REG - Balfour Beatty PLC - Balfour Beatty 2016 half-year results <Origin Href="QuoteRef">BALF.L</Origin> - Part 4
19/08/2016 13:09
- Part 4: For the preceding part double click ID:nRSQ3657Hc
Current
Trade receivables 545 540 506
Less: provision for impairment of trade receivables (7) (21) (11)
538 519 495
Other receivables 41 43 45
Due from joint ventures and associates 62 36 55
Due from joint operation partners 12 19 10
Contract retentions receivable+ 205 217 202
Accrued income 21 47 24
Prepayments 42 60 54
Due on disposals (Refer to Note 19.2.3) 73 - -
994 941 885
Non-current
Trade receivables - 2 -
Other receivables 3 2 2
Due from joint ventures and associates 6 17 12
Due from joint operation partners - 3 -
Contract retentions receivable+ 137 78 100
Prepayments - 6 -
146 108 114
Total trade and other receivables 1,140 1,049 999
+ Including £339m (2015: first half £292m; full-year £298m) construction contract retentions receivable.
14 Trade and other payables
2016first halfunaudited£m 2015first halfunaudited£m 2015yearaudited£m
Current
Trade and other payables 916 1,005 838
Accruals 750 836 755
Deferred income 6 12 7
Advance payments on contracts - 5 -
VAT, payroll taxes and social security 64 85 67
Due to joint ventures and associates 2 18 25
Dividends on preference shares - 5 5
Due on acquisitions 3 3 3
1,741 1,969 1,700
Non-current
Trade and other payables 104 66 86
Accruals 8 17 18
Deferred income - 2 1
Due to joint ventures and associates 7 11 11
Due on acquisitions 13 13 14
132 109 130
Total trade and other payables 1,873 2,078 1,830
15 PPP financial assets
Roads£m Other £m Total £m
At 1 January 2015 audited 260 299 559
Income recognised in the income statement
- construction contract margin 1 - 1
- interest income (Note 5) 8 4 12
Losses recognised in the statement of comprehensive income
- fair value movements (14) (2) (16)
Other movements
- cash expenditure 21 17 38
- cash received (12) (3) (15)
- disposal of interest in Thanet - (214) (214)
At 26 June 2015 unaudited 264 101 365
Income recognised in the income statement
- interest income (Note 5) 9 3 12
Gains/(losses) recognised in the statement of comprehensive income
- fair value movements 6 (3) 3
Other movements
- cash expenditure 16 21 37
- cash received (12) (3) (15)
At 31 December 2015 audited 283 119 402
Income recognised in the income statement
- interest income (Note 5) 8 4 12
Gains recognised in the statement of comprehensive income
- fair value movements 17 5 22
Other movements
- cash expenditure 11 3 14
- cash received (15) (3) (18)
At 1 July 2016 unaudited 304 128 432
16 Retirement benefit assets and liabilities
Principal actuarial assumptions for the IAS 19 accounting valuations of the Group's principal schemes 2016first halfunaudited£m 2015first halfunaudited£m 2015yearaudited£m
Discount rate on obligations 2.70 3.65 3.70
Inflation rate - RPI 2.75 3.15 3.00
- CPI 1.35 1.75 1.60
Future increases in pensionable salary 1.35 1.75 1.60
Analysis of net liabilities in the Balance Sheet 2016first halfunaudited£m 2015first halfunaudited£m 2015yearaudited£m
Balfour Beatty Pension Fund 27 (114) (43)
Railways Pension Scheme^ (71) (62) (51)
Other schemes* (52) (55) (52)
(96) (231) (146)
* Other schemes include the Group's deferred compensation obligations for which available-for-sale investments in mutual
funds of £21m (2015: first half £20m, full-year £20m) are held by the Group to satisfy these obligations.
^ The valuation of the Railways Pension Scheme as at 31 December 2013 is ongoing.
Amounts recognised in the Balance Sheet 2016first halfunaudited£m 2015first halfunaudited£m 2015yearaudited£m
Present value of obligations (3,904) (3,550) (3,397)
Fair value of plan assets 3,808 3,319 3,251
Net liabilities in the Balance Sheet (96)+ (231) (146)
+ This amount represents the aggregate of the retirement benefit assets of £27m and the retirement benefit liabilities of
£123m at 1 July 2016. These amounts are shown separately on the balance sheet as the Balfour Beatty Pension Fund is in a
net surplus position of £27m.
