Balfour Beatty Regulatory News (BBY)

BALFOUR BEATTY PLC RESULTS FOR THE HALF-YEAR ENDED 29 JUNE 2018

15 August 2018 

Highlights

· Underlying profit from operations (PFO) increased by 69% to £66 million (2017: £39m)

· Average net cash £161 million (2017: £45m); half-year net cash £366 million (2017: £161m)

· Underlying UK Construction PFO £5 million (2017: £2m), after £15 million charge on Aberdeen Western Peripheral Route

· Higher quality order book increased 11% to £12.6 billion (2017: £11.4bn), whilst maintaining Build to Last disciplines

· Directors' valuation of Investments portfolio stable at £1.2 billion, post £108 million of sale proceeds

· Interim dividend payment up 33% to 1.6 pence per share (2017: 1.2 pence)

Leo Quinn, Group Chief Executive, said, "All our businesses are now either achieving industry standard margins or on track to do so in the second half. The disciplines installed under Build to Last are also enabling us to increase the order book with key infrastructure projects to translate Balfour Beatty's expert capabilities into future profitable growth.

"Given the strength of our balance sheet and the Board's confidence that the Group's full year earnings will meet expectations, we are raising the interim dividend by 33% and plan to repay the outstanding convertible bonds this year."

Notes:

1 including share of joint ventures and associates

2 from continuing operations

3 before non-underlying items (Note 8)

4 non-recourse net borrowings are cash and debt that are ringfenced within certain infrastructure concession project companies

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

Investor and Analyst enquiries:

Angus Barry

Tel. +44 (0)20 7216 6824

angus.barry@balfourbeatty.com

Media enquiries:

Louise McCulloch

Tel. +44 (0)20 7216 6846

louise.mcculloch@balfourbeatty.com 

Investor and Analyst presentation:

A presentation to investors and analysts will be made at The London Stock Exchange Building, 10 Paternoster Square, London, EC4M 7LT on 15 August 2018 at 09.00.

There will be a live webcast of this presentation on: www.balfourbeatty.com/webcast 

2018 HALF-YEAR RESULTS ANNOUNCEMENT

· GROUP CHIEF EXECUTIVE'S REVIEW

· RESULTS OVERVIEW AND OUTLOOK

· DIVISIONAL OPERATING REVIEWS

· OTHER FINANCIAL ITEMS

· MEASURING OUR PERFORMANCE

GROUP CHIEF EXECUTIVE'S REVIEW

The Group's half-year 2018 results demonstrate Balfour Beatty's continuing transformation under the Build to Last programme with all businesses either delivering industry standard margins or on track to do so in the second half of the year.

For the first six months, the Group reported an underlying profit from operations of £66 million (2017: £39 million) and maintained its strong focus on cash. Average net cash increased substantially during the period to £161 million (2017: £45 million) with half-year net cash of £366 million (2017: £161 million).

UK Construction reported an underlying profit from operations of £5 million (2017: £2 million) after an underlying charge of £15 million for the Aberdeen Western Peripheral Route (AWPR), which experienced schedule slippage and cost increases. Part of AWPR is already open to the public, with the majority of the route scheduled to open by the end of August. Completion of the one remaining bridge is expected in the autumn. It is encouraging to note that excluding AWPR, UK Construction reported a PFO of £20 million representing a margin of 2.1%.

US Construction reported a profit from operations of £17 million (2017: £17 million), representing an improved operating margin of 1.1% (2017: 0.9%). To leverage the Group's market position, leadership of the buildings and civils businesses were reorganised at the start of the year, with two internal promotions. Gammon, the Group's 50:50 joint venture with Jardine Matheson, reported a doubling in profit from operations to £10 million.

In Support Services, profit from operations and margins were stable at £17 million (2017: £16 million) and 3.1% (2017: 3.1%) respectively.

The Group's Investments portfolio is a continuing source of value and opportunity. During the period the Group received £108 million of proceeds, mostly in respect of the sale of a 12.5% interest in Connect Plus, the company which operates and maintains the M25 London Orbital Motorway, and invested £38 million in new and existing projects. The Directors' valuation has remained stable at £1.2 billion (FY 2017: £1.2 billion).

Whilst maintaining disciplined bidding practices, the Group grew its order book to £12.6 billion (FY 2017: £11.4 billion). This was largely due to a number of wins in the US Construction business, including the Group's 30% share of the $2 billion Los Angeles Airport (LAX) Automated People Mover (APM) project. Balfour Beatty's Investments business also has a 27% stake in the APM public-private partnership (PPP) asset.

In the UK, Balfour Beatty's joint venture Balfour Beatty VINCI continues to work with HS2 to deliver detailed plans and costs for Lots N1 and N2 of HS2 (the UK's new high speed railway). The estimated value of this work (£2.5 billion) is not yet included in the order book, with the current Early Contractor Involvement (ECI) stage now expected to conclude in mid-2019.

The Group's continuing cash generation has enabled redemption of $45 million of US private placement and £39 million of convertible bonds since late 2017. The Group plans to repay the outstanding £214 million of convertible notes when they fall due in December 2018. This demonstrates the strength of the Group's businesses underpinned by its Investments portfolio and average net cash position.

At the start of 2018, the Group's investment in the standardisation of its systems progressed further when the US businesses migrated onto a single JD Edwards ERP platform. This transition was achieved smoothly and follows the consolidation of the UK construction business onto Oracle R12. These moves will enable the Group to drive significant ongoing future value through increased productivity coupled with greater transparency and assurance.

Customers buy Balfour Beatty's services due to the expert capabilities of the Group and its employees. In a market where, going forward, there will be intense competition for the best talent, Balfour Beatty recruits, trains and retains the highest calibre workforce. The half-year employee survey measured employee engagement at 64% (autumn 2017: 60%), the highest level of engagement since the introduction of the measure in 2015.

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 a top priority. Each week the Executive Committee reviews the safety performance of each of the business units with particular attention to lessons which should be learnt from any high potential near miss incidents, as well as gauging the status of the Group's safety culture. In the recent survey of employees in the UK and US businesses, 87% of respondents said they saw evidence of Zero Harm being applied whilst 91% felt empowered to speak up about anything potentially unsafe.

The Group's Lost Time Incident Rate (excluding international joint ventures) remained constant at 0.17 (FY 2017: 0.17).

Since the start of Build to Last in 2015, Balfour Beatty has simplified and refocused the Group; strengthened leadership; improved governance and processes; and developed a culture to deliver an organisation which is Lean, Expert, Trusted and Safe.

