Final Results

Costain Group PLC 12 March 2008 Costain Group PLC ('Costain' or the 'Group') Announcement of preliminary results for the year ended 31 December 2007 Year ended 31 December 2007 2006 Revenue* £877.9m £886.3m Profit/(loss) before tax £19.8m £(61.7)m Net cash £132.8m £53.3m Earnings/(loss) per share 3.6p (13.2)p** Recommended dividend 0.5p nil * Including share of joint ventures & associates ** Restated following rights issue bonus element Costain, the engineering, construction and land development group, announces a strong performance, which saw all of the Group's operations in profit for the first time since 1990, and a recommendation for the payment of a dividend for the first time in 17 years. - Delivery on clear strategic objectives for 2007 • Significant growth in profits in the Civil Engineering operations • Delivered a return to profit in Building • Achieved a profit in the Oil, Gas & Process operations for the first time in six years • Actively traded the PFI portfolio to re-invest in bidding for new projects • Cash position significantly strengthened to £133m • Further improved operational efficiency and reduced costs across the Group • Secured a higher quality order book of £1.6bn; repeat orders increased to 80% • Increased the level of preferred bidder positions to over £800m - Financing in place for next phase of Group's development • Significantly strengthened balance sheet following £60 million Rights Issue • Operational capability given added firepower through increased banking and bonding facilities of £200 million - Business in strong position to seize opportunities presented by markets in which it operates • Clear 'Being Number One' strategy for future development • Growth in our chosen markets underpinned by major long-term spend commitments by our target blue-chip customers David Allvey, Chairman, commented: 'We set clear objectives for 2007 and I am delighted to report that we have delivered on all of them. The year's achievements have been reflected in the strong recovery in performance and the Board is especially delighted to announce a recommendation to return to the dividend list for the first time in 17 years. 'The successful Rights Issue along with our strengthened banking and bonding facilities are enabling us to expedite the implementation of our 'Being Number One' strategy. The Group is capitalising on the opportunities available to it in its chosen market sectors and is strongly positioned to move into the next phase of growth. In as far as 2007 was a landmark year for Costain, we expect 2008 will be a year of further growth and I look forward to reporting on our progress.' 12 March 2008 Enquiries: Costain Tel: 01628 842 444 Andrew Wyllie, Chief Executive Tony Bickerstaff, Finance Director Graham Read, Public Relations College Hill Tel: 020 7457 2020 Mark Garraway Adam Aljewicz CHAIRMAN'S STATEMENT 2007: A Year of Delivery Last year was one of major achievement for Costain with delivery on clear operational and financial objectives which Andrew Wyllie, our Chief Executive, reports on in detail in his review of the year. For me, it was especially encouraging to see a return to profit in our Building Division and a profit delivered in our Oil, Gas & Process Division for the first time since 2001. On the back of a strong performance, a successful rights issue and increased banking and bonding facilities, we now have the opportunity to expedite the implementation of our 'Being Number One' strategy. The Group finished the year with both its financial and operational reputation significantly strengthened. The Rights Issue, which raised £60 million (net of expenses) and the extended and enhanced banking and bonding facilities of £200 million give us the financial strength to support our operational resource in delivering our strategic goals. We have already started to capitalise on the opportunities available: we are entering a new phase of the Costain story, one which I feel sure will underline our status as one of the leading names in UK construction. There were also many significant operational achievements. One, above all, stood out as a great example of what Costain is all about: the completion of St Pancras International, the new terminus for Eurostar trains to Paris and Brussels. The completion of this project has enabled the UK to take a major step forward in terms of transport infrastructure. The building has attracted praise from around the world and Costain played a central role in delivering successfully a highly technical major project. It was a feat that further enhanced Costain's reputation and was one of the highlights of the UK construction year. Our strategy, with its focus on excellence and expertise in markets such as Water, Highways and Nuclear, is reaping major benefits as we focus increasingly through longer-term planning on securing more multi-year framework contracts through the provision of integrated full life-cycle services. In keeping with this theme, it is encouraging that the Government has given the go-ahead for a new generation of nuclear power stations. We have established good relationships with a number of customers in the nuclear industry and we have the specialist skills to ensure that we play a central role in its future development. RESULTS Following the decisive management actions in the prior year, including taking a number of write-downs in respect of the closure of the International Division and certain disputed contracts, the Board set a significant recovery in performance as a key objective for 2007. This was achieved. Revenue for the year was £877.9 million (2006: £886.3 million). Profit before tax was £19.8 million (2006: loss of £61.7 million) and earnings per share were 3.6p (2006: loss per share of 13.2p (restated)). The Group has no significant borrowings and net cash balances at the year end totalled £132.8 million (2006: £53.3 million), including the Group's share of cash held by construction joint venture arrangements of £28.8 million (2006: £22.0 million). DIVIDEND The Board is recommending the payment of a dividend for the full year of 0.5p per share, the first dividend declared since 1991. If approved at the forthcoming Annual General Meeting, the dividend will be paid on 23 May 2008 to shareholders on the register as at 25 