Annual Financial Report

RNS Number : 9349J

Balfour Beatty PLC

08 April 2010

 



Balfour Beatty plc Annual report and accounts 2009; Notice of 2010 AGM and Class Meeting

Copies of each of the following documents have today been submitted to the UK Listing Authority ("UKLA"), and will be available for inspection at the UKLA's Document Viewing Facility, which is situated at:

Financial Services Authority

25 The North Colonnade

Canary Wharf

London E14 5HS

Tel: [phone]

The documents referred to are:

-           the Company's Annual report and accounts for year ended 31 December 2009;

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

-           Form of Proxy - AGM;

-           Form of Proxy - Class Meeting.

(Documents will normally be available for viewing shortly).

At the AGM on 12 May 2010 it is proposed that the Company's Articles of Association be amended.  These amendments are set out in the Notice of AGM and the revised Articles of Association are available for inspection at the offices of Linklaters LLP, One Silk Street, London EC2Y 8HQ.  Copies have also been lodged with the Document Viewing Facility.

Copies of the Annual report and accounts 2009 and the Shareholders' update and Notice of 2010 AGM and Class Meeting will be available shortly on the Company's website at www.balfourbeatty.com.

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.    

As part of the implementation of the Group's strategy to grow and protect the

business, Group management identified the need to respond to the changing business environment. It has sought to do so by diversifying the markets and geographies in which the Group operates.

The success in achieving this to date has produced a business portfolio, led by an established management team supported by robust risk management processes,

which has enabled the Group to meet the challenges arising from the changing economic and commercial environment.

In some of the Group's markets and territories, 2009 was a challenging year, due to the ongoing effects of the economic downturn. As a result, the Group has witnessed changes in customer spending in both the public and private sector and experienced

an increased risk of insolvency/financial default. This is not only within the supply chain but within elements of the Group's established customer base.  In addition, the acquisition of Parsons Brinckerhoff now means that the Group operates in a larger number of territories and markets than before, which potentially increases the Group's risk exposure in those areas.

Despite these changes within the business environment, the Group's established risk management and internal control systems have helped identify the effects of these

increased risks and implement actions not only to mitigate their impact but offer opportunity for further growth and development.

Set out below is a description of the key business risks facing the Group, their potential impact and the mitigation steps taken to minimise/eliminate that impact:

Risk	Potential impact	Mitigation
External risks
Economic environment
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.	Any significant changes in 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 world and this mitigates the risk of changes in spending in any one market.
Commercial counterparty solvency
The Group is exposed to counterparty credit risk of its customers, subcontractors, joint venture partners, financial institutions and suppliers. This risk is increased further by the current economic climate.	Failure of a customer could result in non-collection of amounts owed. Failure of a subcontractor or supplier would result in the Group undertaking the task itself or having to find a replacement, which could result in delays and additional costs.	The financial solvency and strength of counterparties are 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 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 subcontractors to mitigate the impact of any insolvency on their part.
Legal and regulatory
The Group is subject to a number of complex, demanding and evolving legal, tax and regulatory requirements. These requirements will increase as the Group continues to expand into a diverse number of territories.	A breach of 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 civil and/or criminal penalties, debarment as well as reputational damage to the Group.	The Group monitors and responds to legal and regulatory developments applicable to the territories in which it operates. A territory's legal and regulatory framework is considered as part of any decision to move into a new territory for the Group.
Strategic risks
Acquisition
The Group has made and continues to make acquisitions in pursuit of its strategic objectives.	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. Such due diligence will also include 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.
Investments
The Group invests in a number of PPP projects, infrastructure projects across the world and infrastructure asset investments. The success of such investments is dependent on a number of assumptions on future revenues and costs.	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 also negatively impact the Group's equity investment.	All investment appraisals are conducted and managed by experienced personnel. Revenue maximisation is carefully managed. The consequent delivery risk arising from an investment activity is managed by the careful selection of delivery and service partners. In many cases such partners are Group companies.
Organisation and management risks
People
The success of the Group depends on its ability to recruit and retain senior management and other key employees.	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 operating company to review the role, competencies, performance and potential of personnel. In addition, the Group has a well-developed succession planning process in place to identify and develop high potential/calibre personnel to fill key roles. 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.
Ethics
The Group operates in various international markets which may have inherent risks relating to ethical business conduct including but not limited to fraud, bribery and other forms of corruption.	Failure by employees to observe the highest standards of ethics and integrity in dealing with customers, suppliers and other stakeholders could result in civil and/or criminal penalties, debarment, as well as reputational damage to the Group.	The Group has clearly set out its expectations of employees and operating companies in dealing with its stakeholders in the recently revised Code of Conduct. This has been distributed to all employees and during 2010, e-learning will be used to raise awareness of the Code within the Group. In addition, there are a number of financial and commercial controls in place to manage these rules. A committee of the Board, the Business Practices Committee, monitors compliance with the Code of Conduct and the effectiveness of the Group's ethics and compliance programme.
Information technology
The efficient operation of the Group is increasingly dependent on the proper operation, performance and development of its IT systems.	Failure to manage or integrate IT systems or to 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.	Group IT manages centrally those systems which affect a number of operating companies. Other IT systems are managed within operating companies locally by experienced IT personnel. Significant investments in IT systems are subject to Board review and approval.
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).	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 developed and rolled out formal information security standards which operating companies are expected to meet as a minimum.   They are subject to periodic assurance by an independent third party.
Financial and treasury risks
The Financial review on page 66, together with Note 20 of the accounts, provide details of the Group's financial and treasury risks.
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 are actuarial deficits in these schemes.	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. For example, steps have been taken to restrict certain future increases in the principal defined benefit schemes' liabilities. The performance of the Group's pension schemes are regularly monitored by the Group and the Trustees of the pension scheme who, as appropriate, take advice from external consultants.
Delivery and operational risks
Bidding
The Group, through its operating companies, seeks to win work through a large number of bids each year.	Failure to identify risks, estimate costs and timing and how best to manage them could have an adverse impact on the profitability of such contracts to the Group.	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 with all major and significant contracts being subject to Group review and approval.
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.	In the event of a disagreement with, failure to deliver by, or poor performance of a joint venture partner, the Group could be exposed to financial and reputational risks.	The Group has procedures in place to ensure that it selects joint venture partners with 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.
Project delivery
The Group is engaged in a number of complex design, engineering, construction, facilities management and asset management projects.	Failure to manage or deliver a project 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) which could adversely impact the profitability and reputation of the Group.	Each operating company has 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.
Health, safety and environmental
The Group's activities require the continuous monitoring and management of health, safety and environmental risks.	Failure to manage these risks could result in serious harm to employees, subcontractors, the public or the environment and could expose the Group to significant potential liabilities and reputational damage.	Detailed HSE policies and procedures exist to minimise such risks and are subject to review and monitoring by both operating companies and Group and are also subject to external audit. More details on the Group's approach to health and safety management is shown in the sustainability section on pages 56 to 61.
Supply chain
The delivery of a large number of the Group's contracts is dependent on the continued availability and effective management of subcontractors and other service providers.	The failure of a subcontractor 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 and other commitments.	The Group seeks to develop long-term relationships with its key subcontractors whilst at the same time not becoming over-reliant on any one for the delivery of certain services. As part of its selection criteria, the Group seeks to partner with subcontractors/suppliers who share its values.

 

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