These results again demonstrate the progress which has been made.

The Group's expert capabilities and focus on selected markets, coupled with its strong order book and balance sheet, gives confidence for profitable growth in 2019 and beyond. With the ongoing reduction to the cost base and by maintaining Build to Last disciplines, underpinned by actions which have reduced geographic, commercial, operational and financial risk, Balfour Beatty is well placed to capitalise on the anticipated increasing demand for new and renewed infrastructure in the UK & Ireland, US and Far East - thus delivering profitable growth and cash generation well into the future. 

RESULTS OVERVIEW AND OUTLOOK

Unless otherwise stated, all commentary in this section, the Divisional operating reviews and Other financial items is on an underlying continuing operations 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 Performance section. Non-underlying items and the results from discontinued operations are the causes of the differences between underlying and statutory profitability. Additionally, underlying revenue includes the Group's share of revenue in joint ventures and associates and is presented on a continuing operations basis.

Group financial summary

In the first half of 2018, the Group's results demonstrate continued delivery of the Build to Last transformation as the income statement, cash flow, balance sheet and order book all strengthened in the period.

In the Group income statement, whilst revenue was down, gross profit increased and overheads reduced, resulting in increased profitability.

With regard to margin targets, the Group delivered industry standard margins for US Construction (1.1%) and Support Services (3.1%). In UK Construction, the Group delivered a PFO margin of 0.5%. However, excluding the AWPR project, Balfour Beatty delivered an underlying UK Construction PFO margin of 2.1%, inside the 2-3% industry standard margin target range.

The Group remains on track to deliver industry standard margins for all three segments in the second half of 2018.

Net cash at half-year increased to £366 million with average net cash for the first six months at £161 million. For 2018, the Group now expects to deliver average net cash at £140 to £170 million, versus the previous range of £120 to £150 million.

The Group continues to have one of the strongest balance sheets in the sector with total equity increasing to £1,240 million.

The order book increased by 11% to £12.6 billion, up 10% at constant exchange rates (CER) (FY 2017: £11.4 billion). The Group's focus on disciplined bidding is continuing to build a higher quality order book capable of delivering profitable growth from the rising infrastructure spend in the UK, US and Far East.

Underlying revenue was down 8% (4% at CER) at £3,836 million (2017: £4,191 million), following the managed reduction in the order book during 2017. Group revenue in the second half of 2018 is expected to be in line with the first half. Statutory revenue, which excludes joint ventures and associates, was £3,218 million (2017: £3,544 million).

Construction Services underlying revenue was down 13% (7% at CER) at £2,975 million (2017: £3,408 million) as a result of the expected decline in the US. Support Services underlying revenue was 5% higher at £543 million (2017: £519 million) with increases in both the utilities and transportation businesses.

Underlying profit from operations increased to £66 million (2017: £39 million), with Construction Services, Support Services and Infrastructure Investments all reporting improved profitability in the period. In local currency, underlying PFO increased at all geographical business segments within Construction Services but PFO was flat in the US in pounds sterling. Statutory profit from operations increased to £60 million (2017: £29 million), primarily driven by the increase in underlying profits.

2 from continuing operations

3 before non-underlying items (Note 8)

Construction Services improved to a profit from operations of £32 million in the first half of 2018 (2017: £24 million). Support Services was stable, with underlying profit from operations of £17 million (2017: £16 million). Infrastructure Investments increased from prior year, as the third partial sell-down of the Connect Plus M25 asset helped generate a £22 million profit on disposal of assets from the portfolio (2017: £nil million).

Net finance costs decreased to £10 million (2017: £17 million) as a result of higher net finance income on the Group's retirement benefit obligations and lower interest costs as the Group continues to pay down debt. The Group now expects full year net finance costs to be around £25 million. Underlying pre-tax profit from continuing operations increased to £56 million (2017: £22 million). The taxation charge on underlying profits increased to £4 million (2017: £nil million).

Underlying profit after tax including discontinued operations for the period increased to £52 million (2017: £23 million). Total statutory profit after tax for the period was £69 million (2017: £20 million), as a result of the net effect of non-underlying items.

Non-underlying items

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

Non-underlying items of £17 million were a net credit to the profit for the period from continuing operations (2017: £8 million net charge).

During the period significant actuarial gains in the Group's main pension fund, the Balfour Beatty Pension Fund (BBPF), led to the recognition of a deferred tax liability which was accounted for through reserves in line with the treatment of the pension movement. This, in turn, led to the recognition of additional UK deferred tax assets of £20 million which resulted in a tax credit being recognised in the income statement as a non-underlying item.

As a result of Carillion's liquidation on 15 January 2018, the Group and its remaining joint venture partner on the AWPR project, Galliford Try plc, became jointly liable to deliver Carillion's remaining obligations on the contract in addition to each partner's existing 33% share. This has resulted in the Group now having a 50% interest in the AWPR contract. In the first six months of the year, Balfour Beatty recognised an additional £23 million loss on the AWPR project. A third of this charge (£8 million) has been recognised in non-underlying items as this reflects the additional loss that the Group has incurred in fulfilling Carillion's obligations on the contract. The loss incurred on Balfour Beatty's original 33% joint venture share (£15 million) is treated as part of the Group's underlying performance. The AWPR loss represents a net charge made up of cost increases on the project partially offset by recovery positions that the Group believe are highly probable to be agreed. The final financial outturn of this contract remains dependent upon the result of ongoing claims discussions. Based on completion in the autumn, the expected Balfour Beatty cash outflow on this project in 2018 is now forecast at £135 million, versus the previous range of £105 - £120 million. 

Other items included: £7 million credit for release of provisions relating to settlements of health and safety claims; a £5 million charge for restructuring costs incurred relating to the Group's ongoing Build to Last transformation programme; and a £4 million charge relating to the amortisation of acquired intangible assets.

Earnings per share

Underlying basic earnings per share from continuing operations were 7.5 pence (2017: 3.2 pence), which, along with a non-underlying earnings per share from continuing operations of 2.6 pence (2017: 1.2 pence loss), gave a total basic earnings per share for continuing operations of 10.1 pence (2017: 2.0 pence). Discontinued operations contributed 0.0 pence (2017: 0.1 pence) to the total underlying basic earnings of 7.5 pence per share (2017: 3.3 pence). Total basic earnings per share were 10.1 pence (2017: 2.9 pence). 

