EDWF HOLDINGS 1 PTY LTD -v- EDWF HOLDINGS 2 PTY LTD [2010] WASCA 78 (30 April 2010)

EDWF HOLDINGS 1 PTY LTD -v- EDWF HOLDINGS 2 PTY LTD [2010] WASCA 78 (30 April 2010) - WASCA 2010 case summary — Zoe

[201]

85 It was alleged that the decision withholding consent was not unreasonable and was made for five reasons. First, the first respondent's concerns about the adequacy of the technical expertise and capacity of TSIL and TSE in the design, development, construction, commissioning, testing, operation, maintenance and modification of wind farms. Secondly, the first respondent's concerns about the adequacy of the financial resources available to and the capacity of TSIL and TSE to adequately finance the design, development, construction, commissioning, testing, operation, maintenance and modification of any future wind farm arising out of or in connection with the JDA, and the operation, maintenance and any significant modification of the Wind Farm. Thirdly, the first respondent's concerns about the commercial detriment likely to be caused to the first respondent and its related bodies corporate (referred to collectively in the defence as 'Griffin') by the first respondent being in a joint venture in the Western Australian energy generation market with a competitor of Griffin in that market, unlike Stanwell (and its related bodies corporate) which were not in competition with Griffin in the Western Australian energy generation market. Fourthly, the failure by Stanwell and its related bodies corporate, including the appellant, to provide sufficient information to the first respondent, despite requests for such information from the first respondent and its related bodies corporate, relevant to the first respondent's decision to grant or withhold consent, or grant its consent subject to reasonable conditions, and sought by the first respondent for the specific purpose of a full and proper evaluation by the first respondent of all matters relevant to the first respondent's decision to grant or withhold its consent, or grant its consent subject to reasonable conditions, to the proposed change in control of the appellant. Fifthly, the consequence of the first respondent consenting to the change in control of the appellant would have been to convey the rights in the JDA to TS Renewables, a subsidiary of TSE, which was a consequence the first respondent did not consider to be in Griffin's best interests by reason of the concerns embodied in the first, second, third and fourth reasons [14].

[214]

The parties have expressed a condition which must be satisfied before any obligation to consent to a Change in Control arises. That condition identifies a number of specified characteristics of the party taking control. It also specifies the standard which is to be applied to the assessment of those characteristics - namely, that they be adequate to support the affected Participant - in this case, [the appellant]. In that context, it would, I think, be perverse to attribute to the parties an intention that consent could reasonably be withheld by the application of some other or different standard to the assessment of those characteristics.

However, it is necessary to note the boundaries of this proposition. Because cl 11.7 is concerned with a Change in Control of a Participant, the characteristics which are identified by the proviso are those of the new controller. By contrast, cl 11.4, which is concerned with an assignment of the JV Interest of a Participant in the Joint Venture, focuses upon the characteristics of the assignee, who is to take on the role of Participant if the assignment proceeds. The proviso to cl 11.7 exhaustively defines the criterion or standard of assessment which is to be applied to the specified characteristics of the new controller - that is, its financial resources, technical resources and experience. The proviso requires that those characteristics be assessed by reference to the adequacy of support to be provided to the affected participant - in this case, [the appellant].

The proviso does not provide an exhaustive statement of all issues relating to financial or technical resources or experience. A Change in Control might have an impact upon the financial or technical resources and experience available to [the appellant], or to the Joint Venture generally, through some means other than the support to be provided to the Participant by its controller. That would be an effect which falls outside the terms of the proviso (because it does not relate to the controller's capacity to adequately support the Participant) which could therefore be taken into account by the party whose consent is sought, if it is sufficiently related to the Joint Venture to be properly taken into account. So, for example, the fact that the Change in Control will lead to Stanwell exercising an option to terminate the Service Agreement is a matter which falls outside the terms of the proviso, because it does not relate to the capacity of the new controller to support [the appellant], but rather to the technical services available to the Joint Venture through the Manager. Thus, the proposition that the proviso exhaustively defines the rights and obligations of the parties in respect of the matters it covers does not answer the question of whether or not Stanwell's termination of the Service Agreement in the event of a Change in Control, is a matter properly taken into account by [the first respondent] for the purpose of determining whether or not to give consent to the proposed Change in Control. That is a question which I will address below [212] - [214].

