Balfour Beatty plc Annual report and Accounts 2014

RNS Number : 3905J

Balfour Beatty PLC

02 April 2015

 



Balfour Beatty plc Annual report and Accounts 2014

Pursuant to Listing Rule 9.6.1, a copy of the Company's Annual report and accounts for year ended 31 December 2014 ("Annual Report 2014") has been submitted to the UK Listing Authority ("the UKLA") following publication on the Company's website, www.balfourbeatty.com, and will shortly be available for inspection at the UKLA's Document Viewing Facility, via the National Storage Mechanism, which is located at www.morningstar.co.uk/uk/NSM.

The printed Annual Report 2014, together with the Notice of 2015 Annual General Meeting ("AGM") and Class Meeting of Preference Shareholders ("Class Meeting") will be sent to those shareholders who have elected to continue to receive paper copies of the Company's Annual report and accounts on 14 April 2015.  Shareholders who have not elected to continue to receive copies of the Company's Annual report and accounts in paper form will be sent the Notice of 2015 AGM and Class Meeting together with the relevant Forms of Proxy.

The Notice of 2015 AGM and Class Meeting and Forms of Proxy will be submitted to the UKLA when posted to shareholders.

The Independent Auditor's Report on the financial statements of the Company for the year ended 31 December 2014, which comprise the Group and Company income statements, the Group and Company statements of comprehensive income, the Group and Company balance sheets, the Group and Company statements of changes in equity, the Group and Company statements of cash flows, and the related Notes 1 to 41, is set out in full on page 81 of the Annual Report 2014.

The Annual Report 2014 submitted to the UKLA today also contains information regarding the Company's principal risks.

This material should be read in conjunction with, and is not a substitute for, the full Annual Report 2014.  Page and note references in the text below refer to page numbers in the Annual Report 2014.

Principal risks

The Group continues to develop risk management and internal control systems and procedures to manage the impact of risks and uncertainties both within and outside its control. The Board believes that Balfour Beatty's risk management and internal control systems will help it to identify such risks and respond in a timely manner.

The principal risks that could adversely impact the Group's profitability and ability to achieve its strategic objectives are set out below.

In addition, the Chief Financial Officer's Review on page 17 includes discussion on financial risk factors and going concern.

HEALTH AND SAFETY IS PARAMOUNT TO EVERYTHING WE DO ACROSS OUR BUSINESS
Health and safety                                                                                                             No change to risk
Risk description The Group works on significant, complex and potentially hazardous projects which require continuous monitoring and management of health and safety risks. How the risk may manifest itself Some common themes where health and safety risks have arisen are recognised and communicated, including: •     risk of poor risk identification/assessment •     risk of not having processes that promote risk elimination or mitigation •     failure to deliver management leadership •     management of subcontractors •     not briefing people properly before setting them to work •     failure to follow procedures •     debarment for safety failures •     ongoing change programme and performance pressures, which may have an effect on our people and their ability to remain focused on health and safety risks.	What impact it might have Failure to manage these risks could result in harm to, or even the death of, employees, subcontractor staff and members of the public, as well as potential criminal prosecutions, debarment and reputational damage. How it is mitigated Balfour Beatty has detailed health and safety policies and procedures to minimise such risks. These are reviewed and monitored by management and external verification bodies. Each division has experienced health and safety professionals who provide advice and support and undertake regular reviews. A Safety Executive committee meets regularly throughout the year to develop a consistent approach to health and safety best practice. During 2014, business units continued their work on implementing the Group's Global Safety Principles across all of their operations and projects (see page 36).

