Balfour Beatty Regulatory News (BBY)

http://www.rns-pdf.londonstockexchange.com/rns/3723I_1-2015-3-25.pdf 

BALFOUR BEATTY PLC RESULTS FOR THE FULL-YEAR ENDED 31 DECEMBER 2014

25 March 2015

Summary

· Total revenue1,2 of £8.8 billion, up 2% at constant exchange rates (CER); order book2 at £11.4 billion (2013: £11.8 billion), down 7% at CER.

· Total loss for the year of £59 million (2013: £35 million).

· UK construction losses include a further £118 million write-down, following an assessment of the existing risk provisions by the Board.

· International construction revenues up 24% at CER to £1.0 billion, predominantly due to Hong Kong based joint venture; Middle East construction underlying losses of £15 million.

· Investments delivers consistently strong performance, with underlying profit from operations increased to £127 million (2013: £102 million). Directors' valuation of Investments portfolio at £1,300 million (2013: £766 million).

· Strengthened balance sheet with £219 million net cash. Net assets increased to £1,230 million (2013: £1,035 million), including a £306 million reduction in the pension deficits to £128 million.

· The Board decided not to recommend a final dividend, to ensure balance sheet strength is maintained, but expects to reinstate the dividend at an appropriate level, by March 2016.

· 'Build to Last' business transformation programme has gained early momentum. Phase 1 is 24 months of self-help: to deliver £200 million cash flow improvement and £100 million cost savings versus 2014.

· Significant progress in first 12 weeks of 2015 with Board changes, senior leadership appointments, programme work streams established and consolidation of UK support functions already underway.

Notes:

1 including share of joint ventures and associates

2 from continuing operations

3 before non-underlying items (Note 8)

4 re-presented to classify Parsons Brinckerhoff and Rail Italy as discontinued operations; to include results of Rail Germany, which no longer meets the definition of a discontinued operation, as non-underlying items, and to show the results of certain legacy Engineering Services contracts as non-underlying items (Notes 3.5 and 10)

Leo Quinn, Group Chief Executive commented: "Balfour Beatty is a global name built on the exceptional engineering skills of its people. This strength is evidenced by the continuing flow of landmark contracts across the Group. The business model also balances Construction Services and Support Services with a successful Investments business which will continue to create significant value.

"Over the next two years we should work through the severe legacy of "problem" construction projects. However, in tackling the cultural change required to ensure these issues are behind us, we face major short-term challenges. The key is that we are determined to address this through self-help. Our transformation programme, Build to Last, is gaining rapid traction and we are driving initial improvements of £200 million cash in, £100 million cost out over 24 months. In addition, our Investments portfolio will provide the financial flexibility of both reliable income and the sale of maturing assets into a strong market.

"To maintain balance sheet strength throughout this period, we have already cancelled the share buyback and re-phased our pension fund payments with the support of the trustee. We have also decided not to recommend a final dividend this year, but expect to reinstate the dividend at an appropriate level by March 2016.

"I remain convinced that all our operations can achieve industry-standard performance as markets improve. The real prize is a sustainable return to profitable growth, built on the Group's unique capabilities, underpinned by leaner, stronger processes and flawless execution. Longer term we believe that as a leader in its core markets Balfour Beatty should be able to deliver superior returns to the benefit of its customers, employees and shareholders."

DIVISIONAL HIGHLIGHTS:

Construction Services

· Underlying revenue1,2,3 flat at £6.6 billion.

· Underlying loss2,3 for the year of £209 million (2013: profit £18 million) reflecting a very poor performance from the UK construction business. Total loss2 for the year of £391 million (2013: £103 million).

· UK construction revenues1,2,3 fell by 6% to £2.35 billion. Growth in Major Projects was more than offset by reductions elsewhere. The business remains focused on implementing the recommendations of the KPMG review, to return to profitability and peer group margins.

· Senior leadership within the UK Regional and Engineering Services businesses will be strengthened by the introduction of a new chief operating officer.

· US revenues1,2 remained flat in the year at £3.0 billion (up 5% at constant exchange rates). Order book at CER maintained flat as a result of good order intake. In 2014, the business was the third-largest building market contractor in the US by revenue.

· Revenues from the international business1,2 grew by 24% at CER to £1.0 billion, predominantly due to Gammon, the Hong Kong based joint venture.

· Middle East construction underlying losses of £15 million largely due to two specific contract positions within the mechanical and electrical engineering joint venture.

Support Services

· Revenue1,2 for the year was up 1% at £1,273 million, with a 35% increase in transportation revenues being largely offset by expected revenue decline in the power sector.

· Underlying profit2,3 from operations was down 9% at £50 million (2013: £55 million), with an underlying operating margin of 3.9% (2013: 4.3%). Good performances in the water sector, including the settlement of multi-year commercial issues, and the transportation sector, were offset by lower volumes in power.

Infrastructure Investments

· Infrastructure Investments achieved record financial results, with future value underpinned by Investments portfolio.

· Directors' valuation increased to £1,300 million (2013: £766 million) despite realising £159 million of disposal proceeds and £92 million of other distributions.

· Underlying pre-tax profits3 increased to £162 million (2013: £132 million), driven by increases in profits on disposal, pre-disposals operating profits and net interest income.

· Number of investments within the portfolio increased to 66 (2013: 61) as the portfolio continued to expand into new sectors and geographies.

· Group has a strong pipeline of new investment opportunities and expects to invest over £300 million over the next five years. Directors estimate the value of the future pipeline at an additional 10%-15% of the Directors' valuation of the Investments portfolio.

Analyst/investor enquiries:

Peter Young - peter.h.young@balfourbeatty.com

Tel. +44 (0)20 7216 6824

Media enquiries:

Dominic Cheetham - dominic.cheetham@balfourbeatty.com

Tel. +44 (0)20 7963 4235

Tulchan Communications:

Andrew Grant/David Allchurch - dallchurch@tulchangroup.com 

Tel. +44 (0) 207 353 4200

Analyst presentation:

A presentation to analysts and investors will be made at London Stock Exchange, The Forum, 10 Paternoster Square, London EC4M 7LS at 08:30 (UK time) on 25 March 2015.

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

2014 FULL YEAR RESULTS PRESS RELEASE

1. RESULTS OVERVIEW

2. GROUP CHIEF EXECUTIVE'S REPORT

3. OPERATING REVIEWS

4. FINANCIAL SUMMARY

5. FINANCIALS

RESULTS OVERVIEW

Underlying revenue from continuing operations including joint ventures and associates was broadly in line with last year at £8,440 million (2013: £8,478 million), and up 2% at constant exchange rates (CER). The order book declined by 4% to £11.4 billion (2013: £11.8 billion), down 7% at CER.

Total loss from continuing operations for the year, including non-underlying items, was £281 million (2013: £33 million). The results of certain legacy Engineering Services (ES) contracts where there has been poor management and in regions where ES has withdrawn from tendering for third-party work, have been classified as non-underlying items as the exceptional size and nature of the losses distorts the underlying performance of the Group. Total loss from continuing operations includes £88 million of losses on these legacy ES contracts (2013: £nil) and £53 million of trading and impairment charges in Rail Germany (2013: £60 million). The underlying loss from operations was £58 million (2013: £146 million profit).

