Balfour Beatty Regulatory News (BBY)

BALFOUR BEATTY PLC RESULTS FOR THE FULL YEAR ENDED 31 DECEMBER 2018

13 March 2019 

Results demonstrate the value being created through Build to Last programme

Highlights

· Underlying pre-tax profit increased 10% to £181 million (2017: £165 million)

· Industry standard margins achieved in second half of 2018; Construction Services profit from operations increased 32%

· Gross debt reduced by over 40%; repaid £231 million convertible bonds

· Higher quality order book; increased 11% to £12.6 billion (2017: £11.4 billion)

· Average net cash increased to £194 million (2017: £42 million); year-end net cash £337 million (2017: £335 million)

· Directors' valuation of Investments portfolio broadly stable at £1.15 billion (2017: £1.24 billion)

· Recommended final dividend of 3.2p, up 33%; full year 4.8p (2017: full year 3.6p)

Leo Quinn, Balfour Beatty Group Chief Executive, said: "These results demonstrate the value being created through Build to Last. We continue to strengthen the Group and meet our targets. The businesses are back at industry standard margins, underpinned by a strong balance sheet and asset base.

"But Balfour Beatty's transformation goes well beyond resolving the issues of forced growth. We have relentlessly invested in capability and leadership to forge a culture which provides sustainable competitive advantage through standardisation of our systems and processes, on a reducing overhead base.

"This gives us a scalable platform to drive profitable managed growth. With this internal momentum and our positions in large growing infrastructure markets, we are well placed to deliver market leading performance."

Notes:

1 underlying revenue and order book includes share of joint ventures and associates

2 from continuing operations

3 before non-underlying items (Note 9)

4 underlying basic earnings per share are from underlying continuing operations

5 2017 valuation includes £62 million relating to the 7.5% partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. These proceeds were received on 23 February 2018

6 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 financial 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 7963 2150

louise.mcculloch@balfourbeatty.com 

Investor and analyst presentation:

A presentation to investors and analysts will be made at Numis, Floor Five, The London Stock Exchange Building, 10 Paternoster Square, London, EC4M 7LT on 13 March 2019 at 09.00.

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

2018 FULL-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

These results demonstrate the value being created through the Build to Last programme. Balfour Beatty's transformation has gone beyond resolving the legacy issues of forced growth: the Group's strong competitive positions in large and growing infrastructure markets, and the platform provided by its scalable operating model, provide the ability to deliver profitable managed growth.

Since the start of Build to Last in 2015, Balfour Beatty has simplified and refocused its operations, embedded new governance, reduced operating expenses by almost 40% and invested steadily in innovation, capability and leadership. As well as the delivery of all Build to Last targets, culminating in industry standard margins, every metric for a culture which is Lean, Expert, Trusted and Safe shows significant continuous improvement. To ensure these improvements are sustainable, they are embedded within consistent systems and processes which address risk and provide management with transparency and control.

The Group reported an underlying profit from operations (PFO) of £205 million (2017: £196 million) driven by improvements in the earnings based businesses. In the second half of the year, UK Construction, US Construction and Support Services all reported underlying PFO margins in, or above, the range of industry standard margins. Underlying earnings per share from continuing operations increased 26% to 26.3 pence per share (2017: 20.9 pence) and the Board has recommended a 33% increase in the final dividend giving a total recommended dividend for the year of 4.8 pence per share (2017: 3.6 pence).

Cash remains Balfour Beatty's compass and ultimately the most reliable barometer of financial performance. During the year, the Group had average net cash of £194 million (2017: £42 million) and at year end, the Group had net cash of £337 million (2017: £335 million). During the year, Balfour Beatty paid down over 40% of its gross debt including repayment of the convertible bonds.

Balfour Beatty's net cash position and the value of its Investments portfolio underline the ongoing strength of the balance sheet, which constitutes a strong competitive benefit with customers and supply chain partners. The Investments portfolio is a strategic source of value and opportunity to the Group's businesses. The Directors' valuation of the Investments portfolio has remained broadly stable at £1.15 billion (2017: £1.24 billion), following £58 million of investments and £187 million of disposals in the year.

The order book increased by 11% to £12.6 billion (2017: £11.4 billion). This increase occurred whilst maintaining disciplined selective bidding in line with the Group's stated policy. The businesses increased bid margin thresholds and focused on projects where Balfour Beatty's capabilities can deliver value, coupled with a lower risk profile, to ensure that the Group wins work at appropriate terms and conditions.

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

In Lean, the governance and processes introduced during Build to Last have driven improved performance in all business segments and ensured that the earnings based businesses achieved industry standard margins in the second half of 2018. At the start of 2018, the Group extended its investment in systems standardisation with the migration of its US businesses onto a single JD Edwards ERP platform. This transition was achieved smoothly and followed the consolidation of the UK Construction business onto Oracle R12. These moves will enable the Group to drive significant ongoing value through increased productivity underpinned by greater transparency and assurance.

During the year the Group launched its 25 by 2025 vision. With the goal to reduce onsite activity by 25% by 2025 Balfour Beatty will increasingly use modular, innovation and digital solutions, in order to become more productive and efficient. From modular on tall towers such as the Madison project in London to the prefabrication of bridges at the £1 billion A14 project, the Group will look increasingly to utilise offsite manufacturing. With enhanced BIM modelling, virtual reality, drones and laser scanning, new technologies are transforming the construction industry. Properly applied, they have the power to lower cost, improve quality and enhance safety. 

Customers contract with Balfour Beatty due to the engineering excellence and Expert capabilities of the Group and its employees. In a market where there will be increasing intense competition for the best talent, Balfour Beatty places a major focus on recruitment, training and retention in order to maintain the highest calibre workforce. The employee survey in December 2018 measured employee engagement at 65% (2017: 60%), the highest level of engagement since the introduction of the survey in 2015.

Leadership changes made at the start of 2018 are already delivering benefits. In US Construction, the promotion of two internal candidates to lead the Buildings and Civils businesses, has delivered an improved overall performance with growing momentum in the pipeline. In Support Services, where the Power T&D, Gas & Water and Rail businesses work with similar types of customers, uniting this expertise has increased flexibility and productivity.

Balfour Beatty continues its sponsorship of The 5% Club, which encourages employers to provide 'earn and learn' training opportunities to help address the UK's skills gap and drive economic prosperity more widely across society. During 2018, Balfour Beatty recruited 102 apprentices, 94 graduates and 20 trainees. The percentage of the UK workforce in 'earn and learn' positions at year end stood at 5.6%. Membership of The 5% Club now includes key customers and supply chain partners of Balfour Beatty, all committed to ensuring the sector has the right capability required to support the growing infrastructure market.

Trusted is Balfour Beatty "doing what we say we will do" and is measured by customer satisfaction. During the year, over 4,000 customer satisfaction reviews were carried out (2017: 3,375), primarily in the UK. The Group customer satisfaction average increased to 97% (2017: 94%).

Following the successful completion of Build to Last Phase One targets at the end of 2016 (£200 million Cash In: £100 million Cost Out) the Group has now delivered its Phase Two targets with all earnings based businesses achieving industry standard margins in the second half of 2018 as follows:

The Group now has a higher quality order book with work won at appropriate levels of risk and return. Combined with the Gated Lifecycle, the Digital Briefcase and Project on a Page, the governance and controls introduced under Build to Last provide management with a clear, consistent line of sight on all stages of work which is being bid and delivered, together with key tools for managing commercial risk and project execution. This common contracting framework enables Balfour Beatty to: selectively bid business to match capability; assess and price risk appropriately; track, and thus intervene on, execution all the way through the lifecycle of a project, including the defect period; and ultimately to achieve higher margins for the Construction Services and Support Services businesses.

