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Build to Last
Annual Report and Accounts 2018
Contents
1-67
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 2018
Directors’ valuation of the
Investments portfolio
Building a sustainable business
Non-financial information statement
Measuring our financial performance
Chief Financial Officer’s review
Risk management
Principal risks
Viability statement
68-103
Governance
Chairman’s introduction
to Corporate Governance
Board leadership
Division of responsibilities
Composition, succession and evaluation
Board Committees
Audit, risk and internal control
Audit and Risk Committee
Directors’ report – other disclosures
Remuneration report
2
4
6
8
10
12
14
27
30
44
45
51
55
58
67
68
70
74
75
77
80
82
85
88
4
Results demonstrate the value
being created through Build to Last
Group Chief Executive’s review
198-200
Other Information
Unaudited Group five-year summary
Shareholder information
198
199
14
Performance review by segment
What we have been doing in 2018
104-197
Financial Statements
Independent auditor’s report
Financial statements
Notes to the financial statements
104
112
120
Manchester Engineering Campus Development (front cover): a state-of-the-art education facility for the University of Manchester.
Leo Quinn, Group Chief Executive
Preserve at Southwind: 306 unit military community offering amenities such as a dog park and fitness centre (artist’s impression).
HS2: Balfour Beatty VINCI has been awarded two major design and build contracts for High Speed 2 (artist’s impression).
East Slope Residences: a £179 million student accommodation development for the University of Sussex.
Balfour Beatty Annual Report and Accounts 2018
Build to Last
“ Balfour Beatty’s transformation has gone
beyond resolving the legacy issues of forced
growth: the Group’s strong competitive
positions in large and growing infrastructure
markets, and the platform provided by its
scalable operating model, provide the ability
to deliver profitable managed growth.”
Leo Quinn, Group Chief Executive
1
12 Read more
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 45 to 50.
Continuing underlying
revenue1 £m
Continuing underlying profit
from operations (PFO) £m
Continuing underlying earnings
per share (basic) Pence
Order book1 £bn
8,215
8,234
7,802
196
205
26.3
12.4
12.6
11.4
20.9
69
7.2
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
Statutory revenue £m
Statutory profit for the year £m Statutory earnings per share
Dividends per share Pence
(basic) Pence
6,923
6,916
6,634
168
24.7
4.8
135
19.7
3.6
2.7
24
3.5
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
1 Underlying revenue and order book include share of joint ventures and associates.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 2
Chairman’s introduction
Whether in the iconic
projects we will deliver, or
in harnessing the advances
in innovation and technology
that will revolutionise our
industry, we have the focus,
the desire and the capability
to shape the world around
us for many years to come.”
Philip Aiken AM
Chairman
This is the fourth occasion I have
written to you as Chairman of
your Board, and once again I
am pleased to be able to report
on significant improvements in
your Company’s performance.
The financial results delivered
in 2018 demonstrate the extent
to which Balfour Beatty has
been transformed through the
Build to Last programme and
the value being created.
This transformation has been achieved in
uncertain times. Events in our sector have
included the collapse of Carillion and the
refinancing challenges of other players,
with the resulting impacts felt throughout
the supply chain. More widely, we continue
to experience delayed decisions caused by
political uncertainties in the UK and abroad.
These factors highlight the advantages
accruing to a company, such as Balfour
Beatty, which is financially strong,
disciplined and with leading positions in
large and growing infrastructure markets.
Today, the organisation is leaner
and more effective; totally focused on
outstanding delivery for its customers
and on improving performance every day.
We have achieved our target of industry
standard margins in all our businesses
and have a growing, higher quality order
book. Notwithstanding our investments
in leadership, capability, systems and
governance, we have continued to pay
down debt and, for the third consecutive
year, are recommending payment of a
progressive dividend. Most pleasingly,
our safety, customer satisfaction and
employee engagement levels have
all improved.
Thanks to the support and enthusiasm
of our employees in embracing Build
to Last over the past four years, we
now have a Balfour Beatty fit and
ready to seize the exciting opportunities
presented by its markets.
Markets
Construction – or, in its widest context,
infrastructure – comprises between 6% and
7% of GDP in our core markets. This spend
has a multiplier effect delivering for the
economy three times the initial investment.
It shapes how and where we live, work
and travel and most importantly underpins
economic growth.
With Balfour Beatty now focused on the
UK, US and Hong Kong – markets where
Governments are planning large-scale
infrastructure investment for the coming
decades – and with the Group’s unique blend
of capabilities underpinned by a strong and
scalable business model, we expect Balfour
Beatty to continue to deliver the major iconic
projects that will shape the world we live in.
In the UK, given the uncertainty over the UK’s
exit from the European Union, our business
has been planning for all potential outcomes.
We now have contingency plans in place to
mitigate foreseeable issues and ensure we
continue to deliver on our current and future
work commitments.
Our people
On behalf of the Board, I would like to
thank everyone who has contributed to
Balfour Beatty’s strong business performance
in 2018, including our customers and supply
chain partners, and especially our hard-working
employees. It is their dedication and relentless
focus on operational excellence in delivering
for our customers that has enabled us to
achieve such major strides forward.
Balfour Beatty Annual Report and Accounts 2018
3
We continue to upgrade the strength and
depth of our leadership team to ensure our
ability to capture the opportunities presented
by our markets in a way which produces
prosperity for all stakeholders, and profitable
managed growth for the business.
We will continue to strive for Zero Harm in
2019, embedding industry best practice
and exploring all ways to learn from cross-
industry reviews to make conditions as
safe as possible for our workforce and
those who work on and around our sites.
Health and Safety remains at the heart of
our culture and our licence to operate. We are
making encouraging progress towards our
Safe goal, measured by Zero Harm, which is
no injury, ill health or incident caused by our
work activities. Incident rates have continued
to reduce across our UK and US businesses
– by almost 50% in the four years of Build to
Last. Our Lost Time Injury Rate has reduced
to 0.15 in 2018.
There were no fatalities across our business
in 2018 as a direct result of our activities.
However, I regret to report the deaths of
two people working for our subcontractors
due to third party incursions into our work
sites. In the US, one person died as a result
of a vehicle being driven by an intoxicated
driver entering a temporary lane closure;
in the UK, one person died and another
sustained life-changing injuries following a
vehicle incursion into a work site on a road
maintenance contract. It is a sad reminder that
tragedy occurs even where works are carried
out with all the expected controls for risk in
place. Our thoughts are with the bereaved.
Our work on treating health like safety
and treating mental health like physical
health continues with raising awareness
of the issues across the Group and
through our commitment to initiatives
such as Mates in Mind.
The Board
Balfour Beatty is committed to building
a truly diverse workforce by attracting the
most talented people from all genders and
backgrounds – this starts with the Board.
I was therefore delighted to appoint Anne
Drinkwater in December 2018. Anne brings
a powerful range of experience in strategic,
commercial and operational roles spanning
over thirty years in the energy industry.
Her extensive knowledge of projects and
operations across multiple jurisdictions,
and particularly in the US, will support
Balfour Beatty’s increasing presence
in this key market.
Following our AGM in May, Iain Ferguson
will stand down as Senior Independent
Director and Chair of our Remuneration
Committee. Iain leaves with my sincere
thanks for his significant contribution to
Balfour Beatty’s current success and I wish
him well for the future. Stephen Billingham
will become Senior Independent Director
and Anne Drinkwater will become Chair
of our Remuneration Committee.
Dividend
The Group’s financial performance
for 2018 demonstrates the value being
created through Build to Last. As a result,
your Board has felt able to recommend
an increase in the final dividend to 3.2p
per ordinary share, bringing the total
dividend for the year to 4.8p per share.
Conclusion
This year Balfour Beatty is 110 years old.
We have an amazing history of delivering
projects for our customers and we are
in robust health for the long term.
Whether in the iconic projects we will deliver,
or in harnessing the advances in innovation
and technology that will revolutionise our
industry, we have the focus, the desire
and the capability to shape the world
around us for many years to come.
For my part, and on behalf of your Board,
I want to add that we look forward with
confidence in Balfour Beatty’s continuing
success, based on the strong framework
now in place to ensure that the business
delivers market leading performance.
Philip Aiken AM
Chairman
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 4
Group Chief Executive’s review
These results demonstrate
the value being created
through the Build to
Last programme.”
Leo Quinn
Group Chief Executive
These results demonstrate
the value being created through
the Build to Last programme.
Balfour Beatty’s transformation
has gone beyond resolving the
legacy issues of forced growth:
the Group’s strong competitive
positions in large and growing
infrastructure markets, and the
platform provided by its scalable
operating model, provide the
ability to deliver profitable
managed growth.
Since the start of Build to Last in 2015,
Balfour Beatty has simplified and refocused
its operations, embedded new governance,
reduced operating expenses by almost 40%
and invested steadily in innovation, capability
and leadership. As well as the delivery of all
Build to Last targets, culminating in industry
standard margins, every metric for a culture
which is Lean, Expert, Trusted and Safe
shows significant continuous improvement.
To ensure these improvements are
sustainable, they are embedded within
consistent systems and processes which
address risk and provide management
with transparency and control.
The Group reported an underlying profit
from operations (PFO) of £205 million
(2017: £196 million) driven by improvements
in the earnings based businesses. In the
second half of the year, UK Construction,
US Construction and Support Services
all reported underlying PFO margins
in, or above, the range of industry
standard margins.
Underlying earnings per share from
continuing operations increased 26% to
26.3 pence per share (2017: 20.9 pence)
and the Board has recommended a 33%
increase in the final dividend giving a total
recommended dividend for the year of
4.8 pence per share (2017: 3.6 pence).
Cash remains Balfour Beatty’s compass
and ultimately the most reliable barometer
of financial performance. During the
year, the Group had average net cash of
£194 million (2017: £42 million) and at year
end, the Group had net cash of £337 million
(2017: £335 million). During the year,
Balfour Beatty paid down over 40%
of its gross debt including repayment
of the convertible bonds.
Balfour Beatty’s net cash position and the
value of its Investments portfolio underline
the ongoing strength of the balance sheet,
which constitutes a strong competitive
benefit with customers and supply chain
partners. The Investments portfolio is a
strategic source of value and opportunity
to the Group’s businesses. The Directors’
valuation of the Investments portfolio has
remained broadly stable at £1.15 billion
(2017: £1.24 billion), following £58 million
of investments and £187 million of
disposals in the year.
The order book increased by 11%
to £12.6 billion (2017: £11.4 billion).
This increase occurred whilst maintaining
disciplined selective bidding in line with
the Group’s stated policy. The businesses
increased bid margin thresholds and
focused on projects where Balfour
Beatty’s capabilities can deliver value,
coupled with a lower risk profile, to ensure
that the Group wins work at appropriate
terms and conditions.
The transformation of the Group continues
to be measured against its Build to Last
goals of Lean, Expert, Trusted and Safe,
using cash flow and profit from operations,
employee engagement, customer
satisfaction and Zero Harm, respectively.
In Lean, the governance and processes
introduced during Build to Last have driven
improved performance in all business
segments and ensured that the earnings
based businesses achieved industry
standard margins in the second half of 2018.
At the start of 2018, the Group extended
its investment in systems standardisation
with the migration of its US businesses
onto a single JD Edwards ERP platform.
This transition was achieved smoothly
and followed the consolidation of the UK
Construction business onto Oracle R12.
These moves will enable the Group to drive
significant ongoing value through increased
productivity underpinned by greater
transparency and assurance.
During the year the Group launched its 25
by 2025 vision. With the goal to reduce onsite
activity by 25% by 2025 Balfour Beatty will
increasingly use modular, innovation and digital
solutions, in order to become more productive
and efficient. From modular on tall towers
such as the Madison project in London to the
prefabrication of bridges at the £1 billion A14
project, the Group will look increasingly to
utilise offsite manufacturing. With enhanced
BIM modelling, virtual reality, drones and laser
scanning, new technologies are transforming
the construction industry. Properly applied,
they have the power to lower cost, improve
quality and enhance safety.
Customers contract with Balfour Beatty
due to the engineering excellence and Expert
capabilities of the Group and its employees.
Balfour Beatty Annual Report and Accounts 2018
In a market where there will be increasing
intense competition for the best talent, Balfour
Beatty places a major focus on recruitment,
training and retention in order to maintain
the highest calibre workforce. The employee
survey in December 2018 measured
employee engagement at 65% (2017: 60%),
the highest level of engagement since the
introduction of the survey in 2015.
Leadership changes made at the start of
2018 are already delivering benefits. In US
Construction, the promotion of two internal
candidates to lead the Buildings and Civils
businesses, has delivered an improved
overall performance with growing
momentum in the pipeline. In Support
Services, where the Power T&D, Gas &
Water and Rail businesses work with similar
types of customers, uniting this expertise
has increased flexibility and productivity.
Balfour Beatty continues its sponsorship
of The 5% Club, which encourages
employers to provide ‘earn and learn’
training opportunities to help address the
UK’s skills gap and drive economic prosperity
more widely across society. During 2018,
Balfour Beatty recruited 102 apprentices,
94 graduates and 20 trainees. The percentage
of the UK workforce in ‘earn and learn’
positions at year end stood at 5.6%.
Membership of The 5% Club now includes
key customers and supply chain partners
of Balfour Beatty, all committed to ensuring
the sector has the right capability required to
support the growing infrastructure market.
Trusted is Balfour Beatty doing “what we
say we will do” and is measured by customer
satisfaction. During the year, over 4,000
customer satisfaction reviews were carried
out (2017: 3,375), primarily in the UK.
The Group customer satisfaction average
increased to 97% (2017: 94%).
Following the successful completion of
Build to Last Phase One targets at the end
of 2016 (£200 million Cash In: £100 million
Cost Out) the Group has now delivered
its Phase Two targets with all earnings
based businesses achieving industry
standard margins in the second half
of 2018 as follows:
Underlying
PFO margin
target
%
2-3%
1-2%
3-5%
Underlying PFO
margin
H2 2018
%
2.4%
1.5%
5.2%
UK Construction
US Construction
Support Services
The Group now has a higher quality order
book with work won at appropriate levels
of risk and return. Combined with the Gated
Lifecycle, the Digital Briefcase and Project
on a Page, the governance and controls
introduced under Build to Last provide
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. This common contracting
framework enables 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 to achieve
higher margins for the Construction Services
and Support Services businesses.
By maintaining Build to Last disciplines,
underpinned by actions which have reduced
geographic, commercial, operational and
financial risk, the Group continues to embed
a culture of active risk mitigation by investing
in capability and IT-based processes and
controls. Balfour Beatty is ensuring a more
collaborative working environment which is
being supported by the Group’s investment in
systems such as the roll-out of the Microsoft
Office 365 platform across the Group.
Balfour Beatty is also continuing to take steps
to better capture and utilise real-time data on
projects to provide unparalleled transparency,
efficiency and forecasting through the
enhancements of visual management,
collaboration with project stakeholders through
BIM enhancements, and accelerating business
intelligence for better business agility.
Construction is an inherently dangerous
industry. It is therefore essential that the
safety and health of everyone who comes
into contact with Balfour Beatty is the top
priority. Each week the Executive Committee
reviews the safety performance of each of
the business units with particular attention
to lessons which should be learnt from any
high potential near miss incidents, as well
as gauging the status of the Group’s safety
culture. Safety is also a leading indicator
of future performance and productivity.
In 2018, the indicators continued to trend
positively, with the Group’s Lost Time Injury
Rate (LTIR) (excluding international joint
ventures) reducing for the fourth consecutive
year to 0.15 (2017: 0.17). This LTIR is now
approximately 50% of the rate when Build
to Last commenced and all other key lagging
indicators also continue to trend positively.
5
The Group primarily operates across
three geographies (UK, US and Hong Kong)
and three sectors (Construction Services,
Support Services and Infrastructure
Investments). This provides resilience as
the Group is less exposed to a downturn
in a single geography or sector.
Overall, the trading environment for Balfour
Beatty’s chosen markets and capabilities
remains favourable.
In the UK, Government policy continues to
drive a strong pipeline of major infrastructure
projects in transport and energy. Over the
next few years, the ‘4Hs’ – HS2 (high speed
rail), new nuclear power at Hinkley Point C,
the Road Investment Strategy for Highways
England and the continued expansion of
Heathrow airport – will contribute to the
Government’s investment in infrastructure
commitment, which is targeted to rise
from 0.8% in 2015/16 to over 1% of GDP
by 2020/21.
In the US, with blue chip repeat customers
such as Disney and Microsoft, the Group’s
Buildings opportunities are robust. In Civils
in December 2015, the FAST Act (Fixing
America’s Surface Transportation), a
US$305 billion transportation bill, was signed,
providing authorised spending for a five-year
period. There are further opportunities being
created, for example with the number of
state-backed infrastructure bonds (over
US$200 billion multi-state transportation
bonds, over US$35 billion of education
bonds in California) and increases in: US
public-private partnership schemes; state
gasoline taxes; and local county sales taxes
dedicated to local infrastructure.
Gammon has a material share of the attractive
Hong Kong market. Both the Buildings and
Civils markets are favourable with significant
opportunities upcoming with the third runway
at the international airport, a ten-year hospital
development plan and continued investment
in transportation infrastructure.
Having achieved industry standard margins,
Balfour Beatty now has the platform in place to
scale the business to drive profitable managed
growth. The Group will look to benefit fully
from its strong competitive positions in large
and growing infrastructure markets to deliver
market leading performance.
Leo Quinn
Group Chief Executive
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 6
Group at a glance
International infrastructure experts
Order book^
£12.6bn
2017: £11.4bn
Underlying revenue^
£7,802m
2017: £8,234m
Statutory revenue
£6,634m
2017: £6,916m
Underlying profit
before tax^
£181m
2017: £165m
Statutory profit
before tax
£123m
2017: £117m
Directors’ valuation
£1.15bn
2017: £1.24bn4
Employees+
26,000
2017: 28,000
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, designs, develops, builds
and maintains complex infrastructure.
It works across sectors such as
transportation, power, utilities, and
social and commercial buildings, and
delivers projects across three main
geographies: the UK, the US
and Hong Kong.
Throughout this report, Balfour Beatty has presented
financial performance measures which are used to
manage the Group’s performance. These financial
performance 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 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 45 to 50.
Readers of the Annual Report and Accounts are
encouraged to review the financial statements
in their entirety.
Image: HK$5.5 billion contract to construct
the final stages of the Lyric Theatre Complex
(artist’s impression).
^ From continuing operations including share of joint ventures and associates, before non-underlying items.
4 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.
+ Includes Gammon employees.
Balfour Beatty Annual Report and Accounts 2018
7
Construction Services
Support Services
Infrastructure Investments
The Construction Services businesses
in the UK, the US, and in joint venture
in Hong Kong, are top tier and all
operate across the infrastructure
and building sectors.
Support Services designs, 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 and the US. Its activities generate
additional construction and service work
for other parts of the Group.
Total revenue^
Total revenue^
Total revenue^
79%
14%
7%
Order book^
£9.8bn
2017: £8.3bn
Order book^
£2.8bn
2017: £3.1bn
Directors’ valuation
£1.15bn
2017: £1.24bn4
Underlying revenue^
Underlying revenue^
Underlying revenue^
£6,127m
2017: £6,649m
£1,104m
2017: £1,061m
£571m
2017: £524m
Underlying profit from operations^
Underlying profit from operations^
Underlying profit before tax^
£95m
2017: £72m
£46m
2017: £41m
£113m
2017: £140m
Statutory profit from operations
Statutory profit from operations
Statutory profit before tax
£46m
2017: £36m
£39m
2017: £39m
£111m
2017: £134m
What we do
– Civil engineering
– Building
– Ground engineering
– Mechanical and electrical installation
– Refurbishment and fit-out
– Rail engineering
What we do
– Design, build, upgrade and maintain
water, gas and electricity networks
– Highways network management,
operation and maintenance
– Rail design, renewals and 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
15 see Construction Services
23 see Support Services
25 see Infrastructure Investments
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 8
Market review
Infrastructure spend continues to grow;
Buildings market stable
UK and US infrastructure spend
continues upwards trajectory, backed
by strong government support.
Construction Services
Key
Growth
Flat
Contraction
Medium-term market outlook
Infrastructure Buildings
UK
US
Hong Kong
UK
The infrastructure market outlook is positive, underpinned by
government expenditure and key programmes (Heathrow, Nuclear
New Build, HS2 and Highways England’s programmes). Overall, the
Government has pledged to spend over £600 billion on infrastructure
in the next 10 years*.
Buildings markets are likely to remain flat in the medium term.
2019 is forecast to see a downturn in activity as Brexit uncertainty
peaks, but subsequent years are likely to see a recovery in the market.
US
Federal initiatives, state-level funding and an active P3 market
are likely to contribute to a growing opportunity in Balfour Beatty’s
US infrastructure markets.
The buildings market is forecast to remain flat, but specific
opportunities will remain. State-level education bonds in particular
are likely to drive strong school building spend.
Hong Kong
Gammon continues to deliver a strong pipeline of infrastructure
and construction projects, benefiting from high public and private
sector demand.
15 see Construction Services
* Infrastructure and Projects Authority, National Infrastructure
and Construction Pipeline – Autumn 2018 update.
Image: Balfour Beatty VINCI has been awarded two major design
and build contracts for High Speed 2 (artist’s impression).
Balfour Beatty Annual Report and Accounts 2018
9
Support Services
Infrastructure Investments
Medium-term market outlook
Medium-term opportunity levels
Power
Gas
Water
Highways
Rail
PPP/PFI
Other
UK
US
UK
The student accommodation market in the UK continues to provide a
significant number of high-quality investment opportunities for Balfour
Beatty, as well as an asset class that allows the Group to leverage its
longstanding track record of Student Accommodation construction.
US
The US student accommodation, multifamily housing and P3 markets
continue to offer significant and attractive investment opportunities
and there are a number of major infrastructure projects in the pipeline.
25 see Infrastructure Investments
UK
Power
With the RIIO-T1 period coming to an end in 2019; the market
is likely to remain stable until RIIO-T2 ramps up after 2020.
Gas
The RIIO-GD1 cycle runs until 2021 and there are unlikely
to be any significant shifts in the market before this point.
Water
Stable market with incremental changes as AMP7 begins to ramp
up. This cycle is expected to result in significant growth in water
infrastructure spend in the medium term, particularly in Capex,
offering significant opportunities for Balfour Beatty.
Highways
Highways England continues to forecast increases in expenditure
over the remainder of the RIS1 period, with a step-change increase
in funding for the RIS 2 period.
Rail
2019 is forecast to see a reduced level of activity before CP6
begins to ramp up. From 2020 activity on CP6 and HS2 will begin
to increase, providing very significant opportunities for growth.
23 see Support Services
Image: M25 – Connect Plus Services (CPS) is a consortium comprising
Balfour Beatty, Atkins and Egis Road Operation UK which operates and
maintains the M25 network on behalf of Connect Plus.
Image: The University of Edinburgh – the design, build, finance
and maintenance of 1,180 student study bedrooms.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 10
Business model
How we create value
The environment we operate in
How our Group works together
External market
The Group is well positioned in
its chosen markets, all of which
represent large and growing
infrastructure opportunities with
real synergies between Construction
Services, Support Services and
Infrastructure Investments.
UK, US and Hong Kong infrastructure
spend continues upwards trajectory,
backed by strong government support.
Balfour Beatty will continue to maintain
a disciplined and focused approach to
bidding for contracts.
8 See Market review
Internal performance
Since the start of Build to Last in
2015, Balfour Beatty has simplified
and refocused its operations,
embedded new governance, reduced
operating expenses by almost 40%
and invested steadily in innovation,
capability and leadership. As well as
the delivery of all Build to Last targets,
culminating in industry standard
margins, every metric for a culture
which is Lean, Expert, Trusted and
Safe shows significant continuous
improvement. To ensure these
improvements are sustainable,
they are embedded within consistent
systems and processes which address
risk and provide management with
transparency and control.
As a result Balfour Beatty has
the culture and scalable platform
to drive profitable managed growth
for the benefit of all stakeholders.
12 See Our priorities
Favourable working capital from our
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
25
Construction
Services
15
Support
Services
23
Represents c.79% of our
revenue and is responsible
for design, engineering
and construction across the
most complex infrastructure
and building projects.
Our services activities
design, upgrade, manage and
maintain critical infrastructure.
They complement both
Construction Services and
Infrastructure Investments.
Balfour Beatty Annual Report and Accounts 2018
11
Why our customers choose us
Output for stakeholders
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 for
employees and subcontractors to work
and develop their careers.
Supply chain
Partnership opportunities for suppliers
and subcontractors allow them to contribute
to, and share in, our success.
Community
Improving the quality of lives by enhancing
infrastructure, and providing local jobs,
apprenticeships and other societal benefits
from projects being delivered.
Social and environmental 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.
Build to Last priorities
The Build to Last transformation programme is designed to deliver
market-leading returns for all stakeholders, from a Group which is
Lean, Expert, Trusted and Safe.
12 Read more
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.
34 Read more
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.
51 Read more
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.
12 Read more
Innovation
Leveraging the latest developments in digital and technology to gain
a competitive edge.
30 Read more
Values
Our values are Talk Positively, Collaborate Relentlessly and Encourage
Constantly; together they are the building blocks of our culture.
Business integrity
We help people who work for Balfour Beatty to make the right choices
and ensure they can speak up freely.
36 Read more
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 12
Our priorities
Build to Last
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.
Our purpose
– Create infrastructure
– Support communities
– Enable growth
Our vision
To be the leading engineering
and infrastructure company
in our chosen markets
Our values
– Talk positively
– Collaborate relentlessly
– Encourage constantly
Balfour Beatty Annual Report and Accounts 2018
Lean
Deliver value to our customers
by improving operational efficiency
and eliminating waste right through
the supply chain.
Why is it important?
Our KPIs
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.
Net cash excluding
Underlying profit
non-recourse borrowings
from operations
£337m
2017: £335m
£205m
2017: £196m
Expert
Ensure we have the best
engineering, design and project
management capabilities.
Why is it important?
Our KPI
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 engagement.
Trusted Be the construction partner
of choice for our customers
and supply chain by delivering
on our promises.
Why is it important?
Our KPI
Customers must have confidence in our ability to deliver and to do
what we say we will do. A robust risk management 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.
Safe
We must ensure the health and
safety of everyone who comes
into contact with our activities.
Why is it important?
Our KPI
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.
Lost Time Injury Rate
excluding
international JVs
Employee
engagement index
65%
2017: 60%
Customer
satisfaction average
97%
2017: 94%
0.15
2017: 0.17
112
34
55
33
13
Lean
Deliver value to our customers
by improving operational efficiency
and eliminating waste right through
the supply chain.
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.
112
Our KPIs
Net cash excluding
non-recourse borrowings
Underlying profit
from operations
£337m
2017: £335m
£205m
2017: £196m
Expert
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.
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 engagement.
34
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 management 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.
55
Our KPI
Employee
engagement index
65%
2017: 60%
Our KPI
Customer
satisfaction average
97%
2017: 94%
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.
Our KPI
Lost Time Injury Rate
excluding
international JVs
33
0.15
2017: 0.17
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 14
What we have been doing in 2018
How we create value
What we have
been doing in 2018
We operate across three sectors; Construction
Services, Support Services and Infrastructure
Investments, and over the following pages
we review their performance and look at some
of their projects.
Caltrain
Electrification of the 52-mile
Caltrain rail corridor between San
Francisco and San Jose, laying
the foundations for the future
operation of high speed trains.
Mayflower Water
Treatment Works
A new state-of-the-art
water treatment works
to serve Plymouth and
the surrounding area.
Balfour Beatty Annual Report and Accounts 2018
Los Angeles
Automated People
Mover (LAX)
US$4.9 billion project
to develop a 2.25-mile,
above-ground airport
transport system
connecting passengers
with the airline terminals
(artist’s impression).
Construction Services
15
Total revenue^
79%
Order book^
£9.8bn
2017: £8.3bn
Underlying revenue^
£6,127m
2017: £6,649m
Statutory revenue
£5,217m
2017: £5,597m
Underlying profit
from operations^
£95m
2017: £72m
Statutory profit
from operations
£46m
2017: £36m
Construction Services continued
to make good progress during the
year with increasing profit, PFO
margin and order book across all
three chosen markets.
Financial review
Underlying revenue decreased by 8% to
£6,127 million (2017: £6,649 million), a 6%
decrease at CER as a result of a managed reduction
in the order book during 2017. Revenues declined
by 5% in the UK, 8% in the US (5% at CER) and
12% at Gammon (8% at CER).
Underlying profit from operations (PFO) continued
to improve under Build to Last as all geographies
had an increase in both absolute profit and margin
percentage. The Group achieved its industry
standard margin targets for UK Construction
and US Construction in the second half of 2018.
The order book at £9.8 billion (2017: £8.3 billion)
increased by 18% (14% at CER) due to increases
in the US (21%, 16% at CER), Gammon (23%, 14%
at CER) and the UK (11%). The increases occurred
whilst maintaining the Group’s policy of selective
bidding. The £2.5 billion (Balfour Beatty 50% joint
venture) HS2 contracts won in 2017 will not be
included in the order book until the conclusion
of the Early Contractor Involvement (ECI) phase,
now expected at the end of 2019.
In the Construction Services 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
Underlying revenue in the UK reduced by 5%
to £1,900 million (2017: £1,998 million). Underlying
profit from operations showed an improvement to
£28 million (2017: £16 million) with an associated
PFO margin of 1.5% (2017: 0.8%). In the second
half of 2018, UK Construction’s underlying
PFO margin was 2.4%, within the 2-3% industry
standard margin target range.
The UK order book increased 11% to £3.0 billion
(2017: £2.7 billion). The UK Construction business
continued to be selective in the work that it bids,
through increased bid margin thresholds, improved
risk frameworks and better contract governance.
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. At 2018 year end, only five of these contracts
were still to reach financial completion.
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: civil engineering, ground engineering,
mechanical and electrical engineering, and
building, providing private and public customers
with locally delivered flexible and fully integrated
civil and building services; and
– Rail: civil engineering, track, power
and electrification projects.
The Major Projects business continues to pursue
a number of key infrastructure opportunities across
core transportation and energy markets. Over the
next few years HS2, new nuclear power (Hinkley)
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 £32 billion funding for Highways
England’s Road Investment Strategy.
In April, the Major Projects business completed
the third and final phase of the Norwich Northern
Distributor Road (NNDR). The scheme, which has
seen delivery of 20 kilometres of dual carriageway,
including the construction of 13 roundabouts and
eight bridges, will alleviate congestion around the
city of Norwich.
Construction Services
UK
US
Gammon
Underlying3
Non-underlying
Total
Rev1,2
£m
1,900
3,329
898
6,127
12
6,139
PFO2
£m
28
44
23
95
(49)
46
PFO2
%
1.5
1.3
2.6
2018
Order
book1,2
£bn
3.0
5.2
1.6
9.8
–
9.8
PFO2
%
0.8
1.1
1.5
Rev1,2
£m
1,998
3,634
1,017
6,649
30
6,679
PFO2
£m
16
41
15
72
(36)
36
2017
Order
book1,2
£bn
2.7
4.3
1.3
8.3
–
8.3
^ From continuing operations
including share of joint ventures
and associates, before non-
underlying items.
1 Underlying revenue and order book include share of joint ventures and associates.
2 From continuing operations.
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 financial performance section.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 16
What we have been doing in 2018 continued
Construction Services continued
Balfour Beatty Annual Report and Accounts 2018
During the year, significant progress has been
made on flagship projects. In November, the UK’s
largest current road construction project, the A14
in Cambridgeshire, reached its half-way point.
The project started in November 2016 and is
on target to be completed by December 2020.
Since work started, more than eight million working
hours have gone into the project, with nine new
bridges already opened and construction well
underway on 25 more. Following Carillion filing for
liquidation, Balfour Beatty has assumed Carillion’s
share of this contract with the revised three-way joint
venture working collaboratively to deliver the project.
On HS2, ECI work is ongoing on the main civils
works, which were awarded as two-part design and
build contracts in July 2017. Balfour Beatty VINCI won
two lots around Birmingham, N1 and N2, worth about
£2.5 billion. These contracts are included in awarded
but not contracted (ABNC) during the ECI period.
The joint venture team is currently working on the
design and pricing of the two lots, with the ECI
work expected to be completed by the end of 2019.
In February 2019, HS2 announced that it intends to
appoint Balfour Beatty/VINCI/SYSTRA joint venture
as the construction team that will be awarded a
contract to manage the construction of the £1.0 billion
Old Oak Common station in London. Balfour Beatty
and VINCI each have a 41.75% share in the
venture, with Systra having the remaining 16.5%.
Procurement processes are also underway on the
rail systems contracts. In March 2018, Balfour Beatty
VINCI, which will work with Balfour Beatty NG Bailey
as a delivery partner, submitted the pre-qualification
response for the combined railway systems Lots
1 (track and overhead catenary system works)
and 2 (tunnel and open route mechanical and
electrical works) worth approximately £1.9 billion.
Announcement of successful pre-qualified bidders
is due in 2019 with Invitation To Tenders expected
late that year and contracts awarded in 2020.
On Crossrail, Balfour Beatty’s three major projects:
C510 (Liverpool Street and Whitechapel Station
tunnels); C512 (Whitechapel Station); and C530
(Woolwich Station) all made headway during the
year. C510 has achieved financial completion with
the other two projects agreeing new supplementary
agreements. Both projects are delivering in line
with the revised completion dates.
At Sellafield, good progress has been made with
the ongoing nuclear decommissioning projects.
The Silo Maintenance Facility (SMF) has completed
its commissioning phase and been handed over
to Sellafield Ltd to allow it to decommission
radioactive equipment.
Thames Tideway
Tunnel
Working in three-way joint
venture to construct the
west section of London’s
new ‘super sewer’.
UK
Underlying revenue^
£1,900m
2017: £1,998m
Order book^
£3.0bn
2017: £2.7bn
At Hinkley Point C, Balfour Beatty’s expanding team
continues to make positive progress on the project.
As well as a growing presence at the main site,
Balfour Beatty has a larger site at Avonmouth.
Occupied in January 2018, it is now home to nearly
200 direct employees and subcontractors. The project
involves the construction of a pair of six-metre
diameter underwater tunnels to supply the nuclear
power station with cooling water and a third seven-
metre diameter tunnel to discharge heated water
back into the Bristol Channel. Three tunnel boring
machines will use rotating cutting heads to excavate a
total of 9 kilometres of tunnel – the two 3.5-kilometre
intake tunnels and one 1.8-kilometre outfall tunnel.
At the Thames Tideway Tunnel project work
continues on the six-kilometre west section
which runs from Acton to Wandsworth.
Excavation works to the tunnelling shaft at the
Carnwath Road Riverside site are now complete
with preparation works to launch the main tunnel
boring machine well underway.
In 2018, the Aberdeen Western Peripheral Route
(AWPR) project experienced schedule slippage and
cost increases. In the year, Balfour Beatty recognised
an additional £29 million loss on the AWPR project.
A third of this charge (£10 million) has been
recognised in non-underlying items as this reflects
the additional loss that the Group has incurred
in fulfilling Carillion’s obligations on the contract.
The AWPR loss represents a net charge made
up of cost increases on the project partially offset
by recovery positions that the Group believes are
highly probable to be agreed. The final section
of the AWPR project was fully open to traffic on
19 February 2019 with the final financial out-turn
of this contract dependent upon the result of
ongoing claims discussions.
The Major Projects business had a number of
notable new contract awards in the year. In July,
Balfour Beatty was awarded a project to turn the
M20 junctions 8-9 into a contraflow system and
convert the central reservation into a lorry park.
In November, Major Projects secured a place on two
lots – B6 in the South East worth up to £1.1 billion,
and B8 in the North worth up to £2 billion – on
Highways England’s Delivery Integration Partnership
Framework. The initial packages of work which
Balfour Beatty has secured through these lots are
worth a total of £425 million with work commencing
in 2019. This regional six-year framework will see
contractors work with Highways England as partners
responsible for designing and constructing
motorway and major A-road projects across
England. Balfour Beatty’s digitally-enhanced way
of working was instrumental in securing both lots.
In collaboration with design partner, Atkins, Balfour
Beatty will utilise Building Information Modelling
(BIM) to improve efficiencies in delivering works
and will also deploy offsite manufacturing techniques.
This is a direct result of the Group’s vision to reduce
onsite activity by 25% by the year 2025, driving
greater project efficiency and safety and lower waste
by moving away from traditional industry methods.
17
In December, a Balfour Beatty VINCI joint venture
was awarded an M4 Smart Motorway contract.
The project will convert the hard shoulder into an
additional lane for traffic and introduce electronically-
policed variable speed restrictions between junction 3
of the M4, just inside the M25 near Heathrow Airport,
and junction 12 at Theale, west of Reading. As part
of the works, 11 overbridges will be replaced with
larger span structures and six underbridges will
be widened to accommodate four lanes. The M4
project is subsequent to the same partnership being
awarded a contract to convert the M6 junctions 2-4
to a Smart Motorway earlier in 2018.
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; and
– 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 business has simplified with an improved span of
control as it operates fewer projects. The number of
live projects, which was over 400 at December 2015
has subsequently fallen to under 250 at December
2018. During Build to Last, 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 two-stage fixed cost and
target cost contracts and framework agreements.
These agreements require early contract engagement
with the customer to ensure greater clarity around
scope, schedule and cost which, in combination,
reduces delivery risk for all parties.
The Regional business is increasingly focused on
customers with around 75% of all work won in 2018
from repeat customers. In November, Balfour Beatty
won ‘Partner of the Year’ at the Team Heathrow
Partnership awards ceremony.
The Group’s largest framework agreement, the
Scape National Civil Engineering and Infrastructure
framework, secured £1.5 billion of civil engineering
and infrastructure work under the initial four-year
framework. Since being appointed as main contractor
in 2015 over 100 projects have been completed on
time and on budget. In October, it was announced
that Balfour Beatty had been appointed as the
sole contractor to Scape’s second generation civil
engineering frameworks, valued at a combined
total of up to £2.1 billion. The Scape National
Civil Engineering framework, which is valued at
£1.6 billion, covers England, Wales and Northern
Ireland, while the Scape Civil Engineering – Scotland
framework, valued at £500 million, covers Scotland.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 18
What we have been doing in 2018 continued
Construction Services continued
Hinkley Point C
Major contracts at Hinkley
Point C include the
North and South 400kV
Overhead Line project, the
electrical works package
and the tunnelling and
marine works package
(artist’s impression).
The frameworks allow local authorities, local
enterprise partnerships and other public sector
bodies to commission works through a procurement
process that provides the fastest route to market
and utilises early contractor engagement to deliver
best value design solutions.
In September, Balfour Beatty was selected by
the Midlands Highway Alliance to deliver vital
transport infrastructure as part of its new
£500 million Medium Schemes Framework (MSF3).
Balfour Beatty is one of four contractors to have
been awarded a place on the framework which
will cover highways improvements, maintenance
and infrastructure works.
In 2018, the Regional business completed the
£63 million Rossall coastal defence scheme for Wyre
Council in partnership with the Environment Agency.
The scheme protects the town’s tramway, hospital
and schools whilst reducing flood risk to 7,500 nearby
residential properties through two kilometres of sea
defences. Other projects completed during the year
included: Balfour Beatty Kilpatrick’s £178 million
Urenco Tails Management Facility project; a £46 million
project for Wanda at One Nine Elms which represents
Balfour Beatty Ground Engineering’s largest ever piling
project for a non-Group customer; Aberdeen South
of the City school, a £47 million project delivering a
1,350 pupil academy on behalf of Hub North Scotland
and Aberdeen City Council; a £44 million 33-storey
student accommodation scheme at Miles Street,
London for Urbanest; a £37 million luxury retirement
complex for Audley Retirement Villages at Redwood,
Bristol; and the new £30 million Dundee train station
and hotel.
In the year, the Regional business achieved a
key milestone at the University of Manchester’s
£287 million Manchester Engineering Campus
Development (MECD) project with the first reinforced
concrete core reaching full height. The core, which
is one of four, will be an integral component of the
seven-storey ‘MEC Hall’ building, housing lift shafts
and stairwells. At the University of Sussex student
accommodation project, which will incorporate
over 2,000 new beds as well as innovative student
amenities such as social hubs and a new student union
facility, nearly 40% of the rooms had been handed over
by year end. Other material ongoing projects include:
the £150 million Madison Tower, a 53-storey residential
building in Canary Wharf, London where modular
construction, including offsite manufacturing
techniques, is central to Balfour Beatty’s approach in
delivering the 187-metre high building; a £54 million
project to construct Forth Valley College, Scotland;
the renovation and new-build scheme at No.1 Palace
Street in St James’, London; and train stations at
Warrington West (new station) and Queen Street
Station, Glasgow (redevelopment).
In addition to the framework wins during the year,
the Regional business also had a number of notable
new contract awards in the year including:
– Curzon Street: work has begun on a new-build
development comprising 32 apartments at
60 Curzon Street, London;
– Vine Street: £85 million contract to construct a
student accommodation scheme for Urbanest
in the City of London;
– London City Airport: £60 million mechanical and
electrical contract to enable growth of the airport;
Balfour Beatty Annual Report and Accounts 2018
19
US
Underlying revenue^
£3,329m
2017: £3,634m
Order book^
£5.2bn
2017: £4.3bn
– New Cross: £40 million contract for student
accommodation in Manchester which will
feature 274 apartments;
– University of Strathclyde: £33 million contract to
construct a new learning and teaching building;
– University of Reading: £33 million contract to
deliver a new Health and Life Sciences building;
– Hornsea Project Two: appointed to build the
onshore substation for the world’s largest
offshore wind farm; and
– Midland Metropolitan Hospital: awarded
a £10 million early works contract on behalf
of Sandwell and West Birmingham Hospitals
NHS Trust.
Included in ABNC at 31 December 2018 the
Group has been selected as preferred bidder for:
the redevelopment of the Darwin Building at the
University of Edinburgh; a new 10-kilometre
bypass connecting Caernarfon and Bontnewydd
in North Wales; phase one of the East Wick
and Sweetwater residential project at the Queen
Elizabeth Olympic Park; and an Audley retirement
village in Scarcroft, Leeds.
In the Rail Construction business, underlying
revenues were broadly flat in the year. The business
completed the West Outer Track Infrastructure,
Western Overhead Electrification and South East
Spur projects as part of its continued support of
the Crossrail programme and work commenced
on the examination, repair specification and report
into the condition and safety of the Rhondda Tunnel.
During the year, the Rail Construction business
won the Reactive Building and Civils contract
worth up to £50 million to perform work arising
related to Network Rail’s building infrastructure
in the West Country.
In June, the Group launched a new Rail
Innovation Centre at its Raynesway facility in Derby.
The purpose-built centre is a dedicated research,
development and testing facility to support Balfour
Beatty’s contribution to the development of the digital
railway for a more reliable, cost efficient and safe
railway network for all users across the UK and
overseas. Omnicom Balfour Beatty, which creates
remote surveying systems that give maintenance
engineers a distinct advantage, is now actively
applying machine learning and artificial intelligence
to offer next generation asset management to
customers, making the railways safer, more
reliable and more efficient.
US
Underlying revenue in the US fell by 8% in the year
(5% at CER) to £3,329 million (2017: £3,634 million)
following the reduction to the order book during
2017. The business reported an underlying
profit from operations for the year of £44 million
(2017: £41 million). The underlying PFO margin was
1.3% for the full year (2017: 1.1%). In the second half
of 2018, US Construction’s underlying PFO margin
was 1.5%, within the 1-2% industry standard margin
target range. Overall the trajectory of the US business
is positive and market conditions are favourable.
The 21% (16% at CER) increase in the US order book
has been achieved at a quality consistent with the
Group’s stated policy of selective bidding for those
projects best aligned with its capabilities. In June, the
US$1.95 billion Los Angeles airport (LAX) Automated
People Mover project reached financial completion
such that the Group’s 30% share of the construction
contract has been included in the order book.
In addition, the Group won over US$1 billion of
contracts for schools and higher education, primarily
in California and North Carolina, during the year.
Caltrain
Electrification of
the 52-mile Caltrain rail
corridor between San
Francisco and San Jose,
laying the foundations
for the future operation
of high speed trains.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 20
What we have been doing in 2018 continued
Construction Services continued
Southern Gateway
This scheme involves
reconstructing and
improving the Southern
Gateway, an 11-mile
stretch of road in
Dallas, Texas.
Balfour Beatty continues to develop its US
organisation, building on the standardisation and
leaning out already delivered. At the start of 2018,
the promotion of two internal candidates to lead
the Buildings and Civils businesses, has delivered
an improved overall performance with growing
momentum in the pipeline.
In December 2015, the FAST Act (Fixing
America’s Surface Transportation), a US$305 billion
transportation bill was signed, providing authorised
spending 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
(over US$35 billion of education bonds in California,
over US$200 billion of multi-state transportation
bonds) and increases in: US public-private partnership
schemes; state gasoline taxes; and local county sales
taxes dedicated to local infrastructure.
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 and in known
geographies where it can deliver value. The business
is focused on specific geographies, known internally
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 2018, Buildings completed a number of notable
projects including:
– VY/Reston Heights: in January, the Group
completed the 483,000 square foot, mixed-use
residential development in Reston, Virginia.
The 385-unit residential community includes
89,000 square feet of retail space;
– Park District: in April, Balfour Beatty completed the
916,000 square foot, mixed-used development in
Dallas, Texas. The project includes a 20-storey
office tower and a 34-storey residence tower;
– Icon Midtown: in October, Balfour Beatty
completed work on the 39-storey residential tower
in Atlanta, Georgia. Located in Atlanta’s Midtown
area, the project features 390 luxury apartments
with 6,500 square feet of retail space; and
– Broadway Tower: in November, Balfour Beatty
completed the 430,000 square foot, mixed-use
development in Portland, Oregon. The project
includes a 19-storey tower with 175,000 square
feet of office space, 180 hotel rooms, and four
levels of underground parking.
During the year good progress has been made
on flagship projects including:
– REI Headquarters: in April, Balfour Beatty
broke ground on a mixed-use headquarters
project including office buildings, conference
centre, market and parking totalling nearly
724,000 square feet in the Spring District
of Bellevue, Washington;
– Capitol Crossing: in May, Balfour Beatty topped
out the 12-storey 250 Massachusetts tower in
Washington DC, having previously topped out the
corresponding 12-storey 200 Massachusetts tower.
The two towers comprising the North Block will
ultimately total 960,000 square feet;
Balfour Beatty Annual Report and Accounts 2018
– The Epic: in June, Balfour Beatty topped out a
16-storey office tower located in Dallas which
includes 290,000 square feet of office space;
– Gables Station: in July, after contract award, the
Group commenced the construction phase of the
1.3 million square foot, mixed-use Gables Station
development located in Coral Gables, Florida.
Comprised of three towers, the development
will feature 120,000 square feet of retail space,
500 residential units, and a 1,000-car parking
garage; and
– 500 Folsom: at the end of the year Balfour Beatty
had completed 40 floors out of 43 liveable floors
and the project was topped out in January 2019.
The building will provide 545 residential units
in the South of Market (SOMA) district of
San Francisco, California.
The Buildings business had a number of notable
new contract awards in the year including:
– Los Angeles World Airports: in June, Balfour Beatty
and its LAX Integrated Express Solutions (LINXS)
joint venture team reached financial close of the
design-build-finance-operate-maintain (DBFOM)
Automated People Mover (APM) project.
Balfour Beatty is a 30% joint venture partner in
the US$1.95 billion construction element of the
project with the work to be delivered across
both the Buildings and Civils divisions;
– Microsoft Redmond Campus: the Group has been
selected, in joint venture with Skanska, as general
contractor on Microsoft’s head office refresh in
Redmond, Washington. The project will include
18 new buildings, clustered into four distinct
villages to create a unified campus;
– Stovall Street: the Group has been awarded a
contract by Perseus TDC for the conversion of a
610,000 square foot office building in Alexandria,
Virginia. The adaptive reuse project will transform
the existing 13-storey office building into a
16-storey, mixed-use residential development;
– Osprey: Toll Brothers Apartment Living has
contracted Balfour Beatty as construction manager
for its mixed-use, multifamily project in West
Midtown Atlanta, Georgia. Balfour Beatty is
leveraging Prescient’s modular construction
technology and offsite manufacturing platform
to build the project’s entire tower structure;
– Wellington Green: ZOM Senior Living has
contracted Balfour Beatty as construction manager
for the first phase of Wellington Green Senior
Living, its mixed-use senior housing community
located in Wellington, Florida; and
– Shoal Creek: Balfour Beatty has been selected
to deliver the first phase of the mixed-use portion
of The Grove project in Austin, Texas. The 400,000
square foot development will include a commercial
office building, retail space, and a 538-car
parking garage.
Included in ABNC, the business has been made
preferred bidder for: a US$605 million contract for
the Broward County Convention Center Expansion
and Headquarters Hotel; a US$150 million contract
for an Atlanta airport hotel; a US$120 million contract
for a 390,000 square foot office tower, 200-room
hotel and adjoining outdoor public plaza in Bethesda,
Maryland; and a US$55 million contract for the
University of North Carolina Marriott Hotel and
Conference Center in Charlotte.
The Civils business continues to operate in the largely
regulated markets of rail, water and road. In March
2018, Civils completed the construction of Charlotte’s
light-rail extension (Blue Line) after four years of build.
The 9.6-mile (15.45-kilometre) Blue Line provides
service to 15 stations located within the Charlotte
city limits. In December, the new Surf City high-rise
bridge opened nine months ahead of schedule
connecting the mainland of Surf City to the popular
tourist destination of Topsail Island in North Carolina.
Additionally during the year, good progress has been
made on key contracts with mobilisation at both the
US$625 million Southern Gateway (45% Balfour
Beatty, 55% Fluor) and US$1.08 billion Green Line
extension (25% Balfour Beatty) projects. At Southern
Gateway, an 11-mile stretch of road in Dallas, Texas,
the design is now complete, with the widening of
frontage roads and mainline barrier demolition well
underway. At Green Line, a 4.7-mile commuter rail
extension in Boston, Massachusetts, the design
is near complete and construction activities
commenced in the second half of 2018. At Caltrain,
a US$697 million contract for the electrification
of the 52-mile rail corridor between San Francisco
and San Jose, design work is near complete and
foundation work and overhead catenary system
construction are ongoing.
In addition to its involvement with the Buildings
business in the Los Angeles World Airports project
described above, the Civils business had a number
of notable new contract awards in the year including:
– EchoWater Project: in April, Balfour Beatty was
awarded a US$299 million contract by Sacramento
Regional County Sanitation District to construct a
new water treatment plant that will produce cleaner
water for discharge to the Sacramento River, as
well as for potential reuse as recycled water; and
– Sterling Valley Water: US$150 million contract
to construct a wastewater treatment facility that
will recharge the natural groundwater aquifer by
treating up to eight million gallons of water per day.
The project will create a drought-proof source
of water for the local aquifers which serve over
800,000 San Bernardino Valley area residents.
21
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 22
What we have been doing in 2018 continued
Construction Services continued
Gammon
Underlying revenue^
£898m
2017: £1,017m
Order book^
£1.6bn
2017: £1.3bn
Gammon
At Gammon, Balfour Beatty’s 50:50 joint venture
based in Hong Kong, the Group’s share of underlying
revenue decreased by 12% (8% decrease at CER)
to £898 million, consistent with the reduction in order
book in 2017. Underlying profit increased to £23 million
(2017: £15 million), and the order book increased
by 23% (14% at CER) to £1.6 billion as a result of
significant wins in the Buildings and Civils businesses.
At Gammon, the timing of orders is more variable
around a small number of large contracts.
Gammon has a material share of the attractive Hong
Kong market. Both the Buildings and Civils markets
are favourable with significant opportunities upcoming,
including: a third runway at the international airport;
a ten-year hospital development plan; and continued
investment in transportation infrastructure (Central
Kowloon Highway, Mass Transit Railway (MTR)
upgrades). 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 significant
infrastructure programmes in Hong Kong and the
Rail Circle Line in Singapore.
During the year, the Civils business completed work
on the West Kowloon Terminus North project for
the express rail link to Shenzhen, China. Work has
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
Somerset House,
Hong Kong
HK$4 billion superstructure
contract to redevelop
Somerset House in
Taikoo Place, one of
Hong Kong’s best-
planned business hubs
(artist’s impression).
^ From continuing operations
including share of joint ventures
and associates, before non-
underlying items.
Balfour Beatty Annual Report and Accounts 2018
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
on a number of Civils projects in Hong Kong, including
the complex Tuen Mun-Chek Lap Kok (TMCLK)
Viaduct project, which includes the design and
construction of a dual two-lane sea viaduct.
Gammon had a number of notable new contract
awards in the year including:
– Lyric Theatre Complex: HK$5.5 billion contract
to construct the final stage of the Lyric Theatre
Complex. Gammon has supported the delivery of
the development of the Lyric Theatre Complex since
2016 when it was awarded a first contract by the
West Kowloon Cultural District Authority (WKCDA)
to deliver the foundation works, for which it twice
received the WKCDA highest commendation for
safety performance. In January 2018, Gammon
won a further contract award to deliver the public
infrastructure and extended basement works.
This third contract forms the final stage of the
Lyric Theatre development;
– Lohas Park: HK$4 billion construction contract
for a large scale residential development at Tseung
Kwan O bay in the Sai Kung District, Hong Kong.
The development will include the construction
of three 54-56 storey residential towers on a
five-level podium;
– Tuen Mun-Chek Lap Kok Link: HK$2.6 billion
Northern Connection Tunnel Buildings contract
for the Highways Department of the Government
of the Hong Kong Special Administrative Region.
The works comprise the provision of electrical
and mechanical facilitation to serve the newly
constructed 5-kilometre tunnel from Tuen Mun
to Boundary Crossing Facilities Island and will
include the tunnel’s ventilation, road lighting,
central monitoring and control systems;
– Sai Sha Road widening project: HK$2.3 billion
contract in a 50:50 joint venture with Sanfield
(Management) Ltd for the development project
in Shap Sze Heung, Sai Kung, Hong Kong;
– M+ project: appointed by the WKCDA as the
management contractor to oversee completion
of the M+ project, a museum for visual culture,
in Hong Kong; and
– Global Switch: S$253 million data centre contract
in Singapore for Global Switch, a leading owner,
operator and developer of large-scale, carrier
and cloud neutral, multi-tenanted data centres.
Further, in January 2019 Gammon was awarded
the Homantin luxury residential project by Gold
Topmont Ltd. The project, worth HK$2.9 billion,
will become an iconic landmark in the prestigious
Homantin residential area in Kowloon, Hong Kong.
Since the start of 2015, Balfour Beatty has exited
construction activities in the Middle East, Indonesia,
Malaysia, Australia and Canada.
23
In the year, power transmission and distribution
successfully installed 148 new composite poles
to connect the Dorenell wind farm to Blackhillock
substation. The business has continued its work
on the Eleclink project, in conjunction with the Rail
business, to lay two 50-kilometre cables through
the Channel Tunnel and connect them to converter
stations in Northern France and Kent. In Folkestone
the seven-metre high Helix cable management
system has been filled with the first 2.5-kilometre
section of cable ready to be pulled into the
Channel Tunnel.
After a period of consolidation, notable new contract
awards in the year included:
– Hinkley Point: National Grid contract for
cabling works which will form part of the
Hinkley Point C connection scheme. The contract
involves the design, supply and construction of
a new 8.5-kilometre 400kV double circuit cable
route from Loxton in the Mendip Hills to a new
substation at Sandford;
– Two contracts worth c.£47 million for the Fort
Augustus to Fort William 132kV Transmission
Reinforcement project; and
– Two contracts worth c.£43 million for the Beauly
to Keith 132kV modernisation programme.
