REG - Balfour Beatty PLC - Balfour Beatty 2016 Full Year Results <Origin Href="QuoteRef">BALF.L</Origin> - Part 2
16/03/2017 07:06
- Part 2: For the preceding part double click ID:nRSP6150Za
number of state backed infrastructure bonds (US$30 billion of education bonds in
California, US$190 billion multi-state transportation bonds), and potentially an increase in US private public partnership
schemes.
Rail
Underlying revenue in the rail business fell by £25 million to £249 million (2015: £274 million). Underlying losses in the
year were £1 million (2015: £5 million) as the business continued to be impacted by poor contract performance on a small
number of historical rail projects. The order book was stable at £0.2 billion. Given the materiality of the segment, future
results announcements will include Rail within UK construction.
International
Underlying revenue in the Group's Hong Kong and Singapore joint venture, Gammon Construction, increased by 21% (8% at CER),
due to growth in major building projects including the construction of seven towers at the TW5 Cityside residential
property development, 33 Tong Yin Street (residential towers and retail areas) and the conversion of the ex-government
Murray building into a hotel.
Underlying profit from operations in the region reduced to £11 million (2015: £19 million) as new contracts are yet to meet
the required revenue recognition milestones. In Hong Kong there are a number of significant contracts where the range of
potential outcomes could result in a materially positive or negative swing to profitability.
The order book grew by 25% (14% at CER), following the award of a number of notable major building projects: a HK$4 billion
contract for the redevelopment of Somerset House into a 48-storey office building; a HK$2.6 billion contract for a
residential development project for 12 residential towers and five four-storey houses, which together will provide 857 new
homes; and a HK$1.6 billion contract for the construction of the Lee Garden Three Project, which will include 20 floors of
office space atop a five-level retail podium.
In the Middle East, underlying revenue increased to £315 million (2015: £197 million). However, the business continued to
make underlying losses, £2 million in the year (2015: £34 million), reflecting the challenging nature of the region. In
early 2017, Balfour Beatty sold the Group's entire share in Dutco Balfour Beatty and BK Gulf, for a total cash
consideration of £11 million, to its joint venture partner. As part of the transaction, the local partner assumed
responsibility for Balfour Beatty's guarantees of bonding obligations in the joint ventures.
Since the start of 2015, Balfour Beatty has exited the Middle East, Indonesia and Australia in order to focus on its chosen
markets, in the UK, US and Far East.
SUPPORT SERVICES
Financial review
The Support Services segment comprises utilities and transportation businesses. Utilities operates across power
transmission and distribution and the gas and water sectors. Transportation operates across rail, highways and managed road
schemes for local authorities.
Underlying revenue for the division reduced by 12% to £1,103 million (2015: £1,259 million), due to the phasing of contract
and regulatory cycles. However, underlying profit from operations increased to £34 million (2015: £24 million), as the 3.1%
(2015: 1.9%) underlying profit from operations margin in 2016 returned Support Services to the bottom end of the Build to
Last Phase Two industry-standard margin target of 3%-5%.
The order book was stable at £3.1 billion (2015: £3.1 billion) as growth in transportation was largely offset by a decline
in utilities.
Support Services 2016 2015
Order book1 (£bn) 3.1 3.1
Revenue1 (£m) 1,103 1,259
Profit from operations2 (£m) 34 24
Non-underlying items (12) (13)
Statutory profit from operations 22 11
Underlying margin1 (%) 3.1% 1.9%
1 including share of joint ventures and associates
2 before non-underlying items (Note 8)
A reconciliation of the Group's performance measures to its statutory results is provided in the Measuring Our Performance
section.
Operating review
Underlying utilities revenue reduced by 6% to £590 million, with power transmission and distribution down 10% and gas and
water down 3%. The utilities order book reduced by 10%, with power transmission and distribution down 13% and gas and water
down 9%.
Volumes in power transmission and distribution saw a decline in cabling and distribution network operator works, with 2015
also having significant one-off repair works in offshore transmission.
The power business has undertaken a significant restructure and cost removal during 2016, including the internal
appointment of a new managing director, along with several other senior changes. The business has also focused on
qualifying out low-value works and areas which do not align to its risk profile, including significantly reducing its
reliance on volume-based and second-tier subcontracting projects.
In March 2016, power transmission and distribution was awarded contracts worth £35 million by Scottish Hydro Electric for
the design and construction of the Bhlaraidh and Beinnuen wind farms connections project near Fort Augustus, in Scotland.
