Balfour Beatty Regulatory News (BBY)

BALFOUR BEATTY PLC RESULTS FOR THE FULL-YEAR ENDED 31 DECEMBER 2015

15 March 2016

Strong progress in first year of transformation

Financial Summary

• Order book and revenues stabilising - favourable markets enabling more selective bidding

• Underlying pre-tax loss reflects historic projects - UK projects expected to be 90% complete in 2016

• Strong cash performance - £163m net cash

• Board expects to reinstate dividend, at an appropriate level, at the Interim results in August 2016

Build to Last

• New processes and controls providing transparency and improving execution

• Order book quality improving - strong pipeline of opportunities

• On course to deliver first 24-month targets of £200m cash in/£100m cost out - £357m cash improvement year-on-year, excluding net proceeds from Parsons Brinckerhoff

Leo Quinn, Group Chief Executive, commented, "In its first year, Build to Last has achieved significant progress in transforming Balfour Beatty.

"We have upgraded the leadership team and set out a clear direction. We are implementing consistent processes to integrate our businesses into a Group with greater transparency and control. Our main markets are providing a positive backdrop, so that with stronger governance we can both win and deliver business on the right terms. Looking to the future, we are investing to maintain Balfour Beatty's expertise and assets.

"By the end of 2016 we will achieve our Phase One targets: our costs are coming down, our cash flow has improved substantially and we expect to reinstate our dividend later this year. Over the following 24 months, I am confident we can reach industry-standard margins. But above all, Build to Last is putting in place the foundations to build a Balfour Beatty with market leading strengths and performance over the longer term."

Notes:

1 including share of joint ventures and associates

2 from continuing operations

3 before non-underlying items (Note 8)

Analyst/investor enquiries:

Peter Young

Tel. +44 (0)20 7216 6824

peter.h.young@balfourbeatty.com

Media enquiries:

Louise McCulloch

Tel. +44 (0)20 7216 6846

louise.mcculloch@balfourbeatty.com

Tulchan Communications:

David Allchurch

Tel. +44 (0) 207 353 4200

dallchurch@tulchangroup.com 

Analyst presentation:

A presentation to analysts and investors will be made at Numis, The London Stock Exchange Building, London EC4M 7LT at 09:00 (UK time) on 15 March 2016. There will be a live webcast of this presentation on: www.balfourbeatty.com/webcast

2015 FULL-YEAR RESULTS ANNOUNCEMENT

· GROUP CHIEF EXECUTIVE'S REVIEW

· RESULTS OVERVIEW & OUTLOOK

· BUILD TO LAST TRANSFORMATION PROGRAMME

· DIVISIONAL OPERATING REVIEWS

· OTHER FINANCIAL ITEMS

GROUP CHIEF EXECUTIVE'S REVIEW

This was a year of fundamental change at Balfour Beatty as the Build to Last transformation programme was implemented.

Coming into 2015, the business performance had deteriorated as a decade of forced growth culminated in an overly complex business, poor contract discipline and unaffordable overhead costs. Whilst the sale of Parsons Brinckerhoff in late 2014 provided liquidity to the balance sheet, the cash situation for the Group remained a challenge.

Decisive action was taken to arrest the decline. The Build to Last transformation programme was launched in early 2015, beginning with a 24-month "self-help" phase. Senior leadership was upgraded and immediate steps taken to strengthen governance, controls and processes. Cost reduction plans were agreed, the proposed share buy-back was cancelled, the dividend suspended and agreement reached to re-phase a deficit contribution to the pension fund.

The initial "self-help" phase of Build to Last targeted £200m cash in and £100m of cost out within 24 months. Half way through this period the Group is on course to deliver on these specific targets and the progress made in improving the cash performance in 2015 gives confidence that colleagues, at every level, are fully engaged in delivering change.

Build to Last is designed to address the Group's performance as it affects all stakeholders - customers and supply chain, employees and subcontractors, investors and communities - by driving continuous measurable improvement. The steps that are being taken are often, in themselves, simple and straightforward. However, taken together they are transforming Balfour Beatty against four goals: Lean, Expert, Trusted and Safe.

In 2016, Balfour Beatty will continue to work through the legacy contracts, increasingly able to look to a future as an organisation with lean ways of working, differentiated by its experts, trusted by clients and leading on safe working practices. Build to Last is putting in place the foundations to deliver value for clients, colleagues, shareholders and wider society.

RESULTS OVERVIEW & OUTLOOK

Unless otherwise stated, all commentary in this section is on a continuing operations basis only. Non-underlying items within continuing operations continue to include the trading results of certain legacy Engineering Services (ES) contracts and Rail Germany. These ES contracts were classified as non-underlying items in 2014 as they relate to poor legacy management and in regions where ES withdrew from tendering for third-party work. Rail Germany was presented within non-underlying items as the Group remains committed to exiting all its Mainland European rail operations.

GROUP FINANCIAL SUMMARY

As the business repositioned to focus on profitable opportunities, underlying revenue from continuing operations, including joint ventures and associates, declined by 2% to £8,235 million (2014: £8,440 million). Revenue at constant exchange rates (CER) fell by 6% as sterling fell against both of the Group's principal foreign currencies, the US dollar and Hong Kong dollar.

As a result of improved controls and disciplines on bidding, together with the decision to withdraw from certain types of work in non-core areas, the underlying order book declined by 4% in 2015 to £11.0 billion (2014: £11.4 billion), down 6% at CER. However the quality of the order book improved as the business increased bid margin thresholds and focused on jobs where the Group can deliver value. Construction Services remained stable at £7.9 billion (2014: £7.9 billion) as an 11% increase in the US offset a 17% decline in the UK; the improved bidding framework resulted in lower order intake in areas of the UK business that suffered from the greatest contract problems in the prior year. The Support Services order book declined by 11% to £3.1 billion (2014: £3.5 billion) caused largely as the business continued to execute on long-term contracts and by the decision to exit a poor performing local authority contract.

At the year-end there was a strong pipeline of projects across both Support Services and Construction Services that were awarded preferred bidder status during 2015. These are not yet included in the order book, but are expected to reach final award in 2016.

The underlying loss from continuing operations was £106 million (2014: £58 million). Infrastructure Investments continued to deliver excellent results with profit from operations of £132 million (2014: £127 million), including the benefit of £95 million of gains from investment disposals (2014: £93 million). Underlying losses in Construction Services of £229 million (2014: £209 million) were largely caused by historic issues in the UK, US and Middle East, whilst the Far East performed in line with expectations. Support Services profits of £24 million (2014: £50 million) were lower than the prior year reflecting, in part, the regulatory cycle of some of its major customers; profitability in 2015 was impacted by lower volumes in the power sector and lower lifecycle cost benefits being realised in the utilities sector, as well as tough comparatives from the prior year, which included positive contract settlements and a strong performance in the transportation business.

Total loss from continuing operations, including non-underlying items, was lower than the previous year at £182 million (2014: £281 million). This was largely due to an improved performance from the Engineering Services contracts reported within non-underlying items which contributed a loss from operations of £8 million (2014: £88 million). Rail Germany's trading losses were £2 million (2014: £23 million).

Net finance costs decreased by £6 million to £17 million (2014: £23 million) predominantly due to lower pension net interest expense of £3 million (2014: £16 million), partially offset by lower subordinated debt interest income of £24 million (2014: £29 million). Total reported loss before tax from continuing operations was £199 million (2014: £304 million). Including discontinued operations, the post-tax loss of £206 million (2014: £59 million) was greater than the prior year due to the £234 million gain on the sale of Parsons Brinckerhoff in 2014 that benefited the prior year comparative.

Earnings per share

Underlying loss per share from continuing operations was 19.7 pence (2014: 11.5 pence), which along with non-underlying loss per share from continuing operations of 10.5 pence (2014: 32.4 pence) gave a total loss per share for continuing operations of 30.2 pence (2014: 43.9 pence). Total loss per share of 30.1 pence (2014: 8.6 pence) increased on the prior year due to the gain on the sale of Parsons Brinckerhoff that reduced the total loss per share in 2014.

