Ichthys Delays Hit UGL Hard

Tuesday, June 7th, 2016
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UGL shares have lost a third of their value after the engineering firm said it may face a $200 million provision due to delays on the massive Ichthys LNG project near Darwin.

UGL said that client-related delays were disrupting its construction work on the onshore facilities for the Ichthys project.

Consequently, UGL said, it may need to make a $200 million provision if negotiations with JKC Australia LNG – the major contractor for Ichthys’s onshore LNG plant – are unsuccessful and the claims go to formal dispute resolution.

UGL, along with its joint venture partners, is in dispute with JKC over two major contracts for components of Ichthys – a $740m structural, mechanical and piping (SMP) package and a $550m deal for construction of a combined cycle power plant (CCPP).

“Delays continue across the Ichthys project generally,” UGL chief executive Ross Taylor said.

“The project team has been and continues to be impacted by significant client delays and disruption.

“These include access delays, material supply delays and many scope changes and variations.”

The $200 million in potential provisions is roughly split one third on the SMP project and two thirds on the power project.

UGL has announced it will not recognise any profits from the SMP project while commercial negotiations continue, and, due to the protracted negotiations on the SMP project, it is no longer confident of a timely resolution of the CCPP claims.

UGL has already made a $175 million provision for the CCPP project, announced in February, 2015.

“To the extent negotiations cannot be satisfactorily concluded on SMP and CCPP and recovery of claims is pursued through formal dispute processes, this could give rise to contract loss provisions of up to $200 million across the SMP and CCPP projects, all or a portion of which may be recoverable from JKC,” UGL said.

“If required, this would be in addition to the $175 million provision previously raised against the CCPP project.”

The company said it would inform the market if a provision were to be made.

UGL said JKC had advised that it was unable to meet its obligations on the CCPP project as scheduled and as a result the CCPP project had incurred cost increases.

UGL and its partners have submitted a significant claim for the delays.

UGL now says it will report on the Ichthys CCPP and SMP projects separately from the other UGL businesses.

Excluding its Ichthys work, UGL said it continues to perform in line with prior guidance and is on track to deliver earnings margins of three per cent on around $2 billion of revenue for the 2016 financial year.

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