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    Annual Report and Accounts 2014 Build to Last Lean. Expert. Trusted. Safe.

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    Strategic Report Governance Financial Statements Other Information 2 BALFOUR BEATTY ANNUAL REPORT AND ACCOUNTS 2014 INTERACTIVE PDF The functionality of this PDF is outlined below. Please note that tablet and mobile users will experience a reduced functionality. Key: Front cover Previous page Next page Previous view Main contents page Go online balfourbeatty.com/ar2013 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information WHO WE ARE Balfour Beatty provides innovative and efficient infrastructure that underpins our daily lives, supports communities and enables economic growth. We finance, develop, build and maintain complex infrastructure such as transportation, power and utility systems, and social and commercial buildings. Our main geographies are the UK, US, Middle East and South East Asia. 2014 overview Balfour Beatty – a leading infrastructure group with more than 100 years’ experience Group at a Glance p2 2014: a challenging and redefining year Chairman’s Review p4 Build to Last: transforming the business Group Chief Executive’s Report p6 Construction markets are recovering. Long-term drivers for infrastructure remain sound Market Overview p12 Very poor performance caused by UK construction contract issues Construction Services p18 Depth of capabilities enables us to deliver complex contracts Support Services p22 A proven track record of developing and financing projects Infrastructure Investments p24 A strong and yielding portfolio Directors’ Valuation of the Investments Portfolio p27 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 1 ”Balfour Beatty is a global name built on the exceptional engineering skills of its people. Contents This strength is evidenced by the continuing flow of landmark contracts across the Group. Strategic Report The business model also balances Construction Services and Support Services with 01 Financial Summary a successful Investments business which will continue to create significant value. 02 Group at a Glance Over the next two years we should work through the severe legacy of “problem” 04 Chairman’s Review construction projects. However, in tackling the cultural change required to ensure these 06 Group Chief Executive’s Report issues are behind us, we face major short-term challenges. The key is that we are 08 Business Model determined to address this through self-help. Our transformation programme, Build 10 Our Priorities to Last, is gaining rapid traction and we are driving initial improvements of £200 million 12 Market Overview cash in, £100 million cost out over 24 months. In addition, our Investments portfolio 14 Chief Financial Officer’s Review will provide the financial flexibility of both reliable income and the sale of maturing 18 Performance Review and assets into a strong market. KPMG Review 27 Directors’ Valuation of To maintain balance sheet strength throughout this period, we have already cancelled the Investments Portfolio the share buyback and re-phased our pension fund payments with the support of the 30 Risk Management Framework Trustee. We have also decided not to recommend a final dividend this year, but expect 31 Principal Risks to reinstate the dividend at an appropriate level by March 2016. 36 Safe, Innovative and I remain convinced that all our operations can achieve industry-standard performance Responsible Business as markets improve. The real prize is a sustainable return to profitable growth, built on Governance the Group’s unique capabilities but underpinned by leaner, stronger processes and 42 Board of Directors flawless execution. 44 Chairman’s Introduction Longer term we want to make Balfour Beatty a leader in its core markets, delivering and Directors’ Report superior returns to the benefit of our customers, employees and shareholders.“ 45 Directors’ Report 64 Remuneration Report Leo Quinn Group Chief Executive Financial Statements 81 Independent Auditor’s Report Financial summary 86 Financial Statements (£m unless otherwise specified) 2014 20132 96 Notes to the Financial Revenue including joint ventures and associates1 8,440 8,478 Statements Group revenue1 6,950 7,118 Other Information (Loss)/profit from continuing operations 165 Unaudited Group Five-Year – underlying1 (58) 146 Summary – reported (281) (33) 166 Shareholder Information Pre-tax (loss)/profit from continuing operations – underlying1 (80) 131 Cover image – reported (304) (49) Michael Wright, General Operative, Profit from discontinued operations 242 18 in the London Power Tunnels. Total loss for the year (59) (35) Balfour Beatty is installing high-voltage (Loss)/earnings per share electricity cables for National Grid. – from continuing operations (43.9)p (7.5)p This project will rewire the capital via deep underground tunnels, in order – basic (8.6)p (5.1)p to ensure London’s electricity needs Dividends per share 5.6p 14.1p continue to be met. Financing – net cash/(borrowings) before infrastructure concessions 219 (66) balfourbeatty.com/londontunnels (non-recourse) – net borrowings of infrastructure concessions Read more online (non-recourse) (445) (354) This Annual Report is available to 1 From continuing operations, before non-underlying items. download in PDF format online. 2 Re-presented to classify Parsons Brinckerhoff and Rail Italy as discontinued operations, to include the results of Rail Germany, which no longer meets the definition of a discontinued operation, as non-underlying items, balfourbeatty.com/AR2014 and to show the results of certain legacy Engineering Services contracts as non-underlying items (Note 38). Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 2 GROUP AT A GLANCE Balfour Beatty – a leading infrastructure group with more than 100 years’ experience Infrastructure is the backbone of the Revenue generated this year1 Employees worldwide economy and society. Everyone relies on energy, water, communications, transport and buildings. £8,440 million 36,000 Balfour Beatty finances, develops, builds and maintains the infrastructure that underpins daily life, supports communities and enables economic growth. Revenue by region1 Major operations Together with our partners and supply Other significant operations UK chain of small and large firms, we know Joint ventures how to deliver innovative, efficient and highly complex infrastructure projects £4,209m with the highest levels of quality, safety and technical expertise. We integrate 50% with customers and local supply chains, and work with local communities. Balfour Beatty’s main geographies are the UK and US, and the Group has a significant presence in the Middle East and South East Asia. Our key market sectors are: • infrastructure • transport (roads, rail and aviation) • power, energy and water North • buildings America • commercial • social (health, education, defence, institutional and housing). £3,219m Rest of the World Over the last 100 years we have created 38% £1,012m iconic buildings and infrastructure all over the world including the London Olympics’ Aquatic Centre, Hong Kong’s first Zero 12% Carbon building, the world’s biggest shopping mall in Dubai, the National Museum of the Marine Corps in the US and the Channel Tunnel Rail Link. Business Model p8 Portfolio valuation by sector No. projects 2014 2013 Portfolio valuation December 2014 Sector (2013) £m £m The Investments portfolio continues to Roads 13 (12) 467 253 grow as we diversify into new sectors and Hospitals 4 (5) 225 144 expand into new geographical markets. Schools 8 (9) 102 68 We continue to realise value through Other 13 (11) 149 69 the investment recycling programme by UK total 38 (37) 943 534 selling investments that are mature and US military housing 21 (21) 322 228 operationally proven, while preserving Hospitals 2 (0) 4 – interests in strategic projects or sectors Other 5 (3) 11 4 that offer opportunities to the Group. North America total 28 (24) 337 232 Directors’ Valuation BBIP fund 20 – of the Investments Portfolio p27 Total 66 (61) 1,300 766 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 3 Construction Services Support Services Infrastructure Investments The construction businesses in The Support Services division The Investments business is a the UK and US, and joint ventures in manages, upgrades and maintains recognised leader in public private the Middle East and South East Asia, critical national infrastructure, and partnerships (PPP) and other are top tier and all operate across the its capabilities complement both developments in both the UK and US infrastructure and building sectors. our Construction Services and and its activities generate additional Infrastructure Investments divisions. construction and service work for other parts of the Group. What we do What we do What we do • Building • Upgrade and maintain water, gas • Develop and finance both public • Civil engineering and electricity networks and private infrastructure projects • Ground engineering • Highways network management, around the world • Mechanical and electrical services operation and maintenance • Operate a portfolio of more than • Rail engineering • Rail renewals 60 long-term infrastructure projects • Refurbishment and fit-out Key highlights Key highlights Key highlights • Stable revenues with strong • Excellent financial performance, • Performance significantly impacted performance in the highways including £93 million of disposal gains by operational issues in the UK maintenance business in the • Substantial and diverse portfolio and Middle East M&E joint venture transportation sector with Directors’ valuation • Order book grew 2% during the • Good underlying profit from at £1.3 billion year to £7.9 billion continuing operations with good • Preferred bidder status achieved • KPMG LLP (KPMG) review an operating margins on 13 new projects with significant important step in understanding • Order book reduction in power pipeline of new opportunities issues faced by the business. and transportation, as anticipated. identified. Total revenue Total revenue Total revenue 78% 15% 7% Order book1 Directors’ valuation Order book1 £7.9bn £3.5bn £1.3bn Revenue1 Revenue1 Revenue1 £6,597m £1,273m £570m Profit from operations1 Pre-tax result1 (Loss)/profit from operations1, 2 £(209)m £50m £162m Construction Services p18 Support Services p22 Infrastructure Investments p24 1 From continuing operations including joint ventures and associates, before non-underlying items. 2 Total loss from continuing operations was £394 million (2013: £103 million), including non-underlying items. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 4 CHAIRMAN’S REVIEW 2014: a challenging and redefining year Continuing issues within the UK In this part of the Group, we saw failures five years under Group ownership. of risk management, and the control 93% of voting shareholders supported construction business made 2014 environment, particularly commercial and the Board in approving the sale. a challenging and ultimately operational controls, was not effective. redefining year for the Group. These were compounded by continuous Taking decisive action upheaval, with substantial people changes In light of further write-downs, and Robust judgements and rapid decisions in the UK construction business. its desire to accelerate refocusing and were required: gripping, scoping, reviewing simplifying the Group, the Board decided More details of KPMG’s independent Chief Executive Andrew McNaughton and providing for the very significant levels review and resulting actions are in the of write-downs that emerged from the should step down on 3 May 2014. operational review on page 19 and the I was asked to step in to progress UK construction business. There were risk management section on page 30. important changes in strategic direction the following priorities: and in executive management, and also The deterioration in performance started 1. Recruit an experienced, top-flight the proposed merger with Carillion plc. before 2014, as many of the 45 problem Chief Executive from outside the projects were tendered or started during Group with strong turnaround Such was the pace of events and change 2012 and 2013. The majority of these are that these seem improbable when listed credentials. expected to be operationally complete Outcome: Leo Quinn started as Group chronologically. The Board met 26 times by the end of 2015. during the year and at every stage the Chief Executive on 1 January 2015. Board remained focused on how best The Board has considered the need for 2. Deliver a competitive sale process to secure both present and future further provisions in addition to those to enable PB to be sold at compelling shareholder value. announced in January 2015, and shareholder value. concluded that a further £118 million Outcome: PB was sold for US$1.35 billion UK construction performance write-down is appropriate, having in cash (gross proceeds) in October 2014. The performance of parts of our UK reviewed both individual contracts and construction business during 2014 has also the rest of the portfolio by taking 3. Further underpin shareholder value undoubtedly been very poor, having a a risk-based approach by revaluing the Investments portfolio materially negative impact on the results and enhancing awareness of its for the whole Group. Total loss from These issues are localised and fixable, intrinsic value. operations over the year, including the but it will take time to work through legacy Outcome: the Directors’ valuation was further provisions now announced, contracts and uncertainty remains. New increased from £766 million at December amounted to £281 million. This is a matter Group Chief Executive Leo Quinn has a 2013 to £1,050 million at June 2014; and of considerable regret to all concerned, transformation programme for the whole £1.3 billion at December 2014. This was most especially the Board of Directors Group, with phase 1 targeting £100 million reviewed and supported independently. and myself as Chairman. Problems were of cost reductions and £200 million of cash The value of the future pipeline is estimated mostly confined to the Engineering flow improvements versus 2014. by the Board at a further 10–15% of the Services and Regional parts of the Directors’ valuation, demonstrating how Sale of Parsons Brinckerhoff business operating in London and the integral this business is to the Group. The Board’s strategic review concluded South West of England. during Q1 2014, ahead of any knowledge 4. Progress management actions to KPMG’s independent review identified of further UK construction write-downs, stabilise the underperforming parts three main dominant causes. Firstly, that the Group had become too complex, of the UK construction business. tendering for certain lump sum fixed-price stretching financial and managerial Outcome: despite the recovery plans projects at very low margins at the bottom resources, and diluting strategic focus. by new UK operational management, of the market, assuming optimistic buying And whilst the Parsons Brinckerhoff (PB) more losses emerged. In October the gains which didn’t materialise as costs business was of high quality, it required Board appointed KPMG to review the UK escalated during the course of the project, substantial investment and its Group construction business and the conclusions leading to losses. Secondly, inadequate synergies were modest. were published in January 2015. The commercial and contract management Board has made further provisions at The Board announced in May its intention processes, and a lack of management 2014 year end of £118 million. to sell PB, subject to an excellent price supervision, led to poor control over being achieved. It was. Following a highly 5. Simplify and de-risk the Group’s projects and failures to recover genuine competitive auction, the sale completed international and rail businesses in contract entitlements. Thirdly, poor cost in October for gross proceeds of US$1.35 territories where it lacked sufficient and programme forecasting, leading to billion, roughly doubling its value during its critical mass or delivery capability. insufficient visibility on project deterioration. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 5 “A new executive team and a refreshed Board is now substantially in place and they have the privilege of taking Balfour Beatty forward to its next chapter.” Outcome: concluded disposal of rail Loss from continuing operations was De La Rue plc. Leo sets out his initial businesses in Austria and Germany (track £281 million (2013: £33 million). The priorities on pages 6 to 7. His appointment and plant); terminated US$1.5 billion of underlying loss per share for total has enabled the intended reshaping and bids in markets as diverse as Indonesia, operations was 8.0p (2013: earnings refreshing of the Board to progress rapidly. Canada and Denmark. Group risk 21.5p). Total loss per share was It is a pleasure to welcome Philip Aiken management oversight tightened and 8.6p (2013: 5.1p). as Balfour Beatty’s new Chairman from made more challenging. The Group had year end net cash of 26 March 2015, when I will step down Approach by Carillion plc £219 million; a strong balance sheet position after 10 years on the Board. After 34 years The initial approach by Carillion plc was despite continuing underlying cash outflow with the Company, including 24 years as a opportunistic, coinciding with the frenetic in the construction businesses. Director, Peter Zinkin retires from the Board activity described above, including the PB in March 2015. His commitment to the The performance of the UK construction sale; all at a time when the Group lacked a business has been unparalled and he leaves business is covered in more detail on permanent Chief Executive. The Board still with our thanks and very best wishes. pages 18 to 20. Profitability in the US concluded it was in shareholders’ interests construction business increased slightly Duncan Magrath leaves the Group in to evaluate the approach, provided key and order book intake is growing amid May 2015, after seven years as Chief parameters were agreed to by Carillion signs of market recovery. Support Services Financial Officer. He steps down with the upfront. Critically, these included achieving maintained revenue levels but saw a small Board’s best wishes and I add my personal a significant valuation premium for Balfour decline in profits and margin. Infrastructure thanks to Duncan for the huge personal Beatty shareholders, and Carillion’s explicit Investments increased both profits and commitment he has made to the Group support for the PB disposal, with proceeds the value of the portfolio. during the last year in particular. to be retained within the combined business. Key terms were agreed in Share buyback and dividend We are very pleased to welcome Philip writing and the Board engaged to jointly In order to maintain a strong balance Harrison who will be joining the Board as evaluate the possible benefits of an sheet, the Board decided to cancel the the new Chief Financial Officer. Philip is all-share merger. proposed £200 million share buyback currently CFO of Hogg Robinson Group, following the PB disposal, and to rephase and prior to that was CFO of VT Group. Whilst joint working was underway, pension fund payments. Whilst the Board and despite a joint public announcement Balfour Beatty’s future recognises the importance of the dividend, a week earlier, Carillion surprisingly The Group has been significantly it will not recommend a final dividend withdrew its support for the sale of PB. simplified and refocused. At its heart but will look to reinstate dividends at an This eroded trust and confidence. The is an Anglo-American construction and appropriate level by March 2016. Board also concluded that the combined construction services presence with business plan prepared by Carillion Health and safety strong local market positions and deep management had very significant delivery During the year, six workers lost their lives engineering expertise. The Group has and financial risks. There was also a real across the Group. There is renewed focus further construction capability through risk that any agreed transaction might be on fatal risks and health and safety targets its South East Asia and Middle East aborted before it was consummated, given have been revised. The primary KPI for joint ventures. Following the sale of PB, the uncertainty regarding Balfour Beatty’s safety has changed to Lost Time Injury the Group has a strong balance sheet, UK construction business. Unfortunately, Rate, which is a more thorough indicator. underpinned by the valuable Investments this proved more than prescient. From 2015, the Group will be redoubling business and the benefits it provides efforts on Zero Harm programmes. across the Group. The Board engaged for the right reasons, recognising the obvious risks. It also A new executive team and a refreshed Board and executive management withdrew for the right reasons, given Board is now substantially in place and Andrew McNaughton stepped down as Directors were unable to recommend they have the privilege of taking Balfour Chief Executive after a 17-year career with the merger transaction as being in Beatty forward to its next chapter. Balfour Beatty and goes with our thanks shareholders’ interests. and best wishes. Results for the year Belinda Richards and Bill Thomas resigned Profitability was materially impacted from the Board in November 2014. by the significant UK construction write-downs. Conversely, the year end The appointment of Leo Quinn as Group balance sheet benefited from the receipt Chief Executive from 1 January 2015 is of the PB sale proceeds. a major step forward. He was previously Steve Marshall CEO of Qinetiq plc and prior to that at Chairman Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 6 GROUP CHIEF EXECUTIVE’S REPORT Build to Last: transforming the business Balfour Beatty’s underlying Importantly, however, the Group retains Lean many core strengths: a strong brand and Deliver rapid performance improvement performance has been declining reputation underpinned by market-leading by strengthening operational and financial since 2010, with the sharpest and innovative engineering capability, controls, and transparency and simplifying and most noticeable decline deep customer relationships as the organisation with detailed indirect cost occurring over the last 12 months. demonstrated by important recent reduction plans, plus the launch of the My contract awards, geographic span and Contribution productivity initiative across This has been caused not only scale, and the commitment of a talented the whole organisation. Similarly, apply by the significant operational and dedicated workforce. The business these processes to lean out delivery for our issues impacting the UK model also balances Construction customers of our value added capability, Services and Support Services with a eliminating waste (Zero Waste) in scheduling construction business over the successful Infrastructure Investments and materials. Metric: operating profit and last two years, but also because business which will continue to create operating cash generation. the cost base of the Group is too significant value. This Investments Expert business provides an important anchor high. There have been significant to the Group’s balance sheet and profits, Customers value our engineering, working capital outflows since design and delivery capability. We will while creating real and substantial attract, retain and develop key employees 2009. This trajectory has made opportunities for the Construction and subcontractors in an increasingly it imperative to identify and Services operations in the UK and North competitive environment by investing America and Support Services in the UK. address the key issues rapidly, in training and talent to enhance the Although the majority of legacy problem Group’s engineering, design and project in order to begin at once to contracts should be completed during the management and delivery capability. restore the Group to strength. current year, major challenges remain and Metric: annual engagement survey and the cultural transformation will take longer. employee retention. Understanding the problems The key is that we have made a good start Trusted Over the last few months, and our transformation programme, called Deliver on our promises through independent reviews have been Build to Last, is gaining rapid traction. strengthening the successful execution underway on operations that account Build to Last of projects and services through for 70% of the Group by turnover and In mid February 2015 the Group disciplined stage-gated bidding, the remainder should be underway launched its Build to Last programme. contracting and risk review processes. by the end of the summer. Already This is designed to address the Group’s Metric: customer satisfaction. it is clear from the outputs – as well as from wide-ranging discussions with performance as it affects all stakeholders Safe senior operational leaders – that the root – customers and supply chain, employees Nothing is more important. If we are cause lies in the Group’s rapid fourfold and subcontractors, investors and not safe we are not in business. Safety revenue expansion since 2000, largely communities – by driving continuous, is a non-negotiable licence to operate by acquisitions which were insufficiently measurable improvement against – at all levels and for all employees, integrated. This resulted in an overly four goals: Lean, Expert, Trusted, Safe. subcontractors, customers and complex, devolved organisation with communities. Metric: Zero Harm. poor controls and weak disciplines Read more on p10 in cost control and project bidding. Following a major industry downturn, the UK construction business was extensively restructured in successive waves and began to exhibit serious project issues which, together with other factors, resulted in substantial operating losses for the Group. The cost base remains too high, with Group-wide overheads approximately 1% of revenue above industry benchmarks. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 7 “The Build to Last programme is designed to ensure that Balfour Beatty can also build to last for itself, starting with the right foundations.” “The Investments portfolio Over time the aim is to bring each differentiated by best-in-class expertise, business unit to sustainable industry- a lean innovative supply chain and robust provides an important standard performance in what appears execution. For over 100 years – and anchor to the Group’s to be a beneficial market environment, throughout all of its recent problems – creating substantial value for the Balfour Beatty has been delivering balance sheet and profits.” Group’s shareholders. major projects for its customers and communities – lasting infrastructure that Read more on p27 Actions underway shapes and improves people’s daily lives. Successfully delivering the Build to Last The Build to Last programme is designed Initial phase – self-help goals will require leadership, rigorous to ensure that Balfour Beatty can also Over the next two years we should work implementation and intensive focus build to last for itself, starting with the through the severe legacy of “problem” on disciplined contracting processes. right foundations. construction projects. However, in tackling A programme office has been set up with UK and US workstreams and a I remain convinced that all our operations the cultural change required to ensure benefits tracking system. Following the can achieve industry-standard performance these issues are behind us, we face major announcements of a new Chairman, as markets improve. The real prize is a short-term challenges. The key is that we Group Chief Executive and Chief Financial sustainable return to profitable growth, are determined to address this through Officer to strengthen the Board, new built on the Group’s unique capabilities but self-help. Our transformation programme, senior appointments include global leaders underpinned by leaner, stronger processes Build to Last, is gaining rapid traction and for IT, commercial and project execution, and flawless execution. we are driving initial improvements of £200 million cash in, £100 million cost and business process re-engineering. Longer term we want to make Balfour out over 24 months. In addition, our In addition, senior leadership within the Beatty a leader in its core markets, Investments portfolio will provide the UK Regional and Engineering Services delivering superior returns to the financial flexibility of both reliable income businesses will be strengthened by the benefit of our customers, employees and the sale of maturing assets into a appointment of a new chief operating and shareholders. strong market. officer. All senior management incentives have been matched to key programme To maintain balance sheet strength goals. The Group-wide cash generation throughout this period, we have already drive has been rolled out with planning cancelled the share buyback and rephased and training to project level. In the UK, our pension fund payments with the enabling functions – those not related to support of the Trustee. We have also front-line delivery – are being consolidated decided not to recommend a final dividend to remove duplication and improve Leo Quinn this year, but expect to reinstate the efficiency, to deliver significant cost Group Chief Executive dividend at an appropriate level by takeout. The Group’s property portfolio March 2016. is being streamlined to reduce overheads and detailed procurement initiatives, commencing with key suppliers and areas of direct and indirect spend, will deliver meaningful and growing savings. All of this demonstrates the scale of opportunity to drive major near-term improvements in cash generation and profitability. At the same time, Build to Last is also about relentlessly holding course. The objective is to shape a Group leading in its core markets and Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 8 BUSINESS MODEL Combining engineering expertise with our investments capability Key: Business divisions Operational benefits Financial benefits lling across custome ross-se owledge transfe r base C Kn r CONSTRUCTION SUPPORT SERVICES SERVICES Read more on p18 Read more on p22 Co nt rac a c ts ts ntr Co Construction delive e m e n t e x p er t i s e Higher margin con contracts CUSTOMERS margin an a g her trac ry e x Hig et m ts p er Contracts As s t is e Ba w l ve la o c ti ga a n rk e to in n ne pit g eg ca at to ca ce ng Ca h pit ive lan i s s Ba ork t flo al w w ve in to to inv es flow t INFRASTRUCTURE Ca sh INVESTMENTS Read more on p24 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 9 Our metrics reflect our strategic priorities: Lean, Expert, Trusted and Safe. Read more on p10 The contracting businesses and Operational benefits The markets we serve The Group’s Construction Services and • We offer services to develop and the Infrastructure Investments Support Services businesses derive real finance, construct, manage and business derive operational and value from the Investments business, maintain essential infrastructure assets financial benefits from each other. because the investments projects • We operate predominantly in the UK provide valuable work. and North America, as well as in parts The strategic value and benefits Support Services’ asset management of South East Asia and the Middle East from owning the Infrastructure expertise and the construction • Our customers are government businesses’ construction delivery Investments business – both the expertise optimise lifecycle costs, departments and agencies, regulated portfolio itself and the skilled utilities and private sector organisations. improve the success rate and mitigate team that operates and develops risk within the Investments business. How we compete the business – is material to Our Construction Services and Support • Our engineering expertise, supported Services businesses gain from each by our scale and balance sheet, allows Balfour Beatty as a whole and other’s operational knowledge and us to deliver the most complex and is how the business generates cross-sell to the same customer base. large-scale infrastructure projects real long-term value. • We combine this ability to deliver major Financial benefits projects with our local presence and a The Group is able to manage its balance strong connection to local customers sheet through the business cycle by and suppliers flexing the level of disposals and investments made by the Investments • The combination of world-class business. We reinvest cash generated by investments capability and leading the Construction Services and Support construction and support services Services businesses to deliver further activities gives us a deep understanding contract revenues. of how to develop and maintain essential infrastructure assets Furthermore, the Investments portfolio balances negative working capital within • Safety, sustainability and ethics are the the contracting businesses and generates bedrock of our business and our licence returns in its own right. to operate. Our strategic priorities • Lean – improve operational performance by increasing productivity and cash generation • Expert – invest to attract, retain and develop the best employee and subcontractor talent • Trusted – deliver value to customers through disciplined contracting processes • Safe – continue to show leadership in safety through Zero Harm for our people, customers and communities. Read more on p10 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 10 OUR PRIORITIES Bringing each business unit to industry-standard performance levels Our strategic priorities Our vision is to be a world-class infrastructure business with leading positions in the UK, US, LEAN 1 Improve operational performance and cost efficiency Middle East and South East Asia. Deliver rapid performance improvement by: Poor operational performance, • strengthening financial controls and transparency • simplifying the organisation as identified by KPMG and our • reducing indirect costs own analysis, has resulted in poor • ensuring profit is backed by cash financial results and demands • increasing productivity. rapid action. We will seek to deliver value To be an employer of choice that for our shareholders by restoring operational effectiveness and EXPERT 2 attracts and develops top talent ensuring profit is backed by cash. Ensure the attraction, retention and development of key employees and subcontractors by investing Build to Last in training and talent to enhance engineering, Our business transformation programme, project management and delivery capability. Build to Last, will drive continual improvement across our businesses, and build a global Group which generates substantial shareholder value and maximises returns by optimising the value of an integrated Balfour Beatty. In its initial phase, Build to Last will target bringing Deliver value to customers each business unit to industry-standard performance levels by focusing on four TRUSTED 3 Strengthen the successful execution of projects and key areas: Lean, Expert, Trusted and Safe. services through disciplined stage-gated bidding, Our new metrics reflect these priorities. contracting and risk review processes. SAFE 4 Continue to show leadership in safety Prioritise safety at all levels and for all employees, subcontractors, customers and communities. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 11 Our performance Our KPIs • Embarked on a cost reduction exercise in UK construction. This initiative has now been broadened into a Group-wide • Refer to the Chief Financial Officer’s Review on page 16 for information about 2014 cash performance 3.3% Gross margin (2013: 6.4%)1 plan targeting £100 million of overhead • Since the end of 2014 we have initiated and procurement cost savings over the next 24 months a programme targeting a £200 million improvement in operating cash flow 6.2% • Took actions to improve gross margins over the next 24 months. Overhead (2013: 6.5%)2 in UK construction through more selective work winning and delivery improvements (recently reinforced Mitigating risk Common minimum standards ensure the business gains from performance -£327m Cumulative operating cash flows3 through KPMG findings) opportunities and cost efficiencies. (2013–2014) • Granted £4.4 million of government • We are committed to the 5% Club funding for a Balfour Beatty Academy to further develop the leadership and with an objective that 5% of our UK workforce will be graduates or 72% Average employee technical skills of our workforce. apprentices in structured training satisfaction Over the next three years, over 2,000 programmes in the next four years. of our employees will benefit from Mitigating risk the Employer Ownership Skills Appropriate remuneration and incentive Funding Scheme policies are in place. The business Read more on p37 provides structured training and key role succession planning. • There is no overall measure of customer Mitigating risk satisfaction, however some areas of the Group do measure this. We are looking The gateway reviews within the Group’s new risk framework are designed to 4 out of 5 Average customer to introduce standardised customer ensure projects are delivered efficiently. satisfaction rating metrics across all our businesses in the future. • Changed our primary lagging indicator Mitigating risk of health and safety performance from Accident Frequency Rate to All employees and subcontractors work to the challenging safety requirements 0.27 Lost Time Injury Rate Lost Time Injury Rate, which is of our Zero Harm goal. The Global Safety a more thorough indicator. Principles define the way we work. Read more on p36 1 Gross profit from continuing operations before non-underlying items as a percentage of Group revenue from continuing operations before non-underlying items. 2 Other net operating expenses from continuing operations before non-underlying items as a percentage of Group revenue from continuing operations before non-underlying items. 3 Cash used in continuing operations before non-underlying items and taxation. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 12 MARKET OVERVIEW Construction markets are recovering. Long term drivers for infrastructure remain sound The outlook for global growth is UK market share, the business anticipates As the UK economy recovers, greater stable conditions over the current improving and the construction confidence in the private sector is driving regulatory cycle and beyond. sector, a late cycle sector, a stronger pipeline of commercial and In power, the urgent need for new nuclear, is seeing growing pipelines. industrial projects. Commercial building thermal and renewable energy capacity, However, margins remain under was up 10% compared to 2013 and other as well as increased levels of wind select building segments, such as student pressure from recessionary order generation, especially offshore, will drive accommodation, are increasingly active. investment in the transmission network. books and rising input prices. In contrast, fiscal austerity continues to Balfour Beatty is well placed to benefit weigh heavily on health, education and from both areas and, although the market We believe the long-term drivers for civic building projects, with volumes is currently being held back by political infrastructure remain sound – ageing declining slightly in 2014. Further, the uncertainty, policy should crystallise transport, water and energy networks in increased volumes in housing and private soon after the election. developed countries, and population and building have put pressure on input costs. economic growth in the developing world US – necessitating ongoing investment. In infrastructure, UK election uncertainty In the US the building market is making could limit new large projects in the a steady recovery, with output up by short term, and competition is keen for 7% in 2014. Indicators such as the ENR Revenue split by sector for UK smaller projects. Nonetheless, the UK Construction Industry Confidence Index Construction Purchasing Managers’ Index and the Architecture Billings Index 1. Buildings improved significantly through 2014 (Figure 2) show increased confidence 4 1 (Figure 1), demonstrating long-term 2. Transport and that building pipelines are growing. 3. Utilities industry confidence. The Construction 4. Other Products Association forecasts 9% The private sector has been resurrecting 3 annualised growth to 2018. stalled projects and there has been 2 a sharp increase in private building In roads and rail, orders across the industry pipelines. The industrial and manufacturing were down year-on-year, as most existing sectors are benefiting from the fall in large projects, such as Crossrail, approach oil prices, although some uncertainty Revenue split by sector for US completion and new major projects such surrounds the potential impact of this as HS2 have not yet started. However, on oil-producing regions. Public building 3 4 the Group’s position on several Network remains relatively depressed, largely 1. Buildings 1 2. Transport Rail alliances for the current regulatory due to low government spending. 3. Utilities period will provide a good baseload of 2 work. The business is well placed to At the same time, global uncertainty, 4. Other benefit from investment on the back of volatile resource prices and low public the Highways Agency’s investment plan spending continue to weigh on confidence and through large rail projects such as and competition remains strong. HS2, EWR and Crossrail 2. In infrastructure, highway investment In local authority roads, despite pressure has been flat, and uncertainty over on revenue budgets, growth will be driven MAP-21 funding is constraining the by the need for customers to lower costs market, although rail has fared better. and improve service delivery through The US water market declined by 6% outsourcing, while investing in in 2014 due to fiscal constraints. Despite economic regeneration. funding uncertainty, the clear need to invest in US infrastructure is gaining In water, the Group is entering a new political importance. The business AMP cycle with an increased order book, continues to see growing use of design- having secured positions on frameworks build and PPP and is investing to take for existing customers and extended its advantage of this as a differentiator relationship with Thames Water, and and means to add more value for anticipates stable demand. In gas, having its customers. secured a position on two key framework contracts with National Grid and gained Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 13 Investments business continues to take advantage of economic and social infrastructure opportunities in the UK and North America. Read more on p24 South East Asia and the Middle East Figure 1: Markit/CIPS, UK Construction Purchasing Managers’ Index (PMI) In Hong Kong, the market has been steady, The UK Construction PMI grew strongly through 2014, showing industry confidence with construction output up over the last year. Although delays in the legislative 70 process to approve public projects pose 65 some risk to market volumes in the short to medium term, government investment 60 in roads and rail, and continued private sector confidence, are helping maintain 55 healthy pipelines for Gammon, Balfour 50 Beatty’s joint venture in the region. The business expects to continue to 45 benefit from economic growth across South East Asia. 40 In the Middle East, the United Arab 35 Emirates felt the impact of the global 30 financial crisis, which depressed developer 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 confidence. That confidence has started PMI, Commercial Building (12-month average) PMI, Civil Engineering (12-month average) to return, with a significant increase in the pipeline over the last 12 months; but it is too soon to gauge the potential dampening effect of the recent fall in oil prices. Infrastructure Investments The UK continues to generate a steady stream of economic infrastructure Figure 2: American Institute of Architects, US Architecture Billings Index (ABI) opportunities, primarily in power The leading indicator for the US building market remained positive throughout 2014 transmission, energy from waste and transport. In social infrastructure, as the 70 pipeline of health and education PPP 65 projects continues to decline, the Group’s Investments business is now successfully 60 targeting the growing residential sector, particularly student accommodation. 55 In North America, the US PPP market is 50 highly fragmented with legislation, funding methods and politics unique to each state 45 and municipality. Nonetheless there is 40 a strong pipeline of social infrastructure projects in student accommodation and 35 multifamily housing projects, which the US business is well placed to address 30 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 due to its platform in military housing PPP, as well as growth in transport and ABI, Non-Res Building (12-month average) other social infrastructure. In addition, the business has now successfully entered the Canadian health market, which represents a future growth area. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 14 CHIEF FINANCIAL OFFICER’S REVIEW Disappointing financial performance in 2014 2014 was clearly a very difficult Given the scale of the losses incurred in the half-year ended 27 June 2014, to 2014, consideration has been given as to reduce the profits from UK construction year for the Group with the whether any of the losses incurred in 2014 by £16 million. impact of poor operational and should have been identified and accounted commercial controls in UK for in previous periods in accordance with Underlying items IAS 8 Accounting Policies, Changes in Underlying revenue from continuing construction leading to a very operations including joint ventures and Accounting Estimates and Errors. Whilst disappointing total loss from all available information may have been associates was broadly in line with last continuing operations of used in preparing prior period accounts, year at £8,440 million (2013: £8,478 million). if there were errors in the information itself, At constant exchange rates revenue £281 million. increased by 2%. Revenue was broadly this could lead to an error that requires adjustment. This could be a mathematical flat across the divisions. FINANCIAL SUMMARY error in the preparation of the information In Construction Services, flat revenue or indeed an assumption that was so at actual exchange rates included a Given the events that have occurred in the optimistic that another reasonable person reduction of 5% in the UK offset by a 27% year, the financial statements somewhat would not have arrived at the same figure. increase in the South East Asia and Middle inevitably are challenging to interpret, and If this was the case, the outturn margin East joint ventures. At constant exchange do take some explanation. The key issues expectation should have been adjusted at rates revenue growth in the US was 5%. to consider when reading the accounts the time, and if the error was of sufficient are the treatment of: The Group’s share of underlying post-tax size, could have resulted in an end loss • discontinued businesses – the disposals position being booked at that time. On the profits from continuing joint ventures and of Parsons Brinckerhoff (PB) (completed other hand, you do not simply use hindsight, associates reduced to £55 million from October 2014), Rail Scandinavia so events that have subsequently occurred, £71 million in 2013, principally due to a (completed January 2014) and Rail Italy such as price inflation or subcontractor poor performance from the mechanical (completed March 2015) failure, which could not have been and electrical engineering business in reasonably forecast at the time, do not the Middle East. • Rail Germany – partial disposals were constitute an error which requires The loss from continuing operations agreed in August 2013 and November adjustment and are instead changes in before non-underlying items was 2014. While the remaining businesses estimate at the point in time that the event £58 million (2013: profit £146 million), are in the process of being sold, their triggering the change occurred. with losses in Construction Services trading will be shown in non-underlying items, within continuing operations The projects on which there was a of £209 million (2013: profit £18 million) significant deterioration in the end margin reflecting a very poor performance • legacy Engineering Services (ES) from UK construction, offsetting good from tender were examined to identify the contracts – certain contracts were bid underlying performances in Support reasons for the change and to identify the into the external market in London and Services of £50 million (2013: £55 million) time of the root cause for the deterioration. the South West where losses are of and Investments of £127 million (2013: such a size and nature that they have The results of the exercise showed that £102 million) which included disposal been separately disclosed in non- the vast majority of the losses were gains of £93 million (2013: £82 million). underlying items. Tendering into these due to operational issues in 2014, and markets has been stopped, and the appropriately accounted for in that year, Net underlying finance costs of £22 million relevant management has left. and for the year ended 31 December 2013 increased by £7 million (2013: £15 million) the aggregate impact of any errors was due to a £10 million increase in finance The results of a review by KPMG into the charges resulting from the convertible not material. Accordingly, the 2013 losses in UK construction were announced bonds issued in December 2013 and a accounts have not been restated. There in January 2015. The findings and actions £7 million increase in pension net interest were, however, certain contracts at arising from it are dealt with in the expense, offset by a £6 million reduction 27 June 2014 where there were errors Construction Services performance in interest on bank loans and overdrafts principally due to unrealistic cost and review on page 19 and are not repeated and a £4 million increase in subordinated scope assumptions. As a consequence here, although clearly, the write-downs debt interest receivable. when we publish our half-year accounts resulting from the failure to apply control for the period ending 26 June 2015 we Underlying pre-tax loss from continuing processes properly have had a significant intend to restate the comparatives for operations was £80 million (2013: profit impact on the results for the year. £131 million). Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 15 “Despite the write-downs, the Group ended the year with a strong balance sheet showing net assets up from £1.0bn to £1.2bn.” Duncan Magrath Chief Financial Officer Non-underlying items Discontinued operations Dividends Non-underlying items for continuing Post-tax profit from discontinued Whilst the Board continues to recognise operations comprise pre-tax losses of operations of £242 million (2013: £18 million) the importance of the dividend to its £224 million (2013: £180 million). These includes a gain on the disposal of PB shareholders, in order to ensure balance include £88 million of losses on certain of £234 million. Following shareholder sheet strength is maintained during the legacy ES contracts, £23 million of trading approval on 28 October 2014, completion transformation programme, it will not be losses in Rail Germany and £30 million of the disposal of PB occurred on recommending a final dividend payable for of non-cash asset impairments in Rail 31 October 2014 for an agreed cash 2014. This results in a total dividend for the Germany. Intangible asset amortisation consideration of £812 million which year of 5.6p (2013: 14.1p). The Board will reduced to £11 million (2013: £17 million) generated a gain on disposal of £468 look to reinstate the dividend payments as assets became fully written down, and million, or £234 million after writing off at an appropriate level by March 2016. there were £7 million of costs associated goodwill and other intangible assets and with the aborted merger discussions incurring £24 million of separation costs Goodwill and intangible assets with Carillion plc. Following a decision and £45 million of transaction costs. PB The goodwill on the Group’s balance in January 2015 to focus the rollout contributed £38 million of pre-tax trading sheet at 31 December 2014 decreased of Oracle R12 into UK construction profits to the date of disposal. £26 million by £222 million to £826 million in 2015 and the closing down of the of charges were booked in respect of (2013: £1,048 million), with a reduction implementation team for Support Services, goodwill and other asset impairments of £227 million due to the disposal of PB. a non-cash impairment for costs related in respect of Rail Italy. A further £24 million reduction resulted to continuing Support Services operations from reviewing the sale proceeds of £21 million was incurred. Other items Overall result for the year achievable for Rail Italy, and as a totalling £44 million include £23 million The results, including both underlying consequence writing down its restructuring and reorganisation costs and and non-underlying items for continuing goodwill to £nil. £14 million cost of implementing the UK and discontinued operations, show a Other intangible assets increased shared service centre (2013: £7 million). total reported loss of £59 million to £216 million (2013: £204 million). (2013: £35 million). Additions in the year included £28 million Continuing operations Earnings per share in Infrastructure Investments from the Operating loss from continuing Underlying loss per share from continuing continuing construction of Edinburgh operations for the year was £281 million operations was 11.5p (2013: earnings student accommodation, and £35 million of (2013: £33 million). 15.3p), which along with underlying software. Amortisation charges decreased Taxation earnings per share from discontinued to £25 million (2013: £35 million), however The underlying tax credit for continuing operations of 3.5p (2013: 6.2p), gave there were impairment charges of operations for the year of £2 million an underlying loss per share for total £27 million as a result of focusing the (2013: £28 million charge), excluding the operations of 8.0p (2013: earnings 21.5p). Oracle R12 rollout on the UK construction Group’s share of results of joint ventures Total loss per ordinary share was 8.6p business only, and stopping the rollout and associates, equates to an effective (2013: 5.1p). to Support Services. tax rate of 1.5% (2013: 46.7%). This represents a tax credit on a loss before tax. The rate of credit is lower than the UK Results for the year 2014 2013 statutory rate, principally due to significant Revenue from continuing operations, non-recognition of deferred tax assets including joint ventures and associates on losses incurred in the year. In 2013, – underlying £8,440m £8,478m the rate of 46.7% (tax charge on a profit) was higher than the UK statutory rate – reported £8,793m £8,852m principally due to writing down deferred Pre-tax (loss)/profit from continuing operations tax balances following the reduction in – underlying £(80)m £131m the UK corporation tax rate to 20% and – reported £(304)m £(49)m the proportion of profits in higher tax Post-tax profit from discontinued operations jurisdictions, offset by the benefit of the – underlying £24m £44m profit from non-taxable investment sales. – reported £242m £18m (Loss)/earnings per share – underlying (8.0)p 21.5p – basic (8.6)p (5.1)p Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 16 CHIEF FINANCIAL OFFICER’S REVIEW CONTINUED Impairment reviews have been carried out, Maintaining strength and none of the carrying values, other than noted above, have been impaired. There £1,400m is however limited headroom in the US construction business and in Blackpool £1,000m Airport such that a change in assumptions could result in an impairment. £600m £200m Pensions – balance sheet movement £0m The Group’s balance sheet includes £(200)m aggregate deficits of £128 million (2013: £434 million) for the Group’s £(600)m pension schemes. £(1,000)m The Group recorded net actuarial gains on those schemes totalling £237 million £(1,400)m Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec (2013: £117 million). There were £337 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 million (2013: £73 million) of actuarial Working capital Net cash/(debt)2 DV of investments1 Net aggregate 3 losses recorded on the present value of the obligations, largely resulting from the 1 Directors’ valuation of Investments portfolio. 2 effects of lower discount rates. However, Excluding net debt of infrastructure concessions (non-recourse). 3 Aggregate of Directors’ valuation of Investments portfolio, net cash/(debt) and working capital. these losses were more than offset by an excellent performance on the asset portfolio, particularly benefiting from in negative working capital in Construction net cash in discontinued operations the bonds and gilts and interest rate and Services. Liquid funds were significantly of £15 million (2013: £19 million) and inflation hedges, resulting in actuarial gains boosted by the sale of PB. The Directors’ £445 million (2013: £354 million) of of £574 million (2013: losses £44 million). valuation of the Investments portfolio non-recourse net borrowings held in A formal triennial funding valuation of the increased to £1,300 million, despite wholly owned infrastructure concessions. Balfour Beatty Pension Fund (BBPF) was the continuing asset sales. Overall the The balance sheet also includes £96 million carried out as at 31 March 2013 and Group finished the year with a strong for the liability component of the showed a funding position of 88%. balance sheet. preference shares. Agreement has been reached to make two Cash flow performance Working capital sets of additional deficit contributions to Total cash used in operations was Including the impact of exchange, the BBPF. Firstly, in respect of the disposal £352 million (2013: £162 million), before tax. favourable/negative working capital of Balfour Beatty WorkPlace in December £114 million was due to non-underlying increased from £550 million at the end of 2013, a £15 million contribution payable items including the outflows from certain 2013 to £731 million at the end of 2014. in monthly instalments during 2015. ES legacy contracts and Rail Germany. This was impacted by the disposal of PB Secondly, in respect of the sale of PB in £46 million arose in discontinued which had £112 million of unfavourable/ October 2014, an £85 million contribution. businesses which saw a £95 million positive working capital at the end of 2013, Subject to definitive documentation, this working capital outflow, principally due which was effectively crystallised in cash will be payable over the period to 2023, to PB’s trading flows up to the end of on disposal. Construction Services’ with the first payment of £4 million due October not benefiting from the usual negative working capital increased by in 2016. improvement that is seen by the end £93 million in the year. In the US of the year. Cash used in underlying construction business working capital Balance sheet and capital structure operations was £192 million, after a has remained relatively stable for the last The Group looks to achieve a balance working capital inflow of £26 million. couple of years, and should benefit from between the favourable/negative working revenue growth going forwards. In the capital, liquid funds and facilities and the Average net borrowings in the second half UK construction business working capital Investments portfolio. During 2014 there of the year were £318 million, although became less favourable, as anticipated, was, as anticipated, a reduction in negative with the sale of PB on 31 October, and however this was offset at the end of the working capital in the first half of the year, a strong cash performance at the end of year by additional cost estimates and risk with a small improvement before the the year, the Group’s net cash position contingencies on a number of contracts. impact of year end contract write-downs. at 31 December 2014 was £219 million In the second half, there was an increase (2013: net debt £66 million), excluding Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 17 Total working capital as a percentage of middle of the year, and ended the year and generate cash and EBIT. While annualised revenue (WCPR) at the end of with a closing rate of US$1.56:£1 recognising that there can be no absolute the year was (9.9)% (2013: (8.5)%). The (2013: US$1.65:£1). certainty, the Directors believe that these most significant component of negative covenant tests will be met. working capital relates to Construction Financial risk factors and going concern The Directors have acknowledged the Services, which ended the year with The key financial risk factors for the Group, guidance ‘Going Concern and Liquidity WCPR of (12.2)% (2013: (9.7)%). other than the reduced foreign currency Risk: Guidance for Directors of UK In 2015, the Group is targeting an risk noted above, remain largely Companies 2009’ published by the improvement in the favourable working unchanged, although following the sale Financial Reporting Council in October capital position from the impact of working of PB, its operations are significantly less 2009. In reviewing the future prospects capital improvement initiatives under Build diversified. Some elements of the Group’s of the Group, the following factors to Last, once the impact of the additional markets are recovering, and this can lead are relevant: cost provisions has flowed through. The to increased risk of subcontractor failures, • the Group has a strong order backlog Group continues to monitor developments due to their cash requirements for in the UK on both project bank accounts, increased working capital, and also the • there continues to be underlying in which it had £17 million of cash at year potential for inflationary pressures in some demand in infrastructure markets in the end, and potential changes in legislation areas. On the other hand this should also countries in which the Group operates regarding payment terms. reduce pressure on bidding margins. • the Group had net cash balances of Banking facilities The Group’s US private placement and £219 million at 31 December 2014 The Group’s principal committed bank committed bank facilities contain certain and has committed bank facilities of facilities total £760 million and extend financial covenants, such as the ratio of £760 million lasting until November through to 2016. They were reduced from the Group’s EBITDA to its net debt which 2016, which were undrawn at £950 million in the year following the needs to be less than 3.0 and the ratio of 31 December 2014 receipt of proceeds from the sale of PB. its EBITA to net borrowing costs which • the Group had an Investments The purpose of these facilities, and other needs to be in excess of 3.0. These portfolio valued at £1,300 million small facilities, is to provide liquidity from a covenants are tested on a rolling 12-month at 31 December 2014. group of core relationship banks to support basis as at the June and December Balfour Beatty in its current and future reporting dates. At 31 December 2014, Based on the above, and having made activities. Over time, as the Group’s both these covenant tests were passed as appropriate enquiries and reviewed business has evolved and particularly the Group had net cash and net interest medium-term cash forecasts, the Directors reflecting the long-term nature of the income from a covenant test perspective, consider it reasonable to assume that the Investments portfolio, the Group diversified so the Group’s poor trading performance Group and the Company have adequate its sources of funds away from the shorter and consequent low level of EBIT had no resources to continue for the foreseeable term bank market through the issue of impact on these tests. future and, for this reason, have continued US$350 million of US private placement to adopt the going concern basis in The Group is forecasting to remain within preparing the financial statements. notes in March 2013 with maturities up its banking covenants during 2015 and to 2025, and £253 million of unsecured To appreciate the prospects for the Group has stress-tested these calculations for convertible bonds in November 2013 as a whole, the complete Annual Report reasonable possible adverse variances with December 2018 maturity. and Accounts 2014 needs to be read. in trading and cash performance. The At 31 December 2014, the Group’s significant losses incurred in the second £760 million of committed bank facilities half of 2014 will be included in the were undrawn. 12-month EBIT for the purpose of the covenant tests at June 2015, which will Foreign currency risk reduce headroom particularly on the The Group is exposed to foreign currency EBITDA to net debt test. In considering risk primarily in the US, Asia-Pacific and that forecast, account was taken of the the Middle East, although this is now range of mitigating actions to conserve significantly reduced following the sale of PB. The average exchange rate for 2014 was US$1.65:£1 (2013: US$1.57: £1). Sterling steadily weakened from the Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

  • Page 21

    Strategic Report Governance Financial Statements Other Information 18 CONSTRUCTION SERVICES Very poor performance caused by UK construction contract issues Highlights underlying loss from operations for yet to be concluded. On the other, Construction Services was £209 million delays in construction and performance (2013: profit £18 million). Included within of the asset have led to increased costs. this is an underlying loss from the UK The results include the £70 million Total revenue construction business of £229 million of contract write-downs announced (2013: £20 million). £6,597m Underlying revenue from continuing operations was flat at £6,597 million in January 2015 in respect of these operational issues, as well as a further £118 million of risk provisions (2013: £6,594 million). subsequently assessed by the Board. In line with KPMG’s recommendations, The Construction Services order book this assessment was essentially • Performance significantly impacted for continuing operations at the end completed in two parts: by operational issues in the UK and of the year stood at £7.9 billion (2013: Middle East M&E joint venture £7.7 billion), up 2% from a year ago, but Firstly, a detailed review of the down 3% at constant currency. The order most significant individual contracts • Order book grew 2% during the book in the UK ended the period at was performed, including current year to £7.9 billion £2.6 billion, down 5%. performance, as part of the normal • KPMG review an important step year end procedures with the objective in understanding issues faced by of achieving an increased level of OPERATIONAL REVIEW the business. prudence. Adopting a cautious view, UK this resulted in additional contract risk The UK construction business is organised and other provisions of £67 million. into three business units consisting of: Of this, £7 million was recorded against the legacy ES contracts in • Major Projects: focused on complex FINANCIAL PERFORMANCE non-underlying items. projects in key market sectors such Construction Services’ performance as energy, transportation and Secondly, across the remainder of reflects the significant impact of heavy infrastructure the portfolio, and generally covering project losses, primarily due to poor the smaller contracts, a risk-based • Regional: private and public, civil operational and commercial controls approach was adopted based on recent engineering and building, providing in the UK business, leading to a performance of individual delivery units customers with locally delivered, very disappointing total loss from and market conditions. This resulted in flexible and fully integrated civil continuing operations of £391 million an assessment of additional contract and building services (2013: £103 million). risk provisions of £51 million. • Engineering Services: mechanical In the UK, certain legacy Engineering and electrical engineering. The KPMG review has been an important Services (ES) contracts, where there step in understanding the problems has been poor legacy management and The underlying loss from the UK faced by the business during a period of in regions, such as London and the South construction business was £229 million uncertainty. The business is focused on West, where ES has withdrawn from (2013: £20 million). The total loss from actively pursuing recovery of contractual tendering for third-party work due to the the UK construction business after entitlements and implementing the problematic delivery of these contracts, including the results of the non-underlying recommendations in order to return to contributed £62 million to Group revenue ES contracts was £317 million profitability and peer group margins. whilst generating losses of £88 million (2013: £20 million). (2013: £nil). The results of these contracts Underlying revenue in the UK fell by 6% Financial performance was adversely have been classified as non-underlying to £2,350 million as increased revenue impacted by significant operational items as the exceptional size and nature in Major Projects was more than offset issues in Engineering Services and in the of the losses distort the underlying by reductions of 10% in the Regional Regional business in the London and performance of the Group. The prior business and 15% in Engineering Services. South West regions. The Scottish, and year comparatives have been restated North and Midlands regions performed The Regional and Engineering Services accordingly and future performance on well. In Major Projects profitability was order books fell as a result of actions these contracts (including any claims adversely impacted due to cost forecast taken to refocus the businesses, but recovery) will be presented in non- revisions on two significant projects. were partially offset by growth in Major underlying items through to their On one there has been a change of scope, Projects. Across the business there has completion. As a result, the 2014 but where the commercial resolution is been an improvement in the quality of new order intake. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

  • Page 22

