REG - Balfour Beatty PLC - RESULTS FOR THE HALF-YEAR ENDED 27 JUNE 2014 <Origin Href="QuoteRef">BALF.L</Origin> - Part 5
29/10/2014 11:41
- Part 5: For the preceding part double click ID:nRSK7414Od
(333)
Currency translation differences - (7) (7) 24 3
Net (decrease)/increase in cash and cash equivalents (19) (59) (78) 22 10
Net increase in term deposits greater than 3 months - - - 2 -
Proceeds from US private placement - - - (231) (231)
Proceeds from liability component of convertible bonds and interest accretion - (3) (3) - (221)
Proceeds from new loans (19) (262) (281) (47) (110)
Proceeds from new finance leases - - - - (1)
Repayment of loans 4 14 18 9 408
Repayment of finance leases - - - 1 2
Disposal of non-recourse borrowings 164 - 164 - 72
Movement in net assets held for sale - (4) (4) (16) (19)
Closing net borrowings (224) (387) (611) (569) (420)
18.5 Borrowings
During the first half of 2014, the significant movements in borrowings were: a net drawdown of short term loans of £248m
(2013: first half £18m, full-year £nil); a drawdown of US private placement loans of £nil (2013: first half £231m,
full-year £231m); issuing unsecured convertible bonds with a liability component of £nil (2013: first half £nil, full-year
£221m); a net repayment of short term loans of £nil (2013: first half £nil, full-year £396m); a £51m net decrease in bank
overdrafts (2013: first half £10m net decrease, full-year £68m net increase); a £19m increase in non-recourse borrowings
funding the development of financial assets in PPP subsidiaries (2013: first half £29m, full-year £110m), disposal of
non-recourse borrowings in Transform Schools (Knowsley) Holdings Limited of £164m (2013: first half £nil; 2013 full-year:
£nil) and Connect CNDR Ltd of £nil (2013: first half £nil; 2013 full-year: £72m) and a £4m repayment of non-recourse loans
(2013: first half £9m, full-year £12m).
19 Acquisitions and disposals
19.1 Acquisitions
No acquisitions were made in the first half of 2014 and in 2013.
Deferred consideration paid during the 2014 half-year in respect of acquisitions completed in earlier years was £1m
relating to the acquisition of Subsurface, and £2m on previous acquisitions.
19.2 Disposals
On 8 January 2014 the Group disposed of its Rail business in Scandinavia for a cash consideration of £2m. The disposal
resulted in a £1m net gain being recognised as a non-underlying item, comprising a £nil gain/loss in respect of the fair
value of net assets disposed, including cash disposed of £9m, and a £1m gain on recycling currency translation reserves to
the income statement.
On 22 May 2014 the Group disposed of its 50% interest in Consort Healthcare (Durham) Holdings Limited (CHDHL) for an agreed
cash consideration of £55m. On this date the Group ceased to jointly control CHDHL by virtue of a put / call structure with
a preferred bidder. The disposal was completed on 30 June 2014 and therefore the consideration is included in trade and
other receivables. The disposal resulted in a net gain of £27m being recognised within underlying operating profit for the
half-year ended 27 June 2014, comprising a gain of £12m in respect of the disposal of the investment in the joint venture
and a £15m gain in respect of revaluation reserves recycled to the income statement.
On 30 May 2014 the Group disposed of its 100% interest in Transform Schools (Knowsley) Holdings Limited (TSKHL) for an
agreed cash consideration of £42m. On this date the Group ceased to jointly control TSKHL by virtue of a put / call
structure with a preferred bidder. The disposal of the subsidiary was completed on 12 June 2014. The disposal resulted in a
net gain of £24m being recognised within underlying operating profit, comprising a gain of £32m in respect of the fair
value of net assets disposed and a £8m loss in respect of revaluation reserves recycled to the income statement. This
includes cash disposed of £9m.
In the first half of 2014, the Group finalised the cash consideration due on the disposal of its UK facilities management
business, amounting to additional consideration for the Group of £1m. At the same time, an agreement was reached to
discharge the Group's obligation to a certain indemnity provision resulting in a release of a provision amounting to £2m.