Cash flow performance

The total cash movement in the period resulted in a £31 million increase (2017: £12 million decrease) to the Group's net cash position of £366 million (FY 2017: £335 million, HY 2017: £161 million) excluding non-recourse net borrowings. Proceeds from Investments disposals were partially offset by a £36 million cash outflow from the Group's operations.

* excluding infrastructure concessions (non-recourse) net debt

Working capital

In the first six months of the year, the Group's working capital position resulted in an outflow of £66 million (2017: £9 million outflow), primarily due to costs incurred on the AWPR project.

^ Excludes impact of foreign exchange and disposals

* The movement in operating working capital has been presented to exclude movements arising from IFRS15 Revenue from Contracts with Customers reclassification adjustments

Trade and other payables increased during the first six months of the year, creating a working capital inflow of £52 million (2017: £49 million inflow). This was offset by a working capital outflow of £63 million (2017: £55 million outflow) from trade and other receivables. The offsetting increase in payables and receivables balances is primarily due to contract mobilisations in US Buildings where several larger jobs have started construction. The cash outflow of £55 million in provisions is primarily driven by costs incurred on the AWPR project.

Including the impact of foreign exchange and non-operating items, negative (i.e. favourable) working capital decreased to £877 million at 29 June 2018 (FY 2017: £888 million).

Net cash/borrowings

The Group's average net cash in the first half of 2018 improved substantially to £161 million (2017: £45 million). The Group's net cash position at 29 June 2018, excluding non-recourse net borrowings, was £366 million (FY 2017: £335 million; HY 2017: £161 million). Non-recourse net borrowings, held in infrastructure concessions entities consolidated by the Group, increased to £329 million (FY 2017: £305 million; HY 2017: £292 million). The balance sheet also includes £104 million (FY 2017: £103 million; HY 2017: £101 million) for the liability component of the preference shares. Statutory net debt at 29 June 2018 was £67 million (FY 2017: £73 million; HY 2017: £232 million).

Pensions

Following the formal triennial funding valuation of the Balfour Beatty Pension Fund (BBPF) at 31 March 2016, the Company and the trustees agreed the key commercial principles of a plan for the BBPF to reach self-sufficiency during 2027, some three years earlier than previously planned. Under this plan Balfour Beatty will make cash contributions totalling £142 million over the six years 2018 to 2023. There is an agreed dividend sharing mechanism such that if the dividend cover ratio falls below 2x from 2018 onwards, funding to the BBPF will be accelerated.

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

The Group's balance sheet includes net retirement benefit assets of £184 million (FY 2017: £32 million, HY 2017: £208 million liabilities) representing net surpluses in the Group's pension schemes, as measured on an IAS 19 basis. The increase in pension surplus in the period is mainly due to actuarial changes, including a small reduction in life expectancy based on the latest mortality studies and an increase in the net discount rate used to measure liabilities. 

Outlook

The Build to Last transformation programme is designed to deliver superior returns over the medium term for all stakeholders, from a Group which is Lean, Expert, Trusted and Safe. As a result of the successful self-help actions taken in Phase One, Balfour Beatty has a strong foundation on which to deliver sustainable, profitable growth.

In Phase Two (24-month period to the end of 2018), the Group expects each of its Construction Services and Support Services businesses to continue their positive trajectory to achieve industry standard margins. Specifically, for these earnings based businesses, the underlying profit from operations margin targets are as follows:

Target

UK Construction 2%-3%

US Construction 1%-2%

Support Services 3%-5%

The Group is on track to achieve industry standard margins in the second half of 2018 as it continues to drive three key levers for improved financial performance: finalising the remaining historical contracts through to completion; reducing costs and raising productivity across its operations; and executing on the improved quality of the order book.

For Infrastructure Investments, during Phase Two of Build to Last, the Group will continue to sell assets, as appropriate, to maximise value to shareholders and invest in new opportunities.

In Phase Three (2019+), Balfour Beatty aims to command a premium to industry standard margins as market-leading strength should be matched by market-leading performance.

Markets

The Group primarily operates across three geographies (UK & Ireland, US and the Far East) and three sectors (Construction Services, Support Services and Infrastructure Investments). This provides resilience as the Group is less exposed to a downturn in a single geography or sector.

Overall, the trading environment for Balfour Beatty's chosen markets and capabilities remains favourable.

In the UK, Government policy is helping to drive a strong pipeline of major infrastructure projects in transport and energy. Over the next few years, the '4Hs' - HS2 (high speed rail), new nuclear power stations at Hinkley Point C and Wylfa, smart motorways for Highways England and the third runway at Heathrow airport - will contribute to the Government's investment in infrastructure commitment, which is targeted to rise from 0.8% in 2015/6 to over 1% of GDP by 2020-21.

The Group is working constructively with industry bodies and the UK Government to identify and manage any challenges caused by the UK's exit from the European Union. At this stage Balfour Beatty has not seen an impact but remains vigilant to respond to any changes in market conditions.

Within the UK commercial building sector, Balfour Beatty continues to see growth opportunities across regional markets although there has been a slowdown of projects coming to market in London.

In the US, Balfour Beatty operates in specific geographies. As the population migrates south and west, it is moving to cities, driving urbanisation in the Group's chosen markets. This leads directly to increased demand for buildings and infrastructure. Even before the 2016 Presidential election, there was a strong market outlook for construction and infrastructure. In December 2015, the FAST Act (Fixing America's Surface Transportation), a US$305 billion transportation bill, was signed, providing guaranteed funding for a five-year period. There are further opportunities being created, for example with the number of state-backed infrastructure bonds (over US$200 billion multi-state transportation bonds, US$35 billion of education bonds in California), an increase in US public-private partnership schemes and the increase in state gasoline taxes across the US.

In Support Services, power transmission and distribution has a stable underlying market. The gas business operates in an established market as a cost plus business with a fee on recovery and an associated pain/gain mechanism. The water business is beginning to transition to the next regulatory cycle (AMP7). Transportation, which includes major road and rail maintenance contracts, is expected to remain broadly stable. Local authorities provide opportunities in highways, whilst a key contract with London Underground, to deliver essential track renewal work across the network, is due for re-tender in the second half of 2018.

The Infrastructure Investments business continues to see significant opportunities for future investment in its chosen geographic markets particularly in the US where the focus is on student accommodation, military housing and public-private partnerships (PPP) opportunities. In the UK, the focus is on student accommodation and transmission opportunities.