Cash flow performance

The total cash flow performance, including non-underlying items, improved on the prior year, as the Group focused on cash and working capital management throughout 2015. Working capital generated an inflow of £178 million (2014: outflow £31 million), offset by an operating cash outflow, before movements in working capital, of £247 million (2014: £272 million) and pension deficit payments of £66 million (2014: £49 million) . Therefore, total cash used in operations was £135 million (2014: £352 million) - an improvement of £217 million compared to the prior year. In addition, tax refunds of £6 million were received (2014: £20 million paid).

The total cash movements in the period resulted in a £56 million reduction to the Group's net cash position, excluding non-recourse net borrowings, of £163 million. This compares to an increase in the Group's net cash position of £285 million in 2014, which was boosted by £723 million of net cash consideration from the sale of Parsons Brinckerhoff. Excluding the impact of Parsons Brinckerhoff, the Group's cash performance improved by £357 million in 2015, compared to 2014.

1 before pension deficit payments

2 excluding infrastructure concessions (non-recourse)

Working capital

The focus on improving working capital management, as part of the Build to Last programme, resulted in favourable operating working capital increasing by £178 million. The increase is mainly driven by Construction Services, where an increase in favourable working capital of £182 million has occurred. Working capital for Support Services was broadly in line with December 2014's position.

The Group has been particularly focused on driving working capital inflows from improvements in its billing and WIP management; converting debtors and WIP into cash at a quicker rate. This is reflected in an improved working capital position held as trade and other receivables, which generated a £74 million working capital inflow (2014: £43 million outflow), and a reduction in inventories and non-construction work in progress, which generated a £27 million working capital inflow (2014: £30 million outflow).

Movements in the Group's due from / due to construction contract customers balances, which reflect the net unbilled contract position and traded profit and loss for each individual construction contract, generated a working capital inflow of £313 million (2014: £43 million outflow). A portion of this inflow is a result of risk contingencies recognised on specific construction contracts. Offsetting this is a working capital outflow in trade and other payables of £236 million (2014: £85 million inflow) as a result of the Group settling creditor invoices within a quicker timeframe compared to the previous year and cash outflows on historic loss-making contracts.

Including the impact of foreign exchange and disposals in the year, favourable working capital increased to £890 million at December 2015 (2014: £731 million).

1 including provisions

Net borrowings

The Group's net cash position at 31 December 2015, excluding non-recourse net borrowings, was £163 million (2014: £219 million), representing a strong cash flow performance as working capital inflows mitigated the operating losses. Average net cash in 2015 was £3 million (2014: £371 million net borrowings). Non-recourse net borrowings held in wholly-owned infrastructure concessions reduced to £365 million (2014: £445 million). The balance sheet also includes £98 million for the liability component of the preference shares.

Outlook and dividend

Build to Last is a long-term transformation programme designed to deliver superior returns for all stakeholders from a Group which is lean, expert, trusted and safe.

The first 24 months are focused on driving consistent processes across the Group to provide transparency and short interval control. At the same time, key investments are being maintained to enhance Balfour Beatty's core strengths.

The trading environment in the Group's core UK and US markets remains positive. In the UK, Government policy is helping to drive a strong pipeline of major infrastructure projects in transport and energy. In the US, the transportation bill signed in December 2015 gives visibility over a five-year period that will provide further growth opportunities. This positive market backdrop allows the Group to be more selective, targeting contracts with improved profitability and cash flow dynamics. Whilst in the short term this may lead to some revenue contraction in certain sectors, such as UK regional construction, it will have the corresponding effect of gradually improving Group margins as historic contracts reach completion, bidding disciplines tighten and overhead and procurement savings are delivered.

In its initial year, Build to Last has begun to deliver measurable improvements: costs are coming down and cash flow has improved substantially, such that the Board expects to reinstate the dividend, at an appropriate level, at the interim results in August 2016.

By the end of 2016, Balfour Beatty will have achieved its Phase One targets. Over the following 24 months, the Group expects each of its businesses to reach industry-standard margins, with the foundations in place to build a Balfour Beatty with market leading strengths and performance over the longer term.

BUILD TO LAST

The Group launched the Build to Last transformation programme in early 2015 as a framework to drive continuous improvement for all stakeholders against four goals - Lean, Expert, Trusted and Safe - as measured by cash/EBIT, employee engagement, customer satisfaction and Zero Harm. Rapid action was taken to remove layers and upgrade leadership and governance through a simplified Group structure. As a result Balfour Beatty is stabilising and making significant progress on its four goals:

Lean

• Deliver value to customers by improving operational efficiency and eliminating waste right through the supply chain.

• The Group metric is cash and EBIT - in the first phase, delivering £200 million of cash in and £100 million of cost out in the first 24 months.

The Group's underlying cash performance improved in 2015. Cash flow in 2015 was £357 million better than 2014, excluding the proceeds from the sale of Parsons Brinckerhoff. This was the result of:

• Strong discipline around cash and working capital;

• Enhanced financial processes - including more consistent reporting and driving down cash management into projects;

• Group-wide "Cash is our Compass" employee training; and

• Management incentives aligned to delivering better performance.

In 2015 good progress was made against the targeted £100 million of cost out. Actions were taken to simplify the business, including the reduction of 846 indirect employees, and standardise working practices which delivered £60 million of annualised savings in the year, comprising: £39 million of savings from centralising back office and support functions; £13 million from IT; and £8 million from indirect procurement.

• Business unit and support function costs have been reduced in the year. Balfour Beatty's back office structure was a legacy of a decade of forced growth. The Group was unnecessarily complicated with lack of integration, inefficiencies in processes, lack of accountability and control and significant additional cost. A federated structure had resulted in supporting functions such as HR and IT being run independently within each unit, causing duplication of services. During 2015, support functions were formed across all businesses to standardise working practices. This will allow significant savings as duplicate systems are removed and a more focused, value added approach is taken. For example, a review of Human Resource policies uncovered multiple different policies for each part of the business; a process is now underway to remove duplication and cut the number of HR policies from c.200 to around 50. Office costs were also reduced by rationalising a number of property locations, including relocating from the Group head office, a saving of £2 million.

• IT systems have seen significant change during the year. The Group is simultaneously focused on increasing the effectiveness of its software, whilst also driving out cost from an inefficient IT estate with poor levels of customer support and sub-optimal outsourcing agreements. In the UK construction business, where it was vital to increase transparency and migrate away from ageing systems to a single platform, the Oracle R12 system was rolled out in August. To reduce costs, a review of the architecture of the IT systems concluded with notice served on the external infrastructure support contract.

• The Group spends approximately £7 billion with suppliers. The existing procurement processes were fragmented with localised arrangements and a disjointed supply base. Therefore, improvements to procurement processes are a key focus to deliver value for customers and to drive out cost for the Group. An enhanced procurement capability for the business is now being put in place, with immediate savings being realised from indirect procurement in 2015. Whilst the latter is a smaller proportion of the overall spend, it provides the opportunity for immediate results. In 2016 the focus will move on to direct procurement costs, with the opportunity to reduce third-party spend across a range of categories. Here Balfour Beatty does not necessarily realise the full financial benefit directly, due to gain share agreements with some clients, but improves the Group's competitive advantage.

Progress continues to be made to simplify the business, with the sale of the signalling business SSL in May and agreement to sell the German rail electrification business, subject to regulatory approvals, reached in December. The UK Regional construction business is in the process of rationalising its management structure and offices. The Support Services and US Construction businesses have removed a layer of management.

Expert

• Ensure that Balfour Beatty has the best engineering, design, project management and delivery capabilities.

• The Group metric is average employee satisfaction.