By maintaining Build to Last disciplines, underpinned by actions which have reduced geographic, commercial, operational and financial risk, the Group continues to embed a culture of active risk mitigation by investing in capability and IT-based processes and controls. Balfour Beatty is ensuring a more collaborative working environment which is being supported by the Group's investment in systems such as the roll-out of the Microsoft Office 365 platform across the Group. Balfour Beatty is also continuing to take steps to better capture and utilise real-time data on projects to provide unparalleled transparency, efficiency and forecasting through the enhancements of visual management, collaboration with project stakeholders through BIM enhancements, and accelerating business intelligence for better business agility. 

Construction is an inherently dangerous industry. It is therefore essential that the safety and health of everyone who comes into contact with Balfour Beatty is the top priority. Each week the Executive Committee reviews the safety performance of each of the business units with particular attention to lessons which should be learnt from any high potential near miss incidents, as well as gauging the status of the Group's safety culture. Safety is also a leading indicator of future performance and productivity.

In 2018, the indicators continued to trend positively, with the Group's Lost Time Injury Rate (LTIR) (excluding international joint ventures) reducing for the fourth consecutive year to 0.15 (2017: 0.17). This LTIR is now approximately 50% of the rate when Build to Last commenced and all other key lagging indicators also continue to trend positively.

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

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

In the UK, Government policy continues to drive a strong pipeline of major infrastructure projects in transport and energy. Over the next few years, the '4Hs' - HS2 (high speed rail), new nuclear power at Hinkley Point C, the Road Investment Strategy for Highways England and the continued expansion of Heathrow airport - will contribute to the Government's investment in infrastructure commitment, which is targeted to rise from 0.8% in 2015/16 to over 1% of GDP by 2020/21.

In the US, with blue chip repeat customers such as Disney and Microsoft, the Group's Buildings opportunities are robust. In Civils in December 2015, the FAST Act (Fixing America's Surface Transportation), a US$305 billion transportation bill, was signed, providing authorised spending for a five-year period. There are further opportunities being created, for example with the number of state-backed infrastructure bonds (over US$200 billion multi-state transportation bonds, over US$35 billion of education bonds in California) and increases in: US public-private partnership schemes; state gasoline taxes; and local county sales taxes dedicated to local infrastructure.

Gammon has a material share of the attractive Hong Kong market. Both the Buildings and Civils markets are favourable with significant opportunities upcoming with the third runway at the international airport, a ten-year hospital development plan and continued investment in transportation infrastructure.

Having achieved industry standard margins, Balfour Beatty now has the platform in place to scale the business to drive profitable managed growth. The Group will look to benefit fully from its strong competitive positions in large and growing infrastructure markets to deliver market leading performance.

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 financial 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

These results demonstrate the value being created through the Build to Last programme. The Group's financial position and order book both improved in the year and Balfour Beatty is now operating from a position of strength.

In the second half of 2018, the Group successfully delivered on its Build to Last underlying PFO margin targets by delivering industry standard margins for UK Construction, US Construction and Support Services.

Net cash at year end was consistent with the prior year despite cash used in operations of £132 million (2017: £41 million generated from operations) which was negatively impacted by the Aberdeen Western Peripheral Route (AWPR) project. The average monthly net cash for the year at £194 million (2017: £42 million) was ahead of the £140 - £170 million guidance range provided during 2018.

The Group continues to have one of the strongest balance sheets in the sector with net assets increasing from £1,066 million to £1,241 million.

The order book increased by 11% to £12.6 billion, up 8% at constant exchange rates (CER) (2017: £11.4 billion). The Group's focus on disciplined bidding is continuing to build a higher quality order book capable of delivering managed profitable growth from the rising infrastructure spend in the UK, US and Hong Kong.

Underlying revenue was down 5% (3% at CER) at £7,802 million (2017: £8,234 million), following the managed reduction in the order book during 2017. Statutory revenue, which excludes joint ventures and associates, was £6,634 million (2017: £6,916 million).

Construction Services underlying revenue was down 8% (6% at CER) at £6,127 million (2017: £6,649 million) as a result of the expected decline in the US. Support Services underlying revenue was 4% higher at £1,104 million (2017: £1,061 million) with an increase in the utilities business.

2 from continuing operations

3 before non-underlying items (Note 9)

In the earnings based businesses underlying profit from operations increased 25% to £141 million (2017: £113 million), which contributed to the 5% increase in the Group's underlying profit from operations to £205 million (2017: £196 million). Statutory profit from operations was £147 million (2017: £148 million).

Construction Services improved 32% to an underlying profit from operations of £95 million (2017: £72 million) with increases in all three geographies. Support Services improved 12% with underlying profit from operations of £46 million (2017: £41 million). Following significant disposals in 2017, Infrastructure Investments underlying profit from operations decreased to £97 million (2017: £116 million).

Net finance costs decreased to £24 million (2017: £31 million) as a result of higher net finance income in relation to the Group's retirement benefit schemes and lower interest costs as the Group continues to pay down debt, partially offset by lower net income from Infrastructure Investments as a result of disposals.

Underlying pre-tax profit from continuing operations increased 10% to £181 million (2017: £165 million). The Group's underlying profit before tax resulted in an underlying tax charge of £2 million (2017: £23 million) following the recognition of deferred tax assets for some of the Group's UK historical tax losses.

Underlying profit after tax for the year including discontinued operations increased to £179 million (2017: £143 million). Total statutory profit after tax for the year was £135 million (2017: £168 million), after non-underlying items.

Non-underlying items

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 from continuing operations of £44 million were a net charge to profit for the year (2017: £20 million net credit).

The Group recognised additional retirement benefit obligations following the judgment on the Lloyds Banking Group High Court hearing with regard to Guaranteed Minimum Pension (GMP) equalisation which was published on 26 October 2018. The judgment indicated that pension trustees need to amend scheme benefits to equalise for the effect of unequal GMPs and indicated an acceptable range of methods for how to do so. The charge arising from the recognition of GMP equalisation on the Group's pension schemes amounted to £28 million and has been recognised in the Group's income statement as a plan amendment. The Group has treated this item as non-underlying due to the size and nature of the income statement charge.

The Group recognised an additional indemnity provision of £12 million in the year following the re-assessment of several projects which were indemnified by the Group as part of the disposal of Heery International Inc. This estimate is subject to final ongoing negotiations with various clients and any further gains or losses that arise as part of this indemnity obligation will be recorded within non-underlying items as part of the Heery disposal.

As a result of Carillion filing for liquidation on 15 January 2018, the Group and its remaining joint venture partner on the AWPR project, Galliford Try plc, became jointly liable to deliver Carillion's remaining obligations on the contract in addition to each partner's existing 33% share. This has resulted in the Group now having a 50% interest in the AWPR contract. Balfour Beatty recognised an additional £29 million loss on the AWPR project in 2018. A third of this charge (£10 million) has been recognised in non-underlying items as this reflects the additional loss that the Group has incurred in fulfilling Carillion's obligations on the contract. The loss incurred on Balfour Beatty's original 33% joint venture share (£19 million) is treated as part of the Group's underlying performance. The AWPR loss represents a net charge made up of cost increases on the project partially offset by recovery positions that the Group believes are highly probable to be agreed. The final section of the AWPR project was fully open to traffic on 19 February 2019 with the final financial out-turn of this contract dependent upon the result of ongoing claims discussions.

Offsetting these charges is a non-underlying provision release of £13 million relating to settlements of health and safety claims. These claims were previously included in non-underlying items as part of the Group's overall reassessment in 2016 of potential liabilities relating to historical health and safety breaches following new sentencing guidelines.

Significant other non-underlying items included £11 million of restructuring costs relating to the Group's Build to Last transformation programme and amortisation of acquired intangible assets of £8 million.