KEY OPERATIONAL BUSINESS RISKS WE FACE AS PART OF OUR PROJECT LIFECYCLE
Economic environment                                                                                                        Decreased risk
Risk description The effects of national or market trends, political change or new developments in infrastructure expenditure or procurement may cause customers to postpone, reduce or change existing or future projects, which may impact the Group's strategy, business model, revenue or profitability in the short or medium term. How the risk may manifest itself The business may fail to anticipate or assess national or market events and developments, their potential negative impact, or the opportunities they present. Such events or developments, whether or not anticipated or correctly assessed, could lead to: •     cash pressures for customers and suppliers •     wider than expected fluctuations in inflation •     increased competition (eg in the UK from other EU countries) •     supply chain failure risk •     reduced revenue or pressure on margins. These risks may also be triggered or exacerbated by the need, actual or perceived, to pursue work in a declining market.	What impact it might have Any significant changes in the level or timing of customer spending or investment plans could adversely impact the future order book. Such changes could arise from changes in government policy or customers' failure to secure financing for future projects or for future stages of existing projects. Failure of a customer, including any government or public sector body, could result in not collecting amounts owed. How it is mitigated The Group's strategy to focus on the more resilient and stable infrastructure markets and geographies will help mitigate this risk. The effect of spending changes in any one market is mitigated by the Group's broad exposure to infrastructure markets across the globe and the continued need for infrastructure spending. It also mitigates the effects of such market conditions by continuing to adapt its business model. It is essential that the financial solvency and strength of counterparties is always considered before contracts are signed and this is a specific focus in the current economic climate. During the life of a contract such assessments are updated and reviewed whenever possible. The business also seeks to ensure that it is not over-reliant on any one counterparty.

Bidding                                                                                                                                    Increased risk

Risk description Through its different divisions, Balfour Beatty seeks to win profitable work through a large number of bids. In some cases it bids in joint venture with carefully selected partners, often to help manage or spread risks, especially where the Group wants to augment its expertise or knowledge of the relevant market. The Group also invests in PPP and infrastructure investments, where success depends on a number of assumptions made, at the time of investment, on future revenues and costs. Balfour Beatty's success depends on its ability to identify, price and execute the right volume and quality of bids to maintain a profitable, sustainable order book. This in turn requires that it has a competitive business model and overheads. How the risk may manifest itself •     Unrealistic programme •     Incorrect pricing •     Unrealistic assumptions on cost savings •     Overambitious budgets •     Bidding at too low a margin •     Poor partner selection •     Customer credit and late payment risks •     Partner and subcontractor performance and credit risks •     Inability to make profit from non-PPP investments and other new work types •     Failure to ensure the Group's overhead structure remains competitive.

What impact it might have Failure to estimate accurately the risks, costs, time to complete, impact of inflation and contractual terms and how best to manage them could cause financial losses. In the event of disagreement with, failure of, or poor delivery performance by a joint venture partner, the Group could face financial and reputational risks. If any of the assumptions behind investment decisions prove incorrect, the profitability of those investments could be reduced. How it is mitigated All bids are subject to rigorous estimating and tendering processes within the risk management framework. This revised framework comprises a number of approval and review gates that cover the business lifecycle from initial project pursuit through to completion (see page 30). The Group has defined delegated authority levels for approving all tenders and infrastructure investments. Reviews are conducted following all tenders to ensure lessons are learnt and applied to future tenders. Before entering into a joint venture agreement the Group reviews the relevant skills, experience, resources and values of joint venture partners to understand how they complement its own. Investment appraisals are performed and reviewed by experienced professionals. The Group analyses the risks associated with revenues and costs and, where appropriate, establishes contractual and other risk mitigations.

Project execution                                                                                                                    Increased risk

Risk description The Group works on complex design, engineering, construction and asset management projects. If it fails to deliver them on time, to customers' requirements, and in accordance with its own cost assumptions and reporting, Balfour Beatty faces the risk of financial loss, claims and reputational damage. Successful delivery of many of these projects depends on the successful implementation and maintenance of a range of operational and commercial procedures and controls, backed up by appropriate training, clear accountabilities and oversight, accurate, realistic and timely reporting, and regular audit and review. It also depends on the combined availability and effective management of subcontractors and other service providers. Finally, it relies upon many complex, technical and commercial judgements and estimates regarding cost, value, progress and likely or practicable outcomes. How the risk may manifest itself •     Unrealistic progress assessments •     Overestimating the Group's ability to recover claims within the time frame or in the amounts estimated •     Incomplete visibility and appreciation of scale of commercial judgements •     Inaccurate, incomplete cost and value data or failure to analyse and report correctly, which could arise due to poor training, lack of supervision, lack of accountability or a project manager's or project team member's fear of reporting bad news •     Inadequate experienced, independent challenge from support •     functions such as commercial, operations and finance.

