Healthcare

Consort Healthcare continued to perform well in 2006, contributing profit and generating cash at anticipated levels.

At 31 December 2006 its portfolio comprised interests in eight major hospital schemes and a committed equity investment of £113m, £28m of which is at preferred bidder stage.

In January 2007, Consort was appointed preferred bidder for the £152m Fife Hospital project in Scotland, which will involve a £7.5m equity commitment. It is expected that this scheme will reach financial close in 2007.

North Durham, Edinburgh Royal Infirmary and University College London Hospital entered 2006 fully operational. Blackburn began full service provision on schedule in July.

In June, Consort achieved financial close on the £553m project for acute and adult psychiatric hospitals for the University Hospital Birmingham NHS Foundation Trust and the Birmingham and Solihull Mental Health NHS Trust.

Consort has continued to progress the Pinderfields and Pontefract hospitals scheme, with a currently anticipated capital value of £300m, and the £200m Northern Batched Hospitals Project, which comprises two hospitals, at Salford and at Tameside. These projects are expected to reach financial close during 2007.

Consort Healthcare remains a clear market leader in UK PPP hospitals with a proven track record, a differentiated approach and high levels of client satisfaction.

Bids are in preparation for hospitals in Enniskillen, Blackpool, and Bremen in Germany, with a total value of approximately £400m.

Education

Balfour Beatty’s market leading brand in the UK education market, Transform Schools, continued to perform well in 2006. Its portfolio consists of six large-scale schools schemes covering some 154 schools in total, with £50m of committed equity investment, £21m of which is at preferred bidder stage. The Stoke concession, which commenced in 2000, remains the largest grouped schools scheme in England, covering 98 schools.

Construction programmes and operations are proceeding well at all our schools schemes, with 20 new schools completed during the year and 34 more currently under construction.

In March 2006, Transform reached financial close for the £89m scheme in Birmingham. This concession will provide 12 new and refurbished schools, including two secondary schools, nine primary schools and an early years centre.

In December, Transform was appointed preferred bidder for the £157m Building Schools for the Future PPP concession at Knowsley on Merseyside. Under this 25-year concession seven new state-of-the-art learning centres will be created, which will replace all of the borough’s existing secondary schools over a three year period. This project is due to reach financial close in 2007.

Bids are in preparation for schools schemes in West Dunbartonshire, Islington and Nottingham, with an aggregate capital value of approximately £270m.

A bid is also in preparation for the Institute of Technical Education in Singapore through our newly established business there. This concession has an approximate capital value of £70m.

Roads and street lighting

Connect Roads, the brand for the Group’s road and street lighting concessions, continued to perform in line with expectations. With the exception of the Derby street lighting project which is at preferred bidder stage, all the concessions are fully operational.

The total committed equity in the roads sector is £63m, of which £2m is at preferred bidder stage.

During 2006, Balfour Beatty acted as an intermediary when I² acquired the 50% shareholding of the Group’s previous partner in Connect M1-A1, through Balfour Beatty exercising its pre-emption rights over its partner’s interest and selling it on to I².

The street lighting schemes in Sunderland and South Tyneside are the only Balfour Beatty Capital PPP concessions to remain 100% owned and whose non-recourse debt appears on the Group’s balance sheet.

During 2006, Balfour Beatty Capital’s new US business, based in Atlanta, was one of twelve organisations which submitted a prequalification for a road scheme concession (SH161) in Dallas, Texas.

In the UK, bids are in preparation for the Surrey street lighting scheme, the New Tyne Crossing, the M80 and the M25 widening project.

The capital value of these bids, in aggregate is approximately £2,100m, of which the M25 scheme is at £1,500m.

London Underground

Since April 2003, Metronet, in which Balfour Beatty is a 20% shareholder, has operated and maintained the Bakerloo, Central and Victoria lines and the sub-surface lines for London Underground and is undertaking a £17bn investment and upgrade programme under the 30-year concession. Balfour Beatty is investing £70m in these concessions.

The underlying operational performance of the assets inherited by Metronet from London Underground continues on an improving trend with December 2006 the best ever month for reliability.

In November 2006, the report of the independent Arbiter, appointed under the contract at Metronet’s request, rated Metronet’s average performance over the first three years of the contract as not to be economic and efficient and not to meet best industry practice in some areas. Many of the actions necessary to address this situation were already in hand at the time of the Arbiter’s report. Further changes in the procurement and delivery system have been finalised recently.

Metronet subsequently asked the Arbiter to produce an opinion on where responsibility for certain unforeseen and uncontracted costs incurred under the projects would lie between Metronet and London Underground. Commercial negotiations with London Underground continue. In the event of the failure of those negotiations, these and other matters can be dealt with under an extraordinary review process, should Metronet so choose.

Other infrastructure concessions

Powerlink and PADCO, which operate and maintain London Underground’s high voltage power system, have continued negotiations with the customer about restructuring the project following the completion of the initial capital works and with the developing needs of the London Underground PPPs becoming clearer. Concession performance was satisfactory, as it was at Aberdeen Environmental Services, which is responsible for wastewater treatment in Aberdeen.

Balfour Beatty has committed £8m of equity to these concessions.

In September, a Balfour Beatty Capital-led concession company was short-listed for the Oakland Connector project in California, a rail line which will connect the airport to the Bay Area Rapid Transit system. The project has an anticipated capital value of $300m.

Non-PPP asset investments

Barking Power had an excellent year with profit from operations before exceptional items well ahead of last year’s results, itself a major improvement on the previous year. The 1000 MW gas-fired station operated with high reliability, efficiency and consistency. The 28% of station output which is sold on the open market attracted increasingly good returns as gas fuel prices fell and electricity prices increased.

In January 2007, Balfour Beatty Capital, through Regional and City Airports, reached financial close on its acquisition of Exeter International Airport from Devon County Council for £60m, of which half has been financed with equity.

Exeter International Airport is one of the fastest growing regional airports in the UK and will handle over 1m passengers in the financial year to March 2007. Continuing strong growth in passenger numbers is anticipated and a clear operational and development plan is in place for the airport’s future. The airport serves a strong local economy, and is expected both to increase its market share and benefit from an increasing propensity for the local population to use the airport.

The airport will be redeveloped with new terminal facilities, new aircraft stands and taxiway extensions on a phased basis to meet increasing demand. Regional and City Airports has subsequently submitted a bid for Leeds Bradford Airport.

PPP outside the UK

During the year new businesses were established to pursue PPP opportunities in the US, Germany and Singapore. In each case the new bidding teams will build on the local knowledge of Balfour Beatty’s existing contracting business and seek opportunities in which the chances of success will be increased by their participation.