April 2008. Subject to shareholder approval, the Company proposes to introduce a scrip dividend alternative for the dividend payable on 23 May 2008 and all future dividends. Further details in relation to the scrip dividend alternative will be provided to Shareholders in due course. PENSION As at 31 December 2007, the deficit in the UK Pension Fund recorded in the Group's balance sheet in accordance with IAS 19 was £36.4 million, net of deferred tax, a reduction of £11.7 million from the position as at 31 December 2006. As previously reported, we have agreed with the Trustee a new contribution plan that is expected to eliminate the deficit over a shorter period of ten years under the valuation assumptions agreed with the Trustee. Following an in-principle agreement in 2006 with the Pensions Regulator - and subsequently with the Trustee - that on resumption of dividend payments the Group would match any dividends pound for pound by a payment into the UK Pension Fund, we have now confirmed with the Pensions Regulator that a payment to the fund of c. £3.1 million will be made in the event that shareholders approve the dividend recommendation at the Annual General Meeting. BOARD I became Chairman at the start of 2008 as successor to David Jefferies who retired from the Board. On behalf of everyone at Costain, I would like to thank David for his contribution over six years to the Group. His leadership skills coupled with his experience and knowledge served Costain well. We have recently welcomed two valuable additions to the Board, Mike Alexander and James Morley, as Non-Executive Directors. Both individuals are senior industry figures and have enjoyed considerable success in a number of sectors. Separately, Mike has been appointed Chairman of the Remuneration Committee and James as Chairman of the Audit Committee. I am also pleased to note that John Bryant has become the Group's first Senior Independent Director, a role that will enhance the Board's compliance with the best standards of corporate governance. OUTLOOK We set clear objectives for 2007 and I am delighted to report that we have delivered on all of them. The year's achievements have been reflected in the strong recovery in performance and the Board is especially delighted to announce a recommendation to return to the dividend list for the first time in 17 years. The successful Rights Issue along with our strengthened banking and bonding facilities are enabling us to expedite the implementation of our 'Being Number One' strategy. The Group is capitalising on the opportunities available to it in its chosen market sectors and is strongly positioned to move into the next phase of growth. In as far as 2007 was a landmark year for Costain, we expect 2008 will be a year of further growth and I look forward to reporting on our progress. David Allvey Chairman CHIEF EXECUTIVE'S REVIEW STRATEGY We have continued to implement successfully our 'Being Number One' strategy which is centred on leadership through focus and excellence and which leverages Costain's core brand values. There is tremendous inherent value in the Costain brand, the result of a long tradition of professionalism, quality and engineering expertise. That brand reputation was further enhanced during the year with the completion of various projects to time and budget, in particular the new Eurostar terminus at St Pancras. Our brand values and reputation are hugely important in attracting key customers, suppliers and people in a market where quality resources are scarce and good people have plenty of choices. Across our business, we are targeting larger, blue-chip customers who increasingly are looking to work with fewer contracting organisations on a longer-term framework or partnership basis. As an example of this, we were delighted recently to be appointed by BAA to their 'Complex Building Framework'. This Framework is worth some £4 billion over ten years. We also continue to focus on market sectors, for example Water, Highways and Nuclear where we have, or can grow, a strong market position as a route to sustainable profit. Our strategic focus has significantly lessened our exposure to sectors particularly susceptible to the macro-economic climate and interest rate fluctuations. Our customers are also increasingly looking for contractors to provide an integrated whole life-cycle service offering and we were delighted to win our first such contract, a five-year highways maintenance contract in joint venture during the year. Partly as a result of these trends in procurement, the construction market has continued to consolidate and polarise towards a smaller number of larger contractors. Our strategy will ensure that Costain is one of those larger contractors. We are now in a stronger position to achieve that ambition. DELIVERING ON OUR OBJECTIVES Following the decisive management actions taken during the latter half of 2006, we set ourselves a number of demanding strategic objectives for 2007 to ensure that we delivered a significant and sustainable recovery in Group profitability. I am pleased to report that we have delivered on all of those objectives. During the year, we: • Achieved significant growth in profit in the Civil Engineering operations • Delivered a profit from Building operations • Produced a profit in the Oil, Gas & Process operations for the first time in 6 years • Actively traded the PFI portfolio to re-invest in bidding for new projects • Significantly strengthened our cash position to £133m • Further improved operational efficiency and reduced costs across the Group • Secured a higher quality order book of £1.6bn; repeat orders increased to 80% • Increased the level of preferred bidder positions to over £800m The Group also continued to manage out certain legacy contracts and good progress has been made during the year, in particular at Costa Azul and Pemex. The projects are nearing completion and commercial discussions are ongoing regarding the final handover of both contracts. FINANCING THE NEXT PHASE OF THE GROUP'S DEVELOPMENT We were successful in achieving our key financial objectives in the year. We enhanced the Group's financial position by strengthening the balance sheet and giving the Group's operational capability added firepower through a 60% increase in the level of banking and bonding facilities. The Rights Issue, which raised £60 million (net of expenses), and the £200 million of banking and bonding facilities give Costain the additional resources with which to take full advantage of the many opportunities available to it in the marketplace. OPERATIONS AND ORDER BOOK As a result of our strict new business criteria, which places long-term quality ahead of short-term quantity, our order book at £1.6 billion (2006: £1.8 billion) reflects a greater proportion of blue-chip customer work in our targeted sectors, 80% of which is repeat order work. Additionally, we have grown the preferred bidder position to in excess of £800 million (2006: £500 million) and started the year with c.