Building, building management and services

In the UK, the acquisition of Dean & Dyball, a well-established civil engineering and building contractor in the southern half of England and in Wales, marked a continuation of the strategy to expand the Group’s regional coverage in the UK.

Dean & Dyball’s UK building business was largely absorbed into Mansell, expanding its national coverage and regional delivery capability, with Dean & Dyball’s Welsh building business absorbed into Cowlin.

The acquisition of Barnhart significantly enhances Heery’s presence in California, one of the US’s most important markets, offering substantial opportunities in education and other construction management markets.

Public sector and regulated customers account for the majority of the work in the UK and US and underpinned a resilient performance, more than offsetting any impact from a general slowdown in private sector work.

The breadth and depth of the Group’s portfolio of building businesses puts us in a strong position to benefit from continued spend on infrastructure, both through existing schemes and additional projects arising from economic stimulus packages in the UK and US.

Profit from operations, before exceptional items and amortisation of intangible assets, rose by 26% to £88m (2007: £70m).

This reflected full-year contributions from Balfour Beatty Construction US, which was acquired at the end of March 2007, and Cowlin and Covion, which were acquired in the second half of 2007, together with the impact of the acquisitions of Dean & Dyball and Barnhart in 2008.

There was very satisfactory organic growth in Balfour Beatty’s established businesses. Performance was held back by a write-down on a large UK building services project pending resolution of income recovery negotiations, and the write-off of a receivable from a property developer.

Our facilities management business, now renamed Balfour Beatty WorkPlace, grew strongly.

Balfour Beatty Construction US performed strongly and Heery International had another good year.

Major projects were secured in the UK from BAA, the Olympic Delivery Authority, BT and in the health and education sectors; and in the US from the Navy, Army and Air Force.

The building sector order book was £6.7bn by the end of 2008 (2007: £6.1bn).

UK building construction
There was a strong performance by Balfour Beatty Construction and Mansell in 2008 with a good flow of work in the key education and health sectors.

In education, Balfour Beatty Construction won the construction contract for Islington Schools Building Schools for the Future (“BSF”) phase one and good progress was made at Knowsley BSF. New orders were secured for the Walworth Academy in London, Sunderland Academies, Eastbourne Academy in Darlington and a Skills Academy in Bristol. Work under the BSF framework in Manchester and Liverpool continued.

There is potential for construction work at Greenwich BSF and at Southwark Schools where Transform Schools is preferred bidder. Following the original tranche of work on the North Lanarkshire PPP, there is the potential for further work through a new framework agreement.

Progress on public healthcare projects was also positive. The Mental Health facility was handed over five weeks early as part of Birmingham New Hospitals PPP, Birmingham’s first new hospital for 70 years, and the Elizabeth Garrett Anderson Wing at UCLH was completed during the year.

Hope Hospital in Salford and Tameside General Hospital are progressing well, as is work on the Pinderfields and Pontefract Hospitals PPP and the Victoria & Stobhill Hospitals for the NHS Greater Glasgow & Clyde.

Financial close on the Fife Hospital PPP, with a construction value of £170m, is anticipated in the first half of 2009.

There was a full-year’s contribution from Cowlin, which has added a profitable presence in building construction markets in South and South West England to the Group. Cowlin, acquired in August 2007, has integrated well and is performing in line with plan.

The successful long-standing working relationship with BAA continued with work at Heathrow, Glasgow and Edinburgh airports. In January 2009, Balfour Beatty signed a 10-year framework agreement with BAA to assist in delivering its £6.6bn capital programme. This framework covers both complex projects, such as the Heathrow East Satellite project, and smaller commodity projects, including alterations, refurbishment and building work at a number of UK airports.

London was an area of strong activity. The contract to build the Aquatics Centre for the London 2012 Olympics was secured and a Balfour Beatty team is working on the first phase of the reconstruction of Blackfriars station. Good progress was made on a number of office building projects, which are scheduled for completion in 2009, and on the Decent Homes framework contract for the London Borough of Hammersmith & Fulham.

In Scotland, contracts were won for the National Museum project in Edinburgh, the Edinburgh Vet School and Ravenscraig Sports Centre.