Movements in the retirement benefit net liabilities for the period 2016first halfunaudited£m 2015first halfunaudited£m 2015yearaudited£m
At beginning of period (146) (128) (128)
Currency translation differences (6) 3 (1)
Current service cost (3) (4) (7)
Finance cost (61) (62) (123)
Interest income 59 60 120
Actuarial movements - on obligations from changes to financial assumptions (538) (51) 51
- on obligations from changes in demographic assumptions - - 16
- on obligations from experience (losses)/gains - (2) 1
- on assets 560 (80) (154)
Contributions from employer - regular funding 1 2 4
- ongoing deficit funding 29 28 66
Benefits paid 2 2 6
Settlements 1 1 3
Reclassified to assets held for sale (Note 12) 6 - -
At end of period (96)+ (231) (146)
+ This amount represents the aggregate of the retirement benefit assets of £27m and the retirement benefit liabilities of
£123m at 1 July 2016. These amounts are shown separately on the balance sheet as the Balfour Beatty Pension Fund is in a
net surplus position of £27m.
In the first-half of 2016, the Group recorded net actuarial gains on its retirement benefit schemes of £22 million (2015:
first half £133m net losses; full-year £86m net losses) primarily driven by a strong performance from return-seeking assets
and the interest rate hedging strategy, more than offsetting an increase in liabilities due to falling long-term interest
rates in the period.
16 Retirement benefit assets and liabilities continued
The investment strategy of the Balfour Beatty Pension Fund (BBPF) and the sensitivity analysis of the Group's retirement
benefit obligations and assets to different actuarial assumptions are set out in Note 28 on pages 138 to 139 and 144 of the
Annual Report and Accounts 2015.
The formal triennial funding valuation of the BBPF is currently being carried out, with a valuation date of 31 March 2016.
Ahead of the conclusion of the formal valuation and funding plan, the Company and the trustee have agreed the key
commercial principles which will underpin these. These will involve the creation of a new journey plan which aims for the
BBPF to reach self-sufficiency during 2027. The Company will make cash contributions totalling £182m over the next eight
years (including the contributions related to the Scottish Limited Partnership (SLP) structure established in 2015); cash
contributions under the previous agreement totalled £376 million over the same period. The Company will also transfer
additional assets into the SLP worth up to £87m by 2019. The Company has agreed 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.
17 Share capital
During the half-year ended 1 July 2016, 1,565,128 (2015: first half 3,340,737; full-year 7,292,588) ordinary shares were
purchased for £4m (2015: first half £7m; full-year £17m) by the Group's employee discretionary trust to satisfy awards
under the Performance Share Plan, the Deferred Bonus Plan and the Restricted Share Plan.
18 Notes to the statement of cash flows
Continuing operations
18.1 Cash (used in)/generated from operations Underlying items2016first half unaudited1£m Non-underlying items2016first half unaudited£m Discontinued operations 2016first halfunaudited£m Total2016first half unaudited£m Total2015first halfunaudited£m Total2015year audited£m
Profit/(loss) from operations 5 (28) - (23) (140) (182)
Profit from discontinued operations - - 2 2 1 -
Share of results of joint ventures and associates (20) - - (20) (8) (44)
Depreciation of property, plant and equipment 17 - - 17 17 35
Amortisation of other intangible assets 3 4 - 7 13 25
Impairment of IT intangible assets - - - - - 17
Pension deficit payments (29) - - (29) (28) (66)
Movements relating to share-based payments 3 - - 3 1 5
Profit on disposal of investments in infrastructure concessions (52) - - (52) (84) (95)
Profit on disposal of property, plant and equipment (1) - - (1) (1) (1)
Net gain on disposal of other businesses - (6) (2) (8) (17) (14)
Impairment of land/goodwill relating to Blackpool Airport - 2 - 2 - 4
Impairment of assets within Rail Germany - - - - - 7
Other non-cash items 2 - - 2 (1) (4)
Operating cash flows before movements in working capital (72) (28) - (100) (247) (313)
(Increase)/decrease in operating working capital (21) 22 - 1 211 178
Inventories and non-construction work in progress 14 - - 14 19 27
Due from construction contract customers (3) (12) - (15) 118 182
Trade and other receivables (4) (6) - (10) 42 74
Due to construction contract customers (17) 9 - (8) 31 126
Trade and other payables (32)9) 7 - (25) (30) (236)
Provisions 21 24 - 45 31 5
Cash used in operations (93) (6) - (99) (36) (135)
