Balfour Beatty Regulatory News (BBY)

BALFOUR BEATTY PLC RESULTS FOR THE FULL YEAR ENDED 31 DECEMBER 2023

13 March 2024

Solid performance with expectations delivered

Operational momentum with immediate and mid-term opportunities

Leo Quinn, Balfour Beatty Group Chief Executive, said: "The Group's reliability and resilience has again delivered a solid performance, with increased revenue and profit from our earnings-based businesses and strong operating cash flow. This success against a challenging economic backdrop is driven by our disciplined contract risk management across a geographically and operationally diversified portfolio.

"The Board remains confident in Balfour Beatty's ongoing ability to deliver sustainable cash generation for significant shareholder returns, with growth from our earnings-based businesses in 2024 underpinned by the strength of the Group's order book. Looking to 2025 and beyond, we expect our unique capabilities and complex infrastructure project experience to drive further earnings growth, with attractive opportunities being pursued in the UK energy, transport and defence markets and in the US."

Solid performance with continuing momentum from earnings-based businesses

· Revenue up 7% to £9.6 billion (2022: £8.9 billion)

· Underlying profit from operations (PFO) from earnings-based businesses up 2% to £236 million (2022: £232 million)

· Underlying profit before tax down 10%, due predominantly to lower gains on investment disposals as guided

· Underlying EPS of 37.3p down 21%: £55 million increase in tax charge, following £56 million credit recognised in 2022

Resilience against economic challenges, with diversified portfolio providing stability 

· Construction Services: PFO up 5% to £156 million (2022: £149 million)

· Support Services: PFO margin of 8.0% (2022: 8.4%) at top of 6-8% targeted range

· Infrastructure Investments: £1.2 billion Directors' valuation (2022: £1.3billion) impacted by exchange and discount rates

· Sixth consecutive year of improved employee engagement

Continued shareholder returns supported by consistent cash generation and balance sheet strength

· 10% increase in recommended full year dividend at 11.5 pence per share (2022: 10.5 pence per share)

· £100 million share buyback commenced for 2024, with total expected cash returns of c.£160 million (2023: £208 million)

· Average net cash of £700 million (2022: £804 million) as forecast

Strategic focus on strong delivery of order book and significant medium-term growth opportunity

· Earnings growth in current year underpinned by £16.5 billion order book (2022: £17.4 billion)

· Unique Group capabilities aligned to significant future opportunities

· Earnings growth accelerating in 2025, driven by energy, transport and defence in UK and buildings in US

Notes:

1 Including share of joint ventures and associates

2 Before non-underlying items (Note 9)

3 Excluding non-recourse net borrowings, which comprise cash and debt ringfenced within certain infrastructure investments project companies, and lease liabilities

# Underlying profit from operations, or PFO, as defined in the Measuring our financial performance section

A reconciliation of the Group's performance measures to its statutory results is provided in the Measuring our financial performance section

Investor and analyst enquiries:

Jim Ryan

Tel. +44 (0)7858 368527

jim.ryan@balfourbeatty.com

Media enquiries:

Antonia Walton

Tel. +44 (0)203 810 2345

Antonia.walton@balfourbeatty.com

Investor and analyst presentation:

A presentation to investors and analysts will be made at Numis, 45 Gresham Street, London, EC2V 7BF at 09:00 (GMT) on 13 March 2024. There will be a live webcast of this on: www.balfourbeatty.com/webcast. The webcast will be recorded and subsequently available at Results, reports and presentations - Investors - Balfour Beatty plc.

2023 FULL YEAR RESULTS ANNOUNCEMENT

· GROUP CHIEF EXECUTIVE'S OVERVIEW

· RESULTS OVERVIEW

· DIVISIONAL REVIEWS

· MEASURING OUR FINANCIAL PERFORMANCE

GROUP CHIEF EXECUTIVE'S OVERVIEW

Full year Group expectations achieved

Balfour Beatty's solid performance in 2023 resulted in the Group delivering underlying profit from operations (PFO) from the earnings-based businesses (Construction Services and Support Services) of £236 million, incrementally ahead of the prior year (2022: £232 million). As expected, the Group's underlying profit for the year reduced to £205 million (2022: £290 million) as gains on investment disposals reduced as planned and the £56 million tax credit relating to the recognition of additional UK tax losses in 2022 did not repeat. Capital expenditure doubled in the year as the Group invested to support growth, and £208 million of cash was returned to shareholders (2022: £208 million) through a combination of dividends and share buybacks. Average net cash reduced as expected to £700 million compared to £804 million in 2022.

Resilient portfolio delivering stability

Balfour Beatty demonstrated the importance of its geographical and operational diversity in 2023, by delivering an overall improvement in underlying financial results from its earnings-based businesses during challenging economic conditions. The results were a further proof point in the strategy to reduce Balfour Beatty's risk profile, with the Group focusing on opportunities which utilise its end-to-end capabilities and large-infrastructure project experience, as well as only contracting on terms consistent with our disciplined risk framework

The underlying PFO from Construction Services increased in 2023 by 5%. UK Construction continued to improve project delivery, making further progress with its ambition to move towards the top of the 2-3% UK industry standard margin target range, Gammon achieved strong margins while growing revenue and US Construction profitability reduced due to the cost of delays at a small number of civils projects. Support Services had another successful year, delivering at the top of its 6-8% margin target range, and Infrastructure Investments achieved its disposal targets. The Directors' valuation of the Investments portfolio decreased by 6% due to foreign exchange movements and an increase in discount rates.

Orders continue with improved second half

The Group's 2023 year end order book remains significant at £16.5 billion, which is 5% lower than 2022 or 2% lower at constant exchange rates. Both the UK Construction and US Construction order books have remained flat on a local currency basis, which is encouraging given the high interest rate environment faced by customers throughout 2023. The second half of the year showed a clear improvement in orders compared to the first half as interest rates in both markets stabilised. In the UK, the proportion of the order book signed on lower risk target-cost or cost-plus contracts compared to higher risk fixed-price contracts remained high at 82%. In the US, where work is predominantly contracted on a fixed-price basis, the Group ensures early issuing of subcontracts for buildings jobs and insurance of the supply chain in order to protect its margin.

The order book for Gammon has reduced in the year, driven by the acceleration of major airport project activity in Hong Kong and lower order intake, and Support Services backlog has grown following the addition of significant road maintenance contracts. Beyond the reported order book, Balfour Beatty has been selected as one of ten preferred bidders on SSEN Transmission's c.£10 billion Accelerated Strategic Transmission Investment (ASTI) framework, with early works for nine projects underway, and the Group's awarded but not contracted position remains high, having added notable airport and major road awards in 2023.

Infrastructure disposals completed above Directors' valuation

The Directors' valuation of the Infrastructure Investments portfolio has reduced to £1.2 billion in 2023 (2022: £1.3 billion), due equally to a weakening of the US dollar against sterling and an increase in discount rates given the interest rate environment and market data. The other usual changes to the valuation, including the equity invested, cash yield received, unwind of discounting, asset disposals and operational performance all largely offset.

The two asset disposals completed in the year were sold at above the Directors' valuation and contributed proceeds of £61 million and a gain on disposals of £26 million. The Group continues to invest in new opportunities (targeting a minimum 2x end-to-end multiple) whilst optimising value through the disposal of further operational assets.