Most of the project was successfully delivered during 2016.
In November 2016, the power business was awarded a £120 million contract by ElecLink Ltd to install two 50-kilometer
electricity cables between France and Great Britain through the Channel Tunnel. This will be the first ever installation of
a High Voltage Direct Current (HVDC) interconnector in a live rail tunnel environment.
The slight reduction in gas and water underlying revenue was caused by the dip in the UK water regulatory cycle between the
completion of Asset Management Period 2010-2015 (AMP5) and new contracts continuing to mature under AMP6 (2015-2020). The
reduction in the order book was as expected, given the progress of the AMP6 delivery cycle. Many water contracts are
extended over multiple AMP periods and the Group has already started to engage on the AMP7 planning cycle.
In 2016, gas and water secured an extension, through to 2020, to the gas transmission and distribution contract worth £130
million for Bord Gais, in Ireland, and also won a £38 million water treatment scheme for South West Water. The delivery of
key and complex schemes remains on track. Gas and water expect a peak volume year in 2017, as it represents the middle of
the current AMP6 cycle.
Underlying transportation revenues reduced by 18% to £513 million, due to expected volume declines from rail and highways.
Underlying rail revenues were lower following the completion of a rail grinding contract in the prior year. Underlying
highways revenues declined due to lower capital spend on a number of contracts for Highways England and completion of the
contract for Area 4 during the period.
The transportation order book grew by 14%, due to strong order intake in rail and from local authorities. The rail business
was awarded a £170 million two-year extension to its Track Partnership contract with London Underground, to deliver
essential track renewal work across the network. In local authorities Balfour Beatty was awarded a £245 million seven-year
highways maintenance contract for Coventry City Council, Solihull Metropolitan Borough Council and Warwickshire County
Council. This unique collaborative arrangement will deliver better value for money, improved service resilience and
flexibility in services. Additionally the Group was awarded a £55 million two-year extension by West Sussex County Council
to continue its highways maintenance and improvement scheme works and Connect Roads signed a £36 million, 10-year extension
to its Balfour Beatty Major Projects Highway Services contract to deliver the essential maintenance works on the A50. The
contract covers a 56-kilometer section of the A50 between Stoke and Derby which acts as a strategic east to west link
between the M1 and M6.
In September, the Group acquired Omnicom Engineering Ltd. Omnicom complements Balfour Beatty's existing rail technology
business by bringing remote surveying hardware and software to enhance the Group's Digital Rail strategy.
INFRASTRUCTURE INVESTMENTS
Financial review
The Investments business delivered another strong performance, having continued its strategy of optimising value through
the disposal of mature assets, whilst also continuing to invest in new opportunities and expanding the breadth of assets.
During the year Investments made significant progress in simplifying its operations by exiting Balfour Beatty
Infrastructure Partners (BBIP), an infrastructure fund run at arm's length and focused on secondary opportunities, and
exiting from the Australian market. In total 16 assets were either sold or part sold in the period, with all transactions
either at, or above, the Directors' valuation.
Underlying profit from operations at £89 million (2015: £132 million) was lower than the prior year, predominantly due to a
reduction in profit on disposals as a different mix of assets was sold. Despite an increase in proceeds to £189 million
(2015: £145 million) the reduction in profit on disposals reflected the accounting profile of the assets sold in 2016.
Pre-disposals underlying operating profit decreased to £24 million (2015: £37 million) due to lost income from previous
disposals. Net interest income remained broadly consistent year on year at £26 million (2015: £29 million). The lower
underlying profit from operations resulted in a lower profit before tax at £115 million (2015: £161 million).
Infrastructure Investments 2016 £m 2015 £m
Pre-disposals operating profit1 24 37
Profit on disposals1 65 95
Profit from operations1 89 132
Net interest income from PPP concessions2 26 29
Profit before tax1 115 161
Non-underlying items (6) (10)
Statutory profit before tax 109 151
1 before non-underlying items (Note 8).
2 subordinated debt interest receivable and net interest receivable on PPP financial assets and non-recourse borrowings
A reconciliation of the Group's performance measures to its statutory results is provided in the Measuring Our Performance
section.
Operational review
The Investments business continued to grow with four wins on new projects where equity will be invested, comprising: three
private rental housing projects and one data centre project. In addition, the Investments business was appointed as
third-party manager on two fee-based projects located in Pennsylvania and Florida. In these fee-based projects no equity
will be invested.
