Major developments in 2007

The 2007 uncertainties for our rail business arising from the entry into PPP administration of Metronet and the stated intention of Network Rail to reduce its supply base for rail renewals from six to four were resolved positively, with confirmation of our ongoing role on both the underground and overground networks. The UK Government published a Rail White Paper which confirmed significantly increased future investment, including the go ahead for Thameslink. The Crossrail project was confirmed and prospects for the electrification of railways in Scotland improved.

We continued to strengthen our market position with acquisitions in systems technology and in the Swedish market at a total cost of £12m, and the formation of new signalling joint ventures in both the UK and Germany. The UK business was reorganised better to match evolving customer requirements.

Our markets

During 2007, our rail businesses operated in largely flat markets, which are not expected to grow in 2008. There are now, however, clear signs of medium-term improvement in many of our principal markets. The stimulus of the UK Government White Paper and the confirmation of the Thameslink and Crossrail projects create the best market outlook in the UK for some years. Investment in mass transit systems and high-speed rail links around the world is growing and major project bidding opportunities are increasing.

Our 2007 performance

Profits for the year improved by 16%. Performance was good in all business streams in the UK, with our rail projects, renewals, track systems and plant businesses making progress in a largely flat market. Outside the UK, our international rail electrification and power supply business continued to perform well and our performance in the US improved.

Review of operations

UK rail

Following the appointment of a new Group managing director with responsibility for rail early in the year, the structure of our UK rail interests was revised significantly. The guiding principles of the reorganisation programme were to make the organisation more customer sensitive and responsive, to shorten reporting lines and to increase cost effectiveness through overhead reduction.

The UK rail headquarters operation was disbanded and three new divisions were created, all reporting directly to the Group managing director. The existing divisions were merged, with Renewals and Plant pulled together as Balfour Beatty Rail Services, Projects and London Underground Services combined as Balfour Beatty Rail Projects, and the Track Systems and Technologies divisions were integrated to become Balfour Beatty Rail Systems and Solutions.

Balfour Beatty Rail Services had a satisfactory year, with the renewals business performing well despite the absence of the settlement income in respect of the close-out of the previous generation of Network Rail renewal contracts which augmented its 2006 numbers. Operational performance continued to improve during the year and, in September, Network Rail confirmed that we were one of four renewals contractors to be retained for future work as they reduced their current supply base from a group of six.

It is anticipated that the new contracts, currently in negotiation, will be finalised during the first half of 2008. The new arrangements, under which Balfour Beatty will be responsible for the same geographic areas as before, are intended to provide long-term security for the successful contracts and facilitate improvements in defining and planning necessary work.

Balfour Beatty Rail Plant, now integrated with the renewals business, continued to perform very well as investment in new equipment continued and improvements in plant reliability and availability were achieved.

Balfour Beatty Rail Projects improved its performance in a year of significant activity arising from the final stages of the integration and delivery of all the rail systems and services related to the new Terminal 5 at Heathrow Airport for BAA. Other ongoing projects, including those in Australia, progressed well as did the early stages of the East London Line, largely civil engineering work, which provides the basis for the technical rail work which will be underway shortly.

In October, Signalling Solutions Ltd, a joint venture with Alstom was created, which combines the signalling resources of Alstom Transport Information Systems with those of Balfour Beatty Rail Projects to provide UK and Irish markets with a full-service signalling supplier.

The new business, which employs over 300 staff, provides planning, design, product supply, installation, testing and commissioning expertise for all types of railway. It has already secured over £70m of UK project work.

The contract on the Santiago Metro was completed and a £30m contract has been secured for the track and electrification on the next segment of the system. Bids are also in preparation for Metro system track and electrification works in Mumbai and New Delhi.

London Underground Services, now combined with Balfour Beatty Rail Projects, performed well with work continuing for London Underground at high volumes, despite Metronet’s entry into administration. New contractual arrangements will come into force at the time of the handover of Metronet from the administrator to Transport for London.

Balfour Beatty Rail Track Systems performed well with a first full-year contribution from the Edgar Allen business acquired in 2006. The integration of the new business was successfully accomplished during the year. A condition of the purchase of Edgar Allen was that the land on which their current operations are undertaken would remain with the vendor. In consequence, the Edgar Allen business is moving to new premises at South Queensferry. The major capital investment programme involved is already well advanced and is proceeding on time. The existing key resources are being retained in the business as a result of the proximity of the new facilities to the old.