Growth opportunities in chosen markets

The principal markets in which Balfour Beatty operates are showing signs of continued growth backed by government supported spending that prioritises modern and reliable infrastructure to support economic growth and help tackle climate change. In the UK, the requirement for clean and domestically generated energy is a priority for both the incumbent Conservative party and Labour opposition and Balfour Beatty is targeting opportunities on both the supply and demand sides of the energy equation. On supply, steep growth in the volume of UK power transmission and distribution projects will begin in 2025, with an acceleration of work to strengthen and stabilise the power networks, while nuclear, wind, carbon capture and hydrogen projects continue to develop. On the demand side, given the Group's involvement in HS2, construction of greener railways is a large part of the Group's UK operations today and the importance of continued investment in the transport sector is evident for both political parties. Balfour Beatty has also identified the UK defence and security infrastructure industry as a growth area, as the Group's capabilities align well to market opportunities, including projects with close adjacencies to the work delivered by the Group for civil nuclear.

In the US, the Group's buildings operations are focused primarily on specific, high growth regions. These areas are population hubs with growth and migration projected to continue driving increased investment, particularly in transportation and social infrastructure. The stabilisation of interest rates and reduced inflation have released some pressure on the commercial office sector, while other market segments targeted by the Group, such as aviation, leisure, education and federal, remain strong. In Hong Kong, the Government's pipeline of infrastructure projects continues to grow, with further major works announced to increase connectivity within the Greater Bay Area, aligned to plans to develop the Northern Metropolis.

Retention and investment in capability vital for meeting future demand

Now more than ever, Balfour Beatty is focused on making sure the right people, culture, policies and procedures are in place to enable sustainable business performance; prioritising attention on developing an environment where all employees can perform, grow personally and enjoy coming to work. The Group operates in markets where there can be tough competition for the best people; therefore, this is critical to enable the retention and development of talented experts and attract and recruit the diverse skills and experiences that the business needs to deliver today and for the future.

The annual employee engagement survey remains the key tool for the Group to gauge how well it is performing in this space and the 2023 results showed an improvement for the sixth consecutive year. Overall employee engagement increased to 81% (2022: 80%). Compared to peers, Balfour Beatty was 7 percentage points above an industry average and 8 percentage points above companies of a similar size. Aligned to the strong survey results, the Group's retention rates improved in 2023.

The challenge of attracting talent into construction is industry-wide and Balfour Beatty, with its size and prominence, can lead the market with its innovation. The Group has diversified its hiring channels in 2023, with increased recruitment from talent pools including military talent, ex-offenders and those from underprivileged backgrounds, while it also continues with its commitment to train the next generation of employees. At year-end, 7.4% of the UK workforce were apprentices, graduates and sponsored students in 'earn and learn' positions, exceeding both The 5% Club's base target and overall average. 

Further work required in journey to Zero Harm

It is a matter of deep regret that two colleagues have tragically lost their lives in 2023. The Company offers its deepest sympathy and support to their family, friends and co-workers. To ensure that lessons are learnt from these events, and with both fatalities being caused in part by stored energy, Balfour Beatty has established a new Stored Energy Fatal Risk Working Group and is designing digitally-assured processes to improve controls over such safety-critical activities.

The Group remains determined that all colleagues who walk onto a Balfour Beatty site should return home safe and well. While the Group's lagging indicators of lost time injury rate and accident frequency rate have improved in 2023, the two fatalities make evident to all the importance of maintaining focus on health and safety. As such, it is encouraging to see voluntary safety observations increasing to nearly 400,000 in 2023 and proactive programmes having an impact on site. In 2023 these included a Slips, Trips and Falls focus in the UK, which reduced these types of incidents by 33%, and the second year of the What3Things? conversations, which have focused on a back to basics approach.

Balfour Beatty is committed to being an innovative leader in the world of health and safety and launched a programme of digital safety initiatives in 2023, which target improvements in not only the safety of the Group's construction sites, but also productivity and assurance.

Next steps in sustainability journey

Balfour Beatty's sustainability strategy, Building New Futures, was launched in 2020 to improve the Group's approach to environment, materials and communities by setting firm 2030 targets and longer-term ambitions for 2040. The 2030 targets set were the achievement of a science-based carbon reduction target, a 40% reduction in waste generated and the delivery of £3 billion in social value. It also outlines the Group's 2040 ambitions to go Beyond Net Zero Carbon, to Generate Zero Waste and to Positively Impact More than 1 Million People. In the year, the UK business delivered £936 million of social value and achieved a 40% reduction in tonnes of waste generated per £million revenue compared to the restated 2021 baseline. The Group also achieved a 2% absolute reduction and a 7% intensity reduction in Scope 1 & 2 greenhouse gas (GHG) emissions.

In 2023, the Group launched its Bridging the Gap action plan, which is designed to help colleagues focus their efforts on initiatives that will have the biggest impact in delivering Balfour Beatty's targets and ambitions. By adopting a uniform approach, Bridging the Gap will also support best practice and encourage greater collaboration across the organisation whilst setting out minimum expectations of sustainable leadership, carbon, materials, communities and biodiversity.

In late 2023, Balfour Beatty formally submitted Science-Based Targets and a related carbon abatement plan, aligned with the 1.5°C global warming limit. The Group's submission is awaiting validation by the Science Based Targets initiative in 2024.

Dividend growth and further share buybacks

The Group's capital allocation framework has been in place since 2021, facilitating the delivery of attractive shareholder returns, while ensuring the appropriate balance between investment in the business, and a strong capital position. When considering the strength of the Group's order book and balance sheet with the depth of opportunities in its chosen markets, Balfour Beatty is confident of continuing to deliver significant future shareholder returns. As such, the Board is today recommending a final dividend of 8.0 pence per share (2022: 7.0 pence), giving a total recommended dividend for the year of 11.5 pence per share (2022: 10.5 pence). Additionally, the Company intends to repurchase £100 million of shares during the 2024 phase of its multi-year share buyback programme, bringing the cumulative return to shareholders since the introduction in 2021 of the multi-year capital allocation framework to over £750 million.

The total cash return to shareholders in 2024 (including the final 2023 dividend and 2024 interim dividend) is therefore expected to be c.£160 million.

Outlook

The Board expects an increase in PFO from its earnings-based businesses in 2024, with growth accelerating in 2025.

Infrastructure Investments is expected to continue to deliver attractive end-to-end returns from its recurring income, by divesting assets and making new investments in line with the Group's capital allocation framework. For 2024, gains on investment disposals are expected in the range of £20 - £30 million.

The Board expects net finance income of around £30 million for 2024 and for the effective tax rates in each of the three geographies to remain close to statutory rates, albeit with cash tax payments in the UK remaining below statutory levels in the medium term as losses are utilised. Capital expenditure in 2024 is expected to return closer to pre-2023 levels of around £35 million and the Group's average cash in 2024 is expected to be roughly in line with 2023.

The Group's longer-term outlook remains positive and the growth forecast in 2025 and beyond is driven by the opportunities in the energy, transport and defence sectors in the UK and the Group's chosen buildings sectors in the US. This gives the Board confidence in Balfour Beatty's continued ability to deliver profitable managed growth and sustainable cash generation, and in turn significant ongoing shareholder returns.

RESULTS OVERVIEW

Unless otherwise stated, all commentary in this section and the Divisional financial reviews is on an underlying basis.

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 financial performance 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. These financial performance measures are also aligned to measures used internally to assess business performance in the Group's budgeting process and when determining compensation. An explanation of the Group's financial performance measures and appropriate reconciliations to its statutory measures are provided in the Measuring Our Financial Performance section. Non-underlying items are the cause of the differences between underlying and statutory profitability. Additionally, revenue includes the Group's share of revenue of joint ventures and associates.

