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Thursday 31 March 2016


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.