Review of 2010 – USD version - Skanska

Business streams
Appraisal methodology
Skanska conducts an annual market appraisal of its project
portfolio. Estimated future cash flows are discounted
at an interest rate equivalent to a yield requirement on
equity. The level of this requirement is based on country
risk, risk model and project phase for the various projects.
The appraisal is not primarily intended to establish a
specific value for the investments in the project portfolio,
but above all to use a consistent methodology to provide
an indication of movements in underlying values, while
clarifying the impact of the transactions carried out during
the period. The appraisal covers 15 projects that have
reached financial close and have thus been started up.
The 2010 appraisal
At year-end 2010, the estimated gross present value
of cash flows from projects, excluding the Autopista
Central highway, totaled USD 0.7 (1.6) billion. Unrealized
development gains before taxes amounted to about
USD 258 M (1.2 bn) at year-end. During 2010 the figure
was reduced mainly due to the divestment of Skanska’s
stake in the concession for the Autopista Central,
which is expected to generate an after-tax gain of about
USD 0.73 billion. The weighted discount rate used in the
appraisal was 10.4 (11.0) percent.
The appraisal carried out at the end of 2010 encompassed
an update of financial models and a review of the
yield requirements applied. The assessment of market
value was made in cooperation with external appraisal
expertise.
Earnings
Revenue in Skanska Infrastructure comes mainly from
Skanska’s share of income in the companies that own
assets in project portfolios and from divestments of
these companies. Expenses consist mainly of bidding
costs and the cost of Skanska’s own employees.
Starting from 2010, Skanska is applying IFRIC 12,
which means that earnings in project companies are
accounted for in relation to value of services provided.
This will result in earlier and higher income from participations
in consortia as well as lower unrealized development
gain.
Its business model is based on investing in projects
that increase in value upon being completed, thereby
enabling Skanska to sell them to investors that have
lower return requirements.
Skanska intends to expand its operations in the public-private
partnership sector. The Company prioritizes
projects with reasonable returns that meet the Group’s
yield requirements.
For some time, the United Kingdom has been the
biggest market for PPP solutions but is now affected by
cutbacks in the British government budget. However,
opportunities are expected in the fields of street lighting
networks and waste-to-energy facilities. Skanska is
working on project opportunities in the latter segment,
which is expected to grow as a consequence of EU legislation
that will not permit waste landfills.
In Sweden, opportunities are expected to increase,
for example in the construction of wind power facilities.
North America continues to offer attractive expansion
potential, but the market is developing slowly.
A number of U.S. states are planning public-private
partnerships related to road projects, but the timetable
remains uncertain.
In Latin America, there is a large potential PPP market
for hospital projects. New hospital projects are expected
to be put out for tender competitions during 2011.
In the Czech Republic and Poland, a future market
for PPP solutions is expected mainly when it comes to
new highway projects and waste to energy power plants.
The strained public budget situation in many countries
is adversely affecting the supply of new projects.
In the U.K., for example, the large-scale program for
constructing new, modern schools − Building Schools
for the Future − may be slowed down or cut back. Meanwhile
the more stable financial market situation means
that the prerequisites for new PPP projects will improve.
At 188 km (117 mi.) , London’s M25
orbital motorway is one of the
longest ring roads in the world.
Widening is currently under way
on two sections in the northeast
and northwest, and extra lanes
totaling 58 km (36 mi.) will be
added. Road-widening activities,
which began in 2009, are expected
to be completed before the
opening of the London Games
in summer 2012. Skanska’s assignment
includes operation and
maintenance of a total of 400 km
(250 mi.) of road links.
Markets
Operations focus on three segments – highways, social
infrastructure and such facilities as bridges, tunnels and
power generation stations. Skanska is involved in the
entire value chain from project design to operation and
maintenance, which implies a gradual reduction in the
risk level of projects.
Changes in unrealized development gain, 2010 1
USD M
300
250
4 −20
257 –43 53 7
258
200
150
100
50
0
Closing balance,
December 2009
IFRIC 12
adjustment
Time value Net investments
Exchange rate Other Closing balance,
December 2010
1 Excluding Autopista Central
56 Infrastructure Development Skanska Review of 2010 – USD version