Balfour Beatty plc Annual Report and Accounts 2015, Notice of 2015 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 posted to shareholders today, 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 2015
("Annual Report 2015);
● The Notice of 2016 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);
● 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
● Notice of availability of the Annual Report and the Notice of AGM and Class Meeting.
Copies of the Annual Report 2015 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 2015, which comprise the Group and Company income statements, the Group and Company statements of comprehensive income, the Group and Company balance sheets, the Group and Company statements of changes in equity, the Group and Company statements of cash flows, and the related Notes 1 to 41, is set out in full on page 85 of the Annual Report 2015.
In compliance with DTR 6.3.5, a description of the principal risks and uncertainties and a responsibility statement prepared for and contained within Annual Report 2015 are set out below. A condensed set of financial statements were appended to the Company's full year results announcement issued on 15 March 2016, which included an indication of important events that occurred during the year.
Page and note references in the text below refer to page numbers in the Annual Report 2015.
This material should be read in conjunction with, and is not a substitute for, the full Annual Report 2015.
"Principal risks
The Board has made a robust assessment of the principal risks which the Group faces, the controls in place to remove or mitigate these risks and also whether these risks represent new, increased or decreased threats. The assessment of these risks and controls is part of the ongoing management of the business.
The principal risks that could adversely impact the Group's profitability and ability to achieve its strategic objectives are set out below. In addition, the Chief Financial Officer's review starting on page 18 includes discussion on financial risk factors and going concern.
Health and safety
No change to risk |
Build to Last pillar:
Safe |
Owner: Safety and Sustainability Committee |
Risk description The Group works on significant, complex and potentially hazardous projects which require continuous monitoring and management of health and safety risks. Causes Some common themes where health and safety risks have arisen are recognised and communicated, including: - poor risk identification/assessment - having processes that fail to promote risk elimination or mitigation - failure to deliver management leadership - management of subcontractors - not briefing people properly before setting them to work - failure to follow procedures - debarment for safety failures - ongoing change programme and performance pressures, which may have an effect on people and their ability to remain focused on health and safety risks. |
What impact it might have Failure to manage these risks could result in harm to, or even the death of, employees, subcontractor staff and members of the public, as well as potential criminal prosecutions, debarment and reputational damage. How it is mitigated Balfour Beatty has detailed health and safety policies and procedures to minimise such risks. These are reviewed and monitored by management and external verification bodies. Each division has experienced health and safety professionals who provide advice and support and undertake regular reviews. The Safety and Sustainability Committee of the Board, as well as business-level Safety and Health executive leadership teams, meet regularly throughout the year to develop a consistent approach to health and safety best practice. During 2015, business units continued their work on implementing Zero Harm action plans. |
Economic environment
No change to risk |
Build to Last pillar:
Expert |
Owner:
The Board |
Risk description The effects of national or market trends, political change or new developments in infrastructure expenditure or procurement may cause customers to postpone, reduce or change existing or future projects, which may impact the Group's strategy, business model, revenue or profitability in the short or medium term. Causes The business may fail to anticipate or assess national or market events and developments, their potential negative impact, or the opportunities they present. Such events or developments, whether or not anticipated or correctly assessed, could lead to: - cash pressures for customers and suppliers - wider than expected fluctuations in inflation - increased competition (eg in the UK from other EU countries) - supply chain failure risk - reduced revenue or pressure on margins. These risks may also be triggered or exacerbated by the need, actual or perceived, to pursue work in a declining market. |
What impact it might have Any significant changes in the level or timing of customer spending or investment plans could adversely impact the future order book. Such changes could arise from changes in government policy or customers' failure to secure financing for future projects or for future stages of existing projects. Financial failure of a customer, including any government or public sector body, could result in not collecting amounts owed. How it is mitigated The Group's strategy to focus on the more resilient and stable infrastructure markets and geographies will help mitigate this risk. The effect of spending changes in any one market is mitigated by the Group's broad exposure to infrastructure markets across the globe and the continued need for infrastructure spending. Balfour Beatty also mitigates the effects of such market conditions by continuing to adapt its business model. It is essential that the financial solvency and strength of counterparties is always considered before contracts are signed and this is a specific focus in the current economic climate. During the life of a contract such assessments are updated and reviewed whenever possible. The business also seeks to ensure that it is not over-reliant on any one counterparty. |
Bidding
Decreased risk |
Build to Last pillar:
Trusted |
Owner: Group Tender and Investment Committee |