Net finance costs of £23 million increased by £7 million on the prior year (2013: £16 million) due to the convertible bonds issued in December 2013 and an increase in pension net interest expense.

Total reported loss before tax from continuing operations was £304 million (2013: £49 million). Profit from discontinued operations of £242 million (2013: £18 million), including a net gain on the disposal of Parsons Brinckerhoff of £234 million, resulted in a total loss for the year of £59 million (2013: £35 million).

The financial results include additional write-downs affecting the financial performance of the Construction Services division, which can be summarised as follows:

· In January 2015, having just received the results of the KPMG review on the operational issues in the UK construction business, the Board announced £70 million of contract write-downs and that it would also assess the overall level of contract risk provisions in that business - the outcome of which would be announced at the full-year results in March 2015. The Board has now completed this process and concluded that further risk provisions of £118 million are appropriate. In line with KPMG's recommendations this assessment was essentially completed in two parts.

Firstly, a detailed review of the most significant individual contracts was performed, including current performance as part of the normal year end procedures with the objective of achieving an increased level of prudence. Adopting a cautious view this resulted in additional contract risk and other provisions of £67 million. Of this £7 million was recorded against the legacy ES contracts in non-underlying trading.

Secondly, across the remainder of the portfolio, and generally covering the smaller contracts, a risk-based approach was adopted based on recent performance of individual delivery units and market conditions. This resulted in an assessment of additional contract risk provisions of £51 million.

· Middle East construction underlying losses of £15 million largely due to two specific contract positions within the mechanical and electrical engineering joint venture business.

The Group's net cash position at 31 December 2014 was £219 million (2013: net debt £66 million), excluding net cash in discontinued businesses of £15 million (2013: £19 million) and £445 million (2013: £354 million) of non-recourse net borrowings held in wholly owned infrastructure concessions. In addition the liability component of the preference shares totals £96 million.

The pension deficits included on the Group's balance sheet reduced by £306 million to £128 million (2013: £434 million). The Group recorded net actuarial gains on those schemes totalling £237 million (2013: losses £117 million).

Underlying loss per share for continuing operations was 11.5 pence (2013: earnings 15.3 pence), which along with underlying earnings per share from discontinued operations of 3.5 pence (2013: 6.2 pence) gave an underlying loss per share for total operations of 8.0 pence (2013: earnings 21.5 pence). Total loss per share for continuing operations was 43.9 pence (2013: 7.5 pence). Total loss per share for the Group was 8.6 pence (2013: 5.1 pence).

Whilst the Board continues to recognise the importance of the dividend to its shareholders, in order to ensure balance sheet strength is maintained during the transformation programme it will not be recommending a final dividend payable for 2014. This results in a total dividend for the year of 5.6 pence (2013: 14.1 pence). The Board will look to reinstate the dividend in March 2016, at an appropriate level.

GROUP CHIEF EXECUTIVE'S REPORT

Balfour Beatty's underlying performance has been declining since 2010, with the sharpest and most noticeable decline occurring over the last 12 months. This has been caused not only by the significant operational issues impacting Construction Services UK over the last two years, but also because the cost base of the Group is too high and there have been significant working capital outflows since 2009. This trajectory has made it imperative to identify and address the key issues rapidly, in order to begin at once to restore the Group to strength.

Understanding the problems

Over the last few months, independent reviews have been underway on operations that account for 70% of the Group by turnover and the remainder should be underway by the end of the summer. Already it is clear from the outputs - as well as from wide-ranging discussions with senior operational leaders - that the root cause lies in the Group's rapid fourfold revenue expansion since 2000, largely by acquisitions which were insufficiently integrated. This resulted in an overly complex, devolved organisation with poor controls and weak disciplines in cost control and project bidding. Following a major industry downturn, the UK construction business was extensively restructured in successive waves and began to exhibit serious project issues which, together with other factors, resulted in substantial operating losses for the Group. The cost base remains too high, with current Group-wide overheads approximately 1% of revenue above industry benchmarks.

Importantly, however, the Group retains many core strengths: a strong brand and reputation underpinned by market-leading and innovative engineering capability, deep customer relationships as demonstrated by important recent contract awards, geographic span and scale, and the commitment of a talented and dedicated workforce. The business model also balances Construction Services and Support Services with a successful Investments business which will continue to create significant value. This business provides an important anchor to the Group's balance sheet and profits, while creating real and substantial opportunities for the Construction Services operations in the UK and North America and Support Services in the UK.

Build to Last

In mid-February 2015 the Group launched its Build to Last programme. This is designed to address the Group's performance as it affects all stakeholders - customers and supply chain, employees and subcontractors, investors and communities - by driving continuous measurable improvement against four goals:

LEAN: Deliver rapid performance improvement by strengthening operational and financial controls and transparency and simplifying the organisation with detailed indirect cost reduction plans, plus the launch of the My Contribution productivity initiative across the whole organisation. Similarly, apply these processes to lean out delivery for customers as a value added capability, eliminating waste (Zero Waste) in scheduling and materials. Metric: operating profit and operating cash generation.

EXPERT: Customers value the Group's engineering, design and delivery capability. Balfour Beatty will attract, retain and develop key employees and subcontractors in an increasingly competitive environment, by investing in training and talent to enhance the Group's engineering, design and project management and delivery capability. Metric: annual engagement survey and employee retention.

TRUSTED: Delivering on business promises through strengthening the successful execution of projects and services through disciplined stage-gated bidding, contracting and risk review processes. Metric: customer satisfaction.

SAFE: Nothing is more important. If Balfour Beatty is not safe it is not in business. Safety is a non-negotiable licence to operate - at all levels and for all employees, subcontractors, customers and communities. Metric: Zero Harm.

Phase One financial targets

The initial phase of Build to Last specifically aims within 24 months to improve operating cash flow by £200 million and achieve £100 million of overhead and procurement cost savings, against 2014 levels. The key is the determination to address this through self-help and Build to Last is already gaining rapid traction. In addition, the Investments portfolio will provide the financial flexibility of both reliable income and the sale of maturing assets into a strong market.

Over time the aim is that all the Group's operations can achieve industry-standard performance as markets improve. The real prize is a sustainable return to profitable growth, built on the Group's unique capabilities, underpinned by leaner, stronger processes and flawless execution. 

Longer term the aim is that, as a leader in its core markets, Balfour Beatty should be able to deliver superior returns to the benefit of its customers, employees and shareholders.

