Balfour Beatty Regulatory News (BBY)

BALFOUR BEATTY PLC RESULTS FOR THE HALF YEAR ENDED 26 JUNE 2020

12 August 2020

Maintained expert capability and financial strength to drive future profitable growth

· Underlying loss from operations (PFO) at £14 million (2019: £72 million profit), principally due to impact of COVID-19

· Half year net cash at £563 million (FY 2019: £512 million); average net cash at £507 million (FY 2019: £325 million)

· In March, repaid $46 million of US private placement notes; in July, fully redeemed £112 million of preference shares

· Group order book increased over 20% to £17.5 billion (FY 2019: £14.3 billion; HY 2019: £13.2 billion)

· Directors' valuation of Investments portfolio maintained at £1.1 billion (FY 2019: £1.1 billion; HY 2019: £1.2 billion)

· Given chosen markets recover as expected, 2021 PFO outlook for earnings-based businesses broadly in line with 2019

· The Board will look to re-instate the dividend as soon as is appropriate

Leo Quinn, Balfour Beatty Group Chief Executive, said: "Since the COVID-19 crisis broke, our mission has been to safely manage through it while protecting the Group's strengths. That meant balancing the needs of all our stakeholders. We have kept sites open wherever safe to do so, prioritised supply chain payments and supported staff. Our people's response has been outstanding, working tirelessly whatever the challenge, to enable Balfour Beatty to provide the daily infrastructure relied on by the public.

"We have preserved the disciplines, expert capability and financial strength we will need as markets move back to normal and then beyond, driven by fiscal stimulus for infrastructure. In achieving this, our systems, processes and leadership have all proved the value of our investments over the last five years.

"The financial impacts of COVID-19 are unavoidable; but they will pass. Since the start of Build to Last, our balance sheet, order book and expert capability are at record levels. We look forward with confidence to returning to profitable managed growth, and to delivering ongoing value for all our stakeholders."

Notes:

1 Including share of joint ventures and associates

2 Before non-underlying items (Note 8)

3 Non-recourse net borrowings are cash and debt that are ringfenced within certain infrastructure investments project companies

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:

Angus Barry

Tel. +44 (0)7966 281635

angus.barry@balfourbeatty.com

Media enquiries:

Antonia Walton

Tel. +44 (0)7966 929633

antonia.walton@balfourbeatty.com

Investor and analyst presentation:

The Company has put in place alternative arrangements for the half year results presentation to comply with the restrictions on public gatherings as a result of COVID-19.

Investors and analysts will not be able to attend in person but a presentation will be made by live webcast on: www.balfourbeatty.com/webcast at 09:00 on Wednesday 12 August.

2020 HALF YEAR RESULTS ANNOUNCEMENT

GROUP CHIEF EXECUTIVE'S OVERVIEW

Supporting stakeholders through the crisis: maintaining strengths for the future

Since the start of the COVID-19 pandemic, Balfour Beatty's priority has been to manage the rapidly changing situation, while maintaining the strengths delivered through the Build to Last transformation programme. This has meant constantly balancing the needs of the Group's customers, suppliers and employees. Balfour Beatty has kept sites open wherever it has been possible to do so safely. Liquidity has been maintained for the Group's supply chain and extensive support has been put in place for employees, whether on-site, working remotely or furloughed.

Despite the disruption, Balfour Beatty has upheld its Build to Last disciplines and maintained capability and financial strength to emerge as a strong and resilient organisation. In achieving this, the Group's investments in upgrading systems, processes and leadership have all proved their value.

Although the Group reported a loss in the period, the cash balance and order book increased in the first half of the year. The net result is a positive outlook where Balfour Beatty will continue to benefit from a strong and diversified portfolio of businesses as trading in its chosen markets moves back to normal and beyond, driven by fiscal stimulus for infrastructure.

Notwithstanding the continuing uncertainty of COVID-19, on the assumption that Balfour Beatty's markets continue to recover as currently anticipated, the Group expects the earnings-based businesses to recover steadily through the second half of 2020 and report a more normalised operating profit in 2021, broadly in line with 2019.

The Board looks forward to the Group returning to profitable managed growth. It will look to re-instate the dividend as soon as is appropriate and will continue to review the Group's capital structure and the potential for further distributions to shareholders.

COVID-19: Maintaining expert capability for the future

Across its US, UK and Hong Kong operations, the Group reacted swiftly and decisively to COVID-19 developments with a clear strategy to:

The key decision to minimise the impact of COVID-19 was keeping the Group's sites operational, in line with government guidance, where it was safe to do so. Most sites remained open for business as the Group continued to safely execute projects and contracts for its customers. This pandemic has tested and proven Balfour Beatty's strengths in efficient back-office systems, best-in-class technology, expert employees and supply chain partnerships.

The health, safety and wellbeing of all those who work for and with Balfour Beatty, as well as the general public has remained the Group's priority. Thereafter, the focus has been to retain the Group's capability, whilst also maintaining its strong cash position. The decisions taken at the start of the crisis, including supplementing salaries for employees placed on the UK Government's Job Retention Scheme, have ensured that the Group's expertise has remained in place.

Going forward the Group will look to harness the speed at which Balfour Beatty has adapted to new ways of working including: the adoption of Microsoft Teams within two days when the scheduled roll-out was throughout 2020; on-site electronic goods receipt notices and invoice processing to eliminate human contact; and the Construction Leadership Council's construction talent retention scheme of which Balfour Beatty was one of the first companies to adopt the scheme.

Financial summary: maintaining strong cash performance

In the first half of the year, the Group delivered the significant achievement of positive operating cash flow with the period end net cash balance at £563 million (FY 2019: £512 million; HY 2019: £425 million) and average net cash at £507 million (FY 2019: £325 million; HY 2019: £290 million). The strength of Balfour Beatty's balance sheet provides the flexibility to make the right long term decisions and the Group carried through with its plan to repay US$46 million of its US private placement notes in March 2020 and fully redeem its preference shares for £112 million on 1 July 2020. The Group now has no debt repayments until 2023.

Despite the strong cash performance, the Group recorded an underlying loss in the period. The most significant COVID-19 impact was at Construction Services with all geographies affected. In the UK, sites were closed in Scotland and London and projects have been put on hold in the aviation sector. In the US, sites were closed in Washington State while the hospitality sector has been impacted in Florida as well as civil infrastructure projects in a number of states. In Hong Kong, there were minimal site closures, but the business operated below optimum productivity in the first half of the year.

In Support Services, many of the Group's employees were designated as key workers and, while profit from operations was negatively impacted, the business has shown good resilience. At Infrastructure Investments, given the current market uncertainty, the Group did not dispose of any assets in the first half of the year which led to a reduction in profit from operations.

Order book: HS2 a transformative infrastructure scheme

The Group's order book at half year was £17.5 billion (FY 2019: £14.3 billion; HY 2019: £13.2 billion), over 20% higher than the year end position. Over the last two years Balfour Beatty's order book has grown substantially, driven by public sector infrastructure projects. It now stands at over two years of revenue which provides good medium term visibility.

The increase at half year is due to the addition of over £3 billion of contracts following HS2 Notice to Proceed being issued by the UK Government in April. Balfour Beatty, in joint venture with VINCI, will deliver the main civils works south of Birmingham and the London hub station at Old Oak Common.