Both the Board and executive management were strengthened significantly during 2015. In addition, the management structure was simplified and rationalised, with layers removed in US Construction and Support Services. There were five additions to the Board, with a new Chairman, Group Chief Executive and Chief Financial Officer joining in the first half of 2015. In addition, Stephen Billingham and Stuart Doughty joined as non-executive Directors. Stephen has broad experience across multiple industries, including construction and support services, both from the supplier and the client side, as well as having a strong background in finance in several complex organisations. Stuart is the former chief executive of engineering company Costain plc, and has 45 years of highly relevant, in-depth experience in the construction industry.

• In addition to the roles of Group Chief Executive and Chief Financial Officer, executive management was upgraded during the year, with two-thirds of the executive committee comprising new appointments to Balfour Beatty or people new to post. The business held its first Group Leadership Conference in January 2016, bringing together 300 leaders from across the business.

• The organisation structure of the UK businesses was simplified with the heads of Major Projects, Gas and Water, Power T&D and Rail all now reporting directly to the Group Chief Executive, as does the new role of managing director for the Regional and Engineering Services business.

At the end of 2015 Balfour Beatty relocated from its central London offices to new devolved offices which are modern and largely open plan, providing staff with a more productive and collaborative working environment.

The 'My Contribution' initiative is the mechanism to engage all staff directly in Build to Last. Since its launch in June, over 3,000 ideas have been submitted, which will drive both measurable savings and improvement to key processes.

Reward and recognition has been aligned across the Group. In 2015, a significant proportion of all bonuses were linked to cash performance. A new Group CEO share awards scheme has been introduced to align incentives for selected key staff who do not qualify for share-based bonuses.

For the first time, a single Group-wide employee opinion survey was carried out in November, which will provide a baseline to monitor employee engagement throughout the Build to Last programme.

In 2015, Balfour Beatty hired 156 apprentices and 216 graduates across the UK and the US. Balfour Beatty is a member of The 5% Club, committed to the aim of ensuring that, within two years, 5% of the UK workforce are apprentices, graduates or sponsored students on structured development programmes. The proportion of the UK workforce in these categories has increased from 3.1% to 4.6% in 2015.

Trusted

• Be the construction partner of choice for customers and supply chain by delivering on promises.

• The Group metric is customer satisfaction.

During 2015, Balfour Beatty continued to win landmark contracts in all its key markets. Considerable progress was made to review, adapt and implement improved governance, processes and controls particularly with respect to the bidding and operation of contracts.

The 8-gated business lifecycle is now mandated for all new business with systems and controls in place to ensure compliance. The process reduces the risk of pursuing inappropriate opportunities, underbidding or accepting inappropriate levels of risk. It also reviews the cash profile of projects.

Prior to the introduction of the process, progress of bids could not be measured. Today across the UK and US approximately 14% of bids are known to be terminated before Gate 4, the final stage before bid submission.

Building on the investment in Oracle R12 and Hyperion, the Group is using data analytics through the pilot of a new, standardised, project reporting and risk-identification system. For the first time, this will provide a complete overview of all active projects to both local and senior management eliminating a large amount of manual work previously required and improving the speed and accessibility of the information required by decision makers.

Automated audit tests and business rules - which create a risk-weighted list of 'review required' projects - are being piloted in the UK. The system will be rolled out across the businesses in 2016, starting with UK Regional construction followed by US Construction. This will enable management for the first time to invasively monitor and review any project in the system.

The Group focused on significantly improving customer engagement in 2015. The number of customer reviews carried out increased by 70% to 1,057 (2014: 622). Customer satisfaction scores were higher in 2015 at 82% (2014: 77%).

Safe

• Ensure the health and safety of everyone who comes into contact with Balfour Beatty's activities.

• The Group metric is Zero Harm.

Many of the activities carried out by Balfour Beatty can be, by their nature, potentially dangerous. It is therefore essential the health and safety of employees and those who come into contact with Balfour Beatty is a paramount consideration.

A new Group Safety and Sustainability Board Committee has been created to ensure that appropriate Board governance is maintained over the businesses in their identifying and remedy of potential risks. Safety matters are regularly reviewed by the Executive Committee and Business Unit leadership teams. A single UK Health and Safety function was created to strengthen leadership and ensure that best practice is shared across the business.

The reinvigorated focus on safety has seen an increase in safety 'observations' of 100%. These observations can be identifying positive activities and behaviours, as well as potential issues. These observations are an indicator of staff engagement.

The Lost Time Injury Rate (LTIR) for the Group, excluding international joint ventures, improved from 0.31 to 0.24. The recent Group employee opinion survey demonstrated that staff have confidence in the Group's attitude to safety. 

New sentencing guidelines published by the Ministry of Justice came into effect in early 2016 which have the potential to lead to significantly higher penalties for Health and Safety breaches. The impact on the industry is yet to be fully understood.

DIVISIONAL OPERATING REVIEWS

CONSTRUCTION SERVICES

The construction business continued to be more selective in the work that it bid, through increased bid margin thresholds, improved risk frameworks and better contract governance. As a result of these actions there was a small decline of 3% (7% decline at CER) in underlying revenue from continuing operations to £6,388 million (2014: £6,597 million). Revenues in the UK fell by 14% due to the lower levels of order intake in the prior year and as the improved bidding disciplines resulted in lower levels of contracts in previous problem areas. This was partially offset by a revenue increase of 3% in the US (4% decline at CER) and a 16% increase in Hong Kong (8% at CER).

Underlying loss from continuing operations was £229 million (2014: £209 million). This was largely due to historic issues in the UK, US and Middle East that resulted in profit write-downs and contract provisions. Total loss from continuing operations reduced by £111 million to £280 million (2014: £391 million), reflecting lower losses arising from Rail Germany and the legacy Engineering Services contracts, as they largely performed to expectations in 2015.

The improved bidding disciplines also resulted in the order book remaining broadly stable during the year (4% decline at CER), as strong growth in the US and the Middle East offset declines in the UK and elsewhere. At the same time, the quality of the UK order book improved as bid margin thresholds and the focus on larger jobs rose. At the year end there was a strong pipeline of projects that were awarded preferred bidder status during 2015. These are not yet included in the order book, but are expected to reach final award in 2016.

Across the construction portfolio there remain a small number of long-term and complex projects where the Group has incorporated significant judgements over contractual entitlements. The range of potential outcomes could result in a materially positive or negative swing to underlying profitability and cash flow. In the UK, the majority of these contracts are within Major Projects. Outside of the UK this primarily relates to a small number of contracts in Hong Kong, which have been recorded at break-even. Several of these claims are expected to reach commercial settlement in 2016.

The Group has continued to present the results of certain external legacy Engineering Services (ES) contracts and Rail Germany as non-underlying in the year. These ES contracts were classified as non-underlying items in 2014 as they relate to poor legacy management and in regions where ES withdrew from tendering for third-party work.

1 including share of joint ventures and associates

2 from continuing operations

3 before non-underlying items (Note 8)

4 includes Balfour Beatty Sakti which operates in Indonesia

UK

The UK construction business is organised into three business units consisting of:

• Major Projects: focused on complex projects in key market sectors such as transportation, heavy infrastructure and energy.

• Regional: private and public, civil engineering and building, providing customers with locally delivered, flexible and fully integrated civil and building services.

• Engineering Services: mechanical and electrical engineering.

Underlying revenue in the UK fell by 14% to £2,024 million, predominantly due to a decline in the Regional construction business. The UK business continued to be more selective in the work that it bid, through increased bid margin thresholds, improved risk frameworks and better contract governance. Revenues were lower due to the lower levels of order intake in 2014 and as the improved bidding disciplines resulted in lower levels of contracts in previous problem areas. The business areas that saw the greatest revenue decline were those that suffered from the greatest contract problems, such as Engineering Services, London and the South West. As the UK business focused on improving the quality of new orders, the UK order book declined by 17%.