£700 million of 2008 revenue secured. Our Civil Engineering operations recorded an excellent performance in the year with increases in both profit and revenue. It was encouraging to see that the division, which encompasses a range of infrastructure and environment-related activities, also further consolidated its market-leading positions, in particular in Water and Highways. The division has been successful in developing a platform for future growth in the Nuclear industry, including undertaking a major contract at Sellafield. We delivered a profit from our Building operations following the implementation of remedial actions, including a re-alignment into key sectors, cost reductions and a restructuring of the management team. We expect that under close supervision, and with new management controls in place, we will see further progress through more selective bidding for higher margin work in its targeted sectors across the built community including Education, Health and Retail. Costain regards its investments in PFI projects in a portfolio including Water, Health, Education and Highways projects as a strategically core activity, not least because PFI is an important procurement route for securing major public sector projects. In line with our strategy of actively trading the PFI portfolio to re-invest in bidding for new projects, including during the year the M25 consortium bid, we disposed of two equity positions in the year. As previously reported, the result at our Property Development operations (' Alcaidesa') was impacted by the delay to a major land sale expected during the second half. However, a number of small transactions were completed and the Board remains confident in the medium to longer-term outlook, a sentiment reinforced by our securing a concession for a major 800-berth marina development project near Gibraltar. The Group's Oil, Gas and Process operations performed ahead of expectations, benefiting from our much greater focus on front-end engineering design and project management services. We were delighted to see the delivery of a profit for the first time in six years and we will continue to drive the division's profitability. Since the year-end, Costain won a number of contract and preferred bidder awards including as preferred contractor for the SPV on the Greater Manchester Waste Disposal Authority's PFI Contract (capital works programme valued in the region of £300 million), as preferred bidder to build a new campus for the University of Worcester (worth c. £70 million) and the contract, in joint venture, for the A14 in Cambridgeshire. HEALTH AND SAFETY The proper management of Health and Safety remains our number one priority. We demonstrated further improvements in our health and safety performance in 2007, and were delighted to receive RoSPA's most prestigious award, the Sir George Earle trophy. This was the first time for many years that the award has been made to a construction company. Our performance was also recognised by a further 34 RoSPA awards. As a result of a number of initiatives and management actions we have continued to reduce our Accident Frequency Ratio ('AFR'), and we now have the best performance in the Major Contractors Group of peer companies. Furthermore our consideration for the local community was acknowledged by the achievement of 18 awards from the Considerate Constructors Scheme. We continued to focus on the health and safety of our employees and others affected by our operations and activities. We take all precautions possible to prevent environmental harm being caused as a result of our activities and are improving the environmental performance on both our sites and in our offices as part of our drive towards becoming an environmentally conscious company. There is no room for complacency when it comes to Health, Safety and the Environment and so we have set a series of challenging objectives for 2008. These include a focus on Behavioural Safety as a way of influencing culture and individual actions to avoid accidents. PEOPLE We are recruiting talented people to Costain and continue to increase investment in training and development programmes at all levels. We have a first-rate operational management team at Costain and I am proud to lead them. Having revamped the Executive Board in 2006, and ensured that we have the right people in the right positions, there is a new confidence at Costain. This is evident in everything we do but particularly when tendering for new contracts, whether working alongside major partners in joint venture or competing successfully against fellow premier-league companies. A major benefit of such strength and depth is that we also have a deep pool of talent from which to promote people and develop succession planning across the business. SUPPLY CHAIN A key element in making Costain more efficient and productive is our focus on reducing the number of suppliers we work with and working with them on a longer-term more strategic basis. This also enhances the service we provide and reduces the cost of project delivery, key ingredients in securing business from customers who are consistently expecting us to deliver 'more for less'. We have continued to reduce our supplier base and now work with a limited number of preferred suppliers for each of the key trades. We are now starting to see the benefit of these more collaborative relationships, be it through improved market intelligence, greater innovation, access to the best people or enhanced operational performance. A very successful first conference for our strategic supply chain partners was held