1 Before non-underlying items (Note 7).
18 Notes to the statement of cash flows continued
18.2 Cash and cash equivalents 2016first halfunaudited£m 2015first halfunaudited£m 2015yearaudited£m
Cash and deposits 541 680 562
Term deposits 162 44 84
Bank overdrafts (3) - (3)
Cash and cash equivalents, excluding cash balances within infrastructure concessions 700 724 643
Cash balances within infrastructure concessions 25 16 20
725 740 663
18.3 Analysis of net borrowings 2016first halfunaudited£m 2015first halfunaudited£m 2015yearaudited£m
Cash and cash equivalents, excluding overdrafts and cash balances within infrastructure concessions 703 724 646
Bank overdrafts (3) - (3)
US private placement (263) (223) (236)
Liability component of convertible bonds (236) (230) (233)
Loans under committed facilities (75) - -
Other loans (10) (10) (10)
Finance leases (1) (1) (1)
Net cash excluding infrastructure concessions 115+ 260 163
Non-recourse infrastructure concessions project finance loans at amortised cost with final maturity between 2019 and 2048 (413) (343) (385)
Infrastructure concessions cash and cash equivalents 25 16 20
(388) (327) (365)
Net borrowings (273) (67) (202)
+Net cash for the Group excluding infrastructure concessions and including £14m of cash reported within assets held for sale amounts to £129m at 1 July 2016. Refer to Note 12.
18.4 Analysis of movement in net (borrowings)/cash Infrastructureconcessionsnon-recourseproject finance2016first halfunaudited£m Other2016first halfunaudited£m Total2016first halfunaudited£m 2015first halfunaudited£m 2015yearaudited£m
Opening net (borrowings)/cash (365) 163 (202) (226) (226)
Currency translation differences (4) 23 19 7 (15)
Net increase/(decrease) in cash and cash equivalents 5 21 26 (11) (83)
Accretion on convertible bonds - (3) (3) (3) (6)
Proceeds from new loans (36) (75) (111) (33) (79)
Repayments of loans 12 - 12 4 12
Disposal of non-recourse borrowings - - - 177 177
Net (increase)/decrease in cash within assets held for sale - (14) (14) 18 18
Closing net (borrowings)/cash (388) 115 (273) (67) (202)
18.5 Borrowings
During the first-half of 2016, the significant movements in net borrowings within the infrastructure concessions
non-recourse project finance were: a net increase in cash and cash equivalents of £5m (2015: first half decrease £24m,
full-year decrease £20m), an increase of £36m (2015: first half £33m, full-year £79m) in non-recourse loans funding the
development of financial assets in infrastructure concession subsidiaries; and repayment of loans of £12m (2015: first half
£4m, full-year £11m).
18 Notes to the statement of cash flows continued
18.5 Borrowings
During the first-half of 2016, the significant movements in net cash within the Group's other financing arrangements were:
an increase in cash and cash equivalents of £21m (2015: first half increase £13m, full-year decrease £63m), a draw-down of
£75m (2015: first half £nil, full-year £nil) on the Group's revolving credit facility and a transfer of cash of £14m to
assets held for sale (2015: £18m decrease).
19 Acquisitions and disposals
19.1 Acquisitions
There were no material acquisitions made in the first-half of 2016.
Deferred consideration paid during the first-half of 2016 in respect of acquisitions completed in earlier years was £3m.
This related to the Group's acquisition of Centex Construction in 2007.
19.2 Disposals
Notes Disposal date Entity/business Percentagedisposed % Cashconsideration£m Net assetsdisposed £m Amount recycled fromreserves£m Direct costs incurred £m Underlying gain £m Non-underlying gain/(loss) £m
19.2.1 15 April 2016 Connect M1-A1 Holdings Ltd ^ 30% 15 (10) - - 5 -
19.2.2 5 May 2016 Living & Learning Unit Trust ^ 50% 19 (1) (8) (1) 9 -
19.2.3 1 July 2016 BSF Schools: Islington, Southwark, Blackburn with Darwen & Bolton, Oldham, Hertfordshire, Ealing, Derby City ^ 80/90% 73# (27) (8) - 38 -
19.2.4 1 July 2016 BBIP Infrastructure Fund + 17.8% 48 (48) 7 (1) - 6
19.2.5 1 July 2016 BBIP Advisor * 100% - (3) - - - (3)
155x (89) (9) (2) 52 3
* Subsidiary.
^ Joint venture.
+ Associate.
# This sale was achieved by virtue of a put/call structure with a preferred bidder. Completion of this sale is ongoing and
therefore the consideration is included in amounts due on disposals. Refer to Note 13.