In January 2019, Balfour Beatty was appointed
to deliver a £214 million contract to provide 400kV
overhead lines from Hinkley Point C on behalf of
National Grid. As part of the contract, Balfour Beatty
will design, supply, install, test and commission a new
overhead line spanning 48.4 kilometres and crossing
through the Mendip Hills in Somerset. On completion,
the new line will connect the power station with a
new substation in Avonmouth, Bristol. This contract
represents the fourth major piece of work won by
Balfour Beatty for the new power station, following
the electrical works package in joint venture with NG
Bailey in 2015, now part of the MEH Joint Venture,
the tunnelling and marine works package in 2017
and the 8.5-kilometre cabling contract won in 2018.
Support Services
Total revenue^
The Support Services segment
comprises utilities and
transportation businesses.
Financial review
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.
Support Services revenue increased by 4% to
£1,104 million (2017: £1,061 million), driven by an
increase in utilities. Underlying profit from operations
and PFO margin for the year increased to £46 million
(2017: £41 million) and 4.2% (2017: 3.9%) respectively.
In the second half of 2018 the underlying PFO margin
was 5.2%, above the industry standard margin
target range of 3-5%. The order book decreased
10% to £2.8 billion (2017: £3.1 billion) as an increase
in transportation was more than offset by the
expected decline in gas and water.
In 2019, the Group expects a revenue decline in
Support Services following the conclusion of the Area
10 highways maintenance contract and a reduction in
power transmission and distribution. Support Services
underlying profit from operations is expected to be
broadly in line with 2018 with the underlying PFO
margin expected to increase year-on-year.
Operational review
Underlying utilities revenue increased by 7%
to £651 million (2017: £608 million), driven by an
increase at power transmission and distribution.
The utilities order book reduced to £0.9 billion
(2017: £1.3 billion) as an increase at power was
more than offset by the expected decline in
gas and water as the current regulatory cycles
approach the end of their periods.
Despite the increased revenue, the power
transmission and distribution business continues to
undergo restructure and cost removal. The business
has consolidated its strategy to focus primarily
on both core clients and core markets. The actions
taken will ensure that the business is focused
on the most profitable areas of its market.
14%
Order book^
£2.8bn
2017: £3.1bn
Underlying revenue^
£1,104m
2017: £1,061m
Statutory revenue
£1,076m
2017: £1,031m
Underlying profit
from operations^
£46m
2017: £41m
Statutory profit
from operations
£39m
2017: £39m
Support Services
Order book1 (£bn)
Revenue1 (£m)
Profit from operations3 (£m)
Non-underlying items (£m)
Statutory profit from operations (£m)
Underlying profit margin3 (%)
2018
2.8
1,104
46
(7)
39
4.2%
2017
3.1
1,061
41
(2)
39
3.9%
^ From continuing operations
including share of joint ventures
and associates, before non-
underlying items.
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 financial performance section.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 24
What we have been doing in 2018 continued
Support Services continued
Mayflower Water
Treatment Works
A new state-of-the-art
water treatment works
to serve Plymouth and
the surrounding area.
In gas, Balfour Beatty delivers network maintenance
and asset growth for the largest gas distribution
companies in the UK and Ireland. The Group
expands and renews underground mains, often in
busy and high-impact residential and commercial
areas. Working on long-term contracts, the business
manages and delivers work, minimising the impact
this essential work has on local communities.
The gas market is in the RIIO-GD1 period until
early 2021. During the year the business managed
two long-term gas contracts which made losses
in 2018. Leadership changes have been made
with a recovery plan put in place.
The water business is now coming towards the end
of the UK water regulatory cycle (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.
In the year, the gas and water business successfully
dealt with the ‘Beast from the East’ storm by tackling
burst water mains throughout its areas of operation.
In addition the business successfully completed the
new Mayflower water treatment facility for South
West Water. The Mayflower facility near Roborough,
north of Plymouth, replaced the existing Crownhill
facility, which dated from the 1950s and had reached
the end of its natural life. Capable of delivering
up to 90 megalitres of high-quality drinking water
per day, the new works will meet the needs of
a growing population.
Underlying transportation revenues were stable at
£453 million (2017: £453 million). The transportation
order book increased to £1.9 billion (2017: £1.8 billion),
due to a number of contract wins for Network Rail.
Balfour Beatty continues to maintain, manage and
operate major highway and road networks across
the UK. The largest contract, M25 Connect Plus, will
continue for another 20 years. In October, the Group
was awarded a seven year, £103 million contract
by Telford and Wrekin Council for the maintenance
of local highways assets. During the year, Balfour
Beatty decided not to re-tender for the Area 10
contract in the North-West of England.
The rail services business won a number of plant
contracts for Network Rail in the year including:
– A seven-year contract worth in excess of
£115 million for the supply, operation and
maintenance of 13 track maintenance
‘tampers’; and
– A four-year contract worth in excess of £40 million
for the operation and maintenance of Network
Rail’s fleet of track maintenance ‘stoneblowers’.
In February 2019, Transport for London re-
appointed Balfour Beatty to deliver the new London
Underground track renewals contract, valued at up
to £220 million over four years. Balfour Beatty was
first appointed in 2002, with the contract already
extended on a number of occasions. The Group’s
detailed knowledge and experience of London
Underground’s infrastructure and systems, as
well as its commitment to championing innovation,
was instrumental in securing the contract.
Balfour Beatty Annual Report and Accounts 2018
Infrastructure Investments
25
Total revenue^
7%
Directors’ valuation
£1.15bn
2017: £1.24bn4
Underlying revenue^
£571m
2017: £524m
Statutory revenue
£341m
2017: £288m
Underlying profit
before tax^
£113m
2017: £140m
Statutory profit
before tax
£111m
2017: £134m
^ From continuing operations including
share of joint ventures and associates,
before non-underlying items.
4 2017 valuation includes £62 million
relating to the 7.5% partial disposal
of the Connect Plus M25 asset, as
the disposal proceeds had not been
received at year end. The proceeds
were received on 23 February 2018.
The Infrastructure 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.
Financial review
The Group achieves enhanced returns when
Infrastructure Investments, Construction Services
and Support Services deliver as one. There is an
inherent advantage in bidding for projects when
the Infrastructure Investments business utilises
the expertise of Construction Services and Support
Services. Additionally, the negative working capital
generated in the Construction Services business
provides opportunity for Infrastructure Investments.
Following significant disposals in 2017, underlying
profit from operations decreased to £97 million
(2017: £116 million), with both pre-disposal operating
profit and profit from disposals lower than the prior
year. Pre-disposals underlying operating profit
decreased to £17 million (2017: £30 million) as a result
of the prior year disposals, refinancing costs on the
Connect Plus M25 asset and write-downs on two
UK investment assets, partially offset by overhead
savings. Underlying profit on disposals decreased
to £80 million (2017: £86 million). Net interest income
decreased to £16 million (2017: £24 million) as a
result of the prior year disposals with underlying
profit before tax at £113 million (2017: £140 million).
Los Angeles
Automated People
Mover (LAX)
US$4.9 billion project
to develop a 2.25-mile,
above-ground airport
transport system
connecting passengers
with the airline terminals
(artist’s impression).
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 26
What we have been doing in 2018 continued
Infrastructure Investments continued
Operational review
In 2018, the Infrastructure Investments business
added five new projects and disposed of five
projects (two full disposals, three partial disposals).
In September, the Group disposed of its entire 50%
interest in Fife Hospital for £43 million. Following this
disposal, the Group only owns one material private
finance initiative (PFI) healthcare asset.
In January 2018, the business was named preferred
bidder on the Automated People Mover project at
Los Angeles airport. Financial close was reached in
June 2018 and Balfour Beatty owns a 27% equity
stake in the project.
In the private rented and regeneration sector, the
North American business acquired: a 7.5% stake at
the Riverchase Landing multifamily housing project
located in Birmingham, Alabama; a 50% stake at
the Providence at Zephyr Ridge project, located
in Tampa, Florida; a 50% stake in the Ridgeland
220-unit community project in Jackson, Mississippi;
and a 15% stake at Southwind, a 306-unit apartment
community located in Memphis, Tennessee.
Balfour Beatty Communities will perform property
management services for the properties,
leveraging its existing capabilities.
In February 2018, the Group made a 5% partial sale
in Connect Plus, the company which operates and
maintains the M25 orbital motorway, for £42 million.
The Group retains a 15% interest in the Connect
Plus M25 asset. In July, Connect Plus completed
a refinancing.
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
In December, the Group sold an 80% interest in
its University of Edinburgh student accommodation
project for £24 million. In addition, before year end,
the Group disposed of its Nesbit Palisades private
rental housing in Alpharetta, Georgia, for cash
proceeds of £3 million and there was a partial sale
of phase one of the University of Texas, Dallas
student accommodation project, where the Group
reduced its interest from 91% to 10%, generating
proceeds of £13 million.
At 31 December 2018, three projects had not yet
reached financial close (2017: five projects).
The Infrastructure Investments business continues
to see significant opportunities for future investment
in its chosen geographic markets particularly in the
US where the focus is on student accommodation,
multifamily housing and PPP opportunities. In the
UK, the focus is on student accommodation.
2018
£m
17
80
97
16
113
(2)
111
2017
£m
30
86
116
24
140
(6)
134
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 financial performance section.
Balfour Beatty Annual Report and Accounts 2018
Directors’ valuation of the investment portfolio
Continued success in targeted sectors
27
Overview
The Directors’ valuation reduced
by £93 million to £1,151 million
(2017: £1,244 million), primarily due to
£187 million being realised from divestments
in the year (2017: £105 million). The number
of projects in the portfolio increased from
71 to 74. This reflected continued success
in targeted sectors with five new projects
included in the Directors’ valuation for the
first time.
The Group invested £58 million
(2017: £35 million) in new and existing
projects. Cash yield from distributions
amounted to £89 million (2017: £53 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.
In February 2018, the Group received
£104 million from 12.5% partial sales in
Connect Plus, the company which operates
the M25 orbital motorway, on completion
of a 7.5% sale agreed in December 2017 and
a further 5% sale agreed subsequently in
February 2018.
In the second half of the year, the Group
sold its interests in Fife Hospital and the
Nesbit Palisades multifamily housing project,
and completed partial sell-downs of its
interests in the University of Edinburgh
student accommodation project and phase
one of the student accommodation project
at the University of Texas, Dallas. In total,
£187 million of proceeds were received
in 2018.
Unwind of discount at £96 million
(2017: £97 million) is a function of moving
the valuation date forward by a year with the
result that future cash flows are discounted
by one year less. Operational performance
movements resulted in an £18 million
increase in the value of the portfolio
(2017: £33 million), consisting mainly of
an exchange rate gain of £36 million on the
US portfolio offset by a number of changes
in cash flow forecasts, discount rates and
economic assumptions, including in respect
of two UK investment assets which were
written down in the year.
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.
As in previous periods, 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
assets in the secondary market continues
to exceed supply and the Group will
continue to sell investment assets timed
to maximise value to shareholders.
The Investments portfolio is now more heavily
weighted to North America (UK 43%, North
America 57%). Within the UK, roads is still the
largest sector despite the partial sales of the
Connect Plus M25 investment, whilst in North
America US military housing represents the
majority of the portfolio. The Investments
portfolio includes £1 billion of projects that
have completed the construction phase and
are operational.
Movement in value 2017 to 2018
£m
UK
North America
Total
20174
636
608
1,244
Equity
invested
34
24
58
Distributions
received
(37)
(52)
(89)
Sales
proceeds
(171)
(16)
(187)
Unwind of
discount
48
48
96
New project
wins
–
7
7
Operational
performance
gains (inc. FX
movements)
(21)
39
18
Gains on
sales
2
2
4
2018
491
660
1,151
4 2017 valuation includes £62 million relating to the 7.5% partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. The proceeds
were received on 23 February 2018.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 28
Directors’ valuation of the investment portfolio continued
Continued success in targeted sectors continued
UK portfolio
In the year, £34 million was invested across
four projects in the portfolio: Aberdeen
Western Peripheral Route; Irish Primary Care;
Welland Bio Power; and the regeneration
development at East Wick and Sweetwater.
In February 2018, there were partial sales
of 12.5% of the Connect Plus M25 asset,
comprising the completion of a 7.5% sale
agreed in December 2017 and a further 5%
sale agreed subsequently in February 2018,
which generated proceeds of £104 million.
In September, the Group completed the
sale of its entire 50% interest in Fife Hospital
for a cash consideration of £43 million.
In December, the Group sold an 80%
interest in its investment in the University of
Edinburgh student accommodation project
which generated proceeds of £24 million.
In aggregate operational performance
movements resulted in a £21 million
reduction in value arising from the net effect
of revised cash flow forecasts and discount
rates for certain projects, including in respect
two investment assets which were written
down in the year.
Discount rates applied to the UK portfolio
range between 7% and 11.5% depending
on project risk and maturity. The implied
weighted average discount rate for the UK
portfolio is 8.5% (2017: 8.5%). A 1% change
in discount rate would change the value of the
UK portfolio by approximately £49 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.
Portfolio valuation December 2018
Value by sector
Sector
Roads
Healthcare
Student accommodation
OFTOs
Waste and biomass
Other
UK total
US military housing
Healthcare and other PPP
Student accommodation
Residential housing
North America total
Total
Portfolio valuation December 2018
Value by phase
Phase
Operations
Construction
Preferred bidder
Total
2018
No. projects
13
3
4
3
4
5
32
21
4
7
10
42
74
2017
No. projects
13
4
4
3
4
5
33
21
3
7
7
38
71
2018
No. projects
64
7
2017
No. projects
56
10
3
74
5
71
2018
£m
205
109
43
50
41
43
491
532
35
46
47
660
1,151
2018
£m
1,003
130
18
20174
£m
290
136
64
51
57
38
636
497
28
49
34
608
1,244
20174
£m
1,089
130
25
1,151
1,244
Portfolio valuation December 2018
Value by income type
Income type
Availability based
Demand – operationally proven (2+ years)
Demand – early stage (less than 2 years)
Total
2018
No. projects
25
40
9
74
2017
No. projects
25
33
13
71
2018
£m
414
614
123
1,151
20174
£m
518
559
167
1,244
4 2017 valuation includes £62 million relating to the 7.5% partial disposal of the Connect Plus M25 asset, as the disposal
proceeds had not been received at year end. The proceeds were received on 23 February 2018.
Valuation – The portfolio value at a range of discount rates
UK portfolio
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
636
491
580
447
704
544
+2%
+1.5%
+1%
+0.5% DV Case
-0.5%
-1%
-1.5%
-2%
■ December 2018 ■ December 2017
Discount rate
Balfour Beatty Annual Report and Accounts 2018
29
m
£
l
n
o
i
t
a
u
a
v
’
s
r
o
t
c
e
r
i
D
North American portfolio
In 2018, the business won five projects:
four investments in private rental housing
portfolios at Birmingham (Alabama),
Zephyrhills (Florida), Ridgeland (Mississippi)
and Memphis (Tennessee); and a PPP project
to construct and operate the Automated
People Mover at Los Angeles Airport
in California.
Investment of £24 million was made
during the year in two existing and four
new projects: a PPP data centre in Canada;
a student accommodation project at Purdue
University; and the stakes acquired in the
four private rental housing portfolios.
In December, the Group completed the
sale of its investment in the Nesbit Palisades
multifamily housing project in Alpharetta,
Georgia generating cash proceeds of
£3 million. In addition, there was a partial
sale of the Group’s investment in phase one
of the University of Texas, Dallas student
accommodation project which generated
proceeds of £13 million.
Operational performance movements
resulted in a £39 million increase in the
value of the portfolio, consisting mainly
of an increase of £36 million due to
exchange rate movements, together
with some revised cash flow forecasts
and discount rate assumptions for
certain projects.
Discount rates applied to the North
American portfolio range between 7.5%
and 10.5%. The implied weighted average
discount rate is 8.2% (2017: 8.2%) and
a 1% change in the discount would change
the value of the North American portfolio
by approximately £86 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 Group’s
assessment of the provisions is that the
restriction will not have a material effect
on the Directors’ valuation.
Valuation – The portfolio value at a range of discount rates
North American portfolio
1,000
900
800
700
600
500
400
300
200
100
0
m
£
n
o
i
t
a
u
a
v
l
’
s
r
o
t
c
e
r
i
D
755
701
660
608
584
534
+2%
+1.5%
+1%
+0.5% DV Case
-0.5%
-1%
-1.5%
-2%
■ December 2018 ■ December 2017
Discount rate
Portfolio investment, divestment and distributions since 2008
£m
m
£
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
1250
750
250
-250
-750
-1250
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
■ Distributions ■ Investment ■ Sales – Directors’ valuation
250
200
150
100
50
0
(50)
(100)
(150)
(200)
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance
30
Building a sustainable business
Group-wide initiatives in
innovation driving success
Innovation
Balfour Beatty is increasingly harnessing
innovation which has the potential
to deliver better, safer, faster, more
cost-efficient outcomes for customers.
To fully leverage the benefits of innovation,
the sector requires a more dynamic, agile
workforce, skilled in new and emerging
digital technologies, and prepared to
challenge and transform conventional
solutions. Balfour Beatty is responding
by upskilling its workforce, bringing people
with new skills into the business and
embracing new technology to deliver
the infrastructure of the future.
In 2018, Balfour Beatty embedded its
25 by 2025 vision, making a reduction
in onsite activity by 25% by the year 2025
core to its operations. This involves removing
complex and repetitive activities from sites
by rethinking design, production and installation.
Using digital tools to deliver
better outcomes
Balfour Beatty is driving forward new
technology and innovative solutions
across the business.
– Balfour Beatty’s cutting edge Rail Innovation
Centre in Derby brings together the Group’s
expertise in systems engineering, computer
science, robotics, data analytics, electronics,
and electrical and mechanical engineering.
The purpose-built centre is a dedicated
research, development and testing facility.
It supports Balfour Beatty’s contribution to
the development of the digital railway for a
more reliable, cost efficient and safe network
for all users across the UK and overseas.
The Innovation Centre is working on the
latest developments in measurements
systems, ‘predict and prevent’ technology,
advanced digital surveying techniques,
signalling and data science. Products and
software being used at the facility include
TrueTrak, OmniVision, OmniSurveyor3D,
OmniCapture3D, DataMap and AssetView,
which all help to improve the speed, safety
and cost efficiency of maintaining the railway
without reducing network capacity through
disruptive possessions.
– On the M6 Smart Motorway scheme
between Birmingham and Coventry,
Balfour Beatty successfully trialled a mobile
robot for setting out works. The tiny robot
operates by a design being uploaded onto a
USB memory stick, pre-marking whitelines
Balfour Beatty Annual Report and Accounts 2018
using GPS. The robot achieved in one
night what normally takes two people
four nights to complete. In addition to
programme benefits, the robot reduces
manual handling and people plant interfaces.
– In the US, Balfour Beatty is now using
Bluebeam, a software application which
streamlines processes, improves project
communication and makes collaboration
a reality by allowing all users to add
mark-ups to the same document in
real-time, delivering significant
efficiencies for the customer.
– As part of the programme to address over
600km of water mains renewals across the
London and Thames Valley regions, Balfour
Beatty has delivered 75% of the water
mains replacement using trenchless
technology. This enables London’s ageing
water supply network to be updated and
made more resilient while minimising
disruption to the end customer.
These examples of successful trials for
innovative ways of working will inform
Balfour Beatty’s approach going forward,
ensuring that the services and solutions
offered to its customers are based on
proven, cutting-edge technology.
My Contribution
Balfour Beatty’s Group-wide employee
engagement programme established in 2015,
My Contribution, enables anyone in Balfour
Beatty to take part in Build to Last and
personally drive change and improvements.
My Contribution encourages employees
to suggest solutions that could benefit the
business by reducing inefficiencies, improving
productivity and making Balfour Beatty a better
place to work. In 2018, business leaders and
Balfour Beatty’s My Contribution champions
received over 1,000 ideas, which have the
potential to deliver £5 million in benefits.
A digital solution is being rolled out for
My Contribution with the launch of a new
streamlined and interactive process on
a social media platform.
Drones
Drone technology is
used across projects
to reduce the amount
of time spent on site,
providing a safer and
efficient way of working.
31
Virtual reality
Our state-of-the-art
3D, virtual reality room
helps our engineers
to visualise and design
a project before work
commences on site.
Worldwide innovation
Balfour Beatty shares ideas and expertise from
projects across its international business to create
innovative solutions for customers.
– The most significant phase of Balfour Beatty’s
digital transformation, Integrated Digital Project
Delivery (IDPD), was launched in 2018 by
Gammon. IDPD combines the power of Level 2
BIM and Modular integrated Construction (MiC)
techniques. Gammon recently completed Global
Switch Singapore’s data centre project with over
70% of the project delivered via Design for
Manufacture and Assembly (DfMA).
– In India, Balfour Beatty’s design team of 60+
technical experts in civil engineering, mechanical
and electrical works and visual design, continued
to provide value-adding services across the
Group’s business. Specific expertise includes
the production of detailed 3D and 4D
visualisations to maintain programme
delivery and customer satisfaction.
– For the €219 million ElecLink contract, Balfour
Beatty is installing a 1GW interconnector through
the Channel Tunnel, connecting France and the
UK. There are over 8,000 brackets and 55km of
monorail being installed in a live rail environment.
To automate the installation process, Balfour Beatty
has developed a bespoke engineering works train.
This has 36 automated arms which simultaneously
drill 144 holes for 36 brackets, enabling the
installation of 36 brackets in 30 minutes, and an
installed monorail length of 2km in a five-hour shift.
This ‘flying factory’ and automation has reduced
the activity onsite by at least 50%.
– Balfour Beatty’s delivery of the Madison, a
53-storey, 187m high residential tower in Canary
Wharf in London has embraced the use of modular
and offsite manufacturing techniques. The tower
is located in a busy area with a small footprint.
The scheme includes the manufacture of bathroom
pods in Italy complete with finishes, fixtures and
fittings, and the manufacture in China of storey-
high panels for the glazed façade. A range of other
innovative techniques are also being used, including
surveys undertaken by drones to generate
accurate, real-time data to assist with the efficiency
of construction. The benefits of the offsite
approach have been in delivering the first phases
efficiently, and in ensuring that construction can
proceed as safely and quickly as possible in spite
of the lack of onsite storage space.
Smarter ways of working – collaborating
with supply chain, industry and academia
Balfour Beatty understands the value of
collaborating to innovate. The Group works
closely with a range of industry bodies and
leading academic institutions, sharing knowledge
and learning and developing new ideas.
– Continued active involvement with industry groups,
such as the UK client-led Infrastructure Industry
Innovation Platform (i3P), provides a platform
for Balfour Beatty to influence the industry and
share knowledge with peers. Gammon is the
first international member of this industry group,
which is focused on improving productivity in
the infrastructure industry through sharing internal
and external industry solutions and collaboration
on the digital platform.
– In 2018, Balfour Beatty and industry partners
including members of the strategic design
consultant partnership, secured funding from
i3P for the development of SafetiBase, at a
‘Spark’ event. SafetiBase is an online platform
which tracks and analyses project risks and health
and safety issues. SafetiBase won an industry
Health & Safety award in 2018 and is now ready
to be deployed on a range of pilot sites.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 32
Building a sustainable business continued
Group-wide initiatives in innovation driving success continued
– Balfour Beatty and Leeds Beckett University have
teamed up on a new project co-funded by Innovate
UK and Balfour Beatty to the value of c. £900,000.
The project aims to address key challenges faced by
the construction industry in adopting BIM systems
by creating automated tools which will be available
as a software plug-in to BIM models. Known as the
Auto-BIM plug-in, it will be tested over two years
using Balfour Beatty’s existing database of projects
and on new developments. On the M25, Balfour
Beatty is piloting the latest remote sensing
techniques to improve maintenance efficiency.
In 2018, this included the deployment of sensors
enabling remote monitoring of drainage systems
and analytics to better assess the risk of flooding
and enable timely maintenance.
The Site of the Future
Balfour Beatty’s work on creating the Site of
the Future will streamline what the Group does
today and ensure that it continues to deliver for
its customers in the future. There are two areas
of focus:
– Digitising and automating processes
and making the data available to people to
inform decision-making, improve risk analysis
and manage projects. This will minimise time
spent manually collecting and processing data,
freeing up project resource to focus on safe
and profitable delivery.
– Innovating and ensuring that the whole
of Balfour Beatty benefits from the solutions
that are being developed across the business.
Balfour Beatty has created a physical test area at
Thurnscoe, South Yorkshire, where the principles
of Fail Fast, Learn Quickly and Deploy Rapidly
can be exercised, so the Group is always at
the forefront of the latest technology.
Significant progress was made in 2018 in
implementing the IT infrastructure required to handle
the large volume of data created. The focus will
now shift to developing the interfaces and reporting
dashboards to capture and leverage this rich seam
of information. Pilots are being run on live projects
to test and develop these new processes.
Conclusion
For an industry that has been slow in the
past to adopt innovation, there are considerable
opportunities to capitalise on the insight, control
and efficiencies that next-generation construction
technologies and more streamlined ways of
working offer. Through its 25 by 2025 vision,
Balfour Beatty has set a clear trajectory to
transform the future of construction. This will
help the Group future-proof its business and
deliver effectively for its customers.
Balfour Beatty Annual Report and Accounts 2018
Madison Tower
Utilising the latest
technologies to ensure a
safe and efficient completion
for this residential building in
London (artist’s impression).
Committed to creating
a safe 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, where no injury, ill health or incident is
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 campaigns and Group-wide stand downs
on key topics. In 2018, these included particular
focus on four fatal risk areas: falls; electrocution;
caught in/between; and struck by. Other topics
included: vehicles and driver risk; slips and trips;
winter working; environmental nuisance; waste;
hand arm vibration; manual handling; mental
health; and wellbeing.
Many parts of Balfour Beatty’s business
reached millions of hours incident free during
2018, demonstrating Zero Harm is achievable.
The Group’s leading and lagging key performance
indicators trended positively, with continued strong
performance in the UK. Leading indicators include
but are not limited to supervisor development,
behavioural safety programme roll-out, recorded
executive site visits, and engagement via
observations. The Group’s Lost Time Injury Rate
(LTIR) improved from 0.17 to 0.15 excluding the
Group’s international joint ventures (IJVs).
Despite all the in-house actions taken to eliminate
or mitigate risk, two subcontractor colleagues
still lost their lives due to third-party incursions
into Balfour Beatty work sites (see page 69 for
more information).
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, 2017 saw the roll-out
of the MSP 1 foundation programme for everyone
on making safe choices and the MSP 4 leadership
programme. Module MSP 2 aimed at supervisors
and influencing behaviour was rolled out in 2018.
In 2018, the milestone of 25,000 MSP
engagement interventions was reached.
Balfour Beatty’s industry-leading commitment
to treating health like safety continues to focus
on eliminating occupational disease and ill health.
Balfour Beatty is a founding member and co-
chairs the UK-wide Health in Construction
Leadership Group (HCLG) bringing together
industry leaders, customers and contractors with a
focus on: healthy by design; dust; musculoskeletal
disorders; and mental health. Balfour Beatty is
an active supporter of the Mates in Mind charity
for UK construction workers and has committed
to rolling out the Mates in Mind programme.
By the end of 2018, Balfour Beatty
had 600 qualified mental health first aiders
and has delivered training and support to over
9,000 of its UK workforce and supply chain.
Balfour Beatty was also the first organisation
to roll out the British Occupational Society
qualification (control of health risks in construction)
in the UK and now has over 270 qualified
occupational health champions.
The business continued to win awards for its
health and safety performance. For example
in the UK:
– the Silo Maintenance Facility project received the
Sellafield Ltd CEO award for safety performance
– the Gas Distribution Strategic Partnership contract
won the Institute of Gas Engineers & Managers
(IGEM) annual safety award
– the Smart Motorways Programme project
won Highways England project of the year
for innovation.
In the US:
– Balfour Beatty’s rail business won a fourth
consecutive platinum award for excellent
safety performance from the National Railroad
Construction and Maintenance Association (NRC).
Employee survey results across the Group rated
consistently highly on health and safety questions,
a strong indicator of engagement.
Balfour Beatty continues to learn and share with
its international joint venture Gammon which is
an active member of the Group’s HSES forum.
Gammon has led on some innovative work with
robotics and musculoskeletal risk. On health and
safety, Gammon follows many of Balfour Beatty’s
standards and initiatives and continues to raise
the bar compared to its local competitors.
2018 also saw the launch of the UK-wide HSES
Supply Chain Forum working in partnership to achieve
Zero Harm. Supply chain led working groups covered
topics including: elimination of hand arm vibration;
plant safety; communications; and health.
In 2019, the Group will continue its relentless
focus on health and safety within the business
and working with the supply chain, customers
and wider industry.
33
Lost Time Injury Rate
(LTIR)
(excl. IJVs)
0.29
0.22
0.21
0.17
0.15
2014
2015
2016
2017
2018
Accident Frequency Rate
(AFR)
(excl. IJVs)
0.19
0.14
0.14
0.12
0.09
2014
2015
2016
2017
2018
Major Injury Rate
(excl. IJVs)
0.08
0.06
0.05
0.05
0.04
2014
2015
2016
2017
2018
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 34
Building a sustainable business continued
Investing in talent
across the Group
People
The Build to Last transformation programme
continues to be the foundation of the Group
people plan. In 2018, the Group’s central focus has
been on talent development and enabling leadership
capability, maintaining high employee engagement
and continuing to stand out as a leading employer
in the sectors in which it operates.
Leadership and talent development
Investing in future leadership capability, retaining
talent and building a strong leadership pipeline
continue as key priorities. To support these priorities,
regular people reviews are executed throughout
the Group as an opportunity to identify talent,
review key professional and technical development
interventions and create a strong succession
plan across the organisation.
An example of investing in talent is the Future
Leaders programme which ran with its second
cohort, bringing together senior leader talent from
across the UK business. 65% of the Future Leaders
from the first cohort have been promoted into
more senior leadership roles. The Aspiring Leaders
programme was launched in the UK for managers
who have the potential to move into senior positions.
The Executive Leader Development Programme
(ELDP) was launched in the US Construction
business to further strengthen leadership capabilities.
The ELDP is expected to launch further cohorts and
the extent to which the programme can be adopted
across the Group will be considered.
In the US there are three well established mid-level
programmes which act as ‘feeder’ development
activities for the ELDP. These will be reviewed in 2019
to create a single programme based on best practice
across the different Balfour Beatty businesses.
Across the Group, the wider development
proposition embraces blended learning which spans
formal training programmes, e-learning, webinars,
in role development, coaching and mentoring.
The US Construction business deployed a broad
collection of classroom training, delivered internally,
focused on entry, mid, and executive-level
management and leadership skills development.
Additionally, more than 400 on-demand online
training videos and training resources were
accessible to all employees through their Learning
Management System to support their professional
development as managers and leaders.
Continued strong investment and focus on people
and capability development in the UK resulted in
the delivery of 3,764 training days and 9,103 users
completed a total of 29,492 e-learning courses.
In the UK, Balfour Beatty has also refreshed
its employer brand and strengthened its wider
resourcing strategy to support the attraction
of key talent into the organisation.
Employee engagement
index %*
65%
58%
60%
2016
2017
2018
Annualised attrition
rate UK %
14%
Engagement
Employee engagement remains a key focus
to support and enhance business performance.
The Group’s aim is to make Balfour Beatty a great
place to work by enabling continuous, two-way
listening across the organisation.
For engagement surveys, standard technology
is used in the UK and US to reach employees and
provide immediate feedback on results ensuring
complete transparency to build trust in the survey.
Balfour Beatty is proud to have achieved a Group
response rate of 72% in its December 2018 survey
outperforming many comparable organisations.
A key measure of the Build to Last ‘Expert’ goal,
the employee engagement index, increased from
58% in 2016 to 60% in November 2017, and
most recently to 65% in December 2018.
13%
12%
Particular highlights from the December 2018
engagement survey across the Group include:
2016
2017
2018
Female employees
across the workforce* %
19%
18%
17%
2016
2017
2018
– Balfour Beatty genuinely cares about
having a positive impact on the environment
and local communities (75% positive)
– I attend meetings where I can share
my views (70% positive)
– my manager motivates me to give my best
(68% positive)
– there are opportunities to develop my skills
and/or knowledge in Balfour Beatty (19%
increase vs. 2017).
The strong increases in the employee response rate
and engagement index score are particularly pleasing.
Emerging talent
Balfour Beatty has continued to invest in its
Emerging Talent aligned with its interest in supporting
The 5% Club. In 2018, the UK recruited 94 graduates,
102 apprentices and 20 trainees. The proportion
of the UK workforce in ‘earn and learn’ positions
has increased from 3.1% in 2014, to 5.6% at the
end of 2018. At 31 December 2018 the UK supports
322 apprentices, 237 graduates, 161 trainees
and 19 year out industrial placement students
on a range of schemes.
During the year in the UK, Balfour Beatty’s Science,
Technology, Engineering and Mathematics (STEM)
ambassadors increased to 280+ and qualified
Fairness, Inclusion and Respect (FIR) ambassadors
increased to 32 raising awareness of Equality,
Diversity and Inclusion (EDI) internally and with
schools, colleges and youth groups.
In the US Balfour Beatty hired 115 college interns
for the summer of 2018 focusing on the best and
brightest with potential to become full-time engineers
upon graduation. Interns are provided with formal
training whilst being assigned to active projects,
complementing their practical learning experience.
Balfour Beatty Annual Report and Accounts 2018
* Excluding international
joint ventures.
Diversity and inclusion
What makes Balfour Beatty unique is the expertise
and capability of its people. Attracting and retaining
the best talent from all backgrounds is key to building
a high-performance culture. Leo Quinn is the Board-
level sponsor for Diversity and Inclusion (D&I) and
regularly promotes this internally and externally,
most recently with his paper ‘Breaking the Deadlock’.
He is supported by a steering committee that sets
the direction for Diversity and inclusion and a cross-
functional working party that leads and co-ordinates
diversity initiatives.
Balfour Beatty’s three-year UK D&I action plan
focuses on Communication, Culture, Creating
Opportunities, Communities/Supply Chain and
Governance and has been cascaded into local
business plans with bespoke targets, helping
to build a strong culture of fairness, inclusion and
respect across the organisation. Affinity networks,
with over 850 members, are sponsored by
a member of the senior leadership team.
The Group’s efforts have been recognised externally
in the UK, including being shortlisted for the CECA:
Inspiring Change in the Community Award, Inspire:
Most Inspiring Contractor Award, workingmums.
co.uk: Career Progression Top Employer Award and
British Ex-Forces in Business: Employer of the Year
Award. Balfour Beatty employees have also been
recognised in the European WICE (Women in
Construction & Engineering) Awards and the
Financial Times Outstanding Top 100.
The US Construction business is embarking
on its five-year strategic plan that will initially
focus on three areas of opportunity and growth:
gender; race/ethnicity; and veterans. The first two
years of the strategic Diversity & Inclusion Plan
have measurable objectives against leadership
commitments, talent acquisition, talent
development, and employee engagement.
Balfour Beatty expanded its Connecting Women
initiative across the US in 2018. Designed to
empower female employees through fostering
alliance and networking, the programme facilitates
diversity and inclusion, creates a culture of peer
support and inspiration to attract and retain
women, and provides education and personal
development opportunities.
Balfour Beatty served as a gold sponsor for
the Groundbreaking Women in Construction
conference in San Francisco in 2018, sending a
large, representative group from all levels to develop
leadership skills, make industry connections and
strengthen leadership skills development.
In the UK, Balfour Beatty helps its supply chain
to improve workforce diversity and workplace
inclusivity by sharing best practice at industry forums.
It collaborates with stakeholders across the sector
on initiatives such as the FIR programme to develop
a range of resources for use in the supply chain to
improve equality, diversity and inclusion practice at
all tiers. Since 2013, Balfour Beatty’s UK businesses
have spent more than £8bn with SMEs with the
majority going to small and micro businesses and is
proud to have focused spend on Social Enterprises;
women and veteran owned businesses based in
the most deprived neighbourhoods in the UK.
Strategic partnerships and sponsorships are in
place with Amos Bursary, Business Disability Forum,
Leonard Cheshire Disability Society, Princes Trust,
Stonewall and WISE. In 2018 Balfour Beatty UK
achieved the Government’s Disability Confident
Level 2 Employer status to support the employment
of disabled people and those with health conditions.
In addition, Balfour Beatty is a co-founder of the
Mates in Mind mental health programme with over
500 Mental Health First Aiders based at sites and
offices and over 8,000 employees having completed
‘Start the Conversation’ awareness sessions.
In June 2018, Balfour Beatty re-signed the Armed
Forces Covenant demonstrating its advocacy for
the Armed Forces, employing veterans and
supporting reservists.
Summary
The Group’s Build to Last transformation programme
continues to improve business performance and
contributes to the creation of a great place to work;
both for current and prospective employees.
The Group continues its commitment to build a
workforce of industry-leading people by offering
a strong Leadership Talent Development offering,
fostering employee engagement and by providing
exciting career opportunities for its people through
the future pipeline of work.
At 31 December 2018
Board
Senior management1
Directors of subsidiaries
Group
1 Senior Functional and Strategic Business Unit leaders.
Male
7
87
202
15,852
Female
2
27
34
3,622
Total
9
114
236
19,474
% Male % Female
22.2
23.7
14.4
18.6
77.8
76.3
85.6
81.4
35
% of graduates,
apprentices and trainees
in UK workforce
5.6%
5.3%
4.3%
2016
2017
2018*
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 36
Building a sustainable business continued
Ensuring integrity
within the business
Business Integrity
Balfour Beatty’s Business Integrity programme is
a principles and behaviours-based programme, to
ensure that the culture within the business enables
people to make the right choices and empowers
them to speak up where others have not.
The core of the Business Integrity programme
remains the Balfour Beatty Code of Conduct, a
web-based code which has been designed to be
accessed from any device with an internet connection
(www.balfourbeattycodeofconduct.com). This enables
site-based personnel to access the Code, along with
customers and partners. This is supported by the
Suppliers Code of Conduct which sets out Balfour
Beatty’s commitment to work with those companies
whose standards are consistent with its own.
The programme underwent significant change
during 2016/17 in order to better utilise technology
and to further embed the programme within the
business. Changes such as an assessment for the
Code of Conduct, bite-sized learning modules and
presentations across the business have seen an
increase in engagement as demonstrated by the
results of the June 2018 UK employees survey:
– 95% of respondents understand what is
expected of them under the Code of Conduct;
– 84% are encouraged to do the right thing
at work; and
– 82% felt they can raise issues and challenge
unethical, dishonest or unacceptable behaviour.
This is very encouraging but there is more to
do to ensure all employees know what is required
of them and that they can report their concerns.
For a greater connection with the businesses, Balfour
Beatty launched a network of Business Integrity
advisers in 2017. Advisers assist by communicating
Business Integrity messages and initiatives,
supporting investigations and are local points of
contact for issues and concerns. In 2019, the focus
will be upon continued reinforcement of the Business
Integrity message consistently across the Group:
– managers are critical to the success of the
programme and the Business Integrity function
will work with them to ensure they nurture and
encourage integrity within their businesses.
– the Code of Conduct assessment, which tests
knowledge in 12 key risk areas, has proven
to be a more effective and engaging method
of training and will be re-issued in 2019.
– to reinforce individual responsibility, all
those who complete the assessment will
be required to provide a declaration about
their own behaviour in regard to the Code
of Conduct and associated processes.
– the Group’s approach to due diligence has been
integrated within commercial processes and the
services of third parties who specialise in collating
data are being used. This has made processes
more effective and allowed better assessment
of suppliers and partners.
Balfour Beatty Annual Report and Accounts 2018
Speak Up Helpline cases
Number
245
238
236
2016
2017
2018
Speak Up Helpline cases
(excluding HR grievances)
Number
224
231
228
2016
2017
2018
Cases per 1,000 employees
(Balfour Beatty)
Number
11.2
11.6
12.0
2016
2017
2018
Cases per 1,000 employees
(global benchmark)
Number
14
14
*
Speak Up
Balfour Beatty encourages the reporting of any
concerns about unethical conduct. Trends and,
where appropriate, details of cases raised are
reported to the Board 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 Business
Integrity programme.
The number of cases reported in 2018 remained
largely consistent with 2017 with the number
of cases per 1,000 employees increasing slightly
as a result of a drop in the number of employees.
Ensuring all in-scope cases are investigated remains
an important priority to support a change in
behaviour and to maintain the trust and support
of those who raise concerns. This continued in
2018 with 100% of in-scope cases investigated.
Modern slavery
Modern slavery is a brutal form of organised
crime in which people are treated as commodities
and exploited for criminal gain. The majority of
these people are in the supply chains of legitimate
industries. Balfour Beatty is committed to working
in the business and its supply chain to ensure an
approach is taken to tackling labour exploitation
and eliminating these practices. The Company’s
full Modern Slavery Act transparency
statement for 2018 can be accessed here:
www.balfourbeatty.com/services/modern-slavery
The EU General Data Protection Regulation
(GDPR)
The General Data Protection Regulation (GDPR)
and the UK Data Protection Act 2018, came into
effect on 25 May 2018. GDPR significantly increases
fines for breaches, requires breaches to be notified
to the regulator, provides enhanced data subject
rights and mandates certain risk assessments
and record keeping requirements.
Ahead of the above legislative changes, Balfour Beatty
appointed a Group Data Protection Officer who has led
a GDPR readiness programme. Under this programme
impact assessments have been carried out on the
Group’s high risk IT systems, supplier processors
and corporate websites and initial risk assessments
of joint venture and customer project processing
activities. Balfour Beatty’s data protection policies and
procedures have been updated and a GDPR steering
board introduced. An automated process for
conducting data protection impact assessments and
data mapping has been implemented, key processor
terms and privacy notices updated, corporate training
on data protection principles delivered and data storage
and retention practices renewed.
The focus for 2019 will be to build on this programme
and further embed best practices into the Group’s
business processes and broader culture whilst preparing
for anticipated future changes to e-privacy laws.
2016
2017
2018
* At the time of print, the global benchmark statistic for 2018 was not
available. The full chart including the 2018 statistic can be found at:
www.balfourbeatty.com/businessintegrity
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.
Being a responsible taxpayer
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.
37
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 38
Building a sustainable business continued
Using Our Blueprint to drive economic,
environmental and social outcomes
Global trends relevant to the Group
Global construction has significant economic,
environmental and social impacts. These impacts
can be positive and negative. Balfour Beatty
welcomes the opportunity to make a positive
difference to people’s lives.
– The construction, renovation and demolition
of buildings account for 40% of ‘developed’
countries’ solid waste streams1
– Buildings and construction together account
for 36% of global energy use and 39% of
energy related carbon-dioxide emissions2
– On a global scale, buildings account for around
40% of the world’s consumption of natural
resources and 25% of the world’s water use3.
Reducing carbon emissions in the built environment
is widely recognised as the least expensive method
of abating the adverse impacts of climate change.
Furthermore, there are significant opportunities
to reduce embodied carbon, materials and waste
by adopting circular economy approaches.
In socio-economic terms, the built environment
has significant direct and indirect impacts on
social wellbeing and the livelihoods and prosperity
of communities and individuals. The construction
sector is a major employer, with a diverse and
complex supply chain, positively impacting local
economies through jobs and training. The sector
provides homes, education, healthcare, transportation
and recreational facilities for communities.
The Group’s long-term materiality assessment
has identified the following scenarios and trends:
– The availability and cost of raw materials and
water will be a challenge as populations grow
and key natural resources dwindle. This will impact
the way Balfour Beatty designs and builds assets,
manages waste, sources materials and conserves
water resources, while also presenting new
commercial opportunities such as water and
waste water treatment technologies.
– The skills gap in key sectors such as construction
is well-documented and getting worse. There is
disparity between the number of skilled workers
needed and the number of young professionals
entering the industry. At the same time there
is an increasing trend towards digitisation,
automation and off-site manufacturing.
– The physical and economic impacts of climate
change are likely to increase over time. This is
likely to increase investment in climate change
adaptation by society and encourage more
innovative ways of managing existing assets.
– Increasing costs of fossil fuel energy and the price
of carbon will encourage Balfour Beatty and its
customers to seek low-carbon opportunities to
reduce costs, and increase security of supply.
– Many local communities struggle with competing
priorities on the public purse and are more likely
to focus on value rather than just cost, allowing
contractors to support economic, social and
environmental outcomes when tendering for work.
This is particularly important in the UK where
social value/community benefits is/are now
factored into public procurement.
– As cities grow and populations increase, there
will be increased demand for infrastructure that
will encroach on green spaces and impact on
biodiversity. Implementing biodiversity net gain
principles on projects over time will help protect
and enhance biodiversity. The Group is well
positioned to leave a lasting positive impact.
Our Blueprint
These trends have been recognised in developing
Our Blueprint, the Group’s sustainability strategy.
It sets out how Balfour Beatty will deliver long-term
economic, social and environmental outcomes for
its employees, customers, society and shareholders.
It is fully aligned with the Company’s wider Build to
Last goals, outlined on pages 12 and 13, and seeks
to further embed sustainability throughout Balfour
Beatty’s operations by providing a robust framework.
The strategy is based on the three pillars of Profitable
Markets (economic), Environmental Limits
(environmental) and Healthy Communities (social).
It is supported by clear guidance on metrics through
a reporting handbook. The Group’s sustainability
performance in relation to its Our Blueprint strategy is
set out on pages 39 to 43. For details on Our Blueprint,
please visit www.balfourbeatty.com/ourblueprint
Other themes such as resource efficiency
or developing skills and talent have developed
into specific programmes such as the 25 by
2025 vision and The 5% Club.
Governance
Balfour Beatty has a solid governance process
that underpins everything it does to ensure that
the business is being managed and run properly,
effectively and ethically. The Safety and Sustainability
Committee (see page 78) reviews the Group’s
sustainability strategy and monitors progress
against Our Blueprint. This ensures governance
and accountability for delivery and performance
at Board level.
Each strategic business unit is responsible for
developing its own sustainability action plan that
communicates its priorities, sets out its targets,
and describes the arrangements it is putting place
in order to deliver them. This is updated annually.
Internal audit teams review performance against
Our Blueprint and the external auditor is engaged
by Balfour Beatty to provide limited assurance over
selected greenhouse gas performance data for
annual reporting purposes.
1 UN Environment, Assessing Global Resource Use, 2017, p.65 (http://www.resourcepanel.org/sites/default/files/styles/83_117_visuel_
document/public/pdfpreview/3c8118deecb8c1c1e5beca38cb1e2c9f.png?itok=MnHp9HFE)
2 UN Environment, Towards a zero-emission, efficient, and resilient buildings and construction sector, Global Status Report 2017, page 6
https://www.worldgbc.org/sites/default/files/UNEP%20188_GABC_en%20%28web%29.pdf
3 UN Environment, Assessing Global Resource Use, 2017, p.64.
Balfour Beatty Annual Report and Accounts 2018
39
Green infrastructure
projects in progress
in 2018
£2.99bn
Installed
solar photovoltaics
32MW
Buildings created with
certification in 2018
8
UK
US
9
Gammon 1
Tonnes of Scope 1 & 2
CO2e/£m revenue
24.5
Reduction in tonnes of
Scope 1 & 2 CO2e/£m
revenue against
2010 baseline
41%
Balfour Beatty’s key policies on ‘Code of Conduct’,
‘Sustainability’, ‘Health and safety’, ‘Supply chain
PR and marketing’, ‘Risk management’, ‘Quality’,
‘Environmental’, ‘Social Value’ and ‘Information
security’ are available on the Group’s website.
These requirements are passed onto Balfour Beatty’s
supply chain through Our Supplier Code of Conduct
and its Sustainable Procurement Policy, recognising
the critical role that the supply chain plays.
Approximately 80% of the Group’s business units
are certified to the environmental management
standard ISO 14001:2014 and assessed against the
sustainable procurement standard ISO 20400:2017.
Both are audited by third parties and management
reviews are conducted to review the findings.
Profitable markets
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.
In 2018, the total value of projects in progress that
related to green infrastructure was £2.99 billion.
This value relates to the contractual value of the
projects some of which may have started before the
reporting year. The Group’s certifications in this area
and its technical knowledge improve the whole-life
performance of customers’ built assets.
Increasingly, customers are scoring against
sustainability criteria as in the case of the £2 billion
Scape Infrastructure frameworks to which Balfour
Beatty was appointed as sole contractor in 2018.
10% of the total score for these two frameworks
was focused on social value, i.e. the economic,
environmental and social benefits the framework
offered to local communities.
The green economy represents a multi-billion pound
growth opportunity over the coming decades in areas
such as renewable energy and nuclear, flood defence
schemes, inter-connectors, sustainable transport
infrastructure, and energy efficient buildings.
Many customers are exploring new solutions
to drive efficiencies and be more sustainable.
Utility network providers for instance are interested
in smarter installation and maintenance solutions
that cause less disruption and reduce digging, vehicle
movements and materials usage. They are particularly
interested in solutions that minimise leaks.
In the US, Balfour Beatty’s rooftop solar programme
for military housing exceeded the Department
of Defense’s Renewable Energy Goal of 25% in
2018, by generating 30% of energy from renewable
sources. To date the programme has installed 32MW
of solar photovoltaics across 12 military installations.
The US Construction business completed nine LEED®
buildings in 2018. Gammon Construction, the Group’s
joint venture in Hong Kong, is in the process of
completing 21 buildings, all of which have provisional
LEED® or equivalent certificates in place.
Environmental limits
Optimising environmental performance forms
a key component of Our Blueprint and is essential for
driving efficiencies and winning work. Balfour Beatty
is committed to minimising its impact on climate
change and mitigating the business risks that climate
change presents. At an operational level the Group
has continued to take steps to reduce Scope 1 and 2
Greenhouse Gas (GHG) emissions and its reliance
on fossil fuels through the use of technology and
algorithms that have been developed in-house
to assist decision making. Balfour Beatty has
also continued to use data to monitor and drive
sustainability performance.
Scope 1 and 2 GHG emissions
The Group has seen an increase in carbon
emissions intensity in 2018 compared to 2017 from
22.1 tonnes of CO2 equivalent (CO2e)/£m revenue
to 24.5 tonnes of CO2e/£m revenue. This is despite
absolute scope 1 and 2 emissions dropping from
242,107 tonnes to 224,430 tonnes over the same
period. Although efforts to manage energy and
fuel and reduce associated GHG emissions have
continued, the increase in intensity is due to a
decrease in revenue. This result is also a clear
indicator that project activity is decoupled from
revenue. Since establishing the baseline in 2010,
tonnes of CO2e/£m revenue have dropped by 41%
from 41.5 tonnes of CO2e/£m revenue to 24.5 tonnes
of CO2e/£m revenue. The Group’s total CO2e figure
for Scope 1 and 2 emissions has dropped by 133,553
tonnes of CO2e (37%) from 357,983 tonnes of CO2e
to 224,430 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.
Reduced consumption also limits the Group’s
exposure to transitional market risks from
energy and fuel price fluctuations.
The requirements for reducing Scope 1 and 2
emissions are well understood and controlled.
In 2018, the Group has continued to: improve the
fuel efficiency of its fleet; optimise the sizing of
generators and the power profile of projects; improve
the energy efficiency of site cabins; undertake energy
efficiency improvements to properties; and optimise
grid connections. Implementing these measures
in the UK alone has resulted in 40,778 MWh
energy reduction or 11,308 tonnes of CO2e.
Gammon Construction, the Group’s joint venture
in Hong Kong, has started to develop Zero Waste
Plans for all new projects to focus attention, planning,
and commitment on actions to achieve the aspiration
of Zero Waste in all its forms including wasted energy.
Renewed efforts have included smart metering
and controls, and more energy efficient site offices.
Gammon has also been promoting earlier connection
to mains power supply to avoid diesel generator
use with government and customers at its
biennial sustainability conference.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 40
Building a sustainable business continued
Using Our Blueprint to drive economic, environmental and social outcomes continued
Balfour Beatty’s 2020 goal is to achieve a
50% reduction in its Scope 1 and 2 emissions
per £ million revenue against a 2010 baseline.
The Group’s performance to date illustrates it is
on track to meet this target. The Group is working
towards a 60% reduction stretch target per £ million
revenue by 2025. Furthermore, a science-based
target for 2030 is being considered by the Safety
and Sustainability Committee.
As illustrated, the UK accounts for 41% of the
Group’s Scope 1 and 2 emissions, the US 23%
and the Rest of the World 36%.
Gammon Construction 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 seven
UNFCCC/Kyoto gases. The Group uses the
operational control approach under the GHG Protocol
Corporate Accounting and Reporting Standard as
at 31 December 2018 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 41 to allow readers to make more
informed comparisons of the Group’s energy use.
Although Balfour Beatty’s Scope 1 and 2 CO2e
emissions dropped by 7.3% (17,677 tonnes)
over the period from 2017 to 2018, the number of
MWh of energy dropped by 3.1% (25,790 MWh).
This difference can be explained by the fact that
different fuels have different carbon intensities,
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 10%
reduction in gas oil (red diesel) use and a 23%
reduction in electricity use. There has been a
12% increase 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 customers 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 2018 to calculate its emissions
into equivalent tonnes of carbon dioxide (CO2e)
and the IEA’s November 2018 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.
Datasets for 2014 to 2017 relating to Heery have
been removed as it was sold in October 2017.
PwC 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 limited assurance
is substantially lower than a reasonable assurance
engagement. In order to reach their opinion, PwC
performed a range of testing 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.
The limited assurance statement should be read
in context of the reporting criteria as set out in
Balfour Beatty’s Global Sustainability Reporting
Guidance available at: www.balfourbeatty.com/
sustainabilityreporting
The guidance outlines the non-financial
KPIs measured by the Group, their definitions,
and evidence requirements.
Scope 1 & 2 emissions
by geography
41%
UK
US
23%
Gammon 36%
Reduction in Scope 1
& 2 emissions in 2018
7.3%
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
2014
Absolute tonnes of CO2e
2018
283,821 221,268 238,083 220,355 170,937 175,065Δ
49,365Δ
224,430
71,170
71,007
357,983 291,183 309,090 298,298 242,107
77,943
69,915
74,162
2016
2015
2017
41.5
30.0
35.0
29.4
22.1
24.5
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 https://balfourbeatty.com/sustainabilityreporting.
Δ Included within PwC’s limited assurance scope.
Balfour Beatty Annual Report and Accounts 2018
Waste intensity
At present, there are limitations on the
completeness of Balfour Beatty’s waste data,
making like-for-like comparisons of its annual data
difficult. Comparing waste data year-on-year will
also vary depending on the type of projects the
Group undertakes and the stage that the projects
are at. Balfour Beatty is working with its
operating businesses to improve this data.
In 2018, over 2,258,033 tonnes of waste that
Balfour Beatty produced were avoided from landfill.
This equates to 97% of the total amount of waste that
Balfour Beatty produced in 2018, but does not include
materials that were reused directly without entering
the waste stream. Although these figures are
impressive, the Group is working on circular economy
solutions to reduce waste in the first place and has
a 2025 vision to reduce onsite activities by 25%.
This will mean a greater shift towards Design for
Manufacture and Assembly (DfMA) techniques which
are inherently more resource efficient. As illustrated,
Balfour Beatty has steadily reduced the tonnes
of waste it produced per £ million revenue over the
last three years. This includes both materials sent
to landfill and materials that are recycled.
On the East Wick and Sweetwater project on the
Queen Elizabeth Olympic Park, the project team
saved 500 vehicle movements by reusing 3,500
tonnes of materials onsite. The team planed
out tarmac surface layers to produce aggregate
that could be reused, saving 175 lorry loads
of deliveries and over £100k.
Water intensity
Water intensity is an optional indicator in Balfour
Beatty’s sustainability strategy. It is measured in
cubic metres per £ million revenue. Depending on
the geography in which the Group operates, water
can be a sparse or abundant commodity. Almost all
of its operating businesses in the UK and Hong Kong
reported on water use. Neither the US Construction
business nor the US Investments business elected
to monitor water use as an optional indicator.
