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Operational review

Construction and Engineering: Australasia and Asia

 
Financial highlights
  2014  
Rm  
2013  
Rm  
Variance  
(%) 
  Gross revenue 28 169   26 749   5  
  Gross earnings 1 575   1 831   (14) 
  Net operating system 271   639   (58) 
  Capital expenditure 243   384   (37) 
  Total assets 13 340   11 525   16  
  Total Liabilities 8 623   7 736   11  

McConnell Dowell is a major engineering, construction and maintenance contractor experienced in delivering complex projects in the building, infrastructure and resources industry sectors in Australia, New Zealand and Pacific Islands, Asia and the Middle East.


59% Contribution to Aveng's
two-year project order book
109% Increase in earnings from
Overseas operations
5% Growth in revenue
to R28,2 billion
70% Employee satisfaction score
 
     

McConnell Dowell operations

 

David Robinson Managing Director

 
Sectors served
  • Infrastructure
  • Mining
  • Power
  • Water
  • Oil and Gas
  • Industrial
  • Commercial
  • Retail
  • Concessions
  • Pipelines
  • Transport
  • Renewable energy

McConnell Dowell is geographically structured into Australian and Overseas operations, with specialist services in tunnelling and pipelines. Built Environs is the commercial building arm of McConnell Dowell. Separately branded Electrix operates in the construction, maintenance and asset inspection parts of high-voltage electrical transmission and distribution systems, generation and electrical substations, as well as gas distribution networks.

McConnell Dowell operated in challenging market conditions during the 2014 financial year, with declining opportunities in its core sectors and increasingly demanding commercial conditions resulting in higher levels of risk. Major contracts contributed to ongoing revenue growth but earnings were materially impacted by losses incurred on the Gold Coast Rapid Transit (GCRT) contract in Australia which was substantially completed during the year.

McConnell Dowell's geographic spread and sector diversity mitigated the impact of the economic downturn to a certain degree, but the business has found it necessary to strengthen its focus on project execution, claims recovery and securing new work at acceptable risks and margins. A number of interventions were implemented during the year under review to improve operational and commercial management of major projects. These actions are discussed in more detail under key focus areas.

Operational performance

Revenue growth of 2% to R9,4 billion in the Australian operations was driven mainly by marine projects at Hay Point in Queensland and Port Hedland in Western Australia. McConnell Dowell worked collaboratively with the engineer, procure, construct and manage (EPCM) contractor to continue with construction of the Hay Point Berth contract, including the mechanical, electrical and instrumentation works. Inclement weather during the first half of the year resulted in delays in the project. Completion of the works is expected in the first half of the 2015 financial year.

The Australian order book remains strong, reflecting new contracts awarded during the year particularly in the marine, civil and rail sectors. The decision in 2013 to focus on transport infrastructure in order to mitigate the slowing of investment in major resources infrastructure resulted in the award of a major roads project in New South Wales and the operation's first road and rail underpass contract in Western Australia. The focus on road and rail transport infrastructure will continue across all Australian states in 2015 and ongoing opportunities in the coal seam methane gas industry are being explored in Queensland.

The Overseas operations performed well in competitive market conditions, achieving strong profit growth, in spite of a marginal decline in revenue to R3,6 billion, and excellent project execution in most areas. In New Zealand, the Te Mihi geothermal power plant was commissioned and handed over and work continued on the Christchurch and Waterview Alliance projects. In Southeast Asia, the Jurong Aromatics and Holcim Tuban and Vale Jetty contracts were completed. New marine works were awarded in Singapore and Indonesia and industrial projects in Malaysia. The Middle East operation continued work on projects in Abu Dhabi, Saudi Arabia and Qatar.

Despite several notable contract awards and a robust opportunity pipeline, new work is strongly contested. The operation continues to seek new technology and refinements in its operating methods to generate a competitive advantage in its targeted oil and gas, mining and minerals, and industrial market sectors.

The Pipelines business unit reported an 11% decline in revenue to R7,1 billion as the large liquefied natural gas pipeline contracts in Queensland progressed towards completion. Construction work on the Australia Pacific Liquid Natural Gas (APLNG) contract was completed in June 2014 and work on the Gladstone Liquid Natural Gas (GLNG) process hub at Roma continued. Commercial close-out for these two projects is expected in the first quarter of the 2015 financial year. The Komo Airport contract in Papua New Guinea was completed and a good commercial outcome was achieved.

The Queensland Curtis Liquefied Natural Gas Pipeline (QCLNG) contract achieved substantial completion on 30 November 2013, with first gas transported in December 2013. Non-contribution by QCLNG impacted heavily on the business unit's profit margin. Although the key project milestones were successfully met and milestone completion incentives were earned and received, the commercial claims process remains a material risk to earnings. Significant executive effort is being applied to recover losses on this contract. In December 2013, the QCLNG joint venture was unsuccessful in the first part of the commercial claims under the expedited dispute arbitration board structure. Leave to appeal this outcome, as announced on 21 July 2014, was unsuccessful. The second arbitration case is to be managed according to the International Chamber of Commerce (ICC) rules rather than the expedited dispute arbitration board structure applied in the first part of the arbitration process. The statement of claims was submitted on 23 July 2014 and the arbitration case is only likely to be heard by the end of the 2015 financial year. Claims contained in the second arbitration are considerably larger in both number and monetary value than those to which the initial arbitration award applied. The parties involved are intent on expediting the arbitration process.

