Carillion performed strongly in difficult market conditions during 2009 to deliver a 19 per cent increase in underlying⁽¹⁾ profit from operations and a 14 per cent increase in underlying⁽²⁾ earnings per share.

This was backed by strong cash generation that resulted in the Group having net cash at 31 December 2009 of £24.9 million, compared with net borrowing of £226.7 million at 31 December 2008.

Profit and earnings growth were due to the Group’s resilient business mix, which delivered a good underlying operating performance, together with the benefits of cost savings from integrating the Alfred McAlpine business, which was acquired in February 2008.

Carillion is a leading UK support services company with a substantial portfolio of Public Private Partnership projects and extensive construction capabilities. Having this wide range of skills and resources enables the Group to deliver fully integrated solutions for buildings and infrastructure, from project finance through design and construction, to life-time asset management.

The Group has operations in the UK, Middle East and North Africa and Canada and the Caribbean and our principal market sectors and activities are described within What we do.

Accounting policies

The Group’s annual consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The following new accounting standards and interpretations, which became effective after 1 January 2009, have been adopted during the year.

• Amendments to International Accounting Standard (IAS) 1 ‘Presentation of financial statements – a revised presentation’
• Revised International Accounting Standard (IAS) 23 ‘Borrowing costs’
• International Financial Reporting Standard (IFRS) 8 ‘Operating segments’
• International Financial Reporting Interpretations Committee (IFRIC) 14 ‘The limit on a defined benefit asset, minimum funding requirements and their interaction’
• Amendments to International Financial Reporting Standard (IFRS) 2 ‘Share-based payment – vesting conditions and cancellations’
• Amendments to International Financial Reporting Standard (IFRS) 7 ‘Improving disclosure about financial instruments’.

These new standards and interpretations, together with the Group’s other significant accounting policies are described within the Notes to the consolidated financial statements.

Group overview

Total revenue in 2009 increased by four per cent to £5,426.5 million (2008: £5,205.8 million), including revenue from Joint Ventures of £922.3 million (2008: £772.0 million).

Total underlying profit from operations increased by 19 per cent to £196.8 million (2008: £165.2 million), including profit from Joint Ventures of £65.9 million (2008: £45.1 million).

The underlying profit from operations margin increased to 3.6 per cent (2008: 3.2 per cent) and reflected our continuing drive to improve margins through contract selectivity, cost reduction and greater efficiency.

After a net financial expense of £14.6 million (2008: £7.7 million), underlying profit before tax was £182.2 million (2008: £157.5 million), an increase of 16 per cent. Underlying earnings per share on the same measure increased by 14 per cent to 39.0 pence (2008: 34.3 pence).

Intangible amortisation was £30.8 million (2008: £54.5 million, including impairment of other investments). Non-recurring operating costs amounted to £15.2 million (2008: £22.7 million) and non-operating income was £11.5 million (2008: £35.6 million). Total non-recurring operating and non-operating items therefore amounted to a net cost of £3.7 million (2008: £12.9 million income), leaving reported profit before tax of £147.7 million (2008: £115.9 million).

Group taxation was £11.5 million (2008: £4.1 million), which when combined with Joint Ventures taxation of £6.5 million (2008: £10.7 million) represented an underlying effective tax rate of 16 per cent (2008: 20 per cent). Profit after tax was £136.2 million (2008: £111.8 million) and minority interests were £3.8 million (2008: £3.5 million), leaving profit attributable to Carillion shareholders of £132.4 million (2008: £108.3 million). Basic earnings per share were 33.4 pence (2008: 28.4 pence).

Underlying cash flow from operations of £268.2 million (2008: £198.3 million) again comfortably exceeded underlying profit from operations of £196.8 million (2008: £165.2 million). After payments of £29.0 million to pension funds (2008: £50.5 million), in line with our pension deficit recovery plan, net capital expenditure of £47.3 million (2008: £26.4 million), restructuring and other costs of £17.1 million (2008: £32.4 million), interest, tax and dividend payments of £63.2 million (2008: £62.2 million) and a net income from disposals of £142.7 million (2008: £227.0 million net cost), the Group had net cash at 31 December of £24.9 million, compared with net borrowing at 31 December 2008 of £226.7 million.