In the private rented and regeneration sector, the North American business continues to expand and successfully acquired a
stake in two private rental housing projects in Mobile, Alabama and Atlanta, Georgia. The Mobile portfolio consists of
three properties totalling 320 units and the Atlanta property consists of 437 units. Balfour Beatty Communities will
perform property management services for the properties, leveraging its existing capabilities. In the UK the business
acquired its first private development site at Manchester New Cross. This project will provide a number of units to the
private rented housing sector and construction is expected to begin following financial close in 2017. The Investments
business also won a data centre project in Ontario, Canada. The project is located on the Canadian Forces Base in Borden,
Ontario and covers the design and construction, financing and maintenance for a new 10,000m2 data centre.
Financial close was reached on seven projects: a primary care centres project in Ireland; a student accommodation project
in Glasgow; an offshore transmission project in the North Sea; an energy from waste facility in Gloucestershire; the two US
private rental housing projects; and the data centre in Canada. Five projects have not yet reached financial close.
The Investments business continued to make substantial equity investments in the portfolio, with £65 million invested in
the period (2015: £102 million), of which £8 million was invested in the BBIP infrastructure fund before its sale.
Interests in 16 assets were sold in the period, seven of which were partial sales, generating total book gains on disposal
of £65 million (2015: £95 million from four assets).
The Investments business continues to see significant opportunities for future investment in its core geographic markets in
the UK and North America, across its existing market sectors and as it continues to grow into new adjacent sectors. The
business continues to monitor both the US and UK PPP markets for opportunities, especially following the recent
announcements regarding PF2 in the UK and by the new administration in the US.
Directors' valuation
The Directors' valuation was broadly maintained at £1,220 million (2015: £1,244 million) despite material disposals in the
period, as the number of projects in the portfolio decreased from 73 to 69. Two of these projects, Houston Baptist
University in Texas and West Florida University, were won in previous years and have now been included in the project count
at December 2015.
The Group continued to make substantial investments, with £65 million invested in new and existing projects. This reflected
continued success in targeted sectors with four new projects included in the Directors' valuation for the first time.
The business continued its strategy of realising value through recycling equity from mature, operationally proven assets,
whilst preserving interests in strategic projects that offer opportunities to the wider Group. 16 investments were sold or
part sold during the year, including the Group's interest in the fund managed by Balfour Beatty Infrastructure Partners
(BBIP). In total these sales generated £189 million in proceeds. All sales were transacted either at, or above, the
Directors' valuation. Cash yield from distributions amounted to £64 million (2015: £82 million). The portfolio again
generated cash flow to the Group net of investment.
The methodology used for the Directors' valuation is unchanged, producing a valuation that more closely 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 years, 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.
2015 Equity invested Distributions received Disposal proceeds Unwind of discount New project wins Gain on sales Operational performance (inc. FX movements) 2016
UK 840 57 (40) (189) 59 - 7 (27) 707
North America 404 8 (24) - 31 6 - 88 513
Total 1,244 65 (64) (189) 90 6 7 61 1,220
UK portfolio
In 2016 £57 million of equity investment was made in projects across the portfolio: in the student accommodation project at
Aberystwyth University; the Ayrshire & Arran community hospital; the regeneration development at Eastwick & Sweetwater; and
waste projects at Gloucester and Welland. One new project, a property development at New Cross in Manchester, has been
added to the UK portfolio.
Demand for high-quality infrastructure investments in the secondary market remained strong and the Group took advantage of
this through further sales of mature assets. Investor appetite for yield in the ongoing, low interest rate environment
continues unabated and pricing in the secondary market is therefore expected to remain strong for the foreseeable future.
Interests in 16 assets were sold in the period, seven of which were partial sales, generating total book gains on disposal
of £65 million (2015: £95 million from four assets). The business sold its entire 50% interest in the Wollongong project in
Australia, a 30% interest in the M1/A1 project (where the Group retains a 20% interest), a 40% interest in the Humber
Gateway OFTO (where the Group retains a 20% interest), its entire interest in the BSF portfolio comprised of seven schools
projects and an 80% interest in five street lighting projects (where the Group retains a 20% interest). The Group's
interest in Balfour Beatty Infrastructure Partners (BBIP), which was included in the Directors' valuation but not as a line
item in the project total, was sold during the year. All disposals were either at, or above, the Directors' valuation.
