Annual Financial Report

RNS Number : 5891E

Balfour Beatty PLC

08 April 2011

 



Balfour Beatty plc Annual report and accounts 2010; Notice of 2011 AGM and Class Meeting

Pursuant to Listing Rule 9.6.1, copies of the following documents 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 http://www.hemscott.com/nsm.do:

-           the Company's Annual report and accounts for year ended 31 December 2010;

-           the Shareholders' update and Notice of 2011 Annual General Meeting ("AGM") and Class Meeting of Preference Shareholders ("Class Meeting");

-           Form of Proxy - AGM;

-           Form of Proxy - Class Meeting.

Copies of the Annual report and accounts 2010 and the Shareholders' update and Notice of AGM and Class Meeting will be available shortly on the Company's website at www.balfourbeatty.com.

The Independent Auditor's Report on the financial statements of the Company for the year ended 31 December 2010, which comprise the Group and Company income statements, the Group and Company statements of comprehensive income, the Group and Company statements of financial position, the Group and Company statements of changes in equity, the Group and Company statements of cash flows, and the related Notes 1 to 37, is set out in full on page 102 of the Annual report and accounts 2010.

The Annual report and accounts submitted to the UKLA today also contains information regarding the Company's principal risks.

Principal risks and risk management

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

The Group operates in several different business environments in which a number of risks and uncertainties exist. Whilst acknowledging that it is not possible to eliminate such risks and uncertainties completely, established risk management and internal control systems and procedures exist within the Group to manage their impact and assist in the delivery of the Group's business objectives and creation of shareholder value.

In many of the territories in which the Group operates, 2010 continued to be a challenging year as customers and suppliers coped with the ongoing effects of the global economic downturn. The Group's exposure to changes in customers' spending is mitigated by the fact that it operates across the whole infrastructure lifecycle in a number of sectors and territories and the impact of changes in spending varies across each part of that lifecycle in those sectors and territories.

The Group recognises the need for effective mitigation steps to address the changes in risk profile it faces as it operates in and seeks to expand into a larger number of territories (be it economic, political, commercial or related to business conduct). Execution of business across the broader geographical footprint may require the Group to enter into joint venture partnerships to deliver projects. The Group has in place selection criteria to ensure that appropriate partners are selected.

The acquisition of Parsons Brinckerhoff in the last quarter of 2009 whilst increasing the number of territories in which the Group operates also brought with it in-depth knowledge of customers and their requirements in the planning and design phase of the infrastructure lifecycle. This will help inform the other divisions within the Group in meeting customers' demands and needs.

The Board believes that the Group's established risk management and internal control systems have helped it to respond to the changing business environment and the challenges it faced in 2010. The Board believes these systems will continue to help it address the risks it faces in the future from the changing economic and commercial environment in which it operates.

Set out on the following pages are the principal risks which could have a material impact on the Group's reputation, operations and financial performance. A number of the risks set out below reflect the ethical and sustainability issues that the Group faces. The table below also describes the potential impact of such risks, the mitigation steps in place and the key reporting and monitoring processes to review risks and their related mitigation plans.