In 2018, Balfour Beatty switched to purchasing all of
its water in England and Scotland from one provider
to enhance data collection.
Since improving its approach to monitoring water the
Group has seen a decrease in its water intensity in the
areas of its business where water is monitored from
162m3/£m revenue in 2017 to 160m3/£m revenue.
Supply chain and collaboration
Balfour Beatty recognises the critical role of its
supply chain in helping to make it a more sustainable
business. The Group has continued to improve its
approach to sustainable procurement in 2018 by
working with its supply chain to deliver social value
outcomes and agree improvement plans across key
categories. Much of the Group’s work is undertaken
collaboratively. For instance, in 2018 Balfour Beatty
worked with A-Plant and El Bjorn to develop and
replace all electric heaters in drying rooms in the UK
with purpose-built dehumidifiers that are 33% more
energy efficient than conventional electric radiators.
Since becoming the first company to implement and
be assessed against ISO 20400:2017 the international
standard for sustainable procurement in 2017 for
its UK operations, Balfour Beatty has continued
to improve its processes to drive sustainability
by targeting specific opportunities and risks.
Innovation through value engineering continues to be
a key focus: Balfour Beatty’s collaborative UK Strategic
Design Consultants partnership with Atkins, Mott
MacDonald and WSP has been a success and allowed
partners to deliver more value and win more quality
business by working together with common goals.
Balfour Beatty is a funding Partner and Gold Member
of the Supply Chain Sustainability School, which aims
to improve sustainability performance throughout
the construction and infrastructure supply chains.
As a result, Balfour Beatty has held a number of
engagement events and workshops with its supply
chain partners improving their knowledge on
sustainability. The number of these partners
registered with the school is now over 2,607,
an increase of over 13.35% from 2017.
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
Global total
UK energy use % of total
2015
167,319
2,603
17,284
2,828
476,488
11,934
–
5,479
288,144
20,025
44,405
185
1
863
2016
140,365
4,561
21,387
6,193
477,400
52,958
410
58
292,502
16,636
12,939
571
2
1,524
1,037,558 1,027,506
2017
130,645
12,836
16,924
3,866
362,589
70,829
456
99
213,012
15,381
3,848
212
1
1,103
831,801
MWh
2018
100,324
14
15,242
3,013
407,209
65,876
67
603
191,374
15,372
6,076
188
–
653
806,011
37.8
41
Tonnes of waste
per £m revenue
370
330
250
2016
2017
2018
Cubic metres of water
per £m revenue
165
162
160
2016
2017
2018
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance Employee engagement
on sustainability
75%
Number of UK sites
assessed against CCS
85
CCS average score
40.55
42
Building a sustainable business continued
Using Our Blueprint to drive economic, environmental and social outcomes continued
Climate disclosure
The Group is committed to addressing climate
change 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 2018, 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.
Although the Group has identified a number
of climate change related risks and opportunities,
none of these pose a principal risk to the business.
The risks identified include:
– climate change increasing the intensity and
frequency of extreme weather events, including
flooding and high winds which could impact
sites negatively
– large fluctuation in energy costs
– sustainability performance failing to keep
pace with demands
– sudden tightening of environmental legislation
to improve air quality and/or reduce CO2 emissions.
The opportunities include:
– energy savings
– increased demand for climate change
mitigation measures by customers
– improved reputation and ability to win
work through our capability.
Environmental compliance
In 2018, two environmental incidents resulted
in enforcement action and fines totalling £3,328.
Healthy communities
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 supply chain partners, 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.
All staff have the opportunity to volunteer up
to two days per year to give something back
to local communities. The December 2018
engagement survey showed that 75% of
the Group’s UK and US employees thought
that “Balfour Beatty genuinely cares about
having a positive impact on the environment
and local communities”. The focus areas for
the charitable work has been on:
– supporting skills in infrastructure
– supporting people and families with
health and wellbeing
– regenerating local communities
– inspiring tomorrow’s workforce
– supporting Affinity Networks
– supporting national charity partners.
In the UK Balfour Beatty has continued to support
the Considerate Constructors Scheme (CCS).
The CCS is a non-profit-making, independent
organisation founded in 1997 by the construction
industry to improve its image. In 2018, 85 of
the Group’s UK sites were assessed against
the scheme, with an average score of 40.55
out of 50 against an industry average of 36.27.
Of these sites, 68% exceeded Balfour Beatty’s
internal target score of 40.
Balfour Beatty Annual Report and Accounts 2018
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 2018, employees raised over £40,256 through
Building Better Futures. The Company matched this
with an additional contribution and donated a total of
£90,000. Since 2013, the Trust has raised £201,416 to
support Barnardo’s, helping over 1,340 young people.
Since 2010, the Trust has contributed over £490,000
to Coram, funding vital services for children and
young people.
The Group has worked closely with the Prince’s Trust
since the beginning of the partnership and has raised
over £1.35 million for the charity. In the UK, a further
£161,825.90 was raised by employees for charitable
purposes. Across the Group’s operations, employees
volunteered 11,854 hours for charitable causes and
donated £58,978 in-kind contributions to charities.
This has brought multiple social value benefits to
the communities in which Balfour Beatty operates.
The US construction business contributed
over US$288,000 to charitable causes in 2018.
Some of the organisations receiving donations were:
– Bridges to Prosperity
– American Heart Association
– Make-A-Wish® Foundation
– Oregon Harbor of Hope
– DC Students Construction Trades Foundation
– Ronald McDonald House
– Sharefest
– Urban Ministry Center.
In coordination with Bridges to Prosperity (B2P),
a 10-member team of Balfour Beatty employees
from across the US celebrated the completion of a
131-metre suspended footbridge in the isolated rural
Espiritu Santo community near Cochabamba, Bolivia.
Planned for months and constructed by Balfour
Beatty’s volunteer team over the course of two
weeks, the new footbridge is helping support B2P’s
dedication to building footbridges over impassible
rivers so that isolated communities can access
healthcare, education and economic opportunities.
The build team’s fundraising efforts received
significant support of over US$107,000 from
colleagues, friends, family and Balfour Beatty
business partners to fund the trip.
In California, Balfour Beatty hosted its annual Golf
Classic that raised more than US$145,000 for the
Sharefest 2018 Workday. Nearly 150 people attended
the tournament and set an event fundraising record
to sponsor six Workday sites, help send nearly 250
disadvantaged youths to camp, and provide four
college scholarships to local deserving students.
The annual Sharefest event mobilises thousands
of volunteers throughout Los Angeles County
to complete tangible work projects that change
the quality of life for its residents. Since its inception
in 2013, Balfour Beatty’s Golf Classic outing has
raised more than US$600,000 to support annual
Workday activities.
For Make-A-Wish® Foundation of Georgia, the Balfour
Beatty team in Atlanta raised US$51,000 at its annual
Golf Tournament for Wishes. The proceeds donated
fund wishes for children in Georgia who have been
afflicted with life-threatening illnesses.
In Texas, Balfour Beatty employees volunteered
their time to mentor high school students as part
of the ACE Mentor of Dallas programme. The
hands-on workshop taught students how to develop
construction milestone schedules and site logistics
plans based on an active project in Dallas, Texas.
The dynamic mentoring programme provides
students with a deeper understanding of industry
career opportunities, while providing insight into
the tools and techniques used by Balfour Beatty
experts in the field.
In 2018, Gammon Construction, its staff and
partners contributed to over 90 activities and
community events in Hong Kong and provided
over HK$2.6 million in charity donations.
2018 marked the 60th anniversary of Gammon.
Celebrations were launched with a ‘Run for 60
– Run for Charity’ event which was sponsored by
Gammon. The run was also organised to raise money
for the Construction Charity Fund which provides
support to families of victims in fatal construction
accidents. More than 100 Gammon staff members,
family members and business partners joined the
event, running the Gammon Construction China
Coast Full or Half Marathons or 10km races to
raise over HK$1.6 million.
One of the strongest typhoons in Hong Kong’s
history, Mangkhut, ripped through the territory
on 16 September. The storm tore off roofs,
broke windows, and caused extensive flooding.
The aftermath saw thousands of trees blocking
hundreds of roads and traffic was paralysed.
Gammon’s project teams deployed workers and
equipment to clear obstructions near sites on public
roads and in adjacent buildings and neighbourhoods.
Gammon was presented with an Appreciation
Certificate by the Hong Kong Government’s
Home Affairs Bureau and received many
commendations from District Councils.
43
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 44
Non-financial information statement
This section of the Strategic Report constitutes the Group’s non-financial information statement, produced to comply with sections 414CA
and 414CB of the Companies Act. The non-financial information is contained within the various sections of the Strategic Report and is
cross-referenced below to help stakeholders find relevant information.
Reporting requirement
Policies and standards which govern our approach
Environmental
Our Blueprint
Sustainability policy
Sustainable procurement policy
Environmental policy
ISO 14001:2014 & ISO 20400:2017
Information necessary to understand our business
and its impact, policy due diligence and outcomes
Using Our Blueprint to drive economic, environmental
and social outcomes, pages 38-43
Employees
Health and safety policy
Code of Conduct
Social and
Community matters
Social Value policy
Code of Conduct
Committed to creating a safe workplace, page 33
Investing in talent across the Group, pages 34-35
Ensuring integrity within the business, page 36
Healthy communities, pages 42-43
Ensuring integrity within the business, page 36
Respect for human rights Modern Slavery Statement
Ensuring integrity within the business, page 36
Code of Conduct
Anti-corruption and
bribery matters
Supplier Code of Conduct
Code of Conduct
Innovation
Description of the business model
Description of principal risks and impact of business activity
Non-financial key performance indicators
The Group’s policies can be found at www.balfourbeatty.com/policies
Ensuring integrity within the business, page 36
Group-wide initiatives in innovation driving success,
pages 30-32
Group at a glance, pages 6-7
Market review, pages 8-9
Business model, pages 10-11
Our priorities, pages 12-13
Risk management, pages 55-57
Principal risks, pages 58-66
Our priorities, pages 12-13
Committed to creating a safe workplace, page 33
Investing in talent across the Group, pages 34-35
Ensuring integrity within the business, page 36
Using Our Blueprint to drive economic, environmental
and social outcomes, pages 38-43
Balfour Beatty Annual Report and Accounts 2018
Measuring our financial performance
Providing clarity on the Group’s
alternative performance measures
45
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 costs 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.
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 120 to 127.
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.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 46
Measuring our financial performance continued
Providing clarity on the Group’s alternative performance measures continued
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.
In accordance with IFRS 15 Revenue from Contracts with Customers, the Group is required to disclose the remaining transaction price
allocated to performance obligations not yet delivered. This can be found in Note 4.3. This is similar to the Group’s order book disclosure,
however it differs for the following reasons:
– the Group’s order book includes its share of orders that are reported within its joint ventures and associates. In line with section (e), the
Board believes that including orders that are within the pipeline of its joint ventures and associates better reflects the size of the business
and the volume of work to be carried out in the future. This differs from the statutory measure of transaction price to be allocated to
remaining performance obligations which is only inclusive of secured revenue from the Group’s subsidiaries.
– as stated above, for contracts that fall under framework agreements, the Group includes in its order book an estimate of what the orders
under these agreements will be worth. Under IFRS 15, each instruction under the framework agreement is viewed as a separate
performance obligation and is included in the statutory measure of the remaining transaction price when received but estimates for future
instructions are not.
– the Group’s order book does not include revenue to be earned in its Infrastructure Investments segment as the value of this part of the
business is driven by the Directors’ valuation of the Investments portfolio. Refer to section (h).
Reconciliation of order book to transaction price to be allocated to remaining performance obligations
Order book (performance measure)
Less: Share of orders included within the Group’s joint ventures and associates
Estimated orders under framework agreements included in the order book disclosure
Add: Transaction price allocated to remaining performance obligations in Infrastructure Investments+
Transaction price allocated to remaining performance obligations for the Group+ (statutory measure)
+ Refer to Note 4.3.
2018
£m
12,625
(2,013)
(358)
2,641
12,895
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.
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.
Balfour Beatty Annual Report and Accounts 2018
47
Reconciliation of 2018 statutory results to performance measures
2018
statutory
results
£m
Build to Last
restructuring
costs
£m
Intangible
amor-
tisation
£m
Additional
loss on
AWPR
contract
£m
Loss on
GMP
equal-
isation
£m
(Gain)/
loss on
disposals
£
Provision
release
on health
& safety
claims
£m
Joint
venture
items
£m
Results
of Rail
Germany
£m
2018
performance
measures
£m
Non-underlying items
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
7,814
(1,180)
6,634
(6,263)
371
80
(8)
(319)
124
23
147
35
(59)
123
12
135
–
–
–
–
–
–
–
11
11
–
11
–
–
11
(2)
9
–
–
–
–
–
–
8
–
8
–
8
–
–
8
(2)
6
–
–
–
10
10
–
–
–
10
–
10
–
–
10
(2)
8
–
–
–
–
–
–
–
28
28
–
28
–
–
28
(5)
23
–
–
–
–
–
–
–
9
9
–
9
–
–
9
(3)
6
–
–
–
–
–
–
–
(13)
(13)
–
(13)
–
–
(13)
–
(13)
–
–
–
–
–
–
–
–
–
5
5
–
–
5
–
5
(12)
7,802
9
(3)
3
–
–
–
–
–
–
–
–
–
–
–
–
(1,171)
6,631
(6,250)
381
80
–
(284)
177
28
205
35
(59)
181
(2)
179
Reconciliation of 2018 statutory results to performance measures by segment
Non-underlying items
Profit/(loss) from operations
Segment
Construction Services
Support Services
Infrastructure Investments
Corporate activities
Total
2018
statutory
results
£m
Build to Last
restructuring
costs
£m
Intangible
amor-
tisation
£m
Additional
loss on
AWPR
contract
£m
Loss on
GMP
equal-
isation
£m
(Gain)/
loss on
disposals
£m
Provision
release
on health
& safety
claims
£m
Joint
venture
items
£m
Results
of Rail
Germany
£m
2018
performance
measures
£m
46
39
95
(33)
147
6
5
–
–
11
3
–
5
–
8
10
–
–
–
10
15
13
–
–
28
12
–
(3)
–
9
(2)
(11)
–
–
(13)
5
–
–
–
5
–
–
–
–
–
95
46
97
(33)
205
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 48
Measuring our financial performance continued
Providing clarity on the Group’s alternative performance measures continued
Reconciliation of 2017 statutory results to performance measures
2017
statutory
results
£m
Build to Last
restructuring
costs
£m
Intangible
amortisation
£m
(Gain)/
loss on
disposals
£m
Results
of Rail
Germany
£m
Non-underlying items
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
(Gain)/
loss on
disposals
£m
Results
of Rail
Germany
£m
Non-underlying items
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
c) Underlying profit before tax
As mentioned on page 45, 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)
Add: Subordinated debt interest receivable+
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.
2018
£m
97
21
9
(14)
113
(2)
111
2017
£m
116
26
11
(13)
140
(6)
134
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.
Balfour Beatty Annual Report and Accounts 2018
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)
49
2018
pence
19.7
–
19.7
0.9
5.7
26.3
2017
pence
24.7
(1.0)
23.7
0.8
(3.6)
20.9
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
2018
statutory
£m
661
70
591
(739)
(379)
(254)
(106)
(78)
Adjustment
£m
(70)
(70)
–
485
379
–
106
415
2018
performance
£m
591
–
591
(254)
–
(254)
–
337
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
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 £194 million for 2018 (2017: £42 million).
Using a statutory measure, which is derived using the average opening and closing figures for the year, inclusive of non-recourse elements and
the liability component of the Company’s preference shares, gives average net borrowings of £76 million for 2018 (2017: £117 million).
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 27 to 29, 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 £1.15 billion at year end (2017: £1.24 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
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
Comparable statutory measure of the Investments portfolio under IFRS
2018
£m
653
(15)
(25)
613
2017
£m
629
(13)
(24)
592
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 50
Measuring our financial performance continued
Providing clarity on the Group’s alternative performance measures continued
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:
– historical cost
– amortised cost
– fair value
Directors’ valuation (performance measure)^
2018
£m
613
2017
£m
592
538
1,151
652
1,244
^ 2017 valuation includes £62 million relating to the 7.5% partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. The proceeds
were 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 27, 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.
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:
2018 statutory growth compared to performance growth
Revenue (£m)
2018 statutory
2017 statutory
Statutory growth (%)
2018 performance+
2017 performance retranslated+
Performance CER growth (%)
Order book (£bn)
2018
2017
Growth (%)
2018
2017 retranslated
CER growth (%)
Construction Services
UK
US Gammon
Total
Support
Services
Infrastructure
Investments
1,903
2,011
(5)%
1,900
1,998
(5)%
3.0
2.7
11%
3.0
2.7
11%
3,314
3,586
(8)%
3,329
3,519
(5)%
5.2
4.3
21%
5.2
4.5
16%
–
–
–
898
979
(8)%
1.6
1.3
23%
1.6
1.4
14%
5,217
5,597
(7)%
6,127
6,496
(6)%
9.8
8.3
18%
9.8
8.6
14%
1,076
1,031
4%
1,104
1,062
4%
2.8
3.1
(10)%
2.8
3.1
(10)%
341
288
18%
571
516
11%
–
–
–
–
–
–
Total
6,634
6,916
(4)%
7,802
8,074
(3)%
12.6
11.4
11%
12.6
11.7
8%
+ Performance revenue is underlying revenue from continuing operations including share of revenue from joint ventures and associates as set out in section (e).
Balfour Beatty Annual Report and Accounts 2018
Chief Financial Officer’s review
51
Results for the year
Revenue from continuing operations
– underlying including joint ventures and associates
– statutory
Pre-tax profit from continuing operations
– underlying
– statutory
Basic earnings per share from continuing operations
– underlying
– statutory
Underlying profit from operations2,3
UK Construction
US Construction
Gammon
Construction Services
Support Services
Earnings based businesses
Infrastructure investments
Corporate activities
Total
2 From continuing operations.
3 Before non-underlying items (Note 10).
2018
£m
7,802
6,634
181
123
26.3p
19.7p
2017
£m
16
41
15
72
41
113
116
(33)
196
2017
£m
8,234
6,916
165
117
20.9p
23.7p
Change
%age
75%
7%
53%
32%
12%
25%
(16)%
–
5%
2018
£m
28
44
23
95
46
141
97
(33)
205
The Group’s financial
position and order book
both improved in the year
and Balfour Beatty is now
operating from a position
of strength.”
Philip Harrison
Chief Financial Officer
Group financial summary
These results demonstrate the value being
created through the Build to Last programme.
The Group’s financial position and order book
both improved in the year and Balfour Beatty
is now operating from a position of strength.
In the second half of 2018, the Group
successfully delivered on its Build to Last
underlying PFO margin targets by delivering
industry standard margins for UK
Construction, US Construction and
Support Services.
Net cash at year end was consistent with the
prior year despite cash used in operations of
£132 million (2017: £41 million generated
from operations) which was negatively
impacted by the Aberdeen Western
Peripheral Route (AWPR) project.
The average monthly net cash for the year at
£194 million (2017: £42 million) was ahead of
the £140 – £170 million guidance range
provided during 2018.
The Group continues to have one of the
strongest balance sheets in the sector with
net assets increasing from £1,066 million to
£1,241 million.
The order book increased by 11% to
£12.6 billion, up 8% at constant exchange
rates (CER) (2017: £11.4 billion). The Group’s
focus on disciplined bidding is continuing to
build a higher quality order book capable of
delivering managed profitable growth from
the rising infrastructure spend in the UK, US
and Hong Kong.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 52
Chief Financial Officer’s review continued
33% joint venture share (£19 million) is
treated as part of the Group’s underlying
performance. The AWPR loss represents a
net charge made up of cost increases on the
project partially offset by recovery positions
that the Group believes are highly probable to
be agreed. The final section of the AWPR
project was fully open to traffic on
19 February 2019 with the final financial
out-turn of this contract dependent upon the
result of ongoing claims discussions.
Offsetting these charges is a non-underlying
provision release of £13 million relating to
settlements of health and safety claims.
These claims were previously included in
non-underlying items as part of the Group’s
overall reassessment in 2016 of potential
liabilities relating to historical health and safety
breaches following new sentencing guidelines.
Significant other non-underlying items
included £11 million of restructuring costs
relating to the Group’s Build to Last
transformation programme and amortisation
of acquired intangible assets of £8 million.
Earnings per share
Underlying basic earnings per share from
continuing operations were 26.3 pence
(2017: 20.9 pence), which, along with a
non-underlying loss per share from continuing
operations of 6.6 pence (2017: 2.8 pence
gain), gave a total basic earnings per share for
continuing operations of 19.7 pence
(2017: 23.7 pence). Discontinued operations
contributed nil pence (2017: 0.1 pence) to the
total underlying basic earnings of 26.3 pence
per share (2017: 21.0 pence). Total basic
earnings per share were 19.7 pence
(2017: 24.7 pence).
Underlying revenue was down 5% (3% at
CER) at £7,802 million (2017: £8,234 million),
following the managed reduction in the order
book during 2017. Statutory revenue, which
excludes joint ventures and associates, was
£6,634 million (2017: £6,916 million).
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.
Construction Services underlying revenue
was down 8% (6% at CER) at £6,127 million
(2017: £6,649 million) as a result of the
expected decline in the US. Support Services
underlying revenue was 4% higher at
£1,104 million (2017: £1,061 million) with an
increase in the utilities business.
In the earnings based businesses underlying
profit from operations increased 25% to
£141 million (2017: £113 million), which
contributed to the 5% increase in the Group’s
underlying profit from operations to
£205 million (2017: £196 million).
Statutory profit from operations was
£147 million (2017: £148 million).
Construction Services improved 32% to an
underlying profit from operations of
£95 million (2017: £72 million) with increases
in all three geographies. Support Services
improved 12% with underlying profit from
operations of £46 million (2017: £41 million).
Following significant disposals in 2017,
Infrastructure Investments underlying profit
from operations decreased to £97 million
(2017: £116 million).
Net finance costs decreased to £24 million
(2017: £31 million) as a result of higher net
finance income in relation to the Group’s
retirement benefit schemes and lower
interest costs as the Group continues to pay
down debt, partially offset by lower net
income from Infrastructure Investments as a
result of disposals.
Underlying pre-tax profit from continuing
operations increased 10% to £181 million
(2017: £165 million). The Group’s underlying
profit before tax resulted in an underlying tax
charge of £2 million (2017: £23 million)
following the recognition of deferred tax
assets for some of the Group’s UK historical
tax losses.
Underlying profit after tax for the year
including discontinued operations increased
to £179 million (2017: £143 million).
Total statutory profit after tax for the year was
£135 million (2017: £168 million), after
non-underlying items.
Non-underlying items from continuing
operations of £44 million were a net charge to
profit for the year (2017: £20 million
net credit).
The Group recognised additional retirement
benefit obligations following the judgment on
the Lloyds Banking Group High Court hearing
with regard to Guaranteed Minimum Pension
(GMP) equalisation which was published on
26 October 2018. The judgment indicated
that pension trustees need to amend scheme
benefits to equalise for the effect of unequal
GMPs and indicated an acceptable range of
methods for how to do so. The charge arising
from the recognition of GMP equalisation on
the Group’s pension schemes amounted to
£28 million and has been recognised in the
Group’s income statement as a plan
amendment. The Group has treated this item
as non-underlying due to the size and nature
of the income statement charge.
The Group recognised an additional indemnity
provision of £12 million in the year following
the re-assessment of several projects which
were indemnified by the Group as part of the
disposal of Heery International Inc.
This estimate is subject to final ongoing
negotiations with various clients and any
further gains or losses that arise as part of
this indemnity obligation will be recorded
within non-underlying items as part of the
Heery disposal.
As a result of Carillion filing for liquidation on
15 January 2018, the Group and its remaining
joint venture partner on the AWPR project,
Galliford Try plc, became jointly liable to
deliver Carillion’s remaining obligations on the
contract in addition to each partner’s existing
33% share. This has resulted in the Group
now having a 50% interest in the AWPR
contract. Balfour Beatty recognised an
additional £29 million loss on the AWPR
project in 2018. A third of this charge
(£10 million) has been recognised in non-
underlying items as this reflects the additional
loss that the Group has incurred in fulfilling
Carillion’s obligations on the contract.
The loss incurred on Balfour Beatty’s original
Balfour Beatty Annual Report and Accounts 2018
53
Cash flow performance
The total cash movement in the year resulted
in a £2 million increase in the Group’s net cash
position to £337 million (2017: £335 million),
excluding non-recourse net borrowings.
Operating cash flows and proceeds from
Infrastructure Investments disposals were
largely offset by working capital outflows and
investment in new Infrastructure assets.
The working capital outflow from provisions
of £80 million (2017: £29 million inflow)
predominantly relates to the significant
AWPR cash outflows in 2018.
Including the impact of foreign exchange and
non-operating items, negative (i.e. favourable)
working capital decreased to £680 million at
31 December 2018 (2017: £888 million).
Impact of IFRS 16
The adoption of IFRS 16 will result in a
right-of-use (ROU) asset and a corresponding
lease liability amounting to approximately
£135 million respectively being brought onto
the Group’s balance sheet on 1 January 2019.
There will be no impact on the Group’s opening
equity as a result of adopting this standard.
Cash flow performance
Operating cash flows
Working capital
(outflow)/inflow
Pension deficit payments
Cash (used in)/from
operations
Infrastructure Investments:
– disposal proceeds
– new investments
Other
Net cash movement
Opening net cash*
Closing net cash*
2018
£m
124
(229)
(27)
(132)
187
(58)
5
2
335
337
2017
£m
39
27
(25)
41
105
(35)
51
162
173
335
Net cash/borrowings
The Group’s average monthly net cash in
2018 improved substantially to £194 million
(2017: £42 million). The Group’s net cash
position at 31 December 2018, excluding
non-recourse net borrowings, was
£337 million (2017: £335 million). Non-
recourse net borrowings, held in infrastructure
concessions entities consolidated by the
Group, increased to £309 million
(2017: £305 million). The balance sheet also
includes £106 million (2017: £103 million) for
the liability component of the preference
shares. Statutory net debt at 31 December
2018 was £78 million (2017: £73 million).
* Excluding infrastructure concessions (non-recourse)
net borrowings.
On a statutory basis the Group reported net debt of
£78 million at 31 December 2018 (2017: £73 million).
Working capital
During the year, the Group’s working capital
position resulted in an outflow of £229 million
(2017: £27 million inflow), primarily as a result
of significant cash outflows on the AWPR
project, reduced working capital as a result
of the expected decline in revenues in US
Construction, and improved supply chain
payment processes.
Working capital flows^*
Inventories
Net contract assets
Trade and other payables
Trade and other
receivables
Provisions
Working capital
(outflow)/inflow^*
2018
£m
(16)
51
(196)
12
(80)
(229)
2017
£m
(12)
7
(92)
95
29
27
^ Excluding impact of foreign exchange and disposals.
* The movement in operating working capital has been
presented to exclude movements arising from IFRS15
Revenue from Contracts with Customers
reclassification adjustments.
The decrease in trade and other payables
has resulted in a working capital outflow of
£196 million (2017: £92 million). This is mainly
attributable to the decrease in revenues in
US Construction and the Group’s focus on
improving payment processes resulting in
faster payment of suppliers compared to
the prior year.
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 the current plan Balfour
Beatty will make cash contributions totalling
£116 million over the five years 2019 to
2023. There is an agreed dividend sharing
mechanism such that if the dividend cover
ratio falls below 2x, funding to the BBPF will
be accelerated. Preparation is underway for
the next formal triennial valuation of the
BBPF which will be as at 31 March 2019.
Following the formal triennial funding
valuation of the Railways Pension Scheme
(RPS) 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 next formal
triennial valuation of the RPS will be as at
31 December 2019.
The Group’s balance sheet includes net
retirement benefit assets of £54 million
(2017: £32 million) representing net
surpluses in the Group’s pension schemes,
as measured on an IAS 19 basis.
The increase in pension surplus in the
year is due to £30 million of employer
contributions and £22 million of net
actuarial gains, partially offset by a
£28 million charge from the recognition
of GMP equalisation.
Outlook
Since the start of Build to Last in 2015,
Balfour Beatty has: simplified and refocused
the Group; strengthened leadership and
governance; invested in innovation,
systems and processes; and developed
a culture which can drive continuous
performance improvement.
Having achieved industry standard margins
in the second half of 2018, the Board remains
confident that the Group will perform in line
with market expectations in 2019.
Balfour Beatty now has the platform in
place to scale the business to drive profitable
managed growth. The Group will look to
benefit fully from its strong competitive
positions in large and growing infrastructure
markets to deliver market
leading performance.
Markets
The Group primarily operates across three
geographies (UK, US and Hong Kong)
and three sectors (Construction Services,
Support Services and Infrastructure
Investments). This provides resilience as
the Group is less exposed to a downturn
in a single geography or sector.
Overall, the trading environment for Balfour
Beatty’s chosen markets and capabilities
remains favourable.
In the UK, Government policy continues to
drive a strong pipeline of major infrastructure
projects in transport and energy. Over the next
few years, the ‘4Hs’ – HS2 (high speed rail),
new nuclear power at Hinkley Point C, the
Road Investment Strategy for Highways
England and the continued expansion of
Heathrow airport – will contribute to the
Government’s investment in infrastructure
commitment, which is targeted to rise from
0.8% in 2015/16 to over 1% of GDP by
2020/21.
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.
Balfour Beatty recognises the inherent
uncertainty arising from this and has been
planning for all outcomes. The Group has
contingency plans in place to ensure it can
continue to deliver on current and future
work commitments.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 54
Chief Financial Officer’s review continued
Dividend
Following the 1.6 pence per ordinary share
interim dividend declared at the half year,
the Board is recommending a final dividend
of 3.2 pence per share, giving a total
recommended dividend for the year of
4.8 pence per share (2017: 3.6 pence).
The Board recognises the importance
of dividends to shareholders and expects
to deliver a continuation of the progressive
dividend policy.
Taxation
The Group’s underlying profit before tax from
continuing operations for subsidiaries of
£153 million (2017: £106 million) resulted in an
underlying tax charge of £2 million
(2017: £23 million) following the recognition
of deferred tax assets for some of the
Group’s historical UK tax losses.
Goodwill
The goodwill on the Group’s balance sheet
increased to £903 million (2017: £874 million)
as a result of foreign exchange movements.
The Group has conducted impairment
reviews on its goodwill balance at the year
end and has concluded that it was
fully recoverable.
Factoring
During the year, the Group closed its
bank-supported supply chain financing
arrangements (2017: £0.2 million drawn).
Banking facilities
The Group’s core committed revolving credit
facilities total £400 million and extend to
December 2020. The purpose of the facilities
is to provide liquidity from a set of core
relationship banks to support Balfour Beatty
in its activities. At 31 December 2018, these
facilities were undrawn.
In the US, Balfour Beatty operates in specific
geographies. As the population migrates
south and west, it is moving to cities, driving
urbanisation in the Group’s chosen markets.
This leads directly to increased demand for
buildings and infrastructure. With blue chip
repeat customers such as Disney and
Microsoft, the Group’s Buildings opportunities
are robust. In Civils in December 2015, the
FAST Act (Fixing America’s Surface
Transportation), a US$305 billion
transportation bill, was signed, providing
authorised spending for a five-year period.
There are further opportunities being created,
for example with the number of state-backed
infrastructure bonds (over US$200 billion
multi-state transportation bonds, over
US$35 billion of education bonds in
California), and increases in: US public-private
partnership schemes; state gasoline taxes;
and local county sales taxes dedicated to
local infrastructure.
Gammon has a material share of the
attractive Hong Kong market. Both the
Buildings and Civils markets are favourable
with significant opportunities upcoming with
the third runway at the international airport, a
ten-year hospital development plan and
continued investment in transportation
infrastructure (Central Kowloon Highway,
Mass Transit Railway (MTR) upgrades).
In Support Services, power transmission and
distribution has a stable underlying market.
The gas business operates in an established
market and the water business is beginning
to transition to the next regulatory cycle
(AMP7). Transportation, which includes major
road and rail maintenance contracts, is
expected to grow steadily in the medium
term. Local authorities provide opportunities
in highways, whilst a key contract with
London Underground, to deliver essential
track renewal work across the network, has
been re-awarded to Balfour Beatty in
February 2019.
The Infrastructure Investments business
continues to see opportunities for future
investment in its chosen geographic markets,
particularly in the US where the focus is on
student accommodation, multifamily housing
and public-private partnerships (PPP)
opportunities. In the UK, the focus is primarily
on student accommodation.
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
2018, 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 book;
– 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 £337 million at
31 December 2018;
– the Group’s portfolio of Infrastructure
Investments comprises reasonably
realisable securities which can be
sold to meet funding requirements
as necessary; and
– the Group has access to committed credit
facilities totalling £400 million through to
December 2020. At 31 December 2018,
these facilities were wholly undrawn.
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.
Philip Harrison
Chief Financial Officer
Balfour Beatty Annual Report and Accounts 2018
Risk management
A refocus and reinvigoration
of risk management
55
Oversight
Audit & Risk Committee
Effectiveness review
Set Policy and drive culture
Common risk infrastructure
Executive steering group
Strategic Risk Register
Risk and control reporting cycle
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: control and mitigation
Risk management process
Project delivery, Strategic Business Units and Enabling Functions
Operational review of risk
1. Identify
2. Assess
3. Respond
4. Monitor
The Gated Business 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
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance
56
Risk management continued
A refocus and reinvigoration of risk management continued
Balfour Beatty’s approach to risk management remained agile and responsive to the Group’s
operational requirements and wider industry good practice throughout 2018. The enterprise risk
management framework was completely reviewed and updated and a more intuitive and dynamic
risk reporting process was deployed. These updates include the development of a new bespoke
risk management software package for the UK business (IRIS: Intelligent Risk Information System)
to identify, assess, respond to and monitor risk.
Oversight
Common risk
infrastructure
Risk process
Assessment
The Board accepts
overall responsibility for risk
management and determines
the nature, extent and
potential timescale of current
and emerging risks facing the
business. Biannually the
Directors assess the
effectiveness of the risk
management and internal
control systems including
financial, operational and
compliance steps that are
in place to prevent occurrence
or mitigate impacts.
The business has in place
several well established and
ongoing processes embedded
within the Gated Business
Lifecycle to support this
assessment and manage
the Group’s risk exposure.
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 comprehensive
reassessment of the Group
Risk Register in 2018 including
the production of a key risk and
control statement to improve
Executive Committee focus.
A dedicated enterprise risk
management resource is in
place in each geography and is
accountable for the consistent
application of the Group’s Risk
Management Framework and
associated processes.
This supports the businesses
in making decisions based
on an accurate assessment
of risk. Pragmatic interaction
between operational delivery
and enterprise risk teams
enables and encourages a
direct understanding,
application and monitoring of
the Group’s risk attitude and
appetite. 2019 will see further
improvements as IRIS becomes
embedded throughout the
UK business and assessment
tools are shared across the
wider Group.
Balfour Beatty’s internal
control environment is
centred on the Gated Business
Lifecycle 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 wide-ranging
Minimum Expectations and
Operating Standards.
Balfour Beatty Annual Report and Accounts 2018
57
Risk appetite
Understanding current and emerging risk is at the heart of Balfour Beatty’s decision-making process.
Throughout 2018 and into 2019 the Board and its Committees and working groups measured the nature and extent of those risks that
the Group is willing to take to achieve its strategic objectives. This required a thorough review of the effectiveness of its internal control
environment. The outcome of this assessment represents the Group’s risk appetite and can be set out in the context of the Group’s
strategic priorities as set out below.
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 maximising the value
of Build to Last.
In delivering better for less,
the Group is prepared to accept
a level of operational risk.
Such risks must not be at
the expense of achieving
the overall lean objective
or meeting customer
requirements.
The Group’s risk appetite for
efficiency remains moderate.
Transformation programme
12
63 Read more
Supply chain
64 Read more
Legacy pension liabilities
66 Read more
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
Balfour Beatty continues
to develop its expertise in
engineering, computer science,
robotics, data analytics,
electronics and electrical &
mechanical engineering to
deliver the very best solutions
to its customers.
This drive for sustained
innovation is undertaken with
industry experts in managed
and safe environments to
minimise risk.
The Group continues to
have a moderate appetite
for expert risk.
People
62 Read more
Risk appetite
Balfour Beatty must deliver
on its promises to stakeholders.
The Group retains a low
appetite for risks around
meeting customer
expectations.
Work winning
59 Read more
Project delivery
60 Read more
Joint ventures
61 Read more
Data governance
61 Read more
Transformation programme
Transformation programme
12
63 Read more
12
63 Read more
Economic environment
Financial strength
66 Read more
63 Read more
Business conduct
65 Read more
Legal and regulatory
65 Read more
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 continues
to be zero.
Health and safety
33
58 Read more
Transformation programme
12
63 Read more
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 58
Principal risks
Influencing the way we work
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. The principal risks and uncertainties are continually mapped to strategic and business plans to ensure the appropriate
coverage of risks allowing the Board to make a robust assessment of the principal risks which the Group faces, the controls in place to remove
or mitigate these risks and whether these risks represent new, increased or decreased threats. The risk profile comprises interlinked and
discrete risks which are focused on understanding the worst case scenarios that could threaten the Group’s business model, future
performance, solvency or liquidity. As a result, changes in the Group risk profile and movements in the some of the principal risks have
been identified and are described on pages 58 to 66 below.
Brexit
Balfour Beatty continues to monitor potential risks and uncertainties posed by the UK’s exit from the EU. A well-established working group
comprised of functional experts monitors developments in this area closely. Specific risks and related mitigations are controlled in individual
strategic business units and kept under review by the Executive Committee. Whilst there remains a great deal of uncertainty as to what Brexit
will mean for the construction industry and Balfour Beatty in particular, the Group continues to develop and implement plans to ensure the best
possible outcomes.
Further commentary is included in the uncertainty within our economic environment risk on page 66.
Climate change
The changing global climate generates a number of risks and opportunities for Balfour Beatty the impact of which, and mitigations against,
are considered and reviewed as part of the Group’s risk management process. Whilst climate change is not currently considered to be a
principal risk to the business, the most significant elements have been identified to be changes in environmental legislation and weather
related events. Further commentary on the potential impacts of climate change is set out on page 38.
Health and safety
Owner:
Safety and
Sustainability
Committee
Build to
Last pillar:
Safe
Risk:
no movement
Risk description
The Group works on significant,
complex and potentially hazardous
projects which require continuous
monitoring and management of
health and safety risks.
How it is mitigated
Balfour Beatty has in place an overarching
Key Strategy comprising policies and procedures
(Zero Harm) to minimise such risks. This strategy
and its action plans 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.
Causes
Some common themes which could drive
health and safety risks are recognised and
communicated, including:
– risk identification/assessment
– lack of competence
– processes that fail to deliver risk
elimination or mitigation
– failure in safety leadership
– ineffective management of subcontractors
– failure to cascade and follow procedures
– ongoing transformation programme and
performance pressures, affecting the ability
of people to remain focused on health
and safety risks.
What impact it might have
Failure to manage these risks gives the potential
for significant harm, including fatal or life changing
injuries to employees, subcontractor staff or
members of the public, as well as criminal
prosecutions, significant fines, debarring from
contract bidding and reputational damage.
Balfour Beatty Annual Report and Accounts 2018
59
Work winning
Owner:
Build to
Last pillar:
Group Tender
and Investment
Committee
Trusted
Risk:
decreased
Risk description
Failure to identify, price, and execute
the appropriate volume and quality of
bids and investment opportunities to
maintain a profitable, sustainable order
book and deliver value to stakeholders.
Causes
Inaccuracy at Gate reviews in:
– assumptions behind investment decisions
– costs versus scope and time calculations
– bid strategy development
– assessment of the impact of inflation
and exchange rates
– technical and written proposal development
– Quick Qualifier assumptions
– contract / account management
– negotiation of terms and conditions
– assessment of customers’ liquidity/
creditworthiness.
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, contractual
terms and how best to manage them could
cause financial losses.
If any of the assumptions behind bid strategy
development and investment decisions prove
incorrect, there is the potential for the business
not to win the required work to sustain and
grow shareholder value.
How it is mitigated
The Group Tender and Investment Committee
process is in place to challenge all proposals.
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.
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.
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.
Risk movement
Continued rigour in tendering and estimating
combined with an ongoing focus on the value
proposition to the Group’s customers has seen
a reduction in exposure.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 60
Principal risks continued
Influencing the way we work continued
Project delivery
Owner:
Group
management
Build to
Last pillar:
Trusted
Risk:
decreased
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) allowing:
– unrealistic programming targets
– inadequate resource (people, plant
and materials)
– unrealistic progress assessments and cost to
complete judgements which could arise due
to poor training, lack of supervision, lack of
accountability or fear of reporting bad news
– overly-optimistic claim recovery assumptions
– incomplete visibility and appreciation of scale
of commercial judgements
– failings in administering the contract terms
to safeguard or protect future claims, change
orders 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 the required quality could result in issues
such as contract disputes, rejected claims, design
issues, liquidated damages, cost overruns and
failure to achieve anticipated customer savings
which in turn could reduce the Group’s
profitability and damage its reputation.
The Group may also be exposed to long-term
obligations including litigation and costs to
rectify defective or unsafe work.
Delivery failure on a high-profile project
could result in significant reputational
damage and costs.
How it is mitigated
A continued focus on identifying and
reporting risks, including the accuracy
of cost and cash forecasting.
Consistent application of strong
commercial management and contract
administration processes.
Integrated work winning and project delivery
teams across the Gateway processes to ensure
expectations are understood and realistic.
Optimal scheduling of key staff within project
delivery teams and senior management, together
with ongoing and focused training of staff via the
Balfour Beatty Academy.
Ongoing management assessment of project
risk management and control including planning,
programme and resource reviews.
Site Mobilisation Hub in place to facilitate early
and effective start-up on site.
Use of innovative and cost-effective engineering
and technical solutions (including the vision for
25% offsite fabrication by 2025).
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
subcontractors and suppliers throughout the
lifecycle of a project.
Risk movement
Improvements to the Group’s reporting systems
and increasing traction of its short interval control
processes within the early stages of project
delivery are providing greater certainty of
operational outcomes. The Group has used the
lessons learnt from legacy problem contracts and
new disciplines resulting from the Build to Last
transformation programme to reduce the risk
of project delivery.
Balfour Beatty Annual Report and Accounts 2018
Joint ventures
Owner:
Group Tender and
Investment Committee
Build to
Last pillar:
Trusted
Causes
The risk could be realised through:
– ineffective assessment of potential partner
including liquidity, capacity and capability
– lack of clarity of the delegated levels
of authority between partners
– delayed and fettered decision making
process between partners
Risk:
new risk
– segregation of management systems
Risk description
Failure of joint ventures to deliver
expected returns and minimise the
risk of unexpected liabilities.
(financial and operational)
– lack of understanding of contract
requirements and expectations
– failure to embed Balfour Beatty cultures
and practices.
What impact it might have
A failure to execute a significant joint
venture contract could result in a significant
impact to profitability and reputational harm
in the marketplace.
The failure of a joint venture partner may expose
the Group to increased resourcing costs and
ongoing warranty and insurance risks.
Disputes with strategic joint venture partners could
impact the Group’s ability to operate successfully
and or expand within its chosen markets.
Failure to share and embed the Group’s health
and safety management expectations could result
in increased potential for injury and or fatality.
Data governance and cyber security
Owner:
Group
management
Build to
Last pillar:
Trusted
Risk:
increased
Risk description
A breach of the Data Protection Act or
the General Data Protection Regulation
(GDPR) and/or a failure to protect key
company data or other confidential
information.
Causes
Failure to:
– comply with the GDPR
– embed required culture and procedure to
address the ongoing threat of cybercrime
– prepare and respond to malicious intent
and/or a targeted attack
– prevent a breakdown of key security
software or management systems.
What impact it might have
Crystallisation of this risk has the potential for:
– the business to face legal proceedings,
investigations or disputes resulting in
business disruption, losses, fines,
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
– disruption to operational delivery
(business as usual)
– exclusion from bidding opportunities.
61
How it is mitigated
All proposals to enter into a joint venture
must be authorised by Group management
via the Agreement to Enter into a Joint Venture
procedure at Gate 1 of the review process.
The Group undertakes significant due diligence
on potential joint venture partners via the
Gateway review process including capacity,
capability and liquidity.
The Group Tender and Investment Committee
process is in place to challenge all proposals.
The Group seeks to enter into joint ventures
with known and trusted long-term partners.
Experienced Project Directors are appointed
to manage the project including an ongoing
assessment of operational delivery risk.
Balfour Beatty monitors the performance of its
joint venture partners throughout the lifecycle
of a project.
Best practice including joint reporting systems
where possible is shared between all partners
to embed the Group’s expectations and culture
throughout joint venture delivery teams.
Risk movement
The Group is involved in a number of joint ventures
and recognises that successfully executing these
agreements presents a significant risk.
This risk represents an amplification of
existing business and project delivery risk.
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.
Resilience in network, endpoint protection
and data backup.
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.
Risk assessment of external providers
of data and services.
All employees are trained in and must
comply with GDPR and information security
management obligations.
Risk movement
Increased potential for cybercrime due to increased
use of data-sharing platforms and standardised
operating systems.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 62
Principal risks continued
Influencing the way we work continued
People
Owner:
The Board
Build to
Last pillar:
Expert
Risk:
increased
Risk description
Inability to provide the required levels
of skilled and competent staff to meet
the Group’s objectives.
Causes
– Ineffective workload and location scheduling
– Increased competitor/sector strength
and opportunities
– Inability to recruit and retain strong performers
– Failure to maintain a culture of pride and
advocacy across the workforce
– Ineffective and or unfocused training
– 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, manage delivery costs,
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, stakeholder
confidence being lost and an inability to drive
business improvements.
Balfour Beatty Annual Report and Accounts 2018
How it is mitigated
Build to Last has included a range of People
policies and processes under the Expert goal
to improve the attractiveness of Balfour Beatty
as the business people want to join and develop
their careers. Since 2015 these measures have
been increasingly effective in developing Balfour
Beatty’s culture and attractiveness as an employer
and enabling the recruitment and retention of
people with the skills and behaviours needed.
Specific activities which mitigate this risk include:
– competency frameworks within core job
families identify and support the development
of key knowledge, skills and expertise
– recruitment and retention rates are measured
and regularly reviewed across all parts of the
business and succession plans are in place
for core disciplines
– regular reviews of remuneration and incentive
arrangements to ensure they are appropriate
to help the Group attract, motivate and retain
key employees
– Group-wide employee engagement surveys
are undertaken to measure engagement
and appropriate actions are developed
and communicated
– 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
– strong employee communication channels
are in place celebrating individual, business
and Group-level successes
– 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 34).
– in 2019 a Strategic Workforce Planning
tool will be implemented to further enhance
longer term planning, of work winning and
matching with focused internal and external
recruitment activities.
Risk movement
To execute the Group’s strategy and achieve
industry leading margins, the breadth and depth
of leadership and the appropriate capabilities need
to be well matched to the opportunities presented.
A key factor impacting the increase in this risk,
which applies to the broader sector, is the
long-term visibility and timing of workload
which has been impacted as a result of ongoing
economic uncertainty. Delays to project
commencement create uncertainty and can
contribute to skilled resource leaving the industry
and make it more difficult to attract people into the
sector. As part of the Build to Last transformation
programme Balfour Beatty has created a culture
with strong people policies and processes in
place which will continue to mitigate this risk.
63
Sustaining the transformation programme
Owner:
The Board
Build to
Last pillar:
All
Risk:
no movement
Risk description
The Group does not sustain and build
upon the good practice, policies and
procedures and culture of the Build
to Last transformation programme.
Causes
Failure to sustain momentum could arise from:
– ineffective communication and reinforcement
of message
– 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
Inconsistency in working practices could result
in the Group’s ability to deliver sustained profit
being jeopardised.
How it is mitigated
Ensuring Build to Last continues to deliver value
is a strategic priority for the Group and is being
led by the Group Chief Executive.
Controls include:
– continuing to reinforce the Build to Last culture
and framework within each business unit
– senior leadership engagement across
the businesses is clear and frequent
– new systems and processes are deployed
with training plans and in agreed phases
– all agreed processes are held on the
BMS and are frequently validated
– employee surveys form a key part
of the programme
– leaders throughout the business frequently
monitor and measure the delivery and impacts
of the programme including through the outputs
of the business improvement community
– senior leadership is well experienced in
delivering business transformation successfully.
Financial strength
Owner:
The Board
Build to
Last pillar:
Trusted
Risk:
decreased
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.
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 use the going concern
basis of accounting in preparing its
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.
Sales across the asset portfolio can be used
to generate cash.
Risk movement
During the year, the Group has significantly
strengthened its balance sheet, paying down
over 40% of its gross debt.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 64
Principal risks continued
Influencing the way we work continued
Supply chain
Owner:
Group
management
Build to
Last pillar:
Lean
Causes
– Supply chain failure risk, exacerbated
during, and when emerging from,
tough economic conditions
– Over-reliance on a limited number of suppliers
– Lack of market capacity
– Retention of subcontracted parties
in buoyant markets
Risk:
increased
– Inadequate assessment of supply chain partner
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.
capabilities and process (including quality, safety,
ethics, materials 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 becoming involved in disputes, having
to find a replacement or undertaking the task itself.
This could result in delays, business disruption,
additional costs or a reduction in quality/increased
defects 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. This includes relationship
mapping with strategic suppliers, including
briefing on order book requirements.
Contingency plans in place to address
subcontractor failure, including replacement
supplier list.
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.
The performance of active suppliers is monitored
and lessons learnt inform future projects.
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, targeted training programmes and
related policies and procedures in place.
Risk movement
Scheduling, capacity and capability tensions
in market hotspots has increased the potential
for risk realisation.
Balfour Beatty Annual Report and Accounts 2018
65
Business conduct/compliance
Owner:
The Board
Build to
Last pillar:
Trusted
Risk:
no movement
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
Failure to embed the Code of Conduct and Balfour
Beatty values could leave the Group exposed to:
– corruption
– bribery
– fraud, deception, false claims or false accounting
– unfair competition practices
– 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
– ethics and values being compromised
as a result of commercial pressures
– other emerging ethical risks.
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 operational controls
(commercial including procurement, due diligence
and risk assessment) that are designed to identify
and manage risks internally and 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 are, in addition to the
Group’s due diligence and approval process,
subject to specific contractual clauses, policies
and agreements.
Legal and regulatory
Owner:
The Board
Build to
Last pillar:
Trusted
Risk:
no movement
Risk description
The Group does not adopt and
implement all relevant legal, tax
and regulatory requirements.
Causes
A failure to recognise or adapt to changes
in applicable laws affecting the Group’s
businesses may result from:
– lack of awareness of the changes made
– ineffective communication of the
requirements across relevant business units
– a deliberate breach.
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.
Affected businesses are alerted to changes in the
law and the requirements of them made clear.
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.
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Strategic ReportOther InformationFinancial StatementsGovernance 66
Principal risks continued
Influencing the way we work continued
Legacy pension liabilities
Owner:
The Board
Build to
Last pillar:
Lean
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.
Risk:
no movement
Risk description
The Group is exposed to and must
effectively manage significant defined
benefit pension risks.
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.
This has the potential to affect the ongoing
sustainability of the Group.
Uncertainty within our economic environment
Owner:
The Board
Build to
Last pillar:
Expert
expenditure plans
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
– wider than expected fluctuations in inflation
– increased competition (e.g. in the UK from
foreign investors acquiring competitors)
– increased supply chain risks (e.g. solvency,
people and materials)
– reduced revenue or pressure on margins.
What impact it might have
Any significant delay or reduction in the level
of customer spending or investment plans could
adversely impact the Group’s strategy and order
book, reducing revenue or profitability in the
near or medium term.
Restrictions on the availability of skilled labour
and competitively priced materials could lead
to increased costs and hence potentially a
devaluation of the business.
Financial failure of a customer, including any
government or public sector body, could result in
increased financial exposure to counterparty risk.
Risk:
increased
Risk description
The effects of national or market
trends, political or regulatory change
(including the UK’s exit from the EU),
may cause customers to re-evaluate
existing or future infrastructure
expenditure and the procurement
of services and/or lead to changes
in the price and availability of labour
and products.
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 funding and investment arrangements of the
pension funds are subject to an in-depth triennial
review with regular monitoring in between.
The Group’s main UK fund has hedged in
excess of 80% of its exposure to interest
rate and inflation movements.
How it is mitigated
The Group primarily operates across three
geographies (UK, US and Hong Kong) and three
sectors (Construction Services, Support Services
and Infrastructure Investments). This provides
resilience as the Group is less exposed
to a downturn in a single geography or sector.
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, commodity prices and regulatory changes.
A well-established working group comprised of
functional experts is in place for this purpose,
although significant uncertainty remains as to
the impact of Brexit.
The financial solvency and strength of
counterparties is always considered before
contracts are signed and 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.
Risk movement
Macro-economic factors, reduced government
spending and delayed decision making on strategic
projects, have the potential to negatively impact
the availability of skilled resource. This risk has
increased in the year.
Common industry-wide risks
In parallel with those principal risks faced by the Group, Balfour Beatty faces significant risks and uncertainties that are prevalent to many
companies – including financial and treasury, communications and marketing, regulatory reporting, information management, business
continuity and disaster recovery, and general hazard risks.
Balfour Beatty Annual Report and Accounts 2018
Viability statement
67
In accordance with provision C.2.2 of the
UK Corporate Governance Code 2016,
the Directors have assessed the Group’s
long-term prospects and its viability over
a three-year period to 31 December 2021.
Assessing the Group’s long-term
prospects
The Group operates primarily in the UK, US
and Hong Kong, specialising in multiple facets
of the construction and services industry.
The Group also maintains an Investments
portfolio which provides a strong underpin
to the Group’s balance sheet.
The Group has many elements necessary
for greater future business success – expertise
in technology and innovation, strong customer
relationships and a talented workforce.
The Group seeks to build on these strong
foundations with continued investment into
technological advances, to not only ensure that
projects are delivered on time and as efficiently
as possible whilst maintaining the upmost
focus on safety, but also to remain market
leaders in the way construction is conducted
and to push the boundaries of innovation in
line with achieving industry-leading margins.
Assessing the Group’s viability
The Directors have assessed the Group’s
viability over a three-year period and consider
this 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 is also impeded
by uncertainties around the costs involved
in delivering 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 58 to 66.
In their assessment of the Group’s viability,
the Directors have also considered the need
to be successful in focusing on the Group’s
strategic goals of Lean, Expert, Trusted and
Safe detailed on pages 12 to 13.
The Group successfully exceeded its Phase
One Build to Last targets of £200 million
cash in: £100 million cost out in 2016.
Since then, the Group has continued to
exploit opportunities to re-engineer processes,
reducing cost whilst maintaining or improving
efficiencies, culminating in all earnings based
businesses achieving the Phase Two target of
industry standard margins in the second half
of 2018. It remains critical that the Build to
Last principles are maintained to drive future
success, although success is also dependent
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 have assessed the Group’s
viability in conjunction with its current
position as well as its projections of its various
debt facilities and associated covenants.
These financial projections are based on the
Group’s Three Year Plan, which has been built
on 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 £148 million debt falling
due in the next three years. In testing the
headroom available under the key sensitivities
modelled, these expiring debt facilities have
been assumed to be fully repaid and will not
be replaced with another form of debt.
In the three-year period, the Group is also
not projecting to draw down on its revolving
credit facility of £400 million. This facility
expires in December 2020 but for the
purposes of testing viability, it is assumed
that an equivalent facility is available in 2021.
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 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; and/or
negative changes to working capital.
The Directors also assessed a ‘perfect storm’
scenario by combining multiple scenarios 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 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 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 2021.
Our 2018 Strategic Report, from pages 1 to 67,
was approved by the Board on 12 March 2019.