Segmental reporting and analysis

Operating profit by financial reporting segment is summarised in the table below and a detailed segmental analysis of the Group’s businesses is provided in Note 2 to the financial statements. Operating performance in each of our financial reporting segments is discussed in more detail below.

Financial reporting segments and analysis

Operating profit by financial reporting segment

	2009 £m	2008 £m	Change from 2008 %
Support services	117.7	113.5	4
Public Private Partnership projects	32.2	29.8	8
Middle East construction services	47.0	34.5	36
Construction services (excluding the Middle East)	30.9	28.7	8
	227.8	206.5	10
Group eliminations and unallocated items	(10.5)	(12.4)	15
Profit from operations before Joint Ventures net financial expense and taxation	217.3	194.1	12
Share of Joint Ventures net financial expense	(14.0)	(18.2)	23
Share of Joint Ventures taxation	(6.5)	(10.7)	39
Underlying profit from operations(1)	196.8	165.2	19
Intangible amortisation and impairment of other investments	(30.8)	(54.5)	43
Non-recurring operating items	(15.2)	(22.7)	33
Reported profit from operations	150.8	88.0	71
(1) Before intangible amortisation, impairment of other investments and non-recurring operating items.

Support services

In this segment we report the results of our facilities management, facilities services, rail services, road maintenance, utility services and consultancy businesses.

Underlying operating profit⁽¹⁾ increased by four per cent to £117.7 million, on revenue three per cent lower at £2,389.5 million, reflecting a substantial improvement in the operating margin from 4.6 per cent to 4.9 per cent. Margins improved, despite more competitive market conditions, as a result of maintaining our financial discipline through continuing to apply strict contract selectivity criteria, together with the benefits of the Alfred McAlpine integration and re-organisation costs savings, which are coming through as expected.

The reduction in revenue reflected the sale of non-core businesses, the loss of a contract to manage insurance claims for Aviva, following a strategic decision by Aviva to take in-house services that involve direct contact with their customers, and the effect of being financially disciplined and selective in respect of contract bids and re-bids.

In 2009, we continued to strengthen our position as one of the UK’s leading support services companies through our ability to combine our extensive skills and nationwide resources to provide innovative cost-effective service solutions tailored to meet the needs of our customers. In particular, having the skills and resources to provide all the services needed to manage and maintain large, complex property estates and infrastructure helps to differentiate Carillion from its competitors. Our use of leading-edge technology to improve the quality and reduce the cost of these services has also become increasingly important to existing and new customers in the current economic climate.

Our order book has increased following a number of notable successes during the year. These included a £1.0 billion, seven-year contract awarded to a Carillion-led Joint Venture to provide Openreach, BT’s local access network business, with nationwide asset management and maintenance services; facilities management and services contracts for the NHS worth some £240 million; road and rail infrastructure maintenance contracts worth £250 million; and facilities management contracts for other Government, regulated and blue-chip private sector customers worth approximately £400 million.

The strong positions we hold in Public Private Partnership (PPP) projects, both in the UK and Canada, through combining our project finance, design, construction and support services capabilities, continue to make significant contributions to this segment. The supports services capabilities forward order book relating to PPP projects currently stands at £6.9 billion and provides exceptional long-term revenue visibility, given PPP contract periods are typically between 25 and 35 years.

The total value of our forward order book for support services at 31 December 2009 was £11.1 billion (2008: £10.8 billion). At the year end, we also had a pipeline of probable new orders worth £0.6 billion (2008: £0.6 billion) and our largest ever pipeline of contract opportunities.

(£m)	2009	2008	% Change
Revenue
– Group	2,108.3	2,227.1
– Share of joint ventures	281.2	236.4
	2,389.5	2,463.5	(3)
Underlying operating profit(1)
– Group	102.9	99.5
– Share of joint ventures	14.8	14.0
	117.7	113.5	4
(1) Before intangible amortisation, impairment of other investments and non-recurring operating items.

Public Private Partnership projects

In this segment we report the equity returns from our investments in Public Private Partnership (PPP) projects. The results of the support services and construction services we provide as part of delivering PPP projects are reported in ‘support services’ and ‘construction services (excluding the Middle East)’, respectively.

Our ability to combine our skills and resources in project finance, design, construction and support services to win and successfully deliver the high-quality assets and services expected from these projects, continues to generate considerable value for the Group.

