Balfour Beatty plc (LON:BBY)

Balfour Beatty plc (LON:BBY)


Share Price
230.00 p
Change
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Market Cap
£1,587.00 m
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Balfour Beatty plc RNS Release

Annual Report 2018 and Notice of Meeting 2019


RNS Number : 1206V
Balfour Beatty PLC
04 April 2019
 

 

 

Balfour Beatty plc

LEI: CT4UIJ3TUKGYYHMENQ17

Balfour Beatty plc Annual Report and Accounts 2018, Notice of 2019 Annual General Meeting and Class Meeting of Preference Shareholders, Forms of Proxy and Notice of availability of documents

 

Copies of the following documents, which are being sent to shareholders, have been submitted to the UK Listing Authority (the "UKLA"), and will shortly be available for inspection at the UKLA's Document Viewing Facility, via the National Storage Mechanism, which is located at www.morningstar.co.uk/uk/NSM:

 

·           The Company's Annual Report and Accounts for the year ended 31 December 2018 ("Annual Report 2018");

 

·           The Notice of 2019 Annual General Meeting ("AGM") and Class Meeting of Preference Shareholders ("Class Meeting");

 

·           Forms of Proxy for AGM and Class Meeting (versions for shareholders who have elected to continue to receive paper copies of the Company's Annual Report and Accounts, and either request a paper proxy form or have elected to continue to receive one);

 

·           Forms of Proxy for AGM and Class Meeting (versions for shareholders who have not elected to continue to receive paper copies of the Company's Annual Report and Accounts, and either request a paper proxy form or have elected to continue to receive one); and

 

·           Notice of availability of the Annual Report 2018 and the Notice of AGM and Class Meeting.

 

Copies of the Annual Report 2018 and Notice of AGM and Class Meeting will also shortly be available to view on the Company's website, www.balfourbeatty.com.

 

The Independent Auditor's Report on the financial statements of the Company for the year ended 31 December 2018, which comprise the Group Income Statement, Group Statement of Comprehensive Income, Group Statement of Changes in Equity, Company Statement of Changes in Equity, Group Statement of Cash Flows, Group and Company Balance Sheets and the related Notes 1 to 42, is set out in full on page 104 of the Annual Report 2018.

 

A condensed set of financial statements were appended to the Company's full year results announcement issued on 13 March 2019, which included an indication of important events that occurred during the year.  That information, together with the information set out below regarding a description of the principal risks and uncertainties, related party transactions and a responsibility statement, which is extracted from the Annual Report 2018, constitute regulated information, which is to be communicated to the media in full unedited text through a Regulatory Information Service in accordance with Rule 6.3.5R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

 

Page and note references in the text below refer to page numbers in the Annual Report 2018.

 

This material should be read in conjunction with, and is not a substitute for, the full Annual Report 2018.



 

Principal risks

Influencing the way we work

Understanding Balfour Beatty's risk profile and establishing the most effective way to manage, accept or transfer risk is central to the Group's decision-making process. The principal risks and uncertainties are continually mapped to strategic and business plans to ensure the appropriate coverage of risks allowing the Board to make a robust assessment of the principal risks which the Group faces, the controls in place to remove or mitigate these risks and whether these risks represent new, increased or decreased threats. The risk profile comprises interlinked and discrete risks which are focused on understanding the worst case scenarios that could threaten the Group's business model, future performance, solvency or liquidity. As a result, changes in the Group risk profile and movements in the some of the principal risks have been identified and are described on pages 58 to 66 below.

Brexit

Balfour Beatty continues to monitor potential risks and uncertainties posed by the UK's exit from the EU. A well-established working group comprised of functional experts monitors developments in this area closely. Specific risks and related mitigations are controlled in individual strategic business units and kept under review by the Executive Committee. Whilst there remains a great deal of uncertainty as to what Brexit will mean for the construction industry and Balfour Beatty in particular, the Group continues to develop and implement plans to ensure the best possible outcomes.

Further commentary is included in the uncertainty within our economic environment risk on page 66.

Climate change

The changing global climate generates a number of risks and opportunities for Balfour Beatty the impact of which, and mitigations against, are considered and reviewed as part of the Group's risk management process. Whilst climate change is not currently considered to be a principal risk to the business, the most significant elements have been identified to be changes in environmental legislation and weather related events. Further commentary on the potential impacts of climate change is set out on page 38. 

