Review of 2012 – EUR - Skanska

Improved conditions for new projects in the U.S.In 2012, Skanska reached its first Financial Close for a PPP project in the U.S. The positive earningspotential in Skanska Infrastructure Development was well demonstrated through the divestmentof four hospitals in the U.K., all for amounts exceeding those of internal appraisals.Value creation in infrastructure developmentValueAward orFinancialCloseIdentifyingBid and negotiateQualifyingProject Development0−2 yearsConstructionAsset Management3−10 yearsRamp upof operationsTimeAchieving Financial Close is the firstand largest step in value creation.Value creation step by stepIn public-private partnership projects, Skanska is involved inthe entire development chain from design and financing toconstruction, operation and maintenance. By assuming thisoverall responsibility, Skanska optimizes both constructionand operating costs.The selection process is crucial to Skanska. Projects must bein product segments and markets where Skanska has proficiencyand experience. They must of course also meet the yieldrequirements that Skanska has established. Skanska performsa thorough examination of risks and opportunities, in closecollaboration with the Group’s construction units. As a result ofthis, Skanska focuses on a limited number of projects. Skanskausually forms a bidding consortium with one or more partners.Following the successful bid of the consortium, final negotiationswith the customer and potential financiers begin. When bindingcontracts have been signed, usually at Financial Close, the assignmentis included in the order bookings of the construction unit.CompetitorsBalfour BeattyACSVINCIMarketRevenueEarningsUnrealizeddevelopmentgainsOutlook2013– Bidding activitiy was high in 2012, primarily in the U.S.– Lengthy processes make it difficult to assess when thebids will result in concrete projects.– There has been strong interest from investors in purchasingprojects in their operational phase with extended andstable cash flow.– Revenue in Skanska Infrastructure Development comesmainly from Skanska’s share of income in the companiesthat own assets in the project portfolio. When thesecompanies are divested, Skanska reports only the gainon the sale, or development gain, directly in operatingincome. Since Skanska owns minority holdings in thesecompanies, no revenue is recognized.– Operating income: EUR 68 M (523).– The divestment of four hospitals and one highway, inaddition to recovered tender costs, had a positive impacton earnings of EUR 57 M. Earnings for the comparativeperiod included the divestment of the Autopista Centralhighway for EUR 498 M.– EUR 202 M (134), an increase of EUR 68 M.– Conditions for PPP projects in the U.S. continue to improve.– The European market is more limited due to the Europeaneconomic and financial situation, even though there is astrong demand for infrastructure investments.Generating valueSkanska’s Infrastructure Development operations focuson three segments; highways including bridges and tunnels,social infrastructure such as hospitals and schools,and utilities such as power generation stations. Skanskais involved in the entire value chain, from project designto operation and maintenance, which implies a gradualreduction in the risk level of projects. Its business model isbased on investing in long-term projects that increase invalue upon completion, thereby enabling Skanska to sellthem to investors that are interested in long-term, stablecash flows when the projects are in operation. Skanska’sambition is to expand its operations in the public-privatepartnership (PPP) sector.PPP allows private market players to provide facilitiesand buildings for the public sector. This implies a numberof macroeconomic advantages for customers, taxpayers,users and construction companies. The model makesmore room for investments in public facilities by spreadingthe cost of large investments over longer periods.PPP projects create value for Skanska by generating largeconstruction assignments as well as potential capital gainsfrom divestment of completed projects, as shown in Skanska’sbusiness model on page 8. In addition to constructionassignments, in many cases Skanska is also responsible forlong-term service and maintenance assignments. SkanskaInfrastructure Development creates assets characterizedby reliable cash flows lasting many years, once steady state(the operational phase) begins.66 Infrastructure Development Substantial growth Growth Stable Decline Significant declineSkanska Review of 2012 – EUR version