Group financial summary

The Group's results for 2023 show a solid performance against a backdrop of challenging economic conditions. Revenue increased by 7% (8% at constant exchange rates (CER)) to £9,595 million (2022: £8,931 million) driven by an increase in Construction Services. Statutory revenue, which excludes joint ventures and associates, was £7,993 million (2022: £7,629 million).

The underlying profit from operations for the year reduced to £228 million (2022: £279 million) despite an incremental increase in PFO from the earnings-based businesses, as gains on investment disposals reduced by £44 million. Corporate activity costs rose in 2023, due largely to higher salaries following inflationary increases, audit fees and share-based remuneration. Statutory profit from operations was £211 million (2022: £275 million). 

Net finance income of £33 million (2022: £12 million) improved as a result of higher interest rates. Underlying pre-tax profit was £261 million (2022: £291 million). The taxation charge on underlying profits increased to £56 million (2022: £1 million) as there were no tax credits relating to the recognition of additional UK tax losses (2022: £56 million). This resulted in underlying profit after tax of £205 million (2022: £290 million). Total statutory profit after tax for the year was £194 million (2022: £287 million), as a result of the net effect of non-underlying items.

Underlying basic earnings per share was 37.3 pence (2022: 47.5 pence), which, along with a non-underlying loss per share of 2.0 pence (2022: 0.6 pence), gave a total basic earnings per share of 35.3 pence (2022: 46.9 pence). This included the benefit from the basic weighted average number of ordinary shares reducing to 558 million (2022: 612 million) as a result of the Group's share buyback programme.

Non-underlying items

The Board believes non-underlying items should be separately identified on the face of the income statement to assist in understanding the underlying financial performance achieved by the Group. 

Non-underlying items after taxation were a net charge of £11 million for the period (2022: £3 million). Items included a £9 million post-tax charge in relation to an increase to a provision, which was recognised in 2021 for stone cladding rectification works, updated to current price expectations, and a £2 million post-tax charge relating to the amortisation of acquired intangible assets. Further detail is provided in Note 9.

Cash flow performance

The Group's net cash increased by £27 million in the year (2022: £25 million), resulting in a year end net cash position of £842 million (2022: £815 million), excluding non-recourse net borrowings and lease liabilities. Operating cash flows were ahead of profit from operations. Cash from operations, which included a working capital inflow, was largely offset by shareholder returns and a higher than normal programme of capital expenditure. 2023 was a peak year for capital expenditure, with increased levels of investment in Support Services to aid the Group's medium-term growth plans. 2024 capital expenditure is expected to be close to 2022 levels.

*  Excluding infrastructure investments (non-recourse) net borrowings and lease liabilities

+  Including £3 million (2022: £2 million) of regular funding

? Excluding £1 million (2022: £59 million) dividends received in relation to Investments asset disposals within joint ventures and associates

Working capital

A working capital inflow of £63 million (2022: £54 million outflow) was favourable to the outflow previously expected for the year, driven by a spike in the negative working capital position during the final weeks of December. The inflow reported for 2023 is not reflective of the trend observed throughout the year of average negative working capital reducing.

^ Excluding impact of foreign exchange and disposals

Including the impact of foreign exchange and non-operating items, negative (i.e. favourable) current working capital increased to £1,230 million (2022: £1,167 million). In the medium term, the Group expects negative working capital as a percentage of revenue to be around the top of its historical long term average of 11-13% (2023: 15.4%; 2022: 15.3%) with the range continuing to be dependent on contract mix and the timing of project starts and completions. 

Net cash/borrowings

The Group's average net cash reduced to £700 million in 2023 (2022: £804 million). The Group's year end net cash position, excluding non-recourse net borrowings and lease liabilities, was £842 million (2022: £815 million).

Non-recourse net borrowings, held in Infrastructure Investments entities consolidated by the Group, were £264 million (2022: £242 million). The balance sheet also included £143 million for lease liabilities (2022: £132 million). Statutory net cash at 31 December 2023 was £435 million (2022: £441 million).

Share buyback

On 3 January 2023, Balfour Beatty commenced an initial £50 million tranche of its 2023 share buyback programme, which was subsequently increased, following the release of its 2022 full year results, to £150 million on 20 March 2023. The Group completed the 2023 share buyback programme on 15 December 2023, having purchased 43.3 million shares, which were held in treasury. These shares were subsequently cancelled on 20 December 2023. The Group commenced the initial £50 million tranche of its 2024 share buyback programme on 2 January 2024.

Banking facilities

In June 2023, the Group completed the refinancing of its core £375 million revolving credit facility, which was set to expire in October 2024, replacing it with a new £475 million facility that will expire in June 2027 (the RCF). The RCF has an extension option for a further year to June 2028, with the agreement of the lending banks, and its terms and conditions are materially the same as the prior facility. The RCF is a Sustainability Linked Loan, retaining the KPIs that featured in the prior facility. The RCF ensures the Group will retain strong liquidity support from a diverse banking group.

In March 2023, the Group repaid US$209 million of US Private Placement (USPP) notes as they fell due. The repayment was funded primarily from the proceeds of debt issuance arranged in 2022, specifically US$158 million of new USPP notes issued in June 2022 (US$35 million 6.31% notes maturing in June 2027, US$80 million 6.39% notes maturing in June 2029 and US$43 million 6.45% notes maturing in June 2032) and a new bilateral committed facility, which expires in December 2024 and was fully utilised through a US$36 million drawdown in March 2023. The US$36 million drawdown was repaid in September 2023. This £30 million bilateral facility has an extension option for a further three years subject to certain specific conditions that were met on the completion of the refinancing of the Group's core facility in June 2023. As at the end of the year the Group had not triggered the bilateral facility's extension option.

Going concern

The Directors have considered the Group's medium term cash forecasts and conducted stress-test analysis on these projections in order to assess the Group's ability to continue as a going concern. Having also made appropriate enquiries, the Directors consider it reasonable to assume that the Group has adequate resources to continue for the period of at least 12 months from the date of approval of the financial statements and, for this reason, have continued to adopt the going concern basis in preparing the full year Group financial statements. Further detail is provided in Note 1.3 Going Concern.

Pensions

Balfour Beatty and the trustees of the Balfour Beatty Pension Fund (BBPF) have reconfirmed their commitment to a journey plan approach to managing the BBPF whereby the BBPF is aiming to reach self-sufficiency by 2027. The Company and the trustees have agreed the 31 March 2022 formal valuation, and as a result Balfour Beatty paid deficit contributions to the BBPF of £19 million in 2023 and will pay deficit contributions of £24 million in 2024 and £6 million in 2025. The Company and the trustees are making good progress with plans to reduce the overall risk in the scheme and the Company has agreed that additional amounts will become payable at £2 million per month from March 2025 if the BBPF's performance is materially different from that expected. The next formal triennial funding valuation of the BBPF is due with effect from 31 March 2025.

Following the formal triennial funding valuation of the Railways Pension Scheme (RPS) as at 31 December 2019, the Group agreed to continue to make deficit contributions of £6 million per annum which should reduce the funding deficit to zero by 2025. A formal triennial funding valuation of the RPS as at 31 December 2022 is currently ongoing. The trustee and Balfour Beatty have reached agreement in principle as to the financial and demographic assumptions to be adopted for the purpose of this valuation, which would include the Group continuing to make deficit contributions of £6 million per annum until February 2025.

The Group's balance sheet includes net retirement benefit assets of £69 million (2022: £223 million) as measured on an IAS 19 basis, with the surpluses on the BBPF (£101 million) and RPS (£3 million) partially offset by deficits on other schemes (£35 million).

