Build to Last Annual Report and Accounts 2017 Contents The transformation of Balfour Beatty is well underway Group Chief Executive’s review p04 Performance review by segment What we have been doing in 2017 p16 Acting responsibly to protect and enhance the environment and support local communities Building a sustainable business p29 Strategic Report Chairman’s introduction Group Chief Executive’s review Group at a glance Market review Business model Our priorities What we have been doing in 2017 Directors’ valuation of the Investments portfolio Building a sustainable business Measuring our performance Chief Financial Officer’s review Risk management framework Principal risks Viability statement Governance Chairman’s introduction Leadership Effectiveness Accountability Directors’ report – other disclosures Remuneration report Financial Statements Independent auditor’s report Financial statements Notes to the financial statements Other Information Unaudited Group five-year summary Shareholder information 02 04 06 08 10 12 16 26 29 38 44 48 51 57 58 60 63 67 72 76 88 94 102 174 175 Front cover images (clockwise): Dorenell wind farm: this £20 million overhead line will connect a key Scottish wind farm to the national grid. Cooper’s Hill retirement development: this luxury facility includes 78 retirement properties, a health club, swimming pool, restaurant and library. The Dallas Horseshoe: following a distinctive U-shaped path, this design-build project upgraded 73 miles of road and 37 bridges to reduce congestion in Dallas, Texas. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 01 2017 progress Build to Last Today, Balfour Beatty is well placed to drive sustainable profitable growth, underpinned by a strong balance sheet. It has strength and depth in leadership, a new, positive culture is being embedded and the business is well positioned in each of its chosen markets.” Leo Quinn, Group Chief Executive Highlights The Group has presented financial performance measures which are considered most relevant to the Group and used to manage the Group’s performance. An explanation of these measures and appropriate reconciliations to statutory measures are provided on pages 38 to 43. Lean £335m 2016: £173m Net cash excluding non-recourse borrowings* Expert 60% 2016: 58% Average employee engagement index score Trusted 94% 2016: 91% Average customer satisfaction rating Safe 0.17 2016: 0.22 Lost Time Injury Rate, excluding international JVs Continuing underlying revenue1 £m 3 5 0 , 8 5 1 2 , 8 4 3 2 , 8 Continuing underlying (loss)/profit from operations (PFO) £m Continuing underlying (loss)/earnings per share (basic) Pence Order book1 £bn 6 9 1 9 6 9 . 0 2 2 . 7 4 . 2 5 1 . 0 1 4 . 1 1 20154 20164 2017 20154 20164 2017 20154 20164 2017 20154 20164 2017 ) 4 7 ( ) 0 . 5 1 ( Statutory revenue £m 5 5 9 , 6 3 2 9 , 6 6 1 9 , 6 Statutory (loss)/profit for the year £m 8 6 1 4 2 ) 6 0 2 ( Statutory (loss)/earnings per share (basic) Pence 7 . 4 2 5 . 3 ) 1 . 0 3 ( 2015 2016 2017 2015 2016 2017 2015 2016 2017 1 Underlying revenue and order book include share of joint ventures and associates. 4 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. * A reconciliation of the Group’s net cash measure to the statutory measure is provided on page 41. Non-recourse net borrowings are cash and debt that are ringfenced within certain infrastructure concession project companies. Dividends per share Pence 6 . 3 7 . 2 Nil 2015 2016 2017 See page 13 for our KPIs balfourbeatty.com/AR2017 02 Chairman’s introduction Today Balfour Beatty is clearly focused on its chosen markets, winning new business on terms and conditions that balance risk and reward. Projects are monitored rigorously and regularly, with consistent processes and systems. Philip Aiken AM Chairman Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 03 This is the third occasion, as Chairman of your Board, that I have written to you at the start of our Annual Report. When we embarked on the Build to Last transformation programme our commitment was to make Balfour Beatty a strong and sustainable company and the sector’s leading performer. Today Balfour Beatty is clearly focused on its chosen markets, winning new business on terms and conditions that balance risk and reward. Projects are monitored rigorously and regularly, with consistent processes and systems. The legacy contracts, which did so much damage to your company, are largely completed. This transformation has been achieved whilst maintaining one of the strongest balance sheets in the sector, maximising value in our Investments portfolio and paying a sustainable and progressive dividend. It has been a long road, and we still have a distance to go; but returning the Group to industry-standard margins is now within sight. I am proud of the progress we have made so far. As we look forward with confidence to the rest of 2018 and beyond, we will continue to Build to Last and strengthen Balfour Beatty. Performance Underlying profit from operations more than doubled to £196 million in 2017; with all of our earnings-based businesses reporting improved profitability. The Group’s cash performance was strong. During the year we had average net cash of £42 million – compared to £46 million average net debt in the previous year and reported year end net cash excluding non-recourse borrowings of £335 million. Balfour Beatty has a number of outstanding debt instruments: as a result of our strong financial performance we were able to pay down some debt at the end of 2017 and we intend to reduce gross debt further in 2018. The Investments portfolio maintained its Directors’ valuation at £1.2 billion, post disposals. The partial sale of our holding in the M25, London’s orbital motorway, demonstrates our commitment to maximise shareholder value, with the sale price considerably higher than a comparable market transaction from 2016. We have continued our practice of only bidding for work on appropriate terms and for those projects best aligned to our capabilities. Our year end order book was £11.4 billion. Markets In the UK, US and the Far East, governments are taking action to renew and improve essential infrastructure – work which Balfour Beatty is well placed to deliver. Notably, in the UK we were selected to deliver two Lots of the new high speed railway (HS2) and won orders to construct the marine tunnels at the Hinkley Point C nuclear power plant. In the US, we secured work to reconstruct and improve the Southern Gateway – an 11-mile stretch of road in Dallas, Texas – and the 4.7-mile Green Line rail extension in Boston, Massachusetts. The business continues to work constructively with industry bodies and the UK Government to identify and manage any challenges caused by the UK’s exit from the European Union. Whilst we have not seen an impact on our markets, any restrictions on the movement of workers would be likely to exacerbate the current shortages of skilled labour in our sector. We continue to see opportunities for our Investments business to finance and deliver projects. In early 2018 we entered our first major public-private partnership (P3) in the US civil infrastructure market for the Los Angeles World Airports Automated People Mover. The Board Barbara Moorhouse and Michael Lucki joined your Board in the summer of 2017. Barbara has over 30 years of business and management experience in the private, public and regulated sectors. Michael has worked with construction and infrastructure providers for 40 years and has extensive knowledge of the US market. I consider a balanced spread of disciplines, diversity and experience essential to the Board’s effectiveness and we will continue to take this into account when considering additional appointments. Very sadly, during the year, Steve Marshall, my predecessor as Chairman, passed away. I would like to express our condolences to his family and recognise the leadership he gave Balfour Beatty at a very challenging time for the Company. Our people The transformation of Balfour Beatty to date could not have been achieved without the energy, dedication and enthusiasm of our employees. On behalf of the Board I would like to thank all of our employees for their commitment once again this year. We are fortunate to work on some of the most impressive and exciting projects in the world and I am always delighted at the level of passion and pride I find every time I visit a site. Safety is at the heart of the culture which the leadership team is creating at Balfour Beatty. Much of the work we undertake is inherently dangerous: taking measures which eradicate risk – or mitigate it where it cannot be completely removed – is vital if we are to ensure that everyone who comes into contact with Balfour Beatty is kept safe. It is, therefore, with deep regret that I have to report that three people died during 2017 whilst working on our projects, two in the US and one in the Far East. As a Board, we review each serious accident in detail and seek actions to prevent a reoccurrence; however I realise that this is of little comfort to the families of those who lost their lives and I use this letter to send formal condolences to the bereaved on behalf of the Board and everyone in our business. Every time someone is injured, it reinforces why we must always strive to do more to make our industry safer. Dividend The results for 2017 demonstrate further progress in restoring Balfour Beatty to sustainable financial strength and stability. As a result, your Board has felt able to recommend an increase in the final dividend to 2.4p per share, bringing the total dividend for the year to 3.6p per share. Conclusion As we have all been reminded, contracting is a business that demands constant focus and control. Risks must be managed and processes and governance must be fit for purpose and continuously applied. Delivering this requires quality leadership and a systematic approach to creating a culture which embeds this as our way of working. As you read this report, you will see many examples of how Balfour Beatty has learnt from the past and is embracing these disciplines. Today we look to the future with confidence and excitement. Balfour Beatty is ready for the challenges ahead. We Build to Last. Philip Aiken AM Chairman balfourbeatty.com/AR2017 04 Group Chief Executive’s review Today, Balfour Beatty is well placed to drive sustainable profitable growth, underpinned by a strong balance sheet. Leo Quinn Group Chief Executive Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 05 With these moves, the Group is now able to maximise its strengths in its chosen markets in the UK & Ireland, US and Far East. Balfour Beatty is increasingly building its business model on a foundation of deep capability underpinned by risk reduction. This means focusing on specific markets with inherent growth, where Balfour Beatty has the right expertise to command market leading margins, while ensuring it deploys the governance and transparency to price contractual risk appropriately and manage project execution closely. Leo Quinn Group Chief Executive These strong results demonstrate the transformation being delivered by the Build to Last programme. Today, Balfour Beatty is well placed to drive sustainable profitable growth, underpinned by a strong balance sheet. It has strength and depth in leadership, a new, positive culture is being embedded and the business is well positioned in each of its chosen markets. The Group reported an underlying profit from operations (PFO) of £196 million (2016: £69 million) driven by material year- on-year improvements in all earnings-based businesses. Both Support Services and US Construction reported PFO margins in the range of industry-standard margins. UK Construction continues on its positive trend, with a profit from operations of £16 million (2016: £65 million loss). The Group is on track to achieve industry- standard margins in all of its earnings- based businesses in the second half of 2018 as it continues to drive three key levers for improved financial performance: finalising the remaining historical contracts through to completion; reducing costs and raising productivity across its operations; and executing on the improved quality of the order book. Cash remains the Group’s focus and ultimately the most important barometer of financial performance. During the year, the Group had average net cash of £42 million (2016: £46 million net debt); at year end, the Group had net cash of £335 million (2016: £173 million). The year end figure includes £103 million received from the sale of a 12.5% stake in Connect Plus, the company which operates the M25 London orbital motorway. The Directors’ valuation of the Investments portfolio has remained unchanged at £1.2 billion (2016: £1.2 billion), despite the Connect Plus M25 partial disposal, as a result of the continuing strong market for secondary infrastructure assets and the recent favourable changes in US tax regulations. The sale of a further 7.5% stake in the M25, for £62 million, was agreed on 29 December 2017, although the cash was not received until 2018. Balfour Beatty’s net cash position and the value of the Investments portfolio underline the ongoing strength of the Group’s balance sheet and place it in a strong position to further pay down gross borrowings in 2018. The order book decreased by 8% to £11.4 billion (2016: £12.4 billion), down 3% at CER compared to prior year, and is directly in line with the order book at 30 June 2017. The reduction is a result of the Group’s stated policy of selective bidding at appropriate terms for those projects best aligned with its capabilities. The business increased bid margin thresholds and focused on projects where Balfour Beatty’s capabilities can deliver value, coupled with a lower risk profile, so that the Group wins work at appropriate terms and conditions. Additionally, the order book does not yet include work won in two-stage design and build contracts, such as work awarded to Balfour Beatty’s 50:50 joint venture (Balfour Beatty VINCI) for two major civils packages, Lots N1 and N2, for the UK’s new high speed railway (HS2) valued at £2.5 billion. This type of work is characteristic of the strong pipeline of infrastructure projects in the Group’s chosen markets and aligns with its balanced attitude to risk and reward. Consistent with the strategy to simplify the Group and focus on markets and geographies where it has a competitive advantage, Balfour Beatty exited the Middle East with the sale of its entire interests in Dutco Balfour Beatty and BK Gulf for £11 million. Both businesses were sold without future liabilities to the joint venture partner. Additionally, Heery International, a full-service US engineering and programme management, architecture and interior design firm, was sold for US$57 million, eliminating potential conflicts of interest with Balfour Beatty’s US Construction business. Since the start of 2015, Balfour Beatty has also exited Indonesia and Australia. In Canada, following the imminent completion of the BC Children’s and BC Women’s hospitals in Vancouver, it now only holds Investments assets. balfourbeatty.com/AR2017 06 Group at a glance Global infrastructure experts Balfour Beatty is a leading international infrastructure group, providing the structures and services that underpin daily lives, support communities and enable economic growth. The Group finances, develops, builds and maintains complex infrastructure such as transportation, power, utilities, and social and commercial buildings. Its main geographies are the UK & Ireland, the US and the Far East. Throughout this report, the Group has presented performance measures which are considered most relevant to Balfour Beatty and are used to manage the Group’s performance. These measures are chosen to provide a balanced view of the Group’s operations and are considered to provide relevant information on the Group’s past or future performance, position or cash flows. These financial performance measures are also aligned to measures used internally to assess business performance in the Group’s budgeting process and when determining compensation. An explanation of the Group’s financial performance measures and appropriate reconciliations to statutory measures are provided on pages 38 to 43. Readers of the Annual Report and Accounts are encouraged to review the financial statements in their entirety. ^ From continuing operations including share of joint ventures and associates, before non-underlying items. 4 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. 5 2017 valuation includes £62 million relating to the 7.5% second partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. The proceeds were subsequently received on 23 February 2018. Balfour Beatty Annual Report and Accounts 2017 £11.4bn Order book^ £8,234m Underlying revenue^ £6,916m Statutory revenue £165m Underlying profit before tax^ £117m Statutory profit before tax £1.24bn5 Directors’ valuation 28,000 Employees Balfour Beatty’s power transmission and distribution team has helped to create the world’s first floating wind farm, Hywind, off the coast of Peterhead, Scotland. Strategic Report Governance Financial Statements Other Information 07 Construction Services Support Services Infrastructure Investments The Construction Services businesses in the UK & Ireland, the US, and in joint venture in the Far East, are top tier and all operate across the infrastructure and building sectors. Support Services upgrades, manages and maintains critical national infrastructure, and its capabilities complement both Construction Services and Infrastructure Investments. The Infrastructure Investments business is a recognised leader in public private partnerships (PPP) and other developments in the UK & Ireland, and the US. Its activities generate additional construction and service work for other parts of the Group. 81% 13% 6% Total revenue^ Total revenue^ Total revenue^ £8.3bn 20164: £9.3bn Order book^ £6,649m 20164: £6,537m Underlying revenue^ £72m 20164: £(21)m Underlying profit/(loss) from operations^ £36m 20164: £(55)m Statutory profit/(loss) from operations What we do – Civil engineering – Building – Ground engineering – Mechanical and electrical installation – Refurbishment and fit-out – Rail engineering £3.1bn 2016: £3.1bn Order book^ £1,061m 2016: £1,103m Underlying revenue^ £41m 2016: £34m £1.24bn5 2016: £1.22bn Directors’ valuation £524m 2016: £575m Underlying revenue^ £140m 2016: £115m Underlying profit from operations^ Underlying profit before tax^ £39m 2016: £22m £134m 2016: £109m Statutory profit from operations Statutory profit before tax What we do – Install, upgrade and maintain water, gas and electricity networks – Highways network management, operation and maintenance – Rail renewals – Rail technology What we do – Develop and finance both public and private infrastructure projects – Operate a portfolio of long-term infrastructure projects – Develop and maintain a large network of military housing facilities across the US Construction Services p16 Support Services p22 Infrastructure Investments p24 balfourbeatty.com/AR2017 08 Market review Gathering momentum in key infrastructure markets Construction Services Backed by strong government support, UK and US infrastructure spend is accelerating. Key Medium-term market outlook Growth Flat Contraction UK & Ireland US Far East Infrastructure Buildings UK & Ireland The infrastructure market is forecast to rise to double-digit percentage growth in 2019. This is backed by a government commitment to increase spending on infrastructure to over 1% of GDP by 2020-2021#. The building market is expected to remain flat over the coming three years. However, there are regional variations, with growth in the South East and North of England, but weakness in London. Balfour Beatty will continue to react to market changes by bidding selectively. US Public spending and legislation continue to provide favourable tailwinds in the US civils market, with the FAST Act and Transportation Bonds driving a high level of state investment over the coming years. In the building market, urbanisation is contributing to growth of the construction market in Balfour Beatty’s chosen geographies. More broadly, the market is entering a mature phase of expansion, following rapid growth in recent years. Far East Hong Kong continues to deliver a strong pipeline of infrastructure and construction projects, benefiting from high public and private sector demand. Over the medium term, the Hong Kong and Singapore markets that the Group operates in will show continued good growth. # Construction Forecast (Feb 2018), Construction Products Association. Construction Services p16 Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 09 Support Services Infrastructure Investments Medium-term market outlook Medium-term opportunity levels Power Gas Water Highways Rail PPP/PFI Other UK & Ireland US UK Balfour Beatty’s investment opportunities in the years to 2020 are expected to arise principally in student accommodation and OFTOs. US Student accommodation and military housing continue to offer significant investment opportunities in the US market, and there are a number of attractive major infrastructure projects in the pipeline. UK & Ireland Power Regulated transmission networks and Offshore Transmission Owners (OFTOs) are expected to drive growth in the market. Gas The industry is currently in the middle of the RIIO GD1 regulatory period; there are unlikely to be any significant shifts in the market until 2020-2021. Water Stable market with incremental changes as AMP6 ramps down through 2018, and AMP7 ramps up from 2019. Highways Highways England is forecasting significant increases in expenditure, representing a significant opportunity in the coming years. Rail 2018 is likely to see a reduction in spend as CP5 contracts draw to a close. However, 2019-2020 is likely to see an upswing in expenditure as CP6 ramps up. Support Services p22 Infrastructure Investments p24 balfourbeatty.com/AR2017 10 Business model How we create value The environment we operate in How our Group works together Favourable working capital from construction business funds investment projects, which generate a return in their own right. We develop and structure finance to enable our customers to achieve their infrastructure ambitions. We also invest directly in infrastructure assets, particularly when there are opportunities to manage the project on completion. Infrastructure Investments p24 n t s e Profi ta ble w D eliv ery s kills o r k f o r d e l i v e r y s u p p o r t i n u n i t s v e s t m e n t s n it s ble work for deliv ery u kills support inv e st m fi ta o r P y s r e liv e D Construction Services p16 Support Services p22 Cross-selling across cu s t o m e r b e s a Knowledge trans f e r Represents c.81% of our revenue and is responsible for the design, engineering and construction across the most complex infrastructure and building projects. Our services activities manage, upgrade and maintain critical infrastructure. They complement both Construction Services and Infrastructure Investments. External market – Infrastructure markets in the UK & Ireland, US and Far East are buoyant with positive drivers. See Market review p8-9 Internal performance – The Build to Last transformation programme is designed to deliver market-leading returns over the medium term for all stakeholders, from a Group which is Lean, Expert, Trusted and Safe. As a result of the successful self-help actions taken in Phase One, Balfour Beatty has a strong foundation on which to deliver sustainable, profitable growth. See Our priorities p12-15 – The Group is on track to achieve industry-standard margins in the second half of 2018 as it continues to drive three key levers for improved financial performance: finalising the remaining historical contracts through to completion; reducing costs and raising productivity across its operations; and executing on the improved quality of the order book. – The Group’s current portfolio is well positioned in chosen markets, with real synergies between business units. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 11 Why our customers choose us Output for stakeholders World-class track record Balfour Beatty is an industry-leading player with a long history of successfully delivering transformative infrastructure projects. People and knowledge Engineering expertise and project management capabilities enable us to deliver industry-leading infrastructure to customers. Read more on p32-33 Financial strength We have a strong balance sheet and sufficient cash to fund our operations and ensure our customers feel confident that we are here for the long term. Read more on p44-47 Whole asset-life capabilities Expertise across the full life of an asset (finance, design build, operate and maintain) enables the highest quality and best value infrastructure solutions. Supply chain relationships Fostering strong relationships with both suppliers and key subcontractors, and delivering value to customers through disciplined contracting processes. Read more on p15 Innovation Leveraging the latest developments in digital and technology to gain a competitive edge. Read more on p29-30 Values Safety, sustainability and ethics are the bedrock of our business and our licence to operate. Read more on p31, p34-37 Investors Reliable return on investment through share price growth and dividends. Customers Value to customers by delivering industry-leading infrastructure and buildings, and providing high-quality support services. Employees A safe, rewarding and inspiring place to work for employees and subcontractors. Supply chain Partnership opportunities to contribute to and share in our success with suppliers and subcontractors. Community Improving the quality of lives by enhancing infrastructure, and providing local jobs, apprenticeships and other societal benefits from projects being delivered. Leadership Leadership in commitment to social and environmental sustainability; Balfour Beatty was the first company in the world to be assessed against ISO 20400, the international standard for sustainable procurement. balfourbeatty.com/AR2017 12 Our priorities Build to Last Lean Expert Deliver value to our customers by improving operational efficiency and eliminating waste right through the supply chain. Ensure we have the best engineering, design and project management capabilities. Trusted Be the construction partner of choice for our customers and supply chain by delivering on our promises. Safe We must ensure the health and safety of everyone who comes into contact with our activities. When we deliver buildings and infrastructure, we expect them to survive the test of time. For Balfour Beatty to remain at the forefront of our industry we need to continuously improve efficiency, lead innovation and always operate safely. These are the drivers of value for our customers. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 13 Why is it important? We want to make sure that our customers get the best value for their money; we need to be relentless in driving out unnecessary costs and work with our customers to ensure their money is spent in the best way possible. Providing customers with better value for their money drives our competitiveness and provides Balfour Beatty with the capital to invest back into developing our expertise. Lean is measured against our financial returns: cash flow performance and profit from operations. Read more on p14 Our KPIs £335m 2016: £173m Net cash excluding non-recourse borrowings £196m 20164: £69m Underlying profit from operations Why is it important? We deliver world-class buildings and infrastructure for our customers by constantly driving innovation. Our strongest differentiator is our engineering and project management capabilities. Having the best talent supported by the strongest supply chain creates a virtuous circle that ensures we win the best and most exciting projects to deliver. Expert is measured against employee satisfaction. Read more on p14 Our KPI 60% 2016: 58% Average employee engagement index score Why is it important? Customers must have confidence in our ability to deliver and to do what we say we will do. A robust risk framework ensures that challenges are mitigated and projects are delivered in the right way. Satisfied customers provide us with the opportunities and projects for the future. Trusted is measured against customer satisfaction. Read more on p15 Our KPI 94% 2016: 91% Average customer satisfaction rating Why is it important? Health and safety is at the heart of everything we do – we must protect our employees, our supply chain partners, our customers and the public. Construction is an inherently dangerous business and without the highest standards of safety we do not have a licence to operate. A safe and healthy workplace is also happier, more motivated and more efficient. Safe is measured against our commitment to Zero Harm. Read more on p15 Our KPI 0.17 2016: 0.22 Lost Time Injury Rate, excluding international JVs 4 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. balfourbeatty.com/AR2017 14 Balfour Beatty launched its Build to Last transformation programme in early 2015 as a framework to drive continuous improvement for all stakeholders against four goals – Lean, Expert, Trusted and Safe – as measured by cash flow and profit from operations, employee engagement, customer satisfaction and Zero Harm. Phase One consisted of 24 months self-help. Rapid action was taken to remove management layers, upgrade leadership and strengthen governance within a simplified Group structure. In Phase Two (2017-2018) Balfour Beatty will return to industry-standard margins and in Phase Three deliver a Group with market-leading strengths and performance. During 2017, Balfour Beatty made significant progress on its four goals: Balfour Beatty Annual Report and Accounts 2017 Our priorities Build to Last continued Lean The governance and processes introduced during Phase One of Build to Last have driven improved performance in all business segments and put Balfour Beatty on track to achieve industry-standard margins in the second half of 2018. The Group continues to re-engineer processes to drive efficiencies, reducing cost whilst maintaining or improving effectiveness. As a result, costs were reduced by a further £30 million in 2017, in addition to the £123 million of annualised cost savings delivered by Phase One of Build to Last. Balfour Beatty’s UK operations continued to standardise systems with further upgrades to the Oracle R12 platform, including the introduction of an electronic payment platform for suppliers. In January 2018, the US businesses migrated onto a single JD Edwards platform. The successful completion of these moves and the investment made into these systems in the Group’s two principal geographies over the last three years will be a significant driver of future value, as benefits continue to flow in terms of reduced cost, raising productivity and improved transparency and assurance. Expert Balfour Beatty’s customers buy the Group’s capabilities through its expert people to deliver their projects. Therefore a priority is to recruit, train and retain the highest calibre of workforce. A growing pipeline of major infrastructure projects, particularly in the UK and US markets, will see increasing competition for skilled workers. The Group’s success in winning work on iconic and challenging engineering projects, such as HS2 and Hinkley Point C in the UK and Dallas’ Southern Gateway and the Los Angeles World Airports Automated People Mover in the US, demonstrates the significant opportunities and unique potential for career development at Balfour Beatty. The Group metric for Expert is employee satisfaction. In 2017 the Group engagement index score was 60% (2016: 58%) in a period of continuing change and challenge. Bench strength in leadership is essential to driving the business forward on a sustainable basis and to motivating high-quality employees. Since the beginning of 2018 there have been further upgrades in this area with the promotion of three leaders. – Balfour Beatty continues to evolve its US organisation building on the standardisation and leaning out already delivered. At the year end the decision was taken to promote two internal candidates, to lead the Buildings and Civils businesses respectively. These appointments will leverage the Group’s market positions while maintaining the new contracting disciplines. – In the UK, given the similar characteristics and requirements of key customers in the rail, power transmission and distribution and gas and water markets, the businesses serving these markets have been brought together under an experienced leader, to drive back-office standardisation while maintaining a strong market, operational and safety focus. In looking always to add to its depth of capability, Balfour Beatty was recently pleased to recruit over 150 valuable staff members following the Carillion liquidation. These people had worked alongside Balfour Beatty staff on the Aberdeen Western Peripheral Route (AWPR), A14 or Manchester Smart Motorway joint ventures. Their significant experience will bolster Balfour Beatty’s long-term capacity at a time of growing market demand. The Group has developed competency frameworks for key operational job families in the UK such as Project Management, Engineering and Commercial. This enables employees’ experience and competencies to be matched to contract risk and complexity, providing them with a clear career path and targeted development, whilst identifying recruitment priorities. These assessments now cover essentially all of the Project Management and Commercial workforce. Balfour Beatty continues its sponsorship of The 5% Club, which encourages employers to provide ‘earn and learn’ training opportunities to address the UK’s skills gap and widen economic prosperity. During 2017 Balfour Beatty recruited 124 apprentices, 93 graduates and 35 trainees. The percentage of the UK workforce in ‘earn and learn’ positions at year end stood at 5.3%. Membership of The 5% Club now includes key clients and supply chain partners of Balfour Beatty all working to build the future capability to support the growing infrastructure market. Strategic Report Governance Financial Statements Other Information 15 The governance and controls now in place enable Balfour Beatty to: selectively bid business to match capability; assess and price risk appropriately; track (and thus intervene on) execution all the way through the lifecycle of a project, including the defect period; and ultimately drive higher margins for the Construction Services and Support Services businesses. In May, Balfour Beatty was the first company in the world to complete the ISO 20400 assessment, the 2017 international standard for sustainable procurement. The standard ensures that key issues are considered in developing: a sustainable procurement policy and strategy; guidance in creating organisational conditions necessary to procure sustainably; guidance in setting priorities in sustainable procurement; and suggestions on how to improve the procurement process as a whole. Clients, particularly in the UK public sector, are increasingly taking into account social value and other environmental factors when making procurement decisions. Safe Balfour Beatty intends that everyone who comes into contact with its work activities should not be harmed. Safety is actively managed and monitored through strong governance, a combination of leading and lagging performance indicators, training and competence and visible leadership working to establish a Zero Harm culture throughout the business. Each week senior management report and consider any accident, ill health or near misses that have occurred and a weekly report, available to all employees, shares safety best practice as well as reporting on significant incidents and learning which can be drawn from Balfour Beatty or elsewhere in the industry. Notwithstanding this, it is with deep regret that three people died during the year whilst working on the Group’s construction projects. In 2017, the indicators continued to trend positively, with the Group Lost Time Incident Rate (excluding international joint ventures) falling for the third successive year to 0.17 (2016: 0.22). Trusted Trusted is Balfour Beatty doing “what it says it will do” and is measured by customer satisfaction. During the year, 3,375 customer satisfaction reviews were carried out (2016: 2,107), primarily in the UK. The Group customer satisfaction average increased to 94% (2016: 91%). The governance and controls introduced under Build to Last, including the Gated Lifecycle, the Digital Briefcase and Project on a Page, create a disciplined, business- like contracting framework. This provides management with a clear, consistent line of sight on all stages of work which is being bid and delivered, together with key tools for managing commercial risk and project execution. The Gated Lifecycle, introduced in 2015, takes a project from the initial enquiry through to completion. The process reduces the risk of pursuing inappropriate opportunities and underbidding or accepting inappropriate levels of risk, including in respect of the cash profile of projects. As the open debate around risk and reward created by the Gated Lifecycle becomes a perceived enabler to future success, so the process becomes an inherent driver of the Group’s culture. All new UK sales opportunities and projects are now using the Digital Briefcase, a secure web-based platform which digitises governance and document control through all stages of the Gated Lifecycle. Selected active projects were also installed retrospectively. The Digital Briefcase helps to ensure that correct procedure is being followed and that documentation is more easily accessible in the event of claims or other issues. In excess of 1,000 current or potential projects are now active on the system. Over the last three years, the Group has derived more value-added business information through the use of business analytics. Project on a Page allows projects to be monitored in a timely and consistent manner, enabling early intervention where signs of adverse trends are detected, thus reducing risk to the business and strengthening customer relationships. balfourbeatty.com/AR2017 16 What we have been doing in 2017 Construction Services 81% Total revenue^ £8.3bn 20164: £9.3bn Order book^ £6,649m 20164: £6,537m Underlying revenue^ £5,597m 20164: £5,612m Statutory revenue £72m 20164: £(21)m Underlying profit/(loss) from operations^ £36m 20164: £(55)m Statutory profit/(loss) from operations ^ From continuing operations including share of joint ventures and associates, before non-underlying items. 4 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. The A21 Tonbridge to Pembury project provides drivers with a new dual carriageway to speed up journeys and boost the local economy. Balfour Beatty Annual Report and Accounts 2017 Financial review Construction Services continued to make significant progress during the course of the year. The segment improved from an underlying loss of £21 million in 2016, to an underlying profit from operations of £72 million in 2017 primarily due to the improvements at UK Construction. Underlying revenue increased by 2% to £6,649 million (2016: £6,537 million), a 2% decrease at CER. As expected, underlying revenues in the UK fell by 7%, as improved bidding disciplines and selectivity adopted under Build to Last resulted in lower levels of activity in previous problem areas. This was more than offset by an underlying revenue increase of 6% in the US (1% increase at CER) and a 5% increase at Gammon (1% increase at CER). The turnaround of underlying profit from operations at £72 million (2016: £21 million loss) is primarily a result of the UK which returned to underlying profit of £16 million (2016: £65 million loss). Underlying profit in the US at £41 million and Gammon at £15 million both improved year on year. The order book decreased by 11% (5% at CER) due to declines in the US and Gammon. The 22% (14% at CER) decrease in the US order book, although greater than anticipated, is consistent with the Group’s stated policy of selective bidding for those projects best aligned with its capabilities. Gammon’s order book decreased by 13% (7% at CER) as the timing of orders is more variable. The overall reduction was, in part, offset by the UK order book increasing by 17% to £2.7 billion, within the more disciplined and selective approach to bidding. The £2.5 billion (Balfour Beatty 50% joint venture) HS2 contracts won in July 2017 will not be included in the order book until the conclusion of the Early Contractor Involvement (ECI) at the end of 2018 or in early 2019. The Group is continuing to manage problem contracts through to completion. Each requires a high level of leadership involvement to ensure the best achievable outcome and a positive effect on customer relations. In most cases, the positions taken are proving adequate, reflecting, as expected, a mix of projects successfully closed out ahead of expectation, as well as others where the outcome, although disappointing, is being managed to its best conclusion. A very limited number of contracts have disappointed outside of this expectation. The largest of these is Aberdeen Western Peripheral Route (AWPR) which has experienced ongoing schedule and cost issues. These contracts have impacted the underlying results of Construction Services. Strategic Report Governance Financial Statements Other Information 17 As these challenges reduce, new contracts are coming on stream which were bid, won and are being executed and monitored within the Group’s framework of contracting disciplines. This means that the strong foundation created in the first 36 months of Build to Last will be reflected increasingly in improved project delivery. As this feeds through the business, management time can increasingly be refocused onto the many opportunities in the pipeline which play to Balfour Beatty’s capabilities. In the construction portfolio there are a small number of long-term and complex projects where the Group has incorporated judgements over contractual outcomes. The range of potential outcomes as a result of uncertain future events could result in a materially positive or negative swing to profitability and cash flow. These contracts are primarily within the major infrastructure business units in the UK, US and Gammon. Operational review UK £1,998m underlying revenue^ £2.7bn order book^ Underlying revenue in the UK fell by 7% to £1,998 million (2016: £2,143 million) but profit from operations remained positive following the return to underlying profit during the second half of 2016. The underlying profit from operations at £16 million equates to a PFO margin of 0.8%, with the business targeting an industry-standard margin of 2%-3% in the second half of 2018. The UK order book increased by 17% to £2.7 billion as the business won a number of material projects including Hinkley Point C and MECD (the University of Manchester’s engineering campus development). The UK Construction business is organised into three business units consisting of: – Major Projects: focused on complex projects in key market sectors such as transportation, heavy infrastructure and energy – Regional: private and public, civil engineering, ground engineering, mechanical and electrical engineering, and building, providing customers with locally delivered flexible and fully integrated civil and building services – Rail: civil engineering, track, power and electrification projects. UK Construction is continuing to manage historical problem contracts through to completion. At the start of 2015, 89 historical contracts were identified that had a material negative impact on profitability and cash. As at the end of December 2017 93% of these projects were at practical completion (90% at end December 2016) with over 80% at financial completion (70% at end December 2016). The Group is working constructively with industry bodies and the UK Government to identify and manage any challenges caused by the UK’s exit from the European Union. At this stage Balfour Beatty has not seen an impact on the building market; however the Group remains vigilant to respond to any changes in market conditions. During the year, Balfour Beatty continued to focus on alignment of the Group’s world-leading expertise to its key customers’ requirements and providing them with a single primary point of contact accountable for the work which is delivered for them, across the organisation. In July, Balfour Beatty created an engineering consultancy collaboration in the UK with Atkins (now SNC-Lavalin), Mott McDonald and WSP. This partnership will focus Balfour Beatty’s procurement of design consultants for its projects towards Atkins, Construction Services US UK Gammon Underlying3 Non-underlying Total Rev1,2 £m 3,634 1,998 1,017 6,649 30 6,679 PFO2 £m 41 16 15 72 (36) 36 PFO2 % 1.1 0.8 1.5 1.1 0.5 2017 Order book1,2 £bn 4.3 2.7 1.3 8.3 – 8.3 Rev1,2 £m 3,427 2,143 967 6,537 153 6,690 PFO2 £m 33 (65) 11 (21) (34) (55) PFO2 % 1.0 (3.0) 1.1 (0.3) (0.8) 20164 Order book1,2 £bn 5.5 2.3 1.5 9.3 – 9.3 1 Underlying revenue and order book include share of joint ventures and associates. 2 From continuing operations. 3 Before non-underlying items (Note 10). 4 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. A reconciliation of the Group’s performance measures to its statutory results is provided in the Measuring Our Performance section. Mott MacDonald and WSP with standard terms and conditions. A community of practice will bring designers and engineers from the four companies together to find solutions in key areas such as health and safety through design, value engineering and the use of more cost-effective design resources. The Major Projects business continues to pursue a number of major infrastructure opportunities across core transportation and energy markets. Over the next few years HS2, new nuclear power stations (Hinkley, Wylfa) and airport expansion (Heathrow) will all contribute to the UK Government’s investment in infrastructure, which is forecast to rise from 0.8% of GDP in 2015-16 to over 1% of GDP by 2020-21. In addition, the highways market continues to provide good growth opportunities following the UK Government’s proposed £35 billion funding for Highways England’s first and second Roads Investment Strategies. In June 2017, the Major Projects business successfully completed work on the M3 four-lane smart motorway between junction 4a for Farnborough and junction 2 for the M25. The project added an extra lane in both directions by converting the hard shoulder into a traffic lane – increasing capacity and adding technology that will make the road more resilient for users. In September 2017, work was completed on the A21 upgrade project between Tonbridge and Pembury which now provides drivers with a new dual carriageway. During the year significant progress has been made on flagship projects. The UK’s biggest road construction project at present, the A14 in Cambridgeshire, had successfully completed more than a quarter of the project’s main construction work as it marked its first year of construction in November. Following the liquidation of Carillion plc, Balfour Beatty has assumed Carillion’s share of this project with the revised three-way joint venture working well together on the project. At the Norwich Northern Distributor Road (NNDR) project, all bridge beams have now been installed along the new 20-kilometre road. At the Aberdeen Western Peripheral Route (AWPR) project Balfour Beatty and Galliford Try continue to move ahead with the complex 58-kilometre project. As a result of the liquidation of previous joint venture partner Carillion, Balfour Beatty has recognised a one-off non-underlying loss provision of £44 million which reflects the Group’s additional loss on the contract. Completion is now expected in the summer of 2018. balfourbeatty.com/AR2017 18 What we have been doing in 2017 Construction Services continued On Crossrail, Balfour Beatty’s three major projects: C510 (Liverpool Street and Whitechapel Station tunnels); C512 (Whitechapel Station); and C530 (Woolwich Station) all made significant progress during the year. C510 is effectively complete with the other two projects on schedule for the December 2018 opening of the Elizabeth Line. At the Thames Tideway Tunnel work continues on the 6-kilometre West section which runs from Acton to Wandsworth. The first tunnel boring machines (TBMs) have been delivered in preparation for the start of tunnelling later this year. The TBMs were transported along the Thames, in line with Tideway’s commitment to transport over 90% of materials by river, thereby reducing the number of road vehicle journeys needed. During the year Major Projects won the tunnelling and marine works package for Hinkley Point C nuclear power station. The four-year package will include the construction of three marine tunnels – both onshore and offshore – totalling over 9.5 kilometres in length and 7 metres in diameter to form part of the vital cooling system. This is the second major package Balfour Beatty will deliver at Hinkley Point C, following its appointment in 2015 to the power station’s electrical works package in joint venture with NG Bailey. In July, Balfour Beatty’s 50:50 joint venture with VINCI was awarded two major civil engineering lots (Lots N1 and N2) for the two northern stretches of HS2 Phase 1, closest to Birmingham. Balfour Beatty VINCI will deliver Lot N1, valued at c.£1.32 billion, and Lot N2, valued at c.£1.15 billion, between the Long Itchington Wood Green tunnel to the Delta Junction/Birmingham Spur and from the Delta Junction to the West Coast mainline tie-in respectively, in two-stage design and build contracts. The contracts are included in awarded but not contracted (ABNC) as the first stage, a 16-month Early Contract Involvement (ECI) period, commenced on 28 July 2017. Also included in ABNC, the highways business has been selected to deliver two Smart Motorway packages to upgrade sections of the M6 (J2 – J4) and M4 (J3 – J12). Additionally, a contract from Highways England for the construction of a proposed lorry area near the M20 has been awarded and is currently under consultation. In February 2018, the M6 (J2 – J4) contract was formally awarded to Balfour Beatty. The Regional business comprises: – Regional Construction: four regions (Scotland & Ireland, North & Midlands, South and London) providing public and private customers with locally delivered, flexible and fully integrated civil and building services – Balfour Beatty Ground Engineering: specialist geotechnical contractor providing innovative piling and ground improvement solutions across all sectors – Balfour Beatty Kilpatrick: heavy mechanical and electrical (M&E) installations and building services. The Regional business is focused on opportunities across five sectors – aviation, buildings, civils, defence and energy. Within Regional, in line with the Group’s strategy, the number of live projects has now fallen from over 400 at December 2015 to around 225 by December 2017. The business is now focused on fewer, larger contracts and continues to reduce its exposure to contracts under £5 million. This allows the business to focus on projects with better pricing and risk dynamics, but also improves the span of control as it operates fewer sites. There has also been a shift towards a lower risk contract portfolio, with a reduction in the number of fixed price contracts offset by an increase in target cost contracts and framework agreements. Both target cost contracts and framework agreements require early contractor involvement (ECI) with the customer to ensure greater clarity around scope, schedule and cost which, in combination, reduces delivery risk for all parties. HS2 Balfour Beatty’s 50:50 joint venture with VINCI will deliver the two northern stretches of HS2 Phase 1, closest to Birmingham. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 19 Included in ABNC, at year end the Group had been selected as preferred bidder for: the East Wick and Sweetwater residential development project; the Vine Street student accommodation project, London; and the Caernarfon bypass. The Regional business also continues to secure a number of significant engineering projects operated by Scape Group, which is open to all public sector bodies in the UK and covers projects ranging from road repairs, new bridges and coastal defence works to light rail schemes and major road projects. In the Rail construction business, underlying revenues were lower as track and overhead line equipment projects between Slough and Maidenhead for Crossrail substantially completed. These projects contributed to a profit improvement in this delivery unit. During the year, the Group was selected by Network Rail to electrify a 40-mile train route as part of the Great Western mainline upgrade. Balfour Beatty will be responsible for the remainder of the electrification between Cardiff and Bristol Parkway and will utilise the latest technology and innovations in design, construction and rail plant to drive efficiencies and improve safety. In February 2017, Balfour Beatty published its Staying on Track paper. This lays out the Group’s view that new funding models are essential to provide the UK’s rail industry with continuity of project flow in order to support growth in innovation and skills. Further, in October, the Group published its Fast Track to Digital Railway: Delivering the Vision paper. This sets out the Group’s views on the Digital Railway, a rail industry- wide programme encompassing a range of digitally enabled interventions to improve the passenger experience by unlocking much needed capacity in the network and delivering a railway system fit for the future, which will stimulate and strengthen the UK economy. US £3,634m underlying revenue^ £4.3bn order book^ Underlying revenue in the US grew by 6% in the period (1% increase at CER) to £3,634 million. The business reported an underlying profit from operations for the year of £41 million (2016: £33 million). The underlying PFO margin at 1.1% is at the low end of the Group’s Build to Last Phase Two target of 1%-2% for US Construction. The trajectory is positive and market conditions are considered favourable. The 22% (14% at CER) decrease in the US order book, although greater than anticipated, is consistent with the Group’s stated policy of selective bidding for those projects best aligned with its capabilities. In January 2018, the US business was awarded, in joint venture, the US$1.95 billion Los Angeles airport (LAX) Automated People Mover project. Balfour Beatty continues to evolve its US organisation building on the standardisation and leaning out already delivered. At the year end the decision was taken to promote two internal candidates, to lead the Buildings and Civils businesses respectively. These appointments will leverage the Group’s market positions while maintaining the new contracting disciplines. Even before the 2016 presidential election, there was a strong market outlook for construction in the US. In December 2015, the FAST Act (Fixing America’s Surface Transportation), a US$305 billion transportation bill was signed, providing funding for a five-year period. This bill permits longer term project planning horizons in the public market and is leading to improved visibility for publicly funded projects that had been slow to come to market. There are further opportunities being created with the number of state backed infrastructure bonds (US$35 billion of education bonds in California, over US$200 billion of multi-state transportation bonds), and an increase in US public-private partnership schemes. In 2017, the Regional business successfully completed the Anchorsholme flood prevention scheme in Blackpool to reduce flood risk to around 5,000 properties. The new defences will help protect Blackpool’s tourism and recreational income for the next 100 years, in addition to safeguarding Blackpool’s iconic seafront tramway, vital infrastructure and a major pumping station. Other projects completed during the year included: Foundry Courtyard, a £32 million student accommodation complex in Glasgow, which completed in the summer ahead of the start of the academic year; the Clyde and Pen y Cymoedd windfarm projects in Scotland and Wales, respectively; the Barons Quay town centre retail and leisure development in Northwich, Cheshire; Gatwick level 10, which involved improvements to check-in and bag-drop facilities, utilising newer technology, in a better layout, to provide efficiency gains and reduced queues; Lewisham and Southwark College, comprising an extension to the college campus in central London; and Project Zeppelin, the construction of a cryogenic storage tank, forming part of a new ethane import terminal facility on Teesside. Work commenced on the £150 million Madison Tower, a 53-storey residential building in Canary Wharf, London, with piling completed in May. Other material ongoing projects include: upgrading baggage screening and handling systems for Heathrow airport; Redwood luxury retirement village for Audley; the renovation and new-build scheme at No.1 Palace Street in St James’, London; Forth Valley College, Scotland, and DRET secondary school in London. The Regional business had a number of successes in 2017. Notable new contract awards in the period included: – £287 million contract for The University of Manchester to construct the Manchester Engineering Campus Development (MECD) – £179 million contract for the University of Sussex, to construct new student accommodation on campus which will provide bedrooms for 2,117 students, together with new student amenities and a Students’ Union building – £124 million Wokingham Public Road project, awarded through Scape – £63 million contract for Network Rail for the redevelopment of Glasgow Queen Street station – £53 million contract for a retirement village at Runneymede for Audley Villages. balfourbeatty.com/AR2017 20 What we have been doing in 2017 Construction Services continued The Buildings business had a number of successes in 2017. Notable new contract awards in the period included: – Matthews Southwest River Landing project, a US$260 million contract to build the River Landing Shops and Residences in Miami. The mixed-use project will offer over 2 million square feet of retail and residences in Miami’s Civic Centre, including two residential buildings which will feature 475 rental apartments and a five-storey shopping centre – US$100 million contract for Cleburne Independent School District to deliver a 500,000 square feet update and expansion of Cleburne High School – US$130 million contract named Portals V, a 4-storey residential building with 292 apartments, 76 condominiums, and 12,400 square feet of amenity space in Washington DC – US$95 million contract named Paseo De La Riviera, a mixed-use development that will include a hotel, residences and retail in Coral Gables, Florida. Included in ABNC, the business has been awarded: the US$260 million Harrison Medical Centre project in Seattle; a US$150 million contract for an Atlanta airport hotel; and a US$70 million contract for Disney in Orlando. The Civils business continues to create value, operating in the largely regulated markets of rail, water and road. In 2017, Civils completed two notable road projects – the Dallas Horseshoe and Wilmington Bypass. The Dallas Horseshoe, which follows a distinctive U-shaped path, was a design-build project upgrading 73 miles of roadway and 37 bridges to reduce congestion. The completion of the I-140 transportation loop around Wilmington, North Carolina, involved driving 184 36-inch concrete piles into the Cape Fear River to complete the three-mile bridge and roadway project. Additionally during the year, significant progress has been made on key contracts. At Caltrain, a US$697 million contract for the electrification of the 52-mile rail corridor between San Francisco and San Jose, the Group started to place the foundations for the conversion of the line from diesel trains to electric trains. In Denver, Balfour Beatty is currently adding 2.3 miles and three stations to the light rail line as part of a design-build contract. In California, the Group is currently on-site modernising the Rinconada water treatment plant by replacing and upgrading ageing facilities and overhauling the treatment process. The Civils business had a number of successes in 2017. Notable new contract awards in the period included: – US$1.08 billion (25% equal four-way joint venture between Balfour Beatty, Flour Corporation, The Middlesex Corp. and Herzog Contracting Corp.) Green Line Extension design and build contract for the Massachusetts Bay Transportation Authority (MBTA) to design and build the new 4.7-mile commuter rail extension, associated infrastructure and seven new rail stations – US$625 million (45% Balfour Beatty, 55% Fluor Corporation joint venture) contract to reconstruct and improve the Southern Gateway, an 11-mile stretch of road in Dallas, Texas. This contract followed the joint venture’s successful delivery of the adjacent Horseshoe project. In January 2018, Balfour Beatty was awarded the US$1.95 billion design, build, finance, operate and maintain contract for the Automated People Mover at Los Angeles International Airport (LAX) for Los Angeles World Airports (LAWA). This project will use expertise from each of the Buildings, Civils and Investments businesses. The design and build element of the contract has been awarded to the LAX Integrated Express Solutions (LINXS) joint venture comprising Balfour Beatty (30%), Fluor Corporation (30%), Flatiron West (20%) and Dragados USA (20%). The design and build works will include a 2.25-mile, above ground airport transport system connecting the LAX central terminal area to the to-be-constructed consolidated rental car facility as well as six stations and a vehicle maintenance facility. Since 2014, over half of the 50 US states have increased state gasoline tax. In 2017 alone, eight states passed legislation to increase their respective state gasoline tax, which will raise around US$5 billion in new funding for infrastructure. Additionally, many counties in various states have raised their sales tax from 0.5% to 1%, which will increase infrastructure funding by over US$2 billion per year. In the US approximately 85% of revenues are generated from the general building market (Buildings), with the civil infrastructure market (Civils) accounting for the remaining 15%. The Buildings business remains focused on working with repeat customers, in known geographies where it can deliver value. In 2017, the Group closed its Houston office and continued to withdraw from bidding on most stick frame multi- family housing. The Buildings business is focused on specific geographies, known as The Southern Smile. This starts in the Pacific North West, runs through California, Texas, Florida and up through Georgia and the Carolinas to Washington DC. The core markets remain as commercial offices, education, hospitality, residential and healthcare. In 2017, Buildings completed a number of notable projects including: the redevelopment of Microsoft Buildings 30, 31 and 32 in Redmond; the 300 South Tryon 25-storey office tower in Charlottesville; the Alta Midtown, a mid- and high-rise residential facility in Atlanta; the 500 East Morehead office building in Charlotte; and the JM Alexander Middle School in Huntersville, North Carolina. During the year significant progress has been made on flagship projects. In California, Balfour Beatty has started construction on a new US$38 million performing arts and recreation centre for Heart of Los Angeles (HOLA) and completed its largest concrete pour, involving 888 trucks, at a new US$276 million 42-storey residential tower at 500 Folsom in San Francisco. In the North West, Balfour Beatty is constructing Portland’s newest high-rise which will reach 19 stories and includes a hotel and 175,000 square feet of office space. In North Carolina the US$101 million Hotel Bennett in downtown Charlestown is due to open in 2018. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 21 Gammon had a number of successes in 2017. Notable new contract awards in the period included: – HK$6.2 billion contract for the Highways Department of the Government of the Hong Kong Special Administrative Region to construct the Kai Tak West section of the Central Kowloon Route in Hong Kong – HK$3 billion residential scheme for Great Eagle involving the development of eight medium-rise residential blocks overlooking Tai Po’s Tolo Harbour in Northern Hong Kong – HK$2 billion contract to create Hong Kong’s first year round, all-weather water park at Tai Shue Wan for Ocean Park Corporation. Covering an area of over 693,000 square feet, the Ocean Park Water World project includes construction of the main building structure and fit-out and installation of various indoor and outdoor attractions – S$230 million contract to construct a data centre for Global Switch in Singapore. This contract follows the construction of a data centre for Global Switch in Hong Kong – HK$1 billion contract to construct The Fullerton Ocean Park Hotel near the Ocean Park water park at Tai Shue Wan, Hong Kong. In January 2018, Gammon was awarded a HK$1.5 billion contract for the West Kowloon Cultural District Authority (WKCDA) in Hong Kong to deliver the extended basement and infrastructure works called the L1 Contract. Since the start of 2015, Balfour Beatty has exited the Middle East, Indonesia and Australia. In Canada, following the imminent completion of the BC Children’s and BC Women’s hospitals in Vancouver, it now only holds Investments assets. Gammon £1,017m underlying revenue^ £1.3bn order book^ At Gammon, the Group’s 50:50 joint venture based in Hong Kong and Singapore, both revenue and profit were up, but the order book declined as the timing of orders is more variable. During the year, two material contracts moved towards satisfactory conclusion. The Midfield Terminal project reached an amicable settlement, without the need for arbitration, and the West Kowloon Terminus North project is now close to completion. The Group’s share of underlying revenue increased by 5% (1% at CER) to £1,017 million. Underlying profit from operations increased to £15 million (2016: £11 million). During the year, the joint venture made a dividend distribution to Balfour Beatty of £37 million (2016: £nil). The order book declined by 13% (7% at CER) to £1.3 billion, as timing of orders is more variable around a small number of large building and civils contracts. The order book is spread across a number of public and private customers. In Buildings the focus is on productivity, efficiency and expanding the customer base on a selective basis. In Civils the strategy is to lever competitive advantage with a key area of future work likely to be from expansion of the airport in Hong Kong and other significant infrastructure programmes such as the Central Kowloon Route in Hong Kong and the Rail Circle Line in Singapore. In 2017, the Buildings business completed the construction of: 33 Tong Yin Street (residential towers and retail areas); and the conversion of the ex-government Murray building into a hotel. During the year work continued on major Buildings projects including: the redevelopment of Somerset House into a 48-storey office building; the construction of the Lee Garden Three Project, which will include 20 floors of office space atop a five-level retail complex; and the construction of a 71,000 square metre data centre for Global Switch in Hong Kong. Work has also continued in 2017 on a number of Civils projects in Hong Kong, including the West Kowloon Terminus North for the express rail link to Shenzhen, China, and the complex Tuen Mun-Chek Lap Kok (TMCLK) Viaduct project, which includes the design and construction of a dual two-lane sea viaduct. balfourbeatty.com/AR2017 22 What we have been doing in 2017 Support Services Financial review The Support Services segment comprises utilities and transportation businesses. Utilities operates across power transmission and distribution and the gas and water sectors. Transportation operates across rail, highways and managed road schemes for local authorities. Underlying revenue for the segment reduced by 4% to £1,061 million (2016: £1,103 million), as an increase in utilities was more than offset by lower transportation revenues. Underlying profit from operations increased to £41 million (2016: £34 million), with the 3.9% (2016: 3.1%) underlying PFO margin in the middle of the Build to Last Phase Two industry-standard margin target of 3%-5%. The order book was stable at £3.1 billion (2016: £3.1 billion) as growth in transportation was offset by an expected decline in utilities. Operational review Underlying utilities revenue increased by 3% to £608 million (2016: £590 million), driven by a 10% increase at gas and water which is in the middle of the regulatory period. The utilities order book fell 13% due primarily to the expected decline in gas and water. The power transmission and distribution business had a disappointing 2017 as it underwent significant restructure and cost removal. The business is eliminating low-value works and areas which do not align to its risk profile, including significantly reducing its reliance on volume-based and second-tier subcontracting projects. The actions taken will ensure that the business is focused on the most profitable areas of its market. In the period, power transmission and distribution successfully completed the Bhlaraidh-Bennuien windfarm connections project (a combined overhead line, cabling and substations contract) near Fort Augustus in Scotland for SSE as well as the London Power Tunnels project for National Grid. The business has commenced work on the Eleclink project in conjunction with the Rail business. The installation of the HVDC interconnector will involve laying two 50-kilometre cables through the Channel Tunnel and connecting them to converter stations in Northern France and Kent. 13% Total revenue^ £3.1bn 2016: £3.1bn Order book^ £1,061m 2016: £1,103m Underlying revenue^ £1,031m 2016: £1,076m Statutory revenue £41m 2016: £34m Underlying profit from operations^ £39m 2016: £22m Statutory profit from operations ^ From continuing operations including share of joint ventures and associates, before non-underlying items. Gateshead Energy Centre Balfour Beatty delivered this innovative energy centre, generating and supplying power and heat for public buildings, homes, a college and businesses across the local area. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 23 Balfour Beatty’s work, valued at c. €140 million, has drawn on its extensive experience in power transmission and distribution, construction and rail to lead the innovative design and installation of this project. The power and transmission distribution business had a number of successes in 2017. Notable new contract awards in the period included: – £43 million contract for a major overhead line refurbishment scheme for National Grid in South Wales – installation of a new £20 million overhead line to connect the Dorenell wind farm for SSE Networks using a new composite tower design, in addition to the award of a 10-kilometre cabling scheme for SSE – contract awarded by SSE Power Distribution for the initial works of the design and refurbishment of five 132kV overhead lines across Southern England. This refurbishment will replace parts of the network that are coming to the end of their working life, making it more robust and resilient and minimising the risk of power cuts for customers in the area. Support Services Order book1 (£bn) Revenue1 (£m) Profit from operations3 (£m) Non-underlying items (£m) Statutory profit from operations (£m) Underlying profit margin3 (%) The power and transmission distribution business has a stable underlying market with increased National Grid spend for new nuclear offsetting a decline across the distribution market. In gas and water, the revenue increase in 2017 was due to the UK water regulatory cycle, as new contracts continue to mature under AMP6 (2015-2020). Many water contracts are extended over multiple AMP periods and the Group has already started to engage on the AMP7 planning cycle. The gas market is in the middle of the RIIO-GD1 period, with no changes likely before early 2021. In the period, the business commenced utility work on Heat Networks in Gateshead, as part of a Government funded initiative, and continued to construct the new Mayflower water treatment facility for South West Water. The Mayflower facility is under construction at a site near Roborough, north of Plymouth, and will replace the existing Crownhill facility, which dates from the 1950s and has reached the end of its natural life. The gas and water business expects a peak volume year in 2018, as it represents the middle of the current AMP/RIIO cycles. 2017 3.1 1,061 41 (2) 39 3.9% 2016 3.1 1,103 34 (12) 22 3.1% 1 Underlying revenue and order book include share of joint ventures and associates. 3 Before non-underlying items (Note 10). A reconciliation of the Group’s performance measures to its statutory results is provided in the Measuring our performance section. Underlying transportation revenues reduced by 12% to £453 million (2016: £513 million), due to expected volume declines from rail and highways. Highways revenues declined due to the end of a maintenance contract and lower capital spend on a number of contracts. The transportation order book grew by 12%, due to increased order intake in highways and from local authorities. In highways, the business was awarded the following contract extensions during the year: – £115 million, 17-month extension for Balfour Beatty Mott MacDonald, a 70:30 joint venture, from Highways England to continue its service delivery for Area 10 in the Northwest of England – £80 million five-year Highways Services Partnership contract extension by Southampton City Council following a history of good performance and collaborative working with the local authority. The extension builds on the current 10-year contract which commenced in October 2010, extending it until the end of September 2025 – £36 million nine-year contract extension for the M1-A1 Link Road (Lofthouse to Bramham) on behalf of Connect Roads, for ultimate customer Highways England. The underlying highways market is positive with a continued Government focus on highways, with its proposed £35 billion funding for Highways England’s first and second Roads Investment Strategies. In the rail business’s year end ABNC, rail was the preferred bidder for a four-year contract worth more than £40 million for the operation and maintenance of Network Rail’s fleet of track maintenance Stoneblowers, and a seven-year contract worth in excess of £115 million for the supply, operation and maintenance of 13 track maintenance Tampers, also to Network Rail. Post year end the Stoneblowers contract has subsequently been awarded to Balfour Beatty. Balfour Beatty’s Track Partnership contract with London Underground, to deliver essential track renewal work across the network, is due for re-tender in 2018. Track Partnership Balfour Beatty delivers essential track renewal work across the London Underground network. balfourbeatty.com/AR2017 24 What we have been doing in 2017 Infrastructure Investments 6% Total revenue^ £1.24bn5 2016: £1.22bn Directors’ valuation £524m 2016: £575m Underlying revenue^ £288m 2016: £235m Statutory revenue £140m 2016: £115m Underlying profit before tax^ £134m 2016: £109m Statutory profit before tax ^ From continuing operations including share of joint ventures and associates, before non-underlying items. 5 Includes £62 million at 31 December 2017 relating to the 7.5% second partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. The proceeds were subsequently received on 23 February 2018. BC Children’s Hospital Balfour Beatty Investments-led project, the BC Children’s and BC Women’s Hospitals redevelopment scheme, officially began welcoming patients in October 2017. Balfour Beatty Annual Report and Accounts 2017 Financial review The Investments business delivered another strong performance, having continued its strategy of optimising value through the disposal of operational assets, whilst also continuing to invest in new opportunities. Underlying profit from operations at £116 million (2016: £89 million) was higher than the prior year, predominantly due to an increase in profit on disposals. Pre-disposals underlying operating profit increased to £30 million (2016: £24 million) due to higher profit from the US, primarily due to growth in new projects and a non-recurring fee associated with military housing. Net interest income remained broadly consistent year on year at £24 million (2016: £26 million) with underlying profit before tax at £140 million (2016: £115 million). Operational review In 2017, the Infrastructure Investments business added three new projects, made one full disposal and partially disposed of one asset. In the student accommodation sector the Group won a project for Purdue University in Indiana which will provide a 835-bed apartment complex on the campus. In the private rented and regeneration sector, the business acquired a 15% stake in a private rental housing portfolio covering three assets in Atlanta, Georgia, totalling 882 units and encompassing 91 acres, and a 50% stake in a 228-unit community serving students enrolled at the University of North Carolina at Wilmington. In June, the business disposed of its interests in one residential housing project at Carmendy, Florida for £2 million. In December, the Group made a 12.5% partial sale in Connect Plus, the company which operates the M25 orbital motorway, for £103 million (profit on disposal of £54 million). In the last week of the year the Group subsequently sold an additional 7.5% stake in Connect Plus for £62 million (profit on disposal of £32 million). Only the initial £103 million of cash was received before year end, with the further £62 million received in February 2018. Additionally, in February 2018, the Group made a third partial disposal, selling 5% of Connect Plus for £42 million (profit on disposal of £21 million). In total, across the 2017 and 2018 financial years Balfour Beatty received £207 million for a 25% stake in Connect Plus. The Group retains a 15% holding in the Connect Plus M25 asset. Strategic Report Governance Financial Statements Other Information 25 Financial close was reached on three new projects where the Group invests equity: the two private rented and regeneration projects acquired in 2017; and at Sussex University for new student accommodation on campus which will provide bedrooms for 2,117 students, together with new student amenities and a Students’ Union building. At year end five projects had not yet reached financial close. In January 2018, financial close was reached at Purdue University. The business also closed on the second phase of a mixed-use project for The University of Texas in Dallas. In the second phase, the development team will expand the Northside first phase development, delivering an additional 900 beds and more than 6,600 square feet of retail space. In addition, the Investments business reached financial close on one fee-based student accommodation development project in Oklahoma. In fee-based projects, no equity will be invested. In January 2018, the business was named preferred bidder on the Automated People Mover project at Los Angeles airport. Balfour Beatty will own a 27% equity stake. The Infrastructure Investments business continues to see significant opportunities for future investment in its chosen geographic markets in the UK and North America, including the US administration’s proposed PPP infrastructure investment programme. Infrastructure Investments Pre-disposals operating profit3 Profit on disposals3 Profit from operations3 Net interest income from PPP concessions+ Profit before tax3 Non-underlying items Statutory profit before tax 3 Before non-underlying items (Note 10). + Subordinated debt interest receivable and net interest receivable on PPP financial assets and non-recourse borrowings. A reconciliation of the Group’s performance measures to its statutory results is provided in the Measuring our performance section. 2017 £m 30 86 116 24 140 (6) 134 2016 £m 24 65 89 26 115 (6) 109 Los Angeles International Airport (LAX) Working in joint venture, Balfour Beatty has been awarded the design, build, finance, operate and maintain contract for the Automated People Mover at Los Angeles International Airport (LAX). balfourbeatty.com/AR2017 26 Directors’ valuation of the Investments portfolio Continued success in targeted sectors As in previous years, the Directors’ valuation may differ significantly from the accounting book value of investments shown in the financial statements, which are produced in accordance with International Financial Reporting Standards rather than using a discounted cash flow approach. Demand for high-quality infrastructure investments in the secondary market continues to exceed supply and the Group will continue to sell investment assets timed to maximise value to shareholders. With the low interest rate environment likely to continue, the secondary market is expected to remain strong for the foreseeable future. Portfolio valuation December 2017 Value by sector Sector Roads Healthcare Student accommodation OFTOs Waste & biomass Other UK total US military housing Healthcare & other PPP Student accommodation Residential housing North America total Total5 Portfolio valuation December 2017 Value by phase Phase Operations Construction Preferred bidder Total5 Portfolio valuation December 2017 Value by income type Income type Availability Demand – operationally proven (2+ years) Demand – early stage (less than 2 years) Total5 The Investments portfolio is split relatively evenly across the UK and North America (UK 51%, North America 49%). Within the UK portfolio roads is still the largest sector, despite the 12.5% partial sale of the Connect Plus M25 asset completed in 2017, whilst in North America US military housing dominates the portfolio. The Investments portfolio includes over £1 billion of projects that have completed the construction phase and are now operational. 