Operational performance movements resulted in a £27 million reduction in value. The most significant components of this
were lower inflation, lower forecast deposit interest rates, and an increase in the assumed tax burden for potential
purchasers. The operational movement reflects lower inflation in 2016 followed by a step-up in 2017 before reaching a 3%
long-term assumption in 2018. The change to interest rates incorporates a lowering of the long-term rate to 2% as a
consequence of the Bank of England's 0.25% reduction in base rates in the second half of 2016. In line with government
announcements in the year the corporation tax rate has been further reduced from a long-term rate of 18% to 17% from April
2020.
Discount rates applied to the UK portfolio range between 7% and 14% depending on project risk and maturity. The implied
weighted average discount rate for the UK portfolio is 8.3% (2015: 8.3%). The impact of selling mature assets has been
offset by a number of investments moving from construction to operations phase. A 1% change in discount rate would change
the value of the UK portfolio by approximately £80 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 increased 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.
Following on from the OECD BEPS project's recommendations on the tax deductibility of interest expense in 2015, HM Treasury
and HM Revenue and Customs issued their consultation on policy design and implementation in May 2016 and published detailed
draft legislation in early 2017. The draft legislation preserves the concept of the public infrastructure exemption put
forward by the OECD and also includes other helpful measures to protect such projects. The proposals and their application
are complex and remain subject to further review, but the initial assessment is that the impact on the Directors' valuation
will not be material. Balfour Beatty will remain engaged with the UK Government to clarify and evaluate the impact of the
draft legislation.
North American portfolio
In 2016, the business won three projects, two investments in residential housing developments at Mobile in Alabama and
Atlanta in Georgia and a PPP data centre in Borden, Canada. In addition, a second phase of the project at University of
Texas, Dallas has been included in the Directors' valuation.
Operational performance movements resulted in an £88 million increase in the value of the portfolio, of which £85 million
was due to the fall in the value of sterling.
Discount rates applied to the North American portfolio range between 7.5% and 10%. The implied weighted average discount
rate is 8.2% (2015: 8.2%) and a 1% change in the discount would change the value of the North American portfolio by
approximately £72 million.
OTHER FINANCIAL 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 before tax of £52 million were charged to the income statement in 2016.
Items included £25 million of costs related to the reassessment of potential liabilities on historical health and safety
breaches, following new sentencing guidelines, and £14 million of restructuring costs incurred relating to the Group's
Build to Last transformation programme which was launched in early 2015.
In 2016, the Group also commissioned a revised independent actuarial report on its historical exposure to industrial
disease related liabilities. As a result, the Group has increased its provision with a £14 million charge to the income
statement in the year. Other non-underlying items included amortisation of acquired intangible assets of £9 million, the
profits from Rail Germany of £1 million, and losses resulting from legacy ES contracts of £6 million. The non-underlying
charges recognised in 2016 were partially offset by a £9 million gain following the release of all remaining provisions
relating to Trans4m Ltd (Trans4m). Trans4m went into creditors' voluntary liquidation on 27 June 2016.
Taxation
The Group's underlying profit before tax from continuing operations for subsidiaries of £5 million (2015: £170 million
loss) resulted in an underlying tax charge of £12 million (2015: £11 million). The tax charge principally arises due to
significant non-recognition of deferred tax assets on losses incurred in the year. In addition tax is levied at the
subsidiary level for US and Canada joint ventures and associates, rather than within the share of joint ventures and
associates.
Discontinued operations
In 2016, Balfour Beatty reached a settlement with the purchaser of Parsons Brinckerhoff (PB), the Group's former
professional services business disposed in October 2014, in relation to outstanding tax matters and indemnities. The Group
received an additional £9 million as a result of the settlement. Provisions in relation to these matters have been
released, resulting in an overall non-underlying gain to the Group of £24 million.
Pensions
The Group's balance sheet includes aggregate deficits of £231 million (2015: £146 million) for pension schemes. The
increase in pension deficit in the year is largely due to a reduction in long-term interest rates and a contraction in
credit spreads. Although the scheme obligations increased, the hedging programmes put in place offset a significant element
of this change with an increase in scheme assets.