Earnings per share

Underlying basic earnings per share from continuing operations were 26.3 pence (2017: 20.9 pence), which, along with a non-underlying loss per share from continuing operations of 6.6 pence (2017: 2.8 pence gain), gave a total basic earnings per share for continuing operations of 19.7 pence (2017: 23.7 pence). Discontinued operations contributed nil pence (2017: 0.1 pence) to the total underlying basic earnings of 26.3 pence per share (2017: 21.0 pence). Total basic earnings per share were 19.7 pence (2017: 24.7 pence). 

Cash flow performance

The total cash movement in the year resulted in a £2 million increase in the Group's net cash position to £337 million (2017: £335 million), excluding non-recourse net borrowings. Operating cash flows and proceeds from Infrastructure Investments disposals were largely offset by working capital outflows and investment in new Infrastructure assets.

* excluding infrastructure concessions (non-recourse) net borrowings

Working capital

During the year, the Group's working capital position resulted in an outflow of £229 million (2017: £27 million inflow), primarily as a result of significant cash outflows on the AWPR project, reduced working capital as a result of the expected decline in revenues in US Construction, and improved supply chain payment processes.

^ excluding impact of foreign exchange and disposals

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

The decrease in trade and other payables has resulted in a working capital outflow of £196 million (2017: £92 million). This is mainly attributable to the decrease in revenues in US Construction and the Group's focus on improving payment processes resulting in faster payment of suppliers compared to the prior year.

The working capital outflow from provisions of £80 million (2017: £29 million inflow) predominantly relates to the significant AWPR cash outflows in 2018.

Including the impact of foreign exchange and non-operating items, negative (i.e. favourable) working capital decreased to £680 million at 31 December 2018 (2017: £888 million).

Net cash/borrowings

The Group's average monthly net cash in 2018 improved substantially to £194 million (2017: £42 million). The Group's net cash position at 31 December 2018, excluding non-recourse net borrowings, was £337 million (2017: £335 million). Non-recourse net borrowings, held in infrastructure concessions entities consolidated by the Group, increased to £309 million (2017: £305 million). The balance sheet also includes £106 million (2017: £103 million) for the liability component of the preference shares. Statutory net debt at 31 December 2018 was £78 million (2017: £73 million).

Pensions

Following the formal triennial funding valuation of the Balfour Beatty Pension Fund (BBPF) at 31 March 2016, the Company and the trustees agreed the key commercial principles of a plan for the BBPF to reach self-sufficiency during 2027, some three years earlier than previously planned. Under the current plan Balfour Beatty will make cash contributions totalling £116 million over the five years 2019 to 2023. There is an agreed dividend sharing mechanism such that if the dividend cover ratio falls below 2x, funding to the BBPF will be accelerated. Preparation is underway for the next formal triennial valuation of the BBPF which will be as at 31 March 2019.

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

The Group's balance sheet includes net retirement benefit assets of £54 million (2017: £32 million) representing net surpluses in the Group's pension schemes, as measured on an IAS 19 basis. The increase in pension surplus in the year is due to £30 million of employer contributions and £22 million of net actuarial gains, partially offset by a £28 million charge from the recognition of GMP equalisation.

Impact of IFRS 16

The adoption of IFRS 16 will result in a right-of-use (ROU) asset and a corresponding lease liability amounting to approximately £135 million respectively being brought onto the Group's balance sheet on 1 January 2019. There will be no impact on the Group's opening equity as a result of adopting this standard.

Outlook

Since the start of Build to Last in 2015, Balfour Beatty has: simplified and refocused the Group; strengthened leadership and governance; invested in innovation, systems and processes; and developed a culture which can drive continuous performance improvement.

Having achieved industry standard margins in the second half of 2018, the Board remains confident that the Group will perform in line with market expectations in 2019.

Balfour Beatty now has the platform in place to scale the business to drive profitable managed growth. The Group will look to benefit fully from its strong competitive positions in large and growing infrastructure markets to deliver market leading performance.

Markets

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

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

In the UK, Government policy continues to drive a strong pipeline of major infrastructure projects in transport and energy. Over the next few years, the '4Hs' - HS2 (high speed rail), new nuclear power at Hinkley Point C, the Road Investment Strategy for Highways England and the continued expansion of Heathrow airport - will contribute to the Government's investment in infrastructure commitment, which is targeted to rise from 0.8% in 2015/16 to over 1% of GDP by 2020/21.

The Group is working constructively with industry bodies and the UK Government to identify and manage any challenges caused by the UK's exit from the European Union. Balfour Beatty recognises the inherent uncertainty arising from this and has been planning for all outcomes. The Group has contingency plans in place to ensure it can continue to deliver on current and future work commitments.

In the US, Balfour Beatty operates in specific geographies. As the population migrates south and west, it is moving to cities, driving urbanisation in the Group's chosen markets. This leads directly to increased demand for buildings and infrastructure. With blue chip repeat customers such as Disney and Microsoft, the Group's Buildings opportunities are robust. In Civils in December 2015, the FAST Act (Fixing America's Surface Transportation), a US$305 billion transportation bill, was signed, providing authorised spending for a five-year period. There are further opportunities being created, for example with the number of state-backed infrastructure bonds (over US$200 billion multi-state transportation bonds, over US$35 billion of education bonds in California) and increases in: US public-private partnership schemes; state gasoline taxes; and local county sales taxes dedicated to local infrastructure.

Gammon has a material share of the attractive Hong Kong market. Both the Buildings and Civils markets are favourable with significant opportunities upcoming with the third runway at the international airport, a ten-year hospital development plan and continued investment in transportation infrastructure (Central Kowloon Highway, Mass Transit Railway (MTR) upgrades).

In Support Services, power transmission and distribution has a stable underlying market. The gas business operates in an established market and the water business is beginning to transition to the next regulatory cycle (AMP7). Transportation, which includes major road and rail maintenance contracts, is expected to grow steadily in the medium term. Local authorities provide opportunities in highways, whilst a key contract with London Underground, to deliver essential track renewal work across the network, has been re-awarded to Balfour Beatty in February 2019.

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

Dividend

Following the 1.6 pence per ordinary share interim dividend declared at the half year, the Board is recommending a final dividend of 3.2 pence per share, giving a total recommended dividend for the year of 4.8 pence per share (2017: 3.6 pence). The Board recognises the importance of dividends to shareholders and expects to deliver a continuation of the progressive dividend policy.

DIVISIONAL OPERATING REVIEWS

CONSTRUCTION SERVICES

Financial review

Construction Services continued to make good progress during the year with increasing profit, PFO margin and order book across all three chosen markets.

1 underlying revenue and order book includes share of joint ventures and associates

2 from continuing operations

3 before non-underlying items (Note 9)

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

Underlying revenue decreased by 8% to £6,127 million (2017: £6,649 million), a 6% decrease at CER as a result of a managed reduction in the order book during 2017. Revenues declined by 5% in the UK, 8% in the US (5% at CER) and 12% at Gammon (8% at CER).

Underlying profit from operations (PFO) continued to improve under Build to Last as all geographies had an increase in both absolute profit and margin percentage. The Group achieved its industry standard margin targets for UK Construction and US Construction in the second half of 2018.

1 underlying revenue and order book includes share of joint ventures and associates

2 from continuing operations

3 before non-underlying items (Note 9)

The order book at £9.8 billion (2017: £8.3 billion) increased by 18% (14% at CER) due to increases in the US (21%, 16% at CER), Gammon (23%, 14% at CER) and the UK (11%). The increases occurred whilst maintaining the Group's policy of selective bidding. The £2.5 billion (Balfour Beatty 50% joint venture) HS2 contracts won in 2017 will not be included in the order book until the conclusion of the Early Contractor Involvement (ECI) phase, now expected at the end of 2019.