In the US, Balfour Beatty was awarded c.US$450 million of additional work on two significant ongoing projects: an office campus redevelopment in Redmond, Washington; and the Broward County Convention Center extension in Fort Lauderdale, Florida. At Gammon, the Group's 50:50 joint venture based in Hong Kong, there were a number of significant wins in the first half including a HK$7.2 billion contract to deliver tunnels and associated works for an automatic people mover and baggage handling system at Hong Kong International Airport and a HK$5.7 billion Central Kowloon Route contract to deliver buildings, mechanical and electrical works for the Highways Department.

Markets: right place right time

The construction sector is widely regarded by governments as an economic growth engine to create lasting infrastructure which is sustainable, digital and innovative. Importantly, infrastructure investment drives widespread benefits by creating jobs and upskilling across a number of subsectors, addressing concerns around structural unemployment issues.

The approval of HS2 provides critical visibility and impetus not only for Balfour Beatty but also the wider UK construction industry and its supply chain partners. As part of the National Infrastructure Strategy and in combination with increased funding for road and other rail programmes, it demonstrates the UK Government's commitment to stimulate economic recovery through infrastructure investment.

In the US, Presidential and Congressional elections will be held later this year, but there is broad bipartisan support for increased infrastructure spend. In Hong Kong, despite uncertainty, the market outlook for infrastructure is also considered favourable with significant upcoming opportunities including two new terminal buildings and other works associated with the third runway at the international airport; a ten-year housing target; a ten-year hospital development plan; and continued investment in transportation infrastructure.

In the UK, US and Hong Kong, COVID-19 is delaying the signing of contracts in the buildings markets. Balfour Beatty went into this pandemic with a record order book and therefore the Group will continue to bid selectively in all its chosen markets. As at June 2020, over 75% of the order book value was contracted with public or regulated bodies and the Group will continue to focus on large, government-backed infrastructure contracts. This transition is also lowering the risk profile of the order book, as evidenced by the HS2 contract awards.

Build to Last: Lean, Expert, Trusted, Safe

The Group measures its transformation against the goals of Lean, Expert, Trusted and Safe, using cash flow and profit from operations, employee engagement, customer satisfaction and Zero Harm, respectively.

Lean: The disciplines learnt during Build to Last have served the Group well in ensuring effective and efficient operations. In the second quarter of the year, management initiated a number of further actions to reduce costs and conserve cash in the business to mitigate the impact of COVID-19 including: temporary 20% salary reductions for the Board and Executive Committee; non-site senior leaders took voluntarily temporary salary reductions of between 10% and 20%, dependent on level of pay; cancelling the final dividend for 2019; and furloughing employees under the UK Government's Job Retention Scheme.

Since the start of COVID-19, the Group's procurement teams have focused on working to ensure that as far as possible materials have been available on site, significantly aided by the recent investment in new procurement systems. Material shortages were a critical issue for the industry but for Balfour Beatty there has been minimal impact in the first half. In addition, as part of its digital strategy, the Group has started to roll-out a new workforce app. This provides contactless entry to sites including time and attendance records, social distancing data to ensure employees remain safe and an enterprise agreement which will allow Balfour Beatty to provide the app to the Group's supply chain.

Expert: Customers buy Balfour Beatty's services due to the unique capabilities of the Group and its employees. Since attracting and retaining the top talent in the industry is fundamental to the Group's strategy of delivering value from its leading positions in growing infrastructure markets, COVID-19 represents a significant challenge. In the UK the assistance of the Government's Job Retention Scheme has helped maintain the Group's expert capability through the crisis.

During the COVID-19 lockdown, Balfour Beatty conducted a survey in the UK to ask what further support employees wanted. The result, from 6,000 employees, was overwhelmingly positive with the standard engagement index rising significantly to 76% (2019: UK 63%, Group 66%), 90% of employees feeling cared for and 85% well informed. Despite remote working and social distancing, 81% continued to feel a strong connection to their team. There was also a significant increase in advocacy for the business, underscoring the culture of Build to Last and the strong leadership approach during the crisis. To kick start productivity, the Group ran a targeted My Contribution 'Bouncing Back' employee engagement campaign at the end of April which generated more than 550 ideas for improvement. The voluntary attrition rate in the UK continued to fall, with the twelve-month rolling average at 9% (FY 2019: 11%; HY 2019: 11%).

Trusted: Balfour Beatty is trusted to "do what we say we will do" and is measured on this metric by customer satisfaction. In the first half, around 1,000 customer satisfaction reviews were carried out with the Group customer satisfaction score at 95% (FY 2019: 94%). The Group continues to embed a culture of active risk management by underpinning strict adherence to Build to Last disciplines with investment in IT-based processes and controls. These include the Gated Lifecycle process, the Digital Briefcase and Project on a Page. Together, these provide management with a clear, consistent line of sight on all stages of work being bid and delivered, together with key tools for managing commercial risk and project execution. 

The Group has achieved important successes in playing its part in the global response to COVID-19 through the determination and dedication of its workforce. Acting as principal contractor, Balfour Beatty converted Glasgow's Scottish Events Campus (SEC) into the NHS Louisa Jordan hospital providing over 1,000 beds for patients requiring treatment for COVID-19. In Pennsylvania, the Pavilion at Penn Medicine project opened 120 patient rooms 15 months ahead of the facility's planned opening, with Balfour Beatty employees working around the clock for 17 days to deliver 122,000 square feet of space in the emergency department. In Hong Kong, Gammon helped fast-track temporary COVID-19 quarantine facilities by providing project management and mechanical, electrical and plumbing services to construct 110 units at Penny's Bay in just 64 days.

Balfour Beatty Communities has faced operational challenges at some of the military bases where it manages properties. The Group developed a comprehensive Performance Improvement Plan, which includes a variety of objectives and performance metrics, with steady progress being made against the targets set. At this time, there is no further update with regard to the Department of Justice investigation.

Safe: Construction is an inherently dangerous industry. It is therefore essential that the safety and health of everyone who comes into contact with Balfour Beatty is the top priority. During the period this assumed an even greater emphasis as Balfour Beatty developed new COVID-19 Site Operating Procedures to support safe working to government guidelines. Despite the challenges of adapting operations to maintain social distancing, Balfour Beatty has seen a positive and significant reduction in incident rates. The Group is currently capturing best practice and lessons around this improvement to understand and to maintain this positive outcome. 

The Group's lost time injury rate (excluding international joint ventures) reduced to 0.12 in the first half (FY 2019: 0.14). All other lagging indicators also showed improvement and the Group continues to drive forward leading indicator activity including use of the health and safety Observation App and a new off-site Zero Harm induction programme.

However, in a tragic illustration vigilance can never be relaxed, during 2020 three individuals working across the Group's operations have lost their lives. Investigations are underway and safety leaders will make sure that any learnings are shared and implemented quickly across Balfour Beatty. In remembering those lost, the Group will continue to strive for Zero Harm making conditions as safe as possible on Balfour Beatty's sites.

Outlook: focus on productivity

The full impact of COVID-19 is yet to be determined, but the Board remains confident that Balfour Beatty will continue as a market leader and return to profitable managed growth.

The Group is committed to maintaining a strong balance sheet. In March, US$46 million of US private placement notes were repaid. In July, the preference shares were fully redeemed for £112 million and as a result the Group expects that full year 2020 average net cash will be in the range of £430 to £460 million.

Having successfully managed the Group's liquidity, the focus for leadership now turns to improving productivity. The easing of lockdown across the geographies in which Balfour Beatty operates means that around 95% of the Group's sites were open at the end of June. The challenge is now to return sites to pre COVID-19 productivity as soon as possible. This has largely been achieved at Gammon, noting that Hong Kong was impacted before other geographies and has previous experience of handling the impacts of pandemics. In the UK and the US, the Group is working with its employees, supply chain partners and customers to ensure disruption caused by COVID-19 is minimised while the evolving social distancing rules are applied.