The additional consideration was received on 10 July 2014 and is included in trade and other receivables. A £3m gain on
disposal was recognised in non-underlying items. Costs of £6m were incurred in 2013 relating to the disposal of the UK
facilities management business and subsequently paid in the first half of 2014.
20 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 obligations of the
Balfour Beatty Pension Fund and the Railways Pension Scheme. Where such agreements are entered into they are considered to
be and are accounted for as insurance arrangements. 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 management's 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
management considers, based on that advice, that the action is unlikely to succeed, or that the Group cannot make a
sufficiently reliable estimate of the potential liability.
21 Related party transactions
The Group has contracted with, provided services to, and received management fees from, certain joint ventures and
associates amounting to £303m (2013: first half £372m, full-year £777m). 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 charged at cost with no mark-up. The amount due from joint ventures and associates from
trading activities, including those within discontinued operations, was £42m (2013: first half £47m, full-year £39m). The
amount due to joint ventures and associates from trading activities, including those within discontinued operations, was
£27m (2013: first half £47m, full-year £28m).
The Group recharged the Balfour Beatty Pension Fund with the costs of administration and advisors' fees borne by the Group
amounting to £3m in the half-year ended 27 June 2014 (2013: first half £4m; full-year £8m).
On 8 January 2014 Rail Scandinavia was sold to Strukton Rail, the Group's joint operation partner, for a cash consideration
of £2m. Refer to Note 19.2.
22 Financial instruments
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. The consequent movement in the fair value is taken to other
comprehensive income.
Investment in the Infrastructure Fund
The Group's investment in the Infrastructure Fund (the Fund) is subject to the terms and conditions of the Fund's offering
documentation. The investment in the Fund is primarily valued based on the latest available financial information provided
by the Fund's General Partner, which is a related party of the Group. Management reviews the details of the reported
valuation obtained from the Fund and considers: (i) the valuation of the underlying investments; (ii) the value date of the
net asset value (NAV) provided;
(iii) cash flows (calls/distributions) since the latest value date; and (iv) the basis of accounting and, in instances
where the basis of accounting is other than fair value, fair value information provided by the Fund's General Partner.
Where the information provided by the Fund's General Partner is not considered appropriate, management will make amendments
to the NAV obtained as noted above in order to present a carrying value that more appropriately reflects the fair value of
the Group's investment at the reporting date. In determining the continued appropriateness of the valuation, management
reviews the valuation reports received from the Fund's General Partner. The terms of the Fund's partnership agreement
require these valuation reports to be supported by an annual external valuation.
Fair value estimation
The Group holds certain financial instruments on the balance sheet at their fair values. The hierarchy level 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 the 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 or preceding year.
Financial instruments at fair value 2014first halfunaudited£m 2013first half 2013year
unaudited £m audited£m
Financial assets
Level 1
Available-for-sale mutual fund financial assets 61 59 60
Level 2
Financial assets - foreign currency contracts 1 3 2
Level 3
Available-for-sale PPP financial assets (Note 15) 287 537 455
Investment in the Infrastructure Fund (Note 4.3) 10 9 11
Total assets measured at fair value 359 608 528
Financial liabilities
Level 2
Financial liabilities - foreign currency contracts (3) (1) (5)
Financial liabilities - PPP interest rate swaps (49) (99) (69)
Total liabilities measured at fair value (52) (100) (74)
The carrying value less impairment provision of trade and other receivables and payables approximate their fair values due
to their short term nature. 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.
Level 3 financial assets
PPP financial assets
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 £14m decrease (2013: first half £23m; full-year £21m) / £15m increase (2013: first half £25m;
full-year £22m) 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.
Investment in the Infrastructure Fund
Management has determined that an absolute shift of 15% represents a reasonably possible change in the fair value of the
Group's investment in the Fund and would result in an absolute change of £1m. In arriving at this value management have
considered the economic assumptions and discount rates used in the valuation of the underlying investments. Refer to Note
4.3 for a reconciliation of the movement from the opening balance to the closing balance.