Philip Harrison
Chief Financial Officer
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Strategic ReportOther InformationFinancial StatementsGovernance 68
Chairman’s introduction to Corporate Governance
Embedding governance practices in our
culture to support the Company’s purpose
I believe that good
standards of corporate
governance are critical to
the long-term sustainability
of our business.”
Philip Aiken AM
Chairman
Corporate Governance reporting
On the pages that follow, we have set out the Company’s compliance with the 2016 UK
Corporate Governance Code. Where practical we have aligned some content to recognise
the new 2018 UK Corporate Governance Code (the 2018 code). We will report against the 2018
Code in full in the 2019 Annual Report.
Board leadership (including relations
with stakeholders)
The Board is responsible for leading the
business in the way it believes leads to the
Company’s long-term sustainable success.
This includes effective engagement with
shareholders and employees.
Division of
responsibilities
The Board has a collective responsibility
to lead but each member of the Board
has a clearly defined role to ensure
no individual or group of individuals
dominates decision making.
Composition, succession
and evaluation
We aim to ensure we have a balanced
Board with the appropriate skills to govern
the business, and an effective evaluation
and succession plan. The Nomination
Committee is appointed to lead on
composition and succession matters
on behalf of the Board.
70 Read more
74 Read more
75 Read more
Board Committees
The Board is supported in its work
through the Safety and Sustainability
Committee, the Nomination Committee
and also the Group Tender and
Investment Committee and Finance
and General Purposes Committee.
Audit, risk and internal control and
Audit and Risk Committee
The Board defines Balfour Beatty’s
strategy, taking care to avoid unnecessary
or unacceptable risks. The Audit and Risk
Committee is appointed to oversee this
process on behalf of the Board.
Remuneration
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. The Board has
delegated this responsibility to the
Remuneration Committee.
Both the 2016 and 2018 UK Corporate Governance
Codes can be found on the Financial Reporting
Council’s website: www.frc.org.uk.
77 Read more
80 Read more
88 Read more
Balfour Beatty Annual Report and Accounts 2018
69
Dear Shareholder
I am pleased to introduce this year’s
Corporate Governance report and to
have the opportunity to share with you
the activities of the Board during 2018.
I believe that good standards of corporate
governance are critical to the long-term
sustainability of our business. In shaping the
Group’s strategic direction, we have sought
to ensure that good governance practices
are embedded in our culture and support our
purpose of creating infrastructure, supporting
communities and enabling growth.
Succession planning
In 2018, the full Board reviewed succession
planning for our senior leaders including
key roles below the Executive Committee.
During the Board’s scheduled annual visit
to the US, we had the opportunity to meet
with a range of senior colleagues and
undertook a detailed review of succession
plans focusing on the US. Directors make
a number of visits to sites and offices in
the UK and also the US specifically to meet
as many of our colleagues as possible.
The views of colleagues are then discussed
with the rest of the Board. To enable Board
members to directly support our pipeline of
future leaders, individual mentoring
relationships have been established.
At Board level, the Nomination Committee
oversees all new appointments.
Candidates are assessed against objective
criteria through a rigorous selection process.
We make appointments based on merit
and do not believe in setting gender quotas.
We adopted this approach in appointing
Anne Drinkwater to our Board; who was
judged to be the strongest candidate
from those we considered.
We welcomed Anne as a non-executive
Director to the Board in December 2018.
Anne brings a wealth of experience of leading
on large complex projects across multiple
jurisdictions including the US from her
long career at BP. With effect from
1 January 2019, Anne has joined the
Safety and Sustainability Committee
and the Remuneration Committee.
The Board undertakes a formal review
of Committee composition each year and
decided that no additional changes were
required to the main Board Committees.
During 2018, terms of appointment
for myself, Stuart Doughty and Stephen
Billingham were reviewed in light of
the contribution made by each of us to
the effective operation of the Board.
After consideration, the Board renewed
each of our appointments for a further
three-year term.
As is our usual practice, all Directors will
stand for re-election, or election in the case
of Anne Drinkwater, by shareholders at the
AGM in May 2019 with the exception of
Iain Ferguson. Iain will be retiring from the
Board after the 2019 AGM and therefore
will not be seeking re-election.
Further information on these matters
is set out in the Nomination Committee
report on page 77.
Independence of Directors
As is our usual practice, we carefully
considered the independence of all Board
members during the year taking account
of the criteria set by the 2016 UK Corporate
Governance Code and reviewing the
conflicts of interest register, further details
of which can be found on page 75.
Evaluation
An externally facilitated evaluation was
conducted this year for which full details are
set out on page 76. In consideration of what
we had learnt in our internal reviews over the
past two years – that the Board and
Committees were functioning in accordance
with their respective charters – I decided to
adopt an approach which focused on the
interpersonal effectiveness and performance
of each Board member in the context of his or
her personality profile and how this aligned
with the profiles of other Board members.
Relations with stakeholders
The Board and I recognise the responsibility
we have to a range of stakeholders including
our customers, employees, key
subcontractors, suppliers, the environment
and the communities we operate in.
We are committed to open and
effective dialogue with shareholders and
meetings have been held with a range of
institutional shareholders and also proxy
advisory firms in order to directly discuss
our strategic objectives and governance
practices. In addition, meetings have been
held with the UK Shareholders Association
which represents retail shareholders.
The AGM is an important opportunity for
private investors to engage with the Board and
all shareholders are encouraged to attend.
During the year, in addition to the informal
meetings of individual Directors during site
and office visits referred to above, all Board
members met with a range of colleagues at a
‘Meet the Board’ event at our Canary Wharf
office. Further details of this can be found on
page 73. Work is underway to develop and
enhance the Board’s formal approach to
engagement with employees and we will
report on this further in the 2019
Annual Report.
Safety and sustainability
The Board has continued to oversee our
Company’s approach to sustainability and
health and safety. Although this work is led
by our Safety and Sustainability Committee,
the full Board receives a briefing paper on
key metrics in this area at each meeting.
More details of the Committee’s work
this year can be found on page 78.
Tragically during 2018, there were two
separate fatalities suffered by our
subcontractor partners, both resulting from
third party incursions into our work sites.
The Safety and Sustainability Committee
received full briefings on these incidents
and reviewed innovations and additional
mitigations that could be undertaken to avoid
such events in future. Such incidents are a
sad reminder of the risk that our colleagues
and partners face in delivering projects for
our customers. The Board remains
determined to drive industry-wide
improvements in such areas to better
protect our workforce across our operations.
Remuneration
Our remuneration policy was last approved
by shareholders at the 2017 AGM. Details of
how we intend to operate that policy in 2019
can be found in the Remuneration report on
pages 88 to 103. We will be conducting a
full review of our remuneration policy in 2019
and will then ask shareholders to approve
our revised policy at the 2020 AGM.
UK Corporate Governance Code
During the year, the Board received
a presentation on the new 2018 UK
Corporate Governance Code.
Processes and procedures including all
Committee terms of reference and the
Board’s matters reserved are being
reviewed in light of the changes brought
in by the 2018 Code. We will report against
the 2018 Code in the 2019 Annual Report.
For the current reporting period, we have
applied the 2016 UK Corporate Governance
Code (the 2016 Code), being the standard
that applies to good corporate governance
practice in the UK. The Company has
complied fully with the requirements of
the 2016 Code throughout the accounting
period and to the date of this report.
Philip Aiken AM
Chairman
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Strategic ReportOther InformationFinancial StatementsGovernance 70
Board leadership
Board of Directors
The Board has a collective
responsibility for promoting
the long-term success of the
Company which is achieved
by having members with a
balanced range of individual
skills and experience.
During 2018, there were no changes made to the composition of the main Board committees.
Anne Drinkwater was appointed to the Board on 1 December 2018 and appointed to the
Safety and Sustainability Committee and the Remuneration Committee on 1 January 2019.
Iain Ferguson, Senior Independent Director and chair of the Remuneration Committee
will step down from the Board at the conclusion of the AGM in May 2019.
Stephen Billingham will be appointed as Senior Independent Director and Anne Drinkwater
will be appointed as chair of the Remuneration Committee. Both of these appointments will
be effective from the conclusion of the AGM in May 2019.
Set out below are some key metrics relating
to the Board as at 31 December 2018.
Board balance
1
3
5
7
9
2
4
6
8
Key for committee membership:
AR – Audit and Risk Committee
Rem – Remuneration Committee
Nom – Nomination Committee
SS – Safety and Sustainability Committee
GTIC – Group Tender and Investment Committee
FGPC – Finance and General Purposes Committee
1
■ Chairman
■ Executive
Directors
■ Non-executive 6
Directors
2
Board tenure
Board gender
Board geography
■ 0-2 years
■ 2-4 years
■ 6+ years
■ Male
■ Female
3
5
1
7
2
■ UK
■ North America
7
2
Balfour Beatty Annual Report and Accounts 2018
71
1 Philip Aiken AM
Chairman
Date of appointment: 26 March 2015
Age at 12 March 2019: 70
4 Iain Ferguson CBE
Non-executive Senior Independent
Director
Date of appointment: 1 January 2010
7 Stuart Doughty CMG
Non-executive Director
Date of appointment: 8 April 2015
Age at 12 March 2019: 75
Committee membership: Nom (Chair)/Rem/SS
Age at 12 March 2019: 63
Experience: Philip has over 45 years of board-level
experience including extensive international business
expertise, principally in the resources sectors.
Philip 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. Philip was awarded a Member of the Order of
Australia in June 2013.
During 2018, Philip served as the chairman of Gammon
China Ltd, the 50:50 joint venture between Balfour
Beatty and Jardine Matheson, and its subsidiary
Gammon Construction Holdings Ltd. Philip now serves
as a non-executive director of the Gammon business.
External responsibilities: Philip is non-executive
chairman of Aveva Group plc and a non-executive
director of Newcrest Mining Limited.
2 Leo Quinn
Group Chief Executive
Date of appointment: 1 January 2015
Age at 12 March 2019: 62
Committee membership: Nom/SS/GTIC (Chair)/
FGPC (Chair)
Experience: Leo has strong leadership expertise
and has significant experience of successfully
delivering transformation strategies for large multi-
national companies.
Leo is a civil engineer and began his career at Balfour
Beatty. He was educated at Portsmouth University and
Imperial College, London where he completed his MSc
in Management Science. Before being appointed as
Group Chief Executive at Balfour Beatty, Leo spent four
years as group chief executive of QinetiQ Group plc and
prior to that, five years as chief executive officer of De
La Rue plc. Before this, he spent almost four years as
chief operating officer 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.
Leo was previously a non-executive director of Betfair
Group plc and Tomkins plc.
External responsibilities: Leo is the founder of ‘The
5% Club’, a UK employer led initiative focused on
creating momentum behind the recruitment of
apprentices and graduates into the workforce.
3 Philip Harrison
Chief Financial Officer
Date of appointment: 1 June 2015
Age at 12 March 2019: 58
Committee membership: GTIC/FGPC
Experience: Philip has considerable financial
expertise and extensive experience of working in large
multi-national manufacturing and services businesses.
Philip was appointed as Chief Financial Officer in
June 2015 having previously served as group finance
director at Hogg Robinson Group plc, and as group
finance director at VT Group plc. Prior to that, he
was VP Finance at Hewlett-Packard Europe, Middle
East and Africa region and was a member of the
EMEA board. Philip’s earlier career included senior
international finance roles at Compaq, Rank Xerox
and Texas Instruments. Philip is a fellow of the
Chartered Institute of Management Accountants.
Committee membership: Rem (Chair)/Nom/SS
Experience: Iain has considerable remuneration
experience and brings significant leadership and
strategic oversight skills to the Board.
Iain spent 26 years at Unilever in a succession of roles
culminating in his appointment as senior vice-president,
corporate development. Following this, Iain joined Tate
& Lyle in 2003 as chief executive, serving in that role
for six years.
He was also formerly chairman of Berendsen plc
and of Wilton Park, an independent and non-profit
making Executive Agency of the British Foreign and
Commonwealth Office. Iain also previously held the
roles of non-executive director of Sygen International
and of Greggs plc.
External responsibilities: Iain is non-executive
chairman of Stobart Group Limited, Hallmarq Veterinary
Imaging Limited and a non-executive director of
Personal Assets Trust plc. Iain is also a council
member of Cranfield University and governor
emeritus of the British Nutrition Foundation.
5 Barbara Moorhouse
Non-executive Director
Date of appointment: 1 June 2017
Age at 12 March 2019: 60
Committee membership: AR/Rem
Experience: Barbara has extensive leadership
experience across the private, public and regulated
sectors. She was 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. Subsequently, Barbara was Director
General at the Ministry of Justice and the Department
for Transport. Her most recent executive appointment
was as chief operating officer at Westminster City
Council. She is a fellow of the Chartered Institute
of Management Accountants and an Associate
Member of the association of Corporate Treasurers.
External responsibilities: Barbara is currently chair
of the Rail Safety Standards Board, a non-executive
director of Microgen Plc and Agility Trains, and a
trustee for Guy’s and St Thomas’ Charity.
6 Dr Stephen Billingham
Non-executive Director
Date of appointment: 1 June 2015
Age at 12 March 2019: 60
Committee membership: AR (Chair)/Nom
Experience: Stephen has significant recent and relevant
financial experience and has worked in the construction,
infrastructure and support services industries for over
30 years.
Stephen was group finance director (CFO) 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 also spent 11 years with Balfour Beatty’s
predecessor company BICC plc in corporate finance
and other roles. He is a fellow of the Association
of Corporate Treasurers.
External responsibilities: Stephen is currently
non-executive chairman of Anglian Water Group Ltd and
Urenco Ltd. He chaired the Urenco Ltd Audit Committee
from 2009 to 2015 and was a member of the Anglian
Water Audit Committee from 2014 to 2018.
Committee membership: SS (Chair)/AR/Nom
Experience: Stuart has over 54 years’ experience in the
civil engineering, construction and infrastructure sectors.
Stuart 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 21 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.
He is a Chartered Engineer and a fellow of both
the Institution of Civil Engineers and the Institute of
Highway Engineers. Stuart was honoured in 2004
by the Queen with a CMG and also received an
honorary doctorate from Aston University in 2018.
External responsibilities: Stuart is the chairman
of the Finance and Major Projects Committee for
Aston University.
8 Michael Lucki
Non-executive Director
Date of appointment: 1 July 2017
Age at 12 March 2019: 62
Committee membership: AR/Rem
Experience: Over 35 years of business and
leadership experience in the US and internationally
in the engineering and construction sector.
Michael has held a number of leadership and finance
roles, including chief financial officer, executive vice
president and board member at CH2M Hill. He was
formerly an audit partner at Ernst & Young LLP
and appointed as 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.
External responsibilities: Michael is currently a
board member at Psomas and also serves as an
advisory board member at Anchor QEA, LLC. He is
a trustee of the California State University Foundation
Board and a member of the Investment Advisory
Committee of The California State University System.
9 Anne Drinkwater
Non-executive Director
Date of appointment: 1 December 2018
Age at 12 March 2019: 63
Committee membership: Rem/SS
Experience: Anne has significant experience in heavy
industry including multiple large capital expenditure
projects with infrastructure considerations and
knowledge of doing business in the UK and US.
Anne was at BP plc for over 30 years, holding a number
of senior strategic and operational roles across multiple
jurisdictions including the US, Norway, Indonesia,
the Middle East and Africa culminating in the role
of president and CEO of the Canadian business.
Anne has previously held non-executive director roles
at Aker Solutions A.S.A. and UK listed Tullow Oil plc
where she served on a number of key board
committees. She was previously oil and gas
advisor to the Falkland Islands Government.
External responsibilities: Anne is a non-executive
director of Equinor A.S.A.
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Board leadership continued
Corporate governance framework
The Board has a formal schedule of matters
reserved for its decision and separate terms
of reference for each of its Committees.
As referenced in the preceding pages, there
are four main Board Committees (Audit and
Risk, Nomination, Remuneration and Safety
and Sustainability). In addition, there is a
Group Tender and Investment Committee
and a Finance and General Purposes
Committee, which are led and managed
by the executive Directors with reports on
their activities being made to the Board as
appropriate. Verbal reports on meetings of
the main Board Committees are provided
at each full Board meeting by the relevant
Committee chair.
Each Committee reviews its own terms
of reference annually and these are then
reviewed by the full Board together with the
matters reserved to the Board. The matters
reserved to the Board cover points affecting
the Group as a whole including its strategy
and budget, risk, high value investments/
expenditure and approval of the Group
financial statements and dividends.
The full terms of reference for all Board
Committees are available on our website
https://www.balfourbeatty.com/investors/
governance/board-committees/.
Responsibility for the day-to-day running of
the Group is delegated to the Group Chief
Executive who in turn delegates particular
responsibilities to different individuals and
functions through his Executive Committee
of direct reports.
To ensure that decisions are taken at
the right level within the Group by those
best placed to take them, the Group
Delegated Authorities set out in detail
the authority afforded to each function
and senior individuals across the UK and
US. Having this central point of reference
for all colleagues ensures there is a
consistency of approach across the
UK and US and allows the business
to operate without creating bureaucratic
and burdensome processes.
During 2018, the Group Delegated
Authorities were thoroughly refreshed
to re-align them with changes to the
Group’s business structure leading
to stronger accountability.
Board and Committee meetings
Set out in the table opposite are details of
individual Directors’ attendance at meetings.
The Chairman encourages all Directors to
attend all Committee meetings unless
conflicted e.g. where an individual’s
term of appointment, performance or
remuneration is being considered.
Balfour Beatty Annual Report and Accounts 2018
Additional attendees are invited to attend
Board and Committee meetings at the
discretion of the relevant chair e.g. the Group
Financial Controller and Group Head of Risk
and Audit are invited to attend all Audit and
Risk Committee meetings together with
representatives of the Company’s auditor
KPMG LLP.
During the year, the Chairman met with
the non-executive Directors without the
executive Directors present.
Where Directors have not been able to
attend part of 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.
Board and Committee agendas
A forward agenda is established for
the Board and each of the main Board
Committees to ensure that items are
scheduled at the appropriate time during the
year. Capacity is maintained on the agenda
for each meeting to allow for the timely
consideration of matters as they arise during
the year. Regular deep dive presentations
form part of the annual meeting cycle
focusing on particular business areas or major
projects of strategic importance to the Group.
A non-exhaustive list of matters considered
by the Board during 2018, includes:
– progress with Phase Two of the Build
to Last transformation programme
– Group strategy and budgets
– Group financial performance including
annual and interim financial statements
– bid and contract updates
– legacy contract out-turns
– pipeline of significant projects
– health and safety performance
– significant human resources issues,
including succession planning and
diversity matters
– consideration of issues relating to major
disputes, proceedings or other matters
with a potentially adverse effect on the
Group’s reputation
– results of employee engagement surveys.
Speak up
The Group provides a service, Speak Up,
which enables colleagues to report,
anonymously if they choose, their concerns
relating to unethical conduct affecting all
areas of the business. Reports on the
operation of this are provided to the Board
biannually by the Group Head of Business
Integrity. Further details of the service can
be found on page 36.
Conflicts of interest
The Board has established formal procedures
for the declaration, review and authorisation
of any conflicts of interest of Board members.
Conflicts are considered by the full Board
on an annual basis. The Board was satisfied
that none of the Directors had any conflict
of interest during the year which could not
be authorised by the Board.
Director
Philip Aiken
Leo Quinn
Philip Harrison
Iain Ferguson
Barbara Moorhouse
Stephen Billingham
Stuart Doughty
Michael Lucki
Anne Drinkwater
Board
8(8)
8(8)
8(8)
7*(8)
8(8)
8(8)
7^(8)
8(8)
1(1)
Audit
and Risk
Safety and
Sustainability
3(3)
3(3)
Nomination
2(2)
2(2)
Remuneration
4(4)
4(4)
4(4)
4(4)
4(4)
2*(3)
3(3)
2(2)
2(2)
2(2)
4(4)
4(4)
4(4)
* Iain Ferguson – both absences were for meetings that were held on the same day and were due to unavoidable
external commitments.
^ Stuart Doughty – absence due to illness.
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 24 May 2018. 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.
Relations with stakeholders
The Board has a responsibility to a range
of stakeholders including the Group’s
customers, key subcontractors and suppliers
and to the environment and the communities
in which the Group operates. Set out below
are details of the Board’s engagement with
two key stakeholder groups; employees
and shareholders.
Employee engagement
Although the Group people plan has its
foundation in the Build to Last transformation
programme, the Board recognises the
importance of its own role in ensuring
constructive employee engagement
to build a sustainable business.
Meet the Board
In 2018, a ‘Meet the Board’ event was held
for staff at the Company’s office in Canary
Wharf. The event was publicised internally
and via the Canary Wharf office social events
committee and was open to all employees
to attend whether or not they were based
in Canary Wharf.
The Chairman delivered a presentation
followed by a Q&A session. The other
Board members were also available
to answer questions. Further informal
discussion continued over tea and coffee.
The intention of this session was for
the Board to have the opportunity to
engage with a wide range of employees.
Members of the Board discussed roles
and responsibilities and also heard directly
from those in attendance about issues
that matter to them.
The event was a great success with
over 90 employees attending and a large
number of questions being asked.
A further session was held in March 2019
in the Canary Wharf office with other office
locations also being reviewed as locations
for future events.
Further employee engagement
The Board has historically received updates
and presentations on people related matters
and routinely receives reports on the results
of employee engagement surveys.
Notwithstanding this, plans are
underway to further develop and formalise
the Board’s engagement programme with
employees which will be detailed in the
2019 Annual Report.
Shareholder engagement
The Board places great importance
on having positive relationships with all
shareholders and seeks to ensure that
there is an appropriate level of dialogue
with investors.
The Group’s website is an important
resource for the Company to communicate
to all stakeholders and in particular provides
information useful for shareholders.
Further engagement activities are set
out below.
Institutional investors
As part of the Group’s investor relations
programme, the Chairman and executive
Directors met with institutional shareholders
throughout 2018. Other Board members,
including the Senior Independent Director,
also met with shareholders.
Details of meetings held were shared
with the rest of the Board during the year.
In addition to these 1:1 meetings, group
sessions were held with current and
prospective shareholders in attendance.
Board members also attended and
spoke at investor conferences.
An annual detailed review of investor
relations activities, including shareholder
meetings and conferences, was provided
to the Board by the Head of Investor
Relations together with a summary of
analyst research briefings and an overview
of the Company’s share price movement.
Proxy advisory firms
Together with the Head of Investor Relations
and the Deputy Company Secretary, the
Chairman met with proxy advisory firms
to directly communicate the Company’s
strategic priorities and governance practices.
Verbal reports of proxy advisory meetings
were provided to the full Board.
Retail shareholders
An event was hosted for the UK
Shareholders’ Association at the Canary
Wharf office, attended by the Head of
Investor Relations and the Deputy Company
Secretary. The event was well attended
with approximately 30 retail shareholders
hearing a presentation from the Chairman
on the Group’s performance followed by
a Q&A session. The discussion continued
informally over a light lunch.
Following the success of this event,
a further session is planned for April 2019.
73
Annual General Meeting
The AGM is an important event in the
Board calendar and all shareholders are
encouraged to participate whether by
attending in person, asking questions
or casting their vote in advance of the
meeting. All resolutions continue to be
put to a poll rather than a show of hands
to ensure that the votes of all shareholders
are counted even if they are unable
to attend the meeting.
Each substantially separate issue is
proposed via a separate resolution and
proxy forms provide for shareholders
to vote for, vote against or withhold
their vote on each resolution.
All Board members attend the AGM and
are available to answer questions during
the formal part of the meeting as well
as being present for informal discussion
over refreshments after the AGM.
2019 Annual General Meeting and Class
Meeting of Preference Shareholders
The 2019 AGM will be held at Painters’ Hall,
9 Little Trinity Lane, London EC4V 2AD
on Thursday 16 May 2019 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.
balfourbeatty.com/AR2018
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The Board is supported by the Company
Secretary who is responsible for ensuring that
the Board is able to function effectively and
efficiently. In addition to making all logistical
arrangements for meetings, the Company
Secretary manages the policies and
processes relating to the Board and ensures
that the Board receives information in a
timely manner.
With the retirement of David Mercer, a new
Company Secretary, Jonathan Lagan was
appointed in February 2019. Jonathan met
with the Chairman, Chief Executive Officer
and Chief Financial Officer as part of the
selection appointment process and had
1:1 meetings with all other Board members
as part of his induction.
74
Division of responsibilities
The Board has a collective responsibility
as set out above. Notwithstanding this,
the division of responsibilities across all
Board members is clear with each having
a defined role with individual duties.
A distinction is made between the
leadership of the Board which is the
Chairman’s responsibility and the executive
leadership of the Company’s business
which is the Group Chief Executive’s role.
The balance of responsibilities at Board
level is set out below and demonstrates
that no one individual has unfettered
powers of decision-making.
Group Chief Executive
The Group Chief Executive is responsible
for the day-to-day management of the
Group and the delivery of the strategy
as set by the Board.
Chairman
The Chairman leads the Board and ensures
its effectiveness in directing the Company.
The Chairman achieves this through promoting
a culture of open and constructive debate
among all Board members, both executive
and non-executive. The Chairman encourages
high standards of corporate governance,
meeting with investors throughout the year
to actively communicate with them.
Senior Independent Director
The Chairman is supported by the
Senior Independent Director who acts as a
sounding board for the Chairman and as an
intermediary for the non-executive Directors
and for investors. The Senior Independent
Director leads the appraisal of the
Chairman’s performance.
Non-executive Directors
All of the non-executive Directors are
considered to be independent under the
Code. They are each responsible for providing
strategic guidance and scrutinising and
challenging the performance of management.
In addition, all the non-executive Directors
serve on at least one of the main Board
committees, each of which is chaired by
a non-executive Director. Through these
committees but also through the main Board,
the non-executive Directors ensure that the
integrity of financial information and financial
controls and systems of risk management are
robust and defensible. They also determine
appropriate levels of remuneration and are
involved in succession planning
and appointments.
Time commitment of Directors
The Board recognises the importance of
individual members having sufficient time
available to discharge their duties effectively.
Additional commitments of Directors are
carefully reviewed on appointment, before
new directors are accepted onto the Board.
Each Director declares his or her external
appointments and commitments to the Board
on an annual basis as part of their conflict of
interest declaration. In addition, a new policy
has been implemented in 2019 to ensure that
any new external responsibilities being
considered by Directors are notified to the
Chairman who can arrange for full Board
approval if necessary. Before approval is
given, an internal review is conducted to
identify any potential conflicts of interest.
The Chairman’s significant commitments are
set out in his biography on page 71 and have
not changed during 2018. Neither of the
executive Directors holds any non-executive
board positions at a FTSE 100 company.
Leo Quinn holds the chairmanship of the 5%
Club of which he was a founder (more details
are set out on page 71).
Balfour Beatty Annual Report and Accounts 2018
Composition, succession and evaluation
75
The induction programme provides
the foundation for the ongoing training
and development of Board members.
The Chairman maintains a dialogue with
individual Directors to identify any specific
training needs. Where appropriate, such
training is delivered by the topic being
included at a future Board meeting so that
all Directors can benefit. Otherwise, training
is delivered by way of formal presentations,
individual meetings and visits to sites in
order to learn more about a particular
initiative or project. All Board members
are encouraged to visit site and project
locations throughout the year and Directors
are invited to provide verbal reports of
such visits at each Board meeting.
Information and support
During the year, the Company Secretary
advised the Board on matters related to
governance, ensuring Board procedures
were followed and relevant statutory and
regulatory requirements were complied
with. The Company Secretary has
responsibility for facilitating the timely
distribution of information between
the Board and its Committees and the
executive and non-executive Directors.
The Directors have direct access to the
Company Secretary for advice and he is
able to arrange, at the Company’s expense,
for the Directors to receive independent
professional advice where appropriate.
Composition
As set out on pages 70 and 71, the Board
consists of nine members, comprising the
Chairman, Group Chief Executive, Chief
Financial Officer and six independent
non-executive Directors. With the retirement
of Iain Ferguson in May 2019, the Board will
revert to having eight members, including
five independent non-executive Directors.
The Board considers this to be an appropriate
size to manage the requirements of
the business.
Independence of Directors
By the criteria set by the Code, the
Chairman was independent at the time of his
appointment. As referenced above, all of the
non-executive Directors are considered to be
independent under the Code. This includes
Stephen Billingham notwithstanding his
directorships at companies that have a
business relationship with the Group, as the
value of such relationships is not considered
to be material (more detail relating to value
is set out in Note 36 on page 177).
Stephen is also a member of the Company’s
pension scheme from his time as an
employee of the Group 15 years ago.
The Board are all apprised of this and a fresh
declaration is made by Stephen and recorded
in the minutes at any meetings where there
is discussion relating to the Group’s pension
scheme. Iain Ferguson has served on the
Board since January 2010 and has remained
independent throughout his tenure. Iain has
now reached nine years of service on the
Board and has informed the Board of his
intention to retire as a Director following
the AGM in May 2019. More details are
available on page 77.
Succession and tenure
On behalf of the Board, the Nomination
Committee reviews succession planning
of Directors. Further information on the work
of this Committee is set out on page 77.
In December 2018, Anne Drinkwater was
appointed to the Board as an independent
non-executive Director. The search process
was led by the Nomination Committee and
all Board members were kept updated
of progress. Further details are set out
on page 77.
All Directors are subject to annual re-election
by shareholders at the AGM where terms of
appointment for each non-executive Director
are available for inspection. Set out in the
Notice of AGM is information on the skills
and experience of each Director seeking
re-election or election. During 2018, terms of
appointment were renewed for the Chairman,
Stephen Billingham and Stuart Doughty, each
for a second three-year term and further
details are set out on page 77.
Set out below is the current length of tenure
for the Chairman and each non-executive
Director as at 31 December 2018:
Tenure
3 years 9 months
9 years
Director
Philip Aiken
Iain Ferguson
Barbara Moorhouse 1 year 7 months
Stephen Billingham 3 years 7 months
3 years 8 months
Stuart Doughty
1 year 6 months
Michael Lucki
1 month
Anne Drinkwater
Induction, training and development
Following the appointment of new Board
members, the Company Secretary in
conjunction with the Chairman prepares
a tailored induction programme. The new
Director is consulted to ensure that areas of
particular interest to him or her are prioritised
or emphasised as necessary. This approach
was taken in arranging the induction of
Anne Drinkwater, appointed in December
2018. Meetings were held for Anne to
speak directly to all members of the
Executive Committee and other senior
leaders across the Group, and visits to
office and site locations across the UK
and the US were arranged.
In addition, Anne was provided with access to
a suite of induction materials via the electronic
Board portal. These materials are also available
to all other Board members as a continuing
point of reference. Included in the pack are key
internal governance documents, information
relating to the business of the Company and
policies and procedures relating to the
operation of the Board.
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Composition, succession and evaluation continued
Evaluation
In accordance with the Code, the Board
undertakes an annual evaluation of its
performance and that of its Committees.
An external evaluation is undertaken every
three years, with internal evaluations carried
out in the intervening years to consider
the performance and effectiveness of the
Board and its Committees, as well as the
Chairman and individual Directors.
2018 evaluation
An externally facilitated evaluation of the
Board was undertaken in 2018 by Dobson
Lyle. The Company has previously engaged
Dobson Lyle to provide services to review
and assess the capability of senior leaders.
In considering the feedback from
Directors and senior management from
the two previous years’ internal reviews,
it was considered that the Board and
its Committees were functioning in
accordance with their respective charters.
External facilitation was not needed to
confirm this and therefore the approach
adopted was to focus on the interpersonal
effectiveness and performance of each
Board member in the context of his or her
personality profile and how this aligned
with the profiles of other Board members.
This focus on the specific skills and
operating style of each Board member
sought to identify the relative strengths
of each Director thereby ensuring that each
Director is appropriately and fully utilised
in light of their capabilities. By profiling each
Board member in this way, the overall
efficacy and communication dynamics
of the Board could be improved.
The evaluation was conducted through
the completion of personality profiles
for each Director individually, followed up
by 1:1 interviews. An overarching report
setting out the findings was prepared and
presented to the Board by Dobson Lyle
for further review. In addition to the full
Board report, an individual review was
prepared and provided to each Board
member. Following this, the Chairman
held 1:1 meetings with each Director
to gather feedback on the outcome
of the evaluation.
Stage 1
Completion of a detailed personality
profile by individual Directors.
Stage 2
1:1 meetings conducted by Dobson
Lyle with each Director based on the
outcome of his or her personality profile.
Stage 3
Preparation of report for the
whole Board and individual Directors.
Stage 4
Results presented to and reflected
on at a Board meeting.
Stage 5
1:1 meetings with the Chairman and
individual Directors to reflect on outcomes.
Key conclusions from the evaluation
This process was considered
effective in improving the depth
of understanding of how the Board
operates and interacts through its
constituent members and opportunities
for improvement were identified.
Appreciation of individual styles
and the impact this has on effective
communication and decision making
has led to an improvement in the
operation of the Board, raising the
standard of debate at meetings and
the Board’s performance overall.
Having reviewed all the materials
and discussed the findings at some
length, the Directors re-affirmed that
the Board and its Committees are
working very effectively.
Balfour Beatty Annual Report and Accounts 2018
Board Committees
77
Philip Aiken AM
Chair of the Nomination Committee
During 2018, the Committee
has considered a range of
matters, most notably leading
on the process to appoint a
new non-executive Director,
Anne Drinkwater.
Nomination Committee report
In 2018, Philip Aiken served as Chairman
of the Committee. Other members were
non-executive Directors Stephen Billingham,
Stuart Doughty and Iain Ferguson,
and the Group Chief Executive, Leo Quinn.
The full terms of reference for the
Committee are available on our website
https://www.balfourbeatty.com/investors/
governance/board-committees/.
Activities during 2018
During 2018, the Committee considered
Board succession planning, the balance
of skills and experience on the Board,
the appointment of a new non-executive
Director and the renewal of existing
Board members’ terms of appointment.
Detailed reviews of internal talent and
succession plans for executive Directors
and senior leaders were presented to the
full Board during 2018 including a focus
on US leadership during the Board’s visit
to Dallas, Texas.
The succession of the executive Directors
was discussed at a meeting of the non-
executive Directors without the executive
Directors present. The Committee also
considered the impact and associated
succession planning required in light of
Iain Ferguson completing nine years of
service as a Board member. This was
particularly significant given Iain’s roles
as Senior Independent Director and
chair of the Remuneration Committee.
The Committee made its recommendations
in respect of these appointments to the full
Board for approval.
Diversity and inclusion
Diversity and inclusion remain central
to Balfour Beatty’s people strategy.
The Committee recognises that it is not only
right to ensure that people of all genders and
backgrounds are able to access fulfilling
careers in the construction industry; but that a
business which reflects the society it serves
will be better placed to continue to deliver for
its stakeholders. By encouraging people of all
backgrounds to join the Group, and enabling
them to do their best, the Group is able to
help bridge the skills gap this industry
continues to face.
In the UK, in order to promote the inclusivity
of people of all backgrounds, the Company
has developed four employee affinity
networks across key areas of protected
characteristics which all employees are
encouraged to join regardless of gender, race,
ability or sexual orientation: LGBT, Gender
Equality, Multi-Cultural/BAME and Ability
(which seeks to identify and remove barriers
to enable people with disabilities to join the
Group and to reach their full potential).
Development of talent at all levels of the
business remains a key focus for the Group
and the Committee seeks to apply this
approach in respect of appointments to
the Board.
Appointment of new non-executive
Director
In securing the appointment of Anne
Drinkwater as a new independent non-
executive Director, an external search
agency, Ridgeway Partners was engaged
in order to identify suitable candidates.
Ridgeway Partners has supported the
Board in previous selection processes
for new Board members but has no
other connection with the Company.
The Committee was keen to ensure
that a fair process was undertaken to
identify candidates on the basis of merit
and objectively determine the strengths
and skills that would complement those of
existing Board members. Anne’s considerable
experience working at BP plc on multiple
large capital expenditure projects with
infrastructure considerations makes
her a strong addition to the Board.
Her knowledge of doing business in the
UK and US also reflects the Group’s
focus on these jurisdictions.
Renewal of terms of appointment
In reviewing existing Board members’
terms of appointment, Phil Aiken, Stephen
Billingham and Stuart Doughty each reached
the end of their initial three-year term as
Board members during 2018.
The Committee considered the individual
performance and contributions made by
each of these Directors over the past three
years. The Committee was satisfied that
each of them would continue to be effective
in their roles and offered each a further
three-year term in accordance with the Code.
Each of the Directors recused themselves
from the discussion where his own
appointment was considered. For the
consideration of the Chairman Philip Aiken’s
renewal of appointment, the Senior
Independent Director chaired the meeting.
Focus for 2019
With the introduction of the 2018 Code, the
Committee will review its terms of reference
to ensure its scope is expanded to formally
address new requirements, particularly in
the areas of diversity across the Group.
Succession planning will remain a key priority
for the Committee to ensure that the pipeline
of the Group’s leadership remains aligned
with the strategic direction of the business.
The balance of skills and experience at Board
level will also continue to be monitored.
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Board Committees continued
Stuart Doughty
Chair of the Safety and
Sustainability Committee
Among the Committee’s duties
are to review the strategies,
policies and performance of
the Group in relation to health,
safety, environment and
sustainability, and to drive
improvement in these areas.
Balfour Beatty Annual Report and Accounts 2018
Safety and Sustainability
Committee report
During 2018, Stuart Doughty has continued
to chair the Committee. Other members
during the year included the Chairman
Philip Aiken, independent non-executive
Directors Stephen Billingham and Iain
Ferguson, and the Group Chief Executive,
Leo Quinn. Anne Drinkwater was appointed
to the Committee on 1 January 2019.
Committee’s duties
Among the Committee’s duties are to review
the strategies, policies and performance of
the Group in relation to health, safety,
environment and sustainability, and to drive
improvement in these areas. ‘Safe’ is one
of the Group’s four Build to Last goals and
the Committee, on behalf of the Board,
is responsible for reviewing the Group’s
strategies, policies and procedures in
relation to health and safety. In addition, the
Committee reviews and approves targets and
key performance indicators on health and
safety and monitors performance against
those targets. With regard to sustainability,
the Committee reviews the environmental
and social performance of the Group,
including but not limited to carbon emissions,
energy, resource efficiency and compliance.
The full terms of reference for the
Committee are available on our website
https://www.balfourbeatty.com/investors/
governance/board-committees/.
Activities during 2018
The Committee met three times during
2018. In addition to receiving routine
reports on matters relating to both safety
and sustainability, detailed briefings were
provided on significant incidents that had
occurred including high potential events
that could under other circumstances
have caused serious harm.
As reported on page 69, sadly during this
year, the Committee received in-depth
reports on two fatalities that occurred in 2018
due to third party incursions into Balfour
Beatty work sites. Detailed briefings were
received on the investigations carried out
following each incident and learnings and
improvements identified.
During 2018, the Committee has overseen
improving trends in safety performance
across the Group (excluding international joint
ventures) with increasing levels of safety
observations indicating a greater workforce
engagement. The Committee has continued
to support the sharing of best practice across
geographies on learnings from incidents and
also innovation opportunities between the UK
and US businesses and with Gammon,
the Group’s 50:50 joint venture operation
based in Hong Kong. A drive towards treating
health like safety was also progressed this
year with mental health being a key priority.
In relation to sustainability, the Committee
reviewed environmental incidents and
environmental performance, discussed a
number of innovations that are being used
to reduce energy and associated carbon
emissions and deliver significant cost savings
and examined how data was being used to
drive positive behaviours, reduce fuel
consumption and associated emissions and
costs as well as improve safety.
Committee members were active in visiting
sites throughout the year, where they were
able to reference the health and safety
calendar for monthly focus areas and see at
first hand the safety and sustainability
measures being implemented at site level.
Areas of focus for 2019
In 2019, the Committee will continue to
promote a strong safety culture and support
the initiative to treat health like safety
including an ongoing focus on mental
health activities.
In line with the Group’s 25 by 2025 vision,
reducing the volume of materials, associated
carbon and waste across project sites will
also be a priority. The Committee is keen to
review Our Blueprint (the Group’s
sustainability strategy) and an update on the
United Nation Assembly’s Sustainable
Development Goals will be provided to assist
this review. Overseeing progress on targets
to reduce carbon emissions will also be key
and consideration will be given to the
development of appropriate metrics with the
Science Based Targets initiative on corporate
climate change action. There will also be a
continued focus on subcontractor
engagement and supply chain engagement.
Our Blueprint can be accessed at:
https://www.balfourbeatty.com/media/
195840/sustainability-blueprint-2017.pdf.
79
Group Tender and Investment
Committee report
Finance and General Purposes
Committee report
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 exposures, contract financing,
bonding and leasing arrangements and
various matters relating to the issued
share capital of the Company.
A summary of all the business conducted at
the meetings is provided to all Directors.
The Committee is 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
or she has executive responsibility.
The Committee has overall authority and
responsibility for the content, maintenance
and operation of the Gated Business
Lifecycle. The Committee meets regularly
throughout the year to discuss proposed
projects at the various stages of their
development and review all major proposed
tenders with projected values above specified
levels, with a specific focus on risk.
Those contracts which are considered to be
of a significant size and risk to the overall
Group are reviewed by a committee of
the Board.
Any member may convene a meeting
of the Committee to discuss any of the
tender reviews in more detail. Key members
of the team involved with the project being
considered and their strategic business
unit leaders attend each meeting in addition
to Committee members. Minutes of all
meetings are made available to all Directors.
Leo Quinn
Group Chief Executive
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Audit, risk and internal control
Risk management and internal control
Risk management
The Board recognises that successful
delivery of the Group’s strategic and day
to day objectives is underpinned by a
comprehensive and consistent assessment
of relevant risks. Effective, agile and
universally applied risk management
principles enable the Group to accurately
examine its risk profile against its accepted
attitude and appetite, limit its exposure to
unacceptable risk and ensure long-term
viability. Once key risks to delivering value to
the Group and its stakeholders are identified a
decision is made to treat, tolerate, terminate
or transfer potential exposure. For more
information, refer to pages 55 to 66.
The Board is committed to meeting the
relevant requirements of the UK Corporate
Governance Code and has applied the
principles of the Code in establishing
procedures to manage risk, oversee the
internal control framework, and determine
the nature and extent of the principal risks
the Group is willing to take in order to
achieve its long-term strategic objectives.
Roles and responsibilities
The Board is responsible for the
implementation and oversight of Balfour
Beatty’s risk management framework and
examining and verifying the internal control
environment. It sets the Group’s appetite
for and attitude towards risk in pursuit of
its agreed strategic objectives and drives an
effective risk management culture. The Board
directs the level of risk that can be taken by
Group, strategic business unit and individual
business unit management without specific
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.
Responsibilities
Actions undertaken
1 Board
– Responsible for the Group’s systems of
risk management and internal control
– Determines Group appetite for and attitude
to risk in pursuit of its strategic objectives.
Audit and Risk
Committee
– Reviews significant accounting judgements
– Reviews the effectiveness of Group internal
controls, including systems to identify assess,
manage and monitor risks
– Agrees the Group Internal Audit Plan.
– Reviews management of non-financial risks
such as health and safety, and sustainability.
– Issues and reviews the Group risk
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.
– Receives regular reports on implementation
of Group policies and procedures on non-
financial risks.
Safety and
Sustainability
Committee
Group Tender
and Investment
Committee
2 Group management
– Reviews and approves tenders and
investments, triggered by certain financial
thresholds or other risk factors.
– Critically appraises significant tender proposals
and investment/divestment opportunities,
with a specific focus on risk.
– Strategic leadership
– Responsible for reviewing and implementing
the Group risk management policy
– Strategic plan and annual budget process
– Produces and tracks Group Risk Register
– Reviews risk management and assurance
– Ensures appropriate actions are taken to
activities and processes
manage strategic risks and other key risks.
– Monthly/quarterly finance and
3 Strategic business
unit management
– Responsible for risk management and
internal control systems within its business
– Ensures that business units’ responsibilities
are discharged.
4 Business unit
management
– Maintains an effective system of risk
management and internal control within
its business unit and projects.
performance reviews.
– 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
and the Board.
– Maintains and regularly reviews project,
functional and strategic risk registers
– Reviews mitigation plans
– Plans, executes and reports on internal
control testing.
Balfour Beatty Annual Report and Accounts 2018
81
Risk management process
Mandated by the Balfour Beatty’s risk
management policy, all business units are
responsible for ensuring that effective
arrangements, and management controls,
are established and implemented for the
management of risk. The Group’s hierarchy
of risk management is to prioritise reduction
in the likelihood of risk events occurring,
mitigate the adverse impact where this is
not possible 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 within the Gated
Business Lifecycle. Risks are continuously
assessed throughout the lifetime of each
project to ensure potential exposure
remains within an accepted tolerance.
Additionally, the Board issued updated and
more detailed delegated authority levels in
2018 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.
Escalation and reporting structures ensure
that risk oversight is rigorously applied at
all levels of the business from operational
review through to scrutiny by the Executive
Risk Steering Group and the Board.
To be effective it is vital that the Group’s
approach to risk management remains
reflective of the shape and direction of the
business and the wider industry. In 2018
the Group Risk Register was completely
refreshed, recategorised and reassessed and
a key risk and control statement was drafted
for review by the Group Chief Executive.
To ensure a consistent application of the
Group’s risk management expectations the
links between the central risk team and
business units were strengthened and a
bespoke risk assessment and escalation
tool was developed with extensive input
from the wider business.
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 both understood and
appropriately managed. The Board recognises
that any system of internal control is designed
to identify and control rather than eliminate
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 sit wholly within Balfour Beatty’s
internal control environment. Where this is
the case, separate 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 2018 and up
to the date of signing this report. The Group
has a thorough understanding of its risk
exposures and has mapped out its assurance
network accordingly. Topics covered by
Policies, Standards and Expectations
include but are not limited to:
– a fully revised and reissued 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
– 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
– a comprehensive suite of policies,
manuals and instructions setting out
the requirements of the Group Finance
function covering the financial
management of the Group, including
but not restricted to 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
– enhanced systems for the management
and reporting of risk which have been
deployed throughout the Group
– 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 82 to 84).
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 2018 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 58 to 66.
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Strategic ReportOther InformationFinancial StatementsGovernance 82
Audit and Risk Committee
Stephen Billingham
Chair of the Audit and Risk Committee
Among the Committee’s
duties are to review significant
accounting judgements,
review the effectiveness of
risk management and internal
controls and assess the external
and internal audit functions.
Audit and Risk Committee report
During the year the Committee comprised
Stephen Billingham as Chairman, Stuart
Doughty, Michael Lucki and Barbara
Moorhouse. All members are independent
non-executive Directors with further details
of their skills, experience and qualifications
set out on page 71.
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. He is supported by Committee
members with varied industry and commercial
experience relevant to the construction sector.
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.
Balfour Beatty Annual Report and Accounts 2018
– 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 Group’s
position and performance, business model
and strategy
– 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
(including key contract judgements), as
noted on pages 126 and 127 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 Group’s accounting policies
– assessing the Group’s implementation of
the new leasing standard, IFRS 16 Leases.
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 2019. Further detail on
the impact of the adoption of IFRS 16 can
be found on page 121.
– reviewing the going concern and viability of
the Group over the longer term as part of
its assessment of the Group’s risks (see
pages 54 and 67).
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 83.
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 performed by
internal audit and the 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.
Summary of activities in 2018
In 2018, the Committee’s core 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 83.
Financial reporting
The Committee reviewed and evaluated
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:
83
Significant issues and other accounting judgements
Revenue
and margin
recognition
Carrying value
of goodwill and
other intangibles
Going concern
and viability
statement
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 Group 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 54 and 67.
Non-underlying
items
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.
Provisions
Retirement
benefits
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:
Items discussed
Mar May Aug Nov
Internal
audit
– biannual assessment of risk and internal control
– approval of the Group’s internal audit plan
– review of the effectiveness of internal audit
– review of findings from internal audit activities and updates
External
audit
– audit report on 2017 financial results
– review report on 2018 interim results
– approval and review of the proposed audit strategy plan and procedures
– transition of lead audit partner
– 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 process and control issues identified during the audit and recommendations to management
Other
matters
– assessment of the Group’s insurance strategy and programme
– assessment of the robustness of the Group’s procedures on Business Integrity and review of its findings
– review and discuss the Group’s update to the Committee on its ERP system standardisation
– review of the Group’s management of its tax affairs including its approach to the new UK corporate
criminal offence of failure to prevent tax evasion
– review regulatory and other third party correspondence
– assessment of Business Integrity’s report on identification of fraud and deception
– annual review of the Committee’s terms of reference
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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•
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Strategic ReportOther InformationFinancial StatementsGovernance 84
Audit and Risk Committee continued
FRC’s Audit Quality Review
During the year, the FRC’s Audit Quality
Review team carried out a review of KPMG
LLP’s audit work for 2017. There were
no findings in their report to the Committee
and consequently no changes were made
to the 2018 external audit process other
than general process enhancements.
Areas of focus in 2019
In 2019, the Committee will continue to
address the topics described on pages 82
and 83 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.
Risk management and internal control
The Board has ultimate responsibility for the
Group’s risk management systems 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:
Balfour Beatty Annual Report and Accounts 2018
Non-audit work
The objective set out in the Group’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 Group’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 2018, there were fees of £0.4 million
(2017: £0.5 million) paid to the external auditor
for non-audit services. 2018 non-audit services
primarily related to the half-year review. Audit
fees for 2018 were £2.6 million. Further
details are included in Note 6.2 on page 134.
There is no inconsistency between the
Financial Reporting Council’s ethical
standards and the Group’s policy.
The Committee considers that the Group
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.
98% by value of non-audit related work
provided by international accounting firms
in 2018 was carried out by firms other
than KPMG.
Annual assessment of the audit process
In addition to receiving written reports from
the auditor (both internal and external) and
management, the Committee also conducted
separate private meetings with the external
auditor 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, the effectiveness of the
external auditor as well as KPMG’s level of
professional scepticism, together with any
identified improvement recommendations,
is prepared each year.
External auditor rotation
The Group undertook an external audit
tendering process in 2015 and KPMG was
selected as the Group’s auditor for the year
ended 31 December 2016, replacing Deloitte
as the incumbent for the last 14 years.
Paul Sawdon is the lead partner on the audit
for the year ended 31 December 2018.
He replaced Stephen Wardell who retired as
the lead partner on the audit after completing
his second year for the year ended
31 December 2017.
The external auditor is required to rotate the
lead partner every five years. Such changes
are carefully planned to ensure business
continuity without undue risk or inefficiency.
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
group’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 Group’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.
Directors’ report – other disclosures
85
Directors’ report
The Directors of Balfour Beatty plc present
their report, together with the audited accounts
for the year ended 31 December 2018.
For the purpose of the Financial Reporting
Council’s Disclosure Guidance and
Transparency Rule (DTR) 4.1.8R, the
Directors’ report is also the Management
report for the year ended 31 December 2018.
As permitted by Section 414 C(11) of the
Companies Act 2006, some matters required
to be included in the Directors’ report have
instead been included in the Strategic report.
These disclosures are incorporated by
reference in the Directors’ report. The Strategic
report can be found on pages 1 to 67.
Corporate governance
The Governance section on pages 68 to
103, including the Compliance with the Code
statement on page 69, forms part of the
Directors’ report.
Directors and their interests
The Directors who served during the year and
were Directors at 31 December 2018 were
Philip Aiken, Leo Quinn, Philip Harrison, Iain
Ferguson, Stephen Billingham, Stuart
Doughty, Michael Lucki, Barbara Moorhouse
and Anne Drinkwater. Further details and
individual biographies are set out on page 71.
The interests of the Directors and their
connected persons in the Company’s shares,
(as notifiable to the Company under Article 19
of the Market Abuse Regulation) are set out on
page 100. In the period between
31 December 2018 and the date of this report
there has been no change in the interests of
Directors or their connected persons save for
the increase of 109 ordinary shares held in the
Share Incentive Plan for Leo Quinn.
At no time during 2018 did any of the
Directors have a material interest in any
contract with the Company or any of
its subsidiaries.
Directors’ indemnities and insurance
The Company maintains directors’ and
officers’ liability insurance which provides
appropriate cover for legal action brought
against its directors.
Qualifying third party indemnity provisions
were in force during 2018 and as at the date
of this report for the benefit of certain
employees who were directors of a
subsidiary company.
Qualifying pension scheme indemnity
provisions (as defined by Section 235 of the
Companies Act 2006) were in force during
the year ended 31 December 2018 for the
benefit of the trustee directors of the Balfour
Beatty Pension Scheme.
All provisions related to indemnities and
insurance are reviewed annually.
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.
Share capital
Details of the share capital of the Company
as at 31 December 2018, including the rights
attaching to each class of shares, are set out
in Note 29 on page 167. During the year
ended 31 December 2018, no ordinary
or preference shares were issued or
repurchased for cancellation.
At 31 December 2018, the Directors had
authority under shareholder resolutions
approved at the AGM and at the Class
Meeting of preference shareholders held in
May 2018 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 2019 AGM or on 1 July 2018 (except in
relation to the purchase of shares the contract
for which was concluded before the expiry of
this authority and which will or may be
executed wholly or partly after such expiry).
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.
Shares held by the Balfour Beatty Employee
Share Ownership Trust rank pari passu with
the ordinary shares in issue and have no
special rights. Voting rights and rights of
acceptance of any offer relating to the
shares held in this trust rest with the
trustees, who may take account of any
recommendation from the Company. Voting
rights are not exercisable by the employees
on whose behalf the shares are held in trust.
Details of shares purchased by the Balfour
Beatty Share Ownership Trust in relation
to the Company’s share schemes can be
found in Note 30.3 on page 170. All shares
purchased were ordinary 50p shares.
The percentage of called-up share capital
represented by the shares purchased in
2018 was 0.22%.
Major shareholders’ interests
Notifications provided to the Company
by major shareholders in accordance with
the DTR are published via a Regulatory
Information Service and on the Company’s
website. Pursuant to DTR 5, the Company
has been notified of the following interests in
voting rights in its shares as at 31 December
2018 and as at the date of this report:
Percentage
of voting
rights (%) as at
31 December
2018
Percentage
of voting
rights (%) as
at 4 March
2019
11.79
12.19
6.39
6.46
5.51
4.76
3.74
3.42
3.30
6.37
6.23
5.52
4.45
3.61
3.42
3.38
Causeway Capital
Management LLC
M&G Investment
Management
BlackRock Inc
UBS Asset
Management
UBS collateral
account
Invesco Limited
Pzena Investment
Management
Vanguard Group
Dividends
An interim dividend of 1.6p per ordinary share
was approved by the Board on 14 August
2018 and a final dividend of 3.2p per ordinary
share will be recommended at the Annual
General Meeting, giving a total dividend per
ordinary share of 4.8p for 2018 (2017: 3.6p).
Preference dividends totalling 10.75p per
preference share were paid in 2018
(2017: 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.
Branches
As the Group is an international business,
there are activities operated through branches
in certain jurisdictions.
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 2019 AGM.
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Strategic ReportOther InformationFinancial StatementsGovernance 86
Directors’ report – other disclosures continued
Innovation, future development and
research and development
Information concerning innovation, future
development and research and development
is set out on pages 30 to 32, and forms part
of the Directors’ report disclosures.
Policies
The Group’s published policies on health
and safety, sustainability, sustainable
procurement, modern slavery, social value,
environment, business conduct and ethics
remain in place and can be accessed on its
website (https://www.balfourbeatty.com/
how-we-work/our-code-of-conduct/policies/
Sustainability
A full description of the Group’s approach to
sustainability, including information on its
community engagement programme,
appears on pages 30 to 43.
Greenhouse gas emissions
Details of Balfour Beatty’s Scope 1 and 2
greenhouse gas emissions during the year
and the actions which the Group is taking to
reduce them are set out on pages 39 and 40
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 two way communication, using
various formal and informal communication
and consultation methods including
engagement surveys, employee
broadcasts, themed roadshows and
localised ‘all-hands’ calls
– 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 35 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 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 financial and
economic factors affecting the performance
of the Group and the Company’s share
price is available to all employees via the
Company’s intranet site.