Actions underway

Successfully delivering the Build to Last goals will require leadership, rigorous implementation and intensive focus on disciplined contracting processes. A programme office has been set up with UK and US workstreams and a benefits tracking system. Following the announcements of a new Chairman, Group Chief Executive and Chief Financial Officer to strengthen the Board, new senior appointments include global leaders for IT, commercial and project execution, and business process re-engineering. In addition, senior leadership within the UK Regional and Engineering Services businesses will be strengthened by the introduction of a new chief operating officer. All senior management incentives have been matched to key programme goals. The Group-wide cash generation drive has been rolled out with planning and training to project level. In the UK, enabling functions - those not related to front-line delivery - are being consolidated to remove duplication and improve efficiency, to deliver significant cost takeout. The Group's property portfolio is being streamlined to reduce overheads and detailed procurement initiatives, commencing with key suppliers and areas of direct and indirect spend, will deliver meaningful and growing savings.

All of this demonstrates the scale of opportunity to drive major near-term improvements in cash generation and profitability. At the same time, Build to Last is also about relentlessly holding course. The objective is to shape a Group leading in its core markets and differentiated by best-in-class expertise, a lean innovative supply chain and robust execution. For over 100 years - and throughout all of its recent problems - Balfour Beatty has been delivering major projects for its customers and communities - lasting infrastructure that shapes and improves people's daily lives. The Build to Last programme is designed to ensure that Balfour Beatty can also build to last for itself, starting with the right foundations.

OPERATING REVIEWS

Construction Services

Construction Services' performance reflects the significant impact of project losses, primarily due to poor operational and commercial controls in the UK business and leading to a very disappointing total loss from continuing operations of £391 million (2013: £103 million).

In the UK, certain legacy Engineering Services (ES) contracts, where there has been poor legacy management and in regions, such as London and the South West, where ES has withdrawn from tendering for third-party work due to the problematic delivery of these contracts, contributed £62 million to Group revenue whilst generating losses of £88 million (2013: £nil). The results of these contracts have been classified as non-underlying items as the exceptional size and nature of the losses distort the underlying performance of the Group. The prior year comparatives have been restated accordingly and future performance on these contracts (including any claims recovery) will be presented in non-underlying items through to their completion. As a result, the 2014 underlying loss from operations for Construction Services was £209 million (2013: profit £18 million). Included within this is an underlying loss from the UK construction business of £229 million (2013: £20 million).

Underlying revenue2  was flat at £6,597 million (2013: £6,594 million). The Construction Services order book2  at the end of the year stood at £7.9 billion (2013: £7.7 billion), up 2% from a year ago, but down 3% at constant currency. The order book in the UK ended the period at £2.6 billion, down 5%.

1including share of joint ventures and associates

2from continuing operations

3before non-underlying items (Note 8)

4 re-presented to include the results of Rail Germany, which no longer meets the definition of a discontinued operation,

as non-underlying items (Notes 3.5 and 10)

5 re-presented to include Heery Inc which was previously included in Professional Services

UK

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

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

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

· Engineering Services: mechanical and electrical engineering.

The underlying loss from the UK construction business was £229 million (2013: £20 million). The total loss from the UK construction business after including the results of the non-underlying ES contracts was £317 million (2013: £20 million).

Financial performance was adversely impacted by significant operational issues in ES and in the Regional business in the London and South West regions. The Scottish and North & Midlands regions performed well. In Major Projects profitability was adversely impacted due to cost forecast revisions on two significant projects. On one there has been a change of scope, but where the commercial resolution is yet to be concluded. On the other, delays in construction and performance of the asset have led to increased costs.

The KPMG review has been an important step in getting a better understanding of the problems faced by the business during a period of uncertainty. The business is focused on actively pursuing recovery of contractual entitlements and implementing the recommendations in order to return to profitability and peer group margins.

Underlying revenue in the UK fell by 6% to £2,350 million as increased revenue in Major Projects was more than offset by reductions of 10% in the Regional business and 15% in ES.

The Regional and ES order books fell, as a result of actions taken to refocus the businesses, but were partially offset by growth in Major Projects. Across the business there has been an improvement in the quality of new order intake.

Joint venture awards such as the £160 million Sellafield nuclear facility contract have been won in the power sector. In the highways sector new awards included the £184 million smart motorway upgrade scheme for the M60 and M62, the £129 million M3 smart motorway contract and a £55 million junction upgrade scheme on the M25. Furthermore the business was awarded a framework contract to deliver up to £180 million of infrastructure works at Heathrow airport. In December the Investments business reached financial close on the £550 million Aberdeen Western Peripheral Route project in a three-way joint venture that combines the Group's investment and construction capabilities.

There is improving confidence in the private sector although increased market volumes in areas such as housing have put pressure on input costs. The number of new major infrastructure projects to be awarded in the short term is expected to be low, exacerbated by the upcoming general election uncertainty. Over the medium term there is an expectation of significant investment through the Highways Agency investment plan and projects such as HS2 and Crossrail 2.

US

Profitability in the US increased slightly in the year, but margins remained broadly flat at approximately 1%. Reported revenue was flat on the previous year, up 5% at constant currency. The increase in the order book in the building business since the beginning of 2013 continues to feed through into revenue growth (at constant currency), and order intake has continued to increase, resulting in an order book at the end of the year which is in line with last year. Order intake in the civil and rail business was down on the previous year.

In the US approximately 80% of revenues are generated from the general building market, where the business is ranked as the No.3 contractor by revenue according to the 2014 ENR rankings. The infrastructure market accounts for the remaining 20%.

The growth in the US order book over the last two years has been as a result of significant steps taken to better leverage local capabilities across the entire business and to make the business more customer focused, through improving best practice, driving innovation and sharing knowledge within a more streamlined structure. However margins have remained flat, partially due to a mix effect as revenue from higher margin work won before the recession has reduced, but also due to executing on work bid in a competitive environment over the last 12-24 months at lower margins.

In 2014 the business continued to work closely with the Investments business, particularly in the student accommodation sector, where the Investments business acts as an equity investor or a fee-based developer. New projects included the University of Texas at Dallas, the University of Iowa and Tarleton State University.

The business continued to grow in the healthcare sector, with the award of a US$533 million contract to renovate and expand the Texas Medical Center campus in Houston, Texas. This complex project for the Memorial Hermann Healthcare System includes building a 17-storey hospital and implementing a building control system. A strong reputation in the sector also helped the Investments business win its first project in Canada, with the award of the Children's and Women's Hospital redevelopment project in Vancouver, where the US construction business will provide 50% of the construction services in joint venture.

Other significant wins in the period included a US$156 million contract to construct new headquarters for the National Science Foundation in Virginia, US. There was strong growth in the education and office sectors, with US$256 million and US$669 million respectively in new awards. These awards reflect recovery in both the public education and private building markets.

In the infrastructure market the City of Charlotte awarded the business a US$131 million rail contract to build track and systems components to extend the city's light rail system, following a US$106 million civil engineering contract in February 2014 for the same light rail system.

International joint ventures

The Group also operates in South East Asia and the Middle East.

The order book in the Group's Hong Kong and Singapore joint venture, Gammon, remained stable. Revenues were up 22% in the year (30% at constant currency) however the Group's share of joint venture profits for the year decreased by £4 million to £12 million, as the long-term nature of recent civil project wins means it will take time for these to feed into financial performance. A small number of these contracts, which are recorded at break-even, have incorporated significant judgements over contractual entitlements.

