end of 2027. Meeting our hurdle rates of 1.2 times cost of equity, in addition to realizing margins in D&C and O&M. And let me repeat what we said in the last couple of quarters. We will continue to be disciplined and we will not move forward with any investments that are not meeting our hurdle rates.

Now let’s assume in the ongoing construction at the Kenhardt site in South Africa. We have brought with us a small video to give you an impression of the size and the dimensions of that project. As we’ve talked about before, this is probably one of the largest hybrid projects globally as of today. We’re talking about 540 megawatts of PV panels. We are talking about 225 megawatts of batteries with the storage capacity of four hours, so meaning that we have almost 1 -- or we have more than 1.1 gigawatt hours of storage capacity on the site. All of this together enables us to deliver dispatchable energy from 5:00 a.m. in the morning until 9:30 in the evening.

And as you can see from the video, the site is immense. This is only showing a small part of the site. Across the site, we’re talking about 10 kilometers. The site area represents 1,200 football fields in total size. We have about 2,600 workers currently on site. We are at peak construction activity level. And the majority of these workers are women. Local employment has ripple effects for the local communities around and is contributing strongly to economic development.

In terms of the installation, we are installing close to 1 million panels. We have 456 containers of batteries. And here, you are seeing the battery area of the site. Each battery being a 40 foot container and weighing in the range of 30 tonnes. And connecting all of this, we have about 9,000 kilometers of D&C cables. That is the same distance as from Norway to South Africa.

And one of the key and important points related to this project is the fact that it was awarded to us in the technology-agnostic tender. This means that we were competing with fossil fuel power plants. And this is evident that in the markets where we operate, renewable energy is competitive not only on an intermittent basis, but it’s also competitive on a dispatchable basis and a space load. So again, we are immensely proud of what the local team has been able to achieve here through development, financing, construction, and soon also the O&M team will start taking over and operating these plants.

The experience that we get from this project is extremely important for us and puts us in a very strong position to compete for similar types of projects in our markets, both in South Africa, but also in the markets where we are currently operating. And the team that has developed this, these are real change makers that has come up with a new solution that has never been done before.

So now let’s move over to the rest of the D&C segment, because we are not only constructing in Kenhardt. I’m pleased to see that the construction activities on all three large projects continue to progress according to plan. We recognized D&C revenues of NOK4.6 billion in the quarter, up from NOK1.7 billion in the previous quarter. Further, we increased EPC gross margins to 12%, up from 11%. And this, as I have said before, is based on the strong performance of the EPC team across the three projects.

Kenhardt, on the right-hand side here, we have already talked about, and the project is progressing according to plan. In Brazil, in the middle, construction activities had solid progress during the quarter. Main civil work activities are completed. And electromechanical and interconnection works are advancing as planned. Finally, construction has continued to progress for the 150 megawatt solar project in Pakistan, and we are expecting to reach mechanical completion of that project this quarter. And finally then, the remaining contract value of our EPC contract is about NOK1.8 billion after the progress that we have recognized in the quarter.

So in these projects as well as in Scatec in general, we apply our integrated business model with multiple revenue streams as we are illustrating on this page. There should be no doubt that our projects under construction are generating strong returns to our shareholders. First, we have solid returns from power production on equity invested on a stand-alone basis. Our hurdle rate is 1.2 times cost of equity for power production.

Secondly, we generate strong D&C margins, which adds to the value. The margin in this quarter on our construction activities was 12%. In terms of future contracts that we have not yet entered into, we have guided on a margin of 8% to 10%.

Thirdly, we provide asset management and O&M services to the power plants with an EBITDA margin target of 25% to 30%. So this together gives you the integrated IRR. And then over the life cycle of the project, there are also additional value creation levers. Refinancing is a lever we have already used actively, and we have refinanced the debt of projects both in Egypt, the Philippines, South Africa and Vietnam.

We can also generate further value creation through asset rotation. This we have also demonstrated through the recent transactions for Upington and for Mocuba. This means that you need to look at all these revenue streams to see the total value creation through and during the life cycle of the project.