Events after the reporting date
As at 12 March 2019, there were no material
post balance sheet events arising after the
reporting date.
Political donations
At the AGM held in May 2018, 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 2019 AGM.
In the US and Canada, corporate political
contributions totalling US$203,000
(£152,300) were made by business units
during 2018 (2017: US$26,100 (£19,306).
The increase in donations made in 2018 is
largely due to payments made by the
business unit based in California (over 80%
of the total payments made) to support voter
approval for the issuance of school bonds.
2018 was an election year in California and
the bond measures, which voters must
approve, are generally timed to coincide
with the election cycle.
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.
Capitalised interest
Details of the Group’s capitalised interest can
be found in Notes 15 and 17 on pages 143
and 145 respectively.
Financial instruments
The Group’s financial risk management
objectives and policies (including its hedging
policy) and its exposure to the following risks
– liquidity, foreign currency, interest rate, price
and credit – are detailed in Note 38 on pages
178 to 182.
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 any
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.
Some other commercial agreements, entered
into in the normal course of business, include
change of control provisions.
Balfour Beatty Annual Report and Accounts 2018
87
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.
Statement of Directors’ responsibilities
The Directors are responsible for preparing
the Annual Report (including this Directors’
report) and the Group and Company financial
statements in accordance with applicable
law and regulations. As set out above, the
Directors are Philip Aiken, Leo Quinn, Philip
Harrison, Iain Ferguson, Barbara Moorhouse,
Stephen Billingham, Stuart Doughty,
Michael Lucki and Anne Drinkwater.
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’s 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.
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
Jonathan Lagan
Group General Counsel
and Company Secretary
12 March 2019
Registered Office:
5 Churchill Place, Canary Wharf
London E14 5HU
Registered in England and Wales,
registered number 395826
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 82 to 84 and the
internal verification and approval process
which has been followed, 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 and
performance, business model and strategy.
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Remuneration report
Chairman of the Remuneration
Committee’s introduction
We believe that the
remuneration policy
continues to deliver
a robust link between
reward and performance.”
Iain Ferguson
Chairman of the Remuneration Committee
Key decisions made in 2018
Following the publication of the 2018 UK
Corporate Governance Code (the 2018 Code),
the Committee reviewed the Company’s
current executive Directors’ remuneration
policy and its operation. It concluded that,
for PSP awards made in 2019 and thereafter,
a post-vesting holding period will apply
to awards granted to executive Directors,
requiring them to retain shares (net of tax)
vesting under the PSP for two years.
This will mean that there will be a minimum
period of five years between grant of PSP
awards and sale of the shares.
Additionally, the Committee’s Terms
of Reference are being reviewed to ensure
they are compliant with the 2018 Code.
Going forward the Committee will be
responsible for reviewing and approving the
remuneration for both the executive Directors
and members of the Executive Committee.
In respect of the proposal to require
companies to report the pay ratio between
the CEO and average of the UK workforce,
we are currently reviewing calculations
with a view to publication in our 2019 report.
The Committee additionally considered
other items, including post-employment
shareholding guidelines, Committee
discretions, executive Director pensions’
alignment with the wider workforce and
clawback and malus clauses. It concluded
that these will be reviewed fully during
2019 as part of the wider policy review.
Dear Shareholders,
As Chairman of the Remuneration
Committee I am pleased to present our
Directors’ Remuneration Report for the
year ended 31 December 2018.
Shareholders approved the Remuneration
Policy at the AGM in 2017 and, in keeping
with the more concise reporting adopted last
year, the policy is not presented in this report
but can be found at https://balfourbeatty.com/
remuneration_policy.
In line with regulatory requirements the
policy is next subject to a vote at the 2020
AGM. Ahead of this, the Committee will
be conducting a full policy review during
2019. Details of the approved remuneration
policy in action during the year, the
Committee’s considerations and the
intended arrangements for 2019 are
set out on the following pages.
Context
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. As referenced earlier in
this Annual Report, the Group continues
to make significant progress through the
Build to Last transformation programme.
This report highlights the remuneration
decisions made by the Committee over the
course of the year. The deliberations of the
Committee are made against the backdrop
of strong progress against the Build to Last
goals, the markets in which the Group
operates, the wider general economy
and developing corporate governance
and shareholder views.
As you will see, the Committee’s decisions
recognised the continuing scale of change
brought by Leo Quinn, Group Chief Executive,
and Philip Harrison, Chief Financial Officer,
and I hope that you will show your support
by voting in favour of this report at the
2019 AGM.
Remuneration alignment to strategy
The Committee considered in detail the
performance measures and targets for
the Annual Incentive Plan and Performance
Share Plan awards in 2018 to ensure
they remain appropriate and support the
Group’s ongoing and future strategy.
The Committee will continue to
review the pay structures and incentive
arrangements in 2019. This will be
informed by the Group’s performance,
the future focus of Build to Last and
the 2019 policy review.
Balfour Beatty Annual Report and Accounts 2018
Reward for 2018
In respect of 2018, the annual bonus
payments for the executive Directors
reflect the strong performance of the
Group – the maximum profit target was
met, the cash target was met in part and
the personal performance of both executive
Directors was strong. Leo Quinn and Philip
Harrison both received annual bonus
payments of 69.06% of the maximum
available respectively, of which 50% will
be deferred in shares for three years.
The TSR performance conditions relating to
the 2016 PSP awards measured performance
over the three years ended 31 December
2018 for all participants. TSR performance
conditions were not met, the maximum net
cash/(debt) target was met and EPS targets
were met in part. As a result, 64.17% of
these awards will vest for Leo Quinn and
Philip Harrison on 13 April 2019.
Salaries are normally reviewed on 1 July,
and it was agreed that the executive Directors
would not receive a salary increase for 2018,
with salaries remaining at the level agreed
upon their appointment in 2015. Their next
salary review date is 1 July 2019.
Remuneration policy for 2019
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 2019 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
– 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, with any shares
vesting subject to a further two-year
holding period.
Areas for focus in 2019
The current remuneration policy was
approved by shareholders at the 2017
AGM. In advance of the 2020 AGM policy
vote, the Committee will be conducting
a full review during 2019 to ensure that
the policy remains effective and aligned
to the Group’s strategic objectives. As part
of the review the Committee will consider
continuing developments in external
corporate governance and best practice.
Remuneration of the wider workforce
The Committee receives regular updates
on pay and benefits for the wider workforce
and takes these developments into account
when reviewing executive pay and benefits.
The Committee will be reviewing
calculations of the pay ratio between the
CEO and average of the workforce. The UK
gender pay gap reporting has also been
reviewed by the Committee during the year.
Shareholder engagement
Although no changes to the remuneration
policy have been proposed over the last year,
we did engage with major shareholders
to discuss their priorities over remuneration
matters. The Committee is made fully
aware of any areas of concern when raised.
As our policy will be put to a binding vote
at the 2020 AGM, the Committee will
be conducting a full policy review over the
course of 2019 and we will consult with
major shareholders to ensure that their
views are considered during the process.
Conclusion
We believe that the remuneration
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.
I will be retiring from the Board after
the 2019 AGM and Anne Drinkwater will
then be appointed chair of the Committee.
I wish her well in this role.
Iain Ferguson
Chair of the Remuneration Committee
89
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Remuneration outcomes at a glance
Outcomes of awards in year
AIP metrics and outcome
Profit before tax and
non-underlying items
Group
total cash flow*
Strategic business and
personal objectives
Targets
Targets
Actual
Threshold: £126.0m
Target: £157.5m
Maximum: £173.3m
Threshold: £0m
Target: £13.6m
Maximum: £30.0m
Actual
Actual
£181m
100%
(of maximum)
£2m
11.6%
(of maximum)
100%
Group Chief Executive
(of maximum)
100%
Chief Financial Officer
(of maximum)
* Group total cash flow is the movement between opening and closing total net cash/(debt).
PSP metrics and outcome
Total shareholder return
Total net cash/(debt)
Earnings per share
Targets
Targets
Targets
Threshold: Median
Maximum: Upper quartile
Threshold: £(75)m
Target: £0m
Maximum: £50m
Threshold: 20p
Maximum: 27p
Actual
Actual
Actual
Below median
0%
£337m
100%
(of maximum)
26.3p
92.5%
(of maximum)
AIP out-turn
% of maximum
69.06
69.06
Group
Chief
Executive
Chief
Financial
Officer
% of maximum
PSP out-turn
% of maximum
64.17
64.17
Group
Chief
Executive
Chief
Financial
Officer
% of maximum
Executive Director remuneration scenarios
(£000)
Executive Directors’ shareholding guidelines
(% of base salary held)
Group Chief
Executive
Chief Financial
Officer
Group Chief
Executive
Chief Financial
Officer
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
£2,943
39%
28%
£2,381
52%
42%
34%
25%
33%
41%
26%21%
£1,334
32%
31%
37%
31%
£1,145
31%
26%
43%
PSP
AIP
Fixed pay
26%
Actual
2018
On-target
Actual
2018
On-target
Balfour Beatty Annual Report and Accounts 2018
550%
200%
150% 164%
Company shareholding
guidelines
Actual holding
(on IA basis)
Calculations shown include
shares beneficially owned
at 31 December 2018 plus
unvested shares, which
are not subject to a further
performance condition,
on a net of tax basis.
Annual report on remuneration
91
This part of the Remuneration report sets out how the remuneration policy will be applied over the year ending 31 December 2019 and how
it was implemented over the year ended 31 December 2018. 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 91 to 103 (excluding the performance graph on page 101),
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 2019
Remuneration received by Directors for the year ended 31 December 2018
AIP awards for the year ended 31 December 2018
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
Executive Directors’ shareholding guidelines
Performance graph
Group Chief Executive’s remuneration table
Percentage change in Group Chief Executive’s remuneration compared with all UK employees
Pay ratio of Group Chief Executive to average employee
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 AGM
91
93
94
97
98
99
99
100
100
100
101
101
102
102
102
102
102
103
103
Implementation of the remuneration policy for the year ending 31 December 2019
Base salaries
The Committee reviewed the base salary of the executive Directors at the normal review date of 1 July 2018. It took into consideration salary
levels, time in role and the salary increase provided to the Group’s UK general workforce, averaging 2.77%. It concluded that current salary
levels remained appropriate. Neither executive Director has received a base salary increase since being appointed in 2015.
The next base salary review date is 1 July 2019.
Leo Quinn
Philip Harrison
Date of
appointment
Jan 2015
Jun 2015
Salary on
appointment
£
800,000
400,000
1 July 2017
£
800,000
400,000
1 July 2018
£
800,000
400,000
%
increase
0.0%
0.0%
Pension
In line with stated policy, executive Directors receive a pension cash allowance equivalent to 20% of base salary.
Performance targets for the Annual Incentive Plan (AIP) in 2019
For 2019, 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 2019 as these include items which the Committee
considers commercially sensitive, retrospective disclosure of the targets and performance against them will be presented in the Remuneration
report for 2019.
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Annual report on remuneration continued
Performance targets for Performance Share Plan (PSP) awards granted in 2019
For 2019, and consistent with 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. The PSP awards to be granted in 2019 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 2019, 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.
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 2019. The 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 2019.
Executive Director remuneration scenarios
A significant proportion of remuneration is linked to performance, particularly at maximum performance levels. The charts below show
how much the Group Chief Executive and Chief Financial Officer could earn in future periods based on different performance scenarios
in respect of awards to be made in the 2019 financial year under Balfour Beatty’s remuneration policy.
Leo Quinn – Group Chief Executive
(£000)
Philip Harrison – Chief Financial Officer
(£000)
£5,000
£4,500
£4,000
£3,500
£3,000
£2,500
£2,000
£1,500
£1,000
£500
£0
£4,581
52.5%
£3,781
42%
32%
26%
£2,381
34%
25%
£981
100%
41%
26%
21.5%
Min
Target
Max Max + 50%
share price
growth
The following assumptions have been made:
£5,000
£4,500
£4,000
£3,500
£3,000
£2,500
£2,000
£1,500
£1,000
500
0
£1,145
31%
26%
43%
£495
100%
Min
Target
£1,795
39%
33%
28%
£2,145
49%
28%
23%
Max Max + 50%
share price
growth
PSP
AIP
Fixed pay
– Minimum (performance below threshold) – Fixed pay only with no vesting under any of Balfour Beatty’s incentive plans
– Target – Fixed pay plus a bonus (AIP) at the mid-point of the range (giving 50% of the maximum opportunity) and vesting of 50%
of the face value of the award at grant under the PSP
– Maximum (performance meets or exceeds maximum) – Fixed pay plus 100% of the bonus (AIP) opportunity and 100% of the
face value of the award at grant under the PSP
– Maximum + 50% share price growth (performance meets or exceeds maximum and potential 50% increase in share price) – Fixed pay
plus maximum bonus (AIP) and maximum vesting under the PSP at a 50% higher share price than when the PSP award was granted.
Fixed pay comprises:
– Salaries – base salary effective as at 1 July 2018
– Benefits – amount received in the 2018 financial year
– Pension – cash allowance in lieu of pension is 20% of base salary.
Balfour Beatty Annual Report and Accounts 2018
93
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 both the non-executive Chairman and Directors on 1 July 2018,
fees were increased as set out below. The Chairman’s fee had not previously been increased since he joined the Board as Chairman on
26 March 2015.
Chairman
Base fee
Senior Independent Director fee
Committee chair fee
1 July 2017
£
270,000
60,000
10,000
12,500
1 July 2018
£
277,000
61,500
10,000
12,500
%
increase
2.6%
2.5%
0%
0%
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.
Remuneration received by Directors for the year ended 31 December 2018
The table below sets out the Directors’ remuneration for the year ended 31 December 2018 (or for performance periods ended in that year
in respect of long-term incentives) together with comparative figures for the year ended 31 December 2017.
Executive Directors
Philip Harrison
Leo Quinn
Non-executive Directors
Philip Aiken
Stephen Billingham
Stuart Doughty
Anne Drinkwater8
Iain Ferguson
Michael Lucki
Barbara Moorhouse
Base salary
and fees1,2
Taxable
benefits3,4
Year
£
£
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2018
2017
2018
2017
2018
2017
400,000
400,000
800,000
800,000
273,500
270,000
73,250
69,250
73,250
64,250
5,125
73,250
69,250
60,750
30,000
60,750
34,667
14,503
14,503
21,006
21,006
–
34
–
–
–
–
–
–
–
7,500
5,000
–
–
Pension
cash
allowance
£
80,000
80,000
160,000
160,000
Annual
incentive
cash5
£
Annual
incentive
deferred
shares5
£
Long-term
incentives6,9
£
Other7
£
Total9
£
207,180
288,000
414,360
582,000
–
424,926
207,180
288,000
74,461
716,454
414,360 1,133,141 1,398,613
582,000 1,979,098 1,171,881
1,333,789
1,861,418
4,341,480
5,295,985
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
273,500
270,034
73,250
69,250
73,250
64,250
5,125
73,250
69,250
68,250
35,000
60,750
34,667
1
2
3
4
5
6
7
8
9
Base salary and fees were those paid in respect of the period of the year during which the individuals were Directors.
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 2018 was £1,800.
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.
Philip Aiken and Michael Lucki received taxable travel expenses and/or travel allowances which are shown in the taxable benefits column.
AIP 2018: further details of these awards are set out on pages 94 to 96. For 2017, details of the AIP awards were set out in the 2017 Remuneration Report.
For 2018, this relates to the 2016 PSP award for which the performance period ended in 2018, with the valuation of vesting shares calculated on a 3-month average share price
to 31 December 2018 of 259.8p. Further details of the 2016 PSP awards are set out on page 97. For 2017, this relates to the 2015 PSP award for which the performance period
ended in 2017, details of which were set out in the 2017 Remuneration Report. For 2017, the valuation of vesting shares for the 2015 PSP has been adjusted from the valuation
included in the 2017 Remuneration Report to reflect the actual valuation on the 26 June 2018 vesting date, based on a share price of 283.0p. 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.
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 2018, Leo Quinn’s award is the second tranche for which the performance period ended 2 January 2018 with the valuation of the 492,589 shares
vesting calculated on the share price of 283.931p at the vesting date on 14 March 2018. 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 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. Further details of these awards are set out on page 99.
Anne Drinkwater joined the Board effective 1 December 2018.
Total figures and long-term incentives figures for 2017 have been adjusted from the figures included in the 2017 Remuneration Report to reflect the actual valuation on the 26 June
2018 vesting date of shares vesting under the PSP 2015.
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Annual report on remuneration continued
AIP awards for the year ended 31 December 2018
For 2018, 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. For the profit before tax element, 20% of the award would vest for threshold performance, increasing
to 50% vesting of that element at target performance and then to 100% of that element at maximum performance or above. For the Group
total cash flow element, 5% of that element would vest for threshold performance, increasing to 50% vesting of that element at target
performance and then to 100% of that element at maximum performance or above.
AIP metrics and outcome
AIP out-turn
%
Profit before tax and
non-underlying items
Group
total cash flow*
Strategic business and
personal objectives
Targets
Targets
Actual
Threshold: £126.0m
Target: £157.5m
Maximum: £173.3m
Threshold: £0m
Target: £13.6m
Maximum: £30.0m
Actual
Actual
£181m
100%
(of maximum)
£2m
11.6%
(of maximum)
100%
Group Chief Executive
(of maximum)
100%
Chief Financial Officer
(of maximum)
* Group total cash flow is the movement between opening and closing total net cash/(debt).
100%
11.6%
% of maximum
Group
Chief
Executive
Lean Met
in full
Expert Met
in full
Trusted Met
in full
Met
in full
Safe
Chief
Financial
Officer
Met
in full
Met
in full
Met
in full
Met
in full
69.06
69.06
Group
Chief
Executive
Chief
Financial
Officer
% of maximum
Balfour Beatty Annual Report and Accounts 2018
Performance against the 2018 AIP strategic business and personal objectives as it relates to the executive Directors was:
Summary of key strategic objectives
Examples of achievement
Lean:
Deliver Phase 2 of Build to Last (industry-standard
margins by end 2018) including:
– continued overhead cost out across the Group
(target £19m)
Achieved in full, including:
– actual overhead reduction of £37m achieved
– Cash is our Compass – deliver higher average
– average net cash of £194m achieved in 2018 vs. £42m
net cash vs. 2017
in 2017
Expert:
Continue to upgrade senior leadership team including:
– strengthen US leadership team
Achieved in full, including:
– new CEOs for US Buildings and US Civils
appointed and performing well
– continue to improve employee engagement
– employee engagement index increased from 60% in
as measured by pulse surveys
November 2017 to 65% in December 2018
Trusted:
Position organisation with robust capabilities
to deliver profitable growth, particularly from
future ‘mega projects’ by:
– driving cash to further strengthen balance
sheet by paying down convertible bonds whilst
positioning balance sheet to redeem convertible
preference shares in 2020
– ensuring disciplines and processes are thoroughly
embedded and applied as management tools
to reduce project risk and safeguard reputation
– continue to roll out J D Edwards(US) and Oracle
R12(UK), and develop data analytics to support
transparency of project performance across
both UK and US organisations
Safe:
Continue to progress improvements made
in safety performance in UK and US LTIR.
10% improvement required
Total
Achieved in full, including:
– convertible bonds fully repaid in December 2018
– governance around work winning and project
controls has continued to improve and is
embedded into normal management process
– systems strategy being implemented to plan
in both the UK and US
Achieved in full, including:
– LTIR improved from 0.17 in 2017 to 0.15 in 2018.
Improvement greater than 10%
95
Group Chief Executive
Weight % Out-turn %
16
16
56
56
20
20
8
8
100
100
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96
Annual report on remuneration continued
Summary of key strategic objectives
Examples of achievement
Lean:
Lead financial transformation to deliver 2018 cost
budget together with a strategy to achieve 2019 target:
– upgrade management reporting ‘project on a page’
to enhance efficiency and effectiveness
– implement the Support Services Oracle R12
implementation and establish project plan for
remaining businesses in 2019
– target further overhead cost reduction of
minimum £19m
Achieved in full, including:
– significantly enhanced reporting and control framework
– successful migration to plan and budget in
2018; plans in place for all future migrations
– actual overhead reduction of £37m achieved
– deliver higher average net cash in 2018 vs. 2017
– average net cash of £194m achieved in 2018
Expert:
Build high-calibre finance function in UK and US,
with succession options, including:
– appoint new finance leadership in US Buildings
– develop central finance hub supporting US business
Trusted:
Deliver agreed capital structure plan for Group, including:
– pay down convertible bonds and private
placement notes when due
– successfully realise cash budget targets
for Infrastructure Investments
vs. £42m in 2017
Achieved in full, including:
– successful appointment of new CFO
for US Buildings and Investments
– implementation successful and to plan
Achieved in full, including:
– convertible bonds and private placement notes
fully repaid on time
– achieved £184m
– negotiate reduction in US surety programme
– achieved US$84m reduction
letters of credit
Safe:
Continue to support and role model improvement
in safety culture and performance
Total
Achieved in full, including:
– demonstrated strong leadership including safety tours.
LTIR improved from 0.17 in 2017 to 0.15 in 2018
Chief Financial Officer
Weight % Out-turn %
28
28
24
24
40
40
8
8
100
100
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 the Group’s goals.
Balfour Beatty Annual Report and Accounts 2018
97
Vesting of PSP awards for the year under review
The PSP awards granted on 13 April 2016 were based on a performance period for the three years ended 31 December 2018.
The performance conditions applying to one-third of each award were comparative total shareholder return measured versus the companies
ranked 51-150 by market capitalisation in the FTSE All Share Index (excluding investment trusts), cash performance measured by reference to
total net cash/(debt) and earnings per share. 25% of each of the total shareholder return and earnings per share parts of the award would vest
for threshold performance increasing to 100% of each part of the award vesting for maximum performance or above. For the net cash/(debt)
part, 25% of that part would vest for threshold performance increasing to 50% vesting of that part at target performance and then to 100%
of that part at maximum performance or above.
Details of the PSP awards vesting for the year under review are therefore as follows:
PSP metrics and outcome
PSP out-turn
% of maximum
Total shareholder return
Total net cash/(debt)
Earnings per share
Targets
Targets
Targets
Threshold: Median
Maximum:
Upper quartile
Threshold: £(75)m
Target: £0m
Maximum: £50m
Threshold: 20p
Maximum: 27p
Actual
Actual
Actual
Below median
0%
£337m
100%
(of maximum)
26.3p
92.5%
(of maximum)
64.17
64.17
Group
Chief
Executive
Chief
Financial
Officer
% of maximum
Metric
Total shareholder return
Cash
Earnings per share
Performance condition
TSR against the 85 remaining
companies ranked 51–150 in the
FTSE All Share Index (excluding
investment trusts)
Measure
TSR ranking
Threshold
target
43 or above
Maximum
target
21.75 or
above
Actual
49.2
Vesting %
0%
Total net
cash/(debt)
Underlying basic
earnings per share
from continuing
operations
£(75)m
£50m
£337m
100%
20p
27p
26.3p
92.5%
Total vesting
64.17%
Name of Director
Philip Harrison
Leo Quinn
Type of award
2016 conditional
2016 conditional
Vesting date
13 April 2019
13 April 2019
Number
of shares
at grant
254,885
679,694
Number
of shares
to vest
163,559
436,159
Number
of shares
to lapse
91,326
243,535
Value of
vesting
shares1
£424,926
£1,133,141
1
Valuation of vesting shares calculated on a 3-month average share price to 31 December 2018 of 259.8p.
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Annual report on remuneration continued
Outstanding share awards
Name of Director
Philip Harrison
Leo Quinn
Share award
PSP1
PSP2,5,6
PSP3,5,6
PSP4,5,6,7
DBP8,9,11,13
DBP8,9,11,13
DBP8,9,11,12,13
Share buyout14
PSP1
PSP2,5,6
PSP3,5,6
PSP4,5,6,7
DBP8,10,11,13
DBP8,9,11,13
DBP,8,9,11,13
DBP8,9,11,12,13
Share buyout14
Date granted
26 June 2015
13 April 2016
7 June 2017
27 March 2018
31 March 2016
31 March 2017
3 April 2018
11 June 2015
26 June 2015
13 April 2016
7 June 2017
27 March 2018
26 June 2015
31 March 2016
31 March 2017
3 April 2018
2 January 2015
At
1 January
2018
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
Maximum number of shares subject to award
At
31 December
2018
–
254,885
253,347
259,163
26,807
43,495
108,320
–
–
679,694
579,080
592,373
–
91,918
87,771
218,896
–
Lapsed
during the
year
42,693
–
–
–
–
–
–
36,591
89,626
–
–
–
–
–
–
–
715,922
Vested
during the
year
253,164
–
–
–
–
–
–
25,071
699,328
–
–
–
197,662
–
–
–
492,589
Awarded
during the
year
–
–
–
259,163
379
615
108,320
–
–
–
–
592,373
1,635
1,302
1,244
218,896
–
Exercisable and/or
vesting from
26 June 2018
13 April 2019
7 June 2020
27 March 2021
31 March 2019
31 March 2020
3 April 2021
31 December 2017
26 June 2018
13 April 2019
7 June 2020
27 March 2021
26 June 2018
31 March 2019
31 March 2020
3 April 2021
2 January 2018
1
2015 PSP award: This award vested in part on 26 June 2018. Details of the Company’s performance against the performance conditions were set out in the 2017 Remuneration
Report. Philip Harrison and Leo Quinn also received 5,741 and 15,864 shares respectively in lieu of the dividends which would have been payable on the shares which vested.
The closing middle market price of ordinary shares on the vesting date was 283.0p.
2 2016 PSP award: Further details of this award are set out on page 97.
3
2017 PSP award: This award is subject to three performance targets over a three-year performance period commencing 1 January 2017. TSR part (33.3% weighting), measured
against a comparator group of companies ranked 51–200 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. No portion of the Cash Part (33.3%) will vest unless the 2019 year end Operating Cash
Flow (OCF) is greater than £132 million. 25% to 50% will vest for OCF between £132 million and £164 million, rising to full vesting for OCF of £200 million or more. EPS part
(33.3%), no vesting unless 2019 EPS is 19p, 25% vesting of this part at 19p, rising to full vesting at 29p or more.
2018 PSP award: Details are set out on page 99.
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 235.4p for the 2016 award, 276.3p for the 2017 award and 270.167p for the 2018 award. The closing middle market price of ordinary shares on the date of the awards
was 238.3p, 271.0p and 273.0p respectively.
All PSP 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.
On 27 March 2018, for all participants in the PSP, a maximum of 3,393,943 conditional shares were awarded which are exercisable on 27 March 2021.
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.
The initial DBP awards made in March 2016, March 2017 and April 2018 will vest on 31 March 2019, 31 March 2020 and 3 April 2021 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).
4
5
6
7
8
9
10 The initial DBP awards made in March 2015 and June 2015 vested on 31 March 2018 and 26 June 2018 respectively. The closing middle market price of ordinary shares in the
Company on the vesting dates was 267.6p and 283.0p respectively.
11 The shares subject to the DBP awards made on 31 March 2015, 26 June 2015, 31 March 2016, 31 March 2017 and 3 April 2018 were purchased at average prices of 241.0p, 245.0p,
252.5p, 266.4p and 269.7p respectively.
12 On 3 April 2018, for all participants in the DBP, a maximum of 734,073 conditional shares were awarded which will normally be released on 3 April 2021.
13 On 19 April 2018/6 July 2018 and 30 November 2018, a further 16,961 conditional shares and 10,854 conditional shares were granted in lieu of entitlements to the final 2017
dividend and interim 2018 dividend respectively for all participants in the DBP. These shares were allocated at average prices of 287.6p/287.6p and 267.4p 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 Philip Harrison and Leo Quinn
for incentive awards which were forfeited on leaving their previous employers. Further details of these awards are set out on page 99. 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 2018 was 249.3p. During the year, the highest and lowest closing market prices were 311.1p
and 230.6p respectively.
Balfour Beatty Annual Report and Accounts 2018
99
PSP awards granted during the year
On 27 March 2018, the following PSP awards were granted to executive Directors:
Executive
Philip Harrison Conditional
Type of award
Leo Quinn
Conditional
Basis of award
granted
175% of salary
of £400,000
200% of salary
of £800,000
Share price
applied at
date of grant
270.1p
Number of
shares over
which award
was granted
259,163
% of face value
that would vest
at threshold
performance
Vesting determined
by performance
over three
years to
25% 31 December 2020
Face value
of award
£700,000
Vesting date
27 March 2021
270.1p
592,373 £1,600,000
25% 31 December 2020
27 March 2021
Awards will vest to executives after three years, subject to the achievement of three independently measured performance conditions as set
out below:
Metric
1/3rd relative TSR
1/3rd cash
1/3rd EPS
Performance condition
Relative TSR against a comparator group
of companies ranked 51-200 by market
capitalisation in the FTSE All Share Index
(excluding investment trusts), straight
line vesting between points
Group’s Operating Cash Flow from continuing
operations, straight line vesting between points
Group’s EPS, straight line vesting
between points
Threshold
Median
(25% vests)
£141m
(25% vests)
22p
(25% vests)
Target
–
Stretch
Upper quartile
(100% vests)
£176m
(50% vests)
–
£211m
(100% vests)
31p
(100% vests)
Executive Directors’ recruitment terms
As previously fully disclosed in our remuneration reports dating back to 2014, as part of their recruitment arrangements both executive
Directors received awards compensating them for incentive awards which were forfeited upon leaving their previous employers. Awards were
granted in 2015 and vested in two tranches, subject to meeting stretching share price targets. The final tranches have now vested and the
Committee believes the final value delivered to both executives reflect the strong performance and strategic change they have brought to the
Company since their recruitment. As this is the final year which we expect to be reporting these values, we set out below details of the awards
and final vesting below:
Philip Harrison
Leo Quinn
Date of grant
11 June 20151,3
11 June 20152,3
Total
2 January 20151,3
2 January 20152,3
Total
Share price
on date
of award
253.1p
253.1p
212.4p
212.4p
Total
number of
shares
30,831
61,662
92,493
604,256
1,208,511
1,812,767
Number
of shares
vesting
21,529
25,071
46,600
423,704
492,589
916,293
Number
of shares
lapsing
9,302
36,591
45,893
180,552
715,922
896,474
Vesting from
31 December 2016
31 December 2017
Share price
on date of
first vesting
268.2p
297p
2 January 2017
2 January 2018
276.58p
283.931p
Value
delivered to
executive
Director
£57,741
£74,461
£132,202
£1,171,881
£1,398,613
£2,570,494
1
2
3
Vesting was subject to share price targets at the end of the vesting period 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.
Vesting was subject to share price targets at the end of the vesting period 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 250p increasing pro-rata for full vesting of this part of the award for an end average share price of 380p with no vesting for this part
of the award for an average share price of less than 250p.
Leo Quinn’s conditional award of 1,208,511 shares was the second tranche for which the performance period ended 2 January 2018 with the valuation of the 492,589 shares
vesting calculated on the share price of 283.931p at the vesting date on 14 March 2018. Leo Quinn’s conditional award of 604,256 shares was 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.
Philip Harrison’s conditional award of 61,662 shares was 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. Philip Harrison’s conditional award of 30,831 shares was the first tranche for which the performance
period ended 31 December 2016 with the valuation of the 21,529 shares vesting calculated on the closing share price of 268.2p at 31 December 2016.
balfourbeatty.com/AR2018
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Annual report on remuneration continued
Payments to past Directors
There were no payments to past executive Directors during 2018.
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:
Directors
Philip Harrison
Leo Quinn
Philip Aiken
Stephen Billingham6
Stuart Doughty
Anne Drinkwater
Iain Ferguson
Michael Lucki
Barbara Moorhouse
Beneficially
owned at
31 December 2018
as a % of
base salary at
31 December
20185
105%
485%
Outstanding
DBP awards
178,622
398,585
Outstanding
PSP awards
767,395
1,851,147
Beneficially
owned at
1 January
20181,2
Beneficially
owned at
31 December
20182,3,4
17,744
798,663
15,000
23,757
4,550
–
55,000
–
4,000
168,049
1,554,821
15,000
23,808
4,550
–
55,000
–
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 12 March 2019, 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 109 shares.
5 The closing market price of the Company’s ordinary shares as at 31 December 2018 (249.3p) was used to calculate the value of shares beneficially owned.
6 Stephen Billingham was also interested in 36,070 convertible redeemable preference shares of 1p each in Balfour Beatty plc at 1 January 2018 and 31 December 2018.
Executive Directors’ shareholding guidelines
The Group Chief Executive and Chief Financial Officer are required
under the Company’s shareholding guidelines 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 their outstanding DBP and PSP awards until the
required shareholding is met. Their beneficial shareholdings
at 31 December 2018 as a % of base salary are shown in the
table above.
In line with the Investors Association (IA)’s guidelines, the
calculations shown in the chart include shares beneficially owned
at 31 December 2018 plus unvested shares, which are not subject
to a further performance condition (outstanding DBP awards),
on a net of tax basis. Both executive Directors’ share interests met
the Company’s shareholding guidelines at 31 December 2018.
Group Chief
Executive
Chief Financial
Officer
550%
200%
150% 164%
% of base salary held
Company shareholding
guidelines
Actual holding
(on IA basis)
Balfour Beatty Annual Report and Accounts 2018
101
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-day average values.
Total Shareholder Return (TSR)
450
400
350
300
250
200
150
100
50
)
d
e
s
a
b
e
r
(
)
£
(
e
u
a
V
l
0
31/12/08
31/12/09
31/12/10
31/12/11
31/12/12
31/12/13
31/12/14
31/12/15
31/12/16
31/12/17
31/12/18
■ Balfour Beatty plc
■ FTSE 250 (excluding investment trusts) Index
Source: FactSet
Group Chief Executive’s remuneration table
The total remuneration figures for the Group Chief Executive during each of the last 10 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.
2009
2010
2011
2012
2013
2014
2015
2016
Year ended 31 December
2018
2017
Total
remuneration1,3,4 £1,617,233 £1,451,016 £1,514,007 £1,189,287
AIP (%)2
40.2%
0%
PSP (%)
60.4%
50.0%
69.6%
18.4%
65.3%
0%
£961,350
21.0%
0%
£797,568 £1,442,070 £1,445,250 £4,124,104
97.0%
88.6%
47.0%
0%
47.5%
0%
0%
0%
£2,942,867
69.06%
64.17%
1
2
3
4
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 from 2015 onwards relate to Leo Quinn.
Andrew McNaughton did not qualify for any 2014 AIP.
Total remuneration for 2017 has been adjusted from the total figure included in the 2017 Remuneration Report to reflect the actual valuation on the 26 June 2018 vesting date
of shares vesting under the PSP 2015.
The figures for 2017 and 2018 exclude the vesting of awards made under the recruitment terms for the Group Chief Executive. Details of the recruitment terms are set out
on page 99.
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102
Annual report on remuneration continued
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 2017 and 31 December 2018, 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)
2017
800
672
181
47
1,164
12
2,145
731
2018
% change
800
657
181
37
829
12
1,810
706
0%
(2)%
0%
(21)%
(29)%
0%
(16)%
(3)%
Pay ratio of Group Chief Executive to average employee
The Committee is mindful about the relationship between the Group Chief Executive’s remuneration and that of the wider employee
population. We are currently reviewing the calculations of the ratio of pay between the Group Chief Executive and the average employee
which we intend to publish in the next Annual Report.
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
2017
1,193
20
166
2018
1,113
27
181
% change
(7)%
35%
9%
1
2
Staff costs include base salary, benefits and bonuses for all Group employees in continuing and discontinued operations (excluding joint ventures and associates).
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 2018. 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 93.
The pension contribution level for executive Directors contrasts to the majority of senior managers who receive around 13%-15% pension
contribution/cash in lieu and the wider UK workforce who typically receive around 3% to 5% contributions. We are mindful of the requirement
under the UK Corporate Governance Code relating to executive Director pension contribution levels and will address this as part of our Policy
review in 2019.
External appointments of executive Directors
No executive Director held external appointments in 2018.
Balfour Beatty Annual Report and Accounts 2018
103
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
– Michael Lucki
– Barbara Moorhouse.
Anne Drinkwater joined the Committee on 1 January 2019.
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
– Aon plc.
Wholly independent advice on executive remuneration and share schemes is received from the Executive Compensation practice of Aon plc.
Aon is a member of the Remuneration Consultants Group and is a signatory to its Code of Conduct. Aon provided a range of advice to the
Committee during the year, including:
– analysis of market practice and corporate governance update
– 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.
During 2018, fees charged by Aon for advice provided to the Committee for 2018 amounted to £47,210 (excluding VAT) (2017: £38,040).
In addition, the only other services provided to the Group by Aon plc or its subsidiaries are for professional services supporting the
administration of the UK healthcare trust.
Statement of shareholder voting at the AGM
At the AGM on 24 May 2018, the resolution to approve the Remuneration report received the following votes from shareholders:
For
Against
Total votes cast
Abstentions
Total number of votes
399,105,828
62,970,570
462,076,398
73,333,706
% of votes cast
86.37%
13.63%
100%
The resolution to approve the Remuneration Policy was approved at the AGM on 18 May 2017 and received the following votes
from shareholders:
For
Against
Total votes cast
Abstentions
By order of the Board
Iain Ferguson
Chair of the Remuneration Committee
12 March 2019
Total number of votes
407,216,825
120,392,331
527,609,156
81,587
% of votes cast
77.2%
22.8%
100%
balfourbeatty.com/AR2018
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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 2018 which comprise
the Group Income Statement, Group Statement of Comprehensive Income, Group Statement of Changes in Equity, Company Statement
of Changes in Equity, Group Statement of Cash Flows, Group and Company Balance Sheets, 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 2018
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.
Overview
Materiality: Group financial
statements as a whole
£10.0m (2017: £10.0m)
5.8% (2017: 6.4%) of normalised Group profit before tax from continuing operations
Coverage
Group profit before tax:
– Full scope audits 87% (2017: 95%)
– Specified audit procedures 13% (2017: 5%)
Risk of material misstatement
Recurring risks
Contract accounting
vs 2017
New risks
The impact of uncertainties due to the UK exiting the European Union on our audit
Recoverability of Group goodwill and of the parent Company’s investment in subsidiaries
Going concern assessment
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 three financial
years ended 31 December 2018. 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.
Balfour Beatty Annual Report and Accounts 2018
105
2 Key audit matters: including 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 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
Our response
The impact of uncertainties due to the UK exiting the European Union on our audit
Risk vs 2017:
Refer to pages 58-66 (principal risks) and page 67 (viability statement)
Unprecedented levels of uncertainty
All audits assess and challenge the reasonableness of estimates,
in particular as described in recoverability of goodwill below, and
related disclosures and the appropriateness of the going concern
basis of preparation of the financial statements (see below). All of
these depend on assessments of the future economic environment
and the Group’s future prospects and performance.
In addition, we are required to consider the other information
presented in the Annual Report including the principal risks disclosure
and the viability statement and to consider the Directors’ statement
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.
Brexit is one of the most significant economic events for the UK
and at the date of this report its effects are subject to unprecedented
levels of uncertainty of outcomes, with the full range of possible
effects unknown.
We developed a standardised firm-wide approach to the consideration
of the uncertainties arising from Brexit in planning and performing our
audits. Our procedures included:
– Our Brexit knowledge – we considered the Directors’ assessment
of Brexit-related sources of risk for the Group’s business and financial
resources compared with our own understanding of the risks. We
considered the directors’ plans to take action to mitigate the risks.
– Sensitivity analysis – when addressing going concern and
Recoverability of Group goodwill and of the parent Company’s
investment in subsidiaries and other areas that depend on forecasts,
we compared the Directors’ analysis to our assessment of the
full range of reasonably possible scenarios resulting from Brexit
uncertainty and, where forecast cash flows are required to be
discounted, considered adjustments to discount rates for the
level of remaining uncertainty; and
– Assessing transparency – as well as assessing individual
disclosures as part of our procedures on going concern and
recoverability of Group goodwill and of the parent Company’s
investment in subsidiaries we considered all of the Brexit related
disclosures together, including those in the strategic report, comparing
the overall picture against our understanding of the risks.
Our findings
As reported under going concern and recoverability of Group goodwill
and of the parent Company’s investment in subsidiaries, we found the
resulting estimates and related disclosures of recoverability of Group
goodwill and of the parent Company’s investment in subsidiaries and
disclosures in relation to going concern to be acceptable. However, no
audit should be expected to predict the unknowable factors or all
possible future implications for a company and this is particularly the
case in relation to Brexit.
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Independent auditor’s report to the members of Balfour Beatty plc continued
The risk
Our response
Contract accounting £6,290 million (2017: £6,606 million)
Risk vs 2017:
Refer to pages 82-84 (Audit and Risk Committee report), Note 2.4 (Principal accounting policies –
Revenue recognition), Note 2.27(a) (Judgements and key sources of estimation uncertainty),
Note 4 (Revenue) and Note 25 (Provisions)
Subjective estimate
For the majority of its contracts, the Group recognises revenue
over time and measures the progress based on the input method
by considering 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 therefore relies 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,
which fall under either the variable consideration or contract
modification requirements of IFRS 15. These are recognised on a
contract-by-contract basis when evidence supports that it is highly
probable that a significant reversal in the amount of revenue
recognised will not occur. In certain circumstances recoveries from
insurers are also assumed when these recoveries are deemed to
be virtually certain.
The effect of these matters is that, as part of our risk assessment,
we determined that contract revenue and other related contract
balances have a high degree of estimation uncertainty, with a
potential range of reasonable outcomes greater than our materiality
for the financial statements as a whole, and possibly many times
that amount. The financial statements (Note 2.27(a)) disclose the
nature and extent of the estimates and judgements made by
the Group.
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: visiting sites related to certain higher risk or larger value
contracts, with the involvement of our industry specialists for some
of these visits, inspecting the physical progress onsite 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 post
year end 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;
– Legal correspondence scrutiny: analysing correspondence with
lawyers, and other legal opinions including arbitration results or other
legal advice obtained by the group, around variations and claims;
– Insurer correspondence scrutiny: analysing correspondence
with insurers around recognised insurance claims to challenge
management’s position taken on the contract, and inquiring
directly with external legal counsel on the prospects of recovery;
– 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; and
– Assessing transparency: considering the adequacy of the
Group’s disclosures including those included in Note 2.27(a)
around the nature of estimates and judgements.
Our findings:
We considered the amount of revenue and associated profits
recognised to be acceptable.
Balfour Beatty Annual Report and Accounts 2018
107
The risk
Our response
Recoverability of Group goodwill and of the parent Company’s investment in subsidiaries
Risk vs 2017:
Group: £851 million (2017: £825 million); parent Company: Amount within total investment in subsidiaries
balance of £1,706 million (2017: £1,700 million)
Refer to pages 82-84 (Audit and Risk Committee report), Note 2.12 (Principal accounting policies –
Goodwill), Note 2.27(d) (Judgements and key sources of estimation uncertainty) and Note 14 (Goodwill)
Forecast-based valuation
Our procedures included:
There is a risk that the goodwill allocated to cash generating units
(CGUs) and the 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 using a value-in-use model which is based on the net
present value of the forecast earnings of the CGU. This is calculated
using certain assumptions around discount rates, growth rates and
cash flow forecasts.
The effect of these matters is that, as part of our risk assessment,
we determined that the value in use assessment has a high degree of
estimation uncertainty, with a potential range of reasonable outcomes
greater than our materiality for the financial statements as a whole.
The financial statements (Note 14 and 2.27(d)) disclose the
nature and extent of the estimates and judgements made by the
Group.
– 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,
including the consideration of the possible impacts of Brexit;
– 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 expertise: challenging the assumptions used by
the Group in the calculation of the discount rates, including
comparisons with external data sources; and
– 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 reflected the risks inherent in the valuation of goodwill.
We also considered the adequacy of the parent Company’s
disclosures in respect of the investments 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.
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Independent auditor’s report to the members of Balfour Beatty plc continued
The risk
Going concern assessment
Our response
Refer to pages 82-84 (Audit and Risk Committee report) and Note 1 (Basis of accounting)
Disclosure quality
Our procedures included:
Risk vs 2017:
The financial statements explain how the Board has formed a
judgement that it is appropriate to adopt the going concern basis
of preparation for the Group and Company.
That judgement is based on an evaluation of the inherent risks to
the Group’s and Company’s business model and how those risks
might affect the Group’s and Company’s financial resources or
ability to continue operations over a period of at least a year from
the date of approval of the financial statements.
The risks most likely to adversely affect the Group’s and
Company’s available financial resources over this period were :
– The impact of Brexit on the Group’s supply chain, including
availability of labour, reduction in payment terms and possible
cost inflation; and
– Reduction of demand in the Buildings market reducing future
revenue and increasing competition which may put pressure
on margins.
There are also less predictable but realistic second order impacts,
such as the erosion of customer or supplier confidence, which
could result in a rapid reduction of available financial resources.
The risk for our audit was whether or not those risks were such
that they amounted to a material uncertainty that may have cast
significant doubt about the ability to continue as a going concern.
Had they been such, then that fact would have been required to
have been disclosed.
– Assessment of cash flow model: assessing the Group’s cash flow
model to identify key inputs for further enquiry. The key inputs are
consistent with those identified in the goodwill impairment testing
identified above. Assessing the resultant cash flow projection as
an indication of whether the Group would have sufficient resources
to continue to operate and meet obligations as they fall due;
– Historical comparisons: evaluating historical forecasting accuracy
of key inputs including revenue and operating margins;
– Sensitivity analysis: reviewing sensitivity analysis of the forecasts
to a number of variable factors including the possible impact of
Brexit, such as impacting revenue, margin and cash, to identify
whether reasonably plausible adverse scenarios could have an
impact on liquidity; and
– Assessing transparency: evaluating the adequacy of the Group’s
disclosures in respect of going concern.
Our findings
We found the disclosures included in Note 1 made by the Directors’
to be acceptable.
Balfour Beatty Annual Report and Accounts 2018
109
Scoping and coverage
Group revenue
85%
■ Full scope audit
(2017: 98%)
85%
■ Specific risk-focused 15%
audit procedures
(2017: 2%)
Group profit before tax
87%
■ Full scope audit
(2017: 95%)
87%
■ Specific risk-focused 13%
audit procedures
(2017: 5%)
Group total assets
88%
■ Full scope audit
(2017: 94%)
88%
■ Specific risk-focused 12%
audit procedures
(2017: 6%)
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 (2017: £10.0 million),
determined with reference to the benchmark of
Group profit before tax from continuing operations
of £123 million normalised to exclude one-off
or exceptional items in the year as disclosed in
Note 10, but excluding the charge relating to the
amortisation of acquired intangible assets.
Our materiality represents 5.8% (2017: 6.4%) of
normalised profit before tax of £173 million
(2017: £156 million). The Group team performed
procedures on the items excluded from normalised
Group profit before tax.
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 0.2% and
total assets, of which it represents 0.2%, where they
provide more consistent measures year on year than
Group profit before tax.
We report to the Audit and Risk Committee any
corrected and uncorrected identified misstatements
exceeding £0.5 million (2017: £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
(2017: £9.0 million), determined with reference to a
benchmark of Company total assets, of which it
represents 0.23% (2017: 0.27%).
Of the Group’s 16 reporting components (2017: 16), 9
were subject to an audit for Group reporting purposes
(2017: 11) and 7 (2017: 5) to specified risk-focused audit
procedures. 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. For three
components, the specified audit procedures were
performed over revenue, and other contract accounting
related balances, including costs, contract assets and
liabilities and any contract provisions. For one
component procedures were performed over costs
and lease classification (one component) and another
inventory (one component) and another on cash (one
component). The components within the scope of our
work accounted for 100% (2017: 100%) of Group
revenue, 100% (2017: 100%) of Group profit before tax
and 100% (2017: 100%) of Group total assets as
illustrated right.
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 component auditors,
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 component
materialities, which ranged from £1.5 million to
£9.0 million, having regard to the mix of size and profile
of the Group across the components. The work on 10
of the Group’s 16 components was performed by the
component auditors. Specified risk-focused procedures
on 3 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 2018, the Group audit team visited 10 components
in the United Kingdom, United States and Hong Kong
(2017: 9 components). This included a number of visits
to the United States. In addition, telephone conference
meetings were held with these component auditors.
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
The Directors have prepared the financial statements
on the going concern basis as they do not intend to
liquidate the Company or the Group or to cease their
operations, and as they have concluded that the
Company’s and the Group’s financial position means
that this is realistic. They have also concluded that
there are no material uncertainties that could have
cast significant doubt over their ability to continue as a
going concern for at least a year from the date of
approval of the financial statements (“the going
concern period”).
Our responsibility is to conclude on the
appropriateness of the Directors’ conclusions and,
had there been a material uncertainty related to going
concern, to make reference to that in this audit report.
However, as we cannot predict all future events or
conditions and as subsequent events may result in
outcomes that are inconsistent with judgements that
were reasonable at the time they were made, the
absence of reference to a material uncertainty in this
auditor’s report is not a guarantee that the Group and
the Company will continue in operation.
We identified going concern as a key audit matter
(see section 2 of this report). Based on this work, 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
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 and 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 54 is materially inconsistent with our
audit knowledge.
We have nothing to report in these respects.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance
110
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
67 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.
Our work is limited to assessing these matters in the context of only
the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent
events may result in outcomes that are inconsistent with judgements
that were reasonable at the time they were made, the absence of
anything to report on these statements is not a guarantee as to the
Group’s and the parent Company’s longer-term viability.
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
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.
7 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 87, 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.
Balfour Beatty Annual Report and Accounts 2018
111
A fuller description of our responsibilities is provided on the FRC’s
website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be
expected to have a material effect on the financial statements from
our general commercial and sector experience, and through
discussion with the Directors and other management (as required by
auditing standards), and from inspection of the Group’s regulatory and
legal correspondence and discussed with the Directors and other
management the policies and procedures regarding compliance with
laws and regulations. We communicated identified laws and
regulations throughout our team and remained alert to any indications
of non-compliance throughout the audit. This included communication
from the Group to component audit teams of relevant laws and
regulations identified at Group level.
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.
The potential effect of these laws and regulations on the financial
statements varies considerably.
Paul Sawdon (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Firstly, the Group is subject to laws and regulations that directly affect
the financial statements including financial reporting legislation
(including related company legislation), distributable profits legislation,
and taxation legislation and we assessed the extent of compliance
with these laws and regulations as part of our procedures on the
related financial statement items.
Chartered Accountants
15 Canada Square
London
E14 5GL
12 March 2019
Secondly, the Group is subject to many other laws and regulations
where the consequences of non-compliance could have a material
effect on amounts or disclosures in the financial statements, for
instance through the imposition of fines or litigation or the loss of the
Group’s licence to operate. We identified the following areas as those
most likely to have such an effect: health and safety, anti-bribery,
employment law, environmental law, regulatory capital and liquidity
and certain aspects of company legislation recognising the financial
nature of the Group’s activities and its legal form. Auditing standards
limit the required audit procedures to identify non-compliance with
these laws and regulations to enquiry of the Directors and other
management and inspection of regulatory and legal correspondence,
if any. Through these procedures, we identified actual or suspected
non-compliance and considered the effect as part of our procedures
on the related financial statement items. The identified actual or
suspected non-compliance was not sufficiently significant to our audit
to result in our response being identified as a key audit matter.
Owing to the inherent limitations of an audit, there is an unavoidable
risk that we may not have detected some material misstatements in
the financial statements, even though we have properly planned and
performed our audit in accordance with auditing standards.
For example, the further removed non-compliance with laws and
regulations (irregularities) is from the events and transactions reflected
in the financial statements, the less likely the inherently limited
procedures required by auditing standards would identify it.
In addition, 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. We are not responsible for preventing non-compliance and
cannot be expected to detect non-compliance with all laws
and regulations.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 112
Group Income Statement
For the year ended 31 December 2018
2018
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 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
7,802
(1,171)
6,631
(6,250)
381
80
–
(284)
177
28
205
35
(59)
181
(2)
179
–
179
179
–
179
12
(9)
3
(13)
(10)
–
(8)
(35)
(53)
(5)
(58)
–
–
(58)
14
(44)
–
(44)
(44)
–
(44)
7,814
(1,180)
6,634
(6,263)
371
80
(8)
(319)
124
23
147
35
(59)
123
12
135
–
135
135
–
135
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
2017
Total
£m
8,264
(1,348)
6,916
(6,605)
311
86
(9)
(299)
89
59
148
42
(73)
117
45
162
6
168
168
–
168
1 Before non-underlying items (Notes 2.10 and 10).
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
Notes
2018
Pence
2017
Pence
12
12
12
12
12
12
13
19.7
–
19.7
19.5
–
19.5
4.8
23.7
1.0
24.7
23.4
1.0
24.4
3.6
Commentary on the Group Income Statement*
Total profit before taxation from continuing operations for 2018 was
£123m (2017: £117m), which is inclusive of a non-underlying loss of
£58m (2017: £48m). The total profit after tax including discontinued
operations was £135m (2017: £168m).
Revenue
Revenue from continuing operations including non-underlying
items, joint ventures and associates decreased by 6% to £7,814m
from £8,264m in 2017. This is reflective of the Group’s continued
efforts in selective bidding as part of its Built to Last principles.
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. There were no discontinued operations in the year.
Gain on disposals of investments
The Group continued its programme of realising accumulated
value in the Investments portfolio and generated income by
disposing of several infrastructure concession interests in the year
resulting in a total underlying gain on disposals of £80m
(2017: £86m). Disposals in the year were: 5% interest in Connect
Plus (M25) Holdings Ltd (£22m gain); 50% interest in Consort
Healthcare (Fife) Ltd (£23m gain); 80% interest in Holyrood
Holdings Ltd (£22m gain); and 81% interest in Northside Campus
Partners LP (£13m gain).
These gains on disposals are recorded after recycling gains of £5m
from reserves to the income statement.
Balfour Beatty Annual Report and Accounts 2018
* The commentary is unaudited and forms part of the Chief Financial Officer’s review
on pages 51 to 54.
113
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.
This recent judgment therefore creates an obligation to equalise for
both the BBPF and RPS schemes. The effect of GMP equalisation
which amounted to £28m has been recognised in the Group’s
income statement as a plan amendment. The Group has also
treated this item as non-underlying due to the size and nature of the
income statement charge.
The Group’s underlying profit generated from its share of joint
ventures and associates decreased from the prior year primarily due
to the sell down of the Group’s interest in Connect Plus (M25)
Holdings Ltd in 2017 resulting in less profit from operations being
generated in the year. The Group also incurred a one-off £9m cost
arising from the refinancing of the debt arrangements within the
M25 joint venture. Within its US Civils operations, the wind down of
two large projects within joint venture arrangements has also
contributed to the decrease in joint venture profits in the year.
Underlying profit from continuing operations
Underlying profit from continuing operations increased to £205m
from £196m in 2017. This was primarily driven by an improvement
in Construction Services from a profit of £72m in 2017 to £95m in
2018 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. This increase was
partially offset by a eduction in disposal gains within the
Infrastructure Investments segment.
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 £58m before
tax were charged to the income statement.
In 2018, the Group recognised additional losses on the Aberdeen
Western Peripheral Route (AWPR) project. £10m of this charge has
been recognised in non-underlying as this reflects the additional
loss that the Group has suffered in fulfilling Carillion’s obligations on
the contract. The loss incurred on the Group’s original 33% joint
venture share is treated as part of the Group’s underlying
performance. The additional AWPR loss represents a net charge
made up of cost increases on the project partially offset by recovery
positions that the Group believes are highly probable to be agreed.
The Group recognised additional retirement benefit liabilities
following the judgment on the Lloyds Banking Group High Court
hearing on Guaranteed Minimum Pension (GMP) equalisation
which was published on 26 October 2018. The judgment indicated
that pension trustees needed to amend scheme retirement
benefits to equalise for the effect of unequal GMPs and indicated
an acceptable range of methods for how to do so.
