Major developments in 2007

Our ambition to become a major player in the US building construction market was achieved through the acquisition of Centex Construction, subsequently renamed Balfour Beatty Construction US. This is a high-quality business operating in those state markets which enjoyed higher than average growth and with a management culture and strategic objectives highly compatible with Balfour Beatty.

In the UK, our programme to extend our leading presence in regional UK building construction markets continued with the acquisition of Cowlin, which has a strong position in the south and south-west of England and in Wales. We also enhanced our offer to the outsourced services market with the acquisition of Covion, a fast-growing integrated services business.

Our markets

UK markets remain buoyant, with public spending on schools, hospitals, defence and social housing continuing to grow and private sector customers generally increasing their expenditure on their key building infrastructure. In the US, market conditions in our key construction markets in Florida, Texas, the Carolinas and Washington DC were strong and our professional and technical services business continued to benefit from both public and private spending on new infrastructure, particularly in the south, south-east and west.

Our 2007 performance

Profits for the year grew very significantly. Balfour Beatty Construction US contributed a first nine months’ profit at better than anticipated levels, while very good progress was made across the board in building construction, building services and facilities management in the UK and in professional services in the US.

Review of operations

UK building construction

In UK building construction, both Balfour Beatty Construction and Mansell performed very well and increased their aggregate profits by over 30%. Cowlin, which was acquired in August to create critical mass in the south and south-west of England and in Wales, also contributed in line with expectations.

Progress on public healthcare projects was very good, with on or ahead of schedule delivery on the hospital project programmes in Birmingham, Pontefract and Pinderfields, Glasgow, Brentwood and UCLH, and successful mobilisation at Salford and Tameside. We have also been successful in winning projects in Cromer, Teddington, Basildon and Chester under the Procure 21 programme.

It was also a successful year in the education sector, with construction work on the projects in Bassetlaw, Birmingham and North Lanarkshire on or ahead of schedule, a good start for the new BSF project in Knowsley and new work secured for South Lanarkshire College, Langside College and student accommodation for the University of Kent amongst others. The £47m York College project was completed and handed over during the year. Work under the BSF framework in Manchester continued satisfactorily and a similar contract was won in Liverpool.

Mansell continued to enjoy considerable success in the growing affordable housing market. Its participation in the Sandwell PPP project progressed well, and work for Catalyst, Riverside, and Metropolitan Housing, amongst others, continued satisfactorily. During the year, new customers included Bromford Housing Association.

In the defence sector, work under regional prime contracts progressed well. The £40m project to build a new facility at Menwith Hill was awarded late in the year.

We made steady progress in the London refurbishment market, including major schemes for the London boroughs of Hammersmith and Fulham, Barnet, Ealing and Islington. Hackney was awarded late in the year as part of the Decent Homes scheme.

We were also very successful in private markets. Good progress continued on the Holborn Viaduct project for Castlemore, leading to our appointment for their new £70m Temple Quay project in Bristol. Elsewhere in London, we won major new projects in St Martins Lane, Tudor Street, Gresse Street and Bartholomew Lane. Balfour Beatty Construction successfully completed Atlantic Quay in Glasgow for Wilson Bowden.

Major works for BAA at the new Terminal 5 at Heathrow were completed on time and on budget and we have begun work, as complex build integrator, on the midfield pier project, also at Heathrow, which has the potential to be worth some £350m in total. Mansell has also been selected for BAA’s new commodity building framework.

Mansell had a very good year under its major framework contracts, including work for the US Air Force at Liberty Village, Lakenheath and for Unite and BT. Good progress was made on the new swimming pool in Sunderland. In the early part of 2008, the Group secured the contract for the London Olympic Aquatic Centre.

UK building services

It was another good year for Haden Young and Balfour Kilpatrick in UK building services, with aggregate profits improving once again. Haden Young’s pre-eminent position in healthcare was augmented through a new generation of complex major hospital mechanical and electrical systems work at Pontefract and Pinderfields, Salford and Tameside to add to ongoing work in Birmingham, Glasgow and at UCLH. The company further augmented its leadership in this field, through the further development of its specialist off-site manufacturing units in Salford, West Bromwich and Weston-super-Mare.

Balfour Kilpatrick’s position in the education market was also further strengthened, with ongoing projects in Birmingham, Bassetlaw and North Lanarkshire augmented by work under the new Knowsley BSF project. It also secured work at Sunderland Academy. Haden Young’s work in the sector included projects for Highland Schools, Queen Margaret University in Edinburgh and a contract award for Mid-Kent College.

