The Gaylord Resort and Convention Center: Centex Construction.

Your Homes, Newcastle: Mansell.

Birmingham Hospital: Balfour Beatty
Construction/Haden Young joint venture.

Corsicana Stadium: Charter.

Victoria and Stobhill Hospital: Balfour Beatty Construction.

Castle Hill Hospital: Haden Young.

Royal Mail: Haden Building Management.

Whitelee Wind Farms: Balfour Kilpatrick.

St. Andrew’s High School, North Lanarkshire: Balfour Beatty Construction.

 

2006 performance

Profit from operations before exceptional items and amortisation of intangible assets in the building sector improved by 23% to £43m (2005: £35m). This represented a good all round performance in strong markets. There was particularly good progress achieved in UK building construction and a first contribution from Charter in the US, offset by the impact of some issues related to the delivery programme under the London Underground PPP, which also had an effect in the engineering sector.

Review of operations

In Balfour Beatty Construction, profits moved ahead, despite the adverse impact of issues relating to the stations delivery programme under the London Underground PPP.

Progress on major projects was good, with work on York College now well advanced, a successful start to a major new office building in Holborn, London and a flying start to the Birmingham Hospital project following substantial advanced works prior to its financial close in June. Work on the rail station and interchange at Heathrow Terminal 5 also progressed well. The Victoria and Stobhill Hospitals project in Glasgow began in August.

In the schools sector, new build programmes in Stoke and Rotherham were completed on time, the schemes at Bassetlaw and in Birmingham proceeded satisfactorily and eight new schools have now been delivered in North Lanarkshire.

There was a particularly strong performance in the London refurbishment market, including successful completion of the Grosvenor House Hotel project. A major new swimming pool in Sunderland and the Paradise Street development in Liverpool, were also commenced during the year.

The delayed stations programme, part of the London Underground PPP, continued to accelerate, with 44 stations due to be completed by the end of March 2007.

Balfour Kilpatrick had another good year. The company is the building services partner on all Balfour Beatty’s education PPPs, where activity levels were high and performance good.

Order intake was very satisfactory, including new work for BNFL at Sellafield, for WhiteleeWind Farms in Scotland and for a number of data centre projects for BT. It will also carry out more than £20m of work on the King’s Cross St Pancras Underground Station Northern Ticket Hall project, which was awarded in May.

Good progress was made on the project to strengthen the main power ring around Edinburgh and on a £20m upgrade for the renewable energy transmission system in Scotland. Work on the substations programme for London Underground progressed well, with a further tranche of work now in the process of final agreement.

Balfour Kilpatrick plays a key part in the extensive rail works at Heathrow Terminal 5, which progressed well during the year. The works include mechanical and electrical engineering in the rail tunnels, the station and the track transit system.

Haden Building Management’s profits were in line with 2005 after absorbing the impact of a reduction in scope of work and slower than anticipated cost reductions in Romec, in which it has a 49% interest. Romec is responsible for facilities management for all the Royal Mail premises.

2006 was, however, a year of very significant progress for Haden Building Management. The company secured over £750m of new orders. Most notable were the £320m nationwide support services contract for the Department for Work and Pensions and the £150m facilities management contract for the Metropolitan Police Authority, both with a seven-year duration and options to extend. Under the former, Haden will deliver a comprehensive range of office support services as part of the modernisation of the organisation. The latter involves a full facilities management service covering over 500 properties in north London.

Other new work won during the year included the facilities management portion of the Group’s new PPP schemes in Birmingham, the extension of a major contract for BT and a new contract for the Ministry of Defence at HMS Nelson. The company now has a very significant portfolio in support of the Group’s PPP projects, with four more major schemes at preferred bidder stage.

In Haden Young, profits held steady during the year despite a decrease in revenues as major projects at Birmingham, Pinderfields and Northern Batched Hospitals took longer than anticipated to reach financial close. Haden Young remains a clear market leader in large, complex M&E schemes, particularly in the healthcare sector.

The new projects in Birmingham and Glasgow commenced towards the end of the year, as did the Highland Schools scheme. The £20m project at the new Liverpool Arena progressed well. The company was successful under the Procure 21 initiative, with a number of small and medium-sized schemes beginning during the year. Work on Castle Hill Hospital in Hull and Queen Margaret College in Edinburgh progressed satisfactorily.

Haden Young has a very strong commercial workload in London, including the major Ludgate West development.

Heery International, the US engineering, architectural and programme management business, had another good year of progress, assisted by a first-time contribution from Charter, the Texas-based construction management business acquired in March 2006.

Although there is some public sector market uncertainty as federal expenditure comes under pressure, Heery’s base workload from the K-12 schools programme, from justice, from healthcare and from the private sector has remained strong and its order book has grown.

Work secured during the year included the Veterans Medical Center at San Juan and major schools schemes in Los Angeles, California and Charleston, South Carolina. HLM and JCM, the two businesses acquired by Heery in 2004 and 2005 respectively, both performed well during the year. Charter has brought some £100m of additional revenues to Heery and has added over £20m of fee work to its order book since it joined the Group, including for the renovation and expansion of the Cotton Bowl which will create a stateof- the-art 84,000 seater stadium in Dallas, Texas. Substantial synergies are emerging between Heery and Charter and the integration process has been successfully completed.

Mansell continued to make excellent progress and was further augmented by the addition of the building business of Birse, acquired as part of the broader Birse transaction in July 2006. Mansell has a broad portfolio of small and medium-sized building projects. Amongst the most notable are Argyll and Bute Schools, Brentwood Hospital, USAF accommodation at Lakenheath in Suffolk and work arising from participation in the Ministry of Defence Prime Contracts for Scotland, and the East and South-East of England.

Amongst its long-term framework contracts are the Job Centre Plus programme for the Department forWork and Pensions and substantial on-going programmes for BT, BAA, the BBC and Hampshire County Council.

It was another very strong year for the company in the social housing market. The value of framework contracts in this market now exceeds £800m, including relationships with Catalyst, Riverside, Your Homes in Newcastle and Metropolitan Housing in the Midlands. In April, the company won a five-year contract to upgrade all council housing at Sandwell in Birmingham.

Outlook

With order books continuing to grow, we expect very good progress in this sector in 2007, accelerated by the additional benefit of the acquisition of Centex.

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