27 Mar 2017

Cavendish Fluor Partnership Magnox contract

Babcock International Group PLC (Babcock or the Group)

Magnox decommissioning contract

Babcock today confirmed that the Cavendish Fluor Partnership (CFP), in which the Group has a 65% stake, has come to a mutual agreement with the UK’s Nuclear Decommissioning Authority (NDA) to bring to an end the Magnox decommissioning contract at the end of August 2019, having operated the contract for a full five years.

This decision follows a lengthy Consolidation period, referenced in previous NDA reports, which has been ongoing since contract award in September 2014. The Consolidation period was a key principle of the contract and is a standard procedure in such major procurements. It allowed CFP to compare the costed proposals in its tender with the actual progress achieved at each site, while beginning to progressively implement proposals contained within its tender.

However the process has highlighted that the scope of work required at the 12 sites is now materially different in volume to that which was initially specified, and this puts the contract at risk of a legal challenge. Last year a High Court judge ruled against the NDA last year in respect of the award of the Magnox contract.

The decision to bring the contract to an end in 2019 was taken despite the high standard of CFP’s  performance. NDA CEO David Peattie said: “Terminating is no reflection on CFP as performance on the sites under its ownership has been strong. Making progress on the ground and keeping our sites safe and secure remain our collective priorities. I would like to thank CFP for its ongoing commitment, as we transition to new arrangements.”

Safe delivery and strong progress have been made across the Magnox sites since September 2014. Collectively the team has implemented a wide range of new initiatives and strategies that are delivering and will continue to deliver significant benefits to Magnox. Indeed it is widely recognised by the NDA that if CFP had continued to deliver to the end of Phase 2 then in excess of £2bn of savings would have been delivered to the UK taxpayers.

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, including the completion of the decommissioning of the Magnox power stations.”

Magnox MD Kenny Douglas said: “Cavendish Nuclear and Fluor are disappointed that we will not be able to fully execute the scope under the existing contract. However we remain fully committed to supporting the Magnox Staff and the NDA in delivering further successes against the programme until the official termination at the end of August 2019. We will be working closely with the NDA to discuss the detailed transition arrangements to facilitate the most smooth and efficient way to exit the contract over the next two and a half years.”

Going forward Cavendish Nuclear are well placed to continue supporting the NDA in whatever model they deem appropriate to deliver the continued decommissioning of the Magnox Fleet and it is our intention, through the continued high standard of delivery, to place ourselves in a strong position to continue this nationally important work.

The change to the contract will result in the removal of around £800 million from the Group’s £20 billion order book, creating an annual step down in revenue of around £100m (less than 2% of the Group’s turnover) from financial year 2020/21 which we would expect to replace in the normal course of business over that timeframe.

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Around £1 billion will be removed from the c £11 billion bidding pipeline; however a number of new identified opportunities coming forward from our tracking pipeline is likely to result in the bidding pipeline being broadly unchanged.  This contract change is not expected to have any negative financial impacts over the next three years and we do not expect this announcement to change the financial guidance we expect to give at the Group’s full year results in May. 

The ongoing decommissioning of Dounreay by the Cavendish Dounreay Partnership (Babcock share 50%) is not affected by today’s announcement.