At 27 June 2014, management considered that the NAV provided by the Fund's General Partner appropriately reflected the fair
value of the Group's investment.
23 Principal risks and uncertainties
The nature of the principal risks and uncertainties which could adversely affect the Group's performance and its ability to
achieve its strategic objectives in the second half of the year are more fully described on pages 20 to 23 and Note 2.27 on
page 103 of the Annual Report and Accounts 2013 respectively. These risks include: external risks arising from the residual
effects of the previous global economic downturn 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 2013. However, the Directors' assessment of their
likelihood and potential impact continues to evolve.
During 2014 there has been a further worsening in the trading performance of the mechanical and electrical engineering part
of the Group's UK construction services business (Engineering Services) since our Full Year 2013 reporting and the
subsequent Q1 Interim Management Statement. A number of factors led to this including design changes, project delays,
rework on projects and contractual disputes.
Given these issues the size and footprint of the business is under review with the aim of creating a smaller, more focussed
business. In central London, Engineering Services will only be working with Group companies where it can influence design
and add value for customers.
The Board has considered the progress that has been made in reinforcing the controls in the UK construction services
business, and confirms that it is satisfied that the necessary actions have been taken or are being taken to rectify any
weaknesses or failures in the application of procedural controls.
The difficult conditions for the Group's Mainland European rail businesses have continued, supporting the Board's decision
to exit from these businesses.
24 Seasonality
In 2014, due to the anticipated recovery in the performance of the UK construction services business, profit is expected to
be significantly weighted to the second half.
25 Events after the reporting date
On 28 July 2014 the Group disposed of its rail trackside plant and equipment rental business to Vp plc for £5.5m.
26 Prior year comparisons
The 2013 half-year and full-year income statements have been re-presented to classify Rail Italy as part of discontinued
operations at the half-year. Refer to Note 9.
The effect on the financial statements is as follows.
Income Statement Aspreviouslyreported2013first half £m Effectof Asre- Aspreviouslyreported2013year£m Effectofdiscontinuedoperations2013year£m Asre-presented2013 year£m
discontinuedoperations2013first half£m presented2013first half£m
Continuing operations
Revenue including share of joint ventures and associates 4,967 (11) 4,956 10,118 (28) 10,090
Share of revenue of joint ventures and associates (645) - (645) (1,373) - (1,373)
Group revenue 4,322 (11) 4,311 8,745 (28) 8,717
Underlying group operating profit1 22 2 24 132 (2) 130
Share of results of joint ventures and associates 30 - 30 71 - 71
Underlying profit from operations1 52 2 54 203 (2) 201
Investment income 33 - 33 65 - 65
Finance costs (40) - (40) (81) - (81)
Underlying profit before taxation 45 2 47 187 (2) 185
Taxation on underlying profit (2) - (2) (50) 1 (49)
Underlying profit for the period 1 43 2 45 137 (1) 136
Non-underlying items after tax (35) - (35) (120) - (120)
Profit/(loss) for the period from continuing operations 8 2 10 17 (1) 16
Underlying loss for the period from discontinued operations after tax (14) (2) (16) (15) 1 (14)
Non-underlying items after tax from discontinued operations (53) - (53) (37) - (37)
Loss for the period from discontinued operations (67) (2) (69) (52) 1 (51)
Loss for the period (59) - (59) (35) - (35)
1 Before non-underlying items (Note 7).
Earnings per share
Basic earnings per ordinary share from continuing operations 1.2 0.3 1.5 2.5 - 2.5
Basic loss per ordinary share from discontinued operations (9.8) (0.3) (10.1) (7.6) - (7.6)
Basic loss per ordinary share (8.6) - (8.6) (5.1) - (5.1)
Diluted earnings per ordinary share from continuing operations 1.2 0.3 1.5 2.5 - 2.5
Diluted loss per ordinary share from discontinued operations (9.8) (0.3) (10.1) (7.6) - (7.6)
Diluted loss per ordinary share (8.6) - (8.6) (5.1) - (5.1)
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