[226]

The evidence establishes that personnel employed or associated with Stanwell have provided significant technical resources and experience to the Manager of the Joint Venture. Those resources and experience have been supplied both formally, pursuant to the [Technical Services] Agreement, and informally, as a result of informal requests made by Mr Roberts, on behalf of the Manager. This is not support provided to [the appellant]. Accordingly, it is not support of a kind covered by the proviso to cl 11.7 of the JVA. The provision of those technical resources and experience is, on the evidence, of substantial benefit to the Joint Venture, and therefore to [the first respondent] as a Participant in the Joint Venture. Although the day to day operation and maintenance of the Wind Farm is carried out by the contractor who constructed the Wind Farm (Vestas), this has been described in evidence, which I accept, as an 'arms and legs' operation. On that analogy, the intellectual input has to be provided from other sources, and in the past, Stanwell has made a significant contribution in this respect. It was reasonable for [the first respondent] to conclude that those benefits would be lost in the event of a Change in Control. [The appellant] does not challenge that conclusion, which is in any event established by the evidence.

The loss of the benefit of the technical resources and experience supplied both formally under contract and informally by personnel related to Stanwell is a matter which directly affects the relationship between the parties which was created by the Joint Venture as regards the Joint Venture. The loss of those benefits could not be said to be a matter extraneous to their relationship as Joint venturers - rather, it bears directly upon that relationship and the Joint Venture itself, and would be the direct consequence of the proposed Change in Control. Although the new controller of [the appellant] will be in a position to direct some personnel who have particular experience in wind farm energy projects to assist the Joint Venture, notably Mr Neil, Mr Johannesen and Mr Ware, the technical resources and experience available from that quarter would be a significant reduction in the technical resources and experience presently available, both informally and formally, through Stanwell and its associates. The evidence also establishes that while it may not be impossible for the Manager to augment the technical resources and experience available to support the maintenance and operation of the wind farm, such expertise is not readily available, and might only be sourced with some difficulty [257] - [258].

[231]

The first reason concerns the adequacy of technical expertise. Although I would not couch my conclusions in quite the same terms as the allegations made in the defence, for the reasons I have given I have concluded that the diminution in the Joint Venture's access to technical resources and experience in the event of a Change in Control provides a reasonable basis for refusing consent.

The second reason concerns the adequacy of the financial resources available. Again, while I would not couch my conclusions in the terms of the defence, and in particular reject any assertion that the potential obligations arising under the JDA are relevant, for the reasons I have given I have concluded that the lack of demonstrated financial capacity to adequately support [the appellant] provides a reasonable basis for refusing consent to the proposed Change in Control.

The third reason pleaded in the defence relates to the likelihood of increased competition. While I would again express my conclusions in rather different terms to those pleaded, for the reasons I have given, I have concluded that the likelihood of increased competition between entities associated with [the appellant] and entities associated with [the first respondent] provides a reasonable basis for refusing consent.

The fourth reason pleaded in the defence relates to the inadequacy of the information provided in support of the request for consent to a Change in Control. To the extent that the information provided was inadequate to establish the financial capacity of TSIL to adequately support [the appellant], this reason overlaps with the reason given related to lack of demonstrated financial capacity. To that extent, it provides a reasonable basis for the refusal of consent. However, in relation to matters other than those concerning financial capacity, the information provided to [the first respondent] appears to me to have been adequate for proper assessment and evaluation of the proposal for a Change in Control.

The fifth reason pleaded in the defence relates to the contemporaneous proposal to assign an interest in the JDA. For the reasons I have given, this reason is extraneous to the matters properly considered by a party in the position of [the first respondent], and therefore provides no reasonable basis for a refusal to consent to the proposed Change in Control [264] - [268].

[349]

In the course of making your recommendations I think you gave some thought to modification of the existing Emu Downs wind farm?---Yes.

What sort of modification did you have in mind?---The potential expansion of the wind farm by the addition of additional wind turbine generators.

Did you have in mind the addition of extra generating capacity?---We had that in mind, yes.

And by that I mean adding to the substations?---No.

Well, is it not the case that the substations out there can only handle 80 megawatts?---Yes.

