Final Results - Year Ended 31 December 1999

Costain Group PLC 31 March 2000 Preliminary results for the year ended 31 December 1999 Key Points: * Profit before tax of £2.1m (1998: £0.5m) after £4.7m of reorganisation costs (1998: £0.6m) * Work in hand - £510m as at 31 December 1999 (1998: £363m) * Further cost base reduction of £7m - current annualised overheads now 50% of the 1997 level * Thames Water contract awarded worth a potential £150m over 5 years * A2/M2 contract secured worth £124m with Skanska and Mowlem in November * Reached financial close on King's College Hospital PFI project in December with construction contract worth £76m in joint venture with Skanska John Armitt, Chief Executive of Costain Group PLC, commented: 'The last year has been one of continued progress for Costain, despite a difficult period for the industry as a whole. Over-capacity and a fragmented market have resulted in margin pressure and intense competition for both public and private sector business. Against this background, Costain has embraced the changes necessary to remain competitive and has succeeded in reducing costs and improving efficiency. 'Partnering, selective tendering and new operational methods are now beginning to reap benefits and clients continue to recognise the strength of the Costain Group. One of our major shareholders Kharafi continues to support us on overseas joint ventures and in the UK our joint venture with Skanska has enjoyed considerable growth. With further operational efficiencies to come, I believe we are well positioned for future success.' Enquiries: Costain Group PLC John Armitt, Chief Executive 020 7705 8444 Graham Read, Public Relations Brunswick James Garthwaite 020 7404 5959 Nigel Fairbrass Pictures now available at www.newscast.co.uk PRELIMINARY STATEMENT 1999 Results The Group made a profit on ordinary activities before taxation of £2.1 million (1998: £0.5 million) on a turnover of £378 million (1998: £392 million). The profit was struck after reorganisation costs of £4.7 million (1998: £0.6 million). Finance The Group ended the year with net cash balances of £ 30.3 million (1998: £36.9 million). Current Trading and prospects Costain has achieved much in recent times to underline the Company's ability to understand and meet the needs of clients. The recently awarded contract for Thames Water is one such example. It is a long term contract and demands strong partnering relationships. This type of work is ideally suited to the Costain culture and further similar projects are being negotiated for major clients. The partnership with Skanska has made its impact in both civil engineering and building. Skanska has given Costain the strength of one of the world's best contractors and a financial reputation few in the industry can match. Clients have immediately recognised the benefits of working with Costain- Skanska and the joint venture has been involved in the award of nearly £300 million of work in approximately 18 months. The Company believes Costain- Skanska is the UK construction industry's fastest growing alliance. Strategy and Management As stated in the 1998 report, Costain has brought its UK Civil Engineering and Construction operations closer together under a strategy entitled One Costain. The One Costain structure is based on a matrix organisation which comprises the support functions and the operational management. The support functions provide a pool of resource which is available across Costain to the operational units. This has worked well and has precipitated a more efficient use of resource, faster sharing of best practice and improved long- term planning. It has also allowed Costain to continually assess the needs of our sites, to monitor overheads and make adjustments when needed. This is an on-going process and allows us the degree of adaptability necessary to remain efficient and cost effective. Key to that efficiency is the maintenance of high standards in vital areas such as safety and the environment. The Group has increased the amount of safety training for all staff and improved the internal audit of safety. The Group has also improved its environmental management system and developed and implemented an environmental audit process. Costain has made certain changes in the senior management structure during the year. As a consequence, John Armitt, Group Chief Executive, has taken direct control for operations both in the UK and overseas with all operations directors reporting to him. The creation of One Costain and the Company's commitment to reduce overheads has enabled Costain to reduce the number of construction staff by approximately 120 and close offices where appropriate. This has not impacted on the Company's ability to win work or to execute work to the satisfaction of clients nor will it do so in the future. Partners for Progress In 1998 the Company introduced a major initiative called Partners for Progress which incorporated business improvement methods from both Costain and Skanska. Since then it has grown and is impacting on several areas throughout the Group. Costain has become