So then let us move to Power Production. Our operating assets continue to provide strong, predictable and growing cash flows supporting our growth ambitions. The last 12-months, we have delivered an EBITDA of NOK3.4 billion from our Power Production segment. And we protect the cash flows in each project from FX and interest rate variations. And around 80% of the project debt is hedged against changes in interest rates. And on the project level, we match the currency of revenues and costs to avoid exposure.

New assets will start to contribute from 2024, and the contribution is significant. We are adding about 25% capacity on what we currently are having. The projects currently under construction, as I mentioned, they will add around NOK750 million in additional EBITDA once they come into operation. So this quarter, the power production reached 873 gigawatt hours. This is compared to 916 in the same quarter last year, and it’s within our guided range on production.

EBITDA increased in the segment by 55% to NOK959 million. The main explanations were NOK350 million from the sale of the Upington asset and NOK76 million EBITDA in Ukraine and foreign currency FX. This is partly offset by lower production and no ancillary services in the Philippines as communicated in our first quarter report.

Based on new legislation in Ukraine, we started selling power from the Progressovka power plant in the merchant market, and this has had a positive effect on the quarterly results for the second quarter. The start of selling in the merchant market was in June. So it has only impacted positively one month of the three months in the quarter.

Additional EBITDA from Laos and Uganda increased by 6% due to positive foreign currency FX. And adjusted for the Upington transaction, the increase in EBITDA is 4%. And then we continue to deliver on our strategy being to grow renewables, advance green hydrogen and optimize our portfolio.

On growth, we reached financial close for the NOK2.9 billion growth from Grootfontein solar project in the quarter. This is the first solar project to reach financial close from the REIPPP Round 5 tender in South Africa. Our gross equity investment in the project will be about NOK150 million, and construction is expected to start in the beginning of 2024.

In July, we signed a land agreement for development of 5 gigawatt wind project in Egypt. This project is intended to be implemented in phases, and we’re still at the early stages of development. In South Africa, we are using our portfolio of projects in development to participate in a number of different tenders. We’re talking about tenders for solar, for wind and for battery storage, and it’s both public and private tenders that are ongoing there for the time being. And finally, we also signed a PPA for a 300-megawatt wind project in India with SECI.

On optimizing our portfolio, we closed the sale of Upington power plant. And in July, we signed an agreement to sell our share in the 40 megawatt Mocuba solar power plant in Mozambique for NOK85 million. And we have also implemented in the quarter the efficiency program to focus our organization with the target to reduce annual operating costs by NOK150 million across the organization, and this NOK150 million is compared to the cost level in the first quarter. We have further high-graded the pipeline to 12.2 gigawatts with focus on time line, maturity and value creation of the individual projects.

And then finally, we reached a major milestone release, as I’ve said, raising NOK1 billion to accelerate growth, and we are now establishing release as a separate platform. Scatec is committed to improving our future through driving the clean energy transition in a responsible way in emerging markets. One approach that we have developed to speed up this transition is Release. It’s a lease concept based on a redeployable solar PV and battery storage solution. And I’m excited that we have signed an agreement to raise NOK 1 billion in funding for Release to accelerate its growth ambitions.

And I want to congratulate the Release team to bringing that concept to this stage now seeing visibly the values that have been created, and these are also real change makers. We are establishing a strong partnership then with climate fund managers that will contribute with $55 million in equity for a 32% equity stake in Release. And they will also provide a shareholder loan totaling $47 million. And this transaction is in line with our strategy and will establish Release as a strong and independent platform. And it will give a financial foundation for Release to meet the strong demand for its flexible solutions and leasing solutions.

Scatec will continue to be a majority shareholder in Release with 68% ownership stake. And Release is -- has now projects in operation and under construction in Cameroon, in South Africa, in Mexico and in South Sudan with a total capacity of 47 megawatts solar PV and 25 megawatts of storage solutions.

On top of that, Release is maturing its pipeline, and we see a strong growth potential for Release with good traction in the market, particularly towards African utilities. New contracts has already been signed and Release is working closely together with the IFC to secure further growth.

