Thursday, 31 March 2016

ASTALDI UNBOWED: TAKES OPPOSITE VIEW TO ED MARTIN'S CLAIM COMPANY IS FAILING

Nalcor CEO Ed Martin is not forthright with the public about the status of the Astaldi contract at Muskrat Falls. 

Astaldi’s version may not be entirely accurate either; but it is very different than the one Ed Martin relates, and we need to know why..

In October, 2013, after six months of evaluation, Nalcor awarded a contract to Astaldi to build the powerhouse, intake, gated spillway, transition structures and other associated work. Astaldi booked the contract with a value of C$1.0 billion.

Last week Martin told reporters: "We do have an issue with the powerhouse that Astaldi is constructing. They have fallen behind significantly”. That lag will have "schedule implications….and with schedule implications, there will be some cost implications", the CBC reported.

This is not the first time Ed Martin has spoken poorly of Astaldi’s performance; the Muskrat Falls Oversight Committee has referred to the problem frequently, too. This excerpt from the March 2015 Report is just one, and not necessarily the latest, example:



Last year, Nalcor blamed Astaldi for having blown the schedule on the powerhouse and spillway, too. Issues with the large Italian contractor extended to the controversial Integrated Cover System (ICS), the “Dome”.

A little more history.

Nalcor said, last year, that the demolition of the estimated $120 million ICS, built to advance construction of the powerhouse during the winter, was Astaldi’s cost and decision to make. Astaldi tore down the steel/concrete structure even before it was completed. Nalcor clearly stated that the dome would have no impact on the consumer. It remains an open question why the dome was tore down.

In addition, the Independent Oversight Committee’s confirmed the existence of penalties in the Astaldi contract and cited “liquidated damages” could be assessed the Company if construction milestones are not reached.This Report excerpt is confirmation: 


The cost of the "Dome", alone, might allow one to conclude that Astaldi Canada had suffered a pretty bad year, financially, in 2015.

But you would be wrong.

Ed Martin’s comments, together with the Reports of the Muskrat Falls Oversight Committee, might also suggest Nalcor was ready to assess "liquidated damages" for the delay. If Astaldi did not concur it might be expected to face legal action by Nalcor; in which case the Astaldi CEO would have to disclose to his shareholders. 

But, again, you will not find any such warning in Astaldi's Third Quarter 2015 Report.  It states "works on the Muskrat Falls Project are in line with current schedules", as the excerpt below confirms.



Neither is the Full Year 2015 Financial Results Presentation apologetic. Astaldi CEO Stefano Cerri released the Report on March 9, 2016, less than a week before Nalcor’s AGM. In contrast to what Ed Martin told the media, Astaldi states that production at Muskrat Falls has reached “remarkable levels” (p.10).  This excerpt from the Report confirms Astaldi's position:

 


But this wasn't the only claim shielded, until now, from the Newfoundland and Labrador public. There are others. Taken together, they constitute a remarkable difference in the narratives of the two CEOs.

Astaldi booked 320 million euros from Muskrat Falls in 2015, about C$500 million; that is not a lot of revenue against which to conduct a full or even a partial write-down of the Dome, underwrite low productivity, as Nalcor asserts, take a reserve for possible Nalcor litigation, and still not lose money. None of this adds up!

Astaldi CEO Stefano Cerri
I’ll let a long time Muskrat analyst, known to me, who posted on last week’s Blog to relate why  Astaldi doesn’t feel a need to warn shareholders of anything. He writes:

“(Astaldi’s) CEO cited challenges with the MF project, due to things such as severe weather (which is likely Nalcor's risk). The CEO also disclosed that there was 320 million Euros ($500 million) of revenue booked in 2015. This was taken at 0 margin (no profit). The CEO was grilled by the analysts in the (subsequent Conference Call) to explain why Astaldi was not making a profit in Canada. He replied that he was optimistic the final negotiations with Nalcor would produce a profit.”

The writer’s comments on “the Canadian project” compelled me to also listen to the audio recording of the Astaldi CEO’s Presentation and the Q&A Session, with stock analysts, which followed.

Far from feeling threatened, financially, Astaldi seems to enjoy a relationship with its “Canadian client” unhindered by rancor or legal threat.

In the excerpt from the 2015 Astaldi Report, shown above, Astaldi reveals that negotiations are “on-going with the client to redefine the schedule and the conditions of the project”.

The statement exposes CEO Ed Martin as possibly playing fast and loose in naming who is actually to blame for Muskrat schedule delays and cost overruns.
Exhibit from Astaldi 2015 Annual Report confirms contract value, % completion data, etc.

Let’s listen into the Astaldi CEO's verbal Presentation….around 20 minutes into the proceeding. He states, through a translator:

“…on…slide 10 you will see two factors which led to apparently lower profitability in this quarter as a result of the sterilization of margins from Canada given that today negotiations are underway which obviously have been very positive with the client. This is a project that is going to lead to break-even, one-time, one-shot drop, in the income statement on the fourth quarter……” 

The next excerpt comes out of the Q&A Session in which the Astaldi CEO responded to a question from an analyst:

“….regarding the Canadian contract negotiations now underway we are confident…I can’t provide other details, I have already said too much…a contract where we have exceeded 40% in terms of work progress…a very complicated contract from an operational viewpoint in terms of logistics and in terms of operations due to the climatic conditions. Last year was the worst winter in 30 years. …I was landed in very critical conditions I remember. So obviously this is a very complicated contract…that’s our job…negotiations are underway; we expect that in the short term it will reach a conclusion.”