Dividend

The Board is declaring an interim dividend of 1.6 pence per share, a 33% increase on prior period (1.2 pence per share). The Board recognises the importance of dividends to shareholders and anticipates a progressive dividend policy going forward.

DIVISIONAL OPERATING REVIEWS

CONSTRUCTION SERVICES

Financial review

Construction Services continued to make good progress in the first six months of the year with increasing profit, in local currency, across all geographies.

1 including share of joint ventures and associates

2 from continuing operations

3 before non-underlying items (Note 8)

As expected following the reduction in order book during 2017, underlying revenue decreased by 13% to £2,975 million (2017: £3,408 million), a 7% decrease at CER. Revenues in the US fell by 19% (12% at CER). At Gammon revenues reduced by 6% (2% increase at CER) and in the UK they decreased by 3%. It is expected that Construction Services revenue in the second half of 2018 will be in line with the first half of 2018.

Underlying profit from operations (PFO) continued to improve under Phase Two of Build to Last as all geographies had an increase in both absolute profit, in local currency, and margin percentage.

The order book at £9.5 billion (FY 2017: £8.3 billion) increased by 14% (13% at CER) due to increases in the US (26%, 23% at CER), and at Gammon (8%, 4% at CER). The UK order book remained constant at £2.7 billion in the first six months of the year. The increases occurred whilst maintaining the Group's policy of selective bidding. The £2.5 billion (Balfour Beatty 50% joint venture) HS2 contracts won in 2017 will not be included in the order book until the conclusion of the Early Contractor Involvement (ECI) phase, now expected in mid-2019.

The Group is continuing to manage a small number of problem contracts through to completion. In most cases, the positions taken are proving adequate. A very limited number of contracts have performed below this expectation. The largest of these is the AWPR project, which has experienced schedule slippage and cost increases. In the first six months of the year, Balfour Beatty recognised an additional £23 million loss on the AWPR project. The loss incurred on Balfour Beatty's original 33% joint venture share (£15 million) is treated as part of the Group's underlying performance. The balance of this charge (£8 million) has been recognised in non-underlying items as this reflects the additional loss that the Group has incurred in fulfilling Carillion's obligations on the contract. The AWPR loss represents a net charge made up of cost increases on the project partially offset by recovery positions that the Group believe are highly probable to be agreed. The final financial outturn of this contract remains dependent upon the result of ongoing claims discussions. Based on completion in the autumn, the expected Balfour Beatty cash outflow on this project in 2018 is now forecast at £135 million, versus the previous range of £105 - £120 million.  

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

Operational review

UK

Underlying revenue in the UK reduced by 3% to £947 million (2017: £975 million), with profit from operations showing an improvement to £5 million (2017: £2 million) with an associated PFO margin of 0.5%. It is worth noting that excluding the AWPR project, Balfour Beatty delivered a UK Construction PFO margin of 2.1%, inside the 2-3% industry standard margin target range.

The UK order book remained constant at £2.7 billion (FY 2017: £2.7 billion). The UK construction business continued to be selective in the work that it bids, through increased bid margin thresholds, improved risk frameworks and better contract governance.

UK Construction is continuing to manage historical problem contracts through to completion. At the start of 2015, 89 historical contracts were identified that had a material negative impact on profitability and cash. Only five contracts remain. Two of these are expected to reach practical completion in 2018.

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

The Major Projects business continues to pursue a number of key infrastructure opportunities across core transportation and energy markets. Over the next few years HS2, new nuclear power stations (Hinkley, Wyfla) and airport expansion (Heathrow) will all contribute to the UK Government's investment in infrastructure, which is forecast to rise from 0.8% of GDP in 2015-16 to over 1% of GDP by 2020-21. In addition, the highways market continues to provide good growth opportunities following the UK Government's proposed £35 billion funding for Highways England's first and second Roads Investment Strategies.

In April, the Major Projects business successfully completed the third and final phase of the Norwich Northern Distributor Road (NNDR), with the entire route now being operational. The scheme, which has seen delivery of 20 kilometres of dual carriageway, including the construction of 13 roundabouts and eight bridges, will alleviate congestion around the city of Norwich.

During the period, significant progress has been made on flagship projects. In February, the UK's largest current road construction project, the A14 in Cambridgeshire, successfully completed the second of 34 bridges and main structures. Connecting Brampton and Grafham, the new bridge will span 10 lanes of carriageway. Following the liquidation of Carillion plc, Balfour Beatty has assumed Carillion's share of this contract with the revised three-way joint venture working well to collaboratively deliver the project.

On HS2, ECI work is underway on the main works civils contracts, which were awarded in July 2017. Balfour Beatty VINCI won two lots around Birmingham, N1 and N2, worth about £2.5 billion. These contracts are included in awarded but not contracted (ABNC) during the ECI period. The joint venture team is currently working on the design and pricing of the two lots, with construction expected to begin in 2019.

In February, HS2 announced contractors that had been invited to tender for the two London stations - including Balfour Beatty VINCI, which is bidding for Old Oak Common station. Contracts are expected to be awarded by the end of 2018. Procurement processes are also underway on the rail systems contracts. In March, Balfour Beatty VINCI, which will work with Balfour Beatty NG Bailey as a delivery partner, submitted the pre-qualification response for the combined railway systems packages 1 (track and overhead catenary system works) and 2 (tunnel and lineside mechanical and electrical and tunnel ventilation works) worth approximately £1.9 billion. Announcement of successful pre-qualified bidders is due in the second half of 2018 with Invitation To Tenders expected in 2019 and contracts awarded in 2020.

On Crossrail, Balfour Beatty's three major projects: C510 (Liverpool Street and Whitechapel Station tunnels); C512 (Whitechapel Station); and C530 (Woolwich Station) all made progress during the period. C510 has achieved financial completion with the other two projects progressing in line with scheduled completion. In February, the first Elizabeth Line train commenced its maiden journey from Woolwich Station.

At Sellafield, good progress is being made with the nuclear decommissioning. The silo maintenance facility is undergoing its commissioning phase to allow it to decommission radioactive equipment and is due for completion later this year.

At Hinkley Point C (HPC), Balfour Beatty's expanding team continues to make positive progress on the project. As well as a growing presence at the HPC site itself, Balfour Beatty has a larger site at Avonmouth. Occupied in January 2018, it is now home to nearly 200 direct employees and sub-contractors. The project involves the construction of a pair of six-metre diameter underwater tunnels to supply the nuclear power station with cooling water and a third seven-metre diameter tunnel to discharge heated water back into the Bristol Channel. Three tunnel boring machines will use rotating cutting heads to excavate a total of 9 kilometres of tunnel - the two 3.5 kilometres intake tunnels and one 1.8 kilometre outfall tunnel.