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

Operational review

UK

Underlying revenue in the UK reduced by 5% to £1,900 million (2017: £1,998 million). Underlying profit from operations showed an improvement to £28 million (2017: £16 million) with an associated PFO margin of 1.5% (2017: 0.8%). In the second half of 2018, UK Construction's underlying PFO margin was 2.4%, within the 2-3% industry standard margin target range.

The UK order book increased 11% to £3.0 billion (2017: £2.7 billion). The UK Construction business continued to be selective in the work that it bids, through increased bid margin thresholds, improved risk frameworks and better contract governance.

UK Construction is continuing to manage historical problem contracts through to completion. At the start of 2015, 89 historical contracts were identified that had a material negative impact on profitability and cash. At 2018 year end, only five of these contracts were still to reach financial completion.

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

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

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

· Rail: civil engineering, track, power and electrification projects.

The Major Projects business continues to pursue a number of key infrastructure opportunities across core transportation and energy markets. Over the next few years HS2, new nuclear power (Hinkley) and airport expansion (Heathrow) will all contribute to the UK Government's investment in infrastructure, which is forecast to rise from 0.8% of GDP in 2015/16 to over 1% of GDP by 2020/21. In addition, the highways market continues to provide good growth opportunities following the UK Government's proposed £32 billion funding for Highways England's Road Investment Strategy.

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

During the year, significant progress has been made on flagship projects. In November, the UK's largest current road construction project, the A14 in Cambridgeshire, reached its half-way point. The project started in November 2016 and is on target to be completed by December 2020. Since work started, more than eight million working hours have gone into the project, with nine new bridges already opened and construction well underway on 25 more. Following Carillion filing for liquidation, Balfour Beatty has assumed Carillion's share of this contract with the revised three-way joint venture working collaboratively to deliver the project.

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

In February 2019, HS2 announced that it intends to appoint a Balfour Beatty/VINCI/SYSTRA joint venture as the construction team that will be awarded a contract to manage the construction of the £1.0 billion Old Oak Common station in London. Balfour Beatty and VINCI each have a 41.75% share in the venture, with Systra having the remaining 16.5%. Procurement processes are also underway on the rail systems contracts. In March 2018, Balfour Beatty VINCI, which will work with Balfour Beatty NG Bailey as a delivery partner, submitted the pre-qualification response for the combined railway systems Lots 1 (track and overhead catenary system works) and 2 (tunnel and open route mechanical and electrical works) worth approximately £1.9 billion. Announcement of successful pre-qualified bidders is due in 2019 with Invitation To Tenders expected late that year and contracts awarded in 2020.

On Crossrail, Balfour Beatty's three major projects: C510 (Liverpool Street and Whitechapel Station tunnels); C512 (Whitechapel Station); and C530 (Woolwich Station) all made headway during the year. C510 has achieved financial completion with the other two projects agreeing new supplementary agreements. Both projects are delivering in line with the revised completion dates.

At Sellafield, good progress has been made with the ongoing nuclear decommissioning projects. The Silo Maintenance Facility (SMF) has completed its commissioning phase and been handed over to Sellafield Ltd to allow it to decommission radioactive equipment.

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

At the Thames Tideway Tunnel project work continues on the six-kilometre west section which runs from Acton to Wandsworth. Excavation works to the tunnelling shaft at the Carnwath Road Riverside site are now complete with preparation works to launch the main tunnel boring machine well underway.

In 2018, the Aberdeen Western Peripheral Route (AWPR) project experienced schedule slippage and cost increases. In the year, Balfour Beatty recognised an additional £29 million loss on the AWPR project. A third of this charge (£10 million) has been recognised in non-underlying items as this reflects the additional loss that the Group has incurred in fulfilling Carillion's obligations on the contract. The AWPR loss represents a net charge made up of cost increases on the project partially offset by recovery positions that the Group believes are highly probable to be agreed. The final section of the AWPR project was fully open to traffic on 19 February 2019 with the final financial out-turn of this contract dependent upon the result of ongoing claims discussions.

The Major Projects business had a number of notable new contract awards in the year. In July, Balfour Beatty was awarded a project to turn the M20 junctions 8-9 into a contraflow system and convert the central reservation into a lorry park.

In November, Major Projects secured a place on two lots - B6 in the South East worth up to £1.1 billion, and B8 in the North worth up to £2 billion - on Highways England's Delivery Integration Partnership Framework. The initial packages of work which Balfour Beatty has secured through these lots are worth a total of £425 million with work commencing in 2019. This regional six-year framework will see contractors work with Highways England as partners responsible for designing and constructing motorway and major A-road projects across England. Balfour Beatty's digitally-enhanced way of working was instrumental in securing both lots. In collaboration with design partner, Atkins, Balfour Beatty will utilise Building Information Modelling (BIM) to improve efficiencies in delivering works and will also deploy offsite manufacturing techniques. This is a direct result of the Group's vision to reduce onsite activity by 25% by the year 2025, driving greater project efficiency and safety and lower waste by moving away from traditional industry methods. 

In December, a Balfour Beatty VINCI joint venture was awarded an M4 Smart Motorway contract. The project will convert the hard shoulder into an additional lane for traffic and introduce electronically-policed variable speed restrictions between junction 3 of the M4, just inside the M25 near Heathrow Airport, and junction 12 at Theale, west of Reading. As part of the works, 11 overbridges will be replaced with larger span structures and six underbridges will be widened to accommodate four lanes. The M4 project is subsequent to the same partnership being awarded a contract to convert the M6 junctions 2-4 to a Smart Motorway earlier in 2018.

The Regional business comprises:

· Regional Construction: four regions (Scotland & Ireland, North & Midlands, South and London) providing public and private customers with locally delivered, flexible and fully integrated civil and building services;

· Balfour Beatty Ground Engineering: specialist geotechnical contractor providing innovative piling and ground improvement solutions across all sectors; and

· Balfour Beatty Kilpatrick: heavy mechanical and electrical (M&E) installations and building services.

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

Within Regional, in line with the Group's strategy, the business has simplified with an improved span of control as it operates fewer projects. The number of live projects, which was over 400 at December 2015 has subsequently fallen to under 250 at December 2018. During Build to Last, there has also been a shift towards a lower risk contract portfolio, with a reduction in the number of fixed price contracts offset by an increase in two-stage fixed cost and target cost contracts and framework agreements. These agreements require early contract engagement with the customer to ensure greater clarity around scope, schedule and cost which, in combination, reduces delivery risk for all parties.

The Regional business is increasingly focused on customers with around 75% of all work won in 2018 from repeat customers. In November, Balfour Beatty won 'Partner of the Year' at the Team Heathrow Partnership awards ceremony.

The Group's largest framework agreement, the Scape National Civil Engineering and Infrastructure framework, secured £1.5 billion of civil engineering and infrastructure work under the initial four-year framework. Since being appointed as main contractor in 2015 over 100 projects have been completed on time and on budget. In October, it was announced that Balfour Beatty had been appointed as the sole contractor to Scape's second generation civil engineering frameworks, valued at a combined total of up to £2.1 billion. The Scape National Civil Engineering framework, which is valued at £1.6 billion, covers England, Wales and Northern Ireland, while the Scape Civil Engineering - Scotland framework, valued at £500 million, covers Scotland. The frameworks allow local authorities, local enterprise partnerships and other public sector bodies to commission works through a procurement process that provides the fastest route to market and utilises early contractor engagement to deliver best value design solutions.

In September, Balfour Beatty was selected by the Midlands Highway Alliance to deliver vital transport infrastructure as part of its new £500 million Medium Schemes Framework (MSF3). Balfour Beatty is one of four contractors to have been awarded a place on the framework which will cover highways improvements, maintenance and infrastructure works.

