Directors' valuation of the Investments portfolio

The Directors’ valuation of the Investments portfolio, including the BSF portfolio, was stable at £1,249 million as at 1 July 2016 (FY 2015: £1,244 million), after realising £82 million of cash disposal proceeds and £43 million of distributions, which were partially offset by £45 million of new investments. The number of investments included within the portfolio increased to 75 (FY 2015: 73) as the business continued to invest in new opportunities, but will reduce to 68 on completion of the sale of the BSF portfolio.

Infrastructure Investments

HY 2016 £m

 HY 2015 £m

Pre-disposals operating profit1

18

14

Gain on disposals1

52

84

Profit from operations1

70

98

Net interest income from PPP concessions2

15

16

Pre-tax result1

85

114

Directors’ valuation of PPP concessions 3

1,249

 1,252

 

1 before non-underlying items (See Note 7 of the Half Year Report and Accounts)

2 subordinated debt interest receivable and net interest receivable on PPP financial assets and non-recourse borrowings

3 includes £73 million at HY 2016 relating to the BSF portfolio of seven schools projects, as the disposal proceeds had not been received. The cash is expected to be received in the second half. 

 

New contract wins and financial closes

The Investments business continued to grow with new wins on three new projects where equity will be invested, comprising: two private rental housing projects and one data centre project. Six projects currently remain at preferred bidder, with investment already made into one of these projects, located in London, to begin developing the project to financial close.

The Investments business was also appointed as third-party manager on one fee-based project in the residential sector located in Pennsylvania, as well as being appointed preferred bidder on two fee-based student accommodation projects. In these fee-based projects no equity will be invested.

UK

The business continues to develop into new sectors and in January 2016 a site was purchased at Manchester New Cross to provide a number of units to the private rented housing sector. Construction is expected to begin following financial close in the second half of 2016.

Financial close was reached on two projects; a hospital project in Ireland and a student accommodation project in Glasgow, Scotland. An additional three projects remain at preferred bidder which are expected to close in the second half of 2016 or early 2017.

North America

In North America, the business continues to expand in the private rental housing market and successfully acquired a stake in one private rental housing portfolio in Mobile, Alabama. The portfolio consists of three properties totalling 320 units. Balfour Beatty Communities will perform property management services for the portfolio leveraging its existing capabilities.

The Investments business was also named preferred bidder and reached financial close on a data centre project in Borden, Canada. The C$155 million project is located on the Canadian Forces Base in Borden, Ontario and covers the design/construction, financing and maintenance for a new 10,000m2 data centre.

Two student accommodation projects remain at preferred bidder.

In addition, the Investments business was appointed as third-party manager on one fee-based project located in Pennsylvania and preferred bidder on two fee-based student accommodation projects located in Oklahoma and Texas. Balfour Beatty Communities will also perform property management services for one of the fee-based student accommodation projects.

Asset sales

The business continued its stated strategy of selling assets at the optimum time to maximise value for the Group. Interests in ten assets were sold in the period, one of which was a partial sale, generating total book gains on disposal of £52 million (2015: £84 million from two assets). The business sold its entire 50% interest in the Wollongong project in Australia, a 30% interest in the M1/A1 project (where the Group retains a 20% interest), its interests in Balfour Beatty Infrastructure Partners and the infrastructure fund, and its interest in the BSF portfolio comprised of seven schools projects. The sale of the BSF portfolio is expected to formally complete in the second half of 2016 following conclusion of the pre-emption process. The profit associated with the BSF disposal was recognised in the first half of 2016 following contract signature.

New investment

The Investments business continued to make substantial equity investments in the portfolio, with £45 million invested in the period (2015: £64 million), including £8 million into the infrastructure fund before its sale. The bulk of the remaining investment was in seven projects: Kennedy Street student accommodation in Glasgow, Woodland View hospital, New Cross Manchester, Cambridgeshire Street Lighting, Birmingham Bio Power, Welland Waste Wood biomass and Mobile, Alabama.

The Investments business continues to see significant opportunities for future investment in its core geographic markets in the UK and North America, across both its existing market sectors and as it continues to grow into new adjacent sectors.

Directors' valuation of the Investments portfolio

In overall terms, the Directors’ valuation rose slightly to £1,249 million at the half year, with the number of projects in the portfolio increasing from 73 to 75. This includes £73 million relating to the BSF portfolio of seven schools projects, as the disposal proceeds had not been received as at 1 July 2016.

The portfolio yielded £43 million from distributions during the period with the sale of investments realising £82 million, including £48 million for the sale of the Group’s investment in the infrastructure fund, with a further £73 million to be received on completion of the BSF sale. The Wollongong sale realised a gain of £2 million relative to the Directors’ valuation with all other sales being at values consistent with the Directors’ valuation. Total investment during the period amounted to £45 million. Projects included in the Directors’ valuation for the first time increased the value by £2 million. The unwinding of the discount increased the portfolio value by £47 million.

Operational performance movements resulted in a £20 million reduction in value with the most significant components being lower inflation (in the year, as well as forecast), lower forecast deposit interest rates, lower forecast lifecycle costs and an increase in the assumed tax burden for potential purchasers. In line with Government announcements the UK corporation tax rate has been reduced to 17% from April 2020. Foreign exchange movements increased the value of the portfolio by £54 million, with the majority arising as a result of the fall in the value of sterling against the US dollar following the EU referendum.

Following on from the OECD BEPS project’s recommendations in relation to the tax deductibility of interest expense in 2015, HM Treasury and HM Revenue and Customs issued their consultation on detailed policy design and implementation in May 2016.  These proposals preserve the concept of the public benefit exemption put forward by the OECD and also include other helpful measures to protect public infrastructure projects such as PPPs. The proposals and their application are however complex and still under development.  Further clarity will be needed before the impact on the Directors’ valuation can be fully evaluated. Balfour Beatty is actively engaged in the consultation process and will remain so in the run up to new legislation.

Directors’ valuation of PPP concessions1

£m

1 January 2016

1,244

Equity invested

45

Distributions received

(43)

Disposal proceeds

(82)

Gain/loss on disposals

2

New project wins

2

Unwind of discount

47

Operational performance movements

(20)

Foreign exchange movements

54

1 July 2016

1,249

1 includes £73 million relating to the BSF portfolio of seven schools projects, as the disposal proceeds had not been received. The cash is expected to be received in the second half.