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Interserve’s EfW partner breaks covenants with $211m loss

Interserve’s partner on three energy-from-waste problem projects has breached its financial covenants after losing $211m (£165m) in three months to the end of June, according to its quarterly results.

US-based Babcock & Wilcox is delivering three EfW plants in the UK with Interserve at Dunbar, Margam and Rotherham.

B&W is responsible for delivering the EfW process elements, while Interserve manages the construction package.

However, the companies are ‘jointly and severally liable’, meaning that if one were to fail then the remaining company would take on the total liability of delivering construction and process for the plants.

B&W has struggled with mounting losses from EfW operations since 2015, and in its quarterly results released last week the company could not guarantee it would overcome its financial problems.

“Management believes it is taking all prudent actions to address the substantial doubt about our ability to continue as a going concern, but we cannot assert that it is probable that our plans will fully mitigate the liquidity challenges we face,” the firm said.

B&W’s shares on the New York Stock Exchange have plunged 25 per cent since last Friday.

The company said it had obtained waivers and agreed amendments with its lenders to avoid defaulting on its loans after breaching its covenants.

The firm added that its plan to sell assets and cut costs would provide “adequate liquidity” to meet its obligations for “at least” the next 12 months.

B&W’s total pre-tax loss for the first six months of 2018 was $321m (£251m), with the bulk of its losses coming from its renewables business, which includes its energy-from-waste division in Europe that trades as Babcock & Wilcox Vølund.

In its full-year results for 2017 released in April, Interserve said: “A financial failure of BW could result in the negation of these cross-indemnity agreements, with Interserve required to assume full responsibility for all aspects of construction.

“This would include the engineering process risk and all associated accrued liabilities and costs.”

Interserve added at the time that it recognised B&W faced problems but believed the company would “remain a solvent counterparty”.

In Interserve’s half-year results released last week the company did not mention B&W and said the three EfW plants in question would be handed over to clients by the end of 2018.

A spokesman for Interserve told CN there had been no change in its position following the disclosure of the US firm’s losses last week.

In July 2016 Interserve was hit by the insolvency of a process subcontractor on its Derby EfW scheme, which caused serious delays to the plant’s completion.

B&W is also responsible for delivery of a fourth EfW plant in Teeside, which it had been working on with Lagan Construction until the firm went into administration in March.

Following Lagan’s collapse, B&W became liable for delivery of the construction element on top of the EfW process works.

The firm has been racing to hit contractual milestones on the job by 30 September to avoid triggering a possible rejection clause.

Under this clause the client could potentially demand B&W returns $144m (£133.5m) paid to it so far, demolishes what has been built and returns the site to its former state.

B&W has now said it does not expect to meet the milestone, but added: “Management believes the customer will not exercise its rejection right.”

The company has been on a drive to improve its liquidity through asset sales, equity offers and cost-cutting.

In May B&W raised $248m (£195.5m) in a share offering that was used to pay off a loan valued at $214.9m (£169.4m), which it said will cut interest costs by $25m (£19.7m) a year. The rest of the money raised was used to boost working capital.

­B&W declined to comment.

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