Balfour Beatty Rail Technologies, with which Track Systems has now been combined, continues to develop concepts and products aimed at improving network safety and reliability. Work continued on a patented track stabilisation technology and a low-speed specific solid-state interlocking signalling system.

During the year we acquired Laser Rail, the specialist technology, software and support services company which supports the engineering of the rail infrastructure and, particularly, its interface with trains. The company has developed and holds intellectual property rights for a variety of specialist software for the assessment of vehicles-to-structure clearance and also more general analysis and management of rail infrastructure data. UK market leadership in this area provides a strong base for international development in a fast-growing sector.

Rail operations outside the UK

In Balfour Beatty Rail Germany and Austria, performance was good. The final elements of the complex Nuremberg to Ingolstadt electrification project were completed, and good progress was made on the year’s largest Deutsche Bahn electrification investment – the fully-electrified, double-track Hamburg to Lübeck line project in northern Germany, which is a preparatory step for the anticipated direct rail link between Germany and Denmark.

The signalling joint venture formed in 2007 with Bombardier Transportation progressed well, with £40m of work now secured for the development of the new European Rail Traffic Management System which will promote the adoption of a common European signalling system.

In early 2007, Balfour Beatty, together with partners, received a preliminary award for the rail systems work for the new Gotthard base tunnel in Switzerland by Swiss National Railways. The multi-disciplinary rail contract, likely to be worth approximately £250m to Balfour Beatty Rail, is due to be signed in April 2008. The work comprises the installation of all rail engineering equipment for two 57 kilometre long tunnels as well as the adjoining open north and south track sections.

Balfour Beatty will be responsible for total project management, complex logistics, trackwork, power supply and cable equipment, light and power systems, overhead catenary lines and other systems, equipment and technology.

Balfour Beatty Rail International, which comprises the Group’s rail interests in Italy, Sweden, Spain, China and Malaysia, made good progress. In Italy performance was good, as work continued on the major high-speed electrification projects between Milan and Malpensa, Milan and Bologna and Bologna and Firenze. During the year, the business secured the €25 million project to design and install a trolley bus system in the city of Pescara, a congestion solution being considered currently by a number of other Italian cities. In Sweden, the electrification and track modernisation project on the Blekinge coastline was successfully completed and handed over on time. The work on the Botniabanan track project continued. Completion is scheduled for 2008 and we have now been awarded the consequent electrification contract.

During the year, two acquisitions were completed in Sweden to augment the existing business. The Nordic rail signalling and communications business of SAAB Systems, followed by the multi-disciplinary business previously owned by Carillion. As a result, Balfour Beatty is now the largest and most broadly-based rail infrastructure company in Sweden and the Nordic region in general.

In Spain, Balfour Beatty carried out work on the Madrid and Barcelona metro systems and is well placed for a number of new high-speed electrification projects due to come to market in 2008.

The development of our rail business in China continued to progress. During the year, we were awarded the £35m contract to design, supply, install and commission an overhead line system for the 968 kilometre Wuhan-Guangzhou railway. Work continued satisfactorily on our electrification project between Tianjin and Shenyang. We have also entered a bid for the Tianjin-Wuhan line and our joint venture for manufacturing components for catenary projects is now fully operational.

In Malaysia, work was completed successfully on the electrification of the Rawang-Ipoh line, with first rolling stock test runs now complete. We are now bidding for the electrification work for the northern section of the line up to the Thai border. Our contract for the maintenance of the Klang Valley line has been extended.

Balfour Beatty Rail Inc in the US, performed significantly better than in 2006 and in line with forecasts. During the year the major signalling project at Broad Street in Philadelphia and the Greenbush Commuter Line in Boston for the Massachusetts Bay Transit Authority were completed.

Major new projects were secured for the $60m signalling, communications and electrification of the Denver Western Corridor and a bid for the $340m multi-disciplinary West Valley Airport line project in Salt Lake City is in final adjudication. There is renewed life in the US mass transit market, including proposals coming forward for a number of Airport-City links, particularly in the western part of the US.

The regional rail services business continues to improve performance with some rationalisation to concentrate more effectively on the most profitable business areas. There was good progress on the Goldline project in Los Angeles.

During 2008, the rail headquarters operation will be moved from Jacksonville, Florida to Atlanta, the location of both Heery and Balfour Beatty Infrastructure Head Offices, in order to take advantage of both a more central business location and access to services shared with the other companies. The business is now well placed for growth on a more stable base in a strengthening market.

Outlook

During 2007, our rail business operated in largely flat markets, which are not expected to grow during 2008. The medium and long-term market outlook is showing clear signs of improvement across the board.

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