And finally, when it comes to Release, we have a strong management team in place. Our Release CEO, Hans Olav Kvalvaag, will be joined by company and industry veteran, Torstein Berntsen, who will take on the role as the CFO of Release.

So with that, I will then hand it over to Hans Jakob, who will take you through the financials.

[Hans Jakob, Chief Financial Officer]

Thank you, Terje. It’s great to be here. And now let me go through the financials. We had a solid construction progress in the quarter, which is one of the main drivers for the increase in revenues and EBITDA.

To the left on this chart, you see the D&C revenues, which increased to NOK4.6 billion compared to NOK25 million in the same quarter last year. Revenues from Power Production was NOK1.2 billion, compared to NOK817 million in the same quarter last year, a 43% increase. This is including the NOK315 million contribution from the sale of Upington.

We’ve had a solid increase in EBITDA of -- to NOK1.4 billion, compared to NOK517 million year-on-year. And the main contributor is Power Production of NOK959 million compared to NOK617 million year-on-year, a 55% increase due to the sale of Upington and contributions from Ukraine. The underlying increase adjusted for divestment was 4%.

The D&C segment delivered NOK461 million EBITDA, up from minus NOK81 million last year. And the gross margin, as Terje said, increased from 11% to 12% compared to the previous quarter. The corporate EBITDA decreased by NOK34 million, mainly driven by nonrecurring costs related to the cost efficiency program. And services EBITDA increased by 65% to NOK33 million due to foreign currency effect, asset management services to projects under construction.

And now over to the consolidated financials. The total revenues increased by 47% to NOK1.2 billion. Revenues from power sales increased by 18% to NOK848 million, mainly driven by increased contribution from Ukraine and positive FX effects. The sale of Upington contributed positively of an accounting gain of NOK744 million.

Net loss from JVs and associated was reduced to minus NOK362 million due to lower production and absence of ancillary services in the Philippines and a NOK350 million impairment in Argentina. In Argentina, we have a JV with Equinor on our solar plant. Equinor has provided a non-recourse bridge loan that must be refinanced. Given the increasingly challenging political and economic situation in Argentina, the refinancing has not been possible, and a sales process has been initiated.

We now have received offers from potential buyers, which came in significantly below the current book value of the project and thus, we have took an impairment on the asset. The operating costs increased by NOK37 million, mainly due to the non-recurring costs related to the cost efficiency program, NOK6 million underlying. And finally, adjusted for these one-offs, revenues and EBITDA were broadly in line with last year.

Our financing consists of the two main elements, debt on project level and on corporate level. The project level where the financing sits within the SPV for each individual project has no direct support from or recourse to corporate. The debt is serviced solely by the cash flow from the individual power plant. In return, we get dividend payments from our projects to service our corporate debt.

Total proportionate net interest-bearing debt was at the same level as the previous quarter of NOK20.3 billion. In total, we drew new project debt of NOK1.6 billion for projects under construction. These projects will generate around NOK750 million EBITDA, once they are up and running. We had a reduction in project net debt of NOK900 million related to Upington and the amortized NOK500 million. And finally, we paid NOK148 million in interest expenses on our corporate debt, an increase of NOK80 million year-on-year.

We have a solid liquidity of NOK3.7 billion. This including our unused revolving credit facility. In the graph, you see the movement of the Group’s free cash flow. In the quarter, we received NOK180 million in distributions from our operating power plants. We generated NOK366 million of cash flow from D&C, driven by the strong construction progress. And we generated NOK27 million of free cash flow from the Service segment.

We had NOK209 million in corporate costs, including interest expenses on corporate financing, and our working capital increased by NOK165 million, mainly related to construction activities. We invested NOK434 million in growth activities, of which NOK413 million was invested into projects under construction. And we received net proceeds of NOK546 million from the Upington sale. And finally, we paid a NOK308 million in dividend to our shareholders.