The underlying loss from the UK construction business was £187 million (2014: £229 million), after provisions were taken to maintain an adequate level of cover against the likely end contract positions on a number of historic contracts that suffered schedule slippages and operational deterioration. The total loss from the UK construction business after including the results of the non-underlying Engineering Services contracts was £195 million (2014: £317 million).

The business is continuing to manage the historic problem contracts through to completion. At the 2015 half-year 89 historic contracts were identified that have had a material negative impact on profitability and cash. The Group continued to make good progress in completing on these contracts. As at the end of December 2015, 60% of these projects were already at practical or financial completion, up from 31% as at June 2015. By the end of 2016, the number of these projects at practical or financial completion is still expected to be greater than 90%.

A number of significant changes were made during the year to improve the operational and financial performance of the business. The senior leadership within the UK Regional and Engineering Services business has been strengthened by the appointment of a new managing director who, along with the managing director of Major Projects, now reports directly to the Group Chief Executive. The regional business was also further streamlined, to focus on profitable markets, with a reduction in delivery units from 19 to 11. The gated risk management framework has been introduced to ensure rigour and control during both the sale and delivery phases of the contract lifecycle. Financial reporting is undergoing a radical overhaul with the introduction of Oracle R12, and new, uniform reporting dashboards have been introduced across the business which are already starting to provide clear, regular reporting to senior management.

The Major Projects business had a number of landmark successes in 2015, including a £416 million contract for the construction of the six-kilometre 'West' section of London's new 'super sewer', the Thames Tideway Tunnel, as part of a joint venture with BAM and Morgan Sindall. Construction is expected to last until 2022 and is worth approximately £139 million to Balfour Beatty. The highways business was awarded a £104 million road scheme for Norfolk County Council to complete works on the Norwich Northern Distributor Road, including the construction of 19.6 kilometres of new dual carriageway, nine new roundabouts and seven new bridges. The London Olympic Stadium transformation successfully reached its planned phase completion in time for the stadium to host the Diamond League athletics and the Rugby World Cup events.

Included within the projects 'awarded but not contracted' in Major Projects, the Highways business was selected to deliver a smart motorway package worth up to £607 million to upgrade sections of the M5, M6 and M4, in joint venture with VINCI - representing the largest of Highways England's three packages across its £1.5 billion smart motorway programme. Highways England also appointed a Balfour Beatty Carillion joint venture as preferred bidder on the £292 million construction package to widen a critical and complex 10-mile stretch of the existing A14, as part of the wider A14 Cambridge to Huntingdon improvement scheme. Within nuclear, the business was appointed preferred bidder for the £460 million Hinckley Point C power station electrical package for EDF Energy, in joint venture with NG Bailey. The work will deliver the critical infrastructure to power the station, including cabling totalling over 3,000 kilometres in length, fire and environmental sealing and specialist packages associated with data acquisition and plant control. 

The Major Projects business is also continuing to pursue a number of major infrastructure opportunities across the core transportation and energy markets, with the largest being High Speed 2 (HS2). The proposed rail route will connect London, Birmingham, Leeds and Manchester; construction is scheduled to start in 2018 and will last 17 years, with total estimated costs of over £50 billion. Balfour Beatty and VINCI are in joint venture pursuing work on HS2, utilising the expertise acquired by both companies on High Speed 1, VINCI's involvement on the €8bn Tours-Bordeaux high-speed rail project in France, and Balfour Beatty's extensive work on transport networks across the UK and overseas. In December 2015 the Balfour Beatty joint venture was successfully shortlisted for the first stage of this iconic project, for £900m of preparatory work, and is actively pursuing a number of civil engineering and station packages that will be awarded under long-term, collaborative contracts. In addition the highways market continues to provide good growth opportunities following Highways England's commitment to spend £11.4 billion on capital projects over the five-year period to 2020.

The Regional business works on a large number of smaller projects, located throughout the UK. Notable new contract awards in the period included an £80 million contract to construct the National Automotive Innovation Centre (NAIC) in Coventry for the University of Warwick, a £32 million contract to build Baltic Triangle, a three-tower residential development in Liverpool city centre and a £28 million contract for the redevelopment of Dundee rail station in Scotland. The business enjoyed continued success in the defence sector with the award of a £35 million contract at RAF Brize Norton, for the construction of a new aircraft maintenance facility, in addition to the ongoing construction of the Defence College of Technical Training at the former RAF Lyneham airbase.

Included within the projects 'awarded but not contracted', the Regional business was appointed by the University of Manchester to deliver the bulk of its £1 billion capital programme through a partnership framework agreement along with two other contractors. As part of the framework Balfour Beatty has been selected as construction partner on the University's flagship project, the £350 million Manchester Engineering Campus Development, with a full construction contract award expected in spring 2016. In London, the business was selected to deliver pre-construction services for The Madison; a £150 million scheme for the construction of a 187 metre, 53-storey residential tower, adjacent to Canary Wharf in London Docklands, with full construction award expected in mid-2016. The business was also selected to deliver the pre-construction services contract for a £130 million renovation and new-build scheme at No. 1 Palace Street, in St James'. Construction of the 72 apartments is due to start in early 2016. The Regional business also secured a number of significant framework positions, including: sole contractor for a £1.5 billion framework operated by Scape Group, which is open to all public sector bodies in the UK and covers projects ranging from road repairs, new bridges and coastal defence works to light rail schemes and major road projects; and the £800 million southern construction framework for public sector work in the South West.

US

Revenues in the US grew by 3% in the period (4% decline at CER), whilst the order book increased by 11% (6% at CER). The business reported a loss from operations for the year of £22 million (2014: £29 million profit), as losses in the first half outweighed a return to profitability in the second half.

Profitability was impacted by write-downs and provisions relating to historic issues. A number of multi-family housing unit projects, bid primarily in 2012 and 2013 by a now discontinued business unit in the South East, suffered subcontractor failures. Two projects in the federal healthcare sector, which had been bid pre 2011, suffered programme overruns and subcontractor performance issues. In addition, provisions were included against a small number of other contracts, primarily awarded in 2013 or earlier.

In the US approximately 85% of revenues are generated from the general building market, with the infrastructure market accounting for the remaining 15%.

In the building business, revenues were relatively stable with only a 3% decline at CER. The order book increased by 8% at CER, as the business continued to see strong order intake despite improved bidding disciplines. The business remains focused on working with repeat customers and where it can deliver value. The organisational structure of the US building business was simplified to create a leaner structure, as part of the Build to Last programme, with the removal of the top layer of regional management.

Notable awards included a US$268 million contract for the construction of a million-square-foot office campus in Plano, Texas. The 9.3 acre campus will include two 19-storey twin towers connected by a 4,600-car parking garage, an on-site medical centre and retail space on the lower levels. In Texas, a US$175 million contract was awarded for a high-rise residential tower in Austin. In Seattle, a US$154 million design and build contract was awarded for the King County justice facility. In San Francisco, a US$176 million contract was awarded for a mixed-use development. In Florida, contract wins for a 50-storey luxury residential tower in Miami and a new resort hotel featuring 1,000 guest rooms, totalled approximately US$300 million.

In the infrastructure business, revenues were flat on the prior year but profitability was lower due to provisions being taken against ongoing contract disputes and favourable contract resolutions that benefited the prior year. The order book grew due to a number of awards, including a US$582 million design-build contract for the Bergstrom Expressway in Austin, Texas, awarded in joint venture with Fluor Corporation, a US$179 million contract for the modernisation of the Rinconada water treatment plant in California and a US$140 million contract in Denver for the extension of Regional Transport District's light-rail line across Denver's south-east suburbs. The business continued to pursue design-build and alternative delivery projects in its key rail, highway and water markets to reflect ongoing changes in procurement trends in the marketplace. As expected, in 2015 the market showed a considerable increase in design-build procurement opportunities and a decrease in hard-bid project opportunities.