External risks
Economic environment
The continued effect of the global economic downturn may cause the Group's customers to cancel, postpone or reduce existing or future projects. In particular, the Group is dependent on UK and US government policies and spending for a significant part of its revenues.
Potential impact		Mitigation	Reporting & monitoring
Any significant changes in the level or timing of customer spending or investment plans could adversely impact the Group's order book.		The Group has a broad exposure to various infrastructure markets across the globe. This and the continued need for infrastructure spending mitigates the risk of changes in spending in any one market. The Group maintains a high level of engagement with its customers to understand and respond effectively to their evolving requirements at all phases of the infrastructure lifecycle. The recent appointment of a Head of Public Affairs will further help us understand the needs of the Group's public sector customers in the UK and US. The Group is also active in seeking out new infrastructure markets as they develop (eg nuclear, wind).	Monthly/quarterly performance reviews Medium-term planning process Budgetary process
Commercial counterparty solvency
The Group is exposed to counterparty credit risk of its customers, sub-contractors, joint venture partners, financial institutions and suppliers. This risk is increased further by the current economic climate.
Potential impact	Mitigation			Reporting & monitoring
Failure of a customer, including any government or public sector body, could result in non-collection of amounts owed. Failure of a sub-contractor or supplier would result in the Group having to find a replacement or undertaking the task itself which could result in time delays and additional costs.	The financial solvency and strength of counterparties is considered prior to the signing of contracts. During the life of the contract such assessments are updated and reviewed whenever possible. The Group seeks to ensure that it is not over-reliant on any one counterparty. During the life of a project retentions, bonds and/or letters of credit will be obtained, where appropriate, from sub-contractors to mitigate the impact of any potential insolvency.			Monthly/quarterly finance and performance reviews
Legal and regulatory
The Group operates in a diverse number of territories and its businesses are subject to a number of complex, demanding and evolving legal, tax and regulatory requirements.
Potential impact	Mitigation			Reporting & monitoring
A breach of these local laws and regulations could lead to legal proceedings, investigations or disputes resulting in a disruption of business, ranging from additional costs incurred on a project to potential debarment and reputational damage.	The Group monitors and responds to legal and regulatory developments in the territories in which it operates. A territory's legal and regulatory framework is considered as part of any Group decision to conduct business in a new territory.			Monthly/quarterly performance reviews Medium-term planning process
Strategic risks
Acquisition
The Group has made and continues to make acquisitions in pursuit of its strategic objectives.
Potential impact	Mitigation			Reporting & monitoring
Failure to identify acquired liabilities or to integrate successfully the business acquired into the Group's processes could result in an adverse impact on the Group's future prospects, financial condition and profitability.	Detailed due diligence including preparation of a valuation model is performed on all potential acquisitions drawing upon both internal and external resources. Due diligence also includes an assessment of the ability to integrate the acquired business successfully into the Group. When a business is acquired detailed integration plans are developed and monitored to ensure the successful integration of the business into the Group and its internal control framework.			Board/Divisional review and approval Monthly/quarterly finance and performance reviews
Investments
The Group invests in a number of PPP and non-PPP infrastructure investments across the world. The success of such investments is dependent on a number of assumptions on future revenues and costs.
Potential impact	Mitigation			Reporting & monitoring
If any of the assumptions should prove to be incorrect they could have an adverse impact on the profitability of those investments. The degree of leverage involved in these investments means that small changes in these assumptions could negatively impact the Group's equity investment.	All investment appraisals are conducted and managed by experienced personnel and those risks associated with revenues and costs are carefully analysed. Appropriate contractual and other risk mitigations are identified and established. The consequent delivery risk arising from an investment activity is managed by the selection of suitably qualified personnel and the careful selection of delivery and service partners			Monthly/quarterly finance and performance reviews
Organisation and management risk
People
The success of the Group depends on its ability to recruit and retain the best management and employees.
Potential impact	Mitigation			Reporting & monitoring
Failure to recruit and retain appropriately skilled people could adversely impact the Group's ability to deliver specific contracts and its future growth.	Organisation and People reviews are undertaken by each division and its operating companies to review the role, competencies, performance and potential of personnel. This well-developed succession planning process includes a review in each operating company to identify and develop high potential/calibre personnel to fill key roles that arise. These plans are reviewed and discussed at all levels within the organisation and by the Board on a regular basis. Appropriate remuneration and incentive packages are in place to assist in the attraction and retention of key employees.			Monthly/quarterly operations and performance reviews Annual succession planning review Board review Remuneration Committee Nominations Committee
Business conduct
The Group operates in various international markets with partners and supply chains which may have inherent risks relating to business conduct including but not limited to fraud, bribery and corruption.
Potential impact	Mitigation			Reporting & monitoring
Failure by employees to observe the highest standards of integrity and conduct in dealing with customers, suppliers and other stakeholders could result in civil and/or criminal penalties, debarment, as well as reputational damage.	The Group has clearly set out in its Code of Conduct its expectations of employees and operating companies in dealing with its stakeholders. This was distributed to all employees and during 2010 e-learning continued to be used to raise awareness of the Code within the organisation.			Business Practices Committee Monthly/quarterly performance and operations reviews