We are reiterating our NOK10 billion equity target, and efficiency and capital discipline remains our priority. The first pillar is strict prioritization, more emphasis on capital efficiency, value over volume, staying committed to capital discipline. Only project with attractive margins will be brought to financial close, targeting a 1.2 times the cost of equity. The second is asset rotation. Divesting core and non-core, given the price is right, like we just did with the sale of Upington and Mocuba. The third one is high-grading the pipeline. As we have taken out projects that do not longer meet, match our criteria.

And lastly, a lean organization. And in May, we announced a target to reduce the annual operating cost by NOK150 million across the organization, compared to the Q1 level. And during the quarter, we implemented the program, including closing offices and staff reductions, and we will continue to stay cost-conscious.

We have updated our outlook, and let me explain the guiding of the 4 segments: first, Power Production. The full year 2023 EBITDA estimate from the Power Production is increased by NOK250 million to NOK3.1 billion to NOK3.4 billion. This is driven by the actual second quarter performance, including the sale of Upington. It is revised estimates for Ukraine, the Philippines and Laos. And consequently, we have reduced the proportion of power production by 100 gigawatt to 3.4 to 3.8 gigawatt hours.

In the third quarter, we expect EBITDA from the Philippines to be in the range of NOK180 million to NOK240 million, reflecting lower prices and limited ancillary services revenues, compared to the same quarter last year and a settlement of the disputed water fee charges of NOK40 million payable to the National Irrigation Administration for the lease of the Magat Dam in the Philippines.

Development and Construction, the remaining contract value is at NOK1.8 billion, and we reiterate the expected gross margin between 10% to 12%. And for new project, as Terje said, we estimate a gross margin of 8% to 10%, as previously communicated. And we’ve also done some minor changes to Services and Corporate.

And now I leave it to you, Terje, to sum up.

[Terje Pilskog, Chief Executive Officer]

Thank you. Yes. Thank you, Hans Jakob. So summing up. We have delivered a very strong operational quarter with a 55% EBITDA increase in Power Production, compared to the same quarter last year. Obviously, a significant part of that was also related to the Upington sales.

We’ve also had a very strong quarter on the D&C, in the D&C segment, with strong construction progress and then NOK4.6 billion in revenues, and the gross margin increased to 12%, which shows the underlying good performance on our EPC activities.

Lastly, we are seeing good progress on our strategic initiatives to optimize our portfolio and become an even more focused and efficient company.

So with that, we will go over and take your questions.

[Operator]

Okay. Yes, we will start with the participants in the room, and then we will move over to our online listeners, Jorgen.

[Jorgen Bruaset, Nordea Markets]

Jorgen Bruaset from Nordea. On the revised EBITDA guidance in Power Production, you raised it by NOK250 million, but you also book a gain from Upington of NOK315 million. And you mentioned sort of the contributors to the developments there in H2. But maybe you can quantify what you expect in terms of Ukraine, which seems like a bit of a black box for us from an outside in perspective?

[Terje Pilskog, Chief Executive Officer]

Yes. In terms of Ukraine, we don’t have any further detailed guidance on how the EBITDA in the Ukraine will look for the rest of the year.

[Jorgen Bruaset, Nordea Markets]

But you still have a positive EBITDA contribution in Ukraine for H2 in the aggregated guidance?

[Terje Pilskog, Chief Executive Officer]

Relative to what we had last year, yes.

[Jorgen Bruaset, Nordea Markets]

Okay, thank you. And then maybe also on Release, which seems like a very interesting deal, both in terms of accelerating this and also in terms of raising capital in the current market. Are you able to say anything more about the rollout plan going ahead on how to deploy the capital, the potential ambitions shared with the new owner? And also if there are any details in the shareholder agreement in terms of them also supporting for more capital beyond the current round if and when needed?

[Terje Pilskog, Chief Executive Officer]

Yes, to start with your last question. There is no commitment, specific commitment beyond the existing capital that they are contributing, as you have talked about here today. In terms of the growth ambitions and what we see from Release going forward. Release continue to have a good pipeline of interesting projects, and we see especially good opportunities, both in Chad and repeat business in Cameroon. And especially in Cameroon, it’s quite interesting because we see that the local utility really likes the solution that Release is providing. And through that, we see an interest in repeat business. So that’s very comforting and promising.