At the Thames Tideway Tunnel project work continues on the 6 kilometre west section which runs from Acton to Wandsworth. Excavation for the main tunnelling shaft at the Carnwath Road site is well underway following the construction of the acoustic shed.

In ABNC, in addition to the HS2 civil engineering Lots 1 and 2, the highways business has been selected by Highways England to deliver a Smart Motorway package to upgrade sections of the M4 (J3 - J12).

The Regional business comprises:

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

Within Regional, in line with the Group's strategy, the business has simplified with an improved span of control as it operates fewer sites. The number of live projects, which was over 400 at December 2015 has subsequently fallen to around 250 at 29 June 2018. During Build to Last, there has also been a shift towards a lower risk contract portfolio, with a reduction in the number of fixed price contracts offset by an increase in 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.

The Group's largest framework agreement, the Scape National Civil Engineering and Infrastructure framework, has now secured over £1 billion of civil engineering and infrastructure work. Since being appointed as main contractor in 2015, the four year framework has been used for over 100 projects across the UK. All completed projects have been on time and on budget. Balfour Beatty is currently bidding to retain its position on this framework with a decision expected in the second half of 2018.

In the first half of 2018, the Regional business successfully completed the £63 million Rossall coastal defence scheme for Wyre Council in partnership with the Environment Agency. The scheme protects the town's tramway, hospital and schools whilst reducing flood risk to 7,500 nearby residential properties through two kilometres of sea defences. Other projects completed during the period included: Aberdeen South of the City school, a £47 million project delivering a 1,350 pupil academy on behalf of Hub north Scotland and Aberdeen City Council; a £37 million luxury retirement complex for Audley Villages at Redwood, Bristol; and the £20 million Radisson Red Hotel in Glasgow.

In the period, the Regional business achieved a key milestone at the University of Manchester's £287 million Manchester Engineering Campus Development (MECD) project with the first reinforced concrete core reaching full height. The core, which is one of four, will be an integral component of the seven storey 'MEC Hall' building, housing lift shafts and stairwells. Other material ongoing projects include: the £150 million Madison Tower, a 53-storey residential building in Canary Wharf, London; Forth Valley College, Scotland; the renovation and new-build scheme at No.1 Palace Street in St James', London; and train stations at Warrington West (new station) and at Dundee (full refurbishment).

The Regional business had a number of successes in 2018 to date. Notable new contract awards in the period included:

Included in ABNC, at 29 June 2018 the Group has been selected as preferred bidder for: Eastwick and Sweetwater residential development project; the redevelopment of the Darwin Building at Edinburgh University; and the Caernarfon bypass.

In the Rail Construction business, underlying revenues were broadly flat in the period. The business completed the West Outer Track Infrastructure (WOTI) project as part of its continued support of the Crossrail programme and work commenced on the examination, repair specification and report into the condition and safety of the Rhondda Tunnel. During the period, the Rail Construction business won the 'Reactive Building and Civils' contract worth up to £50 million. The contract is to perform work arising around Network Rail's building infrastructure in the West Country.

US

Underlying revenue in the US fell by 19% in the period (12% at CER) to £1,577 million following the reduction to the order book during 2017. In the second half of 2018 it is expected that US revenue will be in line with the first six months of the year.

The business reported an underlying profit from operations for the period of £17 million (2017: £17 million). The underlying PFO margin at 1.1% (2017: 0.9%) is within the Group's Build to Last Phase Two target of 1%-2% for US Construction. Overall the trajectory of the US business is positive and market conditions are favourable.

The 26% (23% at CER) increase in the US order book has been achieved at a quality consistent with the Group's stated policy of selective bidding for those projects best aligned with its capabilities. In June, the US$1.95 billion Los Angeles airport (LAX) Automated People Mover project reached financial completion such that the Group's share of the contract (Construction 30% Balfour Beatty) has been included in the US order book. In addition, the Group has won over $500 million of contracts for schools, primarily in California, in the first half of the year.

Balfour Beatty continues to evolve its US organisation building on the standardisation and leaning out already delivered. At the year end the decision was taken to promote two internal candidates, to lead the Buildings and Civils businesses respectively. These appointments are leveraging the Group's market positions while maintaining the Build to Last contracting disciplines.

Even before the 2016 presidential election, there was a strong market outlook for construction and infrastructure in the US. In December 2015, the FAST Act (Fixing America's Surface Transportation), a US$305 billion transportation bill was signed, providing funding for a five-year period. This bill permits longer term project planning horizons in the public market and is leading to improved visibility for publicly funded projects that had been slow to come to market. There are further opportunities being created with the number of state backed infrastructure bonds (US$35 billion of education bonds in California, over US$200 billion of multi-state transportation bonds), and an increase in US public-private partnership schemes.

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

The Buildings business remains focused on working with repeat customers, in known geographies where it can deliver value. The business is focused on specific geographies, known internally as 'The Southern Smile'. This starts in the Pacific North West, runs through California, Texas, Florida and up through Georgia and the Carolinas to Washington DC. The core markets remain as commercial offices, education, hospitality, residential and healthcare.

In 2018, Buildings completed a number of notable projects including:

During the period strong progress has been made on flagship projects.

The Buildings business had a number of new contract awards in the first six months of the year including:

Included in ABNC, the business has been made preferred bidder for: a US$605 million contract for the Broward County Convention Center Expansion and Headquarters Hotel; a US$150 million contract for an Atlanta airport hotel; a US $122 million contract for UNC Wilmington Freshman student housing under a PPP arrangement with the Infrastructure Investments business; and a US$55 million contract for the University of North Carolina-Charlotte Marriott Hotel and Conference Center.

The Civils business continues to create value, operating in the largely regulated markets of rail, water and road. In March, Civils completed the construction of Charlotte's light-rail extension (Blue Line) after four years of build. The 9.6-mile (15.45 km) Blue Line provides service to fifteen stations located within the Charlotte city limits.

