The spectacular collapse of engineering group RCR Tomlinson, which crashed into administration on Thursday just months after raising $100 million in capital, is the story of a company that flew too close to the sun – literally.
Back in 2016, the companys former chief executive, Paul Dalgleish, made it clear he was going big on solar projects. He told The Australian Financial Review that while renewable energy had typically accounted for only a small proportion of the contractor’s revenues, he wanted renewables to be half its business in the future.
By mid-2017, RCR was telling shareholders that it was “positioned for major spend in solar” and when it announced its interim results in February 2018 it boasted its group revenues had doubled to $940 million with help from its expanding renewable energy portfolio.
But industry insiders say RCR’s strategy of bidding aggressively for solar farms, undercutting competitors to win 13 of them and control 20 per cent of the solar market saw it become “greedy”, taking on more projects than it could handle.
Cost pressures in the ultra-competitive construction market for solar farms started to become evident last year, as intensifying rivalry for new projects squeezed profit margins.
Local players with experience in Australian mining and energy such as RCR, as well as Downer EDI and UGL, started facing more competition from overseas companies with a track record in delivering renewable projects.
Steep learning curve
Ben Willacy, a renewable energy analyst at consultancy Rystad Energy, who closely tracks the Australian solar market, says RCR was a victim of the market’s immaturity.
“It was a steep learning curve in terms of how you win the job and how you price it,” Willacy says. “At the end of 2018 there is a much better understanding of cost structures, and contingencies that need to be worked into the job.”
While solar farms are not technically difficult to build, they are hard to make money from. This is partially because the materials used in building them are purchased cheaply from the same Chinese suppliers (meaning companies can’t find alternative materials at lower prices), and also because the contracts are relatively short at around 18 months – making it hard for contractors to catch up if there are delays.
Downer EDI chief executive Grant Fenn told analysts after the company’s annual results in August that solar was a “tough” market (Downer’s first solar contract broken even, and its second took a small loss) and that the company was being cautious on new projects until it got “a handle on the supply chain”.
Willacy says RCR was particularly exposed to systemic risks due to the size of its solar portfolio, which included more than $1 billion worth of projects.
“It was constructing some of the biggest projects – and the bigger the project the more liquidated damages have to be paid if it starts to run over as my understanding is that damages are calculated on a dollar per megawatt basis.”
The fixed price contracts taken on by contractors have liquidated damages that have to be paid if the projects aren’t delivered on time. Several of RCR’s farms were running late, forcing it to pay damages to solar farm developers at the same time it was trying to pay workers and suppliers, draining its available cash.
Delays in securing connections into the electricity grid have also been problematic. On solar farm developer said they did not believe that RCR had invested enough resources in its power systems engineering teams.
RCR also took on the risk of connecting projects to the grid in most of the solar farms it worked on, meaning the company did not get final payments from developers until connection occurred.
One contractor contacted by AFR Weekend says it refuses to take on the risk of commissioning solar farms when signing contracts for projects.
Other contractors say they make sure that their so-called “milestone payments” – money paid for completing work – occur at the same time as they have cash payments due to suppliers and employees to avoid getting caught in a cash crunch.
Solar farm contractors have also had difficulties getting farms from first production through to full commissioning, when the market operator signs off on the plant, with the process taking up to six months, according to Willacy.
“In some instances it’s taking quite a long time, probably longer than some anticipated to get from energisation, when a plant plugs into the grid, to full output.
RCR’s board only seemed to become aware of the company’s risky situation in August when it put the company into a trading halt and asked investors to stump up cash to pay for $57 million in writedowns on its Daydream and Hayman solar farm projects in Queensland.
Bruce James, RCR’s interim chief executive – Paul Dalgleish’s job was terminated on August 7 – told investors that the company was planning to shift away form the kind of fixed price contracts it had entered into on solar projects because they exposed it to too many risks, such as meeting project milestones and unanticipated cost increases.
RCR would instead pursue more collaborative “alliance-style” contracts, Mr James said.
RCR’s new conservative approach has come too late to save the company, or the millions of dollars sunk by investors.
But its demise will strengthen the bargaining position of competitors like Downer and UGL on future solar projects.
Stuart Langdon, partner at KordaMentha Restructuring, says RCR’s collapse proves that alliance-style contracts are “the way of the future.”
“There needs to be more appropriate risk-sharing to enable all stakeholders to succeed.”