On the assumption that the Group's chosen markets continue to recover as currently anticipated, Balfour Beatty expects the earnings-based businesses to recover steadily through the second half of 2020 and report a more normalised operating profit in 2021, broadly in line with 2019. Given the strong liquidity position of the Group, Balfour Beatty will only resume disposals of Infrastructure Investments when market conditions return to more normal levels.

The Board will look to re-instate the dividend as soon as is appropriate and will continue to review the Group's capital structure and the potential for further distributions to shareholders. By maintaining its expert capability and financial strength throughout the COVID-19 pandemic, Balfour Beatty remains well positioned to deliver profitable managed growth in both the medium and long term.

RESULTS OVERVIEW

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

Throughout this report, Balfour Beatty has presented financial performance measures which are used to manage the Group's performance. These financial performance measures are chosen to provide a balanced view of the Group's operations and are considered useful to investors as these measures provide relevant information on the Group's past or future performance, position or cash flows. These measures are also aligned to measures used internally to assess business performance in the Group's budgeting process and when determining compensation. An explanation of the Group's financial performance measures and appropriate reconciliations to 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, underlying revenue includes the Group's share of revenue in joint ventures and associates.

Group financial summary

In the first six months of the year, the Group reported an underlying loss from operations of £14 million (2019: £72 million profit). COVID-19 had a material impact on the financial performance of Construction Services in the first half of 2020, particularly in the UK.

Through this period, the Group worked hard to minimise the impact on operations as the majority of Balfour Beatty's projects remained operational. In April, 78% of the Group's sites, across the UK and US were open, which increased to 83% in May. By the end of June, 95% of sites were open with the most notable exceptions being hospitality projects in Florida and aviation projects in the UK. In Hong Kong, there were minimal site closures.

Site closures combined with a reduction in productivity and the cost of implementing new operating procedures led to a material reduction in margin in the first half of the year. In addition, COVID-19 has led to lengthened site programmes triggering a reassessment of the Group's contract end forecast positions which has also contributed to the decrease in margins in the half year.

In the first half of the year, the Group delivered positive operating cash flow with the period end net cash balance at £563 million (FY 2019: £512 million) and average net cash at £507 million (FY 2019: £325 million). The continued strong cash performance allowed the Group to fully redeem its preference shares on 1 July 2020 for £112 million. Balfour Beatty now has no more debt to repay until 2023.

The Group continues to have one of the strongest balance sheets in the sector with customers increasingly recognising this competitive advantage. Net assets increased to £1,611 million (FY 2019: £1,377 million), principally due to net actuarial gains on the Balfour Beatty Pension Fund (BBPF).

The Group's order book at half year was up over 20% to £17.5 billion (FY 2019: £14.3 billion). This increase is due to the addition of over £3 billion of HS2 contracts following the issue of Notice to Proceed in April.

Underlying revenue was up 6% (5% at CER) at £4,115 million (2019: £3,881 million) as a result of an increase at US Construction following strong order book growth in 2019. Statutory revenue, which excludes joint ventures and associates, was £3,515 million (2019: £3,397 million).

Construction Services underlying revenues were up 8% (6% at CER) at £3,365 million (2019: £3,121 million) as a result of higher volumes in both the US and at Gammon. Support Services revenue decreased by 5% to £476 million (2019: £503 million) following lower volumes in utilities, as contracts in the gas and water business complete.

The earnings-based businesses recorded an underlying loss from operations of £1 million (2019: £63 million profit), which contributed to the Group's underlying loss from operations of £14 million (2019: £72 million profit). Statutory loss from operations was £16 million (2019: £71 million profit).

UK Construction recorded an underlying loss from operations of £23 million (2019: £17 million profit) as COVID-19 had a material impact on operations as: Scotland was effectively closed for the second quarter of 2020; London has seen limited productivity as employees and subcontractors have been affected by public transport availability; the South region has been impacted by the slowdown in aviation as it operates framework agreements at Heathrow and Gatwick; and lengthening site programmes triggered a reassessment of the Group's contract end forecast positions.

US Construction delivered an underlying profit from operations of £6 million (2019: £19 million). At Buildings, Washington State and Florida were the most negatively impacted by COVID-19 and at Civils contractual recoveries were re-assessed on a number of projects. Gammon, the Group's 50:50 joint venture with Jardine Matheson based in Hong Kong, also reported a decrease in underlying profit with Balfour Beatty's share at £6 million (2019: £9 million). In Support Services, underlying profit from operations has fared relatively well at £10 million (2019: £18 million) as many of the Group's employees were designated as key workers.

In Infrastructure Investments, operations in the UK continued as normal, supported by the Government advice that PFI contractors should consider themselves to be part of the public sector response to COVID-19. In the US, Balfour Beatty Communities employees have been working to social distancing rules, as agreed with the military, which restrict access to properties. This restriction, in combination with prior year disposals and legal costs associated with the military housing investigation led to a decrease in pre-disposals operating profit at £3 million (2019: £9 million). Given current market uncertainty, and the strong liquidity position of the Group, Balfour Beatty has not disposed of any material Infrastructure Investment assets in the first six months of the year (2019: £16 million profit on disposal).

Net finance costs were broadly in line at £10 million (2019: £8 million) contributing to an underlying pre-tax loss of £24 million (2019: £64 million profit). There was an underlying taxation credit in the period of £6 million (2019: £10 million charge) which was mainly due to the losses in the UK and a deferred tax benefit arising from the change in the future UK statutory tax rate, partially offset by the US tax charge.

The underlying loss after tax was £18 million (2019: £54 million profit). The underlying basic loss per share was 2.5 pence (2019: 7.6 pence earnings), which, along with a non-underlying gain per share of 5.5 pence per share (2019: 0.9 pence loss), gave a total basic earnings per share of 3.0 pence (2019: 6.7 pence). Total statutory profit after tax for the year was £20 million (2019: £48 million), as a result of the net effect of non-underlying items.

Non-underlying items

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

Non-underlying items after taxation were a net gain of £38 million for the period (2019: £6 million net charge). Items included: a £36 million tax credit for recognition of additional UK deferred tax assets resulting from pension actuarial gains; a £3 million tax credit due to remeasurement of certain UK deferred tax assets resulting from the change in the UK corporation tax rate to 19% (from 17%); and a £1 million net of tax charge relating to the amortisation of acquired intangible assets.

Cash flow performance

The total cash movement in the period resulted in a £51 million increase (2019: £88 million) in the Group's half year end net cash position to £563 million (FY 2019: £512 million) excluding non-recourse net borrowings. The strong performance was driven by positive operating cash flows and working capital, partially offset by IFRS 16 lease payments and investment in Infrastructure Investments.

* Excluding infrastructure investments (non-recourse) net borrowings

+  Includes £2 million (2019: £1 million) of regular funding

In the second quarter of the year, management initiated a number of actions to reduce costs and conserve cash in the business to mitigate the impact of COVID-19 including: temporary 20% salary reductions for the Board and Executive Committee; non-site senior leaders took voluntarily temporary salary reductions of between 10% and 20%, dependent on level of pay; cancelling the final dividend for 2019; and furloughing employees under the UK Government's Job Retention Scheme.

Working capital

In the period, the Group's working capital position resulted in an inflow of £74 million (2019: £11 million). The strong performance in the period benefited from UK and US government tax deferral policies, enacted in response to the COVID-19 pandemic. In total these schemes improved working capital by around £50 million at the half year. This inflow was partially offset by an acceleration in supplier payments in the UK and US. As part of its response to COVID-19, the Group ensured liquidity to its supply chain and in the UK, this acceleration contributed to the Group's second quarter improvement in its payment performance.

