Engineering and construction company Clough Limited (ASX:CLO) today advised that whereas core profitability for the financial year to June 2007 is expected to be ahead of previous indications, the Board has decided to provide an amount of circa $110 million against final resolution of its legacy projects. This decision is in response to recent actions taken by the clients on the G1 and BassGas projects that render the outcome of each contract uncertain.

Major shareholder Murray & Roberts will consolidate the Company into its accounts from 1 July 2007 and has indicated that subject to conditions, it will provide financial support to the Company, including that necessary for the Company’s future growth strategy as an offshore oil and gas specialist contractor.

ONGC G1 Contract in India

Clough contends that completion of the G1 contract with ONGC has been significantly delayed by the client's late delivery of essential interface information and equipment and the client's failure to complete any of the deepwater production wells which were due for handover to Clough before the end of the second quarter in 2006.

The parties had long sought to negotiate a resolution to this impasse, however, with the Company's US$21 million performance guarantee about to expire, ONGC gave notice of its intention to call the guarantee and purported to cancel the contract. The Company has subsequently terminated the contract and obtained a temporary injunction to prevent the calling of the guarantee.

The Board has considered it prudent to make provisions against the realisation of outstanding debts and working capital in India within a reasonable period, has commenced the disposal of equipment purchased by the Company for installation on the project to mitigate its losses, and has commenced a process to recover its rights under the contract.

BassGas Joint Venture Contract in Victoria

The Phase 1 award by the Arbitrator appointed to resolve disputes arising from the BassGas Contract was handed down on 1 June 2007. The Clough Board concluded at the time and advised the ASX on 4 June 2007, that "having reviewed the details of the Phase 1 award .... no amendment is currently required to previous advice given to shareholders as to the dispute's likely impact on Clough's financial position".

The Arbitrator had found in favour of the Company on the majority of its contractual claims and in the circumstances the Board did not consider the loss of its claims under the Trade Practices Act as material. Based on the specific findings of the Arbitrator as detailed below, the Board concluded that a favourable negotiated settlement was possible as the parties had already agreed to engage in negotiations towards reaching an acceptable settlement.

Key findings by the Arbitrator in favour of Clough are that:

1. The client’s instruction to Clough to demobilise from the site on 16 December 2004 was wrongful and in breach of contract;
   
2. The client’s Project Manager appointed under the contract to assess Clough's claims amongst other duties and responsibilities, was disqualified from doing so from September 2004;
   
3. Clough can proceed to have all its extension of time claims determined in Phase 2 on the contractual basis Clough argued the contract should be interpreted;
   
4. Failure by the client’s Project Manager to instruct Clough on the contaminants (being mercury, hydrogen sulphide and BTEX) present in the well fluids was an ‘Act of Prevention’ which Clough expects will provide relief from any claim for liquidated damages; and
   
5. The client has no general entitlement to pursue Clough for third party rectification costs and is generally only entitled to the reasonable costs that Clough itself might have incurred in rectifying the defects, if any at all.

The Client has since lodged its intent to appeal the Arbitrator's findings and as a negotiated settlement seems less likely for the financial year-end, further provisions including forward legal costs have been raised in the 2007 accounts.

Recapitalisation

Subject to conditions still to be finalised, Murray & Roberts will support a recapitalisation of the Company, including an estimated $40 million Rights Issue and if necessary, provide guarantees for a standby facility of $20 million. The Board has determined to pursue the disposal of its remaining non-core assets and Murray & Roberts has agreed to provide further guarantees totalling $150 million to support the financing of the vessel upgrade and acquisition programme announced in February 2007.

Strategy

With the support of Murray & Roberts, the Company is expanding its capacity to be a leading Field Development Contractor focused on small to medium sized offshore oil and gas fields primarily in Australasia and Southeast Asia. This includes a commitment to:

1. upgrade from 400t to 800t the lift capacity and significantly enhance the pipelaying capacity of the Company's existing derrick laybarge Java Constructor;
   
2. acquire through an initial charter, a multipurpose offshore support vessel (MSV) currently under construction and expected to be delivered in early 2009;
   
3. charter a Diving Support Vessel (DSV), primarily to support the operations of the above two vessels; and
   
4. employ a world class executive team headed by John Smith as Chief Executive, who joins the company from 1 August 2007.

Chief Executive Officer John Cooper will revert to being a non-executive director of Clough from 1 August 2007, with a mandate from the Board to lead the resolution of legacy projects BassGas and G1. This will allow new Chief Executive John Smith to focus on the future development of the Company.

John Cooper said that the restructuring of the Company’s balance sheet was necessary to place the company into a position where it can focus its efforts on current contracts and new opportunities for expansion.

“The proposed recapitalisation enables the Company to deal with the consequences of three very damaging and expensive contracts which have been adversely impacting our recent past,” said Mr Cooper.

“We reported a profit in the last two halves, and we expect our full year core earnings to be ahead of previous guidance to the market, clearly demonstrating that outside of these legacy contracts, Clough’s operations are successfully delivering results.

“Implementation of our growth strategy, the new and upgraded vessels, an experienced executive leadership team and the partnership of Murray & Roberts will allow Clough to strengthen and expand its position in the offshore oil and gas industry in Australasia and Southeast Asia.”

About Clough

Clough is one of Australia’s largest multi-disciplinary engineering, construction and asset management groups. The Company operates globally in industry sectors including onshore and offshore oil and gas, petrochemicals, minerals and infrastructure. Clough has significant capability in project management, engineering services, construction, installation, commissioning, operations and maintenance.

www.clough.com.au