Risk description Through its different businesses, Balfour Beatty seeks to win profitable work through a large number of bids. In some cases it bids in joint venture with carefully selected partners, often to help manage or spread risks, especially where the Group wants to augment its expertise or knowledge of the relevant market. The Group also invests in infrastructure assets, where success depends on a number of assumptions made, at the time of investment, on financial modelling, future revenues and costs. Balfour Beatty's success depends on its ability to identify, price and execute the right volume and quality of bids to maintain a profitable, sustainable order book. This in turn requires that it has a competitive business model and overheads. Causes - Unrealistic programme - Unrealistic assumptions on cost savings - Overambitious budgets - Work scope not understood or realistically costed - Poor partner selection - Customer credit and late payment risks - Partner and subcontractor performance and credit risks - Inability to make profit from infrastructure assets - Failure to ensure the Group's overhead structure remains competitive and realistic. |
What impact it might have Failure to estimate accurately the risks, costs versus scope, time to complete, impact of inflation and contractual terms and how best to manage them could cause financial losses. In the event of disagreement with, failure of, or poor delivery performance by a joint venture partner, the Group could face financial and reputational risks. If any of the assumptions behind investment decisions prove incorrect, the profitability of those investments could be reduced. How it is mitigated The Group operates to consistent and shared policies and minimum commercial expectations including acceptable margins. Alongside targeted recruitments a wide and ongoing range of initiatives has been undertaken 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. All bids are subject to rigorous estimating and tendering processes as part of the gateway review process within the risk management framework. The Group has defined delegated authority levels for approving all tenders and infrastructure investments. Reviews are conducted following all tenders to ensure lessons are learnt and applied to future tenders. Before entering into a joint venture agreement, the Group reviews the relevant skills, experience, resources and values of joint venture partners to understand how they complement its own. 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. |
Project execution
No change to risk |
Build to Last pillar:
Trusted |
Owner:
Group management |
Risk description The Group works on complex design, engineering, construction and asset management projects. Successful delivery of many of these projects is dependent on the effective implementation and maintenance of a range of operational and commercial procedures and controls, backed up by appropriate training, operational systems, clear accountabilities and oversight, accurate, realistic and timely reporting, and regular review. It is also dependent on the combined availability and effective management of subcontractors and other service providers. Finally, it relies upon many complex, technical and commercial judgements and estimates regarding cost, value, progress and likely or practicable outcomes. Causes - Unrealistic progress assessments and cost to complete judgements - Overestimating the Group's ability to recover claims within the timeframe or in the amounts estimated - Incomplete visibility and appreciation of scale of commercial judgements - Inaccurate and/or incomplete cost and value data or failure to analyse and report correctly, which could arise due to poor training, lack of supervision, lack of accountability or fear of reporting bad news - Inadequate experience, independent challenge from support functions such as audit, risk, quality, commercial, operations and finance. What impact it might have Failure to manage or deliver against contracted customer requirements on time, budget and to an appropriate quality could result in issues such as contract disputes, rejected claims, design issues, liquidated damages, cost overruns or failure to achieve customer savings - which in turn harm Balfour Beatty's profitability and reputation. The Group may also be exposed to long-term obligations including litigation and costs to rectify defective work. Execution failure on a high-profile project could result in significant reputational damage and costs. |
How it is mitigated It is essential that each business area has defined operating procedures to address the risks inherent in project delivery. The revision of the Group risk management framework and the reinforcing of Group policy and principles encourage prudent and realistic financial planning. The Group has instigated an increased focus on identifying, understanding and reporting risks inherent in projects such as the accuracy and timeliness of cost and cash forecasting supported by consistent application of strong commercial management and contract administration processes. Alongside these measures, targeted recruitment of key staff within project delivery teams and senior management, together with ongoing and focused training of staff, has strengthened the ability of the Group to successfully manage and deliver projects. Projects are subject to greater and more direct senior management oversight and challenge. Allied with this, integrated reviews of projects across audit, risk, quality, commercial, operations and finance disciplines are now in place. The My Contribution initiative has delivered a significant number of local level improvements in project delivery including efficiencies in service level agreements, greater use of BIM technology and resource allocation. A strong pipeline of ideas will be assessed across 2016 to drive further improvements. The Group also has professional indemnity cover to provide further safeguards. Balfour Beatty monitors the performance of joint ventures, joint venture partners, subcontractors and suppliers throughout the lifecycle of a project. |
Supply chain
No change to risk |
Build to Last pillar:
Lean |
Owner:
Group management |
Risk description The Group is heavily reliant on its supply chain partners for successful operational delivery, which means it is also exposed to a variety of risks in the supply chain including availability, financial stability, technical ability, quality, safety, environmental, social and ethical. Causes - Supply chain failure risk, exacerbated during, and when emerging from, tough economic conditions - Retention of subcontracted parties in buoyant markets - A subcontractor's failure to perform to an appropriate standard and quality, which could cause project delays, reducing Balfour Beatty's ability to meet contractual commitments and harming its reputation - Supply chain operating to lower standards (safety, ethics, quality, material stewardship, child labour, forced labour) - Failure to deliver targeted procurement savings - Failure to comply with Group supply agreements - Unethical treatment of the supply chain. What impact it might have Failure of a subcontractor or supplier would result in the Group having to find a replacement or undertaking the task itself. This