X Total cash consideration received by the Group of £84m presented in the cash flow statement also includes £2m cash
received in respect of Parsons Brinckerhoff (Note 7.2.1.1) and £2m of deferred cash consideration received in respect of
SSL (Note 7.1.4.6).
19.2.1 On 15 April 2016, the Group disposed of a 30% interest in Connect M1-A1 Holdings Ltd for a cash consideration of
£15m. The infrastructure concession disposal resulted in a net gain of £5m being recognised within underlying operating
profit. The Group retains a 20% interest in Connect M1-A1 Holdings Ltd.
19.2.2 On 5 May 2016, the Group disposed of its 50% interest in Living & Learning Holdings Custodians Pty Ltd (Living &
Learning Unit Trust) for a cash consideration of £19m. The infrastructure concession disposal resulted in a net gain of £9m
being recognised within underlying operating profit, comprising: a gain of £18m in respect of the investment in the joint
venture, an £8m loss in respect of revaluation reserves recycled to the income statement and £1m costs of disposal
incurred.
19.2.3 On 1 July 2016, the Group disposed of its entire interest in seven BSF (Building Schools for the Future) projects:
Islington, Southwark, Blackburn with Darwen & Bolton, Oldham, Hertfordshire, Ealing and Derby City for a cash consideration
of £73m. On this date, the Group ceased to jointly control these BSF projects by virtue of a put/call structure with a
preferred bidder. The completion of the disposal is currently ongoing and therefore the consideration is included in trade
and other receivables as amounts due on disposals at the half-year. Refer to Note 13. The infrastructure concession
disposal resulted in a net gain of £38m being recognised within underlying operating profit for the half-year ended 1 July
2016, comprising: a gain of £46m in respect of the investments in the joint ventures and an £8m loss in respect of
revaluation reserves recycled to the income statement.
19 Acquisitions and disposals continued
19.2 Disposals continued
19.2.4 On 1 July 2016, the Group disposed of its 17.8% interest in the BBIP Infrastructure Fund for an initial cash
consideration of £48m. The disposal resulted in a net gain of £6m being recognised within non-underlying operating profit,
comprising: a gain of £nil in respect of the investment in the associated undertaking, a £7m gain in respect of revaluation
reserves recycled to the income statement and £1m costs of disposal incurred.
19.2.5 On 1 July 2016, the Group disposed of its 100% interest in the BBIP Advisor for a cash consideration of £nil. The
disposal resulted in a net loss of £3m being recognised within non-underlying operating profit, comprising a loss of £3m in
respect of the investment in the subsidiary.
20 Related party transactions
The Group has contracted with, provided services to, and received management fees from, certain joint ventures and
associates amounting to £184m (2015: first half £235m, full-year £414m). These transactions occurred in the normal course
of business at market rates and terms. In addition, the Group procured equipment and labour on behalf of certain joint
ventures and associates which were recharged at cost with no mark-up. The amounts due from or to joint ventures and
associates at the reporting date are disclosed in Notes 13 and 14 respectively.
During the half-year ended 1 July 2016, the Group also entered into the following transactions with related parties which
are not members of the Group. The following companies were related parties in the first-half of 2016 as they are controlled
or jointly controlled by a non-executive director of Balfour Beatty plc.
Sale of goods& services 2016first half Purchase of goods 2016first half Amounts owed by related parties 2016first half Amounts owed to related parties 2016first half
unaudited£m unaudited£m unaudited£m unaudited£m
Urenco Ltd 25 - 1 -
Anglian Water Group Ltd 5 4 - 2
30 4 1 2
All transactions with these related parties were conducted on normal commercial terms, equivalent to those conducted with
external parties. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or
received. No expense has been recognised in the period for bad or doubtful debts in respect of the amounts owed by related
parties.
21 Financial instruments
Fair value estimation
The Group holds certain financial instruments on the balance sheet at their fair values. The following hierarchy classifies
each class of financial asset or liability in accordance with the valuation technique applied in determining its fair
value.
Level 1 - The fair value is calculated based on quoted prices traded in active markets for identical assets or
liabilities.
The Group holds available-for-sale investments in mutual funds which are traded in active markets and valued at the closing
market price at the reporting date.
Level 2 - The fair value is based on inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly.
The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows utilising yield
curves at the reporting date and taking into account own credit risk. Own credit risk for Infrastructure Investments' swaps
is not material and is calculated using the following credit valuation adjustment (CVA) calculation: loss given default
multiplied by exposure multiplied by probability of default.