A new US$305 billion transportation bill was signed in December 2015, providing guaranteed funding for a five-year period. Whilst funding levels were broadly held flat it is the first transportation funding bill lasting longer than two years since 2005. This will permit longer-term project planning horizons in the public market and, in due course, lead to improved visibility for public funded projects that have been slow to come to market. There are good medium-term opportunities for the business, but there remain risks that a number of new contract awards continue to slip into later years.

International

The Group also operates in South East Asia and the Middle East, through joint ventures. Revenue in the Group's Hong Kong and Singapore joint venture, Gammon, increased by 16% (8% at CER), due in particular to growth in major building projects which overtook civils to become the largest division in 2015. Revenue benefited from new projects awarded in 2014, such as the Tuen Mun Area 54 housing development and the Hong Kong Science Park phase 3C. Profits in the region increased to £19 million (2014: £12 million). The order book was 13% lower at CER as the business continued to execute on long-term major infrastructure projects, with a number reaching completion during the period. At the end of December, the new Midfield Concourse at Hong Kong International Airport, under construction since 2011, opened to commercial flights, providing capacity for an additional 10 million passengers every year. New awards during the year included: the TW5 Cityside residential property development which includes the construction of seven residential towers, worth HK$3.2 billion (£270 million); the development of 33 Tong Yin Street, including residential towers and retail areas; and the conversion of the ex-government Murray building into a hotel.

In the Middle East, the order book grew in 2015 with significant growth in the construction joint venture in Dubai. Wins included a contract with Meeras for a mixed-use development on the Dubai Creek waterfront and work on phase 1 of the Container Terminal 4 project at Jebel Ali Port. Reviews of the Middle East historic contracts resulted in an increase in project-specific provisions, predominantly in the mechanical and electrical engineering business, for additional cost overruns and claim recovery shortfalls. As a result losses from operations in the region were £34 million (2014: £15 million).

Rail

Revenue and the order book declined, as expected, following the disposal of the Group's 50% stake in Signalling Solutions Ltd, the exit from the North-West electrification project and a reduction in operations outside the UK. Underlying losses in the period were £5 million (2014: £6 million) due to lower volumes and as the business continued to be impacted by poor contract performance on a small number of rail projects.

In the first half, phase 2 of the North-West electrification project reached practical completion. However, following a review of future schemes in the North-West, it was concluded that the proposed alliance was unlikely to meet its stated objectives of delivering the scope of the work on time and to budget. In July, it was agreed with Network Rail that Balfour Beatty would not continue with the alliance framework for phases 3-7.

In December, agreement was reached to sell parts of the German Rail business to Tianjin Keyvia Electric Co Ltd, and this remains subject to various approvals. The results of Rail Germany have been presented as non-underlying items within continuing operations, as the Group remains committed to exiting the remaining parts of the German rail business.

SUPPORT SERVICES

Revenue for the division fell by 1% to £1,259 million (2014: £1,273 million), as growth in utilities was offset by a decline in transport. Revenues in utilities grew by 2% as growth in Gas & Water more than offset an expected decline in Power. Revenues from transport declined by 4%, as a decline from local authority work more than offset growth in highways. Underlying profit from operations declined to £24 million (2014: £50 million). Profits for the year were impacted by a weak first half partially offset by an improved performance in the second half. Profitability in 2015 was lower than the prior year due to lower volumes in the power sector, lower lifecycle cost benefits being realised and due to tough comparatives from the prior year, which included positive contract settlements and a strong performance in the transportation business.

The Support Services order book decreased by 11% to £3.1 billion (2014: £3.5 billion) due to an expected decline in transportation whilst utilities remained broadly stable. The transportation order book fell largely due to the active decision to exit from a poor performing local authority contract and as the business continued to execute on long-term contracts. The utilities order book remained flat as growth in water offset expected declines in gas and power.

1 including share of joint ventures and associates

2 before non-underlying items (Note 8)

As part of the Build to Last transformation programme, the organisational structure of Support Services was simplified during the first half; the top management layer was disbanded, with the managing directors of each business now reporting directly to the Group Chief Executive. This brings the Group's expertise closer to strategically important customers, whilst also eliminating waste. The leaner structure enables the Group to more efficiently identify and focus on growth opportunities and deliver value in complex projects, in what are increasingly challenging regulated markets.

The utilities business operates across power transmission and distribution and the gas and water sectors. Revenues in utilities fell due to an expected decline in Power revenues whilst revenues in Gas & Water remained stable. Profitability fell as a result of lower volumes in Power, particularly in overhead lines, and due to timing differences as the utilities business realised lower lifecycle cost savings in the period that are now expected to be realised in future years. This was partially offset by positive contract performance on completion of AMP5 water contracts and following mobilisation of the new AMP6 contracts. The order book remained stable as new contract awards in Water were offset by declines elsewhere as the business continued to execute on long-term contracts.

Within Power, revenues and profitability declined following the completion of the Beauly Denny project in Scotland, lower volumes coming from the National Grid Alliance projects and the completion of other overhead lines projects in Scotland. This was partially offset by growth in the offshore transmission (OFTO) market, following emergency cable repairs successfully completed on both the Thanet and Gwynt y Môr sub-sea cables. As a result of this work the business was awarded a new 20-year operate and maintain (O&M) contract for the Gwynt y Môr sub-sea cables, in addition to 20-year contracts already secured for Thanet and Greater Gabbard. The business continues to see medium-term opportunities within the cabling market, as demonstrated by the award of the Nemo sub-sea cable interconnector between the UK and Belgium, the Group's first win in an expanding market, and preferred bidder status for the construction and maintenance of the cable systems for Eleclink, the Channel Tunnel interconnector project.

Gas & Water revenues remained stable. Volumes in the gas distribution strategic partnership contracts with National Grid returned to more normalised levels from the lower comparatives in 2014. However, this was largely offset by the expected decline in revenues within the Water business as it completed work under the AMP5 regulatory cycle and transitioned to the new AMP6 regulatory cycle, which controls capital expenditure across the network from April 2015 through to 2020. The Water business was awarded a further contract under the AMP6 regulatory period, as a one-third partner in a joint venture, which includes Skanska and MWH Treatment, providing water asset solutions as part of Thames Water's 'super-alliance'. This contract has a value to Balfour Beatty of approximately £265 million over the initial five years and follows on from a two-year Early Contractor Involvement phase that started in March 2013.

The Transportation business operates across rail, highways and managed road schemes for local authorities. Revenues decreased by 4% due to a decline in local authority work whilst revenues in highways and rail remained stable. Profitability fell slightly as an improved performance in the rail sector was offset by an expected decline in highways, whose performance was boosted by contract settlements in 2014. The order book declined as the business continued to execute on long-term contracts and due to the exit from a poor performing local authority contract.

Highways revenues remained stable as the business continued to deliver on long-term contracts for Highways England. New contract awards during the period included a 10-year extension to its existing contract to deliver O&M activities on a 64-mile section of the A30/A35 trunk road across Devon and Dorset. Profitability was lower than in 2014, but this was due to positive contract settlements recognised in 2014.

Local Authority revenues declined due to reduced volumes on highways contracts and following the decision to exit one contract which had suffered operational and commercial issues. Whilst profitability remained relatively stable, the order book declined. At the start of 2016, the business was awarded a £245 million highways maintenance contract over seven years for Coventry City Council, Solihull Metropolitan Borough Council and Warwickshire County Council. This unique collaborative arrangement enables the business to work in partnership with the three councils as a single source service provider, and will result in better value for money, improved service resilience and flexibility in service provision.

The rail business remained stable in the period as rail renewal work for London Underground largely offset the loss of revenue from exiting the Network Rail 'rail renewals' contract in 2014, and the completion of a rail grinding contract. Profitability improved in the year due to higher volumes on the London Underground contract.

INFRASTRUCTURE INVESTMENTS

The Investments business delivered another strong performance, having continued its strategy of optimising value through the disposal of mature assets, whilst also continuing to invest in new opportunities and expanding the breadth of assets.

