Civil and specialist engineering and services

2008 was a significant year for the Group in the UK roads sector, both in delivery and in securing major new schemes. Our levels of activity are at an all-time high in this market.

Balfour Beatty Utility Solutions won new contracts in Canada and New Zealand and, early in 2009, was selected as a preferred provider to National Grid in the US, the first time the Group has won work with a major UK infrastructure owner in a different geography.

In UK civil and ground engineering, markets grew in 2008 and we secured a significant forward order book. Major opportunities include the M25 widening, Crossrail and new-build in the UK nuclear sector.

The UK utilities market remained strong with the new asset management plan periods in water and electricity distribution beginning in 2010.

The market for professional and technical services is growing and, increasingly, sophisticated customers require these skills to help them deliver major, complex projects.

We operate in a number of markets which are likely to benefit from additional infrastructure projects arising from economic stimulus packages.

There has been a significant slowdown in Dubai, which, in the fourth quarter of 2008, saw a rapid reduction in property development and prices, exacerbated by a reduction in liquidity in the market. The Group’s focus on infrastructure positions us well for future work in Dubai, with further opportunities in Abu Dhabi and Qatar.

Markets in Hong Kong and Singapore remain good, with some major infrastructure development programmes offering significant opportunities.

Profit from continuing operations, before exceptional items and amortisation of intangible assets, rose by 27% to £104m (2007: £82m).

We had an excellent year in the UK roads sector, both in delivery – for example, the M1 junctions 6a – 10 widening project – and in securing major new schemes including the M74, A421 and A46 projects. Connect Plus, in which we are a 40% shareholder, was appointed preferred bidder on the M25 widening scheme.

Balfour Beatty Management, our professional and technical services business, continued to grow strongly.

Our utility business also made good progress during the year and further developed its overseas power transmission business, winning new contracts in Canada and New Zealand. Early in 2009, we were selected as a preferred provider to support National Grid’s US electricity transmission capital investment programme.

In December, we announced we were partnering with AREVA, a world leader in nuclear power, to ensure effective delivery of a fleet of EPR nuclear reactors in the UK.

Overseas, performance in Gammon, which operates in Hong Kong and Singapore, was steady. In the US, profitability has continued to improve.

There has been a considerable slowdown in Dubai. Our businesses performed well in 2008, with a particular emphasis on infrastructure projects. Our result in Dubai, however, was affected by a cautious view of project recoveries and cash flows.

Major projects were secured in the UK for the Highways Agency, the Scottish Office and Network Rail; in the US for the Texas Department of Transportation and the water industry in California; and in South-East Asia for the Hong Kong Government.

The sector order book increased by 11% to £4.9bn at the end of 2008.

UK infrastructure

Balfour Beatty Civil Engineering, which consists of Balfour Beatty Major Civil Engineering and Balfour Beatty Regional Civil Engineering, had a very strong year.

The business was extremely busy in the roads sector, both in delivering successful projects and in gaining new work.

Balfour Beatty won, as part of the Interlink M74 joint venture, a £445m contract from Glasgow City Council to design and construct an 8km extension to the M74. The company also began work on the A421, an Early Contractor Involvement scheme with the Highways Agency, between the M1 and Bedford.

As part of the UK Government’s investment in major transport projects to stimulate the economy, the A46 Newark to Widmerpool project, an Early Contractor Involvement project, was given the go-ahead at the end of 2008.

Work was successfully completed on the M1 junctions 6a – 10 widening project and excellent progress was made on the A3 Hindhead improvement scheme and the A1(M) between Bramham and Wetherby in Yorkshire.

Work will begin on the contracts to provide additional capacity for the M25 and on the Carlisle Northern Development Route, once financial close is achieved.

Good progress was made on the Northern Ticket Hall project at King’s Cross, and work started on the first phase of the total reconstruction of Blackfriars station. Satisfactory progress was made on the East London line, where the civil engineering contract will be completed in 2009.

In December, Balfour Beatty announced it was partnering with AREVA, a world leader in nuclear power, to ensure effective delivery of a fleet of EPR nuclear reactors (EPRs) in the UK. The Energy White Paper in 2007 first set out the UK Government’s in-principle support for a programme of new nuclear power stations in the UK. Site construction of the first EPR could start as early as 2013.

Balfour Beatty also formed a joint venture with VINCI Construction to help deliver project management, construction and civil engineering infrastructure for the EPR programme in the UK, both within the AREVA partnership and to bid for EPR sites for utilities adopting alternative procurement models in the UK, including EDF.

The acquisition of Dean & Dyball added a strong, profitable presence in civil engineering markets in the southern half of England and in Wales to the Group. Together with the successful integration of Birse, which is showing good growth, this has broadened the customer base and helped to create the UK’s leading coastal and marine engineering business. Dean & Dyball completed its contract from the Olympic Delivery Authority to produce state-of-the-art facilities for sailing at Weymouth and Portland in Dorset.

Work started on the Aquatics Centre, as well as a number of roads and bridges near the Olympic Park in Stratford.