Dividend

The Board is committed to a sustainable ordinary dividend which is expected to grow over time, targeted at a pay-out ratio of 40% of underlying profit after tax excluding gains on disposal of Investments assets.

Following the 3.5 pence per ordinary share interim dividend declared at the half year, the Board is recommending a final dividend of 8.0 pence per share, giving a total recommended dividend for the year of 11.5 pence per share (2022: 10.5 pence per share).

DIVISIONAL REVIEWS

CONSTRUCTION SERVICES

Financial review

Revenue at £8,081 million was up 8% (2022: £7,482 million), an 8% increase at CER, with higher volumes in the UK and Gammon. Underlying profit from operations increased to £156 million (2022: £149 million) due to improved profitability in UK Construction and higher volumes at Gammon, partially offset by reduced profitability in US Construction. Statutory profit for the year was £143 million (2022: £150 million). The order book reduced by 9% (6% at CER) in the year to £13.7 billion (2022: £15.0 billion), due to a reduction at Gammon and foreign exchange movements.

1 Including share of joint ventures and associates

2 Before non-underlying items (Note 9)

A reconciliation of the Group's performance measures to its statutory results is provided in the Measuring our financial performance section

UK Construction: Revenue in UK Construction increased by 10% to £3,027 million (2022: £2,763 million) driven primarily by higher transport volumes.

UK Construction underlying profit from operations increased to £69 million (2022: £59 million), driven by higher revenue and improved project delivery. This represents a 2.3% PFO margin (2022: 2.1%) and demonstrates progress in the Group's medium term ambition to achieve a 3% PFO margin in UK Construction, with further improvement expected in 2024.

The UK Construction order book remained flat at £6.1 billion, with 91% of those orders from public sector and regulated industry clients.

US Construction: Revenue in US Construction increased by 1% (1% at CER) to £3,697 million (2022: £3,651 million). Underlying profit from operations for US Construction reduced by 12% to £51 million (2022: £58 million) as a small number of civils projects have taken longer than initially scheduled. Due to the fixed-price nature of the contracts, the cost of these delays has impacted profitability in 2023 and we now expect PFO to be flat in 2024.

The US Construction order book decreased by 7% to £5.6 billion (2022: £6.0 billion) due to foreign exchange movements and was flat at CER. Following a difficult period for orders in the first half of 2023, the stabilisation of interest rates has contributed to an improvement in market conditions, particularly in the commercial office sector, resulting in a stronger period of order intake in the second half.

Gammon: The Group's share of Gammon's revenue increased by 27% (27% at CER) to £1,357 million (2022: £1,068 million) driven by an increase in major civils volumes, including the Terminal 2 expansion at Hong Kong Airport. Underlying profit increased to £36 million (2022: £32 million) representing a 2.7% profit margin (2022: 3.0%).

The Group's share of Gammon's order book decreased by 31% (29% at CER) to £2.0 billion (2022: £2.9 billion) with the accelerated utilisation of the order book only partially offset by new orders, which included a HK$3.7 billion contract to construct a new development at Cyberport, which is the largest Fintech community in Hong Kong, from a wholly owned company of the Hong Kong Special Administrative Region Government.

Operational review

UK Construction

Breadth of opportunities in chosen markets

The next UK general election is expected in the second half of 2024 and both the incumbent Government and the Opposition have set out their plans to help accelerate the delivery of critical infrastructure in the UK, which address industry challenges such as slow decision making, planning delays and the uncertainty which has hindered private investment. With both the Conservative and Labour parties recognising the importance of infrastructure development to economic growth, the outlook for Balfour Beatty in the UK remains positive. The Group's chosen focus areas in the UK of energy and transportation infrastructure are high on the priority list for both parties and represented 81% of the Infrastructure and Project Authority's £775 billion National Infrastructure and Construction Pipeline published in February 2024. In the same month, the Labour party revised down its previous green investment policy due to economic pressures, however the new commitment represents an increase to current levels of spending and does not impact Balfour Beatty's view of the broad opportunity in the medium term.

Balfour Beatty's end-to-end capabilities position it well to capitalise on the market opportunities in UK energy security and transition infrastructure. During 2023, the number of conversations with potential customers and the volume of work being pursued in this space has grown significantly, aided in part by favourable fundamentals and Government support. Recent developments include:

· As part of the 2023 Spring Budget, the UK Government allocated £20 billion of funding to the development of carbon capture and hydrogen production technologies. Opportunities include Net Zero Teesside, a first-of-a-kind integrated power and carbon capture project, for which Balfour Beatty was involved in the front-end engineering and design study;

· In July, the UK Government stated that up to £20 billion could be spent on the development and construction of small nuclear reactors (SMR), and in October, Holtec's SMR-160 pressurised light-water nuclear reactor, for which Balfour Beatty is the main construction partner, was selected as one of six designs to progress to the next stage of a government competition for the development of innovative technology to boost Britain's energy security and sustainability;

· In January 2024, the Development Consent Order (DCO) for Sizewell C was triggered and the UK Government made an additional £1.3 billion available for the new nuclear power station, specifically to support ongoing preparatory works such as improvements to roads and rail lines around the Suffolk site.

The Group also continues to pursue opportunities in offshore wind and hydrogen, and from 2025 onwards, the UK Construction division's civil engineering expertise is expected to be drawn on further as a result of the forecast expansion of power transmission and distribution volumes within Support Services.

In the UK transport sector, the Group's order book was unaffected by the Government's decision in October 2023 to cancel HS2 Phase 2, as this stage of the project had yet to be contracted. The Group continues to expect to deliver material volumes of HS2 work across the balance of the decade and is awaiting results for its bids submitted in November on four new packages of HS2 work covering overhead catenary and track installation. Aligned to the cancellation of HS2 Phase 2, the Government announced Network North, a £36 billion plan to improve the roads, buses and railways that people use every day. With Balfour Beatty holding material market positions with both Network Rail and National Highways, Network North could introduce new opportunities for the Group.

Balfour Beatty was awarded a £1.2 billion contract by National Highways in January 2023 to deliver the 'Roads North of the Thames' package of works for the proposed Lower Thames Crossing. As part of the announcement by the UK transport secretary on 9 March 2023 regarding a £40 billion investment in transport schemes across 2023-2025, Lower Thames Crossing was delayed by two years, with the notice to proceed from the Department for Transport now not expected prior to 2026.

In the UK defence and security sector, in which Balfour Beatty has been a long term participant, the Group have identified opportunities to grow its market share at a time when funding is also increasing. The Group's experiences in civil nuclear construction hold close adjacencies with some of the projects being tendered, while its end-to-end capabilities can simplify high security project delivery by reducing complex interfaces. The Ministry of Defence has £110 billion of funding ringfenced for the Defence Nuclear Enterprise (DNE) for the ten years to 2033, which will in part be used to upgrade defence infrastructure, and during 2023, the Group started work at two of the sites funded by the DNE.

Improved delivery driving margin momentum

Balfour Beatty's market-leading position in the UK infrastructure market is built on its unmatched scale and vertically integrated capability for delivering major and regional projects. In 2023, 95% of UK Construction revenue was from public sector and regulated industry clients (2022: 91%). Balfour Beatty will continue to be selective in the work that it bids, through increased bid margin thresholds and utilisation of risk frameworks and contract governance. To this end, the Group's involvement in the Central London high-end private sector property market concluded in 2023. Alongside the Group's focus on reducing the risk within the order book is its determination to provide industry leading project delivery across the UK Construction portfolio.