2017 (2016) No. projects (13) 13 (4) 4 (4) 4 (3) 3 (4) 4 (5) 5 (33) 33 (21) 21 (3) 3 (6) 7 (6) 7 38 (36) 71 (69) 2017 £m 290 136 64 51 57 38 636 497 28 49 34 608 1,244 2016 £m 366 140 63 46 57 35 707 438 9 38 28 513 1,220 2017 (2016) No. projects 56 (49) (15) 10 (5) 5 71 (69) 2017 £m 1,089 130 25 1,244 2016 £m 1,059 134 27 1,220 2017 (2016) No. projects (25) 25 (32) 33 13 (12) 71 (69) 2017 £m 518 559 167 1,244 2016 £m 572 498 150 1,220 5 2017 valuation includes £62 million relating to the 7.5% second partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. The proceeds were subsequently received on 23 February 2018. Overview The Directors’ valuation remained stable at £1,244 million (2016: £1,220 million) despite £105 million being realised from divestments in the period. The number of projects in the portfolio increased from 69 to 71. The Group invested £35 million (2016: £65 million) in new and existing projects. This reflected continued success in targeted sectors with three new projects included in the Directors’ valuation for the first time. Cash yield from distributions amounted to £53 million (2016: £64 million) as the portfolio continued to generate cash flow to the Group net of investment. The business continued its strategy of maximising value through recycling equity from operationally proven projects, whilst preserving interests in strategic projects that offer opportunities to the wider Group. Two investments were sold or part sold during the year for £105 million. In June, the business disposed of its interests in one residential housing project at Carmendy, Florida for a cash consideration of £2 million. In December the Group made a 12.5% partial sale in Connect Plus, the company which operates the M25 orbital motorway, for a cash consideration of £103 million. Unwind of discount at £97 million (2016: £90 million) is a function of moving the valuation date by a year with the result that future cash flows are discounted by one year less. Operational performance movements resulted in a £33 million increase in the value of the portfolio (2016: £61 million), consisting mainly of an increase of £106 million due to the change in Federal corporate income tax rates enacted in the US and a £56 million reduction due to the rise in the value of sterling. The remainder was due to a number of changes in cash flow forecasts, discount rates and economic assumptions. The methodology used for the Directors’ valuation is unchanged, producing a valuation that reflects market value and which therefore changes with movements in the market. Cash flows for each project are forecast based on historical and present performance, future risks and macroeconomic forecasts and which factor in current market assumptions. These cash flows are then discounted using different discount rates based on the risk and maturity of individual projects and reflecting secondary market transaction experience. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 27 Movement in value 2016–2017 £m UK5 North America Total5 2016 707 513 1,220 Equity invested 6 29 35 Distributions received (21) (32) (53) Sales proceeds (103) (2) (105) Unwind of discount 56 41 97 New project wins – 14 14 Operational performance gains (inc. FX movements) (12) 45 33 Gain on sales 3 – 3 2017 636 608 1,244 Following on from the OECD BEPS project’s recommendations, the UK Government passed legislation in 2017 restricting the tax deductibility of interest expense. The legislation is complex and its application in certain areas will require further clarification, but the current assessment is that the impact on the Directors’ valuation is not material. Valuation – The portfolio value at a range of discount rates UK portfolio 1,000 m £ n o i t a u a v l ’ s r o t c e r i D 900 800 700 600 500 400 793 704 707 636 634 580 +2% +1.5% +1% +0.5% DV Case -0.5% -1% -1.5% -2% (cid:81) December 2017 (cid:81) December 2016 Discount rate UK portfolio In 2017 £6 million of equity was invested across four projects in the portfolio: the student accommodation project at Foundry Court in Glasgow; the regeneration development at East Wick & Sweetwater; and the biomass projects Birmingham Bio Power and Welland Bio Power. During the year, there was a partial sale of 12.5% of the Connect Plus M25 project which generated proceeds of £103 million, above the Directors’ valuation of the asset. The Group agreed the sale of a further 7.5% on 29 December 2017 for £62 million, reducing its interest in the asset to 20% at the year end. The proceeds from this sale were received in February 2018 and so are included in the Directors’ valuation at year end. In aggregate operational performance movements resulted in a £12 million reduction in value arising from the net effect of a number of changes to assumptions including higher short-term inflation rates, lower short-term interest rates, higher discount rates on projects where the risk is assumed to have increased and revised cash flow forecasts for certain projects. Discount rates applied to the UK portfolio range between 7% and 12% depending on project risk and maturity. The implied weighted average discount rate for the UK portfolio is 8.5% (2016: 8.3%). A 1% change in discount rate would change the value of the UK portfolio by approximately £62 million. Consistent with other infrastructure funds, Balfour Beatty’s experience is that there is limited correlation between the discount rates used to value PPP (and similar infrastructure investments) and long-term interest rates. In the event that interest rates increase in response to rising inflation, the impact of any increase in discount rates would be mitigated by the positive correlation between the value of the UK portfolio and changes in inflation. balfourbeatty.com/AR2017 28 Directors’ valuation of the Investments portfolio Continued success in targeted sectors continued North American portfolio In 2017, the business won three projects: two investments in private rental housing portfolios at Wilmington in North Carolina and Atlanta in Georgia; and a student accommodation project for Purdue University in Indiana. Investment of £29 million was made during the period in three existing and two new projects: two hospital projects in Canada and a student accommodation project at the University of Texas; and the two stakes acquired in private rental housing portfolios in Atlanta and Wilmington. Carmendy Square, Florida, was sold in the period, generating a net £2 million in proceeds. Operational performance movements resulted in a £45 million increase in the value of the portfolio, consisting of an increase of £106 million due to the change in Federal corporate income tax rates enacted in the US, a £56 million reduction due to the strengthening of sterling against the US dollar and a £5 million reduction due to revised cash flow forecasts for certain projects. Valuation – The portfolio value at a range of discount rates North American portfolio 1,000 900 800 700 600 500 400 300 200 m £ n o i t a u a v l ’ s r o t c e r i D 701 593 608 513 534 450 +2% +1.5% +1% +0.5% DV Case -0.5% -1% -1.5% -2% (cid:81) December 2017 (cid:81) December 2016 Discount rate Discount rates applied to the North American portfolio range between 7.5% and 10%. The implied weighted average discount rate is 8.2% (2016: 8.2%) and a 1% change in the discount rate would change the value of the North American portfolio by approximately £84 million. Under the Tax Cuts and Jobs Act passed by the US Government in December 2017 there are provisions to restrict the tax deductibility of interest expense. The provisions are complex and their application requires clarification in a number of areas, but the initial assessment is that the restriction will not have a material effect on the Directors’ valuation. The Group will monitor the application of the rules and any forthcoming guidance. Portfolio investment, sales and distributions since 2008 £m 200 150 m £ 100 i s n o i t u b i r t s d d n a s e a s , t n e m t s e v n I l 50 0 (50) (100) (150) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (cid:81) Distributions (cid:81) Investment (cid:81) Sales – Directors’ valuation (1,000) Balfour Beatty Annual Report and Accounts 2017 1,500 1,000 500 m £ l n o i t a u a v ’ s r o t c e r i D 0 (500) Strategic Report Governance Financial Statements Other Information 29 Building a sustainable business Group-wide innovations driving success As a value-led business that operates safely and ethically, Balfour Beatty acts responsibly to protect and enhance the physical and social environment. Innovation, research and development Balfour Beatty harnesses innovation that delivers value and efficiencies, improves safety, develops engineering capability and increases the pace of delivery. Balfour Beatty captures the best ideas and invests in research and development. Innovations are embedded across the Group to become business as usual. Innovation is essential for future success. At the end of 2017, Balfour Beatty launched an initiative to reduce activity on site by 25% by 2025. The challenge is to remove complex and repetitive activities from sites by rethinking design, production and installation. My Contribution As a specific stream of the Build to Last programme, the Group-wide My Contribution initiative was launched in 2015 and is now embedded in the business. My Contribution encourages staff to share ideas and solutions that could benefit the business. In 2017, business leaders and Balfour Beatty’s My Contribution champions considered 2,000 ideas, which have the potential to save £2.8 million. Business leaders and My Contribution champions were asked to shine the spotlight on the individuals and teams whose innovative ideas and suggestions have delivered proven benefits during 2017. The winning idea was the digital tool, Autodesk BIM 360™ Field, now embedded across UK Construction Services. This innovation drives defect-free delivery and has identified £1 million of savings. It takes site documentation and inspection requirements online, providing instantly accessible, up-to-date evidence, allowing customers to check progress and quality in ‘real time’ and giving them a tool to support snagging and asset management. Digital Balfour Beatty Integrating and combining digital technologies delivers better outcomes throughout the project lifecycle. – Problem-solving challenges, technical and digital hackathons carried out in 2017 include a collaborative partnership between Balfour Beatty, Google and Flux, which resulted in the creation of the Asset Tracker mobile application. The app enables site-based users to easily manage, monitor and track plant. The mobile application also has potential for tracking other types of assets such as mobile and IT equipment. – Balfour Beatty’s power transmission and distribution business has developed an animated core site safety induction. This ensures a consistent message is delivered across all sites. The voiceover is provided by real people working on site. – Balfour Beatty’s Unmanned Aerial Vehicles produce high-quality images, which are invaluable for inspections of bridges, major plant, pylons, site compounds and earthworks, and for surveying inaccessible areas. In 2017 Balfour Beatty piloted trailblazing technologies to bring the virtual world to construction. – Utilising Mixed Reality the Microsoft HoloLens overlays 3D and 4D (3D + time) graphics onto the real world. In 2017 HoloLens combined with Synchro 4D software and Trimble SketchUp to create a ‘hybrid’ environment, mapping interactive virtual objects to the physical world. This enables Balfour Beatty to build a virtual project in the real world before construction begins. – The 3D Augmented Reality app/viewer provides 3D modelling viewable on site, which Balfour Beatty uses to demonstrate the impact of works to site teams, customers and stakeholders. – Balfour Beatty trialled the latest hand- held mobile scanning device on a project in Hull, where pipework, ducting and services were easily and clearly mapped for inclusion into a 3D as-built model. A daily ‘walkthrough’ of the continually updated model accurately pinpoints potential safety and temporary works issues. Worldwide innovation Innovation occurs across the business and in collaboration with customers, joint ventures and the supply chain. – In 2017 Balfour Beatty introduced consistent 4D planning software across the worldwide business. The tools enable the engagement of people at all levels across the Group’s projects, including stakeholders and clients, design and construction teams. – Balfour Beatty’s India design team has grown to a 60+ strong technical team of experts in civil engineering, mechanical & electrical works and animation. Specific expertise includes the production of detailed 3D and 4D visualisations for many different areas of the business worldwide to maintain programmes, delivery and customer satisfaction and engage the whole team. – Omnicom Balfour Beatty is part of Balfour Beatty’s Rail Engineering Technology Services team based in York and Derby. It provides a range of innovative products and services to the rail industry that are improving safety performance and protecting the workforce. OmniVision® uses machine vision to automate track inspection; OmniSurveyor3D® maps environments using light detection and ranging (LiDAR) and cameras. – Balfour Beatty’s Channel Tunnel ElecLink project uses a range of automated machinery which removes labour-intensive activities, maximises productivity and enhances safety with animations to brief the methodology to the team. – Balfour Beatty’s power transmission and distribution business supplied the electrical interface for the world’s first floating wind farm. The innovative Hywind Scotland, off the coast of Peterhead, features five turbines which are 253 metres tall with 78 metres submerged under the sea and anchored to the seabed by cables. This unique pilot project will eventually power 20,000 homes. – At Forth Valley College’s new Falkirk campus, Balfour Beatty Ground Engineering has worked with design partners GI Energy to develop the UK’s first ever large-scale driven pre-cast energy pile arrangement. More than 800 thermal loops are integrated into the concrete foundations, creating exceptionally low carbon energy for the customer. balfourbeatty.com/AR2017 30 Building a sustainable business Group-wide innovations driving success continued Using digital tools to deliver better outcomes Balfour Beatty is using innovative 3D and 4D modelling techniques to improve efficiency on site. This includes laser scanning, which takes site surveying to the next level by building full 3D models to enhance our processes and increase safety on site. Awards Balfour Beatty’s range of innovation is recognised by diverse industry awards: Two Balfour Beatty innovations won Techfest awards at the New Civil Engineers Festival of Technology: – Balfour Beatty’s Crossrail C510/C512 contracts were joint winners of the Best Use of Technology for the Readiband technology to monitor fatigue levels in workers – TEAM2100 (a collaboration between Balfour Beatty, CH2M and the Environment Agency) won Project of the Year and Innovation of the Year for Big Data for its work on optimising returns on the Thames Estuary Asset Management framework. – Balfour Beatty’s joint venture company, Gammon Construction, was recognised for its long-term contribution to innovation at the Construction Industry Council Awards in Hong Kong: the Bio-Inspired Anti-Vibration Exoskeleton (BIAVE), developed in partnership with the Hong Kong Polytechnic University, won first prize for construction safety. Inspired by the X-shaped limb structure of birds and insects, it reduces hand-arm vibration by up to 90% – the Gammon-invented K-Frame machine used on the Tuen Mun – Chek Lap Kok Southern Connection Viaduct Link erects spans up to 200 metres long with segments weighing up to 240 tonnes without the need for launching gantries. It secured a top prize for Construction Productivity – Balfour Beatty’s Rail division won the workforce safety award at the National Rail awards with the Close Call mobile application – the Beauly-Denny overhead transmission line scooped the prestigious Saltire Greatest Contribution to Scotland Award. The interconnector will enable the country to meet nearly half its target of 50% renewable energy supply by 2020. Collaborating with supply chain, industry and academia The Group is involved with a large number of industry bodies sharing knowledge and learning within the industry. Continued active involvement with industry groups, such as the newly formed client- led Infrastructure Industry Innovation Platform (i3P), provides a platform for Balfour Beatty to influence the industry and share knowledge with peers. The Group has led the delivery of over £2 million of Innovate UK research grants, and is working with various industry groups delivering cutting edge technology that builds a competitive advantage and potential step change in productivity in design and construction. Along with its supply chain, Balfour Beatty has developed an app, accessible via website or smartphone, that is used by Dangerous Goods vehicle operators and allows self-registration and notification prior to entering into the Dartford tunnel. This eliminates 600 daily Dangerous Goods vehicle movements to and from the holding area, removing congestion from the heavily congested orbital motorway around London. Other developments include harnessing the Internet of Things, through which the deployment of sensors and Smart Water will enable remote monitoring of drainage systems and analytics to better assess the risk of flooding and enable timely maintenance. Balfour Beatty has been assessing buried utilities, building on the highly successful Mapping the Underworld (MTU) project funded by the Engineering and Physical Sciences Research Council since April 2013. It has supported this project as an industrial partner throughout and has developed close links with the University of Birmingham. Innovation through value engineering continues to be a key focus: Balfour Beatty has launched a collaborative UK Strategic Design Consultants partnership with Atkins, Mott MacDonald and WSP. This will be a different way of doing business and will deliver more value and enable the partners to win more quality business by working together with common goals. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 31 Building a sustainable business Committed to creating a safe and ethical workplace Health and safety ‘Safe’ is one of the four Build to Last goals and all the Group’s operations must ensure the health and safety of everyone who comes into contact with their activities. Zero Harm is Balfour Beatty’s vision, which means no injury, ill health or incident caused by its work activities. All operations are charged with constantly improving performance, sharing learning and best practice. The Zero Harm objective is supported by the Group’s Health Safety Environment and Sustainability (HSES) strategy and risk-based prioritised action plans. These are formed around 12 key areas: communicating the vision; leadership; learning and sharing; co-ordinated governance; supply chain engagement; health and safety by design; improving management systems and processes; training and competence; behavioural safety; innovation, recognition and reward; performance indicators; and local initiatives. Group initiatives linked to the Zero Harm calendar are proactive and evidence-based. These include focused quarterly campaigns and Group-wide stand downs on key topics. In 2017 these included: interfaces between people and plant; excavations and underground services; winter working; working at height; environment interfaces with water and spills; treating health like safety; mental health; and dust. Many parts of Balfour Beatty’s business reached millions of hours incident free, demonstrating that Zero Harm is achievable. Group-wide leading and lagging key performance indicators trended positively, with continued strong performance in the UK. The Group’s Lost Time Injury Rate (LTIR) increased from 0.31 to 0.39, but improved from 0.22 to 0.17 excluding the Group’s international joint ventures. Central to sustainable delivery of Zero Harm is Balfour Beatty’s Making Safety Personal (MSP) programme, based around four simple golden rules. In 2016 the focus was engagement through workforce observations, which achieved a dramatic increase and this trend has continued into 2017. 2017 saw the roll-out of the MSP 1 foundation programme for everyone on making safe choices and the MSP 4 leadership programme. Further modules (MSP 2 and MSP 3) were successfully piloted. Balfour Beatty’s industry-leading commitment to treating health like safety continues to focus on eliminating occupational disease and ill health. In the UK, Balfour Beatty was a founding member and remains actively engaged in the Health in Construction Leadership Group (HCLG). In 2017 the HCLG brought industry leaders, clients and contractors together in the follow-up to 2016’s ground- breaking summit ‘Committing Construction to a Healthier Future’. The equally successful 2017 summit focused on how the 2016 commitment had been turned to action and the next steps for the future. One of these steps was the formation of the Mates in Mind charity to support UK construction workers. Balfour Beatty actively supports the charity and was one of five piloting organisations. Balfour Beatty has committed to rolling out the Mates in Mind programme to over 75% of its workforce by 2020. In 2017 Balfour Beatty trained 980 of its UK workforce and supply chain in mental health first aid, supervisor training and starting the conversation around mental health. The business continued to win awards for its health and safety performance. In the UK, the Area 10 highways maintenance contract won Safety Project of the Year at the Chartered Institution of Highways & Transportation North West Awards. Balfour Beatty also won several national awards, including a RoSPA Gold award for outstanding safety performance by the Sellafield Box Encapsulation Plant Delivery Team (BEPDT). Balfour Beatty Kilpatrick was presented with the Engineering Construction Industry Association Safe Working Award. In the US, Balfour Beatty Rail was awarded its fifth Platinum National Safe Railroad Contractor of the Year for its commitment to Zero Harm. Employee survey results across the Group rated consistently highly on health and safety questions, a strong indicator of engagement. An independent review of the supply chain indicated that 81% believe Balfour Beatty is leading on health and safety. Sadly, despite these positive improvements, three workers lost their lives across the Group in 2017, two in the US and one in the Gammon joint venture in Hong Kong. All three workers were subcontractors. Each fatal accident was subject to a thorough investigation and a detailed review by the Group Chief Executive and further review by the Safety and Sustainability Committee to ensure lessons are promulgated across the business and wider industry. In 2018 the Group will continue its relentless focus on health and safety within the business and working with the wider industry. The Group’s Lost Time Incident Rate (LTIR) 9 3 . 0 2 3 . 0 1 3 . 0 7 2 . 0 2014 2015 2016 2017 Accident Frequency Rate (AFR) 5 1 . 0 3 1 . 0 2 1 . 0 1 1 . 0 2014 2015 2016 2017 Major injury rate 5 0 . 0 4 0 . 0 3 0 . 0 3 0 . 0 2014 2015 2016 2017 balfourbeatty.com/AR2017 32 Building a sustainable business Investing in talent across the Group People and leadership The Build to Last transformation programme continues to be the foundation of the Group people plan. The central focus in 2017 has been on enhancing the Leadership development offering, improving employee engagement and supporting training and capability development through the Balfour Beatty Academy. Steps have also been taken to develop systems and further improve efficiency, including the launch of a UK self-service portal for administration, payroll and employee requests and queries. Continued strong investment and focus on people and capability development resulted in the delivery of training to nearly 3,000 delegates in the UK (an increase of 148% on 2016). Expectations around leadership and behaviours for high performance have been clarified through the expansion of Balfour Beatty’s Behaviours and design of a comprehensive development offer to support leadership and management capability. In the US, the Propel Leadership Program is designed to gather high-performers on a regular basis to collaborate and learn new leadership talents. The developmental programmes operate within the context of a Group-wide talent review process, ensuring consistent methodology and visibility of talent so that succession planning, leadership training and development interventions are applied in the most effective way. The Group’s development offer spans all roles, job families and levels. Key areas of focus were the Leading 4 Success leadership development programme in UK Construction, building line manager capability via Brilliant Basics and investing in development programmes for Project Leaders in Major Projects and Contract Leaders in Power. The Future Leaders programme was launched, bringing together talent from across the UK business, with the core objectives of investing in future leadership capability and potential, retaining talent and developing the leadership pipeline. In addition to formal programmes, bespoke development has been delivered through individual coaching, mentoring and structured feedback processes. Balfour Beatty Annual Report and Accounts 2017 Employee engagement remains a key focus to support and enhance business performance. Since 2015, Group-wide engagement surveys have taken place annually, followed by key actions in response to survey results. In the survey held in November 2017, the Group employee engagement index score increased to 60% from 58% in 2016. More employees see better opportunities now and there are much improved responses around people feeling part of a team and believing that Balfour Beatty has a positive impact on the environment and local communities. Emerging talent The 5% Club works with UK employers and key influencers to inspire, educate and retain a growing number of apprentices, sponsored students and graduates through ‘earn and learn’ placements. The goal of The 5% Club is to increase the employment and career prospects of today’s youth and equip the UK with the skilled workforce it needs to safeguard Britain’s economy. Members pledge to work towards having a minimum of 5% of their employees in ‘earn and learn’ positions – apprentices, sponsored students and graduate trainees – within five years of joining. In 2017, the Group recruited 93 graduates, 124 apprentices and 35 trainees across the UK. The proportion of the UK workforce in ‘earn and learn’ positions has increased from 3.1% in 2014, to 5.3% at the end of 2017. At 31 December 2017 the Group’s UK businesses were supporting 293 graduates, 292 apprentices, 163 trainees and 19 year out industrial placement students on a range of schemes. The 5% Club has recently revised its definition of sponsored students so that it now includes those studying for part-time further and higher education qualifications where supported by the Company. Balfour Beatty has always had a large number of employees – known as trainees – in these positions and so this has enabled the Group to reflect the proportion of early career employees in whom it is investing. In the US, Balfour Beatty is committed to hiring and developing interns and in 2017 employed 126 summer interns, providing training and on-the-job learning. The commitment is further demonstrated with the well-established High School Mentoring programme in Texas which provides educational and professional development experience and since its inception has hosted numerous high school interns and awarded several scholarships to students pursuing careers in construction management. Balfour Beatty continues to support UK Government reforms on apprenticeships for the construction industry, participating in the development of a number of new Trailblazer standards. Upskilling the UK’s infrastructure workforce The Balfour Beatty Academy, along with the Communities of Practice, continues to blend in-house expertise with external knowledge to develop the professional and technical core of the business. Competency frameworks have been developed across the core job families to identify and support the development of key knowledge, skills and expertise. 2017 has seen the continued investment in key strategic training initiatives. As part of the Build to Last focus, over 1,000 employees have undergone training in commercial management, business development, negotiation skills and project management. % of workforce qualifying as part of The 5% Club 6 5 4 3 2 1 0 4.6 4.3 5.3 2015 2016 2017 % of graduates, apprentices and trainees in UK workforce Strategic Report Governance Financial Statements Other Information 33 Strategic partnerships are in place with WISE, Business in the Community and Stonewall. In 2017 the Group supported the Leonard Cheshire Disability Society by providing two placements and in 2018 is sponsoring students through the Amos Bursary which supports young men of African and Caribbean descent, providing work experience placements, site tours, career days and mentors. In addition, Balfour Beatty recently joined companies across the industry to roll out Mates in Mind to help tackle the stigma of mental health. In October 2017, Balfour Beatty’s advocacy for the Armed Forces and support for employing veterans, encouraging reservists and engaging with military charities and cadet units saw the Company awarded Gold status, with the award being presented by His Royal Highness Prince Henry of Wales. The Group remains committed to building a workforce of industry-leading people that represents the communities it works in. It is this commitment and the continued engagement of employees that will provide the foundations for Balfour Beatty’s future growth. In February 2017 Balfour Beatty joined the Apprentice Diversity Champions Network, working with other UK employers to increase the diversity of future apprentice intakes. A Returners’ programme was launched in 2017, to provide career placements to people who have been on a career break of two years or more. The Company’s efforts have been recognised externally – being shortlisted for a number of awards celebrating the Group’s commitment to D&I – along with Balfour Beatty employees who have featured in the Financial Times Top 100 LGBT+ Executives and Top 50 Future Leaders. Award wins include CECA Inspiring Change, Women in Construction and Engineering, and Northern Power Women. The Company’s efforts across D&I have also been recognised outside the UK with awards including the Contractor of the Year Award by the National Association of Minority Contractors – Southern California Chapter (NAMC), the Company of the Year Award at the Women-In-Non-Traditional- Employment-Roles (WINTER) Annual Awards Gala in Los Angeles, as well as individual awards to employees including the National Advocate of the Year award by the Women Construction Owners and Executives USA (WCOE) and a Women of the Year (Mujeres Del Año) Diversity Award by the Regional Hispanic Chamber of Commerce. Balfour Beatty is improving competitiveness within its supply chain by increasing its diversity and has spent more than 40% of total spend with SMEs over each of the last four years. The percentage spent with social enterprises and female-owned businesses has increased significantly since 2014. The Group is also collaborating across the sector on the CITB funded Fairness Inclusion and Respect programme to develop a range of free resources for use in the supply chain to improve Equality, Diversity & Inclusion practice at all tiers. Diversity and inclusion Attracting and retaining the most capable talent from all backgrounds is key to building a high-performance culture. Leo Quinn, Group Chief Executive, is the Board-level sponsor for diversity and inclusion (D&I), supported by a steering committee that leads, advocates and co-ordinates diversity initiatives. There has been positive action to build strong foundations for Balfour Beatty’s work in D&I during 2017. The three-year UK D&I action plan has been updated and is closely aligned to the Group’s values of Talk Positively, Collaborate Relentlessly and Encourage Constantly, helping to build a strong culture of fairness, inclusion and respect. Affinity networks, each sponsored by a member of the executive team, enable employee groups to network, share information, drive action and support each other. In 2017, 257 UK leaders and employees attended a programme specifically linked to the objectives of the Group’s D&I agenda. To support the creation of an inclusive environment, Unconscious Bias workshops have been rolled out to employees with direct reports. As part of Balfour Beatty’s drive to retain female talent, a three-day Women in Business career development programme has been launched to support women in accelerating their careers. Group gender balance % 2 8 % 8 1 M ale F e m ale Female employees across the workforce % 7 1 % 8 1 % 6 1 At 31 December 2017 Board Senior management1 Directors of subsidiaries Group Male 7 93 216 16,676 Female 1 24 30 3,562 Total 8 117 246 20,238 % Male % Female 87.5% 12.5% 79.5% 20.5% 87.8% 12.2% 82.4% 17.6% 2015 2016 2017 1 Members of Group Head Office and divisional senior leadership teams. balfourbeatty.com/AR2017 34 Building a sustainable business Continuing to embed integrity across the business Business Integrity Balfour Beatty has a well-developed Business Integrity programme which adopts a behaviours-based approach to ensure that the Group’s culture enables people to make the right choices and empowers them to speak up where others have not. The programme was originally launched in 2009 and underwent an effectiveness review in 2016. As a result of this review, a number of changes were made to the programme and the Business Integrity team’s approach in 2017. The core of the programme remains the Balfour Beatty Code of Conduct, which is now web-based and can be accessed from any device with an internet connection (www.balfourbeattycodeofconduct.com). This enables site-based personnel to access the Code, along with clients and partners. The changes identified in response to the 2016 review are designed to continue the process of embedding the programme within the Group in a consistent manner and changing behaviour: – as the programme is relatively mature, a completely new approach to training on the Code of Conduct was launched during 2017. The Code of Conduct assessment tests knowledge in 12 risk areas and training is provided only on the areas failed. This has proven to be more effective and engaging than the previous training – all those who complete the assessment are also required to provide a declaration about their own knowledge and behaviour in respect of the Code of Conduct and associated processes. This reinforces individual responsibility for displaying the right behaviour and complying with the Code – the Group’s approach to due diligence has also been updated by taking advantage of the services provided by third parties who specialise in collating data on individuals and organisations. This has made processes more efficient and effective – a greater connection with the businesses was identified as being a requirement for the UK programme. This has been addressed by launching Business Integrity advisers during 2017. These 22 individuals work within the UK businesses in a variety of roles and assist the Business Integrity team by communicating Business Integrity messages and initiatives, assisting with investigations and being a local point of contact for Business Integrity issues. Balfour Beatty Annual Report and Accounts 2017 Speak Up Helpline cases Number Speak Up Helpline cases (excluding HR grievances) Number 0 7 2 5 4 2 8 3 2 5 6 1 4 2 2 1 3 2 4 0 2 2 4 1 2014 2015 2016 2017 2014 2015 2016 2017 Cases per 1,000 employees (Balfour Beatty) Number Cases per 1,000 employees (global benchmark) Number 2 . 1 1 6 . 1 1 6 . 17 . 7 3 1 3 1 4 1 * 2014 2015 2016 2017 2014 2015 2016 2017 * At the time of print, the global benchmark statistic for 2017 was not available. The full chart including the 2017 statistic can be found at: www.balfourbeatty.com/businessintegrity Speak up Balfour Beatty encourages its staff and the wider community to report any concerns about unethical conduct. Trends and, where appropriate, details of cases raised are reported to the Audit and Risk Committee and each business unit. Whilst action is taken in respect of the immediate issues raised, this data also informs the longer term strategic direction of the programme. Ensuring all in-scope cases are investigated continues to be extremely important to encourage a change in behaviour and support those who raise concerns. This continued in 2017 with 100% of in-scope cases investigated. Areas of focus in 2018 The implementation of the changes to the Business Integrity programme will continue in 2018 with a particular focus on learning, technology, data and developing the network of Business Integrity advisers. Modern slavery Modern slavery is a brutal form of organised crime in which people are treated as commodities and exploited for criminal gain. The International Labour Organisation estimates that at any one time over 40 million men, women and children are working in conditions of modern slavery, including trafficked persons. The vast majority of these people are in the supply chains of legitimate industries. Balfour Beatty is committed to working within the business and its supply chain to ensure a proactive approach is taken to tackling hidden labour exploitation and eliminating these practices. Further details of the Company’s approach to modern slavery and its updated Modern Slavery Act transparency statement for 2017 can be accessed at: www.balfourbeatty.com/services/ modern-slavery The EU General Data Protection Regulation (GDPR) GDPR replaces the Data Protection Act 1998 in the UK and has been designed to harmonise data privacy laws across Europe, to protect all EU citizens’ data privacy and to reshape the way organisations across the region approach data privacy. Balfour Beatty takes GDPR seriously and its Data Protection Officers are working with the business and its supply chain to ensure individuals’ personal information is handled in compliance with the legislation. Strategic Report Governance Financial Statements Other Information 35 Building a sustainable business Using Our Blueprint to support communities and enable growth Environmental performance The Group’s sustainability strategy, Our Blueprint, sets out how Balfour Beatty will deliver long-term economic, social and environmental outcomes for its employees, customers, society and shareholders. It seeks to further embed sustainability throughout Balfour Beatty’s operations by providing a robust framework. For details on Our Blueprint and the Group’s wider sustainability performance, please visit: www.balfourbeatty.com/sustainability/ sustainability-dashboard/ Optimising environmental performance forms a key component of Our Blueprint and is essential for driving efficiencies and winning work. Balfour Beatty has been taking steps to reduce its carbon emissions and mitigate against the business risks of climate change. The Group has continued to automate the collection of sustainability data by investing in software and developing in-house solutions to benchmark and monitor its environmental performance data at project level such as its Scope 1 and 2 Greenhouse Gas (GHG) emissions. Standards Sustainability is an integral part of modern infrastructure projects: public sector customers require conformance to standards such as BREEAM, LEED®, BEAM, Green Mark, and CEEQUAL and these are important to planning authorities. Meeting these standards has resulted in £879 million revenue on green infrastructure projects in 2017. The Group’s certifications in this area and its technical knowledge improve the whole-life performance of customers’ built assets. Scope 1 and 2 GHG emissions The Group has seen a decrease in carbon emissions intensity in 2017 compared to 2016 from 29.5 tonnes of CO2 equivalent (CO2e)/£m revenue to 22.3 tonnes of CO2e/£m revenue. This has been largely driven by concerted efforts to manage energy and fuel and reduce associated GHG emissions. Since establishing the baseline in 2010, tonnes of CO2e/£m revenue have dropped by 46.3% from 41.5 tonnes of CO2e/£m revenue to 22.3 tonnes of CO2e/£m revenue. The Group’s total CO2e figure for Scope 1 and 2 emissions, has dropped by 113,745 tonnes of CO2e (31.8%) from 357,983 tonnes of CO2e to 244,238 tonnes of CO2e over the same period. As evidenced, the Group has made significant progress in reducing energy and fuel consumption and associated Scope 1 and 2 emissions, which is leading to reduced operating costs and therefore improved value to customers and shareholders. Initiatives have included: improving the fuel efficiency of the Group’s fleet; optimising the sizing of generators and the power profile of projects; improving the energy efficiency of site cabins; and undertaking energy efficiency improvements to properties. In addition, a number of customers have expressed an intention to prequalify contractors on the basis of their carbon performance in the future which is driving performance in this area. Balfour Beatty’s 2020 goal is to achieve a 50% reduction per £ million revenue of its Scope 1 and 2 emissions (against a 2010 baseline). The Group’s performance to date illustrates it is on track to meet this target. Gammon Construction, the Group’s joint venture in Hong Kong/Singapore, accounts for approximately 41% of the Group’s Scope 1 and 2 emissions. It is certified to ISO 14064-1 international standard for quantifying and reporting greenhouse gas (GHG) emissions. Its Scope 1 and 2 GHG emissions are independently verified by SGS. GHG reporting and assurance Balfour Beatty’s GHG emissions are reported in accordance with the UK Government’s GHG reporting requirements covering all six Kyoto gases. The Group uses the operational control approach under the GHG Protocol Corporate Accounting and Reporting Standard as at 31 December 2017 to report emissions from its operations around the world. However, Balfour Beatty has chosen to report only using the location-based approach and not the market-based approach. Even though Balfour Beatty does procure significant amounts of renewable electricity, the average DEFRA and IEA location-based conversion factors have been used for carbon reporting purposes in order not to detract from reducing energy intensive operations. Balfour Beatty’s energy consumption in MWh is shown on page 36 to allow readers to make more informed comparisons of its energy use. Although Balfour Beatty’s Scope 1 and 2 CO2e emissions dropped by 18.5% (55,260 tonnes) over the period from 2016 to 2017, the number of MWh of energy dropped by 17.0% (175,345 MWh). This difference can be explained by the fact that different fuels have different carbon conversion factors, with some fuels attracting greater carbon conversion factors than others. Furthermore, the MWh table does not include fugitive emissions. The Energy Use table illustrates that there has been a greater switch towards 5% biofuel petrol blend and biodiesel different blend (other than 5%) accompanied by a reduction in both mineral petrol and mineral diesel. There has been a 23% reduction in 5% biodiesel blend use. Balfour Beatty’s Scope 1 and 2 CO2e emissions include emissions from assets that are otherwise not referred to across the rest of the financial statements such as energy provided by landlords or clients that Balfour Beatty does not pay for. The Group has determined and reported the emissions it is responsible for within this boundary and does not believe there are any material omissions. The Group uses the UK Government’s carbon conversion factors that were updated in 2017 to calculate its emissions into equivalent tonnes of carbon dioxide (CO2e) and the IEA’s October 2017 set of international conversion factors for electricity (Scope 2) except for the UK where the UK Government’s conversion factors were used as they are more up to date. The Group has only reported on Heery’s Scope 1 and 2 data until the point of sale in October 2017. Scope 1 Scope 2 (location-based) Total Scope 1 and 2 carbon emissions Total Scope 1 and 2 carbon emissions per £m revenue Base year 2010 283,821 74,162 357,983 41.5 2013 249,021 73,155 322,176 30.3 2014 221,679 71,208 292,887 30.2 2015 238,685 72,183 310,868 35.2 Absolute tonnes of CO2e 2017 172,270Δ 71,968Δ 244,238 22.3 2016 220,530 78,968 299,498 29.5 Scope 1 emissions include those resulting from the combustion of fuel and operation of facilities. Scope 2 emissions result from the purchase of electricity, heat, steam and cooling for own use. The full description of Balfour Beatty’s definitions can be found in its reporting guidance at www.balfourbeatty.com/enablon. Δ Included within KPMG’s limited assurance scope. balfourbeatty.com/AR2017 36 Building a sustainable business Using Our Blueprint to support communities and enable growth KPMG was engaged to undertake an independent limited assurance engagement, reporting to Balfour Beatty plc, using the assurance standards ISAE 3000 and ISAE 3410 over the GHG data that have been highlighted in this report with the symbol Δ. Their full statement is available at: www.balfourbeatty.com/IIA The level of assurance provided for a limited assurance engagement is substantially lower than a reasonable assurance engagement. In order to reach their opinion, KPMG performed a range of procedures over the GHG data. A summary of the work they performed is included within their assurance opinion. Non-financial performance information, GHG quantification in particular, is subject to more inherent limitations than financial information. It is important to read the GHG data in the context of the full limited assurance statement and the reporting criteria as set out in the Balfour Beatty reporting guidelines available at: www.balfourbeatty.com/GHSS CDP The Group is committed to addressing climate risk and reducing the lifetime emissions of the assets it builds, as evidenced by its performance in the global evaluation standard, the Climate Disclosure Project (CDP), where a B rating was achieved in 2017, compared to the industry average rating of C. The annual rating is based on CDP’s evaluation of the Group’s strategy, goals and actual emissions reductions, as well as transparency and verification of reported data. It assesses the completeness and quality of Balfour Beatty’s measurement and management of carbon footprint, climate change strategy, risk management processes and outcomes. The score’s purpose is to provide a summary of the extent to which companies have answered these questions in a structured format. Balfour Beatty’s B rating indicates that its team has provided comprehensive information in a transparent and open manner. Energy use Fuel Electricity Heat and steam Natural gas Industrial gases 5% biodiesel blend 5% biofuel petrol blend Biodiesel different blend E85 petrol Gas oil (Red diesel) 100% mineral diesel 100% mineral petrol LPG CNG Boiler fuel Total 2014 130,597 1,476 11,620 7,014 376,807 32,786 30 42 227,731 85,944 47,056 149 5 374 921,631 2015 169,678 2,603 18,169 2,828 476,488 11,933 – 5,479 288,143 20,025 44,795 185 1 921 1,041,248 2016 142,477 4,561 22,085 6,193 477,401 53,096 410 58 292,501 16,636 12,939 571 2 1,582 1,030,512 MWh 2017 132,437 28,796 17,367 3,866 367,036 70,949 1,120 99 212,909 15,381 3,848 212 1 1,146 855,167 Balfour Beatty Annual Report and Accounts 2017 Community engagement In many markets the ability to demonstrate the social value of the Group’s operations in economic terms is vital. To benefit local areas, the Group uses local suppliers, employees and materials wherever possible, and invests in future talent through apprenticeship schemes and work placement opportunities. Involved (Balfour Beatty’s community investment programme in the UK) was established in 2015 and focuses on three key areas where the Group can add value to its customers and the local community: – local employment and skills – supporting local businesses – community engagement through charitable fundraising, volunteering and mentoring. Wherever the Group operates it seeks to integrate within the neighbourhood, supporting the local community, its businesses and its workforce. Involved gives Balfour Beatty the opportunity to work within a framework whereby the results of its interventions are captured and the benefit to society shared with its customers and other interested parties. Community investment through charitable fundraising The Balfour Beatty Building Better Futures Charitable Trust was formed in 2009 to help the most disadvantaged young people in society. Through a mix of employee fundraising and financial support provided by the Company, the Trust currently supports three charities: Barnardo’s, Coram and The Prince’s Trust. In 2017, employees raised over £20,964 through Building Better Futures. The Company matched this with an additional contribution and donated a total of £100,000. Since 2013 the Trust has raised £181,416 to support Barnardo’s, helping over 1,340 young people. Since 2010 the Trust has contributed over £470,000 to Coram, funding vital services for children and young people. The Group has been particularly active with the Prince’s Trust ‘Get Into’ programmes to help more young people into the Construction sector. This includes the ‘Get into Construction’ programme, which the Group helped to shape and deliver nationally in 2017. Since the beginning of the partnership, the Group has raised over £1.3 million for the Prince’s Trust. In the UK, a further £157,424 was raised by employees for charitable purposes. The UK business also made in kind contributions of £95,107 to charities and made direct donations of £101,764. Strategic Report Governance Financial Statements Other Information 37 Managing tax risk There are a number of factors that affect the Group’s tax risk and these arise both internally and externally. Balfour Beatty’s ability to control these factors varies and its internal tax team works to minimise these risks to an acceptable level. For example: – new and developing tax legislation is monitored and where it is relevant Balfour Beatty participates in consultations issued by the tax authorities. When new or changed legislation is announced, the impact on the Group is assessed and active measures are taken to ensure there are adequate processes in place to comply with any change – tax risks in relation to compliance and reporting are managed by meeting regularly with professional advisers, industry groups and the tax authorities to both keep abreast of changes in these areas and to seek information on new systems and software – risk in relation to tax in general is managed by the internal tax team and if a position is uncertain the Group may obtain third-party advice in order to gain clarity or support for a particular stance or approach. Interaction with tax authorities Balfour Beatty’s approach to its tax affairs is supported by an open, honest and positive working relationship with the tax authorities, with regular dialogue. Should any dispute arise with regard to the interpretation and application of tax law, the Group is committed to addressing the matter promptly and resolving it in an open and constructive manner. Tax strategy Balfour Beatty recognises that paying taxes arising from its activities is an important part of how it contributes to the societies which it helps to build. The Group makes a major contribution to the tax revenues of governments in the numerous territories in which it operates. For example, the Group’s tax contribution extends significantly beyond corporation tax and the collection of substantial amounts of income tax and includes the payment of significant employer social security contributions. The Group’s tax strategy, approved by the Board, is to sustainably minimise tax cost whilst complying with the law. In doing so, it ensures it acts in accordance with Balfour Beatty’s ethics, values and Business Integrity programme. The Group aims to meet all legal requirements, filing all appropriate tax returns and making tax payments accurately and on time. The Group’s tax strategy applies to all territories in which it does business. Tax governance Balfour Beatty has clear tax policies, procedures and controls in place which are overseen by the Chief Financial Officer. A dedicated internal tax team, led by the Group Head of Tax, is responsible for the implementation of the Group’s tax strategy and supporting tax policies. Members of the tax team are highly experienced with appropriate professional qualifications and experience which reflect the responsibilities required for their roles. Tax risk appetite The Group manages its tax affairs in a proactive manner that seeks to maximise shareholder value. The Group does not enter into artificial arrangements that lack commercial purpose in order to secure a tax advantage. The aim is to ensure full compliance with all statutory obligations and as a consequence attempt to minimise risk wherever possible. Across the Group’s operations, employees volunteered 12,400 hours for charitable causes. This has brought multiple benefits, including helping customer relationships, engaging with employees and supporting local communities. The US Construction business contributed over US$430,000 to charitable causes in 2017. Some of the organisations receiving donations are: – Bridges to Prosperity – American Heart Association – Make-A-Wish Foundation – YMCA. In co-ordination with Bridges to Prosperity, an 11-member team of Balfour Beatty employees from across the US completed construction of a 100-metre suspended footbridge in Bolivia. The new footbridge helps the local community to cross a previously impassable river, providing access to healthcare, education and economic opportunities. In California, Balfour Beatty hosted its annual Golf Classic that raised more than US$135,000 for the Sharefest 2017 Workday. The tournament raised money for seven Workday sites, sending 230 low-income students to camp and providing five college scholarships to local students. In Texas, Balfour Beatty employees volunteered to mentor high school students as part of the ACE Mentor of Dallas programme. They taught students how to develop construction milestone schedules and site logistics plans based on an actual 1.9 million square-foot, mixed-use project in Dallas, Texas. In 2017, Gammon Construction and its staff contributed to nearly 150 activities and community events in Hong Kong, mainland China and Singapore and provided over HK$2.4 million in sponsorships, scholarships and charitable donations. Gammon’s Next Generation Sustainability Panel and Young Professionals Group co-organised a three-month renovation project for the Fung Yuen Butterfly Reserve’s footpath network. Gammon’s Concrete Technology Department produced 2,700 paving bricks from waste concrete for the path renovations. In December 2017, the Tuen Mun-Chek Lap Kok viaduct link project team received an Outstanding Award from the Hong Kong Student Aid Society in recognition of its voluntary work repairing the Tung Wan Mok Law Shui Wah school and island hostel that were damaged by typhoons. balfourbeatty.com/AR2017 38 Measuring our performance Providing clarity on the Group’s alternative performance measures Underlying profit before tax (PBT) The Group assesses performance in its Infrastructure Investments segment using an underlying PBT measure. This differs from the underlying PFO measure used to measure the Group’s Construction Services and Support Services segments because in addition to margins generated from operations, there are returns to the Investments business which are generated from the financing element of its projects. These returns take the form of subordinated debt interest receivable and interest receivable on PPP financial assets which are included in the Group’s income statement in investment income. These are then offset by the finance cost incurred on the non-recourse debt associated with the underlying projects, which is included in the Group’s income statement in finance costs. Measuring the Group’s performance The following measures are referred to in this Annual Report and Accounts when reporting performance, both in absolute terms and also in comparison to earlier years: Statutory measures Statutory measures are derived from the Group’s reported financial statements, which are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and as issued by the International Accounting Standards Board (IASB). Where a standard allows certain interpretations to be adopted, the Group has applied its accounting policies consistently. These accounting policies can be found on pages 102 to 109. The Group’s statutory measures take into account all of the factors, including those that it cannot influence (principally foreign currency fluctuations) and also large non-recurring items which do not reflect the ongoing underlying performance of the Group. Performance measures In assessing its performance, the Group has adopted certain non-statutory measures because, unlike its statutory measures, these cannot be derived directly from its financial statements. The Group commonly uses the following measures to assess its performance: a) Order book The Group’s disclosure of its order book is aimed to provide insight into its pipeline of work and future performance. The Group’s order book is not a measure of past performance and therefore cannot be derived from its financial statements. The Group’s order book comprises the unexecuted element of orders on contracts that have been secured. Where contracts are subject to variations, only secured contract variations are included in the reported order book. Where contracts fall under framework agreements, an estimate is made of orders to be secured under that framework agreement. This is based on historical trends from similar framework agreements delivered in the past and the estimate of orders included in the order book is that which is probable to be secured. b) Underlying performance The Group adjusts for certain non-underlying items which the Board believes assists in understanding the performance achieved by the Group. These items include: – gains and losses on the disposal of businesses and investments, unless this is part of a programme of releasing value from the disposal of similar businesses or investments such as infrastructure concessions – costs of major restructuring and reorganisation of existing businesses – acquisition and similar costs related to business combinations such as transaction costs – impairment and amortisation charges on intangible assets arising on business combinations (amortisation of acquired intangible assets). These are non- underlying costs as they do not relate to the underlying performance of the Group. From time to time, it may be appropriate to disclose further items as non-underlying items in order to reflect the underlying performance of the Group. The results of Rail Germany have been treated as non-underlying items as the Group is committed to exiting this part of the business. Further details of these non-underlying items are provided in Note 10. Following the issuance of the Guidelines on Alternative Performance Measures (APMs) by the European Securities and Markets Authorities (ESMA) in June 2015, the Group has included this section in its Annual Report and Accounts with the aim of providing transparency and clarity on the measures adopted internally to assess performance. Throughout this report, the Group has presented financial performance measures which are considered most relevant to Balfour Beatty and are used to manage the Group’s performance. These measures are chosen to provide a balanced view of the Group’s operations and are considered useful to investors as these measures provide relevant information on the Group’s past or future performance, position or cash flows. The APMs adopted by the Group are also commonly used in the sectors it operates in and therefore serve as a useful aid for investors to compare Balfour Beatty’s performance to its peers. The Board believes that disclosing these performance measures enhances investors’ ability to evaluate and assess the underlying financial performance of the Group’s continuing operations and the related key business drivers. These financial performance measures are also aligned to measures used internally to assess business performance in the Group’s budgeting process and when determining compensation. Equivalent information cannot be presented by using financial measures defined in the financial reporting framework alone. Readers of the Annual Report and Accounts are encouraged to review the financial statements in their entirety. Performance measures used to assess the Group’s operations in the year Underlying profit from operations (PFO) Underlying PFO is presented before finance cost and interest income and is the key measure used to assess the Group’s performance in the Construction Services and Support Services segments. This is also a common measure used by the Group’s peers operating in these sectors. This measure reflects the returns to the Group from services provided in these operations that are generated from activities that are not financing in nature and therefore an underlying pre-finance cost measure is more suited to assessing underlying performance. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 39 b) Underlying performance continued A reconciliation has been provided below to show how the Group’s statutory results are adjusted to exclude non-underlying items and their impact on its statutory financial information, both as a whole and in respect of specific line items. Reconciliation of 2017 statutory results to performance measures 2017 statutory results £m Build to Last restructuring costs £m Intangible amortisation £m Gains on disposals £m Non-underlying items Results of Rail Germany £m Additional loss on AWPR contract £m US Federal tax rate change £m UK deferred tax asset £m 2017 performance measures £m Continuing operations Revenue including share of joint ventures and associates (performance) Share of revenue of joint ventures and associates Group revenue (statutory) Cost of sales Gross profit Gain on disposals of interests in investments Amortisation of acquired intangible assets Other net operating expenses Group operating profit Share of results of joint ventures and associates Profit from operations Investment income Finance costs Profit before taxation Taxation Profit for the year from continuing operations Profit for the year from discontinued operations Profit for the year 8,264 (1,348) 6,916 (6,605) 311 86 (9) (299) 89 59 148 42 (73) 117 45 162 6 168 – – – – – – – 12 12 – 12 – – 12 – 12 – 12 – – – – – – 9 – 9 – 9 – – 9 (3) 6 – 6 – – – – – – – (17) (17) – (17) – – (17) 1 (16) (5) (21) (30) 8 (22) 20 (2) – – 2 – – – – – – – – – – – – – 44 44 – – – 44 – 44 – – 44 – 44 – 44 – – – – – – – – – – – – – – (32) (32) – (32) – – – – – – – – – – – – – – (34) (34) – (34) 8,234 (1,340) 6,894 (6,541) 353 86 – (302) 137 59 196 42 (73) 165 (23) 142 1 143 Reconciliation of 2017 statutory results to performance measures by segment Profit/(loss) from operations Segment Construction Services Support Services Infrastructure Investments Corporate activities Total 2017 statutory results £m Build to Last restructuring costs £m Intangible amortisation £m Gains on disposals £m Non-underlying items Results of Rail Germany £m Additional loss on AWPR contract £m US Federal tax rate change £m UK deferred tax asset £m 2017 performance measures £m 36 39 110 (37) 148 6 2 – 4 12 4 – 5 – 9 (18) – 1 – (17) – – – – – 44 – – – 44 – – – – – – – – – – 72 41 116 (33) 196 balfourbeatty.com/AR2017 40 Measuring our performance Providing clarity on the Group’s alternative performance measures continued Reconciliation of 2016 statutory results to performance measures 2016 statutory results4 £m Build to Last restructuring costs £m Intangible amortisation £m Provision increases/ (releases) £m Gains on disposal £m Results of ES £m Non-underlying items Results of Rail Germany £m 2016 performance measures4 £m Other £m Continuing operations Revenue including share of joint ventures and associates (performance) Share of revenue of joint ventures and associates Group revenue (statutory) Cost of sales Gross profit Gain on disposals of interests in investments Amortisation of acquired intangible assets Other net operating expenses Group operating profit/(loss) Share of results of joint ventures and associates Profit/(loss) from operations Investment income Finance costs Profit/(loss) before taxation Taxation Profit/(loss) for the year from continuing operations Profit for the year from discontinued operations Profit for the year 8,368 (1,445) 6,923 (6,639) 284 65 (9) (381) (41) 58 17 75 (82) 10 (8) 2 22 24 – – – – – – – 14 14 – 14 – – 14 (4) 10 – 10 – – – – – – 9 – 9 – 9 – – 9 (3) 6 – 6 – – – – – – – 31 31 (1) 30 – – 30 – 30 – 30 – – – – – – – (8) (8) – (8) – – (8) – (8) (24) (32) (3) – (3) 9 6 – – – 6 – 6 – – 6 – 6 – 6 (150) 12 (138) 127 (11) – – 10 (1) – (1) – – (1) 3 2 – 2 – – – – – – – 2 2 – 2 – – 2 – 2 – 2 8,215 (1,433) 6,782 (6,503) 279 65 – (332) 12 57 69 75 (82) 62 (12) 50 (2) 48 4 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. Reconciliation of 2016 statutory results to performance measures by segment Profit/(loss) from operations Segment Construction Services Support Services Infrastructure Investments Corporate activities Total 2016 statutory results4 £m Build to Last restructuring costs £m Intangible amortisation £m Provision increases/ (releases) £m Gains on disposal £m Results of ES £m Non-underlying items Results of Rail Germany £m 2016 performance measures4 £m Other £m (55) 22 83 (33) 17 12 1 – 1 14 3 – 6 – 9 19 11 – – 30 (5) – (3) – (8) 6 – – – 6 (1) – – – (1) – – 3 (1) 2 (21) 34 89 (33) 69 4 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 41 c) Underlying profit before tax As mentioned on page 38, the Group’s Infrastructure Investments segment is assessed on an underlying profit before tax (PBT) measure. This is calculated as follows: Underlying profit from operations (section (b) and Note 5) Subordinated debt interest receivable+ Add: Interest receivable on PPP financial assets+ Less: Non-recourse borrowings finance cost+ Underlying profit before tax Non-underlying items (section (b) and Note 5) Statutory profit before tax + Refer to Note 8 and Note 9. 2017 £m 116 26 11 (13) 140 (6) 134 2016 £m 89 29 21 (24) 115 (6) 109 d) Underlying earnings per share In line with the Group’s measurement of underlying performance, the Group also presents its earnings per share on an underlying continuing basis. The table below reconciles this to the statutory earnings per share. Reconciliation from statutory basic EPS to performance EPS Statutory basic earnings per ordinary share Less: earnings from discontinued operations Statutory basic earnings per ordinary share from continuing operations Amortisation of acquired intangible assets Other non-underlying items Underlying basic earnings per ordinary share from continuing operations (performance) 4 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. 2017 pence 24.7 (1.0) 23.7 0.8 (3.6) 20.9 20164 pence 3.5 (3.3) 0.2 0.9 6.1 7.2 e) Revenue including share of joint ventures and associates (JVAs) The Group uses a revenue measure which is inclusive of its share of revenue generated from its JVAs. As the Group uses revenue as a measure of the level of activity performed by the Group during the year, the Board believes that including revenue that is earned from its JVAs better reflects the size of the business and the volume of work carried out and more appropriately compares to PFO. This differs from the statutory measure of revenue which presents Group revenue from its subsidiaries. A reconciliation of the statutory measure of revenue to the Group’s performance measure is shown in the tables in section (b). A comparison of the growth rates in statutory and performance revenue can be found in section (i). f) Recourse net cash/borrowings The Group also measures its performance based on its net cash/borrowings position at the period end. This is analysed using only elements that are recourse to the Group and excludes the liability component of the Company’s preference shares, which is debt in nature according to statutory measures, as this is excluded from the definition of net debt in the covenants set out in the Group’s facilities. Non-recourse elements are cash and debt that are ringfenced within certain infrastructure concession project companies. Net cash/borrowings reconciliation Total cash within the Group Cash and cash equivalents – infrastructure concessions – other Total debt within the Group Borrowings – non-recourse loans – other Liability component of preference shares Net (borrowings)/cash 2017 statutory £m 968 135 833 (1,041) (440) (498) (103) (73) Adjustment £m (135) (135) – 543 440 – 103 408 2017 performance £m 833 – 833 (498) – (498) – 335 2016 statutory £m 769 7 762 (929) (240) (589) (100) (160) Adjustment £m (7) (7) – 340 240 – 100 333 2016 performance £m 762 – 762 (589) – (589) – 173 g) Average net cash/borrowings The Group uses an average net cash/borrowings measure as this reflects its financing requirements throughout the period. The Group calculates its average net cash/borrowings based on the average opening and closing figures for each month through the period. The average net cash/borrowings measure excludes non-recourse cash and debt and the liability component of the Company’s preference shares, and this performance measure shows average net cash of £42 million for 2017 (2016: £46 million net borrowings). Using a statutory measure (inclusive of non-recourse elements and the liability component of the Company’s preference shares) gives average net borrowings of £117 million for 2017 (2016: £230 million). balfourbeatty.com/AR2017 42 Measuring our performance Providing clarity on the Group’s alternative performance measures continued h) Directors’ valuation of the Investments portfolio The Group uses a different methodology to assess the value of its Investments portfolio. As described on pages 26 to 28, the Directors’ valuation has been undertaken using forecast cash flows for each project based on progress to date and market expectations of future performance. These cash flows have been discounted using different discount rates depending on project risk and maturity, reflecting secondary market transaction experience. As such, the Board believes that this measure better reflects the potential returns to the Group from this portfolio. The Directors have valued the Investments portfolio at £1.24 billion at year end (2016: £1.22 billion). The Directors’ valuation will differ from the statutory carrying value of these investments, which are accounted for using the relevant standards in accordance with IFRS rather than a discounted cash flow approach. Reconciliation of the net assets of the Infrastructure Investments segment to the comparable statutory measure of the Investments portfolio included in the Directors’ valuation 2017 £m 629 (13) (24) – 592 2016 £m 631 (12) (21) (6) 592 2016 £m 592 Net assets of the Infrastructure Investments segment (refer to Note 5.1) Less: Recourse loans presented within Corporate activities relating to Infrastructure Investments projects Less: Net assets not included within the Directors’ valuation: – Housing division – Infrastructure asset (see Note 5.2)* Comparable statutory measure of the Investments portfolio under IFRS * Infrastructure asset represents the Group’s carrying value of Blackpool Airport. Blackpool Airport was not included in the Directors’ valuation and has been disposed in 2017. Comparison of the statutory measure of the Investments portfolio to its performance measure Statutory measure of the Investments portfolio (as above) Difference arising from the Directors’ valuation being measured on a discounted cash flow basis compared to the statutory measure primarily derived using a combination of the following IFRS bases: 2017 £m 592 – historical cost – amortised cost – fair value Directors’ valuation (performance measure)^ 652 1,244 628 1,220 ^ 2017 valuation includes £62 million relating to the 7.5% second partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. The proceeds were subsequently received on 23 February 2018. The difference between the statutory measure and the Directors’ valuation (performance measure) of the Group’s Investments portfolio is not equal to the gain on disposal that would result if the portfolio was fully disposed at the Directors’ valuation. This is because the gain/loss on disposal would be affected by the recycling of items which were previously recognised directly within reserves, which are material and can alter the resulting gain/loss on disposal. The statutory measure and the Directors’ valuation are fundamentally different due to the different methodologies used to derive the valuation of these assets within the Investments portfolio. As referred to in the Strategic Report on page 26, the Directors’ valuation is calculated using discounted cash flows. In deriving these cash flows, assumptions have been made and different discount rates used which are updated at each valuation date. Unlike the Directors’ valuation, the assets measured under statutory measures using the appropriate IFRS accounting standards are valued using a combination of the following methods: – historical cost – amortised cost – fair value for certain assets and liabilities within the PPP portfolio, for which some assumptions are set at inception and some are updated at each reporting period. There is also an element of the Directors’ valuation that is not represented by an asset in the Group’s balance sheet. This relates to the management services contracts within the Investments business that are valued in the Directors’ valuation based on the future income stream expected from these contracts. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 43 i) Constant exchange rates (CER) The Group operates across a variety of geographic locations and in its statutory results, the results of its overseas entities are translated into the Group’s presentational currency at average rates of exchange for the period. The Group’s key exchange rates applied in deriving its statutory results are shown in Note 3. To measure changes in the Group’s performance compared with the previous period without the effects of foreign currency fluctuations, the Group provides growth rates on a CER basis. These measures remove the effects of currency movements by retranslating the prior period’s figures at the current period’s exchange rates, using average rates for revenue and closing rates for order book. A comparison of the Group’s statutory growth rate to the CER growth rate is provided in the table below: 2017 statutory growth compared to performance growth Construction Services UK US Gammon Total Support Services Infrastructure Investments Revenue (£m) 2017 statutory 2016 statutory Statutory growth (%) 2017 performance+ 2016 performance retranslated+ Performance CER growth (%) Order book (£bn) 2017 2016 Growth (%) 2017 2016 retranslated CER growth (%) 2,011 2,282 (13)% 1,998 2,143 (7)% 2.7 2.3 17% 2.7 2.3 17% 3,586 3,330 8% 3,634 3,595 1% 4.3 5.5 (22)% 4.3 5.0 (14)% – – – 1,017 1,009 1% 1.3 1.5 (13)% 1.3 1.4 (7)% 5,597 5,612 – 6,649 6,747 (2)% 8.3 9.3 (11)% 8.3 8.7 (5)% 1,031 1,076 (4)% 1,061 1,105 (4)% 3.1 3.1 – 3.1 3.1 – 288 235 23% 524 591 (11)% – – – – – – + Performance revenue is underlying revenue from continuing operations including share of revenue from joint ventures and associates as set out in section (e). Total 6,916 6,923 – 8,234 8,443 (3)% 11.4 12.4 (8)% 11.4 11.8 (3)% balfourbeatty.com/AR2017 44 Chief Financial Officer’s review Group financial summary In 2017, Balfour Beatty delivered a strong financial performance. The Group’s income statement, cash flow and balance sheet all strengthened as the progress made with Phase Two of Build to Last translated into improved financial metrics. In the Group income statement, revenue was flat, gross profit increased and overheads reduced – resulting in increased profitability. Underlying profit from operations margins increased in all business segments as the Group remains on track to deliver industry-standard margins in the second half of 2018. Year end net cash stood at £335 million and importantly average net cash for the year was £42 million. The order book at £11.4 billion decreased by 8%, down 3% at constant exchange rates (CER), compared to prior year (2016: £12.4 billion). The year end £11.4 billion is directly in line with the order book at 30 June 2017. Underlying revenue was flat at £8,234 million (2016: £8,215 million) as the Group continued with its more disciplined and selective approach to bidding. Underlying revenue at CER fell by 3%. Statutory revenue, which excludes joint ventures and associates, was £6,916 million (2016: £6,923 million). Construction Services underlying revenue was up 2% (down 2% at CER) at £6,649 million (2016: £6,537 million) as growth in the US offset an expected decline in the UK. Support Services underlying revenue declined 4% at £1,061 million (2016: £1,103 million) as an increase in utilities was more than offset by lower transportation revenues. Underlying profit from operations increased to £196 million (2016: £69 million), with Construction Services, Support Services and Infrastructure Investments all reporting improved profitability in the period. Underlying profit from operations increased at all geographical business segments within Construction Services. Statutory profit from operations increased to £148 million (2016: £17 million), primarily driven by the increase in underlying profits. Philip Harrison Chief Financial Officer Results for the year Revenue from continuing operations – underlying including joint ventures and associates – statutory Pre-tax profit from continuing operations – underlying – statutory Post-tax profit/(loss) from discontinued operations – underlying – statutory Basic earnings per share from continuing operations – underlying – statutory Underlying profit from operations2,3 US Construction UK Construction Gammon Construction Services Support Services Infrastructure Investments Corporate activities Total 2 From continuing operations. 3 Before non-underlying items (Note 10). 