In addition to the above charges, the Group recognised an additional
indemnity provision of £12m in the year following the reassessment
of several projects which were indemnified by the Group as part of
the sale of Heery International Inc (Heery) in 2017. This estimate is
subject to final ongoing negotiations with various clients and any
further gains or losses that arise as part of this indemnity obligation
will be recorded within non-underlying as part of the
Heery disposal.
Offsetting these charges is a provision release of £13m relating
to the settlement of health and safety claims. These claims were
previously included as part of the Group’s overall reassessment of
potential liabilities relating to historical health and safety breaches
following new sentencing guidelines which was conducted in 2016.
Significant other non-underlying items included £11m of
restructuring costs incurred relating to the Group’s Build to Last
transformation programme and amortisation of acquired intangible
assets of £8m.
Net finance cost
Net finance cost of £24m in the year represents a decrease from
£31m in 2017. This is primarily driven by net pension income arising
this year of £2m as a result of the BBPF scheme being in surplus.
Previously, the Group incurred net pension costs which amounted
to £6m in 2017.
Taxation
The Group’s underlying profit before tax from continuing operations
for subsidiaries of £153m (2017: £106m) resulted in an underlying
tax charge of £2m (2017: £23m). The tax charge in 2018 was
impacted by the recognition of deferred tax assets for some of the
Group’s previously unrecognised UK historical tax losses.
Earnings per share
Basic earnings per share from continuing operations were 19.7p
(2017: 23.7p). Underlying basic earnings per share from continuing
operations were 26.3p (2017: 20.9p).
* The commentary is unaudited and forms part of the Chief Financial Officer’s review
on pages 51 to 54.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 114
Group Statement of Comprehensive Income
For the year ended 31 December 2018
Profit for the year
Other comprehensive income/(loss) for the year
Items which will not subsequently be reclassified
to the income statement
Notes
Share of joint
ventures and
associates
£m
23
Group
£m
112
Actuarial gains/(losses) on retirement benefit liabilities
Tax on above
30.1
30.1
Items which will subsequently be reclassified
to the income statement
Currency translation differences
Fair value revaluations – PPP financial assets
– cash flow hedges
– investments in mutual
funds measured at fair
value through OCI
30.1
30.1
30.1
30.1
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 for the year
Attributable to
Equity holders
Non-controlling interests
Total comprehensive income for the year
30.1
30.1
22
–
22
18
(4)
3
(1)
–
–
16
38
150
(1)
–
(1)
7
9
15
–
(5)
(3)
23
22
45
* Recycling of revaluation reserves to the income statement on disposal has no associated tax effect.
Share of joint
ventures and
associates
£m
60
Group
£m
108
242
(37)
205
(30)
3
4
3
–
–
(20)
185
293
4
–
4
(18)
60
11
–
(85)
(13)
(45)
(41)
19
2018
Total
£m
135
21
–
21
25
5
18
(1)
(5)
(3)
39
60
195
195
–
195
2017
Total
£m
168
246
(37)
209
(48)
63
15
3
(85)
(13)
(65)
144
312
312
–
312
Commentary on Group Statement of Comprehensive Income*
Total comprehensive income for 2018 was £195m comprising
a total profit after tax of £135m and other comprehensive income
after tax of £60m.
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 £21m in 2018 compared to gains of £246m in 2017. 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.
Balfour Beatty Annual Report and Accounts 2018
Fair value revaluations – PPP financial assets
Assets constructed by PPP concession companies are classified
principally as financial assets measured at fair value through OCI.
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, gilt rates remained
stable resulting in a fair value gain including joint ventures and
associates of £5m being taken through OCI (2017: £63m).
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 £18m being recognised in OCI (2017: £15m gain).
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. On disposal of Infrastructure Investments’
concessions in 2018, £5m of profit (including joint ventures and
associates) was recycled to the income statement through OCI and
included in the gain on disposal.
There is no associated tax on the amounts recycled to the
income statement.
* The commentary is unaudited and forms part of the Chief Financial Officer’s review
on pages 51 to 54.
Group Statement of Changes in Equity
For the year ended 31 December 2018
At 1 January 2017
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
Adjustment as a result of transitioning to IFRS 15
on 1 January 20182
Adjusted equity at 1 January 2018
Total comprehensive income for the year
Ordinary dividends
Joint ventures’ and associates’ dividends
Movements relating to share-based payments
Transfers
Reserve transfers relating to joint venture
and associate disposals
Convertible bonds repayment
At 31 December 2018
Called-up
share
capital
£m
345
–
–
–
–
Share
premium
account
£m
65
–
–
–
–
Share of
joint ventures’
and associates’
reserves
(Note 18.6)
£m
184
19
–
(69)
–
Special
reserve
£m
22
–
–
–
–
Other
reserves
(Note 30.1)
£m
191
(20)
–
–
6
Retained
profits/
(losses)
£m
(50)
313
(20)
69
1
Non-
controlling
interests
£m
5
–
–
–
–
–
–
–
345
–
345
–
–
–
–
–
–
–
345
–
–
–
65
–
65
–
–
–
–
–
–
–
65
–
–
–
22
–
22
–
–
–
–
–
–
–
22
(21)
–
–
113
–
113
45
–
(76)
–
–
(19)
–
63
–
–
(2)
175
–
175
16
–
–
4
(9)
–
(24)
162
21
–
2
336
3
339
134
(27)
76
–
9
19
24
574
–
5
–
10
–
10
–
–
–
–
–
–
–
10
Notes
30.1
13
18.1
18.6
26.3
30.1
13
18.1
18.6
26.3
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised as an
115
Total
£m
762
312
(20)
–
7
–
5
–
1,066
3
1,069
195
(27)
–
4
–
–
–
1,241
adjustment to opening equity (Notes 2.1 and 40).
Commentary on Group Statement of Changes in Equity*
Total equity holders’ funds of £1,241m at 31 December 2018
increased primarily due to movements in comprehensive income.
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 1.6p in August 2018
which was paid in November 2018, the Board is recommending a final
dividend of 3.2p, giving a total recommended dividend for the year of
4.8p (2017: 3.6p).
Company Statement of Changes in Equity
For the year ended 31 December 2018
Joint ventures’ and associates’ dividends
Dividends of £76m (2017: £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.
Reserves
Other reserves comprise: the equity components of the preference
shares £18m (2017: £18m) and convertible bonds £nil (2017: £24m);
hedging reserves £(25)m (2017: £(27)m); PPP financial assets
revaluation reserve £24m (2017: £27m); currency translation reserve
£123m (2017: £105m); and other reserves £22m (2017: £28m).
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.
At 1 January 2017
Total comprehensive loss for the year
Ordinary dividends
Movements relating to share-based payments
Convertible bonds repurchase
At 31 December 2017
Total comprehensive income for the year
Ordinary dividends
Movements relating to share-based payments
Convertible bonds repayment
At 31 December 2018
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
122
–
–
2
(2)
122
–
–
7
(24)
105
Retained
profits
£m
578
(35)
(20)
(1)
2
524
355
(27)
(3)
24
873
Total
£m
1,132
(35)
(20)
1
–
1,078
355
(27)
4
–
1,410
* The commentary is unaudited and forms part of the Chief Financial Officer’s review on pages 51 to 54.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 116
Balance Sheets
At 31 December 2018
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
Inventories2
Contract assets2
Due from construction contract customers2
Trade and other receivables2
Cash and cash equivalents – infrastructure concessions
Current tax receivable
Derivative financial instruments
– other
Assets held for sale
Total assets
Current liabilities
Due to construction contract customers2
Contract liabilities2
Trade and other payables2
Provisions2
Borrowings – non-recourse loans
– other
Current tax payable
Derivative financial instruments
Liabilities held for sale
Non-current liabilities
Contract liabilities2
Trade and other payables2
Provisions2
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 profits2
Equity attributable to equity holders of the parent
Non-controlling interests
Total equity
Notes
2018
£m
14
15
16
17
18
19
20
23
28
27
38
21
22
23
26
26
38
39(e)
22
24
25
26
26
38
39(e)
22
24
25
26
26
29
28
27
38
29
30
30
30
30
30
30
903
258
168
33
524
30
156
212
171
80
–
2,535
84
363
–
902
70
591
5
1
2,016
16
2,032
4,567
–
(489)
(1,373)
(167)
(48)
(15)
(17)
(4)
(2,113)
(11)
(2,124)
(2)
(143)
(149)
(331)
(239)
(106)
(117)
(90)
(25)
(1,202)
(3,326)
1,241
345
65
22
63
162
574
1,231
10
1,241
Group
2017
£m
874
281
157
46
531
39
163
216
156
52
1
2,516
107
–
377
899
135
833
8
2
2,361
–
2,361
4,877
(535)
–
(1,542)
(194)
(8)
(268)
(15)
(5)
(2,567)
–
(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
2018
£m
–
–
–
–
–
1,706
–
1
–
–
–
1,707
–
–
–
2,083
–
134
5
–
2,222
–
2,222
3,929
–
–
(2,170)
–
–
–
–
–
(2,170)
–
(2,170)
–
(4)
–
–
(239)
(106)
–
–
–
(349)
(2,519)
1,410
345
65
22
–
105
873
1,410
–
1,410
Company
2017
£m
–
–
–
–
–
1,700
–
2
–
–
–
1,702
–
–
–
1,531
–
134
3
–
1,668
–
1,668
3,370
–
–
(1,925)
–
–
(33)
–
–
(1,958)
–
(1,958)
–
(4)
–
–
(226)
(103)
–
(1)
–
(334)
(2,292)
1,078
345
65
22
–
122
524
1,078
–
1,078
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised as an
adjustment to opening equity (Notes 2.1 and 40).
On behalf of the Board
Leo Quinn
Director
Philip Harrison
Director
12 March 2019
Balfour Beatty Annual Report and Accounts 2018
117
Commentary on the Group Balance Sheet*
Total assets of £4.6bn were 6% less than last year. Total liabilities of
£3.3bn decreased by 13%, resulting in an overall increase in net
assets of 16%. The increase is primarily driven by increased profits
generated in the year of £135m.
Background
The Group’s Balance Sheet shows the Group’s assets and liabilities
as at 31 December 2018. 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 2018
increased to £903m (2017: £874m). The increase was due to
currency translation differences of £29m. 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
£524m in 2018 from £531m in 2017. Dividends received from joint
ventures and associates of £76m and disposals in the year
have been offset by equity and loans advanced into other joint
venture interests by the Group.
Working capital
Net movements in working capital are discussed in the statement
of cash flows commentary on page 118.
Borrowings
Borrowings excluding non-recourse loans
The Group’s committed facilities total £400m. The purpose of these
facilities is to provide liquidity from a set of core relationship banks
to support Balfour Beatty in its activities.
These facilities extend to December 2020. At 31 December 2018,
these facilities remain fully undrawn.
In December 2018, following the partial repurchase of the Group’s
convertible bonds in December 2017 (£21.3m) and March 2018
(£17.7m), the Group repaid the remaining convertible bonds when
they fell due for a further £213.7m.
In March 2018, the Group also repaid the first tranche of its US
private placement notes amounting to £32.5m (US$45m). £239m
(US$305m) remain outstanding, with the next tranche of £36m
(US$46m) being due in March 2020 and the remaining loan notes
falling due in March 2023 and March 2025.
The Group’s borrowings include recourse borrowings to the Group
arising from certain Infrastructure Investments projects in North
America amounting to £15m (2017: £13m).
Non-recourse loans
In addition, the Group has non-recourse facilities in companies
engaged in certain infrastructure concessions projects.
At 31 December 2018, the Group’s share of these non-recourse
net borrowings amounted to £1,955m (2017: £1,724m), comprising
£1,646m (2017: £1,419m) in relation to joint ventures and associates
as disclosed in Note 18.2 and £309m (2017: £305m) on the Group
balance sheet in relation to subsidiaries as disclosed in Note 26.
Retirement benefit assets and liabilities
The Group’s balance sheet includes net retirement benefit assets of
£54m (2017: £32m) representing net surpluses in the Group’s
pension schemes, as measured on an IAS 19 basis. The increase in
pension surplus in the year is due to £30m of employer
contributions and £22m of net actuarial gains, partially offset by a
£28m charge arising from the recognition of GMP equalisation.
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 2018, contract
bonds in issue by financial institutions covered £3.9bn
(2017: £3.2bn) of the contract commitments of the Group.
Equity commitments
During 2018, the Group invested £58m (2017: £35m) 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 2019 onwards,
inclusive of £30m expected for projects at preferred bidder stage.
£43m of this is expected to be invested in 2019, as disclosed in
Note 39(f).
* The commentary is unaudited and forms part of the Chief Financial Officer’s review
on pages 51 to 54.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 118
Group Statement of Cash Flows
For the year ended 31 December 2018
Cash flows (used in)/from operating activities
Cash (used in)/from:
– continuing operations – underlying1
– non-underlying
Income taxes received/(paid)
Net cash (used in)/from operating activities
Cash flows from investing activities
Dividends received from joint ventures and associates:
– infrastructure concessions
– other
Interest received – infrastructure concessions – joint ventures
Interest received – infrastructure concessions – subsidiaries
Acquisition of businesses, net of cash and cash equivalents acquired
Purchases of:
– intangible assets – infrastructure concessions^
– intangible assets – other
– property, plant and equipment
– 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
– investment properties
– other investments
Net cash from investing activities
Cash flows (used in)/from financing activities
Purchase of ordinary shares
Proceeds from:
– new loans – infrastructure concessions
Repayments of:
– loans – infrastructure concessions
– loans – other
Repayment/repurchase of convertible bonds
Ordinary dividends paid
Interest paid – infrastructure concessions^
Interest paid – other
Preference dividends paid
Net cash (used in)/from financing activities
Net (decrease)/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
Notes
31.1
31.1
18.5
18.5
18.5
32.1
15
15
16
17
19
18.5
20
20
18.5/32
18.5/32
32.2.5
32.2.5
19
30.3
31.3
31.3
31.3
31.3
13
31.2
2018
£m
2017
£m
(54)
(78)
2
(130)
36
40
7
8
(3)
(63)
(3)
(38)
–
–
(56)
(2)
14
160
4
21
–
7
7
11
150
(4)
4
(6)
(33)
(231)
(27)
(15)
(25)
(12)
(349)
(329)
22
968
661
62
(21)
(3)
38
16
53
9
12
(3)
(82)
(5)
(20)
(3)
(1)
(30)
(1)
15
103
3
4
36
11
–
8
125
(2)
212
(4)
(52)
(21)
(20)
(10)
(24)
(12)
67
230
(30)
768
968
1 Before non-underlying items (Notes 2.10 and 10).
^ Re-presented to include payments on capitalised interest within purchases of intangible assets in investing activities rather than within the interest paid line in financing activities.
Balfour Beatty Annual Report and Accounts 2018
119
Cash flows from investing activities
The Group received dividends of £76m (2017: £69m) from joint
ventures and associates during the year.
During the year, the Group incurred additional spend on intangible
assets of £66m (2017: £87m), of which £63m related to the
construction spend on the University of Sussex student
accommodation (2017: £82m) and £3m (2017: £5m) related
to software and other intangible assets.
The Group disposed of a 5% interest in Connect Plus (M25)
Holdings Ltd for cash consideration of £42m. In addition to the
consideration for this disposal, the Group also received £62m in
February 2018 from the disposal of its 7.5% interest in December
2017. In September 2018, the Group disposed of its 50% interest in
Consort Healthcare (Fife) Holdings Ltd for consideration of £43m
and in December 2018, the Group also disposed of an 80% interest
in Holyrood Holdings Ltd for a net consideration of £21m. Finally,
the Group disposed of its 81% interest in Northside Campus
Partners LP for consideration amounting to £13m.
In addition to the current year’s disposals, the Group also received
deferred consideration with respect to disposals which took place
in previous years. The Group received £3m with respect to its 2016
disposal of Balfour Beatty Infrastructure Partners and £1m in
relation to its disposal of its Middle East joint ventures in 2017.
Cash flows from financing activities
In 2018, the Group repaid the remaining convertible bonds
amounting to £231m. In addition to this, the Group also repaid the
first tranche of the US private placement notes amounting to £33m.
None of these facilities were replaced with another form of debt.
The Group’s entire revolving credit facilities of £400m remain
undrawn at 31 December 2018.
Preference dividends of £12m (2017: £12m) were paid in the year.
Total interest payments amounted to £40m (2017: £34m) during
the year, of which £15m (2017: £10m) related to infrastructure
concessions and £25m (2017: £24m) related to the US private
placement, convertible bonds and other finance charges.
Commentary on the Group Statement of Cash Flows*
Cash and cash equivalents decreased by 32% during the year to
£661m. The Group used cash in operating activities in the year of
£130m compared to cash generated from operating activities of
£38m in the prior year. The Group also repaid £270m of debt
in 2018.
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; contract assets and liabilities;
trade and other receivables; trade and other payables; and
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.
The decrease in trade and other payables has resulted in a working
capital outflow of £196m (2017: £92m). This is mainly attributable
to the decrease in revenues in US Construction and the Group’s
focus on improving payment processes resulting in faster payment
of suppliers compared to the prior year.
The working capital outflow from provisions of £80 million
(2017: £29m inflow) predominantly relates to the significant AWPR
cash outflows in 2018.
Cash used in operations
Underlying cash outflow from continuing operations of £54m
(2017: £62m inflow) comprised a profit from operations of £205m
(2017: £196m) and a working capital outflow of £169m (2017: £7m)
including the following significant adjustment items: share of results
of joint ventures and associates £28m (2017: £59m); depreciation
charges of £29m (2017: £29m); pension payments including deficit
funding of £30m (2017: £27m); and gain on disposal of investments
in infrastructure concessions of £80m (2017: £86m).
Non-underlying cash used in continuing operations of £78m
(2017: £21m) comprised a loss from operations of £58m
(2017: £48m) and a working capital outflow of £60m (2017: £34m
inflow), including the following principal non-cash items: loss on
GMP equalisation of £28m; a £3m gain on disposal of businesses
(2017: £17m); and an amortisation charge of £8m (2017: £9m) on
acquired intangible assets.
* The commentary is unaudited and forms part of the Chief Financial Officer’s review
on pages 51 to 54.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 120
Notes to the Financial Statements
1 Basis of accounting
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
and consider it reasonable to assume that the Group has 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. Further information is
provided within the Chief Financial Officer’s review on page 54.
The annual financial statements have been prepared 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 2018.
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 2018 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:
– IFRS 9 Financial Instruments
– IFRS 15 Revenue from Contracts with Customers
– IFRIC 22 Foreign Currency Transactions and
Advance Consideration
– Amendments to the following standards:
– 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
– Clarifications to IFRS 15 Revenue from Contract with Customers
– Improvements to IFRSs (2014–2016).
Balfour Beatty Annual Report and Accounts 2018
The new and amended standards do not have a material effect on
the Group except as described below:
IFRS 9 Financial Instruments
IFRS 9 sets out the requirements for recognising and measuring
financial assets, financial liabilities and some contracts to buy or
sell non-financial items. This standard replaces IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9 introduces
new models for classification of financial assets and accounting
for credit losses. The Group has adopted IFRS 9 retrospectively
from 1 January 2018. There was no material impact on adoption
of this new standard. As disclosed in the Group’s Annual Report
and Accounts 2017, under the new standard the Group is 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.
IFRS 15 Revenue from Contracts with Customers
The Group has adopted IFRS 15 from 1 January 2018. The Group
has adopted IFRS 15 retrospectively and has chosen to apply the
cumulative effect approach. As a result, the Group has restated
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 a handful of contracts
according to what the Group has assessed to be the performance
obligations to be delivered to the customer.
In line with the requirements of the standard with regards
to the transition option adopted, the Group has not restated
its comparative information which continues to be reported
under previous revenue standards, IAS 11 and IAS 18. To aid
comparability, the Group has also presented its 2018 results
under IAS 11 and IAS 18 which can be found in Note 40.
As a result of this new standard, the Group has also revised
its accounting policies around revenue recognition (where
applicable). Refer to Note 2.4.
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 2018:
– IFRS 16 Leases
– IFRS 17 Insurance Contracts
– IFRIC 23 Uncertainty over Income Tax Treatments
– Amendments to the following standards:
– IAS 1 & IAS 8 Definition of Material
– IAS 19 Plan Amendment, Curtailment or Settlement
– IAS 28 Long-term Interests in Associates and Joint Ventures
– IFRS 3 Business Combinations
– IFRS 9 Prepayment Features with Negative Compensation
– Improvements to IFRSs (2015–2017)
– References to the Conceptual Framework.
Apart from IFRS 16, the Directors do not expect the other
standards above to have a material quantitative effect.
121
2 Principal accounting policies continued
2.1 Accounting standards continued
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 Directors have substantially completed their assessment of
IFRS 16 and the Group will adopt the new standard for the financial
year ending 31 December 2019 using the modified retrospective
approach. This transition option does not require the Group to
restate its comparative year.
The adoption of IFRS 16 will result in a right-of-use (ROU) asset
and a corresponding lease liability amounting to approximately
£135m respectively being brought onto the Group’s balance
sheet on 1 January 2019. There will be no impact on the Group’s
opening equity as a result of adopting this standard. In deriving
these amounts, judgement was made as to whether certain
lease agreements represent a lease of an underlying asset or the
provision of services by a third party. The Group chose to take the
low value item and short-term hire exemptions allowed under the
standard which resulted in certain leases being excluded from IFRS
16 accounting. The Group also took the practical expedient available
under paragraph C10(c) which allows leases with terms ending
within 12 months of the date of initial application to be treated
as short-term leases in line with the short-term hire exemption.
In addition to the initial impact on the Group’s balance sheet
of adopting this standard, the Group’s income statement will
previously be impacted. Lease charges which were accounted
for as and when hire charges were incurred within cost of sales
or overheads will be replaced with a depreciation charge and
an interest cost, resulting in a higher profit from operations and
a higher interest cost. Cash payments made for these leases
will also be reported within financing activities on the Group’s
cash flow statement rather than within cash from operations.
The Group has chosen not to adopt any of the above standards
and interpretations earlier than required.
IFRS 16 leases policies to be applied from 1 January 2019
As a lessee, the Group assesses whether a contract is, or contains,
a lease at the inception of a contract. A lease exists if the contract
conveys the right to control the use of an identified asset for a
period of time in exchange for consideration. To assess if a lease
exists, the Group assesses whether: (i) the contract involves the
use of an identified asset; (ii) the Group has the right to obtain
substantially all of the economic benefits from the use of the
asset throughout the lease term; and (iii) the Group has the
right to direct the use of the asset.
The Group recognises a right-of-use asset and a lease liability at
the lease commencement date. The right-of-use asset is initially
measured at cost and subsequently depreciated over the lease
term. The lease liability is measured at the present value of the
lease payments that are not paid at the commencement date,
discounted using the interest rate implicit in the lease, or if that
rate cannot be readily determined, the Group’s incremental
borrowing rate.
The Group has elected not to recognise right-of-use assets and
lease liabilities for short-term leases of less than 12 months and
leases of low value assets. Instead, the Group recognises the
lease payments associated with these leases as an expense
on a straight-line basis over the lease term.
This policy is applied to contracts entered into, or changed,
on or after 1 January 2019. There is no material impact on the
Group arising from its activities as lessor as this is insignificant.
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 IFRS 9 Financial Instruments 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 (i.e. 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.
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.
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2 Principal accounting policies continued
2.2 Basis of consolidation continued
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
IFRS 9 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.
Balfour Beatty Annual Report and Accounts 2018
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
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 is
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.
123
2 Principal accounting policies continued
2.5 Construction and services 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. The estimated final
out-turns on contracts are continuously reviewed, and in certain
limited cases, recoveries from insurers are assessed, and
adjustments made 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 highly 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 to the extent
not previously recognised 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 14 to 26.
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
recognised in full when they are received in cash.
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 presented separately 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. The Group’s underlying results
exclude 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.
Refer to Note 5.
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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.
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
properties. 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.
Balfour Beatty Annual Report and Accounts 2018
125
2 Principal accounting policies continued
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.
Investments in mutual funds are measured at fair value. Gains and
losses arising from changes in the fair value of these 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. Investments that
are held until they reach maturity 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.
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: (i) the Group has a present legal
or constructive obligation as a result of a past event; (ii) it is probable
that an outflow of resources will be required to settle the obligation;
and (iii) 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 obligations, 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 and cash-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 or cash payments
made 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.
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Notes to the Financial Statements continued
2 Principal accounting policies continued
2.26 Financial instruments continued
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.
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 financial assets measured at fair value through OCI.
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.
Balfour Beatty Annual Report and Accounts 2018
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 2018 are discussed below.
All the below are both judgements and estimates made by
the Group.
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 both estimates and judgements to be made of both
cost and income recognition on each contract. On the cost side,
estimates of forecasts are made on the final out-turn of each contract
in addition to potential costs to be incurred for any maintenance and
defects liabilities. On the income side, estimates and judgements are
made on variations to consideration which typically include variations
due to changes in scope of work, recoveries of claim income from
customers, and potential liquidated damages that may be levied by
the customer. The Group’s estimates also include assessments of
recoveries from insurers. Judgements and estimates are reviewed
regularly throughout the contract life based on latest available
information and adjustments are made where necessary.
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 Gammon.
127
A £5m gain was taken to other comprehensive income in 2018
(2017: £63m gain) and a cumulative fair value gain of £274m had
arisen on these financial assets as a result of market-related
movements in the fair value of these financial assets at
31 December 2018 (2017: £269m gain).
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.
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.
More specifically on the Group’s provisions set aside for any
liabilities arising due to defects, there is a 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 2018 of £316m
(2017: £292m). 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 2018, the net retirement benefit assets
recognised on the Group’s balance sheet were £54m (2017: £32m).
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 2018, the Group
recognised net actuarial gains of £21m (2017: £246m) in OCI,
including its share of the actuarial gains and losses arising in
joint ventures and associates.
In 2018, the Group recognised additional liabilities following the
judgment on the Lloyds Banking Group High Court hearing on
Guaranteed Minimum Pension (GMP) equalisation which was
published on 26 October 2018. The judgment indicated that
pension trustees needed to amend scheme benefits to equalise
for the effect of unequal GMPs and indicated an acceptable
range of methods for how to do so.
This recent judgment therefore creates an obligation to equalise
for both the BBPF and RPS schemes. The effect of GMP
equalisation which amounted to £28m has been recognised in
the Group’s income statement as a plan amendment. The Group
has also treated this item as non-underlying due to the size
and nature of the income statement charge. Any future changes
in relation to GMP equalisation will be treated as part of the
Group’s actuarial gains/losses which are recognised within OCI.
Refer to Note 28.1.
balfourbeatty.com/AR2018
2 Principal accounting policies continued
2.27 Judgements and key sources of estimation
uncertainty 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 presented separately 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. Certain items within non-underlying also require a
degree of estimation. A total non-underlying loss after tax of
£44m was charged (2017: £25m credited) to the income statement
for the year ended 31 December 2018. 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. Judgement is also required when
determining the appropriateness of these assumptions as well
as the underlying cash flows and the timing at which they arise.
The carrying value of goodwill at 31 December 2018 was
£903m (2017: £874m). Refer to Note 14.
e) Financial assets measured at fair value through OCI
At 31 December 2018, £1,898m (2017: £2,006m) of PPP financial
assets constructed by the Group’s subsidiary, joint venture and
associate companies were classified as financial assets measured
at fair value through OCI. 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 4.2%
to 7.8% (2017: 2.2% to 7.7%), which reflects the prevailing
risk-free interest rates and the different risk profiles of the
various concessions. Refer to Note 38.
Strategic ReportOther InformationFinancial StatementsGovernance 128
Notes to the Financial Statements continued
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
2018
1.33
10.46
1.13
2018
1.27
9.97
1.11
2017
1.29
10.07
1.14
2017
1.35
10.56
1.13
Change
3.1%
3.9%
(0.9)%
Change
(5.9)%
(5.6)%
(1.8)%
4 Revenue
4.1 Nature and services of goods
4.1.1 Construction Services
The Group’s Construction Services segment encompasses activities in relation to the physical construction of assets provided to public and
private customers. Revenue generated in this segment is measured over time as control passes to the customer as the asset is constructed.
Progress is measured by reference to the cost incurred on the contract to date compared to the contract’s end of job forecast (the input
method). Payment terms are based on a schedule of value that is set out in the contract and fairly reflect the timing and performance of
service delivery. Contracts with customers are typically accounted for as one performance obligation (PO).
Types of assets
Typical
contract length
Buildings
12 to 36 months
Infrastructure
1 to 3 months
for small scale
infrastructure
works
24 to 60
months for large
scale complex
construction
Nature, timing of satisfaction of performance obligations and significant payment terms
The Group constructs buildings which include commercial, healthcare, education, retail and residential
assets. As part of its construction services, the Group provides a range of services including design
and/or build, mechanical and electrical engineering, shell and core and/or fit-out and interior
refurbishment. The Group’s customers in this area are a mix of private and public entities.
The contract length depends on the complexity and scale of the building and contracts entered into
for these services are typically fixed price.
In most instances, the contract with the customer is assessed to only contain one PO as the services
provided by the Group, including those where the Group is also providing design services, are highly
interrelated. However for certain types of contracts, services relating to fit-out and interior
refurbishment may sometimes be assessed as a separate PO.
The Group provides construction services to three main types of infrastructure assets: highways,
railways and other large scale infrastructure assets such as waste, water and energy plants.
Highways represent the Group’s activities in constructing motorways in the UK and the US.
This includes activities such as design and construction of roads, widening of existing motorways
or converting existing motorways. The main customers are government bodies.
Railway construction services primarily in the UK and US include design and managing the
construction of railway systems delivering major multi-disciplinary projects, track work, electrification
and power supply. The Group serves both public and private railways including high-speed passenger
railways, freight and mixed traffic routes, dense commuter networks, metros and light rail.
Other infrastructure assets include construction, design and build services on large scale complex
assets predominantly servicing the waste, water and energy sectors.
Contracts entered into relating to these infrastructure assets can take the form of fixed price or
target-cost contracts with shared pain/gain mechanisms. Contract lengths vary according to the size
and complexity of the asset build and can range from a few months for small scale infrastructure
works to 4–5 years for large scale complex construction works.
In most cases, the contract itself represents a single PO where only the design and construction
elements are contracted. In some instances, the contract with the customer will include maintenance
of the constructed asset. The Group assesses the maintenance element as a separate PO and
revenue from this PO is recognised in the Support Services segment. Refer to Note 4.1.2.
Balfour Beatty Annual Report and Accounts 2018
129
4 Revenue continued
4.1 Nature and services of goods continued
4.1.2 Support Services
The Group’s work in this segment supports existing assets through maintaining, upgrading and managing services across utilities and
infrastructure assets. Revenue generated in this segment is measured over time as control passes to the customer as and when services
are provided. Progress is measured by reference to the cost incurred on the contract to date compared to the contract’s end of job forecast
(the input method). Payments are structured as milestone payments set out in the respective contracts.
Types of assets Nature, timing of satisfaction of performance obligations and significant payment terms
Utilities
Within the Group’s services contracts, the Group provides support services to various types of utility assets.
For contracts servicing utility assets, the Group provides services such as renewal, upgrade and expansion of underground
main pipelines for assets within the gas network. Within the water network, services include clean and waste water mains
renewal and repair, metering and treatment facilities. Contracts are typically delivered through framework agreements which
are normally granted on a regulatory cycle period of five years for water contracts and eight years for gas contracts.
Individual instructions delivered under the framework agreements can vary in size and duration but usually last between one
to six weeks for smaller projects or up to one to two years for major projects. Each instruction is accounted for as a separate
PO. Payments are normally set according to a schedule of rates and may include a pain/gain element.
For contracts servicing power transmission and distribution assets, the Group constructs and maintains electricity
networks, including replacement or new build of overhead lines, underground cabling, cable tunnels and offshore windfarm
maintenance. Contracts entered into are normally fixed-price and contract lengths can vary from 12 to 36 months, and
up to 20 years for offshore windfarm maintenance contracts. Each contract is normally assessed to contain one PO.
However, where a contract contains both a construction phase and a maintenance phase, these are assessed to contain
two separate POs.
Infrastructure The Group provides maintenance, asset and network management and design services in respect of highways, railways
and other publicly available assets. The customer in this area of the Group is mainly government bodies. Types of contract
include a fixed schedule of rates, fixed price, target cost arrangements and cost-plus.
Contract terms range from 1 to 25 years. Where contracts include lifecycle elements, this is accounted for as a separate
PO and recognised when the work is delivered.
4.1.3 Infrastructure Investments
The Group invests directly in a variety of assets, predominantly consisting of infrastructure assets where there are opportunities to manage
the asset upon completion of construction. The Group also invests in real estate type assets, in particular private residential and student
accommodation assets. Revenue generated in this segment is from the provision of construction, maintenance and management services
and also from the recognition of rental income. The Group’s strategy is to hold these assets until optimal values are achieved through
disposal of mature assets.
Types of
services
Service
concessions
Nature, timing of satisfaction of performance obligations and significant payment terms
The Group operates a UK and North America portfolio of service concession assets comprising of assets in the roads,
healthcare, schools, student accommodation, biomass and waste and offshore transmission sectors. The Group accounts
for these assets under IFRIC 12 Service Concession Arrangements.
Where the Group constructs and maintains these assets, the two services are deemed to be separate performance
obligations and accounted for separately. If the maintenance phase includes lifecycle elements, then this is considered to be
a separate PO.
Contract terms can be up to 40 years. The Group recognises revenue over time using the input method. Consideration is
paid through a fixed unitary payment charge spread over the life of the contract.
Revenue from this service is presented across Buildings, Infrastructure or Utilities in Note 4.2.
Management
services
The Group provides real estate management services such as property, development and asset management services.
Contract terms can be up to 50 years. The Group recognises revenue over time as and when service is delivered to the
customer.
Revenue from this service is presented within Buildings in Note 4.2.
Housing
development
The Group also develops housing units on land that is owned by the Group. Revenue is recognised on the sale of individual
units at a point in time, which depicts when control of the asset is transferred to the purchaser. This is deemed to be when
an unconditional sale is achieved.
Revenue from this service is presented within Buildings in Note 4.2.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 130
Notes to the Financial Statements continued
4 Revenue continued
4.2 Disaggregation of revenue
Following the implementation of IFRS 15 from 1 January 2018, the Group presents a disaggregation of its revenue according to the primary
geographical markets in which the Group operates as well as the types of assets serviced by the Group. The nature of the various services
provided by the Group is explained in Note 4.1. This disaggregation of revenue is also presented according to the Group’s reportable
segments as described in Note 5.
The revenue disaggregation below represents the Group’s underlying revenue excluding the Group’s revenue generated by Rail Germany
which is presented as non-underlying.
For the year ended 31 December 2018
Revenue by primary geographical markets
Construction
Services
Support
Services
Infrastructure
Investments
Revenue including share of joint ventures and associates
Group revenue
Revenue including share of joint ventures and associates
Group revenue
Revenue including share of joint ventures and associates
Group revenue
Revenue including share of joint ventures and associates
Group revenue
Total revenue
United
Kingdom
£m
1,885
1,885
1,041
1,041
238
124
3,164
3,050
United
States
£m
3,324
3,309
–
–
298
214
3,622
3,523
Revenue by types of assets serviced
Buildings
£m
Infrastructure
£m
Utilities
£m
Construction
Services
Support
Services
Infrastructure
Investments
Total revenue
Revenue including share of joint ventures
and associates
Group revenue
Revenue including share of joint ventures
and associates
Group revenue
Revenue including share of joint ventures
and associates
Group revenue
Revenue including share of joint ventures
and associates
Group revenue
3,891
3,363
–
–
398
336
4,289
3,699
1,840+
1,459+
444
444
127
3
2,411
1,906
391
387
651
623
43
–
1,085
1,010
Rest of
world
£m
918+
20+
63
35
35
3
1,016
58
Other
£m
5
5
9
9
3
2
17
16
Timing of revenue recognition
Over time
At a point in time
Revenue including share of joint ventures and associates
Over time
At a point in time
Group revenue
Construction
Services
£m
6,120+
7
6,127
5,207+
7
5,214
Support
Services
£m
1,096
8
1,104
1,068
8
1,076
Infrastructure
Investments
£m
536
35
571
306
35
341
Total
£m
6,127
5,214
1,104
1,076
571
341
7,802
6,631
Total
£m
6,127
5,214
1,104
1,076
571
341
7,802
6,631
Total
£m
7,752
50
7,802
6,581
50
6,631
+ Excludes revenue earnt in Rail Germany of £12m including share of joint ventures and associates or £3m excluding share of joint ventures and associates.
4.3 Transaction price allocated to the remaining performance obligations (excluding joint ventures and associates)
Construction Services
Support Services
Infrastructure Investments
Total transaction price allocated to remaining performance obligations
2019
£m
4,019
667
309
4,995
2020
£m
1,921
292
75
2,288
2021
onwards
£m
1,858
1,497
2,257
5,612
Total
£m
7,798
2,456
2,641
12,895
The total transaction price allocated to the remaining performance obligations represents the contracted revenue to be earnt by the
Group for distinct goods and services which the Group has promised to deliver to its customers. These include promises which are partially
satisfied at the period end or those which are unsatisfied but which the Group has committed to providing. In deriving this transaction price,
any element of variable revenue is estimated at a value that is highly probable not to reverse in the future.
The transaction price above does not include any estimated revenue to be earned on framework contracts for which a firm order
or instruction has not been received by the customer.
Balfour Beatty Annual Report and Accounts 2018
131
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 (Notes 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:
– 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 (Notes 2.10 and 10).
Construction
Services
2018
£m
6,127
(913)
5,214
67
28
95
Support
Services
2018
£m
1,104
(28)
1,076
48
(2)
46
Infrastructure
Investments
2018
£m
571
(230)
341
95
2
97
Corporate
activities
2018
£m
–
–
–
(33)
–
(33)
(10)
(3)
(36)
(49)
46
–
–
(7)
(7)
39
–
(5)
3
(2)
95
–
–
–
–
(33)
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)
Total
2018
£m
7,802
(1,171)
6,631
177
28
205
(10)
(8)
(40)
(58)
147
35
(59)
123
Total
2017
£m
8,234
(1,340)
6,894
137
59
196
(44)
(9)
5
(48)
148
42
(73)
117
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 132
Notes to the Financial Statements continued
5 Segment analysis continued
5.1 Total Group continued
Assets and liabilities by activity
Contract assets2
Contract liabilities – current2
Inventories2
Trade and other receivables – current2
Trade and other payables – current2
Provisions – current2
Working capital from continuing operations*
* Includes non-operating items and current working capital.
Total assets2
Total liabilities2
Net assets
Construction
Services
2018
£m
251
(411)
46
741
(1,117)
(128)
(618)
Support
Services
2018
£m
97
(76)
12
126
(195)
(8)
(44)
Infrastructure
Investments
2018
£m
15
(2)
26
28
(43)
(7)
17
Corporate
activities
2018
£m
–
–
–
7
(18)
(24)
(35)
Total
2018
£m
363
(489)
84
902
(1,373)
(167)
(680)
2,171
(1,966)
205
509
(289)
220
1,162
(509)
653
725
(562)
163
4,567
(3,326)
1,241
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised as an
adjustment to opening equity (Notes 2.1 and 40).
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
Other information – continuing operations
Capital expenditure on property, plant and equipment (Note 16)
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 and Note 17)
Gain on disposals of interests in investments (Note 32.2)
Balfour Beatty Annual Report and Accounts 2018
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)
Total
2017
£m
377
(535)
107
899
(1,542)
(194)
(888)
2,119
(2,030)
89
539
(270)
269
1,264
(635)
629
955
(876)
79
4,877
(3,811)
1,066
Construction
Services
2018
£m
18
1
11
–
Support
Services
2018
£m
19
2
10
–
Infrastructure
Investments
2018
£m
–
63
3
80
Corporate
activities
2018
£m
1
–
5
–
Construction
Services
2017
£m
5
–
–
13
–
Support
Services
2017
£m
9
–
–
8
–
Infrastructure
Investments
2017
£m
–
3
82
3
86
Corporate
activities
2017
£m
6
–
5
5
–
Total
2018
£m
38
66
29
80
Total
2017
£m
20
3
87
29
86
133
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
2018
£m
3,164
(114)
3,050
United
Kingdom
2017
£m
3,200
(139)
3,061
United
States
2018
£m
3,622
(99)
3,523
United
States
2017
£m
3,819
(55)
3,764
Rest of
world
2018
£m
1,028
(967)
61
Rest of
world
2017
£m
1,245
(1,154)
91
Total
2018
£m
7,814
(1,180)
6,634
Total
2017
£m
8,264
(1,348)
6,916
Major customers
Included in Group revenue are revenues from continuing operations of £1,334m (2017: £1,276m) from the US Government and £1,058m
(2017: £1,093m) 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
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)+
2018
£m
(17)
19
–
2
–
2
242
181
423
–
423
Group
2018
£m
9
24
80
113
(18)
95
360
179
539
(309)
230
Total
2018
£m
(8)
43
80
115
(18)
97
602
360
962
(309)
653
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
Total
2017
£m
24
44
86
154
(38)
116
671
263
934
(305)
629
+ The Group’s share of the results of joint ventures and associates is disclosed net of investment income, finance costs and taxation.
^ Including Singapore.
1 Before non-underlying items (Notes 2.10 and 10).
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 134
Notes to the Financial Statements continued
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 credit of trade receivables impairment provision
Impairment of property, plant and equipment
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
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
7 Employee costs
7.1 Group
Employee costs during the year
Wages and salaries
Underlying redundancy costs
Non-underlying redundancy costs (Note 10.1.3.1)
Social security costs
Pension costs (Note 28)
Non-underlying GMP equalisation costs (Note 10.1.3.3)
Share-based payments (Note 33)
Average number of Group employees
Construction Services
Support Services
Infrastructure Investments
Corporate
Continuing operations
2018
£m
–
28
1
20
(1)
2
2
(5)
86
–
3
45
2018
£m
0.5
2.1
2.6
0.4
–
0.4
3.0
2017
£m
1
28
1
22
–
–
–
(6)
82
3
3
50
2017
£m
0.5
2.2
2.7
0.4
0.1
0.5
3.2
2018
£m
1,113
9
4
95
56
28
8
1,313
2018
Number
12,273
5,833
1,520
142
19,768
2017
£m
1,193
3
8
98
52
–
9
1,363
2017
Number
13,429
5,917
1,448
146
20,940
At 31 December 2018, the total number of Group employees was 19,474 (2017: 20,238).
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 88 to 103.
7.2 Company
The Company did not have any employees and did not incur any employee costs in the year (2017: £nil). Balfour Beatty Group Employment
Ltd, which was established in February 2013, remains the employing entity for the Balfour Beatty Group’s UK employees.
Balfour Beatty Annual Report and Accounts 2018
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
Net finance income on pension scheme assets and obligations (Note 28.2)
9 Finance costs
Continuing operations
Non-recourse borrowings
Preference shares
Convertible bonds
US private placement
Other interest payable
– bank loans and overdrafts
– 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
Continuing operations
Trading results of Rail Germany (including £nil (2017: £2m) of other net operating expenses)
Items (charged against)/credited to profit
10.1
10.1.1
10.1.2 Amortisation of acquired intangible assets
10.1.3 Other non-underlying items:
– Build to Last transformation costs
– additional loss on the AWPR contract as a result of Carillion’s liquidation
– loss arising from the recognition of GMP equalisation on the Group’s pension schemes
– provision release relating to settlements of health and safety claims
– additional gain on disposal of Balfour Beatty Infrastructure Partners
– (loss)/gain on disposal of Heery International Inc
– loss on disposal of Blackpool Airport
Total other non-underlying items from continuing operations
10.1.4 Share of results of joint ventures and associates
– costs relating to the liquidation of the Malaysia joint venture
Charged against profit before taxation from continuing operations
10.1.5
Tax credits:
– tax on loss arising from the recognition of GMP equalisation on the Group’s pension schemes
– tax on other items above
– 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
Discontinued operations
Total tax credit on continuing operations
Non-underlying items (charged against)/credited to profit for the year from continuing operations
10.2
10.2.1 Gain on disposal of Dutco Balfour Beatty LLC and BK Gulf LLC
Non-underlying items credited to profit for the year from discontinued operations
(Charged against)/credited to profit for the year
135
2017
£m
26
11
1
4
–
42
2017
£m
13
12
3
5
7
13
1
4
9
6
73
2017
£m
–
(9)
(12)
(44)
–
–
–
18
(1)
(39)
(48)
–
(48)
–
2
32
34
68
20
5
5
25
2018
£m
21
9
–
3
2
35
2018
£m
14
12
3
4
5
12
1
3
5
–
59
2018
£m
–
(8)
(11)
(10)
(28)
13
3
(12)
–
(45)
(53)
(5)
(58)
5
9
–
–
14
(44)
–
–
(44)
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 136
Notes to the Financial Statements continued
10 Non-underlying items continued
Continuing operations
10.1.1 Rail Germany’s results continue to be presented as part of the Group’s non-underlying items within continuing operations as
the Group remains committed to exiting its Mainland European rail businesses and does not consider its operations part of the Group’s
underlying activity. In 2018, the remaining parts of Rail Germany generated a £nil profit or loss before tax (2017: £nil).
10.1.2 The amortisation of acquired intangible assets from continuing operations comprises: customer contracts £5m (2017: £6m) and
customer relationships £3m (2017: £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 £3m (2017: £4m) and Infrastructure Investments £5m
(2017: £5m).
10.1.3.1 In 2018, the Group continued its Build to Last transformation programme initially launched 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 £11m were incurred in 2018 relating to: Construction Services £6m; and Support Services £5m.
These restructuring costs comprise: redundancy costs £4m; property-related costs £5m; and other restructuring costs £2m.
In 2017, the Group incurred restructuring costs of £12m 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.
10.1.3.2 As a result of Carillion filing for liquidation on 15 January 2018, the Group and its remaining joint operations partner on the AWPR
project, Galliford Try plc, became jointly liable to deliver Carillion’s remaining obligations on the contract in addition to each partner’s existing
33% share. This has resulted in the Group now having a 50% interest in the AWPR contract.
In 2018, the Group recognised additional losses on this project. £10m of this charge has been recognised in non-underlying as this reflects
the additional loss that the Group has suffered in fulfilling Carillion’s obligations on the contract. The loss incurred on the Group’s original
33% joint venture share is treated as part of the Group’s underlying performance. The additional AWPR loss represents a net charge made
up of cost increases on the project partially offset by recovery positions that the Group believes are highly probable to be agreed.
These losses have been recognised in the Construction Services segment.
10.1.3.3 In 2018, the Group recognised additional retirement benefit liabilities following the judgment on the Lloyds Banking Group High
Court hearing on Guaranteed Minimum Pension (GMP) equalisation which was published on 26 October 2018. The judgment indicated
that pension trustees needed to amend scheme retirement benefits to equalise for the effect of unequal GMPs and indicated an
acceptable range of methods for how to do so.
This recent judgment therefore creates an obligation to equalise for both the BBPF and RPS schemes. The effect of GMP equalisation
which amounted to £28m has been recognised in the Group’s income statement as a plan amendment. The Group has also treated this
item as non-underlying due to the size and nature of the income statement charge. Any future changes in relation to GMP equalisation
will be treated as part of the Group’s actuarial gains/losses which are recognised within OCI. Refer to Note 28.2.
The charge was recognised in the following segments: Construction Services £15m and Support Services £13m.
10.1.3.4 In 2018, the Group recognised a provision release of £13m relating to the settlement of health and safety claims. These claims
were previously included as part of the Group’s overall reassessment of potential liabilities relating to historical health and safety breaches
following new sentencing guidelines which was conducted in 2016. As a result of this reassessment, a non-underlying charge of £25m
was recognised in the first half of 2016.
The credit was recognised in the following segments: Construction Services £2m and Support Services £11m.
10.1.3.5 In 2018, the Group received further consideration of £3m relating to its previously disposed interest in Balfour Beatty Infrastructure
Partners in 2016. The additional consideration relates to the earn-out agreement that was entered into with the buyer as part of the disposal.
At the time of disposal, the Group did not include an estimate of the potential earn-out within its assessment of the gain on disposal as there
was significant uncertainty as to whether the earn-out hurdles would be met. This additional gain has been recognised within non-underlying
consistent with the Group’s treatment of the gain on disposal previously recognised in 2016. This gain has been included in the Infrastructure
Investments segment.
Balfour Beatty Annual Report and Accounts 2018
137
10 Non-underlying items continued
Continuing operations continued
10.1.3.6 On 27 October 2017, the Group disposed of its 100% interest in Heery International Inc (Heery) 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 32.3.3. This gain on disposal was
included in the Construction Services segment.
In 2018, an additional indemnity provision of £12m was recognised in the year following the reassessment of several projects which were
indemnified by the Group as part of the sale. This estimate is subject to final ongoing negotiations with various clients and any further gains
or losses that arise as part of this indemnity obligation will be recorded within non-underlying as part of the Heery disposal.
10.1.3.7 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 32.3.2. This loss has
been included in the Infrastructure Investments segment.
10.1.4.1 In 2018, the decision was made to enter the Group’s 70% joint venture Balfour Beatty Rail Sdn. Bhd. into voluntary liquidation.
In light of this decision, an assessment of the joint venture’s balance sheet was carried out which resulted in the Group’s investment
balance and associated goodwill being written off. This write-off amounted to £5m and has been recognised within the Construction
Services segment.
10.1.5.1 As explained in Note 10.1.3.3, a non-underlying charge of £28m was recognised in 2018 to take into account the effect of GMP
equalisation. This charge has given rise to a deferred tax credit of £5m.
10.1.5.2 The remaining non-underlying items charged against the Group’s operating profit from continuing operations gave rise to a tax credit
of £9m comprising: £3m credit arising on the impact of additional indemnity provisions recognised on the disposal of Heery; £2m credit on
the additional loss recognised for the AWPR contract; £2m credit on Build to Last restructuring costs; and £2m credit on amortisation of
acquired intangible assets (2017: £1m charge on the gain on disposal of Heery; and £3m credit on amortisation of acquired intangible assets).
10.1.5.3 The US Government 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.
10.1.5.4 In 2017, 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 led to the recognition of additional UK deferred tax assets in 2017 of £34m. Given the
size and nature of the credit resulting from the increase to actuarial gains in the BBPF, the credit was included as a non-underlying item.
Discontinued operations
10.2.1 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 32.3.1.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 138
Notes to the Financial Statements continued
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
– 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).
Underlying
items1
2018
£m
(18)
20
2
Non-
underlying
items
(Note 10)
2018
£m
(8)
(6)
(14)
5
–
5
5
(2)
3
8
(29)
6
(23)
15
–
2
17
(6)
2
(3)
–
(3)
(3)
–
(3)
(6)
(6)
1
(5)
(3)
–
–
(3)
(8)
(14)
Total
2018
£m
(26)
14
(12)
2
–
2
2
(2)
–
2
(35)
7
(28)
12
–
2
14
(14)
(12)
Total
2017
£m
(30)
(15)
(45)
4
(1)
3
3
(6)
(3)
–
(36)
3
(33)
18
(32)
2
(12)
(45)
(45)
The Group has recognised £14m of tax credits (2017: £68m) within non-underlying items in the year. Refer to Note 10.1.5.
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.
The Group’s underlying tax charge for the year benefits from the recognition of deferred tax assets for some of the Group’s previously
unrecognised historical UK tax losses.
In addition to the Group tax charge, tax of £3m is charged (2017: £50m) directly to other comprehensive income, comprising: a deferred
tax charge of £nil for subsidiaries (2017: £37m); and a deferred tax charge in respect of joint ventures and associates of £3m (2017: £13m).
Refer to Note 30.1.
Balfour Beatty Annual Report and Accounts 2018
11 Income taxes continued
11.2 Income tax reconciliation
Continuing operations
Profit before taxation including share of results from joint ventures and associates
Less: share of results of joint ventures and associates
Profit before taxation
Add: non-underlying items charged excluding share of joint ventures and associates
Underlying profit before taxation for subsidiaries1
Tax on profit before taxation at standard UK corporation tax rate of 19% (2017: 19.25%)
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 10.1.5)
Total tax credit on profit from continuing operations
139
2017
£m
117
(59)
58
48
106
20
3
(16)
9
2
1
(1)
10
–
(5)
23
(68)
(45)
2018
£m
123
(23)
100
53
153
29
6
(13)
4
2
–
(38)
6
6
–
2
(14)
(12)
+ 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 in 2017 on certain losses where these amounts were not expected to be recovered against future forecasted taxable profits.
* In line with meeting Build to Last Phase Two targets additional UK tax losses of £197m have been recognised in 2018.
1 Before non-underlying items (Notes 2.10 and 10).
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 140
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 £2m (2017: £3m)
Other non-underlying items – net of tax credit of £12m (2017: £65m)
Underlying earnings
Discontinued operations
Earnings
Other non-underlying items
Underlying earnings
Total operations
Earnings
Amortisation of acquired intangible assets – net of tax credit of £2m (2017: £3m)
Other non-underlying items – net of tax credit of £12m (2017: £65m)
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 per ordinary share
Total operations
Earnings per ordinary share
Amortisation of acquired intangible assets
Other non-underlying items
Underlying earnings per ordinary share
Basic
2018
£m
Diluted
2018
£m
Basic
2017
£m
Diluted
2017
£m
135
6
38
179
–
–
–
135
6
38
179
135
6
38
179
–
–
–
135
6
38
179
162
6
(26)
142
6
(5)
1
168
6
(31)
143
162
6
(26)
142
6
(5)
1
168
6
(31)
143
Basic
2018
m
682
Diluted
2018
m
687
Basic
2017
m
680
Diluted
2017
m
688
Basic
2018
Pence
Diluted
2018
Pence
Basic
2017
Pence
Diluted
2017
Pence
19.7
0.9
5.7
26.3
–
–
–
19.7
0.9
5.7
26.3
19.5
0.9
5.6
26.0
–
–
–
19.5
0.9
5.6
26.0
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
Balfour Beatty Annual Report and Accounts 2018
141
Per share
2018
Pence
Amount
2018
£m
Per share
2017
Pence
Amount
2017
£m
1.6
3.2
4.8
1.2
2.4
3.6
11
22
33
16
11
27
8
16
24
12
8
20
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
The final 2017 dividend was paid on 6 July 2018 and the interim 2018 dividend was paid on 30 November 2018. Subject to approval at the
Annual General Meeting on 16 May 2019, the final 2018 dividend will be paid on 5 July 2019 to holders on the register on 17 May 2019 by
direct credit or, where no mandate has been given, by cheque posted on 5 July 2019. The ordinary shares will be quoted ex-dividend on
16 May 2019.
14 Intangible assets – goodwill
At 1 January 2017
Currency translation differences
Disposal of Blackpool Airport (Notes 32.3.2 and 32.3.6)
Disposal of Heery International Inc (Note 32.3.3 and 32.3.6)
At 31 December 2017
Currency translation differences
At 31 December 2018
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
(173)
2
4
4
(163)
(5)
(168)
Cost
£m
1,110
(48)
(4)
(21)
1,037
34
1,071
Carrying
amount
£m
937
(46)
–
(17)
874
29
903
2017
Total
£m
694
131
49
874
United
States
£m
434
–
49
483
2017
Pre-tax
discount
rate
%
£m
10.3
248
11.0
413
10.4
68
10.4
58
11.0
49
38 10.2–11.0
874
United
Kingdom
£m
260
131
–
391
United
States
£m
460
–
52
512
2018
Total
£m
720
131
52
903
United
Kingdom
£m
260
131
–
391
2018
Pre-tax
discount
rate
%
£m
10.1
248
11.0
438
10.1
68
10.0
58
11.3
52
39 10.0–11.0
903
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
2019 to 2021. 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.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 142
Notes to the Financial Statements continued
14 Intangible assets – goodwill continued
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. Balfour Beatty recognises the inherent uncertainty arising from this and has been planning for
all outcomes. The Group has contingency plans in place to ensure it can continue to deliver on current and future work commitments.