A formal triennial funding valuation of the Balfour Beatty Pension Fund (BBPF) was carried out as at 31 March 2016. The
Company and the trustees agreed the key commercial principles of the plan for the BBPF to reach self-sufficiency during
2027 (some three years earlier than previously planned). Balfour Beatty will make cash contributions totalling £182 million
over the next eight years; under the previous agreement cash contributions totalled £376 million over the same period.
These payments include contributions related to the Scottish Limited Partnership (SLP) structure established in 2015. The
Company will also transfer additional assets into the SLP worth up to £87 million by 2019. The Company has agreed to amend
the existing dividend sharing mechanism such that if the dividend cover ratio falls below 3x in 2016, 2.5x in 2017 or 2x
from 2018 onwards, funding to the BBPF will be accelerated.
The Group also completed the formal triennial funding valuation for the Railways Pension Scheme carried out as at 31
December 2013. As a result, the Group agreed to make ongoing fixed deficit contributions of £6 million per annum which
should reduce the deficit to zero by 2031. The triennial funding valuation as at 31 December 2016 is now underway.
Goodwill
The goodwill on the Group's balance sheet at 31 December 2016 increased to £937 million (2015: £844 million), primarily
relating to movements in foreign exchange rates. Impairment reviews have been carried out, and none of the carrying values
have been impaired.
In light of the significant, albeit reduced, losses incurred within the UK construction business in 2016 the Group has
considered whether a reasonable possible change in assumptions would lead to an impairment of the goodwill in the related
cash-generating units and concluded that it is not the case. The stabilisation and recovery of the Group's UK construction
business to more normal levels of performance is, however, a key assumption underpinning the cash flow forecasts used to
assess the recoverable amount of the related goodwill.
Banking facilities
Balfour Beatty's committed banking facility totals £400 million. The purpose of this syndicated revolving credit facility
is to provide liquidity from a set of core relationship banks to support ongoing activities. The Company completed its
refinancing in December 2015 with the facility extending through to 2018. In November 2016, £375 million of the facility
was extended until December 2019. A further one-year extension, through to 2020, is available, subject to bank approval. At
31 December 2016, £350 million of this facility was undrawn.
Financial risk factors and going concern
The key financial risk factors for the Group remain largely unchanged. 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 12-month basis as at the June and December reporting
dates. At 31 December 2016, 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 2017. 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;
* excluding the non-recourse net borrowings of PPP subsidiaries, the Group had net cash balances of £173 million at 31
December 2016; and
* the Group's committed bank facility totals £400 million, of which £350 million was undrawn at 31 December 2016.
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 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 its Annual Report with the aim of providing
transparency and clarity on the measures adopted internally to assess performance.
Throughout this report, the Group has presented performance measures which are considered most relevant to the Group and
are used to measure the Group's performance on a day-to-day basis.
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 of the Annual Report and Accounts are encouraged to review the financial statements in their entirety.
Performance measures used to assess the Group's operations in the year
Underlying profit from operations (PFO)
Underlying PFO is presented before finance cost and interest income and is the key measure used to assess the Group's
performance in the Construction Services and Support Services segments. This is also a common measure used by the Group's
peers operating in these sectors.
This measure reflects the returns to the Group from services provided in these operations that are generated from
activities that are not financing in nature and therefore an underlying pre-finance cost measure is more suited to
assessing underlying performance.
Underlying profit before tax (PBT)
The Group assesses performance in its Infrastructure Investments segment using an underlying PBT measure. This differs from
the underlying PFO measure used to measure the Group's Construction Services and Support Services segments because in
addition to margins generated from operations, there are returns to the Investments business which are generated from the
financing element of its projects.
These returns take the form of subordinated debt interest receivable and interest receivable on PPP financial assets which
are included in the Group's income statement in investment income. These are then offset by the finance cost incurred on
the non-recourse debt associated with the underlying projects, which is included in the Group's income statement in finance
costs.
Measuring the Group's performance
The following measures are referred to in this Annual Report 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 the
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 112 to 118 of the Annual Report and Accounts.
The Group's statutory measures take into account all of the factors, including those that it cannot influence (principally
foreign currency fluctuations) and also large non-recurring items which do not reflect the ongoing underlying performance
of the Group.
Performance measures
In assessing its performance, the Group has adopted certain non-statutory measures because, unlike its statutory measures,
these cannot be derived directly from its financial statements. The Group commonly uses the following measures to assess
its performance:
a) Order book
The Group's disclosure of its order book is aimed to provide insight into its pipeline of work and future performance. The
Group's order book is not a measure of past performance and therefore cannot be derived from its financial statements.