 

Health and safety


Owner:

Safety and Sustainability Committee


Causes

Some common themes which could drive health and safety risks are recognised and communicated, including:

·  risk identification/assessment

·  lack of competence

·  processes that fail to deliver risk elimination or mitigation

·  failure in safety leadership

·  ineffective management of subcontractors

·  failure to cascade and follow procedures

·  ongoing transformation programme and performance pressures, affecting the ability of people to remain focused on health and safety risks.

What impact it might have

Failure to manage these risks gives the potential for significant harm, including fatal or life changing injuries to employees, subcontractor staff or members of the public, as well as criminal prosecutions, significant fines, debarring from contract bidding and reputational damage.

How it is mitigated

Balfour Beatty has in place an overarching Key Strategy comprising policies and procedures (Zero Harm) to minimise such risks. This strategy and its action plans are reviewed and monitored by management and external verification bodies.

Each business has experienced health and safety professionals in place who provide advice and support and undertake regular reviews.

The Safety and Sustainability Committee of the Board, as well as business-level Health and Safety executive leadership teams, meet regularly throughout the year to develop a consistent approach to health and safety best practice.

Training programmes (including behavioural) are in place.

Build to Last pillar:


Safe

Risk:


no movement

Risk description

The Group works on significant, complex and potentially hazardous projects which require continuous monitoring and management of health and safety risks.



 

 

Work winning


Owner:

Group Tender
and Investment Committee


Causes

Inaccuracy at Gate reviews in:

·   assumptions behind investment decisions

·   costs versus scope and time calculations

·  bid strategy development

·   assessment of the impact of inflation and exchange rates

·   technical and written proposal development

·  Quick Qualifier assumptions

·  contract / account management

·  negotiation of terms and conditions

·   assessment of customers' liquidity/creditworthiness.

What impact it might have

Failure to estimate accurately the risks, costs versus scope, time to complete, impact of inflation and exchange rates, and failure to understand specification changes, contractual terms and how best to manage them could cause financial losses.

If any of the assumptions behind bid strategy development and investment decisions prove incorrect, there is the potential for the business not to win the required work to sustain and grow shareholder value.

How it is mitigated

The Group Tender and Investment Committee process is in place to challenge all proposals.

Consistent and shared policies and minimum commercial expectations including acceptable margins.

A wide and ongoing range of training initiatives across all disciplines within the Group including Cash is our Compass and High Value Selling to drive increased commercial awareness and an understanding of expectations on margins and cost.

Commercial/contractual reviews are conducted by key commercial and legal staff.

Defined delegated authority levels are in place for approving all tenders and infrastructure investments.

Reviews are conducted following all tenders to ensure lessons are learnt, captured and applied to future tenders.

Investment appraisals are performed and reviewed by experienced professionals. The Group analyses the risks associated with revenues and costs and, where appropriate, establishes contractual and other risk mitigations.

Risk movement

Continued rigour in tendering and estimating combined with an ongoing focus on the value proposition to the Group's customers has seen a reduction in exposure.

Build to Last pillar:


Trusted

Risk:


decreased

Risk description

Failure to identify, price, and execute the appropriate volume and quality of bids and investment opportunities to maintain a profitable, sustainable order book and deliver value to stakeholders.



 

 

Project delivery


Owner:

Group
management


Causes

Failure to implement, maintain and challenge operational and commercial controls (as detailed within checklists at Gate reviews) allowing:

·  unrealistic programming targets

·  inadequate resource (people, plant and materials)

·  unrealistic progress assessments and cost to complete judgements which could arise due to poor training, lack of supervision, lack of accountability or fear of reporting bad news

·  overly-optimistic claim recovery assumptions

·  incomplete visibility and appreciation of scale of commercial judgements

·  failings in administering the contract terms to safeguard or protect future claims, change orders and extensions of time (EOTs).

What impact it might have

Failure to manage or deliver against contracted customer requirements on time, on budget and to the required quality could result in issues such as contract disputes, rejected claims, design issues, liquidated damages, cost overruns and failure to achieve anticipated customer savings which in turn could reduce the Group's profitability and damage its reputation.

The Group may also be exposed to long-term obligations including litigation and costs to rectify defective or unsafe work.

Delivery failure on a high-profile project could result in significant reputational damage and costs.