Additionally during the period, progress has been made on key contracts with mobilisation at both the $625 million Southern Gateway and $1.08 billion Green Line extension projects. At Southern Gateway, an 11-mile stretch of road in Dallas, Texas, the design is in excess of 50% complete, with the widening of frontage roads and mainline barrier demolition commenced. At Green Line, a 4.7-mile commuter rail extension in Boston, Massachusetts, the design is underway with construction activities due to commence in the second half of 2018. At Caltrain, a US$697 million contract for the electrification of the 52-mile rail corridor between San Francisco and San Jose, foundation work continues.

The Civils business had a number of successes in the first half of 2018. Notable new contract awards in the period included:

Gammon

At Gammon, Balfour Beatty's 50:50 joint venture based in Hong Kong and Singapore, the Group's share of underlying revenue decreased by 6% (2% increase at CER) to £451 million, consistent with the reduction in order book in 2017. Importantly, underlying profit from operations increased to £10 million (2017: £5 million) as two complex contracts were resolved in the prior year. In the first six months of the year, the order book increased by 8% (4% at CER) to £1.4 billion, as a result of wins in the Civils and Buildings businesses. At Gammon, the timing of orders is more variable around a small number of large contracts.

The order book is spread across a number of public and private customers. In Buildings, the focus is on productivity, efficiency and expanding the customer base on a selective basis. In Civils, the strategy is to lever competitive advantage with a key area of future work likely to be from expansion of the airport in Hong Kong and other significant infrastructure programmes such as the Central Kowloon Route in Hong Kong and the Rail Circle Line in Singapore.

In the year to date, the Civils business has completed work on the West Kowloon Terminus North project for the express rail link to Shenzhen, China. During the period work has continued on major Buildings projects including: the redevelopment of Somerset House into a 48-storey office building; the construction of the Lee Garden Three Project, which will include 20 floors of office space atop a five-level retail complex; and the construction of a 71,000 square metre data centre for Global Switch in Hong Kong. Work has also continued on a number of Civils projects in Hong Kong, including the complex Tuen Mun-Chek Lap Kok (TMCLK) Viaduct project, which includes the design and construction of a dual two-lane sea viaduct.

Gammon had a number of successes in the first six months of 2018. Notable new contract awards in the period included:

Since the start of 2015, Balfour Beatty has exited the Middle East, Indonesia and Australia. In Canada, following the completion of the BC Children's and BC Women's hospitals in Vancouver, the Group now only holds Investments assets.

SUPPORT SERVICES

Financial review

The Support Services segment comprises utilities and transportation businesses. Utilities operates across power transmission and distribution and the gas and water sectors. Transportation operates across rail, highways and managed road schemes for local authorities.

Underlying Support Services revenue increased by 5% to £543 million (2017: £519 million), driven by increases in both utilities and transportation. Profit from operations and margins were stable at £17 million (2017: £16 million) and 3.1% (2017: 3.1%) respectively. The 3.1% underlying PFO margin was in the Build to Last Phase Two industry standard margin target of 3%-5%. The utilities order book was flat at £3.1 billion (FY 2017: £3.1 billion, HY 2017: £3.3 billion) as increases in rail and power transmission and distribution were offset by the expected decline in gas and water.

1 including share of joint ventures and associates

3 before non-underlying items (Note 8)

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

Operational review

Underlying utilities revenue increased by 3% to £308 million (2017: £299 million), driven by increases at power transmission and distribution. The utilities order book reduced to £1.2 billion (FY 2017: £1.3 billion) as an increase at power was more than offset by the expected decline in gas and water.

Despite the increased revenue and order book, the power transmission and distribution business continues to undergo restructure and cost removal. The business is eliminating low-value works and areas which do not align to its risk profile. The actions taken will ensure that the business is focused on the most profitable areas of its market.

In the period, power transmission and distribution successfully installed 140 new composite poles to connect the Dorenell Wind Farm to Blackhillock Substation. The business has continued its work on the Eleclink project, in conjunction with the Rail business, with good progress made over the last six months on the project to lay two 50-kilometre cables through the Channel Tunnel and connect them to converter stations in Northern France and Kent.

Notable new contract awards in the period included:

In gas and water, revenue was broadly in line with the first six months of 2017. The water business remains in the middle of the current UK water regulatory cycle (AMP6 2015 - 2020). Many water contracts are extended over multiple AMP periods and the Group has already started to engage on the AMP7 planning cycle. The gas market is in the middle of the RIIO-GD1 period, with no changes likely before early 2021.

In the period, the gas and water business successfully dealt with the 'Beast from the East' storm by tackling burst water mains throughout its areas of operation. The gas and water business expects a peak volume year in 2018, as it represents the middle of the current AMP/RIIO cycles.

Underlying transportation revenues increased by 7% to £235 million (2017: £220 million), due to an increase in rail maintenance work. The transportation order book increased 6% to £1.9 billion (FY 2017: £1.8 billion), due to a number of contract wins for Network Rail.

The rail services business won a number of maintenance contracts for Network Rail in the first six months of the year including:

Balfour Beatty's Track Partnership contract with London Underground, to deliver essential track renewal work across the network, is due for re-tender in the second half of 2018.

In June, the Group launched a new Rail Innovation Centre at its Raynesway facility in Derby. The purpose built Rail Innovation Centre is a dedicated research, development and testing facility to support Balfour Beatty's contribution to the development of the digital railway for a more reliable, cost efficient and safe railway network for all users across the UK and overseas.

INFRASTRUCTURE INVESTMENTS

Financial review

The Infrastructure Investments business delivered another positive performance, having continued its strategy of optimising value through the disposal of operational assets, whilst also continuing to invest in new opportunities.

Underlying profit from operations at £33 million (2017: £15 million) was higher than the prior year, due to an increase in profit on disposals following the third partial sell down (5%) in February of Connect Plus, the company which operates and maintains the M25 orbital motorway. Pre-disposals underlying operating profit decreased to £11 million (2017: £15 million) following the combined partial disposals (25%) of the M25 asset in 2017 and the current year. Net interest income remained broadly consistent year on year at £10 million (2017: £11 million) with underlying profit before tax at £43 million (2017: £26 million).

3 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 Performance section.

Operational review

In the first six months of 2018, the Infrastructure Investments business added two new projects and partially disposed of one asset.

In January 2018, the business was named preferred bidder on the Automated People Mover project at Los Angeles airport. Financial close was reached in June 2018 and Balfour Beatty owns a 27% equity stake in the project. In the private rented and regeneration sector, the North American business acquired a 7.5% stake at the Riverchase Landing multifamily housing project located in Birmingham, Alabama. Balfour Beatty Communities will perform property management services for the properties, leveraging its existing capabilities.

