Sweden-based contractor Skanska A.B. is quitting its U.S. markets for privatized infrastructure development, after accumulating large losses on major contracts. Under new U.S. leadership, the company also seeks to divest its U.S. power construction business, but will still pursue infrastructure design-build work.
Skanska reported writedowns of another $100 million on Oct. 18 in a preliminary announcement of third-quarter results, stemming from two large public-private partnership (P3) deals in the U.S.; plus a $44-million goodwill impairment charge in its power-sector construction business.
At the same time, the company replaced, effective immediately, its American civil business unit president, Richard Cavallaro, who it says "stepped down."
Now leading that group is Don Fusco, a 16-year Skanska veteran, who had been COO for the civil unit's western region since 2015. Cavallaro is acting as "an advisor" to Fusco, says a Skanska USA spokesman.
"Skanska remains fully committed to our civil construction and infrastructure business in the US. Skanska USA will continue to pursue alternative delivery infrastructure projects, including design-build projects," says the spokesman. "Skanska USA is not planning further pursuit of design-build/public-private-partnership (PPP) projects as an equity partner at this time."
Having entered the U.S. P3 market six years ago by securing 50% of a contract with the Virginia Dept of Transportation for the Elizabeth River Tunnels, Skanska now finds the risk/reward ratio of U.S. deals “is not attractive,” said CEO Anders Danielsson.
While that project now is generating revenue, “low production rates and delays” are creating losses on two ongoing P3 projects, which Danielsson did not identify as company policy.
Danielsson said that both of those projects are at the 50% completion point and "we have secured the majority of the costs." On one, he said "we have taken charges sufficient for the rest of the project."
In a June 28 report ratings report on the Orlando, Fla.-based I-4 Ultimate highway—a $2.3-billion expansion project on which Skanska Infrastructure Development Inc. and John Laing Investments Ltd. hold the concession and on which Skanska Civil is part of the construction joint-venture with Lane Industries and Granite Construction—Moody’s downgraded about $1.4 billion in project loans to "negative."
When awarded in 2014, Skanska termed the I-4 one of the largest P3s in the U.S.
The ratings service cited a June 11 claim filed to the state Dept. of Transportation by the concession seeking $100 million and time extension to cover cost overruns and an approximate eight-month schedule delay related to site condition complications that caused what was described as a "catastrophic" drill shaft failure.
First Report of Claims
A report in the Orlando Sentinel says the claim issues had not been publicly disclosed before the Moody's report.
While DOT had until mid-October to rule on the claim, its status is still uncertain. A state DOT spokesman said the claim is still under review, but an industry source close to the project says the state requested a 30-day extension to make its decision.
Moody's noted ongoing contractor mitigation strategies, discussions with Florida officials and two years more of construction ahead as possible mediating factors for the cost issues and schedule slippage.
But said Moody's: "Given the negative outlook and the current schedule delay and pending claim outcome, the rating is unlikely to be upgraded at this time," and a further downgrade is possible "if further geotechnical conditions are discovered which could lead to increased delays and costs than already envisioned."
LaGuardia Airport P3
Skanska's biggest current P3 covers Terminal B at New York LaGuardia Airport, which is due for completion in around six years. The company had 70% of the $4-billion design/build contract when the deal was signed in mid 2016. The status and scope of cost or schedule impacts, or any claims, was not clear.
The spokesman added that "Skanska announced in early 2018 our intention to exit the power sector as an engineering, procurement and construction (EPC) contractor for combined cycle generation facilities. As a corollary, Skanska is exploring divestment options specific to its business operations in the power and industrial sectors. We will provide further details on this process if and when available."
The quarter results follow a similar year-long trend. Skanska reported $58 million in civil unit write downs in July for its second quarter. Operating profit fell 11% to $145.1 million. Analysts polled by Reuters had forecast a 5% rise.
Apart from the troubled contracts, Danielsson says the company’s U.S. business “remains strong."
With around 9,500 employees, the company reports U.S. sales of $6.5 billion in its building construction, civil infrastructure and commercial property development operations, it says.
The firm will announce more detailed results on Nov. 8.