In order to put more electricity into the grid you have to increase the capacity of the substations?---At the peak load. The wind farm does not operate at its peak capacity only but irregularly, when the wind is blowing

I understand that. You can add some more turbines to try to generate more electricity when the wind is blowing?---Yes.

But I want to understand whether the modification that you had in mind included increasing the capacity of the substations?---No, it did not.

Did you have in mind any particular extent of possible addition of turbines?---At that time we had asked consideration of the existing noise limitations for the wind farm what our expansion capability might be. We had at that time not yet received confirmation as to what the expansion might be within those limitations.

So did you have in mind at all a potential number of additional turbines that might be installed?---My own view was that we were potentially looking at up to six further turbines.

So you didn't think you had in mind any more than six?---Not given the limitations that were

Did you participate in the process of verbal questions and answers with Transfield and Stanwell people?---A number of times, yes.

That's in relation to the consent question?---Specifically, on March 6 I participated in that meeting.

Did you say or did you hear anyone else from Griffin say that you had in mind the possible addition of up to six turbines?---Yes. We had I believe discussed an expansion of the Emu Downs project. I am not - my recollection with regard to the number six being used I can't confirm for you.

So you don't know whether you ever put to Transfield that what was in your mind at least was up to six additional turbines?---I don't believe that's the case.

You don't think you did tell them?---I believe that we discussed expansion of the wind farm but I don't believe we discussed six.

When you discussed expansion did you make clear what you had in mind, that is, adding turbines, not adding generating capacity?---I don't believe the conversation went to that depth.

Right. The turbines come at about $2 million each on their poles and installed, don't they?---I would suggest that that perhaps is a bit light given current increases.

You mean light not late?---Light. Yes.

You think it's a bit more than two million?---I believe it would be.

But it's of that order, isn't it? Say two and a half million?---Fair enough.

We're not talking $10 million a?---No, we wouldn't be talking

No, so around two and a half million dollars to design, install and get another turbine going and hooked up to the system. Correct?---Correct.

Is it the case that at the moment there are some - there are 48 turbines on poles?---That's correct.

And they are connected to two 40 megawatt substations?---That's correct (ts 145 - 147).

[407]

FINANCIAL

Years 1 & 2

Operational and Maintenance costs are planned to be low in years 1 and 2 due to the EPC Contractor (Vestas) providing defects liability, warranty and scheduled maintenance for this period. The main costs in years 1 and 2 will be associated with management of the wind farm and environmental monitoring and general facility and plant maintenance and compliance.

Years 3 - 5

In years 3 - 5 Vestas will provide all site operations and maintenance services for a price of $26 500/turbine (effective at date of PC - Oct 2006) or a total cost of $1 272 000 (or $1 232 640 in 2005 dollars). Wind farm management costs will be similar to years 1 & 2.

Unscheduled Maintenance of the wind farm will become a major cost item as the plant ages. It is expected that years 3 - 5 will have a relatively low level of unscheduled maintenance.

Vestas will engage third parties as required to assist with the maintenance of the wind farm. These may include fire systems maintenance, lifting equipment inspection and certification and switchyard maintenance and testing.

A spare parts inventory will be determined after experience has been gained with the plant. Prior to the expiry of the defects liability period an analysis will be made of the best option for holding spare parts, ie JV owned inventory, Vestas owned inventory. An amount of $550 000 has been allowed in the EPC Budget for provision of spare parts.

Years 6 - 20

It has been assumed that scheduled maintenance costs and wind farm management costs will be comparable to the first 5 years of operation. Unscheduled maintenance is expected to increase over the life of the project. Unscheduled maintenance costs include labour and spare parts.

A number of electronic based systems will require replacement during the life of the project. It is expected that the Wind Turbine Control Systems and Switchyard Protection relays will require replacement in year 12 due to lack of supportability at an estimated cost of $1 388 000. The site SCADA system will require software and hardware upgrades every 5 years at an estimated cost of $21 000.

The average cost of operation and maintenance of the wind farm over the 20 year life of the projects is $2 107 000 per year or $43 900 per turbine. See the graph below for the cost components and time effect of costs.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (500 paragraphs)

EDWF HOLDINGS 1 PTY LTD -v- EDWF HOLDINGS 2 PTY LTD [2010] WASCA 78 (30 April 2010)

Legislation Cited (1)

Cases Cited (16)