The regional civils business made good progress on a number of projects including work for BAA in Scotland under a framework agreement, the infrastructure for East Midlands Parkway, a new park and ride train station to serve East Midlands Airport and the infrastructure for Phase 1 of the Ravenscraig Redevelopment in North Lanarkshire. a £36m contract to build a runway extension at Isle of Man airport was secured.

Following eight successful years working on the Forth Bridge, Balfour Beatty started work on the new contract for Network Rail to complete the remaining restoration and painting programme.

Overall, 2008 was a year of significant growth.

Balfour Beatty Ground Engineering had a strong year in volume and profit growth. Mini-piling specialist Branlow was acquired in 2008, joining existing businesses Stent and Pennine. Balfour Beatty Ground Engineering worked on major infrastructure projects at the M74 in Scotland and at the Aquatics Centre for the Olympics and has a significant order book for 2009. A new business, Balfour Beatty GeoEnvironmental, was launched to provide a complete service for land remediation.

Balfour Beatty Infrastructure Services, the integrated provider of highway and street lighting contracting and consulting services, had a steady year.

In the roads business, performance within the existing portfolio of strategic roads for the Highways Agency was good. The company performed well in Area – 2 Somerset, Avon, Wiltshire, Gloucestershire and Devon – where Balfour Beatty Infrastructure Services works closely with the Highways Agency to provide safe roads, reliable journeys, informed travellers and a protected environment.

While the contracts with Hampshire County Council and the Highways Agency Area 3 ended in 2008, this will be offset by theM25 widening scheme, for which Connect Plus was appointed preferred bidder in 2008, and which should reach financial close in the first half of 2009.

The Local Authority business performed satisfactorily. It secured a two-year contract extension in Westminster and made progress in North-West Scotland.

The street lighting business performed well and is now one of the leading street lighting contractors in the UK. Concessions are operated on behalf of Connect Roads in Sunderland, South Tyneside and Derby.

Chris Britton Consultancy, which was acquired during 2007, has enabled the company to provide a range of specialist technical support to clients, particularly in asset and pavement systems, management and consultancy.

Professional services

Balfour Beatty Management continued to grow strongly in 2008, particularly in supporting cross-Group activities for sophisticated, major customers.

It plays an important role in the Group, managing a range of major projects and providing much of the upfront thinking and management skills required to deliver complex, integrated projects for customers such as National Grid, British Energy, BAA, the Olympic Delivery Authority and the Highways Agency.

During the year, Balfour Beatty Management successfully led the bids for the M25 widening scheme and on the Aquatics Centre being built for the London 2012 Oympics.

Work at the King’s Cross Northern Ticket Hall (see case studies: Business as usual and Powering tomorrow) is progressing well, as are the Group’s alliances with National Grid.

Working with Balfour Beatty Utility Solutions, Balfour Beatty Management was part of the team that secured a power transmission contract in Canada, in an alliance to assist ATCO Electric in completing its capital works programme in Alberta.

Building on this success, early in 2009, Balfour Beatty was selected, in joint venture, as a preferred provider to support the delivery of National Grid’s US electricity transmission capital investment programme in New England over the next five years. Balfour Beatty Management is working alongside Balfour Beatty Utility Solutions and Balfour Beatty Infrastructure Inc.

Since its inception in 2003, Balfour Beatty Management has grown to over 600 professional staff. It is currently bidding a number of major projects, and it is anticipated that the business will become an increasingly integral part of a number of Balfour Beatty’s major customer relationships in 2009.

Utilities

Balfour Beatty Utility Solutions, whose services contribute to the maintenance and provision of essential utility assets, performed strongly.

In the water sector, good overall progress was made during the year on its portfolio of long-term contracts and bids are being prepared for contracts under AMP5 – the asset management plan period which will run between 2010 and 2015.

In the gas sector, good progress was made on the Greater Manchester Alliance gas mains network contract, where Balfour Beatty is working in a long-term partnership with National Grid on the design, management and construction work required to replace Victorian metallic gas mains with modern pipework systems, and on the gas mains replacement contract for northern England for Northern Gas Networks.

In the electricity sector, the company performed well on the work for National Grid to upgrade and develop the electricity transmission network in the eastern half of England.

Two programmes of work were awarded by Scottish Power Energy Networks, valued at nearly £20m, at Clyde and Crystal Rig as part of the programme to connect new wind farm capacity to the transmission network.

Balfour Beatty’s track record with National Grid in the UK helped to secure selection in early 2009 as a preferred provider, in joint venture, to support the delivery of National Grid’s US electricity transmission capital investment programme in New England. The five-year contract for the design and build of substations and transmission lines in Massachusetts, Rhode Island and New Hampshire will be carried out by the New Energy Alliance, a joint venture between Balfour Beatty and MJ electric.

The total value of the capital projects awarded by National Grid US for both New E ngland and for New York State, where another joint venture partner was also selected, is approximately $1.7bn. There is an option to extend the Alliance for a further three years after the initial five-year period.

Work in Australia continued and new contracts were won in Canada and New Zealand.