at the end of the year at Warwick University, and focused on achieving mutual benefit through greater integrated working. MANAGING COSTS One of the drivers for achieving our significant recovery in profitability this year has been a robust management of costs in the business. The Executive Board reviews the costs in detail every month and actions are taken to further improve efficiency or reduce expenditure. In early 2008, the Group's head office will be moving to a new open plan modern building on the outskirts of Maidenhead, which should further improve operational efficiency. SUMMARY We have achieved a great deal over the past year at Costain with a lean and focused business delivering a strong performance. Growth in our chosen markets is underpinned by the major long-term spend commitments of our targeted blue-chip customers. We have a focused strategy, a strengthened balance sheet and an ambitious management team determined to see Costain build on its position as one of the UK's premier contractors. These are exciting times at Costain and we are looking to the future with great confidence. I believe that we will see further progress during this year, building on the strong performance in 2007, and we are on course to deliver in line with our expectations. Andrew Wyllie Chief Executive BUSINESS & OPERATIONAL REVIEW Civil Engineering Revenue (including share of joint ventures and associates) for the period was £539.3 million (2006: £488.1 million), with a profit of £20.0 million (2006: £10.3 million). Costain is a leader in UK Environmental and Infrastructure projects. Water During 2007, Costain's position was reinforced as the UK's leading asset management contractor with excellent performance on all of our frameworks: Bristol Water, Southern Water, Thames Water, United Utilities, Welsh Water and Yorkshire Water. At Southern Water, in a joint venture, Costain has successfully commissioned the £85 million Margate and Broadstairs Waste Water Treatment Plant, with overall completion achieved two months ahead of programme and final handover in March 2008 some three months early. We secured, in joint venture, a £100 million contract from United Utilities for the construction of the Shell Green sludge treatment project. Costain, in joint venture, is also preferred bidder for the £200 million Brighton and Hove Waste Water Treatment Works, which is currently going through the planning approvals process. Costain was recently awarded an Advance Contract for design and procurement work in anticipation of a full order during 2008. Among a number of awards in recognition of our excellence in this sector, our Southern Water/SEC(4D) joint venture won Partnership Initiative of the Year Award at the inaugural Water Industry Achievement Awards and a RoSPA Gold safety award for the second year running, and we secured Yorkshire Water's Community Contract Partner of the Year Award. Waste Costain has expanded its operations into the Waste sector, where the Group has the opportunity to use complementary process engineering skills and expertise from its water operations to build a presence in the rapidly expanding UK and European regulated marketplace. Costain was recently awarded an advance design and construction contract for the Greater Manchester Waste Disposal Authority's PFI contract for a capital works package valued at some £300 million and we expect full award soon with four years of work. Towards the end of the year, Costain was named as Preferred Bidder for the Riverside Energy-from-Waste Plant at Belvedere in Kent. Nuclear Costain has made steady progress in the Nuclear sector with the successful delivery of the Hunterston MAETP contract, framework contracts for AWE and Trawsfynydd and completion of the UKAEA Winfrith Dragon Phase 1 decommissioning contract. At Sellafield, we have delivered successfully our process and modularisation expertise into the sector-critical Evaporator D project and are making good progress on the site construction phase. Contract awards in the year have included Hunterston's Solid Active Waste Bunker Retrieval, Solid Intermediate Level Waste Encapsulation and Storage Ponds Decommissioning projects, with preferred contractor status confirmed for the Trawsfynydd Capping Roof project and Berkeley Active Waste Vault Retrieval project. Highways Costain strengthened its leading position in the Highways sector, with the delivery of major schemes including the M25 Holmesdale Tunnel, ahead of schedule and under budget, and the A2/A282, a £120 million scheme completed five months early and within budget. Costain also received a number of contract awards including the £40 million M27 (J3 to J4 and J11 to J12) in addition to being Preferred Bidder for the £93 million Church Village by-pass with repeat customers Highways Agency and Rhondda Cynon Taf. The Company has a strong forward order book in Highways with Early Contractor Involvement schemes including the A19, the A34 Wolvercote and the M1 (J10 to J13) with the Highways Agency, the A40 Penblewyn with the Welsh Assembly Government and the recent award in joint venture of the Highways Agency's largest-to-date scheme, the A14 project. We were also pleased to secure in joint venture our first five-year MAC maintenance contract. In line with our strategy of actively trading the PFI portfolio to re-invest in bidding for new projects, including during the year the M25 consortium bid, the Group sold its 50% investment in the Sirhowy Enterprise Way PFI concession. Costain is part of the FLOW consortium, which has been short-listed for the Highways Agency's £5 billion M25 programme. The preferred bidder is expected to be announced in the first half of 2008. Rail The highlight of 2007 was the successful completion, in joint venture, of the £800 million St Pancras International Station. Completion of the Station was the final stage in the new Channel Tunnel Rail Link and has been described as the 'jewel in the crown' of the new High Speed 1 Eurostar service connecting London to mainland Europe. In line with our Rail strategy, and building on our St. Pancras success, Costain secured the first element, in joint venture, of the £400 million Kings Cross Station redevelopment for Network Rail and we are actively bidding for the remaining major elements of the works. We are