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For those with an eye on the small print, page 13 of Interserve鈥檚 2017 results statement made for eye-watering reading. Between 2015 and 2017, the firm鈥檚 losses from its energy-from-waste business have rolled up to 拢216.6m 鈥� which works out at more than 拢70m a year. 鈥淚t鈥檚 been a sobering experience,鈥� says Gordon Kew, the boss of Interserve鈥檚 UK construction arm, which accounts for just under one-third of the firm鈥檚 total revenue.

Chief executive Debbie White must have been wondering what her predecessor Adrian Ringrose had got the business into when she took her up post at the beginning of last September. By October last year, less than two months after she joined, White recalculated that it would cost another 拢35m on top of Ringrose鈥檚 previously estimated 拢160m to pull the business out of the sector. 

City watchdog the Financial Conduct Authority also wants to know why the cost kept jumping, last week announcing an investigation into the way the firm disclosed information over a seven-month period up to Ringrose鈥檚 announcement last February that the cost of getting out of the sector was going to be 拢160m.

鈥淗aving [energy-from-waste] as a separate business allowed me to run the rest of the [construction] business unencumbered鈥�

Gordon Kew, Interserve

All this trouble has had a company-changing effect. It has forced a refinancing and heralded a major restructuring of the group.

Interserve is hardly alone in coming a cropper on a bad punt. Earlier this year, Galliford Try unveiled a rights issue to cover the expense of ballooning costs on its scheme to build a bypass around Aberdeen. So far it has raised 拢144m.

And back in 2013, steelwork contractor Severfield was forced into an emergency rights issue after seven problem jobs 鈥� notably its work on the Cheesegrater building in the City of London 鈥� saddled it with a company-threatening debt pile. 

鈥淲e were quite explicit,鈥� said Severfield鈥檚 new chief executive Alan Dunsmore, who took over from Ian Lawson earlier this year. 鈥淲ithout the shareholders contributing the 拢45m, we wouldn鈥檛 have survived.鈥� For Interserve, energy-from-waste has had a similarly transformational impact.

Good intentions

When it signed its first deal to build a facility in Glasgow in July 2012, Ringrose said the 拢146m facility would 鈥渕ake a real difference to Glasgow and the surrounding area and we are proud to be involved鈥�.

Interserve stated the scheme would be able to handle between 175,000 and 200,000 tonnes of rubbish a year. This would have meant that 90% of the rubbish collected by Glasgow鈥檚 bin lorries would have avoided ending up in landfill and would have been able to generate up to 15MW of electrical power. At the bottom of the announcement, the firm added, somewhat unfortunately given the future, that its vision was 鈥渢o be the trusted partner of all our stakeholders鈥�.

However, in November 2016, Ringrose said he was stepping down and just a day after, Interserve told the Stock Market it had been served notice on the Glasgow job.

It left the job at the end of that year, with Viridor, a recycling and waste management specialist, not holding back in announcing the termination of the deal. 鈥淚nterserve has continually and repeatedly failed to meet delivery milestones,鈥� said capital projects director Alan Cumming. 鈥淰iridor is no longer able to tolerate further impacts on this important environmental project.鈥� 

Such was the scale of the mounting losses from energy-from-waste that the firm decided in October 2016 to separate out its exited business,  with Kew鈥檚 predecessor Ian Renhard taking charge of the mess, and reporting directly to main board director Dougie Sutherland.

Kew says: 鈥淗aving it as a separate business allowed me to run the rest of the [construction] business unencumbered.鈥�

Other challenges

But Kew has not been immune to having to deal with other problem contracts, as the firm flagged up problems on a handful of schemes that helped to send the division to an operating loss of 拢19.4m last year from 2016鈥檚 operating profit of 拢25.2m.

Kew says the four loss-making jobs are a mixture of building and civils work. He adds: 鈥淟ike everyone, we had problems with some jobs won in the recession. We won a few large, complex projects.鈥� He says that work on the jobs, which the firm has declined to name, was complete but negotiations on final accounts were continuing.

Interserve鈥檚 UK construction income is split 80% in favour of building work, with the remaining 20% focused on civil engineering jobs in four sectors 鈥� highways, water, flood defence and airports.

Margins are better in civils, Kew says, and adds the business is eyeing margins of 3% by 2020. Anything more would be difficult, he admits. 鈥淚 don鈥檛 think the way the market operates in the UK [that a higher figure] is achievable.鈥�

鈥淸Debbie White] is adopting a sensible and plausible recovery strategy from an operational point of view鈥�

Kevin Cammack, Cenkos

After its bruising energy-from-waste experience, the firm wants more bread-and-butter work. A few years ago, the firm found itself preferred bidder, along with China State Construction Engineering Corporation, to build the 拢1bn One Nine Elms twin tower scheme in London, designed by US architect KPF.

The news left some in the industry scratching their heads at the fact that Interserve, not known for high-rise work in this country, had won the job ahead of more obvious tower builders. It was Chinese developer Dalian Wanda鈥檚 debut UK project and so a little more high-profile because of that. But this puzzlement became academic after Interserve was replaced, first by Balfour Beatty, and eventually by Multiplex to carry out the work, after failing to agree costs.