At HS2, the scale and complexity of construction activity continued to grow in 2023. At Area North, the 2,000 tonne tunnel boring machine completed its second one mile journey underneath an ancient Warwickshire wood, marking the culmination of a three-year operation, from site set-up to the completion of the second breakthrough. The team also completed the first Birmingham viaduct pier in the city centre and three major bridge slides. At Old Oak Common, the HS2 station in West London, the diaphragm walls and piling to the HS2 Box have been completed, with over 660,000 tonnes of London clay removed from site during the year and transported 1.7 miles via conveyor to Willesden Euroterminal.

At Hinkley Point C, good progress continues to be made on the marine works for the new nuclear power station. During the year the six vertical liners that will ultimately connect the previously bored tunnels with the concrete tunnel heads, which were placed on the seabed in 2022, were safely installed using specialist marine vessels and equipment. In addition, the side walls of the bored outfall tunnel were expertly broken through to allow underground mining works to progress. When all the connections in both the outfall and intake tunnels are completed, the cooling water system will have the capacity to circulate 120,000 litres of water per second directly from the sea to the nuclear power station through the tunnels and underground caverns.

At the Thames Tideway Tunnel project, the Balfour Beatty joint venture's construction work at Putney has been substantially completed and the new riverside area created has been opened to the public, and at its main site, Carnwath Road in Fulham, the team has reached the major milestone of completing the shafts and tunnel works.

Major Highways is a year into the major improvement scheme at the interchange between Junction 10 of the M25 and the A3, which is expected to complete in the summer of 2025. In October, the team enforced a full closure of part of the A3 over one weekend for the installation of ten 33-metre pre-cast concrete beams to form a new bridge, which will provide a safer route for walkers, cyclists, horse-riders, and drivers. This work was completed safely, with the A3 reopened for traffic four and a half hours earlier than anticipated. The Major Highways team also completed concrete safety barrier work on the M3 and M1/A1 in the year and made progress on the A63.

UK Construction currently has around 700 live projects in the portfolio, which is slightly higher than recent years. During 2023, work was completed on a wide range of projects including the Mayfield Retirement Village in Watford, the Forder Valley link road and bridge in Plymouth, the National Treatment Centre Highland Hospital in Inverness and the Institute for Regeneration and Repair at the University of Edinburgh. New projects which started in the year included a new building at the AWE Aldermaston site near Reading, civils work at Devonport Dockyard in Plymouth, the Central Rhyl Coastal Defence scheme in North Wales and the Dunfermline Learning Campus for Fife College.

In addition to projects started in the year, work added to the order book in 2023 included the £300 million West Slope student accommodation development a Sussex University, which is a Balfour Beatty Infrastructure Investments project, and a £67 million contract for a replacement Liberton High School in Edinburgh.

US Construction

Interest rate stability aids progress in commercial office sector

Balfour Beatty's US Buildings business accounted for 85% of US Construction revenues in 2023 (2022: 78%). With most of the projects undertaken by US Construction contracted on fixed-price terms, Buildings remains the lower risk business within the division, as the early issuing of subcontracts for works packages and insurance of the supply chain protects the Group's US margin. The Buildings business operates in five geographies, each with a different mix of customers, and therefore the macroeconomic conditions seen throughout the year have had more of an influence on some areas than others. As a result of this diversification, the result of the upcoming US election is not expected to have a material impact on the US Construction business. 

During 2023, the education market in California remained strong, while the federal market in the Mid-Atlantic, and hospitality and aviation markets in the Southeast, have shown growth. In the Northwest, the technology market has started to show early signs of recovery, while the business is also servicing new end-markets. In Texas, where the Group has the majority of its commercial office exposure, there have been positive signs towards the end of the year that the impact of inflationary pressures and high interest rates is reducing. The Group converted US$800 million of commercial office projects from awarded to contracted in the fourth quarter and with the awarded but not contracted position remaining significant, an easing of economic pressures should lead to another strong year of order intake in 2024.

Early successes in US Buildings growth strategy

The US Buildings business has adopted a growth strategy to add further diversification to its regional businesses. By targeting additional cities in states with existing Balfour Beatty offices, and broader end-markets in some regions where the business is already active, new opportunities are being identified. The new locations were chosen based on market fundamentals and adjacency to established offices, and include Sacramento in California, Savannah in Georgia, Charleston in South Carolina, Richmond in Virginia, and Tampa in Florida. These offices will take time to reach scale, but there are early signs of promise such as the construction of a three-storey building at Sierra College in Rocklin, California, an elementary school in Savannah, a senior living facility in Charleston, a student housing project at The College of William and Mary near Richmond, and a multifamily housing project in Tampa.

By broadening the regions in which it serves certain end-markets, the US Buildings business can further utilise its inhouse expertise and customer relationships held locally to drive organic growth. This has helped secure the award of over US $1 billion of combined airport work at Raleigh-Durham International Airport in North Carolina, Jacksonville International Airport in Florida and Sacramento International Airport in California, which is expected to be added to the order book in phases when contracted. The Buildings business is also working on a theme park in Texas and renovations at a theme park in California, which follow many years of successful construction at theme parks in Florida, as well as a data centre project in Seattle, continuing on the successes in Oregon.

Strong delivery and work winning in 2023

During the year, progress has been made on significant Buildings projects including:

· Substantial completion of Block 216, the fourth tallest building in Portland, Oregon;

· Topping out of the Broward County Convention Center's East Expansion and Hotel in Florida;

· Completion of the Icon Marina Village, a group of luxury apartments in West Palm Beach, Florida;

· Substantial completion of the Del Sol High School in Oxnard, California;

· Completion of the ilani Casino Hotel in Ridgefield, Washington.

In the year, the Buildings business booked material new phases of existing contracts and standalone new contract awards including:

· US$350 million of data centres in the US Northwest;

· Two commercial office projects in Texas totalling US$800 million;

· US$480 million of additional Federal work in Washington D.C.

Progress made on major US Civils jobs

The US Civils business focuses on highways projects in Texas and the Southeast and mass transit rail in major US cities. Order intake improved compared to the prior year, with additions including a US$242 million design-build highways contract in North Carolina, however the volume of civils jobs coming to market and aligned to the Group's capabilities has not increased notably since the passing of the Inflation Reduction Act in 2022.

Balfour Beatty remains cautious in its approach to complex civils contracts in the US, as the combination of fixed-price contractual terms and the self-perform nature of the work gives limited scope to mitigate inflation and schedule risk. As a result, the Group's civils bidding is focused on those projects which closely align to its core capabilities.

Progress at the major US Civils projects in 2023 included:

· As part of the LINXS Constructors joint venture at Los Angeles International Airport, Balfour Beatty achieved energisation of the two Intermodal Transportation Facilities and the traction power substations;

· At the Caltrain rail project in California, testing of the electric trains, operated under power from the overhead contact system, has begun;

· At the Oak Hill Parkway highways project in Texas, the team completed key traffic switches and opened the new William Cannon Bridge;

· Completion of the US$300 million Tertiary Treatment Facilities project at the EchoWater Project in California;

· Completion of the US$60 million Harkers Island bridge in North Carolina a year ahead of schedule. The bridge is the first structure in the state to utilise non-corroding, carbon fibre reinforced polymer strand and glass fibre reinforced polymer rebar to combat corrosion in coastal environments.