4 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. Balfour Beatty Annual Report and Accounts 2017 2017 20164 £8,234m £8,215m £6,916m £6,923m £165m £117m £1m £6m 20.9p 23.7p 2017 £m 41 16 15 72 41 116 (33) 196 £62m £10m £(2)m £22m 7.2p 0.2p 20164 £m 33 (65) 11 (21) 34 89 (33) 69 Strategic Report Governance Financial Statements Other Information 45 In 2017, Balfour Beatty delivered a strong financial performance. Philip Harrison Chief Financial Officer Construction Services improved from a loss of £21 million in 2016, to a profit from operations of £72 million in 2017 as UK Construction reported a profit of £16 million in the period (2016: £65 million loss). Support Services also improved, with underlying profit from operations of £41 million (2016: £34 million). Infrastructure Investments increased from prior year, as partial sell-downs of the Connect Plus M25 asset generated an £86 million profit on disposal of assets from the portfolio (2016: £65 million). Net finance costs increased to £31 million (2016: £7 million). The prior year comparison benefited from a £19 million gain on foreign currency deposits, with the corresponding gain in 2017 at £1 million. Underlying pre-tax profit from continuing operations increased to £165 million (2016: £62 million). The taxation charge on underlying profits increased to £23 million (2016: £12 million). Underlying profit after tax including discontinued operations for the year at £143 million (2016: £48 million) represents a material improvement over the previous year, primarily driven by the improvement in Construction Services. Total statutory profit after tax for the year was £168 million (2016: £24 million), as a result of the net effect of non-underlying items. Non-underlying items The Board believes non-underlying items should be separately identified on the face of the income statement to assist in understanding the underlying financial performance achieved by the Group. Non-underlying items of £20 million were a net credit to the profit for the year from continuing operations (2016: £48 million net charge). During the year significant actuarial gains in the Group’s main pension fund, the Balfour Beatty Pension Fund (BBPF), led to the recognition of a deferred tax liability which was accounted for through reserves in line with the treatment of the pension movement. This, in turn, led to the recognition of additional UK deferred tax assets of £34 million which resulted in a tax credit being recognised in the income statement as a non-underlying item. The US Government has reduced the Federal corporate income tax rate from 35% to 21% with effect from 1 January 2018. The net impact of this change in 2017 was a non-underlying £32 million tax credit in the income statement. On 15 January 2018, Carillion plc filed for compulsory liquidation. Carillion was one of the Group’s joint operations partners in the Aberdeen Western Peripheral Route (AWPR) project on a joint and several basis. As a result of Carillion’s liquidation, the Group and its remaining joint operations partner on the project, Galliford Try plc, are jointly liable to deliver Carillion’s remaining obligations on this contract in addition to each partner’s existing 33% share. As a result, the Group has recognised a one-off non-underlying loss provision of £44 million in 2017 which reflects the Group’s additional loss on the contract as a result of Carillion’s liquidation. The contract is expected to complete in the summer of 2018. Other items included: £12 million of restructuring costs incurred relating to the Group’s Build to Last transformation programme; a £9 million charge relating to the amortisation of acquired intangible assets; and a £18 million gain on the disposal of Heery International Inc. Taxation The Group’s underlying profit before tax from continuing operations for subsidiaries of £106 million (2016: £5 million) resulted in an underlying tax charge of £23 million (2016: £12 million). Discontinued operations The Group has presented its 49% interests in its Middle East joint ventures as discontinued operations in 2017, with comparatives restated accordingly. The sale of these interests was completed in March 2017 and resulted in a non-underlying gain on disposal of £5 million in 2017. Earnings per share Underlying basic earnings per share from continuing operations were 20.9 pence (2016: 7.2 pence), which, along with a non-underlying earnings per share from continuing operations of 2.8 pence (2016: 7.0 pence loss), gave a total basic earnings per share for continuing operations of 23.7 pence (2016: 0.2 pence). Discontinued operations contributed 0.1 pence (2016: 0.2 pence loss) to the total underlying basic earnings of 21.0 pence per share (2016: 7.0 pence). Total basic earnings per share were 24.7 pence (2016: 3.5 pence). Cash flow performance The total cash movement in the period resulted in a £162 million increase (2016: £10 million) to the Group’s net cash position to £335 million (2016: £173 million) driven by operating cash flows and proceeds from investment disposals, partly offset by new investments in infrastructure assets and pension deficit payments. The £162 million improvement is primarily as a result of the continuing recovery in profitability of the Group’s earnings-based businesses, particularly UK Construction. Operating cash flows, before movements in working capital and pension deficit payments, improved to an inflow of £39 million (2016: £58 million outflow). Working capital had an inflow of £27 million (2016: £48 million outflow) and pension deficit payments were an outflow of £25 million (2016: £41 million). Cash flow performance Operating cash flows Working capital inflow/ (outflow) Pension deficit payments Cash generated from/(used in) operations Infrastructure Investments: – disposal proceeds – new investments Other Cash inflow Opening net cash* Closing net cash* 2017 £m 39 27 (25) 2016 £m (58) (48) (41) 41 (147) 105 (35) 51 162 173 335 189 (65) 33 10 163 173 * Excluding infrastructure concessions (non-recourse) net debt. On statutory basis the Group reported net debt of £73 million at 31 December 2017 (2016: £160 million). balfourbeatty.com/AR2017 46 Chief Financial Officer’s review Following the formal triennial funding valuation of the Railways Pension Scheme as at 31 December 2016, the Group agreed to make ongoing deficit contributions of £6 million per annum which should reduce the deficit to zero by 2027. The Group’s balance sheet includes net retirement benefit assets of £32 million (2016: £231 million liabilities) representing net surpluses in the Group’s pension schemes, as measured on an IAS 19 basis. This is primarily due to net actuarial gains of £242 million in the year within the Statement of Other Comprehensive Income, including a gain of £123 million from changes in discount rate methodology. Goodwill The goodwill on the Group’s balance sheet at 31 December 2017 decreased to £874 million (2016: £937 million). The decrease was due to currency translation differences of £46 million and the disposal of goodwill relating to Heery International Inc of £17 million. The Group has conducted impairment reviews on its goodwill balance at the year end and has concluded that it was fully recoverable. Impact of IFRS 15 The Directors have completed their assessment of the impact of IFRS 15 Revenue from Contracts with Customers. The Group will adopt the new standard from 1 January 2018 with the opening equity position as at 1 January 2018 restated by a credit of £3 million to reflect the impact of transitioning to the new accounting standard. This adjustment primarily reflects the impact of unbundling a handful of contracts according to the Group’s assessment of its performance obligation to be delivered to the customer. Using the five-step model required by the new standard, the impact of the £3 million credit to equity represents the acceleration of revenue on transition to IFRS 15 which was not recognised by the Group under the previous revenue standards. IFRS 15 would have resulted in an immaterial impact on the Group’s income statement for the year ended 31 December 2017. Banking facilities The Group’s committed revolving credit facility totals £400 million. The purpose of this facility is to provide liquidity from a set of core relationship banks to support Balfour Beatty in its activities. The Group completed its refinancing in December 2015 with the £400 million facility extending through to 2018. In November 2017, £375 million of the facility was extended until December 2020. At 31 December 2017, all of this facility was undrawn. Outlook The Build to Last transformation programme is designed to deliver superior returns over the medium term for all stakeholders, from a Group which is Lean, Expert, Trusted and Safe. As a result of the successful self-help actions taken in Phase One, Balfour Beatty now has a strong foundation on which to deliver sustainable, profitable growth. In Phase Two (24-month period to the end of 2018), the Group expects each of its Construction Services and Support Services businesses to continue their positive trajectory to achieve industry- standard margins. Specifically, for these earnings-based businesses, the underlying profit from operations margin targets are as follows: UK Construction US Construction Support Services 2%-3% 1%-2% 3%-5% The Group is on track to achieve industry- standard margins in the second half of 2018 as it continues to drive three key levers for improved financial performance: finalising the remaining historical contracts through to completion; reducing costs and raising productivity across its operations; and executing on the improved quality of the order book. For Infrastructure Investments, during Phase Two of Build to Last, the Group will continue to sell assets, as appropriate, to maximise value to shareholders and invest in new opportunities. In Phase Three (2019+), Balfour Beatty aims to command a premium to industry- standard margins as market-leading strength should be matched by market- leading performance. Dividend Following the 1.2 pence per share dividend declared at the half-year, the Board is recommending a final dividend of 2.4 pence per share, giving a total recommended dividend for the year of 3.6 pence per share (2016: 2.7 pence). Working capital The Group has maintained the strong working capital position from December 2016, with an inflow of £27 million in 2017 (2016: £48 million outflow). Trade and other payables decreased during 2017, creating a working capital outflow of £92 million (2016: £60 million outflow), offset by a working capital inflow of £95 million (2016: £134 million outflow) from trade and other receivables. The offsetting reduction in both balances is predominantly due to contract timings and associated customer and supplier payments compared to the prior year and the ongoing completion of historical non- underlying contracts. Including the impact of foreign exchange and non-operating items, negative (i.e. favourable) working capital decreased to £888 million at 31 December 2017 (2016: £894 million). Working capital flows Inventories and WIP Construction contract balances Trade and other payables Trade and other receivables Provisions Working capital inflow/ (outflow)^ 2017 £m (12) 2016 £m 42 7 (92) 95 29 36 (60) (134) 68 27 (48) ^ Excludes impact of foreign exchange and disposals. Net cash/borrowings The Group’s net cash position at 31 December 2017, excluding non- recourse net borrowings, was £335 million (2016: £173 million). Non-recourse net borrowings, held in wholly-owned infrastructure concessions, increased to £305 million (2016: £233 million). The balance sheet also includes £103 million (2016: £100 million) for the liability component of the preference shares. Statutory net debt at 31 December 2017 was £73 million (2016: £160 million). Pensions Following the formal triennial funding valuation of the Balfour Beatty Pension Fund (BBPF) at 31 March 2016, the Company and the trustees agreed the key commercial principles of a plan for the BBPF to reach self-sufficiency during 2027, some three years earlier than previously planned. Under this plan Balfour Beatty will make cash contributions totalling £140 million over the next six years. There is an agreed dividend sharing mechanism such that if the dividend cover ratio falls below 2x from 2018 onwards, funding to the BBPF will be accelerated. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 47 Based on the above and having made appropriate enquiries and reviewed medium-term cash forecasts, the Directors consider it reasonable to assume that the Group and the Company have adequate resources to continue for the foreseeable future and, for this reason, have continued to adopt the going concern basis in preparing the financial statements. To appreciate the prospects for the Group as a whole, the complete Annual Report and Accounts 2017 needs to be read. Philip Harrison Chief Financial Officer The Board recognises the importance of dividends to shareholders and anticipates a progressive dividend policy going forward. Financial risk factors and going concern The key financial risk factors for the Group remain largely unchanged. The Group’s US private placement and committed bank facilities contain certain financial covenants, such as the ratio of the Group’s EBITDA to its net debt which needs to be less than 3.0 and the ratio of its EBITA to net borrowing costs which needs to be in excess of 3.0. These covenants are tested on a rolling 12-month basis as at the June and December reporting dates. At 31 December 2017, both these covenants were passed as the Group had net cash and net interest income from a covenant test perspective. The Group is forecasting to remain within its banking covenants during the going concern assessment period. The Directors have acknowledged the guidance Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 published by the Financial Reporting Council in October 2009. In reviewing the future prospects of the Group, the following factors are relevant: – the Group has a strong order backlog – there continues to be underlying demand in infrastructure markets in the countries in which the Group operates – excluding the non-recourse net borrowings of PPP subsidiaries, the Group had net cash balances of £335 million at 31 December 2017 – the Group’s portfolio of PPP investments comprises reasonably realisable securities which can be sold to meet funding requirements as necessary – the Group has access to committed credit facilities totalling £400 million through to December 2018 and £375 million to December 2020. At 31 December 2017, this facility was wholly undrawn. balfourbeatty.com/AR2017 48 Risk management framework Reinforcing a strong culture of risk management Oversight Audit & Risk Committee Business environment risk Policy tone from the top Common risk infrastructure Executive risk steering group Strategic risk Process | People | Technology R i s k i d e n t i fi c a t i o n a n d e s c a l a t i o n Governance – mitigation and controls Risk process Risk management community of practice Strategic Business Units & Enabling Functions Operating risk 1. Identify 2. Assess 3. Respond 4. Monitor The Gated Lifecycle Key project risks assessed at each gate Initial enquiry Tender Contract negotiations Mobilisation Execution Commissioning & handover Defects liability period Gate 1 Initial ‘Go/No Go’ approval Gate 2 Tender ‘Go/No Go’ approval Gate 3 Tender submission approval Gate 4 Contract signing approval Gate 5 Pre-commencement Gate 6 Monitoring and control Gate 7 Project completion Gate 8 End of defects liability period Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 49 Introduction Balfour Beatty’s risk management process continues to evolve to ensure it is reflective of the shape of the business and its operations. In 2017, the Enterprise Risk management team was repositioned to be fully aligned with the Internal Audit function to further sharpen the focus on the Group’s internal risk and control environment. The Group recognises that a consistent, agile and responsive approach to risk management is crucial to the sustainable delivery of its business objectives. Oversight To meet the requirements of the UK Corporate Governance Code, the Board accepts overall responsibility for risk management and determines the nature and extent of the principal risks to be taken and assesses the effectiveness of the risk management and internal control systems that are in place to mitigate impacts. The business has in place several well established processes including the Gated Lifecycle and Project on a Page to enable senior leadership to engage with the work winning and operational teams to understand the Group’s risk exposure and manage it correctly. Common risk infrastructure The dynamic structure of the Group’s risk management process allows the Group Chief Executive to monitor the risk profile of the business via the Executive Risk Steering Group. Members of the steering group act as the executive sponsor for risk management within their business and functions and as such are in a position to directly influence custom and practice. The steering group undertook a reassessment of the Group Risk Register in 2017 including mapping and assessing the internal control environment against an updated and more granular probability and impact matrix. Risk process The Enterprise Risk management team engages with the wider risk management leadership teams in a number of ways including Strategic Business Unit committees, a community of practice and day-to-day liaison. This two-way information share involves disseminating best practice on risk management across the enabling functions and businesses to ensure consistency of assessment and treatment of risk. As part of the Build to Last programme the application of effective risk management has been greatly improved and this culture will be further embedded in 2018 with the launch of Group Minimum Expectations for Risk Management. Assessment The Gated Lifecycle remains central to Balfour Beatty’s risk management process with a mandatory assessment of risk and risk appetite being made at each review gate. In-house project management includes assessment and subsequent rating of risk and reinforcement of the importance of adherence to the Group’s commercial policies and practices. balfourbeatty.com/AR2017 Risk management framework Reinforcing a strong culture of risk management continued 50 Risk appetite Understanding risk is at the heart of Balfour Beatty’s decision-making process. An ongoing appraisal of the Group’s risk profile is made by the Board. The level of risk the Group is willing to accept is defined as its risk appetite and has been set in the context of the interaction between risk assessment processes and its ability to mitigate and exert control over existing and emerging risks. Risk appetite within any organisation must be dynamic and determined by senior leaders and practitioners to ensure it is embedded in critical business processes. Strategic priorities – Build to Last Lean Expert Trusted Safe Deliver value to our customers by improving operational efficiency and eliminating waste right through the supply chain. Risk appetite Balfour Beatty is committed to the transformation programme. In driving out unnecessary cost and improving efficiencies it is essential to take some operational risk. Such risks must not be at the expense of achieving the overall lean objective. The Group’s risk appetite for efficiency is moderate. Transformation programme Read more on p54 Supply chain Read more on p55 Legacy pension liabilities Read more on p56 Ensure we have the best engineering, design and project management capabilities. Be the construction partner of choice for our customers and supply chain by delivering on our promises. We must ensure the health and safety of everyone who comes into contact with our activities. Risk appetite Conducting business in a safe way and providing a Zero Harm environment for Balfour Beatty’s people and stakeholders is paramount. The Group’s appetite for safety risk is zero. Health and safety Read more on p51 Transformation programme Read more on p54 Risk appetite In order to deliver the best solutions to customers and stakeholders Balfour Beatty strives to remain at the vanguard of innovation and skill development. Controlled and understood risks can be taken whilst seeking to mitigate significant repercussions. The Group has a moderate appetite for expert risk. Economic environment Read more on p53 People Read more on p53 Transformation programme Read more on p54 Risk appetite Balfour Beatty must deliver on its promises to stakeholders. The Group has a low appetite for risks around customer delivery. Work winning Read more on p51 Project execution Read more on p52 Data governance Read more on p52 Transformation programme Read more on p54 Financial strength Read more on p54 Business conduct Read more on p55 Legal and regulatory Read more on p56 Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 51 Principal risks Understanding our risk profile Understanding Balfour Beatty’s risk profile and establishing the most effective way to manage, accept or transfer risk is central to the Group’s decision-making process. As such, the Board has made a robust assessment of the principal risks which the Group faces, the controls in place to remove or mitigate these risks and also whether these risks represent new, increased or decreased threats. The Group recognises that its risk profile comprises interlinked and discrete risks. The principal risks as set out below should therefore be considered alongside the viability statement on page 57 and the discussion on financial risk factors and going concern on page 47. Health and safety Risk: Increased Owner: Safety and Sustainability Committee Build to Last pillar: Safe Risk description The Group works on significant, complex and potentially hazardous projects which require continuous monitoring and management of health and safety risks. Causes Some common themes where health and safety risks could arise are recognised and communicated, including: – risk identification/assessment – processes that fail to deliver risk elimination or mitigation – failure in safety leadership – management of subcontractors – not briefing people properly before setting them to work – failure to follow procedures – ongoing change programme and performance pressures, which may have an effect on people and their ability to remain focused on health and safety risks. What impact it might have Failure to manage these risks gives the potential for significant harm to, or even the death of, employees, subcontractor staff or members of the public, as well as the potential for criminal prosecutions, significant fines, debarment and reputational damage. How it is mitigated Balfour Beatty has detailed health and safety policies, procedures and initiatives to minimise such risks. These are reviewed and monitored by management and external verification bodies. Each business has experienced health and safety professionals in place who provide advice and support and undertake regular reviews. The Safety and Sustainability Committee of the Board, as well as business-level Health and Safety executive leadership teams, meet regularly throughout the year to develop a consistent approach to health and safety best practice. Training programmes (including behavioural) are in place. Zero Harm action plans continue to be implemented and monitored. Risk movement Lagging performance indicators continue to improve however the upper limits for fines and scope for prosecution have increased. Work winning Risk: No change Owner: Group Tender and Investment Committee Build to Last pillar: Trusted Risk description Failure to identify, price, and execute the right volume and quality of bids and investment opportunities to maintain a profitable, sustainable order book and deliver value to stakeholders. Causes Inaccuracy in: – assumptions behind investment decisions – costs versus scope and time calculations – project programme and task duration estimates – design and specifications not fully developed or understood – assessment of the impact of inflation and exchange rates – contract management – negotiation of terms and conditions – assessment of customers’ liquidity/ creditworthiness – assessment of joint venture partners or supply chain. What impact it might have Failure to estimate accurately the risks, costs versus scope, time to complete, impact of inflation and exchange rates, and failure to understand specification changes and contractual terms and how best to manage them could cause financial losses. In the event of disagreement with, failure of, or poor delivery performance by a joint venture partner, the Group could face financial and reputational risks. If any of the assumptions behind investment decisions prove incorrect, the profitability of those investments could be reduced. How it is mitigated Consistent and shared policies and minimum commercial expectations including acceptable margins. A wide and ongoing range of training initiatives across all disciplines within the Group including Cash is our Compass and High Value Selling to drive increased commercial awareness and an understanding of expectations on margins and cost. All bids are subject to rigorous estimating and tendering processes as part of the gateway review process. Commercial/contractual reviews are conducted by key commercial and legal staff. Defined delegated authority levels are in place for approving all tenders and infrastructure investments. Reviews are conducted following all tenders to ensure lessons are learnt, captured and applied to future tenders. Before entering into a joint venture agreement, the Group reviews the relevant skills, experience, resources and values of joint venture partners to understand how they complement its own. Investment appraisals are performed and reviewed by experienced professionals. The Group analyses the risks associated with revenues and costs and, where appropriate, establishes contractual and other risk mitigations. balfourbeatty.com/AR2017 52 Principal risks Understanding our risk profile continued Project execution Risk: No change Owner: Group management Build to Last pillar: Trusted Risk description Failure to deliver projects at the required specification on time and on budget to meet the expectations of customers and minimise the risk of delay-related damages and defect liabilities. Causes Failure to implement, maintain and challenge operational and commercial controls (as detailed within checklists at Gate reviews (4-6)) allowing: – unrealistic programming targets – non-availability of specialist resource – unrealistic progress assessments and cost to complete judgements – overly-optimistic claim recovery assumptions – incomplete visibility and appreciation of scale of commercial judgements – inaccurate and/or incomplete cost and value data or failure to analyse and report correctly, which could arise due to poor training, lack of supervision, lack of accountability or fear of reporting bad news – failings in administering the contract terms to safeguard or protect future claims, change and extensions of time (EOTs). What impact it might have Failure to manage or deliver against contracted customer requirements on time, on budget and to an appropriate quality could result in issues such as contract disputes, rejected claims, design issues, liquidated damages, cost overruns, failure to achieve customer savings and costs to rectify defective work – which in turn harm Balfour Beatty’s profitability and reputation. The Group may also be exposed to long-term obligations including litigation and costs to rectify defective or unsafe work. Execution failure on a high-profile project could result in significant reputational damage and costs. How it is mitigated An increased focus on identifying and reporting risks, including the accuracy of cost and cash forecasting. Consistent application of strong commercial management and contract administration processes. Targeted recruitment of key staff within project delivery teams and senior management, together with ongoing and focused training of staff via the Balfour Beatty Academy. Ongoing project resource reviews. Gateway process embedded within each business and held on the Business Management System to increase accuracy and consistency within work winning and project delivery. Site Mobilisation Hub in place to facilitate early and effective start-up on site. Use of innovative and cost effective engineering and technical solutions. Planning and programming is undertaken to mitigate unforeseen events and changes. Drive for defect-free delivery is being embedded at all levels. Professional indemnity cover in place to provide further financial safeguards. Balfour Beatty monitors the performance of joint ventures, joint venture partners, subcontractors and suppliers throughout the lifecycle of a project. Data governance and cyber security Risk description Breach of the Data Protection Act or the General Data Protection Regulation (GDPR) and/or key company data or other confidential information is lost, stolen or compromised. Causes Failure to correctly assess and prepare for: – the new GDPR – the ongoing threat of cybercrime – malicious intent and/or targeted attack – breakdown of key security software or management system. Risk: Increased Owner: Group management Build to Last pillar: Trusted What impact it might have Crystallisation of this risk has the potential for: – the business facing legal proceedings, investigations or disputes resulting in business disruption, losses, fines and penalties and reputational damage – a reduction or loss of competitive advantage (including loss of intellectual property) – a negative impact on customer relationships, including loss of confidence – exclusion from bidding opportunities. How it is mitigated Data Protection Officers embedded throughout the businesses to ensure breaches are reported promptly and risks are appropriately escalated to the Group Data Protection Officer for consideration and assessment. Data protection programme covering policies, procedures and approved access levels in place alongside a comprehensive training plan. The Group’s exposure has been reduced via a significant reduction in approved suppliers. All data is stored in secure data centres with strengthened back-up procedures. Regular review and communication of the ever-changing cyber threats and how they manifest themselves in practical guidance that all employees and contractors understand. Use of up-to-date anti-viral software and increased patching of key software. All employees are trained in and must comply with information security management obligations. Risk movement The potential risk exposure has increased as a result of the higher level of fines which will be enforceable under The General Data Protection Regulation. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 53 Uncertainty within our economic environment Risk: No change Owner: The Board Build to Last pillar: Expert Risk description The effects of national or market trends, political or regulatory change (including the UK’s exit from the EU and the change of administration in the US), or new developments in infrastructure expenditure or procurement may cause customers to re-evaluate existing or future projects. Causes Failure to plan for any potentially negative impacts, or to capture any opportunities that may be presented could lead to: – customers postponing, reducing or changing expenditure plans – wider than expected fluctuations in inflation – increased competition (eg in the UK from foreign investors acquiring competitors) – increased supply chain risks (eg solvency, people and materials) – reduced revenue or pressure on margins. What impact it might have Any significant changes in the level or timing of customer spending or investment plans could adversely impact the Group’s strategy, business model, revenue or profitability in the short or medium term. Restrictions to the availability of skilled labour and competitively priced materials will lead to a loss of competitive advantage and a devaluation of the business. Financial failure of a customer, including any government or public sector body, could result in not collecting amounts owed. How it is mitigated The Group’s strategy to focus on the more resilient and stable infrastructure markets and geographies will help mitigate this risk. The effect of spending changes in any one market is mitigated by the Group’s broad exposure to infrastructure markets and the continued need for infrastructure spending. Balfour Beatty also mitigates the effects of such market conditions by continuing to adapt its business model. The Group is actively monitoring the potential impacts of the UK exiting the EU including potential market stimulation by the UK Government, freedom of movement, finance costs, exchange rates and commodity prices. A dedicated Group-wide forum is in place for this purpose and issues a Brexit position paper for external audiences which is updated every second month. The financial solvency and strength of counterparties is always considered before contracts are signed and such assessments are updated and reviewed whenever possible during the project lifecycle. The business also seeks to ensure that it is not over-reliant on any one counterparty. People Risk: No change Owner: The Board Build to Last pillar: Expert Risk description Inability to attract and retain required levels of skilled and competent staff to meet the Group’s objectives. Causes – Perceived limitations to internal career development – Lack of recognition and reward – Failure of businesses to promote good news stories – Failure to maintain a culture of pride in the workplace – Lack of a diverse workforce – Restrictions in the availability of skilled labour. What impact it might have Failure to recruit and retain appropriately skilled people could harm the Group’s ability to win or perform specific contracts, grow its business and meet its strategic objectives. A high level of staff turnover or low employee engagement could result in a drop in confidence in the business within the market, customer relationships being lost and an inability to focus on business improvements. How it is mitigated The Balfour Beatty Academy has been established in the UK to provide professional development and knowledge sharing opportunities and to ensure employees feel valued and specialisms are recognised. Regular reviews of remuneration arrangements to ensure they are appropriate to help the Group attract, motivate and retain key employees. Strong employee communication channels are in place celebrating individual, business and Group-level successes. An annual Group-wide employee engagement survey is undertaken to measure engagement and appropriate actions are developed and communicated. Recruitment and retention rates are measured and regularly reviewed across all parts of the business. Affinity networks have been established to create a diverse and inclusive working environment. Emerging talent is supported via a range of graduate, apprenticeship, trainee and industrial placement/internship schemes including The 5% Club (see page 32). Competency frameworks within core job families identify and support the development of key knowledge, skills and expertise. The talent review process focuses on succession and the talent pipeline is supported by various development initiatives across the Group. balfourbeatty.com/AR2017 54 Principal risks Understanding our risk profile continued Realising the transformation programme Risk: No change Owner: The Board Build to Last pillar: All Risk description The momentum gained via the policies, process, and practices of Build to Last is not maintained and potential benefits are not realised. Causes To enable the transformation programme to succeed, a culture of adhering to the Build to Last principles must be continued and enhanced. Failing to grow this culture could result from: – ineffective communication – inadequate resourcing (financial, physical and people) – complacency within core disciplines – new systems and processes being used without appropriate controls being in place and/or tested. What impact it might have Failure to capture fully the benefits of Build to Last could result in the Group’s ability to deliver sustained profit being jeopardised. How it is mitigated Ensuring Build to Last continues to deliver the Group’s standard operating procedures is a strategic priority for the Group and is being led by the Group Chief Executive. Controls include: – continuing to embed the Build to Last culture within each business unit – senior leadership communication across the businesses is clear and frequent – new systems and processes are deployed with training plans and in agreed phases – employee surveys form a key part of the programme – leaders throughout the business frequently monitor the delivery and impacts of the programme – senior leadership is well experienced in delivering business transformation successfully. Financial strength Risk: No change Owner: The Board Build to Last pillar: Trusted Risk description Inability of the Group to maintain the financial strength required to operate its business and deliver its objectives. Causes Failure to manage financial risks, including forecasting material exposures, and the financial resources of the Group that underpin its ability to: – meet ongoing liquidity obligations so that it remains a going concern – meet financial covenants as set out in financing facility agreements – maintain the confidence of customers and key markets and therefore continue to win long-term contracts. What impact it might have Failure to deliver effectively the required financial strength will mean the Group: – fails to meet financial covenant tests, as set out in its financing facility agreements, that would lead to an event of default if not remedied within a specific grace period – fails to pass the required tests that allow it to continue to adopt the going concern basis of preparing the financial statements – loses the ability to compete for key long-term contracts that are critical to the delivery of its long-term objectives and viability. How it is mitigated The Group operates with a centralised treasury function that is responsible for managing key financial risks, cash resources and the availability of liquidity and credit capacity. The Group maintains significant undrawn term committed bank facilities with a banking group of high credit-quality to underpin the liquidity requirements of the Group. The Group maintains significant bank and surety bonding facilities to deliver trade finance requirements of the Group on an ongoing basis. The Group operates standardised reporting, forecasting and budgeting financial processes. This allows monitoring of the impact of business decisions on financial performance over future time horizons. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 55 Supply chain Risk: Decreased Owner: Group management Build to Last pillar: Lean Risk description Supply chain partners are not able to meet the Group’s operational expectations and requirements including availability, financial stability, technical ability, quality, safety, environmental, social and ethical. Causes – Supply chain failure risk, exacerbated during, and when emerging from, tough economic conditions – Over-reliance on a limited number of suppliers – Retention of subcontracted parties in buoyant markets – Inadequate assessment of supply chain partner capabilities and process (including safety, ethics, quality, material stewardship, child labour, forced labour and modern slavery) – Failure to accurately assess project resource requirements and key deliverables – Unethical treatment of the supply chain. What impact it might have Failure of a subcontractor or supplier would result in the Group having to find a replacement or undertaking the task itself. This could result in delays, additional costs or a reduction in quality owing to lack of expertise. Mistreatment of suppliers, subcontractors and their staff, or poor ethical standards in the supply chain, could lead to legal proceedings, investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and debarment. How it is mitigated The Group aims to develop long-term relationships with key subcontractors, working closely with them to understand their operations and dependencies. Contingency plans in place to address subcontractor failure including replacement supplier list. Lessons are learnt from supply chain performance. All UK trade suppliers and subcontractors are assessed using the Constructionline service that collects, assesses and monitors standard company information through a question set aligned to PAS 91, the industry-standard pre-qualification questionnaire. The risk management framework and the gateway review process allow for early (Gates 1-4) and ongoing (Gate 6) assessment of the appropriateness of resource allocation and dependencies. My Contribution programme generates ideas for more effective procurement and resourcing. The Group obtains project retentions, bonds and/or letters of credit from subcontractors, where appropriate to mitigate the impact of any insolvency. Key supplier audits within projects to ensure they are in a position to deliver consistently against requirements. Group-wide Code of Conduct and Supplier Code of Conduct, and related policies and procedures in place. Risk movement Increased rigour in the pre-qualification processes, consolidation of the supply chain and improved monitoring of supplier performance. Business conduct/compliance Risk: No change Owner: The Board Build to Last pillar: Trusted What impact it might have Failure by the Group, or employees and third parties acting on its behalf or in partnership, to observe the highest standards of integrity and conduct could result in legal proceedings (including prosecution under the UK Bribery Act), investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and debarment. How it is mitigated The Business Integrity function promotes, monitors, assesses awareness of and provides training on, the Code of Conduct. The function provides reports to the Audit and Risk Committee and has the full support of the Board. Each business unit, supported by the Business Integrity function, is responsible for embedding the Code of Conduct. The Group has a range of risk assessment, due diligence and procurement controls that are designed to identify and manage risks with third parties. Independent third-party whistleblowing hotline and dedicated email are in place and actively promoted. All in-scope complaints are independently investigated by the Business Integrity function and appropriate action is taken, where necessary. Balfour Beatty works with a limited number of agents, all of whom undergo a due diligence and approval process. Risk description The Group operates in various markets that present business conduct-related risks involving fraud, bribery or corruption, whether by its own staff or via third parties such as agents, partners or subcontractors. Those risks are higher in some countries and sectors. Overall, the construction industry has a higher risk profile than other industries. Causes – Corruption – Bribery – Fraud, deception, false claims or false accounting – Unfair competition – Human rights abuses, such as child and other labour standards generally, illegal workers, human trafficking and modern slavery – Unethical treatment of and by the supply chain – Risk of ethics and values being compromised as a result of commercial pressures – Other emerging ethical risks. balfourbeatty.com/AR2017 56 Principal risks Understanding our risk profile continued Legal and regulatory Risk: No change Owner: The Board Build to Last pillar: Trusted Risk description The Group does not comply with all legal, tax and regulatory requirements. Causes A failure to recognise or adapt to changes in applicable laws affecting the Group’s businesses. Such changes may include: – obligations as a result of government/ regulatory enquiry and enforcement actions – adverse changes of law, including changes to tax law – local procurement laws – exclusion from bidding or blacklisting. What impact it might have The business could face legal proceedings, investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and exclusion from bidding. Such action could also impact upon the valuation of assets within that territory. How it is mitigated The Group monitors and responds to tax, legal and regulatory developments and requirements in the territories in which it operates. Local legal and regulatory frameworks are considered as part of any decision to conduct business in a new country. Appropriate and responsive policies, procedures, training and risk management processes are in place throughout the business. Legacy pension liabilities Risk: No change Owner: The Board Build to Last pillar: Lean Risk description The Group is exposed to significant defined benefit pension risks. Causes The Group is unable to ensure that the trustees of the pension funds react effectively to or manage: – changes in interest rates – inflation or life expectancy trends – intervention by regulators or legislators – investment performance of the funds’ assets. What impact it might have Failure to manage these risks adequately could lead to the Group being exposed to significant additional liabilities due to increased pension deficits. How it is mitigated The Group constructively engages with the trustees of the pension funds to ensure that they are taking appropriate advice and the funds’ assets and liabilities are being managed appropriately. The Group’s main UK fund has hedged in excess of 80% of its exposure to interest rate and inflation movements. More generally and in addition to its principal risks Balfour Beatty faces significant risks and uncertainties that are common to many companies – including financial and treasury, communications and marketing, wider information security, business continuity and crisis management, and hazard risks. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 57 Viability statement Testing the Group’s viability The Directors have assessed the Group’s viability in conjunction with its current position as well as its financial projections in the context of the various debt facilities and associated covenants. These financial projections are based on the Group’s Three Year Plan, which has been built up through a bottom-up basis with a Group overlay which provides a more top-down view to align to the Group’s strategic objectives. These projections indicate that the projected headroom, provided by the Group’s net cash position and under the debt facilities currently in place, are adequate to support the Group over the next three years, whilst still enabling the Group to repay its £410 million debt falling due in the next three years. In the three-year period, the Group is also not projecting to draw down on its revolving credit facility of £400 million to 31 December 2018 and £375 million to 31 December 2020. In testing the headroom available under the key sensitivities modelled, the Directors have assumed that the expiring debt facilities will be fully repaid and will not be replaced with another form of debt. The Group’s projections have been stress- tested against key sensitivities which could materialise as a result of crystallisation of one or a combination of the Group’s principal risks with the aim of stress-testing the Group’s future viability against severe but plausible scenarios. These severe but plausible scenarios include: – failure to manage effectively the uncertainties caused by Britain’s exit from the EU – an inability to collect recoverable amounts – an operating event that damages the Group’s reputation and results in significant penalty – more onerous payment terms demanded from suppliers leading to a reduction in creditor payment days – failure to realise further projected benefits from Build to Last. The above scenarios result in: – a reduction in revenue – a reduction in margin – an increase in operating costs – a slowdown in the Group’s investments disposal programme – negative changes to working capital. Viability statement In accordance with provision C.2.2 of the UK Corporate Governance Code 2016, the Directors have assessed the viability of the Group over a three-year period to 31 December 2020. The Directors consider this period to be appropriate because this is the period aligned to the current order book and for which there is a good visibility of the pipeline of potential new projects. This period also allows greater certainty over the forecasting assumptions used in labour and material pricing, skills and availability. In the longer term, there is also significant political uncertainty. There is inherently limited visibility of contract bidding opportunities beyond the three-year period, and the accuracy of any forecasting exercise will also be impeded by the uncertainty around the costs involved to deliver these contracts. Consequently, the Group performs its medium-term planning over three years. The Directors and the Executive Risk Steering Group continue to monitor the principal risks facing the Group, including those that would threaten the execution of its strategy, its business model, future performance, solvency and liquidity. As part of assessing the Group’s future viability, the Directors have considered these principal risks and the mitigations available to the Group. These principal risks and the consequent impact these might have on the Group as well as mitigations that are in place are detailed on pages 51 to 56. In their assessment of the Group’s viability, the Directors have also considered the need to be successful in implementing the Group’s Build to Last transformation programme and to focus on its strategic priorities of Lean, Expert, Trusted and Safe detailed on pages 12 to 15. By the end of 2016, the Group had successfully exceeded its Phase One Build to Last targets of £200 million cash in: £100 million cost out. The Group continues to exploit opportunities to re-engineer processes to drive efficiencies, reducing cost whilst maintaining or improving efficiencies. The Group is now in Phase Two of its Build to Last programme, which aims towards achieving industry-standard margins in its earnings-based businesses. As part of Phase Two, it remains critical that the principles embedded in Phase One of Build to Last are maintained in order to achieve these industry-standard margins, although this is also dependent to a certain extent on the Group’s ability to selectively win new contracts which will be partly impacted by political changes, particularly in the UK and the US. The Directors also assessed a ‘perfect storm’ scenario by combining multiple scenarios above and modelling the resulting downside to stress-test the Group’s viability if these cash flows were to immediately and simultaneously come under severe threat. This scenario is aimed to test the viability of the Group if it was to experience a catastrophic failure and to allow the Directors to assess the mitigations available to avoid this. In assessing the Group’s viability under these severe but plausible scenarios (including in the instance of a ‘perfect storm’), the Directors have also considered the Group’s projected cash position (which excludes cash that is not immediately available to the Group), bank facilities and their maturity profile and covenants, the borrowing powers allowed under the Company’s Articles of Association and the fact that the Group’s PPP investments comprise reasonably realisable securities which can be sold to meet funding requirements if necessary. It is unlikely, but not impossible, that the crystallisation of a single risk would test the future viability of the Group; however, unsurprisingly, it is possible to construct scenarios where either multiple occurrences of the same risk, or single occurrences of different principal risks, could put pressure on the Group’s ability to meet its financial covenants. The Directors have considered the strength of the mitigations available to the Group and whether these are sufficient to avoid a catastrophic outcome to the Group’s viability and believe that there are sufficient mitigations immediately available to minimise this risk. Based on the assessment undertaken to stress-test the Group’s viability against severe but plausible scenarios, and taking into account the strength of mitigations that are immediately available to the Group, the Directors have concluded that there is a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period until 31 December 2020. Our 2017 Strategic Report, from pages 1 to 57, was approved by the Board on 13 March 2018. Philip Harrison Chief Financial Officer balfourbeatty.com/AR2017 58 Chairman’s introduction to corporate governance The statement of corporate governance practices set out on pages 58 to 87 and the information referred to therein constitutes our Corporate Governance Report which we believe remains appropriate for the Group’s business and is supportive of its strategy and culture. Philip Aiken AM Chairman Leadership Effectiveness Accountability We have a collective responsibility to challenge strategy, performance and accountability to ensure every decision complies with high standards of business integrity and is in the best interests of the Company’s shareholders. Read more about the Board’s leadership p60-62 Remuneration We continually evaluate the balance of skills and experience of the Board and management team to ensure we have the right people in place to provide effective leadership. The Board sets the Group’s strategy and risk appetite and approves the operating plans and targets to deliver this strategy based on the recommendations of management. Read more about the Board’s effectiveness p63-66 Read more about the Board’s accountability p67-71 Our remuneration policy aims to attract, retain and motivate the right calibre of people to drive the performance of the business. We aim to operate this policy in a transparent manner. Read more about the Board’s remuneration policy p76-87 Compliance with the Code The UK Corporate Governance Code 2016 (the Code) is the standard applying to good corporate governance practice in the UK and the Listing Rules require listed companies to disclose whether they have complied with the provisions of the Code (www.frc.org.uk). The Company has complied fully with the requirements of the Code throughout the accounting period and to the date of this report. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 59 Leadership The Board seeks to promote the long- term success of the Group, delivering sustainable value to shareholders and promoting a culture of opennness and debate. It is responsible for setting and upholding high standards of corporate governance, including the way the Group conducts its business and its approach to ethical matters, and sets the risk appetite appropriate to delivering the Group’s strategy. It is committed to providing effective leadership by ensuring that those governance principles are adhered to throughout the Group, supported by an effective framework of systems and controls which define clearly delegations of authority and accountabilities. Further details of how the Board manages risk can be found on pages 65 and 66. As Chairman, it is my role to ensure that the executive leadership and the Board are able to discharge their responsibilities effectively and, within that, I have responsibility to ensure that a robust succession plan is in place to cover all eventualities. The Board comprises a majority of non-executive Directors whose role it is to challenge constructively, scrutinise the performance of management in meeting agreed targets and contribute to the development of strategy. Maureen Kempston Darkes, who has served as a Director since July 2012 and chair of the Safety and Sustainability Committee, retired at the AGM in 2017. I am delighted to welcome two new non- executive Directors to the Board, Barbara Moorhouse who joined in June and Michael Lucki who joined in July. Non-executive Directors are appointed to the Board for an initial three-year term and, subject to continuing satisfactory performance and re-election by shareholders at AGMs, are expected to serve two three-year terms. The Board may invite a Director to serve beyond six years but any such extended period would be subject to particularly stringent review. The Directors believe that the Board provides effective leadership. Details of the Directors are set out on pages 60 and 61. Very sadly, during the year, Steve Marshall, my predecessor as Chairman, passed away. I would like to express our condolences to his family and recognise the leadership he gave Balfour Beatty at a very challenging time for the Company. Diversity Appointments to the Board are made on merit and candidates are assessed against objective criteria through a rigorous selection process, overseen by the Nominations Committee. We ask search firms to identify suitable female candidates although we do not believe in gender quotas. Diversity and inclusion are key components of our talent management and development programmes, details of which can be found on the Company’s website balfourbeatty.com. Accountability We believe that Balfour Beatty’s processes and procedures have been further strengthened during the year with the development of a Business Management System for all aspects of UK business practice and ever greater harmonisation of HR systems and of financial reporting platforms, enabling the Board to present a fair, balanced and understandable assessment of the Group’s trading position and its prospects. We continue to keep under review the matters reserved to the Board and the terms of reference of its Committees. Copies can be found on the Company’s website. Remuneration The remuneration policy was approved by shareholders at the 2017 AGM. Details of how we intend to operate that policy in 2018 can be found in the Remuneration report on pages 76 to 87. Relations with shareholders Our investor relations programme is of critical importance to the Board. The Board routinely receives reports from the investor relations team and analysts, together with feedback from any meetings which the Directors have with institutional investors. As Chairman, I seek to meet, at least annually, with representatives of the UK Shareholders Association. We recognise the AGM as an important opportunity for private investors to engage with the Board. All resolutions will, however, be put to a poll rather than a show of hands to ensure that shareholders who are not able to attend the meeting have their votes fully taken into account. Philip Aiken AM Chairman balfourbeatty.com/AR2017 60 Leadership Board of Directors The Board comprises eight Directors. The names of the Directors serving throughout the year and at the year end are shown here. Maureen Kempston Darkes retired as a non-executive Director at the conclusion of the AGM on 18 May 2017. From 6 January 2017, as part of an agreed review of Committee membership: – Stephen Billingham joined the Safety and Sustainability Committee – Iain Ferguson left the Safety and Sustainability Committee. Following the retirement of Maureen Kempston Darkes, Stuart Doughty became Chairman of the Safety and Sustainability Committee from 1 July 2017. On 6 July 2017, there was a further review of committee membership: – Iain Ferguson left the Audit and Risk Committee and joined the Safety and Sustainability Committee – Stephen Billingham left the Safety and Sustainability Committee and joined the Nomination Committee – Barbara Moorhouse joined the Audit and Risk Committee and the Remuneration Committee – Michael Lucki joined the Remuneration Committee and with effect from 1 September 2017 joined the Audit and Risk Committee. Board Committees code: 1 Audit and Risk 2 Safety and Sustainability 3 Nomination 4 Remuneration 5 Group Tender and Investment 6 Finance and General Purposes 5 6 Chair Balfour Beatty Annual Report and Accounts 2017 Philip Aiken AM (69) Chairman Leo Quinn (61) Group Chief Executive Joined the Board as Chairman in March 2015. He is non-executive chairman of Aveva Group plc and a non-executive director of Newcrest Mining Limited. He was a non-executive director of National Grid plc, chairman of Robert Walters plc and a non-executive (and senior independent) director of Kazakhmys plc and Essar Energy plc, and a senior adviser at Macquarie Bank Ltd. Prior to that, he was group president Energy BHP Billiton and president BHP Petroleum, chief executive of BTR Nylex, and held senior roles in BOC Group. 2 3 4 Appointed as Group Chief Executive in January 2015, after five years as group chief executive of QinetiQ Group plc and before that five years as CEO of De La Rue plc. Prior to these senior roles, he spent almost four years as COO of Invensys plc’s production management business, headquartered in the US, and 16 years with Honeywell Inc in senior management roles across the UK, Europe, the Middle East and Africa, including global president of H&BC Enterprise Solutions. He was a non-executive director of Betfair Group plc and Tomkins plc. He is a civil engineer, and began his career at Balfour Beatty. He is the founder of The 5% Club which encourages industry to increase graduate training and apprenticeships. 2 3 5 6 Philip Harrison (57) Chief Financial Officer Appointed as Chief Financial Officer in June 2015. He was previously group finance director at Hogg Robinson Group plc, and before that he was group finance director at VT Group plc. Prior to that, he served as VP Finance at Hewlett-Packard Europe, Middle East and Africa region and was a member of the EMEA board. His earlier career included senior international finance roles at Compaq, Rank Xerox and Texas Instruments. He is a Fellow of the Chartered Institute of Management Accountants. Iain Ferguson CBE (62) Non-executive Senior Independent Director Appointed a Director in January 2010. Until 2009, he was chief executive of Tate & Lyle. Prior to joining Tate & Lyle in 2003, he spent 26 years at Unilever in a succession of roles culminating in his appointment as senior vice-president, corporate development. He is non-executive chairman of Stobart Group Limited and of Wilton Park, an independent and non-profit making Executive Agency of the British Foreign and Commonwealth Office. He is also a non-executive director of Personal Assets Trust plc. He was formerly chairman of Berendsen plc and a non-executive director of Sygen International and of Greggs plc. 2 3 4 Strategic Report Governance Financial Statements Other Information 61 Barbara Moorhouse (59) Non-executive Director Dr Stephen Billingham (59) Non-executive Director Appointed a Director in June 2017. Barbara has over 30 years of business and management experience in the private, public and regulated sectors and is currently a non-executive director at Microgen plc, IDOX plc, Agility Trains, and the Lending Standards Board, and is a trustee of Guy’s & St Thomas’ Charity. Formerly group finance director at Morgan Sindall plc, regulatory director at South West Water and chief finance officer for two international listed IT companies – Kewill Systems plc and Scala Business Solutions NV. Latterly, she has been director general at the Ministry of Justice and the Department for Transport. Her most recent executive appointment was chief operating officer at Westminster City Council. 1 4 Appointed a Director in June 2015. He is non- executive chairman of Anglian Water Group Ltd and URENCO Ltd. He was group finance director of British Energy Group plc (FTSE 100 power generator) and WS Atkins plc (FTSE 250, and the UK’s largest engineering consultancy) and ran Punch Taverns plc (the UK’s second largest pub owner) as executive chairman. He played instrumental roles in the financial and operational turnarounds of all three companies. He spent 11 years with Balfour Beatty’s predecessor company BICC plc. 1 3 Stuart Doughty CMG (74) Non-executive Director Michael Lucki (61) Non-executive Director Appointed a Director in April 2015. He has over 50 years’ experience in the civil engineering, construction and infrastructure sectors, and was chief executive of Costain Group PLC between 2001 and 2005. This followed executive positions in Welsh multi-utility Hyder plc, Alfred McAlpine plc and Tarmac Construction, where he represented the company on the Channel Tunnel board, following 20 years with John Laing Construction. He has also served as a senior non-executive director of Scott Wilson Group plc, and as chairman of Alstec Ltd, Somero Plc and Beck and Pollitzer Limited. Appointed a Director in July 2017. He has over 35 years of business and leadership experience in the US and internationally in the engineering and construction sector. He has held a number of leadership and finance roles, including chief financial officer, executive vice president and board member at CH2M HILL and an audit partner at Ernst & Young LLP and their Global Industry Leader for Infrastructure, Construction and Engineering Practices. Latterly, he has acted as a strategic advisor to companies and private equity firms in the engineering and construction industry. He is currently an advisory board member at Psomas. 1 2 3 1 4 Male Female Board geography UK Americas Board balance Chairman Executive Directors Non-executive Directors 1 2 5 Board tenure 0–2 years 2–4 years 4–6 years 6+ years Board balance 2 5 0 1 7 1 7 1 balfourbeatty.com/AR2017 62 Leadership continued BOARD Audit and Risk Committee Monitors and reviews the integrity of the financial statements, the relationship with the external auditor, and the Group’s internal operational procedures and risk management process. Safety and Sustainability Committee Monitors health and safety practices across the organisation to mitigate against harm to employees, and ensures other key sustainability issues such as integrity are reviewed at Board level. Nomination Committee Remuneration Committee Has responsibility for assisting the Board with succession planning and with the selection of new executive and non-executive Directors or Chairman. Has responsibility for the creation, approval and implementation of the Company’s remuneration policy under which it determines the pay of the executive Directors. Group Tender and Investment Committee Assesses the viability and pricing of major tenders, and monitors and approves key capital expenditure to ensure adequate returns. Finance and General Purposes Committee Approves various routine banking and treasury matters and matters relating to share capital. Read more p67-69 Read more p70 Read more p71 Read more p76 Read more p71 Read more p71 GROUP CHIEF EXECUTIVE Leads the business and is responsible for its day-to-day management. Roles The roles of the Chairman and the Group Chief Executive are separate, with a clear division of responsibilities between the running of the Board and executive responsibility for running the Group’s businesses. Their respective roles are formally recorded and are available to view on the Company’s website as are those of the Senior Independent Director. www.balfourbeatty.com/investors Board and Committee meetings Procedures for Board and Committee meetings remain largely unchanged from previous years. The Company Secretary is responsible for advising the Board on appropriate governance matters and for ensuring a good information flow and that Board procedures are properly followed. He is available to individual Directors for advice on Board procedures. Details of the number of meetings of the Board and its Committees held during the year and attendance of Directors thereat are set out on page 63. Outside the formal schedule of meetings, the non-executive Directors met without the executive Directors present on a number of occasions. Meetings are normally held at one of the Company’s London offices. The Board has six standing Committees. In the cases of the Group Tender and Investment Committee and the Finance and General Purposes Committee, membership comprises the executive Directors and other members of the senior management team. All non-executive Directors have an open invitation to attend any Committee meeting. A number of the Directors took this opportunity during the year. Board and Committee meetings typically take place over two consecutive days with the first day allocated to Committee meetings and ending with a ‘focus’ presentation by a member of the leadership team. Board meetings will usually include a ‘deep dive’ presentation from one of the business units as well as an agenda focusing on key priorities for the Group, including: – progress with the Build to Last transformation programme – strategy and budgets – operating structures, processes and costs – the Group’s financial performance – bid and project updates – legacy contract out-turns – annual and interim financial statements – health and safety performance – significant human resources issues, including succession planning and diversity – reports from the head of the business integrity function – consideration of issues relating to major disputes, proceedings or other matters of potentially adverse effect on the Group’s reputation – reports by non-executive Directors on site visits – the sale of investment assets – the results of employee engagement surveys. Conflicts of interest and contracts of significance The Board has established a policy and procedures relating to Directors’ conflicts of interest. Where conflicts of interest arise, the Board has power to authorise them. None of the Directors had a conflict of interest during the year. None of the Directors had a direct or indirect material interest in any contract of significance with any Group company during the year. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 63 Effectiveness Directors’ independence At its meeting in January 2018, the Board considered the independence of the non-executive Directors against the criteria specified in the Code and determined that each of them continues to be independent. A non-exhaustive list of the key strengths of the Directors is set out in the table below. Details of their service agreements, emoluments and share incentives are shown in the Remuneration report starting on page 76. Following the performance evaluations of each of the non-executive Directors, it is confirmed that the performance of each continues to be effective and demonstrates commitment to the role. Responsibility and delegation The Board is responsible for the success of the Company and has a formal schedule of matters reserved for its decision which includes the matters summarised below: – determining the Group’s strategic direction – approving annual budgets and financial reporting, including the annual and half-year results and interim management statements – approving interim, and recommending final, dividends – approving major acquisitions, disposals and capital expenditure – approving contracts, contract tenders and bid submissions above specified values or of an unusual nature or complexity – ensuring the necessary financial and human resources are in place to achieve objectives and review management performance – setting the Company’s values and ethical standards – approving policies and systems for risk management and assurance. The Board reviewed its list of reserved matters, most recently, at its meeting in July 2017. The full list and the terms of reference of the Board Committees are available on the Company’s website: www.balfourbeatty.com/investors The day-to-day management of the business is delegated to executive Directors and the Group’s senior management. The Directors are experienced and influential individuals from varied commercial, professional and international backgrounds. Their diverse and balanced mix of skills and business experience, as shown below, is key to the effective functioning of the Board and its Committees, ensuring matters are fully and effectively debated and challenged. Directors – significant strengths Director Philip Aiken Stephen Billingham Stuart Doughty Iain Ferguson Philip Harrison Michael Lucki Barbara Moorhouse Leo Quinn Operating performance and delivery Mergers and acquisitions Business integration Financial management and planning Strategic development Sector- specific Experience of international markets Health and safety Risk management and assurance HR management Stakeholder engagement Ethics, values and culture • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Board and Committee meetings attendance Details of the number of meetings and attendance at the Board meetings and meetings of the Audit and Risk, Safety and Sustainability, Nomination and Remuneration Committees during the year are set out in the table below. Director Philip Aiken Stephen Billingham Stuart Doughty Iain Ferguson Philip Harrison Maureen Kempston Darkes Michael Lucki Barbara Moorhouse Leo Quinn Audit and Risk (4) Board (8) 8 Safety and Sustainability (3) 3 Nomination (3) 3 Remuneration (3) 3 8 8 8 8 3(3) 5(5) 5(5) 8 4 4 2(2) 1(1) 2(2) 1(1) 3 2(2) 1(1) 3 3 3 3 3 1(2) 1(1) 1(1) The number shown in brackets is the total number of meetings the Director could attend during the year (including as a result of changes to Committee memberships). All serving Directors attended the AGM held on 18 May 2017. In addition to the information reported above, the Chairman, Group Chief Executive and Chief Financial Officer routinely attend meetings of the Audit and Risk Committee. The Group Chief Executive also routinely attends meetings of the Remuneration Committee except when matters relating to his own remuneration are discussed. Where Directors have not been able to attend a Board or Committee meeting, they have reviewed the papers circulated for that meeting and provided their comments directly to the Chairman or the Committee chair, as appropriate. balfourbeatty.com/AR2017 64 Effectiveness continued Key conclusions from the evaluation Overall, Directors considered that the Board and its Committees are working effectively and that year-on-year performance improvements are apparent. The quality and timeliness of management information continues to be good and the relationships between executive and non-executive Directors has strengthened during the year. There is a good knowledge of the issues and opportunities facing the Group amongst the non-executive Directors and the recent appointees are already contributing strongly to discussions. All non-executive Directors are encouraged to make regular visits to project sites throughout the UK and overseas and are individually and collectively involved in project reviews. The Board will continue to undertake at least one visit to the US each year, combining a series of presentations by the US leadership team with site visits. Annual General Meeting and Class Meeting of Preference Shareholders The AGM will be held at Painters Hall, 9 Little Trinity Lane, London EC4V 2AD on Thursday 24 May 2018 commencing at 11am. Immediately following the AGM, a Class Meeting of the holders of the Company’s cumulative convertible redeemable preference shares will be held. Shareholders are encouraged to attend these meetings and ask any relevant questions they may have. Further information about the work of each of the Board’s Committees may be found on pages 67 to 71 and pages 76 to 87. Board development Induction Directors undertake a thorough induction programme and receive a range of information about the Company when they join the Board, including access to a portal on which all Board papers are stored, Balfour Beatty’s Code of Conduct and processes for dealing in Balfour Beatty shares. In addition, they take part in a series of one-to-one meetings with other members of the Board, senior executives in the businesses and the Company’s external advisers, which include briefings on the Group’s business strategy, financial procedures, business development, legal and other key issues. The Directors’ induction programme also provides the foundation for continuing professional development. This takes place throughout the year by way of a series of internal and external updates, including visits to operating companies to meet local management and visits to Balfour Beatty projects, both in the UK and overseas. For a copy of the Code of Conduct see: www.balfourbeattycodeofconduct.com/ Training and development In discussion with the Directors and Company Secretary, each year the Chairman determines whether there are any specific training needs identified by the Directors, which can be addressed by the topic being included at a future Board meeting. Directors are also enrolled in the Deloitte Academy, a seminar-led programme for directors of UK listed companies, which provides regular updates throughout the year on the principal governance and other matters of which directors of a listed company should be fully aware. Board evaluation Introduction In keeping with the Code, the Board undertakes external evaluations, typically every three years, with internal evaluations in the intervening two years. The most recent external evaluation was carried out in early 2016, in respect of 2015, by Lintstock, an external facilitator. For 2017, the evaluation has been conducted using internal resources and considered the performance of the Board and its Committees, as well as the Chairman and individual Directors. 2017 evaluation During October 2017, the Chairman conducted an evaluation review with all Board members, the results of which were summarised and presented to the Board for discussion in November 2017. The review was tailored to the specific circumstances of Balfour Beatty and covered the composition, expertise and dynamics of the Board, the Board’s management of time, the support afforded to the Board, the Board’s oversight of strategy and succession planning. Any reported comments made during the reviews were unattributed. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 65 Risk management and internal control Risk management An assessment of risk is central to the Group’s strategic decision- making process and an essential part of meeting the requirements of the UK Corporate Governance Code. By delivering effective risk management and understanding its exposure to risk, the business is better able to protect its reputation, ensure long-term viability and generate sustainable shareholder value. Balfour Beatty maintains an agile and comprehensive internal control environment. Key risks are identified and a decision made to treat, tolerate, terminate or transfer potential exposure dependent upon the Group’s risk attitude or appetite. For more information, refer to pages 48 to 56. The Board has applied principle C2 of the UK Corporate Governance Code by embedding continuously evolving risk management processes throughout the Group at all levels which form an integral part of day-to-day business activity. Roles and responsibilities The Board is responsible for the implementation and oversight of Balfour Beatty’s risk management framework. It sets the Group’s appetite for and attitude to risk in pursuit of its agreed strategic objectives and therefore the level of risk that can be taken by Group, strategic business unit and individual business unit management without specific Board approval. Group policies, procedures and delegated authority levels set by the Board provide the structure in which risks are reviewed and escalated to the appropriate level within the Group, up to and including the Board, for consideration and approval. The roles and responsibilities of the Board, its Committees, strategic business unit and individual business unit management are set out below. 