involved with the Government's Movement For Innovation initiative through the Afan waste water treatments works which Costain is constructing in partnership with Welsh Water. Costain has also been selected as a host company by Inside UK Enterprise because of our ability to demonstrate industry best practice in key areas of our business. Costain is, in addition, playing a leading role in the Major Contractors' Group Benchmarking exercise which enables comparison to be made across a number of key performance indicators. With Partners for Progress occupying a significant role in such industry wide developments and forcing the pace of change internally with several on- going business improvement projects, Costain is continuing to invest in areas vital to its business success. Review 1999 enabled Costain to make further progress in the development of the Company within key market sectors: Transport One of the major highlights of 1999 for the Group was the award of the £124 million A2/M2 road contract. The roads programme has been considerably reduced in recent years and this contract, one of the largest ever awarded by the Highways Agency, was keenly sought by the leading players in the industry. Costain teamed with Skanska and Mowlem and the skills, experience and resource of all three partners resulted in a formidable group. The project involves widening 17 kms between Cobham and junction 4 in Kent. The widened motorway will support economic development and jobs, improve safety and congestion. The existing motorway will be widened to create dual four lane carriageways. In addition the existing bridge over the Medway will be strengthened and a new viaduct will be built adjacent to the existing bridge for London bound traffic. A total of 26 new bridges will be constructed. This award also established the Costain-Skanska joint venture in UK civil engineering. It was the first time the joint venture had been awarded a civil engineering contract and provides a platform for more awards in the future. Costain's reputation in the roads construction market is good as was evidenced during the A50 Derby Southern Bypass M1 Link contract. One of the tasks was to remove a motorway bridge weighing 1600 tonnes in just 20 hours while a section of the M1 was completely closed. The operation was a total success and finished ahead of schedule. This kind of achievement can only bode well for the Company's civil engineering operations in the bridge renovation market. Costain is also working with the Highways Agency on the M5 Avonmouth Bridge strengthening project. That contract continues to provide the sternest of challenges but progress is good and the project is on target for completion in December 2000. The Newbury Bypass, which was opened at the end of 1998 and which featured Costain as the main contractor, experienced problems when the porous asphalt, in some sections of the road, began to suffer problems. The Highways Agency took immediate action and, together with Costain and the paving contractor Hanson, embarked on a programme to replace the porous asphalt. The work was completed without cost to Costain. Also in 1999 the Newbury Bypass team, which included Costain, won three Concrete Society awards including the Overall Winner. Marine The new Millennium proved to be an eventful time for Costain's marine operations. Costain provided the Millennium Pier for the much-publicised Millennium Dome at Greenwich, London. The Costain project went extremely well and the Pier provided the gateway to the Dome for Her Majesty the Queen on New Year's Eve. Costain is currently working with Norwest Holst to construct the Hungerford Bridge Millennium project over the River Thames in London. The £26 million contract involves creating two light symmetrical footbridges suspended from either side of the rail bridge between Waterloo and Charing Cross and replacing the existing Hungerford Bridge footway. As part of the project, one of Brunel's original bridge piers - the Surrey Pier - will be opened up and connected to the South Bank by two lower level walkways. Work continues on the £27 million contract to design and construct the Freeport Container Port's Phase II terminal in the Bahamas with completion expected on the final berth in July 2000. Hutchison Whampoa has taken the main facility into use on time and the customer's trade from the enlarged facility is flourishing. The Cardiff Bay Barrage project is nearing completion and the Client took over control and operation in late 1999. Retail The prestigious Chimes Shopping Centre project in Uxbridge, West London for Capital Shopping Centres is progressing well and is a good example of how the Costain-Skanska joint venture combines two cultures to form a highly effective team. The £70 million design and build contract will produce a shopping centre plus multi-screen cinema and multi-storey car park. Costain continues to work for some of the top names in retailing including Tesco and Waitrose. Hotels In 1999 Costain-Skanska was awarded the £46 million design and construct contract for the major refurbishment and extension of the