Doc re. Annual Financial Report & Notice of AGM

RNS Number : 2072C

Balfour Beatty PLC

11 April 2017

Balfour Beatty plc Annual Report and Accounts 2016, Notice of 2017 Annual General Meeting and Class Meeting of Preference Shareholders, Forms of Proxy and Notice of availability of documents

Copies of the following documents, which are being posted to shareholders today, have been submitted to the UK Listing Authority ("the UKLA"), 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 Company's Annual Report and Accounts for the year ended 31 December 2016 ("Annual Report 2016);

· The Notice of 2017 Annual General Meeting ("AGM") and Class Meeting of Preference Shareholders ("Class Meeting");

· Forms of Proxy for AGM and Class Meeting (versions for shareholders who have elected to continue to receive paper copies of the Company's Annual report and accounts, and either request a paper proxy form or have elected to continue to receive one);

· Forms of Proxy for AGM and Class Meeting (versions for shareholders who have not elected to continue to receive paper copies of the Company's Annual report and accounts, and either request a paper proxy form or have elected to continue to receive one); and

· Notice of availability of the Annual Report and the Notice of AGM and Class Meeting.

Copies of the Annual Report 2016 and Notice of AGM and Class Meeting will also shortly be available to view on the Company's website, www.balfourbeatty.com.

The Independent Auditor's Report on the financial statements of the Company for the year ended 31 December 2016, which comprise the Group income statement, the Group statement of comprehensive income, the Group and Company balance sheets, the Group and Company statements of changes in equity, the Group statement of cash flows, and the related Notes 1 to 41, is set out in full on page 100 of the Annual Report 2016.

In compliance with DTR 6.3.5, a description of the principal risks and uncertainties and a responsibility statement prepared for and contained within Annual Report 2016 are set out below. A condensed set of financial statements were appended to the Company's full year results announcement issued on 16 March 2017, which included an indication of important events that occurred during the year.

Page and note references in the text below refer to page numbers in the Annual Report 2016.

This material should be read in conjunction with, and is not a substitute for, the full Annual Report 2016.

Principal risks

Assessing our risks

The Board has made a robust assessment of the principal risks which the Group faces, the controls in place to remove or mitigate these risks and also whether these risks represent new, increased or decreased threats. The assessment of these risks and controls is part of the ongoing management of the business.

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 starting on page 49 includes discussion on financial risk factors and going concern.

Health and safety

No change to risk

Owner:
Safety and Sustainability Committee

Build to Last pillar:
Safe

Risk description

The Group works on significant, complex and potentially hazardous projects which require continuous monitoring and management of health and safety risks.

Causes

Some common themes where health and safety risks have arisen are recognised and communicated, including:

· poor risk identification/assessment

· having processes that fail to promote risk elimination or mitigation

· failure to deliver 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 people
and their ability to remain focused on health and safety risks.

What impact it might have

Failure to manage these risks gives the potential for significant harm to, or even the death of, employees, subcontractor staff or members of the public, as well as the potential for criminal prosecutions, significant fines, 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 business has experienced health and safety professionals in place who provide advice and support and undertake regular reviews.

The Safety and Sustainability Committee of the Board, as well as business-level Health and Safety executive leadership teams, meet regularly throughout the year to develop a consistent approach to health and safety best practice.

Training programmes (including behavioural) are in place.

Zero Harm action plans continue to be implemented.

Work winning

Decreased risk

Owner:
Group Tender and Investment Committee

Build to Last pillar:
Trusted

Risk description

Failure to identify, price, and execute the right volume and quality of bids and investment opportunities to maintain a profitable, sustainable order book and deliver value to stakeholders.

Causes

Inaccuracy in:

· assumptions behind investment decisions

· costs versus scope calculations

· project duration estimates

· assessment of the impact of inflation

· contract management

· negotiation of terms

· Quick Qualifier assumptions

· assessment of customers' liquidity/credit worthiness

· assessment of joint venture partners.

What impact it might have

Failure to estimate accurately the risks, costs versus scope, 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

Consistent and shared policies and minimum commercial expectations including acceptable margins.

A wide and ongoing range of training initiatives across all disciplines within the Group including

Cash is our Compass and High Value Selling to drive increased commercial awareness and an understanding of expectations on margins and cost.

All bids are subject to rigorous estimating and tendering processes as part of the gateway review process.

Defined delegated authority levels are in place 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

No change to risk

Owner:
Group management

Build to Last pillar:
Trusted

Risk description

Failure to deliver projects at the required specification on time and on budget to meet the expectations of customers and minimise the risk of defect liability.