In the year significant wins included the new S$210 million (£100 million) Havelock Station award for Singapore's Mass Rapid Transit system. In July Gammon won two building contracts in Hong Kong with a combined value of HK$3,910 million (£300 million) to build a public rental housing development and a research office.

In the Middle East, the market for the construction joint venture in Dubai has continued to improve and order book was significantly up on 2013. Wins included the Dubai Mall extension project. However the mechanical and electrical engineering market remains very difficult, with some of the same issues faced by the UK M&E business existing in the Middle East, such as disputes and delays with main contractors who have taken on complex and difficult jobs. In particular two significant projects have caused write-downs, even though we believe a significant proportion of these will be ultimately recoverable. The joint venture is no longer bidding for M&E work outside the UAE.

Rail

The performance of the UK rail construction business continued to be impacted by operational issues on a small number of projects. Losses from operations totalled £6 million in the year (2013: £12 million).

Since the year-end the Group has completed the sales of the German track and plant and Austrian businesses and the sale of the Italian rail business. The Group remains committed to exiting the remaining parts of the German rail business. The results of Rail Germany have been re-presented as non-underlying items within continuing operations and those of Rail Italy are classified as discontinued. In India, after four years, there has been little progress in establishing a presence, and consequently the office is in the process of being closed. In Australia following withdrawal from a major rail PPP due to unacceptable risk levels, it was concluded the Group did not have sufficient critical mass to continue a construction presence.

Support Services

Revenue for the year was up 1% at £1,273 million, with a 35% increase in transportation revenues being largely offset by expected revenue decline in the power sector. The Support Services order book ended the year at £3.5 billion, down 14% from a year ago (2013: £4.1 billion). The increase in order book in the water sector has been more than offset by the expected contraction in the power and transportation order books, as the division continues to execute on long-term contracts. Further awards were made in the water sector after the year end, which will benefit the 2015 order book.

Underlying profit from continuing operations was down 9% at £50 million (2013: £55 million), resulting in an underlying operating margin of 3.9% (2013: 4.3%). Good performances in the water sector, including the settlement of multi-year commercial issues, and in the transportation sector were offset by lower volumes in power.

1including joint ventures and associates

2before non-underlying items (Note 8)

Support Services is a leading provider of specialist renewal and maintenance services in three key sectors - power, water and transportation. The division continues to provide a wide range of essential services and deliver projects for customers across the regulated and public sectors, all of whom need to manage financial pressures, whilst improving the quality of the infrastructure that facilitates public life. This will continue to provide opportunities, as customers look to outsource work, and seek innovative solutions in the provision of that work, but also presents challenges in an increasingly competitive environment.

Power

As anticipated, revenues and profitability in the power sector declined, partially due to strong performance in the prior year but also due to other contracts completing in 2014. The transmission part of the business experienced lower volumes after contracted volume targets were completed ahead of schedule in the latter part of 2013, coupled with lower levels of capital replacement programmes in the year.

In March 2014 the power business was appointed to two major National Grid power infrastructure frameworks. The first is the overhead lines design and build framework, over a four-year contract length with two optional two-year extensions. The total work available for panel members is worth up to £2.5 billion. The second is for National Grid's onshore underground cable framework, over a four-year contract length with an optional two-year extension, worth a total of up to £800 million.

In December, the power business was granted a licence by Ofgem to operate and maintain the Thanet offshore transmission project, following its acquisition by the Investments business, work derived directly from the success of the Investments business in that market.

Elsewhere on existing power sector contracts there was good progress on the Beauly-Denny replacement electricity transmission line contract for Scottish and Southern Energy, the Gas Distribution Strategic Partnership contracts with National Grid and the joint venture contract in the Republic of Ireland to replace and extend the gas network on behalf of state operator Bord Gais.

Volumes in the power transmission sector are constrained within the UK as current contracts complete and new projects are delayed due to the changeover in regulatory periods. New opportunities will continue to be explored as the changing nature of the energy industry will require new sources of power to be connected into the existing infrastructure. The division is well placed to take advantage of UK cabling and offshore windfarm opportunities expected in 2015.

Water

The water business order book benefited from new contracts tendered under the AMP 6 regulatory cycle, which controls capital expenditure across the network from April 2015 through to 2020. In May it was awarded approximately £115 million of work by Anglian Water as part of its investment programme. In addition the business has also won a new contract award from United Utilities valued at £125 million.

Following a 23-month early contractor involvement in a three-way joint venture contract with Thames Water, the joint venture was awarded an initial £800 million contract in February 2015, which was therefore not recorded in the year end order book.

The major water companies will be focusing on broader and improved solutions for their customers driven primarily by the regulatory environment, which we hope will open opportunities for further innovation.

Transportation

The transportation business operates for customers in the road and rail sectors. Overall transportation revenues increased by 35% in the period as the business executed on long-term contracts for local authority and highways maintenance customers. However this, along with exiting from routine renewals work for Network Rail, resulted in a reduction in the order book at the year end.

The highways maintenance business continued to perform strongly in the year with a very good performance on the M25 contract, which more than offset continuing cost issues encountered on the Area 10 contract in the North West of England.

In the rail renewals market the business continued to work with London Underground to renew and improve service levels across the network and achieved excellent volume and margin growth in the year. The remaining elements of the Network Rail contract were completed and handed over to a new contractor in July. Associated exit and demobilisation costs incurred were over £2 million and are included in the division's underlying profit from operations for the year.

Revenues from local authority work increased as the Herefordshire and Wiltshire contracts, which commenced in 2013, were fully mobilised. This more than offset the impact of revenue declines resulting from completed contracts in Westminster, North Yorkshire and Essex. The majority of the contracts in the portfolio performed well in the year and more than offset the impact of operational and commercial issues on the Wiltshire contract, the resolution of which is ongoing with the customer.

The continuing outsourcing trend by local government will provide additional growth opportunities for the division which increasingly looks to leverage its strong position in the highways and street lighting markets to provide additional complementary services to local authority customers.

Infrastructure Investments

The Investments business delivered another successful year of growth in profits and in the value of the Investments portfolio, as the business continued to break into new markets and expand the number of equity investments within the portfolio.

Underlying pre-tax profits increased to £162million (2013: £132 million), driven by increases in profits on disposal, pre-disposals operating profit and net interest income. The pre-disposals operating profit of £34 million was £14 million higher than the previous year. This included a gain of £15 million (2013: £nil) resulting from movements in the fair value of PPP financial assets, attributable to non-market related changes in estimated future cash flows, and recognition of bid costs deferred income. These more than fully offset the decline in UK income as a result of disposals and approximately £10 million of costs incurred which were reimbursed to Construction Services UK to accelerate the completion of construction work and defect resolution on a small number of projects. There was reduced income in the US as the military housing construction phases come to an end along with increased bid costs. Asset sales generated £159 million of proceeds, with disposal gains increasing to £93 million (2013: £82 million), as the secondary market continued to see increased pricing tension. Net interest income, a significant element of total income, also increased to £35 million from £30 million in 2013.