The inflow in net contract assets is primarily driven by the £32 million settlement received relating to the Aberdeen Western Peripheral Route project in February 2020 and the mobilisation of several highways projects in the US. The remainder of the inflow from net contract assets is broadly offset by trade and other receivables outflows.

^ Excluding impact of foreign exchange and disposals

Including the impact of foreign exchange and non-operating items, negative (i.e. favourable) working capital increased to £833 million (FY 2019: £725 million).

Prompt Payment Code

Balfour Beatty was reinstated to the Prompt Payment Code (PPC) in the UK on 22 January 2020. In the first six months of 2020 the percentage of invoices paid within 60 days reduced to 89% as a result of disruption at the start to the year following an internal change to systems which will help to improve and standardise the Group's approach in the future. In the second quarter of the year the percentage of invoices paid within 60 days was over 90% as the Group benefited from prompt payment by the UK Government which in turn was directly passed on to the Group's supply chain.

Whilst Balfour Beatty remains focused on measures which ensure continued improvement in its payment performance, it operates in a sector where supply chains and contractual terms are complex, and prompt payment is often materially impacted by resolution of disputes and alignment to agreed contractual processes.

Net cash/borrowings

The Group's average net cash in the first half of 2020 improved substantially to £507 million (FY 2019: £325 million; HY 2019 £290 million). The Group's net cash position at 26 June 2020, excluding non-recourse net borrowings, was £563 million (FY 2019: £512 million; HY 2019: £425 million). Non-recourse net borrowings, held in infrastructure investments entities consolidated by the Group, were £314 million (FY 2019: £302 million; HY 2019: £330 million).

The balance sheet also includes £112 million (FY 2019: £110 million; HY 2019: £108 million) for the liability component of the preference shares and £119 million for lease liabilities (FY 2019: £120 million; HY 2019: £120 million). The redemption of the preference shares in July 2020 reduces cash without a corresponding reduction in the level of debt as the Group does not take preference shares into account in its measure of net cash/borrowings in line with the definition of net debt set out in the Group's borrowing facilities. Statutory net cash at 26 June 2020 was £18 million (FY 2019: £20 million net debt; HY 2019: £133 million net debt).

Banking facilities

The Group's £375 million revolving credit facility extends to October 2022. The purpose of the facility is to provide liquidity from a set of core relationship banks to support Balfour Beatty in its activities. The agreement includes two one-year extension options, to take final maturity to October 2024, with the agreement of the lending banks. In the first half of the year this facility remained undrawn. The Group does not undertake supply chain financing arrangements.

Going concern

In light of the COVID-19 pandemic and the impact on the Group's performance in the half year, the Directors have reconsidered 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 foreseeable future and, for this reason, have continued to adopt the going concern basis in preparing the half year condensed Group financial statements. Further detail is provided in Note 1.3 Going Concern.

Pensions

In January 2020, the Group concluded negotiations with the trustees of the BBPF on the formal triennial funding valuation as at 31 March 2019. Under the new agreement Balfour Beatty and the trustees have re-confirmed their commitment to a journey plan approach to managing the BBPF. Under this agreement the Group will make total cash deficit contributions of £74 million from 2020 to 2023, whereby the BBPF is aiming to reach self-sufficiency by 2027. There is an agreed mechanism for accelerating the payment of contributions set out above if the earnings cover for shareholder returns falls below 2x.

Following the formal triennial funding valuation of the Railways Pension Scheme (RPS) as at 31 December 2016, the Group agreed to make ongoing deficit contributions of £6 million per annum which should reduce the deficit to zero by 2027. The formal triennial funding valuation of the RPS, as at 31 December 2019, is ongoing.

The Group's balance sheet includes net retirement benefit assets of £326 million (FY 2019: £133 million) as measured on an IAS 19 basis, with the surplus on the BBPF partially offset by deficits on the RPS and other schemes. The accounting for the BBPF in the first six months of 2020 has been impacted by the widening of corporate bond spreads and changes to the data source used to derive the discount rate.

Dividend

At the 2019 full year results the Board recommended a final dividend of 4.3 pence per share, giving a total recommended dividend for the year of 6.4 pence per share.

On 27 March 2020, the Group provided a trading update stating that "Whilst Balfour Beatty benefits from a strong financial position, in light of the market uncertainty arising from COVID-19, the Board will keep the appropriateness of paying the final dividend under review until the rescheduled AGM, with a final decision dependent on the prevailing circumstances at the time". On 1 June 2020, the Group provided another trading update stating that "In line with the current environment, the Board has prudently decided to cancel the final dividend for 2019".

The Board will look to re-instate the dividend as soon as is appropriate and will continue to review the Group's capital structure and the potential for further distributions to shareholders.

DIVISIONAL OPERATING REVIEWS

CONSTRUCTION SERVICES

Financial review

COVID-19 had a material impact on the financial performance of Construction Services in the first half of 2020, particularly in the UK.

The majority of Balfour Beatty's projects remained operational throughout the period. In April, 78% of the Group's sites, across the UK and US, were open. In May, this increased to 83%, noting that 17% of open sites experienced significant disruption due to the availability of employees, subcontractors or materials. By the end of June, 95% of sites were open.

Underlying revenue increased by 8% to £3,365 million (2019: £3,121 million), a 6% increase at CER, as a result of higher volumes at US Construction following strong order book growth in 2019.

UK Construction recorded an underlying loss from operations of £23 million (2019: £17 million profit) as COVID-19 had a material impact on operations as: Scotland was effectively closed for the second quarter of 2020; London has seen limited productivity due to public transport availability; the South region has been affected by the slowdown in aviation; and lengthening site programmes triggered a reassessment of the Group's contract end forecast positions.

US Construction was also negatively impacted by COVID-19. At Buildings, Washington State and Florida were the most affected and at Civils contractual recoveries were re-assessed on a number of projects. In Hong Kong, there were minimal site closures, but the business operated below optimum productivity in the first half of the year.

The order book at £14.5 billion (FY 2019: £11.1 billion) increased by 31% (24% at CER) since the end of 2019 due to the addition of over £3 billion of HS2 contracts following Notice to Proceed in April. Balfour Beatty, in joint venture with VINCI, will deliver Lots N1 and N2 south of Birmingham - comprising extensive earthworks, ground engineering, viaducts and tunnels along a 90-kilometre stretch - and the London hub station at Old Oak Common. The increase occurred whilst maintaining the Group's policy of selective bidding.

In the Construction Services portfolio, there are a small number of long term and complex projects where the Group has incorporated judgements over contractual outcomes. The range of potential outcomes as a result of uncertain future events could result in a materially positive or negative swing to profitability and cash flow. These contracts are primarily within the major infrastructure business units in the UK, US and Gammon.

Operational review

UK Construction

Underlying revenue in the UK decreased by 3% to £986 million (2019: £1,014 million). The business unit has been materially impacted by COVID-19 and in the period, UK Construction recorded an underlying loss from operations of £23 million (2019: £17 million profit).

Looking ahead, the order book has more than doubled since the start of the year to £6.1 billion (FY 2019: £3.0 billion, HY 2019: £3.0 billion) following Notice to Proceed at HS2 which provides much needed certainty for the entire industry and its associated supply chain. In addition, during Build to Last, there has been a shift towards a lower risk contract portfolio in UK Construction, with a reduction in the number of fixed price contracts offset by an increase in target cost (negotiated tender) contracts and framework agreements. Both target cost contracts and framework agreements require early contract involvement with the customer to ensure greater clarity around scope, schedule and cost which, in combination, reduces delivery risk for all parties. As at June 2020, the UK order book was over 75% target cost and cost reimbursable compared to 50% at June 2018.