We target a 15 per cent internal rate of return on our investments in these projects over the life of the concession contracts, which is typically between 25 and 35 years. Once construction of the asset is complete and the project has moved successfully into the operational phase, with the support services contract firmly established, we have the option of selling our equity investments and reinvesting the proceeds in new projects.

During 2009, we sold investments in four mature projects – Exeter Schools, Renfrewshire Schools, the New Accommodation Project (Cheltenham) and Allenby Connaught – generating proceeds of £100.7 million, which reflected a net present value of the cash flows from these investments based on a discount rate of some eight per cent. Over the last six years, we have sold a total of 28 investments, generating proceeds of some £279.9 million and a pre-tax profit of £105.6 million.

During the year, we also continued to add new projects to our portfolio: Carillion joint ventures achieved financial close on five projects – two Building Schools for the Future (BSF) programmes, namely Tameside and Durham, the Lister Surgicentre in Hertfordshire, the Royal Victoria Hospital in Barrie, Ontario and the Centre for Addiction and Mental Health in Toronto – in which Carillion expects to invest total combined equity of some £22.8 million.

At the year end, we had a portfolio of 23 financially closed projects in which we had invested £46.6 million and had commitments to invest a further £74.1 million of equity. Following the equity disposals made during 2009, the Directors’ valuation of our remaining equity investments at 31 December 2009 was £115 million (2008: £216 million), based on discounting the cash flows from these investments at an average discount rate of nine per cent. At 31 December 2009, we had a forward order book worth £2.4 billion (2008: £5.3 billion), with the reduction on 2008 reflecting the sale of four PPP equity investments during the year, and probable orders worth £0.2 billion (2008: £0.1 billion).

Since the year end, we have achieved financial close on Southmead Hospital, Bristol, in which we will invest £50 million of equity, and on the Rochdale BSF programme in which we will initially invest some £2.4 million of equity. We expect to make further equity investments in subsequent phases of the Rochdale programme.

In addition, we are currently the preferred bidder for the Wolverhampton BSF programme, in which we expect to invest up to £6 million of equity and we are shortlisted for a further four projects in the UK and Canada in which Carillion could potentially invest up to £59 million of equity.

Directors’ valuation after selling equity
investments for £100.7m during 2009
Net present value (£m)

(£m)	2009	2008	% Change
Revenue
– Group	1.1	0.9
– Share of joint ventures	214.5	177.5
	215.6	178.4	21
Underlying operating profit(1)
– Group	–	(0.2)
– Share of joint ventures	32.2	30.0
	32.2	29.8	8
(1) Before intangible amortisation, impairment of other investments and non-recurring operating items.

Middle East construction services

In this segment we report the results of our building and civil engineering activities in the Middle East and North Africa.

Our Middle East construction businesses have again performed strongly against our previously announced target of more than doubling our share of revenue from these businesses from £269 million in 2006 to around £600 million in 2009, at an operating margin in excess of six per cent. In 2009, revenue increased by 19 per cent to £554 million, with the underlying operating margin up from 7.4 per cent to 8.5 per cent which resulted in an increase of 36 per cent in underlying operating profit to £47.0 million. Cash flow has also remained strong with receipts from customers in 2009 of some £555 million, which supported an increase in the dividend received from our Middle East businesses.

We have continued to deliver substantial growth in the Middle East, despite the slowdown of construction activity in Dubai, through our strategy of geographical diversification and of focusing on a small number of financially robust customers with whom we have strong long-term relationships.

We commenced operations in Abu Dhabi in early 2008, since when its contribution to Middle East revenue has increased from 20 per cent in 2008 to 55 per cent in 2009, while the contribution from Dubai has reduced as expected from 55 per cent in 2008 to 20 per cent in 2009. Revenue in Oman has also grown significantly to leave its contribution broadly unchanged at 23 per cent, with the balance of two per cent coming from Egypt.

The successful completion in October 2009 of the £350 million Yas Hotel, the centrepiece of Abu Dhabi’s new Formula 1 Grand Prix circuit, for developer ALDAR, has further reinforced the reputation of Al Futtaim Carillion as one of the region’s leading contractors, well positioned to continue winning high-quality work. For example, during 2009, Al Futtaim Carillion secured a number of new orders in Abu Dhabi, including a £550 million contract for ALDAR to build the Al Muneera development and a £150 million contract to build a new headquarters for the Abu Dhabi Investment Council, together with further infrastructure works for Emirates Aluminium and the Qasr Al Muwaiji museum for the Authority for Culture and Heritage, together worth some £50 million.

