In May 2016 Interserve announced it was taking an exceptional provision of £70m because of problems in the EfW sector. Following its dismissal from the Glasgow Recycling & Renewable Energy project in November, ensuing litigation and the collapse of a key subcontractor, Interserve’s board has been forced to re-evaluate the full extent of the damage.
The company has had to put new banking facilities in place to cope with it all.
“In November we were served notice of termination on the Glasgow Recycling & Renewable Energy project. We have considered the implications of this development with our legal advisers and expect a lengthy period of litigation to ensue. Alongside this exercise we have continued to undertake a detailed review of operational developments on the other contracts in our exited EfW business, including the impact of the entering into administration by our principal gasification subcontractor, Energos, together with the likelihood and timing of potential recoveries and claims from third parties.
“In the light of these developments and of the continuing uncertainties in relation to the final conclusion of our EfW contracts, the board has concluded that the exceptional provision of £70m announced in May 2016 is no longer adequate to reflect the incurred and anticipated losses associated with this business. Consequently the board has determined that it is appropriate to increase the exceptional provision for exiting this market and the associated contracts to £160m. We expect to complete substantially the construction and commissioning of the projects during 2017, although our contractual obligations in respect of warranties, and the resolution of claims will continue for a period thereafter. Further cash outflows of c£60m are expected during 2017 as the income statement charge is utilised.
“Managing the challenges of exiting from these projects and of pursuing our entitlements to recoveries and claims from third parties remains the focus for the large, experienced team of commercial, operational and legal experts we have deployed and will remain an area of critical focus for the foreseeable future.
“The adverse cash impact of the EfW business was substantially offset in 2016 by tight control of working capital throughout the rest of the group, resulting in year end net debt at the previously announced £270-£280m level. However the cash outflow on the EfW contracts has had a significant negative impact on our average net debt, which was £390m during 2016, and which is anticipated to be approximately £450m in 2017.
“In response to the additional short-term funding requirements through to completion of the exited EfW business (which will be influenced by the resolution of our claims and recoveries), we have put in place, at no material additional cost, new banking facilities with all of our existing, and some new, lenders. As a result of this exercise, our debt capacity has been expanded by an additional £66m of committed facilities, and extended in duration by approximately 2 ½ years to a weighted average expiry of July 2021. This, combined with our USPP facilities, gives the group a total secured, committed debt facility of £573m, which we consider is adequate to meet all of our existing and anticipated future commitments.”
Meanwhile, no news yet on Interserve’s hunt for a new chief executive to replace Adrian Ringrose, whose departure was announced in November, just the day before news broke that Viridor had sacked Interserve from the Glasgow job.