The Market

The PFI market remains buoyant. In healthcare, despite signs of a decline in very large single building PFI acute schemes, Balfour Beatty is tracking the progress of 15 major schemes with a value of £4.4bn and is currently bidding one such scheme.

In education, the “Building Schools for the Future” initiative provides new longer term opportunities alongside traditional PFI education projects. The programme extends to 2020 and is forecast to generate £40bn. Balfour Beatty is currently bidding two BSF and two traditional PFI education projects. The acquisition of Mansell has enhanced the Group’s expertise in the social housing market and a joint PFI social housing scheme is being bid in Ashford, Kent. We anticipate a proliferation of opportunities in this sector.

In the roads sector, PPP is the chosen procurement method for the £1.5bn M25 widening project, where bidding will commence in 2006, and there are potential opportunities of a similar scale for the M1, M6 and M4.

Strategy

Balfour Beatty will continue to pursue opportunities in those existing markets where it has clear competitive advantages and market leading positions. Projects will continue to be targeted whose size and complexity offer advantages arising from the Group’s unique range of skills and experience.

These projects will, typically, not only provide attractive investment opportunities – but also trade on the proven strengths of, and provide design, construction and service contracts for other parts of the Balfour Beatty Group.

Balfour Beatty will continue to monitor the development of other national markets and is actively pursuing opportunities in both the US and Germany.

2005 performance

Profit from operations, before exceptional items, in Investments and Developments rose by 18% to £20m in 2005. This represents the post-tax concession profits from those PFI and other concessions which are in joint venture with other owners. During the year, three concessions were converted to contract from preferred bidder status and preferred bidder status was achieved for the Northern Batched Hospitals scheme, making four projects at preferred bidder stage at the year end in all.

Outlook

We anticipate that the operating performance of our concessions will continue to meet expectations, that further major projects will reach financial close during the year and that we will make further satisfactory progress in 2006.

 

 

Edinburgh Royal Infirmary: 73.9% University Hospital of North Durham: 50% University College London Hospital (UCLH): 33% Blackburn: 50% Birmingham: 50%† Pinderfields: 50%† Northern Batched: 50%† † Preferred bidder

 

Healthcare

Consort, the established Balfour Beatty business brand in the healthcare market, performed well in 2005, contributing profits and cash at anticipated levels.

Consort Healthcare’s portfolio comprises interests in seven major hospital schemes and represents a committed equity investment of £112m, £50m of which is in three projects at preferred bidder stage.

In December 2005, Balfour Beatty increased its shareholding in the Edinburgh Royal Infirmary concession from 42.5% to 73.9% for a consideration of £31m. This underlines the confidence which the Group feels in the value and earning capacity of its concessions.

North Durham Hospital and Edinburgh Royal Infirmary were already fully operational at the beginning of 2005. In May 2005, Phase I of the University College Hospital in London opened on time and on budget. Phase I of Blackburn Hospital was opened, on time and on budget, in October 2005. The £521m Birmingham scheme and the £250m Pinderfields scheme are scheduled to reach financial close during 2006. In November 2005, Consort was appointed preferred bidder for the £190m Northern Batched Hospitals scheme, which will create new and upgraded facilities in Salford and Tameside in Manchester. A bid is in preparation for the Fife Hospital Scheme with an anticipated capital value of approximately £100m.

Consort Healthcare has strengthened its leadership position in the PPP hospitals market and further developed its proven track record and high levels of client satisfaction.

 

 

Stoke: 50% Rotherham: 50% North Lanarkshire: 50% Bassetlaw: 50% Birmingham: 50%† †Preferred bidder

 

Education

Transform Schools, the established Balfour Beatty brand in the education market, performed well in 2005. Its portfolio comprises interests in five schools schemes, representing £30m of committed equity, of which the Birmingham Schools project is at preferred bidder stage. The Stoke concession is the largest grouped schools scheme in England, covering 98 schools, and has been operational since 2000 to high levels of client satisfaction.

The concession for Rotherham Schools became operational in June 2003 and is also highly successful. In 2005, it was awarded “Best Community Use Project” in the PPP/PFI Journal Awards.