The Directors' valuation of the Investments portfolio increased to £1,300 million as at 31 December 2014 (2013: £766 million). The increase in value was principally due to a change in the valuation methodology, in order to bring the valuation closer to the market value. The number of investments within the portfolio increased to 66 (2013: 61). Recent transactions underline the ongoing ability of this business to create value.

1 before non-underlying items (Note 8)

2subordinated debt interest receivable and net interest income from PPP subsidiaries (Notes 6 and 7)

The Investments business continued to grow with its appointment as preferred bidder on 13 new equity projects (including three between January and March 2015). These projects comprise: four university student accommodation projects, three hospital projects, three private rentalhousing projects, one justice facility project, one road project and one energy project.

As of March 2015, the business had reached financial close on eight of these projects, as well as reaching financial close on three of the five projects which were already preferred bidder at the start of 2014. Seven projects currently remain at preferred bidder stage.

The Investments business was also appointed preferred bidder on five fee-based projects where no equity will be invested, three as developer in the student accommodation sector and two as a third-party manager in the residential sector.

The Investments business continues to see significant opportunities for future investment. There is an identified global pipeline of opportunities over the next five years that represents £35 billion of capital value, spread across multiple sectors in four countries. Over the next five years, the Investments business expects to invest over £300 million in equity and generate over £2 billion of new work for the Group's Construction Services and Support Services businesses, which have historically delivered higher margins when working in conjunction with the Investments business.

UK and Australia - new investment activity

In June 2014, financial close was reached on the £46 million NHS Ayrshire & Arran Acute Mental Health and Community Hospital project. The Group will finance, design and construct the project, and once complete, operate the asset for 25 years.

In December 2014, the £550 million Aberdeen Western Peripheral Route project reached financial close. The design, build, finance and operate contract will generate a significant amount of work for the UK construction business. Balfour Beatty will be working in joint venture to construct the project and will take sole responsibility for the management and maintenance of the road assets for 30 years once construction is complete.

Both Thanet and Gwynt y Môr offshore transmission (OFTO) projects reached financial close. These are high-voltage electricity transmission systems, connecting offshore windfarms to an onshore transmission grid. Through February 2015, Balfour Beatty has achieved financial close on three OFTO projects and now maintains investments in OFTO transmission assets worth £833 million, with a combined transmission capacity of 1,380 MW.

In addition, the Investments business reached financial close on its first project in Australia, at Wollongong University, for the design and construction of a 1,050 new bed development and a 39-year maintenance licence for the university's entire existing accommodation facilities, of 1,905 beds.

In November 2014, Balfour Beatty, including the Investments business, was selected to develop up to 1,500 homes on Queen Elizabeth Olympic Park, in a 50:50 joint venture with People for Places. This will result in the creation of two new neighbourhoods of East Wick and Sweetwater, by 2023. The development, in partnership with the Mayor of London and the London Legacy Development Corporation, will include private rental sector and affordable housing. Financial close of the first phase is expected in 2016.

In January 2015, the business was appointed preferred bidder for the University of Sussex's East Slope Residences project, for the development of 2,000 new bedrooms and other innovative student amenities. Balfour Beatty will design, build, finance and operate the project under a 50-year contract, in partnership with the university. Financial close is expected during 2015.

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

In the UK, further opportunities are expected in the accommodation sector, for both students and private rental, and in the power sector. The business has a strong position in the OFTO market, which has a pipeline of £10 billion, and is also looking at future investment opportunities in the biomass sector.

North America - new investment activity

In June 2014, financial close was reached on the US Air Force ACC III military housing project, valued at US$60 million. In September 2014, financial close was reached on Carmendy Square in Florida, and in February 2015, the business reached financial close on the Ranch at Pinnacle Point in Arkansas, which represented the business's first investments into the US private rental housing sector.

In Canada, financial close was reached on two hospital projects in 2014. The C$350 million (£196 million) BC Children's and BC Women's Hospital Redevelopment Phase 2 project covers the design, construction, financing and facilities management for a new children's and women's acute care centre in Vancouver, British Columbia. The C$606 million (£338 million) North Island Hospitals project is a 30-year PPP project which includes the financing, design, construction, and facilities management of two new hospitals on Vancouver Island, British Columbia.

In the US, the business was appointed preferred bidder for a US$405 million justice complex project for the City of Indianapolis/Marion County in Indiana. This represents Balfour Beatty's first investment project in the US justice sector.

At the University of Texas at Dallas, the business was appointed preferred bidder on a new mixed-use project for the development of accommodation and retail space on land owned by the University. At the University of Iowa, preferred bidder status was awarded for a second phase of development, following the successful first phase development of 270 one and two bedroom units and a separate community centre. The business also remains preferred bidder for two additional student accommodation projects awarded in 2013.

The business continues to leverage its experience in the student accommodation sector, integrating design, construction and investment capabilities, even where direct equity may not be required. As a result, the Investments business now works as a fee-based developer alongside the US construction business on a number of projects, providing design and build services. In 2014, fee-based agreements were executed for Texas A&M University, a phase II project at Tarleton State University, and two third-party management projects located in Florida.

In the US, there is a strong pipeline of additional opportunities in the private rental and student housing markets as well as in generating profits through third-party management fee-based agreements, and the business is continuing to build on its presence in Canada, where there are a number of opportunities.

Asset sales

The Group successfully sold three assets in 2014, generating total book gains on disposal of £93 million. In May, the sale of the Knowsley Building Schools for the Future project and the Group's 50% interest in the University Hospital of North Durham project realised total consideration of £97 million, generating total gains of £51 million. The Group also sold its 50% interest in the Pinderfields and Pontefract Hospital project in West Yorkshire in October for £62 million, generating a gain of £42 million. As a consequence of the favourable prices achieved on recent sales, the Directors' valuation of the Investments portfolio at December 2014 was updated to bring it closer to the market value.

Asset sales are expected to continue as a means of realising the value in mature assets, and recycling equity into new projects.

Investment management business

Balfour Beatty Infrastructure Partners (BBIP) reached final close on its first fund in 2014, with total commitments of US$618 million, including US$110 million by Balfour Beatty. As of February 2015, the fund has acquired Upper Peninsula Power Company, a regulated electric utility business in Michigan, US, a portfolio of ten operational UK solar projects in the UK, and Wightlink Ferries, a ferry company servicing the Isle of Wight. Balfour Beatty has invested £20 million through December 2014, with the expectation that the fund will be fully invested within the next three years.

FINANCIAL SUMMARY

Underlying items

Underlying revenue from continuing operations including joint ventures and associates was broadly in line with last year at £8,440 million (2013: £8,478 million). At constant exchange rates revenue increased by 2%. Revenue was broadly flat across the divisions.

In Construction Services, flat revenue at actual exchange rates, included a reduction of 5% in the UK offset by a 27% increase in the South East Asia and Middle East joint ventures. At constant exchange rates revenue growth in the US was 5%.

The Group's share of underlying post-tax profits from continuing joint ventures and associates reduced to £55 million from £71 million in 2013, principally due to a poor performance from the mechanical and electrical engineering business in the Middle East.