Again, as anyone can see, Astaldi is not a company seized with concern over its performance.

If the Company is suffering any distress, it is due only to having recorded zero profit last year.

There is no mention of lawsuits for damages. There is only a reference to “climatic conditions”, a “complicated contract” and “positive…negotiations…underway”.

There are many questions that need to be addressed by Nalcor; such as:

Nalcor CEO Ed Martin
What kind of contract has Nalcor entered into when the “cost” and schedule” implications, over which Martin blames Astaldi, are actually a matter of “positive” negotiations “, and not a demand for “liquidated damages”?

Has Astaldi drawn a 'line in the sand' for Nalcor by putting these assertions in writing and making them public? 

Does it regard its position as sound due to decisions taken (or not taken) by Nalcor? 

In other words, did engineering design errors which were Nalcor's fault, and operational interference in Astaldi's management (which the Oversight Committee acknowledges but does not make clear if Astaldi formally consented to the insertion of its managers), cause the Company to become emboldened and to view its risk from a position of strength?

The question is not whether Astaldi is right, but whether the Nalcor has been performing so badly as to allow the expertise of major contractors to trump Nalcor's inexperience.

Has the Nalcor CEO been disingenuous, absent the capacity to speak the simple truth?

The analyst who commented on last week’s Blog offers this blunt assessment:

“It is funny that Martin cannot talk about these commercial matters. The CEO of Astaldi has to talk about these things as a publicly traded company. Ed Martin can't provide an update to the very people who are paying for this project.”  

If Premier Ball is going to "open the books on Muskrat Falls", I think he had better hurry! Substantially, Muskrat was picked clean by Nova Scotia; chiefly because Martin let them, just to trigger the Federal Loan Guarantee. 

I wonder if he will award Astaldi the bones of the ratepayers, too.

5 comments:

  1. Nalcor won't have a leg to stand on when this goes to court.

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  2. How long before we see the Telegram headline: Muskrat Falls: Gigantic Blunder.
    That was the newspaper headline following the great Port Nelson project in Manitoba. Work started in 1913. 1000 men in summertime, 250 in winter. It was finally shut down in 1918.
    The blunder was due to poor surveys on the river and water depth to allow large ships to dock. Ships could not get nearer than 1000 feet to the proposed terminal, given 20 feet or less the water depth.
    The cost; 21 million over 4 years, each year about the full budget of the Nfld Govn at that time. It those terms, I guess bigger than the present Muskrat job. Many Nflders worked there. Much of the works remain after a century abandoned. The press of the day were kept out. In 1917, after 4 years of work the chief engineer wrote in secret to the Ottawa government `I condemn this project in absolute terms`
    My father, Capt Esau Adams, who worked there and knew the chief engineer, wrote in his journals that this engineer thought it was a doomed project from the start. Yet much of his works still remain, a monument to the skill of that civil engineer and the workmen. Ice strengthened Nfld ships were used to deliver much of the material and men into Hudson Bay. I cannot help but make comparisons between the projects, when reading my fathers detailed journals. They actually built an island one half mile long out into the river mouth, connected it with 17 steel bridges. They had the largest dredge in the world at that time there , operated by a man from Holyrood. But in the end a gigantic blunder. Hope Muskrat can be salvaged, but it appears rather bleak. And the silence from Nalcor and our government is deafening. Winston Adams

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  3. I find Astaldi's defense a bit weak. If the 2013 and 2014 winters were so severe that it delayed the construction work on the Muskrat Falls site, how come the other major construction project occurring 300 km south continued unabated led by a company whose name shall not be mentioned?

    Was it botched planning by the client? Or lack of experience by a prime contractor whose body of work never included building anything in subarctic conditions? A bit of both? Regardless, as the client who selected Astaldi, Nalcor bears a large part of the blame for its initial choice.

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  4. When you look at the site progress it is clear Asltadi is well behind schedule. Yet they bid this contract using the Dome to protect construction workers from the weather. The Dome was tore down. although Nalcor said this was Astaldi's decision, there really has been no commentary as to why?

    If the reason for tearing down the dome was due to engineering issues from SNC, or other contractors, then this is a tough spot for Nalcor. Without the dome Astladi's execution basis, and pricing is open to revision. The result is that Astaldi would likely be compensated for incurred cost, with a reasonable profit.

    It all comes down to why was the dome dismantled?

    Nalcor are not talking about Liquidated Damages anymore, the recent independent review indicated that they cant even manage to get a integrated project schedule updated in real time. This is despite Nalcor having an army of project controls folk.

    This appears to be a project spiraling out of control. But how do we reset it to try to at least have power this decade?

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  5. I warned from the outset that this was an economic boondoggle as well as an environmental disaster.

    The democratic controls, the JRP and PUB were not permitted access to the information required to assess if this was the "least cost option". Martin and Nalcor have been above scrutiny and accountability from the outset. Why this was allowed to happen is a question NL'ers will be asking for generations.

    Before Winston's dire warnings come to pass the Nalcor secrecy must be stopped. With a new government unwilling to protect the NL future polite questions are not enough. If you love your province you need to demand the Nalcor books and engineering plans be made public NOW!

    At this point with the problems apparent and the disconnect between Astaldi and Nalcor very plain to see, to do less amounts to complicity.

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