Underlying profit from operations increased to £132 million (2014: £127 million). The pre-disposals operating profit increased by £3 million to £37 million (2014: £34 million). A strong underlying operational performance, as well as lower bidding and overhead costs, more than offset lower income from movements in the fair value of PPP financial assets and recognition of bid costs deferred income. Gains on disposal were £95 million (2014 £93 million) as the business completed four disposals in the year, one of which was a partial disposal; total disposal proceeds were £145 million. Net interest income declined to £29 million (2014: £35 million) due to the loss of interest income from disposed assets. Profit before tax remained stable at £161 million (2014: £162 million).

The Directors' valuation of the Investments portfolio decreased to £1,244 million as at December 2015 (2014: £1,300 million), after realising £145 million of disposal proceeds and £82 million of distributions, which were partially offset by £102 million of new investments. The number of investments within the portfolio increased to 71 (2014: 66) as the business continued to invest in new opportunities.

1 before non-underlying items (Note 8)

2 subordinated debt interest receivable and net interest receivable on PPP financial assets and non-recourse borrowings

Operational review

The Investments business continued to grow with its appointment as preferred bidder on eight new projects where equity will be invested, comprising: two university student accommodation projects, three private rental housing projects, one OFTO, one healthcare project and one energy project. The business had reached financial close on four of these projects as at 31 December 2015, as well as reaching financial close on three of the projects which were already preferred bidder at the start of 2015. Seven projects currently remain at preferred bidder, with investment already made into one of these projects, located in Glasgow, in order to begin construction.

The Investments business was also appointed as third-party manager on three fee-based portfolios in the residential sector, consisting of seven locations in Florida, where no equity will be invested, as well as one fee-based student accommodation project that reached preferred bidder stage in 2014.

UK new contract wins and financial closes

The business continued to grow its presence within the student accommodation sector, with the appointment as preferred bidder on two new projects in 2015; this brings the total number of student accommodation projects in the UK and the US to nine. In January 2015, the business was appointed preferred bidder for the University of Sussex's East Slope Residences project, for the development of 2,000 new bedrooms and other innovative student amenities. Balfour Beatty will design, build, finance and operate the project under a 50-year contract, in partnership with the university. In Glasgow, the business is designing, building and financing a 520-bed facility on Kennedy Street, which will also include ground floor retail spaces and a student hub.

The Group has built a strong market position within the specialised, but sizeable, offshore transmission (OFTO) market for the provision of sub-sea cabling and substations that connect offshore wind farms to the mainland electricity grid. In February 2015, a Balfour Beatty consortium with Equitix completed the asset purchase of the £352 million Gwynt y Môr offshore transmission project connecting the 576MW offshore wind farm to the onshore transmission grid in North Wales. In September, the same Balfour Beatty consortium was appointed preferred bidder to own and operate the offshore transmission link for the 220MW Humber Gateway wind project over a 20-year period. This wind farm, located in the North Sea off the coast of East Yorkshire, features 73 wind turbines that can meet the energy requirements of around 170,000 homes.

In March 2015, the business, in partnership with Places for People, signed a development agreement with the London Legacy Development Corporation to invest and construct the new East Wick and Sweetwater housing development project. The project at Queen Elizabeth Olympic Park in East London will create two new neighbourhoods with up to 1,500 homes, including 450 affordable homes, 530 homes for private sale and 500 private rented sector homes.

In the energy sector, the £52 million Welland Waste Wood power station project reached financial close in March 2015. Once complete, the project will convert 60,000 tonnes of dry waste wood feedstock into 9MW of electricity - powering over 17,000 households a year.

Within healthcare, the Investments business, in consortium with Prime and InfraRed Capital Partners was selected as preferred tenderer for the €140 million Irish Primary Care PPP project to deliver 14 primary care centres across Ireland, in the first programme of its kind in the Republic of Ireland's primary care market.

North America new contract wins and financial closes

In North America, the Investments business reached financial close on the acquisition of stakes in three private rental housing developments and reached financial close on two student accommodation projects, one of which is an expansion of an existing student accommodation project. Balfour Beatty Communities will perform property management services for each development, leveraging the existing capabilities of the business. These include: a 398-unit garden style apartment community in Coppell, Texas; a portfolio of five apartment communities in Dallas-Fort Worth, Texas; a 392-unit multifamily community in Rogers, Arkansas; a 595-bed student accommodation project in Dallas, Texas; and a 420-bed student accommodation expansion project in Iowa. In addition, the Investments business reached financial close on one fee-based student accommodation project located in Texas.

The Investments business continues to pursue opportunities to leverage its existing property management, customer services and related real estate capabilities from the multifamily, military, and student housing markets. This has resulted in winning a number of fee-based residential projects, where no equity will be invested and the business acts as a third-party manager; three further portfolios were awarded in 2015, consisting of seven locations in Florida. The Investments business continues to see significant opportunities for future investment in the sector as well as third-party management opportunities.

Asset sales and new investment

The business continued its stated strategy of selling assets at the optimum time to maximise value for the Group. Interests in four assets were sold in 2015, one of which was a partial disposal, generating total book gains on disposal of £95 million (2014: £93 million from three assets). The business sold its 50% interest in the Edinburgh Royal Infirmary project, 80% of its interest in the Thanet OFTO project (where the Group retains a 20% interest), its 20% interest in the Aura BSF schools project in Newcastle and its 33.3% interest in the Greater Gabbard OFTO project. All of these sales realised values consistent with the revised methodology and Directors' valuation published in January 2015.

The Investments business continued to make substantial equity investments in the portfolio, with £102 million invested in 2015 (2014: £53 million). The bulk of this investment was in eight projects: Gwynt y Môr OFTO; Welland Waste Wood biomass; student accommodation in Edinburgh, Glasgow and the University of Texas Dallas; and the three private rental housing developments in North America that reached preferred bidder and financial close in the year. A further £15 million was invested into the fund managed by Balfour Beatty Infrastructure Partners.

The Investments business continues to see significant opportunities for future investment in its core geographic markets in the UK and North America, across both its existing market sectors and as it continues to grow into new adjacent sectors.

DIRECTORS' VALUATION OF THE INVESTMENTS PORTFOLIO

The Group continued to make substantial investments into the portfolio with £102 million of cash invested into projects in 2015. This reflected continued success in targeted sectors with nine new projects being included in the Directors' valuation for the first time, as well as further investment in existing projects. The nine new projects include a project which achieved preferred bidder in 2014 but wasn't included in the Directors' valuation until financial close was achieved in 2015.

The Group continued its strategy of realising value through selling mature investments generating £145 million in aggregate at pricing consistent with the Directors' valuation. Cash yield from distributions amounted to £82m. For the tenth year in succession the portfolio generated cash flow to the Group net of investment.

In overall terms, the Directors' valuation fell slightly to £1,244 million at 31 December 2015 with the number of projects in the portfolio increasing from 66 to 71.

The Directors' valuation has been undertaken using the revised methodology introduced in 2014. This produces a valuation that more closely reflects market value and which consequently changes with movements in the market. For each project, cash flows are forecast based on progress to date and market expectations of future performance. These cash flows have then been discounted using different discount rates depending on project risk and maturity, and reflecting secondary market transaction experience. As in previous years, the Directors' valuation may differ significantly from the accounting book value of investments shown in the accounts, which are produced in accordance with International Financial Reporting Standards rather than using a discounted cash flow approach.

UK portfolio

In 2015 five new projects in the health, OFTO, student accommodation and biomass sectors were included in the Directors' valuation for the first time, increasing the value by £28 million. These included preferred bidder status on a student accommodation project at Sussex University, the Humber Gateway OFTO and a Primary Care PPP project in Ireland, the start of construction on an open market student accommodation project in Glasgow and financial close on a waste wood biomass project in Welland. Significant investment was made in the Gwynt y Mor OFTO, the Welland biomass project, the student accommodation projects in Edinburgh and Glasgow and into the fund managed by Balfour Beatty Infrastructure Partners (BBIP). Total investment amounted to £88 million.