    Strategic Report Governance Financial Statements Other Information 19 KPMG REVIEW In September 2014 it was announced that KPMG would undertake an independent review of the contract portfolio of the UK construction business, given the continued inconsistent operational delivery across some parts of that business. Scope of review Key dominant causes Actions taken The review focused on bidding and KPMG identified the following dominant The Board is acting on the review’s tendering disciplines, commercial causes of poor operational performance: recommendations to strengthen project controls, “cost to complete”, contract performance through: 1. Bidding – Tendering at very low value forecasting, reporting at 1. More rigour in tender assessments margins with optimistic assumptions project level, and project reporting – Improve tender review processes around cost, programme and and reviewing. through improved guidance, procurement savings, and inadequate KPMG reviewed a sample of 127 provisions for risk. operational inputs, early and ongoing projects across the UK construction risk management assessment, 2. Commercial and contract additional independent oversight and business as at August 2014. The management – Insufficient local appropriate allocation of resource. selection criteria were: management challenge and review A review of a sample of recently bid • a sample consisting of the majority of contract performance, failure to contracts shows a tightening up of of the projects that comprised recover genuine contract entitlement tender processes but also shows the profit shortfalls announced in due to poor contract administration that further standardisation of the September and July 2014; and optimistic assumptions on bidding process is required. contract penalties. • a risk-based sample of other projects 2. Improve accountability for project from across Construction Services 3. Accuracy of cost and programme performance – Project managers UK which did not form part of the forecasting – Insufficient visibility, to have greater financial and profit shortfalls. control and understanding on actual commercial accountability with versus reported contract performance. appropriate KPIs. More robust The sample, measured by August 2014 year to date revenue, covered The Group considers insufficient challenge and review of contract approximately 74% of Engineering visibility on project deterioration was performance by local management. Services and 58% of Major Projects. compounded by an overly complex 3. Accuracy and timeliness of Across the four Regional business units reorganisation programme in 2012 and forecasting – Increased focus it covered 33% of August 2014 year to 2013 that led to high levels of employee on identifying, understanding and date revenue in London and the South turnover at a time of extremely reporting risks inherent in projects East, 19% of the South West, 12% challenging market conditions. and the implications on timely of the North and Midlands and 14% of financial performance, with enhanced Scotland. Overall the sample comprised project reporting supported by 36% of CSUK’s August 2014 year to consistent application of strong date revenue. commercial management and The majority of the issues highlighted contract administration processes. are contained within delivery units 4. Group policies – Improve and previously identified as having issues: reinforce Group policies to Engineering Services, and the London commercial and local financial (including Major Projects buildings) and management ensuring rigorous South West regions of the Regional application across all projects. business. These contracts account for In addition, KPMG recommended less than 10% of CSUK’s August 2014 that the Board assess the overall year to date revenue. level of contract risk provisions in the UK construction business. In light of this the Board has concluded that further contract risk provisions of £118 million be recorded in the underlying result for 2014. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 20 CONSTRUCTION SERVICES CONTINUED Joint venture awards such as the £160 from higher margin work won before the significant judgements over contractual million Sellafield nuclear facility contract recession has reduced, but also due to entitlements, however the Group’s have been won in the power sector. In the executing on work bid in a competitive share of joint venture profits for the year highways sector new awards included environment over the last 12–24 months decreased by £4 million to £12 million. the £184 million smart motorway upgrade at lower margins. In the year, significant wins included the scheme for the M60 and M62, the £129 new S$210 million (£100 million) Havelock In 2014 the business continued to million M3 smart motorway contract and Station award for Singapore’s Mass Rapid work closely with the Investments a £55 million junction upgrade scheme Transit system. In July Gammon won business, particularly in the student on the M25. Furthermore the business two building contracts in Hong Kong with accommodation sector, where the was awarded a framework contract to a combined value of HK$3,910 million Investments business acts as an equity deliver up to £180 million of infrastructure (£300 million) to build a public rental housing investor or a fee-based developer. works at Heathrow Airport. In December development and a research office. New projects included the University the Investments business reached of Texas at Dallas, the University of In the Middle East, the market for the financial close on the £550 million Iowa and Tarleton State University. construction joint venture in Dubai has Aberdeen Western Peripheral Route continued to improve and order book was project in a three-way joint venture that The business continued to grow in the significantly up on 2013. Wins included combines the Group’s investment and healthcare sector, with the award of a the Dubai Mall extension project. However construction capabilities. US$533 million contract to renovate and the mechanical and electrical engineering expand the Texas Medical Center campus There is improving confidence in the market remains very difficult, with in Houston, Texas. This complex project private sector although increased market some of the same issues faced by the for the Memorial Hermann Healthcare volumes in areas such as housing have UK M&E business existing in the Middle System includes building a 17-storey put pressure on input costs. The number East, such as disputes and delays with hospital and implementing a building of new major infrastructure projects to main contractors who have taken on control system. A strong reputation in be awarded in the short term is expected complex and difficult jobs. In particular the sector also helped the Investments to be low, exacerbated by the upcoming two significant projects have caused business win its first project in Canada, general election uncertainty. Over the write-downs, even though we believe with the award of the Children’s and medium term there is an expectation a significant proportion of these will be Women’s Hospital redevelopment project of significant investment through the ultimately recoverable. The joint venture in Vancouver, where the US construction Highways Agency investment plan and is no longer bidding for M&E work business will provide 50% of the projects such as HS2 and Crossrail 2. outside the UAE. construction services in joint venture. US Other significant wins in the period Rail Profitability in the US increased slightly in included a US$156 million contract to The performance of the UK rail the year, but margins remained broadly flat construct new headquarters for the construction business continued to at approximately 1%. Reported revenue National Science Foundation in Virginia, be impacted by operational issues on was flat on the previous year, up 5% at US. There was strong growth in the a small number of projects. Losses from constant currency. The increase in the education and office sectors, with operations totalled £6 million in the year order book in the building business since US$256 million and US$669 million (2013: £12 million). the beginning of 2013 continues to feed respectively in new awards. These Since the year end, the Group has through into revenue growth (at constant awards reflect recovery in both the public completed the sales of the German track currency), and order intake has continued education and private building markets. and plant and Austrian businesses to increase, resulting in an order book at In the infrastructure market the City and the sale of the Italian rail business. the end of the year which is in line with of Charlotte awarded the business a The Group remains committed to exiting last year. Order intake in the civil and rail US$131 million rail contract to build track the remaining parts of the German rail business was down on the previous year. and systems components to extend business. The results of Rail Germany In the US approximately 80% of revenues the city’s light rail system, following have been re-presented as non-underlying are generated from the general building a US$106 million civil engineering items within continuing operations market, where the business is ranked contract in February 2014 for the and those of Rail Italy are classified as the No.3 contractor by revenue same light rail system. as discontinued. In India, after four according to the 2014 ENR rankings. years, there has been little progress in The infrastructure market accounts for International joint ventures establishing a presence, and consequently the remaining 20%. The Group also operates in South East the office is in the process of being Asia and the Middle East. closed. In Australia, following withdrawal The growth in the US order book over from a major rail PPP due to unacceptable the last two years has been as a result of The order book in the Group’s Hong Kong risk levels, it was concluded the Group significant steps taken to better leverage and Singapore joint venture, Gammon, did not have sufficient critical mass to local capabilities across the entire business remained stable. Revenues were up 22% continue a construction presence. and to make the business more customer in the year (30% at constant currency) as focused, through improving best practice, the long term nature of recent civil project driving innovation and sharing knowledge wins means it will take time for these to within a more streamlined structure. feed into financial performance. A small However margins have remained flat, number of these contracts, which are partially due to a mix effect as revenue recorded at break-even, have incorporated Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 21 Using our expertise in flood defence to protect UK homes In December 2014, we completed a £21 million flood alleviation project for the Environment Agency and Northumberland County Council. The town of Morpeth in Northumberland, UK, has a long history of flooding, being located in the floodplain of the River Wansbeck. The Morpeth Flood Alleviation Scheme was designed to protect the town from the level of flooding experienced in 2008 when over 1,000 homes and businesses were flooded. To protect the residents’ properties, we built an upstream storage dam and a new earth embankment to store 1.4 million m3 of flood water. We also constructed flood defence walls throughout the town centre, installed flood gates and raised roads. Our recent track record in UK coastal protection and flood defence works includes 21 significant projects for local authorities and the Environment Agency, including the £86 million Rossall and Anchorsholme Scheme, the £5 million River Mersey Flood Defence Scheme, the £22 million Humber Flood Prevention Package and the £6 million Lincshore Beach Replenishment five-year scheme. “The work at the dam is really impressive. We have exceeded 170,000 hours without a lost time injury – it doesn’t get much better than that, especially when you look at the challenging work being completed. At the dam for example, we are working 8–9 metres in the air, concreting and installing large steelwork.” Anthony Myatt Environment Agency, Project Manager Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 22 SUPPORT SERVICES Depth of capabilities enables us to deliver complex contracts Highlights FINANCIAL PERFORMANCE schedule in the latter part of 2013, coupled with lower levels of capital replacement Revenue for the year was up 1% at programmes in the year. £1,273 million, with a 35% increase in transportation revenues being largely In March 2014 the power business was Total revenue offset by expected revenue decline in the appointed to two major National Grid power £1,273m power sector. The Support Services order book ended the year at £3.5 billion, down 14% from a year ago (2013: £4.1 billion). infrastructure frameworks. The first is the overhead lines design and build framework, over a four-year contract length with two The increase in order book in the water optional two-year extensions. The total sector has been more than offset by the work available for panel members is expected contraction in the power and worth up to £2.5 billion. The second is for • Stable revenues with strong transportation order books, as the division National Grid’s onshore underground cable performance in the highways continues to execute on long term framework, over a four-year contract length maintenance business in the contracts. Further awards were made with an optional two-year extension, transportation sector in the water sector after the year end, worth a total of up to £800 million. • Good underlying profit from which will benefit the 2015 order book. In December, the power business was continuing operations with good Underlying profit from continuing operations granted a licence by Ofgem to operate and operating margins was down 9% at £50 million (2013: £55 maintain the Thanet offshore transmission • Order book reduction in power million), resulting in an underlying operating project following its acquisition by the and transportation, as anticipated. margin of 3.9% (2013: 4.3%). Good Investments business, work derived directly performances in the water sector, including from the success of the Investments the settlement of multi-year commercial business in that market. issues, and in the transportation sector Elsewhere on existing power sector were offset by lower volumes in power. contracts there was good progress on the Beauly-Denny replacement electricity OPERATIONAL REVIEW transmission line contract for Scottish Support Services is a leading provider and Southern Energy, the Gas Distribution of specialist renewal and maintenance Strategic Partnership contracts with services in three key sectors – power, National Grid and the joint venture contract water and transportation. in the Republic of Ireland to replace and extend the gas network on behalf of state The division continues to provide a wide operator Bord Gáis. range of essential services and deliver projects for customers across the Volumes in the power transmission sector regulated and public sectors, all of whom are constrained within the UK as current need to manage financial pressures, whilst contracts complete and new projects improving the quality of the infrastructure are delayed due to the changeover in that facilitates public life. This will continue regulatory periods. New opportunities will to provide opportunities as customers look continue to be explored as the changing to outsource work and seek innovative nature of the energy industry will require solutions in the provision of that work, but new sources of power to be connected also presents challenges in an increasingly into the existing infrastructure. The competitive environment. division is well placed to take advantage of UK cabling and offshore wind farm Power opportunities expected in 2015. As anticipated, revenues and profitability in the power sector declined, partially due Water to strong performance in the prior year but The water business order book benefited also due to other contracts completing in from new contracts tendered under the 2014. The transmission part of the business AMP 6 regulatory cycle, which controls experienced lower volumes after contracted capital expenditure across the network from volume targets were completed ahead of April 2015 through to 2020. In May it was awarded approximately £115 million of work Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 23 by Anglian Water as part of its investment customers. However this, along with Revenues from local authority work programme. In addition the business has exiting from routine renewals work for increased as the Herefordshire and also won a new contract award from Network Rail, resulted in a reduction Wiltshire contracts, which commenced United Utilities valued at £125 million. in the order book at the year end. in 2013, were fully mobilised. This more than offset the impact of revenue declines Following a 23-month early contractor The highways maintenance business resulting from completed contracts in involvement in a three-way joint venture continued to perform strongly in the year Westminster, North Yorkshire and Essex. contract with Thames Water, the joint with a very good performance on the M25 The majority of the contracts in the venture was awarded an initial £800 million contract, which more than offset continuing portfolio performed well in the year and contract in February 2015, which was cost issues encountered on the Area 10 more than offset the impact of operational therefore not recorded in the year end contract in the North West of England. and commercial issues on the Wiltshire order book. In the rail renewals market the business contract, the resolution of which is The major water companies will be continued to work with London ongoing with the customer. focusing on broader and improved Underground to renew and improve service The continuing outsourcing trend by solutions for their customers driven levels across the network and achieved local government will provide additional primarily by the regulatory environment, excellent volume and margin growth in growth opportunities for the division which we hope will open opportunities the year. The remaining elements of the which increasingly looks to leverage for further innovation and margin growth. Network Rail contract were completed its strong position in the highways and and handed over to a new contractor in Transport street lighting markets to provide July. Associated exit and demobilisation The transportation business operates additional complementary services costs incurred were over £2 million and for customers in the road and rail sectors. to local authority customers. are included in the division’s underlying Overall transportation revenues increased profit from operations for the year. by 35% in the period as the business executed on long-term contracts for local authority and highways maintenance Two regional partnerships to renew and improve gas networks We have been contracted by National will reduce the number of required Grid to replace ageing metal pipes, excavations, making the work safer service connections and build new gas and more efficient. mains in the North West of England “The Gas Distribution Strategic and West Midlands until 2021. Partnerships contracts will allow National Our commitment to efficiency, Grid to continue to deliver gas safely and innovation and customer service is reliably to our customers in the most fundamental to our successful delivery efficient way during the eight-year period. of this £1.2 billion contract. Project I know based on previous experience that, deployment was large in scale, using the GDSP ‘all together, safer, better, involving over 300 new commercial leaner and faster’ operating model, Balfour vehicles, 1,500 pieces of plant and Beatty will provide exceptional customer 11,000 metres of site barriers. service and deliver the RIIO objectives Use of an innovative new pipe-cutting safely, innovatively and efficiently.” tool removes our employees from the Stephen Murray risks involved in the excavation process. National Grid, Head of the GDSP contract Furthermore, we are trialling a new way for the West of England. to create new pipes within the existing pipe, which when approved in 2015 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 24 INFRASTRUCTURE INVESTMENTS A proven track record of developing and financing projects Highlights end along with increased bid costs. Asset sales generated £159 million of proceeds, with disposal gains increasing to £93 million (2013: £82 million), as the secondary £1.3bn 66 market continued to see increased pricing Directors’ Investments Total revenue tension. Net interest income, a significant valuation of the within the £570m element of total income, also increased to £35 million from £30 million in 2013. portfolio portfolio The Directors’ valuation of the Investments portfolio increased to £1,300 million as at Over the next five years, the Investments 31 December 2014 (2013: £766 million). business expects to invest over £300 million • Excellent financial performance, The increase in value was principally due in equity, and generate over £2 billion of including £93 million of to a change in the valuation methodology, new work for the Group’s Construction disposal gains in order to bring the valuation closer to the Services and Support Services businesses, • Substantial and diverse portfolio market value. The number of investments which have historically delivered higher with Directors’ valuation at within the portfolio increased to 66 margins when working in conjunction £1.3 billion (2013: 61). Recent transactions underline with the Investments business. the ongoing ability of this business to • Preferred bidder status on 13 new create value. UK and Australia – new investment projects with significant pipeline activity of new opportunities identified. In June 2014, financial close was reached OPERATIONAL REVIEW on the £46 million NHS Ayrshire & Arran The Investments business continued to Acute Mental Health and Community grow with its appointment as preferred Hospital project. The Group will finance, FINANCIAL PERFORMANCE bidder on 13 new equity projects (including design and construct the project, and once The Investments business delivered three between January and March 2015). complete, operate the asset for 25 years. another successful year of growth in These projects comprise: four university student accommodation projects, three In December 2014, the £550 million profits and in the value of the Investments hospital projects, three private rental Aberdeen Western Peripheral Route portfolio, as the business continued to break housing projects, one justice facility project, project reached financial close. The into new markets and expand the number one road project and one energy project. design, build, finance and operate contract of equity investments within the portfolio. will generate a significant amount of work Underlying pre-tax profits increased to As of March 2015, the business had for the UK construction business. Balfour £162 million (2013: £132 million), driven reached financial close on eight of these Beatty will be working in joint venture by increases in profits on disposal, projects, as well as reaching financial close to construct the project and will take sole pre-disposals operating profit and net on three of the five projects which were responsibility for the management and interest income. The pre-disposals already preferred bidder at the start of maintenance of the road assets for operating profit of £34 million was £14 2014. Seven projects currently remain 30 years once construction is complete. million higher than the previous year. This at preferred bidder stage. Both Thanet and Gwynt y Môr offshore included a gain of £15 million (2013: £nil) The Investments business was also transmission (OFTO) projects reached resulting from movements in the fair value appointed preferred bidder on five financial close. These are high voltage of PPP financial assets, attributable to fee-based projects where no equity will electricity transmission systems, non-market related changes in estimated be invested; three as developer in the connecting offshore wind farms to an future cash flows, and recognition of bid student accommodation sector and onshore transmission grid. Through costs deferred income. These more than two as a third-party manager in the February 2015, Balfour Beatty has fully offset the decline in UK income as residential sector. achieved financial close on three OFTO a result of disposals and approximately The Investments business continues to projects and now maintains investments £10 million of costs incurred which see significant opportunities for future in OFTO transmission assets worth were reimbursed to the UK construction investment. There is an identified global £833 million, with a combined business to accelerate the completion of pipeline of opportunities over the next five transmission capacity of 1,380MW. construction work and defect resolution on a small number of projects. There was years that represents £35 billion of capital In addition, the Investments business reduced income in the US as the military value, spread across multiple markets in reached financial close on its first project housing construction phases come to an four countries. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 25 The Directors’ valuation of the Investments portfolio is now closer to the market value. Read more on p27 in Australia, at Wollongong University, reached on Carmendy Square in Florida; were executed for Texas A&M University, for the design and construction of a 1,050 and in February 2015, the business a phase II project at Tarleton State new bed development and a 39-year reached financial close on the Ranch University and two third-party maintenance licence for the university’s at Pinnacle Point in Arkansas, which management projects located in Florida. entire existing accommodation facilities, represented the business’s first In the US, there is a strong pipeline of of 1,905 beds. investments into the US private rental additional opportunities in the private housing sector. In November 2014, Balfour Beatty, rental and student housing markets as well including the Investments business, was In Canada, financial close was reached on as in generating profits through third-party selected to develop up to 1,500 homes on two hospital projects in 2014. The C$350 management-fee-based agreements, and Queen Elizabeth Olympic Park, in a 50:50 million (£196 million) BC Children’s and BC the business is continuing to build on its joint venture with People for Places. Women’s Hospital Redevelopment Phase presence in Canada, where there are This will result in the creation of two 2 project covers the design, construction, a number of opportunities. new neighbourhoods of East Wick and financing and facilities management for Sweetwater, by 2023. The development, a new children’s and women’s acute care Asset sales in partnership with the Mayor of London centre in Vancouver, British Columbia. The The Group successfully sold three assets and the London Legacy Development C$606 million (£338 million) North Island in 2014, generating total book gains on Corporation, will include private rental Hospitals project is a 30-year PPP project disposal of £93 million. In May, the sale sector and affordable housing. Financial which includes the financing, design, of the Knowsley Building Schools for close of the first phase is expected construction, and facilities management the Future project and the Group’s 50% in 2016. of two new hospitals on Vancouver Island, interest in the University Hospital of North British Columbia. Durham project realised total consideration In January 2015, the business was of £97 million, generating total gains of appointed preferred bidder for the In the US, the business was appointed £51 million. The Group also sold its 50% University of Sussex’s East Slope preferred bidder for a US$405 million interest in the Pinderfields and Pontefract Residences project, for the development justice complex project for the City Hospital project in West Yorkshire in of 2,000 new bedrooms and other of Indianapolis/Marion County in Indiana. October for £62 million, generating a gain innovative student amenities. Balfour This represents Balfour Beatty’s first of £42 million. As a consequence of the Beatty will design, build, finance and investment project in the US justice sector. favourable prices achieved on recent operate the project under a 50-year sales, the Directors’ valuation of the At the University of Texas at Dallas, contract, in partnership with the university. Investments portfolio at December 2014 the business was appointed preferred Financial close is expected during 2015. was updated to bring it closer to the bidder on a new mixed-use project for the In March 2015, the £52 million Welland development of accommodation and retail market value. Waste Wood power station project space on land owned by the University. Asset sales are expected to continue reached financial close. Once complete, At the University of Iowa, preferred bidder as a means of realising the value in the project will convert 60,000 tonnes status was awarded for a second phase mature assets, and recycling equity into of dry waste wood feedstock into 9MW of development, following the successful new projects. of electricity – powering over 17,000 UK first phase development of 270 one- households a year. and two-bedroom units and a separate Investment management business community centre. The business also Balfour Beatty Infrastructure Partners In the UK, further opportunities are (BBIP) reached final close on its first remains preferred bidder for two additional expected in the accommodation sector, fund in 2014, with total commitments of student accommodation projects awarded for both students and private rental, and US$618 million, including US$110 million in 2013. in the power sector. The business has a by Balfour Beatty. As of February 2015, strong position in the OFTO market, which The business continues to leverage its the fund has acquired Upper Peninsula has a pipeline of £10 billion, and is also experience in the student accommodation Power Company, a regulated electric utility looking at future investment opportunities sector, integrating design, construction business in Michigan, US, a portfolio of in the biomass sector. and investment capabilities, even where 10 operational UK solar projects in the UK, direct equity may not be required. As a and Wightlink Ferries, a ferry company North America – new investment result, the Investments business now servicing the Isle of Wight. Balfour activity works as a fee-based developer alongside Beatty has invested £20 million through In June 2014, financial close was reached the US construction business on a number December 2014, with the expectation that on the US Air Force ACC III military of projects, providing design and build the fund will be fully invested within the housing project, valued at US$60 million. services. In 2014, fee-based agreements next three years. In September 2014, financial close was Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 26 INFRASTRUCTURE INVESTMENTS CONTINUED Environmentally responsible investment in a potential-rich market In June 2014, we reached The Tandem Health Partners consortium, C$17m of which we are a member, issued a Equity invested financial close for two new green bond, which was the first public (£9 million) acute care hospitals on private partnership (PPP) green bond Vancouver Island, British to have been issued to finance a public Columbia, Canada. We will infrastructure project in Canada, and the first in North America. Green bonds invest C$17 million (£9 million) are similar to traditional bonds, but the into the project, which proceeds are used exclusively for projects to stretching energy and greenhouse represents 50% of the required with environmental benefits. gas targets and complied with the British Columbia Wood First Act. equity. This is our second The North Island Hospitals project project in the Canadian qualified for a green bond because it The project earned the 2014 National achieved Leadership in Energy and Innovation & Excellence Award healthcare market. Environmental Design (LEED ®) Gold from the Canadian Council for Public Certification, demonstrated commitment Private Partnerships. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 27 DIRECTORS’ VALUATION OF THE INVESTMENTS PORTFOLIO A strong and yielding portfolio OVERVIEW of 82% above the Directors’ valuation at UK portfolio The Investments portfolio continues December 2013. This prompted a revision The changes to the valuation methodology to grow through diversification into of the valuation methodology and underlying for the UK portfolio fall into three main new sectors and expansion into new assumptions for the Directors’ valuation categories: revised discount rates, geographical markets. Value continues (which retained some conservative updated cash flow assumptions, and to be realised through the investment assumptions) at June 2014. Following this, aligned macroeconomic assumptions. recycling programme by selling in October 2014, the Group sold its 50% Discount rates have been revised to better investments that are mature and interest in the Pinderfields and Pontefract reflect current market rates, project risk operationally proven, whilst preserving Hospital project at a premium of 28% profiles and the maturity of each project interests in strategic projects or sectors above that revised Directors’ valuation. (whether in construction or operational). that offer opportunities to the wider Group. This demonstrated the strength of demand The resulting discount rates range from in the secondary market and has prompted In 2014 eight new projects were included 7.0% to 15.0%. Operational projects a further review of the assumptions in in the Directors’ valuation, in the health, with availability-based income or proven producing the Directors’ valuation at roads, student accommodation, justice, demand have rates towards the bottom December 2014. The collective effect of and property development sectors. This end of the range whilst projects in these two revisions is described below. included winning and closing the Group’s construction or having unproven demand first two Canadian P3 hospital projects In previous years, the Directors’ valuation or other significant risks (or some in British Columbia, its first student was based on discounting the cash flows combination of these characteristics) have accommodation project in Australia at in the financial models approved by rates at the top end of the range. In overall Wollongong University and its first US the senior lenders on each project. The terms the weighted average discount multifamily residential property project investment and return cash flows for each rate applied to the UK portfolio is 7.8% in Florida, and winning its first housing project were discounted using discount (2013: 9.5%). A 1% change in the discount development project at the Queen rates of 9.5% pre-shareholder tax for the rate would change the value of the UK Elizabeth Olympic Park in the UK. This UK portfolio, and 12% pre-shareholder portfolio by approximately £107 million. demonstrates the ability of the business tax for the North American portfolio. This Cash flow assumptions have been updated to successfully transfer capability and approach permitted an assessment of to better reflect market expectations experience from established markets portfolio performance from one year to of future project performance in relation and sectors into new ones. the next through the application of a set of to costs, in particular the lifecycle and unchanging assumptions. In order to bring insurance costs and the management Revised valuation methodology the Directors’ valuation closer to a market costs associated with running The secondary infrastructure market valuation, we have revised the valuation each project. continues to evolve and asset sales over methodology to reflect the knowledge the last few years (including those in 2014) gained from our previous transactions and The capital structure adopted by potential have highlighted a growing difference our understanding of secondary market purchasers may result in a lower tax between the Directors’ valuation and the assumptions and trends. burden under their ownership. This can values achievable for the Group’s UK result in higher values being ascribed As in previous years, the Directors’ investments in the secondary market. to assets in competitive situations. valuation, being based on a discounted In the first half of 2014, the Group sold its A significant proportion of this value is cash flow approach, may differ significantly 100% interest in the Knowsley Building now reflected in the Directors’ valuation. from the book value of the investments Schools for the Future (BSF) project and shown in the accounts, which are produced its 50% interest in the University Hospital in accordance with International Financial of North Durham project at a premium Reporting Standards. Portfolio valuation December 2014 Portfolio valuation December 2014 Value by sector Value by phase No. projects 2014 2013 No. projects 2014 2013 Sector (2013) £m £m Stage (2013) £m £m Roads 13 (12) 467 253 3+ years post construction 10 (10) 254 113 Hospitals 4 (5) 225 144 0–3 years post construction 18 (17) 634 385 Schools 8 (9) 102 68 Construction 14 (11) 55 28 Other 13 (11) 149 69 Preferred bidder 3 (2) 15 12 UK total 38 (37) 943 534 US military housing 21 (21) 322 228 US military housing 21 (21) 322 228 BBIP fund 20 – Hospitals 2 (0) 4 – Total 66 (61) 1,300 766 Other 5 (3) 11 4 North America total 28 (24) 337 232 BBIP fund 20 – Total 66 (61) 1,300 766 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 28 DIRECTORS’ VALUATION OF THE INVESTMENTS PORTFOLIO CONTINUED The key macroeconomic assumptions North American portfolio The cash flows for the military housing which drive value in the portfolio are The North American portfolio has different business have been revised to reflect inflation, interest on cash deposits and characteristics to the UK portfolio. It is a lower allocation of corporate overhead UK corporation tax rates. The long-term dominated by the US military housing costs, bringing it into line with the inflation assumption has the most material business where value is derived principally treatment in the UK portfolio. This is impact, with the portfolio value being from fee income as opposed to investment based on the assumption that current positively correlated to changes in returns. The valuation methodology for the market participants would incur minimal inflation. A constant, long-term inflation military housing projects has been revised incremental overhead costs if they were rate of 3.0% has been used across the UK in the light of project maturity and, in the to buy these investments. portfolio. A consistent long-term deposit absence of sufficient secondary market Income inflation assumptions on a number rate of 3.5% and a corporation tax rate of transactions in the US, through comparison of military housing projects have been 20% have been applied to all UK projects with similar projects in the UK. The main revised in the light of experience over in line with assumptions currently being changes to the valuation methodology a sustained period of time. Construction made in the secondary market. used for the North American portfolio are costs (which form the basis on which in discount rates, cash flow assumptions For assets at preferred bidder or in certain fees are earned) have also been and inflation. construction, only macroeconomic increased in line with historical inflation assumptions have been updated as these At December 2013 the North American trends and to reflect the drive for more projects are not mature enough to assess portfolio was valued using a single energy efficient buildings. if cost savings are likely to materialise. discount rate of 12% on pre-tax cash The other investments in the North flows. Given that a large number of The Group’s investment in the fund American portfolio are more directly investors in the US pay tax, the managed by Balfour Beatty Infrastructure comparable to PPP and student methodology has been altered to apply Partners (BBIP) is included for the accommodation projects in the UK and discount rates to post-tax cash flows, and first time in the Directors’ valuation at have been valued on a similar basis, the discount rates have been amended December 2014. BBIP reached final close taking into account risk profiles, project accordingly. In line with the methodology on its first fund in July with commitments stage and also the maturity of the applied to the UK portfolio, different of US$618 million, of which the Group’s domestic secondary markets. discount rates are now applied to individual share amounts to US$110 million. The projects to take account of their risk and A 1% change in the discount rate would value of the Group’s investment in the maturity. The range of discount rates change the value of the North American fund at 31 December 2014 amounted used at December 2014 is 7.5% to 11.0% portfolio by approximately £48 million. to £20 million. on post-tax cash flows, with a weighted average discount rate of 8.1% (equivalent to 12.2% on the previous pre-tax cash flow basis). Valuation – The portfolio value at a range of discount rates UK portfolio North American portfolio 1,400 500 450 1,200 391 1,080 400 Directors’ valuation £m Directors’ valuation £m 350 337 963 1,000 294 866 300 254 800 250 232 213 200 599 600 534 480 150 100 400 50 200 0 +2% +1.5% +1% +0.5% DV case -0.5% -1% -1.5% -2% +2% +1.5% +1% +0.5% DV case -0.5% -1% -1.5% -2% Discount rate Discount rate December 2014 December 2013 December 2014 December 2013 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 29 Summary and then shows the impact of moving to were the Aberdeen Western Peripheral The revised methodology, together with the new methodology and assumptions. Road, Ayrshire and Arran Hospital, movements in the period, resulted in a the Eastwick and Sweetwater housing The Group invests cash into the portfolio Directors’ valuation of £1,300 million at development on the Queen Elizabeth in the form of equity investments in 31 December 2014. The effect of the Olympic Park and the Wollongong individual projects. In 2014, significant revised methodology and assumptions University project. In North America there investments were made in the Thanet is an increase of 69% compared to the were four wins: North Island Hospital and OFTO, Birmingham Bio Power, and the 2013 basis. KPMG has undertaken an Children’s and Women’s Hospital (both student accommodation project at independent valuation in aggregate of the in British Columbia, Canada), Carmendy Wollongong University which is also entire portfolio and the Directors’ valuation Square multifamily housing in Florida and included in the UK portfolio. Cash flows at December 2014 is consistent with the Indianapolis justice facility. Operational are received from the portfolio in the KPMG’s conclusion. performance gains represent the changes form of distributions from investments in the underlying cash flow assumptions The Directors’ valuation is now closer or as disposal proceeds when interests before the revised methodology and to current market values, albeit values, in projects are sold (Knowsley BSF, assumptions are applied – for example particularly in the UK, may continue to University Hospital of North Durham, and actual inflation over the year. Adjusting the move up in the future given the ongoing Pinderfields and Pontefract Hospital). The opening valuation to take into account all imbalance between the supply of and gain on disposals represents the amount of the above items shows the value of the demand for high-quality investments by which the proceeds exceeded the portfolio under the assumptions prevailing in the secondary market. Future changes Directors’ valuation. With the passage at December 2013. This total is then in the market could increase or decrease of time, future distributions come closer adjusted for changes to the valuation this value. which increases the value of the portfolio methodology in the three categories through an unwinding of the discount. Movement analysis noted above: discount rate assumptions, Projects that reach preferred bidder during The movement analysis shows changes projected performance improvements the year are added to the portfolio and are in value of the portfolio during 2014 on the (cash flow changes), and macroeconomic shown as new project wins provided there basis of the 2013 valuation methodology assumptions, resulting in the revised is sufficient certainty that they will reach Directors’ valuation of £1,300 million financial close. For the UK portfolio these at 31 December 2014. Movement in value 2013–2014 £m Inflation, FX and 2014 New operational value on Change in Projected Equity Distributions Disposal Gain on Unwind of project gains/ BBIP fund 2013 discount performance Macroeconomic 2013 invested received proceeds disposals discount wins losses investment assumptions rates improvements assumptions 2014 UK 534 48 (58) (159) 58 52 17 9 20 521 111 291 40 963 North America 232 5 (34) – – 26 9 10 – 248 4 85 – 337 Total 766 53 (92) (159) 58 78 26 19 20 769 115 376 40 1,300 Portfolio investment, divestment and distributions since 2005 1,600 160 £m – Investment, divestment and distributions 1,200 120 £m – Directors’ valuation 800 80 400 40 0 0 (40) (80) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Distributions Investment Divestment Directors’ valuation Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 30 RISK MANAGEMENT FRAMEWORK There have been failures of In 2014 the KPMG review (summarised The Group’s new risk framework on page 19), together with the Group’s comprises eight approval and review risk management disciplines own analysis, identified what lay gates, spanning initial project pursuit in some parts of the business. behind the unacceptable performance through to delivery and completion. This Managing risk and opportunity resulting from poor contracts in the is a significant extension of the previous in a robust and disciplined way UK construction business. monitoring and control process. All gates are mandatory and require approval at is fundamental to the Board’s It was clear that the Group’s existing risk Group, divisional or business unit level management framework did not, at times, ability to effectively manage identify risk early enough to allow for depending upon the nature and complexity the business and the Group’s of the project. remedial action. strategic development. As a result, the Group examined its The new risk framework has been further reinforced by the implementation of risk and opportunity management common minimum standards and policies activities throughout the business in project and commercial management lifecycle, from initial enquiry, tender across the Group. These standards ensure submission and contract award through consistent expectations across the Group, to ongoing monitoring, control and and rigorous audit and assurance. project completion. The principal risks, detailed overleaf, are: This corroborated the findings from KPMG and showed that the existing • health and safety internal controls needed to be simplified • economic environment and that there needed to be one unified • bidding approach across the Group. • project execution • supply chain A stronger approach has since been • people developed and is being rolled out. • business