Companies
KBR, Jacobs Settle Long-Running Power Plant Contract Dispute
Details are sketchy on what triggered the power plant construction dispute between KBR, a 30% project owner, and its subcontractor team. The plant was built as part of the $40-billion Ichthys LNG project in Australia.
Photo: Total
KBR received the first payment in a $271-million conditional settlement involving a long-running contract termination dispute on a large Australian power plant project between a consortium in which the firm had a 30% interest and its subcontractor group that included design-build firm CH2M, now part of Jacobs.
The settlement with KBR was announced April 12 by the firm in a press statement, as well as by Jacobs, which acquired CH2M in 2017, in a filing to the federal Securities and Exchange Commission, with the payment noted on April 13. The pact is part of an estimated $472-million settlement between Jacobs and the power plant consortium JKC Australia on the contract for a 360-MW combined cycle power plant at the $40-billion Ichthys LNG megaproject in western Australia.
In addition to KBR, JKC Australia included Japan-based contractors JGC Corp. and Chiyoda Corp. JGC held a 40% stake, with Chiyoda holiding the remaining 30% share.
The power plant EPC subcontract, which was fixed-price, was awarded to CH2M and Australian contractor UGC in 2012, according to Andrew Wittmann, lead construction sector analyst for Baird Equity Research, in an April 12 investor note. CH2M and UGC terminated the subcontract in 2017.
The contract was valued at $929 million, but the final project cost was not disclosed.
Australia contractor CIMIC, which acquired UGC in 2016, also said in mid-April that it reached a separate project financial settlement with JKC Australia.
The firms did not disclose details of the contract termination dispute, but Wittmann said the project "was beset by various problems resulting in significant cost escalation and disputed unapproved change orders.” CH2M and UGL also laid off an estimated 300 workers, with the firms and JKC disputing breach of contract and cost responsibilities, according to the analyst.
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KBR had previously outlined several legal cases and arbitration disputes involving more than $900 million of extra costs for changed work orders, according to the Australian Financial Review. Jacobs said in its filing that it no longer pursues fixed-price construction and has no further financial liabilities from past projects.
KBR also said in 2020 that it has exited that work. Stuart Bradie, KBR president and CEO, said the settlement "removes significant uncertainty, distraction and legal costs." The JKC consortium, which was contractor for the Ichthys LNG's onshore facilities, reached a separate financial settlement last October with Inpex, the Japanese energy firm that is the site's majority owner.
In its recent SEC filing, Jacobs said all conditions to the confidential settlement have been met. Parties to the settlement also include General Electric and GE Electrical International.
The settlement provides for a release of claims between JKC and each member of the EPC consortium, Jacobs said. Members of the consortium also waived all claims against each other and their parent organizations relating to the project.
Jacobs said it expects to record up to $80 million in after-tax charges to net income in the second quarter of 2022. Under the settlement, KBR will receive an additional payment of $68 million in March 2023.
"Litigation over the matter has been ongoing and was a disclosed risk at the time of the CH2M acquisition and since," said Wittmann. "Final settlement is far less than the full $1.66 billion value that JKC initially asserted ... [and] removes a significant legacy liability overhang."
The Ichthys LNG facility, which also is owned by energy companies Total, CPC Corp. Taiwan, Tokyo Gas Holding, Osaka Gas, Kansai Electric Power, JERA and Toho Gas, began commercial production and LNG shipments in October 2018.