Information technology
The efficient operation of the Group is increasingly dependent on the proper operation, performance and development of its IT systems.
Potential impact		Mitigation				Reporting & monitoring
Failure to manage, integrate IT systems or implement successfully changes in IT systems could result in a loss of control over critical business information and/or systems. This in turn could impact the Group's ability to fulfil its contractual obligations and manage its businesses.		Group IT works with divisions to set IT strategy and to ensure that business critical systems are being properly managed. Significant investments in IT systems are subject to Board review and approval.				Monthly/quarterly operations and performance reviews
Information security
The Group is exposed to potential information security threats to its own information and also that which it holds on behalf of customers (in particular, in respect of its facilities management customers).
Potential impact		Mitigation				Reporting & monitoring
A breach of information security or an improper disclosure of such information could expose the Group to adverse publicity, investigation and legal claims.		The Group has implemented minimum information security standards which divisions are expected to meet.				Monthly/quarterly operations and performance reviews
Financial and treasury risks
The Group Treasury function is responsible for managing the Group's funding, liquidity and treasury derivative risks. The Board sets and reviews the Group Treasury policy which prohibits entering into speculative trading of financial instruments. The principal financial risks managed by Group Treasury are finance and liquidity, treasury counterparty, contract bonds, currency and interest rate risks, details of which are set out below:
Finance and liquidity
The Group has no significant net borrowings and manages its cash resources to finance its operations and growth.
Potential impact		Mitigation				Reporting & monitoring
Failure to match availability of funds with the Group's current and future funding requirements could lead to a shortfall.		The Group's cash resources are maintained in a variety of cash, term deposits and money market funds of varying durations to ensure availability of funds to meet the Group's requirements. In addition, the Group has in place a number of committed facilities of differing maturities to supplement its cash resources.				Finance and General Purposes Committee
Treasury counterparty
The Group is exposed by virtue of the deposits it holds with various financial institutions to the solvency of those financial institutions.
Potential impact		Mitigation				Reporting & monitoring
Failure of any financial institution with which funds are placed could lead to a loss of those funds.		Treasury counterparty risk is monitored regularly and limits based on a counterparty's credit rating are set as to the amounts and duration of deposits held in any one financial institution.				Finance and General Purposes Committee
Contract bonds
In the normal course of business the Group is sometimes required to provide performance bonds to its customers. These bonds provide a customer with a level of financial protection in the event that a contractor fails to meets its commitments under the terms of the contract. Such bonds are provided, for a fee, by various financial institutions
Potential impact	Mitigation			Reporting & monitoring
If the Group were unable to issue sufficient bonds in the future then its ability to grow the business (by providing such bonds in support of new work) may be constrained.	The Group maintains relationships with a number of financial institutions which provide performance bonds. The Group also reviews the level of headroom available with individual institutions and, where appropriate and necessary, will seek to negotiate increases in capacity			Finance and General Purposes Committee Monthly/quarterly finance and operations reviews
Currency
The global nature of the Group's activities means that the Company is exposed to currency exchange rate volatility in respect of those transactions which are in foreign currencies or on the translation of the net assets and income statement of its foreign subsidiaries and joint ventures.
Potential impact	Mitigation			Reporting & monitoring
Fluctuations in exchange rates could adversely impact the Group's results and net asset position.	Known foreign currency transactional exposures are managed by entering into forward foreign exchange contracts. The Group currently does not hedge its foreign currency exposures on the translation into sterling of profits or net investments in overseas subsidiaries.			Finance and General Purposes Committee
Interest rates
The Group has no significant borrowings other than PPP non-recourse term loans.
Potential impact	Mitigation			Reporting & monitoring
Changes in interest rates could impact cash flows and cause the Group to incur additional borrowing costs on its PPP non-recourse term loans.	PPP concessions use interest rate swaps to swap floating rate borrowings to fixed rates to mitigate changes in interest rates on cash flows.			Finance and General Purposes Committee
Pensions
The Group is exposed to funding risks arising from changes in longevity, inflation and investment assumptions in relation to its defined benefit pension schemes. At present there is an actuarial deficit in these schemes.
Potential impact	Mitigation			Reporting & monitoring
