Infrastructure and resources company Aveng's share price on the JSE fell by more than 28% on April 13 after it announced that the underperforming Batangas liquefied natural gas (BLNG) terminal project being delivered by subsidiary company McConnell Dowell, has suffered further delay.
The BLNG project is lossmaking and resulted in McConnell Dowell's Southeast Asia business unit reporting a loss for the six months ended December 31, 2022.
McConnell Dowell believes it is prudent to provide for the anticipated additional costs associated with the extended time to complete the project, together with an allowance for possible liquidated damages associated with delayed completion, given that the client has not yet granted an extension of time.
As a result, the loss provision associated with the BLNG project has increased and McConnell Dowell is, therefore, expected to report an operating loss for the financial year ending June 30, Aveng said in a statement.
As a result, it is expected that Aveng is also likely to report an operating loss for the financial year ending June 30, it noted.
"The Aveng balance sheet and liquidity will be further supported by the disposal of Trident Steel, which remains on track for completion in the current financial year. This will result in all South African legacy debt being extinguished while leaving surplus available cash," Aveng said.
It added that it remained confident in the management team at McConnell Dowell and their ability to build a sustainable, profitable business.
The BLNG project commenced during the Covid-19 global pandemic. It has been the subject of significant delay and disruption caused by the pandemic, including related supply chain disruptions and the inability to mobilise people to the requisite locations to efficiently execute work.
"Negotiations are continuing with the client to take into account the impact of Covid-19, the Russia-Ukraine war and the resolution of certain contract claims, including claims for extension of time. The BLNG project losses, together with work in progress, have been funded to date from internal resources.
"Despite this and our continued efforts to ensure the project is delivered safely to the appropriate level of quality and in the shortest timeframe, the client, FGEN LNG Corporation, has elected to call on the project guarantees, without notification, in the amount of R528.9-million," said McConnell Dowell.
These guarantees have been settled by its bankers in Australia and, in turn, McConnell Dowell settled an amount of R123-million to its Australian bankers, with a further R123-million expected to be settled by June 30. These same bankers are supportive and the company is currently agreeing repayment terms for the remaining balance, the company added.
Further, after partially settling this amount, McConnell Dowell reported cash on hand of A$168-million and, together with these extended repayment terms, the immediate impact on liquidity was minimised and its working capital requirements remained fully supported.
On March 22, McConnell Dowell received practical completion of the offshore and onshore civil or structural facilities. Final electrical and instrumentation and commissioning work is continuing in order to achieve gas-in-readiness and final facility completion.
"McConnell Dowell continues to work with FGEN to seek the best outcome for both parties, including minimising the time and cost to complete the project, resolving contractual claims and recovering outstanding certifications owing to us under the contract," the company said.
Meanwhile, Aveng said the Australian and New Zealand and Pacific business units continued to perform well.
McConnell Dowell had high levels of work in hand, representing 92% of planned revenue for the next financial year, which provided a strong platform for continued profit generation in Australia, New Zealand and Pacific and Built Environs business units, and would support the recovery of McConnell Dowell in the near term following this disappointing setback, Aveng said.