In 2018, the Regional business completed the £63 million Rossall coastal defence scheme for Wyre Council in partnership with the Environment Agency. The scheme protects the town's tramway, hospital and schools whilst reducing flood risk to 7,500 nearby residential properties through two kilometres of sea defences. Other projects completed during the year included: Balfour Beatty Kilpatrick's £178 million Urenco Tails Management Facility project; a £46 million project for Wanda at One Nine Elms which represents Balfour Beatty Ground Engineering's largest ever piling project for a non-Group customer; Aberdeen South of the City school, a £47 million project delivering a 1,350 pupil academy on behalf of Hub North Scotland and Aberdeen City Council; a £44 million 33-storey student accommodation scheme at Miles Street, London for Urbanest; a £37 million luxury retirement complex for Audley Retirement Villages at Redwood, Bristol; and the new £30 million Dundee train station and hotel.

In the year, the Regional business achieved a key milestone at the University of Manchester's £287 million Manchester Engineering Campus Development (MECD) project with the first reinforced concrete core reaching full height. The core, which is one of four, will be an integral component of the seven-storey 'MEC Hall' building, housing lift shafts and stairwells. At the University of Sussex student accommodation project, which will incorporate over 2,000 new beds as well as innovative student amenities such as social hubs and a new student union facility, nearly 40% of the rooms had been handed over by year end. Other material ongoing projects include: the £150 million Madison Tower, a 53-storey residential building in Canary Wharf, London where modular construction, including offsite manufacturing techniques, is central to Balfour Beatty's approach in delivering the 187-metre high building; a £54 million project to construct Forth Valley College, Scotland; the renovation and new-build scheme at No.1 Palace Street in St James', London; and train stations at Warrington West (new station) and Queen Street Station, Glasgow (redevelopment).

In addition to the framework wins during the year, the Regional business also had a number of notable new contract awards in the year including:

· Curzon Street: work has begun on a new-build development comprising 32 apartments at 60 Curzon Street, London;

· Vine Street: £85 million contract to construct a student accommodation scheme for Urbanest in the City of London;

· London City Airport: £60 million mechanical and electrical contract to enable growth of the airport;

· New Cross: £40 million contract for student accommodation in Manchester which will feature 274 apartments;

· University of Strathclyde: £33 million contract to construct a new learning and teaching building;

· University of Reading: £33 million contract to deliver a new Health and Life Sciences building;

· Hornsea Project Two: appointed to build the onshore substation for the world's largest offshore wind farm; and

· Midland Metropolitan Hospital: awarded a £10 million early works contract on behalf of Sandwell and West Birmingham Hospitals NHS Trust.

Included in ABNC at 31 December 2018 the Group has been selected as preferred bidder for: the redevelopment of the Darwin Building at the University of Edinburgh; a new 10-kilometre bypass connecting Caernarfon and Bontnewydd in North Wales; phase one of the East Wick and Sweetwater residential project at the Queen Elizabeth Olympic Park; and an Audley retirement village in Scarcroft, Leeds.

In the Rail Construction business, underlying revenues were broadly flat in the year. The business completed the West Outer Track Infrastructure, Western Overhead Electrification and South East Spur projects as part of its continued support of the Crossrail programme and work commenced on the examination, repair specification and report into the condition and safety of the Rhondda Tunnel. During the year, the Rail Construction business won the Reactive Building and Civils contract worth up to £50 million to perform work arising related to Network Rail's building infrastructure in the West Country.

In June, the Group launched a new Rail Innovation Centre at its Raynesway facility in Derby. The purpose-built centre is a dedicated research, development and testing facility to support Balfour Beatty's contribution to the development of the digital railway for a more reliable, cost efficient and safe railway network for all users across the UK and overseas. Omnicom Balfour Beatty, which creates remote surveying systems that give maintenance engineers a distinct advantage, is now actively applying machine learning and artificial intelligence to offer next generation asset management to customers, making the railways safer, more reliable and more efficient.

US

Underlying revenue in the US fell by 8% in the year (5% at CER) to £3,329 million (2017: £3,634 million) following the reduction to the order book during 2017. The business reported an underlying profit from operations for the year of £44 million (2017: £41 million). The underlying PFO margin was 1.3% for the full year (2017: 1.1%). In the second half of 2018, US Construction's underlying PFO margin was 1.5%, within the 1-2% industry standard margin target range. Overall the trajectory of the US business is positive and market conditions are favourable.

The 21% (16% at CER) increase in the US order book has been achieved at a quality consistent with the Group's stated policy of selective bidding for those projects best aligned with its capabilities. In June, the US$1.95 billion Los Angeles airport (LAX) Automated People Mover project reached financial completion such that the Group's 30% share of the construction contract has been included in the order book. In addition, the Group won over US$1 billion of contracts for schools and higher education, primarily in California and North Carolina, during the year.

Balfour Beatty continues to develop its US organisation, building on the standardisation and leaning out already delivered. At the start of 2018, the promotion of two internal candidates to lead the Buildings and Civils businesses, has delivered an improved overall performance with growing momentum in the pipeline.

In December 2015, the FAST Act (Fixing America's Surface Transportation), a US$305 billion transportation bill was signed, providing authorised spending for a five-year period. This bill permits longer term project planning horizons in the public market and is leading to improved visibility for publicly funded projects that had been slow to come to market. There are further opportunities being created with the number of state backed infrastructure bonds (over US$35 billion of education bonds in California, over US$200 billion of multi-state transportation bonds) and increases in: US public-private partnership schemes; state gasoline taxes; and local county sales taxes dedicated to local infrastructure.

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

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

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

· VY/Reston Heights: in January, the Group completed the 483,000 square foot, mixed-use residential development in Reston, Virginia. The 385-unit residential community includes 89,000 square feet of retail space;

· Park District: in April, Balfour Beatty completed the 916,000 square foot, mixed-used development in Dallas, Texas. The project includes a 20-storey office tower and a 34-storey residence tower;

· Icon Midtown: in October, Balfour Beatty completed work on the 39-storey residential tower in Atlanta, Georgia. Located in Atlanta's Midtown area, the project features 390 luxury apartments with 6,500 square feet of retail space; and

· Broadway Tower: in November, Balfour Beatty completed the 430,000 square foot, mixed-use development in Portland, Oregon. The project includes a 19-storey tower with 175,000 square feet of office space, 180 hotel rooms, and four levels of underground parking.

During the year good progress has been made on flagship projects including:

· REI Headquarters: in April, Balfour Beatty broke ground on a mixed-use headquarters project including office buildings, conference centre, market and parking totalling nearly 724,000 square feet in the Spring District of Bellevue, Washington;

· Capitol Crossing: in May, Balfour Beatty topped out the 12-storey 250 Massachusetts tower in Washington DC, having previously topped out the corresponding 12-storey 200 Massachusetts tower. The two towers comprising the North Block will ultimately total 960,000 square feet;

· The Epic: in June, Balfour Beatty topped out a 16-storey office tower located in Dallas which includes 290,000 square feet of office space;

· Gables Station: in July, after contract award, the Group commenced the construction phase of the 1.3 million square foot, mixed-use Gables Station development located in Coral Gables, Florida. Comprised of three towers, the development will feature 120,000 square feet of retail space, 500 residential units, and a 1,000-car parking garage; and

· 500 Folsom: at the end of the year Balfour Beatty had completed 40 floors out of 43 liveable floors and the project was topped out in January 2019. The building will provide 545 residential units in the South of Market (SOMA) district of San Francisco, California.

