All those involved in Australia’s $8.7 billion renewables energy development boom ought to rethink their risk management following the voluntary administration of engineering contractor, RCR Tomlinson.
Over the past decade the engineering and contracting sector has been famous for revealing unexplained financial shocks. But it has to be said the RCR collapse is an absolute shocker.
The company had net cash of $54.8 million at June 30, raised $100 million in a capital raising underwritten by Macquarie Capital in September, and had total syndicated finance facilities of $431 million led by the Commonwealth Bank of Australia.
The banks refused to extend additional credit this week but they should not be blamed for the demise of a company which managed to win the support of respected fund managers, including Allan Gray, Perpetual, Dimensional Fund Advisers, Tribeca Investment Partners and Fidelity.
Too much risk
One banker familiar with the renewable energy sector said he had known for a couple of years that RCR Tomlinson was a high-risk business. It was common knowledge that former chief executive Paul Dalgleish had gone too hard and too fast in his quest to dominate solar project development in Australia.
He had incredible success winning tenders. But the fixed price engineering, procurement and construction (EPC) contracts won by RCR Tomlinson resulted in too much risk being carried by shareholders when things went wrong.
A $57 million impairment in August against two solar projects in Queensland worth $315 million showed serious failures on the operational front. The company showed all the signs of being squeezed by an industry-wide shortage of talent.
Management changes over the past few months, including the departure of Dalgleish and the unexpected resignation of the chief financial officer, Andrew Phipps, left chairman Rod Brown and interim CEO Bruce James to handle a severe cash squeeze.
The company’s cash drain was exacerbated by the loss of confidence in the management. RCR Tomlinson was preferred bidder on many projects but the final decisions were deferred to await the precise financial status of the company.
RCR Tomlinson made the mistake of tying its final milestone payments on its Queensland solar projects to targets that included final connection to the grid. When the company could not complete this because of the prolonged testing demands of the Australian Energy Market Operator it was forced to make liquidated damages payments to its client.
AEMO gets tough
AEMO has significantly toughened its testing prior to the introduction of new technology and generation into the power system. This is in keeping with the pressure from the federal government to ensure stability and reliability in the system.
Industry sources say that 18 months to two years ago AEMO was only taking a few weeks to allow renewable generation into the system. This now takes many up to six months and there is no indication of a reduction in testing timeframes.
“There is high interest in renewable connections across the National Electricity Market (NEM), generally in regions remote from existing generation sources, load centres and power transmission infrastructure, and these are increasingly requiring detailed technical assessments to confirm ability to safely operate without adversely impacting power system stability,” a spokesman for AEMO said.
“The speed at which new generation can register in the market and commission is very much dependent on the technology type, its location in the network, the preparedness of the proponent and the performance of the plant during the commissioning phase.”
There is an apocryphal story that there is a solar project in Victoria which has repeatedly failed to meet AEMO’s standards and will never be connected to the grid.
It would appear that AEMO and the transmission network operators are under immense pressure because of the surge in solar and wind projects completed over the past year. The latest AEMO data shows about 3GW of renewable generation entered the market last year.
There is a further 5.2GW committed or under construction – wind (2.9GW) and solar (2.3GW) – in the pipeline. The general rule of thumb for the necessary investment is about $1.5 million/MW for solar and $1.8million/MW for wind.
It is now clear that RCR Tomlinson took on financial risks beyond the capacity of its available capital. In hindsight, it would seem that the capital raising should have been double the size at $200 million.
The administrators – Jason Preston, William Harris, Robert Brauer and Matthew Caddy at McGrathNicol – will have limited choices in dealing with the contracts on the books. The project owners will be trying to find replacement companies.
The collapse will have knock-on effects for several large solar projects. The owners of these may be forced to resort to hourly payments to new contractors to get jobs completed. Contracts that have just been won by the company may face difficult negotiations over financing.
The upfront payments earned by the company on contracts won over the past few years helped drive revenue from $890 million to $1.9 billion. The hit to earnings in the year to June from the $57 million provision was a warning that all was not right inside the company.
With inadequate capital to cover the losses mounting in various projects, the directors had no choice but to seek the protection of voluntary administration.