Downer takes $45m hit on troubled Murra Warra Wind Farm

Project developer Downer EDI has announced that it will take a $45 million hit to its profits, as a result of project partner and wind turbine manufacturer Senvion entering voluntary administration, and effectively leaving it on the hook for completion of the Murra Warra wind farm.

Wind turbine manufacturer Senvion announced in April that it had commenced “self-administration proceedings” in Germany, after the company struggled with the combined pressures of debts, and a competitive international wind turbine market.

Downer EDI had signed a joint venture agreement with Senvion to serve as the EPC providers for stage one of the Murra Warra wind farm in western Victoria, and the company remained liable for the completion of the wind farm.

Downer EDI confirmed in an ASX statement on Thursday that the delivery of the project was held “jointly and severally” by Downer EDI and Senvion, meaning Downer EDI remained on the hook for the project if Senvion was unable to meet its own responsibilities.

As a result of the disruption to the project caused by Senvion’s financial troubles, Downer EDI has been burdened with additional costs, and announced to the ASX that its losses on the project would total $45 million before tax ($31.5 million after tax).

These losses include the cost-to-complete for the project, and the drawing down of project contingency funds, losses on performance rights and liquidated damages. Downer EDI was required to seek agreements to secure procession of all equipment required to complete the project.

Upon Senvion’s announcement of administration proceedings, Downer EDI commenced discussions with key stakeholders to ensure the project could be completed, with the losses being created due to the need for Downer EDI to acquire additional equipment and secure the ongoing work of project suppliers and service providers.

Stage one of the Murra Warra wind farm involves the construction of 61 wind turbines and represented a total project value of $380 million. Across the planned Stages one and two of the Murra Warra project, a total of 429MW of wind generation capacity was to be constructed.

While the administration proceedings have allowed Senvion to continue to deliver wind turbines to the Murra Warra project, it has created substantial legal difficulties in completing the project, and required Downer EDI to step in to take greater responsibility for the completion of the project’s construction, including working with Senvion’s subcontractors.

Downer EDI has already completed the construction of 36 of the 61 wind turbines to be built at Murra Warra, with 13 turbines already operational and generating electricity.

The project secured a power purchase agreement with a consortium of large-energy users led by Telstra, in a deal that is understood to have secured a power purchase price “well below” the market rate.

Senvion will continue to work with Downer EDI towards the completion of the wind farm, including through the company’s involvement in the commissioning of the remaining wind turbines.

Downer EDI remained optimistic that it would still have a positive involvement in the Australian renewable energy sector, despite the setbacks with the Murra Warra project and widespread industry problems with solar projects, particularly in connection delays and commissioning.

Downer took a hit on the 100MW Clare solar farm last year, although it managed to dodge most of the big issues that took down RCR Tomlinson, caused a suspension of shares for solar new-boy Tempo Australia, and caused write downs at many other projects.

“Downer has successfully delivered 14 wind farms since 2003, and during July we completed work on the Beryl Solar Power Plant in New South Wales and the Numurakah Solar Farm in Victoria,” Downer EDI CEO Grant Fenn said.

“Importantly, both these solar projects were completed profitability and in line with expectations. We have reviewed and adjusted our risk management processes, particularly around joint and several liability, following the Murra Warra experience, and we remain committed to building on our leading position in renewable energy.”

Senvion’s troubles have also impacted upon the 212MW Lincoln Gap wind farm, where the company is also serving as a wind turbine supplier.

Project developer Nexif confirmed in an update on the project released in April that the Lincoln Gap wind farm also remains on track for completion, having negotiated the ongoing supply of wind turbines to the project from Senvion, with first generation occurring from the first completed turbines being achieved in April.