Mansell had a strong year with revenue exceeding £1bn for the first time. The building business of Dean & Dyball was successfully absorbed into the business, expanding Mansell’s national coverage and regional delivery capability. One early success was the completion of a new stadium for the Exeter Chiefs rugby team.

As a principal supply chain member for ProCure21 – the pre-approved procurement system designed to speed up construction delivery within the NHS – Mansell won work at Derriford Hospital and for the Cromer Hospital redevelopment. The £26m Brentwood Community Hospital was successfully handed over during the year.

Mansell’s long-standing relationship with UNITE Group continued, with student accommodation at Old Street, London completed on time, and work is progressing well at Cambridge Heath Road in London’s East End and at Woburn Place.

During the year, Mansell was appointed as a national framework partner for the Home Office and won orders on the Hackney BSF scheme and construction of phase three of Guru Nanak School in Hayes.

Excellent progress was made on Liberty Village, the phased accommodation redevelopment programme to design and build family houses on a 74-acre site within RAF Lakenheath Air Force base for the United States Forces in Europe.

As a framework contractor to BAA, Mansell carries out highly-varied schemes to enhance the passenger experience and improve the efficiency of airport operations and during the year successfully completed work on alterations and re-configuration at Heathrow Terminal 1.

Private sector markets in UK building construction were generally difficult during the year but public sector customers account for the majority of revenues. We expect to make progress in 2009, with work in the education sector being a key contributor.

UK building services

Balfour Kilpatrick delivered a strong performance. Significant contract wins included £25m of mechanical and electrical services on the A3 Hindhead scheme, where Balfour Beatty Civil Engineering is the lead contractor, and, in the education market, with work on the Sunderland and Islington BSF phase one projects.

In the industrial sector, new business was secured with Dragon LNG and at the SABIC polyethylene plant in teesside, while the long-standing involvement at Sellafield continued.

In London, power-related work at Earl’s Court from EDF Energy Powerlink was won and good progress was made on the Victoria line upgrade and at King’s Cross Northern Ticket Hall.

Balfour Kilpatrick, Balfour Beatty WorkPlace and Balfour Beatty Management are working together (see Powering tomorrow case study) to provide integrated facilities management and maintenance services for British Energy’s nuclear stations as part of a long-term contract.

The Whitelee Wind Farm project, south of Glasgow, where Balfour Kilpatrick is designing, supplying and installing electrical and control systems, continued to move ahead with over 100 turbines now in place, making it Europe’s largest on-shore wind farm.

Balfour Kilpatrick has a strong order book for 2009 and is well-positioned in the power, renewable energy and nuclear sectors where future growth is anticipated.

Haden Young’s strong focus on the healthcare sector continued in 2008. Hospital contracts at Churchill, Oxford; Castlehill, Hull; and UCLH, London were all completed during the year with new work secured at the Ysbyty Aneurin Bevan Hospital in Ebbw Vale from Welsh Health Estates.

Good progress was made on the Pinderfields and Pontefract Hospitals PPP, where the Pathology building was completed during the year, and at Birmingham New Hospitals.

The company won a significant order for the Aquatics Centre, being built for the London 2012 Olympics, and completed the Liverpool Arena and Conference Centre.

Overall performance in the business was held back by a substantial project write-down, principally arising from design issues, pending resolution of income recovery negotiations.

The balance of future orders in UK building services is likely to be weighted more towards the education sector than the healthcare sector.

UK facilities management
There was another year of strong revenue and profit growth for Balfour Beatty WorkPlace (formerly known as Haden Building Management) with its name change reflecting the range of integrated facilities management services the company now provides.

Revenues topped £400m in 2008 with good performances on the major contract for the Royal Mail, in which the company has a 49% interest, and for the Department for Work and Pensions. Extensions to contracts with the BBC and the Metropolitan Police were secured.

There was a successful mobilisation on the contract with British Energy, which involves the provision of facilities management and maintenance services for its fleet of nuclear power stations over a seven-year period.

Performance under the company’s long-term PPP healthcare and education contracts was good with the pipeline of work boosted by financial close on the Islington BSF phase one project. Southwark Schools, where Balfour Beatty WorkPlace will also carry out long-term facilities management, is currently at preferred bidder stage.

The Monteray joint venture, in which Balfour Beatty WorkPlace is a 24.5% shareholder, secured a new six-year facilities management contract with BT worth in excess of £500m, providing services for 7,000 buildings and 100,000 staff located throughout Britain.