[Jorgen Bruaset, Nordea Markets]

Okay, thank you. Just final one for me. In terms of the situation in Argentina, is the impairment driven off your willingness to divest at lower price than expected before initiating the process? Or is it just for accounting purposes to have a prudent accounting in terms of mark-to-market? And should we read anything into that specific situation in terms of other processes for asset disposals?

[Terje Pilskog, Chief Executive Officer]

No, I think we all have to recognize that Argentina is a unique situation, also from a political and economic development. I mean, the country is in a quite a dire situation. So there’s no reason to infer anything for other assets relative to what is currently happening in Argentina. Argentina is a very unique and specific situation. And the impairment is based on what we’ve seen in terms of offers coming in. And based on that evidence, it is prudent now to take the impairment.

[Jorgen Bruaset, Nordea Markets]

Okay. So we would be wrong in extrapolating that into sort of lower appetite for secondary assets in a broader context?

[Terje Pilskog, Chief Executive Officer]

Yes, I would think so.

[Jorgen Bruaset, Nordea Markets]

Thank you.

[Andreas Nygard, Kepler Cheuvreux]

Andreas Nygard, Kepler Cheuvreux. You stated in your 2022 CMU that you had a NOK2 billion to NOK3 billion funding gap to reassure your growth targets. Now you’ve sold Upington and cut your dividend somewhat. Where are we now in terms of that funding gap? How much remains?

[Terje Pilskog, Chief Executive Officer]

Yes, that’s correct. And at the CMU, we also talked about the fact that we do have a toolbox to work on in terms of closing that funding gap. And I think we’ve been working actively on that since the CMU. As you said, we have sold Upington. We have reduced dividends, and we have now also implemented the cost efficiency program. So all those obviously are positive effects relative to funding gap.

On the flip side, unfortunately, there has also been a macro development, where we have had increasing interest rates. And we have also refinanced our debt and have certain increased amortizations there. On a net-net basis, we have improved and narrowed the funding gap, but we don’t have a new figure to come out with now.

[Andreas Nygard, Kepler Cheuvreux]

Okay. Thank you. And you mentioned your toolbox, and you -- as you’ve stated before, you are intending to sell some non-core assets. I guess, you cannot give a figure, but some feeling on how much of this funding gap is possible to reach with further sales? And I guess, also refinancing some assets is one of the key tools in your toolbox. Could you give any flavor?

[Terje Pilskog, Chief Executive Officer]

As you said, I mean, we have talked about continuing to look at the recycling capital. It is an important part of our strategy. And we have also said that the main focus in terms of recycling capital, the first priority is to do it related to our non-core markets. So if you want to have any type of indication of where that kind of activities might happen first, it would initially be in our non-core markets.

[Andreas Nygard, Kepler Cheuvreux]

Okay, thank you.

[Anders Rosenlund, SEB]

Anders, SEB. Firstly, on Argentina. Will you sell Argentina?

[Terje Pilskog, Chief Executive Officer]

That -- there has been a sales process that has been initiated. And obviously, today, we cannot see and know exactly what the result of that sales process is going to be.

[Anders Rosenlund, SEB]

Okay. So it’s not decided yet?

[Terje Pilskog, Chief Executive Officer]

It’s not decided. Okay.

[Anders Rosenlund, SEB]

And Equinor is -- you have no -- absolutely no recourse to the debt that Equinor has provided as a shareholder loan to that asset, right?

[Terje Pilskog, Chief Executive Officer]

There is no recourse. Exactly.

[Anders Rosenlund, SEB]

And secondly, on revenue reserves for D&C in 2024 you stated in the report. What that is?

[Terje Pilskog, Chief Executive Officer]

Revenue reserves?

[Anders Rosenlund, SEB]

Or contracted revenues for the Development & Construction segment for 2024. You said NOK1.8 billion for the rest of this year, but there are some contracted revenues secured for the Development & Construction segment for next year as well.

