National Power: Balfour Beatty Power Networks.

Roseville Water Treatment Plant: Balfour Beatty Construction Inc.

Palm Island, Dubai: BK Gulf.

North Yorkshire Road Maintenance: Balfour Beatty Infrastructure Services.

Sumburgh Airport: Balfour Beatty Civil Engineering.

Lok Ma Chau Rail Terminus: Gammon Construction.

 

2006 performance

Profit from operations before exceptional items and amortisation of intangible assets in the engineering sector increased by 12% to £55m (2005: £49m). This reflected a good all round UK performance, with strong growth from Balfour Beatty Utilities and Balfour Beatty Management. Outside the UK, there were improved performances from our businesses in Hong Kong and Dubai. In the US, although underlying performance improved, there were some further losses in the central division, which is in the process of closure.

Review of operations

Underlying performance in Balfour Beatty Civil Engineering was in line with the previous year, although there was an adverse impact from the infrastructure upgrade programmes under the London Underground PPP.

In major projects, the Steg Raron tunnelling project was completed and progress was good on the widening project for Junctions 6-10 of the M1.

The £115m contract to construct a new Northern Ticket Hall at King’s Cross St Pancras Underground Station was secured, and in conjunction with Balfour Beatty Rail, the company won the £363m contract to create the new East London rail line. During 2006, two Early Contractor Involvement, Highways Agency schemes, the A3 project at Hindhead, and the A1 between Bramham and Wetherby, were given the go-ahead to proceed.

In the regional civil engineering business, the acquisition of Birse in July has substantially widened the company’s regional coverage. Birse contributed in line with expectations and the integration process is proceeding well. The framework contract for Durham County Council was extended for two years and work at Sumburgh Airport in the Shetlands was completed ahead of schedule. The business has a strong order book and excellent tendering opportunities.

The performance of Balfour Beatty Construction Inc continued to disappoint, with contract losses in the central division offsetting good performances in the businesses serving the West Coast and Texas and in tunnelling. Appropriate action has been taken to address the central division’s issues. The company’s underlying quality of earnings is on an improving trend, with closer supervision from UK management and more rigorously-applied control mechanisms.

In Texas, progress on the $1.3bn SH130 project was good. The future market flow of major road work in Texas will be very significant, some of it let under PPP arrangements.

On the West Coast, project progress has been good and substantial new work was won at good margins, including the $193m I-5 highway project in Orange County, the $120m Freeport water treatment plant and the Roseville Water Treatment plant in Sacramento.

The specialist tunnelling business is close to completing a water project in Rhode Island and has secured a major new tunnel contract in nearby North Dorchester.

During 2006, RCS, the Group’s road management and maintenance company, was renamed Balfour Beatty Infrastructure Services. Profits in 2006 were in line with the strong performance achieved in 2005. Steady progress was made in Highways Agency Areas 2, 3 and 4, with one-year extensions being awarded in Areas 3 and 4.

In January 2006, the company secured new work with a potential total value of over £300m. In Scotland, it won the management and maintenance of major trunk roads in the North-West. In England, it won the contract for county roads in Mid and East Essex. In May, its contracts for both North Yorkshire County Council and Hampshire County Council were extended, taking its order book to approximately £750m. The project to maintain roads in the London Borough of Westminster progressed well.

Balfour Beatty Management made excellent progress in 2006 in terms of both market penetration and profitability. Already an integral part of the Greater Manchester Gas Alliance for National Grid, it was instrumental with Balfour Beatty Power Networks in securing the Eastern Overhead Line and Cable Alliance partnership with the same customer, and the £420m Northern Gas Networks contract through United Utilities.

The company has led the successful delivery of the new London Underground Western Ticket Hall and other facilities at King’s Cross St Pancras Station for London Underground where its programme management work is on-going.

Amongst its other customers are BAA, the Blood Transfusion Service and the Natural History Museum.

Balfour Beatty Power Networks’ results were in line with those of the previous year, with the impact of some issues on its Central Networks contract offsetting good progress elsewhere. A power line project between East Anglia and the East Midlands is nearing completion and projects for the expansion of the Australian power transmission network are proceeding well. In Scotland, the company continued to be active on contracts for Scottish Power.

Work on the Sunderland and South Tyneside Street Lighting projects continued satisfactorily. Preferred bidder status has been achieved in Derby.

In October, the company was appointed preferred partner for a five-year alliance contract with National Grid, likely to be worth up to £550m, to upgrade and develop the electricity transmission network in the eastern half of England. The project, which was converted to contract in March 2007, will involve the connection of new generating capacity to the national grid, and the enhancement and replacement of existing assets.

In the gas and water sectors, Balfour Beatty Utilities’ revenues and profits continued to improve as its substantial portfolio of long-term contracts won in 2004 and 2005 became fully operational. The company has achieved a leading position in the clean water sector with long-term contracts with United Utilities, Anglian Water, Severn Trent Water and South-West Water amongst others. A bid to extend its successful existing relationship with Yorkshire Water is currently under adjudication.

Last year’s good progress on the Greater Manchester Gas Alliance continued. In June, Balfour Beatty was appointed preferred bidder for the seven-year gas mains replacement contract, to be operated by United Utilities for northern England by Northern Gas Networks with a total value likely to be approximately £420m.

Stent, the Group’s specialist foundations and ground treatment specialist, had a good year, helped by a first full-year’s contribution from Pennine, the specialist ground treatment and preparation contractor, which has been integrated successfully into the business.

Revenues continued to increase. Work at the major White City development in London accelerated and piling work in support of the M1 Junctions 6-10 widening project was intense. The company’s penetration of the fast-growing Dubai market also increased. Stent is also carrying out work on the London Underground.

Workload at Devonport Management Ltd, in which the Group has a 24.5% interest, was steady. Devonport Royal Dockyard continues to be the mainstay of strategic support for the UK nuclear submarine fleet and has a second business stream in large, bespoke, commercial yachts.

Discussions are underway which seem likely to result in a change in the structure of ownership of the supply base to the Royal Navy.

Dutco Balfour Beatty, the Group’s civil engineering and building joint venture in Dubai, improved its performance, significantly, in a fast-growing market.

Good progress has been achieved on the Burj Mall, the world’s largest shopping mall, with fitting out due to begin this year.

The Palm Island Interchange and Sheikh Zayed road widening projects were completed, as was the Business Bay Development and the Royal Airwing at Dubai Airport.

Two major new road schemes were secured for the construction of the Jumeirah Lake Towers Interchange on the Sheikh Zayed road, and a widening scheme for 35 km of the Emirates Road.

BK Gulf, also had a very busy and successful year, winning the Atlantis project and making good progress on work for new hotels, theme parks and other facilities.

The performance of Gammon in Hong Kong improved significantly. The Shenzhen Western Corridor and Deep Bay Link projects were completed, and good progress was made on the Venetian Hotel and Casino project in Macau, the 70-storey office development at One Island East, and the railway station and immigration centre on the Chinese border at Lok Ma Chau.

The civil engineering works at Kowloon Southern Loop Station for KCRC also progressed satisfactorily. The refurbishment of the Mandarin Hotel was completed to time and budget. While the Hong Kong market remains flat, tendering activity in Macau for the hotel and casino development programme is intense.

In Singapore, the market is accelerating and bidding activity is high.

Outlook

Our engineering markets, particularly in the UK, Dubai and Singapore, remain strong and, with further recovery in the US, we expect to make substantial progress in this sector in 2007.

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