In March, the UK Government announced its five-year infrastructure plan, which will provide £640 billion of funding for developments in roads, railways, power networks, schools, hospitals and telecommunications. The National Infrastructure and Construction Procurement Pipeline, published in June, laid out how up to £37 billion would be brought to market over the next year. The remaining details are due to be released this Autumn as part of the National Infrastructure Strategy. In the interim, the UK Government has continued to reaffirm its New Deal plan, putting jobs and infrastructure at the heart of its economic growth strategy, by accelerating spending on £5 billion of infrastructure projects.

The Group made use of the UK Government's Job Retention Scheme during the period, with most affected employees now returned to work. For the period, Balfour Beatty has claimed £15 million. The scheme has worked effectively allowing Balfour Beatty to retain employees where sites have been closed and bring them back as sites have re-opened.

Although the UK has now ceased to be a member of the EU and is in a transition period, the nature of its future trading relationship with the EU remains uncertain. Balfour Beatty continues to monitor developments in this area and potential risks arising to the Group's businesses. Specific risks and mitigations are controlled by individual strategic business units and at a project level. In addition, they are kept under review by the Executive Committee.

The UK Construction business is organised into two business units consisting of:

· Major Projects: focused on complex projects in key market sectors such as transportation (road and rail), heavy infrastructure and energy; and

· Regional: civil engineering, ground engineering, mechanical and electrical engineering, and building, providing private and public customers with locally delivered flexible and fully integrated civil and building services.

At Major Projects, the A14, Britain's largest road project, opened to drivers in May, eight months early. The Balfour Beatty joint venture upgraded the 21-mile stretch between Cambridge and Huntingdon from two to three lanes in each direction and built a new 12-mile bypass south of Huntingdon. To open the scheme early, the integrated delivery team focused on innovative and sustainable construction methods with the use of digital asset management and in-field visualisation software.

At the M4 Smart Motorway contract, a Balfour Beatty VINCI joint venture is converting the hard shoulder into an additional lane for traffic and introducing electronically policed variable speed restrictions between junction 3 of the M4, just inside the M25 near Heathrow Airport, and junction 12 at Theale, west of Reading. The team recently completed the widening of the Thames Bray bridge, by building the extended bridge elements on an adjacent site and moving them into their final position over the River Thames in a single weekend with appropriate social distancing pre-visualised with graphic simulation. The scheme has reached its halfway milestone and remains on track for completion in 2022.

On HS2, Notice to Proceed was issued in April and the project moved from the early contractor involvement (ECI) stage into the main civils works. Balfour Beatty, in joint venture with VINCI, will deliver the c. £5 billion Area North section south of Birmingham. Balfour Beatty's in-depth expertise in delivering critical major infrastructure across the UK will combine and complement VINCI's global capability in high speed rail. HS2 also awarded a Balfour Beatty/VINCI/SYSTRA joint venture a c. £1 billion construction management contract for the Old Oak Common station in London. Balfour Beatty and VINCI each have a 41.75% share in that joint venture, with SYSTRA having the remaining 16.5%. Procurement processes are back underway on the rail systems contracts. In July 2020, a Balfour Beatty/VINCI/TSO joint venture submitted prequalification documents for track systems packages covering the full scope of works for Phase 1 and Phase 2a. In the second half of 2020, the same joint venture is intending to submit an expression of interest for the route-wide overhead catenary system and a separate Balfour Beatty/NG Bailey joint venture is intending to submit a prequalification response for the mechanical and electrical systems.

At Hinkley Point C, Balfour Beatty achieved an important milestone, completing the first kilometre of tunnelling for Intake Tunnel 1. The project, to construct a pair of six-metre diameter underwater tunnels to supply the nuclear power station with cooling water and a third seven-metre diameter tunnel to discharge heated water back into the Bristol Channel, will use three tunnel boring machines to excavate around 9 kilometres of tunnel - the two 3.5-kilometre intake tunnels and one 1.8-kilometre outfall tunnel.

In addition to adding HS2 to the order book in the first half of the year, Balfour Beatty also secured a place on Highways England's Smart Motorway Alliance (SMA). The Group were named as one of three contractor delivery partners in the SMA that will deliver the future smart motorway programme worth up to £4.5 billion over 10 years. Of the three delivery partners, Balfour Beatty will be predominantly responsible for Southern England where the Group will manage and deliver construction activity and associated engineering works, including the conversion of existing motorway infrastructure, reconstruction of bridges and installation of roadside technology, to improve the safety and capacity of the strategic road network.

The Regional business is focused on opportunities across five sectors - aviation, buildings, civils, defence and energy - and comprises:

The Regional business is increasingly underpinned by the Scape National Civil Engineering and Infrastructure frameworks. In October 2018, it was announced that Balfour Beatty had been appointed as the sole contractor to Scape's second-generation civil engineering frameworks, valued at a combined total of up to £2.1 billion over four years (2019-2022). The frameworks allow local authorities, local enterprise partnerships and other public sector bodies to commission works through a procurement process that provides the fastest route to market. As part of the UK Government's New Deal plan these frameworks will become increasingly important to help kick start the UK economy.

In the period, the Regional business successfully completed the new temporary NHS Louisa Jordan hospital, at Glasgow's Scottish Events Campus (SEC), on behalf of the Scottish Government. Acting as principal contractor, Balfour Beatty, along with its local supply chain and partner contractors, completed the works in just 20 days.

Despite the impact of COVID-19, which led to delays on projects in the Regional business, good progress continues to be made on many of its contracts with a major milestone recently reached following completion of Eastern Gateway Phase 1. Eastern Gateway, which was separated into two phases, is part of the Wokingham Major Highways programme which comprises 10 road projects that are being delivered under the Scape framework for Wokingham Borough Council. Other material ongoing projects include: the seven-storey 'MEC Hall' building at the £287 million Manchester Engineering Campus Development (MECD) project; the £267 million contract to complete the Midland Met Hospital in Birmingham; and phase one of the East Wick and Sweetwater residential project at the Queen Elizabeth Olympic Park.

The Regional business had a number of new contract awards in the period including a £23 million flood defence scheme in Rhyl for the Welsh Government which will protect 1,650 properties and a £9 million project to redevelop Motherwell Station for ScotRail.

COVID-19 has delayed the contract signing of some large projects in the Regional pipeline. It is expected that many of these will be signed in the second half of 2020. Included in ABNC at 26 June 2020, the Group has been selected as preferred bidder for the following significant projects: the redevelopment of the Darwin Building at the University of Edinburgh; Mayfield Riverside retirement home; Bishop's Stortford secondary school; and the next phase of the Lewisham Gateway scheme (which was signed in July 2020).

US Construction

Underlying revenue in the US increased by 11% (9% at CER) to £1,911 million (2019: £1,727 million) following the increase in the order book during 2019. The business reported an underlying profit from operations for the period of £6 million (2019: £19 million) despite the impact of COVID-19 which affected operations in Washington State, Florida and a number of civil infrastructure projects where contractual recoveries were re-assessed. Following a 25% rise in the full year 2019, the order book decreased 3% to £6.3 billion (10% at CER) from the year end (FY 2019: £6.5 billion, HY 2019: £5.6 billion).