1. Board – Responsible for the Group’s – Issues and reviews the Group risk Responsibilities Actions undertaken Audit and Risk Committee systems of risk management and internal control – Determines Group appetite for and attitude to risk in pursuit of its strategic objectives. – Regularly reviews the effectiveness of Group internal controls, including systems to identify, assess, manage and monitor risks – Agrees the Group Internal Audit Plan. management policy – Annually reviews effectiveness of Group risk management and internal control systems – Reviews the Group’s risk landscape, principal risks and risk responses. – Receives regular reports on internal and external audit and other assurance activities – Annually assesses Group risk management and internal control systems – Reviews effectiveness of the Group’s helpline and other channels for raising concerns about Code of Conduct breaches. Safety and Sustainability Committee – Reviews management of non-financial risks such as health and safety, and sustainability. – Receives regular reports on implementation of Group policies and procedures on non-financial risks. Group Tender and Investment Committee 2. Group management 3. Strategic business unit management – Reviews and approves tenders and investments, triggered by certain financial thresholds or other risk factors. – Strategic leadership – Responsible for reviewing and implementing the Group risk management policy – Ensures appropriate actions are taken to manage strategic risks and other key risks. – Critically appraises significant tender proposals and investment/divestment opportunities, with a specific focus on risk. – Strategic plan and annual budget process – Produces and tracks Group risk register – Reviews risk management and assurance activities and processes – Monthly/quarterly finance and performance reviews. – Responsible for risk management and internal control systems within its business – Ensures that business units’ responsibilities are discharged. – Reviews key risks and mitigation plans – Reviews and challenges business units’ internal control environment – Reviews results of internal control testing – Escalates key risks to Group management 4. Business unit management – Maintains an effective system of risk management and internal control within its business unit and projects. and the Board. – Maintains and regularly reviews project, functional and strategic risk registers – Reviews mitigation plans – Plans, executes and reports on internal control testing. balfourbeatty.com/AR2017 66 Effectiveness continued Risk management process Balfour Beatty’s risk management policy requires that all business units implement effective arrangements and management controls across all operations for the management of risk. The Group’s approach to risk management is to reduce the likelihood of risk events occurring, mitigate the adverse impact of such events and identify opportunities where taking risks might benefit the business. Balfour Beatty is relentless in ensuring that a positive risk management culture remains embedded at all levels. When pursuing new opportunities, an assessment of risk forms a key part of the work winning process. Risks are continuously assessed to ensure potential exposure remains within an accepted tolerance. Additionally, the Board sets and regularly reviews delegated authority levels which act as triggers for the escalation of matters requiring approval. In relation to work winning, this means projects above a certain value, or those with unusual characteristics, such as a move into new markets, require approval by the Group Tender and Investment Committee or the Board, as appropriate. Reporting structures ensure that risks are monitored continually, mitigation plans are reviewed and significant exposures which develop are reviewed within the business unit or by Group senior management via the Executive Risk Steering Group. Effective risk management cannot stand still. In 2017 significant improvements have been made to further align the Group’s risk management and audit functions to bring greater focus on the assurance mapping process. This work will continue in 2018 as part of the ongoing review of risk aggregation and escalation. Review of the Group’s business continuity arrangements will ensure that Balfour Beatty remains resilient to the ever-changing threats it faces in delivering its business objectives. Internal control The Board has ultimate responsibility for the Group’s risk management systems and internal control and regularly reviews their effectiveness. The Group’s systems and controls are designed to ensure exposure to significant risk is managed appropriately. The Board recognises that any system of internal control is designed to understand and manage rather than eliminate the risk and can only provide reasonable and not absolute assurance against material misstatement or loss. In addition, not all the material joint ventures in which the Group is involved are treated, for these purposes, as part of the Group. Where they are not, systems of internal control and risk management are applied as agreed between the joint venture partners. Central to the Group’s systems of internal control are its processes and framework for risk management. These align with the Financial Reporting Council’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and were in place throughout 2017 and up to the date of signing this report. Guidance and policies have been issued and are continuously monitored to provide an interlinked and comprehensive internal control environment. Such topics include but are not limited to: – a clear system of delegated authorities from the Board to management with certain matters reserved by the Board – monthly financial reporting against budgets and the review of results and forecasts by executive Directors and management, including particular areas of business or project risk. This is used to update management’s understanding of the environment in which the Group operates and the methods used to mitigate and control identified risks Balfour Beatty Annual Report and Accounts 2017 – annual review of the strategy and plans of each business and of the Group as a whole to identify risks to the achievement of objectives and, where appropriate, any relevant mitigating actions – specific policies set out in the Group Finance Manual covering the financial management of the Group, including arrangements with the Group’s bankers and bond providers, controls on foreign exchange dealings and management of currency and interest rate exposures, application of accounting policies and financial controls – risk management expectations which are embedded throughout the Group – gateway reviews requiring risk, uncertainty and control assessment at all stages of project development and at all levels of the business from business unit level to Board Committee if value, or perceived exposure, exceeds certain thresholds – reviews and tests by the internal audit function of critical business financial processes and controls and specific reviews in areas of perceived high business risk – reviews and authorising of proposed investment, divestment and capital expenditure through the Board and Board Committees – regular reporting, monitoring and review of the effectiveness of health, safety, environment and sustainability processes. These processes are subject to independent audit and certification to internationally recognised standards as appropriate – legal and regulatory compliance risks which are addressed through specific policies and training on such matters as ethics, competition and data protection laws – promotion of a culture of compliance with ethics and integrity responsibilities to help manage legal and reputational risks across the Group. An ethics helpline encourages staff to raise concerns, in confidence, about possible breaches of the Code of Conduct. There is also an independent internal audit function that executes a risk-based programme of audit throughout the entire Group. All audit reports are shared with relevant business leaders in addition to being reviewed by the Audit and Risk Committee (see pages 67 to 69). It is the expectation and requirement of the Board that business leaders ensure this comprehensive internal control environment (including internal audit) is embedded within their business units. The Board’s assessment of the risk management processes and internal controls during 2017 is based on reports it received and those presented to the Audit and Risk Committee and the Safety and Sustainability Committee, including: – the results of the internal audit function’s reviews of internal financial controls – a Group-wide certification that effective internal controls had been maintained or, where any significant non-compliance or breakdown had occurred with or without loss, that appropriate remedial action has been or is being taken – a paper prepared by management on the nature, extent and mitigation of significant risks and on the systems of internal controls. Principal risks The principal risks that could adversely impact on the Group’s profitability and ability to achieve its strategic objectives are set out on pages 51 to 56. Strategic Report Governance Financial Statements Other Information 67 Accountability Summary of activities in 2017 In 2017, the Committee’s work programme focused on a number of significant issues and other accounting judgements where the Committee believed the highest level of judgement was required and with the highest potential impact on the Group’s financial statements. Further information is set out on page 68. Financial reporting The Committee reviews and evaluates the appropriateness of the interim and annual financial statements (including the announcements thereof to the London Stock Exchange) with both management and the external auditor, including: – at the Board’s request, whether the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. The Audit and Risk Committee has assisted in achieving this objective by reviewing proposals for the internal procedures to be applied in preparing the Annual Report – the clarity of disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements and guidelines, including the European Securities and Markets Authority Guidelines on Alternative Performance Measures – discussing the critical accounting policies and use of assumptions and estimates, as noted on pages 108 and 109 of this Annual Report, and concluding that the estimates, judgements and assumptions used were reasonable based on the information available and had been used appropriately in applying the Company’s accounting policies – assessing the Group’s implementation of the new revenue recognition standard, IFRS 15 Revenue from Contracts with Customers. In particular, the Committee focused on the robustness of the implementation project led by the Group team and the impact assessment of the new standard on the Group’s results. The Committee also reviewed, assessed and endorsed the Group’s proposed internal accounting policies to reflect the requirements of the new standard, which was adopted by the Group on 1 January 2018. Further detail on the impact of the adoption of IFRS 15 can be found on page 102 – reviewing the viability of the Group over the longer term as part of its assessment of the Group’s risks (see page 57). The Committee is able to question management at both Group and business unit levels to gain further insight into the issues addressed in these reports. The key significant financial reporting issues and other accounting judgements are set out in the table on page 68. balfourbeatty.com/AR2017 Stephen Billingham Chairman of the Audit and Risk Committee Audit and Risk Committee During the year the Committee comprised Stephen Billingham as chairman, non-executive Directors Stuart Doughty, Iain Ferguson (until 6 July 2017), Barbara Moorhouse (from 6 July 2017) and Michael Lucki (from 1 September 2017). Main responsibilities The terms of reference for the Committee are based on the Guidance on Audit Committees issued by the Financial Reporting Council. The main responsibilities of the Audit and Risk Committee are summarised below: – review the integrity of the financial statements of the Group and any formal announcements relating to the Group’s financial performance – review the Group’s internal controls established to identify, assess, manage and monitor risks, and receive reports from management on the effectiveness of the systems it has established and the conclusions of any testing carried out by the internal audit function and external auditor – monitor and review the effectiveness of the internal audit function, including its work programme – make recommendations to the Board in relation to the appointment of the external auditor and approve the remuneration and terms of engagement of the external auditor – assess the independence, objectivity and effectiveness of the external auditor and develop and implement policy on the engagement of the external auditor to supply non-audit services – review the integrity of the statement in the Annual Report on being fair, balanced and understandable, as required under the Companies Act 2006 – review the procedures for the Group’s helplines and other mechanisms used by employees to raise concerns confidentially (including any whistleblowing facilities) and their effectiveness. Dr Stephen Billingham, formerly group finance director (CFO) of British Energy Group plc and of WS Atkins plc, has been identified by the Board as having recent and relevant financial experience. Partners from the external auditor, the Group Risk and Audit Director, the Chairman, the Group Chief Executive, the Chief Financial Officer and the Group Financial Controller regularly attend meetings. The Committee also invites divisional leaders and specialists relevant to the Committee’s agenda. 68 Accountability continued Significant issues and other accounting judgements Revenue and margin recognition Carrying value of goodwill and other intangibles Going concern and viability statement Non-underlying items Provisions Retirement benefits Given the nature of the Group’s operations, these elements are central to how it values its work. Having reviewed detailed reports and met with management, the Committee considered contract and commercial issues with exposure to both revenue and margin recognition risks. As a key area of audit focus, the Committee also received a detailed written report from the external auditor setting out the results of its work in relation to key contract judgements. The judgement largely relates to the assumptions underlying the value in use of the cash-generating units, primarily the achievement of the three-year strategic plan and the macroeconomic assumptions (such as discount rates) underpinning the valuation process. The Committee received reports from management outlining the impairment model and the assumptions used; in addition, the external auditor provided detailed written reports in this area. In order to satisfy itself that the Company has adequate resources to continue in operation for the foreseeable future and that there are no material uncertainties that could lead to significant doubt as to the Group’s ability to continue as a going concern, the Committee considered the Group’s viability statement, cash position (both existing and projected), bank facilities and covenants (including bonding lines) and the borrowing powers allowed under the Company’s Articles of Association. The Committee subsequently recommended to the Board the adoption of the going concern statement and the viability statement for inclusion in the Annual Report. More details on going concern and the viability statement are contained on pages 47 and 57. The key judgement is whether items relate to underlying trading or not and whether they have been presented in accordance with the Group’s accounting policy. The Committee conducted a review of each of the non-underlying items, receiving written reports from management and the external auditor as to their quantum and nature. The Committee reviewed the significant judgements relating to provisions, including litigation and other risks. The Committee received detailed reports, including relevant legal advice. The key judgement relates to the assumptions underlying the valuation of the retirement benefit obligations. The Committee received reports from management outlining the assumptions used, including input from the Group’s actuaries, in particular in relation to discount rates, inflation and mortality which were evaluated against external benchmarks and, in relation to which, the external auditor also provided reports. Deferred tax assets The Committee reviewed the Group’s considerations on future profitability to evaluate the judgement that it is probable the deferred tax assets are recoverable. Directors’ valuation of the Investments portfolio The Committee assessed the methodology used to value the assets in terms of the discount rates applied. It also critically appraised the output of the Directors’ valuation exercise. Other matters In addition to its key role in the financial reporting process, the Audit Committee also considered the following as well as developments in regulation: i Items discussed t – annual assessment of risk and internal control d u a l a n r e t n I – approval of the Group’s internal audit plan and review of internal audit activity reports and updates – review of the internal audit function’s terms of reference – review of the effectiveness of internal audit t i d u a l a n r e t x E s r e t t a m r e h t O – audit report on 2016 financial results – review report on 2017 interim results – approval and review of the proposed audit strategy plan and procedures – review of auditor effectiveness and independence following KPMG’s first year as external auditor – review of the provision of non-audit services provided by the external auditor (including fees) – review and assessment of the effectiveness of the planned audit strategy – review of the summary and findings of process and control issues identified during the audit and recommendations to management – progress report on the Group’s implementation of IFRS 15, impact assessment and endorsement of the proposed accounting policies to be adopted by the Group upon transition – assessment of the Group’s insurance strategy and programme – consideration of consequences of future failure to prevent tax evasion – assessment of the robustness of the Group’s procedures on Business Integrity – review and discuss findings in the Group’s Business Integrity reports – consideration of the Group’s readiness to comply with the UK Payment Legislation Requirements – consideration of the correspondence with the FRC on its thematic review of the Group’s 2016 APMs – annual review of the Committee’s terms of reference Balfour Beatty Annual Report and Accounts 2017 March May Aug Nov • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Strategic Report Governance Financial Statements Other Information 69 FRC’s thematic review on Alternative Performance Measures In 2016, the Group received a letter from the Financial Reporting Council (FRC) confirming that the Group’s disclosures on Alternative Performance Measures in its Annual Report and Accounts 2016 would be included in the FRC’s thematic review. At the FRC’s request, the Committee notes that the FRC’s review only covered the specific disclosures relating to the thematic review and provides no assurance that the report and accounts were correct in all material aspects. As a result of this review, the Group committed to providing additional disclosures on how the Directors’ valuation of its Investments portfolio compares to the equivalent statutory measure reported under accounting standards. The enhanced disclosure is included on page 42. Areas of focus in 2018 In 2018, the Committee will continue to address the topics described on pages 67 and 68 including continuing to undertake reviews of the risk management and assurance practices across the Group on a rolling programme. The Committee will also continue to receive any necessary training in order to broaden and refresh the skills and knowledge of its members. The Committee will also oversee the Group’s transition to the new leasing standard, IFRS 16. Risk management and internal control The risk management and internal control framework now comprises a number of approval and review gates that cover the business lifecycle from initial project pursuit through to delivery and completion. These processes are underpinned by common minimum standards in project and commercial management and are under constant review to ensure their effectiveness and compliance. Internal auditor effectiveness The Committee reviews the effectiveness of the internal audit function on an ongoing basis. This is achieved, in part, by reviewing and discussing the reports presented to it at each meeting, setting out the function’s work and findings, but also through a formal annual assessment. An independent periodic review of the internal audit function, as well as a thorough self-assessment scorecard drawn up in accordance with best practice guidelines, also helps contribute to the Committee’s evaluation. External auditor independence and effectiveness The Committee carries out a formal review each year to assess the independence and effectiveness of the external auditor, KPMG. The Committee has satisfied itself as to KPMG’s independence. The Committee took into consideration the following matters: Non-audit work The objective set out in the Company’s policy is to ensure that the external auditor is not placed in a position where its independence is, or might be seen to be, compromised. Under no circumstances will any assignment be given to the external auditor, if it results in: – audits of its own work – making management decisions on behalf of the Group – acting as advocate for the Group – a mutuality of interest being created. The Company’s policy identifies the various types of non-audit services and determines the analysis to be undertaken, and level of authority required, before the external auditor can be considered to undertake such services. For any non-audit services (which are not excluded under the policy), the policy provides for approval by the Chief Financial Officer of expenditure below £250,000, and approval by the chairman of the Audit and Risk Committee of expenditure above £250,000. A report is also submitted to the Committee of any non-audit services carried out by the external auditor, irrespective of value. The aggregated spend on non-audit services with the external auditor will not exceed 60% of the Group audit fee, unless exceptional circumstances exist, with a three-year rolling average not exceeding 70% of the Group audit fee. During 2017, there were fees of £0.5 million (2016: £0.5 million) paid to the external auditor for non-audit services. 2017 non-audit services primarily related to the half-year review. Audit fees for 2017 were £2.7 million. Further details are included in Note 6.2 on page 113. There is no inconsistency between the Financial Reporting Council’s ethical standards and the Company’s policy. The Committee considers that the Company receives particular benefits, including those relating to cost, quality and consistency, from the advice provided by its external auditor, given its wide and detailed knowledge of the Group and its international operations. There can also be savings in management time and accelerated delivery of work in situations where rapid turnaround is required. 90% by value of non-audit related work provided by international accounting firms in 2017 was carried out by firms other than KPMG. Annual assessment of the audit process In addition to receiving written reports from the auditors (both internal and external) and management, the Committee also conducted separate private meetings with the external auditors and with management. These provide the opportunity for open dialogue and feedback on the audit process, the responsiveness of management and the effectiveness of individual internal and external audit teams. A detailed assessment of the external audit process and the effectiveness of the external auditor, together with any identified improvement recommendations, is prepared each year. External auditor rotation The external auditors are required to rotate the lead partner every five years. Such changes are carefully planned to ensure business continuity without undue risk or inefficiency. KPMG’s lead partner, Stephen Wardell, who will complete his second year in May 2018, has communicated to the Committee during 2017 that he will be retiring in May 2018 and will be succeeded by Paul Sawdon. The Committee will oversee this transition. The EU Audit Directive on audit tendering took effect from June 2016 and its key aspects include: – audit firms will have a maximum tenure of 10 years, although the UK Government proposes to allow an extension of (i) up to an additional 10 years where a public tender is carried out after 10 years; or (ii) by an additional 14 years where more than one audit firm is appointed to carry out the audit – audit firms are to be prohibited from providing certain non-audit services and where non-audit services are provided they will be subject to a fees cap – a restriction in any contract limiting a company’s choice of auditor will be prohibited. The Group has therefore adopted a policy that no external auditor appointed after June 2016 can remain in post for longer than 20 years and there will be a tendering process every 10 years, and that KPMG, as the currently appointed external auditor, may remain so until the completion of the 2025 annual audit. However, the Committee will continue to consider annually the need to tender the audit for audit quality or independence reasons. There are no contractual obligations in place that restrict the Company’s choice of statutory auditor. The disclosures provided above constitute the Company’s statement of compliance with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014. balfourbeatty.com/AR2017 70 Accountability continued Stuart Doughty Chairman of the Safety and Sustainability Committee Safety and Sustainability Committee Summary of activities in 2017 In July 2017, Stuart Doughty assumed responsibility as Committee chairman following the retirement of Maureen Kempston Darkes on 18 May 2017. Other members during the year included the Company Chairman, Phil Aiken, non-executive Directors Stephen Billingham (from 6 January 2017 to 6 July 2017) and Iain Ferguson (until 6 January 2017 and from 6 July 2017), and the Group Chief Executive, Leo Quinn. The UK Health, Safety, Environment and Sustainability function performs a Group-wide data collection and reporting role for Balfour Beatty’s UK and international operations. The Committee considered certain significant health and safety related incidents, including fatalities, discussing in detail the themes around supervision, communications and safety by design. It also reviewed the Group’s sustainability performance alongside environmental incidents. During the year safety performance benchmarking against industry peers has been extended to provide the Committee with more objective reporting of absolute and relative performance against agreed KPIs. The Committee has also overseen improvements to the escalation procedures so as to ensure the immediate reporting of any major incidents to all members of the Committee. Initiatives to work with equipment manufacturers have also been taken with a view to designing-in engineering control improvements for improved operational safety. Good progress has been made in establishing much closer liaison between the Committee and its equivalents within major customers, with a view to facilitating a greater sharing of safety information, the development of safer working practices and to improve understanding and co-operation with regard to sustainability objectives. The Committee has also overseen the greater sharing of health and safety best practices between the Group’s UK and US operations. The Group’s sustainability strategy, Our Blueprint, can be viewed at: www.balfourbeatty.com/media/195840/sustainability- blueprint-2017.pdf The merger of the UK Health and Safety function with the UK Environment and Sustainability function has proven very successful with the benefits of greater collaboration now apparent. This continues to be supported by training of health, safety, environment and sustainability practitioners as part of an ongoing development programme to build expertise and flexibility. The Committee has reviewed a number of opportunities to improve Balfour Beatty’s sustainability performance, including opportunities to reduce carbon emissions by focusing on Balfour Beatty’s plant and fleet operations. It has also reviewed Balfour Beatty’s engagement process with customers to drive sustainability performance to add value. Areas of focus in 2018 In 2018, the Committee will continue to seek greater collaboration with the Group’s major customers and maintain its focus on the key areas of health and safety and sustainability by design, supervision, subcontractor engagement and treating health like safety, resource efficiency, carbon reduction, social value and supply chain engagement, as well as measuring performance against Our Blueprint and the Zero Harm action plan. The Committee will also review how best practice is shared across geographies to continually improve performance. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 71 Philip Aiken AM Chairman of the Nomination Committee Leo Quinn Group Chief Executive Nomination Committee Group Tender and Investment Committee Summary of activities in 2017 During the year the Committee comprised Philip Aiken as chairman, non-executive Directors Stuart Doughty, Iain Ferguson and Stephen Billingham (from 6 July 2017) and the Group Chief Executive, Leo Quinn. During 2017, the Committee’s programme of work included the recruitment of two new non-executive Directors, Barbara Moorhouse and Michael Lucki. All appointments to the Board are based on merit, against objective criteria, having due regard for diversity, including gender. In seeking suitable candidates for the positions, Heidrick and Struggles US and Ridgeway, external executive search agencies, were separately engaged. The Committee identified the competencies and experience sought. The key determinant in the selection of the Directors was a background in organisations that share key dynamics with Balfour Beatty, including contracting, customer service, major capital projects, infrastructure and B2B services. The search agencies appointed were reminded to approach a diverse talent pool of candidates, and neither has other connections with Balfour Beatty. Areas of focus in 2018 In January 2018, the Committee received from the Group Chief Executive a comprehensive presentation on the succession and development plans for the Group’s senior leadership team and discussed succession plans for the Board. The implications of the business strategy for senior executive recruitment and the impact on the Group’s succession planning are also areas which the Committee will consider during the year. It will continue to monitor the appropriateness of the composition of the Board. Summary of role The Committee has been chaired by Leo Quinn as the Group Chief Executive, or in his absence, the Chief Financial Officer, or in his absence by any one of four senior business unit leaders. Those business unit leaders are not permitted to chair any meeting which reviews proposals from those areas of the business for which he/she has executive responsibility. The main purpose of the Committee is to review all major proposed tenders with projected values above specified levels, with a specific focus on risk. The Committee also has authority to approve capital expenditure applications and any proposed acquisitions or disposals up to certain specified limits determined by the Board. For example, currently the Committee’s terms of reference require contracts for construction or services in the UK of a value exceeding £100 million to be submitted for review, whilst other limits vary according to geography and nature of the contract. Any member may convene a meeting of the Committee to discuss any of the tender reviews in more detail. In addition to those members of the Committee most relevant for the consideration of each proposed tender, meetings are attended by key members of the bid team concerned and their strategic business unit leaders. Minutes of all meetings are made available to all Directors. Finance and General Purposes Committee Summary of role The Committee is chaired by Leo Quinn as the Group Chief Executive or, in his absence, by the Chief Financial Officer. The Committee is responsible for agreeing the Group’s borrowing and banking arrangements, management of foreign exchange exposure, contract financing, bonding and leasing arrangements and various matters relating to the issued share capital of the Company. A summary of the business conducted at the meetings is provided to all Directors. balfourbeatty.com/AR2017 72 Directors’ report – other disclosures Business and financial review The Chairman’s introduction on pages 2 and 3, the Group Chief Executive’s review on pages 4 and 5, the market and strategic reviews on pages 8 to 15, the performance review on pages 16 to 25, the sustainability section on pages 29 to 37 and the Chief Financial Officer’s review on pages 44 to 47, are incorporated by reference into the Directors’ report. Corporate governance The Governance section on pages 58 to 87, including the Compliance with the Code statement on page 58, forms part of the Directors’ report. Results and dividends The results for the year are shown in the audited financial statements presented on pages 94 to 173 and are explained more fully in the Group Chief Executive’s review, the performance review and the Chief Financial Officer’s review. An interim dividend of 1.2p per ordinary share was approved by the Board on 15 August 2017 and a final dividend of 2.4p per ordinary share will be recommended at the Annual General Meeting, giving a total dividend per ordinary share of 3.6p for 2017 (2016: 2.7p). Preference dividends totalling 10.75p per preference share were paid in 2017 (2016: 10.75p). The Directors continued to offer the dividend reinvestment plan, which allows holders of ordinary shares to reinvest their cash dividends in the Company’s shares through a specially arranged share dealing service. Innovation, research and development Information concerning innovation, research and development is set out on pages 29 and 30, and forms part of the Directors’ report disclosures. Branches As the Group is a global business, there are activities operated through branches in certain jurisdictions. Share capital and shareholders Details of the share capital of the Company as at 31 December 2017, including the rights attaching to each class of share, are set out in Note 29 on page 145. During the year ended 31 December 2017, no ordinary or preference shares were issued or repurchased for cancellation. At 31 December 2017, the Directors had authority under shareholders’ resolutions approved at the AGM and at the Class Meeting of preference shareholders held in May 2017 to purchase through the market 68,973,961 ordinary shares and 16,775,968 preference shares at prices set out in those resolutions. This authority expires at the earlier of the conclusion of the Class Meeting of preference shareholders which will follow the 2018 AGM or on 1 July 2018. Throughout the year, all the Company’s issued share capital was publicly listed on the London Stock Exchange and it remains so as at the date of this report. There are no specific restrictions on the size of a shareholding nor on the transfer of shares, which are both governed by the Articles of Association and the prevailing law. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of shares or on voting rights. No person has special rights of control over the Company’s share capital and all issued shares are fully paid. As at 31 December 2017, the Company had been notified in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority of the following interests in its ordinary share capital: Number of ordinary shares held Percentage of ordinary shares held Causeway Capital Management LLC 76,067,468 11.03 Henderson Group plc Prudential plc BlackRock Inc Schroders plc 48,009,867 42,969,270 34,825,961 34,779,827 Newton Investment Management Limited 31,347,697 Invesco Limited 29,102,945 6.96 6.22 5.04 5.04 4.54 4.21 Since 1 January 2018, the Company has received further notifications that BlackRock Inc’s interest has increased to 6.17% and that Schroders plc’s interest has fallen below 5% and has therefore ceased to be notifiable. Auditor KPMG LLP has indicated its willingness to continue as auditor to the Company and a resolution for its re-appointment will be proposed at the 2018 AGM. Articles of Association The Company has not adopted any special rules regarding the appointment and replacement of Directors or the amendment of the Articles of Association, other than as provided under UK company law. Relations with shareholders The Board attaches great importance to maintaining good relationships with all shareholders and ensures that shareholders are kept informed of significant Company developments. The Company continued its programme of communication with institutional investors and sell-side analysts throughout 2017. Presentations of the half-year and annual results were made in accordance with the practice of previous years. Through the year, approximately 125 one-on-one and group meetings were held at regular intervals with institutional shareholders (2016: approximately 75). Current and prospective shareholders, brokers and analysts were also given the opportunity to engage with Balfour Beatty during road shows in London and North America. This communication programme will be maintained and expanded where appropriate, subject to the constraints of regulation and practice. The 2018 investor relations programme will focus on ensuring investors and the analyst community understand the Group, its operations and strategy, and that institutions continue to be given the opportunity to meet with management. Care is exercised to ensure that any price sensitive information is released to all shareholders at the same time in accordance with UK Listing Authority requirements. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 73 Executive Directors report regularly to the Board on meetings or other contact with shareholders or their representatives. The non-executive Directors continue to believe that, through their direct and ready access to, and contact with, the Chairman and the Senior Independent Director and through the regular reports to the Board, they are kept fully aware of the views of the larger shareholders in the Company and the investment community generally. The Board continues to retain the services of independent external corporate and investor relations consultants who provide advice on the relationship between the Company and its institutional investors. Further information on the Company’s investor relations programme can be found at: www.balfourbeatty.com/investors The Board regards the Company’s general meetings as an opportunity to communicate directly with private investors and actively encourages participative dialogue with all the Company’s shareholders. The chairs of the Board Committees attend the AGM each year along with the other Directors and are available to answer questions from shareholders. The circular setting out the Notice of the 2018 AGM provides a detailed explanation of the business to be transacted and includes contact details which shareholders can use to make any comments or ask any questions concerning the AGM. The website is regarded by the Company as an important source of information on the Group, including financial press releases, shareholder documentation, annual and half-year results presentations and the terms of reference of the principal Board Committees. The Company’s website continues to be developed to ensure it remains a principal source of information on the Group and its activities. Political donations At the AGM held in May 2017, shareholders gave authority for the Company and its UK subsidiaries to make donations to political organisations up to a maximum aggregate amount of £25,000 in the European Union. This approval is a precautionary measure in view of the broad definition of these terms in the Companies Act. No such expenditure or donations were made during the year and shareholder authority will be sought again at the 2018 AGM. In the US and Canada, corporate political contributions totalling £19,306 were made by business units during 2017 (2016: £195,290). Any political contributions or donations are tightly controlled and must be approved in advance in accordance with the Company’s internal procedures and must also adhere strictly to the Company’s policies on probity set out in its Code of Conduct. Corporate responsibility A full description of the Group’s approach to sustainability, including information on its community engagement programme, appears on pages 29 to 37. The Group’s published policies on health and safety, the environment, business conduct and ethics remain in place and are subject to regular reviews. Greenhouse gas emissions Details of emissions during the year and the actions which the Group is taking to reduce them are set out on pages 35 and 36 and form part of the Directors’ report disclosures. Employment The Balfour Beatty Group operates across a number of geographies and end markets. Balfour Beatty provides a Human Resources framework for promoting diversity, ethical behaviour and learning and development as well as continuing to fulfil its commitments in relation to regulation and corporate governance. The key principles in the design and practice of employment policy that are applicable across the Group are to: – provide a safe, open, inclusive and challenging environment that attracts and retains the best people – enable all employees to perform at their best and realise their full potential, assisted by appropriate training and career development – communicate the strategy of the Group, the objectives of each respective business and the role and objectives of each employee within that business – actively consult with all employees and engage in a participating environment that fosters the exchange of best practice and collaboration – provide market competitive pay and benefits that reward both individual and collective performance – ensure that all job applicants receive fair treatment, regardless of age, origin, gender, disability, sexual orientation, marital status, religion or belief – ensure that all employees similarly receive fair treatment throughout their career – provide a working environment of respect and free from harassment. The Group provides fair and flexible employment policies and practices that respond to the different needs of its people. Information concerning employee diversity is set out on page 33 and forms part of the Directors’ report disclosures. Balfour Beatty strives to provide employment, training and development opportunities for disabled people wherever possible and is committed to supporting employees who become disabled during employment and helping disabled employees make the best use of their skills and potential, consistent with all other employees. The Company also operates an all employee Share Incentive Plan (SIP) which enables UK-based employees to acquire the Company’s ordinary shares on a potentially tax-favourable basis, in order to encourage employee share ownership and provide additional alignment between the interests of employees and shareholders. Participants in the SIP are the beneficial owners of shares but not the registered owners, and the voting rights to such shares are exercised by the trustee of the SIP at the discretion of the participants. Information concerning the performance of the Group and the Company’s share price is provided to all employees via the Company’s website. balfourbeatty.com/AR2017 74 Directors’ report – other disclosures continued Events after the reporting date On 15 January 2018, Carillion plc filed for compulsory liquidation. Carillion was one of the Group’s joint operations partners in the Aberdeen Western Peripheral Route (AWPR) project on a joint and several basis. As a result of Carillion’s liquidation, the Group and its remaining joint operations partner on the project, Galliford Try plc, are jointly liable to deliver Carillion’s remaining obligations on this contract in addition to each partner’s existing 33% share. The Group has assessed the liquidation of Carillion plc as an adjusting post balance sheet event and in light of this, the Group has recognised a one-off non-underlying loss provision of £44m in 2017, which reflects the Group’s additional loss on the contract as a result of Carillion’s liquidation. The contract is expected to complete in the summer of 2018. Refer to Note 10 on page 114. On 14 February 2018, the Group repurchased a further £17.7m of its convertible bonds, which will result in a loss on settlement of £0.3m. This settlement will also trigger a further £2m of reserves relating to the equity component of the repurchased bonds being transferred from other reserves into retained earnings. Following this settlement, the Group’s outstanding bonds on maturity in December 2018 amount to £213.7m. On 19 February 2018, the Group agreed the disposal of a further 5% interest in Connect Plus (M25) Holdings Ltd to Equitix for a cash consideration of £42m, equivalent to the price of the 20% disposal in 2017. The expected profit on disposal for this transaction is £21m. On 23 February 2018, the Group completed this transaction and received from Equitix the full cash consideration of £104m, inclusive of the £62m outstanding at the reporting date as detailed in Note 32.2.4 on page 151. The Group continues to own a 15% interest in Connect Plus (M25) Holdings Ltd. On 7 March 2018, the Group repaid the first tranche of its US private placement notes amounting to US$45m (£32.5m). US$305m remain outstanding, with the next tranche of US$46m being due in March 2020 and the remaining loan notes falling due in March 2023 and March 2025. Change of control provisions The Group’s bank facility agreements contain provisions that, on 30 days’ notice being given to the Group, the lender may exercise its discretion to require prepayment of the loans on a change of control of the Company and cancel all commitments under the agreement concerned. A number of significant joint venture and contract bond agreements include provisions which become exercisable by a counterparty on a change of control of the Company. These include the right of a counterparty to request additional security and to terminate an agreement. The Group’s US private placement arrangements require the Company, promptly upon becoming aware that a change of control of the Company has occurred (and in any event within 10 business days), to give written notice of such fact to all holders of the notes and make an offer to prepay the entire unpaid principal amount of the notes, together with accrued interest. The Group’s convertible bond arrangements provide that the holder of bonds can require the Company to redeem its bonds following a change of control of the Company at their principal amount, together with accrued interest. The Company is required to notify the bond holder within 14 days of a change of control. Some other commercial agreements, entered into in the normal course of business, include change of control provisions. The Group’s share and incentive plans include usual provisions relating to change of control, as do the terms of the Company’s cumulative convertible redeemable preference shares. There are no agreements providing for compensation for the Directors or employees on a change of control. Financial instruments The Group’s financial risk management objectives and policies and its exposure to the following risks – foreign currency, interest rate, price and credit – are detailed in Note 38 on pages 156 to 160. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the Company financial statements in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of their profit or loss for that period. In preparing each of the Group and Company financial statements, the Directors are required to: – select suitable accounting policies and then apply them consistently – make judgements and estimates that are reasonable, relevant, reliable and prudent – for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU – for the Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Company financial statements – assess the Group and the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern – use the going concern basis of accounting unless they either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 75 Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Directors confirm that to the best of their knowledge: – the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole – the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. In light of the work undertaken by the Audit and Risk Committee reported in greater detail on pages 67 to 69 and the internal verification and approval process which has been followed this year, the Directors are able to state that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position, performance, business model and strategy. Statements of Directors as to disclosure of information to auditors Each of the Directors at the date of approval of this report confirms that: – so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware – the Director has taken all the steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. By order of the Board David Mercer General Counsel and Company Secretary 13 March 2018 Registered Office: 5 Churchill Place, Canary Wharf London E14 5HU Registered in England Number 395826 balfourbeatty.com/AR2017 76 Remuneration report Chairman of Remuneration Committee’s introduction Our remuneration policy’s primary objective is to ensure we are able to attract, retain and motivate key executives to deliver strong sustainable business performance aligned to the strategic plan and to the interests of shareholders. Iain Ferguson Chairman of the Remuneration Committee Dear fellow shareholders, As chairman of the Board’s Remuneration Committee, I am pleased to present the Directors’ Remuneration report for 2017, which will be subject to an advisory vote at the 2018 AGM. At the 2017 AGM, shareholders approved the Remuneration Policy. The policy is not presented here, but can be found in full at https://balfourbeatty.com/remuneration_policy. The decisions set out in this report are in line with that policy. Our remuneration policy’s primary objective is to ensure we are able to attract, retain and motivate key executives to deliver strong sustainable business performance aligned to the strategic plan and to the interests of shareholders. Context As our Chairman, Philip Aiken, explained in his introduction, the Group has continued to demonstrate further progress in restoring Balfour Beatty to profitability and enhancing its financial and operational resilience. This transformation has happened as a result of strong, confident leadership over the last three years and the team has delivered considerable value for shareholders over the period. Whilst, of course, this has been achieved through the commitment and dedication of our employees, substantial credit should be given to Group Chief Executive, Leo Quinn, and Chief Financial Officer, Philip Harrison. Since joining the Company in 2015, Leo and Philip have led the Build to Last transformation programme and made significant progress towards achieving our goals. As you will see within the report, the decisions recognise the scale of change that Leo and Philip have brought and I hope that you will support these by voting in favour of this report at the 2018 AGM. Reward for 2017 In respect of 2017, the annual bonus payments for the executive Directors reflect the strong performance of the Group – profit and cash targets were met in full and the personal performance of both executive Directors was strong. The Group Chief Executive and the Chief Financial Officer received annual bonus payments of 97% and 96% of the maximum available respectively. 50% of this will be deferred in shares for three years. The TSR performance conditions relating to the 2015 PSP measured performance over the three years ended 31 December 2017 for all participants except Leo Quinn whose award had a measurement period for the TSR part of the three years ended Balfour Beatty Annual Report and Accounts 2017 14 October 2017. TSR performance conditions were met in part, EPS almost met its maximum target and the maximum cash target was met. As a result, 89% and 86% of these awards will vest for Leo Quinn and Philip Harrison respectively on 26 June 2018. Again this reflects the strong performance over the three years of our Build to Last transformation. Salaries are normally reviewed on 1 July, and it was agreed that the executive Directors would not receive a salary increase for 2017, with salaries remaining at the level agreed upon their appointment in 2015. The next salary review date is 1 July 2018. Areas of focus in 2018 The current remuneration policy was approved by shareholders at the 2017 AGM. The Committee believes that the current approach remains effective and aligned to the Company’s strategic objectives. The Committee will continue to monitor external corporate governance developments and best practice developments over the forthcoming year. Remuneration policy for 2018 The Committee will continue to operate within the remuneration policy approved by shareholders in 2017. The key highlights of how we intend to apply this for 2018 are: – the annual bonus will be based on profit before tax 40%, cash 35% and strategic business and personal objectives 25% – the Group Chief Executive will be granted a PSP award over shares worth 200% of base salary and the Chief Financial Officer 175% of base salary and – consistent with awards made previously, PSP awards will continue to be based on the achievement of three performance metrics split equally between relative TSR, EPS and cash. Conclusion The Committee will continue to engage with major shareholders to ensure that executive remuneration remains appropriate as the Board takes its responsibility to engage with investors seriously. We believe that our policy continues to deliver a robust link between reward and performance, that it is implemented rigorously in line with its stated objectives, and is aligned with the Group’s strategic goals. We hope you will support our remuneration report at this year’s AGM. Iain Ferguson Chairman of the Remuneration Committee Strategic Report Governance Financial Statements Other Information 77 Annual report on remuneration This part of the Remuneration report sets out how the remuneration policy will be applied over the year ending 31 December 2018 and how it was implemented over the year ended 31 December 2017. Details of the remuneration earned by Directors and the outcomes of incentive schemes, including details of relevant links to Company performance, are also provided in this part. The detailed information about the Directors’ remuneration, set out on pages 78 to 87 (excluding the performance graph on page 85), has been audited by the Company’s independent auditor, KPMG LLP. The areas covered in this Annual Report on Remuneration comprise: Implementation of the remuneration policy for the year ending 31 December 2018 Remuneration received by Directors for the year ended 31 December 2017 AIP awards for the year ended 31 December 2017 Vesting of PSP awards for the year under review Outstanding share awards PSP awards granted during the year Executive Directors’ recruitment terms Payments to past Directors Statement of Directors’ shareholdings and share interests Performance graph Group Chief Executive’s remuneration table Percentage change in Group Chief Executive’s remuneration compared with all UK employees Relative importance of spend on pay, dividends and underlying pre-tax profit Directors’ pension allowances External appointments of executive Directors Consideration by the Directors of matters relating to Directors’ remuneration Statement of shareholder voting at the AGM 78 79 80 81 82 83 83 84 84 85 85 85 86 86 86 86 87 balfourbeatty.com/AR2017 78 Annual report on remuneration continued Implementation of the remuneration policy for the year ending 31 December 2018 Base salaries The annual base salary review date is 1 July for executive Directors. Current base salaries for the executive Directors are as follows: Leo Quinn Philip Harrison 1 July 2016 £ 800,000 400,000 1 July 2017 £ 800,000 400,000 % increase 0.0% 0.0% The normal review date for executive Directors’ base salaries is 1 July, but it was agreed that neither would receive an increase in 2017. The next salary review date is 1 July 2018. Performance targets for the AIP in 2018 For 2018, the AIP for the executive Directors will be a maximum bonus of 150% of base salary, based on the achievement of three performance measures: – profit before tax (40%) – cash (35%) – strategic business and personal objectives (25%). The three elements are measured and calculated independently of each other and 50% of any bonus earned will be deferred for three years in Balfour Beatty shares. While the Committee has chosen not to disclose in advance the performance targets for the forthcoming year as these include items which the Committee considers commercially sensitive, retrospective disclosure of the targets and performance against them will be presented in next year’s Annual Report on Remuneration. Performance targets for PSP awards granted in 2018 For 2018, the Group Chief Executive will be granted a PSP award over shares worth 200% of base salary and the Chief Financial Officer 175% of base salary. Consistent with the approach adopted in 2015, 2016 and 2017, the PSP awards to be granted in 2018 will be based on the achievement of three performance measures: – relative TSR (33.3%) – the Company’s TSR measured against a comparator group of UK listed companies ranked 51–200 by market capitalisation in the FTSE All Share Index (excluding investment trusts) as at 1 January 2018, the start of the performance period. There is no vesting for ranking below median, with 25% of this part of an award vesting at median ranking, rising to 100% vesting of this part of an award at upper quartile or higher – EPS (33.3%) – the Group’s EPS over the three-year performance period – cash (33.3%) – cash remains critical as a long-term performance measure during the Group’s transformation. As at the date of publication of this Remuneration report, the Committee had not finalised the EPS and cash performance targets for the PSP awards to be granted in 2018. These EPS and cash targets will be set at an appropriate level of stretch and will be fully disclosed in the RNS announcement issued immediately following the grant of the PSP award and in the Remuneration report for 2018. Non-executive Directors The Company’s approach to setting non-executive Directors’ fees is by reference to fees paid at similar companies and reflects the time commitment and responsibilities of each role. At the annual review of fees for the non-executive Directors on 1 July 2017, the annual base fee was increased from £56,000 to £60,000 and the annual fee for chairing a Board Committee was increased from £10,000 to £12,500. Those fees had not been increased since the review on 1 July 2012. A summary of current fees is as follows: Chairman Base fee Senior Independent Director fee Committee chair fee 1 July 2016 £ 270,000 56,000 10,000 10,000 1 July 2017 £ 270,000 60,000 10,000 12,500 % increase 0% 7% 0% 25% For non-executive Directors based outside Europe, the travel allowance for each overseas visit made on Company business remains at £2,500. Where the Chairman is also the chair of a Committee, he or she receives no committee chair fee. The Senior Independent Director fee is only payable if he or she is not the chair of a Committee. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 79 Remuneration received by Directors for the year ended 31 December 2017 The table below sets out the Directors’ remuneration for the year ended 31 December 2017 (or for performance periods ended in that year in respect of long-term incentives) together with comparative figures for the year ending 31 December 2016. Executive Directors Philip Harrison Base salary and fees1,2 Taxable benefits3,4 Year £ £ Pension cash allowance £ Annual incentive cash5 £ Annual incentive deferred shares5 £ Long-term incentives6 £ Other7 £ Total £ 2017 400,000 14,503 80,000 288,000 288,000 751,897 74,461 1,896,861 2016 400,000 14,449 80,000 112,992 112,992 – 57,741 778,174 Leo Quinn 2017 800,000 21,006 160,000 582,000 582,000 2,077,004 1,171,881 5,393,891 2016 800,000 29,250 160,000 228,000 228,000 Non-executive Directors Philip Aiken Stephen Billingham Stuart Doughty Iain Ferguson Michael Lucki8 Barbara Moorhouse9 Former non-executive Directors Maureen Kempston Darkes10 Graham Roberts11 2017 270,000 34 2016 270,000 1,688 2017 2016 2017 2016 2017 2016 2017 2017 2017 2016 2017 2016 69,250 64,333 64,250 56,000 69,250 66,000 30,000 34,667 – – – – – – 5,000 – 25,554 24,393 66,000 2,573 – 33,000 – 57 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,445,250 270,034 271,688 69,250 64,333 64,250 56,000 69,250 66,000 35,000 34,667 49,947 68,573 – 33,057 1 Base salary and fees were those paid in respect of the period of the year during which the individuals were Directors. 2 In practice, the base salary paid to Leo Quinn was reduced due to his participation in the Company’s Share Incentive Plan. The salary reduction in 2017 was £1,800. 3 Taxable benefits are calculated in terms of UK taxable values. Leo Quinn received private medical insurance for himself and his spouse and received a car allowance of £20,000 per annum. Philip Harrison received private medical insurance for himself only and received a car allowance of £14,000 per annum. 4 Philip Aiken, Michael Lucki, Maureen Kempston Darkes and Graham Roberts received taxable travel expenses and/or travel allowances which are shown in the taxable benefits column. 5 AIP 2017: further details of these awards are set out on pages 80 and 81. 6 This relates to the 2015 PSP award for which the performance period ended in 2017 with the valuation of vesting shares calculated on the closing share price of 297p on 31 December 2017. Under the rules of the PSP scheme, the participants may also receive an award of cash or shares in lieu of the value of dividends paid over the vesting period on vested shares. Further details of these awards are set out on pages 81 and 82. 7 Other payments relate to the conditional share awards granted to Philip Harrison and Leo Quinn to compensate them for share awards which were forfeited upon leaving their respective former employers. For 2017, Philip Harrison’s award is the second tranche for which the performance period ended 31 December 2017 with the valuation of the 25,071 shares vesting calculated on the closing share price of 297p at 31 December 2017. For 2017, Leo Quinn’s award is the first tranche for which the performance period ended 2 January 2017 with the valuation of the 423,704 shares vesting calculated on the share price of 276.58p at the vesting date on 16 March 2017. For 2016, Philip Harrison’s award is the first tranche for which the performance period ended 31 December 2016 with the valuation of the 21,529 vesting shares calculated on the closing share price of 268.2p at 31 December 2016. Further details of these awards are set out on pages 83 and 84. 8 Michael Lucki joined the Board effective 1 July 2017. 9 Barbara Moorhouse joined the Board effective 1 June 2017. 10 Maureen Kempton Darkes stepped down from the Board effective 18 May 2017. 11 Graham Roberts died on 1 July 2016. balfourbeatty.com/AR2017 80 Annual report on remuneration continued AIP awards for the year ended 31 December 2017 For 2017, the AIP for the executive Directors was a maximum bonus of 150% of base salary based on the achievement of three performance measures: – profit before tax (40%) – cash (35%) – strategic business and personal objectives (25%). The three elements are measured and calculated independently of each other and 50% of the bonus earned is deferred for three years in the form of Balfour Beatty shares. AIP objective Profit before tax and non-underlying items Group Total Cash Flow Strategic business and personal objectives as agreed by the Remuneration Committee (details below) Threshold Target Maximum Threshold Target Maximum Remuneration Committee assessment of achievement Actual £165m Maximum (% of salary) 60.0 Actual (% of salary) 60.0 Payable in cash (% of salary) 30.0 Payable in shares (% of salary) 30.0 £162m 52.5 52.5 26.25 26.25 £63.7m £79.6m £87.6m £(146.6)m £(122.2)m £(110.0)m Group Chief Executive 88.0% Chief Financial Officer 84.0% Total – Group Chief Executive Total – Chief Financial Officer 37.5 33.0 16.5 16.5 37.5 31.5 15.75 15.75 150.0 150.0 145.5 144.0 72.75 72.0 72.75 72.0 Performance against the 2017 AIP strategic business and personal objectives as it relates to the executive Directors was: Summary of key strategic objectives Examples of actual achievement Lean: – Established detailed plans for Phase 2 of Build to Last transformation programme Met in full: – Further overhead cost reduction of £30m – Strong cash performance moving to average net cash excluding non-recourse debt – Simplification of the business model–exit Middle East and Indonesia, sale of Heery International Inc Expert: – Build a high-calibre sustainable senior leadership Met in part: – Improvement of employee engagement index team and establish effective processes to develop a sustainable talent pipeline – Improve UK employee voluntary retention rates results from 58% to 60% – Voluntary turnover in the UK improved by 4.6% – Management development programme launched and employee engagement survey results across UK – Launch management development programme – 5.3% of UK workforce in ‘earn and learn’ positions – for future leaders meeting The 5% Club target Trusted: – Continue improvement in managing risk and reputation through embedded governance and controls – Over 90% in measured customer satisfaction Met in full: – Governance and controls in place providing a transparent and disciplined contracting framework – 94% customer satisfaction achieved Safe: – Ongoing leadership and drive in improved safety Met in part: – Displayed strong leadership and high visibility culture and performance – Continue improvement in UK and US leading and lagging indicators with regard to promoting Zero Harm objectives – nevertheless three fatalities occurred during the year, two in US and one in Far East – Strong performance in leading indicators: observations increased by 24% – Good performance in lagging indicators (LTIR, AFR, HiPo) Group Chief Executive Out-turn % Weight % 32.0 32.0 24.0 20.0 24.0 24.0 20.0 12.0 Total 100.0 88.0 Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 81 Summary of key strategic objectives Examples of actual achievement Lean: – Achieve a minimum £25m annual overhead Met in full: – Exceeded annual overhead cost reduction target, cost reduction achieved £30m overhead improvement – Deliver 2017 budget targets for cost of the finance function and establish clear strategy and plan to achieve the 2018 targets – Standardised management reporting process across Group – 84% electronic invoicing usage achieved – Launched single ERP in the US Construction – Improve financial systems and processes; businesses on time (1 January 2018) minimum 70% electronic invoicing Expert: – Improve quality of financial information for UK central functions Met in part: – Improved cash forecasting and monthly reporting – Created integrated finance team in the – Progress in building a high-calibre sustainable US Construction businesses finance function in the UK and US with appropriate short and long-term succession options for key positions Trusted: – Develop and implement agreed capital structure for the Group Met in full: – Full programme developed and agreed by the Board – Average net cash excluding non-recourse debt for Safe: – Support and role model improvement in safety culture and performance the year Met in part: – Displayed strong, visible leadership with regard to promoting Zero Harm objectives – nevertheless three fatalities occurred during the year, two in US and one in Far East – Improvements in leading and lagging indicators Group Financial Officer Out-turn % Weight % 28.0 28.0 24.0 18.0 28.0 28.0 20.0 10.0 Total 100.0 84.0 The Committee considered carefully the AIP performance out-turn for the executive Directors against the background of the profit performance and determined that the above payments are appropriate given the Group’s strong financial performance and the personal performance of the executive Directors. The executive Directors have, in the opinion of the Committee, continued to make significant improvements to the business through Build to Last to deliver our goals. Vesting of PSP awards for the year under review The PSP awards granted on 26 June 2015 were based on a performance period for the three years ended 31 December 2017, except for Leo Quinn’s award which has a measurement period for the TSR part of the three years to 14 October 2017. The performance conditions applying to one-third of each award were comparative Total Shareholder Return measured versus the FTSE 51-150 (excluding investment trust) ‘live’ companies, cash performance measured as Total Net Debt and Earnings Per Share. 25% of each part of the award would vest for threshold performance increasing to 100% of each part of the award vesting for maximum performance or above. Details of the PSP awards vesting for the year under review are therefore as follows: Metric Performance condition Measure Threshold target Maximum target Actual Vesting % Total Shareholder Return – Leo Quinn TSR against the 89 remaining companies ranked 51–150 in the FTSE All Share Index (excluding investment trusts) TSR ranking 45.0 or above 22.75 or above 32.54 67.00 Total Shareholder Return – Philip Harrison TSR against the 90 remaining companies ranked 51–150 in the FTSE All Share Index (excluding investment trusts) Cash Earnings Per Share Total vesting – Leo Quinn Total vesting – Philip Harrison TSR ranking 45.5 or above 23.0 or above 35.67 57.77 Total Net Cash/(Debt) Earnings Per Share £(150)m £0m £335m 100 14p 21p 20.9p 98.93 88.64% 85.57% balfourbeatty.com/AR2017 82 Annual report on remuneration continued Vesting of PSP awards for the year under review continued Name of Director Leo Quinn Philip Harrison Type of award 2015 conditional 2015 conditional Vesting date 26 June 2018 26 June 2018 Number of shares at grant 788,954 295,857 Number of shares to vest Number of shares to lapse 699,328 89,626 253,164 42,693 Value of vesting shares1 £2,077,004 £751,897 1 Valuation of vesting shares calculated on the closing price share price of 297p at 31 December 2017. Outstanding share awards Name of Director Share award Philip Harrison PSP1,2,5,6 PSP3,5,6 PSP 4,5,6,7 DBP8,9,11,13 DBP8,9,11,12,13 Share buyout14 Share buyout14 PSP1,2,5,6 PSP3,5,6 PSP4,5,6,7 DBP8,9,11,13 DBP8,9,11,13 DBP,8,9,11,12,13 Share buyout14 Share buyout14 Leo Quinn Date granted 26 June 2015 13 April 2016 7 June 2017 31 March 2016 31 March 2017 11 June 2015 11 June 2015 26 June 2015 13 April 2016 7 June 2017 26 June 2015 31 March 2016 31 March 2017 2 January 2015 2 January 2015 At 1 January 2017 295,857 254,885 – 26,143 – 30,831 61,662 788,954 679,694 – 193,907 89,636 – 604,256 1,208,511 Maximum number of shares subject to award At 31 December 2017 295,857 254,885 253,347 26,428 42,880 – 61,662 788,954 679,694 579,080 196,027 90,616 86,527 – 1,208,511 Vested during the year – – – – – 21,529 – – – – – – – 423,704 – Lapsed during the year – – – – – 9,302 – – – – – – – 180,552 – Awarded during the year – – 253,347 285 42,880 – – – – 579,080 2,120 980 86,527 – – Exercisable and/ or vesting from 26 June 2018 13 April 2019 7 June 2020 31 March 2019 31 March 2020 31 December 2016 31 December 2017 26 June 2018 13 April 2019 7 June 2020 26 June 2018 31 March 2019 31 March 2020 2 January 2017 2 January 2018 1 2015 PSP award: Further details of this award are set out on pages 81 and 82. 2 The 2015 PSP award used a share price of 202.8p to calculate the number of shares awarded, being the average middle market price of ordinary shares in the Company for the 10 dealing dates before Leo Quinn joined the Company on 2 January 2015. The closing middle market price of ordinary shares on the date of the award was 243.0p. 3 The 2016 PSP award is subject to three performance targets over a three-year performance period commencing 1 January 2016. TSR part (33.3% weighting), measured against a comparator group of companies ranked 51–150 by market capitalisation in the FTSE All Share Index (excluding investment trusts), no vesting below median ranking, 25% vesting of this part at median, rising to 100% vesting at upper quartile performance or better. Net Debt part (33.3% weighting), no vesting unless 2018 year end Net Debt is less than £(75) million, 25% to 50% for Net Debt between £(75) million and £(0) million, rising to full vesting for net cash of £50 million. EPS part (33.3% weighting), no vesting unless 2018 EPS is 20p, 25% vesting of this part at 20p, rising to full vesting at 27p. 4 2017 PSP award: Details are set out on page 83. 5 The average middle market price of ordinary shares in the Company for the three dealing dates before the PSP award dates, which was used for calculating the number of shares granted, was 301.9p for the 2014 award, 235.4p for the 2016 award and 276.3p for the 2017 award. The closing middle market price of ordinary shares on the date of the awards was 299.6p, 238.3p and 271.0p respectively. 6 All PSP awards are granted for nil consideration and are in respect of 50p ordinary shares in Balfour Beatty plc. 7 On 7 June 2017, for all participants in the PSP, a maximum of 3,087,443 conditional shares were awarded which are exercisable on 7 June 2020. 8 All DBP awards are granted for nil consideration and are in respect of 50p ordinary shares in Balfour Beatty plc. It is the Company’s current intention that awards will be satisfied by shares purchased in the market. 9 The initial DBP awards made in March 2015, June 2015, March 2016 and March 2017 will vest on 31 March 2018, 26 June 2018, 31 March 2019 and 31 March 2020 respectively, providing the participant is still employed by the Group at the vesting date (unless specified leaver conditions are met, in which case early vesting may be permitted). 10 The initial DBP awards made in 2014 vested on 31 March 2017. The closing middle market price of ordinary shares in the Company on the vesting date was 269.40p. 11 The shares subject to the DBP awards made on 31 March 2014, 31 March 2015, 26 June 2015, 31 March 2016 and 31 March 2017 were purchased at average prices of 301.9p, 241.0p, 245.0p, 252.5p and 266.4p respectively. 12 On 31 March 2017, for all participants in the DBP, a maximum of 632,308 conditional shares were awarded which will normally be released on 31 March 2020. 13 On 20 April 2017 and 5 October 2017, a further 11,289 conditional shares and 7,765 conditional shares were awarded in lieu of entitlements to the final 2016 dividend and interim 2017 dividend respectively. These shares were allocated at average prices of 280.4p and 267.2p respectively. 14 The share buyout awards were granted for nil consideration and are in respect of 50p ordinary shares in Balfour Beatty plc. The awards compensate each of Leo Quinn and Philip Harrison for incentive awards which were forfeited on leaving their previous employers. Further details of these awards are set out on pages 83 and 84. The closing middle market price of ordinary shares in the Company on the date of the awards was 212.4p and 253.1p respectively. 15 The closing market price of the Company’s ordinary shares on 31 December 2017 was 297.0p. During the year, the highest and lowest closing market prices were 298.4p and 253.5p respectively. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 83 PSP awards granted during the year On 7 June 2017, the following PSP awards were granted to executive Directors: Executive Leo Quinn Type of award Conditional Philip Harrison Conditional Basis of award granted 200% of salary of £800,000 175% of salary of £400,000 Share price applied at date of grant 276.3p Number of shares over which award was granted Face value of award 579,080 £1,600,000 % of face value that would vest at threshold performance Vesting determined by performance over three years to 25% 31 December 2019 Vesting date 7 June 2020 276.3p 253,347 £700,000 25% 31 December 2019 7 June 2020 The performance condition applying to one third of each award (the TSR Part) will measure the Company’s total shareholder return performance (TSR) relative to the TSR performance over the same period of a comparator group of companies comprising the constituents of the FTSE 51-200 (excluding investment trusts) as at the start of the measurement period. The measurement period for the TSR Part is the three financial years to 31 December 2019. No portion of the TSR Part will vest unless the Company’s TSR performance ranks at least equal to median TSR performance of the comparator group, at which point 25% of the TSR Part will vest, rising on a straight-line basis to 100% vesting for the Company’s TSR performance ranking at upper quartile or better relative to the TSR performance of the comparator group companies. The performance condition applying to a separate one third of each award (the Cash Part) will measure improvement in the Group’s Operating Cash Flow (OCF) from continuing operations. No portion of the Cash Part will vest unless the Group’s OCF for the financial year ending 31 December 2019 is greater than £132 million. Were OCF for 2019 to be greater than £132 million but not more than £164 million, 25% to 50% of the Cash Part would vest on a straight-line basis. Were OCF for 2019 to be £164 million to £200 million or more, between 50% of and 100% of the Cash Part would vest on a straight-line basis. The performance condition applying to a separate one-third of each award (the EPS Part) will measure the Group’s earnings per share performance. No portion of the EPS Part will vest unless the Group’s EPS for the financial year ending 31 December 2019 is 19p, at which point 25% of the EPS Part will vest, rising on a straight-line basis to 100% vesting for the Group’s EPS for 2019 being 29p or more. Executive Directors’ recruitment terms Leo Quinn As part of his recruitment arrangements and as fully disclosed in the 2014, 2015 and 2016 Remuneration reports, the Company agreed to compensate Leo Quinn for incentive awards which were forfeited upon leaving his previous employer. The Company granted a conditional share award over 1,812,767 Balfour Beatty plc shares on 2 January 2015 to vest in two tranches: – After application of the performance criteria, the first tranche vested on 16 March 2017 with 423,704 shares vesting and 180,552 shares lapsing. Vesting was subject to share price targets tested at the second anniversary of grant based on a 60-day average share price as adjusted for dividends. The targets were 25% of this part of the award vesting for an end average share price of 222p increasing pro-rata for full vesting of this part of the award for an end average share price of 309p with no vesting for this part of the award for an average share price of less than 222p. – Outstanding at year end is the second tranche, a conditional share award over 1,208,511 Balfour Beatty plc shares granted on 2 January 2015 which will vest on the third anniversary of grant subject to share price targets tested at the end of the three-year period based on a 60-day average share price as adjusted for dividends. 25% of this part of the award will vest for an end average share price of 250p increasing pro-rata for full vesting of this part of the award for an end average share price of 380p. No vesting for this part of the award will take place for an average share price of less than 250p. – In addition to the dividend adjusted share price targets, an underpin will apply to the vesting whereby the Committee must be satisfied with the underlying performance of the business for this award to vest. The outstanding share-based buyout award lapses in the event of voluntary resignation or termination for cause prior to the vesting date. In the event of good leaver departure, the awards will vest at employment cessation, subject to performance conditions and pro-rating at the time of cessation. In relation to the second tranche of 1,208,511 shares, on 12 March 2018 the Remuneration Committee reviewed the end average share price of 277.31p at 2 January 2018 against the target range, indicating vesting at 40.76% of this part of the award, and also considered the underlying performance of the Company over the performance period. The Committee determined that 40.76% of the award (492,589 shares) will be permitted to vest on 14 March 2018 when the Company enters an open period. balfourbeatty.com/AR2017 84 Annual report on remuneration continued Executive Directors’ recruitment terms continued Philip Harrison As part of his recruitment arrangements, the Company agreed to compensate Philip Harrison for share awards which were forfeited upon leaving his previous employer. The performance targets are consistent with the awards granted to Leo Quinn at the start of 2015. The Company granted a conditional share award over 92,493 Balfour Beatty plc shares on 11 June 2015 to vest in two tranches: – After application of the performance criteria, the first tranche vested on 16 March 2017 with 21,529 shares vesting and 9,302 shares lapsing. Vesting was subject to share price targets tested at 31 December 2016 based on a 60-day average share price as adjusted for dividends. The targets were 25% of this part of the award vesting for an end average share price of 222p increasing pro-rata for full vesting of this part of the award for an end average share price of 309p with no vesting for this part of the award for an average share price of less than 222p. – Outstanding at year end is the second tranche, a conditional share award over 61,662 Balfour Beatty plc shares which will vest on 31 December 2017 subject to share price targets based on a 60-day average share price as adjusted for dividends. 25% of this part of the award will vest for an end average share price of 250p increasing pro-rata for full vesting of this part of the award for an end average share price of 380p. No vesting for this part of the award will take place for an average share price of less than 250p. – In addition to the dividend adjusted share price targets, an underpin will apply to the vesting whereby the Committee must be satisfied with the underlying performance of the business for this award to vest. The outstanding share buyout award lapses in the event of voluntary resignation or termination for cause prior to the vesting date. In the event of good leaver departure, the awards will vest at employment cessation, subject to performance conditions and pro-rating at the time of cessation. In relation to the second tranche of 61,662 shares, on 12 March 2018 the Remuneration Committee reviewed the end average share price of 277.14p at 31 December 2017 against the target range, indicating vesting at 40.66% of this part of the award, and also considered the underlying performance of the Company over the performance period. The Committee determined that 40.66% of the award (25,071 shares) will be permitted to vest on 14 March 2018 when the Company enters an open period. Payments to past Directors There were no payments to past executive Directors during 2017. Statement of Directors’ shareholdings and share interests The interests of the Directors and connected persons (including, amongst others, members of the Director’s immediate family) in the share capital of Balfour Beatty plc and its subsidiary undertakings during the year are set out below: Outstanding PSP awards 804,089 2,047,728 Outstanding DBP awards 69,308 373,170 Outstanding share buyout awards 61,662 1,208,511 Beneficially owned at 31 December 2017 as a % of base salary at 31 December5 2017 Guideline met6 No 13% Yes 297% Directors Philip Harrison Leo Quinn Philip Aiken Stephen Billingham7 Stuart Doughty Iain Ferguson Maureen Kempston Darkes Michael Lucki Barbara Moorhouse Beneficially owned at 1 January 20171,2 Beneficially owned at 31 December 20172,3,4 6,349 486,127 15,000 23,580 – 55,000 7,000 – – 17,744 798,663 15,000 23,757 4,550 55,000 7,000 – 4,000 1 Or date of appointment, if later. 2 Includes any shares held in the Company’s all-employee Share Incentive Plan. 3 Or date of stepping down from the Board, if earlier. 4 As at 13 March 2018, there have been no changes to the above other than an increase in respect of ordinary shares held in the Share Incentive Plan for Leo Quinn by 106 shares. 5 The closing market price of the Company’s ordinary shares as at 31 December 2017 (297.0p) was used to calculate the value of shares beneficially owned. 6 The Group Chief Executive and Chief Financial Officer are required to hold shares in the Company worth 200% and 150% of base salary respectively and must retain no fewer than 50% of the shares, net of taxes, vesting under the DBP and PSP until the required shareholding is met. 7 Stephen Billingham was also interested in 36,070 redeemable preference shares of 1p each in Balfour Beatty plc at 1 January 2017 and 31 December 2017. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 85 Performance graph As in previous reports, the Remuneration Committee has chosen to compare the TSR on the Company’s ordinary shares against the FTSE 250 Index (excluding investment trusts) principally because this is a broad index of which the Company is a constituent member. The values indicated in the graph show the share price growth plus reinvested dividends from a £100 hypothetical holding of ordinary shares in Balfour Beatty plc and in the index, and have been calculated using 30 trading day average values. 450 400 350 300 250 200 150 100 50 0 ) d e s a b e r ( ) £ ( e u a V l Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 (cid:81) Balfour Beatty plc (cid:81) FTSE 250 (excluding investment trusts) Index Source: Datastream (Thomson Reuters) Group Chief Executive’s remuneration table The total remuneration figures for the Group Chief Executive during each of the last nine financial years are shown in the table below. The total remuneration figure includes the AIP award based on that year’s performance and the PSP award based on the three-year performance period ending in the relevant year. The AIP payout and PSP vesting level as a percentage of the maximum opportunity are also shown for each of these years. Year ended 31 December Total remuneration1 AIP (%)2 PSP (%) 2010 2009 2012 £1,617,233 £1,451,016 £1,514,007 £1,189,287 40.2% 0% 65.3% 0% 69.6% 18.4% 60.4% 50.0% 2011 2013 £961,350 21.0% 0% 2015 2014 2016 £797,568 £1,442,070 £1,445,250 47.5% 0% 47.0% 0% 0% 0% 2017 £4,222,010 97.0% 88.6% 1 The figures for 2009 to 2012 relate to Ian Tyler who retired from the Board on 31 March 2013. The figures for 2013 and 2014 are annualised figures for Andrew McNaughton who was appointed on 31 March 2013 and stepped down on 3 May 2014. The figures for 2015 onwards relate to Leo Quinn. 