also tendering for the major redevelopments of both Blackfriars and Farringdon stations in the Network Rail Thameslink programme with a combined potential value of more than £350 million. Costain also completed in just twelve months the design, build and commission on the new Langdon Park station on the Docklands Light Railway, the first new station build on a live DLR line. Marine Costain completed the winter maintenance of the major coastal protection scheme at Whitstable, Kent for Canterbury County Council. Two major Container Port developments, Felixstowe South Reconfiguration and London Gateway Port, have been given final planning consent. Costain is currently in negotiations with Hutchison Port Holdings regarding the Felixstowe project whilst London Gateway Port, for Dubai Ports, is being re-bid for submission in the first half of 2008. Airports Costain has been appointed by BAA as one of the approved contractors for their ' Complex Building Framework'. This Framework is worth some £4 billion over ten years. We continue to deliver projects for Manchester Airport Group under their current framework agreement. Building Revenue (including share of joint ventures and associates) for the period was £254.7 million (2006: 298.0 million), with a profit of £0.8 million (2006 loss: £25.9 million). Health Costain successfully delivered three projects during the year: the Kingston Hospital Phase V PFI scheme, a new unit providing additional wards and teaching facilities on the Kingston Hospital site; Bridgnorth Hospital extension, a ProCure 21 project providing community hospital facilities; and Finch Road Community Unit, the first health centre of its kind in this area. During the year, two ProCure 21 projects were awarded to Costain at Cheltenham and Gloucester Hospitals. We reached Financial Close on all three 3 Shires PFI contracts in 2007 and we were appointed as one of two contractors on a framework for Circle to build approximately 30 private healthcare facilities around the country over five years. Education Costain delivered three new PFI secondary schools in Kent along with the remaining two PFI schools at Greenford and Acton as part of the Ealing II PFI scheme. Phase 2 of the John Madejski Academy in Reading was also completed and work has commenced on the University of Reading's new Business School and extension. Costain made good progress with the construction, in joint venture, of Phase 1 of Bradford's £400m Building Schools for the Future ('BSF') programme. The first three schools are due for delivery in early summer 2008. Negotiations for Phase 2, valued at approximately £160 million, continue with contracts due to be signed before the end of 2008. During the year, Costain was named as preferred bidder on Lewisham's £210 million BSF programme. The Company achieved Financial Close on the Phase 1 schools with construction starting on Sedgehill and Catford and Phase 2 is underway. At the close of the year, Costain was confirmed as preferred bidder on the University of Worcester's new £70 million Castle Street campus. In order to finance the above PFI bidding activity, and in line with our ongoing strategy of actively trading our PFI equity portfolio, the Group sold its shareholding in Bridgend Prison PFI project during the year. Retail During the year we continued to work closely with Tesco and were appointed to their Strategic Partners Group. We are currently in discussion to formalise the Company's appointment under a three year framework agreement which will result in contracts for new stores during 2008. This significantly strengthens our relationship with Tesco as does the work at Gerrards Cross, Bucks where the two companies are working to progress that scheme. We were one of six main contractors to be appointed a framework contractor by J Sainsbury and also successfully pre-qualified as a contractor on the Marks & Spencer Register of Approved Suppliers. Property Development Revenue (including share of joint ventures and associates) for the period was £3.6 million (2006: 13.2 million), with a profit of £0.2 million (2006: £3.9 million). The Group's Property Development business in Southern Spain ('Alcaidesa') completed a number of small transactions although, as previously reported, a major land sale expected during the second half has been delayed. Consequently, the result for the year was below expectations. Alcaidesa, a joint venture business, does not build property for sale direct to the public. Its principal activity is the purchase of land, securing enhanced planning consents and selling enclaves of consented land to developers. Consequently, Alcaidesa has seen a degree of resilience in its market and maintains a long-term high quality land bank. A large disposal is expected in 2008. The Board therefore remains confident in the medium- to longer-term outlook for the division and this view has been reinforced during the year by securing the 30-year concession for the 800-berth marina near Gibraltar. Oil, Gas & Process Revenue (including share of joint ventures and associates) for the period was £62.3 million (2006: 57.2 million), with a profit of £1.9 million (2006: loss £19.5 million). The Company performed ahead of expectations in this sector as a result of a refocused strategy, a strong order book and much improved productivity levels. Within the UK, Costain has been pursuing a number of natural gas underground storage projects and is currently performing the front-end engineering design of a plant for the Gaz de France's Stublach (Cheshire) Gas Storage Facility. A design verification study for another underground gas storage project with E.ON has seen Costain well placed to secure further business in this sector in 2008. In addition, the division is delivering the process engineering design for the Evaporator D nuclear project at Sellafield. Costain's operation in Abu Dhabi continued to perform well. As one of the principal construction contractors on Das Island for more than 30 years, Costain has been involved in almost every aspect of the island's oil and gas processing complex. With regard to the Pemex contract in Mexico, where good progress has been made during the year, Costain is working with the main contractor towards the completion of the project. International Following the decision in 2006 