Great Western Royal Hotel at Paddington, London. The project will result in a four star hotel with 25,000 m2 of accommodation including 355 rooms and will be operated by Hilton International. The client is Muirgold. Away from London, Costain is building IBIS and Formule One Hotels in Birmingham and Coventry and an IBIS hotel in Leicester. These projects not only add to Costain's hotel portfolio but also give the Company a valuable foothold in the Midlands region. Utilities The water industry continues to invest significant sums and Costain has been named as one of the three contractors for Thames Water's new alliancing agreements which involve much of that company's process capital works on its water and wastewater treatment works over the next five years. The works will involve a total spend of more than £500 million covering about 75 per cent of the Thames Water capital works programme for drinking and waste water. The Costain/Thames Water partnership has developed since 1997 when a three- year partnering agreement was agreed with Thames Water. Costain is also working on a £7 million project for Thames Water in Dartford, Kent. In Wales Costain has continued to work successfully in partnership with Welsh Water on a number of projects. Commercial Development The Company's £29 million contract for the development of luxury apartments at County Hall, London has recently been completed and the Company is also working on the construction of apartments, flats and town houses at two other locations in London. Work is progressing well on the Northgate House office development in the capital for MEPC. This project is being undertaken by the Costain-Skanska joint venture. Away from London, Costain has recently completed a design and build office development for an MEPC subsidiary at Abingdon. The Company was also recently awarded a £7 million contract for a commercial development in Salford. The client is Tameside Metropolitan Borough Council acting as agents for the Greater Manchester Property Venture Fund. International The international markets remain difficult. Costain has focused on reducing its overall presence abroad, concentrating on specific opportunities as and when they arise. Some success has been achieved in Egypt where the Company is currently responsible for the construction management of the Pyramid Heights development in Giza (contract value £125 million). The project, which will be completed in October 2003, involves commercial, retail, leisure and residential facilities set on high ground overlooking the Pyramids of Giza and the city of Cairo. Costain has recently been appointed project managers for two hotel contracts in Egypt worth together more than £40 million. The two contracts are the Steigenberger Fanadir Hotel & Resort at Hurghada and, in the same area, the extension of the Aida Hotel. In Hong Kong, the Company has been awarded a £57 million contract for the Kowloon Canton Railway Corporation. The contract, which Costain is undertaking in joint venture with China Harbour Engineering, involves the construction of a depot building and ancillary equipment for the Corporation to maintain equipment for the new West Rail phase currently under construction in the New Territories. The financial disputes in Hong Kong in relation to the Tsing Ma Bridge and Landside projects remain outstanding. The Company continues to rigorously pursue their financial resolution. In Harare, Zimbabwe Costain has been awarded the Joina Centre contract which is a significant retail and office development valued at £12 million. This project is being undertaken in joint venture with the South African contractor Grinaker. Also in Africa, Costain's joint venture with shareholders Kharafi and Skanska in Tanzania and the Company's joint venture with Kharafi in Botswana proceed satisfactorily. PFI The PFI scheme involving the £76 million redevelopment at King's College Hospital in South-East London was brought to financial close in December 1999 and construction began in February 2000. The project will create a new six storey, state of the art hospital wing, a new regional neurosciences centre and centralise the hospital's services on one hi-tech site. The Hospital Partnership Consortium (which includes Costain, Skanska, Sodexho and Edison Capital ) will be responsible for the design, build, funding and operation of the new development. The new building, to be constructed by Costain-Skanska, will be operational from December 2002. The future of the Pimlico School PFI scheme, also in London, remains politically uncertain. However, the Company is, along with Skanska, pursuing a number of PFI opportunities in several areas including health, roads, custodial and the MoD. PFI offers potential growth to Costain and the Company is confident that the Company has the skills and experience to gain future success. Costain Oil, Gas & Process (COGAP) In the UK COGAP successfully completed, on time and without accidents, the Shearwater Elgin Area Line Reception Facilities for Shell UK at the Bacton Terminal in Norfolk. The total development cost is around £29 million. The