In Canada, the Group signed an alliance agreement to assist ATCO electric in completing its capital programme and to meet electrical transmission needs. Balfour Beatty is providing engineering, construction, procurement and project management services, as part of a joint venture, for the C$700m capital works programme over the next five years.

In New Zealand, Balfour Beatty signed an alliance agreement with Transpower, which owns and operates the high-voltage electricity transmission grid, for the construction of the proposed transmission line from Whakamaru to Auckland. The contract, valued at NZ$230m (£82m) is being carried out in joint venture.

International infrastructure

Profitability has continued to improve at Balfour Beatty Infrastructure Inc., which provides civil engineering and construction services for transportation and water projects in the US.

New orders in 2008 included the $207m Vineyard Water Treatment Plant in Sacramento. The Vineyard plant will receive its water from the Freeport Water Intake Facility that Balfour Beatty Infrastructure Inc. is also constructing in the Sacramento River, reflecting its strong presence in the provision of water treatment and water-handling facilities in California.

In Seattle, an $89m contract was secured for the new Sunnyside Wastewater Treatment Plant, part of the strategy to expand along the West Coast and meet the increasing demand for more water and wastewater treatment plant infrastructure.

Good progress was made on the Dorchester Tunnel in Boston, a $146m project for the Massachusetts Water Authority. at the end of 2008, the $56m project for the New Crystal Springs Bypass Tunnel was secured in joint venture. Working for the San Francisco Public Utilities Commission, the project calls for the drilling of a tunnel 11 feet in diameter and 4,200-feet long and is scheduled for completion in 2011.

There was further success on highways work in Dallas, with two significant projects along State Highway 121 for the Texas Department of Transportation, and two new contracts, totalling more than $35m, were agreed with the North Carolina Department of Transportation.

Work on the $39m contract to replace the Trent River Bridge in New Bern, also in North Carolina, progressed well.

A $67m highways infrastructure project for the Pennsylvania Department of Transportation was completed ahead of schedule, while good progress was made on the I-79 project near Pittsburgh.

At the end of the year, some prospective projects were deferred or delayed, as anticipation of the US Government’s economic stimulus package held back project commitments.

Balfour Beatty Infrastructure Inc. expects to bid for a number of infrastructure projects from the second quarter of 2009 onwards, particularly for highways and bridges, and is well-positioned to take advantage of an upturn in the market.

Performance in Gammon Construction, the Group’s joint venture company in South-East Asia, was steady.

Gammon is the leading contractor in Hong Kong. Its year-end order book of approximately £650m was at a record level.

Major wins included the contract for the design and construction of the new Central Government Complex for Hong Kong – known as the Tamar Development Project. The contract, which will be executed in joint venture, is worth HK$4.9bn and is scheduled for completion in 2011.

The Hong Kong Director of Highways awarded Gammon a HK$2.8bn contract for the reconstruction and improvement of a 6.8km section of the Tuen Mun road between Tsuen Wan and Tsuing Lung Tan.

In Singapore, Gammon grew strongly and secured a number of contracts including a S$100m project to help build a renewable diesel plant at Tuas industrial zone for Neste Oil and transportation infrastructure work at the Chinatown Station underground development for the Land Transport Authority.

In August 2008, Gammon Capital reached financial close on the £100m Institute of Technical Education PPP project in Singapore, which will result in building work for Gammon Construction.

In Macau, work on a further phase of the Venetian Hotel and Casino complex was suspended as a result of economic uncertainty.

In Hong Kong, good progress was made on the Kowloon Southern Link and the contract to build One Island East, a 70-storey office building on the Eastern Shore of Hong Kong Island was completed in 2008. In December 2008, Gammon was awarded the contract to design and build the Hong Kong Pavilion at the World Exposition 2010 in Shanghai.

Gammon anticipates a number of major big infrastructure bids in Singapore and Hong Kong in 2009, particularly mass transit, road and rail projects.

Balfour Beatty’s interests in Dubai comprise 49%stakes in Dutco Balfour Beatty, a building and civil and marine engineering contractor, and BK Gulf, a mechanical and electrical engineering contractor.

There has been a considerable slowdown in Dubai. The Group’s businesses performed well in 2008, with a particular emphasis on infrastructure projects. The result in Dubai, however was affected by a cautious view of project recoveries and cash flows.

Dutco Balfour Beatty completed the Burj Mall, the world’s biggest shopping centre which opened in November, and good progress was made on major improvement and extension projects to the Emirates and Sheikh Zayed roads.

BK Gulf, which has 30 years’ experience in the United Arab Emirates and the Middle East, performed well in 2008.

During the year, it was awarded the contract, valued at Dhm640m, for the supply and installation of M&E and key operational systems at University Hospital.

BK Gulf completed its programme of work at the Atlantis Hotel in Dubai, which opened in November 2008.

In Abu Dhabi, work was won at the Marina Hotel project, which forms part of the new development to provide a Formula 1 standard racing complex, on Yas Island.

Our markets continue to offer significant opportunity. In Dubai, the significant slowdown will depress revenues and cash performance in that market in 2009.

Despite this, we have a very strong order book and expect another year of good progress in the sector.