to close the International Division, we continue to work-out the remaining contracts, in particular Costa Azul, where the project is nearing completion and commercial discussions are ongoing regarding the final handover. Any future international projects will be undertaken by the appropriate specialist sector teams. Order Book We have a high quality order book, standing at £1.6 billion as at 31 December 2007, of which circa £700 million relates to 2008 and 80% of which is repeat business. We have also grown our preferred bidder positions to in excess of £800 million. Our focus on quality rather than quantity has resulted in an order book that contains a range of excellent contracts and which provides a stream of high-quality earnings for the Group. We will continue to manage our order book on the basis of securing an increasing proportion of long-term frameworks with blue-chip customers. PRELIMINARY RESULTS ANNOUNCEMENT Consolidated income statement Year ended 31 December Notes 2007 2006 £m £m Revenue (Group and share of joint ventures and associates) 2 877.9 886.3 Share of joint ventures and associates 6 (130.3) (137.9) Group revenue 747.6 748.4 Cost of sales (716.2) (785.9) Gross profit/ (loss) 31.4 (37.5) Administrative expenses (21.7) (20.9) Group operating profit/(loss) 9.7 (58.4) Profit on sale of investment 2.7 3.6 Profit on sales of interests in joint ventures and associates 3.2 - Amounts written off loans to associate - (2.7) Share of results of joint ventures and associates 6 0.9 (7.0) Profit/(loss) from operations 16.5 (64.5) Financial income 3 29.6 26.7 Finance costs 3 (26.3) (23.9) Net financing income 3.3 2.8 Profit/ (loss) before tax 19.8 (61.7) Income tax (expense)/credit 5 (3.8) 7.7 Profit/ (loss) for the period attributable to equity holders of the parent 2 16.0 (54.0) Earnings/(loss) per share - basic 4 3.6p (13.2)p* Earnings/(loss) per share - diluted 4 3.5p (13.2)p* (* 2006 figures restated) During the year and the previous year, no businesses were acquired. The impact on the results of businesses disposed was not material and therefore all results are classified as arising from continuing operations. Consolidated statement of recognised income and expense Year ended 31 December Notes 2007 2006 £m £m Exchange differences on translation of foreign operations 2.0 - Cash flow hedges: Effective portion of changes in fair value (net of tax) during period - Group (0.1) 0.3 Effective portion of changes in fair value (net of tax) during period - joint ventures and associates (0.1) 3.1 Change in fair value of assets classified as available for sale (2.6) (0.8) Actuarial gains on defined benefit pension schemes 11.7 26.0 Tax recognised on actuarial gains recognised directly in equity (3.3) (7.8) Tax rate adjustment to brought forward actuarial losses recognised directly in equity (1.7) - Net income recognised directly in equity 5.9 20.8 Profit/(loss) for the period 16.0 (54.0) Total recognised income and expense for the period attributable to equity holders of the parent 8 21.9 (33.2) Consolidated balance sheet Notes 2007 2006 As at 31 December £m £m ASSETS Non-current assets Property, plant & equipment 3.5 5.7 Intangible assets 2.7 3.4 Investments in joint ventures 6 29.0 25.0 Investments in associates 6 2.2 1.2 Loans to joint ventures 7.3 3.3 Loans to associates 1.6 2.0 Other investments - 3.6 Other debtors 6.7 10.1 Deferred tax assets 21.2 30.6 Total non-current assets 74.2 84.9 Current assets Inventories 2.0 2.4 Trade and other receivables 150.3 160.6 Cash and cash equivalents 7 133.4 56.4 Total current assets 285.7 219.4 Total assets 359.9 304.3 EQUITY Share capital 31.4 17.9 Share premium 1.1 0.6 Special reserve - 12.8 Fair value reserve - 2.6 Foreign currency translation reserve 0.9 (1.2) Hedging reserve (1.8) (1.6) Retained earnings (4.2) (86.3) Total equity attributable to equity holders of the parent 8 27.4 (55.2) LIABILITIES Non-current liabilities Retirement benefit obligations 50.6 68.7 Other payables 3.7 6.6 Provisions 5.0 4.1 Total non-current liabilities 59.3 79.4 Current liabilities Trade and other payables 268.1 266.1 Tax liabilities 1.8 2.7 Overdrafts 7 - 1.4 Interest bearing loans and borrowings 0.6 1.7 Provisions 2.7 8.2 Total current liabilities 273.2 280.1 Total liabilities 332.5 359.5 Total equity and liabilities 359.9 304.3 Consolidated cash flow statement Year ended 31 December Notes 2007 2006 £m £m Cash flows from operating activities Profit/(loss) for the period 16.0 (54.0) Adjustments for: Depreciation and amortisation 2.8 2.7 Financial income 3 (29.6) (26.7) Finance costs 3 26.3 23.9 Share based payments expense 8 0.2 0.3 Income tax 5 3.8 (7.7) Profit on sale of investment (2.7) (3.6) Profit on sales of interests in joint ventures and associates (3.2) - Share of results of joint ventures and associates 6 (0.9) 7.0 Amounts written off loans to joint ventures and associates - 2.7 Cash from/(used by) operations before changes in working capital and provisions 12.7 (55.4) Decrease/(increase) in inventories 0.4 (0.4) Decrease in receivables 13.3 2.2 Increase in payables 1.9 32.6 Movement in provisions and employee benefits (8.0) (2.6) Cash from/(used by) operations 20.3 (23.6) Interest paid (0.5) (0.3) Income taxes paid (0.3) (0.2) Net cash from/(used by) operating activities 19.5 (24.1) Cash flows from investing activities Interest received 2.8 2.6 Dividends received from joint venture - 6.1 Additions to property, plant and equipment (0.8) (1.9) Additions to intangible assets (0.2) (0.9) Proceeds from sale of fixed assets - 0.2 Additions to investments (0.2) (0.1) Disposal of subsidiary, net of cash disposed (1.4) - Proceeds from sale of investments 9.4 7.1 Loans to joint ventures and associates (10.1) (10.2) Net cash (used by)/from investing activities (0.5) 2.9 Cash flows from financing activities Issue of ordinary share capital 8 65.0 0.3 Share issue costs 8 (4.5) - (Payment of)/proceeds from borrowings (1.0) 0.9 Payment of finance lease liabilities (0.1) (0.2) Net cash from financing activities 59.4 1.0 Net increase/(decrease) in cash and cash equivalents 78.4 (20.2) Cash and cash equivalents at beginning of period 55.0 75.0 Effect of foreign exchange rate changes - 0.2 Cash and cash equivalents at end of period 133.4 55.0 NOTES TO THE PRELIMARY FINANCIAL STATEMENTS 1 Basis of preparation These financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted for use in the EU in accordance with EU law (IAS Regulation EC 1606/2002). The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2007 or 2006 but is derived from those accounts. Statutory accounts for 2006 have been delivered to the Registrar of Companies, and those for 2007 will be delivered in advance of the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not include reference to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and did not contain statements under section 237(2) or (3) of the Companies Act 1985. 