It is anticipated that the US construction market will remain stable, 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 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.
UK Regional and Engineering Services
Balfour Beatty Construction Group Inc
Rail UK
Gas & Water
Balfour Beatty Communities US
Other
2018
Nominal
long-term
growth rate
applied
%
3.2
2.9
3.2
3.2
2.1
3.1
Real
growth
rate
%
1.2
0.9
1.2
1.2
0.1
1.1
2017
Nominal
long-term
growth rate
applied
%
2.2
3.4
2.2
2.2
2.0
2.3
Real
growth
rate
%
0.1
1.4
0.1
0.1
0.1
0.2
Inflation
rate
%
2.1
2.0
2.1
2.1
1.9
2.1
Inflation
rate
%
2.0
2.0
2.0
2.0
2.0
2.0
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.
A reasonable possible change in key assumptions would not give rise to an impairment in any of the Group’s CGUs. Sensitivity analysis
carried out on the UK Regional and Engineering Services CGU factored in potential adverse implications that may arise from a ‘no-deal’
exit from the European Union. No impairment was triggered as a result of this. The Group considers that the stabilisation and recovery
of the Gas & Water business to more normal levels of performance is a key assumption underpinning the cash flow forecasts used to
assess the recoverable amount of the related goodwill. In particular, a reduction of 260 basis points in margin within the Gas & Water
CGU would reduce its headroom to £nil.
Balfour Beatty Annual Report and Accounts 2018
15 Intangible assets – other
Cost
At 1 January 2017
Currency translation differences
Additions
Removal of fully amortised intangible asset
At 31 December 2017
Currency translation differences
Additions
Removal of fully amortised intangible asset
Disposal of interest in Holyrood Holdings Ltd
(Notes 32.2.3 and 32.2.5)
At 31 December 2018
Accumulated amortisation
At 1 January 2017
Currency translation differences
Charge for the year
Removal of fully amortised
At 31 December 2017
Currency translation differences
Charge for the year
Impairment charge
Removal of fully amortised intangible asset
Disposal of interest in Holyrood Holdings Ltd
(Notes 32.2.3 and 32.2.5)
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
Customer
contracts
£m
Customer
relationships
£m
Brand
names
£m
Infrastructure
Investments
intangibles
£m
Software
and other
£m
238
(20)
–
–
218
13
–
–
–
231
(152)
13
(6)
–
(145)
(9)
(5)
–
–
–
(159)
72
73
50
(5)
–
–
45
3
–
–
–
48
(31)
3
(3)
–
(31)
(3)
(3)
–
–
–
(37)
11
14
4
–
–
(1)
3
–
–
–
–
3
(4)
–
–
1
(3)
–
–
–
–
–
(3)
–
–
78
–
82
–
160
–
63
–
(77)
146
(2)
–
(2)
–
(4)
–
(2)
–
–
5
(1)
145
156
125
(1)
5
–
129
1
3
(1)
–
132
(81)
1
(11)
–
(91)
–
(10)
(2)
1
–
(102)
30
38
143
Total
£m
495
(26)
87
(1)
555
17
66
(1)
(77)
560
(270)
17
(22)
1
(274)
(12)
(20)
(2)
1
5
(302)
258
281
The Group recognises certain assets held as part of service concession arrangements as Infrastructure Investments intangibles where the
Group bears demand risk under IFRIC 12 Service Concession Arrangements. On 17 December 2018, the Group disposed of an interest in
the Edinburgh Student Accommodation through an 80% disposal of Holyrood Holdings Ltd (refer to Note 32.2.3). The Group retains a 20%
interest which is accounted for as a joint venture post-disposal. In 2018, the Group continued construction on its remaining IFRIC 12 asset,
at the University of Sussex, incurring a spend of £63m (2017: £82m) in the year (including interest capitalised of £6m (2017: £6m)).
Construction on this project is anticipated to complete in 2020. The Infrastructure Investments intangible assets are amortised on
a straight-line basis over the life of the projects, which is 50 years.
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 of up to 50 years.
Software assets recognised in the UK are amortised on a basis matching their usage profile over their seven-year life. Other intangible
assets are amortised over periods up to 10 years.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 144
Notes to the Financial Statements continued
16 Property, plant and equipment
16.1 Movements
Cost or valuation
At 1 January 2017
Currency translation differences
Transfers
Additions
Reclassified from inventory
Removal of fully depreciated assets/assets scrapped
Disposals
Disposal of Blackpool Airport (Notes 32.3.2 and 32.3.6)
Disposal of Heery International Inc (Notes 32.3.3 and 32.3.6)
At 31 December 2017
Currency translation differences
Transfers
Additions
Removal of fully depreciated assets/assets scrapped
Disposals
At 31 December 2018
Accumulated depreciation
At 1 January 2017
Currency translation differences
Transfers
Charge for the year
Removal of fully depreciated assets/assets scrapped
Disposals
Disposal of Blackpool Airport (Notes 32.3.2 and 32.3.6)
Disposal of Heery International Inc (Notes 32.3.3 and 32.3.6)
At 31 December 2017
Currency translation differences
Transfers
Charge for the year
Impairment charge
Removal of fully depreciated assets/assets scrapped
Disposals
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
Land and
buildings
£m
Plant and
equipment
£m
Infrastructure
leasehold
improvements
£m
Assets in
the course of
construction
£m
93
(3)
(1)
6
–
–
(4)
(15)
(4)
72
2
–
8
(9)
–
73
(50)
2
1
(8)
–
2
9
3
(41)
(1)
(1)
(7)
(2)
9
–
(43)
30
31
309
(7)
5
7
5
(5)
(22)
–
(6)
286
4
3
28
(20)
(20)
281
(236)
6
(1)
(18)
5
19
–
5
(220)
(4)
1
(19)
–
20
18
(204)
77
66
68
(6)
–
–
–
–
–
–
–
62
4
–
–
–
–
66
(3)
–
–
(2)
–
–
–
–
(5)
–
–
(2)
–
–
–
(7)
59
57
–
–
(4)
7
–
–
–
–
–
3
–
(3)
2
–
–
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
3
Total
£m
470
(16)
–
20
5
(5)
(26)
(15)
(10)
423
10
–
38
(29)
(20)
422
(289)
8
–
(28)
5
21
9
8
(266)
(5)
–
(28)
(2)
29
18
(254)
168
157
Infrastructure leasehold improvements comprise student accommodation projects in Iowa and Reno, for which all buildings are held under
short leaseholds and are depreciated over 40 years.
The carrying amount of the Group’s property, plant and equipment held under finance leases was £nil (2017: £nil). 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 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 2018
Group
2018
£m
7
1
22
30
Group
2017
£m
7
1
23
31
17 Investment properties
Cost or valuation
At 1 January 2017
Additions
Reclassified from inventories
Depreciation charge for the year
At 31 December 2017
Depreciation charge for the year
Disposals
At 31 December 2018
145
Cost
£m
Accumulated
depreciation
£m
Carrying
amount
£m
36
4
7
–
47
–
(12)
35
–
–
–
(1)
(1)
(1)
–
(2)
36
4
7
(1)
46
(1)
(12)
33
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 remaining investment properties, the Group has secured non-recourse
project specific financing amounting to £26m (2017: £26m), which is secured through a floating charge over the property. No interest
has been capitalised on the asset in 2018 as the construction on the property was completed in 2017 (2017: £1m).
Once a property is ready for use, the Group ceases capitalisation of interest cost and commences depreciation on the property,
on a straight-line basis over 25 years.
The fair value of the Group’s investment properties at 31 December 2018 approximates the carrying value. The Group generated £3m
(2017: £1m) of rental income from its investment properties.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 146
Notes to the Financial Statements continued
18 Investments in joint ventures and associates
18.1 Movements
At 1 January 2017
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 interest in Connect Plus M25 (Note 32.3.4)
Loans advanced^
Reclassify profit generated by Dutco# to provisions (Note 25)
At 31 December 2017
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 obligations (Note 30.1)
Tax on items taken directly to equity (Note 30.1)
Dividends
Additions
Disposal of interest in Connect Plus M25 (Note 32.2.1)
Disposal of Consort Healthcare (Fife) (Note 32.2.2)
Disposal of University of Texas Northside Campus (Note 32.2.4)
Retained interest in Holyrood Holdings Ltd (Note 32.2.3 and 32.2.5)
Reclassified to asset held for sale
Loans advanced
Loans repaid
At 31 December 2018
Net
assets
£m
426
(21)
60
60
10
4
(13)
(69)
29
(121)
–
(1)
364
11
23
9
15
(1)
(3)
(76)
32
(30)
9
(1)
3*
(5)
–
–
350
Loans
£m
202
–
–
–
–
–
–
–
–
(39)
4
–
167
–
–
–
–
–
–
–
–
(11)
(9)
–
3
–
27
(3)
174
Total
£m
628
(21)
60
60
10
4
(13)
(69)
29
(160)
4
(1)
531
11
23
9
15
(1)
(3)
(76)
32
(41)
–
(1)
6
(5)
27
(3)
524
^ Includes £3m of subordinated debt interest expense which has been capitalised into the carrying amount of the loan.
# 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.
* Retained interest in net assets of Holyrood Holdings Ltd are presented at fair value.
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 (2017: £nil), 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 2048. 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.
Balfour Beatty Annual Report and Accounts 2018
147
Total
2018
£m
1,171
44
111
(120)
35
(7)
28
(5)
23
31
45
15
63
114
2
1,742
110
100
487
427
3,136
18 Investments in joint ventures and associates continued
18.2 Share of results and net assets of joint ventures and associates
Infrastructure Investments
Income statement – continuing operations
Revenue1
Underlying operating profit/(loss)1
Investment income
Finance costs
Profit/(loss) before taxation1
Taxation
Profit/(loss) after taxation before non-underlying items
Share of results within non-underlying items
Profit/(loss) 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 – non-recourse
Other current liabilities
Non-current liabilities
Borrowings – non-recourse
Other non-current liabilities
Total liabilities
Net assets
Loans to joint ventures and associates
Total investment in joint ventures and associates
^ Including Singapore.
1 Before non-underlying items (Notes 2.10 and 10).
Construction
Services
2018
£m
913
30
3
–
33
(5)
28
(5)
23
Support
Services
2018
£m
28
(2)
–
–
(2)
–
(2)
–
(2)
31
–
–
25
–
2
–
–
76
328
184
646
(44)
(441)
–
(61)
(546)
100
–
100
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3)
(3)
(3)
4
1
UK^
2018
£m
124
(5)
94
(104)
(15)
(2)
(17)
–
(17)
–
45
15
38
–
–
1,485
–
23
131
43
1,780
(42)
(137)
(1,255)
(275)
(1,709)
71
171
242
North
America
2018
£m
106
21
14
(16)
19
–
19
–
19
–
–
–
–
114
–
257
110
1
28
200
710
–
(19)
(508)
(2)
(529)
181
–
181
Total
2018
£m
230
16
108
(120)
4
(2)
2
–
2
–
45
15
38
114
–
1,742
110
24
159
243
2,490
(42)
(156)
(86)
(597)
(1,763)
(277)
(2,238)
252
171
423
(1,763)
(341)
(2,787)
349
175
524
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 £2,466m (2017: £2,340m). 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 2018, the unrecognised cumulative net fair value charges to other
comprehensive income amounted to £1m (2017: £9m).
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance
148
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 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 – non-recourse
Other current liabilities
Non-current liabilities
Borrowings – non-recourse
Other non-current liabilities
Total liabilities
Net assets
Loans to joint ventures and associates
Total investment in joint ventures and associates
^ Including Singapore.
1 Before non-underlying items (Notes 2.10 and 10).
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
Construction
Services
2017
£m
1,074
32
3
(2)
33
(3)
30
Support
Services
2017
£m
30
–
–
–
–
–
–
32
–
3
25
–
7
–
–
53
329
206
655
(32)
(456)
–
(52)
(540)
115
–
115
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
–
(1)
(1)
4
3
UK^
2017
£m
173
5
127
(114)
18
(3)
15
–
23
12
38
–
–
1,659
–
17
156
53
1,958
(41)
(141)
(1,331)
(355)
(1,868)
90
163
253
North
America
2017
£m
63
15
9
(10)
14
–
14
–
–
–
3
72
–
184
112
–
19
3
393
–
(11)
(222)
–
(233)
160
–
160
Total
2017
£m
236
20
136
(124)
32
(3)
29
–
23
12
41
72
–
1,843
112
17
175
56
2,351
(41)
(152)
(1,553)
(355)
(2,101)
250
163
413
Joint
ventures
2018
£m
15
412
Joint
ventures
2017
£m
49
425
Associates
2018
£m
8
112
Associates
2017
£m
10
106
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
(73)
(609)
(1,553)
(407)
(2,642)
364
167
531
Total
2018
£m
23
524
Total
2017
£m
59
531
Balfour Beatty Annual Report and Accounts 2018
149
Gammon@
2017
£m
50%
2018
£m
50%
1,803
47
16
(7)
(7)
49
24
23
2,040
35
15
(12)
(6)
32
16
37
Connect
Plus
(M25) Ltd+
2017
£m
20%
118
3
138
(111)
(6)
24
10
–
2018
£m
15%
148
3
139
(169)
5
(22)
(3)
6
366
641
341
982
(657)
(44)
(94)
(143)
(938)
(89)
(23)
(107)
(42)
(261)
149
149
75
–
31
106
319
2,203
2,123
622
387
1,009
(699)
(54)
(70)
(123)
(946)
(76)
(21)
(109)
(36)
(242)
140
140
70
–
29
99
152
85
237
(84)
–
(19)
(19)
(122)
197
69
266
(86)
–
(6)
(45)
(137)
–
–
(1,253)
(433)
(1,686)
632
–
–
(1,027)
(618)
(1,645)
607
632
95
28
–
123
607
121
39
–
160
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
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
Balance sheet
Non-current assets
Current assets
Cash and cash equivalents
Other current assets
Current liabilities
Trade and other payables
Provisions
Borrowings – non-recourse
Other current liabilities
Non-current liabilities
Trade and other payables
Provisions
Borrowings – non-recourse
Other non-current liabilities (including shareholder loans)
Net assets (100%)
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 of joint venture (100%)
Group’s share of net assets
Add: Group’s interest in shareholder loans
Goodwill
Carrying amount of the Group’s interest in the joint venture
@ 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 Connect Plus (M25) Ltd in December 2017 and a further 5% in February 2018. Refer to Notes 32.2.1 and 32.3.4.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance Infrastructure
Investments
North
America
2018
£m
27
–
(25)
(25)
–
–
13
15
UK^
2018
£m
9
7
(31)
(7)
(27)
3
150
135
Other
2018
£m
40
–
–
–
–
–
1
41
Total
2018
£m
76
7
(56)
(32)
(27)
3
164
191
Infrastructure
Investments
North
America
2017
£m
14
–
(26)
(26)
–
–
–
(12)
UK^
2017
£m
2
9
(4)
(3)
(1)
–
103
110
Other
2017
£m
53
–
–
–
–
–
3
56
Total
2017
£m
69
9
(30)
(29)
(1)
–
106
154
Accumulated
profit/(loss)
£m
91
–
60
–
–
4
(1)
(69)
–
(20)
65
–
23
–
–
(1)
–
(76)
–
(19)
(8)
Hedging
reserve
£m
(198)
–
–
–
11
–
(2)
–
58
(1)
(132)
–
–
–
15
–
(2)
–
51
–
(68)
PPP
financial
assets
£m
227
–
–
60
–
–
(10)
–
(143)
–
134
–
–
9
–
–
(1)
–
(55)
–
87
Currency
translation
reserve
£m
64
(18)
–
–
–
–
–
–
–
–
46
7
–
–
–
–
–
–
(1)
–
52
Total
(Note 30.1)
£m
184
(18)
60
60
11
4
(13)
(69)
(85)
(21)
113
7
23
9
15
(1)
(3)
(76)
(5)
(19)
63
150
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
Subordinated debt repaid
Disposal of investments in joint ventures
Net cash flow from/(to) joint ventures and associates
^ Including Singapore.
18.6 Share of reserves of joint ventures and associates
At 1 January 2017
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
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 2018
Balfour Beatty Annual Report and Accounts 2018
151
Total
£m
45
(2)
3
1
(8)
39
1
1
(11)
30
Corporate
bonds
£m
22
–
–
–
(5)
17
–
–
(8)
9
Investments
in mutual
funds
£m
23
(2)
3
1
(3)
22
1
1
(3)
21
19 Investments
19.1 Group
At 1 January 2017
Currency translation differences
Fair value gains
Additions
Maturities/disposals
At 31 December 2017
Currency translation differences
Fair value gains
Maturities/disposals
At 31 December 2018
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 1.76% (2017: 0.73%) and weighted average life of 3.9 years (2017: 2.2 years).
The fair value of the bonds is £8m (2017: £17m), determined by the market price of the bonds at the reporting date. The maximum exposure
to credit risk at 31 December 2018 is the carrying amount. These bonds have been pledged as security for letters of credit issued in respect
of Delphian Insurance Company Ltd.
The 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 these investments is £21m (2017: £22m),
determined by the market price of the funds at the reporting date.
19.2 Company
Investment in subsidiaries
Provisions
2018
£m
1,732
(26)
1,706
2017
£m
1,802
(102)
1,700
Due to the liquidation of a number of dormant subsidiaries in the year, the Company has written off its investment in these subsidiaries
which have all been fully provided for in previous years, resulting in a decrease in both its cost of investments and provisions against
investments of £76m respectively. The remaining increase of investment in subsidiaries of £6m relate to new capital injected into the
Company’s existing subsidiaries. Including provisions recognised to date, the Directors have assessed the Company’s investment in
subsidiaries to be fully recoverable.
20 PPP financial assets
At 1 January 2017
Income recognised in the income statement:
– interest income (Note 8)
Gains/(losses) recognised in the statement of comprehensive income:
– fair value movements
Other movements:
– cash expenditure
– cash received
At 31 December 2017
Income recognised in the income statement:
– interest income (Note 8)
Losses recognised in the statement of comprehensive income:
– fair value movements
Other movements:
– cash expenditure
– cash received
At 31 December 2018
Economic
infrastructure
£m
31
Social
infrastructure
£m
132
3
(1)
1
(4)
30
2
(1)
1
(4)
28
8
4
–
(11)
133
7
(3)
1
(10)
128
Total
£m
163
11
3
1
(15)
163
9
(4)
2
(14)
156
Assets constructed by PPP subsidiary concession companies are classified as financial assets measured at fair value through OCI and
are denominated in sterling. The maximum exposure to credit risk at the reporting date is the fair value of the PPP financial assets.
There were no impairment provisions in 2018 or 2017.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 152
Notes to the Financial Statements continued
21 Inventories
Unbilled non-construction work in progress2
Raw materials and consumables2
Development and housing land and work in progress
Finished goods and goods for resale
2018
£m
–
53
26
5
84
2017
£m
55
20
27
5
107
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised
as an adjustment to opening equity (Notes 2.1 and 40).
22 Contract balances
The timing of revenue recognition, billings and cash collection results in trade receivables (billed amounts), contract assets (unbilled amounts)
and customer advances and deposits (contract liabilities) on the Group’s balance sheet. For services in which revenue is earned over time,
amounts are billed in accordance with contractual terms, either at periodic intervals or upon achievement of contractual milestones.
The timing of revenue recognition is measured in accordance with the progress of delivery on a contract which could either be in advance
or in arrears of billing, resulting in either a contract asset or a contract liability.
Contract assets
At 1 January 20182
Currency translation differences
Transfers from contract assets recognised at the beginning of the year to receivables
Increase related to services provided in the year
Reclassified from contract provisions (Note 25)
Impairments on contract assets recognised at the beginning of the year
At 31 December 2018
Contract liabilities
At 1 January 20182
Currency translation differences
Revenue recognised against contract liabilities at the beginning of the year
Increase due to cash received, excluding amounts recognised as revenue during the year
At 31 December 2018
2018
£m
414
8
(329)
322
(37)
(15)
363
2018
£m
(476)
(17)
429
(427)
(491)
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised
as an adjustment to opening equity (Notes 2.1 and 40).
The amount of revenue recognised in 2018 from performance obligations satisfied (or partially satisfied) in previous periods amounted to £45m.
Balfour Beatty Annual Report and Accounts 2018
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 income2
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
153
Group
20182
£m
Group
2017
£m
Company
2018
£m
Company
2017
£m
599
(5)
594
–
24
19
192
3
30
1
39
902
51
150
5
6
212
1,114
1,084
30
1,114
536
(7)
529
–
23
25
185
18
35
63
21
899
38
173
4
1
216
1,115
1,080
35
1,115
–
–
–
2,083
–
–
–
–
–
–
–
2,083
1
–
–
–
1
2,084
2,084
–
2,084
–
–
–
1,531
–
–
–
–
–
–
–
1,531
2
–
–
–
2
1,533
1,533
–
1,533
# Including £339m (2017: £352m) construction contract retentions receivable.
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised
as an adjustment to opening equity (Notes 2.1 and 40).
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.
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
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
2018
£m
1
–
–
–
4
5
Impaired
Group
2017
£m
–
–
1
–
6
7
Group
2018
£m
(7)
Group
2017
£m
(7)
(1)
2
1
(5)
(2)
2
–
(7)
Past due but not
impaired
Group
2017
£m
31
9
5
3
27
75
Group
2018
£m
63
12
6
8
18
107
At 31 December 2018, trade receivables of £107m (2017: £75m) 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/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 154
Notes to the Financial Statements continued
24 Trade and other payables
Current
Trade and other payables+
Accruals
Deferred income2
VAT, payroll taxes and social security
Advance payments on contracts2
Due to subsidiaries
Due to joint ventures and associates
Dividends on preference shares
Due on acquisitions
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 income2
– VAT, payroll taxes and social security
– advance payments on contracts2
Group
20182
£m
Group
2017
£m
Company
2018
£m
Company
2017
£m
758
580
–
26
–
–
–
6
3
1,373
108
18
9
8
143
1,516
833
604
1
68
16
–
11
6
3
1,542
120
19
7
11
157
1,699
–
6
–
–
–
2,158
–
6
–
2,170
1
–
3
–
4
2,174
1
7
–
–
–
1,911
–
6
–
1,925
1
–
3
–
4
1,929
1,484
1,585
2,174
1,929
6
–
26
–
1,516
29
1
68
16
1,699
–
–
–
–
2,174
–
–
–
–
1,929
+ Included within the Group’s trade and other payables balance is thirty three thousand pounds (2017: £0.2m) 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 payment terms, normally 30 days. As at 31 December
2018, the Group decided to close down this scheme. The remaining balance outstanding on the scheme was fully settled in January 2019.
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised
as an adjustment to opening equity (Notes 2.1 and 40).
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
2018
£m
82
23
3
108
Trade
and other
payables
2017
£m
104
12
4
120
Due to
joint
ventures
and
associates
2018
£m
–
1
8
9
Due to
joint
ventures
and
associates
2017
£m
–
–
7
7
Due on
acquisitions
2018
£m
3
5
–
8
Due on
acquisitions
2017
£m
3
8
–
11
Accruals
2018
£m
7
9
2
18
Accruals
2017
£m
13
5
1
19
Total
2018
£m
92
38
13
143
Total
2017
£m
120
25
12
157
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 2018
25 Provisions
At 1 January 2017
Currency translation differences
Transfers
Reclassified from accruals and due to construction contract customers
Charged/(credited) to the income statement:
– additional provisions
– unused amounts reversed
– profits generated by Dutco
Utilised during the year
Disposal of Dutco (Note 32.3.1)
Disposal of Heery International Inc (Note 32.3.3 and 32.3.6)
At 31 December 2017
Adjustment as a result of transitioning to IFRS 15 on 1 January 20182
Adjusted balance at 1 January 2018
Currency translation differences
Reclassified from accruals
Charged/(credited) to the income statement:
– additional provisions
– unused amounts reversed
Utilised during the year
Reclassified to contract assets
At 31 December 2018
Contract
provisions2
£m
146
(3)
4
13
122
(38)
–
(51)
–
(2)
191
98
289
4
12
140
(31)
(141)
(37)
236
Employee
provisions
£m
61
–
3
–
Other
provisions
£m
66
(1)
(7)
1
29
(7)
–
(24)
–
–
62
–
62
–
(3)
12
(6)
(10)
–
55
12
(10)
(1)
(10)
(11)
–
39
–
39
–
–
8
(14)
(8)
–
25
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised
as an adjustment to opening equity (Notes 2.1 and 40).
Due within one year
Due within one to two years
Due within two to five years
Due after more than five years
Contract
provisions2
2018
£m
139
62
29
6
236
Employee
provisions
2018
£m
17
10
14
14
55
Other
provisions
2018
£m
11
5
6
3
25
Total
2018
£m
167
77
49
23
316
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
155
Total
£m
273
(4)
–
14
163
(55)
(1)
(85)
(11)
(2)
292
98
390
4
9
160
(51)
(159)
(37)
316
Total
2017
£m
194
33
31
34
292
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised
as an adjustment to opening equity (Notes 2.1 and 40).
Contract provisions include construction insurance liabilities, principally in the Group’s captive insurance arrangements, loss provisions, and
defect and warranty provisions on contracts, primarily construction contracts, that have reached practical completion. There is a 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 £67m (2017: £62m) as follows: Contract provisions £35m (2017: £32m);
Employee provisions £28m (2017: £26m); and Other, mainly motor, provisions £4m (2017: £4m).
Restructuring provisions within these categories were £7m (2017: £6m) as follows: Employee provisions £5m (2017: £1m); and Other,
mainly property-related, provisions £2m (2017: £5m).
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 156
Notes to the Financial Statements continued
26 Cash and cash equivalents and borrowings
26.1 Group
Unsecured borrowings at amortised cost
– US private placement (Note 26.2)
– liability component of convertible bonds (Note 26.3)
– other loans
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 2072
Infrastructure concessions cash and cash equivalents
Net cash/(borrowings)
Current
2018
£m
Non-current
2018
£m
Total
2018
£m
Current
2017
£m
Non-current
2017
£m
–
–
(15)
(15)
587
4
591
576
(48)
70
22
598
(239)
–
–
(239)
–
–
–
(239)
(331)
–
(331)
(570)
(239)
–
(15)
(254)
587
4
591
337
(379)
70
(309)
28
(33)
(226)
(9)
(268)
717
116
833
565
(8)
135
127
692
(226)
–
(4)
(230)
–
–
–
(230)
(432)
–
(432)
(662)
Total
2017
£m
(259)
(226)
(13)
(498)
717
116
833
335
(440)
135
(305)
30
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: £18m (2017: £25m) held by the Group’s captive insurance company, Delphian
Insurance Company Ltd, which is subject to Isle of Man insurance solvency regulations; £51m (2017: £12m) held within construction project
bank accounts; and £70m (2017: £135m) 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 £318m (2017: £261m).
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
2018
£m
(48)
(4)
(48)
(279)
(379)
Other
borrowings
2018
£m
(15)
(36)
(164)
(39)
(254)
Non-recourse
project
finance
2017
£m
(8)
(70)
(22)
(340)
(440)
Other
borrowings
2017
£m
(268)
(4)
(34)
(192)
(498)
Total
2018
£m
(63)
(40)
(212)
(318)
(633)
Total
2017
£m
(276)
(74)
(56)
(532)
(938)
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
2018
£m
–
–
–
–
Other
borrowings
2018
£m
–
400
–
400
Non-recourse
project
finance
2017
£m
1
–
–
1
Other
borrowings
2017
£m
25
–
375
400
Total
2018
£m
–
400
–
400
Total
2017
£m
26
–
375
401
The Group has committed facilities of £400m which expire in December 2020. The entire facilities remain undrawn at 31 December 2018.
Balfour Beatty Annual Report and Accounts 2018
157
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. On 7 March 2018, the Group repaid the first tranche of these notes
amounting to US$45m (£32.5m). At 31 December 2018, US$305m (£239m) remain with an average coupon of 5.1% and a remaining
average maturity of 4.1 years.
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 had a coupon of 1.875% per annum
payable semi-annually in arrears and the initial conversion price was set at £3.6692 per share. On 23 April 2014, the conversion price
was revised to £3.6212 per share.
From 14 January 2014 until 14 days prior to final maturity, one bond was convertible at the option of the holder into one preference share
in Balfour Beatty Finance No 2 Ltd which would immediately be transferred to the Company in exchange for the issue of ordinary shares
in the Company.
The bonds were 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 2018, following the partial repurchase of bonds in December 2017 (£21.3m) and March 2018 (£17.7m), the Group repaid the remaining
convertible bonds for a further £213.7m as it fell due on 3 December 2018. As a result of this settlement, the remaining amount previously
held in other reserves which related to the equity conversion component of the bonds was transferred in full to retained earnings. Refer to
Note 30.1.
Liability component recognised in the Balance Sheet
Liability component at 1 January at amortised cost
Accretion
Repayment/repurchase of bonds
Liability component at 31 December at amortised cost
26.4 Company
Cash and deposits
US private placement (Note 26.2)
Net borrowings
2018
£m
226
5
(231)
–
Non-
current
2017
£m
–
(226)
(226)
2017
£m
240
7
(21)
226
Total
2017
£m
134
(259)
(125)
Current
2018
£m
134
–
134
Non-
current
2018
£m
–
(239)
(239)
Total
2018
£m
134
(239)
(105)
Current
2017
£m
134
(33)
101
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 158
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 2017
Currency translation differences
Credited to income statement#
Charged to equity#
Research and development tax credit
Disposal of Blackpool Airport (Notes 32.3.2 and 32.3.6)
Disposal of Heery International Inc (Notes 32.3.3 and 32.3.6)
At 31 December 2017
Currency translation differences
Credited to income statement
Research and development tax credit
Disposal of interest in Holyrood Holdings Ltd (Notes 32.2.3 and 32.2.5)
At 31 December 2018
Group
2018
£m
80
(90)
(10)
Group
2017
£m
52
(70)
(18)
Company
2018
£m
–
–
–
Company
2017
£m
–
(1)
(1)
Group
£m
(26)
7
45
(37)
1
1
(9)
(18)
(6)
14
1
(1)
(10)
Company
£m
(2)
–
1
–
–
–
–
(1)
–
1
–
–
–
# The movement in 2017 also included a £32m credit to the income statement and £1m credit to equity in relation to changes in the US Federal corporate income rate taxes.
Balfour Beatty Annual Report and Accounts 2018
159
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
At 1 January 2017
Currency translation
differences
Credited/(charged) to
income statement
Credited/(charged) to equity
Research and development
tax credit
Disposal of Blackpool Airport
(Notes 32.3.2 and 32.3.6)
Disposal of Heery
International Inc
(Notes 32.3.3 and 32.3.6)
At 31 December 2017
Currency translation
differences
Transfers
Credited/(charged) to
income statement
Credited/(charged) to equity
Research and development
tax credit
Disposal of interest in
Holyrood Holdings Ltd
(Notes 32.2.3 and 32.2.5)
At 31 December 2018
Depreciation
in excess
of capital
allowances
£m
17
–
2
–
–
–
–
19
–
(1)
(2)
–
–
2
18
Retirement
benefits
£m
22
(1)
(5)
(37)
–
–
–
(21)
–
–
–
–
–
Unrelieved
trading
losses
£m
62
Share-
based
payments
£m
2
Provisions
£m
44
Preference
shares
£m
(2)
Fair value
adjustments
£m
(79)
Derivatives
£m
7
Other
GAAP
differences
£m
(99)
Research and
develop ment
credit
£m
–
(4)
21
–
–
–
–
79
2
(4)
35
–
–
–
2
1
–
–
–
5
–
–
(1)
–
–
–
4
1
(16)
–
–
–
(3)
26
–
1
–
–
–
–
27
–
–
–
–
–
–
(2)
–
–
1
–
–
–
(1)
4
14
–
–
–
4
(57)
(3)
–
(8)
1
–
–
(67)
–
–
(1)
–
–
–
6
–
–
–
(1)
–
–
5
7
27
–
–
1
(10)
(74)
(5)
4
(11)
–
–
–
(86)
–
–
–
1
–
–
1
–
–
–
–
1
–
2
–
(21)
(3)
109
Total
£m
(26)
7
45
(37)
1
1
(9)
(18)
(6)
–
14
–
1
(1)
(10)
At the reporting date the Group had unrecognised tax losses from operations (excluding capital losses) that arose over a numbers of years
of approximately £754m (2017: £922m) which are available for offset against future profits. £16m (2017: £8m) 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
2019. The remaining losses may be carried forward indefinitely.
The Group has recognised deferred tax assets for UK corporation tax trading losses of £405m (2017: £245m). The Group has UK corporation
tax trading losses of £437m (2017: £612m) which are not recognised as deferred tax assets. As set out in Note 11, the Group has recognised
£197m of additional UK tax losses in the period consistent with meeting Phase Two Build to Last targets. The Group also had temporary
differences relating to retirement benefits on which a deferred tax asset has not been recognised of £44m (2017: £62m).
Deferred tax liabilities on fair value adjustments of £67m relate to temporary differences arising on goodwill and intangibles. Deferred tax
liabilities on other GAAP differences of £86m relate to temporary differences arising on joint ventures.
At the reporting date the undistributed reserves for which deferred tax liabilities have not been recognised were £nil (2017: £nil) in respect
of subsidiaries and £nil (2017: £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
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.
Deferred tax assets and liabilities
At 1 January 2017
Credited to income statement
At 31 December 2017
Credited to income statement
At 31 December 2018
Deferred tax
liabilities
Preference
shares
£m
(2)
–
(2)
1
(1)
Deferred tax
assets
Share-based
payments
£m
–
1
1
–
1
Provisions
£m
–
–
–
–
–
Net deferred
tax assets/
(liabilities)
£m
(2)
1
(1)
1
–
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 160
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 income arising from the expected interest income
on plan assets and interest cost on scheme obligations is included in investment income. 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 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 owned the Group’s 100% interest in the Edinburgh student accommodation project.
In December 2018, the Group extracted from the SLP the investment in Holyrood Student Accommodation Holdings Ltd and in its place,
the Group transferred in its 15% share of the Connect Plus (M25) asset.
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 2018, the BBPF received distributions of £1m from the SLP
(2017: £1m).
Balfour Beatty Annual Report and Accounts 2018
161
28 Retirement benefit assets and liabilities continued
28.1 Introduction continued
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; £5m in 2017; and a further £7m in 2018. Following this, £9m will be 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 and £18m in 2018. The Group will make further contributions of £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.
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.
Because of a declining population of active members, it has become less likely that the Group’s costs of meeting any deficits would
be capped in line with its strict legal obligation of 60% as members might only be able to afford to fund a small proportion of the
scheme deficit. 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
investments in mutual funds (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.
The Group also participates in The Plumbing & Mechanical Services Industry Pension Scheme (“Plumbers Scheme”), which is an industry-
wide non-associated multi-employer defined benefit scheme. As the Plumbers Scheme does not segregate assets and liabilities between
the different participating employers, the Group’s only obligation to the Plumbers Scheme is to pay the contributions requested by the
scheme Trustees as they fall due. In accordance with IAS 19, this obligation has been accounted for on a defined contribution basis and
the relevant employer contributions have been charged to the income statement.
balfourbeatty.com/AR2018
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Notes to the Financial Statements continued
28 Retirement benefit assets and liabilities continued
28.1 Introduction continued
Membership of the principal schemes
Balfour Beatty
Pension Fund
2018
Railways
Pension Scheme
2018
Balfour Beatty
Pension Fund
2017
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
2017
Defined
benefit
obligations
£m
Average
duration
Years
Defined benefit
– active
members
– deferred
pensioners
– pensioners,
widow(er)s and
dependants
Defined
contribution
Total
8
3
11,121
1,602
17,922
1,711
13,582
42,633
–
3,316
17
22
11
–
16
104
1,217
1,746
–
3,067
44
137
196
–
377
22
22
13
–
17
10
3
11,753
1,692
18,186
1,817
13,534
43,483
–
3,512
17
23
11
–
17
93
1,234
1,709
–
3,036
43
139
209
–
391
22
22
13
–
17
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
2018
%
2.80
3.20
2.20
2.20
2.95
Railways
Pension
Scheme
2018
%
2.80
3.20
2.20
2.20
2.30
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
In 2018, the Group recognised additional liabilities following the judgment on the Lloyds Banking Group High Court hearing on GMP
equalisation which was published on 26 October 2018. The judgment indicated that pension trustees needed to amend scheme retirement
benefits to equalise for the effect of unequal GMPs and indicated an acceptable range of methods for how to do so.
This recent judgment therefore creates an obligation to equalise for both the BBPF and RPS schemes. The effect of GMP equalisation,
which amounted to £26m for the BBPF scheme and £2m for the RPS scheme, has been recognised in the Group’s income statement
as a plan amendment. The Group has also treated this item as non-underlying due to the size and nature of the income statement charge.
Any future changes in relation to GMP equalisation will be treated as part of the Group’s actuarial gains/losses which are recognised
within OCI.
Following independent advice from the Group’s actuaries, the Group reassessed the difference between RPI and CPI measures of price
inflation from 1.1% at December 2017 to 1.0% at December 2018. This resulted in an actuarial loss of £16m being recognised 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 (42,633 members at 31 December 2018) 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 2018 have been updated to reflect the experience of Balfour Beatty pensioners for the period 1 April 2017
to 31 March 2018. The mortality tables adopted for the 2018 IAS 19 valuations are the Self-Administered Pension Scheme (SAPS)
S2 tables (2017: SAPS S2 tables) with a multiplier of 102% for all male and female members (2017: 102%) and 106% for female widows
and dependants (2017: 106%); all with future improvements in line with the CMI 2017 core projection model (2017: CMI 2016 core
projection model), with long-term improvement rates of 1.25% per annum and 1.00% per annum for males and females respectively
(2017: 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)
Balfour Beatty Annual Report and Accounts 2018
2018
Average life
expectancy
at 65 years of age
Female
Male
23.5
21.7
24.5
22.8
2017
Average life
expectancy
at 65 years of age
Female
23.6
24.6
Male
21.9
23.0
163
Total
2017
£m
(6)
–
(46)
(52)
–
96
(102)
(6)
(58)
Total
2017
£m
94
148
242
28 Retirement benefit assets and liabilities continued
28.2 IAS 19 accounting valuations continued
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 £444m (2017: £460m) have been excluded from the
tables on pages 164 to 166. Defined contribution charges for other schemes include contributions to multi-employer pension schemes.
Group
Current service cost
Administrative expenses
Defined contribution charge
Included in employee costs (Note 7)
Past service cost as a result of GMP
equalisation (Note 10.1.3.3)
Interest income
Interest cost
Net finance income/(cost) (Notes 8 and 9)
Total charged to income statement
Balfour
Beatty
Pension
Fund
2018
£m
Railways
Pension
Scheme
2018
£m
Other
schemes
2018
£m
(2)
–
(45)
(47)
(26)
92
(87)
5
(68)
(1)
(1)
–
(2)
(2)
8
(10)
(2)
(6)
(2)
–
(5)
(7)
–
–
(1)
(1)
(8)
Amounts recognised in the Statement of Comprehensive Income
Balfour
Beatty
Pension
Fund
2018
£m
Railways
Pension
Scheme
2018
£m
Other
schemes
2018
£m
123
(108)
15
11
(9)
2
5
–
5
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
Balfour
Beatty
Pension
Fund
2017
£m
Railways
Pension
Scheme
2017
£m
Other
schemes
2017
£m
Total
2018
£m
(5)
(1)
(50)
(56)
(28)
100
(98)
2
(82)
Total
2018
£m
139
(117)
(2)
–
(43)
(45)
–
89
(90)
(1)
(46)
Balfour
Beatty
Pension
Fund
2017
£m
72
129
22
201
(1)
–
–
(1)
–
7
(10)
(3)
(4)
(3)
–
(3)
(6)
–
–
(2)
(2)
(8)
Railways
Pension
Scheme
2017
£m
Other
schemes
2017
£m
2
–
2
20
19
39
(68)
(118)
(66)
(22)
(206)
(133)
(27)
(228)
The actual return on plan assets was a loss of £17m (2017: gain of £244m).
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
2018
£m
(3,316)
3,487
171
Railways
Pension
Scheme
2018
£m
(377)
309
(68)
Other
schemes†
2018
£m
(49)
–
(49)
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
2018
£m
(3,742)
3,796
54
Total
2017
£m
(3,956)
3,988
32
† Investments in mutual funds of £21m (2017: £22m) are held to satisfy the Group’s deferred compensation obligations (Note 19.1).
The defined benefit obligations comprise £49m (2017: £53m) arising from wholly unfunded plans and £3,693m (2017: £3,903m) arising
from plans that are wholly or partly funded.
balfourbeatty.com/AR2018
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Notes to the Financial Statements continued
28 Retirement benefit assets and liabilities continued
28.2 IAS 19 accounting valuations continued
Movement in the present value of obligations
At 1 January
Currency translation differences
Current service cost
Past service cost as a result
of GMP equalisation
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 (losses)/gains
Total actuarial movements
Benefits paid
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+
Administrative expenses
Benefits paid
At 31 December
Balfour
Beatty
Pension
Fund
2018
£m
(3,512)
–
(2)
Railways
Pension
Scheme
2018
£m
(391)
–
(1)
Other
schemes
2018
£m
(53)
(2)
(2)
(26)
(87)
–
(12)
115
23
(3)
123
188
(3,316)
(2)
(10)
–
(4)
13
3
(1)
11
16
(377)
–
(1)
–
–
5
–
–
5
4
(49)
Balfour
Beatty
Pension
Fund
2017
£m
(3,683)
–
(2)
–
(90)
110
(20)
(64)
Total
2018
£m
(3,956)
(2)
(5)
(28)
(98)
–
(16)
133
26
(4)
139
208
(3,742)
40
6
72
191
(3,512)
Railways
Pension
Scheme
2017
£m
(416)
–
(1)
Other
schemes
2017
£m
(56)
2
(3)
–
(10)
13
(5)
(7)
4
15
20
16
(391)
–
(2)
–
–
2
–
–
2
4
(53)
Balfour
Beatty
Pension
Fund
2018
£m
3,668
92
(108)
2
21
–
(188)
3,487
Railways
Pension
Scheme
2018
£m
320
8
(9)
1
6
(1)
(16)
309
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
Total
2018
£m
3,988
100
(117)
3
27
(1)
(204)
3,796
Total
2017
£m
(4,155)
2
(6)
–
(102)
123
(25)
(69)
44
21
94
211
(3,956)
Total
2017
£m
3,924
96
148
2
25
–
(207)
3,988
+ Ongoing deficit funding contributions in 2018 presented above for BBPF of £21m are less than the amounts prescribed in the funding agreement of £25m due to £4m of BBPF
running costs which are funded from ongoing deficit contributions as per the BBPF schedule of contributions.
Balfour Beatty Annual Report and Accounts 2018
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
1,114
297
28
361
–
428
1,784
456
456
719
–
153
194
177
218
3,487
Railways
Pension
Scheme†
£m
170
–
–
–
170
–
139
–
–
–
139
–
–
–
–
309
2018
Total
£m
1,284
297
28
361
170
428
1,923
456
456
719
139
153
194
177
218
3,796
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
165
2017
Total
£m
1,348
384
36
337
222
369
2,146
621
397
887
86
155
215
115
164
3,988
† The amounts represent 100% of the scheme’s assets.
^ Of the assets above, £1,175m (2017: £1,248m) are assets that have quoted prices in active markets. The remaining assets that are neither quoted nor traded on an active market
are stated at fair value estimates provided by the manager of the investment or fund.
Estimated contributions expected to be paid to the Group’s principal defined benefit schemes during 2019
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
2019
£m
2
28
30
(4)
26
Railways
Pension
Scheme
2019
£m
1
6
7
–
7
Total
2019
£m
3
34
37
(4)
33
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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 2018 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 2018 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
%
(7.5)%
5.3%
0.0%
4.0%
(Decrease)/
increase in
obligations
£m
(278)
196
1
149
Percentage
points
0.5%
0.5%
(Decrease)/
increase
in assets
%
(8.1)%
5.1%
(Decrease)/
increase
in assets
£m
(306)
192
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
2018
£m
(3,742)
3,796
54
(4)
(117)
27
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
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 2018
29 Share capital
29.1 Ordinary shares of 50p each
At 31 December 2017 and 2018
167
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 or prior year.
29.2 Cumulative convertible redeemable preference shares of 1p each
At 31 December 2017 and 2018
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 2018
in respect of the six months ended 30 June 2018. A preference dividend of 5.375p per cumulative convertible redeemable preference share
of 1p was paid on 1 January 2019 in respect of the six months ended 31 December 2018.
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 2018 (2017: £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
2018
£m
112
(18)
9
103
3
106
2017
£m
112
(18)
6
100
3
103
The fair value of the liability component of the preference shares at 31 December 2018 amounted to £120m (2017: £126m). 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 were 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.
In 2018, following the partial repurchase of bonds in December 2017 (£21.3m) and March 2018 (£17.7m), the Group repaid the remaining
convertible bonds as they fell due for a further £213.7m. As a result of this settlement, the remaining amount previously held in other
reserves which related to the equity conversion component of the bonds was transferred in full to retained earnings. Refer to Note 30.1.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 168
Notes to the Financial Statements continued
30 Movements in equity
30.1 Group
At 31 December 2017
Adjustment as a result
of transitioning to IFRS 15
on 1 January 20182
Adjusted equity at
1 January 2018
Profit for the year
Currency translation
differences
Actuarial movements on
retirement benefit liabilities
Fair value revaluations
– PPP financial assets
– cash flow hedges
– investments in mutual
funds measured at fair
value through OCI
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
Transfers
Reserve transfers relating
to joint venture and
associate disposals
Convertible bonds
repayment
At 31 December 2018
Other reserves
Called-
up
share
capital
2018
£m
345
Share
premium
account
2018
£m
65
Special
reserve
2018
£m
22
Share
of joint
ventures’
and
associates’
reserves
(Note 18.6)
2018
£m
113
Equity
component
of
preference
shares and
convertible
bonds
2018
£m
42
Hedging
reserves
2018
£m
(27)
PPP
financial
assets
2018
£m
27
Currency
translation
reserve
2018
£m
105
Retained
profits
2018
£m
336
Non-
controlling
Total
interests
2018
2018
£m
£m
10 1,066
Other
2018
£m
28
–
345
–
–
65
–
–
22
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
345
–
65
–
22
–
113
23
7
(1)
9
15
–
(5)
(3)
45
–
(76)
–
–
(19)
–
63
–
42
–
–
(27)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3
–
–
(1)
2
–
–
–
–
–
–
27
–
–
–
(4)
–
–
–
1
(3)
–
–
–
–
–
–
105
–
18
–
–
–
–
–
–
18
–
–
–
–
–
(24)
18
–
(25)
–
24
–
123
–
28
–
–
–
–
–
(1)
–
–
(1)
–
–
4
(9)
–
–
22
3
339
112
–
22
–
–
–
–
–
134
(27)
76
–
9
19
24
574
–
3
10 1,069
135
–
–
–
–
–
–
–
–
–
–
–
–
–
–
25
21
5
18
(1)
(5)
(3)
195
(27)
–
4
–
–
–
–
10 1,241
@ Recycling of revaluation reserves to the income statement on disposal has no associated tax effect.
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised
as an adjustment to opening equity (Notes 2.1 and 40).
Balfour Beatty Annual Report and Accounts 2018
30 Movements in equity continued
30.1 Group 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
–
–
–
–
–
(30)
–
–
–
–
–
–
(30)
–
–
–
–
–
–
–
–
–
3
–
2
5
–
–
6
–
–
–
242
–
–
–
–
(37)
313
(20)
69
1
21
–
(2)
42
–
(27)
–
27
–
105
–
28
2
336
–
–
–
–
–
–
–
–
–
–
–
–
5
–
10
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
– investments in mutual
funds measured at fair
value through OCI
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
@ 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.
169
Total
2017
£m
762
168
(48)
246
63
15
3
(85)
(50)
312
(20)
–
7
–
5
–
1,066
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 170
Notes to the Financial Statements continued
30 Movements in equity continued
30.2 Company
At 1 January 2017
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
Profit for the year
Currency translation differences
Total comprehensive income for the year
Ordinary dividends
Movements relating to share-based payments
Convertible bonds repayment
At 31 December 2018
Other reserves
Equity
component
of
preference
shares and
convertible
bonds
£m
44
–
–
–
–
–
(2)
42
–
–
–
–
–
(24)
18
Special
reserve
£m
22
–
–
–
–
–
–
22
–
–
–
–
–
–
22
Called-up
share
capital
£m
345
–
–
–
–
–
–
345
–
–
–
–
–
–
345
Share
premium
account
£m
65
–
–
–
–
–
–
65
–
–
–
–
–
–
65
Other
£m
78
–
–
–
–
2
–
80
–
–
–
–
7
–
87
Retained
profits
£m
578
(54)
19
(35)
(20)
(1)
2
524
362
(7)
355
(27)
(3)
24
873
Total
£m
1,132
(54)
19
(35)
(20)
1
–
1,078
362
(7)
355
(27)
4
–
1,410
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 profit for the financial year ended 31 December
2018 of £362m (2017: £54m 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 2018 (2017: £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 2018, 1.5m (2017: 0.6m)
shares were purchased at a cost of £4.0m (2017: £1.7m). The market value of the 6.4m (2017: 9.7m) shares held by the Trust at
31 December 2018 was £15.9m (2017: £28.7m). The carrying value of these shares is £16.2m (2017: £24.1m).
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 2018, 3.0m shares were transferred to participants in
relation to the June 2015 awards under the Performance Share Plan (2017: 0.5m shares were transferred to participants in relation to the
March 2014 awards under the Performance Share Plan), 0.5m shares were transferred to participants in relation to the January 2015 awards
under the Executive Buyout Scheme (2017: 0.4m), 0.6m shares were transferred to participants in relation to awards under the Deferred
Bonus Plan (2017: 0.3m shares) and 0.7m shares were transferred to participants in relation to awards under the Restricted Share Plan
(2017: 20 thousand 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 £7.5m (2017: £10.1m) relating to unvested Performance Share Plan awards, £3.5m
(2017: £3.1m) relating to unvested Restricted Share Plan awards, £2.6m (2017: £2.4m) relating to unvested Deferred Bonus Plan awards
and £nil (2017: £1.2m) relating to unvested Executive Buyout Scheme awards.
Balfour Beatty Annual Report and Accounts 2018
171
2017
£m
154
(60)
28
1
22
–
–
(27)
9
(86)
(22)
–
(6)
–
1
14
27
(12)
–
95
–
(92)
29
(14)
21
41
Notes
18
16
17
15
15
16
28.2
33
32.2
32.2
Continuing operations
Non-
underlying
items
(Note 10)
2018
£m
(58)
5
–
–
8
2
–
–
–
Underlying
items1
2018
£m
205
(28)
28
1
12
–
2
(30)
8
(80)
–
2
(5)
–
–
115
(169)
(16)
53
8
(2)
(185)
(27)
–
–
(54)
–
(3)
–
–
28
–
(18)
(60)
–
–
4
–
(11)
(53)
–
–
(78)
2018
£m
147
(23)
28
1
20
2
2
(30)
8
(80)
(3)
2
(5)
28
–
97
(229)
(16)
53
12
(2)
(196)
(80)
–
–
(132)
31 Notes to the statement of cash flows
31.1 Cash 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
Impairment of property, plant and equipment
Pension payments including deficit funding
Movements relating to share-based payments
Gain on disposal of investments in
infrastructure concessions
Net gain on disposal of other businesses
Loss on disposal of investment properties
Profit on disposal of property, plant and equipment
Loss on GMP equalisation
Other non-cash items
Operating cash flows before movements in
working capital
(Increase)/decrease in operating working capital
Inventories2+
Contract assets2+
Trade and other receivables2+
Contract liabilities2+
Trade and other payables2+
Provisions2+
Due from construction contract customers2+
Due to construction contract customers2+
Cash (used in)/from operations
1 Before non-underlying items (Notes 2.10 and 10).
2 The Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 retrospectively with the cumulative effect of initial application recognised
as an adjustment to opening equity (Notes 2.1 and 40).
+ The movement in working capital has been presented to exclude movements arising from IFRS 15 reclassification adjustments. Refer to Note 40 for a re-presentation
of the Group’s balance sheet at 1 January 2018 under IFRS 15.
31.2 Cash and cash equivalents
Cash and deposits
Term deposits
Cash balances within infrastructure concessions
Group
2018
£m
587
4
70
661
Group
2017
£m
717
116
135
968
Company
2018
£m
133
1
–
134
Company
2017
£m
71
63
–
134
Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with
original maturities of less than three months.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 172
Notes to the Financial Statements continued
31 Notes to the statements of cash flows continued
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
Currency translation differences
Accretion on convertible bonds
Proceeds from new loans
Repayments of loans
Disposal of interest in Holyrood Holdings Ltd
(Notes 32.2.3 and 32.2.5)
Amortisation of arrangement fees
At 31 December 2018
Infrastructure
concessions
non-recourse
project
finance
£m
(240)
4
–
(212)
4
–
4
(440)
(2)
–
(4)
6
US private
placement
£m
(285)
26
–
–
–
–
–
(259)
(13)
–
–
33
Convertible
bonds
£m
(240)
–
(7)
–
21
–
–
(226)
–
(5)
–
231
Loans under
committed
facilities
£m
(50)
–
–
–
50
–
–
–
–
–
–
–
61
–
(379)
–
–
(239)
–
–
–
–
–
–
Other
£m
(14)
–
–
–
2
(1)
–
(13)
(1)
–
–
–
–
(1)
(15)
Total
£m
(829)
30
(7)
(212)
77
(1)
4
(938)
(16)
(5)
(4)
270
61
(1)
(633)
During the year ended 31 December 2018, the Group repaid the remaining convertible bonds for £231m. In addition to this, the Group also
repaid the first tranche of the US private placement notes amounting to £33m (US$45m). None of these borrowings were replaced with
another form of debt. In relation to the Group’s non-recourse loans, £61m of these loans were disposed as part of the Group’s disposal of
an 80% interest in Holyrood Holdings Ltd. Refer to Note 32.2.3. The Group’s entire revolving credit facilities of £400m remain undrawn
at 31 December 2018.
Balfour Beatty Annual Report and Accounts 2018
173
32 Acquisitions and disposals
32.1 Current and prior year acquisitions
There were no material acquisitions in 2018.
Deferred consideration paid during 2018 in respect of acquisitions completed in earlier years was £3m (2017: £3m). This related to the
Group’s acquisition of Centex Construction in 2007.
32.2 Current year disposals
Notes
32.2.1
32.2.2
Entity/business
Disposal date
Connect Plus (M25) Holdings Ltd^
19 February 2018
18 September 2018 Consort Healthcare (Fife) Holdings
Percentage
disposed
%
5%
Cash
consideration
£m
42
Net assets
disposed
£m
(41)
Direct costs
incurred,
indemnity
provisions
created and
fair value
uplift
£m
–
Amount
recycled
from
reserves
£m
21
Underlying
gain
£m
22
32.2.3
32.2.4
17 December 2018
28 December 2018
Ltd^
Holyrood Holdings Ltd*
Northside Campus Partners LP^
50%
80%
81%
43
24
13
122#
(3)+
(7)
(1)
(52)
(17)
–
1
5
–
5
–
5
23
22
13
80
* Subsidiary.
^ Joint venture.
+ Net assets disposed include £4m of accrued subordinated debt receivable which was settled as part of the disposal. The balance also includes £1m of excess bid costs recovered
which were released and credited to the gain on disposal.