[Terje Pilskog, Chief Executive Officer]

No, we haven’t specified that. I think you’re probably -- I mean, what we have said is that NOK1.8 billion is what remains on the contracts that we currently are implementing. So that is related to the three projects that we have under construction. And then we’ve had financial close on Grootfontein. And there, we have provided a figure of the total CapEx for that project. But we haven’t specified the EPC contract value related to that project yet.

[Anders Rosenlund, SEB]

No. But you’ve indicated how large share of that contract you will be -- EPC responsible for so…

[Terje Pilskog, Chief Executive Officer]

This project, the Grootfontein project, we’ll have our traditional EPC contract structure. We will take the full EPC contract.

[Anders Rosenlund, SEB]

Okay. And so that NOK1.8 billion on these three projects, previously, you have stated that these three projects would be completed within year-end 2023. Is that still the case?

[Terje Pilskog, Chief Executive Officer]

Yes, that’s still the case. Around year-end. We said there might be some activities also running into Q1 next year. But most of this will be done by the end of the year.

[Anders Rosenlund, SEB]

And the Grootfontein project, that’s 15-months construction time, as you’ve previously indicated. Or is that…

[Terje Pilskog, Chief Executive Officer]

That construction, I don’t think that we’ve been out for the construction, that will typically be in the range for a product like this 12 to 18-months.

[Anders Rosenlund, SEB]

Okay. And then I have a CFO question. What’s the correct amount of debt on the holding level of a company like this with the growth prospects and the attractive future which will tie up capital?

[Hans Jakob, Chief Financial Officer]

We are comfortable where we are.

[Anders Rosenlund, SEB]

Yes. If not, you will probably do something about it. But do you think you are -- is the ideal situation to be -- to have a lot of debt on the holding level? Or should debt be limited? Or could debt lead to any point restrict your ability to pursue those opportunities?

[Hans Jakob, Chief Financial Officer]

I think we have seen debt as an enabler for business, and we are comfortable with the current debt level.

[Anders Rosenlund, SEB]

Okay, thanks.

[Jorgen Bruaset, Nordea Markets]

Jorgen Bruaset. Just following very short on Anders questions on D&C. Of the NOK 1.8 billion remaining for this year in terms of revenue, are you able to say anything about how that’s split between Q3 and Q4?

[Hans Jakob, Chief Financial Officer]

No, I think -- I don’t think we are giving any specific guidance on that. As we have previously talked about, the EPC progress will typically follow an S curve. Now we are certainly on the steep -- we are certainly been on the steepest part of that S curve. And now the S curve will flatten out. So I mean, typically, we would see a bit less in Q4 than in Q3 as the S curve flattens out.

[Jorgen Bruaset, Nordea Markets]

Perfect. Thank you.

[Operator]

Okay. We’ll then take questions from our online listeners. We have three questions from Magnus Solheim, in Fearnley. Can you comment on the NOK150 million cost program? Will this affect growth in any way? And is the growth target unaffected despite this?

[Terje Pilskog, Chief Executive Officer]

The NOK150 million in cost reduction program is not impacting our growth targets with respect to the NOK10 billion we aim to invest as on equity between now and or between 2023, 2022 and 2027.

[Operator]

A question from Magnus. If you exclude the NOK 250 million Upington gain, can you comment on what other changes you have made to the full year 2023 EBITDA guidance? Is this mainly related to the Philippines?

[Hans Jakob, Chief Financial Officer]

I think I commented on that in my presentation. So Argentina is -- now the Ukraine is up due to the performance of the -- starting of the training operations overall good performance by the team. We’ve also seen in the first half that Laos performed a bit better, but the updates on Laos is on the negative side for the second half. And so with the ancillary services of the Philippines coming in late 3Q.

[Operator]

And last one for Magnus. How do you see construction activity in 2024? Which projects do you see as most likely to be constructed first?

[Terje Pilskog, Chief Executive Officer]

Yes. As we have said already, we have already reached financial close for the Grootfontein project. So that means that we already have a product ready that will be constructed in 2024. Beyond that, we will continue to work on our backlog and the mature pipeline to bring also more projects into construction for 2024.