The Group's order book comprises the unexecuted element of orders on contracts that have been secured. Where contracts are
subject to variations, only secured contract variations are included in the reported order book.
Where contracts fall under framework agreements, an estimate is made of orders to be secured under that framework
agreement. This is based on historical trends from similar framework agreements delivered in the past and the estimate of
orders included in the order book is that which is probable to be secured.
b) Underlying performance
The Group adjusts for certain non-underlying items which the Board believes 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
− 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 and certain legacy ES contracts have been treated as non-underlying items as the Group is
committed to exiting these parts of the business.
Further details of these non-underlying items are provided in Note 8.
A reconciliation has been provided on the next page to show how the Group's statutory results are adjusted to exclude
significant items that are non-recurring and their impact on its statutory financial information, both as a whole and in
respect of specific line items.
Reconciliation of 2016 statutory results to performance measures
2016 Build Intangible Provision increases/ Gains on disposal £m Results Results of Rail Germany Other 2016 performance
statutory to Last restructuring costs amortisation (releases) of ES £m £m measures
results £m £m £m £m £m
£m
Continuing operations
Revenue including share of joint ventures and associates (performance) 8,683 - - - - (3) (150) - 8,530
Share of revenue of joint ventures and associates (1,760) - - - - - 12 - (1,748)
Group revenue (statutory) 6,923 - - - - (3) (138) - 6,782
Cost of sales (6,639) - - - - 9 127 - (6,503)
Gross profit 284 - - - - 6 (11) - 279
Gain on disposals of interests in investments 65 - - - - - - - 65
Amortisation of acquired intangible assets (9) - 9 - - - - - -
Other net operating expenses (381) 14 - 31 (8) - 10 2 (332)
Group operating profit/(loss) (41) 14 9 31 (8) 6 (1) 2 12
Share of results of joint ventures and associates 56 - - (1) - - - - 55
Profit/(loss) from operations 15 14 9 30 (8) 6 (1) 2 67
Investment income 75 - - - - - - - 75
Finance costs (82) - - - - - - - (82)
Profit/(loss) before taxation 8 14 9 30 (8) 6 (1) 2 60
Taxation (8) (4) (3) - - - 3 - (12)
Profit/(loss) for the year from continuing operations - 10 6 30 (8) 6 2 2 48
Profit for the year from discontinued operations 24 - - - (24) - - - -
Profit for the year 24 10 6 30 (32) 6 2 2 48
Reconciliation of 2016 statutory results to performance measures by segment
Profit/(loss) from operations 2016 Build Intangible Provision increases/ (releases) Gains on disposal Results Results of Rail Germany Other 2016 performance
statutory to Last restructuring costs amortisation £m £m of ES £m £m measures
results £m £m £m £m
£m
Segment
Construction Services (57) 12 3 19 (5) 6 (1) - (23)
Support Services 22 1 - 11 - - - - 34
Infrastructure Investments 83 - 6 - (3) - - 3 89
Corporate activities (33) 1 - - - - - (1) (33)
Total 15 14 9 30 (8) 6 (1) 2 67
Reconciliation of 2015 statutory results to performance measures
2015 Build Intangible Other restructuring costs IT assets impairment Gains on disposal Results of ES Results of Rail Other 2015 performance
statutory to Last restructuring costs amortisation £m £m £m £m Germany£m £m measures
results £m £m £m
£m
Continuing operations
Revenue including share of joint ventures and associates (performance) 8,444 - - - - - (30) (179) - 8,235
Share of revenue of joint ventures and associates (1,489) - - - - - - 18 - (1,471)
Group revenue (statutory) 6,955 - - - - - (30) (161) - 6,764
Cost of sales (6,798) - - - - 38 151 (6,609)
Gross profit 157 - - - - - 8 (10) - 155
Gain on disposals of interests in investments 95 - - - - - - - - 95
Amortisation of acquired intangible assets (10) - 10 - - - - - - -
Other net operating expenses (468) 23 - 9 17 (16) - 13 19 (403)
Group operating profit/(loss) (226) 23 10 9 17 (16) 8 3 19 (153)
Share of results of joint ventures and associates 44 - - - - - - 3 - 47
Profit/(loss) from operations (182) 23 10 9 17 (16) 8 6 19 (106)
Investment income 52 - - - - - - - - 52
Finance costs (69) - - - - - - - - (69)
Profit/(loss) before taxation (199) 23 10 9 17 (16) 8 6 19 (123)