Gammon

Strong position in buoyant Hong Kong construction market

Gammon, Balfour Beatty's 50:50 joint venture with Jardine Matheson based in Hong Kong, has forged a reputation for delivering high quality projects in Southeast Asia. The business is well placed to capitalise on the high level of major infrastructure investment in the region, which will bring the development of additional land, creating significant development opportunities for both the public and private sectors. The current pipeline of infrastructure projects is driven by the Hong Kong Government's drive to increase connectivity within the Greater Bay Area, as it announced three new strategic railways and three new major roads. It has identified the Northern Metropolis as a new engine for future development and is exploring the benefits of developing the Kau Yi Chau Artificial Islands as a third central business district.

Gammon continues to have a strong share of both the buildings and civils markets in Hong Kong. In buildings, the focus is on the use of Design for Manufacture and Assembly (DfMA) and modular construction to improve productivity and efficiency and expanding the customer base on a selective basis. In civils, the strategy is to lever engineering excellence, with a key area of future work likely to be from significant infrastructure programmes in Hong Kong and in Singapore.

During 2023, Gammon completed a project at Hong Kong International Airport, which included the construction of a bridge to connect the two islands which accommodate the airport and the boundary crossing facilities for the Hong Kong-Zhuhai-Macao bridge. Work continued on two other major projects at the airport, with completion of the concrete structure for the new Terminal 2 facility and its roof fabrication largely complete, and steady progress on the tunnel construction and the electrical and mechanical works for the automated people mover.

At the student hostel project for City University of Hong Kong, which will be the world's largest student hostel to be constructed using modular integrated construction (MiC), the final MiC module out of a total of 1,344 was successfully installed. It resulted in the safe and efficient installation of all the units in less than eight months. 

As part of the Central Kowloon Route project, a 4.7km dual three-lane trunk road that will enhance connectivity between the east and west Kowloon districts, Gammon continued to deliver the Kai Tak West tunnelling contract and the route wide buildings, electrical and mechanical works contract. During the year, excavation of the second stage of underwater tunnelling was completed, with work beginning on the construction of the tunnel structure.

New orders in the year included a HK$3.7 billion contract to construct a new development at Cyberport, which is the largest fintech community in Hong Kong, from a wholly owned company of the Hong Kong Special Administrative Region Government.

SUPPORT SERVICES

Financial review

The Support Services business provides power, plant, road and rail maintenance and is characterised by profitable recurring revenues underpinned by long term frameworks targeting a PFO margin of 6-8%.

Support Services revenue increased by 2% to £1,006 million (2022: £989 million), mainly due to the commencement of two new major road maintenance contracts. Underlying profit from operations at £80 million (2022: £83 million) was lower than the prior year, partially due to the new road contracts incurring additional costs in the start-up phase, as expected. This resulted in PFO margin of 8.0% in the year (2022: 8.4%), which is at the top of the targeted 6-8% PFO margin range and represents a further strong year for the power, road and rail maintenance businesses. 

The Support Services order book increased by 17% to £2.8 billion (2022: £2.4 billion) driven by the addition of the £297 million East Sussex road maintenance contract and the £330 million six-year extension to the Lincolnshire road maintenance contract.

1 Including share of joint ventures and associates

2 Before non-underlying items (Note 9)

A reconciliation of the Group's performance measures to its statutory results is provided in the Measuring our financial performance section

Operational review

Market leading position in rapidly growing Power T&D industry

The UK power transmission and distribution construction industry, in which Balfour Beatty holds a market leading position, is expanding sharply. Due to the necessity of upgrading the UK's electricity network, Ofgem introduced the Accelerated Strategic Transmission Investment (ASTI) regulatory framework to fund the large strategic onshore transmission projects required to deliver the Government's net zero targets. The £20 billion ASTI fund supports the accelerated delivery of network upgrades, with an ambition to cut delivery times in half. This is in addition to the RIIO-T2 spend period (2021-2026) investment, which includes £30 billion for energy networks and potential for a further £10 billion on green energy projects.

This has led to Balfour Beatty's power transmission and distribution team bidding for record levels of work and being selected in August as one of ten preferred bidders on SSEN Transmission's c.£10 billion ASTI framework. The Power business has now commenced early contractor involvement works on nine electricity transmission projects across the north of Scotland under the framework, which are expected to convert to full awards at a later date, and has submitted a bid to be included in National Grid's Great Grid Upgrade ASTI framework. As a result, the Group expects volumes in the Power business to grow steeply across 2025 and 2026.

Operational highlights delivered by the Power business in 2023 include:

· Completion of SSEN Transmission's first major project under the RIIO T2 framework, which was energised after Balfour Beatty installed 148 new steel-lattice towers across a 45km stretch from Port Ann substation near Lochgilphead to the substation at Crossaig.

· Completion of 116 T-pylon structures for National Grid's Hinkley Connection Project. The 8.5km underground cable section under the Mendip Hills Area of Outstanding Natural Beauty (AONB) is now connected to the new line of T-pylons and also energised and transporting electricity.

· Completion of National Grid and Energinet's record-breaking new 'Viking Link' interconnector, for which Balfour Beatty was responsible for the onshore cable installation stretching for 67km between Bicker Fen and Sutton-on-Sea. The link between the UK and Denmark will be able to transport enough green electricity to power up to 2.5 million UK homes.

In November, Balfour Beatty was awarded a significant scheme by National Grid to remove 4.6km of overhead high voltage electricity line and replace it with underground cables in the North Wessex Downs AONB. This is part of National Grid's Visual Impact Provision (VIP) project to reduce the visual impact of high voltage power lines in protected areas.

Further opportunities in rail

The rail maintenance market also has a positive trajectory, with the UK Government's commitment to invest £43 billion (as set out in the Statement of Funds Available (SoFA)) in operations, maintenance and renewal for the period 2024-2029 as part of Network Rail's Control Period 7 (CP7) strategic business plan. The cancellation of HS2 Phase 2 may also bring further funding forward for other rail projects, as pressure grows on the UK Government to direct investment into the North and Midlands. The Group is particularly focused on electrification schemes, as part of its ambition to deliver more net zero infrastructure in the UK.

The Rail business has had a successful year with good work volumes arising on the Core Valley Lines upgrade project in South Wales and the technically challenging emergency repairs of Nuneham Viaduct over the River Thames just south of Oxford, which were completed at pace and ahead of schedule.

Growing market share in road maintenance

The addressable road maintenance market remained positive in 2023. In addition to local council budgets increasing by around 50% in 2022 following the start of a five-year £2.7 billion scheme for road patching, the Government announced in December that £8.3 billion previously allocated to HS2 Phase 2 would be redirected to highway maintenance over the next 11 years. Balfour Beatty's market share also increased in 2023 as the £176 million eight-year contract for highways services for Buckinghamshire County Council started in April and the £297 million seven-year contract for the maintenance of highways assets and the delivery of infrastructure services across East Sussex started in May. In the second half of the year, the Group secured a £330 million six-year contract extension with Lincolnshire County Council and a £54 million two-year extension with Herefordshire County Council.

Looking to the future, there are several Local Authority contracts, like those won by Balfour Beatty for Buckinghamshire and East Sussex in 2022, coming to market in the next year for which the Group is well positioned.

INFRASTRUCTURE INVESTMENTS

Financial review

Underlying pre-disposals profit from operations in the year decreased to £5 million (2022: £11 million) due largely to increased costs relating to the independent compliance monitor's work across the US military housing portfolio. The sale of two assets delivered a gain on disposal of £26 million (2022: £70 million) and resulted in underlying profit from operations of £31 million (2022: £81 million).