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

The US Buildings business operates in specifically chosen growth regions. As the population further migrates south and west, it continues to drive urbanisation and demand for buildings and social infrastructure. The construction management business is focused on specific geographies, known internally as 'The Southern Smile'. This starts in the Pacific Northwest, runs through California, Texas, Florida and up through Georgia and the Carolinas to Washington D.C. The core markets remain as commercial offices, education, hospitality, residential and healthcare. With blue-chip repeat customers and significant state-backed education bonds, including US$35 billion in California alone, the Group's opportunities in Buildings are robust.

In the period, Buildings completed several notable projects including:

· Capitol Crossing: located in Washington D.C., a 2.2 million square foot multi-phase development including two LEED Platinum certified 12-storey office buildings and a 700,000 square foot parking garage; and

· River Landing: located in Miami, Florida, Balfour Beatty delivered 360,000 square feet of commercial space, 118,000 square feet of office space, 528 apartments, more than 2,000 parking spaces and a landscaped riverwalk.

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

· Pavilion at Penn: in response to COVID-19, the Pavilion at Penn Medicine project in Pennsylvania fast-tracked 120 patient rooms 15 months ahead of the facility's planned opening, with Balfour Beatty employees working around the clock for 17 days to deliver 122,000 square feet of space in the emergency department. In addition to the fast-tracked emergency room, which is part of the project to deliver a 1.5 million square foot hospital with 47 operating rooms, Balfour Beatty dismantled the largest electric tower crane in eastern North America. It took crews working 24 hours a day for 11 days to dismantle the crane entirely; and

· The University of North Carolina at Wilmington (UNCW): Balfour Beatty completed the first phase of the project with over 1,000 beds now available for freshman students from August. The second phase of the project, providing a further 776 beds, will be delivered in August 2021.

In the period, the Buildings business booked material new phases of existing contracts and standalone new contract awards as follows:

· Microsoft Redmond Campus: in 2018, the Group was selected, in joint venture with Skanska, as general contractor on Microsoft's head office refresh in Redmond, Washington. The next phase of the project which in total will deliver 18 new buildings, clustered into four distinct villages to create a unified campus, was signed in the first half of the year;

· Broward County Convention Center: in 2019, Balfour Beatty signed a construction agreement for the expansion of the Broward County Convention Center and new construction of an 800-room hotel. In the first half of the year, the second phase (of five) of the US$780 million project in Fort Lauderdale, Florida, was signed;

· Epic Phase II: having successfully completed Epic Phase I last year, Balfour Beatty has now been selected to construct the next phase of the project in downtown Dallas, Texas which will include the largest Uber office outside of San Francisco; and

· Walter Tower: Balfour Beatty has been contracted to construct the US$100 million Walter Tower, a premier luxury residential tower which will be one of the tallest residential buildings in Raleigh, North Carolina.

Included in ABNC at 26 June 2020, US Buildings has been made preferred bidder for: a US$110 million luxury apartment development featuring two 24-storey towers in West Palm Beach, Florida; a c. US$80 million Verizon Site project for an 18-storey residential tower in Arlington, Virginia; and a project to renovate and expand the Randall School in Washington, DC.

In Civils, the Group is focused on the following opportunities: firstly, road projects in Texas and North Carolina; secondly, mass transit rail projects in major cities across the US, including the electrification of existing lines; and finally, water treatment and purification projects. These large and growing markets are supported by the c. US$77 billion 2020 Unified Transportation Program (UTP) from the Texas Department of Transportation (TxDOT) and a number of state-backed infrastructure bonds (over US$200 billion of multi-state transportation bonds). In the US, Presidential and Congressional elections will be held later this year and there is broad bipartisan support for increased infrastructure spending.

Despite the impact of COVID-19, progress has been made on key projects with the following all now mid-way through construction: the US$625 million Southern Gateway (45% Balfour Beatty, 55% Fluor Corporation) project; the US$1.08 billion Green Line extension (25% Balfour Beatty) project; and the Caltrain project, a US$697 million contract for the electrification of the 52-mile rail corridor between San Francisco and San Jose. At LAX, following the joint venture (Balfour Beatty 30%) breaking ground on the Los Angeles International Airport's (LAX) Automated People Mover project last year, construction is now in full scale production mode. At IH-635 (45% Balfour Beatty, 55% Fluor Corporation) in Texas, the design is near complete and construction activities have commenced.

Although there were no new awards for the Civils business in the period, included within ABNC, Balfour Beatty has been conditionally selected, in joint venture with Fluor Corporation, to deliver the Oak Hill Parkway infrastructure project to reconstruct and widen approximately seven miles of interstate highway, for TxDOT.

Gammon

At Gammon, Balfour Beatty's 50:50 joint venture based in Hong Kong, the Group's share of underlying revenue increased by 23% (20% at CER) to £468 million (2019: £380 million). At Gammon, the timing of projects is more variable around a small number of large contracts.

Underlying profit decreased to £6 million (2019: £9 million) as the business was impacted by COVID-19, noting that the impact in Hong Kong has been lower than in the other geographies in which the Group operates. This is partly due to Hong Kong's experiences from other viruses such as SARS which has meant that wearing face masks in public is part of the culture. Given the timing of the spread of COVID-19, the Group has been able to take learnings from Gammon, such as working safely and efficiently in enclosed spaces whilst maintaining social distancing, and apply them across the rest of the Group.

The order book increased to £2.1 billion (FY 2019: £1.6 billion; HY 2019: £1.6 billion) following the awards of a HK$7.2 billion contract to deliver tunnels and associated works for an automatic people mover and baggage handling system at Hong Kong International Airport and a HK$5.7 billion Central Kowloon Route contract to deliver buildings, mechanical and electrical works for the Highways Department.

Gammon has a material share of the Hong Kong market. Both the Buildings and Civils markets are favourable with significant upcoming opportunities including: two new terminal buildings and other works associated with the third runway at the international airport; a ten-year housing target; a ten-year hospital development plan; and continued investment in transportation infrastructure. The order book is spread across a number of public and private customers.

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 the period, the Buildings business helped fast-track temporary COVID-19 quarantine facilities by providing project management and mechanical, electrical and plumbing services to construct 110 units at Penny's Bay in just 64 days. The business also designed and installed the heaviest DfMA thermal tanks in Hong Kong at the Global Switch Data Centre (Phase 2) project in Tseung Kwan O.

Work has continued on major Buildings projects including the construction of the Lyric Theatre Complex in the West Kowloon Cultural District of Hong Kong and the Lohas Park project to deliver three 54-56 storey residential towers. Work has also continued on a number of Civils projects in Hong Kong, including Tuen Mun-Chek Lap Kok Link Northern Connection, where Gammon is providing electrical and mechanical facilitation to serve the newly constructed 5-kilometre tunnel, and the Sai Sha Road widening project.

Gammon had a number of notable new contract awards in the period including:

· Hong Kong Airport: a HK$7.2 billion contract for Airport Authority Hong Kong to construct tunnels and related works for an automatic people mover (APM) and baggage handling system (BHS) at Hong Kong International Airport. The scope of work includes combined 1.8 kilometre-long eight-cell tunnel structures for the APM and BHS systems, 19 ancillary buildings, as well as building services and airport systems; and

· Central Kowloon Route M&E: a HK$5.7 billion contract by the Highways Department of the Government of the Hong Kong Special Administrative Region to construct buildings, mechanical and electrical (M&E) works for the Central Kowloon Route (CKR). Gammon is also constructing the Kai Tak West Section of the CKR which includes underwater and cut-and-cover tunnels, as well as roads.

