Philly Shipyard : Q3 2023 Report

Building the Future

Philly Shipyard ASA (Oslo: PHLY)

Q3 2023 and First Nine Months 2023 Results

31 October 2023

Key Events and Highlights

• Successfully delivered the first NSMV, the Empire State, on 8 September 2023
• Celebrated the steel cutting ceremony for the SRIV, the Acadia, on 20 July 2023 with remarks given by President Biden highlighting the shipyard's union workforce and apprenticeship program
• Continued progress on the NSMV and SRIV newbuild programs
• Order backlog of USD 1,793.7 million on 30 September 2023 with last contractual delivery date in 2027
• Total cash and cash equivalents of USD 123.1 million at 30 September 2023, excluding USD 51.7 million of restricted cash
• Third quarter and first nine months 2023 operating revenue of USD 101.8 million and USD 355.3 million, respectively, compared to USD 92.6 million and USD 284.1 million in the same periods in 2022
• Third quarter and first nine months 2023 net loss of USD 17.2 million and USD 49.1 million, respectively, compared to net loss of USD 10.0 million and USD 3.4 million in the same periods in 2022

Operations

Shipbuilding

The first National Security Multi-Mission Vessel (NSMV 1), the Empire State, was successfully delivered to the U.S. Department of Transportation's Maritime Administration (MARAD) on 8 September 2023. The delivery of NSMV 1 marked the delivery of the first government newbuild in Philly Shipyard's history as well as the first government ship built using the Vessel Construction Manager (VCM) contract model.

Outfitting continues on NSMV 2 in the outfitting dock. NSMV 3 production activities are well underway with over half of the blocks in the building dock and the remaining blocks in the fabrication and paint shops. NSMV 4 production activities continue in the fabrication shops. Pre-production activities on NSMV 5 continue to progress with production scheduled to start in Q4 2023.

First steel cutting on the Subsea Rock Installation Vessel (SRIV) occurred in August 2023. The steel cutting ceremony was capped off by a visit and address by President Biden.

Pre-production activities on the 3600 TEU Aloha Class LNG fueled containership vessels (CVs) continue to progress and long lead equipment continues to be ordered for these ships. As of 30 September 2023, Philly Shipyard has firm commitments for approximately 30% of the total budgeted third party material costs for the CVs.

As of 30 September 2023, Philly Shipyard's workforce consisted of 1,745 employees and subcontractors. Following the delivery of NSMV 1, Philly Shipyard continues to adjust its workforce in line with its backlog and production schedule.

Philly Shipyard continues to increase the size and breadth of its apprenticeship program as more cohorts are added to this program, with the most recent cohort starting on 30 October 2023. Philly Shipyard is seeking to obtain government grants to help fund this program.

Despite aggressive recruiting efforts, the COVID-19 pandemic and the federal contractor vaccine mandate prevented Philly Shipyard from ramping-up its workforce in accordance with plan. COVID driven labor shortages continue to impede Philly Shipyard's efforts to efficiently maintain its workforce. Pandemic related supply chain disruptions have slowed progress on the NSMVs. Notwithstanding ongoing mitigation efforts, these factors are contributing to schedule impacts, productivity loss and increased costs.

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Industry Design Studies

Philly Shipyard continues to progress on the industry design study for hospital ships for the U.S. Navy. PSI has teamed up with VARD Marine to work on this six-month study.

Health, Safety, Security and Environment (HSSE)/Sustainability/ESG

PSI's 12-month trailing average for its Lost Time Incident Frequency Rate (LTIFR) was 0.22 at the end of Q3 2023 compared to 0.21 at the end of Q3 2022. LTIFR is based on lost time incidents (LTI) per 200,000 hours as defined by OSHA.

PSI's 12-month trailing average for its Other Recordable Incident Frequency Rate (ORIFR) was 2.98 at the end of Q3 2023 compared to 2.00 at the end of Q3 2022. ORIFR is based on recordable incidents other than LTIs per 200,000 hours as defined by OSHA.

PSI continues to work proactively to further improve safety and reduce the number of incidents at the shipyard. PSI also continues to execute on its sustainability and environmental, social, and governance (ESG) program as laid out in the Company's 2022 annual report.