conduct/compliance • legal and regulatory • sustainability • discontinued operations. Managing risk and opportunity across the project lifecycle Project lifecycle Initial Contract Defects Tender Mobilisation Execution Commissioning enquiry negotiations liability Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 “Go/No Go” “Go/No Go” Tender Contract Pre- Monitoring Project End of submission award commencement and control completion defects approval liability period Control and monitoring, delivered by Group/division Project management and commercial management standards Audit and assurance processes capture lessons learnt at every stage of the project lifecycle and improve future projects Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 31 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 What impact it might have The Group works on significant, complex and potentially Failure to manage these risks could result in harm to, or even the hazardous projects which require continuous monitoring death of, employees, subcontractor staff and members of the and management of health and safety risks. public, as well as potential criminal prosecutions, debarment and reputational damage. How the risk may manifest itself How it is mitigated Some common themes where health and safety risks have Balfour Beatty has detailed health and safety policies and arisen are recognised and communicated, including: procedures to minimise such risks. These are reviewed and monitored by management and external verification bodies. • risk of poor risk identification/assessment Each division has experienced health and safety professionals • risk of not having processes that promote risk elimination who provide advice and support and undertake regular reviews. or mitigation A Safety Executive committee meets regularly throughout the year • failure to deliver management leadership to develop a consistent approach to health and safety best practice. • management of subcontractors • not briefing people properly before setting them to work During 2014, business units continued their work on implementing • failure to follow procedures the Group’s Global Safety Principles across all of their operations • debarment for safety failures and projects (see page 36). • 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. KEY OPERATIONAL BUSINESS RISKS WE FACE AS PART OF OUR PROJECT LIFECYCLE Economic environment Decreased risk Risk description What impact it might have The effects of national or market trends, political change or new Any significant changes in the level or timing of customer spending developments in infrastructure expenditure or procurement may or investment plans could adversely impact the future order book. cause customers to postpone, reduce or change existing or future Such changes could arise from changes in government policy or projects, which may impact the Group’s strategy, business model, customers’ failure to secure financing for future projects or for revenue or profitability in the short or medium term. future stages of existing projects. Failure of a customer, including any government or public sector body, could result in not collecting amounts owed. How the risk may manifest itself How it is mitigated The business may fail to anticipate or assess national or market The Group’s strategy to focus on the more resilient and stable events and developments, their potential negative impact, or infrastructure markets and geographies will help mitigate this risk. the opportunities they present. Such events or developments, The effect of spending changes in any one market is mitigated by whether or not anticipated or correctly assessed, could lead to: the Group’s broad exposure to infrastructure markets across the globe and the continued need for infrastructure spending. It also • cash pressures for customers and suppliers mitigates the effects of such market conditions by continuing • wider than expected fluctuations in inflation to adapt its business model. • increased competition (eg in the UK from other EU countries) • supply chain failure risk It is essential that the financial solvency and strength of • reduced revenue or pressure on margins. counterparties is always considered before contracts are signed and this is a specific focus in the current economic climate. During These risks may also be triggered or exacerbated by the need, the life of a contract such assessments are updated and reviewed actual or perceived, to pursue work in a declining market. whenever possible. The business also seeks to ensure that it is not over-reliant on any one counterparty. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 32 PRINCIPAL RISKS CONTINUED Bidding Increased risk Risk description What impact it might have Through its different divisions, Balfour Beatty seeks to win Failure to estimate accurately the risks, costs, time to complete, profitable work through a large number of bids. In some cases impact of inflation and contractual terms and how best to manage it bids in joint venture with carefully selected partners, often to them could cause financial losses. help manage or spread risks, especially where the Group wants In the event of disagreement with, failure of, or poor delivery to augment its expertise or knowledge of the relevant market. performance by a joint venture partner, the Group could face The Group also invests in PPP and infrastructure investments, financial and reputational risks. where success depends on a number of assumptions made, If any of the assumptions behind investment decisions prove at the time of investment, on future revenues and costs. incorrect, the profitability of those investments could be reduced. 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 How it is mitigated • Unrealistic programme All bids are subject to rigorous estimating and tendering processes • Incorrect pricing within the risk management framework. • Unrealistic assumptions on cost savings This revised framework comprises a number of approval and review • Overambitious budgets gates that cover the business lifecycle from initial project pursuit • Bidding at too low a margin through to completion (see page 30). • Poor partner selection • Customer credit and late payment risks The Group has defined delegated authority levels for approving all • Partner and subcontractor performance and credit risks tenders and infrastructure investments. • Inability to make profit from non-PPP investments and Reviews are conducted following all tenders to ensure lessons are other new work types learnt and applied to future tenders. • Failure to ensure the Group’s overhead structure remains competitive. 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 What impact it might have The Group works on complex design, engineering, construction Failure to manage or deliver against contracted customer and asset management projects. If it fails to deliver them on requirements on time and to an appropriate quality could result in time, to customers’ requirements, and in accordance with its issues such as contract disputes, rejected claims, design issues, own cost assumptions and reporting, Balfour Beatty faces the liquidated damages, cost overruns or failure to achieve customer risk of financial loss, claims and reputational damage. savings – which in turn harm Balfour Beatty’s profitability and reputation. Successful delivery of many of these projects depends on the successful implementation and maintenance of a range of Execution failure on a high-profile project could result in significant operational and commercial procedures and controls, backed reputational damage and costs. 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. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 33 Project execution continued How the risk may manifest itself How it is mitigated • Unrealistic progress assessments It is essential that each business area has defined operating • Overestimating the Group’s ability to recover claims within procedures to address the risks inherent in project delivery. In addition, the time frame or in the amounts estimated the revision of the Group risk management framework and increased • Incomplete visibility and appreciation of scale of commercial controls aid identification and quantification of specific risks on judgements projects and the mitigating actions required. • Inaccurate, incomplete cost and value data or failure to This has been further reinforced through the implementation of analyse and report correctly, which could arise due to common minimum standards in project and commercial management. poor training, lack of supervision, lack of accountability or a project manager’s or project team member’s fear Projects are subject to management, commercial function and internal of reporting bad news audit review at all levels to monitor progress and to review steps put in • Inadequate experienced, independent challenge from support place to address specific risks identified on those projects. The Group functions such as commercial, operations and finance. 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 What impact it might have The Group is heavily reliant on its supply chain partners for Failure of a subcontractor or supplier would result in the Group successful operational delivery, which means it is also exposed to having to find a replacement or undertaking the task itself. This a variety of risks in the supply chain, including financial, technical, could result in delays and additional costs. quality, safety and ethics. 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 the risk may manifest itself How it is mitigated • Supply chain failure risk, exacerbated during, and when The Group aims to develop long-term relationships with key emerging from, tough economic conditions subcontractors, working closely with them to understand their • A subcontractor’s failure to perform to an appropriate standard operations. It develops contingency plans to address subcontractor and quality, which could cause project delays, reducing Balfour failure, and also obtains project retentions, bonds and/or letters Beatty’s ability to meet contractual commitments and harming of credit from subcontractors, where appropriate to mitigate the its reputation impact of any insolvency. • Supply chain operating to lower standards (safety, ethics, Balfour Beatty aims to work as much as possible with preferred quality, timber, child labour, forced labour) suppliers and subcontractors who undergo rigorous, risk-based • Failure to deliver targeted UK procurement savings prequalification processes and share its values. It also aims to • Failure to comply with Group supply agreements avoid becoming over-reliant on any one supplier or subcontractor. • Ethical treatment of the supply chain. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 34 PRINCIPAL RISKS CONTINUED IMPORTANT RISKS WE FACE, COMMON TO MANY OTHER BUSINESSES People Increased risk Risk description What impact it might have Inability to recruit and retain the best management and employees Failure to recruit and retain appropriately skilled people could harm who have the appropriate competencies and also share Company the Group’s ability to win or perform specific contracts and grow values and behaviours may hamper the Group’s growth prospects. its business. How the risk may manifest itself How it is mitigated • Failure to attract and retain skilled staff All potential recruits for key roles in the organisation are measured • Distraction and impact on morale of change programmes against a competency and leadership framework. Divisions and continued operational issues undertake organisation and people reviews to review the roles, • Inability to successfully promote the right people through competencies, performance and potential of personnel. The succession planning Group’s succession planning process to identify and develop • Commercial and project management quality/performance high-potential personnel is reviewed regularly within the • New staff unfamiliar with culture and procedures organisation and by the Board. Balfour Beatty has appropriate • Lack of a diverse workforce remuneration and incentive packages to help it attract and retain • Bullying and harassment key employees (see page 37). • Loss of former staff with traditional bidding and execution skills. Business conduct/compliance Decreased risk Risk description What impact it might have The Group operates in various markets that present business Failure by the Group, or employees and third parties acting on conduct-related risks involving fraud, bribery or corruption, its behalf or in partnership, to observe the highest standards of whether by its own staff or via third parties such as partners or integrity and conduct could result in civil and/or criminal penalties, subcontractors. Those risks are higher in some countries and debarment and reputational damage (see page 38). sectors. Overall the construction industry has a higher risk profile than other industries. How the risk may manifest itself How it is mitigated • Corruption Balfour Beatty has a proactive approach to assessing and • Bribery addressing corruption risks. It promotes compliance with its Code • Fraud/false claims of Conduct and in areas such as competition and false claims fraud. • Fair competition Each business area has a compliance officer responsible for the • Human rights abuses, such as child and other labour application and monitoring of these programmes. standards generally, illegal workers and human trafficking The risk of business conduct/compliance breaches by third parties is • Unethical treatment of and by the supply chain harder to control, but the Group has a range of risk assessment, due • Other emerging ethical risks diligence and procurement controls that are designed to identify and • Risk of ethics and values being compromised when times minimise such risks. Balfour Beatty works with very few agents, are tough, not just in high-risk markets. all of whom undergo a rigorous due diligence and approval process. Legal and regulatory No change to risk Risk description What impact it might have The Group operates in diverse territories and its businesses are A breach of local laws and regulations could lead to legal subject to a variety of complex, demanding and evolving legal, proceedings, investigations or disputes resulting in business tax and regulatory requirements. 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 state- sponsored cyber activities purely because of its customer base. How the risk may manifest itself How it is mitigated • Data protection and privacy The Group monitors and responds to legal and regulatory • Information security lapse developments in the territories in which it operates. Local legal • Cybercrime and regulatory frameworks are considered as part of any Group • Government/regulatory enquiry and enforcement actions decision to conduct business in a new country. Data protection • Local procurement laws and information security programmes are in place across the Group, • Debarment or blacklisting. and cybercrime and other information security risks are assessed on a regular basis. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 35 Sustainability No change to risk Risk description What impact it might have The Group’s activities can impact the world, and the Failure to address these risks and to execute projects sustainably communities with which it comes into contact, either could result in significant potential liabilities, reputational damage positively or adversely. and inability to win future work. How the risk may manifest itself How it is mitigated • Environmental incident The Group’s sustainability strategy provides a framework for its • Inaccurate greenhouse gas (GHG) data may mean the Group operating businesses to accommodate and embed sustainability is unaware of its actual impact into operations. Sustainability issues such as climate change are • Inaccurate GHG data and other data in sustainability reporting considered in risk management activities at divisional as well as may leave the Group exposed to unacceptable damage project level. and fines Balfour Beatty’s internal audit processes are used to identify • Unethical/unsustainable sourcing (eg timber, forced labour, potential risks and opportunities for the business. These take the child labour) form of sustainability audits and internal data assurance audits. The • Insufficient management support and monitoring to achieve Group also has external audits undertaken by third parties against the Group’s agreed KPIs in this area. 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 What impact it might have The Group continuously reviews the markets and territories in A breach of local law and standards could lead to investigations, which it operates in order to make the best use of its resources. disputes and prosecution with associated reputational damage and increased costs, which could impact adversely on Balfour Beatty’s It is essential that when the Group exits particular markets and continuing businesses. 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 How it is mitigated • In disposing of businesses, the Group typically provides • Experienced professionals, supported by external advisers, the purchaser with various indemnities which may expose manage disposal processes to ensure that the legal Balfour Beatty to future legal claims and cost as a result documentation covering disposals protects the Group’s of indemnity breaches position as well as can be foreseen • The Group may be required to enter transitional service • Use of project management capabilities in managing any arrangements with the purchaser. Such arrangements and transitional service arrangements and migration activities related migration activities could lead to future legal claims to ensure that risk exposure is tolerable and costs • Where appropriate ensure there is a wind-down plan in place • As the Group winds down activities in a particular market and that progress against this is appropriately overseen. or territory there is the risk of losing business-critical staff and knowledge. 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. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 36 SAFE, INNOVATIVE AND RESPONSIBLE BUSINESS Working safely, ethically and responsibly for a positive legacy HEALTH AND SAFETY drivers’ behaviour in order to intervene The Group Lost Time Incident With operations in the UK, US, Middle and correct. All of our UK drivers complete Rate (LTIR) East and South East Asia, we span many psychometric testing so we can identify Increased to 0.27 from 0.23 in 2013. 39% cultures and environments and it is vital and address risks. of our businesses recorded an improved that we operate to high professional or zero LTIR in 2014. In 2014, we changed our primary lagging standards in every location. indicator of health and safety performance 2014 0.27 Only by setting the highest standards for from Accident Frequency Rate (AFR) to ourselves will we be able to retain the trust Lost Time Injury Rate (LTIR). The LTIR, a 2013 0.23 of our customers and the people using universally recognised measure, is a more 2012 0.26 our infrastructure. thorough indicator and has been selected to help us achieve our Zero Harm goal. It We work to the challenging safety recognises all lost time injuries and injuries Major injury rate requirements set out in our Zero Harm that result in restricted duty or transfers, 138 major injuries were reported in 2014 Roadmap 2013–2017. Each business and includes direct, indirect and joint compared to 130 in 2013. Four of those must follow the requirements, and the venture employees. At year end our major injuries were classified as extent to which they meet them is verified LTIR for the entire Group was 0.27. For permanently disabling. externally. Furthermore, we have a set of comparison our LTIR in 2013 was 0.23 rules that define the way we work called compared to 0.26 in 2012 and 0.29 2014 0.05 our Global Safety Principles. As a result in 2011. 2013 0.04 of our tough stance on eliminating safety risk, our businesses are developing smart As a result of workplace injuries, our 2012 0.06 and innovative solutions to prevent workers lost 5,792 days during 2014. incidents and keep people safe. This is an improvement on 2013 (5,996). According to incident data collated and Public injury rate Read more about our GSPs online prepared by ENCORD (European Network There were 70 injuries to members of the balfourbeatty.com/GSP of Construction Companies), these public in 2014, an improvement of 36% figures represent some of the lowest from 2013. Despite our unwavering focus on safety, six workers lost their lives across the levels of absence due to workplace injuries 2014 0.02 Group as a result of our work activities in compared to our competitors across 2014. The incidents occurred in the UK, Europe. 2,798 total injuries were sustained 2013 0.03 Germany, US, Hong Kong and the UAE. by our workforce in 2014 which is 15% 2012 0.04 Three of the workers were employed by less than in 2013 (3,273). subcontractors and three workers were In 2014 our business won a number of direct employees. awards recognising safety excellence. Every fatal accident is subject to a We were named Safe Railroad Contractor thorough investigation and a detailed of the Year by the National Railroad review by the Group Chief Executive and Construction & Maintenance Association the executive team. To ensure improved for the third consecutive year in the US, future performance, in 2014 five Chief and won six awards, more than any other Executive reviews were held covering company, at the annual Heathrow Health each business area and joint venture and Safety Awards. business. As a result of the reviews, a In 2015 and beyond, we will maintain number of lessons learnt were shared our Zero Harm goal of zero fatalities, across the Group, including the need to zero disabling injuries, zero injuries to tackle individual behaviour, tighten control members of the public and zero new of subcontractor operations, and improve cases of long-term harm to health. We are driver risk policies. renewing our focus on the elimination of One of the work-related fatalities was the fatal risks, increasing the level of personal result of a road traffic accident in the US. accountability for safety, and determining We have taken steps to make road travel revised health and safety targets for each safer for our employees, including business and the Group as a whole. installing telematics devices to monitor Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 37 PEOPLE AND LEADERSHIP In recognition of our work to develop our the UK Government’s Your Life campaign, Keeping our people engaged and young employees, in 2014 we received a which is encouraging the study of STEM motivated is critical to ensuring our Partnership Certificate from The Duke of subjects amongst female students. sustainable growth. Edinburgh’s Award scheme, supported by Further building on our Opportunity the Employer Ownership of Skills fund. 2014 saw a significant change in the Now accreditation, a Connecting Women composition of our global workforce. Up-skilling the UK’s network forum has been introduced Following the divestment of Balfour infrastructure workforce across the UK businesses. However, Beatty WorkPlace (8,700 employees), We have received a government grant the proportion of female employees to GDF SUEZ in December 2013 and to further develop the leadership and has reduced in recent years with the the divestment of Parsons Brinckerhoff technical skills of our workforce and disposals of Balfour Beatty WorkPlace (14,500 employees) to WSP in November to attract people into the industry. and Parsons Brinckerhoff. 