SUPPORT SERVICES

Financial review

In Support Services, many of the Group's employees were designated as key workers and as such the business has shown good resilience despite profit from operations being negatively affected by COVID-19. The Group was able to accelerate road and rail maintenance programmes for some customers due to lower volumes of traffic in the period, but this was more than offset by general disruption on projects and other customers reducing maintenance expenditure given the economic uncertainty.

The Support Services segment comprises utilities and transportation businesses. Utilities operates across power transmission and distribution and the gas and water sectors. Transportation operates across rail, highways and managed road schemes for local authorities. The overall market is mixed with areas of growth in power, road and rail offset by areas of decline in gas and water where Balfour Beatty is withdrawing from the market as future opportunities do not meet the Group's selective bidding criteria.

Support Services revenue decreased by 5% to £476 million (2019: £503 million). Underlying profit from operations for the period decreased to £10 million (2019: £18 million). The order book decreased by 6% to £3.0 billion (FY 2019: £3.2 billion) following the Group's decision to withdraw from the UK gas and water sectors.

1 Including share of joint ventures and associates

2 Before non-underlying items (Note 8)

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

Operational review

Underlying utilities revenue decreased by 7% to £258 million (2019: £276 million) and the order book decreased to £0.8 billion (FY 2019: £1.0 billion), as the current regulatory cycles in gas and water approach the end of their periods in 2021 and 2020 respectively.

In the period, power transmission and distribution activity was disrupted in Scotland but the business managed to commence construction at Viking Link, a £90 million contract to deliver the onshore civil works for the Viking Link interconnector project with National Grid Ventures. As part of the four-year contract Balfour Beatty will be responsible for the civil engineering and installation of 68 kilometres of high voltage cabling across Lincolnshire. This will form part of the 760-kilometre Viking Link interconnector that will link Bicker Fen in Lincolnshire and Revsing in Denmark.

In gas, Balfour Beatty delivers network maintenance and asset enhancements for the largest gas distribution companies in the UK and Ireland. The Group expands and renews underground mains, often in busy and high-impact residential and commercial areas. Working on long term contracts, the business manages and delivers essential work, minimising the impact on local communities. The Group continues to manage two long term gas contracts in the RIIO-GD1 period (until early 2021) which have historically underperformed and have also been negatively impacted by COVID-19. The gas market is no longer considered viable to the Group because of the unfavourable working capital and onerous terms and conditions.

The water business is now at the end of the current UK water regulatory cycle (AMP6 2015-2020). Balfour Beatty has historical contracts with Thames Water, Anglian Water and United Utilities. Under the new AMP7 regulatory period (2020-2025) contracts are generally being awarded on terms that are not acceptable to Balfour Beatty and therefore the Group is only expected to retain the Anglian Water contract.

Underlying transportation revenues decreased by 4% to £218 million (2019: £227 million) and the order book was in line with the prior year end at £2.2 billion (FY 2019: £2.2 billion).

Balfour Beatty continues to maintain, manage and operate major highway and road networks across the UK. The largest contract, for M25 Connect Plus, will continue for another 20 years. In the first half of the year, the M25 Connect Plus team was awarded The Chartered Institution of Highways and Transportation (CIHT) UK Climate Change award 2020 for its innovative surfacing trial using 50% reclaimed asphalt.

The largest contract in rail services is for Network Rail under a £1.5 billion Central Track Alliance contract. Balfour Beatty has an 80% share in the ten-year alliance which is responsible for the development, design and delivery of track renewals and crossings, as well as associated infrastructure works across the London North West, London North East and East Midland routes. Performance has been good since contract inception in 2019, including during the COVID-19 lockdown period, with safe delivery of the work ensuring that vital national rail infrastructure remains operational. Work has been accelerated where revised schedules allow renewal of the network that would be difficult to access under normal working conditions, such as the rapid mobilisation and execution of the Kilsby Tunnel project on the West Coast Main Line.

INFRASTRUCTURE INVESTMENTS

Financial review

In Infrastructure Investments, operations in the UK continued as normal, supported by the Government advice that private finance initiative (PFI) contractors should consider themselves to be part of the public sector response to COVID-19. In the US, Balfour Beatty Communities continues to work with its partners to support military families. Employees are working to social distancing rules, as agreed with the US military, which restrict access to properties and thus maintenance activity.

Pre-disposals underlying operating profit in the period decreased to £3 million (2019: £9 million) as a result of prior year disposals and higher legal costs at military housing. Underlying profit from operations at £3 million (2019: £25 million) was lower as there were no Infrastructure Investment disposals in the period.

As a result of the market uncertainty generated by COVID-19, and the strong liquidity position of the Group, Balfour Beatty has not disposed of any material Infrastructure Investment assets in the first half of the year. In the medium term, demand for high quality infrastructure assets in the secondary market is expected to exceed supply and the Group will continue to sell investment assets timed to maximise value to shareholders.

Net interest income reduced to £7 million (2019: £10 million) as a result of prior year disposals, contributing to an underlying profit before tax of £10 million (2019: £35 million).

2 Before non-underlying items (Note 8)

+ Subordinated debt interest receivable and net interest receivable on PPP financial assets and non-recourse borrowings

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

Operational review

The Infrastructure Investments business strategy is to optimise value through the disposal of operational assets, whilst also continuing to invest in new opportunities. The Group achieves enhanced returns when Infrastructure Investments, Construction Services and Support Services deliver as one. There is an inherent advantage in bidding for projects when the Infrastructure Investments business utilises the expertise of Construction Services and Support Services. Additionally, the negative working capital generated in the Construction Services business provides opportunity for Infrastructure Investments. The business continues to see significant opportunities for future investment in its chosen geographic markets, particularly in the US where the focus is on student accommodation, multifamily housing and public-private partnership (PPP) opportunities.

As a result of the market uncertainty generated by COVID-19, the first half of 2020 was relatively quiet for the Infrastructure Investments business with no new projects and no disposals.  

Under the Military Housing Privatization Initiative (MHPI) established in the US in 1996, Balfour Beatty Communities (BBC) manages more than 43,000 family housing properties across 55 Army, Navy and Air Force bases under long term concessions. This spans financing the project development, designing and constructing new houses and community amenities, renovating older legacy properties inherited from the military so that they meet modern requirements, and managing day to day property leasing and maintenance services, within the project's budget that is approved by the government.

BBC has faced operational challenges at some of the military bases where it manages properties. In June 2019, allegations about the handling of certain work orders were publicised about bases managed by BBC. Balfour Beatty instructed Hunton Andrews Kurth LLP, BBC's outside counsel, to conduct an investigation into the allegations, and BBC proactively contacted the Department of Justice (DoJ) to notify them of the review. The DoJ subsequently announced an investigation and BBC is cooperating fully. At this stage, the investigation is still ongoing and therefore the Group is not able to provide an indication of outcome, including timing or any quantum. BBC has also undertaken an extensive internal review of its work order processes and other procedures. Based on this internal review, BBC has implemented a number of changes to the way in which work orders are handled.

Following a series of operational challenges at Tinker Air Force Base in Oklahoma, the US Air Force required BBC to develop a comprehensive Performance Improvement Plan (PIP). The plan, which includes a variety of objectives and performance metrics, was submitted in December 2019 and agreed with the Air Force in February 2020. A number of the initiatives set out in the plan have already been completed, including implementing a significant management restructuring to better align technical support and resident services and appointing a Transformation Director. The impact of COVID-19 is being managed in collaboration with the Air Force as BBC continues to ensure that all PIP objectives are met.

Directors' valuation

The Directors' valuation increased by 5% to £1,125 million (FY 2019: £1,068 million), primarily as a result of foreign exchange rate movements in the period. The number of projects in the portfolio remained unchanged at 69 (FY 2019: 69).