In December, Colledge Trundle & Hall, which specialises in the design and installation of automatic energy control systems for buildings, was acquired for £3m, expanding Balfour Beatty WorkPlace's services into energy management. Covion, the private sector facilities infrastructure services business acquired in 2007, performed satisfactorily.

Balfour Beatty WorkPlace is confident of further progress in 2009, based on its track record of delivering for customers and the continuing trend to outsourcing in the public and private sectors.

US construction

Balfour Beatty Construction US, which was acquired in March 2007, performed strongly in 2008 with revenues of $2.4bn. It continues to exceed expectations from the time of the acquisition.

Through its regional businesses based in Texas, Florida, North Carolina and Washington, DC, it provides Balfour Beatty with a strong position in the US building construction market.

Its services for public and private sector clients include construction management, design-build, pre-construction, general contracting and programme management. 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.

Major project wins in 2008 included a design-and-build contract to construct new training facilities for the US Army Corps of Engineers at Fort Lee, Virginia, incorporating new classrooms, workshops, laboratories and administration offices within five buildings, and a major expansion of the Peabody Orlando in Florida, where the construction of a 35-floor hotel tower, along with new and renovated convention centre space, is underway.

In joint venture, Balfour Beatty Construction US was awarded a $640m contract to design and build additions and renovations to the National Naval Medical Center in Bethesda, Maryland, to create the new Walter Reed National Military Medical Center. At the Pentagon, just outside Washington, DC, Balfour Beatty built the high-profile Pentagon Memorial, where a dedication ceremony took place on 11 September 2008.

Balfour Beatty Construction US also undertakes the majority of military housing project construction work for Balfour Beatty Communities, which was acquired by the Group in April 2008 and is the market leader in the military accommodation PPP concession market. Long-term orders secured in 2008 included Fort Jackson in South Carolina; West Point, New York; and the Air Mobility Command (AMC) West, covering three Air Force bases.

Towards the end of the year, Balfour Beatty Construction US formed a new business unit to target national projects in the Federal sector and is well-positioned to capitalise on building projects included in the new economic stimulus packages.

In February 2009, Balfour Beatty acquired RT Dooley, a construction firm based in Charlotte, for $40m. The business specialises in office and mission critical fit-out, and will expand the service offering in the South-East division.

For 2009, Balfour Beatty Construction US has a strong order book and is well-placed to weather instability in the private commercial market.

US professional services

Heery International had another good year, with revenue approaching $1bn for the first time.

Revenue was boosted by organic growth and the acquisition in June 2008 of Barnhart, the largest programme management, construction management and building company in San Diego and among the largest such companies in California, for a cash consideration of $121m.

Barnhart is the sixth largest education sector builder in the US as a whole, adding to Heery’s strong position in the K-12 public education sector. California is one of the US’s most important markets offering substantial opportunities in education and other construction management markets. It also enhances the potential of Heery’s JCM project management operation, based in Los Angeles, which is addressing a fast-growing design and build market. Charter Builders in Texas, which was acquired in March 2006, continues to exceed expectations.

Good progress was made on the $240m contract for the management and construction of Berlin Prison in New Hampshire, as well as a new complex for the Food and Drug administration in Silver Spring, Maryland. Projects for renovations and additions were completed at a number of college football stadia, including the University of Texas, Western Kentucky University and the Cotton Bowl in Dallas. Work on the Gallaudet University’s Sorensen Language and Communications Center in Washington was completed on time and on budget.

Heery continued to win high-quality work through its mix of services and strong emphasis on State and Federal work. Significant wins included a three-year contract to provide ongoing programme management and design services at Louis Armstrong New Orleans International Airport; construction management services for a new Social Security Administration building in Baltimore; and its appointment as architect of record for the multi-million dollar expansion of facilities for the University of Iowa Health Care.

Heery is pursuing a wide range of opportunities, particularly in the healthcare and K-12 education markets and is well-placed for further progress in 2009.

The high-quality order book and continued infrastructure expenditure, along with the full-year impact of acquisitions, should drive growth in 2009. While declining volumes and increased competition in some private sector markets will have some impact, we anticipate making further progress in the year.