In June 2005, Transform reached financial close on the £140m scheme to build and maintain 21 new schools for North Lanarkshire Council. In July, financial close was also achieved for the £127m scheme in Bassetlaw, North Nottinghamshire, including six new schools, two post-16 learning centres and two new leisure centres. The £56m Birmingham concession is due to reach financial close during 2006. Under this scheme, Transform will provide 12 new and refurbished schools.

Active bids are in hand for new PFI schemes in Newcastle, Aberdeen and Knowsley, with an aggregate total value of £375m. Transform has also prequalified for two schemes under the Building Schools for the Future programme.

Transform Schools, with four operational schemes with an aggregate capital value of over £400m, is now a clear leader in the education market.

 

 

M1-A1: 50% A50 Stoke/Derby link: 85% A30/A35: 85% M77/Glasgow Southern Orbital: 85% Sunderland Street Lighting: 100% South Tyneside Street Lighting 100%

 

Roads

The profit and cash performance of Connect Roads, Balfour Beatty’s brand in the highways market, was in line with that of 2004.

In December 2005, 15% of Balfour Beatty’s interest in the A30/A35 in Devon and Dorset, the A50 in Derbyshire and the M77/GSO in Scotland was sold to I² for a consideration of £13.5m. These concessions had previously been 100% owned. The A30/A35 and A50 projects have been fully operational since 2000 and 1998 respectively. The M77/GSO was completed and opened to traffic in April 2005. As these concessions are now under joint control their finances have been deconsolidated from the Balfour Beatty balance sheet. Balfour Beatty has a 50% interest in the M1/A1 Link near Leeds, which has been operational since 1999.

Connect has 100% owned street lighting projects, in Sunderland, which has been operational since 2003, and South Tyneside, which reached financial close in December 2005.

In all, Balfour Beatty currently has committed equity investment of £61m in UK roads and streetlighting schemes. Bids are in preparation for a further five schemes. These are the £250m Northern Ireland roads package, the £175m Tyne Tunnel, street lighting schemes in Derby and Surrey with a combined capital value of £105m and the £35m Carlisle Northern Development Route.

 

 

Metronet BCV: 20% Metronet SSL: 20%

 

The London Underground

Since April 2003, Metronet has operated and maintained the infrastructure for the Bakerloo, Central, Victoria and the Sub-Surface Lines for London Underground under 30-year concession contracts. Profits from the Group’s 20% share in Metronet’s concessions were satisfactory. The underlying operational performance of the infrastructure for which Metronet is responsible continued to be on a satisfactorily improving trend and in line with previous expectations. Costs increased as the major investment programmes began to accelerate.

As reported last year, the major station refurbishment programme and some other elements of Metronet’s capital works programme were slow in getting under way as design, approvals and mobilisation processes have been further developed and refined. Within the next 41½ years 150 stations will have been refurbished as will have countless other civil assets. The pace of activity continues to accelerate, now under a new management team and a new organisational structure.

The Group has committed £70m of equity investment in Metronet.

 

 

Powerlink/PADCO: 10%/25% Aberdeen Environmental Services: 45% Barking Power Ltd: 25.5%

 

Other infrastructure concessions

The Group has two other infrastructure concessions. These are Powerlink, in which the Group has a 10% interest and which is responsible for the upgrade and maintenance of London Underground’s high voltage power system. Discussions are currently in hand with London Underground to restructure this concession. Aberdeen Environmental Services, which is responsible for waste water treatment in Aberdeen performed satisfactorily in line with the previous year. The total equity committed to these concessions is £10m.

 

Barking Power

Barking Power again performed very strongly in 2005. Availability was excellent, with planned maintenance completed on schedule and very few unplanned outages. Electricity prices for the 27% of the station’s output that is sold on the open market also continued to be strong.

During the year, Barking Power agreed a claim for damages for breach of contract for £179m following TXU Europe’s entry into administration in November 2002. TXU Europe had both an equity investment and a power purchase agreement with Barking Power Limited prior to its insolvency.

Dividends of £164m were received by Barking Power from the settlement for damages during 2005 and, consequently, Balfour Beatty has recognised a net exceptional profit of £30m, after tax of £12m.

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