Forge plunges on ANZ rescuePeter Williams and Stuart McKinnon,...

Forge plunges on ANZ rescue
Peter Williams and Stuart McKinnon, The West Australian
November 28, 2013, 6:07 am
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UPDATE 1.20pm: Forge shares have plunged more than 80 per cent after the engineering contractor emerged from a 24-day trading suspension to announce big writedowns on two power station projects.

The company confirmed reports in this morning’s WestBusiness that its financier, ANZ Bank, has had to come to the company’s rescue to cover its acute cashflow crisis and meet its commitments to continue operating as a going concern.

Forge said it had been forced to writedown $127 million on cost blowouts associated with the Diamantina Power Station project in Queensland and the West Angelas Power Station project in the Pilbara.

It also said it required an extra $45 million to complete the two projects.

Shares in the group plummeted from their last traded price of $4.18 to a low of 28.5 cents at the open after emerging from a 25-day suspension.

But by the close of trade, they had recovered to be down $3.495, or 83.61 per cent, at 68.5 cents. Nearly 93 million shares worth $55.5 million had changed hands.

Forge managing director and chief executive David Simpson said he regretted having to inform shareholders of the extremely disappointing outcome.

“Several commercial, scope estimate and planning deficiencies have recently been identified on the DPS and WAPS projects which contributed to the substantial erosion in profit,” he said.

Forge said the profit writedown on DPS resulted from a range of factors including inadequate allowance for scope growth, large cost overruns in structural, mechanical, piping and electrical works, poor project management and delays in settling a number of claims, as well as the significant acceleration costs allocated in getting the project back on schedule.

The profit writedown on WAPS resulted from inadequate allowance for scope growth, significant rework due to design problems, poor project management and a large number of extension of time claims that have not yet been settled.

ANZ has agreed to new finance facilities and certain amendments to existing debt facilities to alleviate Forge's short term liquidity crisis and bolster its balance sheet.

Mr Simpson said the overall funding support gave Forge the financial flexibility to continue to trade on a business-as-usual basis and deliver on work in hand.

“Additionally, it underpins our future growth and tendering prospects,” he said.

Forge Group chairman David Craig said the scale of the under-performance of the two projects, and the fact that the issues came to light in such a short space of time, was unacceptable to the board.

“We have worked with senior management to take immediate action to ensure that these issues are resolved and that the projects are completed in a timely fashion,” he said.

“Despite these disappointing results, we remain confident on our future prospects.

“The senior management team remains very focused on closing out the DPS and WAPS projects and delivering on our current order book (worth $1.8 billion).”

The company predicted a full-year EBITDA loss of $85-$90 million based on the writedowns.

Pro-forma EBITDA is expected to be in the range of $45-$50 million, after adjusting for the profit writedowns on DPS and WAPS, one-off items and the full-year impact of cost out initiatives.

ANZ extended a new debt facility to Forge after attempts to recapitalise the business through an equity raising failed.

During efforts by broker Goldman Sachs to raise funds from institutional investors, an issue price of as little as 50c a share was flagged.

Without the assistance deal struck with ANZ, it is understood that Forge would have become insolvent.

Before going into a trading halt on November 4, the contractor had a market capitalisation of $360 million.

As part of the arrangement, ANZ has called in corporate recovery and turnaround advisers KordaMentha. The advisers are expected to help bring in equity investors early next year to shore up the company.

Forge has also reached an agreement with client Diamantina Power Station - a partnership between AGL Energy and APA Group - to cut its capital costs.

The deal will see the project's scope changed from a combined- cycle to an open-cycle power system. The original $420 million contract involved the installation of two combined-cycle modules purchased from Siemens for the 242 megawatt station, to be completed next June.

The West Angelas project for Rio Tinto involves the construction of an 80MW open-cycle power station, with completion scheduled for January.

Forge's flirtation with collapse will have come as a shock to observers and shareholders after a relatively spotless performance in contract execution.

It also comes despite Forge having a healthy cash balance of $91 million at June 30 and bank facilities of $210 million.

While rumours of project problems pushed its shares lower over two months, managing director David Simpson gave no hint that anything was amiss at last month's annual meeting.

Mr Simpson took over from company co-founder Peter Hutchinson in mid-2012. Forge Group Power, then CTEC, along with the now problem contracts were acquired six months earlier.