Babcock to take £800m hit after ending nuclear decommissioning contract
Engineering services firm Babcock has said it will take an £800 million hit after terminating a major Government contract to decommission and manage 12 UK nuclear sites.
The 14-year contract will end nine years early in August 2019, knocking its order book and resulting in a £100 million drop in annual revenues for eight consecutive financial years from 2020/21.
Shares in Babcock slipped more than 3.4% following the news.
Babcock - which holds a 65% stake in the Cavendish Fluor Partnership (CFP) that won the original contract from the Nuclear Decommissioning Authority (NDA) - said the amount of work required was "materially different" than initially specified.
The company explained that the mismatch between what was requested in the contract and the work that needed to be done put the contract at risk of legal action.
The NDA revealed on Monday that it has shelled out £97.5 million to settle litigation claims by two American firms - Bechtel and Energy Solutions - over the deal.
Energy Solutions will receive £76.5 million, plus £8.5 million of costs, while Bechtel will be paid around £12.5 million in total.
The £6.1 billion contract ran into controversy last year after a High Court judge ruled that the NDA had wrongly awarded the contract to CFP.
Energy Secretary Greg Clark announced that the Government is now launching an independent inquiry into both the 2012 procurement process, as well as the reasons why the contract proved to be "unsustainable".
"Taxpayers must be able to be confident that public bodies are operating effectively and securing value for money. Where this has not been achieved, such bodies should be subject to rigorous scrutiny," Mr Clark said.
The contract covered the management and decommissioning of 12 Magnox nuclear sites, which included two research facilities.
Mr Clark said the NDA will arrange a replacement contract to be put in place once the current contract ends.
"It is important to emphasise that this termination is no reflection on the performance of Cavendish Nuclear or Fluor, and work on decommissioning at all the sites will continue with the management of CFP for a further two-and-a-half years," the Energy Secretary said.
Babcock chief executive Archie Bethel said: "I am pleased that the NDA has confirmed that CFP's performance has been strong.
"We have developed a good working relationship with the NDA and we look forward to working with them, not only to bring this contract to an orderly end in two-and-a-half years' time but also on future projects."
Babcock said that the loss to its order book would only account for a 2% drop in annual revenue, which it expects to replace in the "normal course of business" by 2028, and that the scrapped contract would not impact finances for the next three years.
The company has not changed its guidance for its full-year results due out in May.