could result in delays, additional costs or a reduction in quality owing to lack of expertise. The Group retains commercial as well as reputational responsibility for performance shortcomings by suppliers and subcontractors, whether in terms of quality, safety, environmental, social, technical or ethical standards. Mistreatment of suppliers, subcontractors and their staff, or poor ethical standards in the supply chain, could lead to significant reputational harm for Balfour Beatty. |
How it is mitigated The Group aims to develop long-term relationships with key subcontractors, working closely with them to understand their operations. It develops contingency plans to address subcontractor failure, and also obtains project retentions, bonds and/or letters of credit from subcontractors, where appropriate to mitigate the impact of any insolvency. Staff are encouraged through the My Contribution programme to generate ideas for more effective procurement and resourcing efficiencies have already been made in material and plant costs. This initiative will be further developed in 2016. Rigorous adherence to the Group's risk management framework and the gateway review process allows for early and ongoing assessment of the appropriateness of resource allocation, including third-party dependencies. The Group undertakes audits of key suppliers within projects to ensure they are in a position to consistently deliver against requirements. Balfour Beatty aims to work as much as possible with preferred suppliers and subcontractors who undergo rigorous, risk-based prequalification processes and share its values. It also aims to avoid becoming over-reliant on any one supplier or subcontractor. |
Transformation programme
Increased risk |
Build to Last pillar:
All |
Owner:
The Board |
Risk description The Build to Last transformation programme is being delivered throughout the business in order to improve operating efficiency. There is a risk that deploying such a wide range of initiatives required to meet the objectives of Build to Last creates a high level of disruption to the delivery of day-to-day operations and the Build to Last programme itself. Causes Ineffective change management during the implementation of the Build to Last programme could cause the risk to be realised via: - excessive drive to deliver anticipated outcomes - resource (financial, physical and people) being diverted from the day-to-day operational priorities towards realising new initiatives and addressing legacy problems - employee fatigue with change programme and loss of focus owing to a perceived high number and frequency of new initiatives - loss of key people and intellectual resource through dissatisfaction with the programme - new systems and processes being used without appropriate controls being in place and/or tested. |
What impact it might have Failure to meet the target of £100 million cost out and £200 million cash in. Failure to win new and retain existing business. Failure to attract and retain the best talent in the industry. There is also the risk of management losing focus on existing key deliverables and market opportunities. How it is mitigated The implications and required controls associated with the Build to Last programme have been well considered. A suite of mitigations are in place to ensure successful delivery including: - Build to Last champions are embedded within each business for constant dialogue and direction - senior leadership communication across the businesses is clear and frequent - employee surveys form a key part of the programme - the Build to Last delivery programme is phased over several years rather than a one-off delivery - leaders throughout the business frequently monitor the delivery and impacts of the programme - senior leadership are well experienced in delivering business transformation successfully. |
People
Increased risk |
Build to Last pillar:
Expert |
Owner:
The Board |
Risk description Inability to recruit and retain the best people may weaken the Group's ability to meet its strategic objectives. Causes - Failure to attract and retain skilled staff - Distraction and impact on morale due to transformation programmes and continued operational issues - Inability to successfully promote the right people through succession planning - Commercial and project management quality/performance - New staff unfamiliar with culture and procedures - Lack of a diverse workforce - Loss of former staff with traditional bidding and execution skills - Deterioration of client relationships. 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 and grow its business. A high level of staff turnover can result in a drop in confidence in the business within the market, client relationships being lost and an inability to focus on business improvements. |
How it is mitigated Change management initiatives are well embedded within the business and aligned to the Build to Last transformation programme. All potential recruits for key roles in the organisation are measured against a leadership framework. Businesses within the Group undertake organisation and people reviews to review the roles, competencies, performance and potential of personnel. Recruitment and retention is measured and regularly reviewed across all parts of the business. A Group-wide employee engagement survey was conducted in 2015 to measure engagement and appropriate actions are being developed and communicated. The Group's succession planning process to identify and develop high-potential personnel is reviewed regularly within the organisation and by the Board. Balfour Beatty regularly reviews its remuneration arrangements to ensure they are appropriate to help it attract, motivate and retain key employees. |
Business conduct/compliance
No change to risk |
Build to Last pillar:
Trusted |
Owner:
The Board |
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. Causes - Corruption - Bribery - Fraud/false claims - Unfair competition - 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 - Other emerging ethical risks - Risk of ethics and values being compromised when times are tough, not just in high-risk markets. |