How it is mitigated

A continued focus on identifying and reporting risks, including the accuracy of cost and cash forecasting.

Consistent application of strong commercial management and contract administration processes.

Integrated work winning and project delivery teams across the Gateway processes to ensure expectations are understood and realistic.

Optimal scheduling of key staff within project delivery teams and senior management, together with ongoing and focused training of staff via the Balfour Beatty Academy.

Ongoing management assessment of project risk management and control including planning, programme and resource reviews.

Site Mobilisation Hub in place to facilitate early and effective start-up on site.

Use of innovative and cost-effective engineering and technical solutions (including the vision for 25% offsite fabrication by 2025).

Drive for defect-free delivery is being embedded at all levels.

Professional indemnity cover in place to provide further financial safeguards.

Balfour Beatty monitors the performance of subcontractors and suppliers throughout the lifecycle of a project.

Risk movement

Improvements to the Group's reporting systems and increasing traction of its short interval control processes within the early stages of project delivery are providing greater certainty of operational outcomes. The Group has used the lessons learnt from legacy problem contracts and new disciplines resulting from the Build to Last transformation programme to reduce the risk of project delivery.

Build to Last pillar:


Trusted

Risk:


decreased

Risk description

Failure to deliver projects at the required specification on time and on budget to meet the expectations of customers and minimise the risk of delay-related damages and defect liabilities.



 

 

Joint ventures


Owner:

Group Tender and Investment Committee


Causes

The risk could be realised through:

·  ineffective assessment of potential partner including liquidity, capacity and capability

·  lack of clarity of the delegated levels of authority between partners

·  delayed and fettered decision making process between partners

·  segregation of management systems (financial and operational)

·  lack of understanding of contract requirements and expectations

·  failure to embed Balfour Beatty cultures and practices.

What impact it might have

A failure to execute a significant joint venture contract could result in a significant impact to profitability and reputational harm in the marketplace.

The failure of a joint venture partner may expose the Group to increased resourcing costs and ongoing warranty and insurance risks.

Disputes with strategic joint venture partners could impact the Group's ability to operate successfully and or expand within its chosen markets.

Failure to share and embed the Group's health and safety management expectations could result in increased potential for injury and or fatality.

How it is mitigated

All proposals to enter into a joint venture must be authorised by Group management via the Agreement to Enter into a Joint Venture procedure at Gate 1 of the review process.

The Group undertakes significant due diligence on potential joint venture partners via the Gateway review process including capacity, capability and liquidity.

The Group Tender and Investment Committee process is in place to challenge all proposals.

The Group seeks to enter into joint ventures with known and trusted long-term partners.

Experienced Project Directors are appointed to manage the project including an ongoing assessment of operational delivery risk.

Balfour Beatty monitors the performance of its joint venture partners throughout the lifecycle of a project.

Best practice including joint reporting systems where possible is shared between all partners to embed the Group's expectations and culture throughout joint venture delivery teams.

Risk movement

The Group is involved in a number of joint ventures and recognises that successfully executing these agreements presents a significant risk.

This risk represents an amplification of existing business and project delivery risk.

Build to Last pillar:


Trusted

Risk:


new risk

Risk description

Failure of joint ventures to deliver expected returns and minimise the risk of unexpected liabilities.



 

 

Data governance and cyber security


Owner:

Group
management


Causes

Failure to:

·    comply with the GDPR

·    embed required culture and procedure to address the ongoing threat of cybercrime

·    prepare and respond to malicious intent
and/or a targeted attack

·    prevent a breakdown of key security software or management systems.

What impact it might have

Crystallisation of this risk has the potential for:

·    the business to face legal proceedings, investigations or disputes resulting in business disruption, losses, fines, penalties and reputational damage

·    a reduction or loss of competitive advantage (including loss of intellectual property)

·    a negative impact on customer relationships, including loss of confidence

·    disruption to operational delivery (business as usual)

·  exclusion from bidding opportunities.

How it is mitigated

Data Protection Officers embedded throughout the businesses to ensure breaches are reported promptly and risks are appropriately escalated to the Group Data Protection Officer for consideration and assessment.

Data protection programme covering policies, procedures and approved access levels in place alongside a comprehensive training plan.

Resilience in network, endpoint protection and data backup.

All data is stored in secure data centres with strengthened back-up procedures.

Regular review and communication of the ever-changing cyber threats and how they manifest themselves in practical guidance that all employees and contractors understand.

