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Portfolio Valuation

Balfour Beatty’s PPP concession portfolio has grown in recent years to beome a very significant part of the Group’s business and a major driver of shareholder value.

At 31 December 2007, Balfour Beatty had total committed equity and subordinated debt of £251 million across 27 projects, four of which were at preferred bidder stage. At that date, £144 million had already been invested and £107 million is due over the next five years.

Valuations of PPP equity often rely on the use of multiples to produce a proxy cash flow valuation. This produces somewhat crude benchmarks as such an approach takes no account of the time value of money, expected rate of return of the asset, the performance of the asset or the potential for capital restructuring.

In order to provide a more reliable indicator of value, in 2005 Balfour Beatty decided to publish its own valuation benchmark for the Group’s PPP investments, based largely on discounting expected future cash flows, but without taking into account potential refinancing gains. This is now a regular feature of Balfour Beatty’s Annual Report and Accounts.

2007 valuation
At 31 December 2007, the Directors’ valuation of Balfour Beatty’s portfolio stood at £299 million, at a weighted average, post-tax nominal discount rate of 8.1%, compared with £341 million at the end of 2006 (8.1%). The movement in value arises both through shareholder cash inflows and outflows and through underlying growth in the portfolio arising from the unwinding of the discount rate from year to year. A 1% change in the discount rate impacts value by approximately £35 million.

The valuation method
The valuation does not set out to estimate the market value of the investments in the portfolio, but rather, through the application of a consistent methodology, illustrates movements in underlying values between periods and highlights the impact of intervening transactions. The valuation covers 23 concessions that have reached financial close and four at preferred bidder stage. One of two methods has been used to establish the value of individual concessions.

DCF
The principal method used to value the portfolio is discounted cash flow (DCF). This is applied to the future forecast cash flows to which Balfour Beatty as a shareholder and a holder of subordinated debt is entitled in order to create a net present value (NPV). DCF has been used on all the investments in 2007. For projects which have reached financial close, forecast future cash flows are extracted from detailed financial models, updated in line with operational experience and lenders’ requirements. For projects at preferred bidder stage, the current financial model has been used.

DCF Methodology (including DCF Methodology text)

Book value
In 2006 the Metronet (£59m) and Powerlink (£7m) concessions were included at the current carrying value in the accounts (book value). Metronet has now been written off and the discussions with London Underground on Powerlink have concluded such that the cash flows now have a sufficient degree of certainty for the concession to be valued using DCF. Accordingly no concessions have been included in the 2007 valuation at book value. Moving from the book value to a DCF valuation of Powerlink increased its Directors’ valuation in 2007 from £7m to £10m.

Assurance
The calculations underpinning the valuation have been independently checked to ensure that the valuation has been accurately carried out in accordance with the specified methodology. However the detailed financial models have not been audited.

	2007	2006
Total equity committed by sector	£251m	£234m
1 Connect: 8 projects	£68m	£63m
2 Consort: 9 projects	£123m	£113m
3 Transform: 7 projects	£48m	£50m
4 Other: 3 projects	£12m	£8m
	2007	2006
Cash invested by December 2007	£144m	£135m
1 Connect: 8 projects	£56m	£56m
2 Consort: 9 projects	£62m	£62m
3 Transform: 7 projects	£18m	£10m
4 Other: 3 projects	£8m	£7m
	2007	2006
Value by sector	£299m	£341m
1 Connect	£134m	£113m
2 Consort	£121m	£138m
3 Transform	£22m	£13m
4 Metronet	£ -	£59m
5 Other	£22m	£18m
	2007	2006
Value by phase	£299m	£341m
1 Operations	£273m	£264m
2 Metronet	£ -	£59m
3 Preferred bidder	£3m	£6m
4 Construction	£23m	£12m

Movement in value 2006/2007