Our business in Oman, Carillion Alawi, also used its reputation as a market leader in delivering high-quality projects to secure significant new contracts in 2009, the largest of which being a £275 million contract for the Royal Court Affairs to build the Majlis, a prestigious new Parliament building. In Egypt, we continue to make progress on the construction of Cairo Festival City, for which the customer is our Joint Venture partner, The Al Futtaim Group.

At the year end, Carillion’s share of the forward order book of our Middle East businesses was £0.7 billion (2008: £0.8 billion). We also had probable new orders worth approximately £0.2 billion (2008: £0.9 billion) and a pipeline of contract opportunities worth over £4 billion.

(£m)	2009	2008	% Change
Revenue
– Group	130.2	111.7
– Share of joint ventures	423.4	352.5
	553.6	464.2	19
Underlying operating profit(1)
– Group	6.8	6.4
– Share of joint ventures	40.2	28.1
	47.0	34.5	36
(1) Before intangible amortisation, impairment of other investments and non-recurring operating items.

Construction services

(excluding the Middle East)

In this segment we report the results of our UK building, civil engineering and developments businesses, together with those of our construction activities in Canada and the Caribbean.

Total revenue increased by eight per cent to £2,267.8 million. Within this total, UK revenue reduced slightly in line with our expectations, but this was more than offset by growth in Canada, primarily due to the acquisition of the Vanbots Group in October 2008. Underlying operating profit⁽¹⁾ increased by eight per cent, reflecting a stable operating margin of 1.4 per cent, which was a satisfactory result in challenging market conditions. The operating margin for all our construction activities, including Middle East construction services, increased to 2.8 per cent (2008: 2.5 per cent).

The UK contribution to revenue reduced slightly as a result of continuing to apply strict contract selectivity and risk management criteria, in order to secure high-quality projects for long-term customers in our chosen sectors of the non-housing, new-build market. As a result, we have continued to adjust the scope and scale of our construction capability to ensure it has the critical mass necessary to support the delivery of Public Private Partnership (PPP) projects and the needs of our support services business, while taking account of our expectations for reduced future demand in other UK construction markets.

The intake of new orders has remained healthy. Notable successes in the UK included contracts for the Building Schools for the Future (BSF) programme worth £800 million, a £209 million contract to upgrade the A1 trunk road to motorway standard in Yorkshire, a £130 million contract for a luxury residential development for Grosvenor on London’s South Bank and a £116 million contract for HM Prison Low Moss in Scotland.

In Canada and the Caribbean, we have had a very successful year. The acquisition of the Vanbots Group further strengthened our construction capability and leadership position in the growing PPP projects market in Canada, as evidenced by a number of major contract wins in 2009. Notable successes in Canada included two PPP projects in the health sector – the £144 million Royal Victoria Hospital in Barrie, Ontario, and the £107 million Centre for Addiction and Mental Health in Toronto – and a £360 million contract for the revitalisation of Union Station in Toronto.

At the year end, our forward order book for construction services (excluding the Middle East) was worth £3.5 billion (2008: £3.5 billion) and we had a pipeline of probable new orders worth approximately £1.0 billion (2008: £1.5 billion).

Since the year end, we have achieved financial close on the Rochdale BSF programme and the Southmead Hospital PPP project in Bristol, which together will generate over £600 million of construction services revenue for Carillion.

(£m)	2009	2008	% Change
Revenue
– Group	2,264.6	2,094.1
– Share of joint ventures	3.2	5.6
	2,267.8	2,099.7	8
Underlying operating profit(1)
– Group	31.7	26.8
– Share of joint ventures	(0.8)	1.9
	30.9	28.7	8
(1) Before intangible amortisation, impairment of other investments and non-recurring operating items.

Intangible amortisation and impairment of other investments

Intangible amortisation of £30.8 million (2008: £54.5 million) relates to the amortisation of intangible assets arising primarily from the acquisition of Mowlem in 2006 and Alfred McAlpine and the Vanbots Group in 2008. The £54.5 million charge in 2008 included an impairment charge of £11.7 million in respect of the investment in the Alice Springs to Darwin railway, a Public Private Partnership project acquired with Mowlem.