Causes

Failure to implement, maintain and challenge operational and commercial controls (as detailed within checklists at Gate reviews (4-6)) allowing:

· unrealistic programming targets

· unrealistic progress assessments and cost to complete judgements

· optimistic claims recovery assumptions

· incomplete visibility and appreciation of scale of commercial judgements

· inaccurate and/or 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 fear of reporting bad news.

What impact it might have

Failure to manage or deliver against contracted customer requirements on time, on budget 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.

The Group may also be exposed to long-term obligations including litigation and costs to rectify defective or unsafe work.

Execution failure on a high-profile project could result in significant reputational damage and costs.

How it is mitigated

An increased focus on identifying and reporting risks, including the accuracy of cost and cash forecasting.

Consistent application of strong commercial management and contract administration processes.

Targeted recruitment of key staff within project delivery teams and senior management, together with ongoing and focused training of staff.

Gateway process embedded within each business and held on the Business Management System (BMS, see page 17) to increase accuracy and consistency within project delivery.

Project delivery teams encouraged to 'Get Left' in Gated Lifecycle process to increase integration within the work winning strategy.

Increased rigour at Gate 5 onwards, including direct senior management oversight and challenge.

Site Mobilisation Hub in place to facilitate early and effective start-up on site.

The My Contribution initiative has delivered a significant number of local level improvements in project delivery including efficiencies in service level agreements, greater use of BIM technology and resource allocation. A strong pipeline of ideas will be assessed across 2017 to drive further improvements.

Balfour Beatty Academy providing focused training.

Quality culture, appropriate resource, competencies and accountabilities to be embedded in the business to support drive for defect-free delivery at all levels.

Professional indemnity cover in place to provide further safeguards.

Balfour Beatty monitors the performance of joint ventures, joint venture partners, subcontractors and suppliers throughout the lifecycle of a project.

Data governance and cybersecurity

Increased risk

Owner:
Group management

Build to Last pillar:
Trusted

Risk description

Breach of data protection laws and/or key company data or other confidential information is lost, stolen or compromised.

Causes

Failure to correctly assess and prepare for:

· the increased threat of cybercrime and/or the requirements of the revised Data Protection Act

· malicious intent and/or targeted attack

· breakdown of key security software or management system.

What impact it might have

Crystallisation of this risk has the potential for:

· a reduction or loss of competitive advantage (including loss of intellectual property)

· a negative impact on customer relationships including loss of confidence

· exposure to fines or prosecution (ie Data Protection Act)

· disruption to business operations

· reputational damage in the wider marketplace

· exclusion from bidding opportunities.

How it is mitigated

Dedicated Data Protection Officers embedded throughout the business to ensure pertinent information cascade including data classification guidance.

Data protection programme covering policies, procedures and approved access levels in place alongside a comprehensive training plan.

All data is stored in secure data centres with frequent synchronisation of data between live and standby data centres.

Use of up-to-date anti-virus and encryption software.

Only approved software is installed on Group hardware and portable data storage devices.

Regular review and communication of the ever-changing cyber threats and how they manifest themselves in practical guidance that all employees and contractors understand.

All employees are trained in and must comply with information security management obligations.

Uncertainty within our economic environment

Increased risk

Owner:
The Board

Build to Last pillar:
Expert

Risk description

The effects of national or market trends, political change (including the UK's exit from the EU and the change of administration in the US), or new developments in infrastructure expenditure or procurement may cause customers to re-evaluate existing or future projects.

Causes

The business may not be effective in managing the uncertainty surrounding the terms of the UK's exit from the EU or anticipating or assessing broader national or market events and developments.

Failure to plan for any potentially negative impacts, or to capture any opportunities that may be presented could lead to:

· cash pressures for customers and suppliers

· wider than expected fluctuations in inflation

· increased competition (eg in the UK from foreign investors acquiring competitors)

· increased supply chain risks (eg solvency, people and materials)

· reduced revenue or pressure on margins.

What impact it might have

Any significant changes in the level or timing of customer spending or investment plans could adversely impact the Group's strategy, business model, revenue or profitability in the short or medium term. 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.

Restrictions to the availability of skilled labour and competitively priced materials will lead to a loss of competitive advantage and a devaluation of the business.

Financial 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 and the continued need for infrastructure spending. Balfour Beatty also mitigates the effects of such market conditions by continuing to adapt its business model.

The Group is actively monitoring the potential impacts of the UK exiting the EU including potential market stimulation by the UK Government, freedom of movement, finance costs, exchange rates and commodity prices. A dedicated Group-wide forum is in place for this purpose and a key strategy document (Infrastructure 2050) has been shared with the UK Government and wider industry.

The financial solvency and strength of counterparties is always considered before contracts are signed and such assessments are updated and reviewed whenever possible during the project lifecycle. The business also seeks to ensure that it is not over-reliant on any one counterparty.