What impact it might have Failure to manage or deliver against contracted customer requirements on time and to an appropriate quality could result in issues such as contract disputes, rejected claims, design issues, liquidated damages, cost overruns or failure to achieve customer savings - which in turn harm Balfour Beatty's profitability and reputation. Execution failure on a high-profile project could result in significant reputational damage and costs. How it is mitigated It is essential that each business area has defined operating procedures to address the risks inherent in project delivery. In addition, the revision of the Group risk management framework and increased controls aid identification and quantification of specific risks on projects and the mitigating actions required. This has been further reinforced through the implementation of common minimum standards in project and commercial management. Projects are subject to management, commercial function and internal audit review at all levels to monitor progress and to review steps put in place to address specific risks identified on those projects. The Group also has public indemnity cover to provide further safeguards. Balfour Beatty monitors the performance of joint ventures, joint venture partners, subcontractors and suppliers throughout the lifecycle of a project.

Supply chain                                                                                                                     No change to risk

Risk description The Group is heavily reliant on its supply chain partners for successful operational delivery, which means it is also exposed to a variety of risks in the supply chain, including financial, technical, quality, safety and ethics. How the risk may manifest itself •     Supply chain failure risk, exacerbated during, and when emerging from, tough economic conditions •     A subcontractor's failure to perform to an appropriate standard and quality, which could cause project delays, reducing Balfour Beatty's ability to meet contractual commitments and harming its reputation •     Supply chain operating to lower standards (safety, ethics, quality, timber, child labour, forced labour) •     Failure to deliver targeted UK procurement savings •     Failure to comply with Group supply agreements •     Ethical treatment of the supply chain.

What impact it might have Failure of a subcontractor or supplier would result in the Group having to find a replacement or undertaking the task itself. This could result in delays and additional costs. The Group will be commercially as well as reputationally responsible for performance shortcomings by suppliers and subcontractors, whether in terms of quality, safety, technical or ethical standards. Mistreatment of suppliers, subcontractors and their staff, or poor ethical standards in the supply chain, could lead to significant reputational harm for Balfour Beatty. How it is mitigated The Group aims to develop long-term relationships with key subcontractors, working closely with them to understand their operations. It develops contingency plans to address subcontractor failure, and also obtains project retentions, bonds and/or letters of credit from subcontractors, where appropriate to mitigate the impact of any insolvency. Balfour Beatty aims to work as much as possible with preferred suppliers and subcontractors who undergo rigorous, risk-based prequalification processes and share its values. It also aims to avoid becoming over-reliant on any one supplier or subcontractor.

IMPORTANT RISKS WE FACE, COMMON TO MANY OTHER BUSINESSES
People                                                                                                                                      Increased risk
Risk description Inability to recruit and retain the best management and employees who have the appropriate competencies and also share Company values and behaviours may hamper the Group's growth prospects. How the risk may manifest itself •     Failure to attract and retain skilled staff •     Distraction and impact on morale of change programmes and continued operational issues •     Inability to successfully promote the right people through succession planning •     Commercial and project management quality/performance •     New staff unfamiliar with culture and procedures •     Lack of a diverse workforce •     Bullying and harassment •     Loss of former staff with traditional bidding and execution skills.	What impact it might have Failure to recruit and retain appropriately skilled people could harm the Group's ability to win or perform specific contracts and grow its business. How it is mitigated All potential recruits for key roles in the organisation are measured against a competency and leadership framework. Divisions undertake organisation and people reviews to review the roles, competencies, performance and potential of personnel. The Group's succession planning process to identify and develop high-potential personnel is reviewed regularly within the organisation and by the Board. Balfour Beatty has appropriate remuneration and incentive packages to help it attract and retain key employees (see page 37).

Business conduct/compliance                                                                                              Decreased risk

Risk description The Group operates in various markets that present business conduct-related risks involving fraud, bribery or corruption, whether by its own staff or via third parties such as partners or subcontractors. Those risks are higher in some countries and sectors. Overall the construction industry has a higher risk profile than other industries. How the risk may manifest itself •     Corruption •     Bribery •     Fraud/false claims •     Fair competition •     Human rights abuses, such as child and other labour standards generally, illegal workers and human trafficking •     Unethical treatment of and by the supply chain •     Other emerging ethical risks •     Risk of ethics and values being compromised when times are tough, not just in high-risk markets.