The Buildings business had a number of notable new contract awards in the year including:

· Los Angeles World Airports: in June, Balfour Beatty and its LAX Integrated Express Solutions (LINXS) joint venture team reached financial close of the design-build-finance-operate-maintain (DBFOM) Automated People Mover (APM) project. Balfour Beatty is a 30% joint venture partner in the US$1.95 billion construction element of the project with the work to be delivered across both the Buildings and Civils divisions;

· Microsoft Redmond Campus: the Group has been selected, in joint venture with Skanska, as general contractor on Microsoft's head office refresh in Redmond, Washington. The project will include 18 new buildings, clustered into four distinct villages to create a unified campus;

· Stovall Street: the Group has been awarded a contract by Perseus TDC for the conversion of a 610,000 square foot office building in Alexandria, Virginia. The adaptive reuse project will transform the existing 13-storey office building into a 16-storey, mixed-use residential development;

· Osprey: Toll Brothers Apartment Living has contracted Balfour Beatty as construction manager for its mixed-use, multifamily project in West Midtown Atlanta, Georgia. Balfour Beatty is leveraging Prescient's modular construction technology and offsite manufacturing platform to build the project's entire tower structure;

· Wellington Green: ZOM Senior Living has contracted Balfour Beatty as construction manager for the first phase of Wellington Green Senior Living, its mixed-use senior housing community located in Wellington, Florida; and

· Shoal Creek: Balfour Beatty has been selected to deliver the first phase of the mixed-use portion of The Grove project in Austin, Texas. The 400,000 square foot development will include a commercial office building, retail space, and a 538-car parking garage.

Included in ABNC, the business has been made preferred bidder for: a US$605 million contract for the Broward County Convention Center Expansion and Headquarters Hotel; a US$150 million contract for an Atlanta airport hotel; a US$120 million contract for a 390,000 square foot office tower, 200-room hotel and adjoining outdoor public plaza in Bethesda, Maryland; and a US$55 million contract for the University of North Carolina Marriott Hotel and Conference Center in Charlotte.

The Civils business continues to operate in the largely regulated markets of rail, water and road. In March 2018, Civils completed the construction of Charlotte's light-rail extension (Blue Line) after four years of build. The 9.6-mile (15.45-kilometre) Blue Line provides service to 15 stations located within the Charlotte city limits. In December, the new Surf City high-rise bridge opened nine months ahead of schedule connecting the mainland of Surf City to the popular tourist destination of Topsail Island in North Carolina.

Additionally during the year, good progress has been made on key contracts with mobilisation at both the US$625 million Southern Gateway (45% Balfour Beatty, 55% Fluor) and US$1.08 billion Green Line extension (25% Balfour Beatty) projects. At Southern Gateway, an 11-mile stretch of road in Dallas, Texas, the design is now complete, with the widening of frontage roads and mainline barrier demolition well underway. At Green Line, a 4.7-mile commuter rail extension in Boston, Massachusetts, the design is near complete and construction activities commenced in the second half of 2018. At Caltrain, a US$697 million contract for the electrification of the 52-mile rail corridor between San Francisco and San Jose, design work is near complete and foundation work and overhead catenary system construction are ongoing.

In addition to its involvement with the Buildings business in the Los Angeles World Airports project described above, the Civils business had a number of notable new contract awards in the year including:

· EchoWater Project: in April, Balfour Beatty was awarded a US$299 million contract by Sacramento Regional County Sanitation District to construct a new water treatment plant that will produce cleaner water for discharge to the Sacramento River, as well as for potential reuse as recycled water; and

· Sterling Valley Water: US$150 million contract to construct a wastewater treatment facility that will recharge the natural groundwater aquifer by treating up to eight million gallons of water per day. The project will create a drought-proof source of water for the local aquifers which serve over 800,000 San Bernardino Valley area residents.

Gammon

At Gammon, Balfour Beatty's 50:50 joint venture based in Hong Kong, the Group's share of underlying revenue decreased by 12% (8% decrease at CER) to £898 million, consistent with the reduction in order book in 2017. Underlying profit increased to £23 million (2017: £15 million), and the order book increased by 23% (14% at CER) to £1.6 billion as a result of significant wins in the Buildings and Civils businesses. At Gammon, the timing of orders is more variable around a small number of large contracts.

Gammon has a material share of the attractive Hong Kong market. Both the Buildings and Civils markets are favourable with significant opportunities upcoming, including: a third runway at the international airport; a ten-year hospital development plan; and continued investment in transportation infrastructure (Central Kowloon Highway, Mass Transit Railway (MTR) upgrades). The order book is spread across a number of public and private customers. In Buildings, the focus is on productivity, efficiency and expanding the customer base on a selective basis. In Civils, the strategy is to lever competitive advantage with a key area of future work likely to be from significant infrastructure programmes in Hong Kong and the Rail Circle Line in Singapore.

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

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

· Lyric Theatre Complex: HK$5.5 billion contract to construct the final stage of the Lyric Theatre Complex. Gammon has supported the delivery of the development of the Lyric Theatre Complex since 2016 when it was awarded a first contract by the West Kowloon Cultural District Authority (WKCDA) to deliver the foundation works, for which it twice received the WKCDA highest commendation for safety performance. In January 2018, Gammon won a further contract award to deliver the public infrastructure and extended basement works. This third contract forms the final stage of the Lyric Theatre development;

· Lohas Park: HK$4 billion construction contract for a large scale residential development at Tseung Kwan O bay in the Sai Kung District, Hong Kong. The development will include the construction of three 54-56 storey residential towers on a five-level podium;

· Tuen Mun-Chek Lap Kok Link: HK$2.6 billion Northern Connection Tunnel Buildings contract for the Highways Department of the Government of the Hong Kong Special Administrative Region. The works comprise the provision of electrical and mechanical facilitation to serve the newly constructed 5-kilometre tunnel from Tuen Mun to Boundary Crossing Facilities Island and will include the tunnel's ventilation, road lighting, central monitoring and control systems;

· Sai Sha Road widening project: HK$2.3 billion contract in a 50:50 joint venture with Sanfield (Management) Ltd for the development project in Shap Sze Heung, Sai Kung, Hong Kong;

· M+ project: appointed by the WKCDA as the management contractor to oversee completion of the M+ project, a museum for visual culture, in Hong Kong; and

· Global Switch: S$253 million data centre contract in Singapore for Global Switch, a leading owner, operator and developer of large-scale, carrier and cloud neutral, multi-tenanted data centres.

Further, in January 2019 Gammon was awarded the Homantin luxury residential project by Gold Topmont Ltd. The project, worth HK$2.9 billion, will become an iconic landmark in the prestigious Homantin residential area in Kowloon, Hong Kong.

Since the start of 2015, Balfour Beatty has exited construction activities in the Middle East, Indonesia, Malaysia, Australia and Canada.

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.

Support Services revenue increased by 4% to £1,104 million (2017: £1,061 million), driven by an increase in utilities. Underlying profit from operations and PFO margin for the year increased to £46 million (2017: £41 million) and 4.2% (2017: 3.9%) respectively. In the second half of 2018 the underlying PFO margin was 5.2%, above the industry standard margin target range of 3-5%. The order book decreased 10% to £2.8 billion (2017: £3.1 billion) as an increase in transportation was more than offset by the expected decline in gas and water.

1 underlying revenue and order book includes share of joint ventures and associates

3 before non-underlying items (Note 9)

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

In 2019, the Group expects a revenue decline in Support Services following the conclusion of the Area 10 highways maintenance contract and a reduction in power transmission and distribution. Support Services underlying profit from operations is expected to be broadly in line with 2018 with the underlying PFO margin expected to increase year on year.

Operational review

Underlying utilities revenue increased by 7% to £651 million (2017: £608 million), driven by an increase at power transmission and distribution. The utilities order book reduced to £0.9 billion (2017: £1.3 billion) as an increase at power was more than offset by the expected decline in gas and water as the current regulatory cycles approach the end of their periods.

Despite the increased revenue, the power transmission and distribution business continues to undergo restructure and cost removal. The business has consolidated its strategy to focus primarily on both core clients and core markets. The actions taken will ensure that the business is focused on the most profitable areas of its market.

