OTTAWA (Reuters) - Canada has reached an agreement with United Technologies Corp's (UTX.N) Sikorsky Aircraft unit to reactivate a C$5 billion ($4.7 billion) deal to buy 28 helicopters that had been beset by delays and was almost scrapped by Ottawa.
Canada signed a contract in 2004 for Sikorsky's Cyclone helicopters to replace its ageing fleet of Sea Kings. But after delays and complications, Ottawa announced last September that it might scrap the deal and consider other options.
The Conservative government now says it has accepted the recommendations of a third-party report for a different project model and governance structure.
It reached an agreement with Sikorsky on December 31, which will form the basis for formal contract negotiations. Sikorsky also agreed to pay Canada $88.6 million in liquidated damages for non-delivery.
"Under the new terms established in the Principles of Agreement, Sikorsky has committed to deliver the needed helicopter capability at no additional cost to Canada," Diane Finley, Canada's minister of public works and government services, said in a statement.
"In addition, the Government of Canada will only issue further payment to Sikorsky upon capability delivery," she said.
Canada will see delivery of helicopters with enough capability to allow the government to begin retiring its old helicopters in 2015. Sikorsky will enhance those capabilities to produce "fully capable" CH 148 Cyclone helicopters in 2018.
Byron Callan, analyst with Capital Alpha Securities, said the deal was not material for a company the size of United Technologies, but it would allow Sikorsky to move past an issue that had been a source of concern.
"It's a Christmas present come late," Callan said. "It allows them a clean slate to start the new year."
Sikorsky officials welcomed the deal.
"We are very pleased to have reached this agreement with the Crown and look forward to a contract amendment while we continue to move the program forward," said spokesman Paul Jackson.
Sikorsky has so far provided just a handful of Cyclones for training purposes, and said last year that some of the delays were caused by major modifications requested by Canada.
On Friday, the company apologized for the delays but said it was confident the new plan would succeed.
"As the pre-eminent helicopter manufacturer in the world, we regret that we have not executed this program to the satisfaction of the Government of Canada and that no aircraft were delivered in 2013," said Sikorsky President Mick Maurer.
Additional reporting by Andrea Shalal-Esa in Washington; Editing by Jonathan Oatis and Grant McCool