Financial Information

Second Quarter 2023 Results

Operating revenue and other income for Q3 2023 was USD 101.8 million compared to operating revenue and other income of USD 92.6 million for Q3 2022. In Q3 2023, there was revenue from progress on NSMVs 1-5, the SRIV and CVs 1-3, whereas in Q3 2022 there was revenue from progress on NSMVs 1-5 and the SRIV.

EBITDA, defined as earnings before interest, taxes, depreciation and amortization, is considered a relevant earnings indicator for Philly Shipyard as it measures the operational performance of the shipyard.

EBITDA for Q3 2023 was negative USD 17.1 million compared to EBITDA of negative USD 14.8 million for Q3 2022. EBITDA for Q3 2023 was driven primarily by increased costs on the NSMV series and selling, general and administrative (SG&A) costs. EBITDA for Q3 2022 was driven primarily by increased costs on NSMVs 1-2 and SG&A costs, partially offset by the gross profit recognized on NSMVs 3-4. The unforeseen cost increases in Q3 2023 are mainly related to increased labor costs, turnkey costs, and overhead costs driven by the ongoing lack of skilled workers, resulting in schedule delays and compression.

Net loss after tax for Q3 2023 was USD 17.2 million compared to net loss after tax of USD 10.0 million for Q3 2022. Net loss after tax for Q3 2023 primarily consists of EBITDA of negative USD 17.1 million and depreciation expense of USD 2.0 million, partially offset by net financial income of USD 1.9 million. Net loss after tax for Q3 2022 primarily consists of EBITDA of negative USD 14.8 million and depreciation expense of USD 1.7 million, partially offset by net financial income of USD 0.6 million and an income tax benefit of USD 5.9 million.

Year-to-Date 2023 Results

Operating revenue and other income in the first nine months of 2023 ended at USD 355.3 million compared to operating revenues and other income of USD 284.1 million in the first nine months of 2022. September 2023 year-to-date operating revenue and other income was primarily driven by progress on NSMVs 1-5, the SRIV, CVs 1-3 and a government design study, whereas September 2022 year-to-date operating revenue was primarily driven by progress on NSMVs 1-5, the SRIV and government design studies.

EBITDA for the first nine months of 2023 was negative USD 48.7 million compared to EBITDA of negative USD 12.8 million in the same period of 2022.

Net loss after tax for the first nine months of 2023 was USD 49.1 million compared to net loss after tax of USD

3.4 million in the same period of 2022. Net loss after tax for the first nine months of 2023 primarily consists of EBITDA of negative USD 48.7 million and depreciation expense of USD 5.6 million, partially offset by net financial items of USD 5.2 million. Net loss after tax for the first nine months of 2022 primarily consists of EBITDA of negative USD 12.8 million and depreciation expense of USD 4.6 million, partially offset by an income tax benefit of USD 13.3 million and net financial income of USD 0.7 million.

Statement of Financial Position

Total assets were USD 337.8 million at 30 September 2023 compared to USD 350.5 million at 31 December 2022.

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Cash and cash equivalents (unrestricted) was USD 123.1 million at 30 September 2023 compared to USD 137.6 million at 31 December 2022. The decrease of USD 14.5 million was due primarily to spending on goods and services related to the vessel projects underway net of customer milestone payments, investments in property, plant and equipment and SG&A costs, partially offset by favorable working capital and net financial income items.

Total restricted cash as of 30 September 2023 amounted to USD 51.7 million, of which USD 41.7 million (long- term) represents the total cash deposited in an escrow account for the bonds required for NSMVs 1-5, and USD

10.0 million (short-term) pertains to reserve accounts required for NSMVs 2 and 3. It is anticipated that the cash collateral for the bonds and the reserve account funds will be released in tranches following the delivery of each NSMV vessel. The reserve account required for NSMV 1 was released upon the delivery of that vessel in September 2023. A portion (i.e., USD 8.0 million) of the cash collateral for the bonds was released after quarter- end in October 2023.

Total equity decreased to USD 24.7 million at 30 September 2023 from USD 73.8 million at 31 December 2022 due to net loss of USD 49.1 million.

Outlook

At 30 September 2023, Philly Shipyard continues to maintain a strong order backlog of USD 1,793.7 million. Philly Shipyard has eight vessels, consisting of four NSMVs, one SRIV and three CVs, in its order book. Philly Shipyard's current order book provides pipeline visibility and stability into 2027.