People

Static risk

Owner:
The Board

Build to Last pillar:
Expert

Risk description

Inability to attract and retain required levels of skilled and competent staff to meet the Group's objectives.

Causes

· Perceived limitations to internal career development

· Lack of recognition and reward

· Failure of businesses to promote good news stories

· Failure to maintain a culture of pride in the workplace

· Lack of a diverse workforce

· Restrictions in the availability of skilled labour.

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, grow its business and meet its strategic objectives.

A high level of staff turnover or low employee engagement could result in a drop in confidence in the business within the market, customer relationships being lost and an inability to focus on business improvements.

How it is mitigated

Balfour Beatty Academy in place to provide professional development and knowledge sharing opportunities to ensure employees feel valued and specialisms are recognised.

Strengthening of the Learning and Development and Talent teams.

Regular reviews of remuneration arrangements to ensure they are appropriate to help the Group attract, motivate and retain key employees.

Strong employee communication channels celebrating individual, business and Group-level successes.

Change management initiatives are well embedded within the business and aligned to the Build to

Last transformation programme.

An annual Group-wide employee engagement survey is undertaken to measure engagement and appropriate actions are developed and communicated.

Recruitment, retention and succession plans are measured and regularly reviewed across all parts of the business.

Affinity networks established to create a diverse and inclusive working environment.

Embedding the transformation programme

No change to risk

Owner:
The Board

Build to Last pillar:
All

Risk description

The traction gained in embedding the policies, process, and practices of Build to Last is lost and potential benefits are not realised.

Causes

To enable the transformation programme to succeed, a culture of adhering to the Build to Last principles must be embedded.

Failing to embed this culture could result from:

· ineffective communication plans

· inadequate resourcing (financial, physical and people)

· employee fatigue with change programme and loss of focus owing to a perceived high number and frequency of new initiatives

· new systems and processes being used without appropriate controls being in place and/or tested.

What impact it might have

Failure to build fully upon the foundations of Build to Last could result in the Group's ability to return to sustained profit and viability being jeopardised.

How it is mitigated

The success of Build to Last is a strategic priority for the Group and is being led by the Group Chief Executive.

The programme is being delivered in several phases and required controls and resources have been well considered.

Controls include:

· the Build to Last culture is now well embedded within each business unit

· senior leadership communication across the businesses is clear and frequent

· new systems and processes are deployed with training plans

· employee surveys form a key part of the programme

· leaders throughout the business frequently monitor the delivery and impacts of the programme

· senior leadership is well experienced in delivering business transformation successfully.

Financial strength

No change to risk

Owner:
The Board

Build to Last pillar:
Trusted

Risk description

Inability of the Group to maintain the financial strength required to operate its business and deliver its objectives.

Causes

Failure to manage financial risks and the financial resources of the Group that underpin its ability to:

· meet ongoing liquidity obligations so that it remains a going concern

· meet financial covenants as set out in financing facility agreements

· maintain the confidence of customers and key markets and therefore continue to win long-term contracts.

What impact it might have

Failure to effectively deliver the required financial strength will mean the Group:

· fails to meet financial covenant tests, as set out in its financing facility agreements, that would lead to an event of default if not remedied within a specific grace period

· fails to pass the required tests that allow it to continue to adopt the going concern basis of preparing the financial statements

· loses the ability to compete for key long-term contracts that are critical to the delivery of its long-term objectives and viability.

How it is mitigated

The Group operates with a centralised treasury function that is responsible for managing key financial risks, cash resources and the availability of liquidity and credit capacity.

The Group maintains significant undrawn term committed bank facilities with a banking group of high credit-quality to underpin the liquidity requirements of the Group.

The Group maintains significant bank and surety bonding facilities to deliver trade finance requirements of the Group on an ongoing basis.

Supply chain

No change to risk

Owner:
Group management

Build to Last pillar:
Lean

Risk description

Supply chain partners are not able to meet the Group's operational expectations and requirements including availability, financial stability, technical ability, quality, safety, environmental, social and ethical.

Causes

· Supply chain failure risk, exacerbated during, and when emerging from, tough economic conditions

· Over-reliance on a limited number of suppliers

· Retention of subcontracted parties in buoyant markets

· Inadequate assessment of supply chain partner capabilities and process (including safety, ethics, quality, material stewardship, child labour, forced labour and modern slavery)

· Failure to accurately assess project resource requirements and key deliverables

· Unethical 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, additional costs or a reduction in quality owing to lack of expertise.

Mistreatment of suppliers, subcontractors and their staff, or poor ethical standards in the supply chain, could lead to legal proceedings, investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and debarment.

How it is mitigated

The Group aims to develop long-term relationships with key subcontractors, working closely with them to understand their operations and dependencies.

Contingency plans in place to address subcontractor failure including replacement supplier list.