Interserve does have experience of high-rise towers at its international arm but Kew admits: 鈥淚t鈥檚 not a job we particularly pursued 鈥� they came to us. I maintain we鈥檇 have delivered it [but] if the situation arose today we wouldn鈥檛 bid for that type of work.鈥�

The company鈥檚 largest ongoing project is a 拢200m scheme to build a new facility for the Defence and National Rehabilitation Centre at Loughborough in Leicestershire.

Kew says turnover at UK contracting will have dropped this year and adds that he is comfortable with income of anywhere between 拢700m and 拢1bn. He wants more work with fewer clients, and in the wake of Carillion鈥檚 collapse is hoping for something of a sea change across the sector. 鈥淭he main contractor-client relationship is about a balanced and appropriate sharing of risk,鈥� he says.

The firm has taken on some of Carillion鈥檚 former staff. 鈥淭hey鈥檙e well-trained, experienced members of the industry. In terms of the demise of Carillion, it鈥檚 extremely sad. They go back to the Tarmac days,鈥� he comments. 鈥淚 do hope the industry learns from this and behaviours are moderated.鈥�

Fire sale?

Mention of the C-word has had some wondering whether the energy-from-waste debacle will force Interserve into a fire sale of some of its more profitable parts of the business 鈥� the star performer is its equipment services division, RMD Kwikform, which posted operating margins of 23.8% last year.

Ringrose mulled over selling the business a few years ago, but instead the firm decided to withdraw its equipment services business from less attractive markets such as Colombia and Singapore and pared back its product range.

Cenkos analyst Kevin Cammack has previously said Interserve might have to look at selling off RMD. The recent refinancing has bought it some time but Cammack warns with that with debt set to peak between at 拢650m and 拢680m in the first half of this year, a sale could still rake in cash if it fails to get debt down sufficiently.

鈥淭he obvious issue with Interserve is how it pays down the debt,鈥� he said in a broker鈥檚 note earlier this month. 鈥淸With] scheduled repayments of the term loan aggregate 拢130m in financial year 2019 and financial year 2020 [鈥�] It seems to me that at the macro level, Interserve has two years鈥� [funding] grace, by which time it will raise new equity or be forced to make a strategic business sale [of equipment services].鈥�

White鈥檚 鈥淔it for Growth鈥� restructuring plan is promising annual savings of 拢50m from 2020. It has already seen the firm spend more than 拢16m on redundancy payments in 2017  鈥� and White was only at the firm for four months last year.

Cammack says White, who picked up close to 拢526,000 in salary and benefits for her four months鈥� work last year, 鈥渋s adopting a sensible and plausible recovery strategy from an operational point of view鈥� and adds that, if nothing else, her and finance director Mark Whiteling鈥檚 decision earlier this month to buy a pile of shares in the firm 鈥渁t least sends out the right message that new management have faith in their recovery plan 鈥� and their own ability to see it through鈥�.

Seeking 拢100m

But he says the firm鈥檚 debt levels means it will have to generate more than 拢200m in the next couple of years and adds: 鈥淚n short, Interserve needs to find circa 拢100m of disposals or new equity.鈥�

It has begun marketing its stake in a 拢200m property scheme in Edinburgh where the firm had been working with Tiger Developments to build offices, hotels and retail outlets on a former goods yard next to Haymarket railway station.

But Cammack adds: 鈥淭he PFI cupboard is now pretty bare so eyes once again will turn to equipment services, the one unquestionably valuable asset in its portfolio. The prospect of new equity could start to haunt the share price if progress on disposals and cash flow prove to be slow.鈥�

Jitters surrounding energy-from-waste are never far away and Viridor鈥檚 parent company, the listed water utility Pennon Group, said in March it was in discussions with Interserve 鈥渨ith regard to the contractual settlement鈥�. However, Kew says: 鈥淲e don鈥檛 concur with their view of life and it鈥檚 a position we鈥檙e entirely comfortable with.鈥�

The firm has completed work on all six of its energy-from-waste schemes apart from its job at Dunbar in Scotland. It is on site carrying out commissioning work at plants in Derby; Margam, south Wales; and Rotherham, South Yorkshire.

Kew says the firm expects to be finally out of energy-from-waste by the end of the year. He adds: 鈥淲e went into a new sector that we鈥檇 thought we鈥檇 prepared for and clearly we hadn鈥檛.

鈥淸It鈥檚] forced a refinancing and it鈥檚 a major catalyst as to why we had to undergo restructure of the business.鈥�

Kew admits the firm came unstuck when it agreed to carry out complex process engineering work at Derby and Glasgow, with Interserve becoming responsible for making sure the plants produced their stated MW output. 鈥淭here was definitely a capability gap.鈥�

He says the firm won too many jobs too quickly and adds: 鈥淲e do process work in other sectors but we hadn鈥檛 lived and breathed it. It鈥檚 a tough old market.鈥�

Asked why Interserve has had to repeatedly revise upwards the amount of money it has blown on energy-from-waste, he says: 鈥淚n my experience, once you鈥檙e in a difficult position on a loss-making job, it鈥檚 very hard to bite your lip [鈥�]. Sometimes you can spend too much money trying to recover a lost cause.鈥�    

Historians of recent UK construction history can point to many examples of catastrophic decisions made with good intentions, from those that plagued John Laing 鈥� when it was put up for sale by the Laing family back in 2000 the hope was it would fetch 拢100m; it ended up being flogged for 拢1 鈥� to Carillion more recently. What happens in the coming months is unclear, but the keener historians on Interserve鈥檚 board will know the energy-from-waste saga is not over yet.