2 Business and geographical segment information by origin In the opinion of the directors, the business segments are Civil Engineering, Building, Oil Gas & Process and International, which undertake engineering and construction projects, Property Development operations in Spain and Central costs. These represent the Group's primary segments. Secondary segments are presented geographically. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Central costs comprise mainly corporate expenses. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. Year ended Civil Oil, Gas & Property Central 31 December 2007 Engineering Building Process International Development Costs Total £m £m £m £m £m £m £m Group revenue 441.4 249.7 53.8 2.7 - - 747.6 Share of revenue 97.9 5.0 8.5 15.3 3.6 - 130.3 of JVs and associates Total revenue 539.3 254.7 62.3 18.0 3.6 - 877.9 Group operating 16.9 (2.3) 1.7 (0.2) - (6.4) 9.7 profit Profit on sale of - 2.7 - - - - 2.7 investments Profit on sale of 3.0 - - 0.2 - - 3.2 JVs and associates Share of results 0.1 0.4 0.2 - 0.2 - 0.9 of JVs and associates Segment result 20.0 0.8 1.9 - 0.2 (6.4) 16.5 Net financing 3.3 income Income tax (3.8) expense Profit for the 16.0 year Group assets 115.0 29.4 17.9 2.9 - - 165.2 Investments in 1.6 8.8 0.1 3.4 26.2 - 40.1 and loans to JVs and associates Segment assets 116.6 38.2 18.0 6.3 26.2 - 205.3 Unallocated 154.6 assets Total assets 359.9 Group liabilities (168.5) (77.3) (24.4) (5.0) - (0.6) (275.8) Provisions (0.8) (2.7) (0.2) - - - (3.7) against JVs and associates Segment (169.3) (80.0) (24.6) (5.0) - (0.6) (279.5) liabilities Unallocated (53.0) liabilities Total liabilities (332.5) Capital expenditure 0.3 0.1 0.5 0.1 - - 1.0 Depreciation/ amortisation 1.7 0.8 0.2 0.1 - - 2.8 NOTES TO THE FINANCIAL STATEMENTS - continued Business and geographical segment information by origin - continued Year ended Civil Oil, Gas & Property Central 31 December 2006 Engineering Building Process International Development Costs Total £m £m £m £m £m £m £m Group revenue 400.3 288.5 51.4 8.2 - - 748.4 Share of revenue of 87.8 9.5 5.8 21.6 13.2 - 137.9 JVs and associates Total revenue 488.1 298.0 57.2 29.8 13.2 - 886.3 Group operating 10.0 (29.6) (19.8) (13.0) - (6.0) (58.4) profit/ (loss) Profit on sale of - 3.6 - - - - 3.6 investments Amounts written off - - - (2.7) - - (2.7) loans to associate Share of results of 0.3 0.1 0.3 (11.6) 3.9 - (7.0) JVs and associates Segment result 10.3 (25.9) (19.5) (27.3) 3.9 (6.0) (64.5) Net financing 2.8 income Income tax credit 7.7 Loss for the year (54.0) Group assets 106.4 52.1 19.0 8.3 - - 185.8 Investments in and 3.9 2.3 (0.2) 1.6 23.9 - 31.5 loans to JVs and associates Segment assets 110.3 54.4 18.8 9.9 23.9 - 217.3 Unallocated assets 87.0 Total assets 304.3 Group liabilities (147.9) (90.7) (26.7) (13.0) - (1.0) (279.3) Provisions against (0.6) (1.0) (0.2) (3.9) - - (5.7) JVs and associates Segment liabilities (148.5) (91.7) (26.9) (16.9) - (1.0) (285.0) Unallocated (74.5) liabilities Total liabilities (359.5) Capital expenditure 1.0 1.0 0.1 0.7 - - 2.8 Depreciation/ amortisation 1.0 1.0 0.3 0.4 - - 2.7 Revenue Segment result 2007 2006 2007 2006 £m £m £m £m United Kingdom 833.8 816.9 16.3 (22.1) Spain 3.6 13.2 0.2 3.9 Rest of the world 40.5 56.2 - (46.3) 877.9 886.3 16.5 (64.5) Segment assets Capital expenditure 2007 2006 2007 2006 £m £m £m £m United Kingdom 167.4 175.3 0.6 2.1 Spain 26.2 25.6 - - Rest of the world 11.7 16.4 0.4 0.7 205.3 217.3 1.0 2.8 NOTES TO THE FINANCIAL STATEMENTS - continued 3 Net financing income 2007 2006 £m £m Interest income from bank deposits 2.4 2.1 Interest income from other loans and receivables 0.5 0.5 Expected return on the assets of the pension scheme 26.7 24.1 Financial income 29.6 26.7 Interest expense (0.5) (0.3) Expected increase in the present value of the pension scheme liabilities (25.8) (23.6) Finance costs (26.3) (23.9) Net financing income 3.3 2.8 Interest income from other loans and receivables relates to shareholder loan interest receivable from the Group's Private Finance Initiative (PFI) investments. 4 Earnings/ (loss) per share The calculation of earnings/(loss) per share is based on profit attributable to equity holders of the parent of £16.0m (2006: loss £54.0m) and the number of shares set out below: 2007 2006 (restated) Weighted average number of shares for basic earnings per share calculation 449,535,401 409,582,962 Dilutive potential ordinary shares: SAYE Scheme 5,404,067 7,131,715 Weighted average number of shares for fully diluted earnings per share 454,939,468 416,714,677 calculation The weighted average number of shares and the number of dilutive potential ordinary shares have been adjusted to take account of the bonus element of the rights issue (see Note 8). The comparative figures have been restated. The anti-dilutive effect of the potential ordinary shares has been excluded for the purposes of calculating the 2006 diluted earnings per share because this would decrease the diluted loss per share. NOTES TO THE FINANCIAL STATEMENTS - continued 5 Income tax 2007 2006 £m £m On profit/(loss) for the year: United Kingdom corporation tax at 30% 0.1 0.1 Adjustments in respect of prior years 0.8 0.2 Overseas taxation (0.3) - Current tax credit for the year 0.6 0.3 Deferred taxation (4.0) 6.6 Adjustments in respect of prior years (0.4) 0.8 Total income tax (expense)/credit in the income statement (3.8) 7.7 2007 2006 £m £m Tax reconciliation: Profit/(loss) on ordinary activities before taxation 19.8 (61.7) Income tax at 30% (5.9) 18.5 Rate adjustments relating to overseas profits 0.4 (0.2) Share of results of joint ventures and associates at 30% 0.3 (2.1) Disallowed provisions and expenses (0.5) (4.4) Profits