The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the reporting
date and yield curves derived from quoted interest rates matching the maturities of the foreign exchange contracts. Own
credit risk for the other derivative liabilities is not material and is calculated by applying a relevant credit default
swap (CDS) rate obtained from a third party.
Level 3 - The fair value is based on unobservable inputs.
There have been no transfers between these categories in the current period or preceding year.
Financial instruments at fair value 2016first halfunaudited£m 2015first halfunaudited£m 2015yearaudited£m
Financial assets
Level 1
Available-for-sale mutual fund financial assets 21 20 20
Level 2
Financial assets - foreign currency contracts 4 1 1
Level 3
Available-for-sale PPP financial assets (Note 15) 432 365 402
Investment in the Infrastructure Fund (Note 4.3) - 33 38
Total assets measured at fair value 457 419 461
Financial liabilities
Level 2
Financial liabilities - foreign currency contracts (3) (4) -
Financial liabilities - infrastructure concessions interest rate swaps (112) (68) (78)
Total liabilities measured at fair value (115) (72) (78)
The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash
flows at the current market interest rate that is available to the Group for similar financial instruments.
21 Financial instruments continued
Level 3 financial assets
PPP financial assets
The fair value of the Group's PPP financial assets is determined in the construction phase by applying an attributable
profit margin by reference to the construction margin on non-PPP projects reflecting the construction risks retained by the
construction contractor, and fair value of construction services performed. In the operational phase it is determined by
discounting the future cash flows allocated to the financial asset at a discount rate which is based on long-term gilt
rates adjusted for the risk levels associated with the assets, with market-related movements in fair value recognised in
other comprehensive income and other movements recognised in the income statement. Amounts originally recognised in other
comprehensive income are transferred to the income statement upon disposal of the asset.
A change in the discount rate would have a significant effect on the value of the asset and a 50 basis points
increase/decrease, which represents management's assessment of a reasonably possible change in the risk-adjusted discount
rate, would lead to a £20m decrease (2015: first half £15m; full-year £14m) / £18m increase (2015: first half £15m;
full-year £15m) in the fair value of the assets taken through equity. Refer to Note 15 for a reconciliation of the movement
from the opening balance to the closing balance.
22 Principal risks and uncertainties
The nature of the principal risks and uncertainties which could adversely impact the Group's profitability and ability to
achieve its strategic objectives include: external risks arising from the effects of national or market trends and
political change and the complex and evolving legal and regulatory environments in which the Group operates; strategic
risks which may arise as the Group moves into new territories and expands through acquisitions; organisation and management
risks including business conduct and people related risks; and operational risks arising from bidding, project execution,
supply chain and health, safety and sustainability matters.
The Directors do not consider that the nature of the principal risks and uncertainties facing the Group has fundamentally
changed since the publication of the Annual Report and Accounts 2015. However, the Directors continue to evaluate the
impact on the Group of the UK's decision to exit the European Union. At this stage there is little sign of impact on
Balfour Beatty's markets as a result of this. However, given the late cycle nature of the construction industry it is too
soon for clarity as to what, if any, direct impact the decision will have.
Balfour Beatty has called on the UK Government to minimise uncertainty and recommit to major projects such as the High
Speed 2 rail project to provide the construction industry with a backdrop which will allow skilled workers and their
capabilities to be retained in the industry and training for new apprenticeships and graduates to continue apace,
mitigating any restrictions on labour movement which may result from leaving the European Union.
The transformation of Balfour Beatty over the last 18 months means that management has much greater visibility and control
over the business than was the case prior to Build to Last. This means that the strengthened leadership team is much better
positioned to adjust and respond to changes in market conditions in the UK or elsewhere.
23 Contingent liabilities
The Group and certain subsidiary undertakings have, in the normal course of business, given guarantees and entered into
counter-indemnities in respect of bonds relating to the Group's own contracts and given guarantees in respect of their
share of certain contractual obligations of joint ventures and associates and certain retirement benefit liabilities of the
Balfour Beatty Pension Fund and the Railways Pension Scheme. Guarantees are treated as contingent liabilities until such
time as it becomes probable payment will be required under the terms of the guarantee.
Provision has been made for the Directors' best estimate of known legal claims, investigations and legal actions in
progress. The Group takes legal advice as to the likelihood of success of claims and actions and no provision is made where
the Directors consider, based on that advice, that the action is unlikely to succeed, or that the Group cannot make a
sufficiently reliable estimate of the potential obligation.
24 Events after the reporting date
There are no material post balance sheet events between the balance sheet date and the date of this report.
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