2014, the Group has reduced to 25,693 Female employees across the workforce: Over the next three years over 2,000 employees in its continuing operations at employees will benefit from the grant 2014 17% 31 December 2014 and a further 12,000 made available by the UK Commission 2013 22% employees as a proportional allocation for Employment & Skills/Skills Funding of its joint ventures. 2012 23% Agency under the Employer Ownership We continued to invest in our people of Skills fund. The newly established 2011 25% in 2014, through the training and Balfour Beatty Academy will deliver An LGBT network has also been development of our existing employees this programme, which, in partnership established as part of the Stonewall and targeted external recruitment with the UK Government, has already Diversity Champion programme. Balfour as necessary. developed 10 new apprenticeship Beatty is also the first infrastructure qualifications for our industry. company to become a member of the These training and development programmes operate within the context Furthermore, we work in partnership with OUTstanding LGBT professional network of a Group-wide Organisation and The Prince’s Trust, who train unemployed and is proud to be represented in the 2014 People Review, which ensures consistent young people through its Get into Financial Times Top 100 LGBT Business methodology and visibility of talent, Construction programme. Over the last Leaders list. so that succession planning, leadership five years, 400 young people completed We also strive to provide employment, training and development interventions this programme, learning while working training and development opportunities draw on a global pool. on our sites. About 70% of these people for disabled people wherever possible. We gained employment with us directly or are committed to supporting employees Emerging talent with our supply chain. In 2014, we joined The 5% Club and are who become disabled during employment committed to the aim of ensuring that Diversity and inclusion and to helping disabled employees make within the next four years 5% of our UK Diversity and inclusion remain central to the best use of their skills and potential, workforce are apprentices, Balfour Beatty our people strategy. We value diversity consistent with all other employees. graduates or sponsored students on and celebrate individual differences, We remain committed to investing structured programmes. The number of believing that our inclusive culture helps in industry-leading people throughout graduates and apprentices as a proportion the business continue to grow as a strong, a period of considerable change. It is of our UK businesses is consistent with dynamic and innovative organisation. this commitment and the continued 2013, despite selling Parsons Brinckerhoff engagement of our employees that will Key interventions are in place to enhance with its large graduate pool. provide the foundations for our recovery diversity and inclusion in our core Apprentices 326 business. For example, we are supporting and future growth. Graduates 184 Sponsored students 17 Total UK workforce 17,000 At 31 December 2014 Male Female Total % Male % Female % of structured trainees 3.1% Board 6 1 7 86 14 Senior management1 75 14 89 84 16 Our UK businesses are supporting around Directors of subsidiaries 286 33 319 90 10 230 people studying part-time at local Group2 21,223 4,470 25,693 83 17 colleges and universities. 1 Members of Group head office and divisional senior leadership teams. 2 Excluding discontinued operations. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 38 SAFE, INNOVATIVE AND RESPONSIBLE BUSINESS CONTINUED VALUES AND BEHAVIOUR Review of whistleblowing hotline Leading the way in business ethics We have a well-developed ethics and We encourage our staff and wider We are committed to acting as a leader compliance programme. Our focus is on community to report any concerns about in business ethics in the construction continual improvement and on monitoring unethical conduct. We treat all concerns and engineering sector. the areas where we are most at risk. seriously and investigate all good faith Business Integrity Round Table concerns wherever possible. A primary area of focus during 2014 In 2014 we identified a need for the has been to ensure that our ethics and In 2014 we ran a promotional campaign industry to work together to develop compliance programme remains fresh across certain business units for the business ethics best practice. in our people’s minds and is increasingly hotline, which prompted a marked As a result we spearheaded the formation embedded throughout the Group. increase in the reporting of incidents in of an industry-focused Business Integrity those areas of the business. We believe The sale of Parsons Brinckerhoff means Round Table made up of both service this correlates with an increase in visibility. that we no longer operate in some providers and our customers. The jurisdictions which typically pose a high To ensure we are doing enough to both inaugural meeting was held in January risk of ethics and compliance violations. encourage reporting and investigate 2015 and the meetings are co-chaired by However, we continue to work in a allegations to the best of our ability, our Group Head of Ethics & Compliance. number of higher-risk countries and we conducted an end-to-end review of Investing in Integrity™ acknowledge that the construction and our hotline and investigations processes Investing in Integrity™ is a UK Charter engineering sector is a high-risk sector in 2014. Several reforms are being Mark designed to enable an organisation in general. Accordingly, we continue implemented. In particular we transitioned to reassure its key stakeholders that to have in place extensive anticorruption to a new whistleblowing hotline service its business can demonstrate a measures. We are also mindful of the in early 2015. The new hotline will improve commitment to act with integrity at all broader ethics risks which exist within interaction with whistleblowers, help us times. This is assessed by testing its the sector. collect vital information, and provide us ethical conduct to ensure those values with better case management technology In addition to the traditional areas of ethical are properly embedded. to support investigations. risk, new areas of focus include human Several of our divisions have completed rights such as children’s rights and labour Number of Ethics Helpline cases the requirements to achieve Investing conditions. Human rights matters have in Integrity™ accreditation during 2014. been addressed by our Code of Conduct 2014 270 We expect to achieve full accreditation for many years. 2013 276 for Balfour Beatty in 2015. Key initiatives in 2014 2012 273 To improve the effectiveness of our ethics and compliance programme, some of our Number of Ethics Helpline cases initiatives have included the following. (excluding HR grievances) New training for site-based staff 2014 204 To help embed the ethics programme across the business, we developed new 2013 208 training for our site-based staff. A key 2012 221 element of the training is a video facilitated by leaders onsite, providing our site staff Number of cases per 1,000 employees with practical and relevant guidance on (Balfour Beatty) our values and the standards of ethical behaviour we expect of everyone 2014 7.6 working on our sites. 2013 5.3 The vast majority of our site-based staff 2012 4.8 have completed ethics and values training and will receive periodic refresher training. Number of cases per 1,000 employees (global benchmark) 2014 13 2013 12 2012 12 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 39 INNOVATION, RESEARCH Colorado at Boulder, Virginia Tech, ENVIRONMENTAL PERFORMANCE AND DEVELOPMENT and the University of Texas at Austin. Our sustainability strategy, the Blueprint, Innovation plays an important role in Other innovations include Gammon’s is customer-focused, embedded in the building long-term relationships and development of a Green Concrete range. local community, efficient, innovative and creating additional value for our customers. It is the only supplier in Hong Kong to offer responsible. As a result, sustainability is Most of our innovation emanates from low carbon concrete solutions that are at the heart of all of our operations. collaboration with our customers, joint PAS 2050:2011 certified. Gammon used Optimising our environmental performance ventures, supply chain and internal 3D printing to develop roof designs at is key to driving efficiencies and winning collaboration across our businesses. Midfield Concourse at Hong Kong work. We are industry leaders in reducing In 2014, we developed a unique tool to International Airport and new visualisation carbon emissions and mitigating business track the amount of money we spend with software solutions in Singapore. Balfour risks of climate change, as one of only local small to medium sized businesses Beatty also created an award-winning two companies in the construction sector (SMEs) in the UK. The tool captures PPP scheme for a hospital in Canada earning a grade A position on the global valuable data for our customers to that will be the first public infrastructure CDP Climate Performance Leadership demonstrate the value we are adding project to be financed with green bonds Index 2014. to the local economy. in North America. We have continued to improve the Some of our innovations are informed by We have also developed new smartphone/ accuracy of measurement techniques, research work at several academic partner tablet apps such as a production, reporting specifically around our Scope 1 and 2 organisations, including Salford University and tracking app to accurately track man emissions, and are striving to improve (Building Information Modelling (BIM)), hours on projects, a Zero Harm app for the accuracy of other sustainability Bristol University (systems engineering), tracking potential incidents on motorways metrics in the future. Liverpool John Moores University with our joint venture partners Mott MacDonald, and a 3D game that scores Standards (condition monitoring), Sheffield University an individual’s ability to highlight potential Sustainability is an integral part of (smart buildings), University College worksite risks. modern infrastructure projects: our public London (future leaders in infrastructure), sector clients require conformance to Manchester University (composite cross However, our greatest opportunities standards such as BREEAM, LEED ®, arms), and Loughborough University are on our projects where we are able BEAM, ESTIDAMA, Green Mark, and (accounting for whole-life carbon emissions to deliver savings and benefits for our CEEQUAL and these are important from highways maintenance contracts). customers by offering creative solutions. to planning authorities. Meeting these Other innovations are powered by employee Our innovation champions across our standards has resulted in a £2.3 billion insights which tackle mega trends and businesses capture, share and turnover on green infrastructure projects existing efficiencies. promote innovation. in 2014. We are also running two projects funded Our ability to collaborate has been Our certifications in this area and by Innovate UK. One is in collaboration enhanced by the growth in communities our technical knowledge improve with Queen’s University Belfast and the of practice, by the deployment of training the whole life performance of our University of West of England to devise in collaborative working practices customers’ projects. a new BIM tool that designers and and through our ongoing Group-wide contractors can use to successfully predict accreditation to the standard BS 11000 Scope 1 and 2 carbon emissions and reduce waste at the design phase. Collaborative Business Relationships. We have seen a slight increase in carbon The other is working with technology emissions intensity in 2014 compared to start-up 3DRepo and the Association 2013. Since establishing our baseline in of Interior Specialists to support the development of a new innovative procurement application called Bid4Free. Absolute tonnes of CO2 e The application reduces the cost of Base year bidding by digitising transactions. 2010 2011 2012 2013 2014 Scope 1 327,968 348,940 320,136 287,061 295,219∆ In the US, we have taught students and funded research at Penn State University, Scope 2 116,597 133,308 131,658 125,980 120,126∆ Stanford University, the University of Total CO2e emissions 444,565 482,248 451,794 413,041 415,345 Total CO2e emissions per £m revenue 43.2 44.1 41.9 35.1 36.0 Scope 1 emissions include those resulting from the combustion of fuel and operation of facilities, Scope 2 emissions result from the purchase of electricity, heat, steam and cooling for own use. The full description of our definitions can be found in our reporting guidance found at balfourbeatty.com/enablon Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 40 SAFE, INNOVATIVE AND RESPONSIBLE BUSINESS CONTINUED 2010, we have reduced our overall Scope calculation of GHG emissions as well GHG data in the context of the full limited 1 and 2 emissions by 29,220 tonnes (7%) as other sustainability metrics. assurance statement and the reporting of CO2 equivalent (CO2e). Our CO2 criteria as set out in the Balfour Beatty Read our full reporting guidance online emissions/£m turnover has dropped from reporting guidelines available at at balfourbeatty.com/enablon 43.2 tonnes of CO2e/£m to 36.0 tonnes balfourbeatty.com/enablon. of CO2e/£m since our 2010 baseline year, We have determined and reported the which equates to a 17% reduction. emissions we are responsible for within CDP this boundary and do not believe there are We are now included in the A List: The Our total Scope 1 and 2 emissions have CDP Climate Performance Leadership any material omissions. We use the UK reduced from 444,565 tonnes of CO2e in Index 2014, the most widely used global Government’s carbon conversion factors 2010 to 415,345 tonnes of CO 2e in 2014. sustainability index which measures that were updated in 2014 to calculate our Our 2015 goal is to achieve a 20% emissions into equivalent tonnes of carbon carbon performance and environmental reduction per £ million turnover of dioxide (CO2e). governance. Our score has increased our Scope 1 and 2 emissions (against by 16 points since 2012. We have incorporated landlord emissions a 2010 baseline). data for the properties we rent or lease 2014 94/100 These targets will mean reduced operating (where we are not the utility bill payer) to costs for our businesses and therefore meet the new GHG reporting requirements. 2013 89/100 improved value to our customers and We have only reported on Parsons 2012 78/100 shareholders. Additionally, a number of our Brinckerhoff data up to the point of sale, customers have expressed an intention to 31 October 2014. All historical data for Environmental compliance prequalify contractors on the basis of their Balfour Beatty WorkPlace, which was In 2014, 10 environmental incidents (2013: carbon performance in the future. disposed of in 2013, has been omitted. 4, 2012: 4) resulted in enforcement action Gammon, our joint venture in Hong Kong, We engaged KPMG to undertake and fines totalling £9,917 (2013: £13,260, accounts for approximately 29% of our an independent limited assurance 2012: £66,800). Six of the violations Scope 1 and 2 emissions. In 2014, it engagement, reporting to Balfour Beatty related to noise, two were for allowing became the first construction company plc, using the assurance standards ISAE mosquitos to breed, one for an unauthorised in Hong Kong to be awarded the 3000 and ISAE 3410 over the greenhouse discharge and one for soil erosion. There CarbonCare® Label that covers all of its gas data that have been highlighted in were corrective actions for each violation. operations in Hong Kong (except joint this report with the symbol ∆. Their full venture projects). This is in addition to statement is available on our website the ISO 14064-1 international standard at balfourbeatty.com/IIA. for quantifying and reporting greenhouse The level of assurance provided for gas (GHG) emissions it holds. Its Scope 1 a limited assurance engagement is and 2 GHG emissions are independently substantially lower than a reasonable verified by SGS. assurance agreement. In order to reach Read more at balfourbeatty.com/efficient their opinion they performed a range of procedures over the GHG data including: GHG reporting and assurance interviewing management responsible for Our GHG emissions are reported in the data, examining reporting processes accordance with the UK Government’s and documentation, agreeing a selection GHG reporting requirements covering of the data to the corresponding source all six Kyoto gases. documentation at operating company level We use the operational control approach and performing analytical procedures over under the GHG Protocol Corporate the aggregated data at Balfour Beatty Accounting and Reporting Standard as of Group level. A summary of the work they 31 December 2014 to report emissions performed is included within their from our operations around the world. assurance opinion. This includes assets that are otherwise Non-financial performance information, not referred to across the rest of the GHG quantification in particular, is subject financial statements as defined in our to more inherent limitations than financial reporting guidance. We have also information. It is important to read the developed reporting guidance for the Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 41 COMMUNITY ENGAGEMENT Working together with The Prince’s Trust TAXATION Wherever we operate, we strive to leave over the last five years, we have helped Our tax strategy, approved by the Board, a positive legacy. transform the lives of 3,458 young people. is to sustainably minimise our tax cost We sponsor several Get Into programmes, whilst complying with the law. Despite a challenging year, our employees which offer young people in the UK the have continued to support both the opportunities to work on our sites as In doing so, we ensure we act in communities in which we operate and apprentices, helping them get onto the accordance with our ethics, values and our core charitable programmes. employment ladder. To date, we have compliance programme. We always supported over 470 young people with consider the financial and reputational Delivering social value work placements on construction-related risk arising from our management of tax In many markets our ability to demonstrate Get Into programmes. In 2013–2014, issues, aiming to maximise long-term the social value of our operations in 72% of these young people moved into shareholder value. economic terms is vital. To benefit local areas, we use local suppliers, employees employment, education or training. We have an open, honest and positive and materials wherever possible, and Our US construction business contributed working relationship with HMRC and invest in future talent through over US$903,000 to charitable causes in are committed to prompt disclosure and apprenticeship schemes and work 2014. Examples of the projects include: transparency in all tax matters. Where placement opportunities. disputes arise with tax authorities with • Balfour Beatty Construction’s central regard to the interpretation and application Community investment through region’s Night of Comedy events, which of tax law, we are committed to charitable fundraising raised US$150,000 for local charities addressing the matter promptly and Through the Balfour Beatty Charitable Trust, • Annual Balfour Beatty Sporting Clay resolving it with the tax authority in an we aim to help the most disadvantaged Shoot, raising US$60,000 for the Texas open and constructive manner. young people in society, with a focus on employment and employability, health, Health Resources Foundation The Group makes a major contribution sport and wellbeing. • The Beale Air Force Military Housing to the tax revenues of governments team’s Tin Cup Charity Fishing from its activities in over 80 countries in In the UK, we work with three primary Tournament raised US$250,000 for which it operated in 2014. For example, charities that we support through our local charities over the five-year project. the Group’s UK tax contribution extends Building Better Futures fundraising and significantly beyond corporate tax, volunteering programme: Barnardo’s, This year, Balfour Beatty announced it is as the size of its workforce means it Coram, and The Prince’s Trust. extending its sponsorship of the London not only collects very large amounts Barnardo’s joined as a partner in 2013, Youth Games to 2016, which will take of income tax, but also pays over £100 while we have supported Coram and the total sponsorship to 10 years. Since million in employer’s national insurance The Prince’s Trust since 2008. During this Balfour Beatty started sponsoring the contributions in a typical year. time, we have donated almost £2 million Games, participant numbers have to programmes aimed at helping young increased fivefold, and the number of our people, as well as providing support employees volunteering at the Games Our 2014 Strategic Report, from in-kind, such as through employee reached a record number in 2014. pages 1 to 41, was approved by volunteering. In 2014, we donated For our business it brings multiple benefits, the Board on 24 March 2015. £19,734 through our Building Better including engaging our employees in Duncan Magrath Futures programme. volunteering, community engagement, Chief Financial Officer Given the youth unemployment issue helping customer relationships and affecting communities around the UK, supporting communities in and around and the skills gap opening up in the UK London where we operate. construction sector, we have focused For the participants, we recognise many of our programmes on improving the value that sport brings to the lives employment and employability. of young people and are committed Our partnership with Barnardo’s focuses to helping raise their aspirations, on four hubs across the UK. These provide motivation and attainment levels school leavers with the necessary skills in local communities. and qualifications to pursue careers in construction, mechanics, office administration, and much more. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 42 BOARD OF DIRECTORS Introducing the Board Philip Aiken AM Leo Quinn Iain Ferguson CBE Non-executive Chairman Group Chief Executive Senior Independent Director (from 26 March 2015) Age 57. Appointed as Group Chief Age 59. Appointed a Director in 2010. Age 66. Joins the Board as non-executive Executive in January 2015 after five years Until 2009, he was chief executive of Chairman with effect from 26 March 2015. as group chief executive of QinetiQ Group Tate & Lyle. Prior to joining Tate & Lyle He is non-executive chairman of Aveva plc and before that five years as CEO of in 2003, he spent 26 years at Unilever Group plc and a non-executive director De La Rue plc. Prior to these senior roles, in a succession of roles culminating in his of Newcrest Mining Limited. He was a he spent almost four years as COO of appointment as senior vice-president, non-executive director of National Grid plc Invensys plc’s production management corporate development. He is non- until February 2015, chairman of Robert business, headquartered in the US, and executive chairman of Berendsen plc Walters plc and a non-executive (and 16 years with Honeywell Inc in senior and Stobart Group Limited. He is also senior independent) director of Kazakhmys management roles across the UK, Europe, chairman of Wilton Park, an independent plc and Essar Energy plc,and a senior the Middle East and Africa, including and non-profit making Executive Agency adviser at Macquarie Bank Ltd. Prior to global president of H&BC Enterprise of the British Foreign and Commonwealth that he was group president Energy BHP Solutions. He is a non-executive director Office and lead independent director Billiton and president BHP Petroleum, of Betfair Group plc and was formerly at the Department for Environment, chief executive of BTR Nylex, and a non-executive director of Tomkins plc. Food and Rural Affairs. He was formerly held senior roles in BOC Group. He has He is a civil engineer, and began his a non-executive director of Sygen extensive international business experience career at Balfour Beatty. He is the founder International and of Greggs plc. in the industrials and resources sectors, of The 5% Club which encourages having worked across the UK, US, Asia industry to increase graduate training 1 2 3 4 and the Middle East. and apprenticeships. 