Non-recurring operating items

These costs are summarised in the table below.

(£m)	2009	2008
Rationalisation costs	(9.9)	–
Office of Fair Trading penalty	(5.4)	–
Curtailment gain	0.1	35.5
Alfred McAlpine integration and re-organisation costs	–	(55.0)
Vanbots Group integration and re-organisation costs	–	(3.2)
	(15.2)	(22.7)

Rationalisation costs of £9.9 million relate to redundancy and other associated costs incurred in rationalising the Group’s structure at the end of 2009. This includes ensuring that the size of the Group’s UK construction capability reflects the expected decline in our general construction markets, while maintaining the capability we need to support the delivery of Public Private Partnership projects and meet the needs of our support services business.

The Office of Fair Trading (OFT) penalty of £5.4 million was imposed on Carillion JM Limited, which was formerly Mowlem plc prior to its acquisition by Carillion. Mowlem was one of 103 companies penalised following an OFT investigation into cover pricing in the construction industry under the Competition Act 1998. The anti-competitive activities for which Mowlem was penalised related to the activities of Mowlem prior to its acquisition by Carillion in February 2006. No other Carillion companies were subject to the OFT investigation.

A curtailment gain of £35.5 million was recognised in 2008, as a result of closing four Carillion defined benefit pension schemes to future accrual, net of £2.8 million of expenses. From 31 December 2009, benefits paid in respect of the Alfred McAlpine Pension Plan will no longer be linked to final salary (see also ‘Retirement benefits’ within this section. This gave rise to a curtailment gain of £0.1 million (net of expenses).

Non-operating items

Non-operating income in 2009 amounted to £11.5 million (2008: £35.6 million) and comprised a profit of £1.2 million on the sale of investments in Public Private Partnership projects and a provisional profit of £10.3 million on the sale of two non-core businesses – Carillion IT Services and the Group’s environmental consultancy business, Enviros.

Net financial expense

The Group had a net financial expense of £14.6 million (2008: £7.7 million). This comprised a net expense of £15.8 million in respect of borrowings, a net interest charge of £2.2 million in respect of retirement benefit schemes and an interest credit of £3.4 million in respect of loans to Special Purpose Companies for Public Private Partnership projects.

Taxation

The effective tax rate on underlying profit was 16 per cent, which is below the UK standard rate of corporation tax, principally reflecting the change to UK legislation in July 2009 that made dividends received from overseas companies exempt from UK taxation, together with the utilisation of UK tax losses. At 31 December 2009 the Group had £375 million (2008: £355 million) of corporate tax losses in the UK that are available to reduce future tax payments.

Earnings per share

Underlying earnings per share increased by 14 per cent to 39.0 pence (2008: 34.3 pence). This substantial increase reflected the Group’s strong operating performance, notably through growing operating margins and by reducing central costs.

Dividend

Carillion has a dividend policy of progressively increasing the dividend paid to shareholders broadly in line with earnings growth, after taking account of the investment needs of the business. Consistent with this policy, the Board has recommended a final dividend in respect of 2009 of 10.0 pence, making the full-year dividend 14.6 pence, an increase of 12 per cent on the total paid in respect of 2008 (13.0 pence). Underlying dividend cover was 2.7 times (2008: 2.6 times).

Cash flow

A summary of the Group’s cash flows is shown below.

(£m)	2009	2008
Underlying Group operating profit	130.9	120.1
Depreciation and other non-cash items	38.8	19.2
Working capital	59.9	34.0
Dividends received from Joint Ventures	38.6	25.0
Total underlying cash inflow from operations	268.2	198.3
Deficit pension contributions	(29.0)	(50.5)
Restructuring costs	(17.1)	(32.4)
Interest, tax and dividends	(63.2)	(62.2)
Net capital expenditure	(47.3)	(26.4)
Acquisitions and disposals	142.7	(227.0)
Other	(2.7)	18.4
Change in net borrowing	251.6	(181.8)
Net borrowing at 1 January	(226.7)	(44.9)
Net cash/(borrowing) at 31 December	24.9	(226.7)
Average net borrowing	(274.4)	(329.8)(1)
(1) Post the acquisition of Alfred McAlpine.