relieved by capital losses or non-taxable gains 1.8 1.1 Unrelieved overseas tax (0.2) - Increase of temporary differences (0.4) (6.2) Rate adjustment relating to deferred tax 0.3 Adjustments in respect of prior years 0.4 1.0 Total income tax (expense)/credit in the income statement (3.8) 7.7 The income tax above does not include any amounts for joint ventures and associates, whose results are disclosed in the income statement net of tax. NOTES TO THE FINANCIAL STATEMENTS - continued 6 Investments The analysis of the Group's share of joint ventures and associates is set out below: 2007 2006 Alcaidesa 4Delivery Associates Total Alcaidesa Associates Total Holding SA Ltd Other Holding 4Delivery Other joint Ltd Ltd joint ventures ventures £m £m £m £m £m £m £m £m £m £m Revenue 3.6 93.8 25.1 7.8 130.3 13.2 84.6 26.5 13.6 137.9 Profit/ (loss) before tax 0.4 - 0.3 0.9 1.6 6.1 - (10.9) 0.1 (4.7) Income tax expense (0.2) - (0.1) (0.4) (0.7) (2.2) - (0.1) - (2.3) Profit/ (loss) for the period 0.2 - 0.2 0.5 0.9 3.9 - (11.0) 0.1 (7.0) Non-current assets 7.7 - 4.2 0.5 12.4 5.7 - 7.2 2.4 15.3 Current 31.0 21.5 114.3 58.6 225.4 33.6 25.1 82.1 51.4 192.2 assets Current liabilities (1.9) (21.5) (25.5) (6.9) (55.8) (8.1) (25.1) (20.0) (12.9) (66.1) Non-current liabilities (10.6) - (90.2) (50.0) (150.8) (7.3) - (68.2) (39.7) (115.2) Investments in joint ventures and associates 26.2 - 2.8 2.2 31.2 23.9 - 1.1 1.2 26.2 Financial commitments - - 10.3 - 10.3 - - 9.3 - 9.3 Capital commitments - - 50.8 - 50.8 - - 25.1 - 25.1 Net interest payable by joint ventures and associates in 2007 was £0.3m (2006: £1.8m receivable). The financial commitments relate to joint ventures involved in PFI schemes and the capital commitments to construction work being undertaken by the Costain Group. All figures are the Group's share. 7 Cash and cash equivalents Cash and cash equivalents are analysed below, and includes the Group's share of cash held by jointly controlled operations of £28.8m (2006: £22.0m). 2007 2006 £m £m Cash and cash equivalents 133.4 56.4 Bank overdrafts - (1.4) Cash and cash equivalents in the statement of cash flows 133.4 55.0 NOTES TO THE FINANCIAL STATEMENTS - continued 8 Capital and reserves Share Fair Share premium Special value Translation Hedging Merger Retained Total capital account reserve reserve reserve reserve Reserve earnings Equity £m £m £m £m £m £m £m £m £m At 1 January 2006 17.8 0.4 13.1 3.4 (1.2) (5.0) - (51.0) (22.5) Total recognised income & expense - - - (0.8) - 3.4 - (35.8) (33.2) Share based payments - - - - - - - 0.2 0.2 Shares issued 0.1 0.2 (0.3) - - - - 0.3 0.3 At 31 December 2006 17.9 0.6 12.8 2.6 (1.2) (1.6) - (86.3) (55.2) At 1 January 2007 17.9 0.6 12.8 2.6 (1.2) (1.6) - (86.3) (55.2) Total recognised income & expense - - - (2.6) 2.1 (0.2) - 22.6 21.9 Share based payments - - - - - - - 0.2 0.2 Shares issued 13.5 0.5 (12.8) - - - 46.5 12.8 60.5 Transfer - - - - - - (46.5) 46.5 - At 31 December 2007 31.4 1.1 - - 0.9 (1.8) - (4.2) 27.4 On 14 September 2007, the Company announced a Rights Issue, which was approved by shareholders on 2 October 2007. The Company raised £59.8m (net of expenses of £4.5m) by the issue of 267,923,469 new ordinary shares at 24 pence per share on the basis of three new ordinary shares for every four existing ordinary shares. The Rights Issue was affected through a structure, which resulted in a merger reserve arising under Section 131 of the Companies Act. Following the receipt of the cash proceeds through the structure, the excess of the net proceeds over the nominal value of the share capital issued has been transferred to retained earnings. The issued share capital of the Company as at 31 December 2007 was £31,443,432.50 consisting of 628,868,650 ordinary shares of 5p. All shares rank pari passu regarding entitlement to capital and dividends. The directors are proposing a dividend of 0.5p per share, which would have a total cost of £3.1m. If approved by shareholders at the annual general meeting, the dividend is expected to be paid on 23 May 2008. The payment would be matched by a contribution to the Group's defined benefit scheme. 9 Significant areas of judgement The Group undertakes construction contracts that may require it to perform extra or change order work. This can result in negotiations over the extent to which the work is outside the scope of the original contract or the price for the extra work. In addition, many contracts specify the completion schedule requirements and allow liquidated damages to be charged in the event of failure to achieve that schedule; on these contracts, this could result in the Group incurring liquidated damages. Two significant legacy contracts, in particular, represent potential risks: Costa Azul Breakwater, Mexico (joint venture between Costain and China Harbour Engineering Company): significant progress has been made during the year and the contract is nearing completion. The final offshore works are weather related and may be affected by sea conditions. Commercial discussions are ongoing and the Group believes it is entitled to additional monies in respect of the works performed and commercial negotiations to this end have reached an advanced stage. Judgment as to the outcome of these negotiations is required at the balance sheet date and a quantification of the probable recoveries has been made in establishing the anticipated loss on this contract. However, until the Breakwater has been handed over and the final account agreed, there will be some residual risk. The Director's quantified this risk as being up to £10m in the 30 June 2007 interim statements. Whilst this exposure remains, the Director's remain confident that the current loss provisions taken on the contract are adequate. Pemex Nitrogen Rejection Unit, Mexico: Costain is a sub-contractor on this contract, which has suffered substantial delays and cost overruns. Costain and Techint SA de CV, the main contractor, are working together towards its conclusion. Although, if either party fails to meet its respective obligations, the matter may be subject to protracted legal dispute: the directors believe appropriate provision has been made. This information is provided by RNS The company news service from the London Stock Exchange

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