The loss from continuing operations before non-underlying items was £58 million (2013: profit £146 million), with losses in Construction Services of £209 million (2013: profit £18 million) reflecting a very poor performance from UK construction, offsetting good underlying performances in Support Services £50 million (2013: £55 million) and Investments £127 million (2013: £102 million) which included disposal gains of £93 million (2013: £82 million).

Net underlying finance costs of £22 million increased by £7 million (2013: £15 million) due to a £10 million increase in finance charges resulting from the convertible bonds issued in December 2013 and a £7 million increase in pension net interest expense, offset by a £6 million reduction in interest on bank loans and overdrafts and a £4 million increase in subordinated debt interest receivable.

Underlying pre-tax loss from continuing operations was £80 million (2013: profit £131 million).

Non-underlying items

Non-underlying items for continuing operations comprise pre-tax losses of £224 million (2013:

£180 million).

These include £88 million of losses on certain legacy ES contracts, £23 million of trading losses in Rail Germany and £30 million of non-cash asset impairments in Rail Germany. Intangible asset amortisation reduced to £11 million (2013: £17 million) as assets became fully written down, and there were £7 million of costs associated with the aborted merger discussions with Carillion plc. Following a decision in January 2015 to focus the roll-out of Oracle R12 into UK construction in 2015 and the closing down of the implementation team for Support Services, a non-cash impairment for costs related to continuing Support Services operations of £21 million was incurred. Other items totalling £44 million include £23 million restructuring and reorganisation costs and £14 million cost of implementing the UK shared service centre (2013: £7 million).

Continuing operations

Operating loss from continuing operations for the year was £281 million (2013: £33 million).

Taxation

The underlying tax credit for continuing operations for the year of £2 million (2013: £28 million charge), excluding the Group's share of results of joint ventures and associates, equates to an effective tax rate of 1.5% (2013: 46.7%). This represents a tax credit on a loss before tax. The rate of credit is lower than the UK statutory rate, principally due to significant non-recognition of deferred tax assets on losses incurred in the year. In 2013, the rate of 46.7% (tax charge on a profit) was higher than the UK statutory rate principally due to writing down deferred tax balances following the reduction in the UK corporation tax rate to 20% and the proportion of profits in higher tax jurisdictions, offset by the benefit of the profit from non-taxable investment sales.

Discontinued operations

Post-tax profit from discontinued operations of £242 million (2013: £18 million) includes a gain on the disposal of Parsons Brinckerhoff (PB) of £234 million. Following shareholder approval on 28 October 2014, completion of the disposal of PB occurred on 31 October 2014 for an agreed cash consideration of £812 million which generated a gain on disposal of £468 million, or £234 million after writing off goodwill and other intangible assets and incurring £24 million of separation costs and £45 million of transaction costs. PB contributed £38 million of pre-tax trading profits to the date of disposal. £26 million of charges were booked in respect of goodwill and other asset impairments in respect of Rail Italy.

Overall result for the year

The results, including both underlying and non-underlying items for continuing and discontinued operations, show a total reported loss of £59 million (2013: £35 million).

Given the scale of the losses incurred in UK construction in 2014, consideration has been given as to whether any of the losses incurred in 2014 should have been identified and accounted for in previous periods. The results of the exercise showed that the vast majority of the losses were due to operational issues in 2014, and appropriately accounted for in that year, and for the year ended 31 December 2013 the aggregate impact of any errors was not material. Accordingly the 2013 accounts have not been restated. There were, however, certain contracts at 27 June 2014 where there were errors principally due to unrealistic cost and scope assumptions. As a consequence when we publish our half-year accounts for the period ending 26 June 2015 we intend to restate the comparatives for the half-year ended 27 June 2014, to reduce the profits from UK construction by £16 million.

Earnings per share

Underlying loss per share from continuing operations was 11.5 pence (2013: earnings 15.3 pence), which along with underlying earnings per share from discontinued operations of 3.5 pence (2013: 6.2 pence), gave an underlying loss per share for total operations of 8.0 pence (2013: earnings 21.5 pence). Total loss per ordinary share was 8.6 pence (2013: 5.1 pence).

Dividends

Whilst the Board continues to recognise the importance of the dividend to its shareholders, in order to ensure balance sheet strength is maintained during the transformation programme it will not be recommending a final dividend payable for 2014. This results in a total dividend for the year of 5.6 pence (2013: 14.1 pence). The Board will look to reinstate the dividend in March 2016, at an appropriate level. 

Goodwill and intangible assets

The goodwill on the Group's balance sheet at 31 December 2014 decreased by £222 million to £826 million (2013: £1,048 million), with a reduction of £227 million due to the disposal of PB. A further £24 million reduction resulted from reviewing the sale proceeds achievable for Rail Italy, and as a consequence writing down its goodwill to £nil.

Other intangible assets increased to £216 million (2013: £204 million). Additions in the year included £28 million in Infrastructure Investments from the continuing construction of Edinburgh student accommodation, and £35 million of software. Amortisation charges decreased to £25 million (2013: £35 million), however there were impairment charges of £27 million as a result of focusing the Oracle R12 rollout on the UK construction business only, and stopping the rollout to Support Services.

Impairment reviews have been carried out, and none of the carrying values, other than noted above, have been impaired. There is however limited headroom in the US construction business and in Blackpool Airport such that a change in assumptions could result in an impairment.

Pensions - balance sheet movement

The Group's balance sheet includes aggregate deficits of £128 million (2013: £434 million) for the Group's pension schemes.

The Group recorded net actuarial gains on those schemes totalling £237 million (2013: £117 million). There were £337 million (2013: £73 million) of actuarial losses recorded on the present value of the obligations, largely resulting from the effects of lower discount rates. However, these losses were more than offset by an excellent performance on the asset portfolio, particularly benefiting from the bonds and gilts and interest rate and inflation hedges, resulting in actuarial gains of £574 million (2013: losses £44 million). A formal triennial funding valuation of the Balfour Beatty Pension Fund (BBPF) was carried out as at 31 March 2013 and showed a funding position of 88%.

Agreement has been reached to make two sets of additional deficit contributions to the BBPF. Firstly, in respect of the disposal of Balfour Beatty WorkPlace in December 2013, a £15 million contribution payable in monthly instalments during 2015. Secondly, in respect of the sale of PB in October 2014, an £85 million contribution. Subject to definitive documentation, this will be payable over the period to 2023, with the first payment of £4 million due in 2016.

Balance sheet and capital structure

The Group looks to achieve a balance between the favourable/negative working capital, liquid funds and facilities and the Investments portfolio. During 2014 there was, as anticipated, a reduction in negative working capital in the first half of the year, with a small improvement before the impact of year end contract write-downs. In the second half, there was an increase in negative working capital in Construction Services. Liquid funds were significantly boosted by the sale of PB. The Directors' valuation of the Investments portfolio increased to £1,300 million, despite the continuing asset sales. Overall the Group finished the year with a strong balance sheet.