In February, the Group made a 5% partial sale in Connect Plus, the company which operates and maintains the M25 orbital motorway, for £42 million (profit on disposal of £22 million). The Group retains a 15% holding in the Connect Plus M25 asset. In July, Connect Plus successfully completed a refinancing.

Financial close was reached on four projects where the Group invests equity: the Automated People Mover in Los Angeles; Riverchase Landing multifamily housing; a student housing project at Purdue University in Indiana; and a major build-to-rent development, 'The Lancastrian', in the New Cross area of Manchester. At the end of June three projects had not yet reached financial close (December 2017: five projects).

The Infrastructure Investments business continues to see significant opportunities for future investment in its chosen geographic markets particularly in the US where the focus is on student accommodation, military housing and PPP opportunities. In the UK, the focus is on student accommodation and transmission opportunities.

Directors' valuation

During the first six months of the year the Directors' valuation remained broadly stable at £1,185 million (FY 2017: £1,244 million) with £108 million being realised from divestments in the period. The number of projects in the portfolio increased from 71 to 73. This reflected continued success in targeted sectors with two new projects included in the Directors' valuation for the first time.

Movement in value FY 2017 to HY 2018 £m

The Group invested £38 million (2017: £24 million) in new and existing projects, predominately in the UK. Cash yield from distributions amounted to £39 million (2017: £26 million) as the portfolio continued to generate cash flow to the Group net of investment.

The business continued its strategy of maximising value through recycling equity from operationally proven projects, whilst preserving interests in strategic projects that offer opportunities to the wider Group. In February, the Group received £104 million for a 12.5% partial sale in Connect Plus the company which operates the M25 orbital motorway, consisting of 7.5% agreed in December 2017 and a further 5% agreed in February 2018.

Unwind of discount at £48 million (2017: £47 million) is a function of moving the valuation date forward with the result that future cash flows are discounted by six months less. Operational performance movements resulted in a £4 million decrease in the value of the portfolio (2017: £30 million decrease). The reduction was due to a number of changes in cash flow forecasts, discount rates and economic assumptions, partially offset by an exchange rate gain of £13 million on the North American US portfolio.

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

Demand for high-quality infrastructure investments in the secondary market continues to exceed supply and the Group will continue to sell investment assets timed to maximise value to shareholders.

The Investments portfolio is currently split evenly across the UK and North America (UK 47%, North America 53%). Within the UK roads is still the largest sector, despite the 25% partial sale of the Connect Plus M25 asset, whilst in North America US military housing represents the majority of the portfolio. The Investments portfolio includes over £1 billion of projects that have completed the construction phase and are now operational.

Portfolio valuation June 2018

Value by sector

Value by phase

Value by income type

UK portfolio

In the first six months of the year, £27 million was invested across four projects in the portfolio: Aberdeen Western Peripheral Route (AWPR); Irish Primary Care; Welland Bio Power; and the regeneration development at Eastwick and Sweetwater.

During the period, there was a partial sale of 12.5% of the Connect Plus M25 asset, comprising the completion of a 7.5% sale agreed in December 2017 and a further 5% sale agreed subsequently in February 2018, which generated proceeds of £104 million. £4 million was received following financial close at a development in the New Cross area of Manchester.

In aggregate operational performance movements resulted in a £16 million reduction in value arising from the net effect of revised cash flow forecasts for certain projects.

Discount rates applied to the UK portfolio range between 7% and 12% depending on project risk and maturity. The implied weighted average discount rate for the UK portfolio is 8.6% (FY 2017: 8.5%). A 1% change in discount rate would change the value of the UK portfolio by approximately £55 million.

Consistent with other infrastructure funds, Balfour Beatty's experience is that there is limited correlation between the discount rates used to value PPP (and similar infrastructure investments) and long-term interest rates. In the event that interest rates increase in response to rising inflation, the impact of any increase in discount rates would be mitigated by the positive correlation between the value of the UK portfolio and changes in inflation. 

North American portfolio

In the first six months of the year, the business won two projects: an investment in a private rental housing portfolio at Birmingham, Alabama; and a PPP project to construct and operate the Automated People Mover at Los Angeles Airport in California.

Investment of £11 million was made during the period in two existing and one new project: a PPP data centre in Canada and a student accommodation project at Purdue University; and the stake acquired in the private rental housing portfolio in Birmingham, Alabama.

Operational performance movements resulted in a £12 million increase in the value of the portfolio, consisting mainly of an increase of £13 million due to exchange rate movements, together with some revised cash flow forecasts for certain projects.

Discount rates applied to the North American portfolio range between 7.5% and 10.25%. The implied weighted average discount rate is 8.3% (FY 2017: 8.2%) and a 1% change in the discount would change the value of the North American portfolio by approximately £86 million.

Under the Tax Cuts and Jobs Act passed by the US Government in December 2017 there are provisions to restrict the tax deductibility of interest expense. The provisions are complex and their application requires clarification in a number of areas, but the initial assessment is that the restriction will not have a material effect on the Directors' valuation. The Group will monitor the application of the rules and any forthcoming guidance.

OTHER FINANCIAL ITEMS

Taxation

The Group's underlying profit before tax from continuing operations for subsidiaries of £37 million (2017: £8 million loss) resulted in an underlying tax charge of £4 million (2017: £nil million).

Goodwill

The goodwill on the Group's balance sheet at 29 June 2018 increased to £885 million (FY 2017: £874 million) as a result of foreign exchange movements. A full detailed impairment review will be conducted at 31 December 2018.

Factoring

Whilst the Group makes available to its supply chain a factoring scheme, it is not actively promoted and at 29 June 2018 the total drawn on the scheme was less than £10,000.

Banking facilities

The Group's core committed revolving credit facility totals £400 million. The facility was last refinanced in December 2015 with the £400 million facility extending through to 2018. In November 2017 £375 million of the facility was extended until December 2020. In March 2018, the Group entered into a further £25 million committed revolving bilateral credit facility that also matures in December 2020. Accordingly the Group now has £400 million of committed facilities that extend to December 2020. The purpose of the facilities is to provide liquidity from a set of core relationship banks to support Balfour Beatty in its activities. At 29 June 2018, all facilities were undrawn.

Financial risk factors and going concern

The key financial risk factors for the Group remain largely unchanged.

