2005 performance

Profit from operations, before exceptional items, in Civil and Specialist Engineering and Services more than tripled to £49m in 2005. This excellent result reflected good progress in all the UK businesses, together with a substantially improved performance in civil engineering in the US.

Review of operations

Balfour Beatty Civil Engineering in the UK performed well, in a relatively flat market environment.

In the roads sector, on-time, on-budget completions were achieved on the £130m M77/Glasgow Southern Orbital PFI scheme and the £148m M25 widening scheme adjacent to Heathrow Airport, both very challenging projects. We were awarded the £241m project to widen the M1 motorway between Junction 6A and Junction 10 and the £171m scheme for the A421 in Bedfordshire.

Balfour Beatty now has six major Early Contractor Involvement schemes for the Highways Agency.

Tunnelling works on the Steg Raron rail projects in Switzerland were successfully completed as was the new Manchester Business Park. The award of the civil engineering works for the new ticket hall at King’s Cross Station is anticipated in the near future.

The regional civil engineering businesses performed well, with good contributions from the long-term framework agreements for the Highways Agency and Cambridgeshire and Durham County Councils. Airport maintenance work for BAA in Scotland also progressed well. The contract for the maintenance of the Forth Railway Bridge was extended for a further three-year period.

New civils contracts for Network Rail were begun in the year and a major project at the Isle of Grain was secured.

Balfour Beatty Management, the Group’s professional services business continued to develop its presence in the markets for project and programme management. It will play a major part in the Greater Manchester Gas Alliance project for National Grid and is also working on projects for BAA and London Underground.

Progress on the programme and project management contract for the major rail development works at King’s Cross, was satisfactory.

Balfour Beatty Power Networks, which designs and constructs power transmission and distribution networks, had a very good year with sales and profits well ahead of 2004. Activity levels were boosted by the 100 kilometre line between the East Midlands and East Anglia. The Central Network contract was also expanded to cover the West Midlands. Volumes of work under a number of other contracts for National Grid continued to be high and the cabling contract for the Western Power Distribution system was renewed.

There was also good progress on the Sunderland Street Lighting PFI project. In December, financial close was reached on the South Tyneside Street Lighting PFI project, under which the company will replace 80% of the existing lighting infrastructure over the first five years.

The company also won contracts for Australia’s power transmission expansion programme.

In the gas and water sectors, Balfour Beatty Utilities' sales grew substantially as a result of a series of major contract wins following 2004 regulatory review. Profits were in line with those of 2004 despite the substantial mobilisation costs incurred in preparing to service its major new commitments.

In 2005, the company won new long-term contracts for gas mains replacement in Greater Manchester; clean water upgrade and maintenance work for Yorkshire Water, Severn Trent Water, Anglian Water and South West Water; and clean water and sewerage works for United Utilities. These contracts are worth approaching £1bn over their full terms and constitute a step-change in the size and scope of the business.

Performance on the existing contracts and on the early stages of the new ones was satisfactory.

In road management and maintenance, RCS had another very successful year with both sales and profits well ahead of 2004 and its order book further extended.

The company performed well on its three long-term Highways Agency contracts for Areas 2, 3 and 4.

Contracts for maintaining local authority roads in Hampshire, North Yorkshire, Westminster and Wokingham and PFI concession roads in Devon, Dorset, Derbyshire, Yorkshire and the West of Scotland also progressed satisfactorily.

Towards the end of the year, RCS won road management and maintenance contracts for North-West Scotland and Mid and East Essex to a total potential value of approximately £200m. Decisions on extending our relationships in Hampshire, Yorkshire and Highways Area 3 are imminent.

Bidding opportunities in 2006 include several county council contracts and the contract for the M25, which is to be let as a single PFI.

Stent, the Group’s specialist foundations and piling business, achieved organic sales and profit growth and acquired Pennine Group. Pennine specialises in the treatment and preparation of poor ground using self-manufactured specialist machinery and has been successfully integrated into the business.

During the year, work was completed on the M25 widening project and the new Arsenal football stadium. Progress was good on the multi-use development site at White City in West London. Work on the M1 widening project will begin in the near future.

The performance of BSR Metro, an internal Balfour Beatty joint venture which provides a range of services to Metronet’s London Underground PPP concessions was good. Work in support of our construction operation in Dubai increased.

Devonport Management Ltd, in which the Group has a 24.5% interest, continued to perform well and to increase its revenues. The nuclear submarine refuelling programme progressed well with Vanguard completed and Victorious now in dock. The ship repair programme was steady as was performance in the maintenance of the naval base.

DML will, undoubtedly, have an active part to play in the Government’s plans for developing and managing the UK’s maritime industrial base.

The performance of Balfour Beatty Construction Inc in the US showed radical improvement after the heavy losses of 2003 and 2004. The marine engineering business in which the majority of the losses were incurred has been closed and its final project is now nearing completion. 2005 saw some claim settlements on its completed projects. The highways business in Texas continued to perform well with good progress made on the $1.3bn SH 130 toll road project, the $84m SH 121 and other contracts. The Western Division in California performed steadily on a range of projects including road widening schemes in Los Angeles and San Diego, the extension of the Downtown Seattle Bus Terminal and the Roseville Water Treatment Plant.

The Central Division also continued to perform steadily and progress a range of road projects largely in Pennsylvania and Ohio.

During the year, the long-awaited SAFETEA federal transport funding programme, increased federal spending on transportation projects by 38% in the period to 2009.

Tunnelling work for a major water project in Providence Rhode Island and the civil works for the Greenbush commuter rail line refurbishment project in Boston progressed well.

The emergence of a US PFI market offers new opportunities for the business.

In Dubai, Dutco Balfour Beatty, in which the Group has a 49% interest, performed steadily in a fast-growing market. Its sales and order book have grown rapidly over recent months. The £400m contract to build the Burj Mall, the world’s largest retail complex is making sound progress. The civil engineering and mechanical engineering businesses have also both progressed well.

During the year, a shopping mall for IKEA was completed and the mechanical and electrical work for a new terminal at Dubai Airport made substantial progress.

Balfour Beatty Sakti in Indonesia, in which the Group has a 49% interest, had low activity rates. In Hong Kong, the performance of Gammon, in which Balfour Beatty has a 50% interest, was in line with that of last year. The order book increased sharply during the year. In 2005, Gammon has been undergoing an adaptation of its processes and systems to the Balfour Beatty model.

During the year, the major rail terminus and immigration hall project at Lok Ma Chau progressed well and the Shenzhen Western Corridor and Deep Bay Link projects were substantially completed. The refurbishment of the Mandarin Hotel also made good progress.

The year saw some very substantial project wins including the £175m Venetian Tower Hotel and Casino project in Macau and, later, a £29m extension contract. Macau offers an increasingly strong market opportunity. Gammon also won the £140m civil engineering and tunnelling contract for part of the Kowloon Southern Link. A contract to manage and maintain high-speed roads was also secured.

Prospects for market and performance improvement in Gammon are good.

Outlook

With strong order books and a number of large new contracts in their early stages, we anticipate further growth momentum in 2006 in the engineering sector.

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