project was undertaken in joint venture with United Kingdom Construction & Engineering Limited. In Abu Dhabi COGAP successfully completed, ahead of schedule and with an excellent safety performance, the annual shutdown of LNG Train 2 on Das Island. This is the fifth successive annual shutdown undertaken for the Abu Dhabi Gas Company, a long term continuing relationship. In Saudi Arabia work was successfully completed on the Continuous Colour Coat Project for SMC.In Tunisia work continued on the upgrade project for British Gas Tunisia Ltd. at their Hannibal natural gas treating plant in Sfax. An extension to the contract was awarded to increase the capacity of the plant and will see COGAP working on this project through into 2001.Two new contracts were awarded for two natural gas compression stations for BG Transco for Churchover and Alrewas with a total development cost of around £18 million. Negotiations to resolve COGAP's financial entitlement for the major project undertaken in Qatar for QGPC were completed. 1999 saw a downturn in investments in the oil and gas sectors, with a number of tenders being cancelled or suspended. In consequence the Company decided to downsize the business, reduce the cost base and withdraw from certain business streams. COGAP has also changed its strategy by the adoption of a more focused effort in pursuing work in the UK which is showing results. Property Good progress was made at Alcaidesa, Spain where Costain holds a 50 per cent interest in a residential, commercial and leisure development company. A small number of villas were built and successfully sold during the year with additional land sales of individual plots and some sales of larger enclaves of land to other development companies. The most significant disposal was of a 9.8 hectare site sold for the development of a 600 bed holiday and leisure complex. Further direct housing development is now underway and additional land sales are also anticipated during the course of this year. Notwithstanding the progress, the Group remains committed to disposing of its interest in Alcadeisa at the appropriate time, as the business does not form part of Costain's core activities. Following the restructuring of activities and the move of Group functions to existing offices in Maidenhead, Costain has been able to successfully dispose of surplus offices in London as well as a number of smaller offices around the country, so reducing our property overheads. Conclusion The Company is on more tender lists than it has been in the recent past and is winning contracts on acceptable terms. The industry remains competitive and, in response, Costain has already made considerable progress in reducing overheads while at the same time increasing efficiency. We continue to exercise our commercial controls while we explore new ways of developing profitable work. Costain is more selective in its tendering and is developing more long-term relationships with clients. The joint venture with Skanska has enjoyed considerable growth and is well positioned for future success. CONSOLIDATED PROFIT AND LOSS ACCOUNT Year ended 31 December 1999 1998 Notes Continuing Continuing Dis- Total continued £m £m £m £m Turnover 1 Group undertakings and Group share of joint ventures 378.1 391.5 - 391.5 Less: Group share of joint ventures turnover (5.0) (9.6) - (9.6) __________ __________ _________ _______ Group undertakings 373.1 381.9 - 381.9 Cost of sales (354.8) (362.8) 0.8 (362.0) __________ __________ _________ _______ Gross profit 18.3 19.1 0.8 19.9 Administration expenses (17.3) (21.8) - (21.8) __________ __________ _________ _______ Operating profit/(loss) from Group undertakings 1.0 (2.7) 0.8 (1.9) Share of joint ventures operating results (0.9) (0.5) - (0.5) __________ __________ _________ _______ Operating profit/(loss) 0.1 (3.2) 0.8 (2.4) Profit on sale of fixed assets 1.2 0.4 - 0.4 __________ __________ _________ _______ Profit/(loss) on ordinary activities before interest 1.3 (2.8) 0.8 (2.0) __________ _________ _______ Net interest receivable and similar income/(charges) Group undertakings 1.2 3.0 Joint ventures (0.4) (0.5) __________ _______ Profit on ordinary activities before taxation 1 2.1 0.5 Taxation (0.2) (0.7) __________ _______ Profit/(loss) on ordinary activities after taxation 1.9 (0.2) Equity minority interests - 0.3 __________ _______ Profit for the financial year 1.9 0.1 ========== ======= Earnings per share 2 0.6p 0.0p During the year and the previous year no businesses were acquired and therefore all continuing and discontinued results arise from existing operations. CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 1999 1998 Notes £m £m £m £m Net cash outflow from operating (6.0) (22.4) activities 4 Returns on investments and servicing of finance Interest received 2.2 4.1 Interest paid (1.0) (1.1) ______ ______ Net cash inflow from returns on investments and servicing of finance 1.2 3.0 Taxation Overseas tax paid (0.8) (0.5) Capital expenditure and financial investment Purchases of tangible fixed assets (1.2) (2.4) Sales of tangible fixed assets 2.1 1.0 Sales of