The company advised that these items will not impact loan covenants, and are either non-cash, or are already largely funded within the existing project working capital.
The company also confirmed that, excluding the Waratah train provision and the abovementioned asset impairments, the 2010 full-year results will be in line with previous guidance.
In relation to the issues raised, the company advised that:
1) Following a full review of the A$1.9 billion Waratah RSM contract, the company has identified the need to raise a provision of $190 million.
Now that the project is sufficiently progressed for reasonable estimation to occur (30% project completion point), it is evident from the detailed review undertaken that the tendered estimates do not sufficiently provide for the full extent of the design development, review and approval processes and the consequential flow on cost and time impacts being incurred during the procurement and manufacturing phases of the contract.
It is also of note that confidential commercial processes, entered into with the client, are unlikely to provide timely outcomes to support carrying these items as recoverable costs at this time. Accordingly, Downer has fully quantified and provided for these items in the provision noted above.
Key elements that account for the projected cost overruns include:
• Design development and approval
• Material supply
• Time-related project overhead costs
• Project delay costs
The provision includes a significant contingency and the assessment does not take up future benefits possible from:
• order extensions to the RSM contract;
• benefits generated by the $2.2billion (non-escalated) Through Life Support (TLS) contract;
• any future commercial settlements.
The provision amount is also already largely covered within the working capital draw of the project.
The first set remains targeted for practical completion at the end of calendar year 2010 with final sets targeted to be delivered over 2013. The Pre-production Test Vehicle is performing well and was put on the tracks for dynamic testing in record time and its current performance augurs well for the safe and reliable performance of the Waratah fleet.
Organisationally the company has mutually agreed with Guy Wannop that he leave the business effective 1 July, 2010. Mr Peter Borden, Group Deputy Chief Operating Officer, has been appointed to the position of Acting CEO Downer EDI Rail, with immediate effect. Peter Reichler, as CEO Group Ventures, will continue to manage the Group’s interests in Reliance Rail and the delivery of the Waratah project.
2) As part of the Group’s regular review of asset carrying values a number of adjustments have been made. As set out below a total of $70 million of pre-tax impairment charges will be incurred in the second half of the 2010 financial year. Approximately $60 million of the impairment charges are non cash and will have no impact on the underlying business or Group cash flow. Details of the adjustment are set out below:
• An impairment charge of approximately $42 million relating to goodwill as follows:
- $20 million relating to goodwill in Works UK largely attributable to the UK economy and changes in the longer term assessment of this business;
- $22 million relating to goodwill in the New Zealand Consulting arm of the Engineering Division attributable to changes in the expected trading conditions and strategy.
• An impairment of other assets totalling approximately $28 million including $18 million of assets relating to past customer contracts in the Engineering Division and $10 million relating to movements in the carrying value of assets held for sale.
The above provision and impairment charges represent ‘individually significant items’ and will be presented as such in the full year financial statements.
Downer’s balance sheet and liquidity are strong with in excess of $500 million in cash and undrawn facilities.
A data pack and an audio recoding of Geoff Knox's conference call with analysts and investors in relation to these matters are available for download below.
CONTACT DETAILS
Investors: Ross Moffat, Executive General Manager Investor Relations, T: +61 412 256 224
Media: Maryanne Graham, Group General Manager Corporate Affairs, T: +61 407 252 230
Downer EDI Limited is an ASX -100 company providing comprehensive engineering and infrastructure design, construction, maintenance and management services to the transport, energy, infrastructure, communications and the resources sectors. The Group works throughout Australia, New Zealand, Asia and the United Kingdom.