Following the delivery of NSMV 1, there is an increased focus on the ongoing implementation of Philly Shipyard's continuous improvement program. The lessons learned and experience gained from construction of NSMV 1 is expected to result in improved performance on subsequent vessels in the NSMV series.

Philly Shipyard continues to pursue prospects in the government and commercial newbuild markets and is presently targeting shipbuilding programs with building slots following the third CV. In the government sector, Philly Shipyard remains focused on opportunities for commercial-like and auxiliary ships. In the commercial sector, Philly Shipyard is exploring a variety of potential new construction projects for U.S.-built vessels. Philly Shipyard continues to promote variants based on existing ship designs as potential cost-effective solutions for both government and commercial customers.

Additionally, Philly Shipyard continues to seek opportunities to replicate the NSMV contract model for other government shipbuilding programs. This innovative approach enables Philly Shipyard to apply commercial best practices for design and construction to government vessels. There is growing interest in Congress in the NSMV contract model and its potential applicability to government shipbuilding programs to reduce costs, accelerate delivery times, and build more vessels.

Philly Shipyard does not foresee excess capacity in its drydocks or fabrication shops for ship maintenance, repair, overhaul and conversion (MROC) projects in the foreseeable future. A substantial capital investment would be required in order for the Company to opportunistically pursue future MROC projects before the CV contract is completed.

Philly Shipyard continues to forecast the five-ship NSMV series to be a loss-making contract. As of the end of Q3 2023, Philly Shipyard has recognized more loss on the NSMV contract than it anticipates to incur when the five-ship contract is completed. Therefore, no loss liability has been recorded to date for an onerous contract.

As previously reported, the forecast has and continues to be impacted by increased costs of labor, turnkey suppliers and overhead driven by schedule delays and compression. Philly Shipyard is pursuing all options available to recoup unforeseen costs related to the COVID-19 pandemic and the federal contractor vaccine mandate. The current forecast excludes any potential recoveries as well as claims for back charges against certain underperforming subcontractors and suppliers.

Risks

Market risks

While Philly Shipyard now has an order backlog for ship newbuilds with contractual delivery dates into 2027, it faces future risks if it is unable to secure new orders and/or financing for major commercial or government shipbuilding programs to follow its existing backlog.

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Operational risks

Philly Shipyard faces risks related to construction of vessels. Philly Shipyard's ability to meet budgets and schedules may be adversely affected by many factors, including changes in productivity, shortages of materials, equipment and labor, and changes in the cost of goods and services, both Philly Shipyard's own and those charged by its suppliers. Philly Shipyard's operations also depend on stable supplier networks and the availability of key vendors for design and procurement services. Philly Shipyard has entered into fixed-price subcontracts for a significant portion of its scope of work on its active shipbuilding programs, including the design and major equipment for the NSMV and SRIV programs and the design and certain long lead items for the CV program.

As is common in the shipbuilding industry, Philly Shipyard's projects are typically performed on a fixed-price basis. Under fixed-price contracts, Philly Shipyard receives the price fixed in the contract, subject to adjustment only for change-orders. In many cases, these vessels involve complex design and engineering, significant procurement of equipment and supplies and extensive construction management. Management uses its best efforts to accurately estimate the costs to complete Philly Shipyard's project awards; however, Philly Shipyard's actual costs incurred to complete these projects could exceed its estimates. The NSMV, SRIV and CV vessel contracts are fixed-price contracts.

Philly Shipyard's productivity and profitability depends substantially on its ability to attract and retain skilled workers at forecasted rates. COVID driven labor shortages have adversely impacted, and are expected to continue to adversely impact, the Company's ability to attract and retain skilled workers at forecasted rates.

There is a higher technical design risk and a higher project execution risk for prototype vessels, such as the NSMV and SRIV, compared to the construction of vessels based on a proven design, such as the product tankers and containership vessels previously built by Philly Shipyard. Following the delivery of NSMV 1, these risks have been reduced for the remaining vessels in the NSMV series. These risks increase the current construction cost estimation uncertainty and the likelihood of occurrence of contract contingencies. In particular, failure to meet Philly Shipyard's performance obligations to deliver vessels on time and within the contract specifications can potentially lead to penalties and ultimately contract termination. The NSMV, SRIV and CV vessel contracts include liquidated damage clauses for late delivery exclusive of excusable delays. The CV vessel contract includes performance guarantee clauses similar to those included in the vessel contracts for the prior series of Aloha Class containership vessels.