In the year, power transmission and distribution successfully installed 148 new composite poles to connect the Dorenell wind farm to Blackhillock substation. The business has continued its work on the Eleclink project, in conjunction with the Rail business, to lay two 50-kilometre cables through the Channel Tunnel and connect them to converter stations in Northern France and Kent. In Folkestone the seven-metre high Helix cable management system has been filled with the first 2.5-kilometre section of cable ready to be pulled into the Channel Tunnel.

After a period of consolidation, notable new contract awards in the year included:

· Hinkley Point: National Grid contract for cabling works which will form part of the Hinkley Point C connection scheme. The contract involves the design, supply and construction of a new 8.5-kilometre 400kV double circuit cable route from Loxton in the Mendip Hills to a new substation at Sandford;

· Two contracts worth c.£47 million for the Fort Augustus to Fort William 132kV Transmission Reinforcement project; and

· Two contracts worth c.£43 million for the Beauly to Keith 132kV modernisation programme.

In January 2019, Balfour Beatty was appointed to deliver a £214 million contract to provide 400kV overhead lines from Hinkley Point C on behalf of National Grid. As part of the contract, Balfour Beatty will design, supply, install, test and commission a new overhead line spanning 48.4 kilometres and crossing through the Mendip Hills in Somerset. On completion, the new line will connect the power station with a new substation in Avonmouth, Bristol. This contract represents the fourth major piece of work won by Balfour Beatty for the new power station, following the electrical works package in joint venture with NG Bailey in 2015, now part of the MEH Joint Venture, the tunnelling and marine works package in 2017 and the 8.5-kilometre cabling contract won in 2018.

In gas, Balfour Beatty delivers network maintenance and asset growth for the largest gas distribution companies in the UK and Ireland. The Group expands and renews underground mains, often in busy and high-impact residential and commercial areas. Working on long-term contracts, the business manages and delivers work, minimising the impact this essential work has on local communities. The gas market is in the RIIO-GD1 period until early 2021. During the year the business managed two long-term gas contracts which made losses in 2018. Leadership changes have been made with a recovery plan put in place.

The water business is now coming towards the end of the UK water regulatory cycle (AMP6 2015 - 2020). Many water contracts are extended over multiple AMP periods and the Group has already started to engage on the AMP7 planning cycle.

In the year, the gas and water business successfully dealt with the 'Beast from the East' storm by tackling burst water mains throughout its areas of operation. In addition the business successfully completed the new Mayflower water treatment facility for South West Water. The Mayflower facility near Roborough, north of Plymouth, replaced the existing Crownhill facility, which dated from the 1950s and had reached the end of its natural life. Capable of delivering up to 90 megalitres of high-quality drinking water per day, the new works will meet the needs of a growing population.

Underlying transportation revenues were stable at £453 million (2017: £453 million). The transportation order book increased to £1.9 billion (2017: £1.8 billion), due to a number of contract wins for Network Rail.

Balfour Beatty continues to maintain, manage and operate major highway and road networks across the UK. The largest contract, M25 Connect Plus, will continue for another 20 years. In October, the Group was awarded a seven year, £103 million contract by Telford and Wrekin Council for the maintenance of local highways assets. During the year, Balfour Beatty decided not to re-tender for the Area 10 contract in the North-West of England.

The rail services business won a number of plant contracts for Network Rail in the year including:

· A seven-year contract worth in excess of £115 million for the supply, operation and maintenance of 13 track maintenance 'tampers'; and

· A four-year contract worth in excess of £40 million for the operation and maintenance of Network Rail's fleet of track maintenance 'stoneblowers'.

In February 2019, Transport for London re-appointed Balfour Beatty to deliver the new London Underground track renewals contract, valued at up to £220 million over four years. Balfour Beatty was first appointed in 2002, with the contract already extended on a number of occasions. The Group's detailed knowledge and experience of London Underground's infrastructure and systems, as well as its commitment to championing innovation, was instrumental in securing the contract.

INFRASTRUCTURE INVESTMENTS

Financial review

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

The Group achieves enhanced returns when Infrastructure Investments, Construction Services and Support Services deliver as one. There is an inherent advantage in bidding for projects when the Infrastructure Investments business utilises the expertise of Construction Services and Support Services. Additionally, the negative working capital generated in the Construction Services business provides opportunity for Infrastructure Investments.

Following significant disposals in 2017, underlying profit from operations decreased to £97 million (2017: £116 million), with both pre-disposal operating profit and profit from disposals lower than the prior year. Pre-disposals underlying operating profit decreased to £17 million (2017: £30 million) as a result of the prior year disposals, refinancing costs on the Connect Plus M25 asset and write-downs on two UK investment assets, partially offset by overhead savings. Underlying profit on disposals decreased to £80 million (2017: £86 million). Net interest income decreased to £16 million (2017: £24 million) as a result of the prior year disposals with underlying profit before tax at £113 million (2017: £140 million).

3 before non-underlying items (Note 9)

+ 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

In 2018, the Infrastructure Investments business added five new projects and disposed of five projects (two full disposals, three partial disposals).

In January 2018, the business was named preferred bidder on the Automated People Mover project at Los Angeles airport. Financial close was reached in June 2018 and Balfour Beatty owns a 27% equity stake in the project.

In the private rented and regeneration sector, the North American business acquired: a 7.5% stake at the Riverchase Landing multifamily housing project located in Birmingham, Alabama; a 50% stake at the Providence at Zephyr Ridge project, located in Tampa, Florida; a 50% stake in the Ridgeland 220-unit community project in Jackson, Mississippi; and a 15% stake at Southwind, a 306-unit apartment community located in Memphis, Tennessee. Balfour Beatty Communities will perform property management services for the properties, leveraging its existing capabilities.

In February 2018, the Group made a 5% partial sale in Connect Plus, the company which operates and maintains the M25 orbital motorway, for £42 million. The Group retains a 15% interest in the Connect Plus M25 asset. In July, Connect Plus completed a refinancing.

In September, the Group disposed of its entire 50% interest in Fife Hospital for £43 million. Following this disposal, the Group only owns one material private finance initiative (PFI) healthcare asset.

In December, the Group sold an 80% interest in its University of Edinburgh student accommodation project for £24 million. In addition, before year end, the Group disposed of its Nesbit Palisades private rental housing in Alpharetta, Georgia, for cash proceeds of £3 million and there was a partial sale of phase one of the University of Texas, Dallas student accommodation project, where the Group reduced its interest from 91% to 10%, generating proceeds of £13 million.

At 31 December 2018, three projects had not yet reached financial close (2017: five projects).

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

Directors' valuation

The Directors' valuation reduced by £93 million to £1,151 million (2017: £1,244 million), primarily due to £187 million being realised from divestments in the year (2017: £105 million). The number of projects in the portfolio increased from 71 to 74. This reflected continued success in targeted sectors with five new projects included in the Directors' valuation for the first time.

Movement in value 2017 to 2018 £m

5 2017 valuation includes £62 million relating to the 7.5% partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. These proceeds were received on 23 February 2018

The Group invested £58 million (2017: £35 million) in new and existing projects. Cash yield from distributions amounted to £89 million (2017: £53 million) as the portfolio continued to generate cash flow to the Group net of investment.

The business continued its strategy of maximising value through recycling equity from operationally proven projects, whilst preserving interests in strategic projects that offer opportunities to the wider Group.

In February 2018, the Group received £104 million from 12.5% partial sales in Connect Plus, the company which operates the M25 orbital motorway, on completion of a 7.5% sale agreed in December 2017 and a further 5% sale agreed subsequently in February 2018. In the second half of the year, the Group sold its interests in Fife Hospital and the Nesbit Palisades multifamily housing project, and completed partial sell-downs of its interests in the University of Edinburgh student accommodation project and phase one of the student accommodation project at the University of Texas, Dallas. In total, £187 million of proceeds were received in 2018.