Balfour Beatty continues to invest in attractive new opportunities, each expected to meet its investment hurdle rates. In the year, the Group invested £31 million in new and existing projects with one new student accommodation project added to the portfolio. Balfour Beatty also continues to sell assets, timed to maximise benefit to shareholders. Two assets were disposed of in the second half of the year and delivered £26 million gains on disposal, within the Group's targeted range of £15 - £30 million. Both transactions were above the Directors' valuation and total proceeds of £61 million comprised £56 million from the disposal of the Group's 49.5% interest in UBB Waste (Gloucestershire) Holdings Limited, the owner of the energy from waste facility at Javelin Park near Gloucester, and £5 million for its interest in the Moretti Apartments multifamily housing project in Birmingham, Alabama.

Net investment income of £16 million was £8 million lower than the prior year (2022: £24 million) due largely to a net £8 million impairment of joint ventures and associates subordinated debt and accrued interest receivable (2022: £2 million) as the cost to repair a faulty OFTO cable was provided for whilst contractual cost recoveries are being pursued. Underlying profit before tax was £47 million (2022: £105 million) and statutory profit before tax was £43 million (2022: £100 million).

2 Before non-underlying items (Note 9)

~ Subordinated debt interest receivable, net interest receivable on PPP financial assets and non-recourse borrowings, fair value (loss)/gain on investment asset and impairment to subordinated debt receivable and accrued interest

A reconciliation of the Group's performance measures to its statutory results is provided in the Measuring our financial performance section

Operational review

Balfour Beatty's competitive expertise to finance, develop, build and maintain infrastructure puts the Group in a strong position to capitalise on new investment opportunities, however in challenging market conditions, the Group's focus must remain on its disciplined approach to investments and disposals with each expected to meet its investment hurdle rates. The Group is currently assessing investment opportunities in:

· Student accommodation: Across the UK and US, demand for student accommodation remains strong as universities continue to improve their facilities to attract students;

· Residential: Balfour Beatty continues to see attractive US multifamily housing come to market, providing opportunity to invest profitably in the regeneration of these properties;

· US P3: The US has become an increasingly exciting market for public-private partnerships, and, to date, 41 states (plus DC) have passed legislation allowing P3 projects;

· Energy transition: As the UK's energy mix transitions to more renewable sources, and the UK adopts more sustainable transport such as electric vehicles, there are opportunities for private sector investment.

In the UK, the Group has commenced construction of a new student accommodation project - the 1,899 bedroom West Slope development - on behalf of the University of Sussex. In addition to £171 million of wrapped bond financing raised through a private placement, Balfour Beatty will invest equity of £32 million, 81% of the project equity, with the University of Sussex as a co-investor providing the remaining 19%. The first new student accommodation and the health and wellbeing centre are expected to be open in time for the 2026/27 academic year, with more accommodation, catering and retail facilities opening over the following two years. The Group also remains preferred bidder on a further UK student accommodation project and is investigating opportunities to invest in off-campus student accommodation.

In the US, the Group added a student accommodation project in Tallahassee, Florida to the portfolio and started construction on the William & Mary University project in Virginia, having completed the construction of the Vanderbilt University student accommodation project for which rentals started in the Fall 2023 semester.

In US military housing, the Group completed demolition works at Fort Carson as part of a proposed multi-phase project for the construction of new homes at the base, with the preparation phase of work underway. This project is an example of similar upgrade work opportunities likely to be required across the Group's military housing portfolio. The Group continues to work with the independent compliance monitor, who was appointed by the Department of Justice in 2021 and commenced work in 2022.

The Group continued its investment in the UK energy transition with entry into the on-street Electric Vehicle (EV) charging market, partnering with EV chargepoint company Urban Electric Networks to form Urban Fox. The partnership combines Urban Electric Networks' innovative and entrepreneurial spirit with Balfour Beatty's scale, while building on the Group's experience and longstanding relationships with local authorities. Urban Fox's innovative 7kW on-street chargepoint, which is installed into the pavement and fully retractable underground, is the first of its kind to the market.

Directors' valuation

The Directors' valuation decreased by 6% to £1,212 million (2022: £1,291 million) due equally to a weakening of the US dollar against sterling and an increase in discount rates. The portfolio is 58% weighted towards the US (2022: 58%). The number of projects in the portfolio remained at 59 (2022: 59).

Movement in value 2022 to 2023

Balfour Beatty invested £31 million (2022: £30 million) in new and existing projects, with UK investment focused on the Eastwick and Sweetwater redevelopment and US investment predominantly relating to the addition of a student accommodation project in Tallahassee, Florida. The West Slope student accommodation project at the University of Sussex, which reached financial close in December 2023, has now been included as a separate project.

Cash yield from distributions amounted to £48 million (2022: £89 million). Balfour Beatty continued disposals in the year with proceeds of £61 million (2022: £93 million). This comprised £56 million from the sale of its stake in Gloucestershire Waste PFI, and £5 million from the sale of the Moretti Apartments multifamily housing project in Birmingham, Alabama.

Unwind of discount at £87 million (2022: £85 million) is a function of moving the valuation date forward by one year with the result that future cash flows are discounted by twelve months less.

Operational performance movements resulted in a £1 million decrease (2022: £139 million increase). The operational performance movements in the UK were primarily due to a revaluation of a student accommodation project due to higher than forecast rental increases, and an increase in short term interest rates. In the US, the decrease arose in the US military housing portfolio due to increased insurance and independent compliance monitor costs, partially offset by higher annual rents.

The foreign exchange movement was a £43 million decrease, as sterling appreciated against the US dollar (2022: £85 million increase).

Methodology and assumption changes

The methodology for valuing most investments in the portfolio remains the discounted cash flow (DCF) method. Under this methodology cash flows for each project are forecast based on historical and present performance, future risks and macroeconomic forecasts. They also factor in secondary market assumptions. These cash flows are then discounted using different discount rates, which are based on the risk and maturity of individual projects and reflect secondary market transaction experience. The main exception to the use of DCF is for US multifamily housing projects which, due to the perpetual nature of the assets and the depth and liquidity of the rental housing market, are valued based on periodic broker reports for each property.

The valuation methodology used at the previous Directors' valuation is unchanged. The discount rates used for the valuation at 31 December 2023 have been increased to reflect changes in secondary market discount rates, which have progressively responded to increases in long term interest rates. As a result, the implied weighted average discount rate for the UK portfolio increased by 0.4% to 8.3% (2022: 7.9%) and the implied weighted average discount rate for the US portfolio increased by 0.2% to 8.1% (2022: 7.9%).

Discount rates applied to the UK portfolio range from 7.25% to 9.25% (2022: 6.75% to 8.75%) depending on the maturity and risk of each project. The implied weighted average discount rate for the UK portfolio is 8.3% (2022: 7.9%) and a 1% change in the discount rate would change the value of the UK portfolio by approximately £50 million.

Discount rates applied to the US portfolio range from 6.25% to 10.5% (2022: 6.0% to 10.5%). The implied weighted average discount rate for the US portfolio is 8.1% (2022: 7.9%) and a 1% change in the discount rate would change the value of the US portfolio by approximately £77 million.

The portfolio remains positively correlated to inflation. A 1% change in the long term inflation rate in the UK portfolio would change the valuation by approximately £26 million and a 1% change in the long term rental growth rate in the US portfolio would change the valuation by approximately £75 million.

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 UK-adopted international accounting standards rather than using a discounted cash flow approach. A full reconciliation is provided in section i) of the Measuring Our Financial Performance section.

Value by phase

Value by income type

MEASURING OUR FINANCIAL PERFORMANCE

Providing clarity on the Group's alternative performance measures

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 this announcement with the aim of providing transparency and clarity on the measures adopted internally to assess performance.

Throughout this announcement, 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 financial performance 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 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 are encouraged to review this announcement in its entirety.