Risk assessment of external providers of data and services.

All employees are trained in and must comply with GDPR and information security management obligations.

Risk movement

Increased potential for cybercrime due to increased use of data-sharing platforms and standardised operating systems.

Build to Last pillar:


Trusted

Risk:


increased

Risk description

A breach of the Data Protection Act or the General Data Protection Regulation (GDPR) and/or a failure to protect key company data or other confidential information.



 

 

People


Owner:

The Board


Causes

·  Ineffective workload and location scheduling

·  Increased competitor/sector strength and opportunities

·  Inability to recruit and retain strong performers

·  Failure to maintain a culture of pride and advocacy across the workforce

·  Ineffective and or unfocused training

·  Lack of a diverse workforce

·  Restrictions in the availability of skilled labour.

What impact it might have

Failure to recruit and retain appropriately skilled people could harm the Group's ability to win or perform specific contracts, manage delivery costs, grow its business and meet its strategic objectives.

A high level of staff turnover or low employee engagement could result in a drop in confidence in the business within the market, stakeholder confidence being lost and an inability to drive business improvements.

How it is mitigated

Build to Last has included a range of People policies and processes under the Expert goal to improve the attractiveness of Balfour Beatty as the business people want to join and develop their careers. Since 2015 these measures have been increasingly effective in developing Balfour Beatty's culture and attractiveness as an employer and enabling the recruitment and retention of people with the skills and behaviours needed. Specific activities which mitigate this risk include:

·     competency frameworks within core job families identify and support the development of key knowledge, skills and expertise

·     recruitment and retention rates are measured and regularly reviewed across all parts of the business and succession plans are in place for core disciplines

·     regular reviews of remuneration and incentive arrangements to ensure they are appropriate to help the Group attract, motivate and retain key employees

·     Group-wide employee engagement surveys are undertaken to measure engagement and appropriate actions are developed and communicated

·     the Balfour Beatty Academy has been established in the UK to provide professional development and knowledge sharing opportunities and to ensure employees feel valued and specialisms are recognised

·     strong employee communication channels are in place celebrating individual, business and Group-level successes

·     affinity networks have been established to create a diverse and inclusive working environment

·     emerging talent is supported via a range of graduate, apprenticeship, trainee and industrial placement/internship schemes including The 5% Club (see page 34).

·     in 2019 a Strategic Workforce Planning tool will be implemented to further enhance longer term planning, of work winning and matching with focused internal and external recruitment activities.

Risk movement

To execute the Group's strategy and achieve industry leading margins, the breadth and depth of leadership and the appropriate capabilities need to be well matched to the opportunities presented. A key factor impacting the increase in this risk, which applies to the broader sector, is the long-term visibility and timing of workload which has been impacted as a result of ongoing economic uncertainty. Delays to project commencement create uncertainty and can contribute to skilled resource leaving the industry and make it more difficult to attract people into the sector. As part of the Build to Last transformation programme Balfour Beatty has created a culture with strong people policies and processes in place which will continue to mitigate this risk.

Build to Last pillar:


Expert

Risk:


increased

Risk description

Inability to provide the required levels of skilled and competent staff to meet the Group's objectives.



 


Sustaining the transformation programme


Owner:

The Board


Causes

·  Failure to sustain momentum could arise from:

·  ineffective communication and reinforcement of message

·  inadequate resourcing (financial, physical and people)

·  complacency within core disciplines

·  new systems and processes being used without appropriate controls being in place and/or tested.

What impact it might have

Inconsistency in working practices could result in the Group's ability to deliver sustained profit being jeopardised.

How it is mitigated

Ensuring Build to Last continues to deliver value is a strategic priority for the Group and is being led by the Group Chief Executive.

Controls include:

·     continuing to reinforce the Build to Last culture and framework within each business unit

·     senior leadership engagement across the businesses is clear and frequent

·     new systems and processes are deployed with training plans and in agreed phases

·     all agreed processes are held on the BMS and are frequently validated

·     employee surveys form a key part of the programme

·     leaders throughout the business frequently monitor and measure the delivery and impacts of the programme including through the outputs of the business improvement community

·     senior leadership is well experienced in delivering business transformation successfully.

Build to Last pillar:

All

Risk:


no movement

Risk description

The Group does not sustain and build upon the good practice, policies and procedures and culture of the Build to Last transformation programme.