The Company faces risk of significant financial, business and intelligence loss if there are cyber security breaches. Philly Shipyard has invested significant resources to provide a more secure computing environment over the last several years, resulting in improved security and business resiliency. Philly Shipyard maintains a continued high awareness of its risk profile regarding cyber security because new threats can emerge quickly.

Entry into, or further development of, lines of business in which the Company has not historically operated may expose Philly Shipyard to business and operational risks that are different from those it has experienced historically. For example, U.S. Government projects generally are subject to suspension, termination or a reduction in scope at the option of the customer, although the customer is typically required to pay for work performed and materials purchased through the date of termination. The NSMV contract has a termination for convenience clause at the option of the U.S. Government.

Financial risks

Philly Shipyard is dependent upon having access to construction financing facilities and other loans and debt facilities to the extent its own cash flow from operations and milestone payments from customers are insufficient to fund its operations and capital expenditures. In turn, Philly Shipyard must secure and maintain sufficient equity capital to support debt facilities. Additionally, Philly Shipyard may be required to obtain bonding capacity in case there is need for payment or performance bonds, or to furnish letters of credit, refund guarantees or other forms of security, to support major commercial or government shipbuilding programs. Philly Shipyard may not be able to obtain sufficient debt facilities or bonding capacity or furnish sufficient security if and when needed with favorable terms, if at all. As of the end of Q3 2023, Philly Shipyard has furnished all bonds and security that are required to support its active shipbuilding programs.

The Company is exposed to changes in prices of materials and duties, tariffs and other taxes imposed on goods imported from foreign (non-U.S.) countries. PSI attempts to mitigate its exposure with respect to steel cost escalation and increased taxes on imported goods by passing these risks on to its end customers. The NSMV, SRIV and CV vessel contracts include price adjustment clauses for steel as defined in the respective contracts.

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The Company is subject to exchange rate risk for purchases made in currencies other than the U.S. dollar. In order to mitigate exposure to this risk, Philly Shipyard will look to pass this risk on to its end customers or suppliers or secure foreign exchange forward contracts for its known requirements for foreign currency. The subcontracts for the detailed design and major equipment for the NSMV and SRIV programs and the design and certain long lead items for the CV program are payable in U.S. dollars. The SRIV contract includes an exchange rate adjustment clause for goods and services purchased in certain foreign currencies.

Other risks

The legacy of the risks related to the COVID-19 pandemic (including labor shortages and supply chain disruptions) continues to impact the Company's shipbuilding projects. The Russia-Ukraine military conflict, as well as the economic sanctions targeting Russia, increases the risk of rising commodity prices, material shortages and transportation delays that could adversely impact Philly Shipyard's business. Philly Shipyard continues to see uncertainty in the macroeconomic environment throughout the world due to the above contributing factors as well as continuing inflation, high interest rates, market volatility and recession concerns.

For a further analysis of risks, please refer to the Company's 2022 annual report.