Performance measures used to assess the Group's operations

Underlying profit from operations (PFO)

Underlying PFO is presented before non-underlying items, finance costs and investment 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, interest receivable on PPP financial assets and fair value gains

on certain investment 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, fair value losses on certain investment assets and any impairment of subordinated debt and accrued interest receivable, which are included in the Group's income statement in finance costs.

Operating cash flow (OCF)

The Group uses an internally defined measure of OCF to measure the performance of its earnings-based businesses and subsequently to determine the amount of incentive awarded to employees in these businesses under the Group's Annual Incentive Plan (AIP). This measure also aligns to one of the vesting conditions attributable to the Group's PSP awards.

Measuring the Group's performance

The following measures are referred to in this announcement 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 have been prepared in accordance with UK-adopted international accounting standards (IFRS) and in conformity with the requirements of the Companies Act 2006.

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 190 to 195 of the Annual Report and Accounts 2023.

The Group's statutory measures take into account all of the factors, including those that it cannot influence (principally foreign currency fluctuations) and also non-recurring items which do not reflect the ongoing underlying performance of the Group.

Performance measures

In assessing its performance, the Group has adopted certain non-statutory measures because, unlike its statutory measures, these cannot be derived directly from its financial statements.

The Group commonly uses the following measures to assess its performance:

a) Order book

The Group's disclosure of its order book is aimed to provide insight into its pipeline of work and future performance. The Group's order book is not a measure of past performance and therefore cannot be derived from its financial statements.

The Group's order book comprises the unexecuted element of orders on contracts that have been secured. Where contracts are subject to variations, only secured contract variations are included in the reported order book.

Where contracts fall under framework agreements, an estimate is made of orders to be secured under that framework agreement. This is based on historical trends from similar framework agreements delivered in the past and the estimate of orders included in the order book is that which is probable to be secured.

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 in the Annual Report and Accounts 2023. 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 (i).

Reconciliation of order book to transaction price to be allocated to remaining performance obligations  

+ Refer to Note 4.3 in the Annual Report and Accounts 2023.

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;

·  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); and

·  impairment of goodwill.

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.

Further details of non-underlying items are provided in Note 9.

A reconciliation has been provided below to show how the Group's statutory results are adjusted to exclude non-underlying items and their impact on its statutory financial information, both as a whole and in respect of specific line items.

Reconciliation of 2023 statutory results to performance measures

Reconciliation of 2023 statutory results to performance measures by segment

Reconciliation of 2022 statutory results to performance measures

Reconciliation of 2022 statutory results to performance measures by segment

c) Underlying profit before tax

As explained, the Group's Infrastructure Investments segment is assessed on an underlying profit before tax (PBT) measure. This is calculated as follows:

+ Refer to Note 7 and Note 8.

d) Underlying earnings per share

In line with the Group's measurement of underlying performance, the Group also presents its earnings per share (EPS) on an underlying basis. The table below reconciles this to the statutory earnings per share.

Reconciliation from statutory basic EPS to performance EPS

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, 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 (j).

f) Operating cash flow (OCF)

The table below reconciles the Group's internal performance measure of OCF to the statutory measure of cash generated from operating activities as reported in the Group Statement of Cash Flows.

Reconciliation from statutory cash generated from operations to OCF

The Group includes/excludes these items to reflect the true cash flows generated from or used in the Group's operating activities:

Pension payments including deficit funding (£28 million): the Group has excluded pension payments which are included in the Group's statutory measure of cash flows from operating activities from its internal OCF measure as these primarily relate to deficit funding of the Group's main pension fund, Balfour Beatty Pension Fund (BBPF). The payments made for the deficit funding are in accordance with an agreed journey plan with the trustees of the BBPF and are not directly linked to the operational performance of the Group.

Repayment of lease liabilities (including lease interest payments) (£63 million outflow): the payments made for the Group's leasing arrangements are included in the Group's OCF measure as these payments are made to third-party suppliers for the lease of assets that are used to deliver services to the Group's customers, and hence to generate revenue. Under IFRS, these payments are excluded from the Group's statutory measure of cash flows from operating activities as these are considered debt in nature under accounting standards.

Operational dividends received from joint ventures and associates (£59 million inflow): dividends received from joint ventures and associates which are generated from non-disposal activities are included in the Group's OCF measure as these are cash returns to the Group from cash flows generated from operating activities within joint ventures and associates. Under IFRS, these returns are classified as investing activities.

Cash flow movements relating to non-operating items (£9 million): the Group's OCF measure excludes certain working capital movements that are not directly attributable to the Group's operating activities.

Operating cash flows relating to non-recourse activities (£8 million): the Group's OCF measure is specifically targeted to drive performance improvement in the Group's earnings-based businesses and therefore any operating cash flows relating to non-recourse activities are removed from this measure. Under IFRS, there is no distinction between recourse and non-recourse cash flows.

g) Recourse net cash/borrowings

The Group also measures its performance based on its net cash/borrowings position at the year end. This is analysed by excluding elements that are non-recourse to the Group as well as lease liabilities.

Non-recourse elements are cash and debt that are ring-fenced within certain infrastructure concession project companies and are excluded from the definition of net debt set out in the Group's borrowing facilities. In addition, lease liabilities which are deemed to be debt in nature under statutory measures are also excluded from the Group's definition of net cash/borrowings as these are viewed to be operational in nature reflecting payments made in exchange for use of assets.

Net cash/borrowings reconciliation

h) Average net cash/borrowings

The Group uses an average net cash/borrowings measure as this reflects its financing requirements throughout the year. The Group calculates its average net cash/borrowings based on the average opening and closing figures for each month through the year.

The average net cash/borrowings measure excludes non-recourse cash and debt and lease liabilities, and this performance measure shows average net cash of £700 million for 2023 (2022: £804 million).

Using a statutory measure (inclusive of non-recourse elements and the lease liabilities recognised) gives average net cash of £438 million for 2023 (2022: £430 million).

i) Directors' valuation of the Investments portfolio

The Group uses a different methodology to assess the value of its Investments portfolio. As described in the Directors' valuation section, the Directors' valuation for most of the investments in the portfolio has been undertaken using forecast cash flows for each project on an asset by asset basis, 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 those investments. The Directors have valued the Investments portfolio at £1.21 billion at year end (2022: £1.29 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

Comparison of the statutory measure of the Investments portfolio to its performance measure

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 Directors' valuation section, the Directors' valuation for most investments 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; and

·  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 valuation date.

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.

j) 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 year. The Group's key exchange rates applied in deriving its statutory results are shown in Note 4.

To measure changes in the Group's performance compared with the previous year 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 year's figures at the current year'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:

2023 statutory growth compared to performance growth

^ Performance revenue is underlying revenue including share of revenue from joint ventures and associates as set out in section (e).

Forward-looking statements

This announcement, including information included or incorporated by reference in it, may include certain forward-looking statements, beliefs or opinions, including statements with respect to Balfour Beatty's business, financial condition and results of operations. All statements other than statements of historical facts included in this announcement may be forward-looking statements.

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 announcement 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 96 to 103 of the Annual Report and Accounts 2023.

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 announcement 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 announcement. No statement in this announcement 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 the historical earnings per share for Balfour Beatty plc. 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 2023

Group Statement of Comprehensive Income

For the year ended 31 December 2023

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

+ Fair value revaluations of investments in mutual funds are measured at fair value through OCI and are not reclassified to the income statement on disposal. Prior year comparatives have not been re-presented.

Group Statement of Changes in Equity For the year ended 31 December 2023