Elsewhere, we successfully completed Phase 1 of Liverpool Arena and Conference Centre as part of Liverpool’s year as European Capital of Culture.

Balfour Kilpatrick’s work on the electrical systems for the rail works at Heathrow Terminal 5 was completed on time and budget and the company was awarded the power contract for the Victoria Line upgrade in London. Work at King’s Cross Underground Station continues to be satisfactory, as is the case for the £60m Whitelee Wind Farm project.

In private sector markets, both companies continued to perform well, with Balfour Kilpatrick completing a refurbishment project for John Lewis in Oxford Street and winning new work for Selfridges in London, the St David’s Centre in Cardiff and the Paradise Street project in Liverpool. Haden Young’s work in the private sector is largely concentrated in London, with prospects good for major Olympic projects and new offices for Transport for London.

UK facilities management

2007 was a year of strong revenue and profit growth for Haden Building Management, with its future prospects further enhanced by the acquisition of Covion, the integrated services provider, in October. Mobilisation programmes for the major Metropolitan Police and Department for Work and Pensions contracts were highly successful, a number of new PPP contracts were added to the portfolio and at the end of the year a major contract was secured for British Energy in conjunction with other Balfour Beatty companies.

Performance under the major contract for the Royal Mail, in which we have a 49% interest, improved following a significant amount of management restructuring in response to the challenges of 2006. Performance under the contract for BT was again good and in the early part of 2008 a major extension to this contract was secured. Performance under the company’s portfolio of long-term PPP healthcare and education contracts continued to be good. During the year, new contracts for PPP hospitals in Pontefract, Pinderfields, Salford and Tameside and learning centres in Knowsley were secured.

In the private sector, new business was won for Nelson Bakewell, the property managers, and, most significantly, British Energy. Under a seven-year, £350m contract, Haden will work alongside Balfour Kilpatrick and Balfour Beatty Management to provide British Energy with facilities management and maintenance services for its portfolio of 11 nuclear power stations and two office complexes across England and Scotland.

In October, the acquisition of Covion broadened and deepened the company’s range of expertise in technology, property and people-related services and increased its penetration of the private sector facilities management market.

US building construction

Balfour Beatty Construction US, acquired as Centex Construction at the end of March 2007, has given Balfour Beatty a strong position in the US building construction market. Its performance during the remainder of 2007 was very strong and has exceeded our expectations at the time of acquisition.

In a full year, it will have sales of over $2.2bn, and it has approaching 250 active projects and over 1,600 employees. Some 89% of its budgeted revenues for 2008 and 72% of its budgeted revenues for 2009 had been secured by the end of 2007. Almost all of its work is secured on the basis of technical capability and track record, with price being determined only after its selection as preferred contractor.

In 2007, its regional businesses, which are based in Texas, Florida, North Carolina and Washington DC, and its nationwide military housing business all performed well. Notable amongst many major projects wins during the year were: the $1.2bn project, under the US Department of Defense’s Base Realignment and Closure programme, to build a major new technical centre at Fort Belvoir in Virginia; and the $500m Navy South-East military housing project, under which over 5,000 new married status housing units will be constructed at 11 bases in five different states.

Balfour Beatty Construction US entered 2008 with a record order book. The company’s state markets, which show significantly higher predicted population growth than US averages, are likely to prove relatively resilient should any overall economic downturn develop.

US professional and technical services

Profits in Heery International continued their steady growth, with organic expansion augmented by a full-year contribution from Charter Builders in Texas, acquired during 2006, and a first contribution from Sequeira and Gavarrete, the Miami-based project management company. Heery continued to win high-quality, publicly funded work, remaining a market leader in the K12 education, healthcare and correction markets, with its order backlog in schools at record levels.

In May, Heery secured a $240m contract for the construction management and construction of Berlin Prison in New Hampshire. This is indicative of a growing penetration of the design and build market, to augment Heery’s established positions in architecture, engineering, design and programme and project management. Its work on Miami International Airport progressed well as did major projects for the Food and Drugs Agency in Washington DC, three Veterans Hospitals in the south of the US and at San Jose, and the American football stadium, the Cotton Bowl, in Dallas, Texas.

Heery has made several successful acquisitions in the period 2004 to 2007 and continues to look at the potential for adding new operations through this route.

Outlook

Despite some threat of a slowing in the rate of UK spending growth, and concerns about recession and the impact of the sub-prime market, principally in the US, Balfour Beatty’s high-quality, long-term order books, strong blue-chip customer relationships and current pipeline give us confidence in further substantial progress in the sector in 2008.

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