Blame is being flung between UGL and its client over ongoing delays at the Ichthys SMP and CCPP projects, and may result in a $200 million legal claim.
UGL has pointed the finger at its client, JKC Australia (a joint venture between JGC Corporation, KBR, and Chiyoda Corporation) as the source of the continuing delays at the project, and as a result announced it will now report the engineering projects at Ichthys separately from its remaining business going forward.
“UGL today advises that the construction of the Ichthys SMP and CCPP projects being undertaken by UGL continues to experience substantial delays and disruptions attributable to the client, JKC Australia LNG,” UGL said in a company statement.
“While commercial negotiations are continuing on the SMP project, they are becoming protracted with a satisfactory commercial outcome yet to be agreed.”
It went on to forecast potential legal action if mediation was not reached soon.
“If a timely resolution of the claims cannot be achieved, it is likely that the claims will need to be concluded through formal legal dispute processes in order to achieve an outcome which appropriately reflects UGL’s entitlements.
“As we have previously stated, UGL will not recognise margin on the SMP project while commercial negotiations are ongoing; due to the status of negotiations and the uncertainty around their timely conclusions, UGL has updated its FY16 and FY17 earnings guidance to exclude any margin from this project.”
It went on to state if negotiations cannot come to a conclusion it may “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”.
“If required, this would be in addition to the $175 million provision previously raised against the CCPP project.”
UGL CEO Ross Taylor voiced his concerns over the “significant client delays and disruption”.
“Despite substantive discussions with JKC in relation to the SMP project, we have not yet been able to achieve a satisfactory outcome in relation to the JV’s claims,” he said.
“This is very disappointing given the co-operation of the JV to ensure client delays to the project were, and continue to be, accommodated.
“UGL maintains a strong contractual position with regards to the delays and disruption impacts and we will pursue recovery of the JV’s claims through formal dispute processes should a near term resolution of commercial negotiations bot be achieved.”
The company went on to outline its new guidance for FY16 – now excluding the Ichthys project.
It reportedly remains on track for FY16, and will deliver 3 per cent EBIT margins on around $2 billion in revenue. UGL also expects to benefits from a one-off FX gain of $5.7 million in HY16.
In FY17 – excluding Ichthys – UGL forecasts a 4 per cent EBIT margin on revenue growth of at least $300 million, based on existing contracts in LNG maintenance and transport infrastructure.
UGL forecasts $300 million in revenue in FY16 and $270 million in revenue in FY17 from its Ichthys contracts.