 

 

Financial strength


Owner:

The Board


Causes

Failure to manage financial risks, including forecasting material exposures, and the financial resources of the Group that underpin its ability to:

· meet ongoing liquidity obligations so that it remains a going concern

· meet financial covenants as set out in financing facility agreements.

What impact it might have

Failure to deliver effectively the required financial strength will mean the Group:

·  fails to meet financial covenant tests, as set out in its financing facility agreements, that would lead to an event of default if not remedied within a specific grace period

·  fails to pass the required tests that allow it to continue to use the going concern basis of accounting in preparing its financial statements

· loses the ability to compete for key long-term contracts that are critical to the delivery of its long-term objectives and viability.

How it is mitigated

The Group operates with a centralised treasury function that is responsible for managing key financial risks, cash resources and the availability of liquidity and credit capacity.

The Group maintains significant undrawn term committed bank facilities with a banking group of high credit-quality to underpin the liquidity requirements of the Group.

The Group maintains significant bank and surety bonding facilities to deliver trade finance requirements of the Group on an ongoing basis.

The Group operates standardised reporting, forecasting and budgeting financial processes. This allows monitoring of the impact of business decisions on financial performance over future time horizons.

Sales across the asset portfolio can be used to generate cash.

Risk movement

During the year, the Group has significantly strengthened its balance sheet, paying down over 40% of its gross debt.

Build to Last pillar:


Trusted

Risk:


decreased

Risk description

Inability of the Group to maintain the financial strength required to operate its business and deliver its objectives.



 

 

Supply chain


Owner:

Group
management


Causes

·  Supply chain failure risk, exacerbated during, and when emerging from, tough economic conditions

·  Over-reliance on a limited number of suppliers

·  Lack of market capacity

·  Retention of subcontracted parties in buoyant markets

·  Inadequate assessment of supply chain partner capabilities and process (including quality, safety, ethics, materials stewardship, child labour, forced labour and modern slavery)

·  Failure to accurately assess project resource requirements and key deliverables

·  Unethical treatment of the supply chain.

What impact it might have

Failure of a subcontractor or supplier would result in the Group becoming involved in disputes, having to find a replacement or undertaking the task itself. This could result in delays, business disruption, additional costs or a reduction in quality/increased defects owing to lack of expertise.

Mistreatment of suppliers, subcontractors and their staff, or poor ethical standards in the supply chain, could lead to legal proceedings, investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and debarment.

How it is mitigated

The Group aims to develop long-term relationships with key subcontractors, working closely with them to understand their operations and dependencies. This includes relationship mapping with strategic suppliers, including briefing on order book requirements.

Contingency plans in place to address subcontractor failure, including replacement supplier list.

All UK trade suppliers and subcontractors are assessed using the Constructionline service that collects, assesses and monitors standard company information through a question set aligned to PAS 91, the industry standard pre-qualification questionnaire.

The risk management framework and the gateway review process allow for early (Gates 1-4) and ongoing (Gate 6) assessment of the appropriateness of resource allocation and dependencies.

The performance of active suppliers is monitored and lessons learnt inform future projects.

My Contribution programme generates ideas for more effective procurement and resourcing.

The Group obtains project retentions, bonds and/or letters of credit from subcontractors, where appropriate to mitigate the impact of any insolvency.

Key supplier audits within projects to ensure they are in a position to deliver consistently against requirements.

Group-wide Code of Conduct and Supplier Code of Conduct, targeted training programmes and related policies and procedures in place.

Risk movement

Scheduling, capacity and capability tensions in market hotspots has increased the potential for risk realisation.

Build to Last pillar:


Lean

Risk:


increased

Risk description

Supply chain partners are not able to meet the Group's operational expectations and requirements including availability, financial stability, technical ability, quality, safety, environmental, social and ethical.



 

 

Business conduct/compliance


Owner:

The Board


Causes

Failure to embed the Code of Conduct and Balfour Beatty values could leave the Group exposed to:

·  corruption

·  bribery

·  fraud, deception, false claims or false accounting

·  unfair competition practices

·  human rights abuses, such as child and other labour standards generally, illegal workers, human trafficking and modern slavery

·  unethical treatment of and by the supply chain

·  ethics and values being compromised as a result of commercial pressures

·  other emerging ethical risks.