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CONDENSED CONSOLIDATED INCOME STATEMENT
Amounts in USD millions		Q3		9 months ended 30 Sept.	Full Year
	Unaudited		Unaudited		Audited
(except number of shares and earnings per share)	Note	2023	2022	2023	2022 *	2022 *
Operating revenues and other income	11	101.8	92.6	355.3	284.1	393.8
Operating expenses		(118.9)	(107.4)	(404.0)	(296.9)	(411.9)
Operating loss before depreciation (EBITDA)		(17.1)	(14.8)	(48.7)	(12.8)	(18.1)
Depreciation		(2.0)	(1.7)	(5.6)	(4.6)	(6.2)
Operating loss (EBIT)		(19.1)	(16.5)	(54.3)	(17.4)	(24.3)
Net financial items		1.9	0.6	5.2	0.7	2.0
Loss before tax		(17.2)	(15.9)	(49.1)	(16.7)	(22.3)
Tax benefit	6	-	5.9	-	13.3	10.6
Loss after tax **		(17.2)	(10.0)	(49.1)	(3.4)	(11.7)
Weighted average number of shares	7	12,107,901	12,107,901	12,107,901	12,107,901	12,107,901
Basic and diluted loss per share (USD)	7	(1.42)	(0.83)	(4.06)	(0.28)	(0.97)
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
		Q3		9 months ended 30 Sept.	Full Year
		Unaudited		Unaudited		Audited
Amounts in USD millions		2023	2022	2023	2022 *	2022 *
Loss after tax		(17.2)	(10.0)	(49.1)	(3.4)	(11.7)
Other comprehensive income, net of income tax		-	-	-	-	-
Total comprehensive loss for the period **		(17.2)	(10.0)	(49.1)	(3.4)	(11.7)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
		Unaudited
		30 Sept.	31 Dec.
Amounts in USD millions	Note	2023	2022 *
Assets
Non-current assets
Property, plant and equipment		43.2	42.2
Right-of-use assets		14.8	13.5
Restricted cash long-term		41.7	45.4
Deferred tax asset long-term	6	27.6	26.2
Income tax receivable long-term	6	0.1	13.7
Other non-current assets		0.5	0.5
Total non-current assets		127.9	141.5
Current assets
Cash and cash equivalents (unrestricted)		123.1	137.6
Vessels-under-construction receivable	10	-	4.9
Prepayments and other receivables		60.6	52.4
Restricted cash short-term		10.0	10.0
Income tax receivable short-term	6	16.1	4.1
Contract assets		0.1	-
Total current assets		209.9	209.0
Total assets		337.8	350.5
Equity and liabilities
Total equity	7	24.7	73.8
Non-current liabilities
Lease liability long-term		3.0	2.3
Income tax payable long-term	6	1.2	1.2
Total non-current liabilities		4.2	3.5
Current liabilities		239.5	230.6
Customer advances (net)	10
Trade payables, accrued liabilities and provisions		68.5	42.0
Lease liability short-term		0.9	0.3
Other contract liabilities		-	0.3
Total current liabilities		308.9	273.2
Total liabilities		313.1	276.7
Total equity and liabilities		337.8	350.5

• Annual 2022 financial information is derived from audited financial statements. ** All attributed to the equity holders of PHLY.

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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

	9 months ended 30 Sept.
		Unaudited
Amounts in USD millions		2023	2022 *
As of beginning of period		73.8	85.5
Total comprehensive loss for the period *		(49.1)	(3.4)
As of end of period		24.7	82.1
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
	9 months ended 30 Sept.
		Unaudited
Amounts in USD millions	Note	2023	2022 *
Loss before tax		(49.1)	(16.7)
Add back depreciation		5.6	4.6
Taxes paid	6	-	(6.9)
Change in restricted cash		3.7	(5.7)
Change in prepayments and other receivables		(8.2)	(6.1)
Change in vessels-under-construction receivable	10	4.9	(13.6)
Change in customer advances (net)	10	8.9	(115.5)
Change in trade payables, accrued liabilities and provisions		26.5	(3.2)
Change in other working capital		(0.1)	5.1
Net cash used in operating activities		(7.8)	(158.0)
Investment in property, plant & equipment		(6.2)	(10.2)
Net cash used in investing activities		(6.2)	(10.2)
Repayment of lease liability		(0.5)	(0.2)
Net cash used in financing activities		(0.5)	(0.2)
Net change in cash and cash equivalents		(14.5)	(168.4)
Cash and cash equivalents at beginning of period		137.6	255.0
Cash and cash equivalents at end of period		123.1	86.6

* All attributed to the equity holders of PHLY.

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Notes to the condensed interim consolidated financial statements for the third quarter and year-to-date 2023