The amount of the deficit can be affected by a number of factors which would result in an additional funding requirement.	Measures to mitigate liabilities are under continuous review by the Group. The performance of the Group's pension schemes is regularly monitored by the Group and the trustees of the pension schemes who, as appropriate, take advice from external consultants. Steps have been taken to restrict certain future increases in the principal defined benefit scheme's liabilities. Agreement has recently been reached with the trustees of the principal fund for the Company to make additional contributions to reduce the deficit over eight years.			Investment committee of the Balfour Beatty Pension Fund Board and Audit Committee review Management review of asset/liability and investment strategy
Delivery and operational risks
Bidding
The Group, through its operating companies, seeks to win work through a large number of bids each year.
Potential impact		Mitigation			Reporting & monitoring
Failure to estimate risks, costs, the impact of inflation and the contractual terms being entered into and how best to manage them could have an adverse impact on the profitability of such contracts.		All bids are subject to rigorous estimating and tendering processes within a defined framework. Defined delegated authority levels exist for the approval of all tenders and infrastructure investments, with all major and significant contracts being subject to Group review and approval by the Group Tender and Investment Committee.			Monthly/quarterly operations, performance and finance reviews
Joint ventures
In certain instances where the Group may not possess the necessary strengths/expertise it will engage in joint ventures with carefully selected partners to deliver certain contracts.
Potential impact		Mitigation			Reporting & monitoring
In the event of a disagreement with, or failure of, or poor performance of a joint venture to deliver, the Group could be exposed to financial and reputational risks.		The Group has procedures in place to ensure that joint venture partners selected have the relevant skills, experience, resources and values to complement those of the Group. The performance of joint venture partners is monitored throughout the life of the project			Monthly/quarterly operations, performance and finance reviews
Service delivery
The Group is engaged in a number of complex design, engineering, construction, facilities management and asset management projects.
Potential impact		Mitigation			Reporting & monitoring
Failure to manage or deliver against contracted customer requirements to an appropriate quality and on a timely basis could result in a number of issues (ie contract disputes, unagreed claims, design issues, cost overruns, failure to achieve customer savings) which could adversely impact the profitability and reputation of the Group.		Each operating company has a number of defined operating procedures designed to address the risks inherent in project delivery. In addition, the Group's risk management framework facilitates the identification of specific risks on projects and the mitigating actions required. Projects are subject to management review at all levels to monitor progress and to review steps put in place to address specific risks identified on those projects.			Monthly/quarterly performance reviews
Health and safety More information: see pages 66 and 67
The Group is involved in significant, complex and potentially hazardous projects which require the continuous monitoring and management of health and safety risks.
Potential impact			Mitigation				Reporting & monitoring
Failure to manage these risks could expose our people or the public to injury/harm and the Group to significant potential liabilities and reputational damage.			Detailed Health and Safety policies and procedures exist to minimise such risks and are subject to review and monitoring by both operating companies and divisional management. Within each operating company there are experienced health and safety advisers who provide advice and support and also undertake regular reviews.				Monthly/quarterly operations reviews Business Practices Committee Group leadership meetings Board review
Sustainability More information: see pages 62 to 69
The Group, through its activities, has the ability to impact either positively or adversely the world in which it operates and the communities with which it comes into contact. In addition, for a number of its customers the impact of projects in both the short term and the long term is a key consideration when evaluating bids. For example, failure to respond to the challenges of the low carbon economy could lead to the Group failing to win work.
Potential impact			Mitigation				Reporting & monitoring
Failure to address this risk and to execute projects in a sustainable manner could result in significant potential liabilities, reputational damage and not being able to win future work.			The Group has developed and implemented a sustainability strategy covering its operations until 2020 in terms of profitable markets, healthy communities and environmental limits.				Business Practices Committee Sustainability Working Group
Supply chain
The delivery of a large number of the Group's contracts are dependent on the continued availability and effective management of sub-contractors and other service providers.
Potential impact			Mitigation				Reporting & monitoring
The failure of a sub-contractor to perform to an appropriate standard and quality could result in delays to a project and adversely impact the ability of the Group to meet its contractual commitments and its reputation.			The Group seeks to develop long-term relationships with a number of its key sub-contractors whilst at the same time not becoming over-reliant on any one. As part of its selection criteria the Group seeks to partner with sub‑contractors/suppliers which share its values.				Monthly/quarterly operations and performance reviews

 

END

 

 

ACSUWVRRAKASRAR