The Group's US private placement and committed bank facilities contain certain financial covenants, such as the ratio of the Group's EBITDA to its net debt which needs to be less than 3.0 and the ratio of its EBITA to net borrowing costs which needs to be in excess of 3.0. These covenants are tested on a rolling 12-month basis as at the June and December reporting dates. At 29 June 2018, both these covenants were passed as the Group had net cash and net interest income from a covenant test perspective.

The Group is forecasting to remain within its banking covenants during the going concern assessment period.

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

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

Responsibility statement

We confirm that to the best of our knowledge:

· the condensed Group financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting;

· the interim management report, as required by Disclosure and Transparency Rules 4.2.7R and 4.2.8R, includes a fair review of:

o important events during the half-year ended 29 June 2018 and their impact on the condensed Group financial statements;

o a description of the principal risks and uncertainties for the second half of the year; and

o related parties' transactions and changes therein.

On behalf of the Board

Leo Quinn Phil Harrison

Group Chief Executive Chief Financial Officer

14 August 2018

Forward-looking statements

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

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

MEASURING OUR 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 continuing operations and the related key business drivers.

These financial performance measures are also aligned to measures used internally to assess business performance in the Group's budgeting process and when determining compensation.

Equivalent information cannot be presented by using financial measures defined in the financial reporting framework alone.

Readers are encouraged to review this announcement in its entirety.

Performance measures used to assess the Group's operations in the year

Underlying profit from operations (PFO)

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

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

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 years:

Statutory measures

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

Where a standard allows certain interpretations to be adopted, the Group has applied its accounting policies consistently. These accounting policies can be found on pages 102 to 109 of the Annual Report and Accounts 2017.

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

Performance measures

In assessing its performance, the Group has adopted certain non-statutory measures because, unlike its statutory measures, these cannot be derived directly from its financial statements. The Group commonly uses the following measures to assess its performance:

a) Order book

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

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

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

b) Underlying performance

The Group adjusts for certain non-underlying items which the Board believes assist in understanding the performance achieved by the Group. These items include:

· gains and losses on the disposal of businesses and investments, unless this is part of a programme of releasing value from the disposal of similar businesses or investments such as infrastructure concessions;

· costs of major restructuring and reorganisation of existing businesses;

· acquisition and similar costs related to business combinations such as transaction costs; and

· impairment and amortisation charges on intangible assets arising on business combinations (amortisation of acquired intangible assets). These are non-underlying costs as they do not relate to the underlying performance of the Group.

From time to time, it may be appropriate to disclose further items as non-underlying items in order to reflect the underlying performance of the Group.

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

Further details of these non-underlying items are provided in Note 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 29 June 2018 statutory results to performance measures

Reconciliation of half-year ended 29 June 2018 statutory results to performance measures by segment

Reconciliation of the half-year ended 30 June 2017 statutory results to performance measures

Reconciliation of the half-year ended 30 June 2017 statutory results to performance measures by segment

Reconciliation of the year ended 31 December 2017 statutory results to performance measures

Reconciliation of the year ended 31 December 2017 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 on an underlying continuing basis. The table below reconciles this to the statutory earnings per share.

Reconciliation from statutory basic EPS to performance EPS

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

The Group uses a revenue measure which is inclusive of its share of revenue generated from its JVAs. As the Group uses revenue as a measure of the level of activity performed by the Group during the year, the Board believes that including revenue that is earned from its JVAs better reflects the size of the business and the volume of work carried out and more appropriately compares to PFO.

This differs from the statutory measure of revenue which presents Group revenue from its subsidiaries.

A reconciliation of the statutory measure of revenue to the Group's performance measure is shown in the tables in section (b). A comparison of the growth rates in statutory and performance revenue can be found in section (i).

f) Recourse net cash/borrowings

The Group also measures its performance based on its net cash/borrowings position at the period end. This is analysed using only elements that are recourse to the Group and excludes the liability component of the Company's preference shares, which is debt in nature according to statutory measures, as this is excluded from the definition of net debt in the covenants set out in the Group's facilities.

Non-recourse elements are cash and debt that are ringfenced within certain infrastructure concession project companies.

Net cash/borrowings reconciliation

g) Average net cash/borrowings

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

The average net cash/borrowings measure excludes non-recourse cash and debt and the liability component of the Company's preference shares, and this performance measure shows average net cash of £161m (2017: first half average net cash of £45m; full-year average net cash of £42m).

Using a statutory measure (inclusive of non-recourse elements and the liability component of the Company's preference shares) gives average net borrowings of £70m (2017: first half average net borrowings of £196m; full-year average net borrowings of £117m).

h) 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.

The Directors have valued the Investments portfolio at £1.2bn at the half-year (2017: first half £1.2bn; full-year £1.2bn). 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

* Infrastructure asset represents the Group's carrying value of Blackpool Airport. Blackpool Airport was not included in the Directors' valuation and has been disposed in the second-half of 2017.

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

+ FY 2017 valuation includes £62 million relating to the 7.5% second partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. The proceeds were subsequently received on 23 February 2018.

The difference between the statutory measure and the Directors' valuation (performance measure) of the Group's Investments portfolio is not equal to the gain on disposal that would result if the portfolio was fully disposed at the Directors' valuation. This is because the gain/loss on disposal would be affected by the recycling of items which were previously recognised directly within reserves, which are material and can alter the resulting gain/loss on disposal.

The statutory measure and the Directors' valuation are fundamentally different due to the different methodologies used to derive the valuation of these assets within the Investments portfolio.

As referred to in the 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:

There is also an element of the Directors' valuation that is not represented by an asset in the Group's balance sheet. This relates to the management services contracts within the Investments business that are valued in the Directors' valuation based on the future income stream expected from these contracts. 

i) Constant exchange rates (CER)

The Group operates across a variety of geographic locations and in its statutory results, the results of its overseas entities are translated into the Group's presentational currency at average rates of exchange for the period. The Group's key exchange rates applied in deriving its statutory results are shown in Note 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:

2018 statutory growth compared to performance growth

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

INDEPENDENT REVIEW REPORT TO BALFOUR BEATTY PLC

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 29 June 2018 which comprises the Condensed Group Income Statement, the Condensed Group Statement of Comprehensive Income, the Condensed Group Statement of Changes in Equity, the Condensed Group Balance Sheet, the 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 six months ended 29 June 2018 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").

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.

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.

As disclosed in note 1.1, 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

14 August 2018

Condensed Group Income Statement

For the half-year ended 29 June 2018

Condensed Group Statement of Comprehensive Income

For the half-year ended 29 June 2018