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AWE review concluded successfully and updated contract agreed

Published: 31 Mar 2016

Serco Group plc (‘Serco’ or ‘the Group’), the international service company, is pleased to announce that an updated contract to manage the operations of the Atomic Weapons Establishment (‘AWE’) has been agreed by AWE Management Limited (‘AWE ML’) and the Ministry of Defence (‘MoD’).  As previously disclosed, the UK Government has been reviewing these arrangements, and this process has now concluded successfully.

The updated contract, which sets out a framework for operations through to 2025, will provide the MoD with greater flexibility to vary activity with changes in funding and other programme demands, and provides for greater incentivisation in the form of demanding risk / reward mechanisms.  There will be regular pricing reviews, with the next one scheduled to take place in 2019.

AWE ML is a joint venture between Serco, Lockheed Martin Inc. and Jacobs Engineering Group Inc., and is contracted to manage on the UK Government’s behalf the development, maintenance and manufacturing of warheads for the UK’s strategic nuclear deterrent, as well as performing other roles central to national nuclear security. As part of the arrangements, the joint venture partners have agreed in principle that Lockheed Martin will take a majority holding in the joint venture, reflecting the anticipated relative level of resources and workload involved in future operations; the shareholdings of both Jacobs and Serco will be adjusted to allow for this, reducing in both cases from 33.3% to 24.5%.

Since the commencement of the contract in 2000, the operations of AWE ML have grown significantly in scale, though in the last two years revenues have reduced reflecting operational activity levels and the delivery of savings to the MoD.  In 2015, AWE ML revenues, which Serco does not consolidate, were £978m; Serco’s share of profit after tax was £18.6m and the dividends received were £17.8m.

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Since 2000, the joint venture’s operating margin has varied between 6% and 14%, and in the last two years has been at the bottom of the historic range. 

The updated contract structure imposes greater risk-sharing with the customer, with the opportunity to earn higher margins in the event of superior performance, and reductions if targets are not met.  If stretching performance targets are met, and the levels of operational demand continue at current levels, Serco will have the opportunity to maintain its returns from AWE ML at very broadly similar levels to those seen in recent years.

Rupert Soames, Serco Group Chief Executive Officer, said: “I am delighted that the UK Government has chosen to secure the operation and management of the Atomic Weapons Establishment through AWE ML, and that Serco will continue to play a central role in supporting a vital component of our national security and scientific expertise.”


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