What impact it might have

Failure by the Group, or employees and third parties acting on its behalf or in partnership, to observe the highest standards of integrity and conduct could result in legal proceedings (including prosecution under the UK Bribery Act), investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and debarment.

How it is mitigated

The Business Integrity function promotes, monitors, assesses awareness of and provides training on, the Code of Conduct. The function provides reports to the Audit and Risk Committee and has the full support of the Board.

Each business unit, supported by the Business Integrity function, is responsible for embedding the Code of Conduct.

The Group has a range of operational controls (commercial including procurement, due diligence and risk assessment) that are designed to identify and manage risks internally and with third parties.

Independent third-party whistleblowing hotline and dedicated email are in place and actively promoted. All in-scope complaints are independently investigated by the Business Integrity function and appropriate action is taken, where necessary.

Balfour Beatty works with a limited number of agents, all of whom are, in addition to the Group's due diligence and approval process, subject to specific contractual clauses, policies and agreements.

Build to Last pillar:


Trusted

Risk:


no movement

Risk description

The Group operates in various markets that present business conduct-related risks involving fraud, bribery or corruption, whether by its own staff or via third parties such as agents, partners or subcontractors. Those risks are higher in some countries and sectors. Overall, the construction industry has a higher risk profile than other industries.



 

Legal and regulatory


Owner:

The Board


Causes

A failure to recognise or adapt to changes in applicable laws affecting the Group's businesses may result from:

·  lack of awareness of the changes made

·  ineffective communication of the requirements across relevant business units

·  a deliberate breach.

What impact it might have

The business could face legal proceedings, investigations or disputes resulting in business disruption, losses, fines and penalties, reputational damage and exclusion from bidding.

Such action could also impact upon the valuation of assets within that territory.

 

 

How it is mitigated

The Group monitors and responds to tax, legal and regulatory developments and requirements in the territories in which it operates.

Affected businesses are alerted to changes in the law and the requirements of them made clear.

Local legal and regulatory frameworks are considered as part of any decision to conduct business in a new country.

Appropriate and responsive policies, procedures, training and risk management processes are in place throughout the business.

Build to Last pillar:


Trusted

Risk:


no movement

Risk description

The Group does not adopt and implement all relevant legal, tax and regulatory requirements.



 

 

Legacy pension liabilities


Owner:

The Board


Causes

The Group is unable to ensure that the trustees of the pension funds react effectively to or manage:

·  changes in interest rates

·  inflation or life expectancy trends

·  intervention by regulators or legislators

·  investment performance of the funds' assets.

What impact it might have

Failure to manage these risks adequately could lead to the Group being exposed to significant additional liabilities due to increased pension deficits.

This has the potential to affect the ongoing sustainability of the Group.

How it is mitigated

The Group constructively engages with the trustees of the pension funds to ensure that they are taking appropriate advice and the funds' assets and liabilities are being managed appropriately.

The funding and investment arrangements of the pension funds are subject to an in-depth triennial review with regular monitoring in between.

The Group's main UK fund has hedged in excess of 80% of its exposure to interest rate and inflation movements.

Build to Last pillar:


Lean

Risk:


no movement

Risk description

The Group is exposed to and must effectively manage significant defined benefit pension risks.



 

Uncertainty within our economic environment


Owner:

The Board


Causes

Failure to plan for any potentially negative impacts, or to capture any opportunities that may be presented could lead to:

·   customers postponing, reducing or changing expenditure plans

·   wider than expected fluctuations in inflation

·   increased competition (e.g. in the UK from foreign investors acquiring competitors)

·   increased supply chain risks (e.g. solvency, people and materials)

·   reduced revenue or pressure on margins.

What impact it might have

Any significant delay or reduction in the level of customer spending or investment plans could adversely impact the Group's strategy and order book, reducing revenue or profitability in the near or medium term.

Restrictions on the availability of skilled labour and competitively priced materials could lead to increased costs and hence potentially a devaluation of the business.

Financial failure of a customer, including any government or public sector body, could result in increased financial exposure to counterparty risk.

How it is mitigated

The Group primarily operates across three geographies (UK, US and Hong Kong) and three sectors (Construction Services, Support Services and Infrastructure Investments). This provides resilience as the Group is less exposed to a downturn in a single geography or sector.