 
 

McConnell Dowell contribution
to the Aveng Group's revenue

McConnell Dowell will continue to focus on its core competencies and current geographic footprint. The Southeast Asia and Middle East markets represent important growth potential.

 
 

The Pipelines business unit enters the new financial year with a healthy portfolio of opportunities within the oil and gas sector in Australia, Southeast Asia and the Middle East.

The Tunnelling operation reported a significant increase in revenue to R1,8 billion. The operational team continued to focus on strengthening execution performance. The DTL2 C917A contract was secured in Singapore during the year, continuing the long-term relationship with the Land Transit Authority. Work on the DTL2 C916 contract is scheduled for completion in June 2015 and C917 in January 2016. Demonstrated expertise in this contract places McConnell Dowell in a strong position to capitalise on future infrastructure transport projects across Australia, Singapore and New Zealand.

In New Zealand, the massive 3 500 tonne, 14,5 metre diameter tunnel boring machine for the R12,2 billion Waterview project was successfully assembled, commissioned and launched, and is now over halfway along the first tunnel where tunnelling is expected to be completed by September 2014.

The revenue of Built Environs increased as work continued on the Perth Airport Terminal 1 expansion and the Ocean Keys Shopping Centre expansion which are the business unit's two largest projects in Western Australia. Built Environs also continued with work on a major retail fit-out for a leading international retailer's flagship store in Adelaide. With the multi-staged Parks Community Centre project nearing completion, Built Environs completed two retail projects in Adelaide: the Myer Centre Adelaide Upgrade and the Centro Arndale Upgrade, and successfully delivered the Australian Submarine Corporation Maintenance Support Towers project. In Queensland, Built Environs completed its scope of works on the Gold Coast Rapid Transit (GCRT) public private partnership project and is assisting McConnell Dowell with building works on the Brisbane Flood Recovery and Milton Ferry Terminal project.

The GCRT, which involves the design, construction and delivery of a 13 kilometre light rail corridor along Australia's Gold Coast is the first of its kind in the State of Queensland and is listed as one of the world's top 100 infrastructure projects. The contract incurred significant losses as a result of design issues, and access, service and weather-related delays during the first half of the financial year, and cost inflation during the second half. The GCRT project achieved practical completion with technical handover to the client occurring in July 2014 and remedial works underway. Additional cash outflow exposure on this contract is reducing but its cost to completion significantly exceeded budget due to complex design and scope amendments, along with the impact of delay events and acceleration requirements. This resulted in a substantial loss being recognised in the financial year along with a significant increase in uncertified revenue.

The Electrix business unit continued to perform well as reflected in its delivery of another year of strong growth. Profits grew on 32% growth in revenue to R3,4 billion.

The New Zealand business had another steady year of performance with the electricity and gas contracts delivering solid results. Work volumes for the distribution business are projected to grow and the transmission business remains in a sound position going forward. The commercial business is benefiting from the Christchurch earthquake rebuild. Securing the Kiwi Rail North Regional Traction Maintenance contract positions the business to expand further in the transport sector.

Electrix Australia continues to grow as a result of strong performances in all regional operations. Renewed term maintenance contracts with major utility customers are now in place, with acceptable contributions being made through projects with McConnell Dowell and other industrial clients. The gas sector business has gained momentum with contracts secured with the Australian Power Authority in both Victoria and South Australia. Expansion into the transport sector, in particular rail, is seen as a growth opportunity. Electrix has a solid level of work on hand and a number of excellent prospects to provide further diversification and growth.

Key focus areas

Financial performance

McConnell Dowell's total revenue increased by 5% to R28,2 billion reflecting the completion of a number of major contracts, notably GCRT, Hay Point Berth, APLNG and QCLNG. Non-Australian operations contributed an increased 26% to revenue.

The operating segment's earnings were materially impacted by losses incurred on the GCRT project, while overseas operations and Electrix performed well. Net operating earnings of R271 million were significantly below the R639 million achieved in the 2013 financial year.

QCLNG was substantially completed in December 2013 and GCRT achieved practical completion in July 2014 but both remain materially significant commercial risks until associated claims are resolved. Uncertified revenue for McConnell Dowell is R4,5 billion (2013: R2,7 billion) including smaller outstanding claims associated with the Perth Airport, Port Botany and APLNG contracts. A significant insurance claim related to the Adelaide Desalination Plant contract which was completed in 2013, was successfully resolved and paid in June 2014.

The QCLNG claims will continue to progress through the ICC rules arbitration process unless an earlier settlement is reached. McConnell Dowell received funding advances from the client of AUD142,5 million (R1 429 million). AUD30 million (R301 million) of the advance payment was paid back during July 2014, with the balance due in December 2014.