Taxation (7) - (4) (2) - - - 2 - (11)
Loss for the year from continuing operations (206) 23 6 7 17 (16) 8 8 19 (134)
Loss for the year from discontinued operations - - - - - (1) - - - (1)
Profit/(loss) for the year (206) 23 6 7 17 (17) 8 8 19 (135)
Reconciliation of 2015 statutory results to performance measures by segment
Profit/(loss) from operations 2015 Build Intangible Other restructuring costs IT assets impairment Gains on disposal Results of ES Results of Rail Germany Other 2015 performance measures
statutory to Last amortisation £m £m £m £m £m £m £m
results restructuring costs £m
£m £m
Segment
Construction Services (280) 14 4 9 9 (16) 8 6 17 (229)
Support Services 11 6 - - 7 - - - - 24
Infrastructure Investments 122 - 6 - - - - - 4 132
Corporate activities (35) 3 - - 1 - - - (2) (33)
Total (182) 23 10 9 17 (16) 8 6 19 (106)
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:
2016 2015
£m £m
Underlying profit from operations (section (b) and Note 5) 89 132
Add: Subordinated debt interest receivable+ 29 24
Interest receivable on PPP financial assets+ 21 24
Less: Non-recourse borrowings finance cost+ (24) (19)
Underlying profit before tax 115 161
Non-underlying items (section (b) and Note 5) (6) (10)
Statutory profit before tax 109 151
+ Refer to Note 6 and Note 7.
d) Underlying earnings per share
In line with the Group's measurement of underlying performance, the Group also presents its earnings per share on an
underlying continuing basis. The table below reconciles this to the statutory earnings per share.
Reconciliation from statutory EPS to performance EPS
2016 2015
Pence Pence
Statutory earnings/(loss) per ordinary share 3.5 (30.1)
Less: earnings from discontinued operations (3.5) (0.1)
Statutory loss per ordinary share from continuing operations - (30.2)
Amortisation of acquired intangible assets 0.9 0.8
Other non-underlying items 6.1 9.7
Underlying earnings/(loss) per ordinary share from continuing operations (performance) 7.0 (19.7)
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 earned 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 debt/cash reconciliation
2016 Adjustment 2016 2015 Adjustment 2015
statutory £m performance statutory £m performance
£m £m £m £m
Total cash within the Group 769 (7) 762 666 (20) 646
Cash and cash equivalents - infrastructure concessions 7 (7) - 20 (20) -
- other 762 - 762 646 - 646
Total debt within the Group (929) 340 (589) (966) 483 (483)
Borrowings - non-recourse loans (240) 240 - (385) 385 -
- other (589) - (589) (483) - (483)
Liability component of preference shares (100) 100 - (98) 98 -
Net (debt)/cash (160) 333 173 (300) 463 163
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 borrowings of £46m for 2016.
Using a statutory measure (inclusive of non-recourse elements and the liability component of the Company's preference
shares) gives average net borrowings of £230m for 2016.
h) Directors' valuation of the Investments portfolio
The Group uses a different methodology to assess the value of its Investments portfolio. As described in the Directors'
valuation section, the Directors' valuation has been undertaken using forecast cash flows for each project based on
progress to date and market expectations of future performance. These cash flows have been discounted using different
discount rates depending on project risk and maturity, reflecting secondary market transaction experience. As such, the
Board believes that this measure better reflects the potential returns to the Group from this portfolio.
The Directors have valued the Investments portfolio at £1.2bn at the year end. 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.
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:
2016 statutory growth compared to performance growth
Construction Services
UK US Rail Gammon Middle East Total Support Services Infrastructure Investments Total
Revenue (£m)
- More to follow, for following part double click ID:nRSP6150ZcRecent news on Balfour Beatty
See all newsREG - Balfour Beatty PLC - Director/PDMR Shareholding
AnnouncementREG - Balfour Beatty PLC - Balfour Beatty disposes of Foundry Courtyard
AnnouncementREG - Balfour Beatty PLC - Transaction in Own Shares
AnnouncementREG - Balfour Beatty PLC - Transaction in Own Shares
AnnouncementREG - Balfour Beatty PLC - Transaction in Own Shares
Announcement