Our continuing focus on strong cash management and the delivery of cash-backed profit has produced underlying cash flow from operations of £268.2 million, significantly ahead of underlying profit from operations of £196.8 million. This, together with proceeds from the sale of four investments in Public private Partnership (PPP) projects and from the disposal of non-core businesses, namely, Carillion IT Services and Enviros, has resulted in the Group having net cash at 31 December 2009 of £24.9 million, compared with net borrowing of £226.7 million at 31 December 2008.

Additional cash payments to the Group’s pension’s schemes amounted to £29.0 million, in line with our pension deficit recovery plan. The cash cost of restructuring of £17.1 million includes costs relating to the integration of the Alfred McAlpine and Vanbots Group businesses, which were acquired in 2008, and costs relating to restructuring the Carillion Group, as described under ‘Non-recurring operating items’ within this section. Net capital expenditure of £47.3 million was higher than in 2008, because the latter was net of disposal proceeds of £15.0 million, not repeated in 2009. Overall capital expenditure was higher than the Group’s annual depreciation charge, because of additional investment in IT infrastructure, in order to accommodate the Alfred McApine businesses and deliver planned synergy benefits, and in plant and equipment to support the growth of our business in Canada. The cash inflow in respect of acquisitions and disposals in 2009 reflected £157.9 million of proceeds (net of costs) from the sale of investments in PPP projects and non-core businesses, net of £15.2 million of further investments in PPP projects.

Balance sheet

Carillion’s balance sheet remains strong and is supported by committed bank facilities of £655 million, the largest of which is a £590 million syndicated facility which matures in September 2012.

(£m)	2009	2008
Property, plant and equipment	168.2	167.2
Intangible assets	1,241.3	1,276.9
Investments	177.1	238.6
	1,586.6	1,682.7
Inventories, receivables and payables	(608.0)	(490.4)
Net retirement benefits liability (net of tax)	(211.1)	(76.2)
Other	(15.2)	(21.8)
Net operating assets	752.3	1,094.3
Net cash/(borrowing)	24.9	(226.7)
Net assets	777.2	867.6

Intangible assets reduced primarily as a result of amortisation. The reduction in investments reflects the sale of four of the Group’s equity investments in PPP projects. The movement in inventories, receivables and payables was primarily due to a £40 million receipt resulting from outsourcing Carillion’s internal IT functions to Accenture, as announced in June 2009, and a reduction in working capital of some £33 million arising from the disposal of Enviros and our external IT business. The increase in the Group’s net retirement benefits liability was due to a number of factors, but primarily reflects a reduction in market bond yields since December 2008, partially offset by additional cash payments to our pension schemes under our pension deficit recovery plan and a curtailment gain, which is explained in the section headed ‘Retirement benefits’.

Share price

Carillion’s share price was 303.8 pence at close of business on 31 December 2009, an increase of 22.5 per cent in the closing price on 31 December 2008 of 248.0 pence.

Carillion’s total shareholder return increased in 2009 by 23 per cent, broadly in line with the return for the FTSE 350. Over the last five years, Carillion’s total shareholder return has significantly outperformed the FTSE 350. The FTSE 350 has been chosen by the Board as the best comparator to illustrate Carillion’s performance against a broad equity market index.

Five-year total shareholder return

One-year total shareholder return

Retirement benefits

The Group’s ongoing pensions charge against profit in 2009 was £28.6 million (2008: £35.8 million). After additional cash payments to the Group’s pension schemes of £29.0 million (2008: £50.5 million), in line with our deficit recovery plan, and a curtailment gain of £3.3 million (2008: £38.3 million), the Group’s pension schemes had a total deficit net of tax at 31 December 2009 of £211.1 million (2008: £76.2 million). As part of the Group’s strategy for managing the risks and liabilities associated with its defined benefit pension schemes, the benefits for members of the Alfred McAlpine Pension Plan will, as with other Carillion schemes, no longer be linked to final salary with effect from 31 December 2009.