What impact it might have Failure by the Group, or employees and third parties acting on its behalf or in partnership, to observe the highest standards of integrity and conduct could result in civil and/or criminal penalties, debarment and reputational damage (see page 38). How it is mitigated Balfour Beatty has a proactive approach to assessing and addressing corruption risks. It promotes compliance with its Code of Conduct and in areas such as competition and false claims fraud. Each business area has a compliance officer responsible for the application and monitoring of these programmes. The risk of business conduct/compliance breaches by third parties is harder to control, but the Group has a range of risk assessment, due diligence and procurement controls that are designed to identify and minimise such risks. Balfour Beatty works with very few agents, all of whom undergo a rigorous due diligence and approval process.

Legal and regulatory                                                                                                       No change to risk

Risk description The Group operates in diverse territories and its businesses are subject to a variety of complex, demanding and evolving legal, tax and regulatory requirements. How the risk may manifest itself • Data protection and privacy • Information security lapse • Cybercrime • Government/regulatory enquiry and enforcement actions • Local procurement laws • Debarment or blacklisting.

What impact it might have A breach of local laws and regulations could lead to legal proceedings, investigations or disputes resulting in business disruption ranging from additional project costs to potential debarment and reputational damage. Increasingly, businesses are the target of cybercrime, which can result in loss of confidential, personal or commercial data, disruption to operations and associated costs. Sometimes Balfour Beatty may be the target of statesponsored cyber activities purely because of its customer base. How it is mitigated The Group monitors and responds to legal and regulatory developments in the territories in which it operates. Local legal and regulatory frameworks are considered as part of any Group decision to conduct business in a new country. Data protection and information security programmes are in place across the Group, and cybercrime and other information security risks are assessed on a regular basis.

Sustainability                                                                                                                    No change to risk

Risk description The Group's activities can impact the world, and the communities with which it comes into contact, either positively or adversely. How the risk may manifest itself •     Environmental incident •     Inaccurate greenhouse gas (GHG) data may mean the Group is unaware of its actual impact •     Inaccurate GHG data and other data in sustainability reporting may leave the Group exposed to unacceptable damage and fines •     Unethical/unsustainable sourcing (eg timber, forced labour, child labour) •     Insufficient management support and monitoring to achieve the Group's agreed KPIs in this area.

What impact it might have Failure to address these risks and to execute projects sustainably could result in significant potential liabilities, reputational damage and inability to win future work. How it is mitigated The Group's sustainability strategy provides a framework for its operating businesses to accommodate and embed sustainability into operations. Sustainability issues such as climate change are considered in risk management activities at divisional as well as project level. Balfour Beatty's internal audit processes are used to identify potential risks and opportunities for the business. These take the form of sustainability audits and internal data assurance audits. The Group also has external audits undertaken by third parties against its management systems that are in place to manage some of the aforementioned risks. Scope 1 and 2 GHG emissions are also externally assured (see page 39) to ensure that the data is correct.

Discontinued operations                                                                                                        Increased risk

Risk description The Group continuously reviews the markets and territories in which it operates in order to make the best use of its resources. It is essential that when the Group exits particular markets and territories through disposal or winding down its activities, it complies with all local regulations and laws, and ethical best practices and adheres to Balfour Beatty values. How the risk may manifest itself •     In disposing of businesses, the Group typically provides the purchaser with various indemnities which may expose Balfour Beatty to future legal claims and cost as a result of indemnity breaches •     The Group may be required to enter transitional service arrangements with the purchaser. Such arrangements and related migration activities could lead to future legal claims and costs •     As the Group winds down activities in a particular market or territory there is the risk of losing business-critical staff and knowledge.

What impact it might have A breach of local law and standards could lead to investigations, disputes and prosecution with associated reputational damage and increased costs, which could impact adversely on Balfour Beatty's continuing businesses. How it is mitigated •     Experienced professionals, supported by external advisers, manage disposal processes to ensure that the legal documentation covering disposals protects the Group's position as well as can be foreseen •     Use of project management capabilities in managing any transitional service arrangements and migration activities to ensure that risk exposure is tolerable •     Where appropriate ensure there is a wind-down plan in place and that progress against this is appropriately overseen.

Balfour Beatty also faces significant risks and uncertainties that are common to many companies - including financial and treasury risks, the management of pension liabilities, information security risks, business continuity and crisis management and hazard risks.

 

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