2 Andrew McNaughton did not qualify for any 2014 AIP. Percentage change in Group Chief Executive’s remuneration compared with all UK employees The table below shows the percentage change in the Group Chief Executive’s salary, benefits and annual bonus between the financial years ended 31 December 2016 and 31 December 2017, compared with the percentage increase in the same years for all UK employees of the Group where UK employees have been selected as the most appropriate comparator. Salary for year ended 31 December Group Chief Executive (£000) All UK employees (£m) Benefits for year ended 31 December Group Chief Executive (£000) All UK employees (£m) Annual bonus earned in year ended 31 December Group Chief Executive (£000) All UK employees (£m) Total remuneration for year ended 31 December Group Chief Executive (£000) All UK employees (£m) 2016 800 668 189 36 456 17 1,445 721 2017 % change 800 672 181 47 1,164 12 2,145 731 0% 1% (4)% 31% 155% (29)% 48% 1% balfourbeatty.com/AR2017 86 Annual report on remuneration continued Relative importance of spend on pay, dividends and underlying pre-tax profit The following table shows the Company’s actual spend on pay for all Group employees relative to dividends and underlying pre-tax profit: Staff costs (£m)1 Dividends (£m) Underlying pre-tax profit (£m)2 2016 1,201 6 60 2017 1,193 20 166 % change (1)% 233% 177% 1 Staff costs include base salary, benefits and bonuses for all Group employees in continuing and discontinued operations (excluding joint ventures and associates). 2 Underlying pre-tax profit is from continuing and discontinued operations. Directors’ pension allowances No Directors were contributing members of the Balfour Beatty Pension Fund during 2017. The executive Directors were in receipt of a cash allowance in lieu of pension equivalent to 20% of base salary as disclosed in the Directors’ Remuneration table on page 79. External appointments of executive Directors No Director held external appointments in 2017. Consideration by the Directors of matters relating to Directors’ remuneration The members of the Remuneration Committee are independent non-executive Directors, as defined under the Corporate Governance Code. No member of the Committee has conflicts of interest arising from cross-directorships and no member is involved in the day-to-day executive management of the Group. During the year under review, the members of the Committee were as follows: – Iain Ferguson (Committee chair) – Philip Aiken – Maureen Kempston Darkes until 18 May 2017. – Michael Lucki from 6 July 2017. – Barbara Moorhouse from 6 July 2017. The Committee also receives advice from several sources, namely: – the Group Chief Executive and the Group HR director, who are invited to attend meetings of the Committee but are not present when matters relating directly to their own remuneration are discussed – New Bridge Street (a trading name of Aon plc) (NBS). NBS has been appointed as external independent executive remuneration advisers by the Committee and has provided a range of advice to the Committee during the year, including: – in support of the Remuneration Policy review, NBS provided analysis of market practice and advice on remuneration approaches for consideration by the Committee and in relation to the views of shareholders and their representative bodies – assistance with the drafting of the Remuneration report – valuation of share-based payments for IFRS 2 purposes – calculation of vesting levels under the TSR element of the PSP awards and the share buyout awards. Neither NBS nor any part of Aon plc provided any other services to the Company during the year under review. Total fees paid to NBS in respect of its services to the Committee were £38,040 (2016: £62,206). NBS is a signatory to the Remuneration Consultants’ Code of Conduct. The Committee is satisfied that the advice that it receives from NBS is objective and independent. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 87 Statement of shareholder voting at the AGM At the AGM on 18 May 2017, the resolution to approve the Remuneration report received the following votes from shareholders: For Against Total votes cast Abstentions Total number of votes 509,605,262 17,155,440 526,760,702 59,119 The resolution to approve the Remuneration Policy at the same AGM received the following votes from shareholders: For Against Total votes cast Abstentions By order of the Board Iain Ferguson Chairman of the Remuneration Committee 13 March 2018 Total number of votes 407,216,825 120,392,331 527,609,156 81,587 % of votes cast 96.7% 3.3% 100% – % of votes cast 77.2% 22.8% 100% – balfourbeatty.com/AR2017 88 Independent auditor’s report to the members of Balfour Beatty plc 1 Our opinion is unmodified We have audited the financial statements of Balfour Beatty plc (the Company) for the year ended 31 December 2017 which comprise the Group Income Statement, Group Statement of Comprehensive Income, Group Statement of Changes in Equity, Company Statement of Changes in Equity, Group and Company Balance Sheets, Group Statement of Cash Flows, and the related Notes, including the accounting policies in Note 2. In our opinion: – the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2017 and of the Group’s profit for the year then ended; – the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; – the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the Audit and Risk Committee. We were appointed as auditor by the shareholders on 19 May 2016. The period of total uninterrupted engagement is for the two financial years ended 31 December 2017. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements, including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided. Overview Materiality: Group financial statements as a whole £10.0m (2016: £10.0m) 6.4% (2016: 20%) of normalised Group profit before tax from continuing operations Coverage 100% (2016: 99%) of Group profit before tax Risk of material misstatement vs 2016 Recurring risks Contract accounting Recoverability of Group goodwill and of parent Company’s investment in subsidiaries Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 89 2 Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters (unchanged from 2016), in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters. The risk Contract accounting £6,103 million (2016: £6,173 million) Risk vs 2016: Refer to page 68 (Audit and Risk Committee report), pages 104 and 105 (Principal accounting policies – Note 2.5 Construction and service contracts) and pages 108 and 109 (Judgements and key sources of estimation uncertainty – Note 2.27a Revenue and margin recognition and Note 2.27f Provisions). Subjective estimate Our response For the majority of its contracts, the Group recognises revenue and profit on the stage of completion based on the proportion of contract costs incurred for the work performed to the balance sheet date, relative to the estimated total forecast costs of the contract at completion. The recognition of revenue and profit/loss therefore rely on estimates in relation to the forecast total costs of each contract. Cost contingencies may also be included in these estimates to take account of specific uncertain risks, or disputed claims against the Group, arising within each contract. These contingencies are reviewed by the Group on a regular basis throughout the contract life and adjusted where appropriate. The revenue on contracts may also include variations and claims. Variations and claims are recognised on a contract-by-contract basis when the Group’s negotiations have reached a stage such that it is probable that the customer will accept the claim and the amount can be measured reliably. In certain circumstances recoveries from insurers are also included in forecasts where sufficient progress has been made to meet accounting recognition requirements. In addition for certain contracts estimates are made for latent and known defect provisions within the warranty period. Therefore there is a high degree of risk and associated management judgement in estimating the amount of revenue and associated profit to be recognised by the Group up to the balance sheet date and changes to these estimates could give rise to material variances. Using a variety of quantitative and qualitative criteria we selected a sample of contracts to assess and challenge the most significant and complex contract estimates. We obtained the detailed project review papers from the Group to support the estimates made and challenged the judgements underlying those papers with senior operational, commercial and financial management. In this area our audit procedures included: – Historical comparisons: evaluating the financial performance of contracts against budget and historical trends; – Site visits: completing site visits, with the involvement of our industry specialists, to certain higher risk or larger value contracts, physically inspecting the progress on site for individual projects and identifying areas of complexity through observation and discussion with site personnel; – Benchmarking assumptions: challenging the Group’s judgement in respect of forecast contract out-turn, contingencies, settlements and the recoverability of contract balances via agreement to third-party certifications and confirmations and with reference to our own assessments, historical outcomes and industry norms; – Customer correspondence scrutiny: analysing correspondence with customers around variations and claims to challenge the estimates of claims and variations made by the Group; – Insurer correspondence scrutiny: analysing correspondence with insurers around recognised insurance claims to challenge management’s position taken on the contract; – Test of detail: analysing the end of job forecasts on contracts tested and challenging the estimates within the forecasts by considering the amounts already procured, the amounts still to be procured, the site and time related cost forecasts against programme and run rates, and any contingency held; – Test of detail: inspecting selected contracts for key clauses; identifying relevant contractual mechanisms such as pain/gain shares, design bonuses, liquidated damages and success fees and assessing whether these key clauses have been appropriately reflected in the amounts recognised in the financial statements; – Our sector experience: using our sector experience to assess whether the amounts recognised in the financial statements resulting from the estimates and assumptions made represent a balanced view of the risks and opportunities pertinent to the contract working capital positions; – Our sector experience: considering whether provisions against contracts sufficiently reflect the level of risk by challenging the Group’s judgement in this area with reference to our own assessments. Our findings: We considered the amount of revenue and associated profits recognised to be acceptable. balfourbeatty.com/AR2017 Independent auditor’s report to the members of Balfour Beatty plc continued 90 The risk Recoverability of Group goodwill and of parent Company’s investment in subsidiaries Group goodwill, excluding Balfour Beatty Communities US: £825 million (2016: £883 million); Parent Company: amount within total investment in subsidiaries of £1,700 million (2016: £1,698 million) Risk vs 2016: Refer to page 68 (Audit and Risk Committee report), page 106 (Principal accounting policies – Note 2.12 Intangible assets, Note 2.16 Impairment of assets and Note 2.17 Investments) and pages 119 and 120 (Note 14 Intangible assets – goodwill) and page 129 (Note 19.2 Investments – Company) Forecast-based valuation There is a risk that the goodwill allocated to cash-generating units (CGUs) and parent Company’s investment in subsidiaries are not recoverable and should be impaired. Due to the inherent uncertainty involved in forecasting and discounting future cash flows, which are the basis of the assessment of recoverability, this is one of the key judgement areas for our audit. Our risk relates to the goodwill within the Construction Services and Support Services segments and to the parent Company’s investment in Balfour Beatty Investment Holdings Ltd. The Group annually carries out an impairment assessment of goodwill and investments using a value-in-use model which is based on the net present value of the forecast earnings of the cash-generating unit. This is calculated using certain assumptions around discount rates, growth rates and cash flow forecasts. Our response Our procedures included: – Assessing methodology: considering the consistency and appropriateness of the allocation of businesses and related goodwill balances into CGUs; – Sensitivity analysis: performing our own sensitivity analysis, including a reasonably possible reduction in assumed growth rates and margins to identify areas on which to focus our procedures; – Our sector experience: considering the underlying assumptions in determining the cash flows and growth assumptions applied with reference to historical forecasting accuracy, current order book, and wider macro-environment conditions; – Our valuation experience: challenging the assumptions used by the Group in the calculation of the discount rates, including comparisons with external data sources and by involving our own valuation specialist to assist us in evaluating the valuation methodologies used by the Group, as well as the discount rate assumptions applied; – Assessing transparency: considering the adequacy of the Group’s disclosures including disclosure of sensitivity of the outcome of the impairment assessment to changes in key assumptions appropriately reflecting the risks inherent in the valuation of goodwill. We also considered the adequacy of the disclosures in respect of the parent Company’s investment in subsidiaries. Our findings: We considered the Group’s assessment of the recoverability of goodwill in the Group and the parent Company’s investment in subsidiaries to be acceptable. 3 Our application of materiality and an overview of the scope of our audit The materiality for the Group financial statements as a whole was set at £10.0 million (2016: £10.0 million), determined with reference to the benchmark of Group profit before tax from continuing operations of £156 million normalised to take into account items that are considered one-off or exceptional in the year as disclosed in Note 10 on pages 114 to 116, but not including an adjustment for the amortisation of acquired intangible assets of £9 million, of which it represents 6.4% (2016: 20%). Due to the volatility in the Group’s results in recent financial years, as part of our materiality assessment we also considered the scale of the business, the level of judgement and precision within the Group’s key accounting judgements, as well as how the level of materiality compares to other relevant benchmarks such as revenue, of which it represents 0.1% and total assets, of which it represents 0.2%, where they provide more consistent measures year on year than Group profit before tax. We reported to the Audit and Risk Committee any corrected and uncorrected identified misstatements exceeding £0.5 million (2016: £0.5 million) in addition to other identified misstatements that warrant reporting on qualitative grounds. Materiality for the parent Company financial statements as a whole was set at £9.0 million (2016: £9.0 million), determined with reference to a benchmark of Company total assets, of which it represents 0.27% (2016: 0.27%). Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 91 Scoping and coverage Group revenue % 2 Group profit before tax % Group total assets % 5 6 98 95 94 Full scope audit (2016: 96%) Specified risk-focused audit procedures (2016: 4%) Full scope audit (2016: 93%) Specified risk-focused audit procedures (2016: 6%) Full scope audit (2016: 94%) Specified risk-focused audit procedures (2016: 6%) Of the Group’s 16 reporting components (2016: 16), 11 were subject to an audit for Group reporting purposes (2016: 11) and five (2016: two) to specified risk-focused audit procedures. For the residual three components in 2016, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these. The components for which we performed specified risk-focused procedures were not individually financially significant enough to require an audit for Group reporting purposes, but did present specific individual risks that needed to be addressed. The specified audit procedures were performed over fixed assets (one component), inventory (one component), provisions (two components), contract accounting (one component) and cash (one component). The components within the scope of our work accounted for 100% (2016: 100%) of Group revenue, 100% (2016: 99%) of Group profit before tax and 100% (2016: 100%) of Group total assets as illustrated above. The Group operates one shared service centre in Newcastle, United Kingdom, the outputs of which are included in the financial information of the reporting components it services. Therefore it is not a separate reporting component. The service centre is subject to specified risk-focused audit procedures, predominantly the testing of transaction processing and review controls. Additional procedures are performed at each reporting component to address the audit risks not covered by the work performed over the shared service centre. The Group audit team instructed components, and the auditors of the shared service centre, as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the components’ materiality, which ranged from £0.5 million to £9.0 million, having regard to the mix of size and profile of the Group across the components. The work on the 11 of the Group’s 16 components was performed by the component auditors. Specified risk-focused procedures on four components, audit of the parent Company, Group consolidation work and procedures on the items excluded from normalised Group profit before tax were performed by the Group audit team. In 2017, the Group audit team visited nine components in the United Kingdom, United States and Hong Kong (2016: nine components). Telephone conference meetings were held with these component auditors and the majority of the others that were not physically visited. At these visits and meetings, the findings reported to the Group audit team were discussed in detail. 4 We have nothing to report on going concern We are required to report to you if: – we have anything material to add or draw attention to in relation to the Directors’ statement in Note 1 on page 102 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group’s and the Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or – the related statement under the Listing Rules set out on page 47 is materially inconsistent with our audit knowledge. We have nothing to report in these respects. balfourbeatty.com/AR2017 92 Independent auditor’s report to the members of Balfour Beatty plc continued 5 We have nothing to report on the other information in the Annual Report The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and Directors’ report Based solely on our work on the other information: – we have not identified material misstatements in the Strategic report and the Directors’ report; – in our opinion the information given in those reports for the financial year is consistent with the financial statements; and – in our opinion those reports have been prepared in accordance with the Companies Act 2006. Directors’ remuneration report In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. Disclosures of principal risks and longer-term viability Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to: – the Directors’ confirmation within the viability statement on page 57 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; – the principal risks disclosures describing these risks and explaining how they are being managed and mitigated; and – the Directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Under the Listing Rules we are required to review the viability statement. We have nothing to report in this respect. Corporate governance disclosures We are required to report to you if: – we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the Directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or – the section of the annual report describing the work of the Audit and Risk Committee does not appropriately address matters communicated by us to the Audit and Risk Committee. We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects. 6 We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: – adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or – the parent Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or – certain disclosures of Directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 93 7 Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on pages 74 and 75, the Directors are responsible for: the preparation of the financial statements, including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. Irregularities – ability to detect Our audit aimed to detect non-compliance with relevant laws and regulations (irregularities) that could have a material effect on the financial statements. In planning and performing our audit we considered the impact of laws and regulations in core areas such as financial reporting, and company and taxation legislation. We considered the extent of compliance with those laws and regulations that directly affect the financial statements, being financial reporting, and company and taxation legislation, as part of our procedures on the related financial statement items. For the remaining laws and regulations, we made enquiries of Directors and other management (as required by auditing standards). We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. As with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. 8 The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Stephen Wardell (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 13 March 2018 balfourbeatty.com/AR2017 94 Group Income Statement For the year ended 31 December 2017 2017 Underlying items1 £m Notes Non- underlying items (Note 10) £m Total £m Underlying items1 £m Non- underlying items (Note 10) £m Continuing operations Revenue including share of joint ventures and associates Share of revenue of joint ventures and associates Group revenue Cost of sales Gross profit/(loss) Gain on disposals of interests in investments Amortisation of acquired intangible assets Other net operating expenses Group operating profit/(loss) Share of results of joint ventures and associates Profit/(loss) from operations Investment income Finance costs Profit/(loss) before taxation Taxation Profit/(loss) for the year from continuing operations Profit/(loss) for the year from discontinued operations Profit/(loss) for the year Attributable to Equity holders Non-controlling interests Profit/(loss) for the year 32.2/32.3 15 18.2 4 18.2 6 8 9 11 8,234 (1,340) 6,894 (6,541) 353 86 – (302) 137 59 196 42 (73) 165 (23) 142 1 143 143 – 143 30 (8) 22 (64) (42) – (9) 3 (48) – (48) – – (48) 68 20 5 25 25 – 25 8,264 (1,348) 6,916 (6,605) 311 86 (9) (299) 89 59 148 42 (73) 117 45 162 6 168 8,215 (1,433) 6,782 (6,503) 279 65 – (332) 12 57 69 75 (82) 62 (12) 50 (2) 48 168 –– 168 48 – 48 153 (12) 141 (136) 5 – (9) (49) (53) 1 (52) – – (52) 4 (48) 24 (24) (24) – (24) 20162 Total £m 8,368 (1,445) 6,923 (6,639) 284 65 (9) (381) (41) 58 17 75 (82) 10 (8) 2 22 24 24 24 1 Before non-underlying items (Notes 2.10 and 10). 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. Basic earnings per ordinary share – continuing operations – discontinued operations Diluted earnings per ordinary share – continuing operations – discontinued operations Dividends per ordinary share proposed for the year 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. Notes 2017 Pence 20162 Pence 12 12 12 12 12 12 13 23.7 1.0 24.7 23.4 1.0 24.4 3.6 0.2 3.3 3.5 0.2 3.3 3.5 2.7 Commentary on the Group Income Statement* Total pre-tax profit from continuing operations for 2017 was £117m, which is inclusive of a non-underlying loss of £48m. The total profit after tax including discontinued operations was £168m. Revenue Revenue from continuing operations including non-underlying items, joint ventures and associates decreased by 1% to £8,264m from £8,368m in 2016. Background The Group Income Statement includes the majority of the Group’s income and expenses for the year with the remainder being recorded within the statement of comprehensive income. The Group’s income statement is presented showing the Group’s underlying and non-underlying results separately on the face of the income statement to assist in understanding the underlying financial performance achieved by the Group. The income statement shows the revenue and results of continuing operations. The post-tax results shown within discontinued operations represent the Group’s share of underlying profits from its joint venture interests in Dutco Balfour Beatty LLC and BK Gulf LLC up until the date of disposal on 1 March 2017 of £1m. Upon disposal of these interests, a non-underlying gain of £5m was recognised within discontinued operations. Gain on disposal of investments The Group continued its programme of realising accumulated value in the Investments portfolio and generated income by disposing of a 20% interest in Connect Plus (M25) Holdings Ltd resulting in a net underlying gain of £86m after recycling gains of £85m from reserves to the income statement. The Group continued to hold a 20% interest in this asset at 31 December 2017. Share of results of joint ventures and associates Joint ventures and associates are those entities over which the Group exercises joint control or has significant influence and whose results are generally incorporated using the equity method whereby the Group’s share of the post-tax results of joint ventures and associates is included in the Group’s operating profit. The Group’s profit generated from its share of joint ventures and associates was in line with the prior year. Balfour Beatty Annual Report and Accounts 2017 * The commentary is unaudited and forms part of the Chief Financial Officer’s review on pages 44 to 47. Strategic Report Governance Financial Statements Other Information 95 Underlying profit from continuing operations Underlying profit from continuing operations increased to £196m from £69m in 2016. This was primarily driven by an improvement in Construction Services from a loss of £21m in 2016 to a profit from operations of £72m in 2017 as the Group continued to be more selective in the work that it bids, through increased bid margin thresholds, improved risk frameworks and better contract governance. Support Services and Infrastructure Investments also reported improved operating results, including the benefit of £86m of gains from investment disposals. Non-underlying items Non-underlying items are items of financial performance which the Group believes should be separately identified on the face of the income statement to assist in understanding the underlying financial performance achieved by the Group. Non-underlying items from continuing operations of £48m before tax were charged to the income statement. On 15 January 2018, Carillion plc filed for compulsory liquidation. Carillion was one of the Group’s joint operations partners in the Aberdeen Western Peripheral Route (AWPR) project on a joint and several basis. As a result of Carillion’s liquidation, the Group and its remaining joint operations partner on the project, Galliford Try plc, are jointly liable to deliver Carillion’s remaining obligations on this contract in addition to each partner’s existing 33% share. In light of this, the Group has recognised a one-off non-underlying loss provision of £44m which reflects the Group’s additional loss on the contract as a result of Carillion’s liquidation. The contract is expected to complete in the summer of 2018. The Group also disposed of its entire interest in its professional services business, Heery International Inc, resulting in a gain on disposal of £18m. In addition to Heery, the Group also disposed of its entire interest in Regional & City Airports (Blackpool) Holdings Ltd (Blackpool Airport) which resulted in a loss on disposal of £1m. Significant other non-underlying items included £12m of restructuring costs incurred relating to the Group’s Build to Last transformation programme which was launched in early 2015, and amortisation of acquired intangible assets of £9m. Net finance cost Net finance cost of £31m in the year represents an increase from £7m in 2016. The prior year comparison benefited from a £19m gain on foreign currency deposits, with the corresponding gain in 2017 at £1m. Taxation The Group’s underlying profit before tax from continuing operations for subsidiaries of £106m (2016: £5m) resulted in an underlying tax charge of £23m (2016: £12m). Discontinued operations On 1 March 2017, the Group disposed of its 49% interests in its Middle East joint ventures for total consideration of £11m, generating a non-underlying gain of £5m in the year. As a result of this disposal, the Group’s interests in its Middle East joint ventures have been presented as discontinued operations. The Group has re-presented its comparatives accordingly. In 2016, the Group reached a settlement with the purchaser of Parsons Brinckerhoff (PB), the Group’s former professional services business disposed in October 2014, in relation to outstanding tax matters and indemnities. The Group received an additional £9m as a result of this settlement. At the same time, provisions in relation to these matters have been released, resulting in an overall non- underlying gain to the Group of £24m. Earnings per share Basic earnings per share from continuing operations were 23.7p (2016: 0.2p) as a result of significant improvements in Construction Services as discussed above. Including the results from discontinued operations, the Group generated basic earnings per share of 24.7p (2016: 3.5p). Underlying earnings per share from continuing operations were 20.9p (2016: 7.2p). * The commentary is unaudited and forms part of the Chief Financial Officer’s review on pages 44 to 47. balfourbeatty.com/AR2017 96 Group Statement of Comprehensive Income For the year ended 31 December 2017 Profit/(loss) for the year Other comprehensive income/(loss) for the year Items which will not subsequently be reclassified to the income statement Actuarial gains/(losses) on retirement benefit liabilities Tax on above Items which will subsequently be reclassified to the income statement Currency translation differences Fair value revaluations – PPP financial assets – cash flow hedges – available-for-sale investments in mutual funds Recycling of revaluation reserves to the income statement on disposal* Tax on above 32.2/32.3 30.1 Total other comprehensive income/(loss) for the year Total comprehensive income/(loss) for the year Attributable to Equity holders Non-controlling interests Total comprehensive income/(loss) for the year 30.1 30.1 * Recycling of revaluation reserves to the income statement on disposal has no associated tax effect. Share of joint ventures and associates £m 60 Notes Group £m 108 30.1 30.1 30.1 30.1 30.1 30.1 242 (37) 205 (30) 3 4 3 – – (20) 185 293 4 – 4 (18) 60 11 – (85) (13) (45) (41) 19 2017 Total £m 168 246 (37) 209 (48) 63 15 3 (85) (13) (65) 144 312 312 – 312 Share of joint ventures and associates £m 56 Group £m (32) (121) 2 (119) 51 27 (16) 1 (17) (1) 45 (74) (106) 1 – 1 41 10 (92) – 9 15 (17) (16) 40 2016 Total £m 24 (120) 2 (118) 92 37 (108) 1 (8) 14 28 (90) (66) (67) 1 (66) Commentary on Group Statement of Comprehensive Income* Total comprehensive income for 2017 was £312m comprising a total profit after tax including discontinued operations of £168m and other comprehensive income after tax of £144m. Background The Group Statement of Comprehensive Income is presented on a total Group basis combining continuing and discontinued operations. Other comprehensive income (OCI) is categorised into items which will affect the profit and loss of the Group in subsequent periods when the gain or loss is realised and those which will not be recycled into the income statement. Items which will not subsequently be reclassified to the income statement Actuarial movements on retirement benefit liabilities are increases or decreases in the present value of the pension liability because of: – differences between the previous actuarial assumptions and what has actually occurred; or – changes in actuarial assumptions used to value the obligations. Actuarial gains for the Group including joint ventures and associates totalled £246m in 2017 compared to losses of £120m in 2016. Refer to Note 28. Items which will subsequently be reclassified to the income statement Currency translation differences The Group operates in a number of countries with different local currencies. Currency translation differences arise on translation of the balance sheet and results from the local functional currency into the Group’s presentational currency, sterling. Fair value revaluations – PPP financial assets Assets constructed by PPP concession companies are classified principally as available-for-sale financial assets. In the operational phase fair value is determined by discounting the future cash flows allocated to the financial asset using discount rates based on long-term gilt rates adjusted for the risk levels associated with the assets, with market-related fair value movements recognised in OCI. During the year, there was a decrease in gilt rates resulting in a fair value gain including joint ventures and associates of £63m being taken through OCI (2016: £37m). Fair value revaluations – cash flow hedges Cash flow hedges are principally interest rate swaps, to manage the interest rate and inflation rate risks in the Group’s Infrastructure Investments’ subsidiary, joint venture and associate companies which are exposed by their long-term contractual agreements. The fair value of derivatives changes in response to prevailing market conditions. During the year, LIBOR increased resulting in a fair value gain on the interest rate swaps including joint ventures and associates of £15m being recognised in OCI (2016: £108m loss). Recycling of reserves to the income statement on disposal Fair value gains and losses and currency translation differences recognised in OCI are transferred to the income statement upon disposal of the asset and therefore on disposal of Infrastructure Investments’ concessions and other businesses, £85m profit including joint ventures and associates was recycled to the income statement through OCI and is included in the gain on disposal. There is no associated tax on the amounts recycled to the income statement. Balfour Beatty Annual Report and Accounts 2017 * The commentary is unaudited and forms part of the Chief Financial Officer’s review on pages 44 to 47. Strategic Report Governance Financial Statements Other Information 97 Group Statement of Changes in Equity For the year ended 31 December 2017 At 1 January 2016 Total comprehensive income/(loss) for the year Ordinary dividends Joint ventures’ and associates’ dividends Movements relating to share-based payments Reserve transfers relating to joint venture and associate disposals At 31 December 2016 Total comprehensive income/(loss) for the year Ordinary dividends Joint ventures’ and associates’ dividends Movements relating to share-based payments Reserve transfers relating to joint venture and associate disposals Minority interests Convertible bonds repurchase At 31 December 2017 Called-up share capital £m 345 – – – – Share premium account £m 65 – – – – – 345 – – – – – – – 345 – 65 – – – – – – – 65 Notes 30.1 13 18.1 18.6 30.1 13 18.1 18.6 26.3 Share of joint ventures’ and associates’ reserves (Note 18.6) £m 196 40 – (43) – Special reserve £m 22 – – – – Other reserves (Note 30.1) £m 144 44 – – 3 Retained profits/ (losses) £m 54 (151) (6) 43 1 Non- controlling interests £m 4 1 – – – – 22 – – – – – – – 22 (9) 184 19 – (69) – (21) – – 113 – 191 (20) – – 6 – – (2) 175 9 (50) 313 (20) 69 1 21 – 2 336 – 5 – – – – – 5 – 10 Total £m 830 (66) (6) – 4 – 762 312 (20) – 7 – 5 – 1,066 Commentary on Group Statement of Changes in Equity* Total equity holders’ funds of £1,066m at 31 December 2017 increased by 40% primarily due to movements in comprehensive income. Joint ventures’ and associates’ dividends Dividends of £69m were received in the year from joint ventures and associates (JVA) resulting in a transfer of this amount between JVA reserves and Group retained profits. Background The Group Statement of Changes in Equity includes the total comprehensive income attributable to equity holders of the Company and non-controlling interests and also discloses transactions which have been recognised directly in equity and not through the income statement. Dividends Following the declaration of an interim dividend of 1.2p in August 2017 which was paid in December 2017, the Board is recommending a final dividend of 2.4p, giving a total recommended dividend for the year of 3.6p. Other reserves Other reserves comprise: the equity components of the preference shares £18m (2016: £18m) and convertible bonds £24m (2016: £26m); the hedging reserves £(27)m (2016: £(30)m); PPP financial assets revaluation reserve £27m (2016: £25m); currency translation reserve £105m (2016: £135m); and other reserves £28m (2016: £17m). Other reserve transfers relating to joint venture and associate disposals On disposal of JVAs, retained profits relating to these businesses are transferred from the JVA reserves to the Group’s retained profits. Company Statement of Changes in Equity For the year ended 31 December 2017 At 1 January 2016 Total comprehensive loss for the year Ordinary dividends Movements relating to share-based payments At 31 December 2016 Total comprehensive loss for the year Ordinary dividends Movements relating to share-based payments Convertible bonds repurchase At 31 December 2017 * The commentary is unaudited and forms part of the Chief Financial Officer’s review on pages 44 to 47. Notes 30.2 13 30.2 13 Called-up share capital £m 345 – – – 345 – – – – 345 Share premium account £m 65 – – – 65 – – – – 65 Special reserve £m 22 – – – 22 – – – – 22 Other reserves (Note 30.2) £m 116 – – 6 122 – – 2 (2) 122 Retained profits £m 604 (18) (6) (2) 578 (35) (20) (1) 2 524 Total £m 1,152 (18) (6) 4 1,132 (35) (20) 1 – 1,078 balfourbeatty.com/AR2017 98 Balance Sheets At 31 December 2017 Non-current assets Intangible assets – goodwill – other Property, plant and equipment Investment properties Investments in joint ventures and associates Investments PPP financial assets Trade and other receivables Retirement benefit assets Deferred tax assets Derivative financial instruments Current assets Inventories and non-construction work in progress Due from construction contract customers Trade and other receivables Cash and cash equivalents – infrastructure concessions Current tax receivable Derivative financial instruments – other Total assets Current liabilities Due to construction contract customers Trade and other payables Provisions Borrowings – non-recourse loans – other Current tax payable Derivative financial instruments Non-current liabilities Trade and other payables Provisions Borrowings – non-recourse loans – other Liability component of preference shares Retirement benefit liabilities Deferred tax liabilities Derivative financial instruments Total liabilities Net assets Equity Called-up share capital Share premium account Special reserve Share of joint ventures’ and associates’ reserves Other reserves Retained profits/(losses) Equity attributable to equity holders of the parent Non-controlling interests Total equity On behalf of the Board Leo Quinn Director 13 March 2018 Philip Harrison Director Balfour Beatty Annual Report and Accounts 2017 Notes 2017 £m Group 2016 £m Company 2016 £m 2017 £m 14 15 16 17 18 19 20 23 28 27 38 21 22 23 26 26 38 22 24 25 26 26 38 24 25 26 26 29 28 27 38 29 30 30 30 30 30 30 874 281 157 46 531 39 163 216 156 52 1 2,516 107 377 899 135 833 8 2 2,361 4,877 (535) (1,542) (194) (8) (268) (15) (5) (2,567) (157) (98) (432) (230) (103) (124) (70) (30) (1,244) (3,811) 1,066 345 65 22 113 175 336 1,056 10 1,066 937 225 181 36 628 45 163 180 – 54 3 2,452 101 380 1,066 7 762 8 1 2,325 4,777 (542) (1,752) (147) (47) (56) (18) (6) (2,568) (151) (126) (193) (533) (100) (231) (80) (33) (1,447) (4,015) 762 345 65 22 184 191 (50) 757 5 762 – – – – – 1,700 – 2 – – – 1,702 – – 1,531 – 134 3 – 1,668 3,370 – (1,925) – – (33) – – (1,958) (4) – – (226) (103) – (1) – (334) (2,292) 1,078 345 65 22 – 122 524 1,078 – 1,078 – – – – – 1,698 – 2 – – – 1,700 – – 1,471 – 167 5 1 1,644 3,344 – (1,771) – – (50) – (1) (1,822) (3) – – (285) (100) – (2) – (390) (2,212) 1,132 345 65 22 – 122 578 1,132 – 1,132 Strategic Report Governance Financial Statements Other Information 99 Retirement benefit assets and liabilities The Group’s balance sheet includes net retirement benefit assets of £32m (2016: £231m liabilities) representing net surpluses in the Group’s pension schemes. This is primarily due to net actuarial gains of £242m in the year. The Group benefited from changes in discount rate methodology, which resulted in a £123m gain which was recognised as part of the net actuarial gains for the year within the Statement of Other Comprehensive Income. The Group accounted for the discount rate change prospectively as a change in estimate. Refer to Note 28 for further details. Any surplus of deficit contributions would be recoverable by way of a refund as the Group has the unconditional right to the surplus and controls the run-off of the benefit obligations once all other obligations of the schemes have been settled. Other In addition to the liabilities on the balance sheet, in the normal course of its business, the Group arranges for financial institutions to provide customers with guarantees in connection with its contracting activities, commonly referred to as bonds. These bonds provide a customer with a level of financial protection in the event that a contractor fails to meet its commitments under the terms of a contract. They are customary or mandatory in many of the markets in which the Group operates. In return for issuing the bonds, the financial institutions receive a fee and a counter- indemnity from the Company. As at 31 December 2017, contract bonds in issue by financial institutions under uncommitted facilities covered £3.2bn (2016: £4.0bn) of the contract commitments of the Group. Equity commitments During 2017, the Group invested £35m (2016: £65m) in a combination of equity and shareholder loans to Infrastructure Investments’ project companies and at the end of the year had committed to provide a further £101m from 2018 onwards, inclusive of £23m expected for projects at preferred bidder stage. £37m of this is expected to be invested in 2018, as disclosed in Note 39(f). Commentary on the Group Balance Sheet* Total assets of £4.9bn were 2% more than last year. Total liabilities of £3.8bn decreased by 5%, resulting in an overall increase in net assets of 40%. The increase is primarily driven by net actuarial gains on retirement benefit liabilities of £246m and increased profits generated in the year of £168m. Background The Group’s Balance Sheet shows the Group’s assets and liabilities as at 31 December 2017. In accordance with IAS 1 Presentation of Financial Statements and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, the Group does not re-present the prior year balance sheet for assets held for sale or disposals. Goodwill The goodwill on the Group’s balance sheet at 31 December 2017 decreased to £874m (2016: £937m). The decrease was due to currency translation differences of £46m and the disposal of goodwill relating to Heery International Inc of £17m. The Group has conducted impairment reviews on its goodwill balance at the year end and has concluded that it was fully recoverable. Investments in joint ventures and associates Investments in joint ventures and associates have decreased to £531m in 2017 from £628m in 2016 primarily due to the disposal of a 20% interest in Connect Plus (M25) Holdings Ltd for total consideration of £165m, of which £62m was included in trade and other receivables as amounts due on disposals. This disposal triggered a £86m gain on disposal, including £85m in respect of revaluation reserves recycled to the income statement on disposal. The Group continued to hold a 20% interest in this joint venture at 31 December 2017. Working capital Net movements in working capital are discussed in the statement of cash flows commentary on page 101. Borrowings Borrowings excluding non-recourse loans The Group’s committed facility totals £400m. The purpose of this facility is to provide liquidity from a set of core relationship banks to support Balfour Beatty in its activities. The Group completed its refinancing in December 2015 with the £400m facility extending though to 2018. In November 2017, £375m of the facility was extended until 2020. At 31 December 2017, all of this facility was undrawn. In December 2017, the Group repurchased £21m of its convertible bonds. The Group’s remaining £231m convertible bonds are due to mature in December 2018. Thus the liability component amounting to £226m has been reclassified from non-current to current on the Group’s balance sheet. The Group’s borrowings include recourse borrowings to the Group arising from certain Infrastructure Investments projects in North America amounting to £13m (2016: £12m). Non-recourse loans In addition, the Group has non-recourse facilities in companies engaged in certain infrastructure concessions projects. At 31 December 2017, the Group’s share of these non-recourse net borrowings amounted to £1,724m (2016: £1,755m), comprising £1,419m (2016: £1,522m) in relation to joint ventures and associates as disclosed in Note 18.2 and £305m (2016: £233m) on the Group balance sheet in relation to subsidiaries as disclosed in Note 26. * The commentary is unaudited and forms part of the Chief Financial Officer’s review on pages 44 to 47. balfourbeatty.com/AR2017 100 Group Statement of Cash Flows For the year ended 31 December 2017 Cash flows from/(used in) operating activities Cash generated from/(used in): – continuing operations – underlying1 – non-underlying – discontinued operations Income taxes (paid)/received Net cash generated from/(used in) operating activities Cash flows from investing activities Dividends received from joint ventures and associates: – infrastructure concessions – other Interest received – infrastructure concessions Interest received – other# Acquisition of businesses, net of cash and cash equivalents acquired Purchases of: – intangible assets – infrastructure concessions – intangible assets – other – property, plant and equipment – infrastructure concessions – property, plant and equipment – other – investment properties – other investments Investments in and long-term loans to joint ventures and associates PPP financial assets cash expenditure PPP financial assets cash receipts Disposals of: – investments in joint ventures – infrastructure concessions – investments in joint ventures – other – subsidiaries net of cash disposed, separation and transaction costs – infrastructure concessions – subsidiaries net of cash disposed, separation and transaction costs – other – property, plant and equipment – other investments Net cash from investing activities Cash flows from financing activities Purchase of ordinary shares Proceeds from: – other new loans – infrastructure concessions – other new loans – other Repayments of: – loans – infrastructure concessions – loans – other Repurchase of convertible bonds Ordinary dividends paid Interest paid – infrastructure concessions Interest paid – other# Preference dividends paid Net cash from financing activities Net increase in cash and cash equivalents Effects of exchange rate changes Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 1 Before non-underlying items (Notes 2.10 and 10). 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. # Re-presented to show interest received and paid in relation to the Group’s offset arrangements on a net basis. Notes 2017 £m 20162,# £m 31.1 31.1 31.1 18.5 18.5 18.5 32.1 15 15 16 16 17 19 18.5 20 20 18.5/32 18.5/32 32.2.11 32.2.11 19 30.3 31.3 31.3 31.3 31.3 31.3 13 31.2 62 (21) – (3) 38 16 53 9 12 (3) (76) (5) – (20) (3) (1) (30) (1) 15 103 3 4 36 11 8 131 (2) 212 – (4) (52) (21) (20) (16) (24) (12) 61 230 (30) 768 968 (132) (15) – 11 (136) 20 23 19 13 (6) (6) (5) (14) (27) (32) (1) (37) (31) 39 155 2 17 14 9 5 157 (4) 65 52 (25) (1) – (6) (24) (41) (12) 4 25 80 663 768 Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 101 Commentary on the Group Statement of Cash Flows* Cash and cash equivalents increased by 26% during the year to £968m. The Group generated cash from operating activities in the year of £38m compared to cash used in operating activities of £136m in the prior year. Background The Group Statement of Cash Flows shows the cash flows from operating, investing and financing activities during the year. Working capital Working capital includes: inventories and non-construction work in progress; amounts due to and from construction contract customers; operating trade and other receivables; operating trade and other payables; and operating provisions. Where the net working capital balance is in an asset position, ie the inventories and receivables balances are greater than the payables and provisions, this is referred to as unfavourable/positive working capital. Where this is not the case, this is referred to as favourable/negative working capital. Working capital movements The movement of the individual working capital balances on the balance sheet will not be reflective of the underlying movement of working capital due to the balance sheet being affected by foreign currency movements and business disposals. Working capital movements are disclosed in Note 31.1. Trade and other receivables and trade and other payables Trade and other payables decreased during 2017, creating a working capital outflow of £92m (2016: £60m), offset by a working capital inflow of £95m (2016: £134m outflow) from trade and other receivables. The offsetting reduction in both balances is predominantly due to contract timings and associated customer and supplier payments compared to the prior year and the ongoing completion of historical non-underlying contracts. Cash used in operations Underlying cash generated from continuing operations of £62m (2016: £132m outflow) comprised a profit from operations of £196m (2016: £67m), a working capital outflow of £7m (2016: £82m) and includes the following significant adjustment items: share of results of joint ventures and associates £59m (2016: £55m), depreciation charges of £29m (2016: £29m), pension deficit payments of £25m (2016: £41m) and gain on disposals of investments in infrastructure concessions of £86m (2016: £65m). Non-underlying cash used in continuing operations of £21m (2016: £15m) was impacted by a loss from operations of £48m (2016: £52m) and a working capital inflow of £34m (2016: £34m), after adjusting for the following principal non-cash items: a £17m net gain on disposal of businesses (2016: £8m), and an amortisation charge of £9m (2016: £9m) on acquired intangible assets. Cash flows from investing activities The Group received dividends of £69m (2016: £43m) from joint ventures and associates during the year. During the year, the Group incurred additional spend on intangible assets of £81m (2016: £11m), of which £76m related to the construction spend on the University of Sussex student accommodation (2016: £6m at the University of Edinburgh) and £5m (2016: £5m) related to software and other intangible assets. The Group disposed of a 20% interest in Connect Plus (M25) Holdings Ltd for a total cash consideration of £165m, of which £103m was received in the year and the balance was received on 23 February 2018. The Group disposed of its 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC during the year for cash consideration of £11m, of which £5m was deferred and included in trade and other receivables as amounts due on disposals. In addition, the Group also made a payment of £3m in 2017 following the completion of the Balfour Beatty Sakti Indonesia disposal. In 2017, the Group also completed the disposal of its entire interest in its professional services business Heery International Inc, for a net cash consideration of £36m. Finally, the Group also received £4m of cash consideration for the disposal of its entire interest in Blackpool Airport. During the year, the Group incurred cash expenditure of £1m (2016: £31m) and received cash receipts of £15m (2016: £39m) relating to PPP financial assets. Cash flows from financing activities The Group made further drawdowns on its non-recourse borrowings of £212m mainly to finance the construction of the University of Sussex student accommodation which has been classified as an IFRIC 12 intangible asset (2016: £65m at the University of Edinburgh). The Group repurchased £21m of its convertible bonds and also repaid £50m of its committed facility. The Group’s entire committed facility of £400m was undrawn at the year end. Preference dividends of £12m (2016: £12m) were paid in the year. Total interest payments amounted to £40m (2016: £65m) during the year of which £16m (2016: £24m) related to infrastructure concessions and £24m (2016: £41m) related to the US private placement, convertible bonds and recourse borrowings drawn down by the Group. Cash and cash equivalents Cash and cash equivalents increased from £768m to £968m. * The commentary is unaudited and forms part of the Chief Financial Officer’s review on pages 44 to 47. balfourbeatty.com/AR2017 102 Notes to the financial statements 1 Basis of accounting The annual financial statements have been prepared on a going concern basis as discussed on page 47 and in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and therefore comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. The Group has applied all accounting standards and interpretations issued by the International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee as adopted by the European Union and effective for accounting periods beginning on 1 January 2017. The financial statements have been prepared under the historical cost convention, except as described under Note 2.26. The functional and presentational currency of the Company and the presentational currency of the Group is sterling. The separate financial statements of the Company are presented as required by the Companies Act 2006 (the Act). The Company meets the definition of a qualifying entity under FRS 100 (Financial Reporting Standard 100) issued by the Financial Reporting Council. Accordingly, in the year ended 31 December 2017 the Company reported under FRS 101 as issued by the Financial Reporting Council. Except as noted below, the Company’s accounting policies are consistent with those described in the Group’s consolidated financial statements. As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to share-based payments, financial instruments, capital management, presentation of a cash flow statement, related party transactions and comparative information. Where required, equivalent disclosures are given in the consolidated financial statements. In addition to the application of FRS 101, the Company has taken advantage of Section 408 of the Act and consequently its statement of comprehensive income (including the profit and loss account) is not presented as part of these accounts. 2 Principal accounting policies 2.1 Accounting standards Adoption of new and revised standards The following accounting standards, interpretations and amendments have been adopted by the Group in the current period: – Amendments to the following standards: – IAS 7 Disclosure Initiative – IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses. The above new and amended standards do not have a material effect on the Group. Balfour Beatty Annual Report and Accounts 2017 Accounting standards not yet adopted by the Group The following accounting standards, interpretations and amendments have been issued by the IASB but had either not been adopted by the European Union or were not yet effective in the European Union at 31 December 2017: – IFRS 9 Financial Instruments – IFRS 15 Revenue from Contracts with Customers – IFRS 16 Leases – IFRS 17 Insurance Contracts – IFRIC 22 Foreign Currency Transactions and Advance Consideration – IFRIC 23 Uncertainty over Income Tax Treatments – Amendments to the following standards: – IAS 28 Long-term Interests in Associates and Joint Ventures – IAS 40 Transfers of Investment Property – IFRS 2 Classification and Measurement of Share-based Payment Transactions – IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts – IFRS 9 Prepayment Features with Negative Compensation – Clarifications to IFRS 15 Revenue from Contracts with Customers – Improvements to IFRSs (2014–2016) – Improvements to IFRSs (2015–2017). The Directors have completed the impact assessment of IFRS 9 and have concluded that under the new standard, which will be adopted for the financial year ending 31 December 2018, the Group will be able to continue to record movements in its PPP financial assets through other comprehensive income (OCI) using the fair value through OCI category. This is because these financial assets are held within a business model whose objective at Group level is achieved by both collecting contractual cash flows and selling financial assets and the contractual terms of the financial asset meet the “solely payments of principal and interest on the principal outstanding” criterion. Therefore, there will be no quantitative impact on the Group upon adoption of IFRS 9 at 1 January 2018. The Directors have also completed their assessment of the impact of IFRS 15 and the Group will adopt the new standard for the financial year ending 31 December 2018 retrospectively using the cumulative effect approach. As a result, the Group will restate its opening equity position as at 1 January 2018 by a credit of £3m to reflect the impact of transitioning to IFRS 15. This adjustment primarily reflects the impact of unbundling of a handful of contracts according to what the Group has assessed to be the performance obligation to be delivered to the customer. Using the five-step model required by the new standard, the impact of the £3m credit to equity represents the acceleration of revenue on transition to IFRS 15 which was not recognised by the Group under the previous revenue standards. IFRS 15 would have resulted in an immaterial impact on the Group’s income statement for the year ended 31 December 2017. In addition to the impact on equity, there will be balance sheet reclassifications as a result of moving away from IAS 11 balance sheet captions to those prescribed by IFRS 15. Full IFRS 15 disclosures will be presented in the Annual Report and Accounts 2018. As the Group has chosen to adopt the cumulative effect approach, the comparative information will not be restated and the Group will continue to present its 2017 results under the previous revenue standards – IAS 11 and IAS 18. As a result of this new standard, the Group has also revised its accounting policies around revenue recognition (where applicable) as detailed on page 103. Strategic Report Governance Financial Statements Other Information 103 2 Principal accounting policies continued 2.1 Accounting standards continued The Directors continue to assess the impact of IFRS 16. IFRS 16 Leases was issued by the IASB in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. The new standard will replace IAS 17 Leases and will eliminate the classification of leases as either operating leases or finance leases and, instead, introduce a single lessee accounting model. The adoption of IFRS 16 is not expected to have a significant impact on the Group’s net results or net assets, although the full impact will be subject to further assessment. The Directors do not expect the other standards above to have a material quantitative effect. The Group has chosen not to adopt any of the above standards and interpretations earlier than required. IFRS 15 revenue recognition policies applied from 1 January 2018 The Group recognises revenue when it transfers control over a product or service to its customer. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Where consideration is not specified within the contract and therefore subject to variability, the Group estimates the amount of consideration to be received from its customer. The consideration recognised is the amount which is highly probable not to result in a significant reversal in future periods. Where a modification to an existing contract occurs, the Group assesses the nature of the modification and whether it represents a separate performance obligation required to be satisfied by the Group or whether it is a modification to the existing performance obligation. The Group does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust its transaction price for the time value of money. The Group’s activities are wide-ranging, and as such, depending on the nature of the product or service delivered and the timing of when control is passed onto the customer, the Group will account for revenue over time and at a point in time. Where revenue is measured over time, the Group uses the input method to measure progress of delivery. Revenue is recognised as follows: – revenue from construction and services activities is recognised over time and the Group uses the input method to measure progress of delivery – revenue from manufacturing activities is recognised at a point in time when title has passed to the customer – interest income is accrued on a time basis using the effective interest method by reference to the principal outstanding and the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount – dividend income is recognised when the equity holder’s right to receive payment is established. IFRS 15 policies in relation to construction and service contracts When the outcome of individual contracts can be estimated reliably, contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion at the reporting date. Costs are recognised as incurred and revenue is recognised on the basis of the proportion of total costs at the reporting date to the estimated total costs of the contract. Estimates of the final out-turn on each contract may include cost contingencies to take account of the specific risks within each contract that have been identified during the early stages of the contract. The cost contingencies are reviewed on a regular basis throughout the contract life and are adjusted where appropriate. However, the nature of the risks on contracts are such that they often cannot be resolved until the end of the project and therefore may not reverse until the end of the project. Management continually review the estimated final out-turn on contracts, and in certain limited cases, assess recoveries from insurers, and make adjustments where necessary. No margin is recognised until the outcome of the contract can be estimated with reasonable certainty. Provision is made for all known or expected losses on individual contracts once such losses are foreseen. Revenue in respect of variations to contracts and incentive payments is recognised when it is probable it will be agreed by the customer. Revenue in respect of claims is recognised only if it is highly probable not to reverse in future periods. Profit for the year includes the benefit of claims settled in the year on contracts completed in previous years. 2.2 Basis of consolidation The Group financial statements include the results of the Company and its subsidiaries, together with the Group’s share of the results of joint ventures and associates, drawn up to 31 December each year. a) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The results of subsidiaries are consolidated from the date that control commences until the date that control ceases. The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the fair value of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (discount on acquisition) is credited to the income statement in the period of acquisition. The interest of non-controlling equity holders is stated at the non- controlling equity holders’ proportion of the fair value of the assets and liabilities recognised. When the Group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest less direct costs of the transaction and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the cost on initial recognition of an investment in an associate or jointly controlled entity. Amounts previously recognised in other comprehensive income in relation to the subsidiary are accounted for in the same manner as would be required if the relevant assets or liabilities were disposed of (ie reclassified to profit or loss or transferred directly to retained earnings). Any acquisition or disposal which does not result in a change in control is accounted for as a transaction between equity holders. The carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the fair value of the consideration paid or received and the amount by which the non-controlling interests are adjusted is recognised directly in equity and attributed to the owners of the parent. balfourbeatty.com/AR2017 104 Notes to the financial statements continued 2 Principal accounting policies continued 2.2 Basis of consolidation continued Accounting policies of subsidiaries are adjusted where necessary to ensure consistency with those used by the Group. All intra- Group transactions, balances, income and expenses are eliminated on consolidation. b) Joint ventures and associates Joint ventures are those entities over whose activities the Group has joint control, whereby the Group has rights to the net assets of the entity, rather than rights to its individual assets and obligations for its individual liabilities. Associates are those entities over whose financial and operating policies the Group has significant influence, but not control or joint control. The results, assets and liabilities of joint ventures and associates are incorporated in the financial statements using the equity method of accounting except when classified as held for sale. The Group may elect to measure some of its investments in associates at fair value through profit or loss in accordance with IAS 39 where the investment is held by a Group entity which meets the classification of a venture capital organisation, in which case the investment will be marked to market with movements being recognised in the income statement. The equity return from the military housing joint ventures of the Group is contractually limited to a maximum level of return, beyond which the Group does not share in any further return. Therefore the Group’s investment in these projects is recognised at initial equity investment plus the value of the Group’s accrued preferred return from the underlying projects. Any excess of the fair value of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the joint venture or associate entity at the date of acquisition is recognised as goodwill. Any deficiency of the fair value of the cost of acquisition below the Group’s share of the fair values of the identifiable net assets of the joint venture or associate at the date of acquisition (discount on acquisition) is credited to the income statement in the period of acquisition. Investments in joint ventures and associates are initially carried in the balance sheet at cost (including goodwill arising on acquisition) and adjusted by post-acquisition changes in the Group’s share of net assets of the joint venture or associate, less any impairment in the value of individual investments. Losses of joint ventures and associates in excess of the Group’s interest in those joint ventures and associates are only recognised to the extent that the Group is contractually liable for, or has a constructive obligation to meet, the obligations of the joint ventures and associates. Unrealised gains and losses on transactions with joint ventures and associates are eliminated to the extent of the Group’s interest in the relevant joint venture or associate. c) Joint operations The Group’s share of the results, assets and liabilities of contracts carried out in conjunction with another party are included under each relevant heading in the income statement and balance sheet. 2.3 Foreign currencies Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange at the reporting date. Significant exchange rates used in the preparation of these financial statements are shown in Note 3. For the purpose of presenting consolidated financial statements, the results of foreign subsidiaries, associates and joint venture entities are translated at average rates of exchange for the year, unless the exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Assets and liabilities are translated at the rates of exchange prevailing at the reporting date. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the rates of exchange at the reporting date. Currency translation differences arising are transferred to the Group’s foreign currency translation reserve and are recognised in the income statement on disposal of the underlying investment. In order to hedge its exposure to certain foreign exchange risks, the Group may enter into forward foreign exchange contracts. Refer to Note 2.26(c) for details of the Group’s accounting policies in respect of such derivative financial instruments. 2.4 Revenue recognition Revenue is measured at the fair value of the consideration received or receivable for goods and services provided, net of trade discounts, value added and similar sales based taxes, after eliminating revenue within the Group. Revenue is recognised as follows: – revenue from construction and service activities represents the value of work carried out during the year, including amounts not invoiced – revenue from manufacturing activities is recognised when title has passed – interest income is accrued on a time basis using the effective interest method by reference to the principal outstanding and the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount – dividend income is recognised when the equity holder’s right to receive payment is established. 2.5 Construction and service contracts When the outcome of individual contracts can be estimated reliably, contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion at the reporting date. Costs are recognised as incurred and revenue is recognised on the basis of the proportion of total costs at the reporting date to the estimated total costs of the contract. Estimates of the final out-turn on each contract may include cost contingencies to take account of the specific risks within each contract that have been identified during the early stages of the contract. The cost contingencies are reviewed on a regular basis throughout the contract life and are adjusted where appropriate. However, the nature of the risks on contracts are such that they often cannot be resolved until the end of the project and therefore may not reverse until the end of the project. Management continually review the estimated final out-turn on contracts, and in certain limited cases, assess recoveries from insurers, and make adjustments where necessary. No margin is recognised until the outcome of the contract can be estimated with reasonable certainty. Provision is made for all known or expected losses on individual contracts once such losses are foreseen. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 105 2 Principal accounting policies continued 2.5 Construction and service contracts continued Revenue in respect of variations to contracts and incentive payments is recognised when it is probable it will be agreed by the customer. Revenue in respect of claims is recognised when negotiations have reached an advanced stage such that it is probable that the customer will accept the claim and the probable amount can be measured reliably. Profit for the year includes the benefit of claims settled in the year on contracts completed in previous years. 2.6 Segmental reporting The Group considers its Board of Directors to be the chief operating decision maker and therefore the segmental disclosures provided in Note 5 are aligned with the monthly reports provided to the Board of Directors. The Group’s reporting segments are based on the types of services provided. Operating segments with similar economic characteristics have been aggregated into three reportable segments which reflect the nature of the services provided by the Group. A description of each reportable segment is provided in Note 5. Further information on the business activities of each reportable segment is set out on pages 16 to 25. Working capital is the balance sheet measure reported to the chief operating decision maker. The profitability measure used to assess the performance of the Group is underlying profit from operations. Segment results represent the contribution of the different segments after the allocation of attributable corporate overheads. Transactions between segments are conducted at arm’s-length market prices. Segment assets and liabilities comprise those assets and liabilities directly attributable to the segments. Corporate assets and liabilities include cash balances, bank borrowings, tax balances and dividends payable. Non-recourse net borrowings are directly attributable to Infrastructure Investments and therefore not included within Corporate activities. Major customers are defined as customers contributing more than 10% of the Group’s external revenue. 2.7 Pre-contract bid costs and recoveries Pre-contract costs are expensed as incurred until it is virtually certain that a contract will be awarded, from which time further pre-contract costs are recognised as an asset and charged as an expense over the period of the contract. Amounts recovered in respect of pre-contract costs that have been written off are deferred and amortised over the life of the contract. For construction and services projects, the relevant contract is the construction or services contract respectively. With respect to PPP projects, an assessment is made as to which contractual element the pre-contract costs relate to, in order to determine the relevant period for amortisation. The relevant contract is that which gives rise to a financial or intangible asset, which is either the construction contract or the contract which transferred the asset to the project. 2.8 Profit from operations Profit from operations is stated after the Group’s share of the post- tax results of equity accounted joint venture entities and associates, but before investment income and finance costs. 2.9 Finance costs Finance costs of debt, including premiums payable on settlement and direct issue costs, are charged to the income statement on an accruals basis over the term of the instrument, using the effective interest method. 2.10 Non-underlying items Non-underlying items are items of financial performance which the Group believes should be separately identified on the face of the income statement to assist in understanding the underlying financial performance achieved by the Group. Such items will not affect the absolute amount of the results for the period and the trend of results. Underlying items are items before non- underlying items. Non-underlying items include: – gains and losses on the disposal of businesses and investments, unless this is part of a programme of releasing value from the disposal of similar businesses or investments such as infrastructure concessions – costs of major restructuring and reorganisation of existing businesses – costs of integrating newly acquired businesses – acquisition and similar costs related to business combinations such as transaction costs – impairment and amortisation charges on intangible assets arising on business combinations (amortisation of acquired intangible assets) – impairment of goodwill. These are examples, however, from time to time it may be appropriate to disclose further items as non-underlying items in order to highlight the underlying performance of the Group. The results of Rail Germany and certain legacy ES contracts have been included as non-underlying. Refer to Note 5. 2.11 Taxation The tax charge comprises current tax and deferred tax, calculated using tax rates that have been enacted or substantively enacted by the reporting date. Current tax and deferred tax are charged or credited to the income statement, except when they relate to items charged or credited directly to equity, in which case the relevant tax is also accounted for within equity. Current tax is based on the profit for the year. Deferred tax is provided, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax on such assets and liabilities is not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date. Deferred tax is provided on temporary differences arising on investments in subsidiaries, joint ventures and associates, except where the timing of the reversal of the temporary difference can be controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. balfourbeatty.com/AR2017 106 Notes to the financial statements continued 2 Principal accounting policies continued 2.12 Intangible assets a) Goodwill Goodwill arises on the acquisition of subsidiaries and other businesses, joint ventures and associates and represents the excess of the fair value of consideration over the fair value of the identifiable assets and liabilities acquired. Goodwill on acquisitions of subsidiaries and other businesses is included in non-current assets. Goodwill on acquisitions of joint ventures and associates is included in investments in joint ventures and associates. Goodwill is reviewed annually for impairment and is carried at cost less accumulated impairment losses. Goodwill is included when determining the profit or loss on subsequent disposal of the business to which it relates. Goodwill arising on acquisitions before the date of transition to IFRS (1 January 2004) has been retained at the previous UK GAAP amounts subject to being tested for impairment. Goodwill written off or discount arising on acquisition credited to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. b) Other intangible assets Other intangible assets are stated at cost less accumulated amortisation and impairment losses. Amortisation charges in respect of software and Infrastructure Investments intangibles are included in underlying items. c) Research and development Internally generated intangible assets developed by the Group are recognised only if all the following conditions are met: – an asset is created that can be identified – it is probable that the asset created will generate future economic benefits – the development cost of the asset can be measured reliably. Other research expenditure is written off in the period in which it is incurred. 2.13 Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditure associated with bringing the asset to its operating location and condition. 2.14 Investment properties The Group classifies land and buildings which it holds to generate capital appreciation and/or to earn rental income as investment property. The Group has chosen to state its investment properties at cost less accumulated depreciation and impairment losses. The Group depreciates its investment properties over 25 years. Land is not depreciated. 2.15 Leasing Leases which transfer substantially all of the risks and rewards of ownership to the lessee are classified as finance leases. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, determined at the inception of the lease, and depreciation is provided accordingly. The liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant effective rate of interest on the remaining balance of the liability. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. 2.16 Impairment of assets Assets that have an indefinite useful life (such as goodwill arising on acquisitions) are reviewed at least annually for impairment. Other intangible assets and property, plant and equipment are reviewed for impairment whenever there is any indication that the carrying amount of the asset may not be recoverable. If the recoverable amount of an asset is less than its carrying amount, an impairment loss is recognised. Recoverable amount is the higher of fair value less costs to sell and value in use. Value in use is assessed by discounting the estimated future cash flows that the asset is expected to generate. For this purpose assets, including goodwill, are grouped into cash- generating units representing the level at which they are monitored by the Board of Directors for internal management purposes. Goodwill impairment losses are not reversed in subsequent periods. Reversals of other impairment losses are recognised in income when they arise. 2.17 Investments Investments are recognised and derecognised on the trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at cost, including transaction costs. Available-for-sale investments are measured at fair value. Gains and losses arising from changes in the fair value of available- for-sale investments are recognised in equity, until the investment is disposed or is determined to be impaired, at which time the cumulative gain or loss is included in the net profit or loss for the period. Held to maturity investments are measured at amortised cost. 2.18 Assets held for sale and discontinued operations Non-current assets and groups of assets to be disposed of are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. Held for sale assets are measured at the lower of their carrying amount on classification as held for sale or fair value less costs to sell. A component of the Group is presented as a discontinued operation if it has either been disposed of or is classified as held for sale and it is a separate major line of business or geographic operation or the proposed sale is part of a single co-ordinated plan to dispose of a single separate major line of business or geographical operation. When classified as a discontinued operation, income statement performance is reported in summary form outside continuing operations and comparative figures are restated. 