# Total cash consideration received by the Group also includes £3m of cash received in respect of the Group’s disposal of Balfour Beatty Infrastructure Partners in 2016 (Note
10.1.3.5) and £1m of deferred cash consideration received in respect of the Group’s disposal of its Middle Eastern joint ventures in 2017 (Note 32.3.1).
32.2.1 On 19 February 2018, the Group agreed to dispose of a further 5% interest in Connect Plus (M25) Holdings Ltd to Equitix for a cash
consideration of £42m, resulting in a gain on disposal of £22m in the first half of 2018.
In addition to the consideration for this disposal, the Group also received £62m on 23 February 2018 from the disposal of a 7.5% interest in
December 2017, which was structured as an unconditional right to sell the stake to Dalmore for an identical price if Equitix failed to exercise
its right to acquire this interest. The Group assessed that a loss of control was triggered as a result of this agreement and therefore the gain
on disposal for this tranche was recognised in 2017 and £62m of consideration held as amounts due on disposal. Equitix subsequently
exercised its right to acquire in 2018 and together with its acquisition of the further 5% stake in 2018, paid a consideration to the Group
of £104m. The Group retained a 15% interest in Connect Plus (M25) Holdings Limited.
32.2.2 On 18 September 2018, the Group disposed of its entire 50% interest in Consort Healthcare (Fife) Holdings Ltd for a cash
consideration of £43m. The infrastructure concession disposal resulted in a net gain of £23m being recognised in underlying operating
profit, comprising: a gain of £40m in respect of the investment in the joint venture and a loss of £17m related to the recycling of revaluation
reserves to the income statement.
32.2.3 On 17 December 2018, the Group disposed of 80% of its interest in Holyrood Holdings Ltd for a cash consideration of £24m.
The disposal resulted in a gain of £22m being recognised in underlying operating profit which includes a fair value uplift of £5m relating
to the remaining 20% interest which the Group retained. The disposal included cash disposed of £3m.
32.2.4 On 28 December 2018, the Group disposed of an 81% interest in Northside Campus Partners LP (Texas Dallas) for a cash
consideration of £13m. The infrastructure concession disposal resulted in a £13m gain being recognised in underlying operating profit,
comprising a gain of £12m in respect of the Group’s investment in the joint venture and a gain of £1m in respect of foreign currency
translation reserves recycled to the income statement on disposal. The Group retained a 10% interest in Northside Campus Partners LP.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 174
Notes to the Financial Statements continued
32 Acquisitions and disposals continued
32.2.5 Subsidiaries net assets disposed
Net assets disposed
Intangible assets – other
Deferred taxation
Trade and other payables
Cash
Non-recourse borrowings
Net assets of interest retained
Fair value uplift on interest retained
Cash consideration
Gain on disposal
Net cash flow effect
Total consideration
Cash and cash equivalents disposed
Net cash consideration
32.3 Prior year disposals
Notes
15
27.1
31.3
Holyrood
Holdings Ltd
£m
72
1
(7)
3
(61)
(1)
7
(5)
(24)
(22)
24
(3)
21
Notes
32.3.1
Disposal date
1 March 2017
32.3.2
12 September 2017
32.3.3
27 October 2017
32.3.4
21 & 29 December
2017
Entity/business
Dutco Balfour Beatty
LLC & BK Gulf LLC^
Regional & City
Airports (Blackpool)
Holdings Ltd*
Heery International
Inc*
Connect Plus (M25)
Holdings Ltd^
Percentage
disposed
%
Cash
consideration
£m
Net assets
disposed
£m
49%
11#
(6)+
100%
100%
20%
4
43
(5)
(21)
165@
223
(164)&
(196)
Direct costs
incurred,
indemnity
provisions
created and
fair value
uplift
£m
Amount
recycled
from
reserves
£m
Underlying
gain
£m
Non-
underlying
gain/(loss)
£m
–
–
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 were therefore discounted at year end. These amounted to £5m and were included in due
on disposals within trade and other receivables.
@ Of this amount, £103m was received in 2017. The remaining £62m was 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.
Balfour Beatty Annual Report and Accounts 2018
175
32 Acquisitions and disposals continued
32.3 Prior year disposals continued
32.3.1 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 was presented as part of its discontinued operations with comparatives
restated accordingly. The £5m gain on the disposal was presented as non-underlying within discontinued operations.
32.3.2 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.
32.3.3 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 in 2017, 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. In 2018, an
additional indemnity provision of £12m was recognised following the reassessment of several projects which were indemnified by the
Group in the sale agreement. This has been recognised as a loss within non-underlying items in 2018. Refer to Note 10.1.3.6.
32.3.4 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 31 December 2017 and therefore the consideration of £62m was 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.
These disposals resulted in a net gain of £86m being recognised within underlying operating profit, 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.
32.3.5 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.
32.3.6 Prior year 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
Region & City
Airports
(Blackpool)
Holdings Ltd
£m
–
6
(1)
–
–
–
–
–
5
–
5
(4)
–
1
4
–
–
4
Heery
International
Inc
£m
17
2
9
(6)
18
(22)
(2)
5
21
10
31
(43)
(6)
(18)
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/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 176
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 £8m in 2018 (2017: £9.4m). Refer to the Remuneration report for details of the various schemes.
In 2017, the Company introduced two cash-settled share-based payment arrangements, namely the Shadow PSP (SPSP) and the Shadow RSP
(SRSP). These share-based payment arrangements mirror the conditions of the equity-settled PSP and RSP plans, the only difference being they
are settled in cash.
Movements in share plans
Equity-settled share-based payment awards
2018 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
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
EBS
conditional
awards
1,270,173
–
–
(752,513)
(517,660)
–
–
–
–
PSP
conditional
awards
9,905,225
3,393,943
–
(1,064,305)
(3,006,009)
–
9,228,854
–
1.3
DBP
conditional
awards
1,709,075
734,073
27,815
(43,734)
(587,604)
–
1,839,625
–
1.4
RSP
conditional
awards
3,142,660
1,226,338
41,988
(354,101)
(773,203)
–
3,283,682
–
1.5
287.6p
280.8p
270.7p
278.7p
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
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 2018 subject to market conditions, were:
Award date
27 March 2018
Name of award
PSP award
Closing
share
price on
award date
Pence
273.0
Expected
volatility of
shares
%
27.62
Expected
term of
awards
Years
3.0
Risk-free
interest
rate
%
0.94
Calculated
fair value
of an
award
Pence
167.0
For the 66.7% of the PSP awards granted in 2018 subject to non-market conditions and for the DBP and RSP awards granted in 2018,
the fair value of the awards is the closing share price on the date of grant.
Cash-settled share-based payment awards
2018 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
Balfour Beatty Annual Report and Accounts 2018
SPSP
conditional
awards
3,125,765
2,651,931
–
(6,261)
–
–
5,771,435
–
1.6
SRSP
conditional
awards
–
381,754
–
(12,000)
–
–
369,754
–
2.3
–
–
177
34 Commitments
Capital expenditure authorised and contracted for which has not been provided for in the financial statements amounted to £7m (2017: £2m)
in the Group and £nil (2017: £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
2018
£m
20
37
20
77
Other
2018
£m
27
38
2
67
Land and
buildings
2017
£m
22
47
15
84
Other
2017
£m
33
48
3
84
The Company did not have any future operating lease expenditure commitments as at 31 December 2018 (2017: £nil).
Future committed operating lease income
Due within one year
Due between one and five years
Land and
buildings
2018
£m
5
2
7
Land and
buildings
2017
£m
7
6
13
The Company did not have any future committed operating lease income as at 31 December 2018 (2017: £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 £269m (2017: £279m). 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 and services
Amounts owed by related parties
URENCO Ltd
Sale of goods and services
Amounts owed by related parties
2018
£m
2017
£m
26
–
19
2
18
3
72
–
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 year for bad or doubtful debts in respect of the amounts owed by related parties.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 178
Notes to the Financial Statements continued
36 Related party transactions continued
Compensation of key management personnel of the Company
Short-term benefits
Share-based payments
2018
£m
2.724
1.728
4.452
2017
£m
2.938
2.584
5.522
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 2018 Remuneration report
on pages 88 to 103.
37 Events after the reporting date
As at 12 March 2019, there were no material post balance sheet events arising after the reporting date.
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; convertible redeemable preference shares as disclosed
in Note 29.2; US private placement 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 2017.
Categories of financial instruments
Loans and
receivables
at amortised
cost, cash
and deposits
2018
£m
Financial
liabilities at
amortised
cost
2018
£m
Financial
assets at
fair value
through
OCI
2018
£m
Financial
assets at
amortised
cost
2018
£m
Loans and
receivables
at amortised
cost, cash
and deposits
2017
£m
Financial
liabilities at
amortised
cost
2017
£m
Financial
assets at
fair value
through
OCI
2017
£m
Financial
assets at
amortised
cost
2017
£m
Derivatives
2018
£m
Derivatives
2017
£m
–
–
–
661
1,084
–
1,745
–
–
–
–
–
–
1,745
–
–
–
–
–
–
–
(106)
(1,484)
(254)
(379)
–
(2,223)
(2,223)
–
21
156
–
–
–
177
–
–
–
–
–
–
177
25
(59)
4
9
–
–
–
–
–
9
–
–
–
–
–
–
9
1
–
–
–
–
–
1
1
–
–
–
–
–
–
968
1,080
–
2,048
–
–
–
–
–
–
–
–
–
–
(103)
(1,585)
(498)
–
(29)
(29)
(28)
–
–
–
2,048
(440)
–
(2,626)
(2,626)
–
22
163
–
–
–
185
–
–
–
–
–
–
185
17
–
–
–
–
–
17
–
–
–
–
–
–
17
–
–
–
–
–
3
3
–
–
–
–
(35)
(35)
(32)
3
31
(67)
17
1
4
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
Infrastructure
concessions non-
recourse term loans
Derivatives
Total
Net
Current year
comprehensive income/
(loss) excluding share of
joint ventures
and associates
Balfour Beatty Annual Report and Accounts 2018
179
Financial assets
Financial liabilities
Current
2017
£m
Non-
current
2017
£m
Total
2017
£m
Current
2017
£m
Non-
current
2017
£m
Total
2017
£m
Financial assets
Current
2018
£m
Non-
current
2018
£m
Total
2018
£m
Financial liabilities
Non-
current
2018
£m
Total
2018
£m
Current
2018
£m
1
–
1
–
–
–
1
–
1
–
(4)
(4)
–
–
(25)
(25)
(29)
(29)
2
–
2
1
–
1
3
–
3
(1)
(4)
(5)
–
(1)
(30)
(30)
(34)
(35)
38 Financial instruments continued
Derivatives
Foreign currency contracts
Designated as cash flow hedges
Interest rate swaps
Designated as cash flow hedges
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
2018
£m
(50)
(6)
(57)
(513)
(626)
247
(379)
Other
borrowings
2018
£m
(15)
(36)
(164)
(39)
(254)
–
(254)
Other
financial
liabilities
2018
£m
(1,341)
(207)
(36)
(12)
(1,596)
6
(1,590)
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)
Total
non-
derivative
financial
liabilities
2018
£m
(1,406)
(249)
(257)
(564)
(2,476)
253
(2,223)
Total
non-
derivative
financial
liabilities
2017
£m
(1,733)
(187)
(202)
(602)
(2,724)
98
(2,626)
Discount
2018
£m
2
8
10
233
253
Carrying
value
2018
£m
(1,404)
(241)
(247)
(331)
(2,223)
Discount
2017
£m
9
14
17
58
98
Carrying
value
2017
£m
(1,724)
(173)
(185)
(544)
(2,626)
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
2018
£m
(30)
(10)
(9)
(20)
(69)
Receivable
2018
£m
27
7
–
–
34
Net
payable
2018
£m
(3)
(3)
(9)
(20)
(35)
Payable
2017
£m
(21)
(7)
(10)
(24)
(62)
Receivable
2017
£m
18
3
–
–
21
Net
payable
2017
£m
(3)
(4)
(10)
(24)
(41)
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 180
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 2017.
(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 179 for details of forward foreign exchange contracts outstanding at the reporting date in respect of foreign currency
transactional exposures.
As at 31 December 2018, the notional principal amounts of foreign exchange contracts in respect of foreign currency transactions where
hedge accounting is not applied was £17m (2017: £13m) receivable and £18m (2017: £12m) payable with related cash flows expected
to occur within two years (2017: one year). 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 £16m (2017: £8m) receivable and £15m
(2017: £9m) payable as cash flow hedges against highly probable cash flows which are expected to occur within two years (2017:
four years). Fair value losses on these contracts of £2m (2017: £1m gains) 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. On 7 March 2018, the Group repaid the first
tranche of this loan amounting to US$45m. The Group has reassessed this hedge and has concluded that the hedge continues to be
effective. Exchange movements in the year totalled £16m (2017: £26m). A 5% increase/decrease in the US dollar to sterling exchange
rate would lead to a £11m decrease (2017: £12m)/£13m increase (2017: £14m) 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 2017.
(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
financial assets measured at fair value through OCI. 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 2018 and 2017, the Group’s non-recourse project subsidiaries’ borrowings at variable rates of interest were denominated in sterling
and US dollars.
Balfour Beatty Annual Report and Accounts 2018
181
38 Financial instruments continued
The notional principal amounts of the subsidiaries’ interest rate swaps outstanding at 31 December 2018 totalled £109m (2017: £113m)
with maturities that match the maturity of the underlying borrowings ranging from one year to 21 years.
At 31 December 2018, the fixed interest rates range from 3.5% to 5.1% (2017: 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 £5m increase (2017: £6m)/£7m
decrease (2017: £8m) in amounts taken directly to other comprehensive income by the Group in relation to the Group’s exposure to interest
rates on the 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 £3.2m decrease (2017: £2.8m)/£3.2m increase (2017: £1.4m) 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 2018, £nil (2017: £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 179.
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 during 2018 or 2017.
Level 1 – The fair value is calculated based on quoted prices traded in active markets for identical assets or liabilities.
The Group holds investments in mutual funds measured at fair value through OCI 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.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 182
Notes to the Financial Statements continued
38 Financial instruments continued
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 £6m decrease
(2017: £7m)/£7m increase (2017: £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
Investments in mutual fund financial assets
Financial assets – foreign currency contracts
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
21
–
–
21
–
Level 2
£m
–
1
–
1
–
Level 3
£m
–
–
156
156
–
–
–
(29)
(29)
–
–
2018
Total
£m
21
1
156
178
–
(29)
(29)
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)
Balfour Beatty Annual Report and Accounts 2018
39 Principal subsidiaries, joint ventures and associates
(a) Principal subsidiaries
Construction and Support Services
Balfour Beatty Group Ltd
Balfour Beatty Construction Group Inc
Balfour Beatty Construction, LP
Balfour Beatty Infrastructure Inc
Infrastructure Investments (Note 39)
Balfour Beatty Communities LLC
Balfour Beatty Infrastructure Investments Ltd*
Balfour Beatty Investments Inc
Balfour Beatty Campus Solutions LLC
Balfour Beatty Investments, LP
Balfour Beatty Communities, LP
Other
Balfour Beatty Holdings Inc.
Delphian Insurance Company Ltd*
(b) Principal joint ventures and associates
Construction and Support Services
Gammon China Ltd
Infrastructure Investments (Note 39)
Connect Plus (M25) Ltd
(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
A14
Bergstrom/CRC
Regional Rail Partners/North Metro
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 20%, the Group disposed of a 5% interest in February 2018. Refer to Note 32.2.1.
A full list of the Group’s related undertakings is included in Note 42.
183
Country of
incorporation
or registration
US
Canada
US
US
US
US
Canada
Canada
US
Isle of Man
Country of
incorporation
or registration
Ownership
interest
%
Hong Kong
50.0
15.0+
26.7
52.5
50.0
70.0
33.3
45.0
50.0
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 184
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
£m Shareholding
close
20%
290
March 1996
25%
42
May 1996
20%
127
July 1996
85%
167
May 2003
August 2003
20%
27
20% December 2005
28
April 2007
100%
36
1,309
176
56
51
64
15%
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
2019
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 three 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
Woodland View Project Co Ltd
Healthcare Centres PPP Ltd
Project
Teaching hospital and mental
health hospital
Mental health hospital in Irvine
Primary health care centres
£m Shareholding
553
58
158
40%
100%
40%
Total debt
and equity
funding
Financial
close
Duration
years
Construction
completion
June 2006
June 2014
May 2016
40
27
26
2011
2016
2019
Note
(i) Registered in England and Wales and the principal operations of each company are in England and Wales, except Woodland View Project Co Ltd which is registered in and
conducts its 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
20%
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 2018
185
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 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 Bio Power involves the design, construction, financing, operation and maintenance of a 10.4MW waste wood gasifier located
at Pebble Hall Farm, Thredingworth. With the exception of the Birmingham Bio Power and Welland Bio Power plants, all assets transfer
to the customer at the end of the relevant concession.
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
Total debt
and equity
funding
£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 43,000 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.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 186
Notes to the Financial Statements continued
39 Principal subsidiaries, joint ventures and associates continued
(e) Balfour Beatty Investments North America continued
Military housing continued
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.
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
138
102
78
53
294
48
88
389
137
6
21
November 2003
November 2006
April 2010
June 2015
November 2003
June 2004
July 2004
November 2004
March 2005
July 2010
March 2013
July 2005
336
December 2009
36
July 2011
122
November 2012
115
May 2006
86
July 2006
66
October 2012
17
February 2007
282
November 2007
438
November 2007
122
Acquired June 2008
181
July 2008
336
August 2008
173
142
October 2008
82 Acquired December 2008
March 2012
August 2013
June 2014
258
328
44
28
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.
Balfour Beatty Annual Report and Accounts 2018
187
39 Principal subsidiaries, joint ventures and associates continued
(e) Balfour Beatty Investments North America continued
Military housing continued
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.
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 had a 50%
participation and the facilities maintenance services were subcontracted to a joint venture in which the Group 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%
262
50%
295
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 PPP concessions
Summary Balfour Beatty is a developer, operator and investor in a data centre located at the Canadian Forces base in Borden, Ontario and
in the automated people mover at the Los Angeles airport. The people mover will be a 2.25 mile, above ground airport transport system.
Contractual arrangements The principal contracts are the respective project agreements between the concession partnership and the
authorities. All assets transfer to the authorities at the end of the concession.
Concession partnership
UIP GP (i)
LAX Integrated Express Solutions LLC (ii)
Project
Borden Data Centre
LINXS
£m Shareholding
50%
89
27%
2,158
Financial close
May 2016
June 2018
Notes
(i) Registered in the province of Ontario in Canada and the principal operations of the project are conducted in Ontario, Canada.
(ii) Registered in the US and the principal operations of the project are conducted in the US.
Total debt and
equity funding
Duration
years
25
30
Construction
completion
2018
2023
Residential investments
Summary Balfour Beatty is a developer, operator and investor in 10 multifamily residential projects.
Contractual arrangements Balfour Beatty has formed joint ventures to acquire residential apartment buildings for 10 multifamily residential
projects. For the Dallas 5 Portfolio, Townlake of Coppell, Mobile Alabama portfolio, Evergreen, Carolina Cove, Riverchase, Zephyr Ridge,
Lexington and Southwind 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. In November 2018, the RAPP-BB Associates LLC joint venture restructured
into a tenancy-in-common ownership, resulting in Balfour Beatty holding a 100% shareholding in BBC-TIC Owner LLC which owns 50% of the
Pinnacle Point project. The Group’s share of assets and liabilities within that project has been presented as held for sale at 31 December 2018
and the project was subsequently sold in January 2019.
Total project
funding
Residential investments (i)
BBC-TIC Owner LLC (Pinnacle Point, Arkansas)
DFW 5 Holdings, LLC (Dallas 5 Portfolio, Texas)
Coppell Properties, LLC (Texas)
BBC – Apexone Mobile Eastern, LLC (Alabama)
Carolina Cove (Wilmington) Owner LLC (North Carolina)
TBB Evergreen Holdings, LLC (Atlanta, Georgia)
Riverchase Landing (Hoover) Owner, LLC (Alabama)
Zephyr Ridge (Zephyrhills) Owner, LLC (Tampa, Florida)
Lexington (Ridgeland) Owner, LLC (Jackson, Mississippi)
Southwind (Memphis) Owner, LLC (Tennessee) (ii)
Financial close
£m Shareholding
February 2015
100%
34
May 2015
10%
135
May 2015
10%
40
January 2016
50%
20
December 2017
50%
38
June 2017
15%
65
March 2018
8%
33
August 2018
50%
24
50%
19
August 2018
20% December 2018
31
Renovation
completion
2018
2018
2018
2018
2018
2021
2022
2021
2021
2023
Note
(i) Registered in the US and the principal operations of each project are conducted in the US.
(ii) Under the joint venture terms, Balfour Beatty maintains a 20% voting ownership interest in the entity and a 15% economic ownership in regard to distributions.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 188
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 five additional student accommodation projects.
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)
Balfour Beatty-Walsh Housing LLC (Purdue)
Total project
funding
£m Shareholding
(ii)
79
100%
24
100%
26
100%
17
10%
42
10%
49
67%
68
Financial close
March 2010
June 2013
May 2015
August 2013
March 2015
February 2017
January 2018
Duration
years
30
41
39
43
61
61
45
Construction
completion
2011
2014
2016
2014
2016
2018
2019
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
Student accommodation
Waste and biomass+
Other UK+
North America
Aviation
Multibuild housing
Projects at financial close
Projects at preferred bidder stage
Total
Note
+ These categories have been presented within Other concessions in Note 39(d).
2019
£m
2020
£m
2021
£m
6
27
9
42
–
1
1
43
34
9
43
17
–
4
21
–
–
–
21
17
4
21
–
–
2
2
–
–
–
2
–
2
2
2022
onwards
£m
Total
£m
–
–
15
15
20
–
20
35
20
15
35
23
27
30
80
20
1
21
101
71
30
101
40 Impact of the adoption of IFRS 15 Revenue from Contracts with Customers
40.1 Impact areas
Except for the adoption of IFRS 15, the Group has consistently applied the accounting policies to all periods presented in these consolidated
financial statements.
The Group has adopted IFRS 15 Revenue from Contracts with Customers from 1 January 2018. As a result, the Group has changed its
accounting policy for revenue recognition and the new policy is detailed in Notes 2.4 and 2.5.
The Group has applied IFRS 15 using the cumulative effect of initially applying the new revenue standard as an adjustment to the opening
balance of equity at 1 January 2018. Therefore, the comparative information has not been restated and continues to be reported under
IAS 11 and IAS 18. The details of the significant changes and the quantitative impact of the changes are set out below:
Adjustment 1: Relates to the recognition of the impact on transition to IFRS 15 at 1 January 2018 of a £3m credit to equity. The adjustment
relates to the unbundling of certain contracts according to the Group’s assessment of each contract’s performance obligations to be delivered
to its customers.
Adjustment 2: In addition to the impact on equity following transition to IFRS 15 at 1 January 2018, the Group’s consolidated balance sheet is
impacted as a result of moving away from IAS 11 balance sheet captions to those prescribed by IFRS 15. The main reclassification adjustment
is in relation to reclassifying amounts due to/from construction contract customers to contract assets or contract liabilities. In addition to this,
provision balances which were previously presented within amounts due to/from construction contract customers for contracts that were
ongoing at that time in line with the requirements of IAS 11 have now been presented within provisions as appropriate.
Balfour Beatty Annual Report and Accounts 2018
189
40 Impact of the adoption of IFRS 15 Revenue from Contracts with Customers continued
40.2 Impact on the financial statements on transition at 1 January 2018
The cumulative effect of the changes made to the Group’s consolidated balance sheet at 1 January 2018 for the adoption of IFRS 15
is as follows:
31 December
2017
£m
Adjustment
(1)
£m
Adjustment
(2)
£m
1 January
2018
£m
Non-current assets
Investments in joint ventures and associates
PPP financial assets
Trade and other receivables
Deferred tax assets
Other non-current assets
Current assets
Inventories and non-construction work in progress
Contract assets
Due from construction contract customers
Trade and other receivables
Other current assets
Total assets
Current liabilities
Due to construction contract customers
Contract liabilities
Trade and other payables
Provisions
Current tax payable
Other current liabilities
Non-current liabilities
Trade and other payables
Provisions
Deferred tax liabilities
Other non-current liabilities
Total liabilities
Net assets
Equity
Retained profits
Other reserves not affected by IFRS 15
Equity attributable to equity holders of the parent
Non-controlling interests
Total equity
531
163
216
52
1,554
2,516
107
–
377
899
978
2,361
4,877
(535)
–
(1,542)
(194)
(15)
(281)
(2,567)
(157)
(98)
(70)
(919)
(1,244)
(3,811)
1,066
336
720
1,056
10
1,066
–
–
–
–
–
–
–
2
–
–
–
2
2
–
5
(4)
–
–
–
1
–
–
–
–
–
1
3
3
–
3
–
3
–
–
–
–
–
–
(53)
412
(377)
31
–
13
13
535
(481)
30
(90)
–
–
(6)
1
(8)
–
–
(7)
(13)
–
–
–
–
–
–
531
163
216
52
1,554
2,516
54
414
–
930
978
2,376
4,892
–
(476)
(1,516)
(284)
(15)
(281)
(2,572)
(156)
(106)
(70)
(919)
(1,251)
(3,823)
1,069
339
720
1,059
10
1,069
40.3 Impact of adopting IFRS 15 on the Group’s 2018 results
Impact on the Group’s consolidated income statement for the year ended 31 December 2018
The Group’s consolidated income statement for the year ended 31 December 2018 is impacted by Adjustment (1). At 31 December 2018,
the Group would have recognised an additional loss of £1m if it had continued to apply IAS 11 and IAS 18 in 2018. There is no other impact
on the Group’s consolidated income statement for the year as a result of applying previous revenue accounting standards.
Impact on the Group’s consolidated balance sheet at 31 December 2018
In addition to the impact arising from Adjustment 1, the Group’s consolidated balance sheet is also impacted by balance sheet reclassifications
as a result of adopting balance sheet captions prescribed by IFRS 15 in place of IAS 11 requirements. The reclassification adjustments to
convert the Group’s consolidated balance sheet at 31 December 2018 back to what it would have been if the Group had continued to apply
previous revenue accounting standards is set out on page 190.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 190
Notes to the Financial Statements continued
40 Impact of the adoption of IFRS 15 Revenue from Contracts with Customers continued
40.3 Impact of adopting IFRS 15 on the Group’s 2018 results continued
Consolidated balance sheet
Non-current assets
Investments in joint ventures and associates
PPP financial assets
Trade and other receivables
Deferred tax assets
Other non-current assets
Current assets
Inventories and non-construction work in progress
Contract assets
Due from construction contract customers
Trade and other receivables
Other current assets
Assets held for sale
Total assets
Current liabilities
Due to construction contract customers
Contract liabilities
Trade and other payables
Provisions
Current tax payable
Other current liabilities
Liabilities held for sale
Non-current liabilities
Contract liabilities
Trade and other payables
Provisions
Deferred tax liabilities
Other non-current liabilities
Total liabilities
Net assets
Equity
Retained profits
Other reserves not affected by IFRS 15
Equity attributable to equity holders of the parent
Non-controlling interests
Total equity
31 December
2018
as reported
under IFRS 15
£m
Adjustment
(1)
£m
Adjustment
(2)
£m
31 December
2018
reported under
IAS 11/ IAS18
£m
524
156
212
80
1,563
2,535
84
363
–
902
667
2,016
16
2,032
4,567
–
(489)
(1,373)
(167)
(17)
(67)
(2,113)
(11)
(2,124)
(2)
(143)
(149)
(90)
(818)
(1,202)
(3,326)
1,241
574
657
1,231
10
1,241
–
–
–
–
–
–
–
–
2
–
–
2
–
2
2
(5)
–
(1)
–
–
–
(6)
–
(6)
–
–
–
–
–
–
(6)
(4)
(4)
–
(4)
–
(4)
–
–
–
–
–
–
7
(363)
395
(75)
–
(36)
–
(36)
(36)
(461)
489
(12)
12
–
–
28
–
28
–
–
8
–
–
8
36
–
–
–
–
–
–
524
156
212
80
1,563
2,535
91
–
397
827
667
1,982
16
1,998
4,533
(466)
–
(1,386)
(155)
(17)
(67)
(2,091)
(11)
(2,102)
(2)
(143)
(141)
(90)
(818)
(1,194)
(3,296)
1,237
570
657
1,227
10
1,237
41 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
Balfour Beatty Annual Report and Accounts 2018
Company
registration
number
6863458
6859623
191
42 Details of related undertakings of Balfour Beatty plc as at 31 December 2018
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 2018 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
2018 and are wholly owned and consolidated into the Group’s results, except where indicated.
Subsidiary undertakings incorporated in the United Kingdom
Name of undertaking
Principal activity
Name of undertaking
Principal activity
Name of undertaking
350 Euston Road, Regent’s Place,
London NW1 3AX
Aberystwyth Student
Accommodation Ltd
West Stratford
Developments Ltd
Investment holding
company
Balfour Beatty Rail Ltd
Infrastructure
concession
5 Churchill Place, Canary Wharf,
London E14 5HU
Balfour Beatty Rail Projects Ltd
Principal activity
Agent of Balfour
Beatty Group Ltd
Agent of Balfour
Beatty Group Ltd
Balfour Beatty Fire and
Rescue NW Holdings Ltd
Investment holding
company
Avatar Ltd
Balfour Beatty Build Ltd
Balfour Beatty Rail Technologies
Ltd
Agent of Balfour
Beatty Group Ltd
Balfour Beatty Rail Track Systems
Ltd
Agent of Balfour
Beatty Group Ltd
Balfour Beatty Fire and Rescue
NW Intermediate Ltd
Balfour Beatty Fire and Rescue
NW Ltd
Balfour Beatty Infrastructure
Investments Ltd (i)
Balfour Beatty Infrastructure
Partners Member Ltd
Balfour Beatty Infrastructure
Projects Investments Ltd
Balfour Beatty Investments Ltd
Balfour Beatty OFTO
Holdings Ltd
BBI Holdings Australia Ltd
BBPF LLP (iv)
Connect Roads Derby
Holdings Ltd
Connect Roads Derby Ltd
Infrastructure
concession
Infrastructure
concession
Investment holding
company
Investment holding
company
Investment holding
company
Agent of Balfour
Beatty Group Ltd
Investment holding
company
Investment holding
company
Investment
partnership
Investment holding
company
Infrastructure
concession
Connect Roads Infrastructure
Investments Ltd
Investment holding
company
Consort Healthcare Infrastructure
Investments Ltd
Investment holding
company
East Slope Residencies Facilities
Management Ltd
Infrastructure
concession
East Slope Residencies
Holdings Ltd
East Slope Residencies
Partner Ltd
East Slope Residencies PLC (ii)
Investment holding
company
Infrastructure
concession
Infrastructure
concession
Balfour Beatty Building Ltd
Balfour Beatty CE Ltd
Balfour Beatty Civil
Engineering (SW) Ltd
Balfour Beatty Civil
Engineering Ltd
Balfour Beatty Civils Ltd
Balfour Beatty Const Ltd
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
Agent of Balfour
Beatty Group Ltd
Agent of Balfour
Beatty Group 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 Ltd
Balfour Beatty International Ltd
Balfour Beatty Investment
Holdings Ltd (i)
Balfour Beatty Management 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
Agent of Manring
Homes Ltd
Agent of Balfour
Beatty Group Ltd
Investment holding
company
Agent of Balfour
Beatty Group Ltd
Balfour Beatty Nominees Ltd
Nominee company
Balfour Beatty Construction (SW)
Ltd
Agent of Balfour
Beatty Group Ltd
Birse Group Ltd
East Slope Residencies Student
Accommodation LLP (ii) (iv)
Infrastructure
concession
Balfour Beatty Overseas
Investments Ltd
Education Investments
Holdings Ltd
Initial GP1 Ltd
Investment holding
company
Investment holding
company
Balfour Beatty Overseas Ltd
Balfour Beatty Property Ltd (i)
Investment holding
company
Investment holding
company
Agent of Balfour
Beatty plc
Manchester Residences
(New Cross) Ltd
Infrastructure
concession
Balfour Beatty Rail Infrastructure
Services Ltd
Agent of Balfour
Beatty Group Ltd
Strata Construction Ltd
Balfour Beatty
Refurbishment Ltd
Balfour Beatty Regional
Construction Ltd
Balfour Kilpatrick Ltd
Balvac Ltd
Bical Construction Ltd
Bignell & Associates Ltd
Birse Metro Ltd
Bnoms Ltd (i)
BPH Equipment Ltd
Cowlin Group Ltd
Guinea Investments Ltd
Haden Building Services Ltd
Haden Young Ltd (i)
Hall & Tawse Western Ltd
Laser Rail Ltd
Lounsdale Electric Ltd
Multibuild (Construction
& Interiors) Ltd
Office Projects (Interiors) Ltd
Omnicom Engineering Ltd
Raynesway Construction 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
Investment holding
company
Construction and
support services
Nominee company
Hire of plant and
transport
Investment holding
company
Investment holding
company
Investment holding
company
Dormant
Dormant
Agent of Balfour
Beatty Group Ltd
Dormant
Agent of Balfour
Beatty Group Ltd
Agent of Balfour
Beatty Group Ltd
Construction
services
Agent of Balfour
Beatty Group Ltd
Dormant
Manring Homes Ltd
Property investment
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 192
Notes to the Financial Statements continued
42 Details of related undertakings of Balfour Beatty plc as at 31 December 2018 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
Midmill Business Park, Tumulus Way,
Kintore, Aberdeenshire AB51 0TG
Southern Track Renewals
Company Ltd
Dormant – in
liquidation
Painter Brothers Ltd
Agent of Balfour
Beatty Group Ltd
Balfour Beatty Engineering
Services (CL) Ltd
Agent of Balfour
Beatty Group Ltd
West Service Road, Raynesway,
Derby DE21 7BG
Park Square, Newton Chambers Road,
Thorncliffe Park, Chapeltown, Sheffield S35 2PH
Balfour Beatty Plant &
Fleet Services Ltd
Hire of plant and
transport
C/O Mazars LLP, 100 Queen Street,
Glasgow, G1 3DN, Scotland
Aberdeen Construction
Group Ltd
Dormant – in
liquidation
Notes:
(i) Held directly by Balfour Beatty plc.
(ii) 80% owned.
(iii) Preference shares and/or deferred shares also held.
(iv) Partnership interests held.
Kings Business Park, Kings Drive,
Prescot, Merseyside L34 1PJ
Balfour Beatty Pension
Trust Ltd (i)
Pension fund trustee
C/O Mc Griggors LLP, Arnott House,
12-16 Bridge Street, Belfast, BT1 1LS
Northern Ireland
Balfour Beatty Utility
Solutions Ltd (iii)
BB Indonesia Ltd
Agent of Balfour
Beatty Group Ltd
Support services
Q14, Quorum Business Park, Benton Lane,
Newcastle upon Tyne NE12 8B
Balfour Kilpatrick
Northern Ireland Ltd
Dormant
Balfour Beatty Rail Corporate
Services Ltd
The Curve Building, Axis Business Park,
Hurricane Way, Langley, Berkshire, SL3 8AG
Balfour Beatty WorkSmart Ltd
Agent of Balfour
Beatty Group Ltd
Agent of Balfour
Beatty Group Ltd
Balfour Beatty Ground
Engineering Ltd
Agent of Balfour
Beatty Group Ltd
C/O Mazars, Tower Bridge House,
St Katharine’s Way, London E1W 1DD
Balfour Beatty Infrastructure
Services Ltd
Agent of Balfour
Beatty Group Ltd
Balfour Beatty Homes
(South Western) Ltd
Balfour Beatty Living Places Ltd
Agent of Balfour
Beatty Group Ltd
Balfour Beatty Power Networks
(Distribution Services) Ltd
Sunderland Streetlighting Ltd
Testing and Analysis Ltd
Agent of Balfour
Beatty Group Ltd
Agent of Balfour
Beatty Group Ltd
Birse Construction Ltd
Birse Rail Ltd
Maxim 7, Maxim Office Park, Parklands Avenue,
Eurocentral, Holytown ML1 4WQ
Dean & Dyball Developments 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 (iv)
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
Dean & Dyball Rail Ltd
Dean & Dyball Workforce Ltd
Edgar Allen Engineering Ltd
Eastern Infrastructure
Maintenance Company Ltd
Footprint Furniture Ltd
Heery International Ltd
Glasgow Residences
(Kennedy Street) Holdings Ltd
Investment holding
company
Mansell plc
Glasgow Residences
(Kennedy Street) LLP (iv)
Glasgow Residences
(Kennedy Street) SPV Ltd
Hall & Tawse 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
Dormant
Investment holding
company
Investment holding
company
Infrastructure
concession
Infrastructure
concession
Multibuild Interiors Ltd
Multibuild Hotels and Leisure Ltd
Office Projects Group Ltd
Office Projects Ltd
South East Infrastructure
Maintenance Company Ltd
Dormant – in
liquidation
Dormant – in
liquidation
Investment holding
company – in
liquidation
Dormant – in
liquidation
Dormant – in
liquidation
Dormant – in
liquidation
Dormant – in
liquidation
Dormant – in
liquidation
Dormant – in
liquidation
Dormant – in
liquidation
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
Balfour Beatty Annual Report and Accounts 2018
193
42 Details of related undertakings of Balfour Beatty plc as at 31 December 2018 continued
Subsidiary undertakings incorporated outside the United Kingdom
Name of undertaking
Principal activity
Name of undertaking
Principal activity
Name of undertaking
Principal activity
Australia
Chile
Malaysia
Allens Corporate Services Pty Ltd, Level 4
Deutsche Bank Place, 126 Phillip Street,
Sydney NSW 2000
Vicuna MacKenna Poniente 6843, Oficina 209,
La Florida, Santiago
Balfour Beatty Chile SA
Construction services
Level 8, Symphony House, Block D13,
Pusat Dagangan Dana 1, Jalan PJU 1A/46,
47301 Petaling Jaya
Balfour Beatty Australia Pty Ltd
Balfour Beatty Holdings
Australia Pty Ltd
Bahamas
Construction and
support services
Investment holding
company
China
Beijing Landmark Towers Building 2,
Room 511-514, No 8 Dongsanhuan North Road,
Chaoyang District, Beijing
Balfour Beatty Rail Design
International Sdn Bhd
Netherlands
Support services
Prins Bernhardplein 200, 1097 JB, Amsterdam
Construction services
BICC Finance BV
Dormant
– in liquidation
Balfour Beatty Rail
Electrification Equipment
Trading (Beijing) Ltd
Dormant
Germany
The Alexander Corporate Group Limited,
One Millars Court, PO Box N-7117, Nassau
Balfour Beatty Bahamas Ltd
Brazil
Avenida Brigadeiro Faria Lima, No. 1478, Suites
105, 1st Floor, Jardim Paulistano, São Paulo,
01.451–001
RHA do Brasil Serviços de
Infraestrutura Ltda
Canada
Construction services
Boren Ladner Gervais LLP, 22 Adelaide Centre
East Tower Toronto ON M5H 4E3
BB Group Canada Inc
BB UIP Inc
Investment holding
company
Infrastructure
Investment
Garmischer Strasse 35, 81373 Munich
Balfour Beatty Capital GmbH
Balfour Beatty Offshore
Transmission Germany GmbH
Dormant
Dormant
Balfour Beatty Rail GmbH
Construction services
BICC Holdings GmbH
Investment holding
company
Rapenburgerstraat 177/B, 1011 VM, Amsterdam
Balfour Beatty Netherlands BV
Investment holding
company
New Zealand
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
Schreck-Mieves GmbH
Hong Kong
Level 54, Hopewell Centre,
183 Queen’s Road East
Balfour Beatty Hong Kong Ltd
Dormant
Romania
23 General Ernest Brosteanu Street, 1st District,
010527 Bucharest
SC Balfour Beatty Rail SRL
Dormant
Construction and
support services
Sri Lanka
No. 216 De Saram Place, Colombo 10
Taylor McCaffrey LLP, 900-400 St. Mary Avenue,
Winnipeg MB R3C 4K5
India
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
Infrastructure
investment
Infrastructure
investment
Construction services
Construction services
Infrastructure
concession
Infrastructure
investment
Infrastructure
investment
Infrastructure
concession
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
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
Ireland
Engineering design
consultancy
City Junction Business Park, Northern Cross,
Malahide Road, Dublin 17
Balfour Beatty Ireland Ltd (ii)
Support services
C/O Mazars, Block 3, Harcourt Centre,
Harcourt Road, Dublin 2
Kenton Utilities & Developments
(Ireland) Ltd
Dormant – in
liquidation
Isle of Man
Tower House, Loch Promenade,
Douglas, IM1 2LZ, Isle of Man
Delphian Insurance Company
Ltd (i)
Insurance company
Jersey
12 Castle Street, St Helier, Jersey, JE2 3RT
Balfour Beatty Employees
Trustees Ltd (i)
Employee trust
47 Esplanade, St Helier, Jersey, JE1 0BD
Balfour Beatty Finance
No.2 Ltd (i)
Finance company
Balfour Beatty Ceylon
(Private) Ltd
Switzerland
Hansmatt 32, 6370 Stans
Balfour Beatty Rail Schweiz
GmbH
Thailand
Construction services
Dormant
– in liquidation
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
Linwood Co Ltd
Dormant
Dormant
Dormant
Dormant
Dormant
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance BICC Cables Corporation
Principal activity
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
Balfour Beatty Construction
Company, Inc
Balfour Beatty Construction
Group, Inc
Construction
services
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 2018, 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.
194
Notes to the Financial Statements continued
42 Details of related undertakings of Balfour Beatty plc as at 31 December 2018 continued
Subsidiary undertakings incorporated outside the United Kingdom continued
Name of undertaking
Principal activity
Name of undertaking
Principal activity
Name of undertaking
United States
1011 Centre Road, Suite 310,
Wilmington DE 19805
Balfour Beatty Holdings Inc
Balfour Beatty LLC
Investment holding
company
Investment holding
company
50 Public Square, Suite 2175, Cleveland OH 44113
National Engineering &
Contracting Company
Construction services
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
Balfour Beatty Rock Springs LLC Construction services
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
Infrastructure holding
company
Balfour Beatty
Communities, LLC
Balfour Beatty Construction
D.C., LLC
Balfour Beatty Construction,
LLC
Balfour Beatty Equipment,
LLC
Balfour Beatty Investments, Inc
Infrastructure
investment
Construction
services
Construction
services
Construction
services
Investment
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
Infrastructure
investment
Construction
services
Investment
company
Infrastructure
investment
Infrastructure
investment
BBC – Evergreen, LLC
Investment company
BBC Independent
Member I, Inc
BBC Independent
Member II, Inc
BBC Military Housing – ACC
Group, LLC
Infrastructure
investment
Infrastructure
investment
Infrastructure
concession
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
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
BBC – TIC Owner, LLC
Balfour Beatty Annual Report and Accounts 2018
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
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
Investment
company
195
42 Details of related undertakings of Balfour Beatty plc as at 31 December 2018 continued
Joint ventures incorporated in the United Kingdom
% held
by the
Group
Name of undertaking
350 Euston Road, Regent’s Place,
London NW1 3AX
Principal
activity
BBDE Orbital Holdings,
LLP (iii)
37.5 Investment holding
company
Name of undertaking
Consort Healthcare
(Birmingham)
Intermediate Ltd
Consort Healthcare
(Birmingham) Ltd
East Wick and
Sweetwater Projects
(Holdings) Ltd (iv)
East Wick and
Sweetwater Projects
(Phase 1) Ltd (iv)
East Wick and
Sweetwater Projects
(Phase 2) Ltd (iv)
East Wick and
Sweetwater Projects
(Phase 3) Ltd (iv)
East Wick and
Sweetwater Projects
(Phase 4) Ltd (iv)
East Wick and
Sweetwater Projects
(Phase 5) Ltd (iv)
East Wick and
Sweetwater Projects
(Phase 6) Ltd (iv)
East Wick and
Sweetwater Projects
(Phase 7) Ltd (iv)
East Wick and
Sweetwater Finance
(Holdings) Ltd (iv)
East Wick and
Sweetwater Projects
(Finance) Ltd (iv)
Gwynt y Mor OFTO
Holdings Ltd (ii) (iv)
Gwynt y Mor OFTO
Intermediate Ltd (ii) (iv)
Gwynt y Mor OFTO
plc (ii) (iv)
Humber Gateway OFTO
Holdings Ltd (iv)
Humber Gateway OFTO
Intermediate Ltd (iv)
Humber Gateway
OFTO Ltd (iv)
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
Connect A30/A35
Holdings Ltd (iv)
Connect A30/A35 Ltd (iv)
Connect A50 Ltd (iv)
Connect CNDR
Holdings Ltd (iv)
Connect CNDR
Intermediate Ltd (iv)
Connect CNDR Ltd (iv)
Connect M1-A1
Holdings Ltd (i) (iv)
Connect M1-A1 Ltd (iv)
Connect M77/GSO
Holdings Ltd (ii) (iv)
Connect M77/GSO
plc (ii) (iv)
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
(iv)
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
Consort Healthcare
(Birmingham)
Holdings Ltd
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
40
% held
by the
Group
40
40
50
50
50
50
50
50
50
50
50
50
60
60
60
20
20
20
20
20
20
Principal
activity
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Name of undertaking
Welland Bio Power Ltd
% held
by the
Group
25
Principal
activity
Infrastructure
concession
Connect Plus House St Albans Road,
South Mimms, Hertfordshire EN6 3NP
Connect Plus (M25)
Holdings Ltd (iii) (iv)
Connect Plus (M25)
Intermediate Ltd (iii) (iv)
Connect Plus (M25)
Issuer Plc (iii) (iv)
Connect Plus (M25)
Ltd (iii) (iv)
15
15
15
15
Investment
holding company
Infrastructure
concession
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
33.3
33.3
33.3
Infrastructure
concession
Investment
holding company
Infrastructure
concession
Holyrood Holdings Ltd
Infrastructure
concession
Holyrood Student
Accommodation Holdings
Ltd
Infrastructure
concession
Holyrood Student
Accommodation
Intermediate Ltd
Infrastructure
concession
Holyrood Student
Accommodation plc
Holyrood Student
Accommodation SPV Ltd
20
Investment
holding company
20 Investment holding
company
20
20
20
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Investment
holding company
Infrastructure
concession
Infrastructure
concession
Investment
holding company
Infrastructure
concession
Infrastructure
concession
Investment
holding company
Infrastructure
concession
Infrastructure
concession
Westminster House, Crompton Way,
Segensworth West, Fareham,
Hampshire PO15 5SS
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 37.5% of BBDE Orbital Holdings
LLP at 31 December 2018. Connect Plus (M25)
Holdings Ltd and its subsidiaries are 40% owned
by BBDE Orbital Holdings LLP.
(iv) 31 March year end.
balfourbeatty.com/AR2018
Infrastructure
concession
Thanet OFTO Holdco Ltd
(iv)
Investment
holding company
Thanet OFTO
Intermediate Ltd (iv)
Infrastructure
concession
Thanet OFTO Ltd (iv)
Investment
holding company
Blythe House, Blythe Park, Cresswell,
Stoke on Trent, Staffordshire ST11 9RD
Infrastructure
concession
Birmingham Bio
Power Ltd
37.5
Infrastructure
concession
Infrastructure
concession
Investment
holding company
Pebblehall Bio Power Ltd
25
Tyseley Bio Power Ltd
37.5
Investment
holding company
Investment
holding company
Strategic ReportOther InformationFinancial StatementsGovernance 196
Notes to the Financial Statements continued
42 Details of related undertakings of Balfour Beatty plc as at 31 December 2018 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
20
20
Infrastructure
concession
Balfour Beatty CLG Ltd
50
Support
services
Infrastructure
concession
C/O Sweett Group, 2nd Floor, Cathedral Court,
New Street South, Dublin 8
Name of undertaking
BBC – ApexOne Mobile
Eastern, LLC
BBC – ApexOne Zephyr
Ridge, LLC
BBC Army Integrated, LLC
Carolina Cove
(Wilmington) Owner, LLC
Coppell Properties, LLC
LAX Integrated Express
Solutions Holdco, LLC
LAX Integrated Express
Solutions, LLC
Lexington (Ridgeland)
Owner, LLC
Northside Campus
Limited Partner, LLC (i)
Park Place (Foley) Owner,
LLC
Riverchase Landing
(Hoover) Owner, LLC
Southwind (Memphis)
Owner, LLC
Southwind (Memphis)
Holdings, LLC
Summer Trace (Gulf
Shores) Owner, LLC
T-BBA Riverchase
Holdings, LLC
Windscape (Daphne)
Owner, LLC
Zephyr Ridge (Zephyrhills)
Owner, LLC
% held
by the
Group
50
50
50
50
10
27
27
50
10
50
7.5
20
20
50
7.5
50
50
Principal
activity
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
concession
Infrastructure
concession
Infrastructure
investment
Infrastructure
concession
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
430 Eastwood Road, Wilmington, NC 28403
New Energy Alliance LLC
50
10
Construction and
support services
Infrastructure
concession
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.
British Virgin Islands
Vistra Corporate Services Centre, Wickhams Cay
II, Road Town, Tortola, VG1110
Gammon Asia Ltd
Gammon Construction
Holdings Ltd
Canada
50
50
Management
company
Investment
holding company
Taylor McCaffrey LLP, 900-400 St. Mary Avenue,
Winnipeg MB R3C 4K5
Affinity BBL Inc
Affinity General
Partner Inc
Affinity Limited
Partnership (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 Limited Partnership (iv)
THP Partnership
50
50
70
70
50
50
50
50
50
50
50
50
50
UIP GP
Germany
Luisenstr. 38, 10117 Berlin
InoSig GmbH
Hong Kong
50
50
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Construction
services
Infrastructure
concession
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
concession
Construction
services
Forum House at Brookfield Place, Scotia Plaza,
181 Bay Street, EP210, Toronto, ON M5J 2T3
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 2018
Healthcare Centres PPP
Holdings Ltd
Healthcare Centres PPP
Ltd
Malaysia
40
40
Investment
holding company
Infrastructure
concession
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 – in
liquidation
Construction
services – in
liquidation
Infrastructure
concession
Infrastructure
concession
Investment
holding company
Corporation Service Company, 1201 Hays Street,
Tallahassee FL 32301
C-BB Management, LLC
50
Investment
holding company
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
Limited Partner, LLC (i)
Northside Campus
Partners, LP (iv)
Northside Campus
Partners 2, LP (iv)
Northside Campus
General Partner, LLC
10
10
50
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Corporation Service Company, 251 Little Falls
Drive, Wilmington DE 19808
Balfour Beatty/Benham
Military Communities LLC (i)
Balfour Beatty/PHELPS
Military Communities LLC (i)
BBC – ApexOne Carolina
Cove, LLC
BBC – ApexOne
Lexington, LLC
BBC – ApexOne
Riverchase Landing, LLC
BBC – ApexOne
Southwind, LLC
90
90
50
50
50
50
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
42 Details of related undertakings of Balfour Beatty plc as at 31 December 2018 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
Name of undertaking
Principal
activity
TBB Evergreen
Commons, LLC
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
Infrastructure
concession
Ashford House, Grenadier Road, Exeter, EX1 3LH
ACC Group Housing, LLC (i)
80
AETC Housing LP (i)(ii)
AMC West Housing LP (i)
(ii)
100
100
UBB Waste (Essex)
Holdings Ltd
UBB Waste (Essex)
Intermediate Ltd
UBB Waste (Essex) Ltd
30
30
30
Investment
holding company
Balfour Beatty-Walsh
Housing, LLC
Infrastructure
concession
Carlisle/Picatinny Family
Housing LP (ii)
Infrastructure
concession
DFW 5 – Josey Ranch, LLC
UBB Waste
(Gloucestershire)
Holdings Ltd
UBB Waste
(Gloucestershire)
Intermediate Ltd
UBB Waste
(Gloucestershire) Ltd
49.5
Investment
holding company
DFW 5 – Madison
Parkway, LLC
49.5
49.5
Infrastructure
concession
Infrastructure
concession
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
67
10
10
10
10
10
10
10
10
10
10
9
10
10
10
10
Lackland Family Housing,
LLC (i)
100
Leonard Wood Family
Communities, LLC
Nesbit Palisades, LLC
Northeast Housing LLC
Northern Group Housing,
LLC (i)
Southeast Housing LLC
Stewart Hunter Housing
LLC
10
15
10
100
10
10
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
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
Infrastructure
concession
Infrastructure
investment
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
197
Principal
activity
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
investment
Infrastructure
concession
Infrastructure
concession
Infrastructure
concession
% held
by the
Group
15
15
15
15
90
TBB Evergreen Holdings,
LLC
TBB Evergreen Park, LLC
TBB Evergreen Terrace,
LLC
Vandenberg Housing LP
(i)(ii)
Western Group Housing,
LP (i)(ii)
100
West Point Housing LLC
10
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/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 198
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/(loss) 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 – other
Statistics
Underlying earnings/(loss) per ordinary share from continuing operations*
Basic earnings/(loss) per ordinary share from continuing operations
Diluted earnings/(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
2018
£m
2017
£m
2016
£m
2015
£m
2014
£m
7,814
(1,180)
6,634
205
(24)
181
(8)
(50)
123
12
135
–
135
1,231
106
309
(337)
1,309
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
2018
Pence
2017
Pence
2016
Pence
2015
Pence
2014
Pence
26.3
19.7
19.5
4.8
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
2.6%
2.4%
0.8%
(0.9)%
(0.5)%
Note
* Underlying earnings per ordinary share from continuing operations have been disclosed to give a clearer understanding of the Group’s underlying trading performance.
Balfour Beatty Annual Report and Accounts 2018
Shareholder information
199
Financial calendar
2019
Ex-dividend date for final 2018 ordinary dividend
16 May
Annual General Meeting
16 May
Final 2019 ordinary dividend record date
17 May
Ex-dividend date for July 2019 preference dividend
23 May
July 2019 preference dividend record date
24 May
Preference dividend payable
1 July
Final 2018 ordinary dividend payable
5 July
Announcement of 2019 half-year results
14 August*
Ex-dividend date for interim 2019 ordinary dividend
24 October*
25 October*
Interim 2019 ordinary dividend record date
21 November Ex-dividend date for January 2020 preference dividend
January 2020 preference dividend record date
22 November
Interim 2019 ordinary dividend payable
6 December*
2020
Preference dividend payable
1 January
Note
* Provisional date.
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.
Registrars
The Balfour Beatty share register is maintained by the Company’s
Registrars, Link Asset Services. All administrative enquiries relating
to shareholdings and requests to receive corporate documents
by email should, in the first instance, be directed to Link Asset
Services, clearly stating 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.
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.
Telephone: 0871 664 0300 from the UK.
If you receive any unsolicited investment advice:
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
5.30pm, UK time, excluding public holidays in England and Wales.
Alternatively, you can email: enquiries@linkgroup.co.uk.
Link Asset Services can help you to: check your shareholding;
register a change of address or name; obtain a replacement
dividend cheque or tax voucher; or 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.
– 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,
which is the UK’s national fraud reporting centre, at
www.actionfraud.police.uk, or by calling 0300 123 2040.
balfourbeatty.com/AR2018
Strategic ReportOther InformationFinancial StatementsGovernance 200
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 Monday to Friday 8.00 am to 4.30 pm, UK time, 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
and Wales, registered number 395826.
Balfour Beatty Annual Report and Accounts 2018
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, and projections are not guarantees of future performance.
Forward-looking statements speak only as at the date of this
document and Balfour Beatty 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 presentation is intended to be, or intended to be construed
as, a profit forecast or profit estimate or to be interpreted to mean
that Balfour Beatty plc’s earnings per share for the current or future
financial years will necessarily match or exceed its historical earnings
per 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’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 Balfour Beatty in good
faith based on the information available to it at the date of this report
and reflect the beliefs and expectations of Balfour Beatty. By their
nature, forward-looking statements involve known and unknown
risks and uncertainties 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 58 to 66 of this document.
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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