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 civil and/or criminal penalties, debarment and reputational damage. How it is mitigated Balfour Beatty has a proactive approach to assessing and addressing corruption risks. It promotes compliance with its Code of Conduct and in areas such as competition and false claims fraud. The Ethics and Compliance function, together with compliance officers in the business, are responsible for embedding and monitoring the compliance programme and investigating any alleged breaches of it. The risk of business conduct/compliance breaches by third parties is harder to control, but the Group has a range of risk assessment, due diligence and procurement controls that are designed to identify and minimise such risks. Balfour Beatty works with very few agents, all of whom undergo a rigorous due diligence and approval process. |
Legal and regulatory
No change to risk |
Build to Last pillar:
Trusted |
Owner:
The Board |
Risk description The Group operates in diverse territories and its businesses are subject to a variety of complex, demanding and evolving legal, tax and regulatory requirements. Causes - Data protection and privacy - Information security lapse - Cybercrime - Government/regulatory enquiry and enforcement actions - Adverse changes of law, including changes to tax law - Local procurement laws - Debarment or blacklisting. |
What impact it might have Changes to local laws and regulations could lead to legal proceedings, investigations or disputes resulting in business disruption ranging from additional project costs to potential debarment and reputational damage. Such action could also impact upon the valuation of assets within that territory. Increasingly, businesses are the target of cybercrime, which can result in loss of confidential, personal or commercial data, disruption to operations and associated costs. Sometimes Balfour Beatty may be the target of state-sponsored cyber activities purely because of its customer base. How it is mitigated The Group monitors and responds to tax, legal and regulatory developments and requirements in the territories in which it operates. Local legal and regulatory frameworks are further considered as part of any Group decision to conduct business in a new country. Data protection and information security programmes are in place across the Group, and cybercrime and other information security risks are assessed on a regular basis. |
Environment and sustainability
No change to risk |
Build to Last pillar:
Expert |
Owner: Safety and
Sustainability Committee |
Risk description The Group's activities can have a positive or negative impact on the natural environment and the communities it operates in. The Group's activities and their location mean that environmental and sustainability risks need to be identified, monitored and managed. Causes Environmental risk may arise leading to a breach of compliance and incident due to: - failure to deliver leadership - ineffective management of subcontractors - poor risk identification/assessment - having processes that fail to promote risk elimination or mitigation - failure to follow procedures - not briefing people properly before setting them to work - failure to identify emerging regulatory requirements. The reporting of inaccurate greenhouse gas (GHG) data and other data needed for sustainability performance reporting may mean the Group is unaware of its actual impact and expose it to reputational damage and fines. Unethical/unsustainable sourcing (eg timber, forced labour, child labour) could lead to reputational damage and impact Balfour Beatty's ability to tender for work. Insufficient management support and resourcing to achieve the Group's environment and sustainability goals. |
What impact it might have Failure to address these risks and to execute projects to meet the Group's environmental and sustainability goals could result in significant potential liabilities, reputational damage, an inability to win future work and in some operational regions potential criminal prosecutions. How it is mitigated The Group's Blueprint strategy provides a framework for its operating businesses to accommodate and embed environment and sustainability into operations. Issues such as climate change and resource use are considered in risk management activities at the business unit as well as project level. Balfour Beatty's business processes are used to identify potential risks and opportunities for the business. Management systems are in place to control some of the aforementioned risks and in addition the Group is subject to external audits undertaken by third parties. Scope 1 and 2 GHG emissions are also externally assured (see page 40) to ensure that the data is correct. |
Legacy pension liabilities
No change to risk |
Build to Last pillar:
Lean |
Owner:
The Board |
Risk description The Group remains exposed to significant defined benefit pension risks. Causes The size of historic pension obligations is largely related to the investment performance of the assets held in the pension funds, net of the change in the value of the funds' liabilities. The latter are typically related to changes in the long-term outlook for interest rates, inflation and life expectancy. The size of the obligations could also be adversely influenced by intervention from regulators or legislators. |
What impact it might have Failure to manage these risks adequately could lead to the Group being exposed to significant additional liabilities. How it is mitigated The Group constructively engages with the trustees of the pension funds to ensure that the the funds' assets and liabilities are managed in a way which reduces the likelihood of an unexpected cost to the Company. The Group's main UK fund has hedged over 65% of its exposure to interest rate and inflation movements. |
Balfour Beatty also faces significant risks and uncertainties that are common to many companies - including financial and treasury, communications and marketing, wider information security, business continuity and crisis management, and hazard risks."
"Statement of Directors' responsibilities
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
The Directors confirm that to the best of their knowledge:
- the financial statements, prepared in accordance with IFRS as adopted by the EU and Article 4 of the IAS Regulation, 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 they face.
In light of the work undertaken by the Audit and Risk Committee reported in greater detail on pages 59 to 61 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.
By order of the Board
Andrew Astin
Company Secretary
14 March 2016"