investments - 0.1 Funding of investments (0.1) - Loans to joint ventures (1.6) (2.7) ______ ______ Net cash outflow from capital expenditure and financial investment (0.8) (4.0) ______ ______ Net cash outflow before financing (6.4) (23.9) Financing Loans drawn down - 1.0 Loan repayments (2.8) (1.9) ______ ______ Net cash outflow from financing (2.8) (0.9) ______ ______ Decrease in cash in the year (9.2) (24.8) ====== ====== RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET CASH 1999 1998 £m £m Decrease in cash in the year (9.2) (24.8) Cash outflow from reduction in loan financing 2.8 0.9 ______ ______ (6.4) (23.9) Currency realignment (0.2) (0.6) ______ ______ Movement in net cash (6.6) (24.5) Net cash at 1 January 36.9 61.4 ______ ______ Net cash at 31 December 30.3 36.9 ______ ______ CONSOLIDATED BALANCE SHEET As at 31 December 1999 1998 Notes £m £m Fixed assets Tangible assets 6.3 7.4 Investments 1.5 1.4 Investments in joint ventures Share of gross assets 12.3 15.3 Share of gross liabilities (9.7) (12.7) _______ _______ 10.4 11.4 _______ _______ Current assets Stocks 1.5 1.7 Debtors - pension fund prepayment 37.4 39.5 Debtors - other 105.3 119.2 Cash at bank, monies on deposit and in hand 38.0 47.1 _______ _______ 182.2 207.5 _______ _______ Creditors: amounts falling due within one year Bank loans and overdrafts (7.7) (3.6) Other creditors (147.2) (169.3) _______ _______ (154.9) (172.9) _______ _______ Net current assets/(liabilities) Due within one year (9.4) (5.7) Due after one year 36.7 40.3 _______ _______ 27.3 34.6 _______ _______ Total assets less current liabilities 37.7 46.0 Creditors: amounts falling due after more than one year Bank loans - (6.6) Other creditors (0.5) (2.4) _______ _______ (0.5) (9.0) _______ _______ Provisions for liabilities and charges (17.7) (18.1) _______ _______ Net assets 19.5 18.9 ======= ======= Share capital and reserves Called up ordinary share capital 33.7 33.7 Share premium account 119.3 119.3 Profit and loss account (133.9) (134.5) _______ _______ Equity shareholders' funds 3 19.1 18.5 Equity minority interests 0.4 0.4 _______ _______ 19.5 18.9 ======= ======= NOTES TO THE ACCOUNTS 1 Business and geographical segment information Business segment information In the opinion of the directors the administering of the engineering and construction projects is the only material class of business. Geographical segment Turnover Profit/(loss) Net assets/ information by origin (liabilities) 1999 1998 1999 1998 1999 1998 £m £m £m £m £m £m Continuing operations United Kingdom 310.1 280.9 1.0 (0.7) (36.2) (31.7) Rest of the world 63.0 101.0 - (2.0) 22.8 11.1 _____ _____ _____ _____ ______ ______ 373.1 381.9 1.0 (2.7) (13.4) (20.6) Discontinued operations United Kingdom - - - 0.8 - - Rest of the world - - - - - - _____ _____ _____ _____ ______ ______ Turnover, operating profit/(loss) and net liabilities of Group undertakings 373.1 381.9 1.0 (1.9) (13.4) (20.6) Joint ventures Continuing operations United Kingdom - - - - 2.3 0.6 Rest of the world 5.0 9.6 (0.9) (0.5) 0.3 2.0 _____ _____ _____ _____ ______ ______ 378.1 391.5 0.1 (2.4) (10.8) (18.0) ===== ===== Profit on sale of fixed assets United Kingdom 1.2 0.4 Rest of the world - - Net interest receivable/(payable) and similar 0.8 2.5 income/(charges) Net cash 30.3 36.9 _____ _____ ______ ______ Profit on ordinary activities before taxation and net assets 2.1 0.5 19.5 18.9 ===== ===== ====== ====== Turnover by destination is not materially different to turnover by origin. 2 Earnings per share The calculation of earnings per share is based on earnings of £1.9m (1998: £0.1m) and 337,136,350 ordinary shares (1998: 337,136,350) being the weighted average number of ordinary shares in issue during the year. Diluted earnings per share are the same as basic earnings per share. 3. Reconciliation of movements in shareholders' funds 1999 1998 £m £m Profit for the financial year 1.9 0.1 Other recognised losses in the year (1.3) (0.7) _________ _________ Net increase/(reduction) in shareholders' funds 0.6 (0.6) Opening shareholders' funds 18.5 19.1 _________ _________ Closing shareholders' funds 19.1 18.5 ========= ========= 4 Notes to the cash flow statement Reconciliation of operating profit/(loss) to net cash outflow from operating activities 1999 1998 £m £m Operating profit/(loss) 0.1 (2.4) Depreciation 1.4 1.9 Amounts written off investments - 0.2 Joint ventures 0.9 0.5 Decrease in stocks 0.2 1.0 Decrease in debtors 14.8 38.8 Decrease in creditors (22.9) (47.0) Decrease in provisions (0.5) (15.4) _________ _________ Net cash outflow from operating activities (6.0) (22.4) ========= ========= The accounts and notes set out above do not constitute the Company's statutory accounts for the years ended 31 December 1999 or 1998 but are derived from those accounts. Statutory accounts for 1998 have been delivered to the Registrar of Companies and those for 1999 will be delivered in due course. The auditors have reported on these accounts; their reports were unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985.

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