Unwind of discount at £96 million (2017: £97 million) is a function of moving the valuation date forward by a year with the result that future cash flows are discounted by one year less. Operational performance movements resulted in an £18 million increase in the value of the portfolio (2017: £33 million), consisting mainly of an exchange rate gain of £36 million on the US portfolio offset by a number of changes in cash flow forecasts, discount rates and economic assumptions, including in respect of two UK investment assets which were written down in the year.

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

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

The Investments portfolio is now more heavily weighted to North America (UK 43%, North America 57%). Within the UK, roads is still the largest sector despite the partial sales of the Connect Plus M25 investment, whilst in North America US military housing represents the majority of the portfolio. The Investments portfolio includes £1 billion of projects that have completed the construction phase and are operational.

Portfolio valuation December 2018

Value by sector

5 2017 valuation includes £62 million relating to the 7.5% partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. These proceeds were received on 23 February 2018

Value by phase

5 2017 valuation includes £62 million relating to the 7.5% partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. These proceeds were received on 23 February 2018

Value by income type

5 2017 valuation includes £62 million relating to the 7.5% partial disposal of the Connect Plus M25 asset, as the disposal proceeds had not been received at year end. These proceeds were received on 23 February 2018

UK portfolio

In the year, £34 million was invested across four projects in the portfolio: Aberdeen Western Peripheral Route; Irish Primary Care; Welland Bio Power; and the regeneration development at East Wick and Sweetwater.

In February 2018, there were partial sales of 12.5% of the Connect Plus M25 asset, comprising the completion of a 7.5% sale agreed in December 2017 and a further 5% sale agreed subsequently in February 2018, which generated proceeds of £104 million. In September, the Group completed the sale of its entire 50% interest in Fife Hospital for a cash consideration of £43 million. In December, the Group sold an 80% interest in its investment in the University of Edinburgh student accommodation project which generated proceeds of £24 million.

In aggregate operational performance movements resulted in a £21 million reduction in value arising from the net effect of revised cash flow forecasts and discount rates for certain projects, including in respect two investment assets which were written down in the year.

Discount rates applied to the UK portfolio range between 7% and 11.5% depending on project risk and maturity. The implied weighted average discount rate for the UK portfolio is 8.5% (2017: 8.5%). A 1% change in discount rate would change the value of the UK portfolio by approximately £49 million.

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

North American portfolio

In 2018, the business won five projects: four investments in private rental housing portfolios at Birmingham (Alabama), Zephyrhills (Florida), Ridgeland (Mississippi) and Memphis (Tennessee); and a PPP project to construct and operate the Automated People Mover at Los Angeles Airport in California.

Investment of £24 million was made during the year in two existing and four new projects: a PPP data centre in Canada; a student accommodation project at Purdue University; and the stakes acquired in the four private rental housing portfolios.

In December, the Group completed the sale of its investment in the Nesbit Palisades multifamily housing project in Alpharetta, Georgia generating cash proceeds of £3 million. In addition, there was a partial sale of the Group's investment in phase one of the University of Texas, Dallas student accommodation project which generated proceeds of £13 million.

Operational performance movements resulted in a £39 million increase in the value of the portfolio, consisting mainly of an increase of £36 million due to exchange rate movements, together with some revised cash flow forecasts and discount rate assumptions for certain projects.

Discount rates applied to the North American portfolio range between 7.5% and 10.5%. The implied weighted average discount rate is 8.2% (2017: 8.2%) and a 1% change in the discount would change the value of the North American portfolio by approximately £86 million.

Under the Tax Cuts and Jobs Act passed by the US Government in December 2017 there are provisions to restrict the tax deductibility of interest expense. The Group's assessment of the provisions is that the restriction will not have a material effect on the Directors' valuation.

OTHER FINANCIAL ITEMS

Taxation

The Group's underlying profit before tax from continuing operations for subsidiaries of £153 million (2017: £106 million) resulted in an underlying tax charge of £2 million (2017: £23 million) following the recognition of deferred tax assets for some of the Group's historical UK tax losses. 

Goodwill

The goodwill on the Group's balance sheet increased to £903 million (2017: £874 million) as a result of foreign exchange movements. The Group has conducted impairment reviews on its goodwill balance at the year end and has concluded that it was fully recoverable.

Factoring

During the year, the Group closed its bank-supported supply chain financing arrangements (2017: £0.2 million drawn).

Banking facilities

The Group's core committed revolving credit facilities total £400 million and extend to December 2020. The purpose of the facilities is to provide liquidity from a set of core relationship banks to support Balfour Beatty in its activities. At 31 December 2018, these facilities were undrawn.

Financial risk factors and going concern

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

The Group's US private placement and committed bank facilities contain certain financial covenants, such as the ratio of the Group's EBITDA to its net debt which needs to be less than 3.0 and the ratio of its EBITA to net borrowing costs which needs to be in excess of 3.0. These covenants are tested on a rolling 12-month basis as at the June and December reporting dates. At 31 December 2018, both these covenants were passed as the Group had net cash and net interest income from a covenant test perspective.

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

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

· the Group has a strong order book;

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

· excluding the non-recourse net borrowings of PPP subsidiaries, the Group had net cash balances of £337 million at 31 December 2018;

· the Group's portfolio of Infrastructure Investments comprises reasonably realisable securities which can be sold to meet funding requirements as necessary; and

· the Group has access to committed credit facilities totalling £400 million through to December 2020. At 31 December 2018, these facilities were wholly undrawn.

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

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 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 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 years:

Statutory measures

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

Where a standard allows certain interpretations to be adopted, the Group has applied its accounting policies consistently. These accounting policies can be found on pages 120 to 127 of the Annual Report and Accounts 2018.

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.

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 2018. 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 Investment portfolio. Refer to section (h).

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

+ Refer to Note 4.3 in the Annual Report and Accounts 2018.

b) Underlying performance

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

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

· costs of major restructuring and reorganisation of existing businesses;

· acquisition and similar costs related to business combinations such as transaction costs; 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 9.

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

Reconciliation of 2018 statutory results to performance measures

Reconciliation of 2018 statutory results to performance measures by segment

Reconciliation of 2017 statutory results to performance measures

Reconciliation of 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 7 and Note 8.

d) Underlying earnings per share

In line with the Group's measurement of underlying performance, the Group also presents its earnings per share 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 £194 million for 2018 (2017: £42 million).

Using a statutory measure, which is derived using the average opening and closing figures for the year, inclusive of non-recourse elements and the liability component of the Company's preference shares, gives average net borrowings of £76 million for 2018 (2017: £117 million).

h) Directors' valuation of the Investments portfolio

The Group uses a different methodology to assess the value of its Investments portfolio. As described 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 £1.15 billion at year end (2017: £1.24 billion). The Directors' valuation will differ from the statutory carrying value of these investments, which are accounted for using the relevant standards in accordance with IFRS rather than a discounted cash flow approach.

Reconciliation of the net assets of the Infrastructure Investments segment to the comparable statutory measure of the Investments portfolio included in the Directors' valuation

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

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

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

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

As referred to in the 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 reporting period.

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

i) Constant exchange rates (CER)

The Group operates across a variety of geographic locations and in its statutory results, the results of its overseas entities are translated into the Group's presentational currency at average rates of exchange for the period. The Group's key exchange rates applied in deriving its statutory results are shown in Note 4.

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).

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 58 to 66 of the Annual Report and Accounts 2018.

No representation or warranty is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved, and projections are not guarantees of future performance. Forward-looking statements speak only as at the date of this 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 its historical earnings per share. As a result, you are cautioned not to place any undue reliance on such forward-looking statements.

Group Income Statement

For the year ended 31 December 2018

Group Statement of Comprehensive Income

For the year ended 31 December 2018

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

Group Statement of Changes in EquityFor the year ended 31 December 2018