Movement in value FY 2019 to HY 2020

The Group invested £21 million (2019: £11 million) in new and existing projects. Cash yield from distributions amounted to £39 million (2019: £32 million) as the portfolio continued to generate cash flow to the Group net of investment. The continuing yield during COVID-19 demonstrates the essential nature of the Infrastructure Investments portfolio. Unwind of discount at £41 million (2019: £45 million) is a function of moving the valuation date forward by six months with the result that future cash flows are discounted by six months less. Operational performance movements resulted in an £34 million increase (2019: £14 million), primarily as a result of foreign exchange movements.

The methodology used for the Directors' valuation is unchanged, producing a valuation that reflects market value and which therefore changes with movements in the market. Cash flows for each project are forecast based on historical and present performance, future risks and macroeconomic forecasts and which factor in current market assumptions. These cash flows are then discounted using different discount rates based on the risk and maturity of individual projects and reflecting secondary market transaction experience. As in previous periods, the Directors' valuation may differ significantly from the accounting book value of investments shown in the financial statements, which are produced in accordance with International Financial Reporting Standards (IFRS) rather than using a discounted cash flow approach.

Portfolio valuation June 2020

Value by sector

Value by phase

Value by income type

Discount rates applied to the UK portfolio range between 7% and 10.5% depending on project risk and maturity. The implied weighted average discount rate for the UK portfolio is 8.2% (FY 2019: 8.3%). Discount rates applied to the North American portfolio range between 7.5% and 10.6%. The implied weighted average discount rate is 8.4% (FY 2019: 8.3%). Consistent with other infrastructure funds, Balfour Beatty's experience is that there is limited correlation between the discount rates used to value PPP, and similar infrastructure investments, and long term interest rates. In the event that interest rates increase in response to rising inflation, the impact of any increase in discount rates would be mitigated by the positive correlation between the value of the UK portfolio and changes in inflation. A 1% change in the discount rate would change the value of the UK portfolio by approximately £52 million. A 1% change in the discount rate would change the value of the North American portfolio by approximately £78 million.

Responsibility statement of the Directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

· the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first half of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining second half of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first half of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Leo Quinn Phil Harrison

Group Chief Executive Chief Financial Officer

11 August 2020

Forward-looking statements

This announcement may include certain forward-looking statements, beliefs or opinions, including statements with respect to Balfour Beatty's business, financial condition and results of operations.

These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes",

"estimates", "plans", "anticipates", "targets", "aims", "continues", "expects", "intends", "hopes", "may", "will", "would", "could" or

"should" or, in each case, their negative or other various or comparable terminology. These statements are made by Balfour Beatty

in good faith based on the information available to it at the date of this 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 77 to 84 of the Annual Report and Accounts 2019.

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.

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 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 in the period

Underlying profit from operations (PFO)

Underlying PFO is presented before finance costs and interest income and is the key measure used to assess the Group's performance in the Construction Services and Support Services segments. This is also a common measure used by the Group's peers operating in these sectors.

This measure reflects the returns to the Group from services provided in these operations that are generated from activities that are not financing in nature and therefore an underlying pre-finance cost measure is more suited to assessing underlying performance.

Underlying profit before tax (PBT)

The Group assesses performance in its Infrastructure Investments segment using an underlying PBT measure. This differs from the underlying PFO measure used to measure the Group's Construction Services and Support Services segments because in addition to margins generated from operations, there are returns to the Investments business which are generated from the financing element of its projects.

These returns take the form of subordinated debt interest receivable and interest receivable on PPP financial assets which are included in the Group's income statement in investment income. These are then offset by the finance cost incurred on the non-recourse debt associated with the underlying projects, which is included in the Group's income statement in finance costs.

Measuring the Group's performance

The following measures are referred to in this announcement when reporting performance, both in absolute terms and also in comparison to earlier periods:

Statutory measures

Statutory measures are derived from the Group's reported financial statements, which are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and as issued by the International Accounting Standards Board (IASB).

Where a standard allows certain interpretations to be adopted, the Group has applied its accounting policies consistently. These accounting policies can be found on pages 157 to 163 of the Annual Report and Accounts 2019.

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 2019. 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  

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.

The results of Rail Germany have been treated as non-underlying items as the Group is committed to exiting this part of the business.

Further details of non-underlying items are provided in Note 8.

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 the half-year ended 26 June 2020 statutory results to performance measures

Reconciliation of the half-year ended 26 June 2020 statutory results to performance measures by segment

Reconciliation of the half-year ended 28 June 2019 statutory results to performance measures

Reconciliation of the half-year ended 28 June 2019 statutory results to performance measures by segment

Reconciliation of the year ended 31 December 2019 statutory results to performance measures

Reconciliation of the year ended 31 December 2019 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 6 and Note 7.

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.

e) Revenue including share of joint ventures and associates (JVAs)

The Group uses a revenue measure which is inclusive of its share of revenue generated from its JVAs. As the Group uses revenue as a measure of the level of activity performed by the Group during the period, 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 from operations (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's 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 (£8 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) (£29 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 (£13 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 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 (£3 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 (£1 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 period end. This is analysed using only elements that are recourse to the Group and excludes the liability component of the Company's preference shares, which is debt in nature according to statutory measures. Non-recourse elements are cash and debt that are ringfenced within certain infrastructure concession project companies. In addition, the Group has recognised lease liabilities on its balance sheet, which are also deemed to be debt in nature under statutory measures.

The Group has excluded these elements from its measure of net cash/borrowings as they are excluded from the definition of net debt set out in the Group's borrowing facilities.

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 period. The Group calculates its average net cash/borrowings based on the average of opening and closing figures for each month through the period.

The average net cash/borrowings measure excludes non-recourse cash and debt, the liability component of the Company's preference shares and lease liabilities, and this performance measure shows average net cash of £507m (2019: first half £290m; full-year £325m).

Using a statutory measure (inclusive of non-recourse elements, the liability component of the Company's preference shares and lease liabilities) gives average net borrowings of £1m (2019: first half £106m; full-year £49m).

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 has been undertaken using forecast cash flows for each project based on progress to date and market expectations of future performance. These cash flows have been discounted using different discount rates depending on project risk and maturity, reflecting secondary market transaction experience. As such, the Board believes that this measure better reflects the potential returns to the Group from this portfolio.

i) Directors' valuation of the Investments portfolio continued

The Directors have valued the Investments portfolio at £1.13bn at the half-year (2019: first half £1.16bn; full-year £1.07bn). 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 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 period. The Group's key exchange rates applied in deriving its statutory results are shown in Note 2.

To measure changes in the Group's performance compared with the previous period without the effects of foreign currency fluctuations, the Group provides growth rates on a CER basis. These measures remove the effects of currency movements by retranslating the prior period's figures at the current period's exchange rates, using average rates for revenue and closing rates for order book. A comparison of the Group's statutory growth rate to the CER growth rate is provided in the table below:

2020 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).

INDEPENDENT REVIEW REPORT TO BALFOUR BEATTY PLC

Conclusion

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the period ended 26 June 2020 which comprises the Condensed Group Income Statement, Condensed Group Statement of Comprehensive Income, Condensed Group Statement of Changes in Equity, Condensed Group Balance Sheet, Condensed Group Statement of Cash Flows and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the period ended 26 June 2020 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The Directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Paul Sawdon

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square

London E14 5GL

11 August 2020 

Condensed Group Income Statement

For the half-year ended 26 June 2020

Condensed Group Statement of Comprehensive Income

For the half-year ended 26 June 2020