2.19 Inventories Inventories are valued at the lower of cost and net realisable value. Cost includes an appropriate proportion of manufacturing overheads incurred in bringing inventories to their present location and condition and is determined using the first-in first-out method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 107 2 Principal accounting policies continued 2.20 Trade receivables Trade receivables are initially recorded at fair value and subsequently measured at amortised cost as reduced by allowances for estimated irrecoverable amounts. 2.21 Trade payables Trade payables are not interest bearing and are stated at cost. 2.22 Provisions Provisions for insurance liabilities retained in the Group’s captive insurance arrangements, legal claims, defects and warranties, environmental restoration, onerous leases, and other onerous commitments are recognised at the best estimate of the expenditure required to settle the Group’s liability. Provisions are recognised when: the Group has a present legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and the amount of the obligation can be estimated reliably. 2.23 Borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Premiums payable on settlement or redemption and direct issue costs are included in the carrying amount of the instrument and are charged to the income statement on an accruals basis using the effective interest method together with the interest payable. 2.24 Retirement benefit costs The Group, through trustees, operates a number of defined benefit and defined contribution retirement and other long-term employee benefit schemes, the majority of which are of the defined benefit type and are funded. Defined benefit contributions are determined in consultation with the trustees, after taking actuarial advice. For defined benefit retirement benefit schemes, the cost of providing benefits recognised in the income statement and the defined benefit obligations are determined at the reporting date by independent actuaries, using the projected unit credit method. The liability recognised in the balance sheet comprises the present value of the defined benefit pension obligation, determined by discounting the estimated future cash flows using the market yield on a high-quality corporate bond, less the fair value of the scheme assets. Actuarial gains and losses are recognised in the period in which they occur in the statement of comprehensive income. Contributions to defined contribution pension schemes are charged to the income statement as they fall due. Any surplus of deficit contributions to the Balfour Beatty Pension Fund (BBPF) and the Railways Pension Scheme (RPS) would be recoverable by way of a refund as the Group has the unconditional right to the surplus and controls the run-off of the benefit obligations once all other obligations of the BBPF and RPS have been settled. 2.25 Share-based payments Employee services received in exchange for the grant of equity- settled awards are charged to the income statement on a straight- line basis over the vesting period, based on the fair values of the awards at the date of grant. The credits in respect of the amounts charged are included within separate reserves in equity until such time as the awards are exercised, when the shares are transferred to employees. 2.26 Financial instruments Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. a) Classification of financial liabilities and equity instruments Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. b) Cumulative convertible redeemable preference shares and convertible bonds The Company’s cumulative convertible redeemable preference shares and the Group’s convertible bonds are compound instruments, comprising a liability component and an equity component. The fair value of the liability components was estimated using the prevailing market interest rates at the dates of issue for similar non-convertible instruments. The difference between the proceeds of issue of the preference shares and convertible bonds and the fair value assigned to the respective liability components, representing the embedded option to convert the liability components into the Company’s ordinary shares, is included in equity. The interest expense on the liability components is calculated by applying applicable market interest rates for similar non-convertible debt prevailing at the dates of issue to the liability components of the instruments. The difference between this amount and the dividend/interest payable is included in the carrying amount of the liability component and is charged to the income statement on an accrual basis together with the dividend/interest payable. c) Derivative financial instruments and hedge accounting The Group uses derivative financial instruments to manage interest rate risk and to hedge exposures to fluctuations in foreign currencies in accordance with its risk management policy. The Group does not use derivative financial instruments for speculative purposes. A description of the Group’s objectives, policies and strategies with regard to derivatives and other financial instruments is set out in Note 38. Derivatives are initially recognised in the balance sheet at fair value on the date the derivative transaction is entered into and are subsequently re-measured at their fair values. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the income statement together with any changes in the fair value of the hedged item that are attributable to the hedged risk. Changes in the fair value of the effective portion of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income (OCI). Changes in the fair value of the ineffective portion of cash flow hedges are recognised in the income statement. Amounts originally recognised in OCI are transferred to the income statement when the underlying transaction occurs or, if the transaction results in a non-financial asset or liability, are included in the initial cost of that asset or liability. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in OCI is retained in equity until the hedged transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in OCI is transferred to the income statement for the period. balfourbeatty.com/AR2017 108 Notes to the financial statements continued b) Taxation The Group is subject to tax in a number of jurisdictions and judgement is required in determining the worldwide provision for income taxes. The Group provides for future liabilities in respect of uncertain tax positions where additional tax may become payable in future periods and such provisions are based on management’s assessment of exposures. This may involve a significant amount of judgement as tax legislation can be complex and open to different interpretation in particular in relation to the basis of taxation on one-off or unusual transactions. Management uses both in-house and external tax experts and previous experience when assessing tax risks. These judgements are prone to changes in future periods. Each potential liability or contingency is revisited annually, and where actual expected tax liabilities differ from the provisions, adjustments are made which can have a material impact on the Group’s profit for the year. Deferred tax liabilities are generally provided for in full and deferred tax assets are recognised to the extent that it is probable that future taxable profit will arise against which the temporary differences will be utilised. Management judgement is required to determine the amount of deferred tax assets that can be recognised based on the likely timing and level of future taxable profits. Refer to Note 27. c) Non-underlying items Non-underlying items are items of financial performance which the Group believes should be separately identified on the face of the income statement to assist in understanding the underlying financial performance achieved by the Group. Determining whether an item is part of underlying items or non-underlying items requires judgement. A total non-underlying loss after tax of £25m was credited (2016: £24m charged) to the income statement for the year ended 31 December 2017. Refer to Note 10. d) Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which the goodwill has been allocated. The value in use calculation requires an estimate to be made of the timing and amount of future cash flows expected to arise from the cash-generating unit and the application of a suitable discount rate in order to calculate the present value. A nominal growth rate, based on real GDP growth plus CPI inflation, is used to calculate a terminal growth multiple in accordance with the Gordon Growth Model. The discount rates used are based on the Group’s weighted average cost of capital adjusted to reflect the specific economic environment of the relevant cash-generating unit. The carrying value of goodwill at 31 December 2017 was £874m (2016: £937m). Refer to Note 14. e) Available-for-sale financial assets At 31 December 2017, £2,006m (2016: £2,292m) of PPP financial assets constructed by the Group’s subsidiary, joint venture and associate companies were classified as available-for-sale financial assets. In the operational phase the fair value of these financial assets is measured at each reporting date by discounting the future value of the cash flows allocated to the financial asset. A range of discount rates is used from 2.2% to 7.7% (2016: 2.3% to 8.3%), which reflects the prevailing risk-free interest rates and the different risk profiles of the various concessions. Refer to Note 38. A £63m gain was taken to other comprehensive income in 2017 (2016: £37m gain) and a cumulative fair value gain of £269m had arisen on these financial assets as a result of market- related movements in the fair value of these financial assets at 31 December 2017 (2016: £349m gain). 2 Principal accounting policies continued 2.26 Financial instruments continued Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives and recorded in the balance sheet at fair value when their risks and characteristics are not closely related to those of the host contract. Changes in the fair value of those embedded derivatives recognised in the balance sheet are recognised in the income statement as they arise. d) PPP concession companies Assets constructed by PPP concession companies are classified principally as available-for-sale financial assets. In the construction phase, income is recognised by applying an attributable profit margin to the construction costs representing the fair value of construction services performed. In the operational phase, income is recognised by allocating a proportion of total cash receivable over the life of the project to service costs by means of a deemed rate of return on those costs. The residual element of projected cash is allocated to the financial asset using the effective interest rate method, giving rise to interest income. Due to the nature of the contractual arrangements, the projected cash flows can be estimated with a high degree of certainty. In the construction phase, the fair value of the Group’s PPP financial assets is determined by applying an attributable profit margin to the construction costs representing the fair value of construction services performed. In the operational phase, fair value is determined by discounting the future cash flows allocated to the financial asset using discount rates based on long-term gilt rates adjusted for the risk levels associated with the assets, with market-related movements in fair value recognised in OCI. Amounts originally recognised in OCI are transferred to the income statement upon disposal of the asset. 2.27 Judgements and key sources of estimation uncertainty The preparation of consolidated financial statements under IFRS requires management to make judgements, estimates and assumptions that affect amounts recognised for assets and liabilities at the reporting date and the amounts of revenue and expenses incurred during the reporting period. Actual outcomes may differ from these judgements, estimates and assumptions. The judgements, estimates and assumptions that have the most significant effect on the carrying value of assets and liabilities of the Group as at 31 December 2017 are discussed below. All of the below are both judgements and estimates made by the Group apart from the classification of non-underlying items which is an item that requires judgement only. a) Revenue and margin recognition The Group’s revenue recognition and margin recognition policies, which are set out in Notes 2.4 and 2.5, are central to how the Group values the work it has carried out in each financial year. These policies require forecasts to be made of the outcomes of long-term construction services and support services contracts, which require assessments and judgements to be made on recovery of pre-contract costs, changes in the scope of work, contract programmes, maintenance and defects liabilities and changes in costs. In the construction portfolio there are a small number of long- term and complex projects where the Group has incorporated judgements over contractual entitlements. The range of potential outcomes as a result of uncertain future events could result in a materially positive or negative swing to profitability and cash flow. These contracts are primarily within the Group’s major infrastructure business units in the UK, US and Far East. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 109 2 Principal accounting policies continued 2.27 Judgements and key sources of estimation uncertainty continued f) Provisions Provisions are liabilities of uncertain timing or amount and therefore in making a reliable estimate of the quantum and timing of liabilities judgement is applied and re-evaluated at each reporting date. More specifically on the Group’s provisions set aside for any liabilities arising due to defects, there is a 12-month latent defect period for which the provision is held, but where there are known identified issues then the provision may be required to cover rectification work over a more extended period. The Group recognised provisions at 31 December 2017 of £292m (2016: £273m). Refer to Note 25. g) Retirement benefit obligations Details of the Group’s defined benefit pension schemes are set out in Note 28, including tables showing the sensitivity of the pension scheme obligations and assets to different actuarial assumptions. At 31 December 2017, the net retirement benefit assets recognised on the Group’s balance sheet were £32m (2016: £231m liabilities). The effects of changes in the actuarial assumptions underlying the schemes’ obligations and discount rates and the differences between expected and actual returns on the schemes’ assets are classified as actuarial gains and losses. During 2017, the Group recognised net actuarial gains of £246m in equity (2015: £120m losses), including its share of the actuarial gains and losses arising in joint ventures and associates. In 2017, the Group benefited from changes in discount rate methodology, which resulted in a £123m gain which was recognised as part of the actuarial gains for the year within the statement of comprehensive income. The Group accounted for the discount rate change prospectively as a change in estimate. 3 Exchange rates The following key exchange rates were applied in these financial statements. Average rates £1 buys US$ HK$ Euro Closing rates £1 buys US$ HK$ Euro 4 Revenue Continuing operations Revenue from the provision of services* Revenue from manufacturing activities Proceeds from sale of development land Total revenue Investment income (Note 8) Total revenue and investment income * Includes IAS 11 construction contract revenue of £6,103m (2016: £6,173m). 2017 1.29 10.07 1.14 2017 1.35 10.56 1.13 2016 1.35 10.51 1.23 2016 1.23 9.57 1.17 Group 2017 £m 6,873 16 27 6,916 42 6,958 Change (4.4)% (4.2)% (7.3)% Change 9.8% 10.3% (3.4)% Group 2016 £m 6,884 11 28 6,923 75 6,998 balfourbeatty.com/AR2017 110 Notes to the financial statements continued 5 Segment analysis Reportable segments of the Group: – Construction Services – activities resulting in the physical construction of an asset – Support Services – activities which support existing assets or functions such as asset maintenance and refurbishment – Infrastructure Investments – acquisition, operation and disposal of infrastructure assets such as roads, hospitals, student accommodation, military housing, offshore transmission networks, waste and biomass and other concessions. This segment also includes the Group’s housing development division. 5.1 Total Group Income statement – performance by activity from continuing operations Revenue including share of joint ventures and associates1 Share of revenue of joint ventures and associates1 Group revenue1 Group operating profit/(loss)1 Share of results of joint ventures and associates1 Profit/(loss) from operations1 Non-underlying items: – additional loss on the AWPR contract as a result of Carillion’s liquidation – amortisation of acquired intangible assets – other non-underlying items Profit/(loss) from operations Investment income Finance costs Profit before taxation 1 Before non-underlying items (Note 2.10 and 10). Income statement – performance by activity from continuing operations Revenue including share of joint ventures and associates1 Share of revenue of joint ventures and associates1 Group revenue1 Group operating profit/(loss)1 Share of results of joint ventures and associates1 Profit/(loss) from operations1 Non-underlying items: – include results from certain legacy ES contracts within Construction Services – include results from Rail Germany within Construction Services – amortisation of acquired intangible assets – other non-underlying items Profit/(loss) from operations Investment income Finance costs Profit before taxation Construction Services 2017 £m 6,649 (1,074) 5,575 42 30 72 Support Services 2017 £m 1,061 (30) 1,031 41 – 41 Infrastructure Investments 2017 £m 524 (236) 288 87 29 116 Corporate activities 2017 £m – – – (33) – (33) (44) (4) 12 (36) 36 – – (2) (2) 39 – (5) (1) (6) 110 – – (4) (4) (37) Construction Services 20162 £m 6,537 (1,066) 5,471 (50) 29 (21) Support Services 2016 £m 1,103 (27) 1,076 33 1 34 Infrastructure Investments 2016 £m 575 (340) 235 62 27 89 Corporate activities 2016 £m – – – (33) – (33) (6) 1 (3) (26) (34) (55) – – – (12) (12) 22 – – (6) – (6) 83 – – – – – (33) Total 2017 £m 8,234 (1,340) 6,894 137 59 196 (44) (9) 5 (48) 148 42 (73) 117 Total 20162 £m 8,215 (1,433) 6,782 12 57 69 (6) 1 (9) (38) (52) 17 75 (82) 10 1 Before non-underlying items (Note 2.10 and 10). 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 111 5 Segment analysis continued 5.1 Total Group continued Assets and liabilities by activity Due from construction contract customers Due to construction contract customers Inventories and non-construction work in progress Trade and other receivables – current Trade and other payables – current Provisions – current Working capital from continuing operations* * Includes non-operating items and current working capital. Total assets Total liabilities Net assets Assets and liabilities by activity Due from construction contract customers Due to construction contract customers Inventories and non-construction work in progress Trade and other receivables – current Trade and other payables – current Provisions – current Working capital from continuing operations* * Includes non-operating items and current working capital. Total assets Total liabilities Net (liabilities)/assets Other information – continuing operations Capital expenditure on property, plant and equipment (Note 16) Capital expenditure on investment properties (Note 17) Capital expenditure on intangible assets (Note 15) Depreciation (Note 16 and Note 17) Gain on disposals of interests in investments (Note 32.2) Other information – continuing operations Capital expenditure on property, plant and equipment (Note 16) Capital expenditure on investment properties (Note 17) Capital expenditure on intangible assets (Note 15) Depreciation (Note 16) Gain on disposals of interests in investments (Note 32.3) Construction Services 2017 £m 254 (440) 29 688 (1,205) (150) (824) Support Services 2017 £m 123 (95) 51 96 (242) (18) (85) Infrastructure Investments 2017 £m – – 27 101 (53) (6) 69 Corporate activities 2017 £m – – – 14 (42) (20) (48) 2,119 (2,030) 89 Construction Services 2016 £m 247 (492) 30 882 (1,421) (126) (880) 539 (270) 269 Support Services 2016 £m 133 (50) 47 93 (218) (5) – 1,264 (635) 629 Infrastructure Investments 2016 £m – – 24 45 (57) (3) 9 955 (876) 79 Corporate activities 2016 £m – – – 46 (56) (13) (23) Total 2017 £m 377 (535) 107 899 (1,542) (194) (888) 4,877 (3,811) 1,066 Total 2016 £m 380 (542) 101 1,066 (1,752) (147) (894) 2,306 (2,534) (228) 476 (322) 154 1,080 (449) 631 915 (710) 205 4,777 (4,015) 762 Construction Services 2017 £m 5 – – 13 – Construction Services 2016 £m 17 – – 14 – Support Services 2017 £m 9 – – 8 – Infrastructure Investments 2017 £m – 3 82 3 86 Support Services 2016 £m 3 – 5 11 – Infrastructure Investments 2016 £m 14 32 6 2 65 Corporate activities 2017 £m 6 – 5 5 – Corporate activities 2016 £m 7 – – 3 – Total 2017 £m 20 3 87 29 86 Total 2016 £m 41 32 11 30 65 balfourbeatty.com/AR2017 112 Notes to the financial statements continued 5 Segment analysis continued 5.1 Total Group continued Performance by geographic destination – continuing operations Revenue including share of joint ventures and associates Share of revenue of joint ventures and associates Group revenue Performance by geographic destination – continuing operations Revenue including share of joint ventures and associates Share of revenue of joint ventures and associates Group revenue United Kingdom 2017 £m 3,200 (139) 3,061 United Kingdom 2016 £m 3,465 (202) 3,263 United States 2017 £m 3,819 (55) 3,764 United States 2016 £m 3,533 (104) 3,429 Rest of world 2017 £m 1,245 (1,154) 91 Rest of world 20162 £m 1,370 (1,139) 231 Total 2017 £m 8,264 (1,348) 6,916 Total 20162 £m 8,368 (1,445) 6,923 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. Major customers Included in Group revenue are revenues from continuing operations of £1,276m (2016: £1,359m) from the US Government and £1,093m (2016: £1,324m) from the UK Government, which are the Group’s two largest customers. These revenues are included in the results across all three reported segments. 5.2 Infrastructure Investments Underlying profit from operations1 UK^ North America Gain on disposals of interests in investments Bidding costs and overheads Net assets/(liabilities) UK^ North America Infrastructure Non-recourse borrowings net of associated cash and cash equivalents (Note 26) Total Infrastructure Investments net assets Share of joint ventures and associates (Note 18.2)+ 2017 £m 15 14 – 29 – 29 Group 2017 £m 9 30 86 125 (38) 87 418 103 – 521 (305) 216 253 160 – 413 – 413 Share of joint ventures and associates (Note 18.2)+ 2016 £m 14 13 – 27 – 27 334 146 – 480 – 480 Group 2016 £m 6 16 65 87 (25) 62 261 117 6 384 (233) 151 Total 2017 £m 24 44 86 154 (38) 116 671 263 – 934 (305) 629 Total 2016 £m 20 29 65 114 (25) 89 595 263 6 864 (233) 631 + The Group’s share of the results of joint ventures and associates is disclosed net of investment income, finance costs and taxation. ^ Including Singapore. The results for 2016 included Australia. 1 Before non-underlying items (Notes 2.10 and 10). Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 113 6 Profit/(loss) from operations 6.1 Profit/(loss) from continuing operations is stated after charging/(crediting) Research and development costs Depreciation of property, plant and equipment Depreciation of investment properties Amortisation of intangible assets Net charge of trade receivables impairment provision Impairment of property, plant and equipment Impairment of inventory Impairment of intangible assets Profit on disposal of property, plant and equipment Cost of inventory recognised as an expense Exchange gains and losses Auditor’s remuneration Short-term hire charges for plant and equipment Other operating lease rentals 6.2 Analysis of auditor’s remuneration – continuing and discontinued operations Services as auditor to the Company Services as auditor to Group subsidiaries+ Total audit fees Audit-related assurance fees Other assurance fees Total non-audit fees Total fees in relation to audit and other services 2017 £m 1 28 1 22 – – – – (6) 82 3 3 53 41 2017 £m 0.5 2.2 2.7 0.4 0.1 0.5 3.2 2016 £m 2 30 – 21 2 3 1 1 (5) 141 – 3 68 42 2016 £m 0.5 2.0 2.5 0.4 0.1 0.5 3.0 + The 2017 audit fee includes an additional fee of £0.2m which represents additional audit scope in the year relating to the audit of the Group’s impact of transitioning to IFRS 15. 7 Employee costs 7.1 Group Employee costs during the year Wages and salaries Underlying redundancy costs Non-underlying redundancy costs (Note 10.1.4.1) Social security costs Pension costs (Note 28) Share-based payments (Note 33) Average number of Group employees Construction Services Support Services Infrastructure Investments Corporate Continuing operations 2017 £m 1,193 3 8 98 52 9 1,363 2017 Number 13,454 5,929 1,448 109 20,940 2016 £m 1,201 – 9 97 48 7 1,362 2016 Number 13,974 6,841 1,524 111 22,450 At 31 December 2017, the total number of Group employees was 20,238 (2016: 21,829). Detailed disclosures of items of remuneration, including those accruing under the Company’s equity-settled share-based payment arrangements can be found within the Remuneration report on pages 76 to 87. 7.2 Company The Company did not have any employees and did not incur any employee costs in the year (2016: £nil). Balfour Beatty Group Employment Ltd, which was established in February 2013, remains the employing entity for the Balfour Beatty Group’s UK employees. balfourbeatty.com/AR2017 114 Notes to the financial statements continued 8 Investment income Continuing operations Subordinated debt interest receivable Interest receivable on PPP financial assets Gain on foreign currency deposits Other interest receivable and similar income 9 Finance costs Continuing operations Non-recourse borrowings – bank loans and overdrafts Preference shares Convertible bonds US private placement Other interest payable – finance cost – accretion – finance cost – accretion – finance cost – committed facilities – letter of credit fees – other finance charges Net finance cost on pension scheme assets and obligations (Note 28.2) 10 Non-underlying items Items (charged against)/credited to profit 10.1 Continuing operations 10.1.1 Trading results of Rail Germany (including £2m (2016: £10m) of other net operating expenses) 10.1.2 Results of certain legacy ES contracts 10.1.3 Amortisation of acquired intangible assets 10.1.4 Other non-underlying items: – Build to Last transformation costs – additional loss on the AWPR contract as a result of Carillion’s liquidation – loss on disposal/impairment of land of Blackpool Airport – gain on disposal of Heery International Inc – pension fund settlement gain – provision increases resulting from revised legal guidelines and settlements – release of Trans4m provisions on liquidation – provision increases resulting from reassessment of industrial disease related liabilities – gain on disposal of Balfour Beatty Infrastructure Partners – gain on disposal of Signalling Solutions Ltd – gain on disposal of parts of Rail Germany Total other non-underlying items from continuing operations 10.1.5 Share of results of joint ventures and associates – release of Trans4m provisions on liquidation Charged against profit before taxation from continuing operations 10.1.6 Tax credits: – tax effect as a result of the reduction in US Federal corporate income tax rate – non-underlying recognition of deferred tax assets in the UK – tax on other items above Total tax credit on continuing operations Non-underlying items credited to/(charged against) profit for the year from continuing operations 10.2 Discontinued operations 10.2.1 Other non-underlying items: – gain on disposal of Dutco Balfour Beatty LLC & BK Gulf LLC – gain on disposal of Parsons Brinckerhoff Non-underlying items credited to profit/(loss) for the year from discontinued operations Credited to/(charged against) profit for the year Balfour Beatty Annual Report and Accounts 2017 2017 £m 26 11 1 4 42 2017 £m 13 12 3 5 7 13 1 4 9 6 73 2016 £m 29 21 19 6 75 2016 £m 24 12 2 5 7 13 4 3 8 4 82 2017 £m 2016 £m – – (9) (12) (44) (1) 18 – – – – – – – (39) (48) – (48) 32 34 2 68 20 5 – 5 25 1 (6) (9) (14) – (3) – 1 (25) 8 (14) 3 3 2 (39) (53) 1 (52) – – 4 4 (48) – 24 24 (24) Strategic Report Governance Financial Statements Other Information 115 10 Non-underlying items continued Continuing operations 10.1.1 Rail Germany was reclassified from discontinued operations in 2014 and has continued to be presented as part of the Group’s non-underlying items within continuing operations. In 2017, the remaining parts of Rail Germany generated a £nil profit or loss before tax (2016: £1m profit before tax). 10.1.2 The Group has continued to present the results of certain external legacy Engineering Services (ES) contracts in non-underlying items. These contracts were classified as non-underlying items in 2014 as the performance of these contracts was linked to poor legacy management and in regions where ES has withdrawn from tendering for third-party work. Construction on these contracts has now completed. These contracts resulted in a £nil profit or loss to the Group in 2017 (2016: £6m loss). 10.1.3 The amortisation of acquired intangible assets from continuing operations comprises: customer contracts £6m (2016: £6m) and customer relationships £3m (2016: £3m). These have been included as non-underlying items as they relate to costs arising on acquisition of businesses. The charge was recognised in the following segments: Construction Services £4m (2016: £3m) and Infrastructure Investments £5m (2016: £6m). 10.1.4.1 The Group launched its Build to Last transformation programme in February 2015. The transformation programme is aimed to drive continual improvement across all of the Group’s businesses and realise operational efficiencies. As a result of this programme, restructuring costs of £12m were incurred in 2017 relating to: Construction Services £6m; Support Services £2m; and Corporate £4m. These restructuring costs comprise: redundancy costs £8m; property-related costs £3m; and other restructuring costs £1m. In 2016, the Group incurred restructuring costs of £14m relating to: Construction Services £12m; Support Services £1m; and Corporate £1m. These restructuring costs comprise: redundancy costs £9m; external advisers £2m; property-related costs £1m; and other restructuring costs £2m. 10.1.4.2 On 15 January 2018, Carillion plc filed for compulsory liquidation. Carillion was one of the Group’s joint operations partners in the Aberdeen Western Peripheral Route (AWPR) project on a joint and several basis. As a result of Carillion’s liquidation, the Group and its remaining joint operations partner on the project, Galliford Try plc, are jointly liable to deliver Carillion’s remaining obligations on this contract in addition to each partner’s existing 33% share. In light of this, the Group has recognised a one-off non-underlying loss provision of £44m which reflects the Group’s additional loss on the contract as a result of Carillion’s liquidation. The contract is expected to complete in the summer of 2018. This loss has been recognised in the Construction Services segment. 10.1.4.3 On 12 September 2017, the Group disposed of its entire interest in Regional & City Airports (Blackpool) Holdings Ltd for a cash consideration of £4m. The disposal resulted in a £1m loss being recognised as a non-underlying item. Refer to Note 32.2.2. In 2016, an impairment of £3m was recognised on land held at Blackpool Airport. These losses have been included in the Infrastructure Investments segment. 10.1.4.4 On 27 October 2017, the Group disposed of its 100% interest in Heery International Inc for a cash consideration of £43m. The disposal resulted in a net gain of £18m being recognised as a non-underlying item. Refer to Note 32.2.3. This gain on disposal has been included in the Construction Services segment. 10.1.4.5 In 2016, £1m was recognised in relation to pension liability settlements by certain members of the Balfour Beatty Pension Fund. This has been reported within Corporate activities. 10.1.4.6 In 2016, potential liabilities on historical health and safety breaches were reassessed following new sentencing guidelines introduced and the settlement of other historical claims previously treated as non-underlying items. As a result of this, the Group revised its legal provisioning levels relating to these items, recognising an expense of £25m. This was presented as non-underlying because its size would otherwise distort the underlying financial performance achieved by the Group and the events giving rise to these expenses occurred in prior years. The charge was recognised in the following segments: Construction Services £13m and Support Services £12m. 10.1.4.7 In 2016, the Group released all remaining provisions relating to Trans4m Ltd (Trans4m) amounting to £9m, £1m of which was recognised at the joint venture level. Trans4m was an equal joint operation between Balfour Beatty and three other partner shareholders and was contracted to Metronet as part of the London Underground PPP. The provisions were originally recorded in non-underlying items in 2007. Trans4m went into creditors’ voluntary liquidation on 27 June 2016. The credit was recognised in the following segments: Construction Services £8m and Support Services £1m. 10.1.4.8 In 2016, the Group commissioned a revised independent actuarial report on its exposure to industrial disease related liabilities. These are mostly for asbestos-related claims in relation to events pre-1972 which are not insured by the Financial Services Compensation Scheme. As a result of the findings within this report, the Group had increased its provision held with respect to industrial disease related liabilities, resulting in a £14m charge to the income statement. This was presented as non-underlying because its size would otherwise distort the underlying financial performance achieved by the Group and the events giving rise to these liabilities occurred in prior years. The entire charge was recognised within Construction Services. 10.1.4.9 In 2016, the Group disposed of its interest in Balfour Beatty Infrastructure Partners, comprising its 17.8% interest in the Infrastructure Fund and 100% interest in the fund’s advisor. Initial consideration of £48m was received, resulting in a gain of £3m to the Group. Refer to Notes 32.3.4 and 32.3.5. balfourbeatty.com/AR2017 116 Notes to the financial statements continued 10 Non-underlying items continued Continuing operations continued 10.1.4.10 In 2016, additional consideration relating to the Group’s disposal of its 50% interest in Signalling Solutions Ltd (SSL) in 2015 resulted in a further gain of £2m being reported. In addition to this, a £1m pension settlement gain arose as a result of transferring pension liabilities relating to the employees of SSL to the new employer. This gain was recognised within Construction Services. 10.1.4.11 In September 2016, the Group completed the disposal of parts of Rail Germany to Tianjin Keyvia Electric Co Ltd for a cash consideration of £15m. This sale resulted in a £2m gain as a result of recycling of foreign currency reserves. Refer to Note 32.3.7. 10.1.5 Refer to Note 10.1.4.7. 10.1.6.1 The US Government has reduced the Federal corporate income tax rate from 35% to 21% with effect from 1 January 2018. The net impacts of this change in 2017 were a non-underlying £32m tax credit to the income statement and a £1m credit to equity. 10.1.6.2 During the year significant actuarial gains in the Group’s main pension fund, Balfour Beatty Pension Fund (BBPF), led to the recognition of a deferred tax liability. Refer to Note 27.1. This in turn lead to the recognition of additional UK deferred tax assets of £34m. Given the size and nature of the credit resulting from the increase to actuarial gains in the BBPF, the credit has been included as a non-underlying item. 10.1.6.3 The non-underlying items charged against Group operating profit from continuing operations gave rise to a tax credit of £2m comprising: £3m tax credit on amortisation of acquired intangible assets; and £1m charge on the gain on disposal of Heery (2016: £3m tax credit on amortisation of acquired intangible assets; £3m charge on the results of Rail Germany; and £4m credit on other non-underlying items). Discontinued operations 10.2.1.1 On 1 March 2017, the Group disposed of its 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC to its joint venture partner for a total cash consideration of £11m, resulting in a gain on disposal of £5m. Refer to Note 32.2.1. 10.2.1.2 Following the Group’s disposal of Parsons Brinckerhoff (PB) in 2015, the Group reached a settlement with the purchaser of PB in relation to outstanding tax matters and indemnities in 2016. The Group received an additional £9m as a result of this settlement. At the same time, provisions in relation to these matters were released, resulting in an overall gain to the Group of £24m. Refer to Note 32.3.10. 11 Income taxes 11.1 Income tax credit Continuing operationsx Total UK tax Total non-UK tax Total tax charge/(credit) UK current tax – current tax – adjustments in respect of previous periods Non-UK current tax – current tax – adjustments in respect of previous periods Total current tax UK deferred tax – origination and reversal of temporary differences – adjustments in respect of previous periods – UK corporation tax rate change Non-UK deferred tax – origination and reversal of temporary differences – US Federal corporate income tax rate change – adjustments in respect of previous periods Total deferred tax Total tax charge/(credit) from continuing operations x Excluding joint ventures and associates. 1 Before non-underlying items (Notes 2.10 and 10). Balfour Beatty Annual Report and Accounts 2017 Underlying items1 2017 £m 2 21 23 Non- underlying items (Note 10) 2017 £m (32) (36) (68) Total 2017 £m (30) (15) (45) Total 2016 £m 2 6 8 2 (1) 1 6 (6) – 1 1 – – 1 19 – 2 21 22 23 2 – 2 (3) – (3) (1) (37) – 3 (34) (1) (32) – (33) (67) (68) 4 (1) 3 3 (6) (3) – (36) – 3 (33) 18 (32) 2 (12) (45) (45) (1) (6) (7) 3 (10) (7) (14) 9 3 (3) 9 8 – 5 13 22 8 Strategic Report Governance Financial Statements Other Information 117 11 Income taxes continued 11.1 Income tax credit continued The Group has recognised £68m of tax credits within non-underlying items in the year. Refer to Notes 10.1.6.1 to 10.1.6.3. The Group tax charge excludes amounts for joint ventures and associates (refer to Note 18.2), except where tax is levied at the Group level. In addition to the Group tax charge, tax of £50m is charged (2016: £16m credited) directly to other comprehensive income, comprising: a deferred tax charge of £37m for subsidiaries (2016: £1m credit); and a deferred tax charge in respect of joint ventures and associates of £13m (2016: £15m credit). Refer to Note 30.1. 11.2 Income tax reconciliation Continuing operations Profit before taxation Less: share of results of joint ventures and associates Profit/(loss) before taxation Add: non-underlying items charged excluding share of joint ventures and associates Underlying profit before taxation and the results of joint ventures and associates1 Tax on profit before taxation at standard UK corporation tax rate of 19.25% (2016: 20%) Adjusted for the effects of: Expenses not deductible for tax purposes and other permanent items Non-taxable disposals+ Tax levied at Group level on share of joint ventures’ and associates’ profits# Preference share dividends not deductible Deferred tax assets not recognised^ Recognition of losses not previously recognised Effect of tax rates in non-UK jurisdictions UK corporation tax rate change Adjustments in respect of previous periods Total tax charge on underlying profit Less: credit on non-underlying tax items (Note 10.1.6) Total tax (credit)/charge on profit from continuing operations 2017 £m 117 (59) 58 48 106 20 3 (16) 9 2 1 (1) 10 – (5) 23 (68) (45) 20162 £m 10 (58) (48) 53 5 1 5 (13) 11 2 12 – 4 (3) (7) 12 (4) 8 + These gains on disposal are not taxable due to availability of exemptions and use of capital losses. # These are mainly in connection with US and Canadian joint ventures and associates where tax is levied at the Group level rather than within the share of joint ventures and associates. ^ Deferred tax was not recognised on certain losses where we do not currently expect to be able to recover these amounts against future forecasted taxable profits. 1 Before non-underlying items (Notes 2.10 and 10). 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. balfourbeatty.com/AR2017 118 Notes to the financial statements continued 12 Earnings per ordinary share Earnings Continuing operations Earnings Amortisation of acquired intangible assets – net of tax credit of £3m (2016: £3m) Other non-underlying items – net of tax credit of £65m (2016: £1m) Underlying earnings Discontinued operations Earnings Other non-underlying items Underlying earnings/(loss) Total operations Earnings Amortisation of acquired intangible assets – net of tax credit of £3m (2016: £3m) Other non-underlying items – net of tax credit of £65m (2016: £1m) Underlying earnings Weighted average number of ordinary shares Earnings per share Continuing operations Earnings per ordinary share Amortisation of acquired intangible assets Other non-underlying items Underlying earnings per ordinary share Discontinued operations Earnings per ordinary share Other non-underlying items Underlying earnings/(loss) per ordinary share Total operations Earnings per ordinary share Amortisation of acquired intangible assets Other non-underlying items Underlying earnings per ordinary share Basic 2017 £m Diluted 2017 £m Basic 20162 £m Diluted 20162 £m 162 6 (26) 142 6 (5) 1 168 6 (31) 143 162 66 (26) 142 6 (5) 1 168 66 (31) 143 2 6 42 50 22 (24) (2) 24 6 18 48 2 42 50 22 (24) (2) 24 18 48 Basic 2017 m 680 Diluted 2017 m 688 Basic 2016 m 680 Diluted 2016 m 684 Basic 2017 Pence Diluted 2017 Pence Basic 20162 Pence Diluted 20162 Pence 23.7 0.8 (3.6) 20.9 1.0 (0.9) 0.1 24.7 0.8 (4.5) 21.0 23.4 0.8 (3.5) 20.7 1.0 (0.9) 0.1 24.4 0.8 (4.4) 20.8 0.2 0.9 6.1 7.2 3.3 (3.5) (0.2) 3.5 0.9 2.6 7.0 0.2 0.9 6.1 7.2 3.3 (3.5) (0.2) 3.5 0.9 2.6 7.0 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. 13 Dividends on ordinary shares Proposed dividends for the year Interim – current year Final – current year Recognised dividends for the year Final – prior year Interim – current year Per share 2017 Pence Amount 2017 £m Per share 2016 Pence Amount 2016 £m 1.2 2.4 3.6 0.9 1.8 2.7 8 16 24 12 8 20 6 12 18 – 6 6 The final 2016 dividend was paid on 7 July 2017 and the interim 2017 dividend was paid on 1 December 2017. Subject to approval at the Annual General Meeting on 24 May 2018, the final 2017 dividend will be paid on 6 July 2018 to holders on the register on 20 April 2018 by direct credit or, where no mandate has been given, by cheque posted on 6 July 2018 payable on 5 July 2018. The ordinary shares will be quoted ex-dividend on 19 April 2018. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 119 14 Intangible assets – goodwill At 1 January 2016 Currency translation differences Additions (Note 32.1) Disposals At 31 December 2016 Currency translation differences Disposal of Blackpool Airport (Notes 32.2.2 and 32.2.6) Disposal of Heery International Inc (Notes 32.2.3 and 32.2.6) At 31 December 2017 Carrying amounts of goodwill by segment Construction Services Support Services Infrastructure Investments Group Carrying amounts of goodwill by cash-generating unit UK Regional and Engineering Services Balfour Beatty Construction Group Inc Rail UK Gas & Water Balfour Beatty Communities US Other Group total Accumulated impairment losses £m (153) (25) – 5 (173) 2 4 4 (163) Cost £m 997 116 2 (5) 1,110 (48) (4) (21) 1,037 United Kingdom £m 260 131 – 391 United States £m 434 – 49 483 2017 Total £m 694 131 49 874 United Kingdom £m 260 131 – 391 United States £m 492 – 54 546 Carrying amount £m 844 91 2 – 937 (46) – (17) 874 2016 Total £m 752 131 54 937 2017 Pre-tax discount rate % 10.3 11.0 10.4 10.4 11.0 10.2–11.0 £m 248 413 68 58 49 38 874 2016 Pre-tax discount rate % £m 10.2 248 12.6 452 10.4 68 10.2 58 54 12.6 57 10.2–12.8 937 The recoverable amount of goodwill is based on value-in-use, a key input of which is forecast cash flows. The Group’s cash flow forecasts are based on the expected workload of each cash-generating unit (CGU), giving consideration to the current level of confirmed and anticipated orders. Cash flow forecasts for the next three years are based on the Group’s Three Year Plan, which covers the period from 2018 to 2020 and includes the stabilisation and recovery of the Construction Services UK business to more normal levels of performance. The cash flow forecasts for each CGU were compiled from each of its constituent business units as part of the Group’s annual financial planning process. Whilst it is anticipated that growth will remain stable in the UK buildings sector, tender margins will improve as there will be an increased selectivity to drive a higher quality project portfolio. The Group is well positioned in the UK infrastructure market for major schemes and regulatory spending uplift. It is anticipated that the US construction market will continue to improve, as will tender margins which will also be driven by increased selectivity of projects. In the Support Services segment, market conditions are anticipated to be stable in the UK. The Support Services business has a portfolio of long-term contracts and has secured the majority of its workload for the forecast period. The other key inputs in assessing each CGU are its long-term growth rate and discount rate. The discount rates have been calculated using the Weighted Average Cost of Capital (WACC) method, which takes account of the Group’s capital structure (financial risk) as well as the nature of each CGU’s business (operational risk). Long-term growth rates are assumed to be the estimated future GDP growth rates based on published independent forecasts for the country or countries in which each CGU operates, less 1.0% to reflect current economic uncertainties and their consequent estimated effect on public sector spending on infrastructure. In the derivation of each CGU’s value-in-use, a terminal value is assumed based on a multiple of earnings before interest and tax. The multiple is applied to a terminal cash flow, which is the normalised cash flow in the last year of the forecast period. The EBIT multiple is calculated using the Gordon Growth Model and is a factor of the discount rate and growth rate for each CGU. The nominal terminal value is discounted to present value. balfourbeatty.com/AR2017 120 Notes to the financial statements continued 14 Intangible assets – goodwill continued UK Regional and Engineering Services Balfour Beatty Construction Group Inc Rail UK Gas & Water Balfour Beatty Communities US Other Inflation rate % 2.1 2.0 2.1 2.1 1.9 2.1 Real growth rate % 0.1 1.4 0.1 0.1 0.1 0.2 2017 Nominal long-term growth rate applied % 2.2 3.4 2.2 2.2 2.0 2.3 Inflation rate % 1.8 1.9 1.8 1.8 1.9 1.9 Real growth rate % 1.1 1.5 1.1 1.1 1.5 1.4 2016 Nominal long-term growth rate applied % 2.9 3.4 2.9 2.9 3.4 3.3 Sensitivities The Group’s impairment review is sensitive to changes in the key assumptions used. The major assumptions that result in significant sensitivities are the discount rate and the long-term growth rate, and for certain CGUs, changes to underlying cash projections. In particular, a reduction of 150 basis points in margin within the Gas & Water CGU would reduce its headroom to £nil. Except as noted above, a reasonable possible change in key assumptions would not give rise to an impairment in any of the Group’s CGUs. The Group continues to consider whether a reasonable possible change in assumptions within the construction business in light of its historical losses would lead to an impairment of the goodwill in the related CGUs and concluded that it is not the case. The Group maintains that the stabilisation and recovery of the Group’s UK Construction business to more normal levels of performance is still a key assumption underpinning the cash flow forecasts used to assess the recoverable amount of the related goodwill. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 121 15 Intangible assets – other Cost At 1 January 2016 Currency translation differences Transfers Additions Removal of fully amortised intangible asset Disposal of BBIP Advisor (Notes 32.3.5 and 32.3.11) Disposal of parts of Rail Germany (Notes 32.3.7 and 32.3.11) At 31 December 2016 Currency translation differences Additions Removal of fully amortised intangible asset At 31 December 2017 Accumulated amortisation At 1 January 2016 Currency translation differences Charge for the year Impairment charge Removal of fully amortised intangible asset Disposal of BBIP Advisor (Notes 32.3.5 and 32.3.11) Disposal of parts of Rail Germany (Notes 32.3.7 and 32.3.11) At 31 December 2016 Currency translation differences Charge for the year Removal of fully amortised intangible asset At 31 December 2017 Carrying amount At 31 December 2017 At 31 December 2016 Customer contracts £m Customer relationships £m Brand names £m Infrastructure Investments intangible £m Software and other £m 207 39 – 1 (9) – – 238 (20) – – 218 (130) (25) (6) – 9 – – (152) 13 (6) – (145) 73 86 59 9 1 – (19) – – 50 (5) – – 45 (42) (5) (3) – 19 – – (31) 3 (3) – (31) 14 19 21 – (1) – (16) – – 4 – – (1) 3 (19) (1) – – 16 – – (4) – – 1 (3) – – 72 – – 6 – – – 78 – 82 – 160 (1) – (1) – – – – (2) – (2) – (4) 156 76 130 2 – 4 (4) (4) (3) 125 (1) 5 – 129 (75) (2) (11) (1) 4 1 3 (81) 1 (11) – (91) 38 44 Total £m 489 50 – 11 (48) (4) (3) 495 (26) 87 (1) 555 (267) (33) (21) (1) 48 1 3 (270) 17 (22) 1 (274) 281 225 The Group recognises intangible assets as Infrastructure Investments intangible for assets where the Group bears demand risk under IFRIC 12 Service Concession Arrangements. At 31 December 2017, there are two student accommodation projects which have been classified as intangible assets. These projects are to design, build and maintain postgraduate accommodation. In 2017, the construction phase at the University of Edinburgh was completed with additional spend of £nil (2016: £6m) incurred in the year. In 2017, the Group also commenced the construction phase at the University of Sussex, incurring a spend of £82m (2016: £nil) in the year (including interest capitalised of £6m (2016: £nil)). Construction on this project is anticipated to complete in 2020. Intangible assets are amortised on a straight-line basis over their expected useful lives, which are one to four years for customer contracts, three to 10 years for customer relationships, three to seven years for software, and up to five years for brand names, except for customer contracts and relationships relating to Balfour Beatty Investments North America which are amortised on a basis matching the returns earned over the life of the underlying contracts and relationships. These contracts have a duration of up to 50 years for customer contracts relating to Balfour Beatty Investments North America. The Infrastructure Investments intangible assets are amortised on a straight-line basis over the life of the projects, which is 50 years. Software assets recognised in the UK are amortised on a basis matching their usage profile over their seven-year life. The Group’s remaining knowledge sharing and collaboration software is amortised on a basis matching its usage profile over its five-year life. Other intangible assets are amortised over periods up to 10 years. balfourbeatty.com/AR2017 122 Notes to the financial statements continued 16 Property, plant and equipment 16.1 Movements Cost or valuation At 1 January 2016 Currency translation differences Transfers Additions Disposals Disposal of parts of Rail Germany (Notes 32.3.7 and 32.3.11) At 31 December 2016 Currency translation differences Transfers Additions Reclassified from inventory Removal of fully depreciated assets/assets scrapped Disposals Disposal of Blackpool Airport (Notes 32.2.2 and 32.2.6) Disposal of Heery International Inc (Notes 32.2.3 and 32.2.6) At 31 December 2017 Accumulated depreciation At 1 January 2016 Currency translation differences Transfers Charge for the year Impairment charge Disposals Disposal of parts of Rail Germany (Notes 32.3.7 and 32.3.11) At 31 December 2016 Currency translation differences Transfers Charge for the year Removal of fully depreciated assets/assets scrapped Disposals Disposal of Blackpool Airport (Notes 32.2.2 and 32.2.6) Disposal of Heery International Inc (Notes 32.2.3 and 32.2.6) At 31 December 2017 Carrying amount At 31 December 2017 At 31 December 2016 Land and buildings £m Plant and equipment £m Infrastructure leasehold improvements £m Assets in the course of construction £m 73 6 12 10 (4) (4) 93 (3) (1) 6 – – (4) (15) (4) 72 (39) (3) (6) (7) (3) 4 4 (50) 2 1 (8) – 2 9 3 (41) 31 43 359 19 (12) 17 (48) (26) 309 (7) 5 7 5 (5) (22) – (6) 286 (273) (16) 6 (22) – 44 25 (236) 6 (1) (18) 5 19 – 5 (220) 66 73 35 8 25 – – – 68 (6) – – – – – – – 62 (1) (1) – (1) – – – (3) – – (2) – – – – (5) 57 65 9 2 (25) 14 – – – – (4) 7 – – – – – 3 – – – – – – – – – – – – – – – – 3 – Total £m 476 35 – 41 (52) (30) 470 (16) – 20 5 (5) (26) (15) (10) 423 (313) (20) – (30) (3) 48 29 (289) 8 – (28) 5 21 9 8 (266) 157 181 Infrastructure leasehold improvements comprise student accommodation projects in Iowa and Reno. All buildings are held under short leaseholds and are depreciated over 40 years. The carrying amount of the Group’s plant and equipment held under finance leases was £nil (2016: £1m). The Company has no property, plant and equipment held under finance leases. Except for land and assets in the course of construction, the costs of property, plant and equipment are depreciated on a straight-line basis over their expected useful lives. Buildings are depreciated at 2.5% per annum or over the term of the lease, and plant and equipment is depreciated at 4% to 33% per annum. 16.2 Analysis of carrying amount of land and buildings Freehold Long leasehold – over 50 years unexpired Short leasehold Balfour Beatty Annual Report and Accounts 2017 Group 2017 £m 7 1 23 31 Group 2016 £m 14 1 28 43 Strategic Report Governance Financial Statements Other Information 123 17 Investment properties Cost or valuation At 1 January 2016 Additions At 31 December 2016 Additions Reclassified from inventories Depreciation charge for the year At 31 December 2017 Accumulated depreciation £m Cost £m Carrying amount £m 4 32 36 4 7 – 47 – – – – – (1) (1) 4 32 36 4 7 (1) 46 Investment properties are held by the Group to generate rental income and capital appreciation. The Group has chosen to account for its investment property assets under the cost method. For one of its investment properties, the Group has secured non-recourse project specific financing amounting to £26m (2016: £18m), which is secured through a floating charge over the property. As a result, £1m of interest cost was capitalised on the asset in 2017 whilst the property was under construction. Construction commenced on one property in 2016 and this was completed in 2017. Once the property was ready for use, the Group ceased capitalisation of interest cost and commenced depreciation on the property, on a straight-line basis over 25 years. The remaining investment properties within the Group consist of one other fully constructed property and £4m of land. The fair value of the Group’s investment properties at 31 December 2017 approximates the carrying value. The Group generated £1m (2016: £nil) of rental income from its investment properties. balfourbeatty.com/AR2017 124 Notes to the financial statements continued 18 Investments in joint ventures and associates 18.1 Movements At 1 January 2016 Currency translation differences Income recognised Fair value revaluation of PPP financial assets (Note 30.1) Fair value revaluation of cash flow hedges (Note 30.1) Actuarial movements on retirement benefit liabilities (Note 30.1) Tax on items taken directly to equity (Note 30.1) Dividends Additions Capital calls Disposals Fair value of retained interest in the five streetlighting projects Loans advanced Reclassify additional losses incurred on negative investment in Dutco# to provisions (Note 25) At 31 December 2016 Currency translation differences Income recognised Fair value revaluation of PPP financial assets (Note 30.1) Fair value revaluation of cash flow hedges (Note 30.1) Actuarial movements on retirement benefit liabilities (Note 30.1) Tax on items taken directly to equity (Note 30.1) Dividends Additions Disposal of Connect Plus M25 (Note 32.2.4) Loans advanced^ Reclassify profit generated by Dutco# to provisions (Note 25) At 31 December 2017 Net assets £m 418 45 57 10 (92) 1 15 (40) 12 – (7) 4 – 3 426 (21) 60 60 10 4 (13) (69) 29 (121) – (1) 364 Loans £m 215 – (1) – – – – – – – (33) 4 17 Infrastructure Fund £m 38 5 – – – – – (3) – 8 (48) – – – 202 – – – – – – – – (39) 4 – 167 – – – – – – – – – – – – – – Total £m 671 50 56 10 (92) 1 15 (43) 12 8 (88) 8 17 3 628 (21) 60 60 10 4 (13) (69) 29 (160) 4 (1) 531 # Represents the combined results of BK Gulf LLC and Dutco Balfour Beatty LLC as both joint ventures have common ownership and report under the same management structure. ^ Includes £3m of subordinated debt interest expense which has been capitalised into the carrying amount of the loan. The principal joint ventures and associates are shown in Note 39. The amount of the Group’s share of borrowings of joint ventures and associates which was supported by the Group and the Company was £nil (2016: £17m), relating to the Group’s share of guaranteed borrowings. The non-recourse borrowings of joint venture and associate entities relating to infrastructure concessions projects are repayable over periods extending up to 2044. The non-recourse borrowings arise under facilities taken out by project-specific joint venture and associate concession companies. The borrowings of each concession company are secured by a combination of fixed and floating charges over that concession company’s interests in its project’s assets and revenues and the shares in the concession company held by its immediate parent company. A significant part of these loans has been swapped into fixed rate debt by the use of interest rate swaps. As disclosed in Note 39(f), the Group has committed to provide its share of further equity funding of joint ventures and associates in Infrastructure Investments’ projects and military housing concessions. Further, in respect of a number of these investments the Group has committed not to dispose of its equity interest until construction is complete. As is customary in such projects, banking covenants restrict the payment of dividends and other distributions. In 2016 and up until the Group disposed of its 49% interests in Dutco#, the Group recognised losses in relation to Dutco in excess of the carrying value of its investment as the Group had constructive obligations to provide further funding to make good these losses. As at the date of disposal, these losses amounted to £11m and had been classified as other provisions (2016: £12m). Refer to Notes 18.4 and 25. The Group disposed of its 49% interests in BK Gulf LLC and Dutco Balfour Beatty LLC on 1 March 2017. Refer to Note 32.2.1. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 125 18 Investments in joint ventures and associates continued 18.2 Share of results and net assets of joint ventures and associates Income statement – continuing operations Revenue1 Underlying operating profit1 Investment income Finance costs Profit before taxation1 Taxation Profit after taxation Balance sheet Non-current assets Intangible assets – goodwill – Infrastructure Investments intangible – other Property, plant and equipment Investment properties Investments in joint ventures and associates PPP financial assets Military housing projects Other non-current assets Current assets Cash and cash equivalents Other current assets Total assets Current liabilities Borrowings Other current liabilities Non-current liabilities Borrowings Other non-current liabilities Total liabilities Net assets Loans to joint ventures and associates Total investment in joint ventures and associates – non-recourse – non-recourse Total 2017 £m 1,340 52 139 (126) 65 (6) 59 32 23 15 66 72 7 1,843 112 70 504 262 3,006 Construction Services 2017 £m 1,074 32 3 (2) 33 (3) 30 Support Services 2017 £m 30 – – – – – – Infrastructure Investments North America 2017 £m 63 15 9 (10) 14 – 14 Total 2017 £m 236 20 136 (124) 32 (3) 29 UK^ 2017 £m 173 5 127 (114) 18 (3) 15 – 23 12 41 72 – 1,843 112 17 175 56 2,351 32 – 3 25 – 7 – – 53 329 206 655 (32) (456) – (52) (540) 115 – 115 – – – – – – – – – – – – – (1) – – (1) (1) 4 3 – 23 12 38 – – 1,659 – 17 156 53 1,958 (41) (141) (1,331) (355) (1,868) 90 163 253 – – – 3 72 – 184 112 – 19 3 393 – (11) (222) – (233) 160 – 160 (41) (152) (73) (609) (1,553) (355) (2,101) 250 163 413 (1,553) (407) (2,642) 364 167 531 ^ Including Singapore. 1 Before non-underlying items (Notes 2.10 and 10). The Group’s investment in military housing joint ventures’ and associates’ projects is recognised at its remaining equity investment plus the value of the Group’s accrued returns from the underlying projects. The military housing joint ventures and associates have total non-recourse net borrowings of £2,340m (2016: £2,710m). Note 39(e) details the Group’s military housing projects. On certain Infrastructure Investments concessions where net fair value revaluations of PPP financial assets and cash flow hedges resulted in the Group’s carrying value of these investments being negative, the Group has not recognised losses beyond the carrying value of its investments. This is because the Group has not committed to provide any further funding to these investments and the borrowings within these concessions are non-recourse to the Group. At 31 December 2017, the unrecognised cumulative net fair value charges to other comprehensive income amounted to £9m (2016: £19m). balfourbeatty.com/AR2017 126 Notes to the financial statements continued 18 Investments in joint ventures and associates continued 18.2 Share of results and net assets of joint ventures and associates continued Infrastructure Investments Income statement – continuing operations2 Revenue1 Underlying operating profit1 Investment income Finance costs Profit before taxation1 Taxation Profit after taxation before non-underlying items Share of results within non-underlying items Profit after taxation Balance sheet Non-current assets Intangible assets – goodwill – Infrastructure Investments intangible – other Property, plant and equipment Investment properties Investments in joint ventures and associates PPP financial assets Military housing projects Other non-current assets Current assets Cash and cash equivalents Other current assets Total assets Current liabilities Borrowings Other current liabilities Non-current liabilities Borrowings Other non-current liabilities Total liabilities Net assets Loans to joint ventures and associates Total investment in joint ventures and associates – non-recourse – non-recourse Construction Services+ 2016 £m 1,066 31 2 (1) 32 (3) 29 1 30 Support Services 2016 £m 27 1 – – 1 – 1 – 1 UK^ 2016 £m 220 6 126 (114) 18 (4) 14 – 14 North America 2016 £m 120 15 7 (9) 13 – 13 – 13 35 – 3 29 – 4 – – 44 392 272 779 (51) (527) – (57) (635) 144 – 144 – – – – – – – – – – – – – – – – – – 4 4 – 19 12 33 – – 1,941 – 24 203 69 2,301 (23) (148) (1,520) (474) (2,165) 136 198 334 – – – – 61 – 188 121 – 35 2 407 – (39) (217) (5) (261) 146 – 146 Total 2016 £m 340 21 133 (123) 31 (4) 27 – 27 – 19 12 33 61 – 2,129 121 24 238 71 2,708 Total 2016 £m 1,433 53 135 (124) 64 (7) 57 1 58 35 19 15 62 61 4 2,129 121 68 630 343 3,487 (23) (187) (74) (714) (1,737) (479) (2,426) 282 198 480 (1,737) (536) (3,061) 426 202 628 ^ Including Singapore. The results for 2016 included Australia. + Excludes the Group’s share of the balance sheets of BK Gulf LLC and Dutco Balfour Beatty LLC as this is presented within provisions as set out in Note 18.1. 1 Before non-underlying items (Notes 2.10 and 10). 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. 18.3 Aggregate information of joint ventures and associates The Group’s share of profit from continuing operations Aggregate carrying amount of the Group’s interest The Group’s share of profit from continuing operations Aggregate carrying amount of the Group’s interest 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. Joint ventures 2017 £m 49 425 Associates 2017 £m 10 106 Joint ventures2 2016 £m 48 504 Associates 2016 £m 10 124 Total 2017 £m 59 531 Total2 2016 £m 58 628 Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 127 18 Investments in joint ventures and associates continued 18.4 Details of material joint ventures Proportion of the Group’s ownership interest in the joint venture Income statement – continuing operations Revenue Underlying operating profit/(loss) Investment income Finance costs Income tax charge Profit/(loss) and total comprehensive income/(loss) (100%) Group’s share of profit/(loss) and total comprehensive income/(loss) Dividends received by the Group during the year Gammon@ 2016 £m 50% 2017 £m 50% 2,040 35 15 (12) (6) 32 16 37 1,940 25 12 (8) (7) 22 11 – 2017 £m 20% 118 3 138 (111) (6) 24 10 – 126 6 138 (104) (7) 33 14 2 Connect Plus (M25) Ltd+ 2016 £m 40% Dutco^ 2016 £m 49% Balance sheet Non-current assets Current assets Cash and cash equivalents Other current assets Current liabilities Trade and other payables Provisions Borrowings Borrowings Other current liabilities – recourse – non-recourse Non-current liabilities Trade and other payables Provisions Borrowings Other non-current liabilities (including shareholder loans) – non-recourse Net assets/(liabilities) (100%) 319 317 2,123 1,967 622 387 1,009 (699) (54) – (70) (123) (946) (76) (21) (109) (36) (242) 140 672 514 1,186 (807) (52) – (109) (94) (1,062) 197 69 266 (86) – – (6) (45) (137) 160 68 228 (66) – – (6) (47) (119) (76) (17) (116) (45) (254) 187 – – (1,027) (618) (1,645) 607 – – (1,044) (605) (1,649) 427 Reconciliation of the above summarised financial information to the carrying amount of the interest in the above joint ventures recognised in the consolidated financial statements: Net assets/(liabilities) of joint venture (100%) Group’s share of net assets/(liabilities) Add: Group’s interest in shareholder loans Goodwill Carrying amount of the Group’s interest in the joint venture 607 121 39 – 160 140 70 – 29 99 187 94 – 32 126 427 171 78 – 249 @ Represents the combined results of Gammon China Ltd and Gammon Capital (West) Pte. Ltd as both joint ventures have common ownership and report under the same management structure. + The Group disposed of a 20% interest in December 2017. Refer to Note 32.2.4. ^ Represents the combined results of BK Gulf LLC and Dutco Balfour Beatty LLC as both joint ventures have common ownership and report under the same management structure. The Group disposed of its 49% interests in Dutco on 1 March 2017. Refer to Note 32.2.1. & The negative carrying amount of the Group’s interest in Dutco was presented within provisions in 2016. Refer to Notes 18.1 and 25. balfourbeatty.com/AR2017 642 (1) – (2) – (3) (2) – 23 12 624 636 (605) (26) (35) – (19) (685) – – – – – (26) (26) (13) – 1 (12)& 128 Notes to the financial statements continued 18 Investments in joint ventures and associates continued 18.5 Cash flow from/(to) joint ventures and associates Cash flows from investing activities Dividends from joint ventures and associates Subordinated debt interest received Investments in and loans to joint ventures and associates Equity Subordinated debt invested Disposal of investments in joint ventures Net cash flow from/(to) joint ventures and associates Infrastructure Investments UK^ 2017 £m 2 9 (4) (3) (1) 103 North America 2017 £m 14 – (26) (26) – – Other 2017 £m 53 – – – – 3 Total 2017 £m 69 9 (30) (29) (1) 106 UK^ 2016 £m 5 19 (20) (3) (17) 108 110 (12) 56 154 112 Infrastructure Investments Infra- structure Fund 2016 £m 3 – North America 2016 £m 12 – (9) (9) – – 3 (8) (8) – 47 42 Other 2016 £m 23 – – – – 2 Total 2016 £m 43 19 (37) (20) (17) 157 25 182 ^ Including Singapore. The cash flows for 2016 included Australia. 18.6 Share of reserves of joint ventures and associates At 1 January 2016 Currency translation differences Income recognised Fair value revaluation of PPP financial assets Fair value revaluation of cash flow hedges Actuarial movements on retirement benefit liabilities Tax on items taken directly to equity Dividends Recycling of revaluation reserves to the income statement on disposal Reserves disposed At 31 December 2016 Currency translation differences Income recognised Fair value revaluation of PPP financial assets Fair value revaluation of cash flow hedges Actuarial movements on retirement benefit liabilities Tax on items taken directly to equity Dividends Recycling of revaluation reserves to the income statement on disposal Reserves disposed At 31 December 2017 Accumulated profit/(loss) £m 92 – 56 – – 1 – (43) (6) (9) 91 – 60 – – 4 (1) (69) – (20) 65 Hedging reserve £m (201) – – – (92) – 14 – 81 – (198) – – – 11 – (2) – 58 (1) (132) PPP financial assets £m 282 – – 10 – – 1 – (66) – 227 – – 60 – – (10) – (143) – 134 Currency translation reserve £m 23 41 – – – – – – – – 64 (18) – – – – – – – – 46 Total (Note 30.1) £m 196 41 56 10 (92) 1 15 (43) 9 (9) 184 (18) 60 60 11 4 (13) (69) (85) (21) 113 Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 129 19 Investments 19.1 Group At 1 January 2016 Currency translation differences Fair value gains Additions Maturities/disposals At 31 December 2016 Currency translation differences Fair value gains Additions Maturities/disposals At 31 December 2017 Available- for-sale investments in mutual funds £m 20 4 1 1 (3) 23 (2) 3 1 (3) 22 Held to maturity bonds £m 24 – – – (2) 22 – – – (5) 17 Total £m 44 4 1 1 (5) 45 (2) 3 1 (8) 39 The held to maturity bonds are held by the Group’s captive insurance company, Delphian Insurance Company Ltd, and comprise fixed rate bonds or treasury stock with an average yield to maturity of 0.73% (2016: 0.73%) and weighted average life of 2.2 years (2016: 2.1 years). The fair value of the bonds is £17m (2016: £23m), determined by the market price of the bonds at the reporting date. The maximum exposure to credit risk at 31 December 2017 is the carrying amount. These bonds have been pledged as security for letters of credit issued in respect of Delphian Insurance Company Ltd. The available-for-sale investments in mutual funds comprise holdings in a number of funds, based on employees’ investment elections, in respect of the deferred compensation obligations of the Group as disclosed in Note 28.2. The fair value of the available-for-sale investments is £22m (2016: £23m), determined by the market price of the funds at the reporting date. 19.2 Company Investment in subsidiaries Provisions 20 PPP financial assets At 1 January 2016 Income recognised in the income statement: – interest income (Note 8) Gains recognised in the statement of comprehensive income: – fair value movements Other movements: – cash expenditure – cash received – disposal of interest in the five streetlighting projects (Notes 32.3.9 and 32.3.11) At 31 December 2016 Income recognised in the income statement: – interest income (Note 8) Gains recognised in the statement of comprehensive income: – fair value movements Other movements: – cash expenditure – cash received At 31 December 2017 2017 £m 1,802 (102) 1,700 2016 £m 1,800 (102) 1,698 Economic infrastructure £m 283 Social infrastructure £m 119 14 16 25 (28) (279) 31 3 (1) 1 (4) 30 7 11 6 (11) – 132 8 4 – (11) 133 Total £m 402 21 27 31 (39) (279) 163 11 3 1 (15) 163 Assets constructed by PPP subsidiary concession companies are classified as available-for-sale financial assets and are denominated in sterling. The maximum exposure to credit risk at the reporting date is the fair value of the PPP financial assets. In 2016, the Group disposed of 80% interests in five streetlighting projects and retained 20% interests. Refer to Note 32.3.9. There were no impairment provisions in 2017 or 2016. balfourbeatty.com/AR2017 130 Notes to the financial statements continued 21 Inventories Unbilled non-construction work in progress Raw materials and consumables Development and housing land and work in progress Finished goods and goods for resale 22 Construction contracts Contracts in progress at reporting date Due from construction contract customers Due to construction contract customers 23 Trade and other receivables Current Trade receivables Less: provision for impairment of trade receivables Due from subsidiaries Due from joint ventures and associates Due from joint operation partners Contract retentions receivable# Accrued income Prepayments Due on disposals Other receivables Non-current Due from joint ventures and associates Contract retentions receivable# Due on disposals Other receivables Total trade and other receivables Comprising Financial assets (Note 38) Non-financial assets – prepayments 2017 £m 55 20 27 5 107 2017 £m 377 (535) (158) 2016 £m 36 29 32 4 101 2016 £m 380 (542) (162) Group 2017 £m Group 2016 £m Company 2017 £m Company 2016 £m 536 (7) 529 – 23 25 185 18 35 63 21 899 38 173 4 1 216 1,115 1,080 35 1,115 653 (7) 646 – 58 7 242 17 36 – 60 1,066 25 151 – 4 180 1,246 1,210 36 1,246 – – – 1,531 – – – – – – – 1,531 2 – – – 2 1,533 1,533 – 1,533 – – – 1,453 17 – – – 1 – – 1,471 2 – – – 2 1,473 1,472 1 1,473 # Including £352m (2016: £390m) construction contract retentions receivable. Based on prior experience, an assessment of the current economic environment and a review of the financial circumstances of individual customers, the Directors believe no further credit risk provision is required in respect of trade receivables. The Directors consider that the carrying values of current and non-current trade and other receivables approximate their fair values. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 131 23 Trade and other receivables continued Movement in the provision for impairment of trade receivables At 1 January (Charged)/credited to the income statement: – additional provisions – unused amounts reversed Utilised during the year Disposal of parts of Rail Germany (Notes 32.3.7 and 32.3.11) At 31 December Maturity profile of impaired trade receivables and trade receivables past due but not impaired Up to three months Three to six months Six to nine months Nine to 12 months More than 12 months Group 2017 £m – – 1 – 6 7 Impaired Group 2016 £m 1 – – 1 5 7 Group 2017 £m (7) Group 2016 £m (11) (2) 2 – – (7) (3) 1 5 1 (7) Past due but not impaired Group 2016 £m 23 12 10 6 33 84 Group 2017 £m 31 9 5 3 27 75 At 31 December 2017, trade receivables of £75m (2016: £84m) were past due but not impaired. These relate to a number of individual customers where there is no reason to believe that the receivable is not recoverable. The Company had no provision for impairment of trade receivables and no trade receivables that were past due but not impaired in either year. balfourbeatty.com/AR2017 132 Notes to the financial statements continued 24 Trade and other payables Current Trade and other payables+ Accruals Deferred income VAT, payroll taxes and social security Advance payments on contracts Due to subsidiaries Due to joint ventures and associates Dividends on preference shares Due on acquisitions Due on disposals (Note 32.3.8) Non-current Trade and other payables Accruals Due to joint ventures and associates Due on acquisitions Total trade and other payables Comprising Financial liabilities (Note 38) Non-financial liabilities: – accruals not at amortised cost – deferred income – VAT, payroll taxes and social security – advance payments on contracts Group 2017 £m Group 2016 £m Company 2017 £m Company 2016 £m 833 604 1 68 16 – 11 6 3 – 1,542 120 19 7 11 157 1,699 936 701 15 73 4 – 11 6 3 3 1,752 110 20 7 14 151 1,903 1 7 – – – 1,911 – 6 – – 1,925 1 – 3 – 4 1,929 2 7 – – – 1,756 – 6 – – 1,771 – – 3 – 3 1,774 1,585 1,772 1,929 1,774 29 1 68 16 1,699 39 15 73 4 1,903 – – – – 1,929 – – – – 1,774 + Included within the Group’s trade and other payables balance is £0.2m (2016: £2.6m) relating to payments due to UK suppliers who are on bank-supported supply chain finance arrangements. The Group settles these amounts in accordance with the relevant supplier’s standard supplier payment terms, normally 30 days. In 2017 these arrangements were used by 19 suppliers and had a peak utilisation of £2.6m. These arrangements are not being extended to any other supplier. Maturity profile of the Group’s non-current financial liabilities at 31 December Due within one to two years Due within two to five years Due after more than five years Due within one to two years Due within two to five years Due after more than five years Trade and other payables 2017 £m 104 12 4 120 Trade and other payables 2016 £m 98 4 8 110 Due to joint ventures and associates 2017 £m – – 7 7 Due to joint ventures and associates 2016 £m – – 7 7 Accruals 2017 £m 13 5 1 19 Accruals 2016 £m 10 7 3 20 Due on acquisitions 2017 £m 3 8 – 11 Due on acquisitions 2016 £m 3 8 3 14 Total 2017 £m 120 25 12 157 Total 2016 £m 111 19 21 151 The Directors consider that the carrying values of current and non-current trade and other payables approximate their fair values. The fair value of non-current trade and other payables has been determined by discounting future cash flows using yield curves and exchange rates prevailing at the reporting date. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 133 25 Provisions At 1 January 2016 Currency translation differences Transfers Reclassified from accruals and due to construction contract customers Charged/(credited) to the income statement: – additional provisions – unused amounts reversed – additional losses arising from Dutco^ (Note 18.1) Utilised during the year Disposal of parts of Rail Germany (Notes 32.3.7 and 32.3.11) At 31 December 2016 Currency translation differences Transfers Reclassified from accruals and due to construction contract customers Charged/(credited) to the income statement: – additional provisions – unused amounts reversed – profit generated by Dutco^ (Note 18.1) Utilised during the year Disposal of Dutco (Note 32.2.1) Disposal of Heery International Inc (Note 32.2.3 and 32.2.6) At 31 December 2017 Due within one year Due within one to two years Due within two to five years Due after more than five years Contract provisions 2017 £m 148 20 16 7 191 Employee provisions 2017 £m 22 7 9 24 62 Other provisions 2017 £m 24 6 6 3 39 Contract provisions £m 92 6 1 40 Employee provisions £m 54 2 5 – Other provisions £m 60 1 (6) 4 Group Total £m 206 9 – 44 Company Other provisions £m 2 – – – 100 (36) – (56) (1) 146 (3) 4 13 122 (38) – (51) – (2) 191 Group Total 2017 £m 194 33 31 34 292 43 (15) – (28) – 61 – 3 – 29 (7) – (24) – – 62 33 (21) 3 (8) – 66 (1) (7) 1 12 (10) (1) (10) (11) – 39 176 (72) 3 (92) (1) 273 (4) – 14 163 (55) (1) (85) (11) (2) 292 Contract provisions 2016 £m 109 11 19 7 146 Employee provisions 2016 £m 22 10 22 7 61 Other provisions 2016 £m 16 16 26 8 66 – (2) – – – – – – – – – – – – – Group Total 2016 £m 147 37 67 22 273 ^ Represents the combined results of BK Gulf LLC and Dutco Balfour Beatty LLC as both joint ventures have common ownership and report under the same management structure. The Group disposed of its 49% interests in Dutco on 1 March 2017. Refer to Note 32.2.1. Contract provisions include construction insurance liabilities, principally in the Group’s captive insurance arrangements, and defect and warranty provisions on contracts, primarily construction contracts, that have reached practical completion. There is a 12 month latent defect period for which the provision is held, but where there are known identified issues then the provision may be required to cover rectification work over a more extended period. Employee provisions are principally liabilities relating to employers’ liability insurance retained in the Group’s captive insurance arrangements and provisions for employee termination liabilities arising from the Group’s restructuring programmes. Other provisions principally comprise: motor and other insurance liabilities in the Group’s captive insurance arrangements; legal claims and costs, where provision is made for the Directors’ best estimate of known legal claims, investigations and legal actions in progress; property-related provisions, mainly onerous lease commitments, some of which arise from the Group’s restructuring programmes; and environmental provisions. The Group takes actuarial advice when establishing the level of provisions in the Group’s captive insurance arrangements and certain other categories of provision. Insurance-related provisions within these categories were £62m (2016: £82m) as follows: Contract provisions £32m (2016: £42m); Employee provisions £26m (2016: £31m); and Other, mainly motor, provisions £4m (2016: £9m). Restructuring provisions within these categories were £6m (2016: £10m) as follows: Employee provisions £1m (2016: £10m); and Other, mainly property-related, provisions £5m (2016: £nil). In 2016 and up until the Group disposed of its 49% interests in Dutco^, the Group recognised losses in relation to Dutco^ in excess of its carrying value of its investment as the Group had constructive obligations to provide further funding to make good these losses and these were classified as other provisions. Refer to Note 18. The Group disposed of its 49% interests in Dutco^ on 1 March 2017. Refer to Note 32.2.1. balfourbeatty.com/AR2017 134 Notes to the financial statements continued 26 Cash and cash equivalents and borrowings 26.1 Group Unsecured borrowings at amortised cost – bank overdrafts – US private placement (Note 26.2) – liability component of convertible bonds (Note 26.3) – loans under committed facilities – other loans Secured borrowings at amortised cost – finance leases Cash and deposits at amortised cost Term deposits at amortised cost Cash and cash equivalents (excluding infrastructure concessions) Non-recourse infrastructure concessions project finance loans at amortised cost with final maturity between 2019 and 2062 Infrastructure concessions cash and cash equivalents Net cash/(borrowings) Current 2017 £m Non-current 2017 £m Total 2017 £m Current 2016 £m Non-current 2016 £m – (33) (226) – (9) – (268) 717 116 833 565 (8) 135 127 692 – (226) – – (4) – (230) – – – (230) (432) – (432) (662) – (259) (226) – (13) – (498) 717 116 833 335 (440) 135 (305) 30 (1) – – (50) (4) (1) (56) 605 157 762 706 (47) 7 (40) 666 – (285) (240) – (8) – (533) – – – (533) (193) – (193) (726) Total 2016 £m (1) (285) (240) (50) (12) (1) (589) 605 157 762 173 (240) 7 (233) (60) The loans relating to project finance arise under non-recourse facilities taken out by project-specific subsidiary companies. The loans of each company are secured by a combination of fixed and floating charges over that company’s interests in its project’s assets and revenues and the shares in the company held by its immediate parent company. A significant part of these loans has been swapped into fixed rate debt by the use of interest rate swaps. Included in cash and cash equivalents is restricted cash of: £25m (2016: £23m) held by the Group’s captive insurance company, Delphian Insurance Company Ltd, which is subject to Isle of Man insurance solvency regulations; £12m (2016: £31m) held within construction project bank accounts; £nil (2016: £nil) relating to cash collateral held against an issued letter of credit; and £135m (2016: £7m) relating to the maintenance and other reserve accounts in the Infrastructure Investments subsidiaries. Cash, deposits and term deposits include the Group’s share of amounts held by joint operations of £261m (2016: £282m). Maturity profile of the Group’s borrowings at 31 December Due on demand or within one year Due within one to two years Due within two to five years Due after more than five years Non-recourse project finance 2017 £m (8) (70) (22) (340) (440) Other borrowings 2017 £m (268) (4) (34) (192) (498) Non-recourse project finance 2016 £m (47) (8) (32) (153) (240) Total 2017 £m (276) (74) (56) (532) (938) Finance leases 2016 £m (1) – – – (1) Other borrowings 2016 £m (55) (285) (37) (211) (588) Total 2016 £m (103) (293) (69) (364) (829) The carrying values of the Group’s borrowings are equal to the fair values at the reporting date. The fair values are determined by discounting future cash flows using yield curves and exchange rates prevailing at the reporting date. Undrawn Group committed borrowing facilities at 31 December in respect of which all conditions precedent were satisfied Expiring in one year or less Expiring in more than one year but not more than two years Expiring in more than two years Non-recourse project finance 2017 £m 1 – – 1 Other borrowings 2017 £m 25 – 375 400 Non-recourse project finance 2016 £m 8 – – 8 Total 2017 £m 26 – 375 401 Other borrowings 2016 £m – 22 328 350 Total 2016 £m 8 22 328 358 In November 2017, £375m of the Group’s £400m revolving credit facility was extended until 2020. The entire facility remains undrawn at 31 December 2017. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 135 26 Cash and cash equivalents and borrowings continued 26.2 US private placement In March 2013, the Group raised US$350m (£231m) of borrowings through a US private placement of a series of notes with an average coupon of 4.94% per annum and an average maturity of 9.3 years. At 31 December 2017, as a result of movements in exchange rates, the balance outstanding was £259m (2016: £285m). 26.3 Convertible bonds On 3 December 2013, the Group issued convertible bonds of £100,000 each maturing on 3 December 2018 at a total issue price of £252.7m and incurred transaction costs of £6.7m resulting in net proceeds of £246m. The bonds have a coupon of 1.875% per annum payable semi-annually in arrears and the initial conversion price has been set at £3.6692 per share. On 23 April 2014, the conversion price was revised to £3.6212. From 14 January 2014 until 14 days prior to final maturity, one bond is convertible at the option of the holder into one preference share in Balfour Beatty Finance No 2 Ltd which is immediately transferred to the Company in exchange for the issue of ordinary shares in the Company. The bonds are compound instruments, comprising equity and liability components. The fair value of the liability component at the date of issue, included under non-current liabilities, was £220m estimated using the prevailing market interest rate of 4.29% per annum for a similar non-convertible instrument. The difference between the net proceeds of issue of the convertible bonds after the transaction costs and the fair value assigned to the liability component, representing the value of the equity conversion component, was included in equity holders’ funds. Refer to Note 29.3. In December 2017, the Group repurchased £21.3m of the convertible bonds, resulting in a loss on settlement of £0.4m. As a result of this settlement, £2m of reserves previously held in other reserves which related to the equity conversion component of the bonds that were repurchased was transferred to retained earnings. Refer to Note 30.1. Liability component recognised in the Balance Sheet Liability component at 1 January at amortised cost Accretion Repurchase of bonds Liability component at 31 December at amortised cost The fair value of the liability component of the convertible bonds at 31 December 2017 was £227m (2016: £244m). The finance cost of the convertible bonds is calculated using the effective interest method. 26.4 Company Cash and deposits Unsecured borrowings at amortised cost – bank loans and overdrafts – loans under committed facilities – US private placement (Note 26.2) Net borrowings Current 2017 £m 134 – – (33) 101 Non- current 2017 £m – – – (226) (226) Total 2017 £m 134 –– – (259) (125) Current 2016 £m 167 – (50) – 117 The bank loans and overdrafts are sterling denominated, variable rate instruments and repayable on demand. 2017 £m 240 7 (21) 226 Non- current 2016 £m – – – (285) (285) 2016 £m 233 7 – 240 Total 2016 £m 167 (50) (285) (168) balfourbeatty.com/AR2017 136 Notes to the financial statements continued 27 Deferred tax 27.1 Group Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same tax authority and the Group intends to settle its current tax assets and liabilities on a net basis. Net deferred tax position at 31 December Deferred tax assets Deferred tax liabilities Movement for the year in the net deferred tax position At 1 January 2016 Currency translation differences Charged to income statement# Credited to equity# Disposal of five streetlighting projects (Notes 32.3.9 and 32.3.11) At 31 December 2016 Currency translation differences Credited to income statement# Charged to equity# Research and development tax credit Disposal of Blackpool Airport (Notes 32.2.2 and 32.2.6) Disposal of Heery International Inc (Notes 32.2.3 and 32.2.6) At 31 December 2017 Group 2017 £m 52 (70) (18) Group 2016 £m 54 (80) (26) Company 2017 £m – (1) (1) Company 2016 £m – (2) (2) Group £m 5 (13) (22) 1 3 (26) 7 45 (37) 1 1 (9) (18) Company £m (2) – – – – (2) – 1 – – – – (1) # Group includes £34m credited (2016: £nil) to the income statement and £1m credited (2016: £nil) to equity in relation to changes in the US Federal corporate income rate taxes. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 137 27 Deferred tax continued 27.1 Group continued The table below shows the deferred tax assets and liabilities before being offset where they relate to income taxes levied by the same tax authority. Net deferred tax position Depreciation in excess of capital allowances £m 14 (2) – 5 – – 17 – 2 – – – Retirement benefits £m 26 2 – (8) 2 – 22 (1) (5) (37) – – At 1 January 2016 Currency translation differences Transfers Credited/(charged) to income statement Credited/(charged) to equity Disposal of five streetlighting projects (Notes 32.3.9 and 32.3.11) At 31 December 2016 Currency translation differences Credited/(charged) to income statement Credited/(charged) to equity Research and development tax credit Disposal of Blackpool Airport (Notes 32.2.2 and 32.2.6) Disposal of Heery International Inc (Notes 32.2.3 and 32.2.6) At 31 December 2017 – 19 – (21) – 79 Unrelieved trading losses £m 46 Share- based payments £m 2 Provisions £m 33 Preference shares £m (3) Fair value adjustments £m (50) Derivatives £m – Other GAAP differences £m (63) Research and develop ment credit £m – 9 – 7 – – 62 (4) 21 – – – – – – – – 2 – 2 1 – – – 5 4 – 7 – – 44 1 (16) – – – – – 1 – – (2) – – – – – (11) (4) (12) (2) – (79) 4 14 – – – (3) 26 – (2) 4 (57) (1) 4 – 1 3 7 – – (1) – – – 6 (14) – (22) – – (99) 7 27 – – 1 (10) (74) – – – – – – – – – 1 – – 1 Total £m 5 (13) – (22) 1 3 (26) 7 45 (37) 1 1 (9) (18) At the reporting date the Group had unrecognised tax losses from operations (excluding capital losses) that arose over a numbers of years of approximately £922m (2016: £1,064m) which are available for offset against future profits. £8m (2016: £6m) will expire between five and 20 years after the year in which they arose, using losses incurred in earlier years before those incurred in later years, with the first expiry in 2018. The remaining losses may be carried forward indefinitely. The Group has recognised deferred tax assets for UK corporation tax trading losses of £245m (2016: £4m). The Group has UK corporation tax trading losses of £612m (2016: £768m) which are not recognised as deferred tax assets. The Group also had temporary differences relating to retirement benefits on which a deferred tax asset has not been recognised of £62m (2016: £108m). At the reporting date the undistributed reserves for which deferred tax liabilities have not been recognised were £nil (2016: £1m) in respect of subsidiaries and £nil (2016: £nil) in respect of joint ventures and associates. No liability has been recognised in respect of these differences because either no temporary difference arises or the timing of any distribution is under the Group’s control and no distribution which gives rise to taxation is contemplated. 27.2 Company Deferred tax assets and liabilities At 1 January 2016 Credited/(charged) to income statement At 31 December 2016 Credited to income statement At 31 December 2017 Deferred tax liabilities Preference shares £m (3) 1 (2) – (2) Deferred tax assets Share-based payments £m – – – 1 1 Provisions £m 1 (1) – – – Net deferred tax assets/ (liabilities) £m (2) – (2) 1 (1) balfourbeatty.com/AR2017 138 Notes to the financial statements continued 28 Retirement benefit assets and liabilities 28.1 Introduction The Group, through trustees, operates a number of defined contribution and defined benefit pension schemes. Defined contribution schemes are those where the Group’s obligation is limited to the amount that it contributes to the scheme and the scheme members bear the investment and actuarial risks. Defined benefit schemes are schemes other than defined contribution schemes where the Group’s obligation is to provide specified benefits on retirement. IAS 19 Employee Benefits (IAS 19) prescribes the accounting for defined benefit schemes in the Group’s financial statements. Obligations are calculated using the projected unit credit method and discounted to a net present value using the market yield on high-quality corporate bonds. The pension expense relating to current service cost is charged to contracts or overheads based on the function of scheme members and is included in cost of sales and net operating expenses. The net finance cost arising from the expected interest income on plan assets and interest cost on scheme obligations is included in finance costs. Actuarial gains and losses are reported in the Statement of Comprehensive Income. The IAS 19 accounting valuations are set out in Note 28.2. A different calculation is used for the formal triennial funding valuations undertaken by the scheme trustees to determine the future company contribution level necessary so that over time the scheme assets will meet the scheme obligations. The principal difference between the two methods is that under the funding basis the obligations are discounted using a rate of return reflecting the composition of the assets in the scheme, rather than the rate of return on high-quality corporate bonds as required by IAS 19 for the financial statements. Details of the latest formal triennial funding valuations are set out in Note 28.3. The assets of the schemes do not include any direct holdings of the Group’s financial instruments, nor any property occupied by, or other assets of, the Group. Principal schemes The Group’s principal schemes are the Balfour Beatty Pension Fund (BBPF), which includes defined contribution and defined benefit sections, and the Balfour Beatty Shared Cost Section of the Railways Pension Scheme (RPS). The defined benefit sections of both schemes are funded and closed to new members with the exception of employees where employment has transferred to the Group under certain agreed arrangements. Pension benefits are based on employees’ pensionable service and their pensionable salary. The schemes operate under trust law and are managed and administered by trustees on behalf of the members in accordance with the terms of the trust deed and rules and relevant legislation. Defined benefit contributions are determined in consultation with the trustees, after taking actuarial advice. The trustees are responsible for establishing the investment strategy and ensuring that there are sufficient assets to meet the cost of current and future benefits. These schemes expose the Group to investment and actuarial risks where additional contributions may be required if assets are not sufficient to pay future pension benefits: – investment risk: equity returns are a key determinant of investment return but the investment portfolio is also subject to a range of other risks typical of the investments held, for example, credit risk on corporate bond holdings. – actuarial risk: the ultimate cost of providing pension benefits is affected by inflation rates and members’ life expectancy. The net present value of the obligations is affected by the market yield on high-quality corporate bonds used to discount the obligations. Changes in the principal actuarial assumptions based on market data, such as inflation and the discount rate, and experience, such as life expectancy, expose the Group to fluctuations in the net IAS 19 liability and the net finance cost. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 139 28 Retirement benefit assets and liabilities continued 28.1 Introduction continued Balfour Beatty Pension Fund The investment strategy of the BBPF is to hold assets of appropriate liquidity and marketability to generate income and capital growth. The BBPF invests partly in a diversified range of assets including equities and hedge funds in anticipation that, over the longer term, they will grow in value faster than the obligations. The equities are in the form of pooled funds and are a combination of UK, other developed market and emerging market equities. The remaining BBPF assets are principally fixed and index-linked bonds and derivatives, providing protection against movements in inflation and interest rates and hence enhancing the resilience of the funding level of the scheme. The performance of the assets is measured against market indices. On 1 July 2015, the Group established a Scottish Limited Partnership (SLP) structure into which its investment in Consort Healthcare (Birmingham) Holdings Ltd (Consort Birmingham), which owns the Group’s 40% interest in the Birmingham Hospital PFI investment, was transferred. The BBPF is a partner in the SLP and is entitled to a share of the income of the SLP. In accordance with IFRS 10 Consolidated Financial Statements, the SLP is deemed to be controlled by the Group, which retains the ability to substitute the investment in Consort Birmingham for other investments from time to time. On 29 December 2016 the Group transferred into the SLP its investment in Holyrood Student Accommodation Holdings Ltd, which owns the Group’s 100% interest in the Edinburgh student accommodation project. Under IAS 19, the investment held by the BBPF in the SLP does not constitute a plan asset and therefore the pension surplus presented in these financial statements does not reflect the BBPF’s interest in the SLP. Distributions from the SLP to the BBPF will be reflected in the Group’s financial statements as pension contributions on a cash basis. In 2017, the BBPF received distributions of £1m from the SLP (2016: £1m). Alongside the establishment of the SLP, agreement was reached to make a series of deficit payments to the BBPF with the first payment of £4m paid in 2016 and a further £5m in 2017. Following this, £7m will be due in 2018; £9m due in 2019; £13m due in 2020; £17m due in 2021; £22m due in 2022; and £25m due in 2023. A formal triennial funding valuation of the BBPF was carried out as at 31 March 2016. As a result, the Group made ongoing deficit payments in addition to those set out above of £22m in 2017. The Group will make further contributions of £18m per annum from January 2018, £19m per annum from January 2019 and £11m in 2020. If the dividend cover ratio is below an agreed trigger level then the contributions set out above may need to be accelerated. This agreement constitutes a minimum funding requirement (MFR) under IFRIC 14 IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The Group has not recognised any liabilities in relation to this MFR as any surplus of deficit contributions to the BBPF would be recoverable by way of a refund and the Group has the unconditional right to the surplus and controls the run-off of the benefit obligations once all other obligations of the BBPF have been settled. balfourbeatty.com/AR2017 140 Notes to the financial statements continued 28 Retirement benefit assets and liabilities continued 28.1 Introduction continued Railways Pension Scheme The RPS is a shared cost scheme. The legal responsibility of the Group in the RPS is approximately 60% of the scheme’s assets and liabilities based on the relevant provisions of the trust deed and rules and trustee guidelines regarding future surplus apportionments and deficit financing. In 2013 and previous years, the assumed cost of providing benefits was split between the Group and the members in the ratio 60:40. This had been a reasonable assumption to make of how costs might have been shared over the long term. This assumption has been retained in relation to the cost of providing future service benefits. Since 2014, because of a declining population of active members, it became less likely that the Group’s costs of meeting any deficits would be capped in line with its strict legal obligation of 60%. It was anticipated that members might only be able to afford to fund a small proportion of the scheme deficit. In the accounts for the years ended 31 December 2014 and 31 December 2015, the long-term cost of providing past service benefits was assumed to be split between the Group and the members in the ratio 95:5. From 1 January 2016 it has been assumed that the Group will be responsible for 100% of any deficit and the balance sheet assets and obligations disclosed, therefore, are equal to 100% of the total scheme assets and obligations. The RPS invests in a range of pooled investment funds intended to generate a combination of capital growth and income and, as determined by the trustee, taking account of the characteristics of the obligations and the trustee’s attitude to risk. The majority of the RPS’ assets that are intended to generate additional returns, over the rate at which the obligations are expected to grow, are invested in a single pooled growth fund. This fund is invested in a wide range of asset classes and the fund manager RPMI has the discretion to vary the asset allocation to reflect its views on the relative attractiveness of different asset classes at any time. The remaining assets in the RPS are principally fixed and index-linked bonds. Following the formal triennial funding valuation carried out as at 31 December 2016, the Group agreed to make ongoing fixed deficit contributions of £6m per annum which should reduce the deficit to zero by 2027. This agreement constitutes a MFR under IFRIC 14 IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The Group has not recognised any liabilities in relation to this MFR as any surplus of deficit contributions to the RPS would be recoverable by way of a refund and the Group has the unconditional right to the surplus and controls the run-off of the benefit obligations once all other obligations of the RPS have been settled. Other schemes Other schemes comprise unfunded post-retirement benefit obligations in Europe, the majority of which are closed to new entrants, and deferred compensation schemes in North America, where an element of employees’ compensation is deferred and invested in available-for-sale assets (as disclosed in Note 19.1) in a trust, the assets of which are for the ultimate benefit of the employees but are available to the Group’s creditors in the event of insolvency. Membership of the principal schemes Balfour Beatty Pension Fund 2017 Railways Pension Scheme 2017 Balfour Beatty Pension Fund 2016 Number of members Defined benefit obligations £m Average duration Years Number of members Defined benefit obligations £m Average duration Years Number of members Defined benefit obligations £m Average duration Years Number of members Railways Pension Scheme 2016 Defined benefit obligations £m Average duration Years Defined benefit – active members – deferred pensioners – pensioners, 10 3 11,753 1,692 widow(er)s and dependants 18,186 Defined contribution 13,534 43,483 Total 1,817 – 3,512 17 23 11 – 17 93 1,234 1,709 – 3,036 43 139 209 – 391 22 22 13 – 17 12 3 12,414 1,754 18,606 13,290 44,322 1,926 – 3,683 17 22 11 – 17 99 1,292 1,686 – 3,077 90 151 175 – 416 21 20 12 – 16 28.2 IAS 19 accounting valuations Principal actuarial assumptions for the IAS 19 accounting valuations of the Group’s principal schemes Discount rate Inflation rate – RPI – CPI Future increases in pensionable salary Rate of increase in pensions in payment (or such other rate as is guaranteed) Balfour Beatty Pension Fund 2017 % 2.55 3.15 2.05 2.05 2.95 Railways Pension Scheme 2017 % 2.55 3.15 2.05 2.05 2.20 Balfour Beatty Pension Fund 2016 % 2.50 3.20 2.00 2.00 2.95 Railways Pension Scheme 2016 % 2.50 3.20 2.00 2.00 2.15 Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 141 28 Retirement benefit assets and liabilities continued 28.2 IAS 19 accounting valuations continued In December 2017, the Group changed two elements of the discount rate methodology which resulted in a discount rate of 2.55% in the current year compared to 2.35% under the previous methodology. The first change was to exclude certain bonds issued by Universities and entities with a UK Government guarantee, which the Group did not consider to meet the high-quality corporate bond requirement of IAS 19. The second change, and noting IAS 19 does not specify the approach that should be adopted where there are no corporate bonds of a suitable duration, was to change from extrapolating the discount rate yield curve with reference to UK Government gilts to using the forward rates observable from relevant corporate bonds. In the Group’s view, these changes resulted in a high-quality corporate bond based discount rate yield curve which is more appropriate for the profile of the Group’s UK pension obligations. The impact of these changes in discount rate methodology is a £123m gain which was recognised as part of the actuarial gains/(losses) for the year within the Statement of Comprehensive Income. The Group accounted for the discount rate change prospectively as a change in estimate. At the same time, following independent advice from the Group’s actuaries, the Group reassessed the difference between RPI and CPI measures of price inflation from 1.2% at December 2016 to 1.1% at December 2017. This resulted in an actuarial loss of £25m, which was recognised as part of the actuarial gains/(losses) for the year within the Statement of Comprehensive Income. The BBPF actuary undertakes regular mortality investigations based on the experience exhibited by pensioners of the BBPF and due to the size of the membership of the BBPF (43,483 members at 31 December 2017) is able to make comparisons of this experience with the mortality rates set out in the various published mortality tables. The actuary is also able to monitor changes in the exhibited mortality over time. This research is taken into account in the Group’s mortality assumptions across its various defined benefit schemes. The mortality assumptions as at 31 December 2017 have been updated to reflect the experience of Balfour Beatty pensioners for the period 1 April 2016 to 31 March 2017. The mortality tables adopted for the 2017 IAS 19 valuations are the Self-Administered Pension Scheme (SAPS) S2 tables (2016: SAPS S2 tables) with a multiplier of 102% for all male and female members (2016: 102%) and 106% for female widows and dependants (2016: 106%); all with future improvements in line with the CMI 2016 core projection model (2016: CMI 2015 core projection model), with long-term improvement rates of 1.25% per annum and 1.00% per annum for males and females respectively (2016: 1.25% per annum and 1.00% per annum). Members in receipt of a pension Members not yet in receipt of a pension (current age 50) 2017 Average life expectancy at 65 years of age Female Male 23.6 21.9 24.6 23.0 2016 Average life expectancy at 65 years of age Female 23.9 25.0 Male 22.1 23.4 Amounts recognised in the income statement The BBPF defined contribution employer contributions paid and charged to the income statement have been separately identified in the table below and the defined contribution section assets and liabilities amounting to £460m (2016: £405m) have been excluded from the tables on pages 142 to 144. Defined contribution charges for other schemes include contributions to multi-employer pension schemes. Group Current service cost Defined contribution charge Included in employee costs (Note 7) Interest income Interest cost Net finance cost (Note 9) Settlements (Note 7) Total charged to income statement Balfour Beatty Pension Fund 2017 £m Railways Pension Scheme 2017 £m Other schemes 2017 £m (2) (43) (45) 89 (90) (1) – (46) (1) – (1) 7 (10) (3) – (4) (3) (3) (6) – (2) (2) – (8) Amounts recognised in the Statement of Comprehensive Income Balfour Beatty Pension Fund 2017 £m Railways Pension Scheme 2017 £m Other schemes 2017 £m 72 129 201 20 19 39 2 – 2 Actuarial movements on pension scheme obligations Actuarial movements on pension scheme assets Total actuarial movements recognised in the Statement of Comprehensive Income (Note 30.1) Cumulative actuarial movements recognised in the Statement of Comprehensive Income Total 2017 £m (6) (46) (52) 96 (102) (6) – (58) Total 2017 £m 94 148 Balfour Beatty Pension Fund 2016 £m Railways Pension Scheme 2016 £m Other schemes 2016 £m (2) (44) (46) 108 (109) (1) 1 (46) (1) – (1) 10 (11) (1) 1 (1) (3) – (3) – (2) (2) – (5) Balfour Beatty Pension Fund 2016 £m Railways Pension Scheme 2016 £m Other schemes 2016 £m (710) (115) 652 52 – – – 242 (58) (63) Total 2016 £m (6) (44) (50) 118 (122) (4) 2 (52) Total 2016 £m (825) 704 (121) (133) (68) (27) (228) (334) (107) (29) (470) The actual return on plan assets was a gain of £244m (2016: £822m). balfourbeatty.com/AR2017 142 Notes to the financial statements continued 28 Retirement benefit assets and liabilities continued 28.2 IAS 19 accounting valuations continued Amounts recognised in the Balance Sheet Present value of obligations Fair value of plan assets Asset/(liabilities) in the balance sheet Balfour Beatty Pension Fund 2017 £m (3,512) 3,668 156 Railways Pension Scheme 2017 £m (391) 320 (71) Other schemes† 2017 £m (53) – (53) Total 2017 £m (3,956) 3,988 32 Balfour Beatty Pension Fund 2016 £m (3,683) 3,621 (62) Railways Pension Scheme 2016 £m (416) 303 (113) Other schemes† 2016 £m (56) – (56) Total 2016 £m (4,155) 3,924 (231) † Available-for-sale investments in mutual funds of £22m (2016: £23m) are held to satisfy the Group’s deferred compensation obligations (Note 19.1). The defined benefit obligation comprises £53m (2016: £56m) arising from wholly unfunded plans and £3,903m (2016: £4,099m) arising from plans that are wholly or partly funded. Movement in the present value of obligations At 1 January Currency translation differences Current service cost Interest cost Actuarial movements from changes in discount rate methodology Actuarial movements from reassessing the difference between RPI and CPI Other financial actuarial movements Actuarial movements from changes in demographic assumptions Experience gains Total actuarial movements Benefits paid Settlements Disposal of parts of Rail Germany (Notes 32.3.7 and 32.3.11) At 31 December Movement in the fair value of plan assets At 1 January Interest income Actuarial movements Contributions from employer – regular funding – ongoing deficit funding+ Benefits paid Settlements At 31 December Balfour Beatty Pension Fund 2017 £m (3,683) – (2) (90) Railways Pension Scheme 2017 £m (416) – (1) (10) Other schemes 2017 £m (56) 2 (3) (2) 110 (20) (64) 40 6 72 191 – 13 (5) (7) 4 15 20 16 – – – 2 – – 2 4 – Total 2017 £m (4,155) 2 (6) (102) 123 (25) (69) 44 2173 94 211 – Balfour Beatty Pension Fund 2016 £m (3,031) – (2) (109) Railways Pension Scheme 2016 £m (314) – (1) (11) Other schemes 2016 £m (52) (9) (3) (2) – (33) (700) (50) – (710) 168 1 – (11) (103) (1) 3 (115) 16 9 6 (416) Total 2016 £m (3,397) (9) (6) (122) – (44) (806) (51) (825) 188 10 – – (3) 76 – – 4 – – (3,512) – (391) – (53) –– (3,956) – (3,683) 6 (56) (4,155) Balfour Beatty Pension Fund 2017 £m 3,621 89 129 1 19 (191) – 3,668 Railways Pension Scheme 2017 £m 303 7 19 1 6 (16) – 320 Balfour Beatty Pension Fund 2016 £m 2,988 108 652 – 39 (168) (8) Railways Pension Scheme 2016 £m 263 10 52 2 2 (16) (8) Total 2017 £m 3,924 96 148 22 25 (207) –– Total 2016 £m 3,251 118 704 41 (184) 3,988 3,621 303 3,924 + Ongoing deficit funding contributions presented above for BBPF of £19m are less than the amounts prescribed in the funding agreement of £27m due to overpaid contributions in 2016 of £3m, and £5m of BBPF running costs which are funded from ongoing deficit contributions as per the BBPF schedule of contributions. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 143 28 Retirement benefit assets and liabilities continued 28.2 IAS 19 accounting valuations continued Fair value of the assets held by the schemes at 31 December Return-seeking – Developed nation equities^ – Emerging market equities^ – Hedge funds – Return-seeking growth pooled funds – Other return-seeking assets Liability-matching bond-type assets – Corporate bonds^ – Fixed interest gilts^ – Index-linked gilts^ – Liability-matching pooled funds – Interest and inflation rate swaps Property Secure income assets Other Total Balfour Beatty Pension Fund £m 1,126 384 36 337 – 369 2,060 621 397 887 – 155 215 115 152 3,668 Railways Pension Scheme† £m 222 – – – 222 – 86 – – – 86 – – – 12 320 2017 Total £m 1,348 384 36 337 222 369 2,146 621 397 887 86 155 215 115 164 3,988 Balfour Beatty Pension Fund £m 1,221 370 117 400 – 334 2,119 698 599 627 – 195 169 51 61 3,621 Railways Pension Scheme† £m 224 – – – 224 – 78 – – – 78 – – – 1 303 † The amounts represent 100% of the scheme’s assets. ^ Of the assets included above, £1,955m (2016: £2,048m) are assets that have quoted prices in active markets, of which £671m (2016: £822m) relate to the corporate bonds, developed nation equities and emerging market equities. Estimated contributions expected to be paid to the Group’s principal defined benefit schemes during 2018 Regular funding Ongoing deficit funding Total required by schedule of contributions Estimated BBPF running costs to be funded from ongoing deficit contributions* Estimated total cash contributions * The running costs of the BBPF are funded from ongoing deficit contributions as per the BBPF schedule of contributions. Balfour Beatty Pension Fund 2018 £m 2 25 27 (4) 23 Railways Pension Scheme 2018 £m 1 6 7 – 7 2016 Total £m 1,445 370 117 400 224 334 2,197 698 599 627 78 195 169 51 62 3,924 Total 2018 £m 3 31 34 (4) 30 balfourbeatty.com/AR2017 144 Notes to the financial statements continued 28 Retirement benefit assets and liabilities continued 28.2 IAS 19 accounting valuations continued The sensitivity analysis below has been determined based on reasonably possible changes in assumptions occurring at the end of the reporting period. In each case the relevant change in assumption occurs in isolation from potential changes in other assumptions. In practice more than one variable is likely to change at the same time. The sensitivities have been calculated using the projected unit credit method. Sensitivity of the Group’s retirement benefit obligations at 31 December 2017 to different actuarial assumptions Increase in discount rate Increase in market expectation of RPI inflation Increase in salary growth Increase in life expectancy Sensitivity of the Group’s retirement benefit assets at 31 December 2017 to changes in market conditions Increase in interest rates Increase in market expectation of RPI inflation Percentage points/ Years 0.5% 0.5% 0.5% 1 year (Decrease)/ increase in obligations % (8.1)% 5.7% 0.0% 4.1% (Decrease)/ increase in obligations £m (314) 223 1 164 Percentage points 0.5% 0.5% (Decrease)/ increase in assets % (8.5)% 5.7% (Decrease)/ increase in assets £m (335) 223 The asset sensitivities only take into account the impact of the changes in market conditions on bond type assets. The value of the schemes’ return-seeking assets is not directly correlated with movements in interest rates or RPI inflation. Year end historical information for the Group’s retirement defined benefit schemes Present value of obligations Fair value of assets Surplus/(deficit) Experience adjustment for obligations Experience adjustment for assets Total deficit funding 28.3 Latest formal triennial funding valuations Date of last formal triennial funding valuation Scheme deficit Market value of assets Present value of obligations Deficit in defined benefit scheme Funding level 2017 £m (3,956) 3,988 32 21 148 25 2016 £m (4,155) 3,924 (231) 76 704 41 2015 £m (3,397) 3,251 (146) 1 (154) 66 2014 £m (3,518) 3,390 (128) (7) 574 49 2013 £m (3,229) 2,795 (434) 16 (44) 59 Balfour Beatty Pension Fund £m 31/03/2016 Railways Pension Scheme £m 31/12/2016 3,536 (3,642) (106) 97.1% 319 (367) (48) 86.9% Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 145 29 Share capital 29.1 Ordinary shares of 50p each At 31 December 2016 and 2017 Million 690 Issued £m 345 All issued ordinary shares are fully paid. Ordinary shares carry no right to fixed income but each share carries the right to one vote at general meetings of the Company. No ordinary shares were issued during the current year. 29.2 Cumulative convertible redeemable preference shares of 1p each At 31 December 2016 and 2017 Million 112 Issued £m 1 All issued preference shares are fully paid. During the current and prior year, no preference shares were repurchased for cancellation by the Company. Holders of preference shares are entitled to a preferential dividend equivalent to a gross payment of 10.75p per preference share per annum, payable half-yearly. A preference dividend of 5.375p per cumulative convertible redeemable preference share of 1p was paid on 1 July 2017 in respect of the six months ended 30 June 2017. A preference dividend of 5.375p per cumulative convertible redeemable preference share of 1p was paid on 1 January 2018 in respect of the six months ended 31 December 2017. On 1 July 2020, any preference shares still outstanding are redeemable at £1 each, together with any arrears or accruals of dividend, unless the holder exercises any option granted by the Company to extend the redemption date. The maximum redemption value of all of the issued and outstanding preference shares, excluding any arrears or accruals of dividend, was £112m at 31 December 2017 (2016: £112m). At the option of the holder, preference shares are convertible on the first day of the next calendar month following receipt of the conversion notice into new Balfour Beatty plc ordinary shares effectively on the basis of 24.69136 ordinary shares for every 100 preference shares, subject to adjustment in certain circumstances. The Company is entitled to convert all outstanding preference shares into ordinary shares if there are fewer than 44,281,239 preference shares in issue or if the average of the closing mid-market price for a Balfour Beatty plc ordinary share during a 30-day period exceeds 810p, subject to adjustment in certain circumstances. The preference shares carry no voting rights at a general meeting of the Company, except where the dividend is six months or more in arrears, or where the business of the meeting includes a resolution which directly affects the rights and privileges attached to the preference shares or a resolution for the winding up of the Company. On winding up the Company, holders are entitled to receive the sum of £1 per preference share, together with any arrears or accruals of dividend, in priority to any payment on any other class of shares. The preference shares are a compound instrument, comprising equity and liability components. The fair value of the liability component at the date of issue, included under non-current liabilities, was estimated using the prevailing market interest rate of 13.5% per annum for a similar non-convertible instrument. The difference between the proceeds of issue of the preference shares and the fair value assigned to the liability component, at the date of issue, representing the equity conversion component at £18m, was included in equity holders’ equity, net of deferred tax. Liability component recognised in the Balance Sheet Redemption value of shares in issue at 1 January Equity component Interest element Liability component at 1 January at amortised cost Interest accretion Liability component at 31 December at amortised cost 2017 £m 112 (18) 6 100 3 103 2016 £m 112 (18) 4 98 2 100 The fair value of the liability component of the preference shares at 31 December 2017 amounted to £126m (2016: £135m). The fair value is determined by using the market price of the preference shares at the reporting date and attributing a fair value to the equity component. Interest expense on the preference shares is calculated using the effective interest method. 29.3 Convertible bonds On 3 December 2013, the Group issued convertible bonds for net proceeds of £246m. The convertible bonds are compound instruments comprising equity and liability components. The fair value of the liability component was estimated as £220m using the prevailing market rate at the date of issue for a similar non-convertible instrument. The difference between the net proceeds and the fair value of the liability represented the embedded option to convert the liability into the Company’s ordinary shares being the equity component of £26m. At 31 December 2017, £2m of this equity component was transferred to retained earnings on the repurchase of £21m worth of convertible bonds. Refer to Note 26.3. balfourbeatty.com/AR2017 146 30 Movements in equity 30.1 Group At 1 January 2017 Profit for the year Currency translation differences Actuarial movements on retirement benefit liabilities Fair value revaluations – PPP financial assets – cash flow hedges – available-for-sale investments in mutual funds Recycling of revaluation reserves to the income statement on disposal@ Tax on items recognised in other comprehensive income@ Total comprehensive income/ (loss) for the year Ordinary dividends Joint ventures’ and associates’ dividends Movements relating to share-based payments Reserve transfers relating to joint venture and associate disposals Minority interests+ Convertible bonds repurchase At 31 December 2017 Notes to the financial statements continued Other reserves Called- up share capital 2017 £m 345 – Share premium account 2017 £m 65 – Special reserve 2017 £m 22 – Share of joint ventures’ and associates’ reserves (Note 18.6) 2017 £m 184 60 Equity component of preference shares and convertible bonds 2017 £m 44 – Hedging reserves 2017 £m (30) – PPP financial assets 2017 £m 25 – Currency translation reserve 2017 £m 135 – Retained profits/ (losses) 2017 £m (50) 108 Non- controlling interests 2017 £m 5 – Other 2017 £m 17 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 345 – – – 65 – – – 22 (18) 4 60 11 – (85) (13) 19 – (69) – (21) – – 113 – – – – – – – – – – – – – – 4 – – – – 3 – – – (1) (1) 3 – – – 2 – – – – – – 27 (30) – – – – – – (30) – – – – – – 105 – – – – 3 – 2 5 – – 6 – – – 28 – 242 – – – – (37) 313 (20) 69 1 21 – 2 336 – – (2) 42 – – – (27) Total 2017 £m 762 168 (48) 246 63 15 3 (85) (50) 312 (20) – 7 – – – – – – – – – – – – 5 – – 5 – 10 1,066 @ Recycling of revaluation reserves to the income statement on disposal has no associated tax effect. + Representing the minority interest’s share of the impact of fair valuing the loan instrument which was injected into the related Group subsidiary. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 147 30 Movements in equity continued 30.1 Group continued Other reserves Called- up share capital 2016 £m 345 – Share premium account 2016 £m 65 – Special reserve 2016 £m 22 – Share of joint ventures’ and associates’ reserves (Note 18.6) 2016 £m 196 56 Equity component of preference shares and convertible bonds 2016 £m 44 – Hedging reserves 2016 £m (58) – PPP financial assets 2016 £m 58 – Currency translation reserve 2016 £m 87 – Other 2016 £m 13 – Retained profits 2016 £m 54 (32) Non- controlling interests 2016 £m 4 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 345 – 65 – 22 41 1 10 (92) – 9 15 40 – (43) – (9) 184 – – – – – – – – – – – – – – (16) – – – 27 – – 48 (63) (4) 3 28 – – – (33) – – – – 25 – 44 – (30) 50 – – – – (2) – 48 – – – – – – – 1 – – 1 – – 3 – 135 – 17 – (121) – – – – 2 (151) (6) 43 1 9 (50) 1 – – – – – – 1 – – – – 5 Total 2016 £m 830 24 92 (120) 37 (108) 1 (8) 16 (66) (6) – 4 – 762 At 1 January 2016 Profit/(loss) for the year Currency translation differences Actuarial movements on retirement benefit liabilities Fair value revaluations – PPP financial assets – cash flow hedges – available-for-sale investments in mutual funds Recycling of revaluation reserves to the income statement on disposal@ Tax on items recognised in other comprehensive income@ Total comprehensive income/ (loss) for the year Ordinary dividends Joint ventures’ and associates’ dividends Movements relating to share-based payments Reserve transfers relating to joint venture and associate disposals At 31 December 2016 @ Recycling of revaluation reserves to the income statement on disposal has no associated tax effect. balfourbeatty.com/AR2017 148 Notes to the financial statements continued 30 Movements in equity continued 30.2 Company At 1 January 2016 Loss for the year Currency translation differences Total comprehensive loss for the year Ordinary dividends Movements relating to share-based payments At 31 December 2016 Loss for the year Currency translation differences Total comprehensive loss for the year Ordinary dividends Movements relating to share-based payments Convertible bonds repurchase At 31 December 2017 Other reserves Equity component of preference shares and convertible bonds £m 44 – – – – – 44 – – – – – (2) 42 Special reserve £m 22 – – – – – 22 – – – – – – 22 Called-up share capital £m 345 – – – – – 345 – – – – – – 345 Share premium account £m 65 – – – – – 65 – – – – – – 65 Other £m 72 – – – – 6 78 – – – – 2 – 80 Retained profits £m 604 (10) (8) (18) (6) (2) 578 (54) 19 (35) (20) (1) 2 524 Total £m 1,152 (10) (8) (18) (6) 4 1,132 (54) 19 (35) (20) 1 – 1,078 As permitted under Section 408 of the Companies Act 2006, the Company has elected not to present its Statement of Comprehensive Income (including the profit and loss account) for the year. Balfour Beatty plc reported a loss for the financial year ended 31 December 2017 of £54m (2016: £10m loss). The retained profits of Balfour Beatty plc are wholly distributable. By special resolution on 13 May 2004, confirmed by the court on 16 June 2004, the share premium account was reduced by £181m and the £4m capital redemption reserve was cancelled, effective on 25 June 2004, and a special reserve of £185m was created. This reserve becomes distributable to the extent of future increases in share capital and share premium account, of which £nil occurred in 2017 (2016: £nil). 30.3 Balfour Beatty Employee Share Ownership Trust The retained profits in the Group and the retained profits of the Company are stated net of investments in Balfour Beatty plc ordinary shares acquired by the Group’s employee discretionary trust, the Balfour Beatty Employee Share Ownership Trust, to satisfy awards under the Performance Share Plan, the Executive Buyout Scheme, the Deferred Bonus Plan and the Restricted Share Plan. In 2017, 0.6m (2016: 1.6m) shares were purchased at a cost of £1.7m (2016: £3.9m). The market value of the 9.7m (2016: 10.3m) shares held by the Trust at 31 December 2017 was £26.2m (2016: £27.8m). The carrying value of these shares is £24.1m (2016: £25.6m). Following confirmation of the performance criteria at the end of the performance period in the case of the Performance Share Plan and the Executive Buyout Scheme, and at the end of the vesting period in the case of the Deferred Bonus Plan and the Restricted Share Plan, the appropriate number of shares will be unconditionally transferred to participants. In 2017, 0.5m shares were transferred to participants in relation to the March 2014 awards under the Performance Share Plan (2016: nil shares were transferred to participants in relation to the April 2013 awards under the Performance Share Plan), 0.4m shares were transferred to participants in relation to the January 2015 awards under the Executive Buyout Scheme (2016: nil), and 0.3m shares were transferred to participants in relation to awards under the Deferred Bonus Plan (2016: 0.3m shares). The Trustees have waived the rights to dividends on shares held by the trust. Participants in the schemes receive an award of shares to represent the dividends which would have been payable on the shares since the date of grant. Other reserves in the Group and Company include £10.1m (2016: £5.8m) relating to unvested Performance Share Plan awards, £3.1m (2016: £1.5m) relating to unvested Restricted Share Plan awards, £1.2m (2016: £1.5m) relating to unvested Executive Buyout Scheme awards and £2.4m (2016: £1.9m) relating to unvested Deferred Bonus Plan awards. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 149 31 Notes to the statement of cash flows 31.1 Cash generated from/(used in) operations Profit/(loss) from operations Share of results of joint ventures and associates Depreciation of property, plant and equipment Depreciation of investment properties Amortisation of other intangible assets Impairment of IT intangible assets Pension deficit payments Pension fund settlement gain Movements relating to share-based payments Gain on disposal of investments in infrastructure concessions Net gain on disposal of other businesses Profit on disposal of property, plant and equipment Impairment of land relating to Blackpool Airport Other non-cash items Operating cash flows before movements in working capital (Increase)/decrease in operating working capital Inventories and non-construction work in progress Due from construction contract customers Trade and other receivables Due to construction contract customers Trade and other payables Provisions Cash generated from/(used in) operations 1 Before non-underlying items (Notes 2.10 and 10). 31.2 Cash and cash equivalents Cash and deposits Term deposits Cash balances within infrastructure concessions Bank overdrafts Notes 18 16 17 15 15 28.2 10 33 32.2 32.2 10 Continuing operations Non- underlying items (Note 10) 2017 £m (48) – – – 9 – – – – Underlying items1 2017 £m 196 (59) 28 1 13 – (25) – 9 Discontinued operations 2017 £m 6 (1) – – – – – – – (86) – (6) – (2) 69 (7) (12) (17) 63 (1) (65) 25 62 – (17) – – 1 (55) 34 – 3 32 22 (27) 4 (21) – (5) – – – – – – – – – – – – 2017 £m 154 (60) 28 1 22 – (25) – 9 (86) (22) (6) – (1) 14 27 (12) (14) 95 21 (92) 29 41 2016 £m 39 (56) 30 – 21 1 (41) (1) 7 (65) (32) (5) 3 – (99) (48) 42 (5) (134) 41 (60) 68 (147) Group 2017 £m 717 116 135 – 968 Group 2016 £m 605 157 7 (1) 768 Company 2017 £m 71 63 – – 134 Company 2016 £m 50 117 – – 167 Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of less than three months and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. 31.3 Analysis of movement in borrowings At 1 January 2017 Currency translation differences Accretion on convertible bonds Proceeds from new loans Repayments of loans Amortisation of arrangement fees Fair value adjustment on loan attributable to minority interest At 31 December 2017 Infrastructure concessions non-recourse project finance 2017 £m (240) 4 – (212) 4 – 4 (440) US private placement £m (285) 26 – – – – – (259) Convertible bonds £m (240) – (7) – 21 – – (226) Loans under committed facilities £m (50) – – – 50 – – – Other £m (14) – – – 2 (1) – (13) Total 2017 £m (829) 30 (7) (212) 77 (1) 4 (938) balfourbeatty.com/AR2017 150 Notes to the financial statements continued 31 Notes to the statements of cash flows continued 31.3 Analysis of movement in borrowings continued At 1 January 2016 Currency translation differences Accretion on convertible bonds Proceeds from new loans Repayments of loans Disposal of non-recourse borrowings (Note 32.3.11) At 31 December 2016 Infrastructure concessions non-recourse project finance 2016 £m (385) (6) – (65) 25 191 (240) US private placement 2016 £m (236) (49) – – – – (285) Convertible bonds 2016 £m (233) – (7) – – – (240) Loans under committed facilities 2016 £m – – – (50) – – (50) Other 2016 £m (14) 1 – (2) 1 – (14) Total 2016 £m (868) (54) (7) (117) 26 191 (829) During the year ended 31 December 2017, the main movement in borrowings within the infrastructure concessions non-recourse project finance was an increase in new loans of £212m (2016: £65m) relating primarily to the development of student accommodation at the University of Sussex, which has been accounted for as an IFRIC 12 intangible. Refer to Note 15. Within the recourse element of the Group’s borrowings, £21m of convertible bonds have been repurchased by the Group and £50m of the drawn committed facility has been repaid in the year. The Group’s entire revolving credit facility of £400m was undrawn at 31 December 2017. 32 Acquisitions and disposals 32.1 Current and prior year acquisitions There were no material acquisitions in 2017. On 30 September 2016, the Group acquired 100% of Omnicom Engineering Ltd for a purchase price of £3m. The consideration included a deferred consideration element of £0.3m which was subject to Omnicom securing key orders at an acceptable level of margin and was paid in 2017. The acquisition resulted in goodwill of £2m. Refer to Note 14. Deferred consideration paid during 2017 in respect of acquisitions completed in earlier years was £3m (2016: £3m). This related to the Group’s acquisition of Centex Construction in 2007. 32.2 Current year disposals Disposal date Notes 32.2.1 1 March 2017 Entity/business Dutco Balfour Beatty LLC & BK Gulf LLC^ 32.2.2 12 September 2017 Regional & City Airports (Blackpool) Holdings Ltd* Heery International Inc* Connect Plus (M25) Holdings Ltd^ 32.2.3 27 October 2017 32.2.4 21 & 29 December 2017 Direct costs incurred, indemnity provisions created and fair value uplift £m Amount recycled from reserves £m Underlying gain £m Non- underlying gain/(loss) £m Percentage disposed % Cash consideration £m Net assets disposed £m 49% 100% 100% 20% 11# 4 43 (6)+ (5) (21) 165@ 223 (164)& (196) – – 6 85 91 – – (10) – (10) – – – 86 86 5 (1) 18 – 22 * Subsidiary. ^ Joint venture. + Net assets disposed include loan receivables due to the Company from BK Gulf LLC of £17m which were settled as part of the disposal. # Cash consideration above reflects elements which have been deferred and therefore discounted at year end. These amount to £5m and have been included in due on disposals within trade and other receivables. Refer to Note 23. @ Of this amount, £103m was received in 2017. The remaining £62m has been included in due on disposals within trade and other receivables and was subsequently received on 23 February 2018. & Net assets disposed include £6m of subordinated debt receivable which was settled as part of the disposal. The balance also includes £2m of excess bid costs recovered which were released and credited to the gain on disposal. 32.2.1 On 26 January 2017, the Group reached agreement to sell its 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC to its joint venture partner for a total cash consideration of £11m, an element of which was deferred. The sale subsequently completed on 1 March 2017. The Group’s share of results in these entities is presented as part of its discontinued operations with comparatives restated accordingly. The £5m gain on the disposal is presented as non-underlying within discontinued operations. 32.2.2 On 12 September 2017, the Group disposed of its entire 100% interest in Regional & City Airports (Blackpool) Holdings Ltd for a cash consideration of £4m. The disposal resulted in a £1m loss being recognised as a non-underlying item within continuing operations. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 151 32 Acquisitions and disposals continued 32.2 Current year disposals continued 32.2.3 On 27 October 2017, the Group disposed of its 100% interest in Heery International Inc for a cash consideration of £43m. The disposal resulted in a net gain of £18m being recognised as a non-underlying item within continuing operations, comprising a gain of £12m in respect of net assets disposed (after direct costs and indemnity provisions incurred of £10m) and a gain of £6m in respect of cumulative foreign exchange reserves recycled to the income statement. The disposal included cash disposed of £5m. 32.2.4 On 21 December 2017, the Group disposed of a 12.5% interest in Connect Plus (M25) Holdings Ltd to Dalmore for a cash consideration of £103m. Subsequently on 29 December 2017, the Group disposed of a further 7.5% interest in the joint venture for a cash consideration of £62m. On this date, the Group ceased to jointly control this 7.5% interest as Equitix had the right to acquire this stake for a cash consideration of £62m which was exercisable up until 13 March 2018. At the same time, the Group had an unconditional right to sell the stake to Dalmore for an identical price if Equitix failed to exercise its right to acquire. The completion of this portion of the disposal was ongoing at the balance sheet date and therefore the consideration of £62m has been included in trade and other receivables as amounts due on disposals. Refer to Note 23. This consideration was subsequently received on 23 February 2018 following completion of the disposal to Equitix. Refer to Note 37. These disposals resulted in a net gain of £86m comprising a gain of £1m in respect of the Group’s investment in the joint venture and a gain of £85m in respect of revaluation reserves recycled to the income statement on disposal. 32.2.5 On 21 November 2016, the Group reached agreement to dispose of its 49% interest in Balfour Beatty Sakti Indonesia to its joint venture partner for a payment by the Group of £3m reflecting the Group’s share of the net liabilities of the joint venture. This was recognised as a disposal in 2016 as completion of the sale was not subject to any substantive terms at 31 December 2016. The Group subsequently completed the disposal in March 2017. A payment of £3m was made by the Group to the purchaser following the completion of this disposal. 32.2.6 Subsidiaries net assets disposed Net assets disposed Intangible assets – goodwill Property, plant and equipment Deferred taxation Due to construction contract customers Trade and other receivables Trade and other payables Provisions Cash Costs directly related to the sale Cash consideration Amounts recycled from reserves Loss/(gain) on disposal Net cash flow effect Total consideration Cash and cash equivalents disposed Transaction costs paid Net cash consideration Notes 14 16.1 27.1 25 Regional & City Airports (Blackpool) Holdings Ltd – 6 (1) – – – – – 5 – 5 (4) – 1 Heery International Inc £m 17 2 9 (6) 18 (22) (2) 5 21 10 31 (43) (6) (18) 4 – – 4 43 (5) (2) 36 Total £m 17 8 8 (6) 18 (22) (2) 5 26 10 36 (47) (6) (17) 47 (5) (2) 40 balfourbeatty.com/AR2017 152 Notes to the financial statements continued 32 Acquisitions and disposals continued 32.3 Prior year disposals Notes 32.3.1 32.3.2 32.3.3 Disposal date 15 April 2016 5 May 2016 1 July 2016 Entity/business Connect M1-A1 Holdings Ltd^ Living & Learning Unit Trust^ BSF Schools: Islington, Southwark, Blackburn with Darwen & Bolton, Oldham, Hertfordshire, Ealing, Derby City^ BBIP Infrastructure Fund+ BBIP Advisor* Humber Gateway^ 32.3.4 32.3.5 32.3.6 32.3.7 32.3.8 32.3.9 1 July 2016 1 July 2016 7 September 2016 21 September 2016 Parts of Rail Germany* 21 November 2016 Balfour Beatty Sakti Indonesia^ 15 December 2016 Streetlighting: Sunderland, South Tyneside, Coventry, Cambridgeshire, Northamptonshire* Percentage disposed % 30% 50% Cash consideration £m 15 19 Net assets disposed £m (10)& (1) Direct costs incurred, indemnity provisions created and fair value uplift £m – (1) Amount recycled from reserves £m – (8) Underlying gain £m 5 9 Non- underlying gain/(loss) £m – – 80/90% 17.8% 100% 40% 100% 49% 73 48 – 2 15 (3) (27) (48) (3) – (14) 3 (8) 7 – – 2 – 80% 33 202# (37) (137) 15 8 – (1) – – (1) – – (3) 38 – – 2 – – 11 65 – 6 (3) – 2 – – 5 * Subsidiary. ^ Joint venture. + Associate. # Total cash consideration received by the Group also includes £9m of cash received in respect of Parsons Brinckerhoff (Note 32.3.10) and £2m of deferred cash consideration received in respect of SSL (Note 10.1.4.9). & Net assets disposed include amounts due to the joint venture of £4m held by the Company. 32.3.1 On 15 April 2016, the Group disposed of a 30% interest in Connect M1-A1 Holdings Ltd for a cash consideration of £15m. The infrastructure concession disposal resulted in a net gain of £5m being recognised within underlying operating profit. The Group retains a 20% interest in Connect M1-A1 Holdings Ltd. 32.3.2 On 5 May 2016, the Group disposed of its 50% interest in Living & Learning Holdings Custodians Pty Ltd (Living & Learning Unit Trust) for a cash consideration of £19m. The infrastructure concession disposal resulted in a net gain of £9m being recognised within underlying operating profit, comprising: a gain of £18m in respect of the investment in the joint venture, an £8m loss in respect of revaluation reserves recycled to the income statement and £1m costs of disposal incurred. 32.3.3 On 1 July 2016, the Group disposed of its entire interest in seven BSF (Building Schools for the Future) projects: Islington, Southwark, Blackburn with Darwen & Bolton, Oldham, Hertfordshire, Ealing and Derby City for a cash consideration of £73m. On this date, the Group ceased to jointly control these BSF projects by virtue of a put/call structure with a preferred bidder. The disposal completed on 22 August 2016. The infrastructure concession disposal resulted in a net gain of £38m being recognised within underlying operating profit, comprising: a gain of £46m in respect of the investments in the joint ventures and an £8m loss in respect of revaluation reserves recycled to the income statement. 32.3.4 On 1 July 2016, the Group disposed of its 17.8% interest in the BBIP Infrastructure Fund for an initial cash consideration of £48m. The disposal resulted in a net gain of £6m being recognised within non-underlying operating profit, comprising: a gain of £nil in respect of the investment in the associated undertaking, a £7m gain in respect of revaluation reserves recycled to the income statement and £1m costs of disposal incurred. 32.3.5 On 1 July 2016, the Group disposed of its 100% interest in the BBIP Advisor for a cash consideration of £nil. The disposal resulted in a net loss of £3m being recognised within non-underlying operating profit, comprising a loss of £3m in respect of the investment in the subsidiary. 32.3.6 On 7 September 2016, the Group disposed of its right to a 40% interest in Humber Gateway OFTO Holdings Ltd. The infrastructure concession disposal resulted in a net gain of £2m being recognised within underlying operating profit comprising a £2m fee received on disposing of the Group’s interest. The Group retains a 20% interest in Humber Gateway OFTO Holdings Ltd. 32.3.7 On 21 September 2016, as part of the ongoing process to exit the Mainland European rail business, the Group disposed of part of its Rail business in Germany to Tianjin Keyvia Electric Co Ltd for a cash consideration of £15m. This sale resulted in a £2m gain as a result of recycling of foreign currency reserves. The related assets disposed were impaired by £11m in 2015 to reflect the value of the agreed consideration which was recognised within non-underlying items (refer to Note 10.1.4.10). The disposal included cash disposed of £10m. 32.3.8 On 21 November 2016, the Group reached agreement to dispose of its 49% interest in Balfour Beatty Sakti Indonesia to its joint venture partner for a payment by the Group of £3m reflecting the Group’s share of the net liabilities of the joint venture. This has been recognised as a disposal in the year as completion of the sale is not subject to any substantive terms at the year end. The amount due to the purchaser has been recognised in amounts due on disposal at 31 December 2016 within trade and other payables (refer to Note 24) and was paid in 2017. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 153 32 Acquisitions and disposals continued 32.3 Prior year disposals continued 32.3.9 On 16 December 2016, the Group disposed of 80% interests in five streetlighting projects for a cash consideration of £33m. This infrastructure concession disposal resulted in a net gain of £11m being recognised within underlying operating profit, comprising: a loss of £4m in respect of the investments in subsidiaries and a £15m gain in respect of fair value reserves recycled to the income statement. The Group retains 20% interests in the infrastructure concession projects which are accounted for as joint ventures under the equity method. The disposal included cash disposed of £16m. 32.3.10 In 2016, the Group reached a settlement with the purchaser of Parsons Brinckerhoff (PB) in relation to outstanding tax matters and indemnities. The Group received an additional £9m as a result of this settlement. At the same time, provisions in relation to these matters have been released, resulting in an overall gain to the Group of £24m. 32.3.11 Prior year subsidiaries net assets disposed Net assets disposed PPP financial assets Intangible assets – other Property, plant and equipment Deferred taxation Inventories and non-construction work in progress Due from construction contract customers Trade and other receivables Trade and other payables Provisions Retirement benefit liabilities Derivative financial instruments Cash Non-recourse borrowings Net assets of interest retained Reserves recycled to the income statement Costs directly related to the sale Cash consideration (Gain)/loss on disposal Net cash flow effect Total consideration Cash and cash equivalents disposed Net cash consideration Net receipt in relation to the disposal of Parsons Brinckerhoff & Sale of parts of Rail Germany to Tianjin Keyvia Electric Co Ltd. Notes 20 15 16.1 27.1 25 28.2 31.3 18.1 Streetlighting £m 279 – – (3) – – 4 (3) – – (57) 16 (191) (8) 37 (15) – 22 (33) (11) Rail Germany& £m – – 1 – 5 21 8 (24) (1) (6) – 10 – – 14 (2) 1 13 (15) (2) 33 (16) 17 15 (10) 5 32.3.10 BBIP Advisor £m – 3 – – – – – – – – – – – – 3 – – 3 – 3 – – – Total £m 279 3 1 (3) 5 21 12 (27) (1) (6) (57) 26 (191) (8) 54 (17) 1 38 (48) (10) 48 (26) 22 9 31 balfourbeatty.com/AR2017 154 Notes to the financial statements continued 33 Share-based payments The Company operates four equity-settled share-based payment arrangements, namely the Executive Buyout Scheme (EBS), the Performance Share Plan (PSP), the Deferred Bonus Plan (DBP) and the Restricted Share Plan (RSP). The Group recognised total expenses relating to equity-settled share-based payment transactions of £9.4m in 2017 (2016: £7.4m). Refer to the Remuneration report for details of the various schemes. Movements in share plans 2017 number of awards Outstanding at 1 January Granted during the year Awards in lieu of dividends Forfeited during the year Exercised during the year Expired during the year Outstanding at 31 December Exercisable at 31 December Weighted average remaining contractual life (years) Weighted average share price at the date of exercise for awards exercised in the year 2016 number of awards Outstanding at 1 January Granted during the year Awards in lieu of dividends Forfeited during the year Exercised during the year Expired during the year Outstanding at 31 December Exercisable at 31 December Weighted average remaining contractual life (years) Weighted average share price at the date of exercise for awards exercised in the year EBS conditional awards 1,905,260 – – (189,854) (445,233) – 1,270,173 61,662 – PSP conditional awards 8,128,097 3,087,443 – (821,131) (489,184) – 9,905,225 – 1.3 DBP conditional awards 1,464,322 632,308 19,054 (76,848) (329,761) – 1,709,075 – 1.3 RSP conditional awards 1,936,946 1,539,448 28,974 (342,624) (20,084) – 3,142,660 – 1.6 271.6p 139.3p 272.1p 274.6p EBS conditional awards 1,905,260 – – – – – 1,905,260 30,381 0.7 PSP conditional awards 7,105,303 3,768,644 – (579,335) – (2,166,515) 8,128,097 – 1.7 DBP conditional awards 1,249,236 651,306 4,676 (127,790) (285,853) (27,253) 1,464,322 – 1.5 RSP conditional awards 1,105,658 986,096 5,592 (159,400) (1,000) – 1,936,946 – 1.8 n/a n/a 252.4p 228.0p The principal assumptions, including expected volatility determined from the historical weekly share price movements over the three-year period immediately preceding the award date, used by the consultants in the stochastic model for the 33.3% of the PSP awards granted in 2017 subject to market conditions, were: Award date 7 June 2017 Name of award PSP award Closing share price on award date Pence 271.0 Expected volatility of shares % 30.0 Expected term of awards Years 3.0 Risk-free interest rate % 0.1 Calculated fair value of an award Pence 132.2 For the 66.7% of the PSP awards granted in 2017 subject to non-market conditions and for the DBP and RSP awards granted in 2017, the fair value of the awards is the closing share price before award date. 34 Commitments Capital expenditure authorised and contracted for which has not been provided for in the financial statements amounted to £2m (2016: £5m) in the Group and £nil (2016: £nil) in the Company. The Group has committed to provide its share of further equity funding and subordinated debt in Infrastructure Investments projects which have reached financial close. Refer to Note 39(f). The Group leases land and buildings, equipment and other various assets under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The lease expenditure charged to the income statement for continuing operations is disclosed in Note 6.1. Future operating lease expenditure commitments Due within one year Due between one and five years Due after more than five years Land and buildings 2017 £m 22 47 15 84 Other 2017 £m 33 48 3 84 Land and buildings 2016 £m 25 63 24 112 Other 2016 £m 41 53 2 96 The Company did not have any future operating lease expenditure commitments as at 31 December 2017 (2016: £nil). Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 155 34 Commitments continued Future committed operating lease income Due within one year Due between one and five years Land and buildings 2017 £m 7 6 13 Land and buildings 2016 £m 6 11 17 The Company did not have any future committed operating lease income as at 31 December 2017 (2016: £nil). 35 Contingent liabilities The Company and certain subsidiary undertakings have, in the normal course of business, given guarantees and entered into counter- indemnities in respect of bonds relating to the Group’s own contracts and given guarantees in respect of their share of certain contractual obligations of joint ventures and associates and certain retirement benefit liabilities of the Balfour Beatty Pension Fund and the Railways Pension Scheme. Guarantees are treated as contingent liabilities until such time as it becomes probable payment will be required under the terms of the guarantee. Provision has been made for the Directors’ best estimate of known legal claims, investigations and legal actions in progress. The Group takes legal advice as to the likelihood of success of claims and actions and no provision is made where the Directors consider, based on that advice, that the action is unlikely to succeed, or that the Group cannot make a sufficiently reliable estimate of the potential obligation. 36 Related party transactions Joint ventures and associates The Group has contracted with, provided services to, and received management fees from, certain joint ventures and associates amounting to £279m (2016: £344m). These transactions occurred in the normal course of business at market rates and terms. In addition, the Group procured equipment and labour on behalf of certain joint ventures and associates which were recharged at cost with no mark-up. The amounts due from or to joint ventures and associates at the reporting date are disclosed in Notes 23 and 24 respectively. Transactions with non-Group members The Group also entered into transactions and had amounts outstanding with related parties which are not members of the Group as set out below. These companies were related parties as they are controlled or jointly controlled by a non-executive director of Balfour Beatty plc. Anglian Water Group Ltd Sale of goods & services Amounts owed by related parties URENCO Ltd Sale of goods & services Amounts owed by related parties 2017 £m 2016 £m 18 3 72 – 13 – 62 5 All transactions with these related parties were conducted on normal commercial terms, equivalent to those conducted with external parties. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No expense has been recognised in the period for bad or doubtful debts in respect of the amounts owed by related parties. Compensation of key management personnel of the Company Short-term benefits Share-based payments 2017 £m 2.938 2.584 5.522 2016 £m 2.384 1.612 3.996 Key management personnel comprise the executive Directors who are directly responsible for the Group’s activities and the non-executive Directors. The compensation included above is in respect of the period of the year during which the individuals were Directors. Further details of Directors’ emoluments, post-employment benefits and interests are set out in the 2017 Remuneration report on pages 76 to 87. balfourbeatty.com/AR2017 156 Notes to the financial statements continued 37 Events after the reporting date On 15 January 2018, Carillion plc filed for compulsory liquidation. Carillion was one of the Group’s joint operations partners in the Aberdeen Western Peripheral Route (AWPR) project on a joint and several basis. As a result of Carillion’s liquidation, the Group and its remaining joint operations partner on the project, Galliford Try plc, are jointly liable to deliver Carillion’s remaining obligations on this contract in addition to each partner’s existing 33% share. The Group has assessed the liquidation of Carillion plc as an adjusting post balance sheet event and in light of this, the Group has recognised a one-off non-underlying loss provision of £44m in 2017, which reflects the Group’s additional loss on the contract as a result of Carillion’s liquidation. The contract is expected to complete in the summer of 2018. Refer to Note 10. On 14 February 2018, the Group repurchased a further £17.7m of its convertible bonds, which will result in a loss on settlement of £0.3m. This settlement will also trigger a further £2m of reserves relating to the equity component of the repurchased bonds being transferred from other reserves into retained earnings. Following this settlement, the Group’s outstanding bonds on maturity in December 2018 amount to £213.7m. On 19 February 2018, the Group agreed the disposal of a further 5% interest in Connect Plus (M25) Holdings Ltd to Equitix for a cash consideration of £42m, equivalent to the price of the 20% disposal in 2017. The expected profit on disposal for this transaction is £21m. On 23 February 2018, the Group completed this transaction and received from Equitix the full cash consideration of £104m, inclusive of the £62m outstanding at the reporting date as detailed in Note 32.2.4. The Group continues to own a 15% interest in Connect Plus (M25) Holdings Ltd. On 7 March 2018, the Group repaid the first tranche of its US private placement notes amounting to US$45m (£32.5m). US$305m remain outstanding, with the next tranche of US$46m being due in March 2020 and the remaining loan notes falling due in March 2023 and March 2025. 38 Financial instruments Capital risk management The Group manages its capital to ensure its ability to continue as a going concern and to maintain an optimal capital structure to reduce the cost of capital. The components of capital are as follows: equity attributable to equity holders of the Company comprising issued ordinary share capital, reserves and retained earnings as disclosed in Notes 29.1 and 30; preference shares as disclosed in Note 29.2; US private placement as disclosed in Note 26; convertible bonds as disclosed in Note 26; and cash and cash equivalents and borrowings as disclosed in Note 26. The Group maintains or adjusts its capital structure through the payment of dividends to equity holders, issue of new shares and buyback of existing shares, and drawdown of new borrowings and repayment of existing borrowings. The policy of the Group is to ensure an appropriate balance between cash, borrowings (other than the non-recourse borrowings of companies engaged in Infrastructure Investments projects), working capital and the value in the Infrastructure Investments investment portfolio. The overall capital risk management strategy of the Group remains unchanged from 2016. Categories of financial instruments Loans and receivables at amortised cost, cash and deposits 2017 £m Financial liabilities at amortised cost 2017 £m Available- for-sale financial assets 2017 £m Held to maturity financial assets 2017 £m Derivatives 2017 £m Loans and receivables at amortised cost, cash and deposits 2016 £m Financial liabilities at amortised cost 2016 £m Available- for-sale financial assets 2016 £m Held to maturity financial assets 2016 £m Derivatives 2016 £m Financial assets Fixed rate bonds and treasury stock Mutual funds PPP financial assets Cash and deposits Trade and other receivables Derivatives Total Financial liabilities Liability component of preference shares Trade and other payables Unsecured borrowings Secured borrowings Infrastructure concessions non-recourse term loans Derivatives Total Net Current year comprehensive income/(loss) excluding share of joint ventures and associates – – – 968 1,080 – 2,048 – – – – – – – 2,048 – – – – – – – (103) (1,585) (498) – (440) – (2,626) (2,626) – 22 163 – – – 185 – – – – – – – 185 17 – – – – – 17 – – – – – – – 17 –– –– – – – 3– 3 – – – –– – – – 769 1,210 – 1,979 – – – (1) – (35) (35) (32) – – – 1,979 – 23 – – – – – (100) (1,772) (588) – (240) – (2,701) (2,701) 22 – 163 – – – 186 – – – – – – – 186 – – – – – 4 22 – – – – – – – 22 – – – 4 – – – – (39) (39) (35) 31 (67) 17 1 4 52 (78) (14) 1 32 Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 157 38 Financial instruments continued Derivatives Foreign currency contracts Held for trading at fair value through Income Statement Designated as cash flow hedges Interest rate swaps Designated as cash flow hedges Financial assets Current 2017 £m Non- current 2017 £m Total 2017 £m Financial liabilities Non- current 2017 £m Total 2017 £m Current 2017 £m Financial assets Financial liabilities Current 2016 £m Non- current 2016 £m Total 2016 £m Current 2016 £m Non- current 2016 £m Total 2016 £m – 2 – 2 – 1 – 1 – 3 – 3 – (1) (4) (5) – – – (1) (30) (30) (34) (35) 1 – – 1 – 3 – 3 1 3 – 4 (2) – (4) (6) – – (2) – (33) (33) (37) (39) Non-derivative financial liabilities gross maturity The following table details the remaining contractual maturity for the Group’s non-derivative financial liabilities. The table reflects the undiscounted contractual maturities of the financial liabilities including interest that will accrue on those liabilities except where the Group is entitled to and intends to repay the liability before its maturity. The discount column represents the possible future cash flows included in the maturity analysis, such as future interest, that are not included in the carrying value of the financial liability. Maturity profile of the Group’s non-derivative financial liabilities at 31 December Due on demand or within one year Due within one to two years Due within two to five years Due after more than five years Discount Carrying value Due on demand or within one year Due within one to two years Due within two to five years Due after more than five years Discount Carrying value Non-recourse project finance 2017 £m (11) (84) (30) (398) (523) 83 (440) Other borrowings 2017 £m (274) (4) (34) (191) (503) 5 (498) Other financial liabilities 2017 £m (1,448) (99) (138) (13) (1,698) 10 (1,688) Non-recourse project finance 2016 £m (57) (10) (34) (188) (289) 49 (240) Other borrowings 2016 £m (56) (299) (37) (209) (601) 12 (589) Other financial liabilities 2016 £m (1,639) (93) (134) (20) (1,886) 14 (1,872) Total non- derivative financial liabilities 2017 £m (1,733) (187) (202) (602) (2,724) 98 (2,626) Total non- derivative financial liabilities 2016 £m (1,752) (402) (205) (417) (2,776) 75 (2,701) Discount 2017 £m 9 14 17 58 98 Carrying value 2017 £m (1,724) (173) (185) (544) (2,626) Discount 2016 £m 10 14 15 36 75 Carrying value 2016 £m (1,742) (388) (190) (381) (2,701) Derivative financial liabilities gross maturity The following table details the Group’s expected maturity for its derivative financial liabilities. The table reflects the undiscounted net cash inflows/(outflows) on the derivative instruments that settle on a net basis (interest rate swaps) and undiscounted gross inflows/(outflows) for those derivatives that are settled on a gross basis (foreign exchange contracts). When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates, using the yield curves at the reporting date. Maturity profile of the Group’s derivative financial liabilities at 31 December Due on demand or within one year Due within one to two years Due within two to five years Due after more than five years Total Payable 2017 £m (21) (7) (10) (24) (62) Receivable 2017 £m 18 3 – – 21 Net payable 2017 £m (3) (4) (10) (24) (41) Payable 2016 £m (77) (10) (14) (27) (128) Receivable 2016 £m 71 6 3 – 80 Net payable 2016 £m (6) (4) (11) (27) (48) balfourbeatty.com/AR2017 158 Notes to the financial statements continued 38 Financial instruments continued Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk; credit risk; and liquidity risk. The Group’s financial risk management strategy seeks to minimise the potential adverse effect of these risks on the Group’s financial performance. Financial risk management is carried out centrally by Group Treasury under policies approved by the Board. Group Treasury liaises with the Group’s operating companies to identify, evaluate and hedge financial risks. The Board provides written principles for overall financial risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies and exposure limits is monitored through the Group’s internal audit and risk management procedures. The Group uses derivative financial instruments to hedge certain risk exposures. The Group does not trade in financial instruments, including derivative financial instruments, for speculative purposes. (a) Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including: – forward foreign exchange contracts to hedge the exchange rate risk arising on trading activities transacted in a currency that is not the functional currency of the operating company – interest rate swaps to mitigate the cash flow variability in non-recourse project finance loans arising from variable interest rates on borrowings. There has been no material change to the Group’s exposure to market risks and there has been no change in how the Group manages those risks since 2016. (i) Foreign currency risk management The Group operates internationally and is exposed to foreign exchange risk arising from exposure to various currencies, primarily to US dollars, euros and Hong Kong dollars. Foreign exchange risk arises from future trading transactions, assets and liabilities and net investments in foreign operations. Group policy requires operating companies to manage their transactional foreign exchange risk against their functional currency. Whenever a current or future foreign currency exposure is identified with sufficient reliability Group Treasury enters into forward contracts on behalf of operating companies to cover 100% of foreign exchange risk above materiality levels determined by the Chief Financial Officer. Refer to page 157 for details of forward foreign exchange contracts outstanding at the reporting date in respect of foreign currency transactional exposures. As at 31 December 2017, the notional principal amounts of foreign exchange contracts in respect of foreign currency transactions where hedge accounting is not applied was £13m (2016: £70m) receivable and £12m (2016: £71m) payable with related cash flows expected to occur within one year (2016: two years). The foreign exchange gains or losses resulting from fair valuing these unhedged foreign exchange contracts will affect the income statement throughout the same periods. The Group has designated forward exchange contracts with a notional principal amount of £8m (2016: £10m) receivable and £9m (2016: £11m) payable as cash flow hedges against highly probable cash flows which are expected to occur in up to four (2016: five) years. Fair value gains on these contracts of £1m (2016: £2m) have been taken to hedging reserves through other comprehensive income. No significant amounts in relation to hedge ineffectiveness have been charged or credited to the Income Statement in relation to any foreign exchange cash flow hedges. The Group’s investments in foreign operations are exposed to foreign currency translation risks. The Group does not enter into forward foreign exchange or other derivative contracts to hedge foreign currency denominated net assets. In March 2013, the Group raised US$350m through a US private placement which has been designated as a net investment hedge against changes in the value of the Group’s US net assets due to exchange movements. The Group has reassessed this hedge and has concluded that the hedge continues to be effective. Exchange movements in the year totalled £26m (2016: £49m). A 5% increase/decrease in the US dollar to sterling exchange rate would lead to a £12m decrease (2016: £14m)/£14m increase (2016: £15m) in the carrying amount of the liability on the Group’s balance sheet, with the movement recognised in other comprehensive income. The hedging policy is reviewed periodically. At the reporting date there had been no change to the hedging policies since 2016. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 159 38 Financial instruments continued (ii) Interest rate risk management Interest rate risk arises in the Group’s non-recourse project companies which borrow funds at both floating and fixed interest rates and hold available-for-sale financial assets. Floating rate borrowings expose the Group to cash flow interest rate risk. The Group’s policy to manage this risk is to swap floating rate interest to fixed rate, using interest rate swap contracts. In an interest rate swap, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. The net effect of a movement in interest rates on income would be immaterial. The fair value of interest rate swaps is determined by discounting the future cash flows using the yield curve at the reporting date. During 2017 and 2016, the Group’s non-recourse project subsidiaries’ borrowings at variable rates of interest were denominated in sterling and US dollars. The notional principal amounts of the outstanding subsidiaries’ interest rate swaps outstanding at 31 December 2017 totalled £113m (2016: £117m) with maturities that match the maturity of the underlying borrowings ranging from one year to 22 years. At 31 December 2017, the fixed interest rates range from 3.5% to 5.1% (2016: 3.5% to 5.1%) and the principal floating rates are LIBOR plus a fixed margin. A 50 basis point increase/decrease in the interest rate in which financial instruments are held would lead to a £6m increase (2016: £7m)/£8m decrease (2016: £9m) in amounts taken directly to other comprehensive income by the Group in relation to the Group’s exposure to interest rates on the available-for-sale PPP financial assets and cash flow hedges of its Infrastructure Investments subsidiaries. Interest rate risk also arises on the Group’s cash and cash equivalents, term deposits and other borrowings. The majority of the debt of the Group is held at fixed interest rates. A 50 basis point increase/decrease in the interest rate of each currency in which these financial instruments are held would lead to a £2.8m decrease (2016: £nil)/£1.4m increase (2016: £nil) in the Group’s net finance cost. (iii) Price risk management The Group’s principal price risk exposure arises in its Infrastructure Investments concessions. At the commencement of the concession, an element of the unitary payment by the customer is indexed to offset the effect of inflation on the concession’s costs. The Group is exposed to price risk to the extent that inflation differs from the index used. (b) Credit risk Credit risk is the risk that a counterparty will default on its contractual obligations, resulting in financial loss. Credit risk arises from cash and deposits, derivative financial instruments and credit exposures to customers, including outstanding receivables and committed transactions. The Group has a policy of assessing the creditworthiness of potential customers before entering into transactions. For cash and deposits and derivative financial instruments, the Group has a policy of only using counterparties that are independently rated with a minimum long-term credit rating of BBB+. At 31 December 2017, £1m (2016: £1m) did not meet this criterion due to the operational and relationship difficulties in transferring certain balances, however no losses are anticipated from these counterparties. The credit rating of a financial institution will determine the amount and duration for which funds may be deposited under individual risk limits set by the Board of Directors for the Group and subsidiary companies. Management monitors the utilisation of these credit limits regularly. For trade and other receivables, credit evaluation is performed on the financial condition of accounts receivable using independent ratings where available or by assessment of the customer’s credit quality based on its financial position, past experience and other factors. The Group’s most significant customers are public or regulated industry entities which generally have high credit ratings or are of a high credit quality due to the nature of the customer. The maximum exposure to credit risk in respect of the above at the reporting date is the carrying value of financial assets recorded in the financial statements, net of any allowance for losses. (c) Liquidity risk The Group manages liquidity risk by maintaining adequate cash balances and banking facilities, continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Details of undrawn committed borrowing facilities are set out in Note 26.1. The maturity profile of the Group’s financial liabilities is set out on page 134. balfourbeatty.com/AR2017 160 Notes to the financial statements continued 38 Financial instruments continued Fair value estimation The Group holds certain financial instruments on the balance sheet at their fair values. The following hierarchy classifies each class of financial asset or liability in accordance with the valuation technique applied in determining its fair value. There have been no transfers between these categories in the current or preceding year. Level 1 – The fair value is calculated based on quoted prices traded in active markets for identical assets or liabilities. The Group holds available-for-sale investments in mutual funds which are traded in active markets and valued at the closing market price at the reporting date. Level 2 – The fair value is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows utilising yield curves at the reporting date and taking into account own credit risk. Own credit risk for Infrastructure Investments’ swaps is not material and is calculated using the following credit valuation adjustment (CVA) calculation: loss given default multiplied by exposure multiplied by probability of default. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the reporting date and yield curves derived from quoted interest rates matching the maturities of the foreign exchange contracts. Own credit risk for the other derivative liabilities is not material and is calculated by applying a relevant credit default swap (CDS) rate obtained from a third party. Level 3 – The fair value is based on unobservable inputs. The fair value of the Group’s PPP financial assets is determined in the construction phase by applying an attributable profit margin by reference to the construction margin on non-PPP projects reflecting the construction risks retained by the construction contractor, and fair value of construction services performed. In the operational phase it is determined by discounting the future cash flows allocated to the financial asset at a discount rate which is based on long-term gilt rates adjusted for the risk levels associated with the assets, with market- related movements in fair value recognised in other comprehensive income and other movements recognised in the Income Statement. Amounts originally recognised in other comprehensive income are transferred to the Income Statement upon disposal of the asset. A change in the discount rate would have a significant effect on the value of the asset and a 50 basis point increase/decrease, which represents management’s assessment of a reasonably possible change in the risk-adjusted discount rate, would lead to a £7m decrease (2016: £7m)/£7m increase (2016: £7m) in the fair value of the assets taken through equity. Refer to Note 20 for a reconciliation of the movement from the opening balance to the closing balance. Financial instruments at fair value Available-for-sale mutual fund financial assets Financial assets – foreign currency contracts Available-for-sale PPP financial assets Total assets measured at fair value Financial liabilities – foreign currency contracts Financial liabilities – infrastructure concessions interest rate swaps Total liabilities measured at fair value Level 1 £m 22 – – 22 – – – Level 2 £m – 3 – 3 (1) (34) (35) Level 3 £m – – 163 163 – – – 2017 Total £m 22 3 163 188 (1) (34) (35) Level 1 £m 23 – – 23 – – – Level 2 £m – 4 – 4 (2) (37) (39) Level 3 £m – – 163 163 – – – 2016 Total £m 23 4 163 190 (2) (37) (39) Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 161 39 Principal subsidiaries, joint ventures and associates (a) Principal subsidiaries Country of incorporation or registration Construction and Support Services Balfour Beatty Group Ltd Balfour Beatty Construction Group Inc Balfour Beatty Construction, LP Balfour Beatty Infrastructure Inc Balfour Beatty Rail Inc Infrastructure Investments (Note 39) Balfour Beatty Communities LLC Balfour Beatty Infrastructure Investments Ltd* Balfour Beatty Investments Inc Balfour Beatty Investments, LP Balfour Beatty Communities, LP Other Balfour Beatty Holdings Inc. Delphian Insurance Company Ltd* US Canada US US US US Canada Canada US Isle of Man (b) Principal joint ventures and associates Country of incorporation or registration Construction and Support Services Gammon China Ltd Infrastructure Investments (Note 39) Connect Plus (M25) Ltd Hong Kong Ownership interest % 50.0 20.0+ (c) Principal joint operations The Group carries out a number of its larger contracts in joint arrangements with other contractors so as to share resources and risk. The principal joint projects in progress during the year are shown below. Crossrail M25 Maintenance Aberdeen Western Peripheral Route^ Area 10 ASC Bergstrom/CRC Regional Rail Partners/North Metro 26.7 52.5 33.3 70.0 45.0 50.0 US US Notes (i) Subsidiaries, joint ventures and associates whose results did not, in the opinion of the Directors, materially affect the results or net assets of the Group are not shown. (ii) Unless otherwise stated, 100% of the equity capital is owned and companies are registered in England and Wales and the principal operations of each company are conducted in the country of incorporation. * Indicates held directly by Balfour Beatty plc. + Previously 40%, the Group disposed of a 20% interest in December 2017. Refer to Note 32.2.4. ^ Following Carillion plc’s compulsory liquidation on 15 January 2018, the Group’s interest in this joint operation has increased to 50%, shared equally between the Group and Galliford Try plc. Refer to Note 10.1.4.2. A full list of the Group’s related undertakings is included in Note 41. balfourbeatty.com/AR2017 162 Notes to the financial statements continued 39 Principal subsidiaries, joint ventures and associates continued (d) Balfour Beatty Investments UK Roads Balfour Beatty is a promoter, developer and investor in 13 road and street lighting projects to construct new roads, to upgrade and maintain existing roads and to replace and maintain street lighting. The principal contract is the project agreement with the governmental highway authority. All assets transfer to the customer at the end of the concession. Concession company (i) Connect M1-A1 Ltd Connect A50 Ltd Connect A30/A35 Ltd Connect M77/GSO plc (ii) Connect Roads Sunderland Ltd Connect Roads South Tyneside Ltd Connect Roads Derby Ltd Connect Plus (M25) Ltd Connect CNDR Ltd Connect Roads Coventry Ltd Connect Roads Cambridgeshire Ltd Connect Roads Northamptonshire Ltd Aberdeen Roads Ltd Project 30km road 57km road 102km road 25km road Streetlighting Streetlighting Streetlighting J16 – J23, J27 – J30 and A1(M) Hatfield Tunnel Carlisle Northern Development Route Streetlighting Streetlighting Streetlighting Aberdeen Western Peripheral Route Total debt and equity funding Financial close £m Shareholding March 1996 20% 290 May 1996 25% 42 July 1996 20% 127 May 2003 85% 167 20% 27 August 2003 20% December 2005 28 April 2007 100% 36 1,309 176 56 51 64 20% 25% 20% 20% 20% May 2009 July 2009 August 2010 April 2011 August 2011 665 33.3% December 2014 Duration years 30 30 30 32 25 25 25 Construction completion 1999 1998 2000 2005 2008 2010 2012 30 30 25 25 25 33 2012 2012 2015 2016 2016 2018 Notes (i) Registered in England and Wales and the principal operations of each company are in England and Wales, except Connect M77/GSO plc and Aberdeen Roads Ltd which are registered in and conduct their principal operations in Scotland. (ii) Due to the shareholders’ agreement between Balfour Beatty and the other shareholder requiring unanimity of agreement in respect of significant matters related to the financial and operating policies of this company, the Directors consider that the Group does not control this company and it has been accounted for as a joint venture. Healthcare Balfour Beatty is a promoter, developer and investor in four healthcare projects to build hospital accommodation and to provide certain non-medical facilities management services over the concession period. The principal contract is the project agreement between the concession company and the NHS Trust and in the case of the Irish Primary Care Centres, the Irish Government. All assets transfer to the customer at the end of the concession. Concession company (i) Consort Healthcare (Birmingham) Ltd Consort Healthcare (Fife) Ltd Woodland View Project Co Ltd Healthcare Centres PPP Ltd Project Teaching hospital and mental health hospital General hospital Mental health hospital in Irvine Primary health care centres £m Shareholding 553 170 58 158 40% 50% 100% 40% Total debt and equity funding Financial close Duration years Construction completion June 2006 April 2009 June 2014 May 2016 40 30 27 26 2011 2011 2016 2018 Note (i) Registered in England and Wales and the principal operations of each company are in England and Wales, except Consort Healthcare (Fife) Ltd and Woodland View Project Co Ltd which are registered in and conduct their principal operations in Scotland and Healthcare Centres PPP Ltd which is registered in and conducts its principal operations in Ireland. Student accommodation Balfour Beatty is a promoter, developer and investor in four student accommodation projects. On Holyrood, Sussex and Aberystwyth, the principal agreement is between the concession company and the university and the assets transfer to the customer at the end of the concession. On Glasgow Residences the building is owned outright by Balfour Beatty and rooms will be let to individual students. Concession company (i) Holyrood Student Accommodation SPV Ltd Aberystwyth Student Accommodation Ltd Glasgow Residences (Kennedy Street) SPV Ltd East Slope Residencies Student Accommodation LLP Project Edinburgh Aberystwyth Glasgow Sussex £m Shareholding 100% 82 100% 51 100% 40 80% 218 Financial close July 2013 July 2013 April 2016 March 2017 Total debt and equity funding Duration years 50 35 n/a 50 Construction completion 2016 2015 2017 2020 Note (i) Registered in England and Wales and the principal operations of each company are in England and Wales except Holyrood Student Accommodation SPV Ltd and Glasgow Residences (Kennedy Street) SPV Ltd which are registered in and conduct their principal operations in Scotland. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 163 39 Principal subsidiaries, joint ventures and associates continued (d) Balfour Beatty Investments UK continued Other concessions Pevensey Coastal Defence Ltd (PCDL) has a 25-year contract with the Environment Agency to maintain a shingle bank sea defence in East Sussex. Gammon Capital (West) Pte Ltd has a contract with the Institute of Technical Education (ITE) College West of Singapore to design, build and finance the ITE and provide long-term facilities management services for the remainder of the 27-year project. Balfour Beatty Fire and Rescue NW Ltd is contracted by the local authority to design, construct, fund and provide facilities for 16 community firestations in Merseyside, Cumbria and Lancashire. UBB Waste (Essex) Ltd and UBB Waste (Gloucestershire) Ltd have contracts with the local authorities to design, build and operate new sustainable waste treatment facilities. Thanet involves the operation of transmission assets for the 300MW offshore windfarm project located off the Kent coast. Gwynt y Môr involves the operation of transmission assets for the 576MW offshore wind farm in the Irish sea. Humber involves the operation of transmission assets for the 219MW offshore wind farm in the North sea. Thanet, Gwynt y Môr and Humber operate and maintain the transmission assets under the terms of perpetual licences granted by Ofgem which contain the right to be paid a revenue stream over a 20-year period on an availability basis. Birmingham Bio Power involves the design, construction, financing, operation and maintenance of a 9.3MW waste wood gasifier located at Tyseley Energy Park, Birmingham. Welland Waste Bio Power involves the design, construction, financing, operation and maintenance of a 10.4MW waste wood gasifier located at Pebble Hall Farm, Thredingworth. All assets transfer to the customer at the end of the concession. Total debt and equity funding Concession company (i) Pevensey Coastal Defence Ltd Gammon Capital (West) Pte Ltd Balfour Beatty Fire and Rescue NW Ltd UBB Waste (Essex) Ltd UBB Waste (Gloucestershire) Ltd Thanet OFTO Ltd Gwynt y Môr OFTO plc (ii) Birmingham Bio Power Ltd Welland Bio Power Ltd Humber Gateway OFTO Ltd Project Sea defences Technical education college Fire stations Waste processing plant Waste processing plant Offshore transmission Offshore transmission Waste wood gasifier Waste wood gasifier Offshore transmission £m Shareholding 25% 50% 100% 30% 49.5% Financial close July 2000 August 2008 February 2011 May 2012 January 2016* 20% December 2014 February 2015 60% 37.5% December 2013 25% March 2015 20% September 2016 3 100 55 146 223 197 256 53 17 187 Duration years 25 27 25 28 25 20 20 n/a n/a 20 Construction completion n/a 2010 2013 2015 2019 n/a n/a 2018 2018 n/a Notes (i) Registered in England and Wales and the principal operations of each company are in England and Wales, except Gammon Capital (West) Pte Ltd which is registered in and conducts its principal operations in Singapore. (ii) Due to the shareholders’ agreement between Balfour Beatty and the other shareholders requiring unanimity of agreement in respect of significant matters related to the financial and operating policies of this company, the Directors consider that the Group does not control this company and it has been accounted for as a joint venture. * Due to delays in achieving planning, UBB Waste (Gloucestershire) Ltd reached a second financial close in January 2016. (e) Balfour Beatty Investments North America Military housing Summary Balfour Beatty through its subsidiary Balfour Beatty Communities LLC is a manager, developer, and investor in a number of US military privatisation projects associated with a total of 55 US government military bases which includes 55 military family housing communities and one unaccompanied personnel housing community that are expected to contain approximately 42,800 housing units once development, construction and renovation are complete. The projects comprise 11 military family housing privatisation projects with the United States Department of the Army (Army), seven projects with the United States Department of the Air Force (Air Force) and two projects with the United States Department of the Navy (Navy). In addition, there is one unaccompanied personnel housing (UPH) project with the Army at Fort Stewart. Contractual arrangements The first phase of the project, known as the initial development period, covers the period of initial construction or renovation of military housing on a base, typically lasting three to eight years. With respect to Army and Navy projects, the government becomes a member or partner of the project entity (Project LLC); the Air Force is not a named partner or member in Balfour Beatty Communities’ Project LLCs, however it contributes a commitment to provide a government direct loan to the Project LLC and has similar rights to share in distributions and cash flows of the Project LLC. On each project, the Project LLC enters into a ground lease with the government, which provides the Project LLC with a leasehold interest in the land and title to the improvements on the land for a period of 50 years. Each of these military housing privatisation projects includes agreements covering the management, renovation, and development of existing housing units, as well as the development, construction, renovation and management of new units during the term of the project, which, in the case of the Army, could potentially extend for up to an additional 25 years. The 50-year duration of each project calls for continuous renovation, rehabilitation, demolition and reconstruction of housing units. At the end of the ground lease term the Project LLC’s leasehold interest terminates and all project improvements on the land generally transfer to the government. Preferred returns The projects will typically receive, to the extent that adequate funds are available, an annual minimum preferred rate of return. On most existing projects, this annual minimum preferred rate of return ranges from 9% to 12% of Balfour Beatty Communities’ initial equity contribution to the project. During the initial development period, the project is precluded from distributing funds to pay the minimum preferred rate of return. The unpaid amounts will generally accrue and accumulate, and can be used to fund renovation and construction costs, if necessary. If the accumulated funds are not needed to fund renovation and construction costs, at the end of the initial development period they are distributed to pay accrued preferred returns to Balfour Beatty Communities and the government in accordance with the terms of the project agreements. balfourbeatty.com/AR2017 164 Notes to the financial statements continued 39 Principal subsidiaries, joint ventures and associates continued (e) Balfour Beatty Investments North America continued Military housing continued Allocation of remaining operating cash flows Subsequent to the initial development period, any operating cash flow remaining after the annual minimum preferred rate of return is paid is shared between Balfour Beatty Communities and the reinvestment account held by the project for the benefit of the government. On most of the existing projects, the total amount that Balfour Beatty Communities is entitled to receive (inclusive of the preferred return) is generally capped at an annual modified rate of return, or cash-on-cash return, on its initial equity contribution to the project. Historically, these caps have ranged between approximately 9% to 18% depending on the particular project and the type of return (annual modified rates of return or cash-on-cash). However, in some of the more recent projects, there are either no annual caps or lower projected annual rates of return. The total capped return generally will include the annual minimum preferred return discussed above. The reinvestment account is an account established for the benefit of the military, but funds may be withdrawn for construction, development and renovation costs during the remaining life of a privatisation project upon approval by the applicable military service. Return of equity Generally, at the end of a project term, any monies remaining in the reinvestment account are distributed to Balfour Beatty Communities and the Army, Navy or Air Force, in a predetermined order of priority. Typically these distributions will have the effect of providing the parties with sufficient funds to provide a minimum annual return over the life of the project and a complete return of the initial capital contribution. After payment of the minimum annual return and the return of a party’s initial contribution, all remaining funds will typically be distributed to the applicable military service. Military concession company (i)(ii) Military family housing Fort Carson Family Housing LLC – Fort Carson expansion – Fort Carson GTA expansion – Fort Carson GTA II expansion Stewart Hunter Housing LLC Fort Hamilton Housing LLC Fort Detrick/Walter Reed Army Medical Center Housing LLC Northeast Housing LLC Fort Eustis/Fort Story Housing LLC – Fort Eustis expansion – Fort Eustis – Marseilles Village Fort Bliss/White Sands Missile Range Housing LP – Fort Bliss expansion – Fort Bliss GTA expansion phase I – Fort Bliss GTA expansion phase II Fort Gordon Housing LLC Carlisle/Picatinny Family Housing LP – Carlisle Heritage Heights phase II AETC Housing LP Southeast Housing LLC Vandenberg Housing LP Leonard Wood Family Communities LLC AMC West Housing LP West Point Housing LLC Fort Jackson Housing LLC Lackland Family Housing LLC Western Group Housing LP Northern Group Housing LLC ACC Group Housing LLC Military unaccompanied personnel housing Stewart Hunter Housing LLC Total project funding £m Projects Financial close Duration years Construction completion Army base Two Army bases Army base Two Army bases Seven Navy bases Two Army bases Two Army bases Army base Two Army bases Four Air Force bases 11 Navy bases Air Force base Army base Three Air Force bases Army base Army base Air Force base Four Air Force bases Six Air Force bases Two Air Force bases 130 96 73 49 277 45 November 2003 November 2006 April 2010 June 2015 November 2003 June 2004 July 2004 82 November 2004 367 March 2005 129 July 2010 6 March 2013 19 July 2005 317 December 2009 34 July 2011 115 November 2012 108 May 2006 81 July 2006 62 October 2012 16 February 2007 265 November 2007 412 November 2007 115 Acquired June 2008 171 July 2008 317 August 2008 163 134 October 2008 78 Acquired December 2008 March 2012 August 2013 June 2014 243 324 43 26 January 2008 46 43 39 34 50 50 50 50 50 45 42 50 46 44 43 50 50 44 50 50 50 47 50 50 50 50 50 50 50 50 2004 2010 2013 2018 2012 2009 2008 2010 2011 2011 2015 2011 2011 2014 2016 2012 2011 2014 2012 2013 2012 2014 2015 2016 2013 2013 2017 2019 2018 2010 Notes (i) Registered in the US and the principal operations of each project are conducted in the US. (ii) The share of results of the military housing joint ventures of Balfour Beatty Communities is limited to a pre-agreed preferred return on funds invested. The Group evaluated each of its interests in the military housing projects to determine if the entities should be consolidated. This analysis included, but was not limited to, identifying the activities that most significantly impact an entity’s economic performance, which party or parties control those activities and the risks associated with these entities. Decision-making power over key facets of the contracts was evaluated when determining which party or parties had control over the activities that most significantly impacted a project’s economics. Based on this review, the Directors consider that the Group does not have the power to direct these activities and does not have control and therefore the Group does not consolidate the military housing projects. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 165 39 Principal subsidiaries, joint ventures and associates continued (e) Balfour Beatty Investments North America continued Hospitals Summary Balfour Beatty is a developer, operator and investor in two hospital projects in Canada. Contractual arrangements The principal contract is the project agreement between the concession companies and the authorities. An inflation-indexed payment is primarily based upon availability of the hospital subject to any performance related deductions. The construction services for the BC Children’s and BC Women’s Hospitals project were subcontracted to a joint venture in which the Group has a 50% participation and the facilities maintenance services were subcontracted to a joint venture in which the Group also has a 50% participation. The soft facilities management services at North Island Hospital were subcontracted to a Group company and the hard facilities management services were subcontracted to a third party. The payments for the soft facilities management services, at both projects, are initially market adjusted after the third year of operations and then every six years thereafter. All assets transfer to the authorities at the end of the concession. Hospitals (i) Affinity Partnerships (ii) THP Partnerships Project BC Children’s and BC Women’s Hospitals North Island Hospital £m Shareholding 70% 270 50% 300 Financial close April 2014 June 2014 Total project funding Duration years 33 32 Construction completion 2017 2017 Notes (i) Registered in the province of Manitoba in Canada and the principal operations of each project are conducted in British Columbia, Canada. (ii) Balfour Beatty has joint control over the project through unanimous consent over all significant operating and financing decisions, and therefore does not consolidate the project. Other concessions Summary Balfour Beatty is a developer, operator and investor in a data centre located at the Canadian Forces base in Borden, Ontario. Contractual arrangements The principal contract is the project agreement between the concession partnership and the authorities. An inflation-indexed payment is primarily based upon availability of the date centre subject to any performance related deductions or security related deductions. Total debt and equity funding Concession partnership (i) UIP GP Project Borden Data Centre £m Shareholding 50% 91 Financial close May 2016 Note (i) Registered in the province of Ontario in Canada and the principal operations of the project are conducted in Ontario, Canada. Residential investments Summary Balfour Beatty is a developer, operator and investor in seven multifamily residential projects. Duration years 25 Construction completion 2018 Contractual arrangements Balfour Beatty formed joint ventures to acquire residential apartment buildings for seven multifamily residential projects. For Townlake of Coppell, The Dallas 5 Portfolio, Mobile Alabama portfolio, Nesbit Palisades, Carolina Cove and Evergreen projects, the joint ventures entered into agreements with Balfour Beatty Communities LLC to perform the operations and renovation work. For The Ranch at Pinnacle Point, the joint venture entered into an agreement with Balfour Beatty Communities LLC to perform the asset management services and renovation work. Residential investments (i) RAPP – BBC Associates, LLC (Pinnacle Point, Arkansas) DFW 5 Holdings, LLC (Dallas 5 Portfolio, Texas) Coppell Properties, LLC (Texas) BBC – Apexone Mobile Eastern, LLC (Alabama) Nesbit Palisades, LLC (Georgia) TBB Evergreen Holdings, LLC (Atlanta, Georgia) Carolina Cove (Wilmington) Owner LLC (North Carolina) Note (i) Registered in the US and the principal operations of each project are conducted in the US. Total project funding £m Shareholding 50% 32 10% 128 10% 37 50% 19 15% 38 15% 60 50% 34 Financial close February 2015 May 2015 May 2015 January 2016 July 2016 June 2017 December 2017 Renovation completion 2018 2018 2018 2018 2019 2019 2018 balfourbeatty.com/AR2017 166 Notes to the financial statements continued 39 Principal subsidiaries, joint ventures and associates continued (e) Balfour Beatty Investments North America continued Student accommodation Summary Through its subsidiary, Balfour Beatty Campus Solutions LLC, Balfour Beatty is a manager on one student accommodation project, where it also acted as a developer. Balfour Beatty is also a developer and owner of three additional student accommodation projects, and is a joint venture partner to develop one other student accommodation project. Contractual arrangements The principal contract in the Florida Atlantic University project is the property management agreement with the state university setting out the obligations for the operation and maintenance of the student accommodation. The principal contracts in the other student accommodation projects where Balfour Beatty is an owner are the ground leases, development leases and operating agreements with the state universities setting out the obligations for the construction, operation and maintenance of the student accommodation including lifecycle replacement during the concession period. Concession company (i) C-BB Management LLC/C-BBC Development LLC (Florida) BBCS-Hawkeye Housing LLC (Iowa) Phase 1 BBCS-Hawkeye Housing LLC (Iowa) Phase 2 BBCS-UN Reno Housing LLC (Reno) Northside Campus Partners LP (Texas Dallas) Northside Campus Partners 2, LP (Texas Dallas) Total project funding £m Shareholding (ii) 74 100% 23 100% 26 100% 16 50% 40 10% 50 Financial close March 2010 June 2013 May 2015 August 2013 March 2015 February 2017 Duration years 30 41 39 43 61 61 Construction completion 2011 2014 2016 2014 2016 2018 Notes (i) Registered in the US and the principal operations of each project are conducted in the US. (ii) 50% holding in the management company. (f) Balfour Beatty Investments UK and North America Total future committed equity and debt funding for Infrastructure Investments’ project companies Concessions UK Roads Healthcare Student accommodation Waste and biomass+ Other UK+ North America Social infrastructure Projects at financial close Projects at preferred bidder stage Total Note + These categories have been presented within Other concessions in Note 39(d). 2018 £m 2019 £m 2020 £m 2021 onwards £m Total £m 20 5 – 2 7 34 3 3 37 30 7 37 – – 6 25 10 41 – – 41 31 10 41 – – 17 – 2 19 – – 19 17 2 19 – – – – 4 4 – – 4 – 4 4 20 5 23 27 23 98 3 3 101 78 23 101 40 Audit exemptions taken for subsidiaries The following subsidiaries are exempt from the requirements under the Companies Act 2006 relating to the audit of individual financial statements by virtue of Section 479A of the Act. Education Investments Holdings Ltd Consort Healthcare Infrastructure Investments Ltd Company registration number 6863458 6859623 Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 167 41 Details of related undertakings of Balfour Beatty plc as at 31 December 2017 In accordance with Section 409 of the Companies Act 2006 a full list of subsidiaries, partnerships, associates and joint ventures, including the principal activity, the country of incorporation and the effective percentage of equity owned as at 31 December 2017 is disclosed below. Unless otherwise stated, all interests are in the ordinary share capital or shares of common stock in the entity and are held indirectly by the Company, and all entities operate principally in their country of incorporation. All subsidiaries had a reporting period ended 31 December 2017 and are wholly owned, except where indicated. Subsidiary undertakings incorporated in the United Kingdom Name of undertaking Principal activity Name of undertaking Principal activity Name of undertaking Principal activity Connect Roads Infrastructure Investments Ltd Investment holding company Balfour Beatty Management Ltd Agent of Balfour Beatty Group Ltd Laser Rail Ltd Balfour Beatty Nominees Ltd Nominee company 350 Euston Road, Regent’s Place, London NW1 3AX Aberystwyth Student Accommodation Ltd Infrastructure concession Balfour Beatty Fire and Rescue NW Holdings Ltd Investment holding company Balfour Beatty Fire and Rescue NW Intermediate Ltd Balfour Beatty Fire and Rescue NW Ltd Infrastructure concession Infrastructure concession Balfour Beatty Infrastructure Investments Ltd (i) Investment holding company Balfour Beatty Infrastructure Partners Member Ltd Investment holding company Balfour Beatty Infrastructure Projects Investments Ltd Investment holding company Balfour Beatty Investments Ltd Balfour Beatty OFTO Holdings Ltd BBI Holdings Australia Ltd BBPF LLP (v) Connect Roads Derby Holdings Ltd Connect Roads Derby Ltd Agent of Balfour Beatty Group Ltd Investment holding company Investment holding company Investment partnership Investment holding company Infrastructure concession Balfour Beatty Civil Engineering (SW) Ltd Balfour Beatty Civil Engineering Ltd Balfour Beatty Civils Ltd Balfour Beatty Const Ltd Balfour Beatty Construction (SW) Ltd Balfour Beatty Construction International Ltd Balfour Beatty Construction Northern Ltd Balfour Beatty Engineering Services (HY) Ltd Balfour Beatty Group Employment Ltd Balfour Beatty Group Ltd Balfour Beatty Homes (South Western) Ltd Balfour Beatty Homes Ltd Balfour Beatty International Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Employer for UK workforce Construction and support services Dormant Agent of Manring Homes Ltd Agent of Balfour Beatty Group Ltd Balfour Beatty Investment Holdings Ltd (i) Investment holding company Consort Healthcare Infrastructure Investments Ltd East Slope Residencies Facilities Management Ltd East Slope Residencies Holdings Ltd East Slope Residencies Partner Ltd East Slope Residencies PLC (iii) East Slope Residencies Student Accommodation LLP (iii) (v) Education Investments Holdings Ltd Initial GP1 Ltd West Stratford Developments Ltd Investment holding company Infrastructure concession Investment holding company Infrastructure concession Infrastructure concession Infrastructure concession Investment holding company Investment holding company Investment holding company 5 Churchill Place, Canary Wharf, London E14 5HU Balfour Beatty Overseas Investments Ltd Balfour Beatty Overseas Ltd Balfour Beatty Property Ltd (i) Balfour Beatty Rail Infrastructure Services Ltd Balfour Beatty Rail Ltd Balfour Beatty Rail Projects Ltd Balfour Beatty Rail Technologies Ltd Balfour Beatty Rail Track Systems Ltd Balfour Beatty Refurbishment Ltd Balfour Beatty Regional Construction Ltd Avatar Ltd Balfour Beatty Build Ltd Balfour Beatty Building Ltd Balfour Beatty CE Ltd Dormant Balfour Kilpatrick Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Balvac Ltd Bical Construction Ltd Bignell & Associates Ltd Investment holding company Investment holding company Agent of Balfour Beatty plc Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Dormant Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Birse Group Ltd Birse Metro Ltd Birse Rail Ltd Bnoms Ltd (i) BPH Equipment Ltd Investment holding company Construction and support services Construction and support services Nominee company Hire of plant and transport Burnbank House Ltd (ii) Property investment Cowlin Group Ltd Dean & Dyball Developments Ltd Dean & Dyball Rail Ltd Eastern Infrastructure Maintenance Company Ltd Footprint Furniture Ltd Guinea Investments Ltd Haden Building Services Ltd Haden Young Ltd (i) Hall & Tawse Western Ltd Heery International Ltd Investment holding company Dormant Dormant Dormant Construction services Investment holding company Investment holding company Dormant Dormant Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Dormant Lounsdale Electric Ltd Manring Homes Ltd Property investment Multibuild (Construction & Interiors) Ltd Agent of Balfour Beatty Group Ltd Multibuild Hotels and Leisure Ltd Multibuild Interiors Ltd Office Projects (Interiors) Ltd Office Projects Group Ltd Office Projects Ltd Omnicom Engineering Ltd Raynesway Construction Ltd South East Infrastructure Maintenance Company Ltd Southern Track Renewals Company Ltd Strata Construction Ltd W. T. Glover & Company Ltd (i) Construction services Construction services Agent of Balfour Beatty Group Ltd Investment holding company Construction services Construction services Agent of Balfour Beatty Group Ltd Dormant Dormant Dormant Dormant balfourbeatty.com/AR2017 168 Notes to the financial statements continued 41 Details of related undertakings of Balfour Beatty plc as at 31 December 2017 continued Subsidiary undertakings incorporated in the United Kingdom continued Name of undertaking Principal activity Name of undertaking Principal activity Name of undertaking Principal activity Hereford Steel Works, Holmer Road, Hereford HR4 9SW Pavilion B, Ashwood Park, Ashwood Way, Basingstoke, Hampshire RG23 8BG Edgar Allen Engineering Ltd EIMCO Ltd Heery Holdings Ltd (i) John Kennedy (Civil Engineering) Ltd (iv) John Kennedy (Holdings) Ltd Kenton Utility Service Management Ltd Kirby Maclean Ltd Mansell North East Ltd Mansell plc SEIMCO Ltd STAT 123 Ltd The Telegraph Construction and Maintenance Company Ltd Traffic Flow Ltd William Cowlin (Holdings) Ltd Dormant – in liquidation Investment holding company – in liquidation Dormant – in liquidation Dormant – in liquidation Investment holding company – in liquidation Dormant – in liquidation Dormant – in liquidation Dormant – in liquidation Investment holding company – in liquidation Dormant – in liquidation Investment holding company – in liquidation Dormant – in liquidation Dormant – in liquidation Dormant – in liquidation Dormant – in liquidation West Service Road, Raynesway, Derby DE21 7BG Balfour Beatty Plant & Fleet Services Ltd Hire of plant and transport Notes: (i) Held directly by Balfour Beatty plc. (ii) 75% owned. (iii) 80% owned. (iv) Preference shares and/or deferred shares also held. (v) Partnership interests held. Balfour Beatty Engineering Services (LEL) Ltd Dormant – in liquidation Network Plant Ltd Painter Brothers Ltd Agent of Balfour Beatty Group Ltd Balfour Beatty Ground Engineering Ltd Kings Business Park, Kings Drive, Prescot, Merseyside L34 1PJ Balfour Beatty Infrastructure Services Ltd Balfour Beatty Pension Trust Ltd (i) Pension fund trustee Balfour Beatty Living Places Ltd C/O Mc Griggors LLP, Arnott House, 12-16 Bridge Street, Belfast, BT1 1LS Northern Ireland Sunderland Streetlighting Ltd Balfour Kilpatrick Northern Ireland Ltd Dormant Testing and Analysis Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Maxim 7, Maxim Office Park, Parklands Avenue, Eurocentral, Holytown ML1 4WQ Q14, Quorum Business Park, Benton Lane, Newcastle upon Tyne NE12 8B Aberdeen Construction Group Ltd Balfour Beatty Construction Ltd Balfour Beatty Construction Scottish & Southern Ltd Balfour Beatty Kilpatrick Limited Balfour Beatty Rail Residuary Ltd Balfour Beatty Regional Civil Engineering Ltd BBPFS LP (v) Dormant Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd Investment partnership Glasgow Residences (Kennedy Street) Holdings Ltd Investment holding company Glasgow Residences (Kennedy Street) LLP (v) Glasgow Residences (Kennedy Street) SPV Ltd Hall & Tawse Ltd Infrastructure concession Infrastructure concession Dormant Holyrood Student Accommodation Holdings Ltd Investment holding company Holyrood Student Accommodation Intermediate Ltd Holyrood Student Accommodation plc Holyrood Student Accommodation SPV Ltd Initial Founder Partner GP1 Ltd Woodland View Holdings Co Ltd Woodland View Intermediate Co Ltd Woodland View Project Co Ltd Infrastructure concession Infrastructure concession Infrastructure concession Investment holding company Investment holding company Infrastructure concession Infrastructure concession Midmill Business Park, Tumulus Way, Kintore, Aberdeenshire AB51 0TG Balfour Beatty Engineering Services (CL) Ltd Agent of Balfour Beatty Group Ltd Park Square, Newton Chambers Road, Thorncliffe Park, Chapeltown, Sheffield S35 2PH Balfour Beatty Utility Solutions Ltd (iv) BB Indonesia Ltd Agent of Balfour Beatty Group Ltd Support services Balfour Beatty Annual Report and Accounts 2017 Balfour Beatty Rail Corporate Services Ltd Balfour Beatty WorkSmart Ltd Agent of Balfour Beatty Group Ltd Agent of Balfour Beatty Group Ltd C/O Mazars, 90 St Vincent Street, Glasgow G2 5UB C/O Mazars, Tower Bridge House, St Katharine’s Way, London E1W 1DD Armpledge Ltd Investment holding company – in liquidation Balfour Beatty Engineering Solutions Ltd Balfour Beatty Power Networks (Distribution Services) Ltd Dormant – in liquidation Dormant – in liquidation Balfour Beatty Property Investments Ltd (i) Balfour Beatty Rail Investments Ltd Birse Construction Ltd Birse Group Services Ltd Birse Integrated Solutions Ltd Birse Properties Ltd Branlow Ltd Chris Britton Consultancy Ltd Clarke Securities Ltd (i) Cowlin Management Ltd Investment holding company – in liquidation Investment holding company – in liquidation Investment holding company – in liquidation Dormant – in liquidation Dormant – in liquidation Dormant – in liquidation Dormant – in liquidation Dormant – in liquidation Investment holding company – in liquidation Investment holding company – in liquidation Dean & Dyball Investments Ltd Investment holding company – in liquidation Dean & Dyball Ltd Dean & Dyball Workforce Ltd Investment holding company – in liquidation Dormant – in liquidation Strategic Report Governance Financial Statements Other Information 169 41 Details of related undertakings of Balfour Beatty plc as at 31 December 2017 continued Subsidiary undertakings incorporated outside the United Kingdom Name of undertaking Principal activity Name of undertaking Principal activity Name of undertaking Principal activity Australia China New Zealand Allens Corporate Services Pty Ltd, Level 4 Deutsche Bank Place, 126 Phillip Street, Sydney NSW 2000 Beijing Landmark Towers Building 2, Room 511-514, No 8 Dongsanhuan North Road, Chaoyang District, Beijing Balfour Beatty Australia Pty Ltd Balfour Beatty Holdings Australia Pty Ltd Construction and support services Investment holding company Balfour Beatty Rail Electrification Equipment Trading (Beijing) Ltd Germany Construction services Allens Corporate Services Pty Ltd, Level 33, 101 Collins Street, Melbourne, Victoria 3000 Balfour Beatty Australian LP (iii) Investment holding partnership Bahamas One Millars Court, PO Box N-7117, Nassau Garmischer Strasse 35, 81373 Munich Balfour Beatty Capital GmbH Balfour Beatty Offshore Transmission Germany GmbH Balfour Beatty Rail GmbH Dormant Dormant Construction services C/O Price Waterhouse Coopers, Level 8, Price Waterhouse Coopers Tower, 188 Quay Street Private Bag 92162, Auckland Balfour Beatty New Zealand Ltd Construction and support services Romania 23 G-Ral Ernest Brosteanu Street, Corp B – Birouri Parter, Sector 1, Bucharest 010527 SC Balfour Beatty Rail SRL Construction services Sri Lanka No. 216 De Saram Place, Colombo 10 Balfour Beatty Bahamas Ltd Dormant BICC Holdings GmbH Brazil Avenida Brigadeiro Faria Lima, No. 1478, Suites 109-110, 1st Floor, Jardim Paulistano, São Paulo, 01.451–001 Schreck-Mieves GmbH Hong Kong RHA do Brasil Serviços de Infraestrutura Ltda Construction services Level 54, Hopewell Centre, 183 Queen’s Road East Investment holding company Balfour Beatty Ceylon (Private) Ltd Construction services Construction services Switzerland Hansmatt 32, 6370 Stans Balfour Beatty Rail Schweiz GmbH Canada Borden Ladner Gervais LLP, Scotia Plaza, 40 King Street West, 44th Floor, Toronto ON M5H 3Y4 BB Group Canada Inc Investment holding company 720 King Street West, Toronto ON M5V 2T3 BB UIP Inc Infrastructure concession Balfour Beatty Hong Kong Ltd Construction and support services India 3rd Floor, Municipal No. 1, Service Road, 11 VB Colony, Outer Ring Road, Ward No. 88, Bansawadi, Banglore, Karnataka-KA Balfour Beatty Infrastructure India Pvt. Ltd Construction and support services Ireland Taylor McCaffrey LLP, 900-400 St. Mary Avenue, Winnipeg MB R3C 4K5 City Junction Business Park, Northern Cross, Malahide Road, Dublin 17 Thailand 9 Soi Santisuk, Sithisarn Road, Huay Kwang, Bangkok Asia Trade Development Co Ltd Balfour Beatty Construction (Thailand) Co Ltd Balfour Beatty Holdings (Thailand) Co Ltd Balfour Beatty Thai Ltd Balfour Beatty Communities GP, Inc Balfour Beatty Communities, LP (iii) Balfour Beatty Construction GP, Inc Balfour Beatty Construction, LP (iii) Balfour Beatty CWH Holdings Inc Balfour Beatty Investments GP, Inc Balfour Beatty Investments, LP (iii) Balfour Beatty THP Holdings, Inc. BB CWH, LP (iii) BB CWH GP, Inc BB NIH, LP (iii) BB NIH GP, Inc Chile Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Vicuna MacKenna Poniente 6843, Oficina 209, La Florida, Santiago Balfour Beatty Chile SA Construction services Balfour Beatty Ireland Ltd (ii) Support services Linwood Co Ltd Kenton Utilities & Developments (Ireland) Ltd Isle of Man Tower House, Loch Promenade, Douglas, IM1 2LZ, Isle of Man Dormant United States 1011 Centre Road, Suite 310, Wilmington DE 19805 Balfour Beatty Holdings Inc Delphian Insurance Company Ltd (i) Jersey Insurance company Balfour Beatty LLC 12 Castle Street, St Helier, Jersey, JE2 3RT 50 Public Square, Suite 2175, Cleveland OH 44113 Balfour Beatty Employees Trustees Ltd (i) Employee trust National Engineering & Contracting Company Construction services 47 Esplanade, St Helier, Jersey, JE1 0BD Balfour Beatty Finance No.2 Ltd (i) Malaysia Finance company Level 8, Symphony House, Block D13, Pusat Dagangan Dana 1, Jalan PJU 1A/46, 47301 Petaling Jaya Balfour Beatty Projects Sdn Bhd Balfour Beatty Rail Design International Sdn Bhd Netherlands Construction services Construction services Prins Bernhardplein 200, 1097 JB, Amsterdam BICC Finance BV Dormant – in liquidation Rapenburgerstraat 177/B, 1011 VM, Amsterdam Balfour Beatty Netherlands BV Investment holding company 999 Peachtree Street NE, Atlanta, Georgia 30309-39764 Balfour Beatty Infrastructure, Inc Construction services Corporation Service Company, 505 5th Avenue Suite 729, Des Moines, IA 50309 BBCS Condominium Association, Inc. Infrastructure concession Corporation Service Company, 1127 Broadway Street NE, Suite 310, Salem OR 97301 Columbia Plaza Investments, LLC HSW Rock Springs, LLC Construction services Construction services balfourbeatty.com/AR2017 Construction services – in liquidation Construction services Construction services Investment holding company Construction services Investment holding company Investment holding company Investment holding company 170 Notes to the financial statements continued 41 Details of related undertakings of Balfour Beatty plc as at 31 December 2017 continued Subsidiary undertakings incorporated outside the United Kingdom continued Name of undertaking Principal activity Name of undertaking Principal activity Name of undertaking Principal activity Balfour Beatty Construction Company, Inc Balfour Beatty Construction Group, Inc Construction services Construction services Notes: (i) Held directly by Balfour Beatty plc. (ii) In accordance with the provisions of Section 357 of the Irish Companies Act 2014, the Company, as the ultimate parent of Balfour Beatty Ireland Ltd (BBIL) having its registered office at City Junction Business Park, Northern Cross, Malahide Road, Dublin 17, Ireland, irrevocably guarantees in respect of the whole of the financial year of BBIL ended 31 December 2017, all the liabilities of BBIL provided that this guarantee shall not extend to any liability or commitment of BBIL which shall not have arisen otherwise than in respect of the financial year or which shall not constitute a liability or loss. (iii) Partnership interests held. (iv) 65% interest held. United States continued Corporation Service Company, 1703 Laurel Street, Columbia SC 29201 National Casualty and Assurance, Inc Insurance company Corporation Service Company, 251 Little Falls Drive, Wilmington DE 19808 Balfour Beatty Campus Solutions, LLC Balfour Beatty Communities, LLC Balfour Beatty Construction D.C., LLC Balfour Beatty Construction, LLC Balfour Beatty Equipment, LLC Infrastructure investment Infrastructure investment Construction services Construction services Construction services Balfour Beatty Investments, Inc Investment holding company Balfour Beatty Management Inc Business services Balfour Beatty Military Housing Development LLC Infrastructure investment Balfour Beatty Military Housing Investments LLC Investment holding company Balfour Beatty Military Housing Management LLC Balfour Beatty – Worthgroup, LLC BBC – D5 Investors, LLC (iv) BBC AF Housing Construction LLC BBC AF Management/ Development LLC BBC – Evergreen, LLC BBC Independent Member I, Inc BBC Independent Member II, Inc BBC Military Housing – ACC Group, LLC BBC Military Housing – AETC General Partner LLC BBC Military Housing – AETC Limited Partner LLC BBC Military Housing – AMC General Partner LLC BBC Military Housing – AMC Limited Partner LLC BBC Military Housing – Bliss/ WSMR General Partner LLC BBC Military Housing – Bliss/ WSMR Limited Partner LLC BBC Military Housing – Carlisle/ Picatinny General Partner LLC BBC Military Housing – Carlisle/ Picatinny Limited Partner LLC Infrastructure investment Construction services Infrastructure investment Infrastructure investment Infrastructure investment Investment holding company Infrastructure investment Infrastructure investment Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession BBC Military Housing – FDWR LLC BBC Military Housing – Fort Carson LLC BBC Military Housing – Fort Gordon LLC BBC Military Housing – Fort Hamilton LLC BBC Military Housing – Fort Jackson LLC BBC Military Housing – Hampton Roads LLC BBC Military Housing – Lackland LLC BBC Military Housing – Leonard Wood LLC BBC Military Housing – Navy Northeast LLC BBC Military Housing – Navy Southeast LLC BBC Military Housing – Northern Group, LLC BBC Military Housing – Stewart Hunter LLC BBC Military Housing – Vandenberg General Partner LLC BBC Military Housing – Vandenberg Limited Partner LLC BBC Military Housing – West Point LLC BBC Military Housing – Western General Partner, LLC BBC Military Housing – Western Limited Partner, LLC BBC Multifamily Holdings, LLC BBCS – Hawkeye Housing, LLC BBCS – Northside Campus, LLC BBCS – UN Reno Housing, LLC BBCS Development, LLC Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure investment Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure investment BICC Cables Corporation Business services Corporation Service Company, 300 Deschutes Way SW, Suite 304, Tumwater WA 98501 Howard S Wright Construction Co HSW, Inc Construction services Construction services CSC – Nevada, C/O CSC Services of Nevada, Inc., 502 East John Street, Carson City, Nevada, 89706 Balfour Beatty – Golden Construction Company Construction services Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 171 41 Details of related undertakings of Balfour Beatty plc as at 31 December 2017 continued Joint ventures incorporated in the United Kingdom Name of undertaking % held by the Group Principal activity 350 Euston Road, Regent’s Place, London NW1 3AX BBDE Orbital Holdings, LLP (iii) Connect A30/A35 Holdings Ltd Connect A30/A35 Ltd Connect A50 Ltd Connect CNDR Holdings Ltd Connect CNDR Intermediate Ltd Connect CNDR Ltd Connect M1-A1 Holdings Ltd (i) Connect M1-A1 Ltd Connect M77/GSO Holdings Ltd (ii) Connect M77/GSO plc (ii) Connect Roads Cambridgeshire Holdings Ltd Connect Roads Cambridgeshire Intermediate Ltd Connect Roads Cambridgeshire Ltd Connect Roads Coventry Holdings Ltd Connect Roads Coventry Intermediate Ltd Connect Roads Coventry Ltd Connect Roads Ltd Connect Roads Northamptonshire Holdings Ltd Connect Roads Northamptonshire Intermediate Ltd Connect Roads Northamptonshire Ltd Connect Roads South Tyneside Holdings Ltd Connect Roads South Tyneside Ltd Connect Roads Sunderland Holdings Ltd Connect Roads Sunderland Ltd Consort Healthcare (Birmingham) Funding plc Investment holding company Investment holding company Infrastructure concession Infrastructure concession Investment holding company Infrastructure concession Infrastructure concession Investment holding company Infrastructure concession Investment holding company Infrastructure concession Investment holding company Infrastructure concession Infrastructure concession Investment holding company Infrastructure concession Infrastructure concession Investment holding company Investment holding company Infrastructure concession Infrastructure concession Investment holding company Infrastructure concession Investment holding company Infrastructure concession Infrastructure concession 20 20 25 25 25 25 20 20 85 85 20 20 20 20 20 20 25 20 20 20 20 20 20 20 40 Name of undertaking Consort Healthcare (Birmingham) Holdings Ltd Consort Healthcare (Birmingham) Intermediate Ltd Consort Healthcare (Birmingham) Ltd East Wick and Sweetwater Projects (Holdings) Ltd East Wick and Sweetwater Projects (Phase 1) Ltd East Wick and Sweetwater Projects (Phase 2) Ltd East Wick and Sweetwater Projects (Phase 3) Ltd East Wick and Sweetwater Projects (Phase 4) Ltd East Wick and Sweetwater Projects (Phase 5) Ltd East Wick and Sweetwater Projects (Phase 6) Ltd East Wick and Sweetwater Projects (Phase 7) Ltd Gwynt y Mor OFTO Holdings Ltd (ii) Gwynt y Mor OFTO Intermediate Ltd (ii) Gwynt y Mor OFTO plc (ii) Humber Gateway OFTO Holdings Ltd Humber Gateway OFTO Intermediate Ltd Humber Gateway OFTO Ltd Thanet OFTO Holdco Ltd Thanet OFTO Intermediate Ltd Thanet OFTO Ltd % held by the Group Principal activity Name of undertaking % held by the Group Principal activity 40 Investment holding company Connect Plus House St Albans Road, South Mimms, Hertfordshire EN6 3NP 40 40 50 50 50 50 50 50 50 50 60 60 60 20 20 20 20 20 20 Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Connect Plus (M25) Holdings Ltd (iii) Connect Plus (M25) Intermediate Ltd (iii) Connect Plus (M25) Ltd (iii) 20 20 20 Investment holding company Infrastructure concession Infrastructure concession Maxim 7, Maxim Office Park, Parklands Avenue, Eurocentral, Holytown ML1 4WQ Aberdeen Roads (Finance) plc Aberdeen Roads Holdings Ltd Aberdeen Roads Ltd Consort Healthcare (Fife) Holdings Ltd Consort Healthcare (Fife) Intermediate Ltd Consort Healthcare (Fife) Ltd 33.3 33.3 33.3 50 50 50 Infrastructure concession Investment holding company Infrastructure concession Investment holding company Infrastructure concession Infrastructure concession Westminster House, Crompton Way, Segensworth West, Fareham, Hampshire PO15 5SS Infrastructure concession Pevensey Coastal Defence Ltd 25 Infrastructure concession Notes: (i) Held directly by Balfour Beatty plc. (ii) Due to the shareholders’ agreement between Balfour Beatty and the other shareholders requiring unanimity of agreement in respect of significant matters related to the financial and operating policies of the company, the Directors consider that the Group does not control the company and it has been accounted for as a joint venture. (iii) The Group owned 68.75% of BBDE Orbital Holdings LLP at 31 December 2017 but had an unconditional right to sell an 18.75% interest, thereby reducing its effective interest to 50%. Connect Plus (M25) Holdings Ltd and its subsidiaries are 40% owned by BBDE Orbital Holdings LLP. Infrastructure concession Investment holding company Infrastructure concession Infrastructure concession Investment holding company Infrastructure concession Infrastructure concession Investment holding company Infrastructure concession Infrastructure concession Blythe House, Blythe Park, Cresswell, Stoke on Trent, Staffordshire ST11 9RD Birmingham Bio Power Ltd 37.5 Infrastructure concession Pebblehall Bio Power Ltd 25 Tyseley Bio Power Ltd 37.5 Welland Bio Power Ltd 25 Investment holding company Investment holding company Infrastructure concession balfourbeatty.com/AR2017 172 Notes to the financial statements continued Name of undertaking United States continued Northside Campus General Partner LLC Northside Campus Limited Partner, LLC (i) % held by the Group Principal activity 50 90 Infrastructure concession Infrastructure concession Corporation Service Company, 2908 Poston Avenue, Nashville TN 37203 Balfour Concord GP (iv) Balfour Concord Property Management, LLC 50 50 Construction services Construction services 430 Eastwood Road, Wilmington, NC 28403 New Energy Alliance LLC 50 Construction and support services Notes: (i) Due to the shareholders’ agreement between Balfour Beatty and the other shareholders requiring unanimity of agreement in respect of significant matters related to the financial and operating policies of the company, the Directors consider that the Group does not control the company and it has been accounted for as a joint venture. (ii) The Group holds a 70% interest in Balfour Beatty Rail Sdn Bhd, which holds a 60% interest in Balfour Beatty Ansaldo Systems JV Sdn Bhd. Due to the shareholders’ agreement between Balfour Beatty and the other shareholders requiring unanimity of agreement in respect of significant matters related to the financial and operating policies of these companies, the Directors consider that the Group does not control these companies and they have been accounted for as joint ventures. (iii) Preference shares and/or deferred shares also held. (iv) Partnership interests held. 41 Details of related undertakings of Balfour Beatty plc as at 31 December 2017 continued Joint ventures incorporated outside the United Kingdom Name of undertaking Bermuda % held by the Group Principal activity Name of undertaking Ireland % held by the Group Principal activity Conyers Dill & Pearman Limited, 2 Clarendon House, 2 Church Street, Hamilton HM 11 Dunmoy House, St Margaret’s Road, Finglas, Dublin 11 CP Bay Carry A LP CP Bay Carry B LP British Virgin Islands 20 20 Infrastructure concession Infrastructure concession Balfour Beatty CLG Ltd 50 Support services C/O Sweett Group, 2nd Floor, Cathedral Court, New Street South, Dublin 8 Healthcare Centres PPP Holdings Ltd P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola Healthcare Centres PPP Ltd 40 40 Investment holding company Infrastructure concession Gammon Asia Ltd Gammon Construction Holdings Ltd Canada 50 50 Investment holding company Investment holding company Malaysia Level 8, Symphony House, Block D13, Pusat Dagangan Dana 1, Jalan PJU 1A/46, 47301 Petaling Jaya Balfour Beatty Ansaldo Systems JV Sdn Bhd (ii) Balfour Beatty Rail Sdn Bhd (ii) Singapore 239 Alexandra Road, 159930 Gammon Capital (West) Holdings Pte. Ltd Gammon Capital (West) Pte. Ltd Gammon Investments Pte. Ltd United States 60 70 50 50 50 Construction services Construction services Infrastructure concession Infrastructure concession Investment holding company Corporation Service Company, 1201 Hays Street, Tallahassee FL 32301 C-BB Management, LLC 50 C-BBC Development, LLC 50 Infrastructure investment Infrastructure investment Corporation Service Company d/b/a CSC- Lawyers, Incorporating Service Company, 211 E. 7th Street, Suite 620, Austin TX 78701-3218 Northside Campus Partners, LP (iv) Northside Campus Partners 2, LP (iv) 50 50 Infrastructure concession Infrastructure concession Corporation Trust Company, 1209 Orange St, Wilmington, Delaware 19801 RAPP-BBC Associates, LLC 10 Infrastructure investment Balfour Beatty/Benham Military Communities LLC (i) Balfour Beatty/PHELPS Military Communities LLC (i) BBC – ApexOne Carolina Cove, LLC BBC – ApexOne Mobile Eastern, LLC BBC Army Integrated, LLC 90 90 50 50 50 Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Taylor McCaffrey LLP, 900-400 St. Mary Avenue, Winnipeg MB R3C 4K5 Affinity BBL Inc. Affinity General Partner Inc. Affinity LP (i) (iv) Affinity Partnerships CWH Facilities Management, LP (iv) CWH FM GP Inc CWH Design – Build GP (iv) Gracorp Balfour Beatty THP Holdings Inc. Ledcor Balfour Beatty Affinity Holdings Inc. THP GBB Inc. THP GP Inc. THP LP (iv) THP Partnership 50 50 70 70 50 50 50 50 50 50 50 50 50 Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Construction services Investment holding company Investment holding company Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Forum House at Brookfield Place, Scotia Plaza, 181 Bay Street, EP210, Toronto, ON M5J 2T3 UIP GP Germany Luisenstr. 38, 10117 Berlin InoSig GmbH Hong Kong 50 50 Construction services 28th Floor, Devon House, Taikoo Place, 979 King’s Road Gammon China Ltd Gammon Construction Ltd (iii) 50 50 Investment holding company Construction services Balfour Beatty Annual Report and Accounts 2017 Infrastructure concession Corporation Service Company, 251 Little Falls Drive, Wilmington DE 19808 Strategic Report Governance Financial Statements Other Information 173 41 Details of related undertakings of Balfour Beatty plc as at 31 December 2017 continued Associated undertakings incorporated in the United Kingdom Associated undertakings incorporated outside the United Kingdom Name of undertaking United Kingdom % held by the Group Principal activity Name of undertaking United States % held by the Group Principal activity Newington House, 237 Southwark Bridge Road, London SE1 6NP Corporation Service Company, 251 Little Falls Drive, Wilmington DE 19808 Power Asset Development Company Ltd UK Power Networks Services Powerlink Ltd 25 10 Infrastructure concession ACC Group Housing, LLC (i) Infrastructure concession AETC Housing LP (i)(ii) AMC West Housing LP (i)(ii) Ashford House, Grenadier Road, Exeter, EX1 3LH UBB Waste (Essex) Holdings Ltd UBB Waste (Essex) Intermediate Ltd UBB Waste (Essex) Ltd 30 30 30 Investment holding company Carlisle/Picatinny Family Housing LP (ii) Infrastructure concession Infrastructure concession Carolina Cove (Wilmington) Owner, LLC Coppell Properties, LLC UBB Waste (Gloucestershire) Holdings Ltd UBB Waste (Gloucestershire) Intermediate Ltd UBB Waste (Gloucestershire) Ltd 49.5 Investment holding company DFW 5 – Josey Ranch, LLC 49.5 49.5 Infrastructure concession Infrastructure concession DFW 5 – Madison Parkway, LLC DFW 5 – Round Grove, LLC DFW 5 – Wimberly, LLC DFW 5 – Wimbledon Oaks, LLC DFW 5 Holdings, LLC FDWR Parent LLC Fort Bliss/White Sands Missile Range Housing LP (ii) Fort Carson Family Housing LLC Fort Detrick/Walter Reed Army Medical Center Housing LLC Fort Eustis/Fort Story Housing LLC Fort Gordon Housing LLC Fort Hamilton Housing LLC Fort Jackson Housing LLC 100 100 100 10 50 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 Lackland Family Housing, LLC (i) 100 Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure concession Name of undertaking Leonard Wood Family Communities, LLC Nesbit Palisades, LLC Northeast Housing LLC % held by the Group 10 15 10 Northern Group Housing, LLC (i) 100 Park Place (Foley) Owner, LLC Southeast Housing LLC Summer Trace (Gulf Shores) Owner, LLC Stewart Hunter Housing LLC TBB Evergreen Commons, LLC TBB Evergreen Holdings, LLC TBB Evergreen Park, LLC TBB Evergreen Terrace, LLC Vandenberg Housing LP (i)(ii) Western Group Housing, LP (i)(ii) West Point Housing LLC Windscape (Daphne) Owner, LLC 50 10 50 10 15 15 15 15 100 100 10 50 Principal activity Infrastructure concession Infrastructure investment Infrastructure concession Infrastructure concession Infrastructure investment Infrastructure concession Infrastructure investment Infrastructure concession Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure investment Infrastructure concession Infrastructure concession Infrastructure concession Infrastructure investment Notes: (i) The Group evaluated each of its interests in the military housing projects to determine if the associated entities should be consolidated. This analysis included, but was not limited to, identifying the activities that most significantly impact an entity’s economic performance, which party or parties control those activities and the risks associated with these entities. Decision- making power over key facets of the contracts were evaluated when determining which party or parties had control over the activities that most significantly impact a project’s economics. Based on this review, the Directors consider that the Group does not have the power to direct these activities and does not control or jointly control them and therefore the entities have been accounted for as associated undertakings. (ii) Partnership interests held. balfourbeatty.com/AR2017 174 Unaudited Group five-year summary Income Revenue including share of joint ventures and associates Share of revenue of joint ventures and associates Group revenue from continuing operations Underlying profit/(loss) from continuing operations Underlying net finance costs Underlying profit/(loss) before taxation Amortisation of acquired intangible assets Other non-underlying items Profit/(loss) from continuing operations before taxation Taxation on profit/(loss) from continuing operations Profit/(loss) from continuing operations after taxation Profit from discontinued operations after taxation Profit/(loss) for the year attributable to equity holders Capital employed Equity holders’ funds Liability component of preference shares Net non-recourse borrowings – infrastructure concessions Net (cash)/borrowings – other Statistics Underlying earnings/(loss) per ordinary share from continuing operations* Basic profit/(loss) per ordinary share from continuing operations Diluted profit/(loss) per ordinary share from continuing operations Proposed dividends per ordinary share Underlying profit/(loss) from continuing operations before net finance costs including share of joint ventures and associates as a percentage of revenue including share of joint ventures and associates 2017 £m 20162 £m 20152 £m 20142 £m 20132 £m 8,264 (1,348) 6,916 196 (31) 165 (9) (39) 117 45 162 6 168 1,056 103 305 (335) 1,129 8,368 (1,445) 6,923 69 (7) 62 (9) (43) 10 (8) 2 22 24 757 100 233 (173) 917 8,262 (1,307) 6,955 (74) (17) (91) (10) (66) (167) (7) (174) (32) (206) 826 98 365 (163) 1,126 8,616 (1,352) 7,264 (43) (22) (65) (11) (213) (289) 3 (286) 227 (59) 1,227 96 445 (219) 1,549 8,723 (1,235) 7,488 140 (15) 125 (17) (163) (55) (4) (59) 24 (35) 1,033 94 354 66 1,547 2017 Pence 20162 Pence 20152 Pence 20142 Pence 20132 Pence 20.9 23.7 23.4 3.6 7.2 0.2 0.2 2.7 (15.0) (25.5) (25.5) – (9.4) (41.8) (41.8) 5.6 14.4 (8.4) (8.4) 14.1 2.4% 0.8% (0.9)% (0.5)% 1.6% Notes * Underlying earnings per ordinary share from continuing operations have been disclosed to give a clearer understanding of the Group’s underlying trading performance. 2 Re-presented to classify the Group’s 49% interests in Dutco Balfour Beatty LLC and BK Gulf LLC as discontinued operations. Balfour Beatty Annual Report and Accounts 2017 Strategic Report Governance Financial Statements Other Information 175 Shareholder information Financial calendar 2018 19 April Ex-dividend date for final 2017 ordinary dividend 20 April Final 2017 ordinary dividend record date 24 May Annual General Meeting 24 May Ex-dividend date for July 2018 preference dividend 25 May July 2018 preference dividend record date 1 July Preference dividend payable 6 July Final 2017 ordinary dividend payable 15 August* Announcement of 2018 half-year results 4 October* Ex-dividend date for interim 2018 ordinary dividend Interim 2018 ordinary dividend record date 5 October* 22 November Ex-dividend date for January 2019 preference dividend January 2019 preference dividend record date 23 November Interim 2018 ordinary dividend payable 30 November* 2019 Preference dividend payable 1 January Note * Provisional date. Registrars All administrative enquiries relating to shareholdings and requests to receive corporate documents by email should, in the first instance, be directed to the Company’s Registrars and clearly state your registered address and, if available, your shareholder reference number. Please write to: Link Asset Services, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU, Telephone: 0871 664 0300 from the UK. Calls cost 12p per minute plus your phone company’s access charge. If you are outside the UK, please call +44 (0)371 664 0300. Calls from outside the UK will be charged at the applicable international rate. Lines are open Monday to Friday 9.00 am to 5.30 pm, UK time, excluding public holidays in England and Wales. Alternatively, you can email: enquiries@linkgroup.co.uk. They can help you to: check your shareholding; register a change of address or name; obtain a replacement dividend cheque or tax voucher; record the death of a shareholder. Dividends and dividend reinvestment plan Dividends may be paid directly into your bank or building society account through the Bankers Automated Clearing System (BACS). The Registrars can provide a dividend mandate form. A dividend reinvestment plan (DRIP) is offered which allows holders of ordinary shares to reinvest their cash dividends in the Company’s shares through a specially arranged share dealing service. Full details of the DRIP and its charges, together with mandate forms, are available at www.balfourbeatty-shares.com. International payment service Shareholders outside the UK may elect to receive dividends direct into their overseas bank account, or by currency draft, instead of by sterling cheque. For further information, contact the Company’s Registrars on +44 (0)371 664 0391 (from outside the UK) or 0871 664 0385 from the UK. Calls from outside the UK will be charged at the applicable international rate. Lines are open Monday to Friday 9.00 am to 5.30 pm, UK time, excluding public holidays in England and Wales. Alternatively, you can log on to www.balfourbeatty-shares.com and click on the link for International Payment Service. Shareholder information on the internet and electronic communications Our website www.balfourbeatty.com provides a range of information about the Company, our people and businesses and our policies on corporate governance and corporate responsibility. It should be regarded as your first point of reference for information on any of these matters. The share price can also be found there. You can create a Share Portal account, through which you will be able to access the full range of online shareholder services, including the ability to: view your holdings and indicative share price and valuation; view movements on your holdings and your dividend payment history; register a dividend mandate to have your dividends paid directly into your bank account; change your registered address; sign up to receive e-communications or access the online proxy voting facility; and download and print shareholder forms. The Share Portal is easy to use. Please visit www.balfourbeatty-shares.com. Alternatively, you can email: Shareportal@caslink.co.uk. Unsolicited telephone calls In the past, some of our shareholders have received unsolicited telephone calls or correspondence concerning investment matters from organisations or persons claiming or implying that they have some connection with the Company. These are typically from overseas-based ‘brokers’ who target UK shareholders offering to sell them what often turn out to be worthless or high-risk shares in UK or overseas investments. Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free reports on the Company. If you receive any unsolicited investment advice: – always ensure the firm is on the Financial Conduct Authority (FCA) Register and is allowed to give financial advice before handing over your money. You can check via www.fsa.gov.uk/ register/home.do – double-check the caller is from the firm they say they are – ask for their name and telephone number and say you will call them back. Check their identity by calling the firm using the contact number listed on the FCA Register. If there are no contact details on the FCA Register or you are told that they are out of date, or if you have any other doubts, call the FCA Consumer Helpline on 0800 111 6768 – if you are approached about a share scam, please visit the FCA’s ScamSmart website at www.fca.org.uk/scamsmart where you can access information about the various types of scam, including share and boiler room fraud, see the FCA’s Warning List and reports on firms about whom consumers have expressed concerns. Alternatively, you can call the FCA Consumer Helpline (see above). If you use an unauthorised firm to buy or sell shares or other investments, you will not have access to the Financial Ombudsman Service or be eligible to receive payment under the Financial Services Compensation Scheme if things go wrong – you should also report any approach to Action Fraud, who are the UK’s national fraud reporting centre at www.actionfraud.police.uk, or by calling 0300 123 2040. balfourbeatty.com/AR2017 176 Shareholder information continued Gifting shares to your family or to charity To transfer shares to another member of your family as a gift, please ask the Registrars for a Balfour Beatty gift transfer form. Alternatively, if you only have a small number of shares whose value makes it uneconomic to sell them, you may wish to consider donating them to the share donation charity ShareGift (registered charity no. 1052686), whose work Balfour Beatty supports. Any shares you donate to ShareGift will be aggregated, sold when possible, and the proceeds will be donated to a wide range of other UK charities. Since ShareGift was launched, over £27m has been given to more than 2,600 charities. The relevant share transfer form may be obtained from the Registrars. For more information visit www.sharegift.org. Share dealing services Link Asset Services (a trading name of Link Market Services Trustees Limited) provide a telephone and online share dealing service for UK and EEA resident shareholders. To use this service, telephone: 0371 664 0445. Calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom are charged at the applicable international rate. Lines are open between 8.00 am – 4.30 pm, Monday to Friday excluding public holidays in England and Wales. Alternatively, you can log on to www.linksharedeal.com. Link Market Services Trustees Limited is authorised and regulated by the Financial Conduct Authority and is also authorised to conduct cross border business within the EEA under the provisions of the EU Markets in Financial Instruments Directive. London Stock Exchange Codes The London Stock Exchange Daily Official List (SEDOL) codes are: Ordinary shares: 0096162. Preference shares: 0097820. The London Stock Exchange ticker codes are: Ordinary shares: BBY; Preference shares: BBYB. Capital gains tax (CGT) For CGT purposes the market value on 31 March 1982 of Balfour Beatty plc’s ordinary shares of 50p each was 267.6p per share. This has been adjusted for the 1 for 5 rights issue in June 1992, the 2 for 11 rights issue in September 1996 and the 3 for 7 rights issue in October 2009 and assumes that all rights have been taken up. Consolidated tax vouchers Balfour Beatty issues a consolidated tax voucher annually to all shareholders who have their dividends paid direct to their bank accounts. If you would prefer to receive a tax voucher at each dividend payment date rather than annually, please contact the Registrars. A copy of the consolidated tax voucher may be downloaded from the Share Portal at www.balfourbeatty-shares.com. Enquiries Enquiries relating to Balfour Beatty’s results, business and financial position should be made in writing to the Corporate Communications Department at the address shown below or by email to info@balfourbeatty.com. Balfour Beatty plc Registered Office: 5 Churchill Place, Canary Wharf, London E14 5HU. Registered in England Number 395826. Balfour Beatty Annual Report and Accounts 2017 No representation or warranty is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Forward-looking statements speak only as at the date of this document and Balfour Beatty plc and its advisers expressly disclaim any obligations or undertaking to release any update of, or revisions to, any forward-looking statements in this document. No statement in the document is intended to be, or intended to be construed as, a profit forecast or profit estimate or to be interpreted to mean that earnings per Balfour Beatty plc share for the current or future financial years will necessarily match or exceed the historical earnings per Balfour Beatty plc share. As a result, you are cautioned not to place any undue reliance on such forward-looking statements. Forward-looking statements This document may include certain forward-looking statements, beliefs or opinions, including statements with respect to Balfour Beatty plc’s business, financial condition and results of operations. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes”, “estimates”, “plans”, “anticipates”, “targets”, “aims”, “continues”, “expects”, “intends”, “hopes”, “may”, “will”, “would”, “could” or “should” or in each case, their negative or other various or comparable terminology. These statements are made by the Balfour Beatty plc Directors in good faith based on the information available to them at the date of this report and reflect the Balfour Beatty plc Directors’ beliefs and expectations. By their nature, these statements involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. A number of factors could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, developments in the global economy, changes in UK and US government policies, spending and procurement methodologies, failure in Balfour Beatty’s health, safety or environmental policies and those factors set out under Principal risks on pages 51 to 56 of this document. Find out more about our investor relations at: www.balfourbeatty.com/investors Follow us on: Twitter @balfourbeatty LinkedIn linkedin.com/company/balfour-beatty-plc Facebook facebook.com/balfourbeatty YouTube youtube.com/BalfourBeattyPlc Instagram instagram.com/balfourbeatty Designed and produced by Radley Yeldar Printed in England by Pureprint Group The paper used in the report contains 100% recycled content, of which 100% is de-inked post-consumer waste. All of the pulp is bleached using an elemental chlorine free process (ECF). Printed in the UK by Pureprint Group using its pureprint® environmental printing technology, with vegetable inks used throughout. Pureprint Group is a CarbonNeutral® company. Both the manufacturing mill and printer are registered to the Environmental Management System ISO 14001 and are Forest Stewardship Council® (FSC) chain-of-custody certified. Balfour Beatty 5 Churchill Place Canary Wharf London E14 5HU Telephone: +44(0) 20 7216 6800 www.balfourbeatty.com Balfour Beatty is a registered trademark of Balfour Beatty plc