[Operator]

We have a couple of questions from Eivind Garvik. I think we have covered most of them. But we have one at least. Can you say a little bit more about the 300-megawatt PPA signed in India? Why isn’t this project in backlog? And when do you expect an FID?

[Terje Pilskog, Chief Executive Officer]

Yes, in terms of the project in India, moving projects into backlog, we have a number of different criteria for doing that, including that they should be 90% likely to happen. Signing PPA is one of the criteria, but we also have other criteria related to the maturity of the development activities of the projects. So according to our internal criteria, this has not quite gotten to that level yet. In terms of the time line of the project, this is a project that could reach financial close in 2024, if moving forward.

[Operator]

Thank you. A follow-up on the efficiency program from Eivind. When do we expect to see the full effect on the program?

[Terje Pilskog, Chief Executive Officer]

As we have said today, we have implemented the major part of the efficiency program already. We have taken the charges related to the efficiency program, but we also communicated that the full effect of the efficiency program will be seen in the first quarter of 2024.

[Operator]

Thank you. A couple of questions from Naisheng Cui from Barclays. Let me see if we’ve covered most of them. I think actually, we covered those questions. Let me see then if we have anything else. One from Thomas [Indiscernible]. Why are the ancillary services revenue expected to be lower in the coming quarter versus last year? Weren’t the new contracts supposed to be better than the ones you had last year?

[Terje Pilskog, Chief Executive Officer]

Yes. I think in terms of the adjustments that we’ve done on the ancillary services revenues for the second-half, those are obviously impacted by the fact that now we see ancillary services coming in towards the end of the third quarter. And therefore, the revenues for ancillary services for the whole second-half is likely to be lower than what we had last year.

[Operator]

Okay. Thank you. Thomas also had a question on Argentina. I think we covered that. A follow-up from Nash. Could you please comment on the Philippines power prices that decreased significantly quarter-on-quarter? Why? What’s the outlook for second-half? I think we covered the second-half.

[Hans Jakob, Chief Financial Officer]

Yes. I think we can just repeat what we have said that we are forecasting lower power prices in the Philippines in the second-half, and that has been included in our outlook for the second-half.

[Operator]

Compared to previous year.

[Hans Jakob, Chief Financial Officer]

Compared to last year.

[Operator]

Okay. That ends the Q&A. Sorry, we have one more from Andreas.

[Andreas Nygard, Kepler Cheuvreux]

Yes. Just I think you mentioned during your prepared notes that you had one month of revenue recognition in the Ukraine in Q2. Was that the correct interpretation?

[Terje Pilskog, Chief Executive Officer]

That’s the correct, yes.

[Andreas Nygard, Kepler Cheuvreux]

Okay. And Ukraine contributed with NOK76 million, NOK78 million in the quarter?

[Hans Jakob, Chief Financial Officer]

Yes.

[Andreas Nygard, Kepler Cheuvreux]

Okay. And how has that developed into Q3? Have you had revenue recognition throughout August?

[Terje Pilskog, Chief Executive Officer]

Yes. So just to explain exactly what’s happened in Ukraine. In Ukraine, there was a new legislation that was passed that allowed you to step out of the feed-in tariff contract with a guaranteed buyer and potentially also step back in again at a later point in time if you wanted to. So we have Progressovka, which is our largest plant that also has the lowest feel-in tariffs stepped out, and that became effective as of 1st of June. And we are continuing with that situation, and we’ll continue to sell into the merchant market for Progressovka through July and August. And we’ll continue to do that as long as the market conditions are as good as they are today.

The good thing with the merchant contract is that we are paid 100% immediately. When you’re selling to the guaranteed buyer, we are receiving typically in the range of 40% to 60% payments.

[Operator]

With that ends the Q&A and the presentation. Thank you, everyone.

[Terje Pilskog, Chief Executive Officer]

Thank you.

[Hans Jakob, Chief Financial Officer]

Thank you.