Cash flow performance

Total cash used in operations was £352 million (2013: £162 million), before tax. £114 million was due to non- underlying items including the outflows from certain ES legacy contracts and Rail Germany. £46 million arose in discontinued businesses which saw a £95 million working capital outflow, principally due to PB's trading flows up to the end of October not benefiting from the usual improvement that is seen by the end of the year. Cash used in underlying operations was £192 million, after a working capital inflow of £26 million.

Average net borrowings in the second half of the year were £318 million, although with the sale of PB on 31 October, and a strong cash performance at the end of the year, the Group's net cash position at 31 December 2014 was £219 million (2013: net debt £66 million), excluding net cash in discontinued operations of £15 million (2013: £19 million) and £445 million (2013: £354 million) of non-recourse net borrowings held in wholly owned infrastructure concessions. The balance sheet also includes £96 million for the liability component of the preference shares.

Working capital

Including the impact of exchange, favourable/negative working capital increased from £550 million at the end of 2013 to £731 million at the end of 2014. This was impacted by the disposal of PB which had £112 million of unfavourable/positive working capital at the end of 2013, which was effectively crystallised in cash on disposal. Construction Services negative working capital increased by £93 million in the year. In the US construction business working capital has remained relatively stable for the last couple of years, and should benefit from revenue growth going forwards. In the UK construction business working capital became less favourable, as anticipated, however this was offset at the end of the year by additional cost estimates and risk contingencies on a number of contracts.

Total working capital as a percentage of annualised revenue (WCPR) at the end of the year was (9.9)% (2013: (8.5)%). The most significant component of negative working capital relates to Construction Services, which ended the year with WCPR of (12.2)% (2013: (9.7)%).

In 2015, the Group is targeting an improvement in the favourable working capital position from the impact of working capital improvement initiatives under Build to Last, once the impact of the additional cost provisions has flowed through. The Group continues to monitor developments in the UK on both project bank accounts, in which it had £17 million of cash at year end, and potential changes in legislation regarding payment terms.

Banking facilities

The Group's principal committed bank facilities total £760 million and extend through to 2016. They were reduced from £950 million in the year following the receipt of proceeds from the sale of PB. The purpose of these facilities, and other small facilities, is to provide liquidity from a group of core relationship banks to support Balfour Beatty in its current and future activities. Over time, as the Group's business has evolved and particularly reflecting the long-term nature of the Investments portfolio, the Group diversified its sources of funds away from the shorter term bank market through the issue of US$350 million of US private placement notes in March 2013 with maturities up to 2025, and £253 million of unsecured convertible bonds in November 2013 with December 2018 maturity.

At 31 December 2014, the Group's £760 million of committed bank facilities were undrawn.

Foreign currency risk

The Group is exposed to foreign currency risk primarily in the US, Asia-Pacific, and the Middle East although this is now significantly reduced following the sale of PB. The average exchange rate for 2014 was US$1.65:£1 (2013: US$1.57:£1). Sterling steadily weakened from the middle of the year, and ended the year with a closing rate of US$1.56:£1 (2013: US$1.65:£1).

Financial risk factors and going concern 

The key financial risk factors for the Group, other than the reduced foreign currency risk noted above, remain largely unchanged, although following the sale of PB, its operations are significantly less diversified. Some elements of the Group's markets are recovering, and this can lead to increased risk of subcontractor failures due to their cash requirements for increased working capital, and also the potential for inflationary pressures in some areas. On the other hand this should also reduce pressure on bidding margins.

The Group's US private placement and committed bank facilities contain certain financial covenants, such as the ratio of the Group's EBITDA to its net debt which needs to be less than 3.0 and the ratio of its EBITA to net borrowing costs which needs to be in excess of 3.0. These covenants are tested on a rolling twelve-month basis as at the June and December reporting dates. At 31 December 2014, both these covenant tests were passed as the Group had net cash and net interest income from a covenant test perspective, so the Group's poor trading performance and consequent low level of EBIT had no impact on these tests.

The Group is forecasting to remain within its banking covenants during 2015 and has stress-tested these calculations for reasonable possible adverse variances in trading and cash performance. The significant losses incurred in the second half of 2014 will be included in the twelve-month EBIT for the purpose of the covenant tests at June 2015, which will reduce headroom particularly on the EBITDA to net debt test. In considering that forecast, account was taken of the range of mitigating actions to conserve and generate cash and EBIT. While recognising that there can be no absolute certainty, the Directors believe that these covenant tests will be met.

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

• the Group has a strong order backlog

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

• the Group had net cash balances of £219 million at 31 December 2014 and has committed bank facilities of £760 million lasting until November 2016, which were undrawn at 31 December 2014

• the Group had an Investments portfolio valued at £1,300 million at 31 December 2014.

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

To appreciate the prospects for the Group as a whole, the complete Annual Report and Accounts 2014 needs to be read.

Responsibility statement

This responsibility statement below has been prepared in connection with the Company's Annual Report and Accounts 2014. Certain parts thereof are not included within this announcement.

The Directors confirm that to the best of their knowledge:

· the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union and Article 4 of the IAS Regulation, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

· the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and

· the annual report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

This responsibility statement was approved by the Board of Directors on 24 March 2015 and is signed on its behalf by:

D J Magrath

Chief Financial Officer

P J L Zinkin

Planning and Development Director

ENDS

Forward-looking statements

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

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

Additional information

The Annual Report and Accounts 2014 will be available on the Company's website www.balfourbeatty.com, in due course.

The Company's AGM is scheduled to be held at Park Plaza Victoria, 239 Vauxhall Bridge Road, London SW1V 1EQ at 11:00 on 14 May 2015.

A preference dividend of 5.375p gross (4.8375p net at current tax rate) per cumulative convertible redeemable preference share will be paid on 1 July 2015 in respect of the six months ending 30 June 2015 to holders of these shares on the register on 22 May 2015 by direct credit or, where no mandate has been given, by cheque posted on 30 June 2015 payable on 1 July 2015. The preference shares will be quoted ex-dividend on 21 May 2015.

The Company's statutory accounts for the year ended 31 December 2014 comply with the Disclosure and Transparency Rules of the Financial Services Authority in respect of the requirement to produce an annual financial report. Those financial statements are the responsibility of, and were approved by the Directors, on 24 March 2015.

Group Income Statement

For the year ended 31 December 2014

2 Re-presented to classify Parsons Brinckerhoff and Rail Italy as discontinued operations (Note 10).

3Re-presented to include results of Rail Germany, which no longer meets the definition of a discontinued operation, as non-underlying items within continuing operations (Note 8).

Group Statement of Comprehensive Income

For the year ended 31 December 2014

^ 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 2014

Group Balance Sheet

At 31 December 2014

Group Statement of Cash FlowsFor the year ended 31 December 2014

1 Before non-underlying items (Note 8).

2 Re-presented to classify Parsons Brinckerhoff and Rail Italy as discontinued operations (Note 10).

3Re-presented to include results of Rail Germany, which no longer meets the definition of a discontinued operation, as non-underlying items within continuing operations (Note 8).