The secondary market remains strong and the Group continued its strategy of realising value from mature investments. The business sold 80% of its interest in the Thanet OFTO as well as its entire interest in the Edinburgh Royal Infirmary, Newcastle BSF schools and Greater Gabbard OFTO projects for an aggregate £145 million. The proceeds received from these sales were consistent with the Directors' valuation. The business continues to preserve interests in projects with strategic clients and those that offer further value to the wider Group through the provision of future lifecycle and maintenance work. Strong demand for infrastructure investment allied to a shortage of supply in the secondary market is expected to underpin pricing for the foreseeable future. With the largest primary infrastructure portfolio held by any contractor in the UK, the Group remains well placed to benefit from these market dynamics.

Operational performance movements resulted in a £100 million reduction in value. The most significant components of this were lower inflation (in the year, as well as forecast), lower forecast deposit interest rates, higher actual and forecast lifecycle and management costs and an increase in the assumed tax burden for potential purchasers. The changes to inflation reflect a lowering of forecast inflation which now steps up through 2016 and 2017 before reverting to a long-term assumption of 3% thereafter. The long-term interest rate assumption has been lowered from 3.5% to 2.75% in response to the continuing policy of near zero interest rates adopted by the Bank of England and the resulting impact on long-term rates forecast by the financial markets. In line with government announcements the corporation tax rate has been reduced from 20% currently to 19% in April 2017 and to 18% from April 2020.

The Group's investment in the fund managed by BBIP is included in the UK portfolio and amounted to £38 million at December 2015.

Discount rates applied to the UK portfolio range between 7% and 14% depending on project risk and maturity. The implied weighted average discount rate for the UK portfolio (excluding BBIP) is 8.3% (2014: 7.8%). The increase during 2015 reflects the impact of selling mature operational projects with lower discount rates whilst investing in new projects where construction has yet to be completed and which are valued using higher discount rates. A 1% change in the discount rate would change the value of the UK portfolio (excluding BBIP) by approximately £95 million.

In 2015, the OECD BEPS project delivered its recommendations in relation to the tax deductibility of interest expense, including the potential for a 'public benefit' exemption. A number of governments are currently considering their response to these recommendations. The UK Government has consulted extensively in order to understand the views of the infrastructure industry. At this stage any impact on the Directors' valuation remains uncertain as is the timing of any changes to legislation. Balfour Beatty will continue to actively engage with the UK Government and to monitor developments in this area.

North American portfolio

In North America, the business acquired investments in three residential housing developments at Coppell and Dallas-Fort Worth (both in Texas) and at Rogers in Arkansas, achieved financial close on a student accommodation project for the University of Texas at Dallas and commenced a further phase of accommodation at the University of Iowa. These projects increased the value of the portfolio by £17 million. Overall investment in existing and new projects in the portfolio totalled £14 million during the year. Operational performance movements increased the valuation by £13 million. This increase arose predominantly from the annual budget settlement for the military housing portfolio, particularly the inflation adjustment for housing rental allowances which feeds through to the fee income and equity returns from individual projects. The Indianapolis justice facility which was at preferred bidder stage was cancelled by the procuring authority just prior to financial close and has therefore been removed from the valuation.

Discount rates applied to the North American portfolio range between 7.5% and 10%. The implied weighted average discount rate for the North American portfolio is 8.2% (2014: 8.1%). A 1% change in the discount rate would change the value of the North American portfolio by approximately £58 million.

OTHER FINANCIAL ITEMS

Non-underlying items

Pre-tax losses from non-underlying items for continuing operations reduced by £148 million to £76 million (2014: £224 million). The improvement was largely due to lower trading losses on certain legacy ES contracts of £8 million (2014: £88 million) and lower trading losses in Rail Germany of £2 million (2014: £23 million). Non-underlying items also include amortisation of acquired intangible assets of £10 million (2014: £11 million).

Significant other non-underlying items included £23 million of costs incurred relating to the Group's Build to Last transformation programme which was launched in early 2015. At the same time, the Group incurred other restructuring costs of £9 million, relating to restructuring costs incurred in Rail Germany and Heery. Rail Germany also recognised further impairment in its underlying assets of £11 million, including £4 million relating to joint ventures and associates. This is as a result of an impairment assessment following an agreement to sell parts of Rail Germany to Tianjin Keyvia Electric Co Ltd. This agreement remains subject to various approvals at the year end.

The Group continued its plan to transition other business units to its UK shared service centre in Newcastle-upon-Tyne, incurring further cost in the year of £8 million. In addition, the Group impaired £17 million of cost capitalised in relation to the transformation of its UK IT estate from a federated to a more centralised model due to curtailments in scope and termination of the agreement with its implementation partner.

The non-underlying charges recognised in 2015 were partially offset by a £16 million gain recognised on the disposal of Signalling Solutions Ltd in May 2015.

Taxation

The Group's underlying loss before tax from continuing operations for subsidiaries of £170 million (2014: £135 million) resulted in an underlying tax charge of £11 million (2014: credit £2 million). The tax charge principally arises due to significant non-recognition of deferred tax assets on losses incurred in the year.

Discontinued operations

The underlying post-tax loss from discontinued operations was £1 million (2014: £24 million profit). Total post-tax profit from discontinued operations was £nil (2014: £242 million).

Profit from discontinued operations reflects an additional gain on disposal of £5 million from the sale of Parsons Brinckerhoff, which completed in 2014. Profit from discontinued operations also included an underlying post-tax loss of £1 million relating to Rail Italy which was disposed in March 2015 resulting in a loss on disposal of £4 million.

Goodwill and intangible assets

The goodwill on the Group's balance sheet at 31 December 2015 increased by £18 million to £844 million (2014: £826 million), primarily relating to movements in foreign currency being partially offset by a £4 million charge in respect of Blackpool airport. Impairment reviews have been carried out, and none of the carrying values have been impaired.

In light of the significant losses incurred within the UK construction business in 2015, the Group has considered whether a reasonable possible change in assumptions would lead to an impairment of the goodwill in the related cash-generating units and concluded that it is not the case. The stabilisation and recovery of the Group's UK construction business to more normal levels of performance is, however, a key assumption underpinning the cash flow forecasts used to assess the recoverable amount of the related goodwill.

Other intangible assets increased to £222 million (2014: £216 million), which is primarily driven by additions in the period, including £23 million in Infrastructure Investments from the continuing construction of Edinburgh student accommodation and £20 million spend on software, partially offset by a £17 million impairment charge against the Group's UK software assets due to curtailments in the scope of the implementation and termination of the agreement with its implementation partner.

Pensions

The Group's balance sheet includes aggregate deficits of £146 million (2014: £128 million) for pension schemes. The Group recorded net actuarial losses on those schemes of £86 million (2014: £237 million gains). The small increase in the deficit in the year is largely as a result of poor performance of the return-seeking assets in the Group's largest scheme. 

In July 2015, following the establishment of a Scottish Limited Partnership (SLP) into which the Group transferred its 40% interest in the Birmingham Hospital PFI concession, agreement was reached to defer the payment of £85 million, which had been due to be paid to the BBPF in 2015, over the period to 2023 with the first payment of £4 million due in 2016.

The next formal triennial valuation of the Group's largest pension scheme, the Balfour Beatty Pension Fund, will be as at 31 March 2016. The Company remains committed to proactively working with the trustees to agree an appropriate level of funding which is consistent with the Build to Last programme and allows the Company and the trustees to meet their obligations.

Banking facilities

In December 2015, the Group agreed a new £400 million syndicated revolving credit facility, refinancing the facilities that had been due to expire in 2016. The size of the credit facility was reduced, consistent with the Group's ongoing capital requirements and the underlying strength of the balance sheet. The new facility extends through to 2018, with the option for two additional one-year extensions through to 2020, subject to bank approval. At 31 December 2015, these bank facilities were undrawn.