A simplified but more frequent assessment of all suppliers and subcontractors, to ensure compliance with all requirements Balfour Beatty commit to, using Achilles and internal assessment tools.

The risk management framework and the gateway review process allow for early (Gates 1-4) and ongoing (Gate 6) assessment of the appropriateness of resource allocation and dependencies.

My Contribution programme to generate ideas for more effective procurement and resourcing.

Upgrading of skills across the procurement process.

The Group obtains project retentions, bonds and/or letters of credit from subcontractors, where appropriate to mitigate the impact of any insolvency.

Key supplier audits within projects to ensure they are in a position to deliver consistently against requirements.

Group-wide Code of Conduct and Supplier Code of Conduct, and related policies and procedures in place.

Business conduct/compliance

No change to risk

Owner:
The Board

Build to Last pillar:
Trusted

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 agents, partners or subcontractors. Those risks are higher in some countries and sectors. Overall, the construction industry has a higher risk profile than other industries.

Causes

· Corruption

· Bribery

· Fraud/false claims

· Unfair competition

· Human rights abuses, such as child and other labour standards generally, illegal workers, human trafficking and modern slavery

· 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 litigation, civil and/or criminal penalties, debarment and reputational damage.

How it is mitigated

Group-wide Code of Conduct and Supplier Code of Conduct, and related policies and procedures in place.

The Business Integrity function promotes, monitors, assesses awareness of and provides training on, the Code of Conduct. The function reports to the Audit and Risk Committee and has the full support of the Board.

Each business unit, supported by the Business Integrity function, is responsible for embedding the Code of Conduct.

The Group has a range of risk assessment, due diligence and procurement controls that are designed to identify and manage risks with third parties.

Independent third-party whistleblowing hotline and dedicated email are in place and actively promoted. All in-scope complaints are independently investigated by the Business Integrity function and appropriate action is taken, where necessary.

Balfour Beatty works with a limited number of agents, all of whom undergo a due diligence and approval process.

Legal and regulatory

No change to risk

Owner:
The Board

Build to Last pillar:
Trusted

Risk description

The Group does not comply with all legal, tax and regulatory requirements.

Causes

· Failure to adapt to changes in applicable laws affecting the Group's businesses.

· Such changes may include:

· obligations as a result of government/regulatory enquiry and enforcement actions

· adverse changes of law, including changes to tax law

· local procurement laws

· exclusion from bidding or blacklisting.

What impact it might have

The business could face legal proceedings, investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and exclusion from bidding.

Such action could also impact upon the valuation of assets within that territory.

How it is mitigated

The Group monitors and responds to tax, legal and regulatory developments and requirements in the territories in which it operates.

Local legal and regulatory frameworks are considered as part of any decision to conduct business in a new country.

Appropriate and responsive policies, procedures, training and risk management processes are in place throughout the business.

Legacy pension liabilities

No change to risk

Owner:
The Board

Build to Last pillar:
Lean

Risk description

The Group remains exposed to significant defined benefit pension risks.

Causes

The size of the Group's legacy pension obligations is largely related to the investment performance of the assets held in the pension funds, net of the change in the value of the funds' liabilities. The latter are typically related to changes in the long-term outlook for interest rates, inflation and life expectancy.

The size of the obligations could also be adversely influenced by intervention from regulators or legislators.

What impact it might have

Failure to manage these risks adequately could lead to the Group being exposed to significant additional liabilities.

How it is mitigated

The Group constructively engages with the trustees of the pension funds to ensure that the funds' assets and liabilities are managed in a way which reduces the likelihood of an unexpected cost to the Company.

Following the successful conclusion of the 2016 actuarial valuation, the trustees of the Group's main UK fund have agreed to hedge in excess of 80% of its exposure to interest rate and inflation movements.

Balfour Beatty also faces significant risks and uncertainties that are common to many companies - including financial and treasury, communications and marketing, wider information security, business continuity and crisis management, and hazard risks.

"Statement of Directors' responsibilities

The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Company financial statements for each financial year. Under that law, the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and applicable law and have elected to prepare the Company financial statements in accordance with UK Accounting Standards and applicable law.

Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of their profit or loss for that period. In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently

· make judgements and estimates that are reasonable and prudent

· for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU

· for the Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in its financial statements

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to

show and explain the Company's transactions and disclose with reasonable accuracy, at any

time, the financial position of the Company and enable them to ensure that its financial

statements comply with the Companies Act 2006. They have general responsibility for taking

such steps as reasonably open to them to safeguard the assets of the Group and to prevent and

detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors confirm that to the best of their knowledge:

· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole

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

In light of the work undertaken by the Audit and Risk Committee reported in greater detail on pages 75 to 77 and the internal verification and approval process which has been followed this year, the Directors are able to state that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

By order of the Board