Appropriate substantiation has been performed by management regarding the assertions underpinning the recognition of GCRT's uncertified revenue position. The process of claim finalisation and resolution with the affected counterparties will be intensified. Given the technical and legal complexities associated with the process, it is expected that the commercial negotiations will be protracted, and thus the final outcome remains an uncertain and significant risk to the Group.

Elsewhere in the business there were good performances. Overseas construction continued to perform well and achieved sound close-outs of the Vale contract in Malaysia and a number of other contracts in Asia, Middle East and New Zealand.

Electrix maintained its trend of strong growth in revenue and earnings.

The performance of Built Environs improved but its profit performance was affected by challenges experienced on the Perth Airport and Ocean Keys projects, and growing competition in its markets.

Improving project execution

McConnell Dowell implemented a range of initiatives to strengthen project execution, including key changes to the structures of Australian operations and the pipelines business unit to improve performance and better position the operations for changes occurring in the industry. Built Environs was separated from Australian operations and senior management changes were made in Queensland, and in the problem contracts, to strengthen the focus of operational leadership.

An independent review was undertaken to determine the root causes of problems on the GCRT project and ensure that they are not repeated in other major projects. Internal processes and project guidelines were strengthened to ensure current projects are delivered on schedule.

A proactive ‘lessons learnt' process ensures that there is substantial sharing of knowledge about errors and execution successes in major projects across the Group. During the year, the GCRT team shared their experiences with other rail PPP projects.

Safety and environment

Major initiatives during the year under review included the introduction of critical incident reviews by senior management to drive the sharing of lessons learnt, an extensive review and simplification of the safety management system, development of targeted safety training for project teams and quarterly safety, health and environment reviews, with each business unit focusing on lead indicator performance and management of critical risks.

McConnell Dowell's safety performance was regrettably marred by a fatal incident in its American Samoa business when an employee was electrocuted after a crane contacted overhead power lines. Combined with a number of serious non-fatal incidents, this tragic event has resulted in McConnell Dowell's failure to meet its injury reduction targets. While the all injury frequency rate (AIFR) of 6,9 per 200 000 man-hours reflected a small improvement on the 2013 result of 7,2, the lost-time injury frequency rate (LTIFR) remained constant at 0,13.

There was a reduction in both the total environmental incident frequency rate and the serious environmental incident frequency rate during the year. These results signal an improvement in procedural and site-based environmental controls implemented, following the increase in frequency rates that occurred in 2013. McConnell Dowell maintained its ISO 14001 certification across the Group and uses this to drive improved environmental performance.

Human capital

McConnell Dowell's workforce remained steady throughout the year, in line with business requirements. The business achieved an overall satisfaction score of 70% in its annual employee opinion survey and continues to focus on leadership training and performance management.

Looking ahead

While challenging market conditions limited the growth of McConnell Dowell's order book to R24,1 billion at 30 June 2014, the operating group's prospects remain strong. Major new contracts secured in the second half of the 2014 financial year comprise maritime works, including a new wharf at the Webb Dock in Melbourne, ferry terminals in Brisbane, the Kempsey to Kundabung Pacific Highway extension and the Fourth Parallel Pipeline Joint Venture.

With a significant slowdown in some of its traditional markets, McConnell Dowell has shifted its focus to position itself for the opportunities available in its non-traditional markets.

The reduction in resources investment in Australia has resulted in a greater focus on securing transport (road and rail) projects across the country. The water sector is likely to grow but does not offer major project opportunities. A larger maintenance market is emerging as new projects come on line with assets that require ongoing maintenance. The Australian building market offers opportunities in commercial building, health and aged care infrastructure and a slow recovery is forecast in industrial construction.

By shifting from a capability-based to a sector-focused organisation and creating two strategic groups designed to provide a more collaborative approach to the oil and gas and mining and minerals sectors, McConnell Dowell aims to achieve increased profitable market share within these sectors.

Road PPPs continue to offer growth potential in the New Zealand infrastructure market and water, particularly irrigation, is another area where significant future investment is projected.

The infrastructure market in Southeast Asia offers ongoing opportunity, backed largely by public sector investment in road and rail networks in Singapore and Hong Kong. However, competition remains intense across all sectors in Singapore, with consequent pressure on pricing.

In the Middle East, McConnell Dowell anticipates substantial opportunities in the three Gulf Cooperation Council countries (UAE, Qatar and Saudi Arabia) in which it currently operates. In particular, Saudi Arabia has announced large investment programmes in its traditional oil and gas and petrochemical sectors as well as in other sectors to support the region's diversification strategy.

McConnell Dowell will continue to focus on its core competencies and current geographic footprint. The Southeast Asia and Middle East markets represent important growth potential.

The McConnell Dowell board has been strengthened by the appointment of non-executive directors who will play a key role in risk and commercial management. The executive team will continue to employ early corporate intervention in underperforming businesses and projects, and cost control will remain a core focus.