Financial risk factors and going concern

The key financial risk factors for the Group remain largely unchanged. Some elements of the Group's markets are recovering, and this can lead to increased risk of subcontractor failures, due to their cash requirements for increased working capital, and also the potential for inflationary pressures in some areas. On the other hand, this should also reduce pressure on bidding margins.

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 2015, both these covenants were passed as the Group had net cash and net interest income from a covenant test perspective, so the Group's poor trading performance and consequent low level of EBIT had no impact on these tests.

The Group is forecasting to remain within its banking covenants during 2016. The losses incurred in the second half of 2015 will be included in the 12-month EBIT for the purpose of the covenant tests at June 2016, which will reduce headroom against these tests. In considering that forecast, account was taken of the range of mitigating actions to conserve and generate cash and EBIT. While recognising that there can be no absolute certainty, the Directors believe that these covenant tests will be met.

The Directors have acknowledged the guidance 'Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009' published by the Financial Reporting Council in October 2009. In reviewing the future prospects of the Group, the following factors are relevant:

• the Group has a strong order backlog

• there continues to be underlying demand in infrastructure markets in the countries in which the Group operates

• excluding the non-recourse net borrowings of PPP subsidiaries, the Group had net cash balances of £163 million at 31 December 2015 and has committed bank facilities of £400 million lasting until December 2018, which were undrawn at 31 December 2015.

Based on the above, and having made appropriate enquiries and reviewed medium-term cash forecasts, the Directors consider it reasonable to assume that the Group and the Company have adequate resources to continue for the foreseeable future and, for this reason, have continued to adopt the going concern basis in preparing the financial statements.

To appreciate the prospects for the Group as a whole, the complete Annual Report and Accounts 2015 needs to be read.

Responsibility statement

The responsibility statement below has been prepared in connection with the Company's Annual Report and Accounts 2015. Certain parts thereof are not included within this announcement.

The Directors confirm that to the best of their knowledge:

• the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union and Article 4 of the IAS Regulation, 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 they face; and

• 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 Company's performance, business model and strategy.

This responsibility statement was approved by the Board of Directors on 14 March 2016 and is signed on its behalf by:

Leo Quinn

Group Chief Executive

Philip Harrison

Chief Financial Officer

ENDS

Forward-looking statements

This announcement may include certain forward-looking statements, beliefs or opinions, including statements with respect to Balfour Beatty plc's business, financial condition and results of operations. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "anticipates", "targets", "aims", "continues", "expects", "intends", "hopes", "may", "will", "would", "could" or "should" or, in each case, their negative or other various or comparable terminology. These statements are made by the Balfour Beatty plc Directors in good faith based on the information available to them at the date of this announcement and reflect the Balfour Beatty plc Directors' beliefs and expectations. By their nature these statements involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. A number of factors could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, developments in the global economy, changes in UK and US government policies, spending and procurement methodologies, and failure in Balfour Beatty's health, safety or environmental policies.

No representation or warranty is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Forward-looking statements speak only as at the date of this announcement and Balfour Beatty plc and its advisers expressly disclaim any obligations or undertaking to release any update of, or revisions to, any forward-looking statements in this announcement. No statement in the announcement is intended to be, or intended to be construed as, a profit forecast or profit estimate or to be interpreted to mean that earnings per Balfour Beatty plc share for the current or future financial years will necessarily match or exceed the historical earnings per Balfour Beatty plc share. As a result, you are cautioned not to place any undue reliance on such forward-looking statements.

Group Income Statement

For the year ended 31 December 2015

Group Statement of Comprehensive Income

For the year ended 31 December 2015

+ Re-presented to show the share of comprehensive (loss)/income relating to the Group's joint ventures and associates separately from the rest of the Group.

^ Recycling of revaluation reserves to the income statement on disposal has no associated tax effect.

Group Statement of Changes in EquityFor the year ended 31 December 2015

Group Balance Sheet

At 31 December 2015

Group Statement of Cash FlowsFor the year ended 31 December 2015

1 Before non-underlying items (Note 8).

2 Re-presented to separately identify cash flows from infrastructure concessions and other.

Notes to the financial statements

1 Basis of accounting

The annual financial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and therefore comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. The Group has applied all accounting standards and interpretations issued by the International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee as adopted by the European Union and effective for accounting periods beginning on 1 January 2015. The presentational currency of the Group is sterling.

The financial information in this announcement, which was approved by the Board of Directors on 14 March 2016, does not constitute the Company's statutory accounts for the years ended 31 December 2015 or 2014, but is derived from those accounts. Statutory accounts for 2014 have been delivered to the Registrar of Companies and those for 2015 will be delivered following the Company's Annual General Meeting. The auditor has reported on the 2015 accounts; the report is unqualified, did not draw attention to any matters by way of emphasis without qualifying the report and did not contain statements under Section 498(2) or (3) of the Companies Act 2006.

Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial statements for the Group and the Company that comply with IFRS in April 2016.

2 Going concern

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 Other Financial Items on pages 19 to 22.

3 Accounting policies

3.1 Judgements and key sources of estimation uncertainty

The Group's principal judgements and key sources of uncertainty are set out in Note 2.26 of the Annual Report and Accounts 2015.

In respect of the available-for-sale financial assets, in addition to judgement on discount rates, judgement is also required when assessing the non-market related cash flows within the infrastructure concessions.

Following the construction business contract reviews carried out in the year, risk-based provisions were recognised on specific contracts. The risk-based provisions are recognised to reflect an increased level of prudence in estimating specific contract completion costs. In 2014, the risk-based provisions were recognised across the broader UK construction portfolio, and generally covered the smaller contracts.

Across Construction Services there are several long-term and complex projects where the Group has incorporated significant judgements over contractual entitlements. The range of potential outcomes could result in a materially positive or negative change to underlying profitability and cash flow. In the UK, the majority of these contracts are within Major Projects. Outside the UK, this primarily relates to a small number of contracts in Hong Kong which have been recorded at break-even. Several of these claims are expected to reach commercial settlement in 2016.

3.2 Adoption of new and revised standards

The following accounting standards, interpretations and amendments have been adopted by the Group in the current period:

· Amendments to the following standards:

o IAS 19 Employee Benefits: Defined Benefit Plans: Employee Contributions

o Improvements to IFRSs (2010 - 2012)

o Improvements to IFRSs (2011 - 2013).

The above new and amended standards do not have a material effect on the Group.

3.3 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 2015:

· IFRS 9 Financial Instruments

· IFRS 14 Regulatory Deferral Accounts

· IFRS 15 Revenue from Contracts with Customers

· IFRS 16 Leases

· Amendments to the following standards:

o IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

o IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exemption

o IFRS 11 Accounting for Acquisitions of Interests in Joint Operations

o IAS 1 Disclosure Initiative

o IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation

o IAS 16 and IAS 41: Agricultural: Bearer Plants

o IAS 27 Equity Method in Separate Financial Statements

o Improvements to IFRSs (2012 - 2014).

The Directors continue to assess the impact of IFRS 9, IFRS 15 and IFRS 16 but do not expect the other standards above to have a material quantitative effect.

4 Exchange rates

The following key exchange rates were applied in these financial statements.

Average rates

Closing rates

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, schools, student accommodation, military housing, offshore transmission networks, waste and biomass and other concessions. This segment now also includes the Group's housing development division which has moved from Construction Services.

^ Presented before non-underlying items for underlying operations (Note 8).

5 Segment analysis continued

5.1 Total Group continued

^ Presented before non-underlying items for underlying operations (Note 8).

+ £10m of costs relating to the acceleration of the completion of construction works were included within Infrastructure Investments.

* Includes non-operating items and current working capital.

+ Inventory relating to development and housing land and work in progress amounting to £26m (2014: £37m) was previously included in Construction Services. This is now presented within Infrastructure Investments.

5 Segment analysis continued

5.1 Total Group

* Includes non-operating items and current working capital.

^ Includes net assets held for sale of £13m relating to the Rail disposal group.