4Re-presented to show the results of certain legacy Engineering Services contracts as non-underlying items (Note 8).

5Re-presented to separately identify cash flows from underlying and non-underlying operations and discontinued operations.

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

Notes to the financial statements

1 Basis of accounting

The annual financial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and therefore comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. The Group has applied all accounting standards and interpretations issued by the International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee as adopted by the European Union and effective for accounting periods beginning on 1 January 2014. The presentational currency of the Group is sterling.

The financial information in this announcement, which was approved by the Board of Directors on 24 March 2015, does not constitute the Company's statutory accounts for the years ended 31 December 2014 or 2013, but is derived from those accounts. Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 will be delivered following the Company's Annual General Meeting. The auditor has reported on the 2014 accounts; the report is unqualified, did not draw attention to any matters by way of emphasis without qualifying the report and did not contain statements under Section 498(2) or (3) of the Companies Act 2006.

Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial statements for the Group and the Company that comply with IFRS in April 2015

2 Going concern

The Directors have acknowledged the guidance "Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009" published by the Financial Reporting Council in October 2009 and consider it reasonable to assume that the Group has adequate resources to continue for the foreseeable future and, for this reason, have continued to adopt the going concern basis in preparing the financial statements. Further information is provided within the Financial Summary on page 20.

3 Accounting policies

3.1 Judgements and key sources of estimation uncertainty

The Group's principal judgements and key sources of uncertainty are set out in Note 2.27 of the Annual Report and Accounts 2014.

Given the scale of the UK construction business losses incurred in 2014, consideration has been given as to whether any of the losses incurred in 2014 should have been identified and accounted for in previous periods in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The results of the exercise showed that for the accounts for the year ended 31 December 2013, the aggregate impact of any errors was not material and accordingly the 2013 accounts have not been restated. Further information is provided within the Financial Summary on page 17.

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

3.2 Change in accounting estimate

Following the UK construction business contract reviews the Group has reassessed its accounting for construction contracts and taken a more prudent position in estimating contract completion costs. This is a prospective change in accounting estimate and has resulted in a £51m expense in the current year.

In respect of the Group's PPP financial assets, movements in the fair value of PPP financial assets attributable to non-market related changes in future cash flow assumptions are recognised in the income statement. At December 2014 this has given rise to a fair value gain of £15m (2013: £nil) which has been recognised within underlying profit from operations.

3.3 Adoption of new and revised standards

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

· IFRS 10 Consolidated Financial Statements

· IFRS 11 Joint Arrangements

· IFRS 12 Disclosure of Interests in Other Entities

· IFRIC 21: Levies

· Amendments to the following standards:

o IFRS 10, IFRS 11 and IFRS 12: Investment Entities

o IFRS 10, IFRS 11 and IFRS 12: Transition Guidance

o IAS 27 Separate Financial Statements

o IAS 28 Investments in Associates and Joint Ventures

o IAS 39 Novation of Derivatives and Continuation of Hedge Accounting.

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

3.4 Accounting standards not yet adopted by the Group

The following accounting standards, interpretations and amendments have been issued by the IASB but had either not been adopted by the European Union or were not yet effective in the European Union at 31 December 2014:

· IFRS 9 Financial Instruments

· IFRS 14 Regulatory Deferral Accounts

· IFRS 15 Revenue from Contracts with Customers

· Amendments to the following standards:

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

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

o IFRS 11: Accounting for Acquisitions of Interests in Joint Operations

o IAS 1: Disclosure Initiative

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

o IAS 16 and IAS 41: Agricultural: Bearer Plants

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

o IAS 27: Equity Method in Separate Financial Statements.

Of these, IFRS 9 is expected to have the most significant effect.

The Group has chosen not to adopt any of the above standards and interpretations earlier than required.

3.5 Re-presentation of comparative information

Discontinued operations

The Income Statement has been re-presented to classify Parsons Brinckerhoff and Rail Italy as discontinued operations. Refer to Note 10.

Rail Germany has been reclassified from discontinued operations in 2014 and its performance has been included within non-underlying items as part of continuing operations. The Group has presented Rail Germany outside of underlying items as it remains committed to exiting its Mainland European rail businesses as soon as possible and does not consider its operations part of the Group's underlying activity. When initially classified as a discontinued operation on 28 June 2013 the German business was being marketed to be sold as an entire unit. Subsequently it became apparent that this would not be possible and disposal of part of the business was agreed in November 2014. As a result, Rail Germany does not satisfy the criteria under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations for it to remain as a discontinued operation and the prior year comparatives have been restated accordingly. Refer to Note 10. 

3.5 Re-presentation of comparative information continued

Engineering Services

The performance of external Engineering Services (ES) contracts linked to poor legacy management and in regions that ES has withdrawn from tendering for third-party work has also been included in non-underlying items as the size and nature of the losses due to the problematic delivery of these contracts are exceptional and distort the underlying performance of the Group. ES has stopped bidding external work in London, South East and the South West. At 31 December 2014, 12 of these contracts were still active, with the last of these contracts currently scheduled to complete in January 2016. Separate disclosure of these contracts aids the reader's understanding of the underlying performance of the remainder of the Group. Performance on these contracts including any claims recovery will be presented in non-underlying items through to their completion. Prior year comparatives have been restated accordingly.

Segmental analysis

The Group no longer presents a Professional Services segment following the sale of Parsons Brinckerhoff on 31 October 2014 which constituted the vast majority of this segment. Refer to Note 5. The remaining continuing operations, principally comprising the operations of Heery Inc. which were previously reported in Professional Services, now report into Construction Services management and consequently have been re-presented within the Construction Services segment. Prior year comparatives have been restated accordingly.

The 2013 segmental analysis has also been re-presented to include the net non-recourse borrowings directly attributable to Infrastructure Investments within the Infrastructure Investments segment. All other net debt is classified within Corporate activities.

4 Exchange rates

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

Average rates

Closing rates

5 Segment analysis

Reportable segments of the Group:

Construction Services - activities resulting in the physical construction of an asset.

Support Services - activities which support existing assets or functions such as asset maintenance and refurbishment.

Infrastructure Investments - acquisition, operation and disposal of infrastructure assets such as roads, hospitals, schools, student accommodation, military housing, offshore transmission networks and other concessions.

Refer to Note 3.5 for a description of the prior year re-presentations.

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

^ £10m of costs relating to the acceleration of the completion of construction works has been included within Infrastructure Investments. Refer to page 13.

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

2Re-presented to classify Parsons Brinckerhoff and Rail Italy as discontinued operations (Note 10).

3Re-presented to include results of Rail Germany, which no longer meets the definition of a discontinued operation, as non-underlying items within continuing operations (Note 8).

4Re-presented to show the results of certain legacy Engineering Services contracts as non-underlying items (Note 8).

7Re-presented to include Heery Inc. which was previously included in Professional Services.

* Includes non-operating items and current working capital.

^ Includes net assets held for sale of £13m relating to the Rail disposal group (Note 10).

+ Includes Heery Inc. representing net assets of £11m.

5.1 Total Group