The Group is actively monitoring the potential impacts of the UK exiting the EU including potential market stimulation by the UK Government, freedom of movement, finance costs, exchange rates, commodity prices and regulatory changes. A well-established working group comprised of functional experts is in place for this purpose, although significant uncertainty remains as to the impact of Brexit.

The financial solvency and strength of counterparties is always considered before contracts are signed and assessments are updated and reviewed whenever possible during the project lifecycle. The business also seeks to ensure that it is not over-reliant on any one counterparty.

Risk movement

Macro-economic factors, reduced government spending and delayed decision making on strategic projects, have the potential to negatively impact the availability of skilled resource. This risk has increased in the year.

Build to Last pillar:


Expert

Risk:


increased

Risk description

The effects of national or market trends, political or regulatory change (including the UK's exit from the EU), may cause customers to re-evaluate existing or future infrastructure expenditure and the procurement of services and/or lead to changes in the price and availability of labour and products.



 

 

Common industry-wide risks

 

In parallel with those principal risks faced by the Group, Balfour Beatty faces significant risks and uncertainties that are prevalent to many companies - including financial and treasury, communications and marketing, regulatory reporting, information management, business continuity and disaster recovery, and general hazard risks. 

 

Related party transactions

 

Joint ventures and associates

The Group has contracted with, provided services to, and received management fees from, certain joint ventures and associates amounting to £269m (2017: £279m). These transactions occurred in the normal course of business at market rates and terms. In addition, the Group procured equipment and labour on behalf of certain joint ventures and associates which were recharged at cost with no mark-up. The amounts due from or to joint ventures and associates at the reporting date are disclosed in Notes 23 and 24 respectively.

 

Transactions with non-Group members

The Group also entered into transactions and had amounts outstanding with related parties which are not members of the Group as set out below. These companies were related parties as they are controlled or jointly controlled by a non-executive director of Balfour Beatty plc.

 


 

2018

£m

 

2017

£m

Anglian Water Group Ltd



Sale of goods and services

26

18

Amounts owed by related parties

-

3

URENCO Ltd



Sale of goods and services

19

72

Amounts owed by related parties

2

-

 

All transactions with these related parties were conducted on normal commercial terms, equivalent to those conducted with external parties. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No expense has been recognised in the period for bad or doubtful debts in respect of the amounts owed by related parties.

 

Compensation of key management personnel of the Company


 

2018

£m

 

2017

£m

Short-term benefits

2.724

2.938

Share-based payments

1.728

2.584


4.452

5.522

 

Key management personnel comprise the executive Directors who are directly responsible for the Group's activities and the non-executive Directors. The compensation included above is in respect of the period of the year during which the individuals were Directors. Further details of Directors' emoluments, post-employment benefits and interests are set out in the 2018 Remuneration report on pages 88 to 103.

 

Statement of Directors' responsibilities

 

In compliance with DTR 4.1.12R, the Annual Report and Financial Statements 2018 contains a Directors' responsibility statement. This is reproduced below, in line with DTR 6.3.5R. The statement relates to and is extracted from the Annual Report and Financial Statements 2018 and does not attach to the extracted information presented in this announcement or the preliminary results announcement released on 13 March 2019.

 

Company law requires the Directors to prepare Group and Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the Company financial statements in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework.

 

Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of their profit or loss for that period. In preparing each of the Group and Company financial statements, the Directors are required to:

 

·     select suitable accounting policies and then apply them consistently

 

·     make judgements and estimates that are reasonable, relevant, reliable and prudent

 

·     for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU

 

·     for the Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Company financial statements

 

·     assess the Group and the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern

 

·     use the going concern basis of accounting unless they either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

The Directors confirm that to the best of their knowledge:

 

·     the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole

 

·     the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

In light of the work undertaken by the Audit and Risk Committee reported in greater detail on pages 82 to 84 and the internal verification and approval process which has been followed this year, the Directors are able to state that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

 

Statements of Directors as to disclosure of information to auditors

 

Each of the Directors at the date of approval of this report confirms that:

 

·     so far as the Director is aware, there is no relevant audit information of which the Company's auditors are unaware

 

·     the Director has taken all the steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

 

This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.

 

By order of the Board

 

Jonathan Lagan

Group General Counsel and Company Secretary

 

Registered Office: 

5 Churchill Place, Canary Wharf 

London

E14 5HU

 

Registered in England and Wales, Number 00395826

 

 

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.
 
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