1. Introduction - Philly Shipyard ASA
   Philly Shipyard ASA (PHLY) is a company domiciled in Norway. These condensed interim consolidated financial statements for the quarter and year-to-date periods ended 30 September 2023 and 30 September 2022 are comprised of PHLY and its direct and indirect wholly-owned subsidiaries (collectively referred to herein as the Group), including Philly Shipyard, Inc. (PSI).
   This interim report has not been subject to audit or review by independent auditors.
   The audited consolidated financial statements of PHLY as of and for the year ended 31 December 2022, which include a detailed description of accounting policies and significant estimates, are available at www.phillyshipyard.com.
2. Basis of preparation
   These condensed interim consolidated financial statements reflect all adjustments, in the opinion of PHLY's management, that are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and year-to-date period are not necessarily indicative of the results that may be expected for any subsequent quarter or year-to-date period.
   The going concern assumption
   These condensed interim consolidated financial statements have been prepared on a going concern basis which contemplates continuity of normal business activities and realization of assets and settlement of liabilities in the normal course of business.
3. Statement of compliance
   These condensed interim consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union IAS 34 Interim Financial Reporting. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the audited consolidated financial statements of PHLY as of and for the year ended 31 December 2022.
4. Significant accounting principles
   The accounting policies applied by PHLY in these condensed interim consolidated financial statements are substantially the same as those applied by PHLY in its audited consolidated financial statements as of and for the year ended 31 December 2022.
   There have not been any new IFRS standards or interpretations which were effective 1 January 2023 that have had a significant impact on Q3 2023 or the year-to-date period ending 30 September 2023.
5. Use of estimates
   The preparation of these condensed interim consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.
   The most significant judgments made by management in preparing these condensed interim consolidated financial statements in applying PHLY's accounting policies, and the key sources of estimation uncertainty, are the same as those that are applied to the audited consolidated financial statements as of and for the year ended 31 December 2022 unless described elsewhere in this report.
6. Tax estimates
   Income tax (expense)/benefit is recognized in each interim period based on the best estimate of the expected annual income tax rates.
   Beginning in 2022, R&D expenses must be capitalized and amortized over 60 months, as required by the 2017 Tax Cuts and Jobs Act. The Company expects that the R&D costs incurred in 2022 and beyond could impact the amount of cash taxes owed in the near term. The Company is monitoring the legislative activity to defer the implementation of the capitalization provision within the U.S. tax law with retroactive effect.

Enacted by the U.S. Congress on 27 March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows for the carryback of net operating losses (NOL) arising in taxable years beginning after

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31 December 2017, and before 1 January 2021, to the five taxable years preceding the loss year. This rule allows corporate taxpayers the opportunity to carry back NOLs to tax years as far back as 2013. As the Company had qualifying taxable losses in 2018, 2019 and 2020, these losses were carried back to previous tax years and resulted in an income tax receivable of USD 22.1 million at 31 December 2020.

The 2018, 2019 and 2020 refund claims are currently under examination by the Internal Revenue Service (IRS). The 2018 refund of USD 6.5 million has been received and, due to the backlog at the IRS, the 2019 and 2020 refunds are both expected in the second quarter of 2024.

1. Share capital and equity
   At 30 September 2023 and 30 September 2022, PHLY had 12,107,901 ordinary shares (excluding 466,865 own shares) at a par value of NOK 10 per share. There were no share issuances or repurchases for both the quarter and year-to-date periods ended 30 September 2023 and 30 September 2022. Accordingly, 12,107,901 ordinary shares were used in the calculation of earnings per share for both the quarter and year- to-date periods ended 30 September 2023 and 30 September 2022.
2. Interest-bearingdebt
   At 30 September 2023 and 30 September 2022, Philly Shipyard had no external debt.
3. Related party transactions
   Aker Capital AS, a wholly-owned subsidiary of Aker ASA, is the majority shareholder of PHLY, owning 57.6% of its total outstanding shares as of 30 September 2023. Kristian Røkke, the Chairman of the Board of Directors of PHLY, is a board member of TRG Holding AS, which owns 68.2% of the total outstanding shares of Aker ASA as of 30 September 2023. TRG Holding AS is controlled by Kjell Inge Røkke through The Resource Group TRG AS.
   Philly Shipyard has service agreements with Aker ASA and certain of its affiliates which provide specified consulting, tax, financial, insurance and administrative services. All payables (including service fees and insurance premiums) under these agreements are paid within the normal course of business. Philly Shipyard believes that related party transactions are made on terms equivalent to those that prevail in arm's length transactions.
   Related costs and financial statement amounts for the three-month period ending 30 September 2023 were USD 38 thousand (USD 34 thousand for the same period in 2022) and for the nine-month period ending 30 September 2023 were USD 497 thousand (USD 461 thousand for the same period in 2022).
   On 4 March 2022, PSI obtained a USD 25.0 million standby letter of credit from a bank to fulfill its contractual obligation under the SRIV contract. The standby letter of credit is secured by a first priority lien in the shares and material assets of PSI, subject to certain exclusions, has normal and customary fees, and accrues interest quarterly in arrears at 4.0% per annum. Aker Capital AS holds 50.0% of the commitment. As of 30 September 2023, Philly Shipyard has paid fees of USD 379 thousand for further payment to Aker Capital AS pursuant to this arrangement.
4. Construction contracts
   Order backlog of USD 1,793.7 million at 30 September 2023 represents a contractual shipbuilding obligation to deliver newly built vessels (NSMVs 2-5, the SRIV and CVs 1-3) that have not yet been produced for the Company's customers (TOTE Services, Great Lakes and Matson, respectively). Order backlog consists of future construction contract revenues and is subject to adjustment based on change orders as defined in the construction contracts. Order intake of USD 5.1 million at 30 September 2023 represents combined change orders on NSMVs 1-5 and the SRIV. Order backlog and order intake on long-term construction contracts are as follows:

	Order	Order intake	Order
	backlog	9 months to	backlog
Amounts in USD millions	30 Sept. 2023	30 Sept. 2023	31 Dec. 2022
	1,793.7	5.1	2,143.8

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The recognized combined profit/(loss) on long-term construction contracts in process (NSMVs 1-5, the SRIV and CVs 1-3) as of 30 September 2023 is as follows:

Amounts in USD millions	30 Sept. 2023
Construction contracts revenue recognized to date	965.1
Construction contracts expense recognized to date	(1,019.9)
Construction contracts loss recognized to date	(54.8)

As of 30 September 2023, the Company has USD 51.7 million as prepayments to suppliers for materials and equipment for the construction of NSMVs 2-5, the SRIV and CVs 1-3 included in prepayments and other receivables on the statement of financial position.

Typical variable consideration elements identified in the Company's contracts with customers include liquidated damages, performance guarantees and warranties.

As of 30 September 2023, Philly Shipyard has three separate awards under one shipbuilding contract in place for the NSMV program. NSMVs 1-2 were awarded at contract signing in April 2020; NSMVs 3-4 were awarded upon the exercise of an option in January 2021, and NSMV 5 was awarded upon the exercise of an option in April 2022. Therefore, the three awards under the NSMV contract are treated as three separate performance obligations that are reported as three separate projects for revenue recognition. Each of these projects is being accounted for using the percentage-of-completion method per IFRS 15 Revenue from Contracts with Customers. PSI is building five NSMVs (NSMVs 1-5) for TOTE Services, with the first two vessels (NSMVs 1-2) scheduled for delivery in 2023 and 2024, the next two vessels (NSMVs 3-4) scheduled for delivery in 2024 and 2025, and the final vessel (NSMV 5) scheduled for delivery in 2025. As of 30 September 2023, the NSMV projects for NSMVs 1-2, NSMVs 3-4 and NSMV 5 are 92.2%, 54.5% and 3.5% complete, respectively.

Philly Shipyard also has a shipbuilding contract in place for the Subsea Rock Installation Vessel (SRIV) program, which was awarded in November 2021. PSI is building one SRIV for Great Lakes, scheduled for delivery in 2025. As of 30 September 2023, the SRIV project is 12.3% complete.

Philly Shipyard also has a shipbuilding contract with Matson in place for the containership vessel program, which was awarded in November 2022. PSI is building three CVs (CVs 1-3) for Matson, scheduled for deliveries in 2026 and 2027. As of 30 September 2023, the CVs 1-3 project is 0.7% complete.

Philly Shipyard's accounting policy is to not recognize profit on projects until they are 5.0% complete or such later time when the cost to complete can be measured with reasonable certainty. No profit on NSMV 5, the SRIV or CVs 1-3 has been recognized as of Q3 2023.

Vessels-under-construction receivable as of 30 September 2023 and 31 December 2022 totaled USD 0 and USD 4.9 million, respectively. Vessels-under-construction receivable represents the difference between (i) cash advances received from the customers for vessels under construction plus accounts receivable for those vessels and (ii) revenue recognized for vessels under construction.

Customer advances (net) as of 30 September 2023 and 31 December 2022 totaled USD 239.5 million and USD 230.6 million, respectively. Customer advances (net) represents the difference between (i) cash advances received from customers for vessels under construction plus accounts receivable for those vessels and (ii) revenue recognized for vessels under construction.

As of 30 September 2023, Philly Shipyard has USD 287.9 million in unpaid non-cancellable purchase commitments for materials, equipment and design fees for vessels under construction.

11. Operating revenues and other income

		Q3	9 months ended 30 Sept.
Amounts in USD millions	2023	2022	2023	2022
Shipbuilding	101.8	92.6	355.1	283.0
Government design studies	-	-	0.2	1.1
Operating revenues and other income	101.8	92.6	355.3	284.1

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