2 3 4 3 5 6 Board Committees code: The Directors who held office during the year were: Steve Marshall Chairman 1 Audit, Risk & Assurance Robert Amen 2 Business Practices Iain Ferguson Maureen Kempston Darkes 3 Nomination Duncan Magrath Chief Financial Officer 4 Remuneration Andrew McNaughton Chief Executive (until 3 May 2014) Belinda Richards (until 21 November 2014) 5 Group Tender and Investment Graham Roberts 6 Finance and General Purposes Bill Thomas (until 21 November 2014) Peter Zinkin Planning and Development Director Chair New appointments in 2015: Philip Aiken Non-executive Chairman (effective 26 March 2015) Philip Harrison Chief Financial Officer (Date to be confirmed) Leo Quinn Group Chief Executive (from 1 January 2015) Resignations in 2015: Steve Marshall Effective 25 March 2015 Peter Zinkin Effective 25 March 2015 Duncan Magrath Effective 8 May 2015 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 43 Robert Amen Maureen Kempston Darkes Graham Roberts Non-executive Director Non-executive Director Non-executive Director Age 65. Appointed a Director in 2010. Age 66. Appointed a Director in 2012. Age 56. Appointed a Director in 2009. Until 2009, he was chairman and chief She joined General Motors Corporation He is chief executive of Assura Group, executive officer of International Flavors in 1975 and held a number of progressively a UK primary healthcare property company & Fragrances Inc (IFF). Prior to joining senior roles during her time with the and was formerly finance director of The IFF in 2006, he spent over 25 years business, culminating in her appointment British Land Company between 2002 and at International Paper in a succession as group vice-president for General 2011. Prior to that, he spent eight years at of roles, culminating in his appointment Motors’ Latin America, Africa and Middle Andersen, latterly as a partner specialising as president and member of the board. East operations. She retired from General in the real estate and government services He was also a director of Wyeth, the US Motors in 2009. She has a portfolio of sectors. He is a Fellow of the Institute of pharmaceutical and healthcare company, non-executive directorships including Chartered Accountants. until its acquisition by Pfizer in October Brookfield Asset Management, Canadian 2009. He is a non-executive director National Railways, Enbridge Inc, Irving 1 3 4 of Verso Corporation, a US producer of Oil Company and Schlumberger. printing and specialty papers and pulp, She is a member of the Canadian and currently serves as an executive-in- Government’s Science, Technology residence at Columbia Business School. and Innovation Council. 1 2 3 2 3 4 Executive Directors in 2014 Steve Marshall Non-executive and Duncan Magrath Chief Financial Peter Zinkin Planning and Executive Chairman (until March 2015) Officer (until May 2015) Development Director Age 58. Appointed a Director in 2005 Age 50. Appointed to the Board in 2008, (until March 2015) and Chairman in May 2008, in May having joined Balfour Beatty in 2006 as Age 61. Appointed to the Board 2014 he was appointed to the role of deputy finance director from Exel. He will in 1991, having joined the Group in Executive Chairman on the departure cease to be a Director and an employee 1981. He will cease to be a Director of the then Chief Executive before of Balfour Beatty on 8 May 2015. He is a on 25 March 2015 and will retire from reverting to non-executive capacity on non-executive director of Brammer plc Balfour Beatty in August 2015. He is 1 January 2015. He will cease to be a and a Fellow of the Institute of a governor of Birkbeck, University Director and Chairman on 25 March Chartered Accountants. of London and a councillor in the 2015. He is non-executive chairman of London borough of Barnet. 5 6 Wincanton plc and Biffa Group Holdings 5 6 Limited. He is a Fellow of the Chartered Institute of Management Accountants and a member of its governing council. 2 3 4 Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 44 DIRECTORS’ REPORT Our governance framework CHAIRMAN’S INTRODUCTION We have continued to apply the UK Accountability Corporate Governance Code and, with Despite the issues we have faced, we Balfour Beatty is committed respect to its main principles, I would like continue to believe that the Company’s to applying the very highest to draw your attention to the following: policies and procedures enable the standards of corporate Board to present a fair, balanced and Leadership understandable assessment of the governance wherever it operates. Our areas of focus for the Board in 2014 Group’s trading position and its prospects. and 2015 are summarised in the adjacent We continue to keep under review the Areas of focus in 2014 column. In the pages which follow, I have matters reserved for the Board and the • Recruitment of a new Group Chief set out how we have been addressing terms of reference of its Committees Executive and search for a new these items as a Board; whether through and will make adjustments as considered Chairman and Chief Financial Officer the Directors collectively, or via the Board necessary and publish any changes on Committee structure. our corporate website. During 2014, the • Operational delivery – focus on Construction Services UK Losing Andrew McNaughton as Chief Audit, Risk & Assurance Committee made Executive early in the year meant I had significant revisions to the identification • Implementation of business strategy and assessment of risk at divisional level to combine executive responsibility with – disposal of Parsons Brinckerhoff. to achieve more reliable and responsible my role as Chairman, until the business’s future was assured and a successor reporting. Increased interrogation and risk Areas of focus in 2015 could be recruited (as referred to in my reporting, and integrated analysis of • Programme of business transformation Chairman’s Review on pages 4 and 5). commercial and business risks and their under the new leadership team This, and the especially difficult year that controls and the assurance that can • Financial performance, including cash 2014 proved to be, imposed additional be placed on them, will be a focus for generation and cost reduction plan burdens particularly on our non-executive 2015. More information can be found Directors, both in the commercial on pages 58 and 59. • Greater assurance of risk analysis, controls and reporting decisions we were having to make Remuneration and in governance matters. • Rebalance the skills and experience The remuneration policy, subject to a on the Board. The appointments of Leo Quinn as Group binding vote for the first time in 2014, Chief Executive, Philip Aiken as Chairman was approved by shareholders at the and Philip Harrison as Chief Financial Annual General Meeting in May. Officer will bring a wealth of relevant We remain committed to the policy’s experience. The Company is actively principles and alignment to performance recruiting a further non-executive Director and shareholder value, and do not propose to ensure the right balance of skills and any changes for 2015. Details of how it experience, following the departure late will operate in 2015 can be found in the last year of Belinda Richards and Bill Remuneration Report on page 71. Thomas. In addition, in 2015 Duncan Magrath, Peter Zinkin and myself will Relations with shareholders leave the Board. Our investor relations programme remains of critical importance to the Board and Diversity this is why, at each of our meetings, Though we again find ourselves with we receive a comprehensive report from only one female Director on the Board, our investor relations team, as well as we specifically ask search firms to receiving, at regular intervals, updates identify suitable women candidates from analysts and the feedback from any as we endeavour to increase the female meetings which the Directors, including composition of our Board. Although, myself, may have held with institutional as a policy, we strongly support greater shareholders. The Annual General Meeting diversity in all its forms, not least gender is recognised as an opportunity for private diversity, as an important objective for shareholders to engage with the Board. the Group, we do not believe in the Further information on our investor relations concept of gender quotas, our preferred programme is set out on page 61. approach being much more directed at Read more online in our Investors section merit, experience and skills. We are in balfourbeatty.com/investors the third year of our diversity and inclusion programme, which includes the development of women for future management positions in the Group. More information on the various aspects of our diversity programme across the organisation is set out on page 37. Steve Marshall Chairman Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 45 Balfour Beatty Governance Framework executive. Details of the changes during the year can be found under the heading “Board composition” below. The Board Remuneration Committee Board composition • Group strategy • Remuneration strategy and policies The names of the Directors serving • Annual budgets and financial • Remuneration packages through the year and at the year end are reporting • Incentive plans. shown on page 42. All of the Directors • Interim and final dividends in office on 26 March 2015, with the Read more on p55 • Major acquisitions, disposals exception of Duncan Magrath, will seek and capital expenditure election or re-election at the Annual • Financial and human resources General Meeting in accordance with Business Practices Committee • Values and ethical standards the Code. Brief biographical details are • Corporate values, ethics and • Risk management and assurance. shown on pages 42 and 43. Full details Code of Conduct Read more on p48 • Health and safety of Directors’ service agreements, • Stakeholder management emoluments and share interests are • Sustainability shown in the Remuneration Report Audit, Risk & Assurance Committee • Whistleblowing starting on page 64. • Financial statements • Community engagement. Andrew McNaughton stepped down • Financial controls as Chief Executive and from the Board Read more on p56 • External audit on 3 May 2014, and Steve Marshall was • Internal audit appointed to the role of Executive Chairman. • Risk management and assurance. Belinda Richards and Bill Thomas resigned Group Tender and Read more on p51 Investment Committee as non-executive Directors effective • Major contract approvals 21 November 2014. Since the year end, • Acquisitions and disposals we have made a number of changes to the Nomination Committee • Capital expenditure. Board and announced some which have • Structure and composition of Board yet to take effect. Leo Quinn took office as Read more on p57 Group Chief Executive and as a Director on • Appointment of non-executive Directors the Board on 1 January 2015; Philip Aiken • Succession planning and joins the Board as non-executive Chairman Finance and General on 26 March 2015, succeeding Steve talent management. Purposes Committee Marshall who, with Peter Zinkin, will cease Read more on p54 • Banking facilities and other to be Directors at that time; while Duncan treasury matters Magrath will cease to hold office on • Share options. 8 May 2015. Read more on p57 Each of the Directors brings skills and experience which enhance the quality of debate in the boardroom and provides guidance. The Directors believe that Compliance with the Code that procedures exist for employees the Board retains the ability to provide The UK Corporate Governance Code 2012 to raise concerns in confidence and this effective leadership and that appointments (the Code) is the standard applying to good is an integral element of its overall remit. being made will achieve an appropriate corporate governance practice in the UK, However, the Audit, Risk & Assurance balance of skills. Having said this, there and the Listing Rules require listed Committee is kept informed of any is a need to make further appointments companies to disclose whether they allegations of fraud or poor financial to the Board to give it the appropriate have complied with the provisions controls and internal audit participates in balance. A search for a non-executive of the Code throughout the financial investigations into such claims and reports Director has been commissioned, and year. (For information on the Code, to that Committee on the outcome. Philip Aiken, as Chairman, will be further visit www.frc.org.uk.) considering the composition of the Board Directors’ independence The Company has complied with the to ensure it has the right balance of skill At its Board meeting in March 2015, requirements of the Code throughout the and experience. There are, however, areas as part of its annual audit of corporate accounting period, other than in respect where the non-executive Directors, in governance, the Board considered the of the effectiveness of the Group’s particular, bring with them a wealth of independence of the non-executive whistleblowing procedures which is kept insight and, although not exhaustive, some Directors against the criteria specified under review by the Business Practices of their most significant strengths are in the Code and determined that each Committee and not by the Audit, Risk highlighted on page 46. of them continues to be independent. & Assurance Committee. The principal reason for this is that the Business The Board Practices Committee, in particular, Effective from 26 March 2015, the Board focuses on the Company’s business will comprise seven Directors, of whom conduct, its ethics and values, ensuring five, including the Chairman, are non- Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 46 DIRECTORS’ REPORT CONTINUED Board balance Board tenure Board geography Board diversity Chairman 1 0–2 years 1 UK 6 Male 7 Executive Directors 3 2–4 years 1 Americas 2 Female 1 Non-executive Directors 4 4–6 years 2 6+ years 4 Non-executive Directors – significant strengths Operating Financial Strategic performance Mergers and Business management development and delivery acquisitions integration and planning Sector-specific Philip Aiken Robert Amen Iain Ferguson Maureen Kempston Darkes Graham Roberts Experience of Risk international Health management Stakeholder Ethics, values markets and safety and assurance HR management engagement and culture Philip Aiken Robert Amen Iain Ferguson Maureen Kempston Darkes Graham Roberts After evaluation, your Board is satisfied The Board reviewed its list of reserved Specifically, their roles comprise that each of the Directors continues matters, most recently, at its meeting the principal responsibilities in the to be effective and demonstrates in March 2015. The full list and the terms sections following: commitment to the role; and that their of reference of the Board Committees Chairman’s responsibilities election or re-election is in the Company’s are available on request from the Company • Ensuring effective strategic planning is best interests. Secretary and are also displayed on the undertaken by the executive Directors Company’s website. Descriptions of the Matters reserved for the Board specific responsibilities which have been • Ensuring corporate governance is The Board is collectively responsible delegated to the Group Chief Executive properly maintained for the success of the Company and and to the principal Board Committees has a formal schedule of matters reserved • Formally appraising the performance are also provided on page 47 and pages for its decision which includes the matters of the Group Chief Executive and 51 to 57. summarised below: reviewing with the Group Chief The day-to-day management of the Executive his views on the performance • determining the Group’s strategic business is delegated to executive of the other executive Directors direction Directors and the Group’s senior • Providing leadership to the Board • approving annual budgets and financial management. reporting, including the annual and • Acting as senior ambassador Read more online in our Investors section half-year results and interim for the Company balfourbeatty.com/investors management statements • Considering Board balance, composition Chairman and Group Chief Executive • approving interim, and recommending and succession The two roles are complementary and the final, dividends Company usually keeps them separate. • Ensuring the smooth operation • approving major acquisitions, disposals The Chairman is responsible for managing of the Board and its Committees and capital expenditure the business of the Board, whilst the • Providing effective communication Group Chief Executive actually runs the • ensuring the necessary financial and between the Board and its business. As the senior executive officer human resources are in place to achieve shareholders. of the Company, the Group Chief objectives and review management Executive is responsible to the Chairman performance and Board for directing and prioritising the • setting the Company’s values and profitable operation and development of ethical standards the Group. The Chairman and Group Chief Executive keep each other appropriately • approving policies and systems for risk informed on the other’s current activities. management and assurance. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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    Strategic Report Governance Financial Statements Other Information 47 Group Chief Executive’s communication channel between 2014 meeting programme responsibilities the non-executive Directors and the In 2014, confronted by an exceptional • Strategy development and the shareholders and other stakeholders, series of events, the Board met on stewardship of physical, financial as required. Mr Ferguson meets with the 26 occasions and held numerous update and human resources other non-executive Directors without discussions. The vast majority of these the Chairman or executive Directors being were held at the Company’s head office • Group operational and financial present at least once a year. He has led in London, or by telephone. In addition to performance the search for a new Chairman, on behalf the scheduled eight meetings, many called • Executive leadership of the Board. at short notice were accommodated as conference calls. Contrary to the • Health, safety and environmental Directors’ interests Company’s usual practice, given the performance No Director had any material interest overwhelming workload that had to be in any contract of significance with the • Corporate values and ethics accommodated, none of the scheduled Group during the period under review. meetings during 2014 were held at • Objective setting for the senior The Directors have put in place procedures business units or overseas. management team to ensure the Board collectively, and the Directors individually, comply with Each scheduled Board meeting normally • Organisational structure, succession the disclosure requirements on conflicts lasts four to five hours but can be longer. and talent management of interest set out in the Companies Act On the evening preceding those Board • Major capital expenditure prioritisation 2006. At its meeting each January, meetings, the Directors generally meet and allocation of resources a formal declaration of interests is for dinner and sometimes take the reviewed by the Board. • Consideration of acquisitions, opportunity to discuss predetermined disposals and financing The interests of Directors in the share developmental themes, led by one of capital of the Company and its subsidiary the executive Directors, other senior • Stakeholder management. undertakings and their interests under managers or a specialist external speaker. Until 3 May 2014, Steve Marshall carried the long-term incentive scheme (the One of the dinners each year is attended out the role of non-executive Chairman. Performance Share Plan), the Deferred by the Chairman and the non-executive He spent an average of two days a week Bonus Plan, the Share Incentive Plan and Directors only, whilst a second includes on Company business, the Board being share options are set out in the tables in the Group Chief Executive, but none satisfied that his role as non-executive the Remuneration Report commencing of the other executive Directors. chairman of two other companies, on page 64. Each scheduled Board meeting addresses and his other business and charitable Directors’ indemnities key strategic topics for the Group which commitments, could be accommodated The Company grants an indemnity to all enable the Directors to engage in detailed without hindering his ability to carry out his of its Directors to the extent permitted reviews. The Board also considers at each duties as Chairman. Assuming executive by law. These indemnities are uncapped of these meetings monthly updates from responsibility on 3 May, he relinquished in relation to losses and liabilities which the Group Chief Executive and the Chief one of his other company non-executive Directors may incur to third parties in Financial Officer. Regular reports are positions and devoted substantial the course of acting as a Director of the also provided on health, safety and additional time to the Company’s needs Company, or in any office where such environment, operational performance, until a new Group Chief Executive could duties are performed at the request of the corporate communications, risk be appointed. From 1 January 2015, Board, or as a result of their appointment management and assurance, investor he reverted to non-executive capacity. as Directors. relations and any legal issues. At each Senior Independent Director such meeting, the chairs of the various As Senior Independent Director, Iain Board meetings Board Committees provide a summary Ferguson’s principal responsibilities Procedures for Board meetings remain of the discussions held at the preceding are to ensure that the views of the other largely unchanged from previous years. Committee meeting and the key actions non-executive Directors are properly The Company Secretary is responsible arising; minutes of the Committee considered and to provide an additional for advising the Board on appropriate meetings are then made available for governance matters and for ensuring inspection on the electronic portal used a good information flow and that Board for disseminating papers for meetings procedures are properly followed. He also and on which other key data and provides updates on legal matters of documents are kept. relevance to the Group and is available to individual Directors for advice on Board procedures. Balfour Beatty Annual Report and Accounts 2014 balfourbeatty.com/AR2014

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