Committed bank facilities

The Group’s main committed bank facilities of £655 million comprise a £590 million syndicated five-year facility, bilateral facilities of £50 million and a £15 million 364-day facility. The £590 million facility is repayable on 30 September 2012, having been arranged in September 2007 on favourable terms, before the severe tightening of the credit markets. The bilateral facilities have repayment dates between September and December 2012. These facilities have proved to be more than adequate to support the operations of the Group.

Operational and financial risk management

Carillion has rigorous policies and processes in place to identify, mitigate and manage strategic risks and those specific to individual businesses and contracts, including economic, social, environmental and ethical risks. These are summarised within the Group Chief Executive’s review.

Treasury policy and financial risk management

The Group has a centralised Treasury function whose primary role is to manage funding, liquidity and financial risks. In addition, Treasury sources and administers contract bond and guarantee facilities for the Group. Treasury is not a profit centre and does not enter into speculative transactions. The Board sets policies within which Treasury operates that ensure the most effective financing of the Group’s operations and limit exposure to financial risk. The areas of significant financial risk facing the Group relate to funding and liquidity, counterparty risk, foreign exchange and interest rates.

Funding and liquidity

In addition to Carillion plc’s principal borrowing facilities described above, money market and short-term overdraft facilities are available to Carillion plc and certain subsidiaries. Operating leases are also employed to fund longer-term assets. The quantum of committed borrowing facilities available to the Group is regularly reviewed by the Carillion Board and is designed to satisfy the requirements of the Group’s business plan. At 31 December 2009, the Group had undrawn committed facilities amounting to £518.4 million (2008: £242.3 million). This excludes the Group’s share of cash balances amounting to £144.5 million (2008: £157.7 million) within jointly controlled operations, which are outside of the Group’s facilities. These cash balances are available to the Group to the extent that they are not needed to meet the working capital requirements of the jointly controlled operations.

Counterparty risk

The Group undertakes significant financial transactions only with counterparties that have strong credit ratings. The limits and requirements in respect of such transactions are reviewed regularly by the Board of Carillion plc.

Foreign exchange

The Group hedges all significant currency transaction exposures using foreign exchange risk management techniques. In order to protect the Group’s balance sheet from the impact of exchange rate volatility, foreign currency net assets are hedged using matching currency loans equivalent to at least 60 per cent of the net asset value, where these assets exceed the equivalent of £10 million. Profits arising within overseas subsidiaries are not hedged unless it is planned to make a distribution. Such distributions are then treated as currency transactions and hedged accordingly.

The average and year-end exchange rates used to translate the Group’s overseas operations were as follows:

	Average		Year end
(£ sterling)	2009	2008	2009	2008
Middle East (US Dollar)	1.56	1.84	1.61	1.44
Oman (Rial)	0.60	0.71	0.62	0.55
UAE (Dirhams)	5.72	6.75	5.93	5.28
Canada (Dollar)	1.78	1.95	1.69	1.77
Trinidad (Dollar)	9.81	11.52	10.23	9.04

Interest rates

The Group’s borrowing facilities are at floating rates of interest linked to the London Inter Bank Offered Rate, UK base rate or prevailing local currency interest rates. Short-term bank deposits and foreign currency hedging transactions are executed only with highly credit-rated authorised counterparties and credit exposures to counterparties are monitored regularly so that exposure to any one counterparty is either within Board approved limits or approved by the Board. The Group has not entered into interest rate derivatives to fix or hedge interest rate risk and currently none are outstanding. Certain longer-term assets have been financed using fixed rate leases.

Carillion has invested equity in a number of Joint Venture Special Purpose Companies (SPC) to deliver Public Private Partnership projects. SPCs obtain funding for these projects in the form of long-term bank loans or corporate bonds without recourse to the Joint Venture partners and secured on the assets of the SPC. A number of SPCs have entered into interest rate derivatives as a means of hedging interest rate risk. These derivatives are interest rate swaps that effectively fix the rate of interest payable.

Credit risk

An analysis of the Group’s credit risk is provided in Note 27 to the financial statements.

Going concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position, the financial position of the Group, its cash flows, liquidity position and borrowing facilities are described within the Chairman’s statement, Group Chief Executive’s review and this section. In addition, Note 27 to the financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities and its exposures to credit and liquidity risk.

The Group has considerable financial resources together with long-term contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

The Directors confirm that, after making enquiries, they have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Richard Adam FCA
Group Finance Director
3 March 2010